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Chinas Economic Transition, 1978-2000
An Alternative Institutional Analysis
by
Stanley Zhao-xiong Yang
A dissertation submitted in partial fulfillment of the
requirements for the degree o f
Doctor o f Philosophy
(Sociology)
at the
University o f Wisconsin-Madison
2002
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A dissertation entitled
C h i n a ' s Economic T r a n s i t i o n , 1 9 7 8 - 2 0 0 0 An A l t e r n a t i v e
I n s t i t u t i o n a l A n a ly sis
submitted to the Graduate School of the

University of Wisconsin-Madison
in partial fulfillment of the requirements for the
degree of Doctor of Philosophy
by
S t a n l e y Z hao-X iong Yang
Date of Final Oral Examination: December 18, 2002
Month& Y ear D eg ree to be awarded: Decem ber 2002 May August

Committees Page. This page is not to be hand-written except for die signatures
Approval Signatures of Dissertation Committee
Signature, Dean of Graduate School
Abbreviations:
PRC - People's Republic of China

FSU -- Former Soviet Union
FEE -- Former Eastern Europe
CCP -- Chinese Communist Party
RCP - Russian Communist Party
CPSU -- Communist Party of Soviet Union
SOE - State-Owned Enterprise
COE ~ Collectively-Owned Enterprise
TVE - Township and Village Enterprise
TVP -- Township, Village, and Private Enterprise (cf. Qian and Xu 1993, p.141)
HRS -- Household Responsibility System
M-form -- Multiple-Divisional Hierarchy Form
U-form - Unitary Hierarchy Form
RMB - Ren-min-bi, i.e., people's currency in China
NIE -- New Institutionalist Economics
NICA - Newly Institutionalist Comparative Analysis
MNC - Multinational Corporations
SSB - State Statistical Bureau of China
EBRD - The European Bank for Reconstruction and Development
OECD - Organization for Economic Cooperation and Development (18
industrialized countries, including US, UK, Japan, Australia, Canada,
350 rmany, Spain, France, and Italy).
ii
Centennial Chronicle of China, 1900-2000
World Events:
1900 1900: Invasion of China by Eight Countries & the
Boxer Movement
Start of W W I (1914)
1911: Overthrown of Qing Dynasty and
Russian Revolution (1917) Founding of ROC
End of W W I (1918)
1920 1919: May Fourth Young Students Movement
1921: Founding of C CP
World Depression 1927: Founding of PLA

1930
1931: Japanese Invasion of Manchuria
Roosevelts New
Deal (1935)
1937: Start of Sino-Japan W ar
Establishment of United Front of CCP and KMT
Start of W W II (1939) 1940
1945: Surrender of Japan

End of W W I I (1945)
1949: Founding of PRC
1950
Korean W ar (1950-53)
1956: Mao's Challenge to FSU
1958: Great Leap Forward
1960 1959-61: Three Years Severe Famine

Cuban Crisis (1962)
Vietnam W ar (1964-75)
1966: Start of Cultural Revolution
1970 1972: Nixons Visit to China

World Oil Crisis (1973)
Nixons Resignation (1974) 1976: End of Cultural Revolution
1978: Start of Chinas Economic Reform
1980 1978-85: Reform Priority of Economic Efficiency
1979: Introduction of Rural Household Responsibility System
1985: Start of Overall Institutional Reforms

Collapse of FSU and FEE . 1989: Tiananmen Square Event
(1989-) 1990 1992: Southern Tour of Deng
1997: Reversion of Hong Kong to China (1999: Reversion of Macao)
Asian Financial Crisis 1997
Global Information Age Jan. 2, 2002: Chinas official joining of the W T O
(Start of 1990s)
Chinas Long March to the 21st Century
Apr. 1348 China becomes signatory of the GATT.
Sept. 1949 CCP takes power in Beijing.
Mar. 1950 Taiwan announces withdrawal from GATT.
1957 CCP launches a campaign of anti-rightest intellectuals.
1958-1961 Mao launches Three Red F la js : General Routes to Socialism," Great Leap
Forward, and Peoples Communes.
1966-1976 Cultural Revolution.
1976 Gang of Four arrested, China begins its new regime.
1978 China embarks on transition and reform.
July 1989 Chinese students protest in Tiananmen Square.
1991 FSU and FEE collapse.
Mar. 1994 China asks to join WTO.
May 1994 US de-links most favoured-nation status for China from human rights concerns.
Dec. 1994 China fails to gain GATT entry.
July 1995 China receives WTO observer status
Nov. 1995 Chinese President Jiang Zemin announces sweeping trade reforms. US gives
China Road-map for WTO negotiations.
Oct. 1997 Jiang Zemin visits Washington. China cuts industrial tariffs.
Apr. 1998 First EU/China summit.
June 1998 US President Clinton visits China.
Apr. 1999 Chinese premier Zhu Rongji visits Washington, unsuccessfully proposes wide
ranging concessions.
May 1999 Beijing suspends WTO talks following NATO bombing of Chinese embassy in
Belgrade, Yugoslavia.
July 1999 China reaches bilateral WTO accords with Japan and Australia.
Sept. 1999 US and China resume bilateral WTO negotiations.
Nov. 1999 China-US reach deal on WTO terms.
Jan. 2, 2002 China officially becomes a WTO member.
Source: adapted from Financial Times, p. 13, Tues. Nov. 16,1999; ibid. p. 32, Mon., Dec. 10, 2001.
iv
Table of Contents
Preface vii
Chapter 1: Introduction - Analyzing China's Transition 1
1.1 China prior to its transition
1.2 Chinas economic growth during its transition: 1978-2000
1.3 Structure of this study
Chapter 2: Theories and Models of Chinas Transition 27
2.1 Theories of state socialist economies between the 1950s and 1980s
2.11 Theories of state socialist economies in the 1950s and 1960s

2.2 Nee: Chinas hierarchy-market dilemma
2.21 Nees 1992 empirical thesis on China's hybrid economy

2.22 Nees non-marketized state-owned sector
2.23 Nees marketized non-private sector
2.24 Nees private sector
2.3 Boisot and Child: The emergence in China of a new economic order -
network capitalism
2.31 Boisot and Childs description of Chinas transition

2.32 Boisot and Childs thesis of Chinas network capitalism
2.4 Qian and Xu: Chinas M-form hierarchy in transition
2.41 Qian and Xus comparative study of the organizational structures in

different transitions
2.42 Qian and Xus account of Chinas M-form hierarchy
2.43 Chinas M-Form hierarchy and its hybrid economy in transition
2.5 A brief comment on institutional models of Chinas transition
Chapter 3: Criticisms of the Three Institutional Models 156
3.1 A brief review of the three institutional models
3.11 Summary of the three institutional models

3.12 Transition as social action
3.2 Limitations of the three models
3.21 Limitations of Nees model

3.22 Limitations of Boisot and Childs model
3.23 Limitations of Qian and Xus model
3.24 Transition as social construction: Institutions as social actors
3.25 Transition as historical derivative: Generality (convergence) vs.
particularity (divergence) across transitional economies
3.3 Summary of the shortcomings of the three institutional models
Chapter 4: Research Methodology and Assumptions Regarding Transitions 247
4.1 Historical-institutional comparisons - Research methodologies and

assumptions
4.2 Transitions and expectations, depth of history, and thickness of institutions
4.3 Two modes of transition
Chapter 5: Chinas Transition and Expectations, Depth of History, and Thickness of

Institutions 392
5.1 The initiation of Chinas transition
5.11 The turnabout of Chinas social expectations: From the pursuit of a Maosit
Utopia (1949-1976) to its period of transition (1976-2000)
5.12 Chinas economic transition (1976-2000)
5.2 China's institutional reforms during its transition
5.21 Historical perspectives of institutional reforms: State activism, divergent

momentums, and characterizations
5.22 Profile of China's institutional reforms in transition: Chronicle and taxonomy
5.3 Strategies for rebuilding institutions in China's transition
5.31 Bringing social choice back in: the social structure of institutions in China's
transition
5.31.1 Markets, hierarchies, and networks as alternative coordinative
arrangements
5.31.2 Chinas decentralization reforms - From a perspective of firm
hierarchy
5.32 Chinas hybridization
5.32.1 Chinas hybrid economy
5.32.2 The feasibility of a hybrid economy for rebuilding institutions
5.32.3 Hybridization, decentralization, and the Xia-Gang system
5.33 An oveiview of China's hybridization: Toward a quasi-market economy
5.4 Summary
Chapter 6: Transition as an Historical Spiral: Chinas Prospects 633
6.1 Dilemmas and reciprocities between background modes and constitutive

modes
6.2 Chinas transitional movements
6.3 China in the information age
6.4 A dialectic view of Chinas prospects
6.5 Concluding remarks.
Bibliography 743
vii
Preface
I n the early 1980s, as a young junior research fellow of the Chinese Academy o f Social Sciences
(CASS), I attended several sessions of the unofficial Conferences on Chinas Strategies o f Social and
Economic Development. Most of the attendees were ordinary natural- and social-science researchers like
myself. However, there were also a number of well-known leading scholars, government officials, and elite
state plannere, most of whom sided with the nations reform-minded intellectual avant-gardes.
These conferences dealt with big ideas about Chinas reforms and strategies. A major concern was
howto realize the Four Modernizations (i.e., modernization in industries, agriculture, defense, and sciences)
set by the Chinese Communist Party (CCP) in the 1950s to make economic development the nations priority,
a priority that was reaffirmed in the early 1970s by Zhou En-lai, then-popular Premiere and chief architect of
the C C Ps pragmatist strategies. The conference sessions dealt with such topics as how to streamline
Chinas state bureaucracy and how to enhance the states economic efficiency, while acknowledging the
bureaucratic inertias of state institutions. Even today I can remember how vivid, enthusiastic, bold, free, and
candid those discussions were, though most of the audience could barely understand the breadth of the
issues, and much of the discussion was imbued with party ideology. Those discussions touched upon just-
embarking agricultural reforms, soon-impending urban enterprises reforms, later reforms of the state sector,
future social dilemmas facing peasants, workers, intellectuals, and state functionaries, and lessons to be
learned from other transitional economies (particularly in Hungary and Yugoslavia). In the end a broad
consensus reached was reached to allow market forces to streamline the economy. The charms of the
market had been rediscovered in China.
More than a decade later, I came to realize that conferences like the one I attended in Beijing played
an important role in Chinas early transition, setting the tone for Chinas economic transition toward a market
driven future. The point I want to make here is that China's early economic transition was institutionally well-
planned. Later on the transition snowballed into Chinas structural transformation, a transition that
accompanied sustained rapid growth for virtually two and half decades.
I chose Chinas economic transition, 1978-2000 as the subject for my dissertation since I feel, in
the beginning of this new millennium, that few events are more spectacular than Chinas great
transformation and its significant impacts on the rest of the world. My Chinese-American heritage has
nothing to do with my choice. However, I believe my background in business provides me with
perspectives that are missing among many of todays politicians and scholars of social sciences, and
even some intellectual avant-gardes. Trying to do business in China reveals more about a transition than
arguing about theory. Business firms cannot afford to make many misjudgments in different cultural
environments. An overestimate of targeted markets or an undervaluation of a price could make all the
difference between a business thriving and a business going under. I believe it is not a bad idea to start
from empirical observations of business practices in order to explore further the complexities of different
sociological perspectives.
In terms of acknowledgements, from the very bottom of my heart I give full thanks to my major
advisor, Professor Joseph W . Elder. Joe has been extremely patient in editing and trimming my lengthy
dissertation drafts. Through his editing and instructions he has contributed many enlightened insights to how I
have structured my dissertation, while inspiring me to keep this dissertation going on to its successful
completion. I would also like to thank the other members of my committee - Professors J. Zeitlin, G. Green, J.
Gilbert, and D. Bromley. They have all spent considerable time reading my dissertation and offering helpful
comments and references. Without their generous supports and guidance I cannot imagine how I would have
finished this dissertation.
Preface
I n the early 1980s, as a young junior research fellow of the Chinese Academy of Social Sciences
(CASS), I attended several sessions of the unofficial Conferences on Chinas Strategies of Social and
Economic Development. Most of the attendees were ordinary natural- and social-science researchers like
myself. However, there were also a number of well-known leading scholars, government officials, and elite
state planners, most of whom sided with the nations reform-minded intellectual avant-gardes.
These conferences dealt with big ideas about Chinas reforms and strategies. A major concern was
howto realize the Four Modernizations (i.e., modernization in industries, agriculture, defense, and sciences)
set by the Chinese Communist Party (CCP) in the 1950s to make economic development the nations priority,
a priority that was reaffirmed in the early 1970s by Zhou En-lai, then-popular Premiere and chief architect of
the CCP's pragmatist strategies. The conference sessions dealt with such topics as how to streamline
Chinas state bureaucracy and how to enhance the states economic efficiency, while acknowledging the
bureaucratic inertias of state institutions. Even today I can remember how vivid, enthusiastic, bold, free, and
candid those discussions were, though most of the audience could barely understand the breadth of the
issues, and much of the discussion was imbued with party ideology. Those discussions touched upon just-
embarking agricultural reforms, soon-impending urban enterprises reforms, later reforms of the state sector,
future social dilemmas facing peasants, workers, intellectuals, and state functionaries, and lessons to be
learned from other transitional economies (particularly in Hungary and Yugoslavia). In the end a broad
consensus reached was reached to allow market forces to streamline the economy. The charms of the
market had been rediscovered in China.
More than a decade later, I came to realize that conferences like the one I attended in Beijing played
an important role in Chinas early transition, setting the tone for China's economic transition toward a market
driven future. The point I want to make here is that Chinas early economic transition was institutionally well-
planned. Later on the transition snowballed into Chinas structural transformation, a transition that
accompanied sustained rapid growth for virtually two and half decades.
X
I chose Chinas economic transition, 1978-2000 as the subject for my dissertation since I feel, in
the beginning of this new millennium, that few events are more spectacular than Chinas great
transformation and its significant impacts on the rest of the world. My Chinese-American heritage has
nothing to do with my choice. However, I believe my background in business provides me with
perspectives that are missing among many of todays politicians and scholars of social sciences, and
even some intellectual avant-gardes. Trying to do business in China reveals more about a transition than
arguing about theory. Business firms cannot afford to make many misjudgments in different cultural
environments. An overestimate of targeted markets or an undervaluation of a price could make all the
difference between a business thriving and a business going under. I believe it is not a bad idea to start
from empirical observations of business practices in order to explore further the complexities of different
sociological perspectives.
In terms of acknowledgements, from the very bottom of my heart I give full thanks to my major
advisor, Professor Joseph W . Elder. Joe has been extremely patient in editing and trimming my lengthy
dissertation drafts. Through his editing and instructions he has contributed many enlightened insights to how I
have structured my dissertation, while inspiring me to keep this dissertation going on to its successful
completion. I would also like to thank the other members of my committee - Professors J. Zeitlin, G. Green, J.
Gilbert, and D. Bromley. They have all spent considerable time reading my dissertation and offering helpful
comments and references. Without their generous supports and guidance I cannot imagine how I would have
finished this dissertation.
1
Chapter One
Introduction -- Analyzing China's Transition
1.1 China prior to its transition
t has been estimated * (Angus Maddison 2000: Monitoring the World Economy 1820-1995) that
I in 1820 Chinas gross domestic product and China's proportion of world trade exceeded those of
any other nation in the world (i.e. Chinas GDP comprised 28.7% of the world total in 1820 at
1990 PPP level; see Table 1.1). During the next 130 years Chinas GDP remained more-or-less constant
or stagnated in comparison with other nations (see Figure 1.1). Then, beginning in the second half of the
twentieth century, Chinas G D P started to grow. By 2000 it equaled almost half that of the United States
(i.e., Chinas G D P comprised 10.7% of the world total - $3,983bn -- in 1998 at 1990 PPP level). During
the 1990s alone, Chinas economic size (as measured by its G D P level) grew 2.28 times (cf. Financial
Times, p. 19, Wed. Oct. 11, 2000) [1].
2
Table 1.1: World GDP in 1820 and 1998
GDP 1820 GNP1998 GNP1998

At 1990 PPP A s% of At 1990 PPP A s % o f At Market A s% of
($m) World Total ($bn) World total Values ($bn) World tc
1. China 199.2 28.7 1.U S 7,922 21.7 1. US 7,922 27.4

2. India 111.0 16.0 2. China 3,983 10.9 2. Japan 4,089 14.2
3. France 37.4 5.4 3. Japan 2,928 8.0 3. Germany 2,122 7.4
4. UK 36.2 5.2 4. Germany 1,708 4.7 4. France 1,466 5.1
5. Russia 33.8 4.9 5. India 1,660 4.5 5. UK 1,263 4.4
6. Japan 21.8 3.1 6. France 1,312 3.6 6. Italy 1,166 4.0
7. Austria 13.5 1.9 7. UK 1,218 3.3 7. China 928 3.2
8. Spain 13.0 1.9 8. Italy 1,163 3.2 8. Brazil 758 2.6
9. US 12.4 1.8 9. Brazil 1,021 2.8 9. Canada 612 2.1
10. Prussia 12.0 1.7 10. Mexico 785 2.1 10. Spain 553 1.9
Top Ten Total 490.0 70.5 Top Ten Total 23,705 64.8 Top Ten Total 20,882 72.4
World 694.8 100.0 World 36,556 100.0 World 28,862 100.0
Source: Angus Maddison Monitoring the World Economy 1820-1992; OECD 1995; IMF; World
Bank; cit. Financial Times, p. 24, Economics, in Markets 2000, Jan. 1, 2000
Figure 1.1: Global Growth since 1870
Million 1990 international (purchasing power parity) dollars

Semi-log scale
10,000,000
5,000,000
1,000,000
500,000
. USA
. China
100,000 Japan
USSR'
50,000 India
Brazil
1870 80 90 1900 10 20 30 40 50 60 70 80 90 99
Note: * Russia after 1992;

Source: Angus Maddison Monitoring the World Economy 1820-1992, updated from 1992/1994 to
1998 using IMF Growth Rates in constant price GDP; cit. from Financial Times, p. 24,
Economics, in Markets 2000, Jan. 1,2000
3
In the minds of recent Chinese generations, China had two defining turnarounds in the second half of
the twentieth century. One was the founding of the Peoples Republic of China in 1949; the other was the
transition toward Chinas integration with the world economy after 1978. The first turnabout was followed by
an inward search trying to eradicate all forms of private proprietorship linked to social inequality and global
capitalism. The second one was followed by an outward search reverting to an economy with private property
and links with the global community [2],
In 1911 Chinas Qing Dynasty was overthrown by the so-called Republican Revolution, led by Dr.
Sun Yat-sen. In the 1910s and 1920s, in the wake of the Republican Revolution, some Chinese youths
craved for more liberal reforms and institutional learning from the outside world. They believed that only
institutional reforms through learning could wake up China, a sleeping giant. Two options for the future stood
before them: one was toward the capitalist world, Chinas old nemesis, that had exploited China during the
preceding centuries. The other was toward the Soviet Union, a rather fresh and attractive alternative to the
capitalist world that had recently emerged from a feudal social formation similar to that of China. Those
looking to the capitalist world were inclined toward gradual evolution, involving a closer alliance with Western
powers. In time they were represented by the Kuomintang (KMT) regime in China headed by Chiang Kai-
shek. In the 1930s Japan invaded China, not withdrawing from China till 1945, leaving China in shambles. By
then the thought of Chinas old landlords and capitalists repositioning themselves in power in collusion with
foreign imperialists did not resonate well with the Chinese masses. Mao Zedoing and his red army forced
Chiang Kai-shek and the Kuomintang out of mainland China to the island sanctuary of Taiwan. By 1949 the
future of China lay with MaoZedong, the Communist Party of China (CCP), and the new economic strategists
of the Peoples Republic of China. Hundreds of millions of Chinese peasants, laborers and intellectuals
supported Mao Zedong and his socialist society committed to benefiting the majority of Chinese people.
Initially China tried to imitate the socialism-constructing strategies of the Soviet Union. However, it soon
became clear that China's economy differed from that of the Soviet Union and that strategies that appeared
to work in the Soviet Union would not necessarily work" in China. In time, China evolved its approach from
its own strategic culture f3], planning the details to suit the basic features of Chinas economy.
4
Many of China's economic practices under its planned economy actually reflected then-power-
struggles among the inner circles of the CCP. For the ordinary people, socialism was defined as equivalent to
patriotism. During this period the CCP informed the people that the imperial world had enriched itself by
draining wealth from the exploited world. Marxism-Leninism predicted that moribund and rotten capitalism
(V. Lenin 1917) and imperialism could not survive in competition with multiple socialist states, and that world
socialism would eventually triumph. However, by the late 1970s, Chinas optimism regarding a future socialist
world had begun to fade. China's highly-erratic-5% GDP growth rate, relative to the more steady 8% growth
rate of its immediate East Asian neighbors, was unimpressive, even though Chinas growth rate was
considerably greater than the growth rate of such South Asian countries as India and Pakistan. Chinas
Great Leap Forward" (1958-1960) and its Cultural Revolution (1966-1976) had devastating impacts on
Chinas economic development (see Figure 1.2.1, Chapter 1). After 1978 China became increasingly
willing to learn advanced technologies and practical managerial skills from capitalist countries, to make efforts
to attract their capital investment, and even to borrow loans from them to accelerate Chinas economic
development. China began to expand its commercial ties with the rest of the world I4]. Pragmatism replaced
socialist utopianism.
After Chinas Cultural Revolution had ended, one of Chinas major concerns was to reintroduce
social order. By the late 1990s Chinas economy could no longer be called a planned socialist economy. It
was an economy incorporating trial-and-error experiments with marketization and hybridization.
Hybridization (or "building socialism with Chinese unique characteristics" in China's official parlance; cf.
Zhao Ziyang 1987) was one way in which China could still maintain it was adhering to its earlier Marxist
principles while experimenting with various non-Marxist policies. In this way China launched its transition
into greater participation in the global market economy. This dissertation focuses on Chinas efforts to
carry out that transition.
5
1.2 Chinas economic growth during its transition: 1978-2000
To understand Chinas transition, we need an overarching vision of Chinas economy in the global
arena, based on wide-ranging economic information. Our data in this chapter are drawn chiefly from
Statistical Yearbook o f China 1999, World Development Report 2000, and other major secondary
literature, such as The Economist, Financial Times, The Wall Street Journal, The N ew York Times, etc.
W e have used trend analyses to compare China with such countries as Russia, Hungary, India, Japan,
South Korea, the US, and the UK. To overcome the limits and the fragmented nature of the available
statistics and data, we sometimes used a combined method to integrate the data drawn from multiple
sources into our tabulations I5].
Two words describe Chinas growth during its transition: fast and sustainable. Figure 1.2.1
illustrates trends of the world economy in the second half of the last century. As the figure shows, in the
early 1960s Japan emerged and experienced double-digit growth for two decades before going into a
decline. In the 1970s the four tigers in East Asia emerged with their so-called miracles" until the late
1980s; after which, their performance became mediocre (Figure 1.2.2 here). In the 1980s arid 1990s,
China underwent its transition and led the world economy in growth I6]. W hat follows for the remainder of
this chapter is evidence of Chinas economic performance during its transition. An overarching question
will be: How did China establish and maintain its high rate of growth that has sustained much longer than
any other country? A secondary but equally interesting question will be: How did China make such a rapid
transition from a former planned economy into the world marketplace, while other former socialist
economies, such as the former Soviet Union (FSU) and former Eastern Europe (FEE), failed to make
similar successful transitions into the world marketplace.
6
Figure 1.2.1: Differing growth rates in the world economy since 1950
Fast-double-digit-growth: 1960s-70s: Japan; 1970s-80s: 4 East Asian Tigers (with

growth rates close to double-digits);1980s-90s: China
By GDP Growth (%)
15
10
-10
-15
1950 1960 1970 1980 1990 2000
Label:
Case A: moderately slow ------------ OECD
Japan
Case B: moderately f a s t East Asian Four Tigers ; ------------- India
.............. SEA
Case C: Fast China
Case D: Negative Growth .............. Former Soviet Union (Russia after 1991)
Source: Combined sources from World Development Report 200 1 , from various issues of
Financial Times, The Economics in recent years, as well as from Kornai et al. 2001, etc. Chinas
data drawn from SSB, 2000
7
Figure 1.2.2: Economic growth of China and the Four Tigers, 1993-2001
Real GDP
Annual % Change
15.0
12.0 China
Singapore
South Koreaf .
9.0
Hong Kong
6.0
3.0 Taiwan
-3.0
- 6.0
93 95 97 99 01* 93 95 97 99 01* 93 95 97 99 01* 93 95 97 99 01*
Source: DGBAS, Quarterly National Economic Trends; cit. Financial Times, p. I, Wed. Nov. 24, And p.
5, Fri. Nov. 2 6 ,1 9 9 9 ; Statistical Yearbook o f China, 1998; The Economist, p. 38,Dec. 2 3 rd,
1999; * estimate, ibid. cit. The Economist, p. 128, Oct. 14th, 2000, and Financial Times, p.
VII, South Korea 7 , Thurs. Oct. 19, 2000.
During the fifteen years following 1978, prominent swings occurred in both the Chinese and the
Russian economies. Previously the swings in Chinas economy were mainly the result of catastrophic
events like the Great Leap Forward (1958-60) and the Cultural Revolution (1966-1976). Russia in the
1990s underwent its own turbulence similar to Chinas Cultural Revolution only three decades later. After
Chinas Cultural Revolution, especially after 1978, China's economy grew steadily except during the
unsettled years 1989-90 following the student demonstrations in Beijings Tian-an-men Square. Additional
testimony to the sustainable robustness of Chinas economy has been the relatively minor way in which
the Asian economic crisis of the late 1990s affected China. This is partially attributable to the fact that
Chinas economy was a continental economy and remained not fully subject to the world market
movements in magnitude and direction (see Figure 1.2.3).
8
The remaining figures in this chapter provide multiple forms of evidence of how Chinas economy
performed in the 1980s and 1990s, the two decades of its transition. Figure 1.2.4 compares Chinas
GDP% growth with the G D P% growth of seven countries. O f the selected countries, Russia fared the
worst, compared to China, the best.
Figure 1.2.3: The emerging market access Index*, 2000
0 20 40 60 80 100
Singapore
Chile
Hong Kong
Estonia
Slovenia
Lithuania
Taiwan
Latvia
Romania
Israel
Mexico
Hungary
Argentina
Turkey
Czech Rep
Philippines
Poland
South
Bulgaria
Thailand
Slovakia
Russia
Indonesia
Brazil
Malaysia
Ukraine
India
China
Uzbekisan
Source: Tuck School of Business, Dartmount, New Hampshire; The Economist, p. 114,
June 10th, 2000; * "market access index" refers to the ratio of marketized sectors to
the country's economy.
g
Figure 1.2.4: Comparison of Chinas economy and the world economy, 1960-99
By GDP % growth
-10
-20
-30
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999
China - - Japan South Korea Russia Hungary India U S UK
Source: World Development Report 2001.
Figure 1.2.5: Chinas real GDP growth, 1978-2000
Real GDP Growth

Annual% Change
16
14
12
10
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: SSB, China, Table 3 -3 ,1 9 9 9 .
10
Figure 1.2.5 presents the performance of Chinas economy from 1978 to 2000, based on China's
statistics by the State Statistical Bureau (SSB). Figure 1.2.6 provides detailed illustrations of the recent
strength of China's economy. It shows that Chinas G D P total at purchasing-power parity (PPP) in 1998
was $3.8 trillion, compared to the US with $8.0 trillion, and to India with $2 trillion. Yet Chinas G DP
growth rate in 1998 was 8.6%, relative to the US at 2.7% , and to India at 4.9% . Figure 1.2.7 shows a
steady increase in Chinas per capita income between 1977 and 2001. Figure 1.2.8 shows how Chinas
annual average percent of real G D P growth changed from 1990 to 1999, compared to that of eleven other
countries (including the United States, Japan, and Russia). Figure 1.2.9 shows what percent of the
worlds G N P at purchasing-power parity level China possessed in the year 2000. Figure 1.2.10 compares
Chinas purchasing power parity between 1985 and 1998 with that of seven other countries, showing that
Chinas purchasing power parity was second only to that of the United States. Figure 1.2.11 compares
China with the nations of the Organization for Economic Cooperation and Development (OECD, which
refers to the industrialized country grouping, including the US, UK, Japan, Canada, Germany, Spain,
France, and Italy) in terms of annual percent increase of G DP, percent increase in consumer price index,
percentage of unemployment in the labor force, and balance of payments. In each instance Chinas
performance matches or exceeds that of the O ECD nations. Figure 1.2.12 shows that there was an
average annual 5.5% growth rate in real wages in Chinas urban areas between 1983 and 1999. Figure
1.2.13 shows the growth of average per capita real income in thirteen countries between 1965 and 1998.
China is second only to South Korea in its growth of average real income per head. Figure 1.2.14 shows
the marked increase in foreign direct investment in China between 1984 and 200 [7]. Figure 1.2.15 shows
Chinas growth of industry and merchandize export between 1984 and 2001. Figure 1.2.16 shows the
steady growth of Chinas exports as a percentage of Chinas gross domestic product between 1952 and
2001. Figure 1.2.17 shows Chinas monthly trade surplus from January 1998 to August 1999. Figure
1.2.18 shows China bimonthly foreign exchange reserves between November 1997 and 2000. Figure
1.2.19 shows China's percentage export growth between January 1998 and August 1999 [], Figure
1.2.20 shows the annual percentage changes in Chinas gross domestic product between 1990 and 1999.
Figure 1.2.21 shows the foreign direct investment confidence in eighteen countries in January 2001,
11
calculated on a three-point scale. China is second only to the US in its foreign direct investment
confidence climate. And figure 1.2.22 shows Chinas overall trade balance between 1990 and 2001.
Figure 1.2.6: A global comparison of GDP growth at purchasing-power parity (PPP)
(1) GDP at PPP, 1998$trillion
Annual
us 2.7
average GDP
CHINA 1.6
growth 1965-
JAPAN 4.3
98 (%) (i.e.,
INDIA 4.9
figures
GERMANY |2.5
attached to
FRANCE I 2.6
the bars)
BRITAIN
j ' 2 -1
ITALY I 2.7
BRAZIL I 4.3
RUSSIA -4.8*
MEXICO J 3.9
CANADA
SPAIN __ I : .0
1.1/
SOUTH KOREA _ 1 8 1
INDONESIA ^ 6.:
Source: World Bank; cit. The Economist, p. 106, May 13th, 2000;
* USA Today, 1B, Fri. Apr. 23,1999
Figure 1.2.7: Chinas estimated GDP per capita (by market value, not by PPP level)
$1,168
1200
1000
800
600
400
200
0
'77 87 '97 '98 '99 2000 2001
Source: World Bank; US Commerce Department, cit. USA Today, 15A, W ed. Feb. 16, 2000; Financial
Times, p. xii, Mon. Nov. 13, 2000
12
Figure 1.2.8: Real GDP growth, annual Figure 1.2.9: % of world GNP
average % change, 1990-99 At PPP ($38,804.9bn in 2000)
-6 -4 -2 0 2 4 6 8 10 12 China Japan
10.6%
China
India
21.5% 5.5%
Germany
Brazil
4.7%
Mexico
France
Germany
Brazil
Rest of 2.7%
. . .S . Russia
world . . Mexico""-
Canada*- 2.4%
Source: World Bank; c it FlnanclalTime, 31.2%
1.9% %
p. 13, Mar. 14, 2001
Figure 1.2.10: GDP at purchasing-power parity in comparison 1985-98 ($bn)
10000 2000
9000 1800
8000 1600
7000 1400
6000 1200
5000 1000
4000 800
3000 600
2000 400
1000 200
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
US (left axis) China (left axis)

-Japan (left axis) India (left axis)
South Korea (right axis) -Russia (right axis)
Hungary (right axis) UK (right axis)
Source: World Development Report 2000\ USA Today, 2A, Thurs. Apr. 12,2001
13
Figure 1.2.11: Comparison of China with OECD - Some major economic indicators
GDP % Increase over previous year, Consumer prices

1996-2001 % increase over previous year,
1996-2001
12.0 10.0
8.0
China
6.0
4.0
OECD. 2.0
0.0
Chil
i------------------------1---------------------- 1----------------------- 1------------------------1----------------------- 1 o .O 1 - 2.0
96 '97 '98 99* 00** 01" '96 '97 98 '99* ' 01* *
Unemployment % of labor force, China's balance of payments

1996-2001 $bn, 1996-2001
60
OECD
------------------------------------------------------------ 50
Balance of payment
China
2.0
Current account balance

i-------------------1------------------- 1-------------------1--------------------1-------------------1 0 . 0 i__________ i__________ i__________i__________ i__________ i o
96 97 '98 '99* '00** '01** 96 '97 98 '99* '00** '01**
Source: OECD, cit. from The Economist, p. 90, August 12th, 2000; China Statistical Bureau, SSB, 1999;
Financial Times, p. xii, Mon. Nov. 13, 2000
* Estimate
** Forecast
14
Figure 1.2.12: Average % annual growth in real
wages in China's urban areas, 1983-1999
- - - Nominal
30.0 Real
25.0
20.0 Linear
15.0 (Real)
10.0
5.0 Average annual 5.5% change of
0.0 real wage in China, 1983-1999
83 85 87 89 91 93 95 97 99
Source: Financial Times, p. ii, China 2, Mon. Nov. 13, 2000
Figure 1.2.13: Growth of average per capita real

income in thirteen countries, 1965-98
Source: Financial Times, p.

South Korea 6.6 ii, Mon. June 12, 2000
* Chinas data are for
China*
average real income per
Thailand 5.0 head, 1983-1999 as above.
Malaysia 4.1 ** U S s data refer to growth
Portugal 3.2 rate of US G D P per head
in 1960-99, cf. The
Indonesia 2.7
Economist, p. 19, The
Italy
llL_ New economy survey,
Greece 2.4 Sept. 23rd, 2000
US** 12.4
Brazil 2.2
France 2.1
Turkey 2.1
Mexico 1.5
15
Figure 1.2.14: China net foreign direct investment (FDI) influx and current account,
1984-2001, $bn
$bn
50
45
40
35
30
Current account *
25
Net FDI inflow
20
15
10
0
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Statistical Yearbook o f China, SSB, 1999; figures in 1999-2001 forecasted, cit. Financial
Times, p. XI, Fri. Sept. 22, 2000 ft; * Current account refers to net trade of goods and services
[ ft .
Figure 1.2.15: Chinas growth of industry and merchandize export, 1984-2001

(1984=100)
1200
1100
1000
900 Industrial growth
volume
800
700
Merchandize export
600 volume
500
400 GDP growth volume
300
200
100
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: data rebased from Tables 3 -2 ,1 3 -4 ,1 7 -3 , SSB, China, 1999; also cf. Financial Times, p. xii.
Mon. Nov. 13, 2000.
16
Figure 1.2.16: Chinas export trend, as% of GDP, 1952-2000
30
25
20
15
10
0
1952 65 78 82 85 88 91 94 97 '00
Source: Financial Times, p.21, Wed. Nov. 8, 2000; Tables 3 -3 ,1 7 -3 , SSB, China, 1999.
Figure 1.2.17: China's monthly Figure 1.2.18: China's foreign

exchange reserves ($bn) bimonthly,
trade surplus ($bn),
Jan. 1998-June. 2000
Jan. 1998-Aug. 1999
6 170
165
5
160
4 155
150
3
145
2 140
135
1
130
0 125
J F M A M J J A S O N D J F M A M J J A
1998 1999
Source: CLSA Global Emerging Markets; State Statistics Bureau', cit. Financial Times, p. 4, Wed.
Dec. 2 9 ,1 9 9 9 ; ibid. p. 6, Thurs. Jan. 18, 2001
17
Figure 1.2.19: China's % export Figure 1.2.20: China's GDP

growth, Jan. 1998-Aug. 1999 annual % change, 1990-1999
16 ---------------------------------------------------------------------
20
14 ------------- ==-------------------------------------------
15
12 -------------------------------------
10
10 ------- JFt----------------
5
8 ===
0 6 -----
-5 4-- -----
2
-10
0 uuuuu11U11UU
-15
90 ^ l * 2 'SS "35 96 *97 ^99 '00
J F M A M J J A S O N D J F M A M J J A
1998 1999
Source: Ibid.
Figure 1.2.21: Foreign Direct Investment Confidence

Climate,
Top 18, Jan. 2001, index values calculated on a 0-3 scale.
The higher the value the higher the confidence
US ' ' ........................ 1
Brazil
UK .............. 1
Mexico __________ ... ........................ 1
Germany ........ ................................................ 1
India ........... ........ ...... ..........1
Italy . . ............................................ 1
Spain ................. .................................... 1
France 1
Poland 1
Canada 1
Singapore ' 1
Thailand ' 1
Australia . 1
Czech Rep.
South Korea
.. .............. ; i
Netherlands i
0.0 0.6 1.0 1.5 2.0 2.5
Source: Fiancial Times, p. 6,"Foreign direct investment," in

"International economy," Feb. 19, 2001.
18
Figure 1.2.22: Chinas overall trade balance since 1990s ($bn)
43.6
40.4
33.7
29.0 30 0
16.7
12.2
8.7 8.1
4.4 54
nx
V
- 12.2
1990 91 92 93 94 95 96 97 98 99 '00 '01
Source: cit. Financial Times, p. xii, Mon. Nov. 13, 2000; ibid, p. 14, Fri. Dec. 1, 2000; also cf. Institute for
International Economics- cit. Financial Times, p. 15, May 17, 2000.
As illustrated in different ways in each of the figures in this chapter, Chinas economic growth
following its 1978 policy changes was strong and consistent. W hereas other former planned economies
have faltered, especially those of the former Soviet Union (FSU) and former Eastern Europe (FEE). China
has persistently moved forward in an impressive transition from a planned economy to an economy linked
effectively with the global economy.
19
1.3 Structure of this study
My dissertation includes 6 chapters in which I attempt to analyze what has actually happened in
China so far in its transition from a planned economy to an increasingly market-oriented economy. My study
focuses on China's institutional reforms. At times I compare China with its FSU and FEE counterparts, trying
to acquire sociological insights on the unique strategies of Chinas transition.
Chapter 1 gives a general statistical account of Chinas recent economic performance during its
transition since 1978. These basic facts provide quantitative evidence of Chinas changing reality through
institutional reforms.
Chapter 2 reviews earlier studies of China's post-Maoist transitional economy and antecedent
literatures on the state socialism, including such writers as Komai and Nove. It focuses on three institutional
models about Chinas transition in detail: Nee (1989, 1992), Qian and Xu (1993), and Boisot and Child
(1996).
Chapter 3 criticizes three institutional models for their methodological reductionism, their focus on
market-hierarchy dilemmas, their neglect of transitions as historically derived and socially embedded, and
their failure to capture important dynamics of transition.
Chapter 4 identifies three dilemmas (market vs. hierarchy, ideology vs. strategic rationality, and
reality change vs. regime change) that have puzzled mainstream scholarship on transitions. In search of a
sociologically-grounded institutional account, I propose a mode of transition built on three dynamic sources:
expectations, depth of history, and thickness of institutions. I then examine two contrasting transitions in
Russia and China.
Chapter 5 provides a sociologically-grounded institutional account of Chinas transition process. It
provides historical evidence for those assumptions and methodologies I proposed in Chapter 3. Section 5.1
20
outlines how Chinas changing expectation initiated Chinas transition and how its political process earned out
those changes. Section 5.2 examines how China inaugurated its institutional reforms on a substantial scale
and how the state government played a strong role in facilitating the reforms and encouraging
entrepreneurship. Section 5.3 explores the dilemmas facing China in its economic governance (such as
market vs. hierarchy dilemmas) and the methods China used to tackle the dilemmas through decentralization
and hybridization, according to the so-called Xiagang' system.
Chapter 6 extends above institutional search to those regime change issues. It raises questions
about Chinas future direction. It sees Chinas transitional upgrade occurring in three sequential phases,
associated with construction of rule of law and social democracy. It asks if Chinas transition is reducible
to digital management (so-dubbed digital democracy), since that could help perpetuate the paradox
between instrumental rationality and humanitarian endeavors and thus impede Chinas reform efforts.
Lastly, it envisions Chinas prospects of integration into the global community through Chinas historically-
grounded and socially-embedded institutional reconstruction of its future.
21
Endnotes of Chapter 1:
1. But while China once had its economy in the groove in the world history, people might legitimately
question why China had a big setback around the turn of the last century and how it brought its
momentum back resuscitating in the late last century. A reminder: its modernizing since the mid-last-
century just started from a position with virtually semi-feudalist and semi-capitalist conditions. Yet China
has managed to catch up those mid-income level economies in the world by the dawn of this century at a
pace even faster than the rest of East Asia and other emergent economies in the last two decades.
See Meisners vivid portrait of Chinas backwardness in the turn of the last century, compared to the
Russia, cf. M. Meisner 1996, pp. 21-23: ...in China the objective forces favoring a capitalist-type
revolution were far stronger than they had been in Russia and the socialist content far weaker. At the time
of the Communist victory in 1949 China was a much more backward country than Russia had been at the
time of the Bolshevik triumph. Czarist Russia, of course, was a backward and undeveloped country in
comparison with the industrialized capitalist countries of Western Europe. But it was far in advance of
China. In pre-1949 China, wit a population of 500 million, there were fewer than 3 million industrial
workers (many of whom labored in small shops lacking mechanical power), whereas in pre-Revolutionary
Russia there were 6 million industrial workers among a population of approximately 125 million. On a per
capita basis, industrial output in China, even in the best of pre-1949 years, was less than one-eighth of
what it was in Russia in 1917. Chinese agriculture compared even less favorably. Whereas the Russian
agrarian economy traditionally produced surpluses for export, Chinas pre-Revolutionary farm economy
yielded endemic famines which, decade after decade, took a staggering toll of lives. Between 1850 and
1930, an average of 4.5% of each generation died from famines. The famine of the late 1920s in the
sparsely populated provinces of the Northwest, for example, resulted in some 5 million deaths, killing one-
third of the population of Shensi province alone. Even in normal times, observers estimate, per capita
agricultural production in pre-1949 China was only about one-fifth of that in czarist Russia. And even after
Stalins assault on the Russian countryside during the First Five Y ear Plan, as Carl Riskin noted: 'Soviet
foodgrain production per capita in the disastrous year of 1932 was actually some 45% higher than the
comparable figure for China in the average year of 1957. Laboring under a primitive technology, and with
nearly a quarter of humanity dependent on no more than 6% of the worlds arable land, Chinese
agriculture was a precarious enterprise even in the best of times, capab'e of providing little more than
bare subsistence for the great majority of the Chinese people. Beyond the enormous human costs and
suffering this inevitably entailed, it also meant that the potential surplus that could be extracted from the
countryside to finance modem industrialization would be far smaller in China than in Russia. Chinas
backwardness in industry and agriculture, as compared with Russia, was exacerbated by backwardness
in a variety of other areas: much less developed railroad, transportation, and communication systems
(and ones that had been built primarily to serve foreign imperialist interests); a population burdened by a
substantially higher rate of illiteracy and a considerably lower level of education; and a country far more
lacking in modem scientific and technological knowledge."
2. cf. USA Today, 8A, Oct. 8, 1997: In a country where public proximity to leadership is a test of one's
stature, two officials came off well...Jiang lauded the incoming body as "another step forward toward
revolutionizing, rejuvenating...and professionalizing the party's central leadership...'Deng Xiaoping
Theory, a code for pragmatic, market-oriented reformism was set on a pedestal alongside 'M ao Tse-tung
Thought in the Communist Party canon.
3. cf. Jepperson et ai. 1996 on Variations in state identity, or changes in state identity, affect the national
security interests or policies of states (pp. 60-1): ...Johnston argues...that Chinas strategic culture in
the Maoist period was based on a zero-sum view of the world, a division between 's e lf and 'other that
generated specific strategic commitments. Classical Chinese conceptions were reinforced by contacts
with the European state system: nationalism and Marxism-Leninism provided themes o f class war and
anti-imperialist war that could be grafted onto traditional constructions. Historical variations in the
structural conditions of the Chinese empire do not account wel! for the constancy in strategic culture: the
relation between 'anarchy and realpolitik depicted by neorealism, Johnston suggests, is in this case
22
spurious. Rather it is Chinas strategic culture that drives its real politik. Ibid. p. 62: ...Chinas strategic
culture and Japans and Germ anys politico-military culture have stronger effects on national security
policies than international structure does. Accordingly, the follow analysis of contemporary Chinese
history is based on such a perspective of Chinas strategic culture and tradition that drives its realpolitik
(Ibid. 61).
4. cf. Strategic investors take a shine to China - The countrys political commitment to capitalism and its
expected entry into the World Trade Organization attract a huge share of capital inflows into the region
by John Thornhill in Financial Times, p. ii, Tues. May 8, 2001: One glance at the headquarters of the
municipal administration of Shunde is enough to confirm the towns reputation as the most experimental
region in the most experimental province in China...Shundes openness to new ideas has rapidly turned
the former agricultural commune into one of Asias investment hot-spots. On a visit to the southern
Chinese province of Guangdong in the 1980s, the diminutive Communist leader, Deng Xiaoping, urged
Shunde to be bolder and dare to forge ahead. It is a message that Feng Run Sheng, the no-nonsense
mayor of the town of 1m people, has taken very much to heart. 'The government does not intervene in
every aspect of business. It only functions as a facilitator for businesses. Profits return to the people who
run them, he says, in a display of capitalist rhetoric that is still somewhat startling in Communist China.
So now I hope that China will quickly join the W T O [World Trade Organization] and we will be more
integrated into international capital flows and management concepts....It is the success of towns like
Shunde that explain why China is drawing such strong investment flows...Moreover, the latest slowdown
in the US economy appears to be spurring more multinational companies to lower their production costs
by shifting manufacturing capacity to Asia
Also cf. W ake-up call comes amid reform fatigue - As banks continue to grapple with problem loans and
the region again starts to show signs of weakness, the financial focus is beginning to switch to China by
John Thomville. Ibid. p. I: ...T h e word biggest investment banks are now targeting China as by far the
most promising long term opportunity in Asia. 'From a regional perspective China is the most important
market and the lead focus for Merrill Lynch, says M r Li. He believes that future share offerings - and
lucrative investment banking mandates - will come from Chinese power companies, the railway network,
the postal service, and even the media. But it is not just investment bankers and fund managers who are
currently fixated with China. Foreign strategic investors are also pouring money into the mainland
economy. At 30bn, the current stock of foreign direct investment in China is third in the world after the UK
and the US. Other Asian countries are slowly waking up to the awesome challenge that Chinas economic
development poses for the region. And many banks and companies in the smaller countries are now
scrambling to gain the scale and prominence needed to achieve greater operational efficiencies and to
attract the attention of the worlds fund managers. The most striking example of the trend is in Singapore
where the islands biggest bank, DBS, has just launched a $5.4bn bid for Dao Heng bank in Hong Kong
as part of its quest to become Asias leading banking group. 'You cannot be the best bank in Asia without
gaining a certain size, says Phillippe Paillart, D BSs chief executive...The consolidation bandwagon
seems certain to gather pace as more Asian companies evolve from being national, closely-controlled,
private or state businesses into bigger, more transparent, and increasingly internationally-minded public
companies. That trend only promises more excitement for investors and more business for bankers. As in
so many other fields swept by the forces of globalization, Asias financial markets are increasingly subject
to the winner-takes-all mentality. International fund managers, seeking sizeable, liquid investments, are
most likely to invest their money in the 50 biggest companies in the region and will ignore the more
opaque, marginal markets. Those countries that do not match the demands of this new era and complete
structural reforms run the danger of being marginalized.
5. As Cao et al. 1999 emphasized (107), Date limitations imply that we must rely on anecdotes, case
studies, and survey results rather than systematic data. Therefore, although our evidence is informative, it
should not be interpreted as systematic."
6. cf. All together now? - The worlds economies are much more in sync now than ever. But they still
dont move as one" by in The Wall Street Journal, R3, Mon. Oct, 14, 2002: ...The Chinese economy
grew by more than 7% last year and is on track for the same this year, according to economists, replacing
23
Japan as the provider of regional economic ballast. Massive public investment projects, low-priced
exports and its gigantic consumer market kept the Chinese economy chugging through last years global
downturn. As a result, investors are increasing their exposure to A sia...
Also cf. An Asian Stampede by Shahid Javed Burki in Financial Times, Mon. p. 13, June 11, 2001:
...Between 1870 and 1913, the US overtook Britain and became the leading would economy. Between
1950 and 1973, Japan caught up with Europe and the US to become the worlds second largest
economy. The third catch-up period, from 1975 to 1997, saw the narrowing of the gap between several
tiger economies of East Asia and the developed world. The next phase is likely to shift the center of the
world economy from the Atlantic ocean to the Asian mainland. It will change the composition of world
output and world trade, the way the world uses resources and the make-up of populations of Europe and
the US. It will almost certainly create severe tensions with todays leading economies as they are
challenged for global economic dominance. The US and Europe currently account for about two-fifths of
the global economic output of $40,000bn. By 2025, the overall global figure may increase two and half
times, to $100,000bn. China and India may account for about two fifths of that. China, with a G D P of
$25,000bn in 2025 measured in terms of PPP - will probably by the worlds largest economy followed
by the US at $20,000bn and India, in third place, at about $13,000bn. These projections are based on
what I consider feasible, long-term rates of growth; it is not beyond China's capacity to grow at 6% a year
for the next 25 years. After all, it has grown at a much faster rate over the past 25 years...For the first
time in history, two of the three leading economies will also be among the world's poorest countries in
terms of the incidence of absolute poverty. China and India will have a combined population of nearly 3bn
people by 2025, of which 500m may still be living below the poverty line. They will require vast amounts
of food and other essentials. To meet their needs, both countries will continue to put an emphasis on
industry and agriculture. Instead of becoming lighter, the worlds output will start to get heavier."
Also cf. Asian economies: Reliable prosperity comes to an end - Chinas inexorable growth is sucking
investment away from the once dynamic tigers by John Thornhill in Financial Times, p. VI, World
Economy, Fri. Sept. 27, 2002 (emphasis mine): Fro several decades, East Asias economies appeared
to be models of predictable prosperity. First Japan, then Hong Kong and Singapore, then Taiwan and
South Korea followed by South-East Asia and China recorded prolonged bursts of dynamic economic
growth that collectively became known as the Asian economic m iracle...
7. cf. China draws foreign investors by Chris Giles in Financial Times, p. 1, Mon. Sept. 23, 2002: China
has for the first time supplanted the US as the most attractive destination for foreign direct investment,
according to a survey of senior executives of the worlds largest companies. Chief executives and chief
financial officers are attracted by the size of chinas market, the vibrancy of its economy, and the
perception of few competitors with entrenched positions. But they are also disillusioned with the US as
the worlds most dynamic economy, according to the annual survey by A T Kearney, the consultancy.
After the surge of foreign investment into the U S in recent years, executives who responded expressed
growing concerns over the security of US investments...In 2001, China attracted nearly $50bn of FDI,
compared with $125bn in the US. But while foreign investment levels in China were growing, he level of
FDI in the US was down from $30bn in 2 0 0 0 ...
8. cf. China exports hit global industry in The Wall Street Journal, A8, Thurs. Oct. 10, 2002: ...China
makes more than 50% of the cameras sold world-wide, 30% of the air conditioners and televisions, 25%
of the refrigerators. A private Chinese company Guangdong Galanz Enterprise Group Co., now accounts
for 40% of all microwave ovens sold in Europe. The city of Wenzhou, in eastern China, sells 70% of the
worlds metal cigarette lighters. Chinas entry into the W T O late last year accelerated the trend toward
exports. By forcing down trade tariffs, W TO membership cuts production costs and removes obstacles to
selling overseas. That is drawing more investment into China, funding new factories and leaving industry
after industry groaning with overcapacity. What's more, as the Chinese government relaxes its export
rules, a new generation of nimble Chinese companies - particularly private enterprises - is beginning to
focus on overseas sales as well. (The investment boom also is reviving an old economic nemesis: a real-
estate bust...China's growth as a production base has followed a consistent pattern: A new product is
introduced, usually by a foreign company. Within months, numerous local Chinese manufacturers also
24
start cranking it out. Prices slide and producers, both foreign and Chinese, start looking for new markets,
increasingly overseas. Helping drive this competitive cycle is the flood of foreign investment into China -
more than $600bn during the past two decades - and the introduction of modem manufacturing
techniques. Foreign technology has powered productivity gains across the economy, and a nationwide
entrepreneurial zeal has sprouted from the shambles of central planning. Low wages have slowed
Chinas transition to a consumption-driven economy but the pool of cheap labor remains deep, allowing
companies to control costs and often to cut them dramatically. Some of the foreign companies that have
expanded their focus from the local Chinese market to exports include: General Electric Co., Toshiba
Corp. of Japan, Siemens AG of Germany, Samsung Electronics Co. of South Korea and personal
computer maker Acer Inc. of Taiwan. General Motors Corp. is exporting family wagons from its $1.5bn
joint venture factory in Shanghai to the Philippines and says it may also begin exporting minivans it
makes in China to other areas in Asia. Foreign investment in China is on pace to hit a record $50bn this
year. Motorola Inc. says its total investment in China will reach $10bn within four years, up from $3.7bn
now. Toshiba is building one of the worlds biggest laptop factories outside Hangzhou, with output next
year projected at 750,000 units and growing to 2.4million in 2004. The bulk of that is destined for export.
Feeling the effects. The US, the worlds biggest market, feels the effects more than most. Since May,
Americas monthly imports from China have consistently outstripped those from Japan. After decades of
exporting mostly low-end products, such as textiles and toys, china has moved into more sophisticated
goods, such as computers and DVD players. In July, exports to the US of China-made electronic products
hit $1.2bn, up to 12.5% from the month before. Chinas high-tech exports to the US, are now growing
faster than any other category of Chinese export, up 47% in the first seven months of this year from a
year earlier. Exports from China to the US affect most industries. Televisions and audio equipment rose
at a 13% annualized rate between 1998 and 2001 to $6bn in 2001; tools and hardware were up at a 23%
annual rate to more than $1.5bn in 2001; sporting goods rose at a 16% to $2bn. And as imports from
China are rising, US retail prices in many of these categories are falling. TV-set prices have declined on
average by 9% each year since 1998, according to Labor Department data; tool prices have fallen 1%
each year on average; sports-equipment prices have dropped at a 3% annual rate. To be sure, other big
changes in the global economy are driving prices down. The North American Free Trade Agreement and
European economic integration have boosted the flow of goods around the world Gains in technology
have spurred productivity, helping damp prices. The slowdown in the US economy has added to the
global glut of goods. But Chinas export juggernaut is a leading source of deflationary pressure.T h o u g h
the flood of cheap Chinese imports has translated into some lost jobs for US workers who compete
against Chinese manufacturers, it has been a boon for American consumers. Amatsia Salomon, who
operates a New York Limousine service, spent $48 at Home Depot on a combination ceiling fan and light
fixture made in China. Mr. Salomon, 63 years old, says: 'Years ago, we would say, 'M ade in China, we
dont want to buy it, because its very cheap quality. Then he adds, 'Today, this looks good...and its
inexpensive. In Japan, China's low-price exports are reinforcing deflation that has plagued Japan in
recent years. Matsutake mushrooms, prized for their delicate aroma, used to be considered such a luxury
that they appeared only in minuscule quantities in Japan, either sliced in soup or cooked in rice. But
matsutake mushrooms grown in China under contract with Japanese companies for export cost a tenth of
the price of Japanese-grown mushrooms and account for almost two-thirds of the matsutake mushrooms
sold in Tokyos biggest wholesale markets. Competitive prices also forced Xerox and its Asian joint
venture, Fuji Xerox Co., to refocus their energies on Chinas export market...The auto industry is one of
the best examples of the growing focus on new exports industries. Honda Motor Co. is setting up the
countrys first export-focused auto factory as a joint venture with Guangzhou Auto corp. and Dongfeng
Motor Corp., Chinas second-largest auto maker. Nissan Motor Co. announced last month that it plans to
spend about $1bn to buy a 50% stake in Dongfend Motor and begin mass production of a wide range of
cares and trucks. The Japanese company said recently that the joint venture could be exporting in one to
two years. Ford Motor Co. announced last month that it plans to boost its purchases of auto parts in
China to as much as $1bn annually starting in mid-2003. GM has already purchased more than $1bn in
Chinese spare parts in the past five years, and says it plans to increase that figure in the years ahead... In
the past decade, Asimco has acquired and revamped 1 '5 auto-parts plans across China that now bid for
manufacturing business around the world through Internet auctions. They often win contracts from US
auto-parts companies desperate to pare costs...Mr. Perkowski [a former Wall Street banker] is convinced
that will expand, as more auto-parts companies shift low-margin production to China and car
25
manufacturers themselves buy parts from China to save money. For large U S retailers such as Target
Corp. and W al-Mart Stores Inc., China has become a huge spigot of supply. W al-Mart has been buying
goods in China to stock its stores for more than 20 years. About $10bn in Chinese-made merchandize
makes it to W al-Mart stores every year, either directly from manufacturers in China or from other suppliers
that tap sources in the country. In February, W al-Mart set up a new independent sourcing unit, based in
the southern city of Shenzhen, to buy directly from Chinese factories, with most of the goods going to the
US, executives say. General Electric, which posted sales in the local market of $ 1 .6bn last year, expects
purchases from China - both parts and finished goods - to hit $5bn annually within the next three years.
The goods include GE-brand refrigerators made by independent Chinese manufacturers, and parts for
G E s gas-turbine engines, used to generate electricity. Phillips has witnessed the unfolding of this
massive factory floor since the company made the switch from local to overseas targets. O f 23 factories it
operates, six are wholly owned and 17 are joint ventures. The company still pursues the local market,
where competition has forced Philips to adjust its strategy. Several years ago, David Chang, the 54-year-
old head of Philips's China operations, was strolling through an electronics exhibition in Shenzhen when
he was shocked by yet another round of price cuts in color T V sets. Growing numbers of these sets also
were being exported. The result was a new partnership Phillips formed with a major competitor. TCI Ltd.,
one of Chinas biggest T V makers, mainly for domestic sales. But Philips still seeks to wring more exports
from its China interests. Last month, the company broke ground on a $77million factory that will make
module displays, pr screens, for notebook computers, monitors and televisions. The majority of the
displays will be exported overseas - inside a Philips electronics product. If the factory is successful,
Philips says it may set up other such display plants in China and gradually shift the industry away from
South Korea, where the screens are now made. Ultimately, Philips says the goal is to turn China into a
global supply base from which the companys products will be exported around the world. Last year, 20%
of everything Philips made world-wide came from China, and executives say the figure is rising quickly.
Several products, such as the drivers for C D and D VD players, are now made only in China.
9. Chinas influx of foreign direct investment (FDI) is supported from another source that "By 1998 the
stock of FDI was $1 bn and 3.3% of G D P in India, against $261 bn and 23.5% of G DP in China." cf.
Financial Times, p. 20, W ed. Oct. 1 3 ,1 9 9 9 (underlining mine).
Also, see a comparison of the Top 10 global recipients of foreign direct investment, 1999:
($bn) (%)
US 720 20.86
UK 274 7.94
China 217 6.29
France 174 5.04
Belgium/Lux 143 4.14
Germany 137 3.99
Canada 137 3.97
Netherlands 127 3.70
Brazil 126 3.65
Austria 126 3.25
World Total 3,455 62.83%
Source: UNCTAD, cit. from Financial Times, "Inward Investment into the UK 2 , Thurs. Oct. 1 4,1 99 9 .
Also cf. The Economist, p. 80, Feb. 24th, 2001: ...the point about FDI is that it is far more than mere
capital: it is a uniquely potent bundle of capital, contacts, and managerial and technological knowledge.
It is the cutting edge of globalization.
10. Balance of payments includes current account, capital account, financial account, and net errors and
omissions, as well as reserves and related items. Current account refers to net trades of goods and
26
services, current transfers (credit and debit)). Capital account refers to credits and debts. Financial
account includes direct investment abroad, portfolio investment assets (equity securities and debt
securities), other investment assets and liabilities. Reserves and related items include reserve assets, use
of fund credits and loans, exceptional financing, cf. Taiwan Statistical Data Book, 2001, by Council for
Economic Planning and Development, Republic of China, June, 2001.
27
Chapter 2
Theories and Models of China's Transition
his chapter will review a number of scholarly explanations for the exceptional growth China has
T experienced during its transition from a planned economy to an economy relying increasingly on
market forces. Three of these explanations - by Nee, Boisot and Child, and Qian and Xu - will receive
my special attention.
2.1 Theories of state socialist economies between the 1950s and 1980s
In the 1950s and 1960s, in the midst of the cold war between the West and the Soviet Union and
Eastern Europe, some Western scholars had already developed an array of alternative theories regarding
state socialism. Initially these earlier scholars had challenged the mainstream critics of Leninist doctrine of a
dialectical relationship between the base and the superstructure that viewed historical development as an
unfolding progress of productive forces [1], They had also challenged the mainstream critics of Stalin's
dogmatist totalitarianism that viewed communism as the polar opposite of capitalism (cf. C. Friedrih and Z.
Brzenzinski. 1956: Totalitarian Dictatorship and Autocracy, Adam Ulam 1963: The N ew Face o f Soviet
Totalitarianism) [2],
Modernization theorists about socialist economies emerged in the West who challenged those
critics of totalitarianism for being unable to answer questions about industrial growth under state socialism
(R. Richta 1969: Civilization at the Crossroads: Social and Human Implications o f the Scientific and
Technical Revolution] R. Lowenthal 1970: "Development vs. Utopia in Communist Policy"; M. Montias
1970: Types of Communist Economic Systems. M. Field 1976 ed. 1976: Social Consequences o f
Modernization in Communist Societies; T. Baylis 1974: The Technical Intelligentsia and the East German
Elite; R. Bahro 1979: The Alternative in Eastern Europe; J. Bielasiak 1980: "Modernization and Elite
Cooptation in Eastern Europe, 1954-1971"; F. Parkin 1982: "System Contradiction and Political
28
Transformation") I3]. Some modernization theorists argued that Communist party ideology and the forces
of modernization in planned economies could reinforce each other rather than have one (e.g.,
modernization) subjugated to the other (e.g., party ideology) (cf. R. Lowenthal 1970, p. 50: The
Communist Dilemma: Utopia vs. Modernity and p. 108: Uses of limits of the Totalitarian Model) f4].
According to these modernization theories, even under state socialism society would undergo its
own modem/industrial progress with a diminishing role of communist ideology. Implicit in their theories was
a mechanist logic of industrialization that assumed that industrialization, whether in a socialist or capitalist
society, could automatically expedite the spread of modem values and an efficient technology, and could
even help a rational bureaucracy to develop. According to such theorists, certain values, efficient
technology, and rational bureaucracy were benchmarks of modernization, irrespective of given historical
contexts and institutional conditions. According to R. Lowenthal (1970):
The very success of economic development [in the socialist economies] tends in the long
run to strengthen the forces of spontaneous, self-sustaining change, which are typical of
modem societies everywhere, while making the cost of further imposed revolutionary
change not only higher and more obvious, but less likely to be recovered by a new upsurge
of enthusiasm...[It thus] suggests the existence of a long term trend toward the victory of
modernization over utopianism (p. 54).
In this sense,
...a powerful, recurrent urge to utopian-motivated revolutions from above gradually loses
momentum with the progress of economic development (p. 108);
and
No longer able to justify its rule as a dictatorship of the proletariat needed to achieve full
Communism, it [the Communist party] claims that its guardian role is necessary to assure a
steady growth of production and welfare (which will eventually lead to Communism), to
prevent the penetration of foreign influences hostile to the countrys socialist achievements,
and generally to maintain national unity, independence, and greatness...the renunciation of
further revolutions from above and the acceptance of the primary need for continuous
economic growth lead to a strong emphasis on rationality, not only in the running of the
economy but in the methods of bureaucratic government (p. 115) (emphasis and brackets
mine) f t .
In the late 1970s, when several socialist economies began their transitional experiments to
29
incorporate elements of market forces, modernization theorists in the West were already beginning to rethink
the dilemmas of market-state/hierarchies and to redefine them more often locally and dynamically at the
micro- or meso-institutional level.
In the mid- and the late 1970s several dramatic events occurred including the oil crisis in the Middle
East, Japan's fast growth, moderate development in the capitalist countries, and a widening gap between the
North and South. During this same period, the state socialist countries and the previous planned economies
experienced protracted economic stagnation. China's planning economy had seriously suffered from its
Cultural Revolution, with a drastic drop in social production after the 1960s. Socialist state planners began to
seek alternatives. At this point, Hungary became a focus of attention (cf. X. Richet 1981) I6].
Why was this so? It may have been because Hungarian reforms seemed to provide a promising
model for other ailing planned economies (cf. Nina P. Halpem 1985) [7], The Hungarian economist Janos
Komai identified a number of factors he felt contributed to the problems of the socialist economies,
particularly those in Hungary f t . He maintained (1956/[1959]) that the problem of shortages was a central
and unavoidable feature of any kind of planned economy f t . Komai stated (cf. Komai 1986a, pp.: 6-7):
In my opinion, all the above-mentioned symptoms spring from the sam e root; in the final
analysis they can be traced back to common main causes. W e are faced with various
concrete manifestations of the same general phenomenon...The 'reproduction [of
shortage] of the title refers to the fact that we are not faced with temporary, provisional,
occasional events but with a complex of phenomena that constantly reproduces itself
under specific circumstances. It is not simply a case of 'shortage breeding shortage
although such self-movement and self-generation can also feature. Shortage is
continually reborn out of social conditions and certain characteristics of the economic
mechanism about which we shall speak in a moment.
Ibid. p. 10: ...shortage and slack are not mutually exclusive phenomena, considering the
whole of production and a long period, but are necessarily concomitant.
Komai in 1992 offered a systemic comparison between a socialist shortage' economy and a
capitalist counterpart as follows (cf. 1992. Table 12.2, p. 291),
30
Table 2.12a: The shortage syndrome: Komais comparison
between capitalist and socialist systems
Criterion for comparison Capitalism Classical socialism
1. Market regime Buyers market Sellers market
2. Dominant deviation Surplus Shortage

from market
equilibrium
3. State of labor allocation Labor surplus Labor shortage
4. Effective constraint Demand-constrained Resource-constrained

system system (administrative quota,
supply constraint, physical
input constraint)
Komai thought that the problem of shortages in socialist economies was rooted in the mechanism
of budgetary constraints facing state-owned companies. Komai called these "soft budget" constraints
under the policy of socialist redistribution [10J. According to Korai, these shortages cause the inefficiencies
of socialist economies and impede their growth (see Figure 2.12a for comparisons of the economic
performance in the former socialist economies prior to and following their transitions, 1961-2002) [11J.
Figure 2.12a: Economic performance of some socialist economies before and after their
introduction of market reforms: former Eastern Europe, former Soviet
Union, and China, 1961-2002
G D P Growth %
16
12
8
4 ^ L .
-/ , /+ " "
0 V v if ' *
-4 W\ /
-8 v
-12
-16
tf? o f? o f? o f? o f? J? o f? d f? o f? d f?
"P r< *? cJ?
Bulgaria - Czech Republic Hungary

Poland Romania Russia
East Germany China
Source: Komai 1992, Table 9.10, pp. 194-5; Komai et al. 2001, p. 78. Table 3.1, p. 269, Table A.1;
World Development Report 2000; Financial Times, II, Investing in Central and Easter
Europe, Mon. July 2,20 01 ; The Economist, p. 90, July 21st, 2001; the rest as same as of
Table 1.21b (2), Chapter 1.
Komai stated (1986a, p. 8):
W e shall center attention on the producer firm, dealing exclusively with the short-term
behavior of the firm. It is presumed that the firm strives for increasing production, and we
shall not question its motivation, i.e. whether its impetus comes from the command of
superior authorities, from its own voluntary decision (with a view to increased profit), or
from bonuses promised to the managers, or from the urgings of customers, etc. The
question is the following: what are the constraints limiting efforts at increasing
production? Constraints are divided into three large groups: 1. Resource constraints...2.
Demand constraints... 3. Budget constraints: Financial expenses of the firm cannot
exceed the amount of its initial money stock and of its proceeds from sales...Which of the
three constraints is effective is a defining characteristic of the social system...It is always
the comparatively narrower constraints that are effective, for these conflict with the
endeavor to raise production. Relatively looser constraints are not effective (emphasis
mine).
As a further revelation, Komai later on developed a system-to system comparison of the short
term behavior of the firm (1992, p. 264, Tables 12.1) with the following features:
32
Table 2.12b: Komais system-to-system comparison: the short term behaviors of
capitalist firm and socialist state-owned firms
Competitive private
firm under capitalism State-owned
within framework of firm under
Main feature imperfect competition classical socialism
1. Interest Primarily increasing profits Primarily recognition

from superior organizations,
chief criterion: performance of
instructions.
2. Entry and exit Determined by the market. Bureaucracy decides on all

Free entry. Business failure leads entries and ail exits.
to exit.
3. Budget constraint Hand Soft
4. Price responsiveness Strong W eak
5. Price determination Firm sets selling price. Price Price authority sets selling
higher than marginal cost. price, but firm has influence
on it. Relationship of price to
marginal cost is arbitrary.
6. Information on Firm unsure of demand Firm sure of demand

demand
Producer-seller Does not expect notional Expects notional excess

Hypothesis excess demand. Quantity demand. Quantity sold does
sold depends on own efforts. not depend on own efforts.
7. Notional excess Would like to sell more at price Would not like to sell more at
supply set than buyer buys. There is price set (approved) by price
notional excess supply and authority than amount it deems
notional excess capacity. its production limit. There is no
notional excess supply or
notional excess capacity.
8. Demand for inputs Constrained Inclined to run away [12].
Komai further distinguished the effective profit-making in socialist economies (through soft budget
constraints) from the effective budget constraints in capitalist market economies (through hard budget
constraints):
...The budget constraint is soft, if the growth of the firm is not tied to its present and
future financial situation. In this case there is no failure; the firm survives even when
investment entails grave losses. W hat I call here the hardness of the budget constraint is
not identical with what is called profit incentive of the firm in disputes about economic
management reforms in socialist countries. Profit incentive - e.g., profit sharing of
33
managers and workers - is compatible with a soft budget constraint. In such cases
managers of the firm ask superior authorities for financial support exactly in order that
workers (and maybe also the managers) can get their usual profit share even in the case
of losses. Hard budget constraints are effective in the sense we have explained. They
constrain action and the freedom of choice. W e can spend only as much money as we
have. If we invest badly, we shall die of it. Soft budget constraints are not effective. The
financial situation of the firm does not constrain action. Money has only a passive role.
Let it cost what it may. The main thing is to acquire material and capacity, and money
for it will be found in some way. Once we have a contractor, we shall not stop the
investment just because we have no money. If there is a loss, the state budget will take
it over. The preceding stereotypes of common thought in business circles suggest that
the hardness or softness of the budget constraint reflects an attitude. It must not be
mistaken for the book-keeping category of the balance sheet of the firm. The latter is an
ex post identity. It is a relationship which holds all the time: the difference of the terminal
and the initial money stock is identical with the difference of incomes and of expenses. As
opposed to this, the budget constraint - if hard and thereby effective - is an ex ante
behavioral regularity, which exerts an influence on the firms decision. Exactly because it
is an ex ante constraint, it is related to the firm managers expectations...beyond a certain
limit, the manager can expect almost with a 100% certainty that the survival of his firm is
guaranteed; it can stand every loss and investment financial failure. If the overwhelming
majority of firm managers have this expectation for the future, it can be said that the
budget constraint is soft. In the 'classic' form o f socialist economy the budget constraint
is soft (1986a. pp. 13-15; emphasis mine).
The softness of the budget constraint decreases the elasticity of demand of all alternative
inputs, of all factors; diminishes the firms sensitivity toward the interest rate, exchange
rate and so on (cf. 1986b, p.9) [13].
Komai's major contribution herein was his observation that "it is not only market economies that
have an 'invisible hand, the economies of state socialism, too, have self-reproducing institutional
mechanisms" (cf. Nee and Stark 1989, p. 11; also cf. Komai 1980: Economics o f Shortage, Vol. A,
Chapter 9: The investor: Institutional framework, pp. 189-215) Furthermore Komai suggested that the key
remedy for ailing socialist economies would be to end the separation of production, enterprises, and
organization of socialist societies from market competition, financial constrains, and incentives; and this
would require a transition toward market economy [14] (also cf. P. Hall 1986: Chap. 2). Komais study was
acclaimed as a great theoretical breakthrough. It renewed the interests of Western academics in the
enduring institutional problems of the state socialist societies with their planned economies (cf. Komai
1980, 1986b, 1990).
With Komai's work as a start, new projects emerging in the late 1970s and the early 1980s began
to investigate the economic institutions in the socialist societies and their reforms. Alec Noves 1983
volume The Economics o f Feasible Socialism (1983a) can be regarded as one of the more fascinating
34
subsequent presentations. Nove concurred with many of the insights Komai had addressed [15J. But he
did so on his own by reexamining Marx's theories of value as the fundamental premises accepted in
socialist societies for counting valuations and prices [16]. According to Nove, one flaw of socialist societies
was their common adoption of Marx's misconception of labor value that separated the value of a
commodity from the price of that commoditys production. According to Marx, value is calculated only on
the basis of labor time, excluding other factors such as scarcity of resources and of marginal production
other than labor costs, which Marx treated as value-in-use. In the meantime the price of a commodity was
to be stated according to its market values in money terms. Thus in planning economies value was
related only to the cost of production or production for use. It was de-linked from demand utilities, money
factors and market relations. As Nove uttered, this economic reductionism became a principal guideline
for inefficient resource allocation and deficient competition. In Noves vision (cf. Nove 1983a, p. 30)
Marx had little that was relevant to say about computation of costs under socialism. Marxists
who have tried to adapt his theory of value tend wrongly to use "valuations in terms of
(direct) labor-cost alone, which, so far as efficient resource allocation is concerned, is plainly
inadequate, as it ignores scarcity of production factors other than labor, and neglects use-
value...Labor-time can be measured in hours, but it is far from clear, unless one assumes
the existence of money, how other elements of cost can be computed and added to a sum
of labor-time.
Nove explained (ibid. pp. 25-6) that:
For Marx, the presence of use-value is a pre-condition for value, but there is no recognition
in this context that some things have greater use-value than others. There is total abstraction
from quality unless it requires more labor-time to achieve it. Marx certainly knew that
exchange-values and use values will tend to be brought into line with each other in a
competitive capitalist market...Market forces so guide profit-making capitalists that they do
not knowingly hire labor-power to make goods which yield below-average profits, or no
profits at all. But what happens if there is no market? Its absence removes the link -
imperfect, no doubt, but still a link - between effort and result, between the quantity of labor-
power utilized and the use-value it produces... if goods are valued in labor time...there is a
total absence of any connection between this valuation and use-value...Throughout Soviet
history, both theory and practice have suffered from this disjunction between value (or cost-
based price) and use-value.
Nove went on to criticize Marx's theories of values:
values (=sodally necessary labor time) [themselves] underlie prices; the former are
essence, the latter are appearance (ibid. p. 29; parentheses original; brackets mine).
35
Hence according to Nove, Marx analyze the values instead of price, while he obviously ignored that
the price of production is the rules when capitalism develops (ibid.) [17].
As Nove stressed (ibid. p. 30), labor value in itself incorporates many other factors, such as who
provide tools, materials, means (e.g., parts, facilities), and how they are organized and distributed, etc. [18].
That is, labor value cannot supersede these factors such as society, market, and utility in accounting for
price [19]. In Marx's theories, value in use is basically neglected: "Demand (utility) does not 'fit' into either
the theory or the practice of price-fixing" with the assumption that "materials and energy are
inexhaustible" (ibid. p. 30). Moreover, in the context of deciding valuations and price, market values are
jettisoned as subjective factors that ought to be excluded [20]. Marx's theories of value and labor value
barely counted on money terms, since any valuation in money terms would be an imperfect appearance,
exclusive of the essence. Thus in state socialist and/or planned economies, labor values were measured
only by hours of labor-time, and that presumably determined production costs. As Nove explained, in
socialist economies, anywhere, everywhere production is [only] for use," and thus the real "value" is
linked with use value and likened to it (ibid. p. 27),
in contrast to the real world of capitalist commodity production in that the products of
labor [as exchange values] are related to one another through the market (ibid.; brackets
mine).
Noves trenchant arguments could be regarded as significant supplements to Komais
extrapolations on soft budget constraints and transitions in the socialist economies, where market
mechanisms as real determinants had long been ignored or abandoned.
In the early 1980s, Victor Nee shared many of Noves observations (1983. "Between Center and
Locality: State, Militia, and Village," In Nee, Victor and David Mozingo, eds. State and Society in
Contemporary China. Ithaca: Cornell University Press). But unlike Noves focus on Marxs theory of value
and labor value in terms of cost of production, Nee presented some conventional wisdom about market
forces and competition, derived primarily from mainstream canons. However, he also addressed his
discontent with neo-classic economics for neglecting many institutional constraints on economic efficiency
36
and a rational economic model, and described how presentations were altered through a lens of new
institutionalism that he claimed to adopt (1989) [21], His thesis, as I perceived it, was a synthetic combination
of Polanyi's redistributive economy (K. Polanyi 1944 [1957]) and Szelenyis reduction of inequality under
state socialism (cf. Ivan Szelenyi 1978, 1983; also cf. R. Manchin and I. Szelenyi 1987). Nee attempted to
develop a revised view of an economic transition, through rephrasing state-market boundaries that could
affect the transition of a former planned economy from redistributive domination to market guidance (cf. Nee
1989: pp. 167-207; see the detailed discussion below in Section 2.2). Nee assumed that markets could
provide efficient incentives to direct producers and could create new structures with more opportunities in
the market place. This process could eventually transfer decision-making from the central powers to the
direct producers and thus eliminate the central powers monopoly.
David Stark, a co-author with Nee in their 1989 Remaking the Economic Institutions o f Socialism:
China and Eastern Europe, in his "Coexisting Organizational Forms in Hungary's Emerging Mixed
Economy" (ibid.) stressed the need to compare institutional configurations in socialist economies rather
than particular elements. While concurring with Szelenyi's arguments challenging the conventional
wisdom that markets indispensably increase inequalities, Stark added that:
...behind the explicit and very specific economic goals stands another political-economic
consideration that is especially important for understanding the establishment of the
V G M s [vdllalati gazdas&gi munkakOzOssPgek, i.e. enterprise business work
partnerships"!. The [Hungarian] political leaders saw the work partnerships as, above all,
a means of maintaining the standard of living of the politically and economically strategic
core group of workers inside the large enterprises during a period in which the real wages
for the entire working class were growing little, if at all. It was hoped that the VGMs, by
providing an additional source of income, would prevent the emergence of tensions
among workers whose key position in the labor process (and whose political skills and
ability to use their dense social connections) provide a strong basis for informal
bargaining inside the large enterprises (ibid. 1989: p. 142; emphasis mine).
Hence in capitalist economies where
the firm operates in a market environment...systemic uncertainties regarding labor are

reduced through internal bureaucratic rules,
whereas in state socialist economies,
37
by contrast, where systemic uncertainties are produced by a bureaucratic environment.
workers and manaaers respond through internal market transactions (Stark and Nee
1989, p. 13; emphasis mine).
In their 1989 work, Stark and Nee together stated that in state socialist economies
the 'internal labor markets of the capitalist firm are a set of bureaucratic rules whose
logic is more classificatory than transactive (ibid. p. 13; also ibid. D. Stark 1989, pp. 143-
9: Market Inside the Socialist Firm"; and also cf. D. Stark 1986: Rethinking Internal
Labor Markets: New Insights from a Comparative Perspective").
So-called classificatory logic working on capitalist conditions is here designated as a
supplemental welfare measure to remedy the defects in market relations through rules regulated by the
state and market institutions. In contrast, socialist economies under redistributive mode might need a
boost via market forces to facilitate economic production and distribution. Market forces could counteract
superfluous bureaucratic organs and functionaries and provide more space to develop a "civic" economy,
reduce inequality, and flatten out social privileges, etc. Thus an advantage in such a new comparative
institutional analysis, as Nee and Stark like to call it (1989, p. 13), was that it could help unravel in a
systemic fashion the contrasting modes of systemic institutions of capitalism and socialism before
reviewing the specific attributes of each system. Nee and Stark went on to say:
Whereas modernization theory posited the West as the standard from which to gaze at
the 'other, in these and other studies the new comparative institutional analysis provides
a vantage point from which to look back at the institutions of capitalism as the specific
features of each system are revealed in their mutual contrast (Stark and Nee 1989, p. 13;
emphasis mine).
New institutional comparison herein is posed as a systemic means whereby we can make
effective comparisons between quite divergent socio-economic systems. To both Nee and Stark, as well
as to Komai, the bureaucratic inflexibility and redundancy in state socialism had incurred economic
inefficiencies. Reducing economic inefficiencies called for rebuilding economic institutions including state
bureaucracies. As Komai et al. claimed (2001, p. 10):
The transition to a market economy opens extraordinary opportunities for enhancing

growth and improving efficiency in the allocation of resources.
In short, the early institutional explorations of socialist transitions that started in the late 1950s
38
provided a systemic critique of state socialism and its associated problems in terms of market-state relations
that contrasted with capitalism [22]. This kind of critique helped unveil the deficiencies of the cold-war
theories of totalitarianism in the 1950s and the inadequacies of the modernization theories prevailing in
1960s and 1970s. The picture of state socialism was not so much one of despotism but one of bargaining
and negotiation, with a primary focus on society. A new area of interdisciplinary research had been
identified: the study of transitional economies emerging between sociology and economics [23].
Following this line of early scholarship, could a reduction of bureaucratic size or central control,
as Komai and Nee implied [24|, induce increased economic efficiency and increased governance
effectiveness in socialist economies? If so, why did a great cut in bureaucratic size and central control in
the former Soviet Union (FSU) and the former Eastern Europe (FEE) apparently generate a bureaucratic
collapse and economic depression rather than add momentum and streamline the economy [25]?
Similarly, could privatization alone bring greater economic efficiency and performance [26]? O r could
privatization be a major factor in economic efficiency and performance? If so, how could one explain the
inconsistent relationships between the degrees of aggressive re-privatization and the respective GDP
performances in China, the FSU and the FEE, as shown in above Figure 2.12a, and Figure 1.2.1k, Table
1.2.1b (2) in our Chapter 1 [27]? In examining the transition of Hungary, Komai found that
it has been exactly the nonstate sectors that have brought the most palpable changes
into the life of the economy" (cit. from Nee 1989, 22).
In the 1970s and 1980s, the expansion of non-state sectors had gone "further" in Hungary and
China than in any other socialist society (cf. Michel Oksenbeng 1983; David Zweig 1985). These changes,
albeit piecemeal, had eventually initiated structural transformations in both countries [28]. As illustrated by
Table 2.12c and Figure 2.12b below, from the mid-1970s to the mid-1980s, the non-state sectors in China
grew more rapidly than they did in Hungary (cf. D. M. Newbery 1993) [29]. But we need to add a caution
regarding the numbers in the table and figure. Currently, Chinas data are available only for its gross
industrial output but not for its agricultural output. And Hungarian data are available only for its agricultural
output but not for its industrial output. Considering that the Hungarian industrial sector occupied a large
share of its economy, much larger than its counterpart in China, we could use Hungarys data o f national
39
income as a surrogate indicator of Hungary's industrial output so that we could make comparisons
between China and Hungary. Nevertheless, one must keep these differences in mind while making
comparisons I30].
Table 2.12c: State-owned vs. non-state-owned annual share of national output,
China vs. Hungary
China * Hungary **
Share of Gross Industrial Output Share of National Share of Gross

Value by Ownership (% per annum Income*** by Owner- Agricultural Output by
for selected years) ship (% per annum Ownership (% per annum
for selected Years) for selected years)
State-Owned Non-State-Owned State Non-State State Non-State
Year Year
1949 26.25 73.75

1957 53.77 46.23
1958 89.17 10.83
1966 90.18 9.82 1966 16.4 83.6

1970 87.61 12.39
1975 81.09 18.91 1975 73.3 26.7 18.0 82.0
1978 77.63 22.37
1980 75.98 24.02 1980 69.8 30.2 16.8 83.2
1985 64.86 35.14 1984 65.2 34.8 15.3 84.7

1990 54.60 45.40 1990
1991 56.17 43.83 1991 70.0 30.0
1992 51.52 48.48 1992 53.0 47.0
1993 46.95 53.05 1993 45.0 55.0
1994 37.34 62.66 1994 40.0 60.0
1995 33.97 66.03 1995 35.0 65.0
1996 28.48 71.52 1996 25.0 75.0
1997 25.52 74.48 1997
Sources:
* China: Statistical Yearbook of China, various issues from 1985 to 1992,1998; Qian and Xu 1993.
** Hungary: converted from Central Statistics Office, Hungary; cit. Nee and Stark 1989: 36 [31]; data after
1991 refer to Official Estimates of the Private Sectors Contribution to GDP" in Komai et al. eds. 2001, p.
276: Table A.5.
*** See above note in parenthesis.
40
Figure 2.12b: Growth in non-state sectors: China vs. Hungary.
80%
70%
60%
China
50%
40%
Hungary
30%
20%
1975 1980 1985 1990 1995 1997
Source: same as Table 2.12a.
Labels:
Hungary: Share of non-state sectors in national income

(Percentage distribution)
- China: Share of non-state sectors in gross industrial output

(Percentage distribution) [32].
Table 2.12c and Figure 2.12c compare the growth in the non-state sectors of the economy in
Hungary and in China between 1975 and 1996. They show that China had a significant amount of small-
scale commercial and industrial activities outside the central planning economy, except for the periods of
the Great Leap Forward (1958-66) and the Cultural Revolution (1966-76). Since 1979 Chinas industrial
system has become considerably more diversified, and there has been a gradual but substantial growth
in the non-state sector share of the total national output throughout the years I33]. By contrast, Hungarys
non-state sector changed less than Chinas during three decades until 1991, when its private sector
became a major driving force in its economic transition. Since 1991 Hungary has taken much more
41
radical approach to privatization of its industrial system. As regards agriculture, by the 1990s Chinas rural
reforms had gone much further than Hungarys rural reforms both in depth and breadth, having assigned
virtually all the arable lands to households since its transition [34]. Since 1978 Chinas agriculture had
provided increased incentives and opportunities for collective production, private production, and for non
state market exchanges, and these had precipitated the emergence of a hybrid economy [35]. In contrast,
Hungary had set aside only a relatively small proportion of its land as auxiliary plots by the 1990s.
Hungarian market-induced policies remained until then merely adjustment measures.
This brief comparison between Hungary and China, two pioneers in the transition from state
socialism (or centrally planned economy) toward a market economy (or a quasi-market economy),
suggests the usefulness of institutionally-based cross-national comparisons. However, China differed in
so many ways from most socialist economies that it might be useful to look at China as a unique instance
of the transition from a centrally planned economy toward a market economy. This dissertation has no
intention to ignore some of the downsides of Chinas transition, its numerous backlashes, social
aftermaths, institutional failures, and even setbacks, which have consistently haunted Chinas process of
transition. But it will try from an institutional perspective to explain China's relatively rapid economic
growth as it introduced increased market forces into its formerly-planned economy.
42
2.2 Nee: Chinas hierarchy-market dilemma
Many early writers tried to explain the underlying dynamics of Chinas economic transition by
examining the binary relationships between the state hierarchical coordination and the market coordination.
By chronological order of its appearance and due to its salience to scholarship on China's transition, we
start with Victor Nee's explanation early in 1989. Some other explanations we will discuss later can be seen
as modifications of N ees explanation (e.g., Boisot and Child). Nee and Stark first presented their
explanation in an introduction to their 1989 co-edited volume defining the predominant mode of Chinas
transition and the nature of its emergent hybrid economy [36] (cf. Nee and Stark 1989: Toward an
Institutional Analysis of State Socialism," in Nee and Stark, eds. 1989. Remaking the Economic
Institutions o f Socialism: China and Eastern Europe, pp. 1-31). Another important work by Nee was his
Peasant Entrepreneurship and the Politics of Regulation in China," also in Nee and Stark, eds. 1989.
Remaking the Economic Institutions o f Socialism: China and Eastern Europe, pp. 169-207).
In his Toward an Institutional Analysis of State Socialism," Nee acknowledged two possible patterns
of transition for a socialist state: (1) A socialist state could go through a radical political transformation to
remove political obstacle from the one-party Leninist state, in which case the transition would involve a
decisive shift from bureaucratic to market coordination." O r (2) A socialist state could follow an
incremental path to rebuild economic institutions and reform socialist economies. The first pattern
involves changes of the state hierarchy. The second pattern involves changes of the society. As N ee and
Stark stated (pp. 25, 27-8),
The history of market reform in socialist economies has been marked by cycles of
decentralization and centralization, expanding markets and restoration of hierarchies, and
alternating periods of reform and countenreform...ln a one-party Leninist state, without
competing political parties, there is little scope for open debate to ensure thoughtful
consideration of alternative visions, programs, agendas, and public policies. Progress
and successes in reform typically have no secure institutional basis or
guarantees....Som e analysts believe that the concentration of political power in a Leninist
party-state without electoral accountability and public scrutiny seriously complicates, if
not ultimately jeopardizes, any attempt at market reform. There is no political penalty for
failure in the absence of genuine opposition parties capable of mounting political
challenges through electoral politics... Brus, Whyte, and Lin thus contend that the
Leninist state is the main obstacle to remaking the economic institutions of socialism. In
marked contrast, Susan Shirk argues that it is precisely the concentration of power in a
43
few top leaders in setting the reform agenda, shaping the reform ideology, and managing
conflicts in subordinate agencies that provides the tools to manage the implementation
process. Far from an obstacle, the Leninist state is the instrument of reform. To support
this position, Shirk notes that although reform in Hungary and China has not brought
about a decisive shift from bureaucratic to market coordination, we should not lose sight
of the lam er cumulative trend across cycles toward the increased role of the market
mechanism in the reforming socialist economies (emphasis mine).
While introducing numerous chapters by major scholars analyzing transitions from socialism, Nee
and Stark pointed out how scholarly attention eventually focused on redrawing the boundaries between state
and society.
Redrawing the boundaries of the state is especially marked in societies with Stalinist or
Maoist legacies in which, for longer or shorter periods, a concerted effort had been made to
deny these boundaries altogether (Ibid. p. 22).
But Nee called such a reform simultaneously involving a mix of bureaucratic and market
coordination" a partial reform, holding that it merely underscored the problem of the transition from
bureaucratic to market coordination. Nee further argued that rebuilding the economic institutions of socialism
in order to shape new patterns of transaction could provide the long-run possibility that capitalism and state
socialism could eventually merge by denying those boundaries,
Market reform and its social consequences will no doubt stimulate interest in models of
convergence between capitalism and state socialism (ibid. p. 30).
According to Nee, to be effective, boundary redrawing has to be systemic, immediate, and essential
to the transitions. Explicitly, state and society, hierarchy and market, can be treated in a binary relationship.
Below is my heuristic figure of Nees major thesis regarding the convergence between capitalism and state
socialism (also see Nees further clarification about his institutional thesis on the convergence in 2001; cf. V.
Nee, 2001, p. 846) [37J.
44
Figure 2.2:
Nees 1989 model (i.e., solid line):

Redrawing boundaries between
State hierarchy and market
(State Socialism) Welfare State

Redistribution
State/Hierarchy
Today Tomorrow
A Crbss-Systemic
CovergenceV
Market Competition
Laissez-raire Market Competition (Re-Privatization)
Market
Note: this heuristic figure is mine.

Labels: Solid line shows Nees thesis on Chinas market transition from the state socialism to a
market economy;
Dotted line shows advanced capitalist development with a long-run possibility in Nees
proposal of the convergence between capitalism and state socialism.
As above shown, Nees model emphasized that the socialist state bureaucracy is the principal barrier
to the transition. The transition can occur only through reforming political institutions and reducing the size of
the state bureaucracy:
A central contradiction of reform efforts in socialist economies derives from the reform
leaderships failure to cut back sharply or dismantle entirely the bureaucracy that managed
the command economy. This is largely because inherent in any reform effort is the fear that
the reform may fail to realize desired results...To minimize the risk of failure, reformers tend
to move gradually in carrying out organizational reforms that are aimed at sharply reducing
the size of the economic bureaucracy (1989, pp. 26-7).
Nee went on to say:
In an important sense, reforms in a socialist society, even when they do not challenge the
sacrosanct institutions of the Communist party or raise the issue of political democracy,
always involve a reconceptualization of the relation between particular and general interests.
At a basic level, genuine reforms legitimate the particular - in the sense that particular
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45
interests can have validity without being expressed in immediately universal terms. To take
the problem of enterprise autonomy seriously, for example, means that an enterprise
director can legitimately justify a decision on the grounds that it is good for his firm. He might
go on to make a link to general interests, adding that if it is good for his firm, it is good for the
country; but that is quite different from the earlier situation in which the argument from the
central planners usually ran the other way around; since it was good for the national
economy, it followed that it would be good for the firm. Similarly, legalization (as opposed to
mere toleration) of private ventures involves a legitimization of particular interests. Thus
remaking the economic institutions of socialism involves redefining the conceptions of
interests and redrawing the boundaries of the state and economy as well as of state and
society...the state-society boundary is not only redrawn by state policy makers; it is also
reshaped by society, the activities of peasants, manual workers, and other employees who
are not functionaries in the bureaucracy (ibid. pp. 22-3).
Thus, according to Nee, the transition from state socialism to market competition required redefining the
conception of the general/particular interests and state/society boundaries I38]. As Nee elaborated,
The penetration of the state into all realms of life did not extend a public sphere so much as
negate it, for without attachment to the party or one of its subsidiary organizations no
particular individual could make claims with any general validity. Yet at the same time, the
omnipresence of ideas about universal interests threatened to eliminate the particular as
individuals lived in fear that the simplest particularity...could be interpreted as intending to
convey a general comment (ibid. 22).
In Nees view, partial reforms in transitional economies are most problematic. They produce the
dilemma of dual dependence on both bureaucratic coordination and market coordination. Partial reform can
result in the worst ends instead of the best ends, and can reinforce or even perpetuate central control. The
solution thus has to be the complete removal of state bureaucratic coordination and a complete entry through
market reforms to market coordination. According to Nee,
Public ownership, Komai argues, fosters paternalism on the part of central planners...The
hyperactive role that comes with public ownership and the resulting multitude of direct
microinterventions on the firm have the effect of distorting the regulation of the firms survival
and growth. Moreover, central planners undertaking these interventions are disadvantaged
in making rational allocative decisions because prices set by bureaucratic procedures
cannot convey detailed information on changing conditions. These allocative inefficiencies of
central planning led early reformers in state socialist societies to advocate incorporating the
market mechanism into central planning... The outcome of market reform in Eastern Europe
has been largely disappointing, especially in light of the early reformers extreme confidence
in the harmonious, mutually correcting duality of plan and market...As Komai suggests, the
naivete of the early reformers was to believe that in combining central planning with the
market mechanism they could achieve the best of both worlds. They failed to consider fully
the possibility that partial reform would result in the worst of both worlds (ibid. 16-7).
Bureaucratic allocation encourages firms both to make exaggerated claims for resources
to strengthen their bargaining position and to hoard, actions that, when aggregated to the
economy as a whole, are reflected in excessive or limitless demand and therefore in
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46
permanent shortages. The existence and perception of widespread shortage in turn
necessitate continuation of bureaucratic allocation. Moreover, the same bureaucracy
entrusted by reformers to implement market reform has strong vested interests in
maintaining its power and prestige, which are based in its control over economic
transactions (ibid. 19).
On the one hand, Nee did suggest that the redrawn boundaries between the public/state and
private/society might generate hybrid and intermediate forms and enable society/private sectors to grow and
penetrate into the state/public sector
...the process of establishing the institutional framework of a mixed economy generates

pressures for bureaucratic rationalization within state socialism. As the state withdraws from
direct control over the economy, and as markets expand in scope and generate new
entrepreneurial activity in the private sector, the state must adopt a regulatory role in
specifying and enforcing rules and procedures within which economic actors operate and
which define the limits of state power...the growth of competitive markets generates
organizational dynamics that may result in greater reliance on legal-rational procedures and
indirect macroeconomic regulation to economize on transaction costs (ibid. 20).
The boundary between public and private sectors would thus be crisscrossed by multiple
strands of joint ownership forms and related leasing arrangements...Redrawing the
boundaries between private and public, between state and society, need not entail making
them more distinct and clearly defined but may mean widening the boundary zones and
blurring the distinctions (ibid. 25).
On the other hand, Nee was skeptical of partial reforms, since he doubted if any room existed in
between central planning by the state bureaucracy and market mechanism,
Instead, partial reforms both perpetuated problems of the prereform economy and created
new distortions and imbalances... The command economy was replaced by a hybrid
economy, which Komai argues[,]...operates in a condition of 'dual dependence in which the
economy is coordinated by both vertical bureaucratic and horizontal market relationships.
The essence of dual dependence, however, is the continued dominance of hierarchical
forms of coordination over the socialist firm and the debilitation of the market mechanism by
persistent and pervasive bureaucratic microinterventions. Komais analysis points to the
dilemma of partial reform, that despite giving a greater role to the market, all of the critical
decisions - entry, exit, investments, prices and wages, output, credit - still depend more on
processes internal to the planning governance structure than on the market. As a result, the
problems of the soft budget constraint, shortage economy, and investment fever of the
prereform socialist firms persist in the postreform economy. Komais analysis of the
reforming socialist economy reveals the relative weakness of the market mechanism when
confronted with an intact bureaucracy accustomed to controlling economic action. Whether
the actual mechanism of bureaucratic control is direct or indirect, the effect on the firm is to
weaken its responsiveness to the market and perpetuate the conditions of inefficiency
associated with central planning. Komai concludes from the Hungarian experience of partial
reform that without a decisive shift from plan to a structure of market governance,
characterized by hard budget constraints and market competition, there can be no escape
from the dilemma of dual dependence. The transition from bureaucratic to market
47
coordination in Chinas industrial sector, Nicholas Lardy argues, has proceeded far more
slowly than the stated intentions of Chinese reform leaders would suggest...In these crucial
areas [such as pricing structure], argues Lardy, China has yet to go as far as Hungary and
Yugoslavia in changing the governance structure from hierarchical to market modes. The
difficulties of bypassing hierarchies and shifting to market coordination point to the
extraordinary staying power of established bureaucracies in charge of economic
allocation...(ibid. 17-9; emphasis and brackets mine) f39].
N ees and Komais agendas of socialist economies transition resemble each other, not only for
their similar terminologies, such as market efficiency," shortage economy, and soft budget constraints
(also, cf. Nee 1992, p. 6), but also for their similar contentions that the best way to prevent bureaucratic
hyperactive microintervention is aggressively to undertake full privatization. As Nee and Stark stated,
Just as the evolution of hierarchical organizational forms has been explained as a means to
economize on transactions costs under conditions of market failure in capitalist economies,
so the shift from hierarchies to markets should be understood as a response to
organizational failures in socialist economies. Kornais soft budget constraint, for example,
can be viewed as an organizational failure generic to centrally planned economies.
Organizational failures in state socialism are rooted in the relationship between the firm and
the state, that is. in the allocative processes of central planning (1989,16; emphasis mine).
W e have to credit Nees model for its contrast with the previous school of totalitarianism and
modernization theory I40] by including social institutions and interested groups. N ees model identifies the
social constructive nature of transition and the underlying need to redress the problems generated by the
ambiguity of property rights that comes along with China's hybrid economy and that might enable a
hyperactive state to become a regulatory state under the rule of laws. Ambiguity of property rights could lead
to considerable corruption and malfeasances.
One outcome of Nees observations was his conclusion that a new form of institutional analysis
would be most fruitful in guiding the comparative study on transitions f41]. Such an analysis could shift from a
conception of reform as mix of plan and market within the state sector to a conception of reform as the
transition to a mixed economy of public and private property forms with implications for the emergence of new
social groups and autonomous social organizations (ibid. 16).
Nee, in another work (i.e., "Peasant Entrepreneurship and the Politics of Regulation in China,"
1989), while persisting with the primary theses elaborated in his joint essay with Stark, approved the role
48
Chinas peasant entrepreneurs were playing in pursuing public goals by promoting economic growth, and
by providing new workplaces for the underemployed (ibid. p. 23). To Nee, the penetration of society by
the state can also be seen as a penetration of the state by society (ibid.). In this work, Nee documented
how Chinas peasants, through their entrepreneurship, pursued their private profits within their legitimate
range (ibid. pp. 169-207).
Despite observations such as these, N ees analysis remained haunted by this binary dilemma
and its intractable nature. Many of Nees arguments appeared vulnerable to being holistic, resting chiefly on
mainstream conventions of the market economies and general economic regularities. Nee presumed that
Chinas reforming regime had retained an intact bureaucracy" inherited from the erstwhile planning system
(ibid, 17), i.e., the classical socialist economy so-called by Komei (see our Section 1.1, Chapter 1), and that
Chinas decentralized hierarchy was at most a "partial reform" that could eventually generate the worst result,
i.e., saving the "persistent and pervasive bureaucratic microinterventions" policies that impeded market
competition. According to Nee, those hybrid forms essentially weakened Chinas organizational "responses to
the market" and entrenched "the conditions of inefficiency associated with central planning" because they
reinstated such "an intact bureaucracy accustomed to controlling economic action" (ibid. 17) f42].
2.21 Nees 1992 empirical thesis on China's hybrid economy
N ee in 1989 had maintained that unless China's transition headed for a market economy, China
could not solve its "soft budget" problems related to the irrational nature of bureaucratic coordination and
the inefficient allocation of resources. Hence remaking China's economic institutions had to center on
ownership re-privatization through diminishing the role of state sector and through elevating the role of
non-state sectors that come along with market expansion f43]. N ees 1992 empirical investigation of
Chinas organizational dynamics retained his concern for ownership re-privatization. As he stressed,
The organizational dynamics growing out of disparities in economic performance and

access to resources among the state, collective, and private sectors is what drives
market transition in China (1992, p. 24).
Notwithstanding, Nee's 1992 work ("Organizational Dynamics of Market Transition: Hybrid Forms,
49
Property Rights, and Mixed Economy in China." Administrative Science Quarterly Vol. 37 (1), 1992: 1-27)
cast new light on the study of Chinas transition by acknowledging Chinas considerable institutional
changes since the 1990s, affected in part by the hybrids,
The emergence of the hybrid marketized sector reflects a fundamental structural change
that is still in progress (ibid. p. 23) I44].
Here Nee treats the hybrids more positively. According to Nee (1992, p. 8),
In China at present, the marketized redistributive and private sectors sustain potent interests
in market-oriented economic growth, which is often nurtured by direct links to urban centers
and the world economy through subcontracting or 'putting out arrangements and joint-
venture projects (Su, 1992). These interests, moreover, are often supported and articulated
by local governments, which have become increasingly reliant on revenues gained from the
marketized redistributive sector [i.e., the state sector], as well as the private economy. The
new alignment of interests structured by market forces and the institutional dynamics of
partial reform has given rise to neolocalism, a form of corporatism based on a coalition
between local government, the marketized firm, and private enterprise, often against the
encroachment of the central state. Far from being unitary hierarchies, local government,
marketized firms, and private enterprise constitute a loosely coupled coalition of interest
groups, in which interests and group cohesion are continuously shifting and reconstituting
themselves in new combinations according to changing environmental conditions (Pfeffer
and Salancik, 1978) (the brackets mine).
Despite his insistence that Chinas reforms were partial, Nee now suggested that Chinas
economic hybrids provided intermediary links between the state hierarchy and markets that buffered the
tensions between them and thus were indispensable to Chinas transition (ibid. p. 3), particularly through
a booming local corporatism f45] that underscored the salient role of local governments sponsorship of
the local business communities and had little to do with the central state government j46].
In 1992 Nee also noted that Chinas hybrid economy actually adapted elements of the East Asian
development model which cannot be readily accounted for by neoclassical assumptions (ibid. 25) f47].
As Nee argued,
The East Asian development model - Japan, South Korea and Taiwan - rested on
continuous but selective state interventions (e.g., Amsden 1985; Hamilton and biggart,
1988). There, authoritarian states intervened in markets and firms to shape the course of
development, which enable these late-industrializing economies to mount and sustain
high levels of economic growth. Chinas market transition bears family resemblance to
the East Asian mode, and economic development there may in time take a similar course
(Perkins, 1986). As Biggart (1991) argued, the East Asian cultural tradition encompasses
50
the deep structures that produce the distinctive institutional environments of East Asian
market economies, which cannot be readily accounted for by neoclassical assumptions.
The market has penetrated the state socialist redistributive economy and is in the
process of transforming it into a hybrid market economy characterized by strong
government involvement (ibid. 24-5; emphasis mine).
Thus we could use a heuristic figure to illustrate N ees revised scheme in 1992 (see Figure 2.21
below). It shows that China's transition through its market reforms, if on the right track, would move from a
hierarchically-dominated or state-commanding economy to a market-oriented or market-mechanism-
approached economy.
Figure 2.21: Nees 1992 perception of

Chinas transition
Hierarchy
China Prior to Reform
Reforming China
Right Track - Head for Market Economy
Market
Note: This figure is made with reference to N ees 1992 figure and table (cf. pp. 8-9: Figure 2 and Table 1).
In 1992 Nee divided Chinas enterprises into three types: nonmarketized firms (NF), marketized
firms (MF), and private firms (PF) (ibid. pp. 11-13), somewhat similar to Komais divisions (cf. Komais
1992, p. 291: Table 12.2 contrasting classical socialist firms with capitalist private firms). Nonmarketized
firms (NF) refer to those state-owned enterprises (SOEs) that are mainly large-sized and big-city-based
(also cf. Cao et al. 1999, Table 1, i.e., Table 2.21a below) I48].
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51
Table 2.21a: Chinas state-owned industrial enterprises by size, 1993
Number Output Employment Net value Profits and

(%) (%) (%) of fixed taxes (%)
assets (%)
Large 4.7 56.7 43.2 62.0 66.7
Medium 12.9 23.6 25.6 18.6 19.4
Small 82.3 19.7 31.1 19.5 13.9
Source: China Statistical Yearbook 1994, pp. 388-91; cit. from Cao et al. 1999, p. 108: Table 1.
Marketized firms (M F) refer to mid-sized SOEs, C O Es (collective-owned enterprises), and TVEs
(township-village enterprises). The mid-sized cities and urban centers are surrounded largely by mid
sized SO Es and COEs, while Chinas rural townships and villages are the locations of the TVEs. Private
firms (PF) are mainly owned by individual entrepreneurs, private firms, and private ventures, including
those joint ventures with foreign firms and the joint ventures with SOEs and COEs, depending upon the
percentage of holding shares. The SO E, COEs, TVEs, and Private Ownership are currently standard
ownership used by Chinas State Statistical Bureau. I49]. Currently, most individual entrepreneurs and
most indigenous private firms operate with small amounts of working capital relative to their SOE
counterparts. But during this period the individual entrepreneurs and private firms have expanded, while
the SO Es have shrunk. In 1992 Nee compared the organizational dynamics, managerial styles and
attributes of different types of enterprises in Chinas hybrid economy (see Table 2.21 b).
Table 2.21b: Nees 1992 comparative organizational dynamics of nonmarketized firms

(NF), marketized firms (MF), and private firms (PF) f50]
Attributes NF MF PF
Enterprise autonomy 0 + ++
Neolocalist orientation 0 ++ +
Soft-budget constraints ++ 0 0
Efficiency 0 + ++
Access to capital ++ + 0
Access to raw material ++ + 0
Access to labor + ++ +
Access to markets + ++ +
Workers compensation + ++ +
* ++ = strong; + = semi-strong; 0 = weak; Source: Nee 1992, p. 9, Table 1.
52
As Boisot and Child noted in 1996 (609), Nees distinctions most overtly followed the concept of a
bifurcated economic system between market and state, albeit they also addressed the distinctions from the
perspective of management. However, Nees distinctions sensed the plurality of China's present economic
order" (ibid, 610). According to Boisot and Child [51], N ees classification could be regrouped as follows,
Table 2.21d: Boisot and Childs regrouping of Nees classification of

Chinese enterprises by ownership and marketization
Mode of Ownership/Property Rights

Coordination
State Collective Private
Non-Market 1. Non-Marketized
State Enterprises
Market 2. Marketized 3. Collective 4. Private

State Enterprises Enterprises Enterprises
Source: Nee 1992, p. 8: Figure 2; cit. Boisot et al. 1996: Table 1, p. 609 [52].
In the following sections 2.22-2.24 I will use the above regrouping of Nees classification, since, in my
opinion, it can help identify the nature of Chinas hybrid economy, and expose the strengths and weaknesses
of Nee's model. My following description is also reflective of Boisot and Childs discussion in 1996 of Chinas
emerging hybrids (610, 622).
2.22 Nees non-marketized state-owned sector (Sector 1 of above Table 2.21 d)
In the 1990s the non-marketized state-owned sector of China's economy included most core
enterprises and competent industries. Despite this sectors increasing discretion from the central government
that followed decentralization and new Enterprise Law, the governance and management of non-marketized
state enterprises remained mostly controlled by the "vertical ties to higher-level agencies" (Boisot and Child
1996, 610). They have thus retained the constraints of soft budget on efficient resource allocation inherited
from the pre-reform period I53]. A major concern here was the ambiguity of this sectors property rights with
multiplying market operations that kept it from the fully free market contracting formally required by a market
53
firm for its complete autonomy I54]. Nee noted that state ownership made it difficult to delegate full authority to
the boards of directors and firm managers like most private firms could. With state ownership, only the upper
authorities could appoint most of those who were in charge of the firms governance and managerial
decision-making (ibid, 620). Ultimate state ownership would incite myriads of problems, such as those of
legal loopholes, legitimacy, soft budgets, organizational inertia, corruption, etc. These problems could further
dampen the local entrepreneurship, tamper with the activism of the economic organizations I55], and drag
down their performance. In the end, Nee holds out little hope for the non-marketized state-owned sector of
Chinas economy.
2.23 Nees marketized non-private sector (Sectors 2 and 3 of above Table 2.21 d)
The Marketized State Enterprises (Sector 2) and the Collective Enterprises (Sector 3) in Nees
above classification include most business enterprises, state-owned or collective-owned or semi-state-
owned. There is some controversy regarding whether or not these state-owned enterprises and
collective-owned enterprises (most rural collective-owned enterprises are now township-village
enterprises) actually represent private firms I56]. These enterprises of this sector act more or less as
formally autonomous entities or players, somewhat independent of the state in a legitimate sense through
marketization. Such a semi-dependent status of ownership and operation accompanies growing
discretion in decision-making [57]. Although these enterprises do not enjoy full formal discretion as the
private sector does, the effective discretion they can enjoy informally is sometimes larger than that of
private firms f58]. Private firms are actually suffering double hits not only from state interventions but also
from the very hard budget constraints of the markets invisible hand. The leverage drawing from the
duality of ownership and the associated complexities exposed to Chinas transition could really be
revealed through this marketized non-private sector I59].
If we look at N ees non-state sectors (i.e., Sectors 3 and 4 of above Table 2.21d), they are by and
large made up of mid- or small-sized, undercapitalized collectives of family businesses, and private
enterprises providing over 70% of overall industrial output (see above Table 2.12c and Figure 2.12b).
Supposedly, they are more vulnerable than the marketized non-private sectors (i.e., Sectors 2 and 3 of
54
above Table 2.21d) to the double sufferings from their free market transactions and from the intervention
of local governments. As Nee explained in 1992, the non-state sectors could not escape the exactions of
local bureaucracies with which they must reach some accommodation for their survival" I60]. In the
meantime, as Nee discovered, their operations could succeed only if they were beyond the reach of the
state central bureaucracy. According to Nee, the role of the state is mostly perceived as negative,
whereas the role of market mechanisms is mostly romanticized I61]. The state role is assumed as
contradictory to marketization. Such a perception ignores the fact that many firms in the state sector have
actually leveled themselves out through subcontracting to non-state firms and through forming joint
ventures with both non-state firms and foreign partners. The distinctions between the state sectors and
the non-state sectors with respect to their property rights and operations thus become rather blurred and
ambiguous in China's transition.
Nees marketized non-private sector (i.e., Sectors 2 and 3 of the above Table 2.21d) cannot be
immune to the same dilemma related to its property rights and operation mode I62]. Nee realized in 1992
that the ambiguous role of the state in regard to the marketized non-private sector could be positive and
not always be negative I63]. Boisot and Child (1988, 1996) and Pei (1996) held even more optimistic
perspectives, particularly regarding TVEs or COEs (Sector 3). Boisot and Child assumed that this
ambiguity could allow the sector actually to enjoy both a "type of state-dependence" and a kind of semi
autonomy backed by localized intermediaries like local banks with their access to local resource and
network information I64]. Pei in 1996 explained that TVEs, in the absence of sufficient resources and
proper market regulations by the state, could become major surrogates for other alternatives in rural
industrialization. Further, the reciprocity between the state and the marketized non-private sector actually
caps the collusion with local governments. This agreed with Qian and Xu's observation that the local
agencies of the state have actually filled many roles that in the market economies would be played by
private intermediary institutions. Boisot and Child share similar findings I65]. As seen in Chinas current
transition, keeping stronger personal ties to communities and informal connections with local
governments have been conducive to the thriving of these sectors (see Figure 2.23) I66]. W hat counts
here is the actual role of state reforms and policies, whether they are supportive or repressive, and how
55
their effects can be evaluated. In comparison to the ambiguity of property rights in the non-marketized
state sector (Sector 1 of the above Table 2.21d), that Nee regarded negatively, Nee regards the double-
edged nature or duality enjoyed by marketized non-private sector, particularly by TVEs, much more
positively. Today the marketized non-private sector (Sectors 2 and 3 of the above Table 2.21d) and the
private sector (i.e. sector 4 of above Table 2.21 d; see below Section 2.24) altogether constitute an
integrative marketized sector, which has taken over 85% of Chinas total industrial output in 2001.
Figure 2.23: C h in a - Industrial o u tp u t by types o f ow nership,

1952-1997
% per annum
90
80
70 State
Enterprises
60 Collective
50 Enterprises
Private
40 Enterprises
30
20
10
0
1952 1962 1970 1978 1985 1987 1989 1991 1993 1995 1997
Source: China Statistical Yearbook, 1998.
2.24 Nees private sector (Sector 4 o f the Table 2.21 d).
Most components of the marketized private sector have more unique characteristics and even close
affinities with overseas Chinese family businesses in the so-called Chinese Diaspora I67]. Following the
institutional reforms intensified since 1985, this sector of Chinas economy, consisting of those individual
ownerships and other ownerships (non-SOE and non-COE owned), as well as venture capital enterprises
(many of which mix with local SOEs, COEs, and overseas capital enterprises), has formally enjoyed greater
economic discretion than any other sector. Nee was most interested in this sector, since he thought it might
56
be the sector most seeking short-termed economic efficiency, although he remained doubtful about its
capacity, in the long run, to introduce modem capitalism t68]. Indeed, in 2001 this is the sector of fastest
growth with strongest momentum I69]. Many of those private firms remain small, contingent, localized, and
undercapitalized, operating under hard budget constraints. Many of them remain rather self-reliant, diligent,
and frugal, and thus distinct from their Western counterparts as well as from giant corporations [70]. This
sector operates almost entirely exposed to the market, much more so than the TVEs or COEs, though many
private firms have co-partners in the slate-owned enterprises, or strong affiliations with them, and have even
been shaped by governmental institutions. In this way the leverage that private firms could enjoy from the
formal discretion would be less than what marketized non-private firms could enjoy with their informal
discretion. On the whole, however, the survival of this sector rests upon a private firms ability to make
dynamic and innovative decisions. Local banks and other intermediaries provided little assistance for the
private firms since they concentrated on larger state enterprises and collective firms [71],
Prior to 1990, the state had not yet stipulated full-fledged codes and stable procedures, regulating
the normative routines of those fledgling private firms, protecting their legitimate rights, and promoting their
growth. In the absence of stable institutional procedures and well-coded private intermediaries, as Boisot and
Child noted in 1996 [72J, the management of many private firms had to depend on personal connections and
local governments and trust networks to tackle the scarcity in resources and information. The legitimacy of
the private sector had been more problematic than that of other sectors. Sometimes private firms that had
registered in the name of collectively owned firms found that they enjoyed more subsidies and protections
from the local governments (cf. Pei 1996). Hence similar in some ways to the marketized non-private sector,
the property rights of the private sector were "dependent importantly upon the sanctions of local governments
and officials" (cf. Boisot and Child, p. 612).
After Dengs famous Southern Tour in 1992, the situation in China began to change. Nee published
his work before he could see that state governments had taken a series of more aggressive reforms
regarding industrial structure. The duality in private firms gradually abated in the 1990s, and their economic
leverage increased. As more and more COEs or TVEs become converted into private firms, SOEs' reforms
57
were extended, and the governments policies became more relaxed. More SOEs marketized and sold out.
Private firms gained greater access to capital funds and labor [73]. The increasing sizes, employment
numbers, and growth rates of private firms contributed significantly to Chinas national industrial growth.
In summary, we can say N ees model focused on the binary distinction between state/hierarchy
and the intractable nature of the market. His 1989 works explored the transitions to market economies
from erstwhile socialist economies. Nee extended his analysis beyond the narrow neo-classical range to
include society and social groups. But while focusing on redrawing boundaries between state/hierarchy
and market and between public interests and private interests, his observations and programs of
remaking economic institutions essentially repeated essentially repeated Komais thesis regarding the
needs for market efficiency and the inept nature of the state bureaucracy in socialist economies.
According to Nee, Chinas regime remained an intact bureaucracy of a planning system; therefore its
reforms through decentralization and hybridization were doomed to be only partial reforms. His thesis
was later criticized by Boisot and Child as an example of Williamsons unidimensional market-hierarchy
continuum (see our discussion below). By contrast, Nee in 1992 provided an empirical investigation of
organizational dynamics in Chinas market transition. He put Chinas hybrids in the dynamic front of its
transition. He turned to Chinas local corporatism and cultural intermediaries to account for the
momentum of Chinas fast growth. Accordingly, Nee identified Chinas privatization of its non-state
sectors as playing a key part in Chinas economic transition and subsequent rapid growth.
58
2.3 Boisot and Child: The emergence in China of a new
economic order - network capitalism
Max Boisot and John Child (hereafter B&C) presented their analysis of Chinas transition in their two joint
treatises in 1988 and 1996, in both of which they expressed their critical reservations about Nees endeavors
to analyze Chinas transition.
Boisot and Childs 1988 work (507-527) started with a critique of Williamsons theorems on
transaction costs. According to them, the current markets and hierarchies framework of transaction-cost
economics provides too limited room to account for the PRCs bureaucratic failures of economic governance
in the pre-reform as well as the economic reform periods, failures that lie beyond the market-hierarchies
typology (1988, p. 507).
In Williamson's (1975) early analysis, as well as in that of his predecessors, such as

Commons (1934) and Coase (1937), the choice was seen to fall between governance
through the hierarchical structures of formal bureaucracies or through the market
mechanism. Thus if a bureaucratic governance of transactions failed, the market was
presented as the alternative, and vice versa. While Williamson wrote with reference to the
United States, a developed capitalist economy, discussions of economic system reform in
socialist countries have also taken as a central theme the postulated dichotomy between
bureaucratic and market transaction-govemance structures (e.g.. Komai. 1986)...The
examination of the Chinese case in this article indicates, however, that Williamsons model
reouires extension to take into account other transaction-govemance possibilities that may
be more consistent with the social preferences emanating from a traditional culture and that
are also easier to support with the limited infrastructure of an economically less developed
nation (ibid.; emphasis mine).
In above paragraph Boisot and Child indicate that Williamsons theorems of transaction costs
essentially created a dilemma between hierarchy and market. To Boisot and Child, there is an area beyond
market and hierarchy structure, in which social preferences and cultural underpinnings might play salient and
crucial roles. Seen in this light, Williamsons theorems of transaction costs might need an extension,
particularly when analyzing changes in the developing worlds [74]. According to Boisot an Child, to extend
Williamson's as well as Nees analyses of Chinas transition toward market competition [75], one must know
more about institutional sources of information hold key, because it is information that frames those economic
transactions.
Information is inherent in transactions for goods and services because it is a prerequisite for
59
their initiation and completion. Transactions require the production and exchange of
information. The structures through which transactions are governed differ in the ways they
express and distribute information (ibid. 507).
Implicit in Boisot and Child's view is the idea that the role of the market per se is not aimed to bring
about a price equilibrium or an optimum economy but to act as a signaling device to enable information
scattered in the economy to be brought together so that it can be used as an incentive to business decision
making [76]. Boisot and Child wrote:
Focusing on the codification and diffusion of information, it [this paper] provides a set of
concepts designed to extend the existing framework...[this] paper identifies a form of
bureaucratic failure that lies beyond the markets-hierarchies typology [e.g., N ees scheme]
and that highlights the important role played by culture and level of development in shaping
transactional preferences (ibid. 507; the bracket mine).
Boisot and Child looked at the ways in which social groups structured and shared information across
space and time. In so doing Boisot and Child further distinguished between the codification of information
(regarding the structuring of information) and the diffusion of information (regarding the extent to which
information is shared). Both the codification and diffusion of information are fashioned in social and cultural
contexts. And sets of possible combinations" of codification and diffusion in their different contextual levels
could demonstrate various information environments for transactions, environments that were dynamic in
some occasions, and repressive in others, and that varied in levels of constraints or dynamics they could
present [77]. According to Boisot and Child,
The culture space described by the dimensions of codification and diffusion posits distinctive
information environments for transactions (ibid. 508).
Following this line of reasoning, Boisot and Child concluded that any society or culture could follow
its own way of codification and diffusion to structure and share information (i.e., societies or cultures are
constructed by means of information codification and diffusion); and any society or culture could have its own
special tools for codification and diffusion (i.e., information codification and diffusion are culturally-dependent
and socially-embedded). Quand m&me, in order to solve an economic puzzle or an institutional mystery in
any given society, one should unearth the anatomy of codification and diffusion of information. Yet
Williamson's scheme of transaction costs ignored these insights about information codification and diffusion
60
and had no regard for culture space or social contexts. Boisot and Child stated,
Bounded rationality and opportunism are responses to an information environment that has
been insufficiently specified by Williamson. He has concentrated on information
impactedness - degree of nondiffusion in the culture space - and has relegated problems
associated with codification under the catch-all term of atmosphere. What our brief outline
of Chinas experience with its enterprise reforms has tried to show is that the codification
variable has an important bearing on the governance options available either at the level of
the individual firm or at the broader institutional level (ibid. p. 525).
2.31 Boisot and Childs description of Chinas transition.
In 1988 Boisot and Child believed that understanding Chinas transition could be helped by their
typology of transaction-govemance structures, in a matrix of such combinations of codification and
diffusion that were disengaged from the unidimensional market-hierarchv continuum" but were related to
cultural space (ibid. 524). Later, in 1996, they referred to their typology of transactional environments
created by information codification and diffusion (1996, 603). They listed four dominant institutions that
could fashion transactional environments and define market arrangements: bureaucracies, markets, fiefs,
and clans, all of which needed to be researched,
The outcome of such research will help us to assess how far the production and distribution
of information impinges on the way that the production and distribution of other goods and
services is organized (1988, 526).
Corresponding to their typology, Boisot and Child generated a matrix distinguishing between the
diffusion/undiffusion and codification/uncodification of information in bureaucracies, markets, fiefs, and
clans (see Table 2.31a):
61
Table 2.31a: Information matrix of dominant institutions
in cultural space (C-space), according to Boisot and Child
Information:
Undiffused Diffused
2. BUREAUCRACIES 3. MARKETS
Diffusion of information: Diffusion of information:

Codified centrally controlled; virtually unlimited;
Relationships: impersonal; Relationships: impersonal;
Goals: hierarchically imposed; Goals: freely chosen by agent;
Coordination: hierarchical; Coordination: self-regulation;
Information access size: medium; Information access size: very large;
Uncertainty: high Uncertainty: low;
1. FIEFS 4. CLANS
Diffusion of information: Diffusion of information:

Uncodified very restricted; limited;
Relationships: personal; Relationships: personal;
Goals: hierarchically imposed; Goals: by negotiation;
Coordination: hierarchical Coordination: by mutual adjustment;
Information access size: small; Information access size: medium;
Uncertainty: high; Uncertainty: high.
Source: Adapted from Boisot and Child 1996 Figure 2 (p. 603), which is a slight revision of Boisot and
Child 1988 Figure 1 (p. 509).
Using this information matrix, Boisot and Child illustrated Chinas bureaucratic and market failures
prior to and during its transition.
62
Figure 2.31a: Boisot and Childs 1988 illustration of Chinas bureaucratic and
market failure with reference to cultural space
Information
Codified
(Impersonal)
The markets and
hierarchies continuum Markets
Bureaucracies
The ir The iron laws of

of fief oligarchy
Fiefs Clans
Uncodified
(Personal)
Undiffused Diffused
(Relational)
Source: Adapted from Boisot and Child 1988: Figure 3, p. 526.
Using a figure (see above Figure 2.31a), Boisot and Child illustrated Chinas bureaucratic and
market failures prior to its transition corresponding to the different types of environments of transacting
governance (or so-called economic orders), and explored the potential failures that could emerge during the
transition indicated by different moves back to certain indigenous environments in Chinas cultural space,
unlike those that Western mainstream economists would expect (for the details, reader might have to see
their article) [78]. As they described it, Chinas transition could be seen as a search for a form of governance
that would integrate bureaucratic and market transactions" (ibid. 513) [79],
Boisot and Child also contrasted their matrix with the unidimensional market and hierarchies
continuum proposed by Williamson in 1975 and mediated by Nee to describe the rebuilding Chinas
economic institutions. As Boisot and Child's matrix illustrated, forms of economic order or transacting
governance and their rebuilding process existed beyond the market and hierarchy continuum. The iron laws
of fiefs were characterized by transactions with relatively noncodified information that was asymmetrically
distributed within the relevant population of low diffusion, i.e., small numbers, hierarchically structured
63
through face-to-face and personalized power relationships that often have to be charismatically legitimated
(ibid. 508) I80]. The iron laws of clans (resembling Japans giant industrial groups or Mancur Olsons 1965
logic of collective action"; ibid. 525) were characterized by transactions with relatively noncodified information
that was widely diffused within the relevant population, although this remained based on personal trust and
informal ties (see their further elaboration in 1996, 604). By using their typology, Boisot and Child attributed
Chinas market failures and bureaucratic failures to the deficiencies of the iron laws of fiefs" and the iron
laws of clans. By the same token, a path of the iron laws of fiefs" toward the iron laws of clans illustrated
Chinas unique path of modernization in a direction different from Western market economies, given Chinas
bureaucratic decentralization. It thus appeared according to Boisot and Child that only a bureaucracy
compliant with the rational-legal codification and diffusion, which came out short in current China, could carry
out such a transformation. As explained in 1996 (604-5),
Using the codification/diffusion framework as an analytical tool, Boisot and Child (1988)
argued that China would have been inhibited in decentralizing from bureaucracies to
markets, had it wanted to, because it had not actually built up a stable codified bureaucratic
order from which to decentralize. A preference for interpersonal accommodation - an
orientation to particular individuals and relationships rather than to impersonal rules -
coupled with the irrationalities of the post-1949 command economy, was always
undermining the countrys attempt to develop into bureaucracies and pulling China toward its
traditional mode of social organization. ..The process is self-reinforcing in that the absence of
a rational-legal institutional framework fails to engender confidence in a wider system of
bureaucratic or market transacting outside networks based on personal power, commitment,
and trust. Boisot and Child labeled this tendency the iron laws of fiefs....In China...the
bureaucracy that the communists inherited in 1949 was 'patrimonial' (Weber 1964), and
feudal in its operations. It was in the hands of an unspecialized class of literati that, although
dirigiste, interventionist, and particularistic in its orientation, was more concerned with
formality of bureaucratic codes than with their rational-legal content of effects. Its survival
owed much to the fact that the simple and cellular preindustrial society it had presided over
was comparatively undemanding of coordination and rational...Without the courrtervailance
of a legal-rational bureaucracy, however, Marxism-Leninism in China operated through the
fieflike traditional mode of social organization. This was reinforced by a Chinese cultural and
cognitive bias against abstraction. Abstraction is a prerequisite for the creation of robust
codifications and the construction of a rational-legal order. If codification seeks to economize
on data processing by assigning the data of experience to categories, abstraction seeks to
economize on the number of categories used in the act of codifying (Boisot 1995). It involves
a move away from treating each specific exchange concretely sui generis and toward the
use of general principles that apply predictably and systematically to every case.
In 1988 Boisot and Child cautioned that their diagrammed typology of Chinas cultural space with
four quadrants might be only descriptive rather than explanatory (ibid. 508) I82]. Perhaps they remained
unsure of their categories, since they were derived from Western rather than indigenous perceptions f 3].
64
They were both aware that Chinas patterns of abstract thought throughout its history could have uniquely
affected its current decentralization to market (1996, 604-5).
In Boisot and Child, China's transition during its new search for a form of governance that would
integrate bureaucratic and market transactions (ibid. 513) could be seen as paralleling its passage from the
iron laws of fiefs to iron laws of oligarchy or clans in social organization and exchange. But such a
passage to the iron laws of oligarchy was quite vulnerable to market failures, just as the previous iron laws
of fiefs had been vulnerable to bureaucratic failures I84]. Boitsot and Child explained Chinas need for such a
transition in the following context,
...it [China's 1949 revolution] faced the problem that the charismatic leadership style - most
effective in the governance of a fief - that Mao had displayed during the Yenan Period in
the revolutionary base areas could no longer cope on its own with the transactional scale
and complexity of national government ...The result, predictably, was clan governance and
factionalism (ibid. 512; brackets mine).
According to Boisot and Child, Chinas bureaucratic failures prior to its transition could be seen as
the failures of its fief quadrant or mode I85]. Therefore, a logical prediction drawn from their figure (i.e., above
Figure 2.31a) could be that Chinas transition of transacting governance ought to be in a direction moving
toward an economic order based on well-codified and widely diffused information. As they concluded,
...the 'iron law [of dan] might work in reverse when a parochial structure is overwhelmed by
volumes of well-codified and readily diffusible data...(ibid. p. 526; brackets mine).
Boisot and Childs description of Chinese bureaucratic and market failures prior to and during its
transition has advantages over Williamsons and Nees unidimensional market-hierarchy continuum. Boisot
and Child could perceive the market-hierarchy relational continuum to be sodally embedded in Chinas
cultural space. China's bureaucratic failures ought to be seen as those of its fiefs, a particular form of its
bureaucracy in the pre-transitional era, but not those of any modem bureaucracy (ibid. 525). Although the
fiefs might follow their hierarchical rules, their hierarchical rules are not the same as the hierarchical rules of
modem bureaucracy in the Weberian sense. By the same token, clans might follow their hierarchical
coordination in market competition, which is not the same as the hierarchical coordination in markets. Clan
coordination is through negotiation or collective action, whereas market coordination is through self
65
regulation. In 1996 Boisot and Child added that collective action in China was based on a mutual adjustment
resembling that workable for Japanese developed interfirm networks or industrial conglomerates (ibid. 624).
Albeit Boisot and Child did not further clarify this, it is implicit in their framework that without such a stage of
formal bureaucratization China could not move toward a market economy. In fact, Chinas own transition
toward the hierarchy of iron laws of clan might abort, since it is susceptible to reproducing those
bureaucratic and market failures that once happened to its former patriarchal planning system. In the end,
Boisot and Child made virtually the same prediction as did Nee, based on his formal analysis, using a
unidirectional market-hierarchy continuum. This is a dilemma that counters Boisot and Childs logic of Chinas
network capitalism."
Boisot and Childs 1996 work (600-628) expressed their 1988 thesis in more general terms, viz. from
a comparative institutions perspective (621), to use their phrase. They continued to attribute Chinas rapid
growth to Chinas own experience and its unique system of industrial governance and transaction. They
continued the debate with Williamson and Nee over the thesis of unidirectional markets and hierarchies
continuum I86], exploring in particular the mechanisms of institutions working in Chinas transition (621-2).
Boisot and Childs major differences with Williamson and Nee might be captured in two associated
propositions that drew from their summary of Biggart and Hamiltons 1992 theses:
Proposition 1: The markets and hierarchies perspective, when applied to the modernization
process, assumes that policy options are located along a single dimension with the state
(bureaucracies) at one extremity and autonomous firms (markets) at the other. This
perspective assumes, therefore, that decentralization involves a transition from
bureaucracies to markets. A C-space fculture-spacel analysis indicates that it is also
possible to decentralize at a lower level of codification than is implied by the markets and
hierarchies perspective. In that case, the move will be from fiefs to clans.
Proposition 2: China offers an instance of such decentralization and in so doing, it is moving

not toward a market order, as it claims, but toward a form of economic organization that can
be labeled network capitalism and that to a lame degree appears to be characteristic of East
Asian societies.
Taken together, these two propositions extend the institutional options available for the
modernization process beyond those offered in the markets and hierarchies framework.
They do so in a wav that challenges both the widely held assumption that capitalism is a
unitary market-oriented phenomenon (cf. Braudel 1979) and the popular belief that
institutional and economic development invariably lead to a convergence with a unitary
capitalist order (cf. 1996, 624; emphasis mine; I feel indebted to Boisot and Child; many
of their assumptions were very instrumental to my thinking and helped organizing the
66
thesis of this study).
An immediate benefit from Boisot and Childs is the possibilties that Chinas transition provides an
alternative to the conventional view that market transition must come through a structural transformation in
the state bureaucracy. For the transition to occur there must be a shift of economic order or transacting
governance; and that might be fathomed through a shift in network institutions. Boisot and Childs 1996
position might be recapitulated as follows: 1. The market-hierarchy perspectives, which are epitomized in
Williamson's theorems on transaction costs, essentially assume a neo-classical account of economic
transition that would follow a unidirectional path from bureaucracies to markets, viz. a unitary market
transition toward capitalism; 2. The neo-classical position posits the market and the state in binary
relationships, whereas they actually fall on a continuum within a cultural space t87]; 3. China's transition
follows a path of decentralization at lower levels of codification with reference to its Culture-space, namely, a
path of information network from vertically-personal-relationship-based fiefs" to horizontally-community-
based clans; 4. Chinas decentralization moved toward network capitalism as its emerging economic order
and toward new forms of organization that resembled other East Asian counterparts; and 5. An institutional
perspective such as that of Boisot and Child, while critically challenging neo-classics in theory and practice,
extends the analysis of institutional options in transition beyond the narrow market-hierarchy dichotomy.
Further, such an institutional perspective could suggest future research agendas that focus on selected local
economies and their linkages to the wider national and international economy (ibid.) I88].
In 1988 Boisot and Child imputed most of Chinas bureaucratic and market failures to the
deficiencies of China's patrimonial style of governance that relied on fiefs or clans for information structuring
and sharing (fitting Webers particularism and substantive rationality) H - At that time Boisot and Child
blamed fiefs and dans for impeding Chinas market transition I90]. In 1996 they praised Chinas particularism
and applauded its network organizations and informal sectors as dynamic sources of Chinas transition.
The Chinese system of network capitalism works through the implicit and fluid dynamic of
relationships. On the one hand, this is a process that consumes much time and energy.
On the other hand, it is suited to handling complexity and uncertainty. Networks offer
greater capacities for generating and transmitting new information, and when they are
sustained bv trust-based relationships they offer a cushion against the possibility of
failure that is a concomitant of uncertainty (ibid. 625; emphasis mine).
67
On the basis of their analysis, Boisot and Child described the contrasts in different expectations by
Western and Chinese companies wishing to achieve differing levels of success in their China market policies
(625):
Westerners may well believe that their best policy is to enact their Chinese business
environment via formal dealings with the state, whereas Chinese investors may well enact
their environment via the invisible weak network...overseas Chinese investors are more
likely to establish business relationships through friendship ties or other informal contacts
than are Western investors (625).
This is because,
The social rules of business in China are not those to which Westerners have become
accustomed or which conform to their stereotype of socialist" economy. What they find
when engaging with China is a system that in its transformation is giving rise to a distinctive
institutional form - network capitalism (626; emphasis mine).
Rational-legal bureaucratization based on formal codification could have remained a prerequisite to
market transition, as was the case in the late feudalist Europe (ibid. 601). Yet in terms of modernizing a
nations economic order, feasible alternatives do exist, as shown in the East Asian transformation as well as
in Chinas transition, that challenges Western conventions of transitional processes, outcomes, and even
causes [91], In this light, for example, the iron laws of oligarchy were no longer seen as a cause of Chinas
market failures but rather as a dynamic force for Chinas marketization.
Boisot and Child claimed that they were not prepared to challenge the universal validity of
conventional Western assumptions (ibid. 621) f92]. However, they were willing to criticize certain elements of
those assumptions. Their Figures 1 and 3 in 1996 (cf. pp. 602, 622; i.e., adapted in the following Figure 2.31 b
and 2.31 c) displayed such a networked alternative workable for Chinas transition path [93].
68
Figure 2.31b: Boisot and Childs 1996 vision of institutional regimes in transition
relative to the information matrix in cultural space (C-space)
Information:
Codified
(Impersonal)
Markets (Western Capitalism)
Bureaucracies (FSU
Clans (Reforming China Moving Toward

Network Capitalism)
* Fiefs
Uncodified (Pre-Reform China)
(Personal)
Undiffused Diffused
(Relational)
Source: Adapted from Boisot and Child 1996: Figure 1 on Institutions in the C-space, p. 602; also in
comparison with Boisot and Child 1988: Figure 3 - Bureaucratic and market failure in the culture
space, p. 526. Label: * Symbol of a Regime; the parentheses mine.
Figure 2.31b based on Boisot and Child describes different types of dominant institutions
according to their different levels of information codification and diffusions (602). For the purpose of
comparison, see Table 2.31a and Figure 2.31a above (which are adapted from Boisot and Childs article
in 1988).
69
Figure 2.31c: Boisot and Childs version of the Western capitalist transition
compared to the Chinese alternative transition relative to the
regime changes of the information matrix in cultural space (C-space)
Information:
Codified
(Impersonal)
Markets: Western Market Capitalism
Bureaucracies
Clans (Reforming China Toward

Network Capitalism)
Fiefe
Uncodified (Pre-Reform China)
(Personal)
Undiffused Diffused
(Relational)
Source: Adapted from Boisot and Child 1996: Figure 3, p. 622 [94]; the parentheses mine.
M odels:------------- Western path (Williamson & Nee) Chinese alternative (B&C)
Figure 2.31 b highlights Boisot and Childs comparison between Western capitalist transition and
Chinese alternative transition. Two points are noteworthy for our observation: 1. Varieties of transitional
economic paths emerge in addition to the bureaucracy-market path followed by the West. These paths are
delineated as a distinct ensemble of social relations and information carriers encapsulating their respective
institutional environments and contexts. 2. Alternative transitional paths can be conjectured: through a
Western path toward market economies (including the FSUs path toward market capitalism), a Chinese path
toward quasi-market economies (e.g., Boisot and Child account of so-called network capitalism), or possibly
some other paths toward some other forms of economic system.
According to Boisot and Child, the neo-classical account of Chinas transition clung to market-
hierarchy relations is basically consistent with Williamsons theorems on transaction costs and N ees
scheme. This neo-classical account could be envisaged in a path from fiefs (uncodified/undiffused
70
information system) through bureaucracies (codified/undiffused information system) in its aborted far-
searching attempts in the previous command economy and even in Chinas history. In such a case, the
destination would be to markets (codified/diffused information system) (618, 622). Boisot and Child
actually explored such a possibility in their 1988 work, although even at that time they doubted if Chinas
transition under the given institutional circumstances could reach such a destination. At that time Western
scholars were looking for those attributes in China that they had expected for modernizing economic
order, like efficiency-seeking and professional specialization based on modem division of labor, through
formalization, codification, legalization, and bureaucratization. However, these attributes barely emerged
in China. Boisot and Child addressed,
China had not been able to sustain a satisfactory position in the bureaucracies region of
Figure 1 (economic regulation via a central planning bureaucracy), while the attempt to
have the state exercise direct central initiative and control through traditional fieflike
social formations proved disastrous (ibid. 618; Boisot and Childs Figure 1 refers to our
Figure 2.31 b above).
Boisot and Child in their more developed thesis in 1996 maintained that China's transition had so far
evolved internally through its own institutional mutations from a fief system (uncodified/undiffused) to a clan
system (uncodified/diffused) (ibid. 613), depending for economic transactions more on processing the
information flow through well-diffused personal networks, rather than through a well-codified bureaucracy
(623, 625). This is a path-dependent-featured devolution, parallel to East Asian patriarchal bureaucratization,
which would focus more on the strengths of diffusion for economic transactions than those of codification.
Given Chinas many obligatory networks (including overseas diasporic groups and the like) that had
developed as a result of Chinas unique history, culture-space, and demographic structure, China could
expect such obligatory networks I95] to provide alternative systems to support its economic development and
fast growth. Boisot and Child pointed out that a fundamental feature of China's institutions is their structure of
property rights and their social embeddedness providing safeguards against the market failures often seen in
the Western experiences, failures linked to formal contracts assured by bureaucratically-administrated
property rights. A full examination of these cells in Table 2.31a and Figure 2.31c (see above) could
substantially extend the scope of this study.
71
In short, to Boisot and Child. Chinas emergent economic system and forms of institutions in
transition can be perceived as socially chosen and as linked to Chinas unique experience and social
contexts, that differ from those of China's Western counterparts. Boisot and Child thus likened Chinas
transition to a shift of hierarchical types of network-featured information organization. As for information
network, Boisot and Child were chiefly concerned with the depth and nature of its social embeddedness
that was unique and critical to Chinas transition (623) I96].
2.32 Boisot and Childs thesis of Chinas network capitalism
In their 1996 volume, Boisot and Child concentrated their attention on the failures of neo-classical
economics and modernization theory to account for Chinas rapid growth by signing conventions on property
rights through formal bureaucratic codification and by market competition in a growing integration with the
world economy:
These developments would appear prima facie to be moving Chinas economic system
toward market capitalism. China has distinctive political, institutional, and cultural
characteristics, however, and it is recognized that such factors can give rise to different
modes of economic organization (Hamilton and Biggart, 1988; Whitley 1994) (cf. Boisot and
Child 1996, 600) [97].
The conventions China was being asked to sign had been drawn basically from Western
experiences that did not apply to China. Boisot and Child noted that
Chinas rapid economic development is being accomplished through a system of industrial

governance and transaction that differs from Western experience (ibid. 600).
The assumed conjunction between market relations and capitalist (or at least non-state)
ownership, made by both Nee and Whitley and drawn from the Western model, does not
necessarily apply to China (ibid. 610).
Boisot and Child recognized that Chinas own unique experience included a dynamic mix of
government and non-state enterprises in facilitating business networks at the local level that could no longer
be seen as either socialist nor capitalist f98].
The combination in contemporary China of decentralization from central authorities with

the bottom-up dynamic provided by township and village enterprises leads to a
perspective on the role that government can play in facilitating business networks at the
local level that is quite different from Western experience...The mixed pattern is certainly
72
not a socialist planned economy, nor is it a Western capitalist system. The so-called
township village enterprise is a new animal, a species in economic development that has
yet to be properly defined (Ibid. 619-20).
Boisot and Child noted that the emerging economic order in such a dynamic mix actually was
community based and personal-relationship-related ["]. Combined with their information matrix, Chinas
transition thus could accentuate its economic order in a shift from personal-tied information structure (less-
codified and -diffused hierarchy of fiefs) to relational-tied information structure (less-codified but more-
diffused hierarchy of clans), a shift of socially embedded types of network.
Bruun (1993) argued that the state and the family (or community) - fundamental
institutions in China - present a dichotomy that has historically been in mutual tension.
W e are suggesting, by contrast, that the significant feature of the emeraina Chinese
system lies in the wavs government and community or family work together within a
system of relatively uncodified relationships that derives legitimacy from embedded social
practice rather than from formalized ownership and property rights (B&C 1996, 620;
emphasis mine) [1U0].
This significant feature of the emerging Chinese system led Boisot and Child to pose such research
questions as: what type of economic order is emerging in China? How much does Chinas economic order
differ from Western economic orders? How can we explain the puzzles in Chinas conjunction between
market relations and non-state ownership? Where could decision makings be located within what appear to
be quite fluid and dynamic systems (625-6)? Boisot and Child inquire:
If, as Nee (1992) suggested, there is a newer system of marketized transactions in addition
to state-dominated nonmarket firms, does this merit special attention as the Chinese
economic system of the future (cf. Qian and Xu 1993)? (ibid. 600).
...the question we shall be addressing is whether it (Western market system, characterized

by impersonal economic relationships, large-numbers transacting, relatively decentralized
self-regulating economic units, a plurality of goals, and the other constituents of the ideal
type] can be applied to China and, if not, what kind of alternative characterization would be
appropriate for that country (ibid. 603).
W e argue that China is treading a path toward modernization that differs from Western
experience and that the essence of this can be analyzed in institutional terms. W e then
tentatively identify the distinctive features of Chinas emerging economic order, by reference
to Chinas business system and markets, capitalism and government with that system (ibid.
601).
To Boisot and Child, what makes a network matter to Chinas transition does not lie in its
presence in China. For even the W est recently witnessed a rapid growth of its various forms of the
73
network competition (ibid. 612). As Boisot and Child state:
W e have argued that...the networks of the emergent Chinese capitalism are qualitatively
different from those within the Western market system, for the latter continue to be based
on legal contract and ownership rights rather than on long-term trust relationships (625)
To make further comparison between China and the West about economic governance, Boisot and
Child also suggested a check on how to apprehend the nature of transaction arrangements.
Many business transactions in China appear to be settled through negotiation with a

system of network relations based on interpersonal reciprocal obligations (guanxi), with
local government being a major player as resource provider, facilitator, and tax collector
(see Pye 1995). These transactional arrangements, weak in Western terms
(Granovetter 1985). appear to have considerable latent strengths (ibid. 612; emphasis
mine).
Quite contrary to Western market arrangements based on legal contracts, many of Chinas
transaction arrangements are based on interpersonal networks and reciprocal obligations in terms of guanxi
(i.e. personal relations). Yet these transactional arrangements through negotiations between enterprises and
local authorities "appear to have considerable latent strengths," since they can utilize the ambiguity in
property rights to institute flexibility and to reconstitute the channels of transaction beyond the formal-legal
reach to tap into China's markets and to meet Chinas changing environments [102].
As Boisot and Child reiterate, this would eventually involve a theoretical extension of the debates
over market-hierarchy relations rekindled by Williamson in 1975. According to them,
As it evolved, the markets and hierarchies formulation established a unidimensional

continuum, with market coordination at one end and hierarchical coordination at the
other. Clan or federal forms of governance (Ouchi 1980; Butler 1983) and relational
contracting (Williamson 1985) could then be located at notional points along this
continuum - not quite markets but not quire hierarchies either (ibid. 602).
From Boisot and Child's perspective, a unidimensional continuum between markets and
hierarchies, as had been suggested by Williamson and Nee, appeared inadequate [103j, since it ignored
those transaction arrangements beyond markets and hierarchies (or contextual data; ibid. 603), that
vary along with their culture-space," such as forms of fiefs and clans.
74
Boisot (1986) questioned the ability of a unidimensional markets and hierarchies

continuum to capture adequately the transactional options available in different cultural
and institutional settings. Using a conceptual framework that he labeled the culture space
or C-space, which relates the diffusion of transactionally relevant knowledge within a
given population to how far it has been codified, he showed that the clan forms of
governance, together with a form of governance that he labeled fiefs," could not be
convincingly depicted as mere staging posts between markets and hierarchies. W e use
the C-space framework here to illustrate the special and challenging characteristics of
Chinas modernization (ibid. 601).
In Boisot and Child, the main weakness of Nees propositions is that they fail to recognize that
Chinas institutional environments and arrangements are quite different from those in Western market
economies (see above Figure 2.31c).
As Boisot and Child suggested in their 1988 work, to contrast business negotiations and economic
coordination, and transaction arrangements in China from those in the West, one has to look at two critical
dimensions - (1) the codification and (2) the diffusion of information in fashioning those market arrangements
(see Figure 2.32).
Figure 2.32: Boisot and Childs Information structure by codification vs. diffusion
Level of Hierarchy:
Codification
(Depersonalization)
Space for Modes of Network Organization
Level of Marketization: Diffusion

(Personalization)
Figure 2.32 can be seen as a more rarefied abstraction of the previous figures. It addresses the
75
degree to which information accessed through codification or information accessed through diffusion is
central to identifying the key institutions in Chinas transition, including different property rights or forms of
ownership. The Space for Modes of Network Organization in the above figure corresponds to an information
matrix (see above Table 2.31a) that distinguishes between the diffusion/undiffusion and
codification/uncodification of information in bureaucracies, markets, fiefs, and clans.
For Boisot and Child, the unique transition of Chinas economic order could be traced to unique
features in Chinas information matrix, its so-called "quasi-market networks," or its distinctive institutional
forms (613),
Here, we identify the broad institutional nature of this distinctiveness within a framework of
information codification and diffusion...The limited extent of codification of information in
China and its communal property rights and organization of economic transactions suggest
that decentralization from the former state command system is giving rise to a distinctive
institutional form - network capitalism.
But what really gives rise to such a new economic order in China is historically derivative. As
Boisot and Child explained,
China thus demonstrates that a modernizing economic order is able to operate in the less
codified domain of the C-space...It is therefore not the presence of networking that is
distinctive about China's emerging economic order but, rather, the depth and nature of its
social embeddedness. Redding (1990, 95) has noted how living in a collectivist and group-
dominated society is a cultural tradition for the Chinese. The roots of networking as an
institutionalized practice are ancient and extensively developed in China (ibid. 623;
emphasis mine).
The Chinese path to modernization since 1949, by contrast, involved first an abortive
move up the codification scale (state planning), punctuated by wild oscillations toward
mass mobilization, and then, after a reversion into fiefs, a subsequent decentralization,
coupling with traditional systems in the lower reaches of the C-space. In the absence of
effective codification, and given traditional Chinese social organization, such
decentralization leads not to markets but to clans and permits the more local and
personalized institutional order, which, following other observers of Asian economic
institutions (Biggart and Hamilton 1992; Gerlach and Lincoln 1992; Berg 1994), we shall
label network capitalism (ibid. 621-2).
People have to understand the unique context of such an emergence in Chinas transition. This
could all come along with Chinas decentralization, which has its historical precedents and social
embeddedness, and which could be seen as a reaction to the failures of market and hierarchy under the
76
former planning system and as an organizational response to the high demand for speeding industrial
diversification and economic hybridization in transition. According to Boisot and Child,
China has always had a significant amount of small-scale commercial and industrial
activity outside the centrally planned command economy, but since 1979 the industrial
system has become considerably more diversified...Today, there is a free market for
most consumer goods, while the market remains supplementary to planning only in the
production and supply of some industrial goods and materials, especially those
considered to be of strategic significance. Moreover, several different forms of industrial
property rights have now emerged alongside a diversification in the forms of enterprise
ownership and of relationships with the organs of government, including different types of
contracts for the management of state-owed enterprises (ibid. 608-9).
According to Boisot and Child, as China decentralized and found itself growing at an ever
accelerating pace driven mainly by the boom of its non-state sectors [104], what was happening was
overwhelmingly less and less controllable by the administrative bodies of Chinas central authority:
Although economic reform measures were enacted at an ever accelerating pace throughout
the 1980s and the early 1990s, decentralization measures have encountered problems on
the ground. The state has lacked both the appropriate economic and institutional concepts
and the 'low-context (Hall 1976) culture that would allow such measures to usher in a
workable market order. The situation has not appreciably changed in the 1990s. The
institutions that characterize a rational-legal system - an effective central bank,
macroeconomic levers, enforceable and consistent laws - remain absent, all official rhetoric
to the contrary notwithstanding. The freeing up of the financial system, for example, has led
to the emergence of a sizeable secondary credit sector in which lending takes place through
direct relationships between firms and other bodies at very high interest rates; this sector is
beyond the control of the monetary and regulatory authorities (CEA 1993). Chinas growth
has been barely controllable, with a continuing tendency to overheat, and the only tools
available to central policy makers for bring the economy under control remain the
microeconomic ones designed for a command economy in which firms come under direct
administrative authority (Economist 1995a) (ibid. 606).
Given the past failures of Chinas markets and hierarchies, in which Chinas economic order had
seemed so inept and its decentralization so problematic, how can one explain Chinas dramatic
turnaround and its sustainable fast growth for two decades [105]? Boisot and Child posed a question,
If. according to Western experience, modernization requires institutional changes moving

transactions first toward bureaucracies and then toward markets China cannot be said to
be modernizing effectively. Yet if China is not modernizing effectively, how does one
account for its spectacular performance on the criterion of growth - an average of 9% per
annum in the 1980s and in double figures since 1992?.. .This means the question can
now be reformulated: How can China be achieving such rapid rates of growth while
retaining an institutional order so heavily invested in the lower, uncodified regions of
Figure 1? (ibid. 606-7; Figure 1 here refers to Boisot and Child Figure 1, ibid. 602, from
which Figure 2.31b above is adapted; emphasis mine).
R eproduced w ith perm ission o f the copyright owner. F urther reproduction prohibited w ith o u t perm ission.
77
In Boisot and Childs view, the state government to compensate for its loss of control due to
decentralization has no option but to engage actively in direct interpersonal encounters with economic
agents at local levels for sharing information, raising funds, and allocating resources.
To function at all they p.e., the firms] require direct interpersonal encounters between state
actors and myriad economic agents in highly particularistic circumstances. Under the
economic reform, governmental encounters with economic agents have shifted significantly
to the local level and the center has lost much control over the provinces and municipalities.
This is evidenced by the share of tax revenue accruing to the central government, which,
according to the World Bank, amounted to 34% of GDP at the beginning of the reform
process 15 years ago and shrank to 19% by 1994 (Economist 1994a) (ibid.).
It is important to note here that Boisot and Child found that the lax control by the state has
effectively placed Chinas institutions in highly particularistic circumstances. Later on, Cao, Qian, and
Weingast in 1999 elaborated this unique situation created by Chinas decentralization in the sense that it
had actually hardened local budget constraints specific to their respective contexts. This is very crucial,
because under such a new situation, the state and its administrative bodies might take it as functionally
imperative to deal with the problems of these personal relationships seriously, much more than to deal
with the problems of rational-legal bureaucracy, and to deal with information diffusion or sharing more
seriously than with information codification or structuring. And this makes Chinas market and business
systems quite distinct from their Western counterparts in conception and practice. Within the emergent
economic order. Chinas new economic sectors and enterprises, while beginning to work their own wav
for economic coordination, are basically embodied in a mix of administrative units and economic units,
and in a mix of community-based personal arrangements and market arrangements. This differs from
N ees and W hitleys associated definitions and perceptions of Chinas hybrid economy or Chinese
business system (ibid. 610).
Chinas emerging economic order is constituted by a combination of communal property

rights and transactions in which contingent risks are managed in these networks
informally on the basis of accepted social practice rather than by reliance on formal laws
of contract. The security of property rights, which, according to the Western tradition is
guaranteed by the rule of law in democratic societies, in China derives primarily from a
relatively uncodified process of legitimization within the community as a socioeconomic
network. The security of Chinese rights to employ economic assets in the fulfillment of
transactional obligations is supported by the intervention of officials at the various levels
of government to safeguard what is a politically and socially acceptable use of those
78
rights. In terms of our analytical framework, China appears to show how a clan-based
system of transactions can function successfully based on a communal definition of
property rights, rather than these being defined externally and from above through a legal
system that identifies property rights based on individual ownership. China thus
demonstrates that a modernizing economic order is able to operate in the less codified
domain of the C-space (ibid. 622-3; emphasis mine).
That is, the kind of economic order emergent in Chinas transition is in a conjunction of
administration and markets. In Boisot and Childs phrase, it is the market-oriented, administratively
supported system of networked transacting; ibid. 614) with so-called entrepreneurial connections with
the bureaucracy (619). This differs from both the Western well-codified industrial networks of firms and
Whitleys centrifugal business systems of the Oriental small firms. In China, both codification and
diffusion of information heavily rely upon personal relationships [106].
This kind of system of local quasi-market networks in Nees phrase [107], facilitates transactional
arrangements, breeds long-term trust obligations, and provides institutionalized sources of working capital
and information access. It also economizes on transaction costs and compensates for risks due to
ambiguous property rights by offering flexibility and assuring opportunities through negotiations.
...the advantages [are] these long-established relationships could provide in an economic

environment in which uncertainties persisted about the honoring of trading agreements,
the assurance o f quality in goods exchanged, the provision of working capital, and so
forth. These transactions were founded on longstanding economic relationships between
key individuals within the organizations concerned. The assurances that underpinned the
transactions derived from mutual trust...[in] local quasi-market networks [that Nee
analyzed]...local government agencies play a facilitating role and benefit from the tax
revenues that derive from the stimulation that dynamic networks provide to local
economic growth. The development of both internal and external subcontracting,
particularly by large enterprises, serves to extend such networks. External subcontracting
encourages the growth of close personal relations between managers and technical staff
of the collaborating firms, particularly when technical quality specifications and delivery
schedules need to be tightly controlled (Child 1994, chap. 7) (ibid. 612-3; brackets mine).
Such networks dynamically prompt the vertical and horizontal integration of Chinas economy and
nurture Chinas economic growth at both micro- and macro economic levels.
It has also become quite common for Chinese enterprises to form alliances and mergers
to provide horizontal and vertical integration (Su 1994). These alliances contribute to the
development of quasi-market networks within China and appear to constitute a growing
trend (ibid. 613) f 08].
79
Boisot and Child also noted that as Chinas economy became increasingly integrated, the ways it
integrated also become more sophisticated. Chinas sectoral economy in its changing hierarchical order
could provide such supportive evidence. They noted interesting differences between the growth of
Chinas state-owned enterprises and non-state-owned enterprises [109]. This move toward vertical
integration also paralleled Chinas proceeding in horizontal integration, through approaching formal and
informal alliances among industries, sectors, and enterprises for economic transacting.
...A shift from fieflike to clan-based transactions within Chinas economic order is
evidenced by several developments. The first is the growing share of economic activity
accounted for by non-state-owned enterprises. State-owned enterprises are more
beholden than other Chinese firms to specific governmental authorities in which custody
of their ownership is vested, such as ministries and economic commissions. The
structure of control over state-owned enterprises, and in some cases their input-output
transactional networks, tends to be narrower in scope and to retain more fieflike
characteristics. Control over non-state enterprises is less specific, and their patterns of
resource dependency lead them into a wider network of external organizations from
which they transact factor inputs and dispose of their outputs. Second, an increasing
number of enterprises are widening the scope of their transactions, and securing greater
economic independence from higher governmental bodies, through the formation of joint
ventures with foreign firms investing in China. These linkages with foreign firms extend
their networks beyond the scope of localized fiefs. Third, more Chinese enterprises are
forming alliances between themselves, chiefly to provide horizontal integration and to
enlarge the scope of their transactions within the Chinese economy as a whole (ibid.
623).
The activities in these economic sectors differ in many ways from neo-classical conventional
beliefs regarding unitary market transitions, as well as Komai et al.s visions of market competition, based on
neo-classical assumptions. Boisot and Child maintained that China's transition could be seen as moving
from fief typed networks to clan typed networks (613, 619) toward network capitalism (622).
In Boisot and Childs perspective, in China, property rights in each economic sector are not clear-
cut. They take plural forms that are socially embedded and community-based, and further articulated by
and mixed with many contingent institutional underpinnings [110].
The case of China prompts the realization that property rights" can be a complex mixture
that does not constitute a simply binary set of possibilities - state vs. private." In China,
a bundle of property rights is exercised by different bodies, and de facto property rights
tend to emerge from continuing processes of negotiation between central, regional
community, and private interests. Moreover, the rights relate to such diverse matters as
the appointment of senior enterprise managers, allocation of profits, investment funding,
and formation of interfirm relationships. These rights, in the context of different categories
of firms, are articulated through a variety of institutional structures, some of which are
80
more strongly oriented toward the interests of the community than those of either the
individual or the state. In this respect, again, the contrast between Chinas economic
development and that of the West is consistent with the view that different institutional
frameworks are capable of generating economic development in different societies. While
the Chinese have explained the post-1978 economic reforms as a move from a bureaucratic
to a market-led system of industrial coordination, they have been at pains not to present this
as a move toward capitalism and private property rights...Markets and hierarchies, in this
perspective, are just tools - mechanisms for coordinating transactions - that with suitable
adjustments can each be placed equally effectively at the service of a socialist or a capitalist
order...their disassociation of marketization from private ownership reflects a distinctive
feature of Chinas economic development that appears to be socially embedded...The lively
current discussion on the possibility of introducing stockholding systems to state enterprises
points to a further impending redefinition of their ownership (615-6) (emphasis mine).
Chinas case might serve as a competing alternative to a Western model of economic
development. However, at this point, Boisot and Child would rather reserve judgment on whether or not
Chinas current structure of property rights could be permanent or might need a redefinition [111]. As they
cautioned,
The nature of such redefinition is uncertain, since it will depend on the determination of
which groups are entitled to own stock and the percentage of enterprise assets that are
allocated to stockholders. It is therefore quite difficult at this moment to comment on the
prospects that the state sector will be privatized and whether, in this respect, there will be
a move toward a capitalism of the Western variety. If there is. it is quite likely that the
institutional basis on which ownership rights are defined will not accord to the highly
formal and legalized Western pattern (ibid. 616; emphasis mine).
Examples of currently unique Chinese establishments of ownership rights are Chinas township-
village enterprises. According to Boisot and Child:
Whereas the reform of state enterprises has been from the top down, township-village
enterprises (TVEs) have emerged and proliferated from the bottom up. The consequence
is that their ownership status is very ill-defined (ibid. 616; emphasis mine).
Boisot and Child realized that Chinas TVEs could demonstrate their ability to drive local
economies not through their ownership status but through their operations.
Overall, it seems appropriate to break away from the legally based Western notion of
property rights that emanates from ownership and, instead, adopt a concept more
appropriate to China that allows for the possibility that (1) such rights may be granted
upon administrative sufferance and (2) that their terms can be subject to a continuing
process of renegotiation. In that case, the significant research question is not so much
who owns Chinese business assets as who controls and regulates them and through
what social process, a question that Berle and Means (1932) asked of the large American
corporation six decades ago (ibid. 617).
81
The legitimacy of an enterprise in terms of its ownership is actually granted through the
enterprises operations as an administrative unit, even while the state sector per se is transforming its
formal structure through privatization (i.e., its ownership, administration, management, and their systems
of regulation and codification). In the latter case, the governments of the various levels are actively
engaging in economic operations and behave like business partners. Close alliances among enterprises,
communities, and governments, while accentuating the dynamic role of the government in facilitating
business networks at the local level [112], could make all parties more entrepreneurial in transition.
According to Boisot and Child, entrepreneurial connections with the bureaucracy create clientelist networks
(619). This mix of economic and administrative powers has developed various forms of hybrid firms"
(ibid. 617) that could not be found anywhere in the West.
...hybrid firms have provided an extremely important dynamic for economic growth and
development at the micro level. They also contribute importantly to the formation of
business networks that, among other things, stimulate innovation through information
exchange and innovation. They are often formed and operate on a basis of personal trust
rather than formal contract (ibid.).
Boisot and Child saw in Chinas emergent structure of property rights something they labeled
quasi-capitalism.
There is a juxtaposition in China of (1) an emergent form of what at best can be termed
quasi-capitalism, incorporating important aspects of governmental patronage, and (2)
marketization (ibid.).
This will, according to conventional Western thinking, inevitably generate certain

fundamental tensions, and it remains to be seen how significant these are. One such
tension stems from the temptation of government officials to introduce non-economically
rational criteria into resource allocation by firms (cf. Child and Lu, 1996). Another derives
from the increasingly local focus of industrial governance, which may in several ways
inhibit the flow of investment funds to their nationally most beneficial uses, such as
through pressures to retain surplus funds within the locality or the discouragement of
outside investors because of the risks they perceive to stem from local interpretations of
the law and the distortions introduced by local corruption. As Faure (1994: 87) stated,
The present danger in the development of a market in China lies in the very real
possibility that with the devolution of state power, local authorities may take away what
the state world concede. It is as vet unclear if the state can effectively curb the
emergence o f patronage networks built upon the personal influence of members of the
officialdom (ibid. 617; emphasis mine).
In summary, Boisot & Childs 1996 version of network capitalism developed Biggart and Hamiltons
82
theses of East Asian economies in 1988 and 1992 [113]. Their description of Chinas emergent structure of
property rights juxtaposed with a governmental patronage network and marketization cast doubt on whether
privatization could plav a part in Chinas transition. What has been happening in China challenges neo
classic theses like the "autonomy of economic actors," "formality of modem bureaucracy," as well as the triad
corollary of "decentralization, privatization, and marketization" [114]. What has been happening in China also
counters some neo-Marxist views that capitalism is a unitary market-oriented phenomenon, and that modem
economic development invariably leads to a convergence with a unitary capitalist order (F. Braudel 1979,
1985; also cf. B&C 1996, 624). With reference to Chinas cultural-space, Boisot and Child conclude that
Chinas emergent economic order is actually in transition to quasi-capitalism," reflecting an East Asian type
of transacting-govemance with a propensity for information diffusion rather than information codification. Its
transition presents a passage of network capitalism from the iron laws of fiefs to the iron laws of clans,"
which is socially embedded, personally-related and community-based.
83
2.4 Qian and Xu: Chinas M-form hierarchy in transition
As we have just seen, Boisot and Child (1996) saw Chinas emerging economic order rising from
its decentralization reforms that certain particular circumstances encouraged both local governments and
local enterprises to pursue entrepreneurship. In some ways Boisot and Child drew on Qian Yingyi and Xu
Chenggang's earlier 1993 thesis that Chinas M-form hierarchy played a key role in Chinas economic
transition, illustrating how a countrys economy could be shaped in each countrys own situation (1993b,
158). Qian and Xus two joint treatises were published in 1993 (1993a. 'T h e M-Form Hierarchy and
China's Economic Reform," European Economic Review. 37, pp. 541-548; and 1993b. "Why China's
Economic Reforms Differ, the M-form Hierarchy and Entry/Expansion of the Non-State Sector."
Economics o f Transition 1: 135-170). For purposes of discussion these two essays will be treated as
complementary. According to Qian and Xu, prior to Chinas reforms China was being administered by an
M-form hierarchy (1993a, 543; 1993b, 137-8; with M-form hierarchy referring to a (single-layer) multi
divisional form of organization by brand name or geography). The term M-form hierarchy had been
used earlier by A.D. Chandler, Jr. (1966, 1977, and 1985), as well as by Chandler et al. (1980). An M-
form" hierarchy differed from a U-form hierarchy (a unitary form of organization along functional lines)
that characterized the former Eastern Europe and the former USSR. In Qian and Xu, the fact that China
had an M-form hierarchy enabled China to make its transition by going through economic
denationalization and deconcentration instead of privatization. In the late 1990s, when the privatization of
Chinas SOEs was looming large [115J, Qian revised his position. In a 1999 joint article with Cao and
Weigast, Qian stated that the federalism, Chinese style, has induced privatization, Chinese style [Cao,
Yuangzheng, Yingyi Qian, and Barry R. Weingast. 1999. From Federalism, Chinese Style to
Privatization, Chinese Style." Economics o f Transition, Vol. 7, (1) 1999, p. 103]. According to this
changed perception, China's decentralization had drawn its political logic from federalism, Chinese style,
which was key for explaining Chinas transition [116]. Thus Chinas privatization could be seen as local-
govemment-driven. The reforms of decentralization, featured by denationalization and deconcentration,
could eventually be integrated with Chinas privatization in its own way [117].
84
2.41 Qian and Xus comparative study of the organizational structures in different transitions
In 1993 Qian and Xu had declared,
W e have provided a comparative analysis of transition from institutional perspectives,

and have addressed the issues of how initial institutional environments differ between
China and Eastern Europe and the former Soviet Union, how reform and transition
strategies in China depend on institutional conditions: and how the institutional changes
of decentralization affect Chinas transition path and outcomes (1993b, 156; emphasis
mine).
In this context Qian and Xu had distinguished between Chinas M-form hierarchy and the U-
form hierarchy of the former Eastern Europe and the former Soviet Union (hereafter FEE and FSU).
Accordingly, Chinas M-form hierarchy was proposed as describing the initial conditions of institutions
prior to Chinas transition. This could be traced back much earlier to Maos era of the Great Forward
Leap in the late 1950s (ibid. 424; also cf. Cao, Qian, and Weingast 1999, p. 125) [118].
Qian and Xus 1993 inquiry entered into a debate in mainstream scholarship over whether Chinas
fast growth was attributable to its much lower initial development stage or to its gradual approach to its
economic transition (Qian and Xu 1993a, pp. 541-2) [119]. Qian and Xu pointed out that despite widespread
misimpressions, China did not necessarily begin from a much lower initial development stage than did the
former Eastern Europe.
Chinas level of industrialization was perhaps higher than most people would think... In terms
of GNP, Chinas industry accounted for about half in 1978, as compared to 60% to 65% in
Eastern Europe (1993b, 136).
According to Qian and Xu, Chinas reforms had been
more successful in the industrialized regions with a weak central government control than in
the less developed regions (1993a, 542).
Reforms have been less successful in both less industrialized regions (like the Northwest
provinces) and the more industrialized regions with strong central government control (like
Shanghai and provinces of Liaoning and Jilin); the latter share similar problems to those of
the earlier Hungary reform. This fact suggests that one cannot explain the success of the
reforms by low level of development alone (1993b. 136) [120].
So Qian and Xu turned to the other possible explanation for China's fast growth, i.e., its gradual
85
approach to its economic transition. They asked why and how the gradualism could be successful in China
but not in Eastern Europe. From the early 1960s to the late 1980s Easter Europe had intermittently
experimented gradual reforms. As Qian and Xu illuminated, when the gradual reforms failed, Eastern Europe
turned to radical transitions [121]. They stated:
The argument for gradualism also raises more questions than answers. First, the agricultural
reform in China proceeded very fast in the early 1980s. The abolition of the commune
system and the nationwide establishing of the household responsibility system (an
ownership reform) was implemented almost at one stroke, and can thus be viewed as a big
bang. More importantly, Eastern Europes radical transition should not be examined in
isolation: it came after deep troubles of failures of many years of gradual reform. In fact, the
Hungarian reform started in 1968 with some initial success, but then ran into difficulties in
the 1980s. Ironically, in several respects China followed Eastern Europe's gradual reform
measures. If Chinas gradualism is a success, why has it worked in China but not in Eastern
Europe? On the other hand, why was Chinas success not a temporary one, and will China
soon encounter problems similar to Hungarys (1993b, 137)?
Pursuing the possible role of gradualism in China's transition, Qian and Xu launched their inquiry:
W e first make an observation and provide extended evidence...We then theorize an

institutional reason which is responsible for this phenomenal expansion and for the
concurrent emergence of the market (ibid.).
Like Nee, and Boisot and Child, Qian and Xu started gathering their evidence from Chinas fastest
growing sector - the non-state sector. They then recognized that the rapid growth of Chinas non-state
sector might explain why the state sector had shrunk so dramatically and how the economy might be
denationalized even without full privatization [122].
The Eastern European transitions have shown that the massive and fast privatization of
the state sector is rather costly. Given the initial condition of the M-form organization in
China, the evolutionary approach of developing the non-state sector is perhaps an easier
and less costly way at the initial stage of transition. Eventually, with the continuation of
this process, the state sector will be forced to share a minor role in the national economy.
Moreover, the rapid expansion of the non-state sector has important implications for
denationalization of state enterprises for further reforms in China: successful non-state
enterprises will eventually take overstate enterprises (1993a, p. 548; emphasis mine).
During the period from 1981 to 1990, the share of the non-state industry in the national
total has expanded from 22% in 1978 to 47% in 1991. If this trend should continue,
Chinas state sector would shrink to about only one quarter of the total by the year 2000,
even without massive privatization (ibid. p. 543).
As Qian and Xu noted, the continuing growth of Chinas non-state sector throughout the entire
86
economy provided such an alternative argument that the non-state sector, (not necessary the private
sector alone), could be the main earner of economic efficiency and improvement:
Although true private industry in China did not appear until the early 1980s. the collectives
had growth from 11% out of the national total in 1969 to 22% in 1978. or about one per cent
increase in output share every year. However, the dramatic shift of weight towards the non
state sector has been apparent since 1979: The non-state sector in industry has on average
experienced an increase in industrial share of two percentage points every year for 13 years.
Accompanied by the high growth rate, the non-state sector is also more efficient than the
state sector. The annual growth rate of total factor productivity of the non-state enterprises
was much higher than that of the state enterprises (ibid. 140-1; emphasis mine).
The unexpected, and perhaps unintentional, growth of the non-state sector is critical for the
success of China's economic reforms...Chinas non-state sector is engaged in all kinds of
activities: construction, transportation, commerce, service, and in particular, industry. This is
perhaps a crucial difference between Chinas non-state sector and that of Eastern Europe
before 1989.. .Accompanied with the high growth rate, the non-state sector is also more
efficient that the state sector. For example, the annual growth rate of the total factor
productivity of the TVEs was about ten times higher than that of the state enterprises
(1993a, pp. 542-3; emphasis mine).
Eastern European transitions were similarly initiated by the boom of the non-state sectors in their
economies. But as Qian and Xu noted, the sustaining growth of Chinas non-state economy has been
uniquely rooted in tremendously boosted local initiatives rather than in the initiatives coming from above - the
government reform programs, witnessed in Eastern Europe.
One important characteristic about the entry and expansion of the non-state sector in
China should be emphasized: the fast and sustained entry and expansion occurred
largely from local initiatives, not from an intentional design of a reform program by the
central government, and it took an evolutionary rather than revolutionary path 1993a,
543) [121
Both China and Eastern Europe had launched their respective decentralization program relatively
early. Hence it remained unclear why the outcomes of their decentralization programs differed so much. In
their efforts to understand why, Qian and Xu looked into the different kinds of hierarchical structures that
existed in China and Eastern Europe prior to reforms [124]. According to Qian and Xu, such a search might
provide an institutional explanation for Chinas fast growth in an incremental fashion using various unigue
trial-error experiments.
The organization structures of both Eastern Europe and the Former Soviet Union were of a
unitary form based on the functional or specialization principles (the U-form economy),
and in contrast, the Chinese hierarchy has been of a multi-layer-multi-regional form mainly
87
based on a territorial principle since 1958 (the deep M-form economy, or in short, the M-
form" economy). The M-form structure has been further decentralized along regional lines
during reform with both increased authority and incentives for regional governments, which
provided flexibility and opportunities for carrying out regional experiments, for the rise of non
state enterprises, and for the emergence of markets. Our institutional approach is able not
only to incorporate and link together aspects of the arguments concerning the level of
development and gradualism, but also to explain richer phenomena such as the successful
use of experiments in China but not elsewhere.. .This explains how the rise of the non-state
sector occurred by gradually weakening the existing hierarchical control without destroying
the existing structure at one stroke (1993b. 137: emphasis mine) fi2tT
In contrast to the enterprises under Chinas M-form economy, the Eastern European counterparts
under U-form economies were strictly controlled by the ministries of the central governments, and even
regional governments were subordinates of the center and only implementing the plans from
above without much autonomy (1993a, 544) [126].
As a result, the Eastern European and USSR enterprises were mostly large-sized and highly
specialized (see Table 2.42 below). Accordingly, as Qian and Xu pointed out.
Comprehensive and rigorous planning and administrative coordination between ministries

and between enterprises were crucial for the normal operation of the U-form economy
(1993a, 544).
Why the FSU and FEE chose such an U-form hierarchical design might have a couple of historical
explanations. One was the ideological obsession with economies of scale and gigantic factors that can be
traced back to the early establishment of the Soviet Union (ibid.: T h e U-form organization takes full
advantage of economies of scale and specialization). For this Qian and Xu added their endnote (24) that
Lenin made this famous remark in his book The State and Revolution (1917): 'The whole
of [socialist] society will become a single office and a single factory. This ideology can be
attributed to Marx (ibid. 160).
Another explanation could be that the 1920s notion of modernizing the Soviet economy was strongly
affected by the then-extant knowledge of organizing industrialization prevailing in the West.
...when the Soviet Union began to establish a centralized economy in the 1920s, the U-form
was the only way of organizing industrial activities within large corporations in the West, as
the multi-divisional firms in capitalist economies had not yet emerged. The claims of Lenin
and Kautsky about establishing a socialist economy as a gigantic factory also reflected the
prevailing knowledge about economic organization at that time (1993b, 143).
88
Still another explanation could be the political objective of the Soviet Union on account of its
hegemony throughout its own territory and over Eastern Europe.
...there were political reasons for the U-form organization, particularly under Stalin, to
achieve better control by Moscow over the Soviet Republics and the Eastern European
countries. Because each region of Eastern Europe and the Soviet Republic was made a
branch of the grand hierarchy, all regions became strongly interdependent, and ultimately,
were dependent on Moscow (ibid.).
But once the economies of the Soviet Union and Eastern Europe became modernized and more
complex, inflexibility, ineptness, occlusion of U-form hierarchies and the huge expense of any change and
reform became increasingly apparent.
In order to change the organization structure, Nikita Khrushchev in 1957 abolished the
ministries altogether and introduced 105 Regional Economic Councils (Sovnarkhozy), to
which all the state enterprises were subordinated. However, this reform did not go very far
and soon failed. Given the already very concentrated industrial structure, a change from a
unitary form to a multi-regional form required both political changes and economic changes.
The power of ministries would be weakened, large enterprises would be broken up or new
duplicating enterprises would be established, and all of these were very costly. In 1965,
blaming the growing localism of the Sovnarkhozy and the difficulties of coordinating a
regionally operated planning apparatus, the regional coordination system was replaced by
the former ministerial system (Gregory and Stuart 1981) (ibid.).
In contrast, Chinas economy was organized under a M-form hierarchy from the start. This provided
Chinas economy with local initiatives and market competition.
This is critically important: it is precisely because of the autonomy and incentives

provided to the bottom levels of the regional governments in China that the non-state
sector was able to grow so fast (1993b, 138; emphasis mine).
From their inception, those non-state enterprises (most o f them are not private though) have
been market-oriented. Furthermore, competition between regions for getting rich fast puts
pressure on the local governments to concentrate on growth and their limited access to bank
credits maintains discipline on their behavior (Ibid. 137; emphasis mine) [127].
Why did China choose decentralization reforms under its M-form hierarchy? First, China chose to
maintain its existing regime during its transition, unlike the FEE and the FSU (1993b, 137). From the
beginning the existing regime remained in power, the central government played an important role, although
not very critical (ibid. 149) (though the nature of the regime has arguably changed along the way). Second,
many enterprises had existed in China's economy outside the scope of planning and control prior to reform
89
(ibid. 155). Throughout the decades these enterprises had constantly bargained for local discretion or
hierarchical devolution and had eventually become widespread. Their spread was particularly precipitated by
the development of horizontal coordination within the state sector between regions and between enterprises
that started in the Cultural Revolution, when the state sector became crippled [128]. Third, instances of the
chosen M-fonm hierarchy and horizontal coordination had been particularly affected historically by some of
Maos legacies. Fourth, many local initiatives that boosted Chinas reforms actually fit in well with China's
heterogeneous regional reality, reflecting patterns of uneven regional development. Many of the institutional
choices were geographically determined.
Qian and Xu described the organizing of Chinas economy along regional lines and the particular
reasons and contexts as follows,
There are several reasons why Chinas economic organization evolved into the M-form.
First, historically, before the Chinese Communist Party fully took power of China in 1949.
both the economy and the military forces in regions under Communist control were
organized in a M-form. The organizational heritage and skills accumulated in history have a
deep influence on the evolution of the organizational structure of the Chinese economy.
Second, technologically, poor communication and transportation facilities in a large country
make the M-form organization an easier choice for the Chinese. Third, politically, nationalism
was less a problem in China than in the Soviet Union and Mao had many other means (for
example, political movements) to hold the country together. Fourth, militarily, as Mao was
worried about the Soviet and American air-raid invasion and the Third World War, industries
were dispersed into inland areas and placed under the supervision of the regional
governments. Finally, culturally, there is vast classical literature in China on the art of
managing multi-regional organization because for more than two thousand years the
Chinese empires were basically organized along regional lines. Chinas M-form hierarchical
structure has evolved since 1958. Because of ideological and political reasons, Chinas first
five year plan (1953-1957) was formulated with the help of the Soviet experts, which was a
process of copying the Soviet Model - the U-form organization - into the Chinese economy.
Toward the end of the first five year plan, Mao was increasingly dissatisfied with the over
centralization and bureaucratization in the Soviet model. In his famous 1956 speech on the
ten major relationship, Mao discussed the relationship between the central and the local
governments and advocated the ideas of mobilizing two initiatives of both central and local
governments" (diaodong zhongyang he defang liangge jijixing) and walking on two feet
(liangtiaotui zoulu), the latter referring to development of both central and local industries
[129]. These ideas later became official government policies and were subsequently
implemented. Under Maos initiative. China started to deviate from the Soviet model and
move toward the direction known as administrative decentralization" within the hierarchy.
Two major waves of administrative decentralization occurred in 1958 (the Great Leap
Forward) and in 1970 (the Cultural Revolution): the central governments bureaucracy was
trimmed; supervision authority of many state-owned enterprises was delegated from
ministries to provinces and cities or even counties; and local governments initiatives for
developing their regions were encouraged. The legacies of Mao had a great impact on the
organizational structure of the Chinese economy. As far as the initial institutional conditions
for economic reform are concerned. Chinas multi-laver-multi-reoional hierarchical structure
90
prior to 1979 was already substantially different from that of the unitary hierarchical form
inherited in Eastern Europe and the Soviet Union before their economic reforms (ibid. 145;
emphasis mine).
The fact that Chinas economy organized in a M-form hierarchy was not accidental. It emerged from
geographic reality and China's bureaucratic history.
In Chinas official language, regions at each level are called blocks (kuaikuai), as opposed
to branches (tiaotiao), and bureaucratic supervision takes place along the lines of function
and specialization. Instead of mainly following functional or specialization principles like
those in Eastern Europe and the Soviet Union, the Chinese economy is organized into a
multi-laver-multi-reaional form mainly according to territorial principle, in which each region
at each layer can be regarded as an operating unit. Each unit is further divided along
geographic lines and at the same time the unit controls its own enterprises along functional
and specialization lines. Regions are relatively self-contained; that is, they are self-sufficient
in terms of functions and supplies in production. Directly under the control of the central
government are 30 province-level regions (blocks) and a few dozen functional and industrial
ministries (branches). Before the economic reform which began in 1979, industries in China
were much less concentrated than those in Eastern Europe and the former Soviet Union and
there was a large number of state-owned industrial enterprises not controlled by the central
government. This is true for light industries as well as for heavy industries. In 1978, the
share of industrial output of state-owned enterprises controlled by the central government
was less than one half of the national total (Wong 1987). In the automobile industry, almost
all enterprises in Eastern Europe and the Soviet Union were directly controlled by the central
government and the number of the enterprises was rather small. In China, there were 58
enterprises making automobiles before the reform, and most of them were controlled by the
local governments (Wang and Chen, 1991). Consistent with this, the number of products
directly under the central plan in China was much smaller, only 791 in 1979 (Zhu 1985), as
compared to more than twelve million in the former Soviet Union in the late 1970s (Nove
1980). Wrth a much reduced work-load. the desired number of ministries in the center is
much smaller than in the Soviet Union (less than 30 vs. more than 6 0 )...The commune
system in the rural area between 1958 and 1984 provides a good example showing some of
the features of the bottom level of the M-form hierarchy. A commune (now township)
government was a bottom-level government in China (only the level of village is below it).
Far from having specialization and division of labor, a commune encompassed all kinds of
activities of industry, agriculture, commerce, education, entertainment and even military
(peoples militia"). The counterpart of the commune in urban areas is the neighborhood
committee, which similarly has many of its own collective enterprises (ibid. 144-5; emphasis
mine).
Chinas decentralization reforms since transition extended its economy along regional lines and
made its M-form hierarchy even deeper [130]. The decentralization policies prompted a number of institutional
changes at the levels of administrative divisions (branches) along the regional lines (blocks):
First, a fiscal revenue sharing system between any two adjacent levels of governments was
implemented starting from 1980. Although schemes vary both across regions and in time,
the basic idea is that a lower level regional government enters into a contract with the upper
level regional government on the total amount (or share) of taxes/profits revenue (negative
means subsidies) to be remitted for the next several years, and the lower level government
91
1^1
keeps the rest [ ]...Second, the so-called extra-budgetary revenues (i.e., the second
budget) of the local governments and ministries were expanded. Eighty per cent of these
funds belongs to state-owned enterprises as retained profits over which the local
governments and ministries have substantial control. Before the reform, the extra-budgetary
revenue was relatively small, 9% of G NP in 1978 compared to the budgetary revenue of
35% of GNP. In 1991, the extra-budgetary revenue was up to 15% of GNP while the
budgetary revenue was down to only 18% of GNP (Sicular, 1992). Third, the banking system
in China was also decentralized with the separation of the central bank and the specialized
banks in 1983. Although banks were still owned by the state, each regional branch of the
specialized banks was required to link their total credit extension to deposits collected within
the region (cundai guagou). In case deposits fall short in a specialized bank, it is the regional
branch of the central bank (not the general office of that specialized bank) which is
responsible for reallocating funds within the region or asking for refinancing loans from the
central bank. This regional-based banking institution was also deep, as the central bank in
China has branches even at the county level. Although the banking system was somewhat
re-centralized in terms of personal appointments starting in the fourth quarter of 1988, the
influence of the regional government (through regional branches of the central bank and
specialized banks) on credit remained rather strong. Fourth, more autonomy was granted
and more responsibilities were assigned to the regional governments. These include
reduced planning scope of the central government, increased authority of local governments
for determining prices, for setting up new firms, for making investment with self-raised
funds, that is, funds drawn from the extra-budget or borrowed from banks. At the same
time, burdens of fiscal expenditure were also decentralized, local government assumed
greater responsibility for providing education, health, housing, local infrastructure, etc.
(ibid.146-7; emphasis mine).
As a result of these changes, local governments in China became residual claimants and had
more incentives to maximize local revenues.
Because the local governments budgets are highly dependent on local enterprises, they
have incentives to set up more enterprises using their newly-gained authority. More firms
mean more revenue, more revenue means more resources for regional development.
With such a decentralization, local governments do not receive a great deal of financial
support from above and consequently, their responsibilities to above are also small (ibid.
147).
Tables 2.41a and 2.41b illustrate how fiscal shares of budget revenue and expenditures
between the central government and local/ regional governments changed after Chinas
decentralization reforms.
92
Table 2.41a: Changing fiscal sharing in China between central and local
governments: public revenue and expenditure (1)
(Unit: 100,000,000 yuan)
Year Government Revenue Government Expenditures

Total Central Local Total Central Local
1981-90 Rate (% ) 11.9 17.6 8.5 12.1 7.6 15.4
1980 1160 285 876 1229 669 562

1985 2005 770 1235 2004 795 1209
1986-90 Rate (% ) 12.0 15.5 9.2 13.0 9.6 14.9
1990 2937 992 1945 3084 1005 2079
1991-95 Rate (%) 16.3 26.8 9.0 17.2 14.7 18.4
1994 5218 2907 2312 5793 1754 4038

1995 6242 3257 2986 6824 1995 4828
Source: above categorical statistics converted and calculated from China Statistical Yearbook, 1996: p.
22-3.
Note: Rate refers to the change as % of GDP in the given period.
As Table 2.41a demonstrates, central government revenues steadily increased between 1981
and 1995, exceeding local government revenues in 1995. In terms of government expenditures, both
central and local government expenditures increased between 1981 and 1995. However, during this
same period, local government expenditures increased more rapidly and to a level more than twice as
high as central government expenditures.
93
Table 2.41b: Changing fiscal sharing in China between central and local
governments: public revenue and expenditure (2)
(% per annum)
Year Government Government

Revenue Expenditure
Central Revenue Local vs. Central Expendi Local vs.

as G D P (%) Central Ratio ture as G D P (%) Central Ratio
1980 25.7 307.8 27.2 84.3

1985 22.4 160.5 22.4 152.0
1990 15.8 196.0 16.6 207.0
1995 10.7 91.7 11.7 242.0
Source: above categorical statistics converted and calculated from China Statistical Yearbook, 1996: p.
34-5.
As Table 2.41b demonstrates, between 1980 and 1995 Chinas central government revenues as
well as expenditures declined significantly as a percentage of GDP. During that same period the ratio of
local government expenditures to central government expenditures more than doubled. 1985 was a
critical year. M any key reforms were instituted in 1984, and many new laws were enacted [132].
Unlike Boisot and Child, who explained Chinas networked transacting governance as a result of its
decentralization, Qian and Xu explained Chinas decentralization largely as a result of its unique M-form
hierarchy prior to the reform [133].
Give this structure of the hierarchy. China also followed a much more decentralized method
than their Soviet counterpart in the process of making a plan: each region first formulates a
plan, then the higher government makes a balance, all the way up to the central government
(1993a, 544; emphasis mine).
And Qian and Xu certainly provided evidence that Boisot and Child could later develop. For example,
according to Qian and Xu, decentralization created substantial autonomy for the local governments so that,
while under strictly hard budget constraints and facing considerable pressure of market competition, these
local governments had to tolerate the fast-growing private enterprises and had to engage in their own
entrepreneurial efforts for survival. This internalized approach allowed China to generate rapid growth
through its local initiatives without totally destroying the existing structure. In this way China was able to take
94
an incremental approach to its transition. As Qian and Xu emphasized,
Having recognized the costs associated with decentralization along regional lines, our
analysis focuses on a neglected but important aspect of benefits of a multi-layer multi-
regional form of organization, that is, the opportunity and possibility that the M-fomri
organization provided to facilitate sustained entry and expansion of the non-state-sector.
This is mainly because, under the M-form organization in China, governments at the bottom
levels of the hierarchy have little bargaining power vis-a-vis their superiors but have
substantial autonomy in developing their own regions by establishing market-oriented
enterprises outside the state sector. Furthermore, competition between regions for getting
rich fast puts pressure on the local governments to tolerate ad even to encourage private
enterprises as well. The very limited bargaining power and substantial autonomy together
weaken bureaucratic controls and strengthen market activities inside this M-form hierarchy.
What makes Chinas case particularly interesting is the fact that the rise in the non-state
sector (including the private sector) occurred by gradually weakening the existing
hierarchical control without totally destroying the existing structure like the one experienced
by Eastern Europe and the USSR (1993a, pp. 542-3; emphasis mine).
2.42 Qian and Xus account of Chinas M-form hierarchy
To Qian and Xu, one of the main strengths of Chinas M-form hierarchy lay in the semi-autonomous
power that local governments could gain. But the financial semi-independence of these local governments
also meant that they had to rely on the market performance of local enterprises with which they were
associated rather than relying on the performance of those from above,
This is particularly true for the bottom level governments (i.e., township and village
governments in the rural area, and district and neighborhood governments in the urban
area). At the bottom levels of the hierarchy, community governments are in a very low
bargaining position vis-a-vis the government hierarchy and the banks (1993a, 544).
...the role of local governments before the economic reform was still limited compared to
that after the economic reform. Before 1979, as the fiscal system remained very centralized,
the local government had little financial resources for regional development. Autonomy of
the local governments was also limited given the constraint of the central planning and the
use of markets not being officially sanctioned. Furthermore, the Chinese economy was a
closed one without informational and technological exchanges with the rest of the world. The
subsequent reforms since 1979 opened up the Chinese economy to the outside world. The
scope of planning was gradually reduced and the use of the market was encouraged. More
importantly, several reform policies were carried out that have meant authority, information
and incentives being decentralized to the regional governments. It is only after these
complementary reform policies that initiatives of the regional governments were mobilized
and the market emerged beyond the boundary of each region (1993b, 145-6).
Thus the real mechanism was hard budgets constraints. Both local governments and local
enterprises had to face fierce market competition. The new situation demanded that they both seek
entrepreneurship.
95
...the budget constraints for non-state enterprises are much harder than the state-owned
enterprises. With hard (or harder) budget constraints, community governments are more
conscious about risks and profitability and, in the final analysis, the efficiency of their
enterprises. The number of township and village enterprises that went bankrupt during the
1989-91 retrenchment could be used as evidence for the harder budget constraints in the
non-state sector. In 1989, about three million township and village enterprises went
bankrupt, or were taken over by other township and village enterprises nationwide, while in
the same year almost all loss-making state-owned enterprises were bailed out by the
state...the loss-making state enterprises accounted for 31% of all the state enterprises in
1990 (1993b, 152).
Certainly it would make sense for the local non-state enterprises to pursue efficiency, as they faced
market competition and hard budget constraints. And local governments would have something to gain by
supporting those local non-state enterprises capable of creating revenues and profits.
Compared to their counterparts in the U-form economy, regional governments in China pay
less attention to bargaining with the higher authorities because they have less to gain from
bargaining within the hierarchy. The local government has to raise revenue on its own
without much help from above, and so it has strong incentives to set up and to support local
enterprises for revenue generating and employment purposes. Some scholars even view a
township or village as a corporation", and the government of township as the board of
directors and the management team of the corporation (Oil 1992) (1993b, 152).
Harder budget constraints in market competition that brought uncertainties to the local agencies
could force them to change their behavior and terminate those troubled enterprises with bad performances
[134]. In this way, as Qian and Xu indicated, both the weak bargaining power and the semi-autonomous
position could provide local governments and the non-state sector with some form of the incentives for
market-oriented institutional changes and ultimately promote market competition between different regions
n.
In a M-form organization, coordination at the centre is not so critical, thus providing semi-
autonomv together with higher-powered incentives to local governments may be
optimal...After further decentralization in the region, local governments have more
incentive to build up their regional empires and officials have less interest in promotion to
a higher rank. Because the regions are self-contained with delegated authority and
because different regions engage in a similar composition of activities, aggregate
indicators like growth in revenue or output reflect the true performance of the regional
government rather than random noise. Therefore, tournament or yardstick competition
between regions is a powerful tool for providing incentives bv filtering out common or
systematic uncertainties (Holmstrom 1982). In China regional governments often take
great pride in being ranked in first place in a competition among neighboring
regions... This type of incentive would be less effective and more costly to provide to
ministries in the U-form hierarchies because idiosyncratic uncertainty is more significant
(1993b. 150; emphasis mine).
96
According to Qian and Xu, efficiency can be institutionally initiated.
Although privatization, understood as a process of simply transferring ownership from the

state to citizens, might be achieved relatively quickly, privatization as a mechanism to
achieve efficient organizational structure and competitiveness is bound to be a Iona
historical process. Typically, the privatization process per se does not automatically
change the industrial structure of the economy (Czech Republic is an example). If the U-
fonm structure is not changed, the fundamental problems related to the high degree of
concentration may still remain after privatization (1993b, 157; emphasis mine).
The development of the non-state sector has benefited from agriculture reforms in at least
three aspects: 0) capital accumulation; (ii) release of labor force; and (iii) creation of
demands (ibid)- However, surplus labor, financial savings and potential of markets by
themselves cannot be transformed into growth automatically. Institutions are required to
facilitate trade, and entrepreneurs are needed to organize production and distribution. It is
the M-form organization that provides the flexibility within the system for efficient utilization of
those favorable conditions (ibid. 155-6; emphasis mine).
As Qian and Xu here underscore, different hierarchies with their U-form or M-form essential
features could generate different sets of combinations of costs and benefits for their respective
economies.
The costs and benefits of a U-fomn and M-form organization affect the static efficiencies,
stabilities, and evolutionary processes of the system (1993a, 545).
In the U-form organization, industries are highly concentrated, the regions are highly
specialized, and the operating units of ministries and enterprises alike are strongly
interdependent. Hence a rigorous coordination at the centre is crucial for maintaining the
normal operation of the economy, and a decentralized coordination at the regional level may
not be efficient (1993b, 149).
The costs and the benefits of different forms of organization are determined by the essential
features of the organizational structures...Compared to the U-form hierarchy, the M-form is
less efficient in utilizing scale economies. The automobile industry in China provides an
extreme example: there are more than a hundred small-scale state-owned auto makers in
China, each producing on average about ten thousand automobiles annually. It is typical that
regional governments in China control both heavy and light industries, and therefore regions
are less specialized in products and industries are less concentrated. This leads to criticism
of Chinas local industrialization for inefficient scale and wasteful duplications, and for
associated regional protectionism and segmented markets, in particular in the presence of
distorted prices and taxes (Wong. 1992). On the beneficial side, duplication may reduce
vulnerability and increase reliability of supplies under uncertainty. It mav also induce
competition and facilitate technology diffusion into inland areas. Furthermore, less
specialization mav also be more beneficial, less specialization mav reduce coordination
costs (Becker and Murphv 1992). and less specialization mav also make workers more
efficient in learning and in operation, as shown by the Japanese experience (Aoki 1986).
(ibid. 147-8; emphasis mine) [1i>e].
97
In Qian and Xu's view, what distinguishes Chinas M-form hierarchy from Eastern European U-form
hierarchy has more to do with the different internal structures of the regional governments than with the kinds
of relationships at the top level between the central government and the provincial government. In Chinas
case, what makes its M-form hierarchy unique is its distinct internal structure of regional governments in a
deep M-form hierarchy.
...the internal structure of a province in China is different from that of an Eastern European
country, even though the size may be similar. For example, Hungary with a U-form hierarchy
has a different organizational structure from Guangdong province of China. As a province,
Guangdong is a part of the large hierarchy of China. But Guangdong itself is also organized
in an M-form, with multiple regions consisting of prefectures, counties, townships and
villages, and all of them are self-contained economic units (1993b, 145).
The M-form hierarchy has lower requirements in communication and information processing
in which to coordinate its operation due to its decentralized nature. For example, in the
former USSR, the central government had to coordinate the production and distribution of
millions of products. But in China, the central government dealt with only a few hundred
products. The rest was taken care of by the local governments independently (1993a, 545).
In such a deep" M-form economy, at the lowest level Chinas industrial structure consisted of many
small- and mid-sized non-state-owned enterprises including private firms , localized at the levels of villages,
townships, and counties; and most of its state-owned enterprises were concentrated on the levels of
provincial and city governments. Qian and Xu provided the following 1985 data (Table 2.42a),
Table 2.42a: China: distribution of state-owned industrial enterprises

by administrative levels (1985)
Central Provincial and County

government city governments government
Number of state-owned 3,825 31,254 35,263

industrial enterprises
Share in total 19.57 44.57 8.98%

industrial output %
Source: cf. Qian and Xu 1993b, p. 170, Table 4.1.
According to them, by 1985 Chinas decentralization reforms had begun to affect Chinas industrial
structure,
98
First, more state-owned enterprises were delegated to local governments. In 1985, the state-
owned industrial enterprises controlled by the central government accounted for only 20% of
the total industrial output from enterprises at or above township level, while the provincial
and city government controlled 45% and county government 9%...Second, the Chinese
industry has become even less concentrated. For instance, there are more than 100 color
television assembly lines, and every province has at least one. The number of enterprises
making automobiles increased from 58 before the reform to 116 in 1987 (Wang and Chen,
1991). Third, the average size of state enterprises in China is much smaller than that in
Eastern Europe and the Soviet Union, and is quite close to that in the West. For example, in
1988, employment per enterprise in manufacturing was 806 in the Soviet Union and 460 in
Hungary, as compared to 145 in China and 96 in Italy. In clothing, the corresponding figures
were 6,600 in Czechoslovakia, 307 in Hungary, 80 in China, and 71 in Italy...In spite of
twenty years of reform, the average size of Hungarian enterprises remained substantially
larger than that in the West (ibid. 147).
To illustrate their last point about the relative sizes of industrial enterprises, Qian and Xu compared
China and Eastern Europe, the former Soviet Union and the West in 1988 as follows (see Table 2.42b),
Table 2.42b: Com parison o f the size o f enterprises in C hina, Eastern Europe,
the FSU and the W est (Italy and the United K ingdom ) in 1988
Unit=number of employees per unit of enterprise
Manufacturing Food Products Clothing
1988:
Czechoslovakia 2930 1609 6600
The Soviet Union 806 290 402
Hungary 460 925 307
Yugoslavia 311 243 402
Italy 96 71 71
United Kingdom 35 67 25
China
1988 145 75 80
1995* 118 234 87
* I added the 1995 statistics; the sizes of Chinas enterprises in the year were calculated by the ratio of
numbers of employees vs. total number of enterprises).
Source: Industrial Statistics Yearbook, Volume 1, United Nations, Geneva; cit. Qian and Xu 1993: 170; for
Chinas data in 1995, cf. Statistical Yearbook o f China, 1996: pp. 402, 414.
99
In 1988, the average sizes of Chinas enterprises in Manufacturing, Food Products, and
Clothing were much smaller than those in the FSU and the FEE; and the size of Chinas Manufacturing
enterprises shrank between 1988 and 1995. Chinas non-state sector had many more mid- and small
sized enterprises than Chinas state sector.
Later, in 1999, Cao, Qian, and Weingast further clarified the point that enterprise size also has a
significant impact on the momentum, pace, and method of privatization in the state sector.
In China, there are two separate worlds in the state sector one of small and medium SOEs
[state-owned enterprises] under the supervision of local governments, and another of large
SOEs under the supervision of the central governments. In contrast to Eastern Europe ana
the former Soviet Union, the distribution of SOEs by size in China is skewed toward the
small enterprises; further they are spread throughout the country rather than having a
geographical concentration...Therefore, privatization of small SOEs is equally, if not more,
significant in China than the reform of large ones. In a 1995 survey, the State Assets
Management Administration reported that the state sector had about 300,000 SOEs. The
top 1,000 SOEs accounted for 40% of total assets, 51%of net assets, and 66% of profits in
the state sector (Peoples Daily, August 1 4 ,1 9 9 5 )...In 1993, although large industrial SOEs
accounted for about two-thirds both in profits and taxes and in net value of fixed assets,
small and medium industrial SOEs together accounted for 95% in number, 57% in
employment, and 43% in output of the state industrial sector...some of them [very larger
enterprises] are in natural monopoly industries such as telecommunications and railroad
transportation; and some are in government monopoly industries such as airlines, banks,
electricity, oils and petrochemicals (107-8; brackets mine).
The process of SOE privatization at the county level (one level above township and one
level below city) began with pioneering counties such as Yibin of Sichuan, Shunde of
Guangdong and Zhucheng of Shandong as early as 1 9 9 2 ...It became widespread after
1994 [137]. Surveys suggest that by the end of 1996 up to 70% of small SO Es had been
privatized in pioneering provinces; most counties had moved from an experimentation
stage to a promotional stage; and many provinces have completed zhuanzhi, or change
of ownership, in more than 50% of their small and medium SOEs at the county level.
Some economists in China predict that most small SOEs at county level will be gone
soon, although some of them may remain SOEs in name (ibid. 109).
Cao, Qian, and Weingast documented the size of state-enterprises as follows (see Table 2.42c),
100
Table 2.42c: State-owned enterprises in China by size, 1993
Number Output Employment Net Value Profits and

(%) (%) (%) of fixed tax es (%)
assets (%)
Large 4.7 56.7 43.2 62.0 66.7
Medium 12.9 23.6 25.6 18.6 19.4
Small 82.3 19.7 31.1 19.5 13.9
Source: China Statistical Yearbook, 1994, pp. 388-91, except employment figures, which are from the State
Statistical Bureau; cit. from Cao et al. 1999, Table 1, p. 108.
Small-sized and mid-sized SOEs having higher debt-equity ratios are more vulnerable to market
failures, some of which have driven them toward privatization. Large-sized SOEs, having lower debt-equity
ratios, have suffered less from hard budget constraints and thereby have lacked the momentum for
privatization (ibid. 109).
Qian and Xu went on further to specify and compare the differed functional properties of the U-form
hierarchy and M-form hierarchy,
In a U-form hierarchy, incentives of subordinates are designed for implementing the

commands from the above. Agents are subject to frequent and arbitrary control of their
superiors, and thus they try to avoid any change or risks. In M-form organization, local
governments are given semi-autonomies. Compared with the U-form hierarchy, it is less
effective in implementing orders from the above in a well coordinated wav, but it is better in
mobilizing initiatives from bottom level units. This is because the local governments are not
subject to arbitrary control from the above for tasks within their autonomies. This feature of
the M-form organization induces strong incentives for local governments to conduct
experiments (1993a, 545; emphasis mine).
In the M-form economy of China, coordination is distributed at all levels of the hierarchy:
regional governments have substantial responsibility for coordination in addition to the
important (though not critical) coordinating role of the central government. There are two
reasons which favor a more decentralized coordination vis-i-vis a more centralized one:
First, to the extent that information is initially dispersed, local governments have better
information than the central government amply because they are closer to the sites. Hence
the local information is better used by local governments than by the central government for
regional development. Second, decentralized coordination has lower requirements for
capability in communication and information processing. The burden of communication and
information processing is reduced since fewer messages need to be transmitted and fewer
tasks need to be coordinated. Therefore, the M-form hierarchy has advantages when there
is a high degree of complexity in an economy and the communication and information
processing technologies are backward. However, decentralized coordination may also result
in inefficiency when a market is incomplete (Weitzman 1974, Bolton and Farrell 1990, and
101
Milgrom and Roberts 1992). In the case of China, interdependence between economic
activities in different regions is not strong, and a more decentralized coordination is likely to
be preferred to a more centralized one as in the U-form. other things being equal (1993b,
149; emphasis mine).
According to Qian and Xu, the regional interdependence and inter-industrial interdependence under
the M-form hierarchy in China have been much weaker than their counterparts under a U-form hierarchy in
the FEE and the FSU. These have facilitated Chinas reforms across regions and industries through constant
yet much less costly error-trial experiments and through incremental institutional mutants. As a result, Chinas
transition had taken on an evolutionary path toward marketization without sudden, structural, and costly
changes,
It is acknowledged that one major feature in the Chinese reform is its success in using
experimental approaches [McMillan and Naugthton (1992) and Singh (1991)]...The question
arises: why is China special by using experimental approaches? In the U-form organization,
all industries are highly specialized and so are the regions. Thus, operating units are heavily
interdependent and rigorous vertical administrative coordination is crucial for maintaining the
normal operation of the economy. In such a case, allowing one or a few regions to do
experiments may be very costly or perhaps not feasible. These features of the U-form
hierarchy make the scope of regional experiments limited, which may reduce the chance of
being a success. Even when an experiment was a success, a large-scale promotion of one
experiment required high coordination cost economy-wide. In the M-form organization,
however, the regional interdependence is relatively weak. In this case, the regional
experimental strategy of reform in an M-form organization is less costly and more feasible:
even a failure in the experiment will not considerably disturb the whole economy. With more
experiments, therefore, under the M-form structure, people in different regions have more
chances to develop a large variety of 'mutants, and to compare and to select among
various alternatives. In this sense, the M-form organization is more flexible in the institutional
evolutionary process. In contrast, the extremely strong regional dependence in the U-form
organization makes the institution more rigid and difficult to change (1993a, 545-6) [138].
In Eastern Europe and the Soviet Union, some experiments had been introduced in their
reforms before 1989. However, the experiments were often unsuccessful; even when
they were successful in the local area, they were rarely promoted nationwide. Economists
tend to believe that regional experiment is not the right approach to reform a planned
economy. However, one major feature of the Chinese reform is its success in using local
experiments and in adopting the bottom-up" approach (Chen, Jefferson and Singh,
1992; McMillan and Naughton 1992). The a question arises: why is China so special in
using experimental approaches? In a U-form organization with a high degree of
interdependence between operating units, allowing one or a few regions to do
experiments may be very costly or perhaps not feasible. This is because experiments
generate shocks and may disturb normal operations of the economy regardless of the
success or failure of the experiments evaluated at local level. This makes the scope of
regional experiments more limited and chances of success smaller. Even when an
experiment was a success in a particular industry or region, its relevance to other
industries and other regions is less significant because of heterogeneity across operating
units. Given these features of the U-form hierarchy, economic reforms will more likely be
earned out in a top-down" fashion, in which decisions for changes have to be more
centralized to minimize transition costs. In the M-form organization, however, the regional
102
interdependence is relatively weak, so even a failure in the experiment will not
significantly disturb the whole economy. In this case, the regional experimental strategy
of reform in an M-form organization is less costly and more feasible. Under the M-form
structure, large scale regional experiments can be carried out, many regions have a
chance to develop a large variety of mutants. and the central government mav be able
to compare and select among various alternatives. Furthermore, because adjacent
regions are similar in terms of economic structure, a successful experiment in one region
can be promoted relatively easily in other regions. Hence, under the M-form organization,
reforms may proceed more efficiently with the bottom-up approach, which provides a
less costly way of learning to establish and to use market institutions in a unprecedented
environment. This makes the M-form organization more flexible in the institutional
evolutionary process (1993b, 151; emphasis mine).
Here Qian and Xu argued that the weak interdependence of Chinas M-form hierarchy was rather
conducive to feasible reform experiments and to more efficient bottom-up institutional learning. The
main reason was that Chinas existing weak organizational interdependence could help China endure those
exogenous shocks and avoid those structural syndromes that Eastern Europe had suffered under the
structural transformations in their U-form economies [139]. This illustrates the Chinese saying that while the
sky darkens in the western side, it can still brighten in the eastern side.
In the M-form economy, a region-specific shock mav not affect the economy as a whole
because industries are spread out in many regions. The sustainability of the Chinese
economy during the Cultural Revolution illustrates this point. During that period, some
regional economies in China collapsed (due to factional conflicts) but the national economy
did not: national income dropped in only two years (-7.2% in 1967 and -6.5% in 1968), and
recovered quickly afterwards. On the other hand, since different regions have similar
industrial compositions, an industry-specific shock may affect all regions, but in a similar
way. This may reduce the aggregate adverse effect for several reasons: each region is
better capable of dealing with the shock locally since the magnitude of the shock is smaller;
regions may adjust better to the new environment by learning from each other since all
regions face similar shocks; and the incentive may become less of a problem because the
shock is transformed into a systematic one in the M-form organization rather than an
idiosyncratic one as in the U-form organization (1993b, 149-150; emphasis mine) [140j.
Chinas M-form hierarchy with its path dependent nature enabled China to follow a strategy for
denationalization" instead of privatization" (1993b, 156). This strategy was followed because Chinas
transition has been strongly backed by its local discretion and its advantageous structure of cost diffusion.
With the crowding-out effects of takeover, mergers and transformation of ownership, the
economy will eventually rely more on the non-state sector. This is perhaps an alternative
way to privatization and a less painful path of transition for China. To the extent that the
majority of the non-state sector has community or local government ownership rather
than private ownership at the present time, China can be better described as
'decentralized market socialism according to its ownership structure (Qian and Xu 1993)
(ibid.) n .
103
According to Qian and Xu,
The recent Eastern European experiences have shown that massive and fast
privatization of the state sector is rather costly. Given the initial condition of the M-form
organization, it may be easier and less costly for China to follow the evolutionary
approach of developing the non-state sector rather than the revolutionary approach of
massive and fast privatization. Eventually, the state sector will be forced to share a minor
role in the national economy. This has important implications for the possibility of
denationalization, instead of privatization of state-owned enterprises in China in the future
(ibid.).
Our analyses have demonstrated that the success of Chinas particular gradual reform
strategies depends on its initial institutional conditions...that is, the transition is a path
dependent evolutionary process... One of the important implications of our analyses is
that the difference in the initial institutional conditions concerning the organizational
structure of the planning hierarchy should be taken into account when making policy
suggestions for other countries based on China's reform experience. The central idea
underlying our theory is that, in addition to ownership, the organizational structure of the
economy matters (ibid. 157: emphasis mine) f1^ l.
In the underlined portion of the second paragraph above, Qian and Xu make a statement that
provides a theoretical premise for this dissertation [143]: The paths and outcomes of transitions, and the
desirability of those outcomes vary according to the initial institutional conditions and environments. This
theoretical premise differs from conventional claims calling in all instances for unidimensional market
transitions through radical privatization, regardless of how costly tat might be. As Qian and Xu concluded,
W e have discovered several important linkages between the reform process and the
organizational structure of centralized economies, which have policy implications, though
tentative, for other economies in transition. First, decentralization and deconcentration of
the state sector are desirable in their own right, and for facilitating entry and growth of
private business (Aghion, Burgess, and Xu 1993). There are several reasons: (i)
Although privatization, understood as a process of simply transferring ownership from the
state to citizens, might be achieved relatively ouicklv. privatization as a mechanism to
achieve efficient organizational structure and competitiveness is bound to be a long
historical process...(ii) If for some reason privatization will be delayed, then there is a
need for explicit policies to maintain and restructure the existing state-owned enterprises.
The policies of decentralization and deconcentration of state enterprises are beneficial in
generating competition and improving performance (perhaps with the exception of the
natural monopoly industries) and (iii) decentralization and deconcentration of the state
sector will facilitate and speed up entry and growth of new private businesses, which is a
vital part of privatization both in the long run and in the short run. The growth of the
private sector in Eastern Europe and the former Soviet Union has so far remained limited
to trade, services and construction, while other sectors such as manufacturing industries
have not yet been much affected. The monopoly and monopsony power of the
concentrate state enterprises or newly-privatized firms are one of the major barriers to
entry and growth. Decentralization and deconcentration will reduce these barriers. In
addition, decentralization of financial institutions also helps private firms to access credit,
104
which is again critical for the fast growth of the private sector...Third, given the
unprecedented and complicated nature of the transition from centralized to market
economies, an experimental approach mav be a less costly wav of learning to establish
and to use market institutions in transition. Economic theory does not provide sufficient
guidance for the transition. Other countries experience mav be relevant, but must be
adapted to each country's own situation. By the decentralized nature of market economy
and by the very nature of the transition, a lame amount of bottom-initiated institutional
experimentation is needed to acquire knowledge in transition. Although the U-form
structure is not suitable for large scale experiments as we analyzed in this paper, it is still
possible to establish some special areas for the purpose of experimentation. To avoid
interfering with the normal operation of the economy, these regions should be located
outside the old industrial bases and far away from the central control, as was done in
China. Alternatively, after decentralization and deconcentration of the state sector, the
economy will be more suitable for local experiments (1993b, 157-8; emphasis mine).
Despite the rationale for such an experimental transitional path through denationalization, the state
still needs to make a credible" commitment to warrant the implementation for such a path (ibid. 120) [144]. To
Qian and Xu, such a commitment could be a key to solving the fundamental political dilemma of an
economic system."
In any economy, incentives cannot be really created unless the government is able to make
a credible commitment not to expropriate promised incomes and not to subsidize loss-
makers. Absence of such a commitment was a legacy of centralized economies that led to
the ratchet effect (excess profits were constantly siphoned away, Berliner 1957) and the
soft budget constraint" (loss-makers were continually bailed out, Komai 1980)...In contrast,
credible commitment may be achieved under decentralization. Dewatripont and Maskin
(1991) argue that dispersed banks and decentralized information structures can harden the
budget constraint....During Chinas decentralization, many upper levels of government
departments and bureaux were removed or merged, and the number of bureaucrats was cut
down. According to Migrom and Roberts (1990), this reduces information channels between
the superior and the subordinates, which in turn reduces influence costs. Thus a better
commitment may be achieved as less information reaches the top (1993b, 150). The central
government in the former Soviet Union retained strong discretionary power during its
reforms. In contrast, Chinas reform policy of decentralization of authority to local
governments makes it difficult for the central government to use its discretion [145]. In his
study of the history of economic development Weingast (1993) emphasizes the role of
decentralized political institutions in achieving credible commitment to thriving markets by
the state. The crucial aspect of what he called market-preserving federalism" is that the
central governments authority to make economic policy must be limited and this authority
must be placed in the hands of the local governments. This is viewed as the key to solving
the fundamental political dilemma of an economic system": a government strong enough to
protect property rights is also strong enough to confiscate the wealth of its citizens. One of
the key differences between Chinas and Russias reforms, as seen by Weingast. is that
China proceeded in this direction but Russia did not (1993b, 151; emphasis mine).
Qian and Xus view of political commitment was later developed by Cao, Qian, and Weingast in
1999 into their arguments for federalism, Chinese style.
105
2.43 Chinas M-Form hierarchy and its hybrid economy in transition
Qian and Xu also explored how well China's M-form hierarchy could function in a hybrid transitional
economy. Considering the fact that China maintained its existing central regime throughout its transition, one
could reasonably expect that the state governments roles were crucial in carrying out the transition. But the
role of the central government came into play with a mix of regulatory control and acquiescence allowing
greater local discretion and flexibility for ongoing local experiments beyond the central plan. Later in 1999,
Cao et al. likened such a role to one of federalism, Chinese style, resembling a laboratory of the local
governments" (124) for bolstering and protecting various local initiatives and local activism. According to
Qian and Xu,
The fast growth of the non-state sector is not in the plan of the government, but rather
almost a spontaneous process under a relaxed political and economic environment. The
central government acknowledged openly that the fast growth of the non-state sector was an
unexpected surprise. Chinas case demonstrates that with commitment to economic
development and commitment to decentralization, whether this be conscious or not, reforms
can go very far even with the limited roles of the central government, given the M-form
structure and incentives to lower-level government in expanding non-state enterprises.
Compared to the central governments role in Eastern Europe and the former Soviet Union.
Chinas central government is relatively passive in guiding the reforms. It has not provided
any coherent plan for the reform. It gives a green light for local experimentation, and it
approves and promotes successful reform measures discovered in the course of regional
experiments. At the same time, it also imposes limits on reforms or institutional changes; for
instance, it continues to restrict the activities of state-owned enterprises and it is against
mass privatization. The observed gradualism in China is, to a large extent, a reflection of
these binding limits... More provincial governments are authorized to experiment with
different reform measures in their provinces within the limits set by the central government.
This helps to explain why there are lame variations in the reforms from province to province.
In many cases, a higher level of regional government protected their lower level
governments and the non-state enterprises at a time when the political atmosphere at the
center turned against them (1993b, 154; emphasis mine).
Qian and Xu argue that the fast growth of Chinas non-state sector (consisting mainly of those urban
COEs and rural TVEs by 1991) was attributable to the local initiatives boosted by Chinas M-Form hierarchy
that allowed for extensive market activities at the discretion of local authorities at the bottom of the hierarchy.
The most relevant aspects of the M-form organization are those associated with the two
bottom levels of government, that is, township and village governments in the rural area, and
district and neighborhood governments in the urban area (1993b, 152).
...by 1991, collectives and joint ventures were the dominant majority of the non-state sector,
and private-owned enterprises played a minor role in the national scale. The collectives and
joint ventures have a larger scale of operation, employ better technology, and absorb more
106
human capital. This is because in China, there is still a lack of legal protection of private
property rights, let alone commitment to private ownership. Private firms often face
discrimination in obtaining credit, labor and material supplies (Nee 1992). Local government
ownership like a township or a village enterprise can be viewed as an institutional response
to such an environment, in which they have comparative advantages over both private and
state ownership. They are politically correct. protected by at least some level of
government, and they also enjoy the flexibility of business operation that the state-owned
enterprises are lacking (1993b, 141; emphasis mine) [146].
Qian and Xu described Chinas official classification of its hybrid economy into state-sectors vs. non
state sectors, according to the levels of their geo-based administrations (ibid. 140). Such a geo-based
classification differs from Nees binary classification of Chinas ownership structure into marketized sectors
vs. non-marketized ones (see above Table 2.21 d). According to Qian and Xu, the state-sector enterprises
could be further classified as follows,
In practice, every state-owned enterprise is affiliated to one of the following four levels of
government: (1) central; (2) provincial (with a population size of dozens of millions); (3)
prefecture (with a population size of several millions); and (4) county (with a population size
of several hundreds of thousands)...Typically the responsible government delegates the
supervision of its" state-owned enterprises to the industrial ministries/bureaux. Therefore,
even for the state owned enterprises, they are not homogeneous in terms of control (1993b,
138) [147].
Qian and Xu noted that the state enterprises under Chinas M-form hierarchy were not
homogeneous in terms of control" according to their local levels of administration. This observation provided
support for Cao, Qian, and Weingasts 1999 observation that the privatization of the state enterprises varied
in many ways according to their sizes.
According to Qian and Xu, Chinas non-state sectors included those urban and rural collectives (or
the community sectors according to their alternative classification; Table 2.43a below; cf. Qian and Xu
1993b, 140), and private sectors [148].
107
Table 2.43a: Qian and Xu - Classification of Chinas non-state sectors
by industries and administrative levels
Official
Classification Collectives Individual Others
Urban District Neighborhood Urban Urban Private,

Enterprises Enterprises Cooperatives Individual
.Foreign
& other
Rural Township Village Rural Rural Joint
Enterprises Enterprises Cooperatives Individual Ventures
Alternative
Classification Community Private
By Q&X
Source: adapted from Qian and Xu 1993, p. 139.
Note:
1. Following the new version of the China Statistical Yearbook 1996, "Urban" herein is defined as
"structure of gross industrial output value of at and above township level;" and "Rural" is defined
as "structure of gross industrial output value of at and below village level."
2. "Private" sector is defined to include self-employed, private domestic firms, joint ventures, and
foreign-owned firms.
Rural collectives included township and village enterprises (TVEs) affiliated to the respective
governments of townships and villages and other collectives in rural China.
The predecessors of township and village enterprises (TVEs) were commune and brigade
enterprises (CBEs) emerging during the Great Leap Forward in 1958. The ownership form of
township and village enterprise is truly a Chinese invention that has not been found
elsewhere (ibid.).
Chinas private enterprises are much more heterogeneous and idiosyncratic than enterprises in
Chinas other sectors. They include household/individual enterprises (no more than 7 people in each) and
seven other types of enterprises with more than 7 people in each, including foreign enterprises and joint
ventures with foreigners, and other types of joint ventures (e.g., those between state and private enterprises),
and joint stock companies. These enterprises are more reliant on market-oriented mechanism for regulation
and efficiency. The seven other types of ownership did not emerge until the eariy 1980s" (ibid.). Qian and Xu
108
added, some TVEs and urban district and neighborhood enterprises are de facto private enterprises with
vaguely defined ownership under the name of collectives (Qian and Xu 1993b, 140). Rural enterprises in the
non-state sector and both rural and urban enterprises in the private sector experienced unprecedented
growth in China during this period.
Within the non-state sector, the largest and the most dynamic part is the segment of rural
enterprises, also known as Township, Village and Private Enterprises (TVPs). Between
1978 and 1991, the number of rural enterprises increased from 1.5 million to 19.1 million and
employment increased from 28.3 million to 96.1 million. Between 1981 and 1990, the total
output by rural enterprises grew at an annual rate of 29% , in which the industrial output grew
at 28% , much higher than the national average of 13%. Exports by township and village
enterprises (excluding private enterprises) increased at an average annual rate of 65.6%
from 1986 to 1990... With the rapid growth of rural enterprises, their status in the national
economy has changed from a subsidiary sector of agriculture to an important engine of
growth...By all measures, the Chinese rural enterprises had already expanded to more than
half of the non-state sector and to about one quarter to one-third of the national total bv
1991 .The rapid growth of the rural enterprises has changed the industrial structure of the
Chinese rural areas as well. In 1980, the share of agriculture in gross output value in rural
areas was 69% and the share of non-agriculture was 31%, of which industry accounted for
only 20%. Ten years later, in 1990, the share of agriculture output had dropped to 46% and
the share of non-agriculture output increased to 54%, of which industry accounted for 40%
(Qian and Xu 1993b, 141; emphasis mine).
Employment by the rural private sector was about 24% and total output about 14% of the
rural total in 1984, the corresponding numbers increased to 49% and 33%, respectively, in
1988...An important part of the private sector in China is individual business. China
restored individually or household-operated business in 1978 and since then, this segment
of the private sector has registered rapid growth in both urban and rural areas, largely in
industrial and commercial enterprises. Between 1981 and 1988, the number of individual-run
enterprises increased seven-fold, from 1.8 million to 14.5 million, and employment increased
nine-fold, from 2.3 million to 23.0 million (ibid.).
As Cao et al. 1999 further documented, rural enterprises (including both TVEs and private
enterprises) have already become a major force of domestic industrial production since 1992 (see Table
2.43b).
Both foreign firms and domestic non-state firms have become the major sources of the
competition. The former are the result of the rapid increase of foreign direct investment
(FDI) to China, and the latter are mostly from rural enterprises which include both
Township-Villaqe Enterprises (TVEs) and private enterprises. Bv the mid-1990s, foreion
firms together with rural enterprises already accounted for more than half of Chinas
industrial output. As a result, competition pressure on SOEs from non-state firms reached a
new le v e L .Beoinninq in 1992. rural enterprises (including both TVEs and private
enterprises) also expanded, becoming a major domestic competitive force. In 1993, rural
enterprises accounted for 45% of coal production, 37% of cement, 59% of paper, 61% of
electric fans, 70% of canned food, and 42% of silk products (China Industrial Development
Report 1996) (ibid. 118-9).
109
Table 2.43b: Chinas rural industrial employment and rural share

of national industrial output, 1986-1996
1986 1990 1991 1992 1993 1994 1995 1996
Rural non-farm employment (million) 79.4 92.6 96.1 106.3 123.5 120.2 128.6 135.1
Rural Industrial employment (million) 47.6 55.7 58.1 63.4 72.6 69.6 75.6 78.0
Share of rural industrial output to 0.22 0.25 0.31 0.37 0.45 0.46 0.46 0.47
national industrial output
Source: China Statistical Yearbook, 1997; adapted from Cao et al. 1999, p. 119.
In Qian and Xu, accompanying Chinas hybrid economy is an emerging institutional environment
(helped by China's M-form hierarchy) of competitive horizontal relationships between regions, industries,
local enterprises, and economic sectors. This industrial environment is conducive to market activities. It is an
environment that could not be found in economies under a U-form hierarchy. In many ways this environment
is directly responsible for the rapid market expansion and the booming non-state sector in Chinas transition.
Another important feature, which distinguishes the M-form hierarchy from the U-form
hierarchy, is the horizontal, and potentially competitive, relationship between regions and
between regional governments. The horizontal relationships between regions create a
condition for market-oriented transactions and trade among enterprises outside the scope
of the state planning. It soon generates a competitive market environment. This is how
the market mechanism in China emerged at such a fast pace within the existing
hierarchical system. In contrast, in the U-form hierarchy, transactions between two
enterprises advance mainly through their common superior. The rationale of this rule can
be justified by the specialization of the enterprise. With a high degree of specialization,
rigorous administrative coordination is important for the normal operation of the economy.
Thus the development of the horizontal relationship inside a U-form hierarchy may
severely damage the normal operation of the hierarchy. Without the horizontal
relationship developed, the market mechanism is hard to emerge and evolve (1993a, p.
In fast-growing areas like Guangdong and Jiangsu, many non-state enterprises hire more
than half of their labor from inland provinces like Sichuan and Hunan. Capital poured into
these areas as well, as shown by the substantial increase in bank deposits in the last few
years [149] (1993b, 153).
In capitalist history, an evolution of horizontal independence has been a prerequisite for rising market
competition and the emergence of market economies. But China with its M-form hierarchy could bring about
such an evolution within its existing structure of institutions during its transition. Chinas M-form hierarchy
110
offered a great tolerance of horizontal autonomy that provided incentives for the regions, industries,
enterprises, and individual cadres to pursue entrepreneurship and engage in endogenously-incubated market
competition.
In Chinas reforms, entrepreneurship is developed inside the M-form hierarchy. With the
weak bargaining position in the hierarchy, low-rank officials temptation for promotion in the
hierarchy have been reduced. An alternative for their career is doing business. Some
officials quit their jobs to do business, more officials do business on their jobs. Instead of
implementing commands from above, their major job is to use their autonomous power in
earning profits. Entrepreneurship is developed among many local government officials or
Party cadres. There are many valuable human capitals accumulated in the M-fomri hierarchy
which are better utilized when government officials are transformed into entrepreneurs (ibid.
The success of the agricultural reform itself is helped by the M-form structure. The
household responsibility system was based on experiments initiated by regional
governments (villages, township, county and province) before it was promoted nationwide by
the central government. Strong motivation and initiatives by local governments, tolerance on
the part of the central government, and rapid promotion of this system, are all made possible
by the M-form organization structure (ibid. 156; emphasis mine).
Qian and Xu also pinpointed in the final section of their work (1993b) that Chinas M-form hierarchy
had its overall impacts on other transitional reforming measures and achievements, such as China's open-
door policy, its dual-price system, its success of agriculture reforms, etc. (ibid. 154-6) [150j.
In summary, Qian and Xu's model signals the emergence of a revisionist institutional insight
through a historical comparison of transitions. According to them, Chinas economic hybridization actually
dovetails with a new spectrum of hierarchical alliances, more favorable to coordination and cooperation in
an emerging decentralized and integrated system - federalism," Chinese style. In Qian and Xu' view,
Chinas M-form economy provided a path toward "decentralized market socialism" (1993b, 157). In
retrospect, Nee (1989) also acknowledged that transitions were launched by the planning regimes. But unlike
Qian and Xu, Nee also rejected the idea of transitions with multiple approaches and paths, because he
treated all bureaucracies from the former socialist economies as intact fait accompli with no regard to their
variations and their historical and cultural contexts (17). N ees classification of China's hybrid economy
reflected his thesis of market transition by distinguishing between marketized sectors and non-marketized
ones. In contrast, Qian and Xu were inclined to define sectors according to their regional divisions and
administrative levels (i.e., blocks and branches).
111
In rejecting Nees approach to rebuilding economic institutions based on a unidimensional market-
hierarchy continuum," Boisot and Child made endogenous comparisons of hierarchical changes of
transacting governance, networked-switch-featured, in reference to Chinas cultural space. Qian and Xu
compared Chinas transition and Eastern Europes transition in terms of their respective organizational
structures. Qian and Xu attributed Chinas momentum to its decentralization reforms under an M-form
hierarchy that greatly boosted the local initiatives and generated a boom of the non-state sector. Qian and Xu
traced Chinas and Eastern Europes different hierarchical forms to the initial conditions of institutions. By
contrast, Boisot and Child attributed the unique forms of Chinas bureaucracy before and after the transition
to the lower regions of China's information matrix. Boisot and Child rephrased Qian and Xus M-form
hierarchy in terms of networked organizations in Chinas cultural space. Both Boisot and Child and Qian
and Xu believe it is important to note the institutional particularities in Chinas contexts, particularly those
existing in China priorto its transition.
Qian and Xu especially credited the utility of Chinas M-form hierarchy in facilitating Chinas gradual
institutional reforms. A successful reform could spread quickly throughout one region, several regions, and
even the entire nation by way of geographically-based duplications in the M-form economy. In the meanwhile,
an unsuccessful reform experiment could swiftly be terminated and disappear, since nobody would want to
adopt the reform, and since the regions and locals had been endowed with their own discretionary authority
to decide what was the best for them in their own circumstances (referred to as vertical non-uniformity" by
Cao, Qian, and Weingast 1999). It thus suggests that through such a decentralization China finds its own
way against bureaucratic inertias and economic inefficiency in general. Later on in 1999, Cao, Qian, and
Weingast named this sort of regionally-based decentralization (favoring local incentives and competition yet
without forfeiting central control) federalism, Chinese style.
While attributing Chinas recent institutional changes to Chinas decentralized reform policies within
an M-form hierarchy, Qian and Xu did not compare Chinas current M-form hierarchy with earlier or later
hierarchies. Thus Qian and Xu essentially accepted the M-form hierarchy as static. They also deliberately
112
avoided serious talk about the state sector and the reforms of the state institutions and their impacts on
changing the structure of the existing hierarchies (cf. Qian and Xu 1993b, endnote 7, p. 158) [151]. Boisot
and Child differed from Qian and Xu in that they attributed Chinas transition to be a switch from a fie f type
hierarchy to a clan type hierarchy. Another difference between Boisot and Child and Qian and Xu comes
from the fact that while Qian and Xu's examination of a M-form hierarchy looked at the roles of formal
organizations of the state and local governments, Boisot and Childs examination of networked hierarchy
looked at Chinas actual economic governance as well as at informal organizations working in Chinas non
state sectors. Despite the strengths of these two models, neither one seems able to explain how Chinas
institutions and organizations could be endogenously changed through internal reforms and mutations to
spearhead Chinas transition, or to recognize that the internal reforms and mutations were outcomes of social
actions in the transition rather than that were unintentionally chosen. Thus neither model could explain why
China turned to privatize the state sector of the economy as part of its economic transition. The next chapter
will try to address these and similar questions with alternative, more encompassing explanations.
113
2.5 A brief comment on institutional models of Chinas transition
This chapter has first of all examined some existing models of post-socialist transitional
economies, most of which concluded that privatization was a major, universal component of all
transitions. Yet that would meet some empirical counters. For example, we found the inconsistencies
between the different transitional economies and their performances. In Chinas case, the impacts of
privatization on its growth seemed paltry in the 1980s, relative to the impacts of collective-owned
enterprises (COEs), consisting of most of the non-state sectors. Only after the 1990s did the association
of privatization with Chinas growth becomes manifest (cf. Cao, Qian, and Weingast 1999). This fact
suggests that China's transition and its success cannot be explained by privatization alone (ibid.).
At this point, I think it may be useful to quote C. Lanes 1995 account of institutionalism.
According to Lane,
... institutionalism accords overriding importance to national distinctiveness in industrial

organization, attributing this to the influence of historically grown, enduring institutional
frameworks which create the lenses through which organizational actors come to view
the world (DiMaggio and Powell 1 991:13). In the process, institutions both constrain and
enable actors, and, in the words of Jepperson (19 91 :1 46 ). *are vehicles for activity within
constraint. The concern of institutionalists to understand how social choices are shaped,
mediated and channeled by institutional arrangements has long informed scholars in all
the social sciences, and a variety of different institutionalist approaches are on offer (p.
10; emphasis mine).
If I paraphrase Lanes statement correctly, he says: 1. Institutions have their own history and are
affected by their history. 2. As institutions are persistent, constrained, and dynamic, they may function as
both conditions and drivers. 3. Dynamics of institutions affect and are affected by the social actors,
including institutional and organizational actors in the sense that institutions and organizations are
human-made, and they are carriers of human history. 4. Institutional sociologists must discover what
motivates these social actors to make their choices and frame their actions, what ulterior motives may lie
behind their choices and actions, and how those different institutional environments and arrangements
can mediate and shape the actors choices and actions.
114
Much of the institutional scholarship on Chinas transition has been critical of the neo-classics; and
many of the institutional theses have evolved from critiques of the neo-classics. The institutional scholarship
on China has focused on market, hierarchy, or network institutions, whichever appeared to be galvanizing the
transition most dynamically. Nee looked for ways of rebuilding economic institutions. Eoisot and Childs
looked for networks and their effects on economic order. Qian and Xu probed into different organizational
structures that affected transitions away from the former planned economies. In my own terminology, Nee
uses a market-approach, Boisot and Child use a network-approach, and Qian and Xu use a hierarchy-
approach. Empirically, they all focused their attention on the fastest growth of the non-state sector. According
to Nee, the fatest growth was driven by market mechanisms. According to Boisot and Child, the fastest
growth was driven by changes in Chinas bureaucratic structure, Chinas information matrix, and Chinas
culture-space, since information imbalance played a critical role in Chinas economic transition. In Qian and
Xu, Chinas transition was driven by the non-state sector of the economy, which was local-govemment-
driven; thus local initiatives, facilitated by Chinas decentralization under its M-form economy, were the driving
forces of Chinas economic transition.
But all these efforts could be seen to draw on J. Komeis 1956 assertion about soft-budget
constraints prevailing in most planning economies, placing structural limitations on those systems. From there
it could be argued that any significant transition away from a planned economy would ultimately require a
regulatory switch from the mode of the hyperactive bureaucratic control by the state hierarchy to the mode of
market-approached management guided by free-economic mechanisms for efficient allocation of resources.
In other words, a concern for efficiency would eventually generate the transition (cf. Lin et al. 1996: 75-83)
[152]. But coming in the late 1980s, Komais view of transitions along a unidimensional market-hierarchy
continuum" became problematic and unconvincing when faced with transitional realities. Some scholars may
still insist that market-oriented arrangements are the most fundamental prerequisite for transition. Others are
inclined to think of alternatives that blend both efficiency and legitimacy, or that deal with the boundary
between efficiency and legitimacy, etc. For example, all three aforementioned models treated efficiency as
institutionally built. Boisot and Childs model and Qian and Xus model went even further. In Qian and Xu's
model, institutional dynamics were treated more as arrangements than environments. All three of these
115
alternatives further raised questions about the boundaries between markets, hierarchies, and networks and
their interactions, all of which can affect transitions.
These three different models epitomize the alternative choices between market, hierarchy, and
network approaches to the transition away from a planned economy. Nee's model centers on a market-
oriented transition. Boisot and Childs model centers on networked-based economic reforms; and Qian and
Xus model centers on the local-govemment-driven institutional changes under Chinas M-form hierarchy.
In contrast to Boisot and Childs model (which likens networks to their information matrix in
Chinas cultural space in a more flat and flexible structure between two poles - market and hierarchy),
and in contrast to Nee's thesis (around market-hierarchy binary relations and transition mainly driven by
market-induced competition and concern of enhancing efficiency), Qian and Xu further identify efficiency
as institutionally-constructed; its improvement and economic streamlining are made through local
entrepreneurship driven by decentralization reforms under the regionally-specific M-form economy. As
Aoki stated in 1995,
Qian and Xu analyzes how differences in coordination mode between planning regimes
in the U SSR and China may affect the speed, effectiveness, and mode of transition to a
market economy. In the USSR, planning was coordinated through centralized ministerial
hierarchies organized on a functional (industrial) basis, whereas in China coordination
opted to be decentralized on a geographical basis in a locally integrated manner [note:
yet it differs from Hungarian decentralization on the basis of operation units but still under
control of functional departments of specialization, which can thus be regarded as an
incomplete decentralization]. Regional decentralization in Communist China was
deliberately pursued as Mao's strategy to thwart possible disaster that might be inflicted
by external attack. This communist legacy seems to m ake the gradualist transition in
China viable as well as to foster the development o f a more decentralized market
economy (cf. 1 9 9 5 ,1 7 ; bracketed note and emphasis mine).
Another way of comparing these three institutional models is to look at how they have dealt with
developments in China in the 1990s. In the 1990s, Chinas transition was determined more by reforms in
the state sector than in the non-state sector. As Boisot and Child claimed,
One of the most difficult problems facing the current reform of state enterprises away
from the contract responsibility system toward a modem corporate system lies in
determining who has the right to select their boards of directors (1 9 9 6 ,6 2 0 ).
116
For a long time property rights were assumed to be a critical variable at the heart of China's
transition. But Boisot and Childs thesis paradoxically suggested that China's marketization upon the
basis of common lands and communal property rights could present a new route different from
privatization. Qian and Xu earlier held a similar view of privatization. But according to them, Chinas
decentralization could be only a transitive step to avoid the heavy costs of radical privatization, given that
privatization was still viewed in the end as vital to an eventual transition. In 1993, Q&X favored such an
organizational perspective that necessitated a separation of economic administration from ownership and
took the economic administration more seriously than ownership. According to Qian and Xu, it is hard to
envisage Chinas current reform on a trajectory differing from the objectives of the existing regime and
giving up its institutional commitment to some kind of socialist end (note: Qians tone later on softened in
his joint article with Cao et al., describing central governments relaxation of the ideological constraints
(ibid. 1999, 120). China's transition has been directed on a path towards decentralized market socialism,
precipitated by Chinas unique hierarchical structure and political legacy. Seen in this light, it can be
argued that hierarchical devolution, institutional coordination and the fitness of its organizational form to
its transitional needs have worked very well and have proven to be more critical than ownership structure
in achieving transitional success (cf. Aoki 1995, p. 17).
For Boisot and Child, the difficulties in Chinas economic governance have added to the
difficulties in determining ownership in China's hybrid economy [153]. Boisot and Child featured Chinas
economic order networked with Chinas cultural space. Yet their managerial perspective made it hard for
them to dismiss N ees view that treated the dynamics of private sectors independently as the primary
solution to the dilemma of economic governance in Chinas transition. To Qian and Xu, Chinas hybrid
economy has derived its unique characters from Chinas initial institutional condition the M-form
hierarchy. For Qian and Xu Chinas primacy lies more in its collective ensemble -- the rural TVEs and the
urban COEs comprising most of the non-state sector. Further administrative relaxation to promote local
initiative, flexibility, and discretion could be crucial to initiate and boost Chinas transition.
While Boisot and Child's arguments remain indeterminate between management and property
R eproduced with perm ission o f the copyright owner. F urther reproduction prohibited w ith o u t perm ission.
117
rights, Qian and Xus perspectives seem more certain of the role of hierarchy in building managerial
ability to tackle the dilemmas of ownership in transitions [154J. Yet the recent uptrend in Chinas economy
appears to counter both Boisot and Childs arguments and Qian and Xus earlier perspectives. Chinas
reforms now tend to anchor on overall privatization inclusive of the state sector, as the private sector
demonstrates its unprecedented momentum for the transitional upgrade with the countrys incoming
access to the World Trade Organization [155]. Qian and Xu never intended to explore any further
implications behind Chinas unique decentralization, in spite of their acknowledgment of the state role in
hierarchical reforms and in promoting non-state sectors. For example, Qian and Xu did not pay further
attention to the reforming SOEs, which one can now see brought more dynamics to the transition.
It was not until 1999, did Cao, Qian, and Weingast in their treatise acknowledge that the main tool
for the current project of SOE restructuring was privatization (cf. Cao, Qian, Weigast 1999, 104-5). In
Cao, Qian, Weigasts version (ibid, 103), the decentralization, highlighted by economic denationalization
and deconcentration, eventually boosted local entrepreneurship and propelled local governments to seek
privatization of the state sector through two major processes, i.e.. reforms for hardening budget
constraints and increased competition from the non-state sector, rather than the programs of privatization
from above. Other mentioned factors affecting the incentives of local governments for privatization
included the role of the central government and of SOE managers (ibid. 120) [156], as well as the costs
and benefits of the alternatives, etc. (ibid. pp. 121, 123) [157]. Hence it was the local governments with
their incentives that drove Chinas privatization in a fashion of gradualism. As Cao and Qian et al. stated,
Our argument about privatization combines with the evidence from previous reform
initiatives to suggest a general and consistent pattern of what might be called economic
reform, Chinese style. The Chinese style of reform relies on the 'laboratory of the local
governments to pursue reform (ibid. 123). In many of Chinas major reform efforts,
reform began on an experimental basis in a few local areas. The successes were then
learned and imitated on a moderate scale by a few provinces. If these beta experiments
succeeded, they were recommended and promoted by the central government as a
national policy. This sequential set of experiments creates a series of templates for
reform, adopted first at the local level, then at the national level. In doing so, local
governments adapt one of the templates to their local conditions, sometimes creating
new ones. This explains in part why we observe a great number of varieties of reform
across different regions in China...At any given point in time, this pattern of reform is
characterized by a horizontal non-uniformitv" of reform with some areas doing
experiments and other areas waiting - or resisting - as described above. Furthermore,
over time the reforms expand in scope to include new issues, often being initiated at
118
different levels of government: Agriculture reform began at the household level: TVEs at
the village and township level: privatization of SOEs at the county level: lay-offs of state
workers at the city level: and marketization at the provincial level. This vertical non-
uniformity" has progressed steadily and has continuously generated substantial pav-offs
over the past two decades. Together, these reforms have led Chinas transition into a
new stage (ibid. 123-4; emphasis mine).
According to Cao. Qian, and Weingast. Chinas M-form decentralization embodies its new
political logic federalism. Chinese style, which warrants Chinas privatization, while favoring risk
aversion, i.e.. to reduce the ex ante resistance to privatization" and to increase the durability of reform
ex p o s f (pp. 111-2) [158]. This has provided political incentives for local governments to promote
economic gain and enhance efficiency through a variety of experiments suitable to their contexts and
circumstances in Chinas M-form economy [159]. The privatization, Chinese style, is characterized by three
features: (i) financing privatization, (ii) corporate governance and 'stock co-operatives, and (iii)
privatization with new investments. In their 1999 analysis of Chinas economic development, Cao, Qian,
and Weingast identified a wide variety of forms of privatization and associated cases (ibid. 110-112).
Under Chinas federalism, local governments have undertaken far-reaching reforms in Chinas taxation
system and financial markets and had lifted the countrys transition to a new stage. As Cao, Qian, and
Weingast stated,
Local governments can be an inducement for efficiency-enhancing privatization and

restructuring when they are under hard budget constraints and facing market competition.
Therefore, privatization, Chinese style, can be better understood in the framework of
federalism, Chinese style (ibid. 123).
In 1995, China began a quiet reform in privatizing and restructuring its SO Es under the
slogan grasping the large and letting go the small" (zhuada fangxiao). This reform has
proceeded in three areas: (i) privatization of small SOEs at the county level; (ii) mass lay
offs of SOE workers at the city level; and (iii) mergers (jianbing),
groupings/conglomerations (jituanhua), corporatizations (gongsihua), and initial public
offerings (IPO ) (shangshi) of some large SOEs which often involve the central
Qovemment. SO E reform has made significant progress in the first two areas. By the end
of 1996, up to 70% of small SO Es had been privatized in pioneering provinces and about
half were privatized in many other provinces. Furthermore, about ten million workers from
SO Es and urban collectives were laid off in 1996 and an additional 11.51 million workers
were laid off in 1997. In these two areas, local governments have been the driving force
underlying reform. Moreover, these reforms have thus far proceeded relatively smoothly
and with fewer social problems than expected. The third area of reform has not yet made
any significant progress, and we will leave it out in this paper [160J (104-5).
Chinas particular federal framework provides two major sources of political incentives for
local governments to undertake the reform. First, recent reforms in tax, fiscal, monetary.
and banking policy have hardened the budget constraints of local governments. The hard
119
budget constraint means that local governments - and the SOEs under their supervision
- must survive using their own financial resources. In China it is the hard budget
constraint that prompts local governments to privatize. This reform path stands in
contrast to SO E privatization in Eastern Europe and the former Soviet Union where
reformers attempted to use privatization to harden the budoet constraints of enterprises.
Second, increased competition within the state sector and, more importantly, from the
non-state sector raises competitive pressures on SO Es. Because of the fifteen years of
successful reform, the non-state sector in China has already become a major force in the
economy, for example, foreign firms and rural enterprises alone have accounted for more
than one-half of the national industrial output...we argue that harder budget constraints.
together with increased competition, have changed the costs and benefits to local
governments for keeping S O E s... Under hard budget constraints, increasingly poor SO E
performance implies that these enterprises have become increasingly heavy fiscal
burdens for the local government budget. Financing these losses crowds out other
expenditures, thus providing local governments with an incentive to privatize and
restructure SOEs. The recent Fifteenth Congress of the Chinese Communist Party in
September 1997 adopted a national policy to replace state ownership as the dominant
ownership form of firms in the economy and to support privatization. This policy should
be viewed as an endorsement, rationalization, and promotion of what is already going on
in many local areas...With respect to privatization and restructuring of SOEs. local
governments have pushed the central government. This pattern of reform in privatization
parallels many earlier reforms such as the introduction of the agricultural household
responsibility system in the late 1970s. Both the recent privatization and the 1970s
agrarian reform featured a guiet revolution from below. Both were later promoted by the
central government. This was not an accident. The initiatives of local governments and
the tolerance of. and later promotion by. the central government are precisely the
predictable consequences of federalism (ibid. 106-7; emphasis mine).
In 1993, the year their work was published, Qian and Xu could not have drawn such a conclusion
regarding the privatization of the state sector.
This chapter offers an overview of the institutional discourse on transitions and three institutional
models linked to the study of Chinas transition. Each model contains strengths and weaknesses. In
Chapter 3, we shall provide our critique of the weaknesses of these three models. The evaluation will
serve as a transition to Chapter 4 clarifying some assumptions and methodological issues from a
historically institutional perspective, which I shall call a New Institutional Historical Comparison (thereafter
N IH C ). Chapter 5 will analyze some of the intricate contexts and contingencies in Chinas past
experience, the heterogeneous conditions in its present transition, and the dynamic roles of its social and
institutional actors.
12.0
1. Readers may also refer to a contrast between Althusser's structuralist version and Gramsci's revisionist
notion of "historical bloc" with the base/superstructures dialectic (cf. Althusser. 1966. Reading Capital;
Antonio Gramsci. 1927, Prison Notebook 8, note 182; also, Christine Buci-Glucksmann. 1980. Gramsci and
the State. Trans, by David Fembach. London: Lawrence and Wishart. pp. 278-9). The discussion of these
theses may be beyond the current subjects.
2. cf. Friedrih, Carl J. and Zbigniew K. Brzenzinski 1956, Adam Ulam 1963, Schapiro, Leonard 1967,1972;
and David Lane 1976 and Stephen F. Cohen 1980 critiques of the theory of totalitarianism. Here it is
necessary to keep in mind the context of early scholarship on state socialism and transitional economies.
As regards the critics of totalitarianism, for instance, C. Friedrih et al 1956 claim (p. viii) that At present the
Soviet Union still exhibits all the criteria of totalitarian dictatorship, even though the extent of terror may in
some respects have dropped to the level prevalent in national Fascist regimes, which could always count
on a considerable amount of political consensus. The psychic terror exercised by holistic groups can be
more terrifying than the threat of death and torture." Ibid. p. xiii: ...T he manuscript [of this volume] was
completed in Dec. 1955. In view of the events in the Soviet Union surrounding the Twentieth Party
Congress, held in Feb. 1956...the hard core of the analysis has not been changed; developments up to
now do not appear to call for any such revision; as yet no fundamental change seems to have occurred in
the Soviet system. The party continues to play its crucially important and predominant role and, indeed,
the significance of the party as the mainspring of the system has increased. Ibid. pp. 4-5: Totalitarian
dictatorship may, in a preliminary characterization, be called an autocracy based upon modem technology
and mass legitimation...Totalitarian dictatorships of our time are characterized by a vast amount of
'legislation, necessitated by the requirements of a technically industrialized economy and of the masses of
dependent operators involved in such a society. Ibid. p. 17: ...the innovation of the totalitarian regimes, is
the organization and methods developed and employed with the aid of modem technical devices in an effort
to resuscitate such total control in the service of an ideologically motivated movement, dedicated to the total
destruction and reconstruction of a mass society. It seems therefore highly desirable to use the term 'totalism'
to distinguish the much more general phenomenon just sketched...Totalitarian dictatorship then emerges as
a system of rule for realizing totalist intentions under modem political and technical conditions, as a novel
type of autocracy. P. 21: The basic features or traits...to be common to totalitarian dictatorships are six in
number. The 'syndrome, or pattern of interrelated traits, of the totalitarian dictatorship consists of an
ideology, a single party typically led by one man, a terroristic police, a communications monopoly, a weapons
monopoly, and a centrally directed economy." P. 47: In the mature totalitarian society, the role of the party is
a distinctive one, which bears little resemblance to the role of parties in democratic societies. P.51: T h e
party bureaucracy is undoubtedly the hard core of the Soviet system. P. 85: ...the ideology shapes the
behavior of the totalitarian leaders as well as of the mass following. Pp. 88-9: ...a totalitarian ideology would
be one that is concerned with total destruction and total reconstruction, involving typically an ideological
acceptance of violence as the only practicable means for such total destruction...This total change and
reconstruction in its very nature constitutes a 'utopia. Pp. 375-6: What then is going to be the course of
totalitarian development?...it seems most likely that the totalitarian dictatorships will oscillate between an
extreme of totalitarian violence and an opposite extreme of an actual breakdown...[with respect to the future
transformation,] a number of other factors, some of them countervailing in impact, are at work, such as the
personality of the dictator, the success of the regime in mastering its foreign and domestic problems, and
major technological breakthroughs. In this connection, it is argued that the technological needs of an
advancing industrial civilization will play a decisive role. There is the possibility here of an inherent conflict
between industrialization and totalitarian dictatorship, through the rise of a class of managers and
technicians. These, when allied with the military, might wish to abandon the ideology and the party and thus
bring the totalitarian dictatorship to an end. This development is conceivable, but not very likely...[Because]
as part of this general pattern, autocratic organizations have tended to turn to violent aggression as a way of
solving their difficulties. ..ideology plays a greater role in this respect."
For many early Western Marxists (e.g., LukScs, Gramsci, etc.), Marxs inauguration of his challenge against
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capitalism began with his 1844 "Economic Manuscript" that assumed a humanitarian synthesis between
nature and mankind as communism. Namely, while human beings creating society are on their historical
mission to revert it to its essence as "human nature", or "second nature", the nature per se as raw nature will
eventually have been transformed by the society with its social appearance or as humanized environment not
antagonist to human beings. As Marx had spent his entire life working on "Capital", he insisted on his
communist ideal not a utopian truism and tautological hypothesis but starting with its scientific base inherent
in the logic of capitalist economy. These provocative arguments at his age revealed the inhuman nature of
early industrial capitalism and inspired thousands of socialist reformers to realize his utopia at the time. With
the endeavors of the pioneer socialists, Lenin first heralded the arrival of such a nascent social system in the
wake of the "October Revolution", which had effectively transformed the communist ideology into his Soviet
practice. The world subsequently divided into two antipodal camps. One, based on a natural economy in
continuity with the previous civilizations, continued to abide by the market-oriented inexorable laws. Another,
as a social artifact distinct from other erstwhile social forms, was reconstructed through certain social
transformations by working class, peasants, and other social groups, attempting to change the nature of
commercial society upon the basis of natural selection, so that the whole of mankind could move forward to
an imaginary rational society with "human nature" in the future. Stalin's era began to perform such a utopian
ideal, yet through so-called Soviet "industrialization", i.e., a large-scaled and systemic state intervention with
the economy, imbued with orthodox dogmatism. Such an "industrialization," started with an illusion about the
Russian reality or/and false consciousness of collectivization, led to economic inefficiency, prolonged
stagnation, as well as organizational inertia and political crisis that soon provided immediate targets for anti
communist Western scholars in the era of cold war, including the neo-classic mainstream, who had regularly
criticized the Soviets party politics and totalitarianist regime. In such a context Soviet "industrialization" was
typically portrayed as an extreme case, apt to generate systemic distortion of the relationships between
commodity and markets, with unlimited exploitation and excessive control over the natural resources, ruthless
internal eradication of political dissidents, militarization of economic organizations, etc.
3. For a more detailed elaboration, see Stark and Nee 1989, pp. 3-7: Initially developed to analyze the
overthrow of the old order (be it through revolution or in the aftermath of war) and the rapid consolidation
thereafter of new regimes, the theory of totalitarianism gave explanatory primacy to global ideologies,
Leninist parties, and individual leaders. In its classic expression, the totalitarian model portrayed the Leninist
party as bent on establishing total control over Soviet society through mass terror and party-dominated
hierarchies, destroying the boundaries between state and society and eliminating any autonomous social
institutions and processes. Less thoroughly entrenched in the study of Chinese communism, the theory of
totalitarianism had enormous influence in the field of Soviet and East European studies, molding the
orthodoxy in Western scholarship between the late 1940s and early 1960s...Within the totalitarianism
framework, critics charged, the analysis of change in socialist societies was limited to the transition, however
dramatic, from the old order to the new...the analysis of diversity across socialist societies was limited to
national differences in party leaders interpretations of Marxist-Leninist doctrine. Similarly, the analysis of
differences across social systems was confined to the contrast between communism's night and
democracys day, and hence the study of state socialism was unable to benefit from insights produced by
theoretically guided transystemic comparison. The search for an alternative framework began by accepting
as given totalitarianisms account of the Leninist project as directed toward total control by the party-state
over society but then went on to elaborate the unintended consequences of such a project. The typical steps
in such an analysis can be schematized as follows. Having consolidated its position after a revolution, a
ruling Communist party, to remain in power in contemporary historical conditions, must be devoted to
economic growth. Such growth requires industrialization and the introduction of modem technologies, which
in turn require a set of modem values and institutions at odds with the revolutionary enthusiasm, efforts at
top-down mobilization, and attempts at totalizing control that initiated the chain of
consequences...dissatisfaction arising from the limited utility of the totalitarian model in explaining change
and diversity in communist societies stimulated interest in applying new conceptual developments in the
behavioral sciences to the study of communism. Modernization theory, coupled with interest group
pluralism, posited an optimistic framework of evolutionary change that, over the long run, would result in the
inevitable death of the utopian goals espoused by revolutionary Marxism. Processes generic to
modernization would work out their inexorable logic and remake state socialism after the image of the
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advanced industrial societies. The analytic tools for the comparative study of modem communism need not
be taken from the analysis of Hitlers Germany but could be applied directly from the analysis of other
Western democracies because, in fact, the two systems were becoming alike. Whereas totalitarian theory
had viewed capitalism and communism as polar opposites on divergent trajectories, modernization theory
saw existing socialism on an evolutionary course convergent with that of all modem industrialism.
Note: references for interest group pluralism may include G. Skiling 1971: "Interest Groups and
Communist Politics.
4. Ibid. p. 52: ...such a shift is likely to reduce the political power of the agencies of coercion; moreover, it
will tend to reinforce the role 'economic man' and correspondingly to reduce the importance of
Communist ideology in the life of the working masses...once the structural obstacles to economic
development have been removed, economic growth may be expected to proceed most rapidly if further
violent upheavals are avoided and all productive classes can go about their daily business with a sense of
both personal and social security,"
5. Ibid. Lowenthal continued that It seems to reflect the basic dilemma of these new authoritarian
dictatorships, which, in contrast to the totalitarian dictatorships they have succeeded, have found it
necessary to tolerate certain limited elements of pluralism but are still seeking to keep them under tutelary
control.
6. cf. Komai 1989, p. 32: The influence of the Hungarian experience, however, does not stop at the
borders of this small Eastern European country...The leaders of the Chinese economy are studying the
Hungarian situation carefully in an effort to learn from its successes and failures...In the Soviet Union and
in a few smaller Eastern European countries, where a genuine reform has not yet begun, the advocates
of more far-reaching changes refer to Hungary frequently...the Hungarian reform has some global
relevance." But Komai also admitted the limits of Hungarian reforming experiences (ibid. p. 94): The
questions raised above cannot be answered by speculation, only by historical experience. Up to now,
Hungary does not provide a conclusive answer. W e must wait and see what may be revealed by
Hungarian or Yugoslav or Chinese experience or by the history of any other socialist country that may
take the route of reform Also cf. Nina P. Halpem 1985.
Also cf. Nee and Stark 1989, p. 2: ...Largely in response to the perceived dam ages of the Cultural
Revolution and mainly in agriculture, Chinese reforms were initially introduced in highly piecemeal fashion
in 1978. But in 1984, after the establishment of a special reform commission influenced by the Hungarian
experiences, far-reaching reforms were more systematically implemented. Thus in the current situation
some segments of the Chinese leadership are looking to Eastern Europe (and to Hungary in particular)
not for material as object lessons in morality plays, but for the economic lessons that can be learned
about reforming a centrally planned economy. As a result, some of the same economists from Eastern
Europe who were writing pioneering dissertations in the 1950s on new approaches to socialist economics
are now being invited to China to engage in discussions with their counterparts about the prospects and
problems of market reforms in socialist economies...In world-historical terms, when decentralization and
privatization give 10 million Hungarians more economic autonomy, the efforts are path-breaking; but
when reprivatization gives more than 800 million Chinese peasants the right to manage their own
production, the consequences are epochal.
7. cf. J. Komai 1986a, p. 3: ...Hungary is in the forefront of experimentation with new economic methods,
institutions and mechanisms. Hungary as a laboratory of the history of socialism deserves attention from
the outside world, which can perceive as much as filters through the laboratory walls or as much as can
be appreciated on a superficial visit.
Also cf. M . Mesner 1996, p. 292: The reformers took Hungarys three-tiered price system as their model
- on the assumption that Hungary w as the most advanced model of 'm arket socialism, blissfully ignorant
at the time of Hungarys rapidly deteriorating economy."
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8. cf. Nee and Stark 1989, pp. 9-10 (emphasis mine): Based on field research in a number of Hungarian
enterprises...[Komais] study has been described as the first examination of the socialist economy which
'did not explain what the mechanism of the economy under central plan directives ought to be, but how it
did operate in reality, and why it did not ensure the expected development and efficiency of the socialist
economv...The significance of Komais theoretical breakthrough is that he showed how the same
mechanism that produced rapid economic growth in planned economies give rise, in the long run, to an
economy of chronic shortage, hindering further economic growth. In Komais view, the problem of
shortage is the central, unavoidable feature of planned economies. It is rooted in the budgetary
constraints facing the socialist firm, which are 'soft' because the firms survival and growth are not
dependent upon its present or future financial situation..."
9. cf. Nee and Stark 1989, p. 16: Hierarchies and markets. Just as the evolution of hierarchical
organizational forms has been explained as a means to economize on transaction costs under conditions
of market failure in capitalist economies, so the shift from hierarchies to markets should be understood as
a response to organizational failures in socialist economies. Komais soft budget constraint, for example,
can be viewed as an organizational failure generic to centrally planed economies. Organizational failures
in state socialism are rooted in the relationship between the firm and the state, that is, in the allocative
processes of central planning. Public ownership, Komai argues, fosters paternalism on the part of central
planners."
10. According to Cao, Qian, and Weingast (1999, 116): The soft budget constraint is widely seen as one
of the biggest problems for both governments and enterprises in all transition economies. Put simply,
enterprises of governments which are endless bailed out have no incentive to make financial prudent
decision, let alone efficient ones.
11. See Nee and Starks description of the reform history in the former socialist economies, cf. Nee and
Stark 1989, pp. 25-6: The history of market reform in socialist economies has been marked by
decentralization and centralization, expanding markets and restoration of hierarchies, and alternating
periods of reform and counterreform. From the 1960s to the present [up to 1989], reforms in Eastern
Europe have taken a zigzag course of initiatives and retrenchment. Stimulated by the post-Stalinist
climate of greater flexibility and openness to change as well as by anxiety over the loss of dynamism
under central planning (reflected in the downturn in the rate of growth of the Czechoslovak economy in
1963), a wave of reform fever swept through Eastern Europe in the mid-1960s, a wave of reform fever
sweprt through Eastern Europe in the mid-1960s infecting even the most deeply conservative regimes
such as the German Democratic Republic (G D R ) and the Soviet Union. With the exception of Hungary
and Yugoslavia, these reforms proved to be short-lived, and by the 1960s, retreat from reform policies
was in full progress, as central planning bureaucracies reasserted their dominant control over the
economy. Such was the fate of reforms in the G D R , Czechoslovakia, and Bulgaria. Reforms in Poland,
halfhearted at best, were derailed after the 1970 workers rebellion resulted in the overthrow of Gomulka,
though attempts were resumed in 1972-73. By 1975 reform measures were tabled under the pressure of
Polands rapid deteriorating economic conditions. Only Hungary and Yugoslavia retained the basic
features of the reform programs, though the efforts in these countries also fell shorts of reformers
expectations."
12. As Komai explained (ibid. 268; emphasis mine), A classical state-owned firm is in a different
situation. To obtain the approval of its superior organizations and obey their instructions it should produce
without interruption; the problems of obtaining supplies associated with shortage impede this. So the firm
tries to stockpile inputs. In fact, only the supply constraint is effective; if a firm manages to gain access to
the inputs, it can certainly finance the purchase of them, since its soft budget constraint presents no
obstacle. It is not really a response to prices, particularly not on the input side. So the firms demand of
the inputs for current production is not strictly constrained: instead, it is inclined to run a wav. It is hardly
worth asking how much the firm's voluntary constraint on demand would be, since even a smaller quantity
than that would encounter the supply constraint (or the administrative constraint imposed by the authority
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rationing the inputs...).- The phenomenon of 'runaway demand appears far more acutely in the
allocation of investment goods, which is the subject of the next section." Komai then added his Footnote
(8) beneath this page: I used the expression 'almost infinite demand for cases like this in my earlier
works. This caused misunderstandings. I hope the expression used above ('inclined to run away) will be
clearer. Also, ibid. 270: [In a capitalist firm,] The conclusion is obvious: demand for investment
resources is constrained. Though it may rise steeply from time to time, there is no continuing runaway.
The situation is sharply different in the case of a classical socialist firm. The self-restraint just described
fails to apply for numerous reasons...Since the budget constraint is soft, decision makers are not afraid
investment may lead to financial failure. Any such fear is even less justified because responsibility is
shared with the superior organizations, which have endorsed the investment project and may even have
forced the firm to implement it. Whatever kind of financial rescue is chosen for an unsuccessful
investment, the bill is ultimately picked up by the state, that is, by everybody - and nobody. There is no
one like the owners of a private firm to be hit in the pocket when a loss is incurred. No one feels a true
inner interest in ensuring caution in the handling of the money, which is the states money - and that is
the root cause behind the lack of voluntary restraint to counter the appetite for investment. Sales
prospects are no problem: whatever is produced, demand will adapt to supply...Again the conclusion is
obvious. There is a constant runaway demand for investment resources from the state-owned sector
under classical socialism...Demand for investment credit exceeds supply. The vertical application and
horizontal demand for plant, construction, and installation is more than the allocating authority has at its
disposal and more than the producers of them have physically available.
13. Ibid. p. 8: W e shall center attention on the producer firm, dealing exclusively with the short-term
behavior of the firm. It is presumed that the firm strives for increasing production, and we shall not
question its motivation, i.e. whether its impetus comes from the command of superior authorities, from its
own voluntary decision (with a view to increased profit), or from bonuses promised to the managers, or
from the urgings of customers, etc. The question is the following: what are the constraints limiting efforts
at increasing production?...Constraints are divided into three large groups: 1. Resource constraints: The
use of real inputs by production activities cannot exceed the volume of available resources. These are
constraints of a physical or technical nature...2. Demand constraints: sale of the product cannot exceed
the buyers demand at given prices. 3. Budget constraints: Financial expenses of the firm cannot exceed
the amount of its initial money stock and of its proceeds from sales...Which of the three constraints is
effective is a defining characteristic of the social system...In the solution of a programming problem,
equality holds for some of the constraints which are given originally in the form of inequalities...The
constraints for which equality holds are effective because they actually delimit the choice. Production
would have been greater had the effective limits not been reached. However inequality holds for other
constraints ( they are not exhausted) in the solution of the programming problem, these are not effective
from the point of view of a momentary solution. It is as if they are not there: they are redundant, exerting
no influence on the choice. It is always the comparatively narrower constraints that are effective, for these
conflict with the endeavor to raise production. Relatively looser constraints are not effective.'
Komai then further distinguished the effective profit making from the effective budget constraints. Ibid. pp.
13-15: ...A budget constraint is hard if it is asserted with iron discipline: the firm can spend only as much
money as it has...The budget constraint is soft, if the above-mentioned principles do not get asserted
consistently. The hardness or softness of the constraint can be started indirectly and through the
observation of two phenomena. First, survival. The budget constraint is hard if grave financial difficulties
drive the firm to bankruptcy...The budget constraint is soft if the state helps the firm out of trouble, There
are various means to do so: subsidies; individual exemption from the payment of taxes or other charges
(their full or partial remission or postponement); allowance on the centrally fixed price of an input; open
increase of the centrally fixed selling price or toleration of a hidden price increase; credit granted on soft
conditions; prolongation of the due credit repayment, etc. The state is a universal insurance company
which compensates the damaged sooner or later for every loss. The paternalistic state guarantees
automatically the survival of the firm. The second phenomenon...with regard to hardness or softness of
the budget constraint is the growth of the firm. The budget constraint is hard if the growth of the firm
depends on its own financial position, i.e., on the one hand, on how much it has been able to save and
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accumulate from its earlier profit, and on the other hand, or whether - under hard 'conservative
conditions - it is ready to take out credit and is able to get credit for investment purposes. This depends
on the prospects of its financial situation and the expected profitability of the investment. If the investment
proves to be a financial failure, it may lead to bankruptcy of the firm. The budget constraint is soft, if the
growth of the firm is not tied to its present and future financial situation. In this case there is no failure: the
firm survives even when investment entails grave losses. W hat I call here the hardness of the budget
constraint is not identical with what is called 'profit incentive of the firm* in disputes about economic
management reforms in socialist countries. Profit incentive - e.g.. profit sharing of managers and workers
- is compatible with a soft budget constraint. In such cases managers of the firm ask superior authorities
for financial support exactly in order that workers (and maybe also the managers) can get their usual
profit share even in the case of losses. Hard budget constraints are effective in the sense we have
explained. They constrain action and the freedom of choice. 'W e can spend only as much money as we
have. 'If we invest badly, we shall die of it. Soft budget constraints are not effective. The financial
situation of the firm does not constrain action. Money has only a passive role. Let it cost what it m ay.
'The main thing is to acouire material and capacity, and money for it will be found in some wav. 'O nce we
have a contractor, we shall not stop the investment just because we have no money. 'If there is a loss,
the state budget will take it over. The preceding stereotypes of common thought in business circles
suggest that the hardness or softness of the budget constraint reflects an attitude. It must not be mistaken
for the book-keeping category of the balance sheet of the firm. The latter is an ex post identity. It is a
relationship which holds all the time: the difference of the terminal and the initial money stock is identical
with the difference of incomes and of expenses. As opposed to this, the budget constraint - if hard and
thereby effective - is an ex ante behavioral regularity, which exerts an influence on the firms decision.
Exactly because it is an ex ante constraint, it is related to the firm managers expectations...beyond a
certain limit, the manager can expect almost with a 100% certainty that the survival of his firm is
guaranteed: it can stand every loss and investment financial failure. If the overwhelming majority of firm
managers have this expectation for the future, it can be said that the budget constraint is soft. In the
'classic' form o f socialist economy the budget constraint is soft. "
14. Komai labels the planned economy of state socialist redistributive mode as "resource-constrained" at the
macro level as opposed to "demand-constrained" in the market economy (cf. 1986a, pp. 9-10). He predicted
with caution that even when a socialist firm is operating in a more decentralized and market like environment,
Hungarian reform under state ownership may continue to reproduce the problems of soft budget constraints.
Komai's rigorous work is thus perceived as a supplement to Polanyi's observation of the "invisible hand" in
market economy in that a socialist economy has its own self-reproducing institutional mechanisms. The crux
to its soft-budget constraints is through state redistribution (cf. Nee and Stark's discussion in their introduction
to the 1989 volume).
15. cf. Nee and Stark 1989, p. 20: ...Alec Noves view that there can be only two alternative forms of
economic coordination in socialist societies, market and bureaucratic...
16. To compare with others of the similar interests, see Lippi 1979 Value and Naturalism in Marx.
17. According to Rubin criticism (1923, published in Moscow; dt. from Nove 1983, 29), values and prices of
production are "not as theories of two types of economies, but the theory of the same economy at two levels
of abstraction."
18. To compare Noves arguments with Komais, see Komais discussion about Galbraithian socialism.
cf. Komai 1989, p. 89 (brackets mine): I call the first school Galbraithian socialism. A dispute...goes on
between them [Galbraithians] and the school of radical re formers...The Galbraithians contend that
radicals advocate an anachronistic system. The radicals, they say, want to introduce a mechanism into a
socialist economy that would recall early nineteenth-century Manchester capitalism: a market free from
any government intervention and the predominance of small economic units. They are socialistic
Friedmanites - so the rebuke goes - although the true nature of contemporary capitalism is quite
different...Contemporary capitalism is a dual economy. The first sector is a small group of huge and very
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powerful corporations, many of them in monopolistic or oligopolistic positions, intertwined with and
sheltered by the government. It operates in an environment created by a large and powerful bureaucracy
that intervenes in the economy continuously through Keynesian demand management, price and wage
regulation, protectionist measures, and so on. The second sector is composed of small producers, small
merchants and the households, whose activities are coordinated by the market. Although both sectors do
exist, the first is the really powerful and dominant one and the second is ancillary and subservient. If that
is true in the case of modem capitalism - so the argument of the Galbraithian school goes - there is no
reason to require more decentralization in socialism. On the contrary: a socialist system has the
possibility and the obligation to apply central planning and coordination more consistently and to establish
more thorough links between the central and the large enterprises. The crucial role of central planning
must not be disguised bashfully, but should be openly and proudly declared, and, of course, much better
organized than before... Galbraithian school is accused in some writings of desiring the restoration of the
prereform command econom y...W hat they do suggest is the legitimation of the status quo. They justify
the dualities of the present system: the coexistence of public and private sectors, bureaucracy and
market, large and small firms, provided that the first component in all these pairs has the undisputed
upper hand...They would legitimate the actual state of affairs, suggesting minor changes for
improvement, but reject any further radical change that would go much beyond the present
situation...The trouble is that the similarity is exaggerated. True, modem capitalism is a system very
different from a perfectly competitive atomistic Walrasian world...Without seeking completeness. I will
underline only a few attributes relevant in the present context." My note here is that Komais
completeness expects a complete structural transformation in these economies.
19. cf. C. Bettelheim 1970 in Paris who underscores that "a product is often the work of all of society and not
only of that laborer or group of laborers who have made it...Their work involves very large amounts of the
work of others, to provide tools, materials and means, which are combined within a highly complex
organization...Most are made by workers who also produce simultaneously a great variety of products, so
that their contribution to each product cannot be precisely determined..." (op. tit. ibid. 30).
To illuminate Nove's arguments, I can think of no better example than todays equity markets, which have
utility in making money beyond the reach of industrial production. Here we can cite Martin W olfs latest
articles introducing the associated puzzles and the new search for solutions as supplements for Noves
early contentions, cf. The price of stocks is still high - No matter what new economy theories suggest,
equities have deviated massively from their underlying value" in Financial Times, p. 15, W ed. Oct. 17,
2001: ...Historical experience is that it is adjustments in prices, not earnings, that bring the market back
towards long-run equilibrium. Here the measurement used is by the valuation ratio, or Tobins Q - the
ratio of the stock markets valuation of corporate net assets to their replacement cost. Ibid: ...Two years
ago, Q was higher even than in 1929. On September 21, argues London-based Smithers & Co, the
market still needed to fall by another 30% to reach its historic average (without overshooting on the
downside). At its peak, the market needed to fall by two-thirds. Similarly, the long-run average p/e ratio is
14, consistent with a real return of 7 %. Today the DataStream measure of the total market p/e is 23,
down from a peak of 33 in April 2000. Unless current earnings are far below long-run averages, the
market is again overvalued on historical m easures... In the full flush of enthusiasm for the 'new economy,
other arguments were m ade for the belief that an apparently grossly overvalued market was cheap.
Among the most important were the propositions - to which, alas, Alan Greenspan gave indirect support
- that exceptional productivity growth or improved returns on capital justified equally exceptional market
valuations. Neither experience nor economic theory supports the proposition that a higher rate of growth
of productivity means a durably higher return on capital. Productivity gains are usually bid away for the
benefit of consumers, workers, and owners of land. Again, at the level of the economy as a whole, the
higher the return on capital, the higher must also be its costs. This is not just a tautology. If growth is
expected to be higher, people feel richer and will want to spend more, including now. As the propensity to
save out of current income falls (and the desire to invest rises), real interest rates - and so the cost of
capital - will also have to rise. The conclusion that the market has been - and still is - hugely expensive
is also distressing for economists. It destroys not just almost any version of the efficient market
hypothesis but also the deeper principle that markets will eliminate any extraordinary opportunity to make
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money. If one accepts that the U S stock market has been three times overvalued, one has to ask why
that opportunity was not seized at once by a tidal wave of short-sellers. As it happens, one distinguished
economist, Robert Hall of Stanford University, has set out to resolve the puzzle. In the process, he has
done the world a great service by showing what needs to be assumed if the reputation of markets is to be
rescued. He has in effect tried to do for markets what 19lh-century physicists tried to do for the Newtonian
view of the universe...He has invented something called e-capital. E-capital is a body of technical and
organization know-how, captured neither in the remuneration of employees nor in physical capital. To
justify the stock market valuations of the 1990s, Prof Hall has had to imagine a huge quantity of this stuff.
Between 1990 and 1999, the stock of e-capital is said to have risen from almost nothing to equal the total
value of all tangible corporate assets. This accumulation of capital was unrecorded. Consequently,
estimates of corporate profits, savings, investment and gross domestic product have, on Prof Halls view,
been fa rto o low. To give orders o f magnitude, in 1999 gross e-capital investment world have been 13 %
of G D P. Prof Hall has also had to assume that neither companies nor government statisticians noticed
this but markets did. And then, most miraculous thing of all, in 2000 and 2001, trillions of dollars of the
stuff vanished...
20. In this matter, we might also add Boisot and Childs 1988 arguments as supportive evidence (518):
"Allocating profit-center responsibilities to workshops is now quite common in Chinese industrial firms and
requires comment. First,, the practice is consistent with the Marxist tenet that since only labor creates
value, workers rather than managers are the source of profit. For this reason, bonus payments to
managers are often below what is received by 'high-performing workers, and in general bonus levels are
not found to vary according to level of responsibility (Child 1988). Second, this labor theory of value merges
with a concern for industrial democracy that aims to make workers 'masters of their enterprise in a
meaningful way.
21. Here I would like to reiterate Nee and Stark's incisive perspective of rising new institutionalism in the
study of state socialism: Over the past decade, 'new institutionalist paradigms have been developed in
every one of the social science disciplines, brought about in political science because internal developments
in public choice theory undermined rational choice models lacking institutional constraints; in economics
because market failures could not be explained with the standard analytic tools; and in sociology because
efficiency models failed to explain economic behavior and patterns of organizational survival in the
institutionalized sectors of the economy. These diverse 'new institutionalisms share a critique of the
limitations of neoclassical economics, an emphasis on the interpenetration of economic organizations and
social institutions, and a commitment to represent complex relationships in formalized modes. These same
traits, rather than an allegiance to any one of the particular neoinstitutionalisms, characterize the recent
institutional analysis in the study of state socialism (Stark and Nee 1989:11-12).
22. See the relevant arguments by Lindblom, Charles 1977 Politics and Markets: The World's Political-
Economic Systems.
23. For instance, both Nee and Stark were dissatisfied with Kremlinologist analyses of inner circles and
party politics that left the cognition of the state-society configuration under the state socialism in a black box.
While concurring with Komais contributions to reveal "soft budget" problems in the economic institutions of
state socialism that may invite inefficient allocation of resources, both N ee and Stark agreed that market
inefficiencies had root causes in institutional constraints set by the state governments. They further raised
the questions of the institutional nature and characteristics of building modem bureaucracies under state
socialism. In their viewpoints, market mechanisms and economic efficiency would not automatically and
spontaneously emerge. Their emergence required rebuilding economic institutions.
Nee contended that it is the growth of competitive markets [in state socialist economies] that generates
organizational dynamics may result in greater reliance on legal-rational procedures and indirect
macroeconomic regulation to economize on transaction costs (ibid. 21). Thereby it may push the
transformation of central planning systems under state socialism. For elaboration, he extends Weber's
analysis of the relationship between competitive markets and bureaucratic rationalization into developing an
128
institutional theory of changing state-society boundaries in China, showing that the process to establish the
institutional framework of a mixed economy generates pressures on state socialism for bureaucratic
rationalization. With this logic, he and Whyte consider the expansion of markets in the post-Mao reforms as
accompanied by the reduction of substantive bureaucratic control over social and economic processes and
by the emergence of legal-rational modes of organizational functioning." He emphasizes that as the state
withdraws from direct control over the economy, and as markets expand in scope and generate new
entrepreneurial activity in the private sector, the state must adopt a regulatory role in specifying and enforcing
rules and procedures which define the limits of state power (20-1) and within which economic actors are able
to operate. His study of state policy toward rural entrepreneurs provides a vivid attestation that the reforms
that increase bureaucratic procedures in the internal administration of the state can reduce bureaucratic
intrusion in the everyday life of a society.
24. cf. Nee and Stark 1989, pp. 26-7: A central contradiction of reform efforts in socialist economies
derives from the reform leaderships failure to cut back sharply or dismantle entirely the bureaucracy that
managed the command economy. This is largely because inherent in any reform effort is the fear that the
reform may fail to realize desired results...To minimize the risk of failure, reformers tend to move
gradually in carrying out organizational reforms that are aimed at sharply reducing the size of the
economic bureaucracy.
25. Otherwise, one might try to explain the bureaucratic collapse in the FSU and the FEE because of the
absence of sufficient modem experts, highly trained technocrats, and professional personnel. O r one
might try to explain the collapse because of the absence of benchmarking infrastructure that could
function as supporting system, and because of the lack of institutional leadership in transition. Those
state managers who were mostly ex-state officials, and the reformers, who are preoccupied with dramatic
actions, rushed to demolish entire bureaucratic machines without having considered the bureaucratic
infrastructure needed for delivering the transition. But with insufficient human resources, they could only
bear extensive risks in instituting the new systems. This made it more difficult for new regimes to recruit
fresh bllod from universities and advanced training programs to replace the old bureaucrats of the vested
interests. Furthermore, with such a scarcity of human resource, it is most unlikely to launch and boost
those indispensable R&D programs. Therefore, whatever the explanation for the bureaucratic collapse in
the FSU and the FEE during the transitional period, thesis on reduction in bureaucratic size - in itself -
could not provide the key to make transition from the state socialism.
26. See Boisot and Childs introduction to the debate over privatization in the W est (1996, 614): There is
a major debate in western economics about the relevance of property rights to economic performance.
Economic reform in the different socialist countries since the 1970s has intensified this debate, on which
the Chinese case should offer an important comment. Arguably the seminal text of the modem debate is
that of North and Thomas (1973: 157), who maintained that the key factor explaining the 'rise of the
Western world was the evolution of 'a set of property rights that provided the incentives necessary for
sustained growth; they attributed economic failure, including that of 'much of Latin America, Asia and
Africa in our times, to 'inefficient property rights. A large literature has emerged, arguing on both
theoretical and practical grounds that, with certain exceptions, state ownership of industrial assets is
incompatible with efficient operation. This argument has shaped the policy advice received by developing
countries, often as a condition of further aid from the Bretton Woods organizations (Cook and Kirkpatrick,
1988). Most recently, it has informed the advice given to the reforming communist countries: 'The
hallmark of market capitalism is that private capital has wide autonomy to enter or leave industries by
creating or closing enterprises and it has substantial control over the management of the enterprises it
owns (EBRD 1 99 3:11 3). Chinas rapid growth, and that of a wide spectrum of East Asian countries, calls
these broad judgments into question...
27. Even the US continues to have lots of problems in its private sector, such as its recent private-sector
financial deficit, cf. Americas slowdown has done little to remove the countrys serious economic
imbalances in The Economist, July 14th, 2001: ...If the private sectors balance reverts to its historical
average within three years, Messrs Godley and Izurieta reckon that this would cause a recession this
129
year, with annual GDP growth in the five years to 2006 of only 1.1% . Even if the private-sector deficit fell
by only half, to 3% of GDP, [American] annual growth would average only 2% over the next five years. To
keep the three sectors in overall balance, higher net private saving must be matched by either a fall in
Americas current-account deficit or a swing in the budget from surplus to deficit.
28. "Whereas for several decades debate centered on finding a harmonious mix of plan and market in the
state sector, today in China and Hungary one is more likely to find economists arguing about the most
advantageous mix of public and private property forms across sectors of the economy" (ibid, 21). Also cf. Cao
et al. 1999, p. 542: Distinguished from Eastern Europe and the USSR, sustained entry and expansion of the
non-state sector in China during the reforms were forceful and fast enough to reach a critical mass by the end
of the 1980s. The non-state sector has in fact become the most important engine of growth in China. The
unexpected, and perhaps unintentional, growth of the non-state sector is critical for the success of Chinas
economic reforms.
29. China's non SOE share of gross industrial output by ownership during 1975-85 had almost doubled (from
19% to 35%). In contrast, its Hungarian counterpart in the same period was much slower with around 20%
changes (from 27% to 35%), as shown in Hungarian SO E share of national income. Note here: we use gross
industrial output share in China and national income share in Hungary, by assuming that the growth pattern
of the industrial structure is very close to that of the GDP or net income in both countries. Hence the
comparison here is only approximate.
30. A high note here is Chinas non-state sector with incremental growth since transition in sharp contrast
with its Hungarys counterpart suddenly looming large since 1991. The growth of Hungarys non-state
sector had essentially stagnated throughout the 1980s.
31. Ibid. See the original table as follows,
Hungary: Share of social sectors

in employment and national income
(Percentage distribution), 1966-84 (Selected Years)
Distribution of active Income-eamers contribution

income earners to national income
1966 1975 1980 1984 1975 1980 1984
1. State sector 65.0 70.9 71.1 6 9.9 73.3 69.8 65.2
2. Nonstate sector
a. Cooperatives 30.7 24.9 25.5 25.9 17.8 19.8 20.6
b. Household
farming . . . . 4 .0 3.2 2.8
c. Auxiliary
production
of employees - - - - 3.0 3.7 5.9
c. Formal
private
sector. 4.3 4.2 3.4 4 .2 1.9 3.5 5.5
32. Note: it is noteworthy that the agricultural sector in both economies has been more dynamic than the
130
industrial sector, with more non-state share on it. If Hungarian data were available so that we could draw a
line of the non-state-share in industrial output only, then the line would be flatter than the current national
income line including the agricultural share. In other word, our lines drawn here represent a relatively
conservative observation. China's line (of the only industrial output) would likely appear more dynamic than
Hungarian one.
33. As Qian and Xu 1993 pinpointed (1993b, 137), unlike the case of Eastern Europe and the Soviet
Union, sustained entry and expansion of the non-state sector in China during the reforms were forceful
and fast enough to become an important engine of growth by the end of the 1980s.
34. In China, prior to 1958 rural areas were occupied mostly by small agricultural landholders. After 1958,
private land ownership had been replaced by collective brigades and state-owned communes in rural
areas, and they were subsequently transformed into SOEs and C O Es in urban industries and businesses.
Since the early 1970s, small holder of lands in rural areas were reassigned to the peasants in an effort to
solve the problems of incentive and unemployment. In urban areas, after the cultural revolution, the
central government aggressively adopted many new measures to expand those non-state owned
enterprises and to encourage the spread of those private businesses and enterprises.
35. Nee and Stark 1989, 22: "Once peasants have met the assigned quota production for sale to the state,
they are free to produce for the market place."
36. cf. Nee 1989,17: "The command economy turns to a hybrid economy, which Komai argues operates in a
condition of 'dual dependence in which the economy is coordinated by both vertical bureaucratic and
horizontal market relationships"
37. Ibid.: The transitions from state socialism in China, Russia and Eastern Europe provide natural
experiments involving change in the stratification order on a scale reminiscent of that experienced in the West
during the rise of capitalism. Comparative stratification research builds on modernization theory in assuming
that industrial development, whether socialist or capitalist, leads to convergence (Upset and Zetterberg 1959;
Treiman 1970; Grusky and Hauser 1984; Hauser and Gmsky 1984). Institutional theories, however, are
skeptical about theories of convergence driven by industrialism. If convergence pointed the way to state
socialisms future, the sweeping measures to institute a market economy in industrially developed Eastern
Europe and Russia would not have been necessary. Rather than focusing on the effects of industrial growth,
institutionalists insist that research on state socialism needs also to take into account underlying differences
in institutional forms. Such a focus on alternative institutional forms that provide a deep structure for
economic action underlies my argument that he shift from redistribution to markets gives rise to different
mechanisms of stratification."
38. That is, the failure of state socialism ought to be attributable to the lack of those market institutional
mechanisms functional only in the existing market economies. Such reforms of institutions in terms of
redrawing boundaries could also refer to redefining the conceptions of interests, or reversing the logic of
political economy behind the transition, changing from general interests to particular interests to from
particular interests to general interests."
39. Ib id .: Komais view of the tenacity of the bureaucratic mode of organization echoes W ebers 'iron cage
metaphor in which humanity becomes imprisoned by bureaucratic rationalization. Komai asks :'What caused
this tenacity? What is the explanation for the fact that the growth of bureaucracy is an almost irreversible
process?... In a shortage economy, when markets cannot accomplish the mutual adjustment of supply and
demand, bureaucratic coordination, argues Komai, becomes indispensable."
40. Whereas totalitarian theory targets party politics and ideologies in full charge of the oligarchic rule of the
state socialism, modernization theory accents the primacy of technology and modem values to explain
socialist industrialization and modernity.
131
41. Ibid. 3: This set of essays is brought together, however, not simply to reach across the boundaries of
disciplines and area studies or to publish a compendium of related findings, but because the research
and analysis in these papers exemplify an emerging new perspective in the study of state socialism. This
new perspective, whose broad contours will be outlined in this introduction, is developing as an
alternative to the two major traditions - the theory of totalitarianism and modernization theory - that have
dominated the specialized study of socialist societies in the postwar period."
42. cf. Nee 1989,17: "The command economy turns to a hybrid economy, which Komai argues operates in a
condition of 'dual dependence in which the economy is coordinated by both vertical bureaucratic and
horizontal market relationships. The essence of dual dependence, however, is the continued dominance of
hierarchical forms of coordination over the socialist firm and the debilitation of the market mechanism by
persistent and pervasive bureaucratic microinterventions. This is the dilemma of partial reform that despite
giving a greater role to the market, all of the critical decisions - entry, exit, investments, prices and wages,
output, credit - still depend more on processes internal to the planning governance structure than on the
market. As a result, the problems of the soft budget constraint, shortage economy, and investment fever of
the pre-reform socialist firm persist in the post reform economy. Thus this reforming socialist economy
reveals the relative weakness of the market mechanism when confronted with an intact bureaucracy
accustomed to controlling economic action. Whether the actual mechanism of bureaucratic control is direct or
indirect, the effect on the firm is to weaken its responses to the market and perpetuate the conditions of
inefficiency associated with central planning" (emphasis mine).
43. cf. Nee 1992, 19: "Expanding markets, new economic institutions, and a changing structure of property
rights are incrementally transforming the institutional environment, resulting in changes in the comparative
cost of governance."
44. cf. Nee 1992, p. 3: Critical to the neoclassical contract regime in market societies is the maintenance
of legal autonomy based on clearly specified property rights. This provides the basis for litigation when
losses incurred exceed the level specified by excuse doctrine of the neoclassical contract. By contrast,
hybrids in reforming state socialist societies lack a well-specified structure of property rights and,
therefore, effective autonomy (e.g., Stark 1989). For this reason, the socialist hybrids must rely more on
personal ties than on legal contracts to provide assurances that the terms of a transaction will be met by
both parties (Carroll, Goodstein and Gyenes 1988). The need for intense investment in personal
connections (guanxi), stemming from having to cope with widespread uncertainties in the institutional
environment, provides the impetus behind the rise of local corporatism in China.
45. According to Nee, along with market expansion, the new alignment of interests becomes ingrained
into the emerging new structure of institutions, predominated by local corporatism among local
governments, marketized firms, and private enterprises with double-edged nature which could provide
protection for the entrepreneurs against central control, and which could also become an eroding force
against the transition.
46. cf. Nee 1992, pp. 3-4: Local government involvement in rural industry has been interpreted as a
distortion of partial reform that undermines the efficiency goals of economic reform (Wong 1986, 1987,
1990). The claim is that the causes of inefficiency were unwittingly transferred from central ministries
down to local governments, where they were compounded by the antimarket, protectionist conservatism
of local officials and the Maoist legacy of closed local economies. Although I do not disagree with salient
aspects of Wongs analysis. I propose an alternative new-institutional analysis in which the relationship
between local government and industry is viewed in corooratist terms, as an institutional arrangement that
represents a solution to the problem of weak market structures and incomplete market transition. Local
governments assist collective enterprises, which receive little from the state, to secure reliable access to
factor resources they need, especially those in short supply. They also oversee local labor markets and
appoint managers to collective enterprises not leased to private operators, serve as intermediaries in
critical negotiations with banks for access to credit, fix local prices on select numbers of commodities, and
approve and coordinate investment of extrabudgetary funds under their control for projects proposed by
132
collective enterprises. Although such microinterventions by local government exert a softening effect on
the firm's budget constraint, local corporatism can enhance the firms competitiveness in domestic and
world markets by offering subsidies, facilitating horizontal and vertical economic integration, providing
access to credit capital, and investing in infrastructure such as schools, roads, public transportation, and
other services. In short, local governments may provide the backing and resources needed by
entrepreneurs to compete effectively in an economy characterized by partial reform, in which the still-
dominant redustributive institutions interact with market forces in a manner that subordinates market
institutions (emphasis mine).
47. As Nee criticized here, the prevailing scholarship would still be preoccupied with economic
conventions for such as those recurring themes of legitimizing privatization and rebuilding market
relations, etc., to account for the successes in China as well as in East Asia.
48. cf. Cao et al. 1999, p.124.
49. cf. Qian and Xu 1993, p.543: The non-state sector in China includes all enterprises not in the state-
sector. In Chinas official statistics, there are three categories of non-state ownership: collective
ownership, 'individual ownership, and 'other types of ownership (mainly private ownership and joint
ventures). The vast growing rural enterprises, which include Township and Village Enterprises (TVEs) are
all in the non-state sector.
50. Also see Boisot and Child 1996, pp. 609-10: W e therefore need to use a framework for analysis
within which the spread of markets and changing structure of property rights in China can be taken into
account. One available framework is that developed by Whitley (1991, 1992, 1994) for comparing
business systems. He argued that business system vary internationally in terms of three main sets of
characteristics: (1) the nature of firms as economic actors, especially their autonomy; (2) the way relations
between firms are structured to form markets, and (3) the logic that governs managerial systems of
coordination and control within the firms. He applied his analysis of these three constituents to 'market
economies in which 'control over economic resources is decentralized to private owners (1994: 155).
While reference to the three constituents can potentially identify differences between Chinese economic
sectors, the way he posited a necessary conjunction of market transactions and capitalist ownership
appears to be less appropriate...The application of Whitelys (1994) criterion characteristics helps to
make these distinctions more specific and in so doing demonstrates the plurality of Chinas present
economic order...."
51. According to Boisot and Child 1996, N ees classification ought to be revised appropriately to fit
Chinas reality (610); that is, These distinctions point to the presence of three main sectors within Chinas
economic order (1) a non-marketized state-owned sector, (2) a marketized non-private sector, and (3) a
(marketized) private sector." The following discussion is therefore based on their revised classification
instead of N ees original classification.
Ibid. 622: Three main sectors have been distinguished within Chinas emerging economic order. These
are the non-marketized state-owned sector, the marketized non-private sector, and the marketized private
sector. They vary in the extent to which their constituent enterprises engage in market transactions and
enjoy autonomy from the state in the exercise of property rights. They share, however, a high level of
engagement in transactional networks based on relational contracting and interfiim alliances that involve
governmental agencies in approving, supporting, and sometimes initiating roles.
52. According to Boisot and Child (ibid.): Nee (1992) has identified three categories of Chinese
enterprise according to the predominant mode through which their transactions are coordinated and the
rights over industrial property they embody. He called the three types the 'non-marketized firm, the
'marketized firm, and the 'private firm. Table 1 builds on N ees classification but also adds certain
refinements."
133
53. ibid, 611: 'Their performance [in this sector] is judged more in the light of plan fulfillment than of hard
budget criteria. One-third of state enterprises are overtly loss-making, while another third have so-called
hidden (unpaid) debts; these firms rely on subsidies to keep them afloat."
54. Boisot and Child explained in 1996 how this ambiguity in property rights makes Chinas current
market transition so difficult (620): One of the most difficult problems facing the current reforms of state
enterprises away from the contract responsibility system toward a modem corporate system lies in
determining who has the right to select their boards o f directors. If this is the state as owner, then it is
hard to see how any reform will be affected. If this is not the state, then who else has the right, since there
are no other owners? Collective and private firms avoid this dilemma insofar as tangible social units
constitute their de facto ownership, whereas the ownership of a state-owned enterprise is intangible.
55. ibid: 'This undermines the decentralization of responsibility to enterprises as economic actors since it is
not clear under a non-market system who should bear the responsibility for losses, and under soft budget
constraints it is effectively government that does so."
56. cf. Private sector in China catching up state rivals - 'Socialist market economy scarcely less capitalist
than some in the West by James Kynge in Financial Times, p. 1, Thurs. May 1 1 ,2 0 0 0 (the underlined added
by myself): ...The IFC [i.e., the International Finance Corp, the private sector arm of the World Bank] figures
split Chinese corporations into six categories. They included state, agricultural and collective in the state or
semi-state sector. Shareholding, foreign and domestic private companies were included in the 'pure private
sector. The most statistically elusive of these categories is 'collective. a classification that denotes a mix of
private and state stakeholders. The IFC decided that nearly half of the companies that call themselves
collective should in fact be called private. These firms adopt the name collective to preserve a sense of
closeness to communist authority which can be useful in business. Discrimination against private businesses
is still commonplace. The 'big four1 state banks are generally more reluctant to lend to private companies
than to their traditional state-owned clients."
57. In fact, as Boisot and Child 1996 analyzed, for non-marketized state enterprises, marketized state
enterprises, and collective-owned enterprises, they all share the dual nature of market autonomy and
state-dependency in todays China. The difference is in the degree of their autonomy and the
dependence. This is contrary to Nees observations in these three sectors. Ibid. 610: The marketized
firm, according to Nee, falls outside the bounds of central planning, though it may rely to some extent on
local government to secure access to resources allocated through the plan. He regards the collectively
owned enterprise as the stereotypical marketized firm, and the economic contribution of collective
enterprises has grown considerably under the reform. It is necessary, however, to make some distinctions
that Nee has overlooked, within both the state-owned and collective categories. First, many state
enterprises now engage fully in market transactions and report to local government authorities (see Child
1994, for examples). They are therefore distinguished in Table 1 as 'm arketized state enterprises.
Second, collectively owned enterprise is a very broad category. It includes quite large urban
manufacturing enterprises that may in reality have a rather similar relationship with local government to
that of a marketized-state enterprise and are to that extent state-dependent. Thus the assumed
conjunction between market relations and capitalist (or at least non-state) ownership, made by both Nee
and Whitley and drawn from the Western model, does not necessarily apply to C hin a... In other word,
each section would represent its own form of duality or plurality with the blurring boundary among
different sectors, rather than a clear cut sector in a neo-classical sense of property rights, assumed by
Nee and Whitley, that would be appropriate to analyze Western market economies but not Chinese ones.
Moreover, the markets for those small CEOs located in townships and villages or TVE s might also be
distinct, and not efficient neoclassical markets often seen in the West; rather, they remain for the most
part small, local and hierarchically ordered. They retain formal links with local authorities and may enjoy
some preferences over access to resources such as working capital (ibid.).
58. Ibid. 611:"...this sector bears some resemblance to Whiteys state-dependent type of business system.
Firms in this sector do not enjoy the same degree of formal autonomy as do private firms, although their
134
effective freedom of economic action is usually greater because of the support they enjoy from local
institutional intermediaries such as banks.
59. The state interference underscores the state dependence of these Chinese enterprises, or so-called
external dependency" problems by Boisot and Child in 1988. Pp. 518-9: Nothing exemplifies the
organizational interdependence of supervising bureaucracy and industrial enterprise as well as the so-
called 'mother-in-law problem...External dependency has been a common feature of all the enterprises
we have studied, with senior organizational members reporting, matrix-fashion, both to the enterprise
director and to their external supervisors in the municipal bureaucracy. Indeed, the line that separates a
state-owned enterprise from the bureaucracy is perceived to be more hypothetical than real by those
required to span it. As one of our interviewees put it, 'The manager of a state-owned enterprise is
considered to be a government official; the manager of a collective enterprise is not. Ibid. 520-1,
concerning an ambiguous external environment that this marketized non-private sector with duality would
encounter: Recently, however, three-year employment contracts have been introduced for new recruits,
and managers have been given more discretion in the setting of worker bonuses. Thus today more
freedom has been given to enterprise managers in the selection of new workers, even if the labor and
personnel bureaus still define the pool from which the selection is m ad e...T he question is whether this
increment of flexibility at the enterprise level points toward the market orientation that the Chinese
leadership is seeking to promote. The signals are mixed. For one thing, it is not easy to factor out
managerial 'passivity inculcated by years of compliance, a lack of training, and a providential view of the
state, from genuine bureaucratic constraints...Managers of state-owned enterprises, considered by many
in the PRC to be the key 'field workers of the reforms, thus face an ambiguous external environment that
can be read two ways. It can be seen as a competitive threat emanating from the market quadrant of the
culture space: In many product markets managers face deceasing guaranteed quotas, the need to secure
their own inputs, and the need to face up to 'interlopers, small undercapitalized new entrants from the
rural sector or outlying provinces that are beginning to nibble away at their market share; the closer one
gets to consumer goods in the PRC, the more this situation obtains. Alternatively, the environment can be
seen as a protective cocoon beckoning from the fief quadrant of the culture space: In spite of the
economic reforms, the state-owned enterprise remains a highly privileged player in a protected sector.
The preservation of privilege and protection requires that a quasi-feudal relationship with local
bureaucracy be maintained, and the price exacted from the firm for the guanxi (privileged relationship) will
be compliance and contribution.
60. Nee 1992 emphasized that The relationship herein remains feudal, with the protection ensured by
the local bureaucracy, in return for loyalty from the private and collective enterprises under its jurisdiction.
The phenomenal growth of official corruption in recent years bears eloquent testimony to this problem.
The implementation of company and contractual law enacted by the central government is very much at
the discretion of local authorities and often comes down to a matter of individual application.
Nee in 1992 referred COEs to those led by care-entrepreneurs, who, as he compared to those factory
directors in nonmarketized firms (i.e., SOEs; ibid. p. 14), have positive incentives for risk taking and
innovation, though they are more risk-averse than private entrepreneurs, who stand to profit mightily from
successful ventures (and lose greatly from failure). For cadre-entrepreneurs, success in the market place
does not lead to enormous personal wealth, except through illicit means. Like corporate executives in
capitalist corporations, cadre-entrepreneurs strive to advance their careers, to gain higher bonuses, and
to expand their organizational power and influence. Faced with intense market competition and operating
under hardened budget constraints, cadre-entrepreneurs know they cannot avoid taking risks and
innovating without jeopardizing their firms prospects for survival and growth. Cadre-entrepreneurs realize
that the capacity of local governments to underwrite unprofitable and inefficient firms is limited, unlike that
of the central state, a consideration the rash of bankruptcies of collective enterprises during the economic
retrenchment (1988-90) reinforced.
61. See Nees summary of the strengths and weaknesses of Chinas hybrid economy, cf. Nee 1992, p. 6:
The close interorganizational relationship between collective enterprises and local government not only
135
is based on the structure of property rights but is reinforced by bilateral dependency. First, in a shortage
economy, collective enterprises, which are at the bottom of the hierarchy of industrial firms, must rely on
connections provided by local government to secure needed resources and credit. Similarly, local
governments became increasingly dependent on revenues from collective enterprises. Second, local
corporatism economizes on transaction costs when the institutional arrangements underpinning markets
are weak. In the absence of contractual law hardened by routine compliance and enforcement, marketizd
enterprises need political allies to go to bat for them in negotiating and enforcing contracts, especially with
dominant state agencies and enterprises. Because a state-owned enterprise or foreign firm might show
little compunction for strong-arm tactics and guile in direct dealings with smaller collective and private
firms, it may be to the advantage of collective enterprise managers to use joint negotiations involving local
authorities to enhance their negotiating position. State enterprises can be very slow in paying smaller
collective firms for subcontracted parts; such debts pose severe problems for local industries in meeting
current salaries and expenses. Another common complaint is the abrupt abrogation of contracts without
compensation for possible losses suffered by subcontractors. Obtaining business contracts with local
government backing may reduce transaction costs for state enterprises and foreign firms as well, by
providing official assurance that the terms set by the contract will be fulfilled in a timely manner. In
addition, a foreign or domestic firm subcontracting the production and assembly of a trademark
commodity will want assurances that the collective firm will not resort to opportunism by selling excess
brand-name products independent of the main firm.
62. See Boisot and Child's 1996 analysis of Chinas TVEs (616): Weitzman and Xu (1993) argued that
TVEs do not have any owners, in the spirit of Western property rights theory. Nominally, TVEs are
collectively owned enterprises, with community members being the owners. These collective owners do
not, however, have shares in a formal sense and are permitted to participate in the T V E on the basis of
their residency, a right that is mandated by the community government. The community government is the
de facto executive owner of the TVEs and is reported normally, to control them. The T V E is therefore not
a private capitalist firm in disguise, and there are legal restrictions to prevent it from converting into one.
So, while TVEs are highly successful non-state enterprises, with a growth rate of total factor productivity
about ten times that of state enterprises and accounting for about 38% of Chinas industrial output by
1991, they do not represent a shift toward capitalism in the western sense. TVEs and other Chinese
enterprises today may behave like Western capitalist firms, and indulge in an increasingly entrepreneurial
pursuit of market opportunities, but this does not necessarily mean that their constitution is of the Western
capitalistic variety.
63. See Nees 1992 revealing observation of the reciprocity of COEs with the state and market, cf. Nee
1992, p. 7: Despite the protectionist tendencies of local governments, the behavior of larger collective
enterprises is oriented toward extralocal trade. Because collective enterprises fall outside the central plan,
which encompasses state-owned enterprises, their growth became increasingly dependent on markets.
Although collective enterprises rely on local government to gain access to resources allocated through
the plan, such resources are limited. For this reason, they must turn to specialized markets to purchase
many factor resources. This often involves importing outside (domestic and foreign) investments and
technologies to sustain economic growth. Similarly, products produced by collective enterprises, aimed
not for local consumption but for extralocal sales, are more readily sold in regional markets than absorbed
by state redistributive agencies. An additional market incentive stems from state agencies fixing purchase
prices at lower than market price for most commodities. Enterprises that could purchase factor resources
at subsidized state prices and sell part of their products at higher market prices developed a keen interest
in arbitrage. Collective enterprises quickly oriented their production to the marketplace and contributed to
the rapid expansion of markets in China.
64. Boisot and Child further explicitly opine that the localized nature of state-dependency for the firms in
this sector is rather conducive to The development of their personal interoganizational connections.
1996, 611. Also, ibid, 612: "local government being a major player as resource provider, facilitator, and tax
collector." Because of this, the local governments want to reward them with indispensable networks and
assistance in gaining access to capital, raw materials, labor, and information. Also cf. Boisot and Child
136
1988, p. 520: Indeed, it could be argued that the greatest stimulus for change in state-owned enterprises
today comes only indirectly from the enterprise reforms, in the shape of intensified competition from rural
collectives and individual enterprises. These have been growing at more than twice the pace of the state-
owned enterprises and, being far less controllable by state bureaucracy, have shown a mobility and a
vitality that holds promise for the future. If the volume of transactions in the market quadrant of the culture
space is on the increase in the PRC today, it may not be because existing state-owned enterprises are
changing their transactional style but because small, new, mobile firms are placing their uncommitted
transactions there.
65. Ibid. 6 11 :"... local agencies of the state fill many of the roles that in other business systems are played by
private intermediary institutions. The isolation of firms in this sector from supporting institutions...is therefore
relatively low.
66. Ibid. 614: The localized nature of state dependency for firms in this sector supports the development of
their personal interorganizational connections, which are of greater importance than appears to be the norm
for this type of business system, as described by Whitley."
67. cf. Boisot and Child 1996, 611: 'The characteristics of the Chinese marketized private sector have
several similarities to those Whitleys 'centrifugal' business system, which he illustrates by the example of the
non-mainland Chinese family business."
68. Nee in 1992 gave an analysis of the behaviors of those private entrepreneurs (PE) when he said that
they not only have stronger proclivities for risk taking and innovation, but their profit-maximizing
orientation and hard-budget constraints encourage more exacting cost-benefit calculations in their
investment decisions. Because profits accrue directly to them, entrepreneurial incentives are far greater
than those for cadre-entrepreneurs. They are growth-oriented, to be sure, but less so than either the
cadre-entrepreneur or even the factory director, who operate under softer budget constraints. Private
entrepreneurs face greater uncertainties due to the continuing instability of fundamental rules of the game
involving the market economy (Nee and Young 1990). They therefore are reluctant to make long-term
investments in the growth of their enterprise because, in the absence of adequate legal protection of
private property rights and possible hostility directed against them in a future political campaign, they
worry about possible appropriation of their assets. Instead, they invest to gain rapid returns on their
capital, emphasize liquidity, and spend their profits on conspicuous consumption such as new housing
and imported luxury commodities rather than investing in fixed capital. In this sense, their behavior
resembles more that of middlemen minorities (Bonacich, 1973) than that of modem capitalists
(Schumpeter 1942)" (ibid. p. 14). In my opinion, such an analysis is short-sighted. If those private
entrepreneurs are in a track of fast growth, they would change their investment strategy to the long-term
goal of investment in fixed capital, as some in the high-tech-oriented internet industries and stocks.
In N ees view, however, Cadre-entrepreneurs, by contrast, are more oriented toward growth than are
private entrepreneurs. Though their firms operate under harder budget constraints than the
nonmarketized firm, they are subsidized by local government through tax reduction arrangements, access
to raw materials at below-market prices, and cheap credit. Moreover, as profits do not directly increase
their personal wealth, cadre-entrepreneurs have less incentive, compared with natural owners, to
economize on wages and bonuses. For this reason, the largest portion of extrabudgetary funds goes to
increase salaries and bonuses or into social investments such as employee housing. Thus cadre-
entrepreneurs who manage marketized firms are less discriminating in their investment decisions than
private entrepreneurs and favor rapid growth as a strategy to enhance their power and prestige within the
local elite. Nonetheless, the cadre-entrepreneur is more oriented to profit making than the factory
director. But the fact is since the 1990s, the COEs share in the G D P has relatively declined, whereas the
share of private enterprises has drastically increased.
69. cf. Chinas star rises - The countrys economy is growing strongly again and there are signs that
structural reforms will help to sustain the recovery by James Kynge in Financial Times, p. 16, Tues. July
137
25, 2000: ...there is evidence of transformation in the state corporate sector. Mu Suixin, mayor of
Shenyang in the Eastern rustbelt, says the private sector now contributes 48% of local GDP, compared
with less than 20% at the start of 1988. The process is painful and undignified for many of those involved.
But it has allowed the closure of thousands of state factories that are Chinas worst destroyers of capital.
70. The differences between them, as Boisot and Child 1996 discussed (612), The first is that private
companies in China are normally still small-scaled organizations, unlike some centrifugal firms [as Whitley
presumed in 1994]. Thus the diversity of their operations is limited, and they achieve a relatively high-
level of international integration under the close personal control of their owners. T h e second is that,
because the ownership of property in China does not furnish unambiguous legal property rights, such
rights continue to depend importantly on the sanction of local governments and their officials. Even the
private sector in China thus continues to be shaped partly by governmental institutions.
71. cf. Boisot and Child 1996, 614: 'Within this system, economic power is decentralized to firms...partly
because there is a lack of stable institutional procedures (especially laws) governing economic relations. Nor
can firms in this sector expect much support from intermediaries like the Chinese banks which, having
hitherto remained as government agencies, continue to offer loans as much on the basis of political as
economic criteria, favoring state and large collective owned firms."
72. Boisot and Child had similar perspectives (1996, 612) that in China such alternative connections more
rely upon the ties with local government agents, or institutional collusion, than upon the ties with other semi-
autonomous enterprises and other intermediaries, since private property rights haven't fully yet legalized in
China, cf. Boisot and Child 1996, p. 612: "Many private firms in China attempt to compensate for these
disadvantages by seeking close ties with local government, but they cannot take support from that quarter
for granted, they often have to pay a 'management fee to the local authority for assistance in securing
access to resources and political protection, or they have to register as collective enterprises to obtain greater
support. This mode of compensation parallels a characteristic of the centrifulgal business system posited by
Whitley, namely, that in the absence of stable institutional procedures and well developed private
intermediaries, the managers of fines have to use personal connections. A difference is that the key personal
connections in China lie with local government officials rather than with other firms."
73. S ee a report about Internet entrepreneurship as one of the venture-capital projects in the vibrant
private sector, cf. A Dot-Com Revolution in China - Venture capital backs talented young entrepreneurs;
the private sector could become a potent force in a Marxist country by Craig S. Smith in The N ew York
Times, B1, B2 in Business Day, Sat. July 15, 2000: While most private companies in China cannot
raise money easily, a number of Internet companies have attracted foreign investors...hundreds of
millions of American investment dollars have fattened the bank accounts of Chinas young Internet
entrepreneurs over the last year, making dot-com companies the most vibrant part of the countrys
fledgling but still struggling private sector. And despite the high-technology stock slump in the US, as
much as $1bn more in venture capital, most of it from America, is hovering overhead waiting to dive into
Chinas fast-developing Internet industry, venture capitalist say. The torrent of cash into private hands is
without parallel here under Communist Party rule. It also is particularly conspicuous given the enormous
financing difficulties that many budding Chinese entrepreneurs confront in a society that still officially
discourages real capitalism...But if the money keeps coming, the impact could be as big as the breakup
of the countrys Maoist communes 2 0 years ago. A capital-backed private sector may be the economys
best hope for survival as hundreds o f millions of workers spill from sinking state-owned enterprises, and
foreign competitors eagerly await Chinas market opening after it joins the W TO . For the first time since a
fledgling private sector reappeared in the late 1970s, a group of private businesses here are
accumulating capital. 'China is seeing a core entrepreneurship being established that is different from the
old one, which never really grew because it didnt have access to capital, says Dong Tao, an economist
with Credit Suisse First Boston in Hong Kong...But as Chinas old Marxists know, capital is power and if
the countrys young Internet entrepreneurs can hang onto their assets and make them grow, they could
emerge as a potent force shaping the countrys economic - and political - future. So far, the big capital
formation is limited mostly to Internet companies, though China is exploring ways to m ake it easier for a
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business's original investors to cash out when it goes public. Chinas regulators are considering a second
board on the countrys stock exchanges that might allow share sales by companies before they are
profitable, for example. And Chinese start-ups can, in theory, list their shares on a second board already
operating in Hong Kong. Several domestic venture capital funds have even appeared, though they are
mostly government controlled. If that model takes hold, it could fundamentally alter economic life in China,
where, despite 20 years of changes that have made the economy more flexible and market-driven, the
ever-present state still decides how resources are allocated...For now, few of Chinas Internet companies
are seriously considering raising capital at home. Current listing requirements make that impossible and
the approval to go public is a political favor that private companies rarely win. And most of the foreign
investment in Chinas Internet sector remains technically illegal under rules barring foreign ownership of
value-added telecommunications services. In June, Chinas stock market regulators issued a new rule
requiring companies that want to list abroad to first submit to Beijing documents detailing their ownership
structure and showing that the structure adheres to Chinese law ...Yet, with China expecting to join the
W T O later this year, a feeling of invincibility - some say hubris - has permeated the industry. 'T h e same
deference isnt being paid to the ministries and bureaucrats as was paid in the past,...Even if the current
trend does die without transforming Chinas economy, it has taught a group of bright, ambitious young
people the basic tools of capitalism...
74. Ibid. 510-1: In his more recent work, Williamson (1985, 1987) recognized a number of transactional
governance structures that fall between the extremes of pure hierarchy and pure market. These can be
categorized broadly as forms of either periodic or continuous contracting. The transactional relationships
involved are contractually based but also involve a degree of particularism, or limited information
diffusion, to the set of partners in question. Other recent analyses have also identified intermediate
modes of organizing transactions along the hierarchy-market continuum, such as federations (Daems,
1983), networks (Thorelli, 1986), and other forms of coordinated contracting (Child (1987a). These
extensions, however, continue to locate transactions primarily, if not exclusively, in the codified domain.
They focus on variation along the diffusion dimension of Figure 1 as a function of the monopolistic
possession of information, with hierarchically governed processes involving restrictions on the diffusion of
information and the classical market relying on the absence of restrictions on access to relevant
information...To do so would point to the possibility that rationality itself could be bounded by the
idiosyncratic and customary nature of particularistic relationships (fiefs), in which impacted, uncodified
information can promote noneconomic forms of opportunism, or that economic opportunism may be
constrained by clan-like networks such as the Mafia or the Green Gang in Kuomintang China (Seagrave
1 98 5)...Williamsons discussions of 'atmosphere...enters into his joint work with Ouchi (Willaimson and
Ouchi 1981), which recognizes the existence of 'soft contracting in which informal noncodified, trust-
based relationships provide an additional governance support. It remains, however, to be given as central
an analytical place as variance on the information-diffusion dimension.*
75. Ibid. 525: A transactional continuum along the lines suggested by Williamson would lead one to
predict that such a massive disinvestments in bureaucracy [in China's transition] would move the country
toward market governance. In both the commercial and the light industrial sector, modest moves toward
market governance indeed seem to be taking place. The explanation seems to lie both in the greater
remoteness of these sectors from the bureaucracy and in the greater competition from fast-growing rural
industries that between 1982 and 1986 have grown by 266% and are today almost beyond bureaucratic
control. Yet our own hypothesis is that markets in the PRC at present compete with fiefs for the
governance of the uncommitted transaction and that in the urban industrial sector the dynamic of the
reforms is pushing toward fiefs as the dominant transactional mode. Patrimonial values have reasserted
themselves and are once more imposing a well-tested cellular structure on the Chinese industrial
landscape. Our brief examination of the reform process at work in state-owned enterprises has illustrated
this dynamic at the organizational level...Not only does a deeply rooted cultural preference for
personalized hierarchical relations push toward fiefs. The lack of an adequate physical infrastructure that
might integrate markets and hence lower transaction costs also favors localism and small-numbers
bargaining...* (brackets and emphasis mine).
139
76. See Samuel Brittans book review of David Simpsons Rethinking Economic Behavior. By that
Simpson expounds the market role in terms of his process economics, in which he contends that
whereas market functions as a mechanism for economic coordination, it makes economic forecasts in
non-linear systems nearly impossible, cf. Brittans What is really wrong with todays economics in
Financial Times, p. 13, Thurs. Dec. 21, 2000: ...A group of dissenters, originally emanating form Austria,
see the role of q market rather differently from the 'neoclassical mainstream. Its aim is not to bring
about an equilibrium or an optimum but to act as a signaling device to enable information scattered
among millions of people to be diffused and to act as an incentive to action...economy is a complex
adaptive system that never approaches a stable equilibrium but is characterized by self-organization and
evolution.
77. As they found (512), China today inherits a distinct cultural legacy characterized by (1) a respect for
hierarchy, (2) a collective orientation, (3) a preference for personal relationships and connections, and (4)
a strong sense of national identity (Lockett 1985; Pye 1985; Domenach 1986; Knutsson 1986; Qian
1986). Behavior is regulated by appeals to the law, and consequently, the move from 'status to 'contract
that Sir Henry Maine (1986) discerned in Europe at the end of the Middle Ages has yet to occur. Cultural
values of this kind imply a preference for face-to-face transactions based on personal trust and mutual
obligation. Ibid.: ...Formal, natural barriers to communication turned the Chinese bureaucracy inward
toward the court, leaving the countryside largely free of direct rule and control by superior authority and
creating a cellular society of low transactional complexity cemented together by loyalty to the emperor
and a simple bureaucracy that was patrimonial rather than rational-legal in character. As Reischauer put
it, 'the government thus was a relatively small, highly centralized body that floated on a sea of isolated
peasant communities' (Rodzinski 1984: 48).
78. As mentioned before, the environments of institutions are identified by the ways in which information is
structured and shared. Each economic order or transacting governance in a certain period could be identified
by the corresponding dominant institution in charge of information structuring and sharing.
79. Ibid. The search was to be less constrained by socialist ideology, which had tended to channel all
transactions, whatever their characteristics, into the bureaucratic mode. Providing that the primacy of
bureaucratic transactions, i.e., planning, was not questioned, peaceful co-existence between alternative
forms could now be envisaged.
80. Iron laws of fief, for example, give rise to the above-mentioned external dependency problem or
the problem of vertical interdependence of supervising bureaucracy and industrial enterprise, i.e.,
mother-in-law problem (ibid. 518-9): The pattern that emerges thus far is one of the hierarchical
exercise of personal power that is characteristic of fiefs.
81. Boisot and Child went on (ibid.): The central role of law in modem societies illustrates the importance of
abstraction to the notion of modernization. The modernization hypothesis assumes that there is a shift from
particularism to universalism and from substantive to procedural rationality. Thus the ability to move toward
higher levels of codification, and to stay there, requires a greater disposition for abstract thought than
Chinese culture has shown up until now. Remove abstraction from efforts at codification and one obtains little
more than ritual and mock bureaucracies (Gouldner 1954), low institutional stability. Sooner or later under
these conditions, transacting gravitates back toward the lower regions of the C-space...
82. Ibid. : It should be borne in mind that codification and diffusion are descriptors rather than
explanators, albeit that their four main configurations are posited here as necessary conditions for the
operation of given transactional modes.
83. The nudging evidences could refer to 1. their comments on the FSU s bureaucracies as the legacies of
old Russian bureaucracies, which predated the advent of Marxism-Leninism, and, as assumed, are more
consistent with Western sensed rational-legal bureaucracies, and 2. their observations on Japanese
counterparts, as assumed, guided by the Western liberal model, and 3. their arguments on those problems
140
potential to Chinas transition in lack of impersonal abstract order throughout its history that could come along
with its current decentralization to markets (pp. 604-5), as well as 4. their contention on Chinas transition:
The Chinese authorities themselves experience this law without being able to articulate it or incorporate
it in their policies. They implicitly adopt the unidimensional perspective of the markets and hierarchies
approach - albeit at a macro-economic level - when they explain the economic reforms they have
undertaken since 1978, in institutional terms, as a restructuring of the system from bureaucratic to market
governance... (ibid. 605-6). If their predictions on Chinas institutional reforms were right, then, Chinas
recent updated endeavors, such as on its market capitalization and privatization, would be futile ones. But
as they admitted, all these debatable points could challenge those conventions built on Western notion of
modernization. But as all these instances could stir potential controversies and surface to challenge the
Western academia, it could suggest a need for some new perspectives to account for these historical
precedents and the transitional uptrend.
84. Ibid. 525: If the 'iron law of oligarch loosely describes one form of market failure...then the 'iron laws
of fiefs covers those bureaucratic failures that can be traced to the same causes, namely, the absence of
a transactional infrastructure that can sustain a high degree of codification and hence an adequate level
of formal rationality. Both 'laws are illustrated schematically in Figure 3, and clearly neither is derivable
from Williamsons continuum.
85. Yet to compare with this fief mode, Chinas iron laws of clan might gain more leverage for bargaining for
power and information sharing from Chinas transition through decentralization and a hybrid economy (ibid.
525), albeit Boisot and Child cast no lesser doubts on Chinas hierarchical decentralization than its
bureaucratic failures under the fief mode. Ibid. p. 522: ...the economic reforms in the industrial sector, by
mishandling delegation and decentralization issues have, if anything, reinforced the transactional bias in
favor of fiefs.
86. cf. B&C 1996, 613: Richardson (1972) came close to recognizing the phenomenon of relational
transacting in his discussion of cooperative interfirm relationships, and Williamson (1985) has brought it
into his perspective. While these contributions diverge importantly from neoclassical market analysis, they
still regard relational transacting as falling within the domain of codified transactions at an intermediate
point between hierarchy and market. The Chinese system of networked transactions, however, is
relatively uncodified, and it is based on trust and longstanding personal connections.
87 Ibid. 602: In theoretical terms, the paper extends the markets and hierarchies debate initiated by
Williamson (1975) in a new direction. As it evolved, the markets and hierarchies formulation established a
unidimensional continuum, with market coordination at one end and hierarchical coordination at the other.
Clan or federal forms of governance (Ouchi 1980; Butler 1983) and relational contracting (Williamson
1985) could then be located at notional points along this continuum - not quite markets but not quire
hierarchies either.
88. Such as, a research agenda like this (ibid.): A local focus is justified by the emergence of the non
state sector, to which many state enterprises are becoming increasingly tied through subcontracting and
alliances (Su 1994). It is the sector from which much of the bottom-up momentum of the reform has
derived and within which new business networks are emerging with local government support. Questions
of ownership, financing, trading, and regulation need to be investigated as components of a wider
regional commercial system, and with regard to its historical antecedents, and this comprehensive
perspective can only be practically accomplished on a local basis. Some localities should furnish records
relevant to a reconstruction of the pre-1949 economic system, and it should be possible to question those
influential in establishing the new system as to their design templates and the normative framework that
informed them (cf. Jiang 1992).
89. cf. B&C 1988, p. 522: Since 1949 the pursuit of formal rationality in the PR C was ideologically
confined to the bureaucratic region of the culture space where, at best, it managed to create 'mock
bureaucracies (Gouldner 1954) in Marxist-Leninist garb. The limited degree of formal rationality achieved
141
was confined to higher levels...Formal rationality was not always the goal of the leadership...Only
recently has the search broadened to include market forms of governance as well...Substantive
rationality, providing it can be suitably clad, will thus be allowed to keep its seat at the high table. Those
who fram e the problem of modernization as an exclusive choice of governance structure in the
formalized, codified regions of the culture space - bureaucracy for socialists, markets for capitalists - will
balk at the search for transactional modes sui generis that is implicit in current Chinese policies. Also
ibid. 525: At any one time, upward of a million people are traveling across China on trains in search of
raw materials or other scarce inputs for their firms. They lack nationally available information on where
these might be found, and it can take up to several days to effect telephone calls within the country.
Nevertheless, even if information on supplies were available, would-be purchasers could only secure
some after a slow process of relationship building. A written order or a telephone call serves little
purpose, and suppliers are unwilling to formalize their commitments by setting them down on paper. Only
a face-to-face relationship will clinch the deal. Impersonal contracting is out. When contractual
relationships have been made, they are hard to enforce...In the land of fiefs, interpersonal trust is the
lubricant that oils exchange relationships, and trust is not built in a day. It is for this reason that many
state-owned enterprises are allowed to maintain a 'relationship expenses budget and that those selling
scarce consumer goods will allocate up to 10% of their total output to those suppliers with whom they
need to keep on friendly terms.
90. Ibid. p. 522: ...In the culture space, therefore, formal rationality drives markets and hierarchies, and
substantive rationality drives fiefs and clans.
91. Ibid. 624-5: Western capitalism in its mature form has directed its codifying efforts toward increasing
efficiency and managing risk. It has striven toward order and predictability through both the codification of
law outside enterprises and the codification (formalization) of management structures and systems within
them. This is a path that an increasing number of Western writers are now urging corporations to
abandon in favor of modes o f organizing that are more consistent with the concept of networking, such as
subcontracting and temporary alliances (e.g., Kanter 1983; Hastings 1993; Miles and Snow 1994). Peters
(1992) has called this the 'necessary disorganization for the nineties. While this emerging thinking might
be more accurately described as the search for the self-learning and self-reconstituting organization, the
significant point is that networking is increasingly being seen as a necessary way of achieving this end.
92. Perhaps they felt that their limited observations up to 1996 could not provide sufficient evidence
supporting their arguments and assumptions.
93. Ibid. 623: ...China thus demonstrates that a modernizing economic order is able to operate in the
less codified domain of the C-space.
94. Cf. Boisot and Child 1996, 621-2: The Western path to modernization, involving first an increase in
codification toward rational-legal administrative systems (i.e., bureaucracies) and then a decentralization
toward market order, created the institutions of modem 'm arket capitalism. Such a path, at least when
codification has been achieved, is consistent with the unidimensional markets and hierarchies
perspective. The Chinese path to modernization since 1949, by contrast, involved first an abortive move
up the codification scale (state planning), punctuated by wild oscillations toward mass mobilization, and
then, after a reversion into fiefs, a subsequent decentralization, coupling with traditional systems in the
lower reaches of the C-space. In the absence of effective codification, and given traditional Chinese
social organization, such decentralization leads not to markets but to clans and permits the more local
and personalized institutional order, which, following other observers of Asian economic institutions
(Biggart and Hamilton 1992; Geriach ad Lincoln 1992; Berg 1994), we shall label network capitalism.
95.That is, those institutions that are background-minded (i.e., the lower reaches of the C-space,
according to Boisot and Child, ibid, 622).
96. cf. B&C 1996, 623: Redding (1990: 95) has noted how living 'in a collectivist and group-dominated
142
society is a cultural tradition for the Chinese. The roots of networking as an institutionalized practice are
ancient and extensively developed in China. The fundamental contrasts in the institutional constitution of
property rights and transactional safeguards between Western (especially Anglo-Saxon) societies and
China also imply that the nature of the social processes sustaining networking in China are also quire
different from those in Western countries.
97. Ibid.: Two broad questions there arise. The first is what kind of economic order is merging in China, an
answer to which is complicated by the countrys size and heterogeneity and by the uneven spread of its
economic reform...The second is how far Chinas emerging economic order can be analyzed in conventional
Western terms. The ability of Western neoclassical economic theory to account for the nature and success of
other Asian business systems has already been put in doubt (e.g., Biggart and Hamilton, 1992).
98. As one investor said, Strong political control and robust economic growth are not mutually exclusive,
as the example of Singapore has shown. cf. Catching the China wave before it gets away by Desmond
M acRea in Financial Times, p. 24, W ed. Aug. 15, 2001: With a sixth of the worlds population and a
gross domestic product of $4,500bn - half that of the US - growing at an annual rate of about 7%, China
may become the worlds biggest economy within 20 years. The countrys administration is doing all of
it...'Transformation to a market economy, which began in 1979, will be completed when China enters the
W T O , he adds...Chinas growth will be led by domestic consumption and non-government investment
aided by the governments expansionary fiscal policy...
99. See a recent report about how Western companies could break through the labyrinth tangled by the
regulatory rules, personal relationships, and pedigree: China's tangled broadband revolution - Foreign
investors trying to break into the worlds biggest cable T V market face a maze of regulation" by James
Kynge in Financial Times, Thurs. Aug. 2, 2001: A riddle inside a puzzle wrapped in an enigma. A puzzle
in a fluid state - foreign businessmen in Beijing are fond of using such phrases to describe the China
market...the lure of the china dream as Beijing prepares to join the W TO exerts a powerful pull...This will
unify fixed-line telecoms, the internet and cable T V so that all can be received down one high-capacity,
broadband line. Such convergence has already created fierce competition in the worlds most advanced
economies. But in China the battle is mirrored by a struggle between rival regulators that are also the
owners of the dominant companies...The rival camps have staked out their turf. The Ministry of
Information Industry, which owns China Telecom, the dominant fixed-line company, has ruled that cable
T V companies are not allowed to offer voice and internet services unless they have an Mil license. The
State Administration of Radio, Film and TV, which at the local level owns a network of cable T V operators
nationwide, has countered by ruling, in effect, that no telecoms company can offer video content unless it
is approved by SA R FT...Faced with SA R FTs brazen forays into its regulatory territory, the Mil has tried
to frustrate cable T V companies development by issuing edicts against their use of offshore investment in
upgrading their networks. M il is also retaliating: in the southern province of Guangdong, corporations
affiliated to the telecoms authority offer cable T V over broadband connections. For foreigners, it is
important to keep out of the M II-SARFT crossfire. To do this, they must devise skilful strategies to enter
the market and, above all, forge a trusting relationship with the right Chinese partner. But this is not easy.
If the foreign company has designs on becoming an operator of basic telecoms, internet and cable TV,
then it must tie up with a telecom company (W TO rules permit foreign equity stakes in telcos) or find ways
to circumvent a ban on direct foreign investment in cable T V operators. Although risky, several
companies have plumped for the second option. Instead of directly investing, the foreign partner leases
equipment, knowhow and content to the Chinese cable company which, in return, hands over a share of
the revenue. One such company is DVN, a listed Hong Kong company that has recently started supplying
technology to cable T V operators in 13 locations throughout China. The alternative is to seek partnerships
with Chinese telecoms companies. This sounds simple, but it is not. There are six actual or would-be
fixed-line telcoms In China, each with a partial broadband network. The favored company so far is China
Netcom, a newcomer considered to be insulated from regulatory risk because it boasts Jiang Mianheng,
the eldest son of president Jiang Zemin, as one of its directors. It has signaled its desire to become a
provider not only of telecom services but also T V by recently buying up broadband cable from local cable
T V companies. Such attributes have attracted News Corp, the international media group led by Rupert
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Murdoch, to invest in a Netcom entity registered in Hong Kong. The Hong Kong registration provided a
convenient way to circumvent a ban on direct foreign investment in mainland telecom companies before
W TO entry. AOL Tim e Warner, the US media and internet company, have chosen a different route.
Through AOL, they have taken a 49% stake in a $200 m Hong Kong internet portal venture with Legend
Holdings, Chinas leading computer maker. The venture is intended to serve as a stalking horse for entry
into the mainland market once post-WTO regulations allow. AOL Time W arner and Viacom are also
seeking to make money from beaming television channels into mainland China from Hong Kong.
Negotiations are proceeding, even through it is technically illegal for foreigners directly to supply T V
content to Chinese companies, executives say. Breaking into a converging - and inconsistently regulated
- Chinese communications market is a complex task. But given that domestic companies - and even
regulators - are breaking the rules and getting away with it, it is difficult not to be sympathetic with foreign
companies that are coming up with creative solutions of their own.
100. Boisot and Child went on: In some forms, government and family work constitute a fieflike
relationship, as with some large enterprises that report directly to a ministry or with business ventures that
have been started by the children of senior party members or by the Peoples Liberation Army. In other
forms, like many township or village collective enterprises, government and community organizations
work together with firms in a more extensive clan-like network. In both instances, there is an evident
contrast with the Western market capitalism model in which government codifies the rules and monitors
adhere to them from outside the transactional arena. The distinction between the inside and the outside
remains itself uncodified and hence subject to arbitrary interpretation by power holders (ibid.).
101. Ibid.: If Peters (1992) is correct in seeing Western capitalism as exhibiting conditions of increasing
impermanence and fickleness, with businesses joining in more and more temporary alliances, then it
clearly is not developing toward the long-term dan-like relationships of Chinese network capitalism.
Rather, Western networking is likely to be characterized by short-term expediency that will increase rather
than cope with uncertainty and in which there may well be an increasing resort to litigation to deal with
disputes arising from broken business marriages. These differences between the emerging Chinese and
Western economic orders point dearly to the influence of the institutional systems in which they are
respedively embedded.
102. ibid, "local government...[is] a major player as resource provider, fadlitator, and tax colledor (see Pye,
1995). These transadional arrangements, 'weak' in Western terms (Granovetter 195), appear to have
considerable latent strengths. Thus the institutionalized use of negotiation between enterprises and local
authorities appears to introduce flexibility into regional property rights and to allow for the reconstitution of
transadions to meet new opportunities and changing drcumstances."
103. In the case of bureaucracies, for instance, Boisot and Child pointed out that ...Transadional
coverage - the ability to subsume a large number of particular cases under a general coding scheme - is
achieved at the expense of transadional nuance and richness. The depersonalization associated with
codified transadions merely refleds the difficulty of maintaining a dense network of interpersonal
obligations as small-numbers transading gives way to large-numbers transading. What Williamson
(1975) termed 'atmosphere is lost as exchange loses its 'embeddedness (Granovetter 1985).
104. Also cf. Qian and Xu 1993a, p. 542: Disinguished from Eastern Europe and the USSR, sustained
entry and expansion of the non-state sed o r in China during the reforms were forceful and fast enough to
reach a critical mass by the end of the 1980s. The non-state s e d o r has in fa d become the most
important engine of growth in China. The unexpeded, and perhaps unintentional, growth of the non-state
sedor is critical for the success of Chinas economic reforms."
105. As Boisot and Child elaborated, one could count on modernization theory. That is, Chinas transition
started from a very low base of industrialization (ibid. 607),
Most of its growth is the result of bringing into play fadors that had hitherto been
144
underutilized, rather than of any effort to reorganize them. According to this explanation,
reorganization has a part to play, but it hardly drives the process.
According to Boisot and China, this account could be workable only for Chinas growth in the 1980s, but
not for that in the 1990s. Because by the World Bank new PP P estimation, Chinas G D P per head had
already reached the level of middle income country in the world. As the economic development of a
country attains such a level, according to Western criterion,
...low [institutional] base vanishes, as do the arguments that are used to support. At this
income level, many economies have already acquired the rudiments of a rational-legal
bureaucracy as well as those of efficient market institutions - hence their claim to be
modernizing (ibid. 607).
Another explanation could take the iron laws of fiefs to account for the dilemmas between those state-
owned sectors and non-state-owned sectors and between hierarchy and market. One enigma that Boisot
and Child posed might center on the non-state-owned sector: how to explain how the non-state sector
could boom faster than the state sector; but the market boom did not go through the fonmal bureaucracy
of rational-legal codification that their 1988 framework imposed,
These considerations indicate that the non-state sector in China is not pushing toward
the codified areas of our framework. Rather, it is having once more to fend off, or at least
manage, the personalized impositions of ostensibly formal governmental organization as
it had to in late-imperial times (Mann 1988). Bruuns (1993: chap 5) ethnographical
account of private household businesses in contemporary Chengdu richly illustrates this
phenomenon (ibid. 608).
That is, the social facts in Chinas transition were what they had observed,
W e are thus left with a country representing over a fifth of the worlds population that is
achieving an unprecedented level of economic performance through a relatively
uncodified system of ownership and transacting...In effect, Chinas rapid growth and
development over the last 15 years challenges our concepts of modernization initially as
an institutionalization toward greater codification (cf. Durkheim 193; Tdnnies 1955;
Habermas 1970) followed by a decentralization toward a market order, (ibid.).
In view of the evidence, one must say either that fast growth can happen without modernizing or one
must reconceptualize the process of modernization (ibid.) The first option is certainly not convincing in the
case of China The second option is the only plausible one. Chinas transition has never tried the
Western model; it has always followed its own way,
W e are then left with the need to rethink the concept of modernization itself and to extend
it beyond its Western conception. This opens up the possibility that China is not even
trying to move further up the transactional framework toward a more codified rational-
legal order as a precursor to a less troublesome decentralization - that it is not
attempting to build a Western type of economic order. If Chinas rapid development is
being pursued through its own model of economic and social organization, can more be
said about the distinctive features of this model? W e attempt this, in terms of China's
business system and markets, capitalism, and government within that system (ibid.).
Analysis of the contrast between China and Europe is facilitated by reference to the C-
space (Boisot, 1986, 1987), a conceptual framework that relates the extent to which
transactionally relevant information can be diffused, and hence shared, within a target
population to how far it has been codified. Codification, the selection and compression of
data into stable structures (Shannon 1948), is a matter of degree... (ibid. 602)
145
It is very critical, because
An institutional order can be thought of as the center of gravity of a scatter of transactions

in the C-space and a change of institutional order as a shift in the center of gravity...In
reality, all the institutional forms depicted in Figure 1 are likely to find a niche within a
given institutional order, even if one of these forms predominates (ibid.).
106. Because of the presence of Chinas administration in its economic order, its codification of economic
transactions remains not well up to the level of Western bureaucracy; its limited increase remains
incomparable with a rapid increase of its diffusion of economic transactions. Ibid. 623: Despite this
limited reliance on codification, there is an increase in the diffusion of economic transactions within
Chinas economy.
107. According to Boisot and Child, the network can be called a quasi-market because it is not codified,
and it is divergent from Western industrial networks in conception and practice (ibid. 613): T h e Chinese
system of networked transactions, however, is relatively uncodified, and it is based on trust and
longstanding personal connections. It doest not therefore fit with Western analyses, nor is there reason to
suppose that the Chinese system is merely in transition to a Western model; quite the contrary. For
instance, the rapid spread in China today of modem technology for personal communications (such as
mobile phones) is actually reinforcing the system by removing some of the constraints on the diffusion of
personalized transacting previously imposed by low levels of clan-type networks that achieve a measure
of market coverage through relatively uncodified, personal means. It facilitates the extension of economic
fiefs into clan-type networks that achieve a measure of market coverage through relatively uncodified,
personal means.
108. The local operations of such networks for Chinas development are described by Boisot and Child as
follows (ibid.): In the cases known firsthand to the writers, the initial moves in establishing these alliances
were made by the enterprise director approaching persons from his home town in other units who were
acquainted with him personally. Later on, endorsement from the relevant government ministry became
necessary to ensure the support of local government departments and encourage coordination between
them. Once in operation, integration between the constituent units of these alliances appears to depend
heavily on close personal relations among senior managers and, to some extent, the interlocking of roles
between the units.
109. By that the control over the SO Es is internalized mainly through the networks, characteristic of fief
like organizations, whereas the control over the non-SOEs is more reliant upon a wider network of
external organizations, characteristic of clan-like organizations.
110. Namely, their findings on Chinas unique networks could stimulate further research probes into what
types of institutions really affect transitions and how Western conventions on privatization and property
rights play nay role in economic development. How can one address the North and Thomas 1973 Model
(ibid. 614; i.e., which insists that private property rights provided the incentive and economic rationality for
the West, and therefore are the ultimate driver for modem economic development)? And how can one
compare these contexts? Ibid. 614: Arguably the seminal text in the modem debate is that of North and
Thomas (1 9 7 3 :1 5 7 ),who maintained that the key factor explaining the 'rise of the Western world was the
evolution of 'a set of property rights that provided the incentives necessary for sustained growth; they
attributed economic failure, including that of 'much of Latin America, Asia and Africa in our times to
'inefficient property rights. A large literature has emerged, arguing on both theoretical and practical
grounds that, with certain exceptions, state ownership of industrial assets is incompatible with efficient
operation. This argument has shaped the policy advice received by developing countries, often as
condition of further aid from the Bretton Woods organizations...
146
111. In this regard, the inquiry we could refer to might be very fundamental and comprehensive such as:
Is the structure moving toward privatization and, if so, how? What is the structures of institutional base?
How likely is it to succeed without going through rational-legalized and formal bureaucracy? What is the
nature of Chinas marketization, and Chinas privatization? How can one refer to capitalism without
referring to privatization? As revealed in Figure 2.12a, so far it has been hard to find strong support for a
close association between re-privatization and transitional performances or efficiency improvement
among the erstwhile planned economies of the post-1989 era. In this respect, Boisot and Child retained
their suspicions of the legitimacy of many institutional forms that emerged during Chinas transition.
112. Ibid. 619: The combination in contemporary China of decentralization from central authorities with
the bottom-up dynamic provided by township and village enterprises leads to a perspective on the role
that government can play in facilitating business networks at the local level that is quite different from
Western experience. Tu (1993: xi) observe that the collusion of state and entrepreneur made for a
peculiar economic strength: The interdependence of economy and polity is such that the state plays a
vitally important role at all levels in removing structural impediments to development and building
necessary infrastructures for manufacturing industry, commerce, and trade. The mixed pattern is certainly
not a socialist planned economy, nor is it a Western capitalist system. The so-called township village
enterprise is a new animal, a species in economic development that has yet to be properly defined.
113. Note: Biggart and Hamilton's 1992 propositions are:
Proposition 1: The markets and hierarchies perspective, when applied to the modernization
process, assumes that policy options are located along a single dimension with the state
(bureaucracies) at one extremity and autonomous firms (markets) at the other. This
perspective assumes, therefore, that decentralization involves a transition from
bureaucracies to markets. A C-space analysis indicates that it is also possible to
decentralize at a lower level of codification than it implied by the markets and hierarchies
perspective. In that case, the move will be from fiefs to clans (my note here: the benefit from
this view is that it may avoid a conventional stereotype that transition to capitalism must
through a revolution in state bureaucracy for privatization, since it may be realized come
through information and network resolution in infrastructure, and other aspects).
Proposition 2: China offers an instance of such decentralization, and in so doing, it is moving

not toward a market order, as it claims, but toward a form of economic organization that can
be labeled network capitalism and that to a large degree appears to be characteristic of East
Asian societies.
Ibid. p. 624.
114. Such as, Whitleys theorem like "control over economic resources is decentralized to private owners,"
ibid, p. 609; also cf. Whitley 1994.
115. cf. Chinas hot economy on pace for 7% growth by Steve Fries Special to USA Today in USA
Today, 13B, Wed. Sept. 12, 2001: ...T he government spent the 1990s pushing a litany of reforms now
starting to take hold, from allowing the urban public to buy property to liberalized rules on how foreign
companies can operate here to privatizing government-owned conglomerates...'In another 10 years, this
will not be a state-owned economy, he [Kim Woodard, chairman of Javelin Investments, a consulting firm
advising mid-size US companies on China] says. 'This normalization is the reason why you see this surge
in foreign investment.
116. Ibid. 115 (emphasis mine): The local government-driven process of privatization and
restructuring...raises important questions: W hat are the economic and political foundations on which this
reform rests? W hat are the incentives of local governments to privatize and restructure the firms under
their supervision? W e argue that federalism, Chinese style - a result of the decentralization of
147
government in Chinas earlier reform (Montinola, Qian, and Weingast 1995; Qian and Weingast 1996) -
has provided an adequate foundation and created appropriate incentives for local governments to
undertake this reform. Federalism. Chinese style, is therefore a key to the understanding of economic and
political dynamics underlying privatization in China...W e begin by defining a specific form of federalism
called market-preserving federalism. This type of federalism requires that, first, local governments have
the primary authority and responsibility for their local economies: second, they are subject to hard budget
constraints: and third, they are unable to insulate their economies from outside competition (Weingast,
1995; Qian and Weingast 1996). As compared with the central government, local governments are more
likely to be subject to hard budget constraints (McKinnon 1997). They may also possess less regulatory
power under the mobility of goods and factors.
117. According to Cao, Qian, and Weingast (1 9 99 ,1 05 ), privatization and restructuring of SOEs in China
are new phenomena and are quite different from other transition economies.... Ibid, 123: Our main
thesis is that privatization, Chinese style, rests on an economic and political foundation of federalism,
Chinese style. Local government privatization works reasonably well because these governments are in a
better position to address economic and political issues through localized privatization programs. More
importantly, we also argued that the federal structure provides the local governments with the incentives
to privatize. Hard budget constraints, combined with increased competition from the non-state sector,
yield strong financial pressures for many local governments to address S O E problems.
Ibid. 106: ...federalism, Chinese style (Montinola, Qiann, and Weingast 1995; Qian and Weingast 1996),
has created an adequate economic and political foundation for the earlier reforms in China. In this paper,
we argued that federalism, Chinese style, has also induced what we call privatization, Chinese style.
Ibid. 116: Hardening the budget constraint has been a major object of the reform. In Eastern Europe and
the former Soviet Union, reformers attempted to use privatization as a way to harden budget constraints
of enterprises. In China we observe a different path: the hard budget constraint of local governments
induces privatization of enterprises under their supervision. W e emphasize that both fiscal and financial
reforms between 1994 and 1996 in China have played important roles in hardening the budget
constraints of local governments. These reforms effectively corrected some problems arising from the
decentralization of the 1980s (Qian and Weingast 1996). Yet, the fundamental feature of decentralization
remains: local governments continue to assume primary responsibility for managing the local economies
and have their own revenue sources.
118. cf. Cao et al. 1999, 125: This pattern of reform also demonstrate a fundamental change in the role
of the central government before and after reform in China. Under Mao, the central government forced all
regions in the country to copy the same model, such as Qiliying Peoples Commune of Henan province
during collectivization in the 1950s and D azhai Production Brigade of Shanxi province for agricultural
development in the 1960s and 1970s. This 'one size fits all approach allowed no independent
experimentation, no adaptation, and no local government autonomy of choice. This approach to
institutional change failed miserably. After 1978, reform took place within the framework of federalism,
Chinese style. This system has altered the roles of the central and local governments in fundamental
ways. First, in the various reform episodes after 1978, the central government did not attempt to establish
'the model of reform, let alone force local governments to copy it. Second, local governments have had
the authority to decide on the form and speed of the reform and to adapt reform to local needs. Given
hard budget constraints and an open economy, local governments cannot afford to make big mistakes for
an extended period of time. From the perspective of cross-country comparisons, economic reform,
Chinese style, also differs considerably from economic reform in Eastern Europe and the former Soviet
Union, which is far more centrally driven...we note here that the pattern underlying economic reform,
Chinese style, is not an accident. There is a political logic for it. Again, the initiatives of local governments
and the tolerance of, and later promotion by, the central government are predictable consequences of
federalism. The federal perspective provides important insights to the economic and political dynamics
underlying privatization, as well as other reforms, in China. Indeed, reform in China depends on the
incentives of local governments, large numbers of which seek to promote economic gain and remove
sources of economic inefficiency.
148
119. Also cf. Qian and Xu 1993b, p. 135: Recently, there has been a revived interest among economists
in Chinas economic reforms. Since 1979, economic reforms in China have generated a significant growth
across the board: the overall performance of the Chinese economy has been better than its own past
record, better than most developing countries at similar development levels, and also better than Eastern
Europe and the former Soviet Union, both before and after their radical transformations in 1989. It
appears that China had no coherent reform programs, no commitment to private ownership, and no
changes in the political system, and Chinas economy was still not fully liberalized. From both the
theoretical and policy perspectives, Chinas different reform strategies and outstanding reform
performances are particularly interesting and puzzling.
120. Shanghai is now becoming the most successful reforming center in China. This might suggest that
fast growth in some regions cannot be even explained by whether or not these regions were once
strongly controlled by the state government. Rather, the growth is most likely attributable to Chinas
institutional reforms led by the state. Thus we would argue that it has been the states reforms that have
generated Chinas fast growth in transition.
121. cf. 1999b, 136: What is more important, but tends to be neglected, is the economic stagnation in
Eastern Europe and the Soviet Union in the decade of the 1980s before the radical changes. According to
official statistics, the average growth rate of GDP in Hungary was 1.8% between 1981 ad 1985 and almost
zero in 1988 and 1989. In Poland, the average GDP growth rate was less than 2% between 1981 and 1989.
The situation in the Soviet Union was no better. Also cf. 1993a, 542: The Eastern European radical
transition came after deep troubles or failures of many years of gradual reform. If Chinas gradualism is a
success, why has it worked in China but not in Eastern Europe?
122. Also cf. 1993b, 140 (emphasis mine): From 1978 to 1991, the share of the non-state sector in national
non-agriculture employment increased from about 40% to 57%. However, this happened not because of
privatization or conversion of state enterprises to non-state enterprises. It is mainly due to entry and
expansion of new non-state enterprises. In fact, employment by the state sector increased from 75 million
in 1978 to 107 million in 1991. Its share declined because employment in the non-state sector grew even
faster: from 21 million to 44 million in the urban area and from 28 million to 96 million in the rural area
during the same period.
123. Also cf. 1993b, 141 (brackets and emphasis mine): ...the substantial entry and expansion fof the
non-state sectorl occurred not because of an intentional design of a reform program from the central
government: on the contrary, it came largely from local initiatives. The central government's tolerance is
mainly because it solves unemployment problems without much financial support from the state.
124. cf. Qian and Xu 1993b, 138: The U-form referred to the unitary organizational form of the firm along
functional lines in the second half of 1800s and early 1900s, while the M-form referred to the multi
divisional form of the firm organized by product, by technology, or by geography, which emerged since
the 1920s. Compared with departments in the U-form firms, divisions in the multi-divisional firms are more
self-contained and their responsibility for coordination and profit inside the division is high. The regional
governments in our multi-layer-multi-regional structure economy share these features. However, our
concept is not simply an application or an extension of the Chandler-Williamson concept from firms to
economies. There are important differences between the two concepts. In a multi-divisional firm,
decentralization occurs exactly at the level of general office and the divisions, and each division is often
organized by functions. In contrast, in our concept of the M-form economy, decentralization occurs at all
levels of the hierarchy, that is, the M-form is deep. This is critically important..."
125. Also cf. Qian and Xu 1993b, pp. 142-3: The phenomenal entry and expansion of the non-state
sector distinguishes Chinas reform from the Eastern European reforms. Among many reasons which may
explain these phenomena are the institutional differences between the (deep) M-form organization in
China and the U-form organization in Eastern Europe and the Soviet Union, and the subsequent Chinese
149
reform policies of further decentralization along regional lines which had a major influence of both the
transition path and performance.n
126. Also cf. Qian and Xu 1993b, 142: In Eastern Europe and the Soviet Union the economies were
organized in the U-form in which hierarchical information flow and control were organized into a unitary
form by functional or specialization principle. Most enterprises were grouped by industry and under the
direct supervision of ministries, and regional governments were primarily subordinates of the centre and
their roles were limited to collecting information from below and implementing plans from above without
much autonomy. In order to utilize fully economies of scale and to avoid conflicting operations, there was
little overlapping of functions among ministries in a U-form hierarchical economy. Enterprises were highly
specialized and their sizes were extremely large. This lead to extraordinary industrial concentration.
Because of the strong interdependence between enterprises across different regions, comprehensive
planning and administrative coordination between ministries at the top level of the government were
crucial for the normal operation of the U-form economy in the absence of the market. To show the
complexity, for example, in the late 1970s there were 62 ministries under the Gosplan in the Soviet
Union.
127. Ibid. (brackets mine): When the M-form economy was further decentralized along regional lines in the
reform and the constraints on local government were gradually removed, the bottom level [of] regional
governments (i.e., townships and villages in the rural areas, and districts and neighborhoods in the urban
areas) gained substantial autonomy in developing their own regions. They established enterprises outside the
state sector and outside the plan...
128. Ibid. 155: During the administrative decentralization in 1958 and 1970, a large number of small non
state enterprises emerged under local governments' support. Because those enterprises were outside the
scope of planning, the market price on top of the planned price had to be tolerated for these enterprises
survival. In the Cultural Revolution, the central planning system was crippled, and input allocations to
many state-owned enterprises were not guaranteed by the plan. Thus, horizontal cooperation (hengxiang
xiezuo) between regions and between enterprises, including semi-legal black markets and barter trading,
started to develop within the state sector.
129. Here Qian and Xu added their endnote (26): 'O ur territory is so vast, our population is so large and
the conditions are so complex that it is far better to have the initiatives come from both the central and the
local authorities than from one source alone. W e must not follow the example of the Soviet Union in
concentrating everything in the hands of the central authorities, shackling the local authorities and
denying them the right to independent action. ' The central authorities want to develop industry, and so
do the local authorities. 'T h e central authorities should take care to give scope to the initiative of
provinces and municipalities, and the latter in their turn should do the same for the prefectures, cities,
districts and townships; in neither case should the lower levels be put in a strait-jacket (Mao 1977) (ibid.
160).
130. cf. Qian and Xu 1993b, 147-8: ...the organizational features of the multi-layer-regional form of
hierarchy in China are (i) organization mainly by territorial principle in addition to functional or
specialization principles; (ii) each region is relatively self-contained and interdependence between regions
is relatively weak; (iii) coordination at all levels is important but at the top it is not particularly critical: (iv)
the size of enterprise generally is small and industries are less concentrated; and (v) the above features
extend to many levels down to the very bottom... One of the differences between M-form economy and M-
form firm is...the M-form economy in China is a multi-layer one, or it is deep. Ibid. 148: ...C hinas multi-
regional form shares several essential properties of multi-division firms: each operating unit (division in a
firm and region in an economy) is self-contained, much of the coordination is delegated to the operating
unit, performance evaluation of each unit is based on comparisons of performance between units.
Also cf. 1993a, 544: ...a multi-layer-multi-regional form, in which each geographic region at each layer can
be regarded as an operating unit. Each unit is further divided along geographic lines and at the same time the
150
unit controls its own enterprises along functional lines. Operating units (regional governments) are semi-
autonomous and relatively self-sufficient in terms of functions and supplies in production...The hierarchical
structure of each region at each level is a copy of that of the central government. For example, a county has
about 10-20 townships. The county government controls the enterprises affiliated to the county government
by functional like and specialization principle (e.g., finance bureau, textile industry, etc.), and it also oversees
township governments within its territory. Similarly, a township controls its own enterprises in addition to the
oversight of its villages..."
131. Ibid. 146: Consider, for example the fiscal sharing schemes between the central and provincial
(local) government. There are two categories of revenue incomes in any province: central revenues and
local revenues. Division between the central and local revenues is by source (for example customs duties
are central revenue and turnover takes are local revenue) and by affiliation of enterprises (for example,
profit taxes from centrally-controlled enterprises are central revenue and those from provincially-controlled
enterprises are local revenue). Only local revenue is subject to revenue sharing, and there have been
four major types of sharing schemes (Wong 1992): (A) To remit a lump sum (possibly with an annual
increment) and retain the rest. (This was applied to only two experimental southern provinces,
Guangdong and Fujian, first); (B) To remit a portion which is fixed for four to five years. (This is for the
majority of provinces); (C) To remit a portion which is set annually. (This is applied to the three cash cows
if industrial cities (which have provincial ranks) of Beijing, Shanghai and Tianjin); (D) To receive a fixed
amount of subsidies. (This applied first to four poor provinces in the Northwest, and later to a total of nine
provinces). Starting from 1988, most provinces shifted to schemes (A) and (D), which have the strongest
incentive effects. For example, Shanghai entered into a contract with the central government to remit a
fixed 10.5 billion yuan since 1988.
132. See Section 5.2 in our Chapter 5. Those important measures taken by the state include: a. financial
decentralization: the Central Bank in 1984 created a 2-tier system (i.e., a public establishment of the
division of labor between central and local banking institutions in their respective rights and
responsibilities for revenues and expenditures), with more rights decentralized to the local governments
for financing the new entries of local enterprises (such as TVEs); b. fiscal decentralization: the state
ratified tax reforms that created 4 new indirect taxes, including VAT, the enterprise taxation (enacted in
1984-5), i.e., profit remittance to the state being replaced by partial taxation at negotiated rates of profits
with depreciation, and post-tax profits retained by enterprises (enacted in 1986), through which the
central government enters into "fiscal contract responsibility system" with local governments.
133. cf. 1993a, 542: Although the reasons for the rapid expansion of the non-state sector in China may
be many, we argue that one of the keys in understanding the phenomenal expansion of the non-state
sector in China is the organizational structure of the hierarchy prior to the reforms. Also cf. 1993b, 137:
W e argue that the difference in the initial institutional conditions concerning the organizational structure
of the planning hierarchy plays an important role in the different transition paths of China and Eastern
Europe and the former Soviet Union.
134. 1993a, p. 547: ...the community governments ability to mobilize financial resources are very
limited. The low bargaining power of community governments disables them from bailing out loss making
community enterprises, thus enabling them to commit to terminating troubled enterprises. Therefore, the
budget constraints for non-state enterprises are actually much harder than for the state-owned
enterprises.
135. 1993a, p. 546: At bottom levels, without much investment funds allocated from above, the
community governments turn to set up or support non-state owned enterprises. Both the weak bargaining
power and the semi-autonomous position deeply affect the incentives and behavior of local governments.
With less gains in bargaining within the hierarchy, local government officials pay less attention to
bargaining with the authorities above them. With more chances to earn money in the market, more
attention is given to community enterprises.
151
136. cf. 1993b, 137-8 (emphasis mine): O f course, administrative decentralization induces, at the initial
stage, costs of regional conflict, market protection, wasteful duplication, inefficient small scales of
production and increased administrative intervention by local governments. W e do not argue against
these opinions but we would like to focus on a neglected but important aspect of the benefits of a multi-
laver-multi-reaional form of organization, that is. the flexibility of the system for experiments and hence for
institutional changes, and the opportunity provided to facilitate entry and expansion of the non-state
sector outside the plan."
137. Cao and Qian et al. added here that There are no nationwide statistics for the extent of
privatization. As they explained in the footnote, ...figures in various issues of China Statistical Yearbook
do not reflect the true picture, because after privatization enterprises may take many different corporate
forms and they may still be recorded as SO Es in many cases (ibid. 109).
138. cf. 1993b, 137: Under the M-form organization in China, interdependence between regional economies
is not as strong as that of the U-form organization in Eastern Europe and the Soviet Union, because each
region is relatively self-contained." Unlike in Eastern Europe and the Soviet Union, regional governments in
China (be they province, county, or township, village) have had considerable responsibility for coordination
within the region. In particular, a large number of state-owned enterprises, including many in heavy industries,
were subordinated to the regional governments even before the economic reforms. Hence, each region was
relatively self-sufficient, the scale of an enterprise was small and industries were less concentrated. In this
environment, regional experiments can be carried out in a less costly way because the disruptive effect to the
rest of the economy is minimal. A successful experiment in one region also has greater relevancy to other
regions since adjacent regions are similar.
139. 1993b, 149: ...U-form economy is more fragile to external shocks. In contrast, with many duplications
and a weak interdependence between units of the M-form hierarchy, the adverse effects of an external shock
to one or several units on the whole organization will likely spread in a slower and weaker way. That is, the
effects of shocks in an M-form hierarchy can be localized. cf. 1993a, 546: Different forms of organizations
have also different responses to exogenous shocks. When an exogenous shock (say, a supply disruption or
a change of rales) hits one unit of the U-form organization, the trouble of that unit may spread to the whole
organization due to strong complementarities. In contrast, when the operation of one or several units in an M-
form hierarchy is affected by exogenous shocks with a weak interdependence between units of the hierarchy,
the adverse effects will be spread to the whole organization in a slower and weaker way. That is, the effects
of exogenous shocks on an M-form hierarchy may be localized. This is another reason why the M-form
hierarchy is more suited to regional experiments.
140. Ibid.: The effects of region-specific shocks and industry-specific shocks to the U-form and M-form
economies are also different. In the U-form economy, regional shocks affect not only the local economy but
also affect the whole economy through strong regional interdependence. The adverse effects of the collapse
of the CMEA is a good example.
141. Ibid. 156-7: Denationalization is a transformation process which includes successful-non-state

enterprises taking over or merging with state enterprises; state enterprises are converted into joint
ventures with either domestic or foreign non-state enterprises; state enterprises are reorganized into joint-
stock companies etc. In either case, the transformation may include the sale of small-sized state
enterprises or sale of parts of large- and medium-sized state enterprises. In fact, recently takeovers and
mergers by the non-state enterprises have already emerged in China and reorganization to joint-stock
companies has also become a fashion...It is decentralized because non-state properties are not owned
by the central government; it remains socialism because properties are owned by organized communities
like townships or villages (von Mises 1981). W hat is less clear at this point is whether this type of
decentralized socialist ownership is a mere transition phenomenon, or whether it is sustainable for a long
time. In any event decentralized market socialism is clearly a unique outcome of Chinas gradual
transition process.
152
142. Ibid. For this reason, Chinas experience cannot, and should not, be simply copied to other
economies in transition.
143. See our Chapter 4 about theoretical assumptions and methodological issues of the variations across
transitions and Chinas background-characteristic transition.
144. Note: This recognition is actually consistent with Cao, Qian et al.s 1999 version on relaxation of the
ideological constraints by Chinese central government and in their treatise about the late privatization of
Chinas SOEs. In this work, they also addressed the political logic behind Chinas decentralization reforms -
federalism, Chinese style.
145. Here is the Qian and Xus original endnote (37): During the 1990 retrenchment, the central
government tried to remove fiscal revenue sharing schemes and to re-centralize investment decisions,
but encountered strong opposition from the governors of provinces led by the Guangdong Governor and
gave it up (ibid. 161).
146. Ibid. 152: The M-form organization is directly responsible for fast entry and expansion of the non-state
sector under the condition that the existing hierarchy is not destroyed in one stroke.
147. Ibid. A municipality is treated as one of the levels of province, prefecture or county, with a majority
being at the level of a prefecture.
148. According to them, M any urban collectives are subsidiaries of state-owned enterprises which
receive some transferred assets from the parent firms and hire their surplus employees or the employees
spouses and children. The advantages of subsidiaries being registered as collectives under the
supervision of lower level government are less government control and more business flexibility. (1993b,
139).
149. Here Qian and Xu added their endnotes (45): It is estimated that there are about 70 million 'floating
migrants' every year in recent years in China looking for temporary jobs (People's Daily, Overseas
Edition, p. 8, March 10, 1993)" and (46): For example, specialized banks in the Zhongshan municipality
of Guangdong province borrowed about 2.1 billion yuan through inter-bank loans from other regions (Qian
and Stiglitz 1993). In 1992, total bank deposits in Hainan province (now a special economic zone) were
20bn yuan, increased by 142.6% over the previous year and most of the increase were deposits from
other provinces (Peoples Daily, Overseas Edition, p. 2, March 3 ,1 9 9 3 ) (Ibid. 161).
150. As for the dual price system, for instance, Qian and Xu elaborated (ibid. 155; emphasis mine) that W e
focus on a different effect of the dual price system. If for some reason the price cannot be liberalized at one
stroke, introducing legalized markets for ajl goods (an important distinction between Chinese reforms and
Eastern European reforms before 1989) has a critical benefit for facilitating entry and expansion of the non
state sector, although it is at the margin and is imperfect. This is because a necessary condition of fast
growth of the non-state sector is the existence of markets for intermediate goods which include capital goods
and materials. Although the state sector faces two prices for one product, the non-state sector faces only one
price, the market price. In a more or less competitive environment with market price signals, the non-state
enterprises are likely to be more efficient than the state sector, which is essential for fast expansion of the
non-state sector.
151. Ib id .: W e deliberately avoid the issue of the state sector. Evaluation of the reform in the state-sector
has been controversial among China experts and Chinese economists.
152. Because as Komai might insist, how could one conceive of these economies on their own
generating and reproducing efficient mechanisms of resource allocation while annulling indispensable
market institutions?
153
153. Ibid. p. 621: "It is important always to recall that in China government straddles several hierarchical
levels, and the resolution of the relationship between these levels in economic governance is inherently
problematic".
154. In comparison, we may cite the parallel arguments by M. Meisner in 1996 about TVEs and the
socialist nature of the current institutional reforms in China, which, I think, reveal something hidden
behind Qian and Xus convictions, cf. M. Meisner 1996, p. 518: In recent years, the hope that the existing
system can be reformed in a genuinely socialist fashion has focused on local rural industries and what is said
to be their collectivist, communitarian, and democratic potential. The importance of township and village
enterprises (TVEs) is undeniable. They constitute by far the most dynamic sector of the Chinese economy,
the value of their extraordinarily diverse output having increased at an astonishing annual rate of about 30%
since 1980. The TVEs employ well over 100 million workers and it is this rural industrial sector, not
agriculture, that has been the main source of rural household income growth, especially since 1985. Yet,
however economically successful, there are numerous considerations which counsel skepticism about the
socialist potential of rural industry. While rural enterprises are officially described as part of the collective
sector of the economy, the meaning of 'collective is ambiguous and actual ownership and control of the
TVEs is obscure. While a small number of rural industries are collectively owned and operated by their
workers, and a substantial number are privately owned, the great majority are owned or controlled by local
governments. A considerable number of the latter, however, are contracted or leased to private capitalists,
both foreign and domestic, and have become de facto privatized; others are operated under complex
partnership and share-holding arrangements where ownership and control are particularly ambiguous. But
the great majority of rural industries are owned and managed by local government organs. It is by no means
clear who the real beneficiaries are. There is not yet sufficient evidence to judge if this is a successful form of
'municipal socialism, as characterized by one observer, or another manifestation of bureaucratic capitalism
where the greatest profits go not to the local community but rather to the officials who govern the community.
In either case, rural enterprises operate in a larger market economy and must conform to the rules of the
capitalist market, including the exploitation of wage labor. And it is precisely the commodification of labor-
power, as Ellen Meiksins Wood has forcefully pointed out, that 'places the strictest limits on the 'socialization
of the market and its capacity to assume a human face. While there is considerably less naivete today about
the magic of the market than there was in the early 1980s, there is a strong reluctance among Chinas
remaining socialist intellectuals to acknowledge fully the deleterious social consequences of market
relationships. They would prefer to believe, now that the Dengist regime has gone so far in erecting a
capitalist economy, that it is possible to utilize the economically beneficial aspects of the market without
suffering its destructive social and ecological consequences. It must also be noted that the belief in the
socialist potentialities o f rural industry, even supposing that the TVEs actually have all the collectivist virtues
sometimes attributed to them, assumes the cooperation of a beneficent state...
155. cf. China sells the scenery - Nation lets private companies develop natural wonders; critics foresee
desecration; Jade Peak Gorge aims to set up a panda-research center. 'Foreigners like pandas, an
official says by Peter Wonacott, staff reporter in Jade Peak Gorge, China for the Wall Street Journal in
Wall Street Journal, B 1, B3, W ed. May 23, 2001 (myself add the underlined): A long and winding trail
here in Chinas first privately operated nature reserve leads from the top of a 110-foot rock face to a
crashing waterfall below, but few visitors use it. Instead, they head for an elevator that takes them to the
waterfall and back - and the parks operator, Ten Million Cash Holdings, rakes in $2.40 per passenger for
each round trip. Ten Million Cash, realizing that people generally prefer convenience to leg cramps - and
will pay for it - is nothing if not s a w y about the business of tourism. That acumen, drawing hundreds of
daily visitors to this area of evergreen forests and mountain rivulets, has prompted the Sichuan Tourism
Bureau to back a proposal to hand over another 10 parks to private developers; if that works out, an
additional hundred scenic sites could follow. All over China people are watching Sichuans lead. Already,
foreign and Chinese companies are exploring investments at some of the countrys landmark reserves,
one of which, Sichuans Jiuzhaigou Valley, has been designated a World Heritage Site by the United
Nations Educational, Scientific and Cultural Organization. The moves highlight how fast and far the
privatization ethos in China has spread - and also its costs. In fact, Chinese leaders attempt to fuel
growth in the nations most impoverished western areas has sparked a roiling debate over how the nation
154
manages its national parks and scenic treasures...Selling development rights to parks represents a
logical step in a nation rapidly - and sometimes chaotically - shifting assets into private hands. Backers
of the Sichuan plan believe private businesses can better develop tourism. And by screening developers
and limiting their numbers, the government hopes to contain commercial sprawl. Critics, however, worry
that hundreds of scenic spots will be sacrificed and China's natural and cultural heritage will be
trampled...'You cant boost tourism and have absolutely no impact on the environment,' says Wang
Xiaogang, a researcher who advised the Sichuan government on the park plan. 'But if the rural economy
doesnt grow, people dont eat....The commercialization of Jade Peak Gorge has its roots in well-
intentioned policy. Beginning three years ago, local residents saw their income from lumber sales - the
main source of livelihood, for 80% of the local population - shrivel in the wake of a nationwide ban on
logging. The ban halted widespread deforestation, which had exacerbated summer floods. But it also
made a poor area poorer...Economically, Jade Peak Gorge is an unqualified success. Last year, after its
first full year of operation, Ten Million Cash had an after-tax profit of $3million. During this years week-
long May Day holiday, the reserve reported 138,000 visitors, up 30% from last year.
156. Ibid. (emphasis mine): 4.3.1 Relaxation of the ideological constraints: role of central government.
The process of privatization and restructuring in China has been mainly driven by local government. This
does not mean that the hand of the central government is absent. After all, the central government retains
ultimate ownership rights to all SO E assets (Qian 19961: changes in SO E property rights therefore reguire
the central governments (sometimes tacit) endorsement. The willingness of the central government to do
so is driven by the local governments. To a lame extent, the central governments ideological constraint
has become relaxed because of the local incentives. This is evident from the recent endorsement of
privatization by the Fifteenth Party Congress, which is a result of the widespread practice which has taken
place at the local level for several years. Relaxation of the ideological constraint in turn encourages local
governments to push privatization even further because it reduces the costs of privatization due to
political risks.
4.3.2 Inside control of SOEs: the role of SOE managers. The SOE reform of the 1980s, attempting to
expand enterprise autonomy under the 'contract responsibility system, produced an important legacy for
the 1990s. It created a tendency toward what is known as 'inside control. That is, enterprise managers
(often colluding with workers) used their effective control over the assets of SOEs to benefit themselves
at the expense of the state (Qian 1996). In the extreme form, managers steal money and assets from
enterprises. Indeed, the so-called 'state asset stripping problem has increased at an alarming rate in the
past few years (Qian 1996). W e observe that increased inside control of SO Es reduced profitability of
SOEs even without increasing their inefficiency. This source of losses consequently reduces the benefits
for local governments to maintain these SOEs. The local governments know that these SOEs are likely to
become profitable if managers are converted to owners and their incentives are subsequently changed.
This makes privatization more attractive to local governments. A related possibility is that managers of
SOEs bribe the local governments to support privatization. The increased agency problem of managers
alone may not be sufficient to provide the local government with enough incentives for privatization for
two reasons. First, although the aoencv problem reduces the profitability of SOEs. without competition.
the government can still eniov considerable monopoly rents, as in many monopoly SOEs under the
supervision of the central government. Second, without a hard budget constraint, governments may still
have little incentive to private loss-making firms.
157. Ibid. 123: In summary, local governments incentives for privatization and restructuring depend on
the costs and benefits of the alternatives. Local governments can be an inducement for efficiency-
enhancing privatization and restructuring when they are under hard budget constraints and facing market
competition."
158. Ibid. 125 (emphasis mine): Part of the reason we project that the central government will eventually
privatize some the largest SOEs is that it too faces the same financial incentives as local governments:
Once the central government gives up its monopoly in the key industries, maintaining inefficient
enterprises is too expensive. And once local governments have shown the way - especially shown that
155
workers do not become destitute - there will be far less political resistance. O f course, the central
governments task is made easier in China than Eastern Europe and the former Soviet Union because
there are so many fewer large SOEs. Nonetheless, if this project pattern holds. SOE reform will provide a
strong case in favor of our thesis that federalism. Chinese style, underlies the process of economic reform
in China.
159. Ibid. 125: From the perspective of cross-country comparisons, economic reform, Chiese style, also
differs considerably from economic reform in Eastern Europe and the former Soviet Union, which is far
more centrally driven. A more detailed comparison from this perspective awaits further research (see
Qian and Xu 1993). But we note here that the pattern underlying economic reform, Chinese style, is not
an accident. There is a political logic for it. Again, the initiatives of local governments and the tolerance of,
and later promotion by, the central government are predictable consequences of federalism. The federal
perspective provides important insights to the economic and political dynamics underlying privatization,
as well as other reforms, in China. Indeed, reform in China depends on the incentives of local
governments large numbers of which seek to promote economic gain and remove sources of economic
inefficiency.
160. Cao and Qian et al. added their endnote here that The third area of reform contains more difficult
economic and political problems facing the central government, Some of the reform practices (such as
merger and conglomeration) may not even be in the right direction (World Bank, 1997)" (ibid. 105). But
the current data show this trend along with Chinas soon impending access to the W TO.
156
Chapter 3
Criticisms of the Three Institutional Models of Chinas Transition
his Chapter will give our evaluation and some of our criticisms of the three models of Chinas
economic transition presented in Chapter 2. In Chapter 4 I will propose an alternative model of
Chinas economic transition.
3.1 A brief review of the three institutional models
3.11 Sum m ary o f the three institutional m odels
Table 3.11a summarizes the main features of the three models presented in Chapter 2:
Table 3.11a: Sum m ary o f th e th ree m odels o f C h in a s transition
Nee: 1 9 8 9 ,1 9 9 2 B&C: 1996 Q&X: 1993
Perceived m acronn- Market-oriented Network-linked Hierarchy-induced

stitutional dynamics
Theses on Chinas
Institutions
in Transition
Transition of Rebuilding of market Transition of information Regionally-based

institutions institutions; networks from fiefs to decentralization &
clans; denationalization;
Dilemmas of State vs. market binary; Information codification vs. U-form vs. M-form
institutions information diffusion; hierarchy;
Thrust on Irreconcilable dilemmas Duality conducive M-form hierarchy prompting

dilemmas between market and to transition with local initiatives competing
in China's state with mixed momentum in informal between formality and
transition consequences; soft sector; repugnant informality; dilemmas
budget problems in dilemmas reconcilable; reconcilable;
formal sector;
Thematic focus Privatization of SOEs Centrality of network Devolution of formal

Efficiency concerns; & informal sectors sectors & boom in TVEs;
to market transition;
Core feature of Overall re-privatization; Communal form of Primacy of COEs, TVEs;

ownership in property rights;
transition
157
(Table 3.11a to be continuous)
Nee: 1989,1992 B&C: 1996 Q&X: 1993
Information Toward least Toward personal Toward a localized mix

access in personalization in relationships in (semiformal);
transition charge of codification charge of diffusion
(formal); (informal);
Key mechanism Hard budget constraints Switch of network Economic devolution &
to transition & incentive structure; relationships for access to regional coordination;
information and resources;
Transitional Arms-length market Information flow & Hierarchical decentralization

dynamics competition; relational network; for local initiatives;
rule of law; quanxT as social
embeddedness;
Theses on Chinas
Hybrid Economy
Alternative Marketized vs. non- Private, non-state Central SOEs vs.

classification marketized sectors vs. state sectors local & rural COEs
TVEs, and privates;
SOEs Dilemmas in binary Not focused; Ongoing reforms

market-hierarchy in a M-form
relations (-); hierarchy (+);
COEs Not focused; Duality between Primacy in the

(TVEs) market competition & current transition
state dependence in (+);
transition (+);
Private Primacy in the Momentum in the current Significant (+) but

sector future economy (+); economy (+); restricted by current
system;
Label: + Positive; - Negative.
The above summary by no means exhausts all the many different current views regarding
Chinas economic transition, but they do provide a good starting point.
All three models call attention to macro-institutional environments and the plurality of China's
present economic order" (Boisot and Child 1996, 610). But none of them ask if such a plurality of economic
order could hatch a "civil society in China, be the civil society" democratic or semi-democratic [1].
Arguably, Chinas hybrid economy that started up from its non-state-owned secondary economy might
158
pave the way for such a transformation to civil society. This could occur irrespective of whether the
economy goes mainly through arms-length market competition, as Nee envisioned, or mainly through
network paths in terms of clan-like reciprocity inside and outside state enterprises, as Boisot & Child
assumed, or through the local-govemment-driven competition along with Chinas decentralization in an
M-form hierarchy, as Qian & Xu proposed. The lack of evidence suggests that possibly a democratic
future for China will come through a path of industrial pluralism rather than through a path of privatization.
All three models with variations suggest that Chinas S O E reforms boil down to marketization, or
even to privatization. But all three models fail to perceive the historical context and the inherent dilemmas
in such SO E reforms, i.e., dilemmas shaped by the complex reciprocity between scale economy and
scope economy that Chinas transition inevitably entails. Chinas scale economy has been embodied in its
large-sized SOEs, whereas its scope economy is more concentrated on its diversified and localized mid
sized or small-sized SOEs, COEs, TVEs, and private enterprises. Nee neglects this point in his
discussion of Chinas market transition from a planning regime, as do Qian and Xu in their development
of Chinas M-form hierarchy. Figures and tables in Chapter 2, Sections 2.4, 2.5, and 2.6 show that among
those non-SOE sectors in the 1990s, the private sectors grew fastest, whereas the S O E s share in
Chinas total industrial output actually shrank. The changes occurred because, under the pressure of
accelerated marketization on China's economy [2], many non-performing and badly-performing SOEs
wound up in bankruptcy, while market competition become fiercer, as it was instituted, enforced, and
regulated by the reforming state governments and the banking institutions.
Many of these SO Es were sold to non-SOEs or divested in joint ventures with those non-SOEs or
foreign ventures, or through M&As (i.e., merges and acquisitions by others). This trend, as reported,
continued in breadth and depth. Reformers could not cover up their curiosity and their worries: how far
would this trend go? Could all SOEs ultimately be squeezed out and swamped by growing collective
enterprises such as urban COEs and rural TVEs as well as private enterprises? In 1993 Qian and Xu were
open to such alternatives. While proposing Chinas decentralization and denationalization, they argued that,
159
Denationalization is a transformation process which includes successful-non-state
enterprises taking over or merging with state enterprises: state enterprises are converted
into joint ventures with either domestic or foreign non-state enterprises; state enterprises
are reorganized into joint-stock companies etc. In either case, the transformation may
include the sale of small-sized state enterprises or sale of parts of large- and medium
sized state enterprises. In fact, recently takeovers and mergers by the non-state
enterprises have already emerged in China and reorganization to joint-stock companies
has also become a fashion. With the crowding-out effects of takeover, mergers and
transformation of ownership, the economy will eventually rely more on the non-state
sector. This is perhaps an alternative wav to privatization and a less painful path of
transition for China (1993b, 156; emphasis mine).
The unexpected, and perhaps unintentional, growth of the non-state sector is critical for
the success of Chinas economic reforms (1993a, p. 542).
But the data sets of the fast growth of Chinas non-state sectors that Qian and Xu collected were
only up to 1991. After that the expansion of COEs and TVEs decelerated and finally ceased in 1994,
when China accelerated its privatization of the state sector. W hat led the state to accelerate its processes
of privatization? What relationships emerged between state sectors and non-state sectors in the 1990s?
And what roles might SO Es play in Chinas future?
Here I would like to explore the states motivation. China might believe that its SO E reforms have
to deal with not only the urgent efficiency issues and short-term tactics, but also with the long-term goals
through strategies, such as. acquiring core technologies and competences from the capital-intensive
infrastructure, knowledge-intensive industries, and other basio-inputs sectors, etc.. many of which are
considered as public goods f3]. And this is what Chinas scale economy and the politics behind are all
about, insomuch they had often puzzled Chinas reform planners for economic streamline f4]. The state
has to deal with a dilemma between its desire for reforms and its desire for scale economy. Scale
economy could help development with the advantages of large capital and skilled labor pools (cf. Geng
Xiao 1990). A country like China might not want to forfeit its existing advantage of size, for example, for
its currency stability I5], its R&D programs, etc., while streamlining its inefficient SOEs. Redundancy is
often indispensable in such a big economy j6]. When Chinas core industries and competent sectors
consist mainly of large-sized SOEs, transitional China might not want to hurt or possibly even lose those
promising programs by cutting its larger SOEs, even if their performance were relatively poor [7], Even if
inefficient SO Es are cut, sold, or suspended, the state might still have to check its need potential for
160
public goods, economic upgrading, and technical advances in the future. Without its scale economy, the
state might feel it has to act like those small or inferior countries that must rely upon their flexible
adjustments to the contingencies in larger environments as well as upon their other advantages, such as
their geo-structural formation, their access to capital- and knowledge-intensive programs, their
infrastructures, and the industries they badly want. But while committing itself to hold up its strategic edge
with scale economy, the state simultaneously had to bear the brunt of huge costs and risks.
One might acquire some historical vision of Chinas SO E reforms and the dilemma the reforms
might face by looking at Chinas recent history. Under China's former planning regime, state-owned
enterprises and/or public firms were long used as major instruments and large reservoirs for Chinas
capital accumulation. This fact could not be ignored by those planners for Chinas transition as they
sought ways to streamline their SOEs. In the eariy years of Chinas planned economy, when its industrial
base was fragmented and rudimentary, it had developed its economy mainly by establishing larger
enterprises. In the 1960s and 1970s the large-sized SOEs had once absorbed about 40-70% of the
economys gross investment and a huge amount of human capital.
Even when Chinas national economy was no longer reducible to those large SOEs, their status
as m ajor players remained significant to the economy. They could still guide the states economic policies
and direction, and significantly influence the behavior of other sectors of Chinas economy in
management, finance, and production. Chinas transition planners knew that too much streamlining SOEs
too quickly might reduce national prosperity and security and generate massive layoffs. The costly
aftermath could be huge unemployment, extensive public expenditure, etc. Such worries gave them a
reason to delay at least temporarily large-scaled industrial restructuring and structural changes.
Transitional planners knew that the final outcome would have to be a rational compromise of delicate
trade-offs between efficiency and legitimacy, keeping in mind considerations of both scale economy and
scope economy. W e will return to these points in our Section 4.2, Chapter 4.
161
From the perspective of political economy, social relations within and across firms and firms more
formal relations to the state, according to Fligstein in 1996, are pivotal to understanding how stable
markets might emerge f t . They are also pivotal to understanding how complex the choices are between
which planners must choose. Firm competition is based not only on social embeddedness, but also on
the state of the political economy f t . Firm competition has often taken place in non-competitive ways [10].
In 1991 Campbell, Hollingsworth, and Lindberg said that the social structures of markets and the internal
organizations of firms are often best viewed as attempts to mitigate the effects of competition with other
firms. This rationale is as well suited to transitional economies as it is to market economies. For instance,
privatization could meet very high and very unexpected institutional barriers. Too rapid SOE reforms
might generate an economic free fall, against which the state might want to secure safety net ["]. The
state might want to be circumspect in order to keep SO E reforms from retracting the scale economy in
return for a myopic trade-off promoting local entrepreneurship and petty commodity production [12]. But in
so doing, the state might generate problems of Soft Budget Constraints" (SBC), i.e., redundant or
excessive subsidization reducing SOEs performance and slowing down the pace of reform.
In 1993 Cui Zhiyuan argued with J. Komai (in Vedat Milor. ed. 1993. "Privatization and Public
Sector Reform") that "Soft Budget Constraints" (SBC) have long existed in the West, visible in the
problems of credit money of private firms and incomplete capital markets [13J.
One of the complications that causes SBC in a private ownership monetary economy is
the fact that modem banking systems have the ability to create credit money. Under the
fractional reserve system, the banks can loan more money than they receive in deposits
For example, if the reserve requirement is 20% , the bank with $20 in deposits can lend
out $100. Moreover, the bank can lend out money it does not hold: it simply opens a
creditor account from which the customer may draw up to the amount he or she promises
to pay. This is called loans make deposits. Clearly, Komais definition of SBC -
nonexistence of 'strict relationship between expenditure and earning does fit the modem
banking system based on factional reserve (ibid. 306).
Even Komai admitted in his latest book that any static interpretation would provide a
highly simplified picture of the intricate social phenomenon termed here the softness of
budget constraint. It depicts a static problem of choice, whereas this is clearly a case of
dynamic process in which an expenditure flow is opposed to an income flow. [cf.] Jnos
Komai, The Socialist System, 1 99 2:14 3. From a static perspective, SBC is bad, so there
are proposals for establishing 100% reserve banking. However, from a dynamic
perspective, a proper degree of SBC is necessary for economic growth. For a fuller
discussion of static vs. dynamic perspectives in the context of socialist economic reform,
162
see Cui, 1991: Market Incompleteness, Innovation, and Reform, Politics and Society,
No. 1, (March 1991): 59-69 (Ibid. p. 324, Endnote 49; brackets mine).
Some degree of Soft Budget Constraints is unavoidable and even allowable in any type of
modem market economy in general, and in private firms in particular [14]. From a dynamic perspective,"
SBC is indispensable to subsidize R&D programs within firms, industries, and economic sectors. Cui
particularly discredits some Schumpeter's insights, appreciating the importance of monetary factors (in
contrast to some real input or supply factors) to the market economies in general. But the rationales he
elaborates could also be informative and instrumental in helping to analyze the problems in transitional
economies. For example, as shown in Chinas current transition, what ultimately succeeds hinges on the
activism of the public sector, financial institutions, and other associated reforms, rather than exclusively
on a rush to privatize everything owned by the state. And the scale of the economy and the reforms of
SO Es would be unavoidably affected by these concerns. In the meanwhile, policies with excessive use of
SBCs could generate serious stagnations. Too circumspect macro economic strategies and policies could
paradoxically incur more side-effects, curbing reform and thwarting overall endeavors to hasten
marketization, economic streamlining, transparency, local flexibility, and managerial discretion. As O.
Williamson 1975 explained, even in the West,
"radial expansion of the firm eventually exhibits diminishing returns...[as] large size is
associated with greater opportunities for discretion" (127-8) n .
In China, it was up to the state transitional planners to develop a strategy that included market
efficiency, social security, legitimacy, and scale economy, based on accurate and adequate empirical
data. The planners had to calculate what would be reasonable economic relaxations at different stages of
development, and what would be a proper growth rate to absorb sufficient employment from Chinas huge
labor pool in order to prevent increasing unemployment [16].
In regard to the above dilemmas between scale economy and market efficiency, in 1995 F.
Fukuyama, wrote a book on T ru s t that claimed from the angle of network organization that
The relative importance of scale, and consequently small vs. large companies, may well
change in the future, and in unpredictable ways. [Since] Future scale economies will
163
depend on technological developments that have not yet occurred and are therefore
impossible to predict...In the light of these kinds of uncertainties, it is possible to argue
that in the future the optimal form of industrial organization will be neither small
companies nor large ones but network structures that share the advantages of both (ibid.
341; brackets mine) [17].
Network organizations can take advantage of scale economies while avoiding the
overhead and agency costs of large, centralized organizations (ibid).
According to Fukuyama, analyses of network organizations would bring high social trust or
"spontaneous sociability on economic life" back on to the table of "a natural advantage [18]. Network
organization analysis could even become a predominant form of future organization, particularly in high-
tech, high-value-added areas and industries.
A country like China has had a range of options for tackling the dilemmas between scale
economy, scope economy, and market efficiency. Through institutional reforms China could tap sundry
and hybrid strategic alliances with core SOEs for R&D programs, backed by both central and local
governments. The state could build giant equity partnerships and collaborative research projects with
large scale research consortia. Some of Chinas giant state-owned or state-sponsored research projects
are currently paving the way for even larger emerging forms of market-oriented R & D collaboration.
These rising big collaborations in turn could shape the new network constituencies with more innovative
links with ever larger, generalist firms and specialized entrepreneurial start-ups. A noteworthy example is
Zhongguancun Science Park (dubbed the "Scientists' Village").
Zhongguancun Science Park" emerged in the 1980s and 1990s in the residential communities
near the complex of research institutions and universities concentrated on the outskirts of Beijing (see
Figure 3.11; cit. from The Wall Street Journal, R12, Mon. Sept. 25, 2000). In some ways is equivalent to
Silicon Valley in California, USA. The idea behind the establishment of Zhongguancun Science Park
was that through such a concentration of capital, technology, and knowledge, scientists and researchers
could establish their own communities and academic environments that could generate dose interactions
that might promote innovations and core competencies, and thus enhance China's R&D in breadth and
depth.
164
Zhongguancun Science Park has already been valuable in eliminating costly, duplicative R & D ,
in achieving efficient economies of scale and in diversifying the search for solutions to assorted technical
problems [19].
Figure 3.11: Zhongguancun Science Park fact sheet
Name: Zhongguancun Haidian Science Park

Location: Beijing City, Haidian District
Size: 5 miles long in central district
Established: May 1988
Companies: more than 5,000
Universities and Colleges: 73
Sales by companies in the park (1999): $7.7bn
Exports by companies in the park (1999): $548million
Ownership structure of companies in the park:
Private company Collective

0% company
14%
Joint-Stock
Company Foreign Joint
43% Venture
Company
20 %
State-Owned
Company
23%
Source: Administrative Committees of Zhongguancun Haidian Science Park; cit. The Wall S te e t Journal,
R12, Mon. Sept. 2 5 ,2 0 0 0
W hen exploring the rationales behind China's fast growing non-state sectors, Boisot and Child
took Chinas network of information governance seriously in their description of a transition from personal
165
type (fief) networks to relational type (clan) networks. In doing so, they essentially treated Chinas network
organizations as informal; they ignored the growing salience of those formal, larger research network
consortia like Zhongguancun Science Park. Boisot and Child ignored the fact that those networks
governing mega-information and transaction flow were more formal, were built under rational-legal
bureaucracies, and were regulated by China's state institutions. They were not acting like fiefs and clans.
In Zhongguancun Science Park larger business and industrial conglomerations could create
their own novel strategic partnerships by shifting the very base of corporate competition from rivalry of
firm vs. firm to rivalry of intra- and inter-national groupings of collaborators. Such entrepreneurial pursuits
and innovative moves, through institutional/organizational collaborations and collusions, have always
contained some risky trade-offs and tough choices. To stay in R&D associations, each partner has to
abrogate its own identity; otherwise it might face disciplinary actions from the R&D association through
incentives and disincentives [20]. Disciplinary actions imposed by network organizations are designed to
prevent individual opportunism, organizational slack, inertia, and group inefficiency. But concomitantly
they can also incorporate collusive retardation of R&D programs on behalf of the status quo and the
vested interests [21], The "Scientists' Village" emerging in China drew largely from the subsidies of the
state government and the sponsorship of the state-owned industrial conglomerates. Silicon Valley in the
US was pushed by entrepreneurial momentum and trickle-up venture capital. These two types of network
research consortia differ in their origins and trajectories. They may be more similar in their outcomes.
Nee stressed that Chinas reforms substantially involved remaking the economic institutions
outside the state sector [22]. Nee did not go further to see that before 1995 China's nationwide
entrepreneurship had been boosted mainly by local initiatives. It was the rural COEs and TVEs, not the
SOEs, that ignited and nurtured national entrepreneurship. This raises the questions about the main
dynamics behind Chinas economic transition. Hungary illustrated the fact that remaking post-socialist
institutions could start from a booming non-state sector rather than from state-led superstmctural reforms
j23]. Chinas reforms were initially pushed mainly by Chinas burgeoning non-state sectors in the local
economy, sectors that had formerly been appended to the planning economy. But in time Chinas state
166
institutions stressed hybridization and further reforms in the state sector.
To a large extent, Chinas early COEs and TVE s consisted mainly of smaller enterprises and not-
very-large enterprises. Their burgeoning proliferation brought about the ensuing dynamic milieu and
socio-cultural ethos throughout China that precipitated the later SO E reforms. These eventually brought
about the restructuring of Chinas economy incorporating a new level of entrepreneurial momentum.
In 1993 Qian and Xu suggested that when Chinas reforms faced unprecedented uncertainties,
China might accelerate its institutional learning curve and adopt more flexible approaches to the
acquisition of complicated and localized knowledge. Chinas use of such an approach might avoid
replications of costly mistakes experienced by other transitions and enable China to discover innovative
way to reconstruct institutions [2A].
Table 3.11b summarizes the attributes of Chinas transitional industrial and/or business system in
the year 2000 [25],
Table 3.11b: Attributes of Chinas transitional industrial/business system in 2000 [26]
Attributes C haracteristics
Ownership pattern Hybrid ownerships;
Intra-group network Internal trust within localized firm hierarchy;
Inter-group network Coordination through banks, government, & multi

tiered and regional industrial organizations;
cross-investment by local hybrid sectors
Subcontracting Highly flexible, mainly informal;
Investment pattern Diversification under vertical & horizontal integration;

localized fund raising and subsidization by the local
government and banks;
Growth pattern Semiformal-financing & cross-shared growth by hybrid

sectors; incremental and relatively balanced.
167
In the 1990s China still had a long way to go to catch up with the global edge through building
innovative infrastructures and institutional environments. Yet its economic momentum had already been
cultivated by its M-form hierarchy, its trickle-up entrepreneurship, and a number of institutional reforms.
Together, these became a driving force that could help solve the dilemmas between scale economy and
scope economy, between size and hybrid forms, and between economic efficiency and social legitimacy.
In turn, all these helped China build its core competencies and ultimately its globalization.
3.12 Transition as social action
A more effective critique of the current institutional scholarship on Chinas transition is based on a
higher level of epistemology - sociologically-grounded. I think an institutional account of transition as social
action could provide such an epistemological tool to tackle a number of dilemmas which all three institutional
models described in Chapter 2 failed to unearth. Before proceeding further, it may be useful to review Nees
description in 1989 of what he called new institutionalist paradigms. Nee stated that
Over the past decade, 'new institutionalist paradigms have been developed in every one
of the social science disciplines, brought about in political science because internal
developments in public choice theory undermined rational choice models lacking
institutional constraints; in economics because market failures could not be explained with
the standard analytic tools; and in sociology because efficiency models failed to explain
economic behavior and patterns of organizational survival in the institutionalized sectors
of the economy. These diverse 'new institutionalisms share a critique of the limitations of
neoclassical economics, an emphasis on the interpenetration of economic organizations
and social institutions, and a commitment to represent complex relationships in formalized
modes. These same traits, rather than fsic.l an allegiance to any one of the particular
neoinstitutionalisms. characterize the recent institutional analysis in the study of state
socialism (cf. Nee and Stark 1989, pp. 11-12; emphasis mine).
It is clear here that Nee attempted to broaden the social domains of new institutionalism [27]
beyond the limits of any particular kind of neoinstitutionalism. Nee indicated that institutional searches
cannot be confined only to the current institutional theses. They need to investigate society as a whole,
and particularly the involved relationships between state and society. Thus Nee tried to bring in sociology
to help account for some of the complexities of Chinas transition, albeit he himself fell short of applying
sociology to its fullest advantage. As Boisot and Child criticized, N ee s scheme of market-hierarchy
relations stays within Williamsons theorems of unidimensional market-hierarchy continuum."
168
Following N ees breakthrough, Boisot and Child, in their institutional model, recognized social
embeddedness in Chinas network organizations. Qian and Xu were quite conscious of the political logic
and state commitment to decentralization reform under Chinas M-form hierarchy. All three models, more
or less, acknowledged the importance of institutions. However, they all treated institutions as static
conditions, as fait accompli. All three models recognized that efficiency was an institutional construct. But
all three failed to explore more dynamic and social sources with which China rebuilt its institutions as part
of its economic transition.
In this study I propose to use an institutional perspective of social action to account for Chinas
economic transition and to compare Chinas transition with other economic transitions. I shall consider
any transition to require strategic action, entailing risky and costly choice-making. I shall look at
institutions more as choices than as conditions. I shall combine both subjective and objective aspects of
institutions to account for Chinas transition. Transitions require institutional changes, and institutional
changes cannot be made without subjects being willing to change and sometimes to change themselves.
According to Lanes earlier definition (see Section 2.5, Chapter 2), new institutionalism needs to analyze
institutions in terms of social actors, social actions, and historical contexts. An economic transition is a
strategic action, made by social subjects. One needs to relate economic transitions to social actors' frame
re-alignments in changing historical contexts. Economic transitions involve ensembles of social actors
identities, reconfigurations of their identities, and re-alignments of their frames of reference. For example,
in China, previously-subordinate private entrepreneurs after embarking on the economic transition
became their own masters, obtained new identities, and became new actors [28]. New social actors could
determine the pace and process of reform by their own balanced judgment and by their own desire to
ward off social chaos. All reforms would still remain uncertain inasmuch as the state government could
still hedge, suspend, or veto the reforms if they judging them as not good public.
Based on this sociologically-grounded cognition, Figure 3.12 positions the three models from
Chapter Two according to their institutional perspectives.
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Figure 3.12: Institutional perspectives of three models of Chinas economic transition
Pre-transitional era Transitional era

1950-70 since 1980
Perceived general Central focus Perceived dynamic Perceived major actors

Deficiencies in Chinas of concern by Institutional arrangements or players
planning economy selected institutional for transition
models
Efficiency -------------- Market-oriented --------------- Private enterprises and

(Nee) individual entrepreneurs
Soft budget
constraints --------------- Effectiveness ------ Hierarchy-approached Central and local
(Qian and Xu) state institutions
Social trust------------- Network-based Local groups in collusion

(Boisot and Child)
As shown above, in the pre-transitional era, early institutional discourse recognized the problems
of soft budget constraints generic to erstwhile socialist economies. In the 1980s the focus of institutional
discourse began to diverge from the earlier uniform focus on efficiency to those institutions that might
contribute most significantly to efficiency. Qian and Xu suggested that hierarchical form was critical for
Chinas economic transition. Boisot and Child argued for the centrality of social embeddedness and trust
relationships in governing Chinas economy. Accordingly their respective perceptions about the major
social actors differed. Nee favored private individual entrepreneurs, Boisot and Child focused on local
enterprises in collusion with the local governments, whereas Qian and Xu concentrated on the state
governments of all levels. Each of these three models focused to greater or lesser degree on some forms
of social action. Hence each of them might be addressed systematically from a sociological perspective.
My perspective is historical as well as sociological. I do not believe that states, hierarchies,
markets and networks exist without being embedded in given social nexus and without being derivative
from given historical contexts [29j. It is from these two theoretical perspectives that I shall spend the
remainder of this chapter identifying the shortcomings of Nee, Boisot and Child, and Qian and Xu.
170
3.2 Limitations of the three models of Chinas transition
3.21 Limitations of Nees model
N ees model (referring mainly to his essays in 1989) was most deeply embedded in the neo
classic formula of a unidimensional market-hierarchy being generic to all transitions. Even while calling
for a new institutional search, Nee identified market-approached efficiency as the most compelling item
on Chinas agenda. Nee was less attentive to the social complexities behind market competition, while
calling attention for his project of rebuilding economic institutions f30].
One can identify two flaws in N ees reductionism. One is his lopsided unidirectional claim of
market competition. Another is his failure to recognize those intermediary areas, often with mixed
consequences. Nees unidirectional claim about transition towards market economy is represented by the
solid line in our heuristic Figure 2.2 in Chapter 2. Nees thesis requires full re-privatization as a
prerequisite for market competition (note: this is indicated by the solid line diagonal arrow from the top-left
to the bottom-right in the figure) [31]. Nee claims that
Organizational failures in state socialism are rooted in the relationship between the firm and
the state, that is, in the allocative processes of central planning (1989,11).
According to Nee, Chinas inefficient allocation of resources and the associated soft budget"
problems are rooted in state ownership, which is presumedly detrimental to efficiency and competition.
The solution therefore requires market-oriented re-privatization in place of state bureaucratic intervention
[32]. In Boisot and Childs view, Nees approach was typical of the early institutional discourse about
transitions from socialism with the belief that the transition required primarily a switch of choice-makings,
pivoting on the dichotomy between bureaucratic and market transaction-govemance structures... (Boisot
and Child 1988, 507) t33]. That is, economic governance had to be directed by market-oriented re
privatization, not by state bureaucratic intervention. Nee saw state socialism and planned economies as
systemically discontinuous from the capitalism f 4]. On the macro-institutional" level, the essential
distinction between socialism and capitalism were their different market-state configurations [35].
171
Nee argued that state socialism contained self-reproducing institutional mechanisms, distinct from
those of the market economies I36]. Nee claimed that
it is not only market economies that have an 'invisible hand': the economies of state
socialism, too, have self-reproducing institutional mechanisms" (1989,11).
In a socialist society, a typical bureaucratic error, committed by a state institution such as a
government agency, could entail an irremediable and severe blunder, because it could spread out to the
entire structure. According to Nee, a transition in China or in any other planned economy could be judged as
complete only if it forfeited its socialist self-reproducing institutional mechanisms. In N ees phrase, this
could mean only a shift from [planned] redistribution to markets (Nee 1992, p. 4) [37].
On closer scrutiny, N ees heuristic demarcation of a systemic shift is nothing more than a
polarized metaphor of state socialism vs. capitalism - a typical neoclassic paradigm. N ees cross-
systemic comparisons, as he liked to call them (1989, 13), contrasted binary categories such as state
monopoly vs. market-society autonomy, as well as their ramifications in the forms of private vs. public
interests, private vs. public property rights, and soft vs. hard budgetary constraints, etc. In the end, Nees
institutional analysis was little more than an ideologically-bent sermon. Nee called for sweeping re
privatization and a complete rescission of SOEs, etc. Nee viewed re-privatization as the critical
transitional template without taking into sufficient consideration the institutional complexities and
mechanisms identified by Cao, Qian, and Weingast (1999) t38]. Because of Nees perspective, he never
addressed which soft budget constraints and which bureaucratic subsidies might become indispensable
to economic growth under increasing public welfare, nor did he specify where and when they would
become unaffordable to an economy (cf. Cui 1993). Nor did he explore how to make a feasible transition
away from a planned economy. H e could not make a distinction regarding what soft budget constraints
were unaffordable and what soft budget constraints were unproductive. Once he failed to do so, Nee
found it even harder to find a plausible institutional base for market-hierarchy relations existing in
transitional economies. Even capitalist economies had their own soft budget constraints. This would
weaken Nee's original criticisms of state socialism and perhaps even m ake them untenable, since even a
transition to a full-fledged market economy could not assure a satisfactory solution to the problems of
172
state intervention or guarantee a complete avoidance of budget constraints that were supposedly specific
only to state socialism [39].
Broadly speaking, the problems under the state socialism could not be simply reduced to the
micro-interventions of bureaucracy per se, for such interventions prevail in non-socialist societies as well.
Bureaucratic interventions have their roots in modem divisions of labor, as W eber suggested in his
metaphor of capitalisms bureaucratic "iron cage" (cf. Weber. 1968. Economy and Society). Nee failed to
discern how the bureaucratic problems across economies are different in kind. He might have mentioned
that state bureaucratic hyper-active interventions are unique to centrally-planned economies. In such
economies state interventions can become regular and extensive problems, encroaching on public and
private lives, and dampening civil activism, and/or individual and organizational entrepreneurship. Nee
could also have pointed out that so-called organizational failures are apparently more severe in centrally-
planned economies, where all their bureaucracies are exclusively controlled and monitored by state
governments.
In short, although Nee highlighted the salience of remaking economic institutions during the
transition from socialism to market economies, his logic became opaque when he identified hierarchy as
the opposite of markets or assumed state hierarchy to be opposed to market expansion (cf. 1989, p. 16:
Hierarchies and Markets). Nee was also opaque when he ignored the roles of the transitional institutions
in tackling those thorny issues and institutional dilemmas associated with transition, and when he ignored
the roles of social groups and forces other than workers and peasants. In his mind economic reform
seemed to boil down to a logical reversal of market forces vs. bureaucratic mles. Which one could prevail
depended on whether a society were in a pre-transitional era or transitional era. In the former, the
economy was bureaucratically ruled, whereas in the latter, the economy was reconfigured for market
competition. Institutional comparisons using those dichotomous categories such as N ees could miss
many more links between the dichotomies such as institutional parameters, dimensions, and alternatives
such as networks, a variety of hierarchical forms, industrial associations, NGOs, coordination mediated by
173
middlemen, political negotiations, and social bargaining, etc., all of which can play important parts in
transition in their own rights f40].
Unlike Boisot and Child and Qian and Xu, Nee believed that re-privatization was the only way to
initiate Chinas economic transition, market competition, and the subsequent streamlining I41]. N ees
approach failed to acknowledge the variants of planned and market-driven structures existing in their
particular contexts. Nee also failed to see that the existing market economies were also in transitions I42].
Nee also never recognized the diversity of Chinas ownership patterns during its transition, nor did he
recognize how the changing role of state ownership had been dynamically affected by ownership diversity
and how that had in turn dynamically affected Chinas transition I43]. As it later turned out, Nee simply
failed to discern the unique institutional mechanism and organizational dynamics that were available to
China to help with its transition J44].
North (1990) and Aoki (1995) contend that the kernel of marketization resides in the
organizational mode of hierarchical governance. Peter Hall 1986 also emphasizes (p. 46; cit. from
Lindberg, Campbell, and Hollingsworth 1991, p. 17) that markets in capitalist economies are embedded in
institutions through particular organizational forms (competitive, oligopolistic, oligopsony, monopolistic,
and monopsony as such) that can structure the relations between economic actors in certain ways. Even
when markets are organized informally, market exchanges abide by the certain rules (of pricing and
contracting) that are stipulated and regulated by state institutions and government agencies, and that can
be biased in favor of vested interests and distorted by current power structures. Between control and
contract there are diverse and mid-ground institutional arrangements and practices, either hierarchy-like,
market-like, or network-like, such as obligatory agencies, promotional networks, industrial associations,
and monitoring-typed interlocking firms that deviate from the institutional forms associated with typical
market contracting or corporate hierarchies. An array of institutional arrangements can be organized in
more flexible and less codified ways to deal with uncertainties in market transactions and with
uncertainties created by non-economic factors and environments. In Chinas case, as Boisot and Child
observed, personal relationships could play a critical role in sharing information and diffusing risks for
174
economic transactions and governance, albeit the transactions and governance may still follow certain
formal procedures and legal codes stipulated by the state governments. In both formal and informal
cases, therefore, whatever arrangements are made according to hierarchies, or markets, or networks can
be seen as reciprocal trade-off alternatives or complementary to each other when other arrangements
appear vulnerable or absent.
While Nees first flaw is his lopsided focus on market competition, his second flaw in his
methodological reductionism that omits and erases those vital institutional underpinnings that serve as
intermediaries between markets and hierarchies and between institutions and their precedents. Although
Nee recognized the significance of those hybrid entities, he did not fully and seriously take them into
account in China's transition. Yet no matter how markets contract or hierarchical decisions are processed,
they have to go through certain routine institutional channels and filtering processes. Moreover, there
always exist alternative forms beyond market and hierarchical arrangements. This was why Powell in
1990 criticized Williamsons theorems for failing to identify "networks as a distinctive form of coordinating
economic activity. According to Powell, Williamsons theorems on transacting cost merely noted that,
economic changes can be arrayed in a continuum-like fashion with discrete market

transactions located at one end and the highly centralized firm at the other...(1990, 298).
Yet Powell clarified that while Moving from the market pole, where prices capture all the relevant
information necessary for exchange, there exist various kinds of repeated trading, quasi-firms, and
subcontracting arrangements; and while moving toward the hierarchy pole, there exist franchising, joint
ventures, decentralized profit centers, and matrix' management (ibid). Thus
the various intermediate or hybrid forms of organization [exist in between these two
poles],..(ibid.; brackets mine).
R. Burt (1995) and R. Boyer (1998) were also interested in those dynamic intermediaries between
market and hierarchy and those dynamic arrangements beyond. According to Burt (1 9 9 5 ,2 6 1 ),
The sociological analysis is keyed to network data, which will let us estimate reputation
effects, and so reveal social structural primitives to inform economic analysis t45].
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And Boyer wrote:
In this context, the notion of hybridization becomes significant, not just as a mere short
term adaptation to environmental resistance, but as a principle of transformation, indeed
of genesis, of industrial models themselves, through their interaction with social and
economic systems which are different from those in which they first developed (Boyer
1998: 27; emphasis mine) f46].
Hybridization could also be cited as a principle of transition, not just as a transient adaptation to
institutional environmental resistance. To many observers, Chinas hybrid economy portrayed a
paradoxical silhouette of its transition. The burgeoning of Chinas hybrid economy has been driven by and
is reflective of reciprocity between SO Es and non-SOEs. Nee overlooked these complexities. He also
failed to recognize that each sector in Chinas economy had its own dilemmas, and each sector varied in
terms of its magnitude, growth rate, and trend. During the transition, many intermediary activities cropped
up beyond the reaches of the markets and the state/hierarchies; in some sectors they provided a buffer
between market and hierarchical failures. In principle, hybridization accentuated the dilemmas of a
transitional economy, but also hybridization could lead the economy forward, as could it do backward I47!.
Nee maintained that Chinas early reforms had generated plenty of ambiguities for economic governance.
However, he failed to forecast that the latest development of Chinas hybrids had been attuned to a
transitional upgrade through institutional reforms such as those of restructuring ownership structures.
Nee dismissed hybridization and any other form of decentralization as equivalent to an
incomplete economic transition. From his position he was unable to fathom the developments of both
state enterprises and non-state enterprises, or to understand the latest privatization of state enterprises.
Qian and Xu, Aoki, Gelb et al. and Pei, unlike Nee, all sensed and attempted to develop the concept of
dynamic reciprocity within Chinas economy. In 1993 Qian and Xu argued that M-form hierarchical
arrangements gave rise to pressures in China for decentralization and denationalization reforms I48]. To
Nee, with his methodological reductionism, however, these alternative forms of diversity, mix, hybrid, etc.,
could be defined simply as half-way products doomed to failure. N ee asserted that
With the correct mix of plan and market, the market mechanism would not generate
spontaneous economic adjustment processes but instead would serve as an instrument to
reduce the transaction costs of central planning...the early reformers believed that the most
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efficient governance structure for socialist economies was a combination of market and
central planning (1989, p. 17).
Nee insisted that public ownership in SOEs and COEs could hobble Chinas full transition toward
market economy, since these enterprises might still be owned and controlled by the state bureaucracy. Nee
stated that
Public ownership, Komai argues, fosters paternalism on the part of central planners.
Ultimately responsible for the well being of the economy and of the enterprises put under
their care, central planners want organizational instruments to allow them to steer production
directly when necessary. The problem is that once the tools for central management are
available, they tend to be used. The hyperactive role that comes with public ownership and
the resulting multitude of direct microinterventions on the firm have the effect of distorting the
regulation of the firm's survival and growth. Moreover, central planners undertaking these
interventions are disadvantaged in making rational allocative decisions because prices set
by bureaucratic procedures cannot convey detailed information on changing conditions
(ibid., p. 16; brackets mine).
Nee believed that,
A central contradiction of reform efforts in socialist economies derives from the reform
leadership's failure to cut back sharply or dismantle entirely the bureaucracy that managed
the command economy (ibid, p. 26) f 9].
In the final analysis, Nee deeply suspected that under its current leadership China could never
change the paternalist nature of its economy. The Chinese hierarchy would continue to inhibit any
genuine form of market economy.
By sticking to his methodological reductionism, Nee essentially dismissed the comparability of
economic institutions across national borders. He was unable to see that institutional variations have
existed not only between transitional and capitalist economies but also in between and within the market
economies, or between and within the Oriental economies and Western economies. R. Whitleys series of
East Asian studies of social institutions, business systems, and films took a sharply differing view from that of
Nee f ]. Whitley tried to relate the key characteristics of East Asian business systems with such factors as
their surrounding cultural homogeneity, cultural isolation, hierarchy-market relations, etc. in an effort to predict
different growth modes. Nees reductionism and his insistence on the market-hierarchy dichotomy
prevented him from seeing the relationships Whitley was able to identify.
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In summary, although the earlier institutional studies had brought state-society relationships back
in account for transitions and had challenged the old clinches of cold-war- ideologies, they essentially
failed to capture the underlying relationships as institutionally-specific to their particular settings. Although
Nee highlighted society as new dimension for the transitional scholarship, and although he requested a
paradigmatic switch from state into society, his focus did no more than redraw state-society dichotomous
boundaries (Nee 1989, 1992). All the early studies dismissed the intermediary areas interplaying between
hierarchy and market [51], This led them to overlook what makes institutions become dynamic, and how
social actors unleash reforms and drive changes - institutional and organizational - during periods of
transition [52].
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3.22 Limitations of Boisot and Childs model
In contrast to Nee's more or less dichotomous and reductionist scheme f53], Boisot and Child model
of network capitalism I54] challenged the irreconcilability between market and hierarchy, and focused on
China's principal forms of ownership and information flows during Chinas economic transition. Boisot and
Child discussed such factors as risk diffusion, trust ties, symbols, tosh I55], and other intangible assets and
relations. Qian and Xu also challenged the irreconcilability between market and hierarchy (see above Table
3.11a), but then their analysis went in a different direction from that of Boisot and Child.
Boisot and Childs network approach paid special attention to access to resources, information, and
social trust, accentuating those functions de-linked from hierarchical authority and market bargaining. Boisot
and Child felt this approach could help understand China's unique transition toward a quasi-market economy.
But like Qian and Xu, Boisot and Child did not spell out how these networks could emerge and dynamically
channel Chinas economic transition. Boisot and Child treated networks as an ensemble of "background-
characteristic institutions (i.e., institutions existing in a pre-industrialized society) instead of as "proximate-
characteristic institutions (i.e., institutions playing dynamic roles in shaping industrialized societies), if we
borrow Whitley's terminology (cf. Whitely 1992, 1994) f56]. Yet Boisot and Childs network approach
attempted to tap the innovative role of shifting regimes of information and transacting governance through
reciprocal processes of formality and informality (e.g., through social trust) in China's transition so that they
could address blurring boundaries between formality and informality and thus help account for the boom of
Chinas non-state sector in its emerging hybrid economy. In this way Boisot and Childs network perspective
identified new alternative dynamics within China's institutional environments, dynamics that were not limited
to two polarized poles - formal market and hierarchy [57].
As we outlined in Chapter 2 (section 2.3), in 1996 Boisot & Child explored Chinas institutional
dynamics in their frame of cultural space I58]. According to Boisot and Child, Chinas bureaucracy before and
during its transition was never as formal as bureaucracies had been in the former Soviet Union and the West
I59]. Boisot and Child also focused their attention on families, communities, and things like social trust. They
looked for informal structures (unlike much recent scholarship that has focused on formal structures). From
179
Boisot and Childs view, much of Chinas transition occurred in the informal terrain (i.e., low regions in the
information matrix within Chinas cultural space), as Chinas network relations had switched from personal-
based (fief type) networks to relational-based (clan type) networks during the transition. Implicitly, this
perspective questions whether or not Chinas modernization could live up to the contemporary standards of
the commercial world. A problem with the perspective is its inability to be prospective (ex ante). It could at
most be retrospective (ex post). In the future, after China seriously enters the new era of information
technology, China will more likely adopt formalized network governance (see above Figure 3.11) in order to
manage more effectively mass information flow and more complicated transactional activities. This will come
along with recently increasing reliance on long-term institutionalized trust, formal contracts, and
rationalization of institutional environments for doing business. And this places some limitations on the
relevance of Boisot and Childs observations for post-transition China. These limitations may haunt or even
discount Boisot and Childs contentions about Chinas network transitions in the future.
Boisot and Child also underscored the social embeddedness of Chinas network governance. But
in their paraphrase, it mainly referred to their observation that Chinas transition would be essentially
caught up in China's cultural space. But such reference is vulnerable to treating culture as sui generis,
defined by itself. It comes close to being a tautology, sometimes with adjectives such as, "mysterious"
(borrowed from Whitley in 1994) or "invisible" (borrowed from Aoki in 1995). Boisot and Child never
specified how culture and social embeddedness interplay through network and how networks affected
changes in governance j60]. Culture was too broad an explanation j61]. Boisot and Childs model led to
little further inquiry and ultimately to reductionism.
Perhaps Boisot later (in 1998) sensed this problem and converted his C-space" to l-Space
(information-space) j62]. But this did not end the problem of culture being an independent variable. In
some cases it forfeited or annulled further inquiry into cultural constraints and dynamics. In some ways it
could even be transfigured into an anti-scientific sanctuary or asylum. In 1991 Orru, Biggart, and Hamilton
(1991: 365) said:
180
cultural explanations and anthropological arguments ...mislead us in focusing on
'primordial constants that undergird everything, since this would also "lead to prediction
of nearly total homogeneity in organizational forms [across societies]. Both the cultural
and the economic approach err in adopting a unidimensional view of the environment
(either as a culture or as a market) to explain organizational forms, which are subject to
more articulated and detailed environmental factors. [In this respect,] The new
institutionalism is more sensitive to the details of environments because it escapes
reductionism in either direction... (emphasis and brackets mine).
The more articulated and detailed environmental factors they referred here were first of all
concerned with social embeddedness of the East Asian business systems they examined f63]. According
to Orru, Biggart, and Hamilton in 1991 (386-7) and Whitley in 1992, East Asia contains many different
institutional environments, economic governances, and business systems. Furthermore, as Swedberg et
al. said in 1992 (9),
The network approach helps avoid not only the conceptual trap of atomized actors but
also theories that point to technology, the structure of ownership, or culture as the
exclusive explanation of economic events.
It is clear that Swedberg et al. called for disengaging the network approach from some conceptual
trap and cultural reductionism. Nevertheless, Boisot and Childs network analyses seem vulnerable to
treating cultural cohesion as sui generis, something prone to being autonomous from social
embeddedness. Boisot and Child did not demarcate the extent to which culture and social relations could
or could not separate.
W e have further concerns about Boisot and Child's network thesis in terms of trust relationship.
Our question now is more ontological than epistemological: Are network organizations identical to trust
relationships as Boisot and Child identified (1996, 604)? In Zuckers view in 1986, trust relationships
could be both personal and institutional. But in whatever form trust relationships take shape, they are
ultimately contingent and situational. In this light, trust relationships are not like networks. Networks are
constants etched in the social structure of given institutions. The forms of trust relationships can change
when social situations change. But network organizations might not continue in the same way. Obviously,
trust relationships are not identical with networks. And misconstruction of the association between
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network and social trust as such could obstruct people like Boisot and Child from shedding much light on
the institutional dynamics of China's economic transition I64].
Plausible linked with this misconstruction, Boisot and Child had some misconceptions of the
reciprocity of formality and informality behind social trust. Their framework of cultural space" (cf. Boisot
and Child 1996, p. 602, Figure 1) overlooked the dynamics of the formal sector to Chinas transition. Here so-
called formal (upper regions of the figure) might refer to those cultural segments in the public with explicit
codifications, and those institutions "proximate" to market and hierarchy with warranted codifications, such as
bureaucratic routines and procedures, as well as legitimate market contracts for hedging off risky
uncertainties, etc. Although Boisot and Child in some ways excluded the formal sector from their discussion
of the institutional dynamics, changes and mutations of formal institutions have been palpably evident in
Chinas transition during the 1990s. Formal/legal links of economic activities and organizations have grown
among non-state sectors including COEs, TVEs, and private firms like joint ventures (JVs) with foreign
capital. Much of the momentum has come from Chinas larger-scaled marketization and privatization in
dealing with the uncertainties of changing legal environments and the growing engagement of capital
internationalization I65]. For instance, the unprecedented capital stock markets in Beijing, Shanghai, and
Shenzhen have constantly pushed the state government for effective regulation against market failures and
malfeasances for greater reinforcement of innovative pro-business-minded legal codes j66]. Moreover, along
with Chinas rapid growth will come an increasing demand for formally defining property rights as well as
greater pressure to stretch informal "tosh," trust, and clan-like networks. Obviously, Boisot and Child were
unable to see all these developments when they were writing in 1996.
Boisot and Childs perception of formality could plausibly lead them to misinterpret informality and
its formation. Boisot and Child failed to see that the dynamics of Chinas informal sector has fashioned
and sustained through a reciprocal and concurrent process between informality and formality in a larger
institutional environment. Although Chinas non-state sector generated a tremendous momentum in
Chinas economy, its activism could be seen as legally (formally) instituted and socially (informally)
constructed. In their 1993 thesis, Qian and Xu understood this better than Boisot and Child. The
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reciprocal process of informality and formality reflected the interplay among Chinas local governments,
banking institutions, COEs, and the local communities, as well as among the private sectors within
China's changing legal system. The accompanying heuristic figure might help illustrate the dynamic
reciprocity (see Figure 3.22),
Figure 3.22: Social embeddedness of

non-state sector expansion in transitional China
Local community:
Non-state employment &
enterprises
(collectives)
Local government & Private:

banking institutions ---------------------------------- Rural cooperatives,
joint ventures, private firms,
& subcontracting (individuals)
Label:
Strong reciprocity (social trust relationship)

Moderate reciprocity (network relationship)
Less moderate support (hard budget constraints)
W eak response (hard budget constraints)
Points for illustration:
1. The momentum of the non-state sectors has been boosted by Chinas decentralization in M-Form
economy, regionally-based;
2. Heavy arrows indicate strong reciprocity (between local governments and communities) or inter
dependence (between private firms and local communities or C O Es and TVEs); solidarrows
indicate moderate or less moderate support (of local community for private sector or of
government for private sector); dashed arrows indicate weaker response of private sector to
governments and banking institutions due to their budget constraints hardening toward the private
sector);
3. The economic coordination is initiated and affected by
a. growing cohesion and reciprocity along with horizontal integration,
b. greater local feedback sustainability (earning returns, and growth),
c. reliable responses to adversity, shirk, breach, and risk diffusion;
d. assurance of contract stability (under the contract responsibility system"),
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e. hard budget constraints and financial planning based on convergent expectations, and
f. less externalities and environmental shocks.
Note: limited to the scope of this study, we might not want to go for more details elaborating this figure.
As we said in Chapter 2, the "secondary" or informal sectors identified by Nee and Stark referred to
the non-state sector including those urban COEs, rural TVEs, private enterprises, and joint ventures in
China's hybrid economy. In the early 1990s they were no longer viewed as secondary, but were now seen as
a primary source of Chinas G D P growth and industrial growth (Qian and Xu 1993a, 542). Along with Chinas
increased vertical integration and horizontal diversification, Chinas non-state sector continuously expended
in conjunction with widespread SOE's subsidiaries and their network affiliates, facilitated by regional
decentralization reforms. This kind of new development further strengthened Chinas hybrid economy starting
from the 1980s, involving an economic mix of both public and private properties. In time Chinas economic
hybridization brought changes in the formal sectors moving toward the rule of law. In turn, China's hybrid
structures were no longer treated just as "midway houses" alternative or perfunctory excuses for Chinas
resistance to its political and economic integration into the world economy.
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3.23 Limitations of Qian and Xus model
In contrast to Boisot and Child's focus on the primacy of informality, Qian and Xu noted the presence
of dynamic reciprocity between formality and informality. Qian and Xus informal sectors were almost
identical with non-state sectors, such as COEs, TVEs, and private enterprises, most of which were
concentrated at the local levels - villages, townships, and small cities. Qian and Xus formal sectors were
nearly identical with SOEs and were concentrated mainly on the mid- and large-sized cities. Qian and Xu
believed that the existing formal state structures in China could boost non-state sector initiatives f67]. As
Qian and Xu explained (1993, 548),
The Eastern European transitions have shown that the massive and fast privatization of
the state sector is rather costly. Given the initial condition of the M-form organization in
China, the evolutionary approach of developing the non-state sector is perhaps an easier
and less costly way at the initial stage of transition. Eventually, with the continuation of
this process, the state sector will be forced to share a minor role in the national economy.
Moreover, the rapid expansion of the non-state sector has important implications for
denationalization of state enterprises for further reforms in China: successful non-state
enterprises will eventually take over state enterprises.
In 1993 Qian and Xu suggested that Chinas state/hierarchies might contribute to the non-state
sector boom in particular in China through reducing central controls and promoting market activities.
Chinas decentralization reforms in an M-form hierarchy had created dynamic institutional environments
conducive to regional-specific triat-and-enror experiments. Chinas M-form economy might be seen as rational
in the sense that it could maximize the benefits of the reforms while minimizing the risks and the costs of the
limited numbers of bad performers. Yet Qian and Xu did not further elaborate how China could dynamically
fashion such a hierarchical form in the existing context. They left unexplained Chinas M-form hierarchy,
and treated it as a given condition. In 1999, Cao, Qian, and Weingast added a political logic, attributing
Chinas sticking to an M-form economy as a continuation of the states commitment to federalism,
Chinese style." In 1999, as SO E reforms loomed large, Cao, Qian, and Weingast put the boom of China's
non-state sector (mainly COEs and TVEs) under its hierarchical reform as a stopgap measure toward
formalized privatization of the SOEs I68].
But when we noted Boisot and Childs ignorance of the dynamic role of formal organization, we were
185
referring that their view that Chinas transition was essentially not proactive. Chinas transition was once
thought as a strategic adjustment to the worldwide economic pressures (as emergent environmental
shocks). Today Chinas strategic adjustment is considered more pro-active with changes through
institutional reforms driven by social actors and devising institutional mutations evolving from China's
particular circumstances and contexts. Many of these strategic adjustments appear capable of sustaining
to Chinas momentum and upgrading its transition I69]. Mere normative adaptation to the changing
environment through, for example, trust relationships and networks, would not be sufficient to uphold a
structural transformation. For a transition has a lot to do with actors themselves as subjects in trust
relationships and networks and with their dynamic changes. In a genuine sense, a transition incarnates
and reflects the changes of institutions as social actors, insofar as the enactments of ftheirl socially
acceptable economic behaviors are concerned (the parlance is borrowed from Orrii, Biggart, and
Hamilton; brackets mine) [70]. In my analysis I will try to tap these actors and their proactive reforms in an
effort to account for Chinas transition [71J.
Many of the early institutional studies and the current institutional scholarship on transitions remain
vulnerable by ignoring the fact that transition involves the changes and mutations of institutions as actors.
Many ofthese early studies misinterpret cultural dynamics, separating them from the activism of social
actors. As M. Granovetter pinpointed (1992, 4-5),
These highly elliptical and often tautological culturalist and functionalist accounts become
superfluous once the social construction of institutions is properly understood" [72].
Another count is their misconstruction of institutional fitness. In comparison with the early institutional
studies on transitions, an intellectual progress made by the current institutional models is that both
institutional adaptation and institutional change are equally treated as indispensable for Chinas transition and
as inseparable. However, they do not explicitly theorize that: institutional adaptation and institutional changes
are indispensable prerequisite for each other. If the fitness or adaptation become lopsided and lack impulse
to drive the institutional changes, then the adaptation acts in a reverse way, entrenches institutional inertia,
and eventually contributes little to transition. Institutional adaptation can go in two opposite directions.
Overemphasis of the adaptation and the fitness could misguide people to overlook institutional reforms
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against institutional barriers [73]. Much of the current discourse on Chinas transition has justified the
institutional legitimacy of the transition or has confirmed the current regime of institutions (e.g., Boisot and
Child in 1996) or has justified the organizational fitness in the current regime (e.g., Qian and Xu in 1993).
Much of institutional discourse on Chinas transition had paid little attention to the institutional changes in a
dynamic way, driven by the social actors who made the changes and by the changes of social actors [74].
Although both institutional adaptations and institutional changes were assumed as complementary, it was
obvious among the current institutional models that Chinas transition was more institutional-conditions-driven
than institutional-actors-and-their-choices-driven. As it turned out, the transition was essentially treated as a
process of institutional adaptation separated from an enactment of institutional changes. More precisely, in
Boisot and Childs thesis in 1996, Chinas transition in terms of network switch (from fief type to clan type)
seemed a normative adaptation to Chinas changing environments. Path dependence (in terms of
background institutions and informal sectors) was overstated in account for the institutional dynamics driving
Chinas transition. In Qian and Xus thesis in 1993, institutional changes were credited to the fitness of
previous institutions (in terms of their M-form hierarchy) into the current regime so that that could justify its
social legitimacy (in terms of transition being initiated by Chinas existing regime) and make sure Chinas
transition as an incremental social evolution.
From our perspective, the fitness of the contemporary institutions is playing an active and
constructive role in generating impressive growth in China. In turn, the innovative institutions must retain
institutional fitness. As Aoki underscored in 1995, institutional fitness can help generate alternative strategies
for dealing with competitiveness across economies, as well as with the rountinization of rules, provisions, and
procedures regarding market firm performances and national developments [75]. I shall discuss some of these
matters in greater detail in the remaining sections of this chapter.
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3.24 Transition as social construction: Institutions as social actors
All three of the institutional models we have been critiquing more or less recognized the dynamic
roles of institutional environments and arrangements in effecting Chinas economic transition. But each
model had limitations. When Nee talked about rebuilding economic institutions, he did not note that the
pre-existing institutions from which new institutions were evolving had themselves been in transition. Nee
did not say much about the contradictory nature of these institutions. He did not mention that some of
these institutions could be active in Chinas rebuilding process, incubating institutional dynamics that
could drive Chinas transition forward. Boisot and Childs arguments of network adaptation were equally
vulnerable in terms of a passive or static nature [7S]. Boisot and Childs thesis essentially failed to specify
how Chinas network-typed regimes could effectively facilitate the additional flow of information and
transactions, except for looking at how Chinas information regimes in different time periods gained from
having thick personal connections or dense network relationships. One point made by R. Burt in 1992
was that a network might gather to itself as many redundant or wasteful connections as it could in order to
get access to information and power; and these redundant connections could impede the networks
performance.
How a network becomes efficient does not depend on its type, a thesis R. Burt explored; or its
density, as Boisot and Child assumed. It has a lot to do with the actors inside the network and how they
can become innovative and vigorous. Qian and Xu also did not ask why China could not boost its growth
and improve local initiatives prior to its transition, even when it had already strategically chosen the M-form
hierarchy. Obviously, the factors lowering or raising economic momentum do not come from hierarchical form
alone. Without sufficient account of social subjects, it might be hard for Qian and Xu to explain Chinas growth
and local initiatives during Chinas transition even in terms of Chinas M-form hierarchy and its
decentralization reform. Similarly, we could seriously challenge Boisot and Childs typology (i.e., information
matrix) of institutions in Chinas cultural space, since institutions (in terms of variously-typed networks) not
only demarcate the environments (in terms of the corresponding transacting governance regimes), but
also are designed by social actors [77J.
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Social actors are players in existing and newly emerging social and economic institutions and
organizations [78]. And the state institutions are certainly the first echelon of such critical actors [79]. Yet all
three institutional models we have been critiquing were inclined to attribute bureaucratic failures to the
state institutions, ignoring the dynamic roles these state institutions could and did play in Chinas
economic transition f80]. For instance, when Qian and Xu traced the path-dependent nature of Chinas M-
fonm hierarchy prior to the reform, they treated Chinas state institutions essentially as static, lifeless, and
disconnected. They tried to identify in this way what geo-political, ideological, or other sources generated
Chinas M-form economy. For example, they elaborated Maos unique strategy to deal with Chinas
hierarchical form before and after 1958. Unlike Boisot and Child, Qian and Xu did not perceive Chinas
hierarchy per se as changing over time. Qian and Xu conceived of the M-form economy as sui generis
persisting through the Cultural Revolution and Chinas subsequent transition [1]. In many ways Chinas
decentralization in its transition could be treated as an institutional mutant of Mao's decentralization under his
central planning regime. If Chinas hierarchy before Maos decentralization in 1958 was a non-M-form
hierarchy, it was certainly not a U-form hierarchy as were the hierarchies in the FSU and the FEE. And if
whatever was in China before 1958 did evolve into an M-form hierarchy, why and how did China achieve M-
form decentralization more successfully than any other nation did? While addressing the importance of these
M-form hierarchies in Chinas hybrid economy, Qian and Xu in 1993 failed to perceive the emerging
hybrid economy as the embodiment of the changing state. As the state role was taken for granted, the
discussion of its activism in transition was dismissed I82]. Albeit Qian and Xu acknowledged the boom of
the non-state sector and saw it as local-govemment-driven, they attributed it to the state governments
inability to exercise its control and thought it was induced by Chinas unique institutional environments under
M-form hierarchy. But if the state had no strong commitment to decentralization reform, how could the boom
of non-state sector be local-govemment-driven? And how could Chinas transition be sustained for so long,
especially when it involved a changing repertoire and the construction of complex institutional codes,
procedures, etc.?
Chinas fast growth was made possible because of its institutional learning experiences and trial-
and-enror experiments. But such learning experiences and experiments were launched and regulated by
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state institutions. Through decentralization and denationalization, China managed very rapid economic
growth for a span of virtually two decades. And both decentralization and denationalization were initiated
by the state relaxing its policies in order to boost local initiatives. On another level, without the states
commitment China's joining W TO would be unconceivable f 3]. Throughout Chinas transition, the state
has never taken a hands-off posture toward business and the economy. Government involvement has
always played an important role I84]. According to Boisot and Child,
The state has...played a far more directive role in the industrialization of countries such
as Japan and South Korea. China adds an interesting dimension, with its tiered system of
governmental involvement creating an interdependence of economy and polity down to
the bedrock of local communities. As Tu (1993) observed, this mixed pattern is neither a
socialist planned economy, nor a Western capitalist system (1996, 621).
Contrary to Boisot and Childs assumptions, however, Chinas current hands-on governance
accentuates the increasing activism of state-level bureaucratic formality as well as local-level hierarchical
informality I85]. In Chinas current transition the growing activism of the central government is blatant in many
key areas, including currency exchange rate and price control, allocation of the massive inflow of foreign
investment, population control, public expenditure on welfare programs, and current construction of the rule
of law, etc. The Chinese state is playing a major role in rationalizing Chinas economy to enable it to be
integrated with the world economy I86].
China in its early transition took decentralization and denationalization as its main method of
reform. Since the mid-1990s, particularly in conjunction with joining the W TO , China has speeded up
overall privatization. Cao and Qian et al. in 1999 noted the incentives derived from the states
commitment -- federalism, Chinese style in their vernacular. As Cao and Qian et al. stated,
Economists often assume that privatization programs result from an exogenous political
event, ignoring the issues of government incentives to initiate reform (ibid. 106).
Such a political logic is imperative to both decentralization and privatization I87]. Without the
states commitment, re-privatization would virtually be unconceivable in China, since that would require a
near-total reverse from Chinas-once-firmly-declared socialist road. Without the states commitment,
China could not have reached its current level of privatization (cf. Cao et al. 1999). The magnitude of the
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states commitment suggests how important state privatization is and has even prompted the state to
deliberate further its political reforms f88]. According to Cao and Qian et al. (1999, 125; emphasis and
brackets mine):
[Chinas] This pattern of reform also demonstrates a fundamental change in the role of the
central government before and after reform in China. Under Mao, the central government
forced all regions in the country to copy the same model, such as Qiliying Peoples
Commune of Henan province during collectivization in the 1950s and Dazhai Production
Brigade of Shanxi province for agricultural development in the 1960s and 1970s. This 'one
size fits all approach allowed no independent experimentation, no adaptation, and no local
government autonomy or choice. This approach to institutional change failed miserably. After
1978. reform took place within the framework of federalism. Chinese style. This system has
altered the roles of the central and local governments in fundamental wavs. First, in the
various reform episodes after 1978, the central government did not attempt to establish 'the
model of reform, let alone force local governments to copy it. Second, local governments
have had the authority to decide on the form and speed of the reform and to adapt reform to
local needs. Given hard budget constraints and an open economy, local governments cannot
afford to make big mistakes for an extended period of time.
Federalism, Chinese style, highlighted the state's commitment to institutional changes through
trial-and error experiments with the commitment left to local discretion through hard budget constraints.
However, in 1993 Qian and Xu perceived the state to be more an institutional barrier than a contributor to
decentralization and denationalization:
To avoid interfering with the normal operation of the economy, these regions should be
located outside the old industrial bases and far away from the central control, as was
done in China. Alternatively, after decentralization and deconcentration of the state
sector, the economy will be more suitable for local experiments (1993b, 158).
Because of their stance, Qian and Xu could not foresee even those regions with old industrial
bases and strong central control could pursue reforming experiments of their own. Shanghais transition
was living proof that a committed state could do a lot to assist reform. Qian and Xu recognized (cf. Qian
and Xu 1993b, 141) that Shanghai as Chinas economic hub used to be strongly controlled by the state in
implementing the central governments plans. And yet by 2002, under the states reforming policies,
Shanghai had become Chinas financial center with great discretion for the daily handling of colossal
(domestic and global) amounts of moving capital I89]. Seen in this light, Chinas state-led decentralization of
its M-form hierarchy allowed for semi-autonomy that boosted local initiatives that facilitated horizontal
competition, a non-state sector boom, and fast market expansion. All these in turn eventually prompted the
191
privatization of the state sector.
At the same time many COEs and TVEs induced by state policies were already converting into
private enterprises. Many of the COEs and the TVEs, mainly smaller and not-very-large enterprises, had
been private enterprises since the early 1990s. Since then, these non-state sectors have been the primary
source of Chinas GDP growth (see Figure 2.23, Chapter 2). Had the state role been inept, Chinas hybrid
economy could never have expected such a turnaround. None of the three institutional models we have
examined predicted Chinas remarkable development. Even in 1996 Boisot and Child did not foretell, their
publishing year, the rush of SOEs to privatize (particularly those large-sized SOEs concentrated in big cities)
f90]. They could not foretell the expansion of private investment from overseas along with Chinas access to
the W T O I81]. Similarly, Qian and Xu in 1993 could not foresee the expansion of private enterprises and the
latest decline of the COEs or TVEs in Chinas economy after the mid-1990s (cf. Qian and Xu 1993a, 542;
1993b, 140). Many critics of Chinas transition, Nee in particular, were unable to recognize that the
momentum for China's reform came not only from the entrepreneurship of non-stated enterprises but also
from the entrepreneurship of larger state-owned enterprises f92]. Now both SOEs and non-SOEs made no
secret of their striding forward in tandem toward marketization and privatization I93]. The privatization of SOEs
entailed even stronger linkages for upgrading Chinas transition under the rule of law I94]. Large-businesses
were more concerned about business integrity and compliance with the regulations than were smaller
businesses f95].
In 1996 Boisot and Child predicted that SOEs would contribute less to Chinas economic transition
than would non-SOEs because non-SOEs operated more informally and therefore could more easily be
reformed. Boisot and Child did not anticipate that SOEs, recognizing their problems of formality, aggressively
adopted rational-legal reforms to enable themselves to participate in the transition I96]. All three institutional
models failed to recognize that it was just those existing problems in the SOEs that prompted their finding
their own solutions to their problems I97]. Since 1995, non-SOEs have aggressively adopted more legal-
rational arrangements; but the reformed SOEs have been in the drivers seat for transforming the entire
economy. The state was never a passive bystander, but instead it was a critical participatory actor.
192
Reforms of the state sectors and reforms of the non-state sectors have proceeded at different paces.
In the early stages of transition, the reforms of the non-state sectors, such as the rural-industrial TVEs, went
first and faster than those of the state sectors. The early reforms were fragmented, fragile, and small, and
occurred primarily in secondary sectors throughout China. As the Household Responsibility System" was
carried out and agricultural productivity enhanced, the massive surplus of rural laborers flocked into cities and
townships, where they could find new lives with the spawning TVEs. Thus Chinas industrial structure
became more diversified than ever [98].The expansion of informal sectors and rural diversification in local
economies in turn boosted urban entrepreneurship, SOEs marketization, and even reforms in the state
hierarchies. Although Boisot and Child might insist that Chinas formality was still a far cry from Western
formality, they could not ignore the tendency in China toward increasing formality of both state and non-state
sectors under the rule of law ["].
In 1993 Qian and Xu suggested that through M-form decentralization reforms China could find some
way to avoid bureaucratic inertias and economic inefficiency. Later, in 1999, Cao, Qian, and Weingast
labeled this decentralization federalism, Chinese style (i.e., favoring local incentives and competition without
forfeiting central control). But could reform go further than decentralization? Here all three models failed to
see that more and more SOEs actually put their property rights into stock and equity markets in the forms of
IPOs, debt-equity swaps, buy-outs (merges and acquisitions - M&A), etc. All three models failed to
understand how Chinas marketization could become more complex in breadth and depth and could get such
paradoxical outcomes, such as massive layoffs alongside economic and bureaucratic streamlining (a result of
the state dropping inept enterprises and non-performing and badly-performing enterprises), during which the
state ownership devolve more and more on private investors and shareholders, domestic and overseas. As a
result, property rights in the state sector itself became further diversified, and Chinas ownership structure
became more ambiguous. And in this process Chinas transition became more innovative, resilient, and
dynamic.
193
While exploring Chinas emerging hybrid economy as a strategy for changing ownership structure, all
three models overlooked the dynamic effects on both the state sectors and the non-state sectors of China's
economic scale. China relied primarily on large-sized SOEs to balance its development strategies and
receive cost advantages in its R&D programs, and attain other long-term goals without being derailed by
short-term interests and myopic trade-offs [100]. From the beginning of Chinas transition, Chinas elite
reformers used scales of economy as development strategy. These reformers felt that they might face a
predicament if they quickly dropped those non-performing and bad performing SOEs and things went wrong
(cf. S. Yusuf 1993). Many COEs and TVEs had actually been backed by large-sized SOEs for sustainable
growth and for access to resources, information, and technical personnel [101]. It would be risky to erode the
uptrend of the COEs and the TVEs quickly without the presence of the core SOEs. It was up to the state to
implement its desired balance in both promoting reasonable efficiency for robust growth and protecting the
vested interests of the state employment - preserving their status quo for the time being. The state would
rather protect its reforms from the worst scenarios of lopsided and vacillating choices ~ between promoting
growth and protecting vested interests that could bring instability to the economy.
The institutional discourse on Chinas transition has lately focused on the reforms of the local
SOEs, mainly medium-sized and small-sized SO Es (see our Table 2.42c, Chapter 2; cit. from Cao et al.
1999: Table 1, p. 108). According to federalism, Chinese style," the state promotes the local
governments with more incentives to improve their behavior and the performance of local SOEs. Hard
budget constraints on the local finance come into play as real economic mechanism operate through
state decentralization reforms so that the local enterprises have to perform better to compete in the
marketplace, when they can no longer rely on state subsidies. As Cao, Qian, and Weingast said in 1999
(122; emphasis mine),
The local governments decision about whether to privatize SO Es depends on its costs
and benefits. W e argue that the two factors discussed in the previous section have
changed many local governments calculation in favor of privatization. In other words, it
has become in the local governments own interests to privatize or restructure SOEs.
Harder budget constraints of local governments and increased competition from the non
state sector have made it increasingly costly to maintain these inefficient enterprises.
194
Cao et al. recognized that keeping inefficient SOEs in operation cost Chinas economic transition
heavily, since it deterred the nationwide creation of new job opportunities and diverted the attention of local
governments from being good regulators of their local economies [102]. The opportunity cost were very high
for local governments to keep localized, smaller, and inefficient SOEs in operation [103]. The deterioration of
the SOEs' financial performance throughout China during the 1990s made their privatization an even
more pressing issue [104] (see following Table 3.24).
Table 3.24: State-owned industrial enterprises operating at a loss
1988 1989 1990 1991 1992 1993 1994 1995 1996
Share in number 0.12 0.16 0.32 0.30 0.25 0.30 0.33 0.34 0.38
Loss/after-tax 0.09 0.24 0.90 0.91 0.69 0.55 0.58 0.81 1.74
profit
Source: China Statistical Yearbook, 1996; A Statistical Survey o f China, 1993-1997; cit. from
Cao et al. 1999: Table 6, p. 122.
Competitive pressures for privatization had always existed in the marketplace. Concentrating on
hard budget constraints alone might not have been sufficient to explain how the local governments and
SO Es could change their institutional inertias and poorly-performing units. One needed to take an inside
look at local governments and inefficient SOEs [105J. But all three models in their institutional search fell short
of such an inside look. Nees analysis was more like ex ante prospective, and lacked consideration of the
given contexts and the preexisting conditions of Chinas transition [106]. Boisot and Child and QianandXus
analyses were more like ex post retrospectives or afterthoughts, and lacked any perspectiveon Chinas
future. It seemed hard for these models to address the issues in a panoramic way, integrative of retrospect
and prospect. Not until 1992 did Nee attempt to tap Chinas local and cultural heterogeneous complexities,
when he began to look at some new developments of Chinas transition. By then, Boisot and Child had
launched their search for the new economic order evolving from within China. And Qian and Xu seemed to
convey more practical sense than either Nee or Boisot and Child could have. As Qian and Xu saw it, any
transition of an erstwhile planned economy had to start from its own existing structure and move with feasible
and incremental institutional changes. They saw China steering a path toward market socialism, i.e., staying
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with its old socialist end, instead of addressing the transition as a mutant in a new orbit moving toward a
quasi-market economy.
In summary, this section criticizes the current institutional scholarship that treats institutions as
though they contained pure unconscious objectivity sui generis. All three institutional models we have
examined failed to capture the uptrend of Chinas privatization of its SOEs [107] and the growing salience of
bureaucratic formality in social construction of Chinas transition under the rule of law [108]. It is my hope that
the new institutional perspective I apply will cast additional light on how China has gained its institutional
dynamics in its economic transition.
3.25 Transition as historical derivative: Generality (convergence) vs. particularity (divergence)

across transitional economies
In the last section, we criticized three current institutional models, each of which failed to pay
sufficient attention to historical contexts and given circumstances [109]. Particularly in the case of China,
preexisting and existing institutions have no doubt left their heavy imprints on the minds of its reforming
planners and participants. China's transition raises both structural and piecemeal/incremental questions
n.
In explaining Chinas fast economic growth, all three of our institutional models identified two
main processes: a. the declining role of state sectors, and b. the expansion of market relations with the
world economy. One thing these models missed is a historical vista, a bigger picture, or a panorama. W e
have to give credit to all three models for trying to include historical dimensions in their explanations.
Chinas recent economic transition might have more to do with some internal mechanisms beyond
markets and hierarchies and beyond even some institutional conventions. This might particularly be the
case because of Chinas largely internal-demand-driven continental economy. A key explanation might be
rooted in Chinas history and social systems [111]. Some alternative factor or factors being capable of
supporting Chinas economic governance in transition and supplementing China's deficient market and
hierarchies" might have evolved from Chinas past. Boisot and Childs portrait of formality and informality
provided a possible alternative (1988, 526), when they attempted to identify an information matrix to
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explain the variations existing within the market and hierarchies continuum and beyond. But when
people probed more into Chinas history, society, and institutions, Boisot and Childs network-bound
hypothesis did not seem able to explain Chinas transition. Their information matrix of formality and
informality (or, formal rationality and substantive rationality) might prove to be too narrow.
In a relatively short time period, China engineered a structural transformation of its whole
spectrum of unfitted codes, rules, routines, procedures, and corporate structures, making Chinas
bureaucratic governance and legislative bodies more effective and flexible. As Qian and Xu and Boisot
and Child all noted, Chinas transition toward globalization demonstrated an array of institutional reforms
introduced into China's preexisting institutions. Chinas assimilating process incorporated historical
continuity [112].
Chinas social and economic transition as a development case cannot be separated from its
previous institutions. It has been true even when its previous state-led institutions were fraught with many
deficiencies that Komai and his associates as well as all three institutional models identified. One must go
back to the founding years of the PRC with its early attempts to integrate those scattered and fragmented
local industries left by the KMT government. Chinas new regime established those nascent national
standards and economic norms, national currency, integrative monetary system, and central financial
institutions. These central financial institutions included the Federal Reserves, the Customs, as well as
capital-intensive infrastructures like transportation and communication networks, as well as modem
education and health care systems, and other public services, such as the countrys R&D programs. All of
these institutions reflected Chinas early efforts at modernizing its economy [113].
Chinas TVEs and/or COEs that were driving Chinas hybrid economy until the early 1990s were
mainly the legacies of rural industrialization and the Peoples Commune System during the Great Leap
Forward in 1958-60 (cf. Nee 1992, 5) [114]. Transitions in Chinas rural private sectors could be thought of
as evolving from their early 1960s. Chinas rural private sectors were rejuvenated in response to the
failure of the Great Leap Forward in 1958, a peak year of the CCP's radicalism. Dynamic entities created
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during Chinas transition were joint ventures (JVs) mostly concentrating on the coastal areas. They took
shape because of an urgent need to attract advanced technologies and massive FDI into the target
industries. Chinas SO Es had prevailed during the two decades from the 1950s to the 1970s, the years of
Chinas Cultural Revolution (see Figure 2.23, Chapter 2). Most of the components of Chinas new social
and economic institutions established in transition were actually re-constructed by the changing state
institutions and co-opted with the features of the changing state sector. This process was endorsed by the
states Enterprise Law" that combined local activism with social embeddedness. Social embeddedness
referred to the process in historical continuity meshing old establishments with new establishments (as for
the social construction of non-state sector through social embeddedness, see above Figure 3.22 in this
chapter). Chinas use of embeddedness was never passive but always was active. It gave rise to a new
dynamic stream of market-oriented reforms in the 1990s, reforms that went much deeper than those in
the 1980s.
Based on its past experience, China might not want to develop an economic model universally
adaptable to all circumstances; nor might it want to develop a model grafted from other countries (e.g., an
Anglo-Saxon model or a Japanese model, or a Hungarian model, or any kind of Western capitalist model),
nor an indigenously-based model from Chinas past (such as the previous Da-zhai" model in Chinas
agriculture and Da-qing model in Chinas industry, popular before and during the Cultural Revolution) [115].
As Cao et al. in 1999 found, China now would rather adopt any model fitting in with its given local contexts
[116]. There is no general pro forma formula for efficient performance found yet to fill in all of Chinas local
niches and fully cover Chinas all these variations [117].
I like to argue that a sweeping efficiency concern was just the Achilles heel of the early scholarship
on transitions. Komai as well as Nee saw soft budgets as the major ill-fated practice in those former
planning economies. But their analyses stopped short of offering comparisons specific to local contexts and
institutional complexities. Komai proposed evocative prototypes of socialist systems" in 1992, based on
his formulations of general regularities" (pp. 15-6, 19). Yet such classified socialist systems appeared
problematic when the realities in socialist systems were not only far cry from the classic caliber of true
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socialism, as were their various transitions [118J. According to Komai and his associates, they would rather
consider it fruitful to take a more general approach than emphasize the uniqueness of each country,
society, and culture, and consider it futile to look for general regularities or the expression of general
historical laws (ibid. p. 4) [119]. As Komai said,
Let me begin...by taking an example: present-day C hina...M any researchers are studying
it, and every one of them feels how difficult it is to know and understand so vast, stratified,
and complex a country...1. The Communist party has been in power in China for more
than four decades. This has left its mark on all spheres of society, politics, and the
economy. 2. China is part of the 'Third Worid....3 . Geographically, China is part of Asia.
Numerous typically Asian attributes are therefore displayed in its history, its cultural
heritage, its religious and philosophical traditions, and its peoples way of life and relations
with one another. 4. Whereas the previous three points concern similarities that China
bears to the different groups of countries (other countries under the control of Communist
parties, other developing countries, and other Asian countries), there are many things in
which China is unique and cannot be compared with any other country. It differs in scale:
its more than one billion inhabitants make it the most populous country in the world. It has
a several-thousand-year-old culture, which was also the cradle of several other Asian
cultures. The history of China, like the history of any country, is unique, individual, and
markedly different from any other countrys. The same applies to the history of the last
decades, Mao-Zedong was not the same as Stalin or Tito, and Deng Xiaoping is not the
same as ...Mikhail Gorbachev. At every state, the policy of China has differed appreciably
from the policy pursued by any other country, socialist or otherwise (ibid. p. 3).
Komai maintained that although he would rather consider it fruitful to take a more general
approach, he also attempted to
eschew[s] single-factor explanations of any kind, deeming it decidedly necessary to make

a multicausal, multifactoral analysis of society. To build up a comprehensive picture of
China today and attempt an explanation of the existing situation and the developments
likely to emerge from it, one should consider all the factors listed above, plus a great
many features and influences that have not been mentioned (ibid. p. 4; brackets mine)
A more general approach required a structural and multicausal analysis. Komai went on:
Although the indispensability of mutifactoral analysis cannot be underlined too strongly, the
books attention will be confined nevertheless to a single group of factors: those covered by
the first point in the list [note: i.e., the factors on those generalities applied to all transitions].
The purpose is to study more closely the phenomena, causal relationships, and regularities
that are similar in China, the Soviet Union. North Korea. Yugoslavia, and in general all
countries where a Communist party was or still is in power. No one can argue...that this
method yields explanations for all the aspects of China or the Soviet Union or Albania. But
one can certainly say that identification of these similarities, kinships, and common
regularities can serve as an important analytical instrument (alongside other, eouallv useful
instruments) for studying these countries (ibid. brackets and emphasis mine).
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Despite adding some modifications, Komai remained overwhelming concerned about generalities
(or in Komas phrase common regularities") [120] (cf. Komai 1992, 3; Komai et al. 2001). Komai
recognized that general regularities could function only through the operations of particular mechanisms,
each of which was culturally bred, historically derived, and socially constructed (note: the formation of
Japanese kaisha inter-firm networks is based on uniquely Japanese horizontal-hierarchical relationships
[121]). W ere it not for these particular mechanisms, it would be hard to explain why transitional economies
had different outcomes and reform paces, and why they had diverse approaches, paths, and directions
[122]. It is evident that the so-called common regularities Kornai identified have not yet worked
consistently across the transitional realities in Russia, China, and other former planning economies.
Komai aroused much attention from the scholars of transitions and energized new research. This was
particularly true in the post-1989 era, when scholars had already become more attentive to those
variations. Rather than staying within the confines of neo-classic formulations to elaborate transitional
realities, sociologists searched for variables with greater explanatory power, while most economists failed
to apprehend more subtle variations, complex particularities, and causal relationships [123].
When transitions could be viewed according to their various processes, outcomes, paths,
approaches, and directions, they could be more appreciated in relation to their initial conditions and
strategic choices of institutions. As more details began to emerge, those earlier pro forma prescriptions in
healing the central planning economies might become obsolete. Komai and Nee raised some interesting
questions. People could now wonder if a reduction of bureaucratic size or central control [124] could really
induce economic efficiency and effective governance. If so, why did a great cut in bureaucratic size and
central control in the FSU and the FEE apparently generate a bureaucratic collapse and economic
depression rather than add momentum and streamline their economies [125]? Similarly, could privatization
alone bring greater economic efficiency and performance [126]? If so, how could one explain the indefinite
and inconsistent relationship between degrees of aggressive re-privatization and the respective GDP
performances in the FSU and the FEE (as shown in above Figure 2.12a, and Figure 1,2.1k, Table 1.2.1b
(2) in our Chapter 1) [127]? W hen privatization was introduced into all the erstwhile socialist economies,
how common and salient a role did privatization play in all these transitions? And how could the
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institutions other than property rights come into play in these transitions?
To answer these questions, scholars had to look at individual case rather than at pro forma
totalities responding to sweeping formulas because of their common regularities [128]. Boisot and Childs
model of Chinas cultural space exemplified an alternative economic configuration that differed from Whitleys
and Nee's models drawn from neo-classic economics and other Western models. According to Boisot and
Child,
...the assumed conjunction between market relations and capitalist (or at least non-state)
ownership, made by both Nee and Whitley and drawn from the Western model, does not
necessarily apply to China (Boisot and Child 1996,610).
In Whitley and Nee, the non-state sector was apt to marketize first because it was more closely
affiliated with private ownership than was the state sector. Thus privatization was assumed to be the ultimate
driving force for all transitions from planning economies. According to Boisot and Child, however, the
transition to capitalism was convertible into a matter of marketization in a way separate from privatization [12S].
At least in Chinas case, one might expect the privatization not to be a prerequisite to marketization. As Boisot
and Child argued, a more costly process of privatization would not be appreciated or expected in China.
China appears to show how a clan-based system of transactions can function successfully
based on a communal definition of property rights, rather than these being defined externally
and from above through a legal system that identifies property rights based on individual
ownership (cf. Boisot and Child 1996,623).
According to Boisot and Child, Chinas marketization or market transition could proceed in a separate
way from privatization or with lesser light on privatization [130]. As Boisot and Child (1996) reasoned, it is
implausible that Chinas transition would go through a stage of rational-legal bureaucracy in the Weberian
sense; it is instead plausible that Chinas marketization would evolve its own capitalist development path
different from the Western path. Boisot and Childs information matrix (of codification/diffusion) referred to a
network switch from iron laws of fie f to iron laws of clan. It suggested that Chinas transition had no
functional imperative for full privatization of ownership by way of a typical rational-legal bureaucracy, and so
on. Chinas structure of property rights and economic order are so deeply socially embedded that China will
need to proceed on its own path including its property rights and economic order [131]. Even though Boisot
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and Child were not ready to rebuff the mainstream perception that privatization through legal-rational
bureaucracy was an inherent attribute of capitalism, their assertion did send a clear signal. By mainstream
convention, privatization was neither an appendage to marketization nor a completely independent entity
apart from marketization. Privatization and marketization were not interchangeable terms for capitalism [132]. If
this indeed is true, then Chinas transition should not be forced into the trajectory of capitalist development
according to Western standards.
Privatization programs have been strongly recommended by the IMF as critical to the economic
recovery and capitalist development in indebted or debtor countries [133] as well as in transitional economies,
since supposedly it would make efficient market available for national development. W e could see such an
implicit recommendation in Nees model. Although Boisot and Child did not call for re-privatization to rebuild
China's economic institutions, their portrait of Chinas transition did not clarify their points about why Chinas
marketization could be separated from rational-legal-bureaucracy-based privatization and about why such a
separation was available in China. Tilings in China drastically changed after the mid-1990s from what Boisot
and Child had perceived in their 1996 article; and their prediction based on the earlier data could not cover
what happened after the mid-1990s. But more seriously what Boisot and Child lacked was a deep historical
vision of Chinas bureaucratic transition, and they neglected the role of the state in Chinas transition. Boisot
and Child recognized that non-state enterprises had flourished without a well-developed formal-legal frame of
property rights (also cf. Gelb et al. 1996; Pei 1996). They were unclear whether or not during Chinas
transition, Chinas bureaucracy could be rebuilt along with a formalized rational-legal framework. They also
did not make a further demarcation of the boundaries between Chinese communal property rights,
marketization, and privatization. They did not clarify how these boundaries were conflicting, separating,
overlapping, complementing, or coupling. Their presentation of Chinas bureaucratic regimes was descriptive
rather than explanatory. The problem for us is how to evaluate Boisot and Childs model of Chinas transition.
If we examine their model for Chinas transition, it is obviously inconsistent with Chinas development in the
latter 1990s, as China was proceeding toward privatization of the state sector in a socially embedded
manner. Boisot and Childs arguments might help us explore the nature of Chinas transition, so long as we
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are aware that the transition is occurring in a much bigger context than that covered by Boisot and Childs
thesis (e.g., including Chinas bureaucratic reforms in the mid- and late-1990s).
W e can discover similar weaknesses in Qian and Xus model of an M-form economy in China
contrasted with the U-form economies in the FSU and the FEE. Qian and Xu stated,
In those economies [of the FSU and the FEE] enterprises were highly specialized and their
sizes were extremely large (1993a, 544; brackets mine).
The U-form economy was designed to explore scale economies through technology
engineering and through specialization and division of labor. The U-form organization is
effective in mobilizing scarce resources and concentrating on a few high priority objectives.
Enterprises in the U-form economy consistently have the following three features: a large
scale of operation, a narrow scope of products, and a high degree of vertical integration.
This leads to two significant features of the U-form economy: a high degree of industrial
concentration and a high level of regional specialization (1993b, 148).
But Qian and Xus observations could counter some historical evidence. Many European economies
other than the FSU and FEE are also U-form economies, e.g., the Finnish economy includes industrial
behemoths concentrated mainly in the forest industry and in telecommunications such as Nokia. Compared
to the FSU and FEE economies, these economies have maintained moderate-fast growths during their same
time period. Furthermore, not all hierarchies in the FSU and FEE were U-form structures; some of them were
M-form structures. The boundaries between M-form and U-form hierarchies in the FSU and the FEE were not
straightforward or clear-cut. Selection of the economic strategy was left up to the given social ambiances and
historical circumstances. Although China organized M-form economy, its large sized SOEs shared the same
size and soft budget problems as the large scale operations in the U-form economies. But Chinas large
sized SO Es did matter to the states scale economies, especially concerning the states balanced strategy
and the cost advantages to the states R&D programs. In Chinas case, the U-form hierarchies and M-form
hierarchies were not incongruous but were complementary, providing strategic alternatives for developing a
national economy. Hence Qian and Xus elaborations that fewer larger sized SO Es in China than in the
FSU and the FEEs did not provide a sufficient explanation for Chinas fast growth. Hierarchical form does
not hold the key for explaining Chinas institutional dynamics. In 1999 Cao et al. pointed out that Chinas
largest privatized SO Es were becoming a dynamic force driving Chinas institutional reforms and
ultimately its transition (1999, 125). Previously Chinas decentralization reform and privatization had not
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been in synch. In the end, privatization might replace decentralization [134]. But whether or not this
happens will become apparent only with the passage of time.
In summary, this section has addressed three flawed institutional models of Chinas economic
transition. Some of the flaws were similar to the flaws of historical amnesia associated with neo-dassic
economics [135].
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3.3 Summary of the shortcomings of the three institutional models
In this chapter, we have examined three institutional models with their alternative theses for
rebuilding Chinas social and economic institutions. Qian and Xu recommend reform through hierarchical
decentralization reform (e.g., China and Hungary in the 1980s). Boisot and Child recommend network
transformation (in East Asia and China). Nee recommends market-oriented re-privatization (e.g., in the FEE
and the FSU). The different recommendations underscore different interpretations of what has been
happening in China and why. Each model has been built on its own institutional thesis and particular strategy
for rebuilding institutions in Chinas economic transition. Yet each model is more ore less vulnerable to the
lack of historical consciousness of Chinas transition. Like Komai, Nee was preoccupied with efficiency
concern and market competition. Boisot and Child, and Qian and Xu identified other institutional mechanisms
they considered conducive to transition. Both Boisot and Child and Qian and Xu started their theses on
Chinas transition from how to appreciate a social fact that it has an administration system much stronger
than its legal system. Boisot and Child searched its institutional dynamics from the outside of market-
hierarchy relations, whereas Qian and Xu found Chinas institutional dynamics from its hierarchical form. In
Qian and Xu, Chinas administration system was better than its legal system; or, it could assume a surrogate
role in place of its legal system. No doubt, all these new searches of institutional dynamics brought a new
dimension into studying Chinas transition. But they fell short of referencing any existent institution and
institutional change to its own genesis, progress, and contextual factors. Thus what important is not which
particular institutional thesis, hierarchy or network, would be better to serve illumination as such. For an
institution and its change are time- and space-specific, and are available through its social embeddedness,
social construction, associated with social expectations. The intrinsically historically-specific nature of
institutions jettisons simple reductionism or economic determinism that takes efficiency and market
competition for granted or as a panacea for healing ailing planned economies. This further clarifies that
efficiency can never be taken for granted or even considered as the singular criterion for success or failure,
because means (alternative choices) and ends (efficiency) have to interplay in the same structure [136].
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In the last sections of this chapter, I particularly explored a socially constructive perspective and an
historical derived perspective on Chinas transition. I would like now explore briefly the dialectics between
social construction and historical derivation in analyzing China's transition. Comparison can be made
between institutional homogeneity vs. heterogeneity, institutional convergence vs. divergence, and
institutional endogeny (dilemma as diversity) vs. exogeny (dilemma as contradiction) across economies and
within [1cl']. The categories of endogeny vs. exogeny in use here might refer to the selective process of
alternative strategies [13u], Such an institutionally-based historical comparison might be formulated in the
following way:
First is about institutional fitness into such a historical process of social construction. Some
institutionalists (e.g., R. Scott 1995) declare that each institution occupies a unique structural niche or perch
in every society. However, the structures of institutions vary over time and are specific to given
circumstances. For instance, in the social construction of a transition, economic coordination and social
cohesion are crucial to economic governance and the improvement of efficiency. But corporate structures
and their effectiveness vary across societies. And the structural attributes of the institutions cannot be
separated from the intrinsic idiosyncrasies of the economic players, which are historically specific. For
example, economic players typically draw their expectations from certain historical contexts, related to larger
environments, and from their own experiences, related to those of their predecessors and of previous
generations. The effectiveness of corporate structures cannot be separated from the collective expectations
of an ensemble of these players and agencies living and working in their historical circumstances [139]. Their
corporate effectiveness could further be appraised by requiring their economic efficiency and organizational
effectiveness to dovetail with the social expectations of multiple players including individual members,
agencies, organizations, and institutions, all of which are relevant social actors in given cultural ambiances
and historical circumstances. Corporate effectiveness is essentially socially constructed and historically
derived.
Second is about social embeddedness consistent with such a historical process of social
construction. Social embeddedness concerns the degree of social cohesion of institutions and the patterns
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by co-opted institutions as their economic systems and characteristics are integrated into society. All of these
patterns are in constant change, in fact now they are putatively moving toward integration into the global
community. Yet given the perspective of historical institutionalism, this pro forma globalization poses its own
dilemmas. The considerable variability of institutions severely limits their standardization across economies
and over times. Any country could even contest through public discourse the pro forma assumptions of
globalization and could claim that in its case a particular one or more of its institutions challenged the
globalization model.
At this point I would like to introduce a third theorem: that institutional divergence (variations)
ought to be concurrent with institutional convergence (complementarity). I do not find any kind of
dilemma or oxymoron in the conjunction of divergence and convergence. Historical dialectics allow one to
treat institutions as both deviant from each other and complementary to each other, rather than contradictory.
Historical dialectics can present the whole complexion of institutions associated with an ensemble of
complexities between divergence and convergence. Historical dialectics lead us to propose institutional
comparability across economies and societies. But to understand such comparability, one needs to recognize
dialectical nature of socially constructed institutions.
The institutions effective in particular contexts cannot be judged merely as dichotomous to or
antagonistic to each other. This feature is discernible in the influence of one institution on another
institution (cf. R. Whitley 1992, 1994). Institutional isomorphism is undeniable; change comes from other
institutions inside the sam e social structure or from outside institutions in the larger environments. In
reality this just reflects a process of institutional learning through error-trial experiments that can generate
institutional reforms and changes. And institutional learning itself epitomizes a kind of organizational
activism to adopt different and possibly more innovative forms of institutions (cf. R. Axelrod1984).
Institutional complementarity essentially echoes historical derivation of institutions and thus historical
disparity of institutions. Institutional convergence and historical divergence run in couples. Each institution
has its own distinctive characteristics drawn on its own social system, economic organization, and
characteristic cultural practices. Such a dialectic epistemology is contrary to the neo-classic reductionism
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in favor of perfect market competition and uni-dimensional market transition. Such a dialectic
epistemology can not only overhaul institutional establishments and their key features, but also ask where
they have come from, how they have shaped in their social surroundings, and what effective mutants they
may have bred. In the case of transition, we could examine how institutions and organizations frame their
subsequent expectations and pattern their behaviors in ways that they might prompt institutional reforms
and changes.
W e could further envision such dialectics in institutional non-reversibility vs. transferability among
different economic and social systems. Given corporate structures as a variable across economies and
societies, one might wonder whether and to which extent an effective business system in its given context
could be successfully transplanted and inserted into another different context. To what extent can such
transplants or insertions happen, and can they happen to an entire economy, to a particular sector of the
economy, to some industries within the economy? For instance, why have some partial practices or
operations of Japanese systems been effectively transplanted into their counterparts in the US and the
Britain, but not vice versa? In our study, one can ask is how Russian transition is incompatible with the
Chinese one and to what extent they are incompatible. W e want to know what specific conditions or
determinants facilitate and constrain such institutional isomorphism. These questions all spark new searches,
looking into feasible strategies of business operations and management and government practices extending
across different economies. Thus they open a new chapter for an inquiry into both market economies and
transitional economies and how they relate to each other.
In this regard, Whitleys studies in 1992 and 1994 were quite informative. Whitley compared the
natures, the economic institutions, and the organizations of business systems in Europe and East Asia.
He asked how institutions, established in pre-industrialization periods, evolved with industrialization,
generating their links with political and social norms and expectations, and with their public commitment
to changes in the business community and in their social environments. He inquired how they could make
successes through their economic coordination and cooperation, and how they could do this in the face of
external exigencies, such as wars, international pressures, and other shocks, e.g., productivity shocks
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(also cf. Aoki 1996), etc. All these factors make the institutions more appreciated as regulator and
facilitator of competition [140].
A dynamic account of Chinas transition might need to recognize its social construction in such a
dialectic way that could dovetail with its historical contexts; namely, its social construction could be thought of
as being historical derived. First, such a social construction does happen in a special time period. It does not
happen at one stroke and follow a reverse way or topsy-turvy logic. A transition can be either incremental or
radical, though. Each institutional arrangement in a transition can be considered as temporal and historically
specific. Long time periods and repeated practice have had profound impacts on the social actors in the
current transition. Our historical institutional perspective enables us to compare variations of institutional
arrangements and environments across territories and overtime, whilst addressing the comparability not only
of their disparities, but also of their similarities across these territories in terms of economic structures and
social cohesions [141]. Here again, such an institutional-based historical comparison might encounter
reductionism in the neo-classic economics. But our approach to transition essentially underscores an
institutional demarcation of hierarchy-market relations, through sets of institutional parameters drawn on
certain social expectations and affiliated with social relations drawn on given historical circumstances. Thus
the causal linkage of institutional changes ought to be traceable to the changing social expectations and
relations, in which a transitional economic system is embedded [142].
This chapter underlines that our search needs to start from where all three institutional models were
inadequate. It is imperative to bring more social dimensions into our institutionally-based historical
comparison. W e shall in the next chapter extend our interrogation to include three more sociological
dimensions, social expectation (as subjectivity and rationality), history (as spatio-temporal factors), and
institutions (as institutional pre-conditions and changes) as dynamic sources of change. Ultimately we shall
combine them to theorize about transitions.
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1. cf. Far from Beijing, a semblance of democracy by Elisabeth Rosenthal in The N ew York Times, A3,
Fri. March 8, 2002: ...A s China now convenes its legislature, the National People's Congress, it is clear
that the pyramid of local congresses that underlies the national body is changing, becoming more
responsive to popular sentiment, if still far from democratic. The congresses at provincial and local levels
have become increasingly activist since new laws expanded their powers a decade ago. Today, in many
places, they are reinventing themselves as agents of change or at least guardians of good government.
'Ten years ago, whatever the local government submitted to us we would approve, said Li Yujing, deputy
secretary general of the standing committee of the powerful Guangdong Peoples Congress, which has
led the change. 'Even if we saw great need for a certain type of legislation, all we did was wait. 'N ow not
only do we review laws, weve started to write laws on our own. W e call in outside experts. W e hold open
hearings. W e demand to see budgets. Some modest advances nonetheless represent a big change in
China. While the Peoples Congresses have long been charged with government oversight, in practice
they inevitably served as applause machines for the party-controlled government. 'The major function of
the invigorated provincial Peoples Congresses - and it is an important one - is monitoring the provincial
governments, wrote Roderick MacFarquhar of Harvard, an expert on Chinese politics. 'Politically it acts
as a brake on the untrammeled power of the provincial government. The results are particularly obvious
in Guangdong where, among other triumphs, the Peoples Congress recently forced the provincial
government to reverse a rise in the price of drinking water and demanded the resignation of powerful
officials in the environmental protection office for their failure to close polluting factories...In Guangdong
Province, where the vast majority of the 775 delegates are also party members, candidates can be
nominated by the party, by other 'authorized social groups or by more than 10 members of country
congresses. In general, delegates represent interest groups rather than places: in Guangdong, 36
percent represent workers, peasants and other laborers, 21 percent represent the interests of Communist
Party cadres, 22 percent represent intellectuals, and so on.
2. cf. China likely to see economy expand 7.7%" by James Kynge in Beijing in Financial Times, p.2,
Weekend, June 3 /4 ,2 0 0 0 : ...Despite the continued structural inefficiencies in the economy, there is no
doubt that China has made progress over the past two years in crucial reforms toward some 300,000
state-owned enterprises. The dynamic private sector is also emerging at a relatively rapid rate, a factor
that may raise the aggregate efficiency of the economy in coming years.
3. Such as AIDS drugs that would require massive capital investment in doing research. If research funds
and resources are fully controlled by few private enterprises that want to m ake considerable profits, then,
these private enterprises could tend to manipulate the medicine price, and that would make the A IDS
drugs unaffordable to those ordinary patients. In this matter, therefore, China has recently planned to
treat making of AIDS drugs and related research programs as public goods, avoiding or rejecting the
approach of privatization. That is, making of drugs is publicly allowed to be copied (in terms of generic) in
order to be sold cheaper to the unlimited users, cf. China opens door to generic drugs to counter A ID S
by Leslie Chang in The Wall Street Journal, A12, Mon. Sept. 9, 2002 (emphasis mine): Beijing - China
could soon permit generic production of AIDS drugs, showing the nation is waking up to the urgency of a
burgeoning epidemic that government estimates has infected about one million people. At a news
conference Friday, Qi Xiaoqiu, director-general of the department of disease control at the Ministry of
Health, said the government was lobbying multinational drug makers to lower the prices of patented drugs
that can slow the spread of HIV, the virus that causes AIDS. But if the talk dont bear fruit 'by the end of
the year or early next year, he said, China would change tack and start granting license for local drug
firms to manufacture and sell the medicines far more cheaply, though in violation of the companies
patents. 'W e would like to do as Brazil and India have done, to have compulsory license so the drugs can
be much cheaper, Mr. Qi said. He also noted Chinas international agreement to protect intellectual
property, but added: 'W e feel that any government must be responsible when peoples lives, health and
interests are concerned. The W TO , in which China recently became a member, allows countries to
bypass patents and manufacture generic version of patented drugs in case of national health
emergencies. For years, Chinese officials denied the seriousness of A ID S in China, even as its main
victims - poor rural dwellers who contracted the virus either through sharing needles of selling blood to
unsanitary blood stations - began to sicken and die with little recourse. Seeking a cheaper drug supply is
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in some ways the easiest part, compared with politically sensitive or logistically difficult tasks like
implementing school sex-education programs or working with such high-risk groups as prostitutes and
drug users...
In my view, some other areas that similarly need the state governments help to cover most associated
expenses, such as of insurance protection, which are unaffordable to private sectors, are environmental
shocks, disasters, and wars. cf. America uncovered - Congresss failure to end the deadlock on
terrorism insurance could cost the couniry dear by David Hale in Financial Times, p. 11, Thurs. Sept. 12,
2002 (emphasis mine): ...The US is unusual among the leading industrial nations in having no coherent
government policy to help the private sector insure against terrorism. Most insurance companies have
suspended all coverage for terrorism unless their clients buy a policy specifically focused on that risk.
Such policies are usually far more expensive and restrictive than previous policies. If there were another
attack, it is likely that there would be no significant insurance overage for either the destruction of property
or the cost of business disruption. The Bush administration recognized the need for the government to
play a grater role in insuring against terrorism risk last October. It proposed to congress that the
government would help to cover 80% of the cost of terrorist attacks after the first $1 Obn of losses: the
private sector would cover the remaining 20% . The House voted to lend insurance companies money to
cover their losses after the first $1bn. The Senate followed the original White House plan. Despite the
differences there was strong support for government intervention until the issue reached an impasse over
the question of tort - or litigation - reform. The House Republicans want to limit the ability of tort lawyers
to sue both the government and the private sector for punitive damages resulting from terrorists' attacks.
Senate Democrats, by contrast, will accept some protection for the government in punitive damage cases
but not the private sector - Democrats do not want to accept constraints on punitive damages because
they depend heavily upon the tort lawyers for campaign contributions. It is a remarkable commentary on
the power of US litigation lawyers that they have been able to delay development of an effective policy for
insuring against terrorism risk. The insurance industry needs help because the high cost of September 11
and the falling stock market have produced a huge decline in its policyholder surplus: the surplus fell by
$18bn during 2000 because of the equity market and has fallen another $40bn because of September 11.
The surplus could easily decline again this year because of the lagged costs of September 11 and the big
losses that insurance companies are experiencing on their portfolios of both equities ($155bn) and bonds
($519bn). As a result, there is only $80bn of capital left to support commercial risk exposure. The industry
has announced big price increases during the past nine months in order to restore its financial health. In
modem times, property/casualty insurance premiums have fluctuated between 3% and 4% of gross
domestic product. Between 1999 and 2001, they were just over 3% of GDP. If the industry is to restore its
balance sheet strength, premiums will probably have to rise back to at least 4% of GDP - close to
$400bn, compared with $3Q0bn last year...There is no simple way for American politicians to resolve this
conflict because of its links to the much bigger political issue of tort reform. But they are still likely to
compromise, for one simple reason. If there were another terrorist attack that produced losses on the
scale of the World Trade Center, the country would hold Congress responsible for the fact that very few
would have any insurance protection."
4. See a report by Foo Choy Peng in Shanghai and Christine Chan in Southern China Morning Post,
Wednesday, July 21, 1999: a recent party internal document about SOE reform declares that the listed
companies for privatization and going to stock markets (i.e.. a handful of the 900-odd companies listed on the
Shanghai and Shenzhen stock exchanges) do not include those strategic industries of public goods and
defense industries. Overseas listed state-owned firms are also not included in the list.
Even in the West today, all-round privatization is not unproblematic, cf. British reopening the debate over
privatization - Energy losses lead some to ask if business can do everything better. Picture illustration: A
British Nuclear Fuels installation in Cumbria, in northwestern England. Some of that companys reactor
contracts could be transferred as part of an effort to bolster the finances of the struggling British Energy by
Suzanne Kapner in The N ew York Times, Thurs. Aug. 2 9 ,2 0 0 2 (emphasis mine): London, Aug. 28 - Sizable
losses by one of Britains largest nuclear power companies have reopened debate here over the limits of
privatization. The company, British Energy, is the latest example of the problems Britain has had with its
privatization program. Facing declining energy prices and tough regulations, British Energy has lost millions in
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the last two years. Last October, the Railtrack Group, which owns the nations railroad tracks, signals and
stations, was declared insolvent and effectively re-nationalized through a public-private partnership. In
addition, the former air traffic control monopoly has struggled since it was privatized last year. In the 1980's
under Prime Minister Margaret Thatcher, Britain started turning state-owned entities into private companies,
often by selling shares to the public. Private business, the thinking went, would be more efficient than the
government at running businesses and providing services, and opening industries to competition seemed like
the ideal way to pass savings on to consumers. Analysts say that for the most part, that thinking holds true.
They maintain that most of Britain's privatized industries - ranging from telecommunications to coal and steel
- have worked. But they also say that the recent trouble underscores important lessons that will serve as a
bellwether not just for Britain, but for other European countries in the process of privatizing their industries.
'W e ve learned that not everything is right for privatization, said Philip Collins, director of the Social Market
Foundation, a research institute here. For British Energy, which was privatized in 1996 and produces 230% of
the countrys electricity, the limits came largely in the form of regulation that put nuclear generating
companies at a disadvantage to other energy producers. Nuclear plant owners are required to pay a share of
a climate control tax intended to limit cartxjn dioxide emissions, even though they do not produce the gas.
And they also pay higher rates on property leases than fossil-fuel plants do. British Energy has been lobbying
for exemption from the tax and for revised property rates, which if changed could result in savings of 100m
(about $154m) a year, analysts said. Partly as a result of these restrictions, British Energy is losing money at
its eight plants in Britain. Over all, the company lost 39m ($59.9m) in the most recent fiscal year, after losses
of 23m the year before. The financial situation took on fresh urgency this week, when the company shut
down two reactors in Scotland after problems with gas circulators were discovered. Two other plants in
England are closed for scheduled maintenance. The total cost of the shutdowns could approach 80m, the
company said, though insurance will probably pay some of it. Such losses are unsustainable, analysts said,
especially if British Energy is to put away enough money to shoulder the cost, estimated at 14bn over the
next 15 years, of taking older plants off line. The problems at British Energy come amid a broad review of the
nations energy policy. Although electricity prices initially fell sharply, recent results have been mixed. A report
by Credit Suisse First Boston estimates that since 2000. wholesale electricity prices, the prices at which
British Enemy sells its power, have dropped 36%. vet domestic retail prices remain flat - a poor scorecard for
a free-market system that is supposed to benefit consumers. Advocates of privatization said there was
typically a lag between changes in wholesale and retail prices. But even free-market advocates agreed that
the government would probably have to act if British Energy was to remain solvent. Analysts said
renationalizing the company would be an embarrassment, particularly after the Railtrack debacle. But there
are less direct ways the government can help. One option is to transfer some reactor contracts from another
company, British Nuclear Fuels, to British Energy, bolstering its revenue. The two companies said they were
discussing such a proposal. But if wholesale electricity prices remain low, additional steps may be needed.
'Its almost inconceivable that the government would let British Energy go into receivership, Roger Reynolds
of Credit Suisse First Boston said. Eamonn Butler, director of the Adam Smith Institute, said that for free-
market advocates, the solution is to limit politicians involvement. But for others, issues of free markets are
inextricable form matters of social justice. 'Whose responsibility is it when a commercial company doesnt
provide for things that are socially necessary in the public realm? Mr. Collins of the Social Market Foundation
asked. Where there are public goods at stake, a private market on its own hasn't delivered. He and others
suggest that the solution lies in public-private partnerships, like the model being tested with the railway
system. In such a case, the company remains private, but the money it earns is put back into the services it
provides. The Railtrack model is being scrutinized, analysts said, by Germany and the Netherlands, both of
which are restructuring their rail systems. Still, there is no guarantee that joint ownership will work. Mr. Collins
said, mainly because it removes a pillar of free-market efficiency - the threat of bankruptcy."
5. cf. Chinas star rises - The countrys economy is growing strongly again and there are signs that
structural reforms will help to sustain the recovery by James Kynge in Financial Times, p. 16, Tues. July
25, 2000: W hen China sneezes, Asia catches a cold...The last time the worlds most populous nation
entered a new growth cycle was in the early 1990s. That boom, which lasted until 1996, was powerful
enough to help drive vibrant growth throughout the region. Some economists believe that history may be
about to repeat itself. Fund managers have begun to increase Hong Kongs weighting in regional
portfolios, and the search is on for credible stocks with exposure to growth in mainland China. 'The bull
case for Asia is at present more soundly based on China than Japan, says Christopher Wood, chief
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global emerging markets strategist at ABN Amro Asia. 'China is looking better than at any time since the
early 1990s."
6. cf. Barry Bluestones presentation in UW-Madison, Sociology Dept., Feb. 7, 2002. Bluestone
mentioned economic redundancy very often indispensable to the m aiket economies.
7. cf. Worlds big banks weigh taking small China stakes - Investing offers scant control but builds
relationships with local regulators" by Karby Leggett in The Wall Street Journal, A15, Tues. Dec. 11,
2001: ...Chinese bank regulators have long been wary of allowing foreign investors into an industry
considered central to economic security. Foreign banks in China face a slew of restrictions ranging from
where they can open branches to capital controls and the clients they are allowed to serve. But Chinas
membership in the W TO , which will phase out all restrictions on foreign banks operations in China over
the next five years, is starting to change that.
Also cf. China begins career as a W T O member - Pacts stipulations offer cover to reformers; state
interests linger* by Peter Wonacott in The W all Street Journal, A14, Tues. Dec. 11, 2001: Chinas W T O
entry wont force Beijing to abandon its strategy of backing favorites altogether. At a weekend
government conference, Vice Premier Wu Bangguo said China would help 50 state-owned giants to fend
off foreign competition in such sectors as petrochemicals and telecommunications..."
8. Ibid, "I outline a political cultural approach and I use the metaphor 'markets as politics to discuss how
these social structures come into existence, produce stable worlds, and are transformed.
9. For instance, SOEs have political leverage in competition. Hence, as Fligstein emphasizes (ibid), firm
competition is an issue of political economy.
10. cf. Fligstein 1996, pp. 656-7: These latter perspectives have been buttressed by studies on comparative
industrial organization (Hamilton and Biggart 1988; Chandler 1990; Gerlach 1992) that show how state-firm
interactions in various societies have produced unique cultures of production. Industrial countries are not
converging toward a single form (Fligstein and Freeland 1995). Instead a plurality of social relations has been
observed that structure markets within and across societies. These observations have challenged the
neoclassical economists' view that markets select efficient forms which, over time, converge to a single form."
11. cf. "China's Leaders Face "Grim Reality of Skidding Economy" by James Cox in USA Today, 5B,
Monday, August 10,1998: "by sliding exports and consumption, China is pulling back on its drive to downsize
unprofitable state-owned companies, privatize housing, clean up banks and cut government by half...They're
facing a grim reality. They have no choice but to slow down their ambitious reform program and pump in
more (government) money to heat up the economy...Beijing worries that the economy is not growing fast
enough to absorb state sector employees being laid off as a result of its reforms...The government has
responded by easing pressure on state firms to fire unneeded workers and on banks to stop lending to
money-losing state companies. Plans to eliminate housing subsidies by raising rents and encouraging
occupants to buy their apartments have been delayed indefinitely. Top leaders say the economy must hang
on at an 8% growth rate to avoid the risk of widespread unrest among growing legions of unemployed
Chinese. The plan: prime the pump by accelerating a three-year, $750 billion infrastructure program that will
pour billions into bridges, roads, dams and power piants.Jntemal wrangling has stalled Premier Zhu Rongji's
campaign to cut up 4 million civil servants nationwide, combine ministries, and split the business interests and
administrative functions of government branches."
12. cf. Qian and Xu 1993, p. 154.
13. Ibid Chapter 9 Can Privatization Solve the Problem of Soft Budget Constraint? - 'M onetary vs.
'R e a l Perspectives on East European Reforms.
14. See a recent case of K-marts bankruptcy protected by the U S legal system, cf. Kmarts directors
back Chapter 11 filing - action in Bankruptcy Court, possible today, to follow curbs from key suppliers by
213
The Wall Street Journal staff reporters Mitchell Pacelle, Amy Merrick and Scott Kilman in The Wall Street
Journal, A3, Tues. Jan. 22, 2002: Crippled by a dismal holiday seasons and halts in shipments from key
vendors, Kmart Corp. is expected to file as soon as today for bankruptcy-court protection, people familiar
with the situation said. The board of the nations No. 2 discount retailer authorized the filing in a meeting
late yesterday afternoon, after efforts to secure bailout funding from its bankers fizzled, these people said.
The discounter is expected to use the process of filling under Chapter 11 of the US Bankruptcy Code to
shut down underperforming stores and restructure about $4.7bn in debt...The Chapter 11 process gives
troubled companies a temporary reprieve from creditors so that they can devise a plan to restructure.
Kmart was in negotiations yesterday afternoon to secure as much as $2bn in debtor possession financing
from a group of lenders including J.P. Morgan Chase & Co., Fleet Boston Financial Corp., and General
Electric Co., according to someone familiar with the situation. Such financing, which is senior to most of
the companys other debts, will enable it to continue operating in bankruptcy court. A provision of
bankruptcy law that will be especially helpful to Kmart is a formula that sets a ceiling on the liability to
debtor companies for walking away from real-estate leases. A slew of movie-theater companies used the
Chapter 11 process to dump their weakest leased theaters. Analysts believe Kmart needs to close as
many as 500 underperforming stores, about 25% of the total chain...Under Chapter 11 protection, Kmart
is expected to shut down other underperforming stores. Under bankruptcy law, Kmarts liabilities will be
capped at the greater of either one years rent or 15% of the remaining rent for a maximum of three years.
O f utmost importance is that Kmart keep its shelves stocked. Nothing in the law stops Kmarts suppliers
from halting shipments, but bankruptcy court does give vendors some incentives to keep shipping. For
instance, vendors who ship after the filing receive priority-payment status. Because the primary purpose
of Chapter 11 filing is to keep a company operating while it reorganizes its debts, both the judge and the
company typically strive to avoid alienating customers and hereby damaging the franchise. In the case of
Kmart, it is so large a customer that most suppliers will want to keep its business. It accounts for about
25% of Flemings revenue, for example..."
15. Ibid, p. 128: "...Where the leadership exercises these opportunities by permitting slack and indulging
in corporate personal consumption, size limitations necessarily follow - especially if lower-level
performance varies directly with higher-level example, which normally is to be expected."
16. cf. Tiger China pussyfoots around growth by John Thornhill in Financial Times, p. 28, June 3, 2002
(emphasis mine): ...Chinas growth rates - unlike most of those in south-east Asia - have been boosted
by large-scale government spending during the past five years. There is also a huge amount of off-
balance-sheet funding that has bolstered parts of the economy. CLSA, the international investment bank,
has calculated that China's true public debt to gross domestic product ratio is 139% - rather than the
23% publicly stated - once the state-owned banks and companies debts and obligations are taken into
account. This may not be a problem if the economy continues to expand at a reasonable rate but it could
crush the economy, if growth stalls. In any event, it is clear that much of the countrys capital spending
has been wasted. While Chinas investment rate of 40% of G D P produces economic growth of 7% a year.
Indias investment rate of 25% generates G D P growth of 5% . Is there, in fact, something fundamentally
flawed with the Chinese economy, which is impeding faster growth? But my argument is that the
question here might not reside in the states large-scale government spending per se but in that how the
state could properly treat its large-scale government spending. To my understanding, the right question
here ought to be: is such large-scale spending wasteful to sack Chinas economy or indispensable to
transform the economy in a way of sustaining faster growth rate than its Indian counterpart. A fact facing
Chinas economic transition, as John Thornhill correctly pointed out, was that it is also [an economy]
moving from a planned economy to a market economy. This is a negative constraint on growth and that
massive, state-owned enterprises need to restructure their entire businesses without sacking millions of
workers and shredding the corporate welfare net (ibid.). W hat is unique to such a transitional economy is
the fact that Chinas huge part of formal employment of industrial sectors has amassed in its large-sized
SOEs. How could one expect China could absorb millions of formal workers immediately while
accelerating its economic streamlining? Instead, only huge investment in public sector and infrastructure
could help China both improve its economic efficiency and avoid massive layoffs, since massive layoffs
would create even greater social instability, very self-destructive to Chinas transition and economic
restructuring. In addition, Chinas scale economy (consisting mainly of large-sized SOEs), which has been
214
concerned with the core of its R&D programs, is also dependent on the huge public investment. Put
differently, the currently massive public investment has been indispensable to Chinas transition, 'if you
take all these challenges into account (ibid.).
I think that the real problem facing Chinas state leaders and reform planners is that how China could
steer a balancing path between economic streamline and social legitimacy to address the underlying
efficiency concerns, while still managing its sustainable fast growth in transition, rather than how China
could run a huge percentage in public spending, a figure that is reflected merely in paper as if Chinas
economy were even less efficient than Indias in allocation of resources. The balancing act is going to be
a very tough challenge facing China. In this regard, contrary to John Thornhills claim, a real problem in
Chinas recent transition has been a constant decline of governmental tax revenues and public
expenditures (to the level of only 12% of its GDP growth, compared to that of 30-40% of the G D P growths
in most advanced industrial countries). In my view, this fact is contrary to the assumptions by those
advocators for greatly reducing public spending and restraining public investment in Chinas transition.
17. He argued that "No one could have known ahead of time that IBMs massive R&D advantage would
be undermined by its slowness in making decisions or that the development of continuous casting
steelmaking technology would make possible mini-mills that could steal market share from the traditional
large, integrated producers. It is possible that scale economies will increase in some sectors and
decrease in others at the same time... Ibid.
18. With a greater elaboration, however, Powell 1990 adds that it is the nature of information technology (IT)
to facilitate the inter-organizational collaboration in place of scale economy. Since these configurations
evolved in high technology, they can process information in multiple directions, and thus create complex
webs of communication and mutual obligation to enhance the spread of information (Powell 1990: 316).
Thereby those IT-based firms may combine their strengths and even overcome weakness in collaboration:
the advantages they could gain are much broader and deeper than those with typical marketing joint ventures
and technology licensing that used to be prevalent.
19. In the West, however, most qualified centers of specialized excellence find themselves increasingly
being located outside the boundaries of the large corporations. At the same time, some research firms
dependent on large corporations are becoming less able to obtain the support they need to sustain their
advance of science and technology necessary to fuel growth.
20. Notre Dame's debates in recent years about joining the Big Ten Athletic Conference serves as an
example of a Western academic consortium and its decisionmaking procedures. If Notre Dame acquired
athletic membership in the Big Ten's and University of Chicago's academic consortium, it would automatically
be eligible to share all of the gigantic resources and facilities owned by its Committee on Institutional
Cooperation (CIC). On one hand that would enhance Notre Dame's research level from a rating merely as an
undergraduate institution to a rating as serous graduate center. On the other hand, while the schools Faculty
Senate applauded such a decision, the board of trustees became worried about Notre Dame losing its
national and catholic identity, that is "Notre Dame's long-held and carefully protected image." "Of course,
[even if it joined the conference,] it would continue to be a Catholic University," the Rev. Bill Miscamble, an
associate professor of history and Notre Dame alumnus, said. cf. USA Today, 2C, Thurs. Feb. 4 ,1999.
21. Janusz A. Ordover and Robert D. Willig 1985 did report on the ways in which joint ventures (RJVs)
delayed R&D, as well as incentives and competition (cf. p. 332).
22. cf. Nee 1989, 22: "Alternatively, the boundary is not only redrawn by state policy makers; it is also
reshaped by society, by the activities of peasants, manual workers, and other employees who are not
functionaries in the bureaucracy."
23. Some reformers aware of orthodox Leninism and dogmatist Marxism might presume so. The transitions
in the FSU and the FEE might be affected somewhat by such orthodox and dogmatic ideas. Superstructure,
a Marxian term, refers to an ensemble of political institutions, legal systems, ideologies, and cultures, etc.
215
Also according to Mao, a socialist state should continue its revolution, mainly in regard to its superstructure.
Such a philosophy led him to launch Chinas Cultural Revolution in the founding years of the PRC.
24. cf. Qian and Xu 1993, p. 158: "given the unprecedented and complicated nature of the transition from
centralized to market economies, an experimental approach may be a less costly way of learning to establish
and to use market institutions in transition. Economic theory does not provide sufficient guidance for the
transition. Other countries' experience may be relevant, but must be adapted to each country's own situation.
By the decentralized nature of market economy and by the very nature of the transition, a large amount of
bottom-initiated institutional experimentation is needed to acquire knowledge in transition. Although the U-
form structure is not suitable for large scale experiments...it is still possible to establish some special areas for
the purpose of experimentation. To avoid interfering with the normal operation of the economy, these regions
should be located outside the old industrial areas and far away from the central control, as was done in
China. Alternatively, after decentralization and de-concentration of the state sector, the economy will be more
suitable for local experiments."
25. This table adapts the ideas from "Organizational Isomorphism in East Asia" by Marco Orru, Nicole
Woosley Biggart, and Gary Hamilton in The N ew Institutionalism in Organizational Analysis, eds. Walter
W . Powell and Paul J. DiMaggio 1991, p. 386.
26. For further discussion of these issues, readers might check arguments in organizational studies. For
instance, Thompson and Thore 1992 (89) contend in that organizational efficiency becomes indeterminate in
light of any single form but may be suboptimal in a combination of diverse forms, away from the optimally
efficient frontier. Thus firm efficiency optimization can only be realized in the mix of several forms or input
factors corresponding to organizing and managing the production process. Early in 1978, Chames, Cooper,
and Rohodes proposed a more complex data envelopment analysis (DEA) of the multiple-input-multiple-
output situation. Then in 1998 Kenneth I. Spenner et al. in their micro-organizational analysis of Bulgarian
SOEs' reform and macro-economic policies further tested and developed Chames et al.'s hypotheses. They
found that efficiency enhancement is not always determined by production function or/and a linear
combination of some input factors; efficiency enhancement is less significantly correlated with firm size,
and/or organizational change than with path dependence and industrial environments, etc.
27. cf. Nee 1989, 22: "Alternatively, the boundary is not only redrawn by state policy makers; it is also
reshaped by society, by the activities of peasants, manual workers, and other employees who are not
functionaries in the bureaucracy."
28. In this light, transition could be seen as initiated and affected by social actors' identity crisis during the
transition and before.
29. For instance, Powell 1990 criticizes Williamsons theorems for failing to identify "networks as a
distinctive form of coordinating economic activity. According ot Powell, Williamson maintains that
"economic changes can be arrayed in a continuum-like fashion with discrete market transactions located
at one end and the highly centralized firm at the other...[ignoring]the various intermediate or hybrid forms
of organization" in between these poles. "Moving from the market pole, where prices capture all the
relevant information necessary for exchange," there exist "various kinds of repeated trading, quasi-firms,
and subcontracting arrangements"; "toward the hierarchy pole," there are "franchising, joint ventures,
decentralized profit centers, and matrix management" (Ibid. 298).
30. cf. Nee 1992, p. 3: Local government involvement in rural industry has been interpreted as a
distortion of partial reform that undermines the efficiency goals of economic reform (Wong 1986, 1987,
1990). The claim is that the causes of inefficiency were unwittingly transferred from central ministries
down to local governments, where they were compounded by the antimarket, protectionist conservatism
of local officials and the Maoist legacy of closed local economies."
31. This figure might work in reverse, as suggested by the dotted line of the diagonal from left-bottom up to
right-top, that could present the flip side of the story - the current transition of the market economies from
216
laissez-faire capitalism toward the social welfare state. The question is how to explain this thesis rather than
Nees. What are the relationships between these two theses? Why do the institutional reforms in transitional
economies and market economies have divergent forms? W hat are their boundaries? Do they ever
converge? Does each system of reform have an antithesis or a contradictory thesis? What are the natures of
the institutional reforms to both kinds of economies? From above figures we can see market-hierarchy
relations in a continuum beyond their binary poles that Williamson expressed in his theorems of transaction
costs. The hierarchy-market continuum still is unidimensional, yet it could present their variations and
mutations. Answers to any of these questions will lead us into a more complicated inquiry than Nees
straightforward concern about unidirectional market transition. For a more detailed discussion, the reader
may refer to our further illustration in Section 5.21, Chapter 5.
32. In this matter, as Boisot and Child stated in 1988 (511), The unidimensional hierarchy-market
continuum underlying Williamson's analysis implies that a response to market failure will lie in the
substitution of hierarchical coordination, while a response to bureaucratic failure will lie in greater reliance
on the market mechanism. In both capitalist and socialist countries during the past decade there have
been strong voices proclaiming bureaucratic failure and the need to give greater play to the m arket...The
current [Chinas] economic reforms can be seen in one sense as the leaderships response to
bureaucratic failure, and the fact that it is exploring market forms of governance would appear at first sight
to speak in favor of Williamsons continuum...As Williamson (1985: 392) himself noted, however, the
study of bureaucratic failure remains very primitive and the associated literature is relatively
underdeveloped. One recommendation for dealing with bureaucratic failure that has in recent years
gained favor in the West, named to place greater reliance on organizational 'cultures' fostered by top
management (Deal and Kennedy 1982), clearly points to movement toward a fief mode rather than
toward the market.
33. Also cf. Boisot and Child 1988, p. 524: Berger (1987) distinguished between governance choices that
favor markets or hierarchies and those that simply favor modernization...Seen in this light, system reform in
the Soviet Union genuinely boils down to a choice of first type, and the challenge it faces is to reposition
some transactions along Williamsons continuum toward market forms of governance. Even so, the move up
the culture space toward greater codification that accompanies modernization may only be a partial one, as
the continued presence of bureaucratic fiefdoms in the Soviet Union and the quasi-feudal nature of much
Japanese managerial practice (Boisot 1983) serve to remind u s...
34. Nee pointed out that China's market conditions had the same flaws in 1992 that it had in 1989, despite
modifications.
35. See Theresa K. Lant and Joel A. C. Baum's critique of this deficiency of macro-institutional analysis
(1996, pp. 15-6).
36. Nees 1989 work justified the merits of the New Institutionalism that poses a framework "based on the
assumption that state socialism represents a distinctive social formation that has its own institutional logic
and dynamics of development." Nee pinpointed its presence as "defined in opposition to the earlier theories
of totalitarianism and modernization." He stated that "This [state socialisms] logic is not derived from
capitalist development, either as its polar opposite or its convergent future", but taking "into account the
institutional arrangements specific to state socialism" (1989, pp. 30-31; brackets mine). His statement might
be thought of as opposed to modernization theory, the one which, as Nove early in 1983 outlined,
optimistically projects that market reform and its social consequences would ultimately accompany
homogenization of social, economic, and political institutions between state socialism and capitalism. Nee
however points out here that "far from convergence as a likely outcome of market reform in state socialist
economies, the societies of China and Eastern Europe are giving rise to a new diversity in social life that
stems from dynamics peculiar to state socialism...[despite] juxtaposing elements of socialist realism with
Western commercial culture, traditional cultural forms with contemporary practices...The plurality of
property forms in reforming socialist societies thus is giving rise to a hybrid version of socialism that
accepts practical compromises and mutually contradictory principles as a given condition of social life" (cf.
Nee, 1989: 30-1). No doubt, his arguments in light of the New Institutionalism convey some active
217
progress with the acknowledgement that the dynamics for change and the future development in these
economies will be derived from the existing environments and arrangements peculiar to their histories
and the realities rather than be grafted from outside, although these economies are "juxtaposing [their]
elements" with Western cultures.
37. cf. Nee 1992, p. 1: Despite the political retrenchment in China, the market reforms implemented in
the 1980s have had lasting consequences that are not easily reversed, even with a hard-line conservative
faction in control of state power. Economic reform from 1978 to 1989 brought about changes in power
relationships within the state structure and in society, which in turn gave rise to new alignments of
interests that champion marketization." Ibid., p. 4: A continuing shift from redistribution to markets,
however, induces change in the comparative costs of governance...Key factors that explain the rapid
growth of hybrid forms and private enterprise are the expanding relative scope of market institutions in
coordinating the economy, changes in the structure of property rights, and the incremental shift from a
redistributive to a regulatory state (Nee, 1989b)...
Also ibid. p. 7: In a redistributive economy, central decisions distribute goods and services through a
vertical hierarchy (Polanyi 1957). What characterizes redistribution at each level of this hierarchy is the
structured centricity of economic transactions. W hether at the local, provincial, regional or national level,
the circulation of goods and services in a state socialist redsistributive economy involves complex
resource transfers from the firm to state agencies, which in turn allocate factor resources back to firms
and distribute output to consumers. Within this system, the redistributive firm (whether a collective or a
state-owned enterprise) operates as an appendage of the state, responding to commands sent down
from the central ministry, provincial bureau, or local government. In the case of the marketized firm, the
hierarchical centricity of the classic redistributive economy is replaced by a mixed regime characterized
by increased market dependence. With the expansion of markets, horizontal market transactions increase
in significance while dependence on vertical ties lessens, as the firms survival and growth become more
contingent on market exchange.
38. I.e., those institutional mechanisms designed to reduce the ex ante resistance to privatization and to
increase the durability of reform ex posT. W e might refer the form er to the function of hard budget
mechanisms, and the latterto the creation of new political environments (ibid. pp. 1 1 1 -2 ,1 2 5 ).
39. It is so because state intervention is thought of as a problem exclusive to state socialism or a

sweeping deficiency of state socialism.
40. For example, to illuminate the rising NGOs in Chinas economic transition. See A shoppers friend:
Consumer protection in China - Wang Hai goes after the cheats in The Economist, p. 41, Asia, November
17th, 2001: In a small, dimly-lit office in the northern outskirts of Beijing, a new Internet venture is trying to
cash in on the growing demand among Chinese consumers and businesses for protection of their legal
rights. One of the companys investors is Wang Hai, who has become something of a hero in China as a
campaigner. Wang Hai Online Information & Consulting hopes that Mr. W angs fame will attract clients willing
to pay for legal help. Wanghai Online is a commercial spinoff from a growing body of individual activities and
non-governmental organizations (NGOs) that has begun to emerge in China as the Communist Party retreats
from its once all-pervasive involvement in public affairs. The 'W ang Hai phenomenon, as some Chinese
newspapers call it, began in 1995 when Mr. Wang discovered a little-publicized section of Chinas new
consumer-protection law. Clause 49 says that business operators found to have committed fraud in providing
goods or services must compensate the consumer with a sum double the amount paid. Mr. Wang bought a
number of fake products - which abound in China - then demanded compensation from the shops that sold
them. The media ad public lionized him. Fearful of reprisals from angry shopkeepers, Mr. Wang took to
wearing dark glasses. They have now become his trade mark. The Communist Party had no reason to
discourage Mr. Wang. Such activism has helped China to convince the public and especially the outside
world that it is serious about protecting intellectual-property rights. Demonstrating such commitment was an
important part of Chinas bid to join the W TO , which was finally approved last weekend [in 2002], after 15
years of talk. But activism such as Mr. W angs is changing China in even more important ways than simply
helping the countrys downtrodden consumers. It is the driving force behind the development of autonomous
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NGOs that are trying to fulfill the needs of citizens as the party becomes less able or less willing to do so
itself. While Mr. Wang is engaged in making money - albeit with the stated motive of helping and educating
consumers - many others like him have established organizations which belong more clearly in the NGO
category. They are engaged in a wide range of activities, from advising women to campaigning for
environmental protection. Chinas fledging NGOs avoid confronting the party, which may be grateful for some
of their services but is still extremely wary of any organized force...The government sponsors a group called
the China Consumers' Association, which approves of Mr. Wangs efforts..."
41. It was not until 1995, when privatization of the state sector became a preferred method to navigate
the transition.
For most of the transitional economies, re-privatization has underscored the old problems inherited from
the old regimes before the socialist revolutions. It was initially instituted by the restitution of those re
claimed lands and property rights to the old owners or heirs or other claimants, most of whom were bom
in the pre-WWH period and now are 80-90 years old. The complexities of the asset restitution could have
involved many factors, like historical, religious, political, geographic contingencies, archival evidence,
multiple asset transfers, etc., and particularly those institutional barriers. And the public polls in the
economies do not show the keen interests in recreating the new social divisions and in promoting the
stakes of old vested interests, and of those high-profiled aristocratic claims. In Chinas case, therefore,
privatization has so far proceeded not in the way of re-privatization, but mostly the forms of those recent
upstarting individuals and enterprises as well as the newly emergent sectors, such as joint ventures with
overseas private capital. See an article analyzing the difficulties for such re-privatization in transitional
economies, cf. Lost property of a generation - Private homes in Poland were seized first by the Nazis,
then the communists - and then the countrys borders were moved. It all makes the task of unraveling the
claims of conflicting owners seemingly impossible" by Stefan Wagstyl in Financial Times, p. I, Feb. 10/11,
2001: ...T he restitution problem in Poland is incomparably more complex than elsewhere. Can this
problem be resolved completely? Probably not. Should we try? Yes...Successful claimants would find
themselves sharing ownership with the present owners, often municipal authorities. W here restitution
proves impossible...the government would offer alternative property or financial compensation in the form
of public bonds...[that] would cost about $10bn, the most the economy can bear...the [restitution] plans
are 'seriously flawed and...[wait] ominously for the Polish government..."
42. Boisot and Child 1988 captured such a contrast between China and the West in their observation of
the changing organizational forms of network information, which could provide their alternative
explanation about Chinas transition (511), ...whereas uncodified and more personalized transactions
are sought as complements and counterweights to bureaucratic ones that have become inefficiently
entrenched and hegemonic in large Western organizations, in the PR C they are re-emerging as
opportunistically available traditional alternatives to a bureaucratic order that fails to stabilize for want of
formal rationality (W eber 1968). It is essential therefore to heed Granoveters (1985) critique of
Williamson for failing to take account of the social embeddedness of economic transactions. Williamsons
reliance on economic efficiency for explaining the choice of transaction made not only depends on the
assumption of the universal motivational primacy of economic considerations; it also overlooks the extent
to which a country's social relations, as the behavioral and structural expressions of its culture and
development, support or detract from the efficient operation of different transaction modes." W hat the
underlying point here is that whereas the W est tends to prefer more formalized institutionalization and
marketization, Chinas current hybrid economy and decentralized hierarchy tended to more favor
uncodifled and personal information, socially-embedded, which is fitted well to China's transition.
43. Stark and Nee 1989, p. 11: 'These allocative inefficiencies of central planning led early reformers in state
socialist societies to advocate incorporating the market mechanism into central planning. The socialist state
would control the commanding heights of the economy, regulating the market mechanism by manipulating
investment credits, amortization rates, depredation allowances, interest rates, prices, wage structures, and
other macroeconomic controls."
44. Nee himself called for embarking on such an undertaking in 1992, while proclaiming that the
219
organizational mechanisms in forms of hierarchy and property rights for marketization in transitional
economies are distinct from those in market economies.
45. Under this general guidance, Burt emphasizes how critical it is to balance network size and diversity
for effectiveness (ibid. p. 67). Also cf. Figure 2-5, ibid. p. 71. For Burt, how to make transmission is a
matter of network as medium. Accordingly, researchers ought to pay sufficient attention to how such
transmission could be affected by a network of agencies and organizations delivering varyingly accurate
information (Burt 1995, 259).
46. For Boyle, the transmission as intermediaries could underscore the plural nature of any kind of
industrial model and the associated social and historical traits cf. Boyer 1998, p. 27: ...This vision of a
'one best way implies that there is a single optimal industrial model whatever the context or period, and
that, except for non-economic obstacles (which are viewed as irrational), firms and countries should
converge towards nearly identical configurations. On the other hand, recognition of the relative character
of superiority in production opens the way for a plurality of models to coexist because they are better
adapted to various contexts, to the point that durably divergent trajectories may characterize the evolution
of industrial models.
47. W hat researchers need here is to distinguish these two kinds of trends, backward and forward,
downhill and uphill, and inert and dynamic, in different time horizons, clarify them by nature, and to inquire
into the complexities and mechanisms working in the whole complexion.
48. Campbell et al. 1991 contend in an inverse way that competitive markets could stimulate demand for
protectionist measures or hierarchical allocation of resources on behalf of threatened enterprises and sectors
of the economy.
49. Also cf. Nee and Stark 1989, pp. 17-8 (emphasis mine): T h e outcome of market reform in Eastern
Europe has been largely disappointing, especially in light of the early reformers extreme confidence in the
harmonious, mutually correcting duality of plan and market. Instead, partial reforms both perpetuated
problems of prereform economy created new distortions and imbalances. As Komai suggests, the naivete of
the early reformers was to believe that in combining central planning with the market mechanism they could
achieve the best of both worlds. They failed to consider fully the possibility that partial reform would result in
the worst of both worlds. The command economy turns to a hybrid economy, which Komai argues operates
in a condition of 'dual dependence' in which the economy is coordinated by both vertical bureaucratic and
horizontal market relationships. The essence of dual dependence, however, is the continued dominance of
hierarchical forms of coordination over the socialist firm and the debilitation of the market mechanism by
persistent and pervasive bureaucratic micnointerventions. This is the dilemma of partial reform, that despite
giving a greater role to the market, all of the critical decisions - entry, exit, investments, prices and wages,
output, credit - still depend more on processes internal to the planning governance structure than on the
market. As a result, the problems of the soft budget constraint, shortage economy, and investment fever of
the prereform socialist firm persist in the post reform economy. Komais analysis of the reforming socialist
economy reveals the relative weakness of the market mechanism when confronted with an intact
bureaucracy accustomed to controlling economic action. Whether the actual mechanism of bureaucratic
control is direct or indirect, the effect on the firm is to weaken its responsiveness to the market and
perpetuate the conditions of inefficiency associated with central planning. Komai concludes from the
Hungarian experience of partial reform that without a decisive shift from plan to a structure of market
governance, characterized by hard budget constraints and market competition, there can be no escape from
the dilemma of dual dependence."
50. As Whitley writes, "In the West, as in East Asia, effective ways of coordinating and controlling economic
activities in market economies depend on, and are closely connected to, particular institutional arrangements
of the kind and will not be as effective in situations where these differ markedly. The comparative analysis of
Western business systems, then, focuses on the processes by which specific national institutions encourage
and constrain specific features of business structures and managerial practices to become established and
relatively effective, and how these change, within the more general context of greater institutional pluralism.
220
commitment to legal-rational authority principles and stronger emphasis on individual identities, rights and
dirties throughout Western societies when compared to East Asian ones. National configurations of
hierarchy-market relations are not so distinctive and specific as in Japan. Korean. Taiwan and Hong Kong.
but important variations nonetheless exist and can only be adequately understood in terms of major
institutional differences (1994:251; emphasis mine).
51. The eariy studies failed to recognize those existing variants and alternatives in transitions. Despite
many of their trenchant critiques and insights, their analysis did not go much further than dabble in those
macro-institutional issues about transition. Although some later institutional models (such as those of Nee)
opened new directions and broadened our visions, we could still call their achievements initial steps for
further institutional discourse on transitions. Epistemologically, these early critics including some
institutional models had their mindsets enmeshed with methodological reductionism, imbued with some
neo-classic conventions. The former planning economies were criticized only in very general terms with
little regard to their specific arrangements and alternative mechanisms in their respective and different
contexts.
The reader may refer to some critics of the weaknesses of neo-institutionalism, cf. John R. Sutton and Frank
Dobbin 1996, 798: "Early formulations of neoinstitutional theory sought to explain organizational conformity
with highly institutionalized, and therefore broadly legitimate models of structure and practice (DiMaggio and
Powell 1983; Meyer and Rowan 1977). This approach has been useful in explaining the diffusion of
established institutional forms, but has been less successful in accounting for institutional change - an issue
that requires greater attention to interest and agency (DiMaggio 1988; Jepperson 1991; Poor 1985).''
52. Those early institutional studies that we discussed in Chapter 2 had indeed made great strides in
exploring the failures in market efficiency in the previously planning economies that was attributable to their
inherent institutional deficiencies, such as those wasteful "soft budgets," hyperactive micro-interventions,
inept regulations and administrations, etc. But these studies were problematic that they designated only the
institutional constraints to the unique state/hierarchy-market relations in the economies, but paid little regard
to those alternative forms and dynamic solutions, economizing on transacting governance, in response to the
competition. With such incompleteness, these works fell short of anticipating the tragic catastrophes in the
programs of re-privatization in the FEE and the FSU and of explaining the sustained fast growth in transitional
China.
To learn from the dynamic roles of institutions, we could start from some of the latest institutional studies
such as, those of North (1990) and Aoki (1995). Both of them accented that mode of hierarchical
governance, that is not antipodal to market competition but could take a critical part in organizing either
market economies (North) or transitional economies (Aoki). Lindberg, Campbell, and Hollingsworth
volume in 1991 could be considered to be a further supplement to Williamson's transaction cost theorems
or their ramification. But they contended that as the underlying institutional alternatives are diversified,
they all could economize on transactions by virtue of effective governance arrangements and thus be
appropriate organizational forms, as well as legitimate power structures. These writers' endeavors guided
a new search that redirected researchers interests to study those differed yet more dynamic institutional
arrangements, either as alternative forms of market and hierarchy, or as alternative forms beyond any
market-hierarchy binary scheme, or as intermediaries between market and hierarchy, the two extreme
ends in an economy. In this light, we could regard existing institutional models moving toward this
direction, such as Nee's inquiry into hybrid economic forms in China's transition in 1992, Qian and Xus
probe into M-form hierarchy in 1993, Boisot and Childs examination on network transacting governance
in 1996, and Peis interrogation on the TVE s in 1996 as a nascent economic sector emerging form
Chinas reforms, and so on. All of these competing theses appear caught up in the contemporary social
theories and the up-dated streams in transitional China, despite their respective angles and limitations
here and there. Particularly, Nees work demonstrated his attitude changes toward China's hybrid economy,
from a negative critique to a softened mix with positive affirmation of its dynamic role in shaping rapid growth
(1-6). The reader may compare it with his relevant arguments in his 1989 co-authored article; see our
discussion in Chapter 2.
221
53. That is, to assume that state socialism is systematically discontinuous from capitalism.
54. Or rather, we may call it network venture capitalism.
55. Note: By definition, "tosh" refers to the things occupied with "superfluous rituals, rules of procedure
without clear purpose, and needless more cautions preserved through habit" (Fuller, L. 1978: 356). These
forms of symbolic construction of reality have real consequences. They may delimit the feasible options that
people set according the certain rationality, although thereafter rationality is in a fully operative mode (cf.
Friedland and Alford 1991). But I would like to add that "tosh" might be more important to noncommercial
circumstances - state, family, religion - than to the commercial circumstances. Also, cf. Hamilton & Biggart
1988, who attempted to go well beyond "tosh," bringing more institutional underpinnings such as property
rights, contract law, politics, and the likes into consideration.
56. Notwithstanding, I would like to argue that Whitley essentially treated his proximate institutions as fait
accompli. In my opinion, he did not note how these institutions are changing and how they could be changed
in a way dynamic to industrialization or economic transition. Whitleys contention may be criticized for
attributing the distinctness of each East Asian business system merely to persistence, while ignoring the
dynamic sides of the business system, contingent upon time of origins and time sequences. For instance, the
Chinese business system in Hong Kong is stereotyped as imbued with small businesses, inept at dealing
with environmental shocks and at fundraising to acquire capital for upgrading, whereas Japanese business
system is stereotyped as attempting to generate business collusion between giant industrial groups, banking
institutions, and the governments, which would be vulnerable to financial crisis. But as Whitleys inquiry goes
deeper, further problems arise. How can one explain the dynamic roles of these small and big firms with their
respective contributions to the developments of Hong Kong and Japan in the 1980s? And how can one
explain those dynamic changes in todays Hong Kong business system, now dominated by the big firms and
those in todays Japan with Japans emergent New Economy, now entrenched by myriads of entrepreneurial
small enterprises? Big firms could play a leading role in the vibrant and resilient economy in Hong Kong,
while those small firms could be most dynamic to the New Economy in Japan, which is accustomed to
functioning under the auspice of the predominant industrial giants. Firms of the same size will act differently in
different contexts, timing, and institutional environments. Size has nothing to do with dynamics, which instead
is most sensitive to the environments and arrangements of institutions. In this sense, Whitleys
characterization of East Asian business systems fails to account for the dynamics, or to identify institutional
mutations and their changing features, or to provide reasons for their formation.
57. A more fruitful research strategy might try to develop a synthesis regarding network, market and hierarchy
in their respective terrains corresponding to Chinas transition. Such an effort at synthesis will be the work of
Chapter 5.
58. Their changing networks were found in the regions beyond the unidimensional market-hierarchy
continuum" in their Figure 1 (ibid. 602; see Figure 2.31b in our Chapter 2). Chinas emergent economic
order actually runs on the lower regimes of their information matrix in terms of personal-relationship-based
transacting governance, and community-based transacting governance, in which one could find those local
initiatives and transacting flows in an informally institutional way, different from their Western counterparts in
the formal market-hierarchy scheme. Nonetheless, while Boisot and Child moved to study a codification-
difFusion continuum related to contextual bureaucratic environments, their network assertions appeared more
likely to accept impalpable, informal relations than the palpable, formal ones. Accordingly, for instance, one
may argue that the Chinese people share a sufficiently risky consciousness in their economic operations that
have evolved from a long commercial civilization, which is assumed to be much stronger than that of their
FSU and FEE counterparts. This would lead one to expect Chinas institutional reforms in transition to be
different from those in the FSU and FEE counterparts.
59. This was shown in Boisot and Childs Region 2 of in Figure 1 (cf. 1996, 602). Yet this figure could be seen
only as heuristic, since it is unclear what real demarcation of formal bureaucracy is about and whether or not
such formal bureaucracy could refer to their Region 2, in contrast to their Chinese counterparts in the low
regions of their information matrix under Chinas C-space. Region 2 could have multiple references. It
222
could refer to a Western type of modem bureaucracy in the Weberian sense, or to a Western model of
economic governance. But it could also refer to bureaucracies in the former central planned economies, in
FSU, FEE, and Maos regime prior to Chinas transition (i.e., formal command-economy relationships"; ibid.
619). It could also refer to Chinas patriarchal bureaucracy in its late imperial era, or refer to the active
intervention of Chinas reforming government during its transition. Thus Region 2 could compound plural
implications in such a way that bureaucratic formality might be left unexplained, ambiguous, and enigmatic. If
Region 2 refers to a Western model of bureaucratic formality, the problem is that there has never been a
uniform type of governance that has been adopted by all Western nations. The so-called laissez-faire
neo-liberalism, i.e., a hands-off stance by the state towards business, is not accepted by all Western
governments.
Boisot and Child added their modification (1996, 621) that The Western concept of the state in the process
of modernization has envisaged it as the legislator of rules for economic behavior and of procedures for
resolving disputes under these rules. In the liberal interpretation, the state acts on behalf of the majority in
society through the democratic process, and in the Marxist interpretation, it acts on behalf of the dominant
capitalist class (Gran 1994). The state is not assumed to be the natural body either to own or directly to
manage industrial organizations. Studies of East-Asian societies other than China have already called for
the amendment of this theory about the role of government in modernization (Hamilton and Biggart 1988;
Whitley 1992). The state has, for example, played a far more directive role in the industrialization of
countries such as Japan and South Korea. China adds an interesting dimension, with its tiered system of
governmental involvement creating an interdependence of economy and polity down to the bedrock of
local communities. As Tu (1993) observed, this mixed pattern is neither a socialist planned economy, nor
a Western capitalist system. It requires an elaboration, if not amendment, of conventional theories about
the role of the state in economic life, including further development of those that do adopt a comparative
institutions perspective.
60. To sociology, culture is socially constructed, cf. R. Scott 1995, p. 51: "Broad cultural beliefs as well as
individual self-conceptions are the product of social processes...Preferences are not taken as given: They are
not 'exogenous' to the analysis, but among the most important factors to be explained. Both ends and means
are institutionally shaped."
61. L. W . Pye 1985, p. 13 (myself add the underlined): Questions about the role of culture have led to
another major misunderstanding about development theories. This is the charge that only certain cultural
values can produce positive development - such as Protestantism for economic development and Anglo-
American values for democracy - and that any identification of cultural variables means that an attempt is
being made to explain everything psychologically. As David Gellner has succinctly pointed out, the
common fallacies in interpreting Max W ebers The Protestant Ethic and the Spirit o f Capitalism have
arisen from the tendency to argue that because W eber identified the Protestant ethic as critical in
explaining why modem capitalism emerged in Europe, he believed that such an ethic was a necessary
and sufficient factor for producing economic growth. Robert Bellah, of course, shows that Japanese
culture possessed the functional equivalents of W ebers Protestant ethos, but neither W eber nor Bellah
would argue that: ( D a culture of a different type cannot, as a latecomer, achieve economic development.
or (2) any culture that has the same elements is destined to have economic development. The point is
that different cultures will produce different styles of modernization, and that some cultural traits can
facilitate, while others will impede, development. To point out the influence of culture on historical
developments is not, as critics seem at times to be saying, the same as to hold that everything is
determined by psychology. In part this problem of explanation is related to two peculiar and related
tendencies in the social sciences. The first is a problem Nathan Leites identified in the first issue of World
Politics...On another point, revisionist critics have claimed that development theories underplayed the
importance of the international system, and particularly the influences of the 'world economic system, in
determining the patterns of change in the underdeveloped areas."
62. See the aforementioned abstract about Boisot 1998 "Organizations as Adaptive Systems in Complex
Environments: The Case of China": This paper treats organizations as adaptive systems that have to
match the complexity of their environments. The nature of this complexity is analyzed by linking an
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institutional Information-Space (1-Space) framework to the work of complexity theorists. The 1-Space
framework identifies the codification, abstraction, and diffusion of information as cultural attributes...
Accordingly, the dimension of codification becomes the mode of information complexity reduction,
whereas the dimension of diffusion becomes the mode of information complexity absorption. Complexity
reduction entails getting to understand the complexity and acting on it directly, including attempts at
environmental enactment. Complexity absorption entails creating options and risk-hedging strategies,
often through alliances.
Boisot then argues that with Chinas unique historical and cultural contexts, the mode of complexity
absorption is most suitable for the Chinas transition, whereas the mode of complexity reduction is mostly
suitable for Western experiences.
63. According to M. Granovetter (1992), social embeddedness is referred to social networks.
64. Take the Asian crisis as an example. 1997, a peak year, there existed virtually no trust in Asia with
outsiders in business deals and contracts, albeit Asian business networks had extensively and continuously
functioned there. East Asian then-networks had to coexist functionally with personal trust. For overseas
investors, market exchange through personal network all of a sudden ceased to function. Networks could not
be reduced to trust relationship. This prevents any sweeping inference that different types of networked
transacting governance could dynamically drive Chinas transition.
Networks based on personal trust become more vulnerable to inefficient economic transactions. See a
recent article - Japan points to weakness in use of information technology" by David Ibison in Tokyo in
Financial Times, p. 8, Tues. May 22, 2001 (emphasis mine): Japan is lagging seriously behind other
countries in its use of information technology, according to a damning report by the powerful Ministry of
Economy, Trade and Industry (Meti). In its white paper on international trade, Meti says Japanese
companies IT strategies are weak and that a lack of competition, high costs and bad IT infrastructure
need to be addressed immediately if Japan is to catch up...According to Meti, internet use charges in
Japan are three times higher than in the US and most European countries. This is primarily attributable to
the effective monopoly of NTT, Japans largest telecommunications services provider, which is being
deregulated but at a snail's pace. 'Comparing the IT strategies of Japanese companies to those of their
US, European and Asian counterparts, relatively little effect has yet to emerge from Japanese companies
IT use, the paper said. 'Where foreign companies are pushing ahead with more open internet-based
transactions as part of their internationalization strategies, the focus in Japan is still on private line
transactions among companies in the same keiretsu aroupina...ln January Japan announced its 'e-
Japan strategy which paves the way for high speed infrastructure, e-commerce, e-govemment and
arrange of other measures. Despite the new strategy, the pace of implementation has been traditionally
slow as incumbent players seek to protect their interests and politicians remain under the sway of vested
interests.
65. For instance, Chinas access to the W T O deal brings new momentum to Chinas non-state-run
industries and local economies, cf. How [China's Access to W TO ] deal could affect industries in USA
Today, p. 10A, May 24, 2000: ...[Along with the impending access to W TO , in Chinas autos,] All
vehicles made in China require 80% of their parts to be made locally, a provision Beijing instituted to kick-
start the local auto industry. Tariffs on imported vehicles and car kits run from 80% to 100% , W T O
membership would end all that and bring tariffs down to 25% by m id-2006. Auto parts tariffs would be cut
to an average of 10% by mid-2006. State-run car dealership networks would also evaporate."
66. Otherwise, there are mounting signs showing that the sources of informality taking advantages of vague
boundaries could attenuate or dampen the formal and hierarchical advantages of economizing on transaction
costs, as informally-sourced transactions become more and more entangled with those side-effects. The
exacerbated aftermaths could slow down growth performance and be an impediment to law reinforcement in
those cases, where enterprises become larger and more sophisticated, searching for larger and longer-term
investments for more lucrative deals. Consequently, macro-economic management is demanding more
efficient, stable regulations and predictable tax rules, rather than case-by-case negotiations and tax bargains.
224
Pressures would increase for more explicit codification, such as well-defined apportionment of income, risk,
and contract responsibility, and so on. cf. The gentle art of lobbying in China in Asia, in The Economist,
P. 43, Feb. 17th, 2001: ...building up the contacts and influence to bring about change takes time. 'You
dont start lobbying them the first time you meet them, or youre just run into a brick wall. Says Brenda
Chow, of British American Tobacco, who was bom in the Chinese province of Guandong. 'I have to show
them my best Chinese self....Som e firms ban such [personal] contacts. Doing personal favors for officials
is a 'slippery slope, they say. Just being a 'good corporate citizen can gain a sympathetic ear with
officials. Contributing to an educational foundation or flood relief wins bonus points. Most ministries have
research centers run for profit. Hiring their researchers can make it easier to get a meeting with officials
Protocol is important. A lobbyist will have a perceived rank when dealing with the government, equivalent to
the level of the official he speaks to...The big problem for many western companies in China is counterfeiting.
The China Anti-counterfeiting coalition, set up in 1998, represents more than 30 companies...'You generally
dont want to become too visible because then you create enemies, he says. 'Be non-confrontational. You
dont want them to lose face. In the short term, the coalition seeks better enforcement of Chinas anti-piracy
laws. In the long term, it wants more comprehensive legislation. Despite Chinas promise to outlaw the
counterfeiters, it still has a long way to go to clampdown on, for example, pirated compact discs."
67. cf. 1993a, 548: ...the achievements of these measures can be better understood within our analytical
framework of the M-form hierarchical organization of China. For example, the phenomenal expansion of the
non-state sector is closely related to the success of Chinas agricultural reform.
68. cf. China Eastern to form airline with private partner by Reuters reports from Shanghai in Financial
Times, p. 18, Thurs. Mar. 21, 2002 (emphasis mine): China Eastern Airlines, the countrys second-
biggest carrier, is to set up an airline with a private conglomerate, marking a rare private investment in the
countrys state-owned aviation sector...Industry officials said the government was turning to cash-rich
private firms to help restructure the struggling and fragmented aviation industry and build globally
competitive airlines. China Eastern yesterday said it would form a Yn700mm ($84m) joint venture in
central Hubei province with Wuhan Airlines called China Eastern Airlines Wuhan. 'In the new airline,
shareholders will be diversified to include private and high-technology firms so that it will be helpful to run
the company in a more commercial way, said Shanghai-based China Eastern. It said it would own 40%
of the new airline, Shanghai-based private company Junyao (group) would have 18%, Wuhan Airlines
40% and Wuhan High-technology Holding Group 2% . The Junyan Group is named after founder Wang
Junyao, who started his business in 1991 by block-booking flights and selling them to retail customers.
The firm also produces milk, runs taxi fleets and invests in property. The government is turning to the
private sector as it overhauls the state sector, with entrepreneurs invited to help boost sectors needing to
restructure to meet greater foreign competition following Chinas W T O entry in December. 'This deal is a
sign that the priority for reforms in major Chinese industries has shifted to how to make them successful
enterprises. said Credit Lyonnais Securities Asias aviation analyst Jim Lam. China Eastern is one of
three top carriers the Civil Aviation Administration of China appointed to lead a consolidation of the
crowded industry, which has about 30 airlines, many small and lossmaking.
69. Also cf. Organizational Isomorphism in East Asia by Marco Orrii, Nicole Woosley Biggart, and Gary
Hamilton in The N ew Institutionalism in Organizational Analysis, eds. W alter W . Powell and Paul J.
DiMaggio 1991, p. 389: East Asian economies have prospered not because they have unilaterally
adapted to technical environmental requirements, but because they have successfully institutionalized the
principles of market activity suited to their socialcultural environment and to their strategies of economic
development."
70. cf. Marco Orru, Nicole Woosley Biggart, and Gary Hamilton in The N ew Institutionalism in
Organizational Analysis, eds. W alter W . Powell and Paul J. DiMaggio 1991, p. 386-8 (emphasis mine):
Enterprise groups in Japan, South Korea, and Taiwan display distinctive organizational patterns of
ownership, management, finance, and production. Measures of isomorphism confirm the uniformity of firm
relations within each country and, equally, the differences among them. These distinctive characteristics
are summarized in table 1 5 .1 7 . The economies of these nations are not reducible to the business groups
we examined, of course, but these groups are significant economic actors in their respective economies
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and their isomorphism demands explanation. W hy are business groups so uniform within each market
economy, yet so different in comparison with the others? Multiple answers are necessary for a full
account, but they are not reducible to purely economic variables - the pressures of technical
environments or patterns of competitive isomorphism. Business groups might be explained as competitive
collusions - the opportunistic response to technical environmental pressures in northeast Asia. The
organizational isomorphisms we identified, however, cannot simply be explained as the attempt to
achieve market fitness. Business groups are too widespread and too isomorphic to be viewed as
idiosyncratic responses to market factors. Moreover, multiple social institutions in each society support
the formation of patterned firm relations, as we described, and do not press organizations toward the
Western idea of autonomously competing firms. Technical requirements alone cannot explain East Asian
isomorphism. Following the arguments of institutional theories, we claim that each society creates a
context of fiscal, political, as well as social institutions that limit and direct the development of fit
organizational forms. In all three economies we discussed, but especially in South Korea and Japan, the
important role of the state in economic affairs leads us to believe that institutional and normative factors
are particularly important to organizational viability in those nations. Asian firms, like all firms, operate in
an institutional environment that presents a structure of constraints and possibilities, but, most
importantly, of normative forms of economic action. Each of these economies, our data suggest, fashions
itself after a distinctive institutional environment, generating a characteristic pattern of business
relationships. These relationships are not simply ones of convenience or efficiency, but represent
enactments of socially acceptable, institutionalized forms of economic behavior - they are the
manifestations o f normative structure that underlies economic activity and provides market order. Clearly.
the firms in these economies are capitalist and profit seeking, but they seek profit not abstractly, but with
knowledge of legitimate strategies for gaining market advantage. This they accomplish by merging
together the technical and institutional requirements of their environments. Different fundamental
principles of control, which are not solely economic in character but rather are drawn from other
institutional sources such as the state, the community, and the family, are at work in each society. These
principles inform predictable social relations in multiple arenas, including the economic, and are
supported in various ways by state agencies...Japanese enterprise groups enact a communitarian
ideal...The South Korean chaebol are an expression of a patrimonial principle...Taiwanese business
groups enact yet another principle, that of the familial network...East Asian enterprise groups are both an
expression and a product of these three organizing principles. None is a corruption of a mythical ideal of
competitive market fitness; rather, each is an enactment of socially constructed technical and institutional
requirements. While these three principles are subject to variation in each economy, exceptions are
variations on a common them e...
71. As Nee pointed out, New Institutionalism has the potential to tap the dynamics of changing social
institutions in general, and the dynamics of China's transition in particular. But in so doing, one has to
examine those social actors (including institutional actors) reforming practices that generated changes in
Chinas institutional environments and arrangements. C. Lane in 1995 stated that institutional actors are
influenced not only by cultural factors but also by resource flows, and that external environmental factors
may provide the impetus for institutional crisis and change. cf. C. Lane, 1995, p. 12: ...it is important to
note that New Institutionalists do not conceive of organizational actors as solely influenced by cultural
factors but also recognize the impact of resource flows. But, in contrast to the other theories...such
material factors are regarded as less worthy of study because their impact is seen as modified by
institutions. The study of resource flows is not incorporated into the theory as a variable in its own right.
This relative neglect of material factors, however, can turn into a shortcoming of this approach as radical
changes in resource flows, caused by external environmental factors, may also provide the impetus for
institutional crisis and change.
But more importantly, as I like to argue, those institutional changes are not generated only by external
shocks. They are also prompted by inward changes - through the changing social or institutional actors
themselves who pursue goals, such as power, interests, or altruism, as well as other agendas. Otherwise,
as with the old institutionalism, which had a unidimensional obsession with adaptation, conformity,
homogeneity, and persistence (cf. M. Granovetter 1992), the current institutional discourse on transitions
would be unable to capture the participatory role of actors voluntarism in changing institutional
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environments and the likes.
72. cf. Granovetter 1992, 4-5 (emphasis mine): "An important part of this focus is a sociological theory of
the construction of economic institutions. Such a theory must make dynamics central, in contrast to most
neoclassical economic work on institutions which (like many branches of economics) emphasizes the
comparative statics of equilibrium. Without explicit dynamic argument, we have the irony that economics,
despite its devotion to methodological individualism, finds itself with no ready wav to explain institutions
as the outgrowth of individual action, and so falls back to accounts based on gross features of the
environment...This implicitly assumes a system in equilibrium, since a still-evolvina institution might not
reveal bv inspection what problem it had evolved to solve. These highly elliptical and often tautological
culturalist and functionalist accounts become superfluous once the social construction of institutions is
properly understood."
73. This can be exemplified by the Japanese inter-firm-based financial system, developed from its
institutional adaptation of kaisha" industrial groups, inter-firm-based (cf. J.C. Abegglen et al. 1985). This
system now faces the tremendous difficulties of launching institutional reforms for survival from the financial
crisis that Japan had suffered since 1997. In contrast, however, China's transition seems to provide other
side story that its institutional fitness could dovetails and facilitates its transitional changes. Such a fitness of
institutions as facilitators was somewhat suggested by Qian and Xus thesis of Chinas regionally-based
decentralization in transition, albeit they did not go further to theorize.
74. Here one notes that B&C assertion of network capitalism has the similar flaws of New Institutionalism,
as C. Lane 1995 pointed out, which is preoccupied with the persistence of institutions, while ignoring
tensions among institutions and organizations [Ibid. p. 11 (emphasis mine): New institutionalists do not
want to rule out change within organizations and attribute it mainly to the impact of external shocks. But
their understanding of institutions as self-perpetuating and self-reinforcing structures, together with their
notion of actors and interests as being constituted bv institutions, makes their new emphasis on change
problematic and unconvincing. The emphasis on common understandings and conformity downplays
conflicts within organizations and hence eliminates one dynamic of organizational change. It does not
probe the possibility that some actors benefit more than others from the perpetuation of institutionalized
practices. Also the exclusive focus on external shocks as sources of institutional change neglects their
impact on power relations within organizations and the creation of new maneuvering space for various
groups of actors. Opportunities for change may be created bv external shocks but actual implementation
of such change necessitates the mobilization of internal actors in support of such change. Both differential
power and interests within organizations and 'the active political side of the story need more attention, as
DiMaggio and Powell freely admit (1991: 30-11.1.
One thing I find problematic with Lanes thesis is its implication, since he attempts to use a Marxist
approach to overcome the limits of the New Institutionalism and further integrate it into a Marxist
framework. According to Lane, institutional changes could be driven only by contradictions, tensions,
conflicts, or/and struggles, which are inherent in the structure of institutions and, as inside forces, are
more dynamic than outside forces such as environmental shocks. I think these two streams - persistence
or conformity and tensions - can be integrated into a further synthesis of New Institutionalism, rather
than being viewed as insurmountably contradictory or irreconcilable. I do not think it is necessary to
create a new terminology of Marxist New Institutionalism. Both persistence and tension can be treated as
being both conditions and dynamics of institutions in that conditions and dynamics are convertible into
each other. To further expose this weakness of Lanes thesis, we might examine institutional mutation.
Mutations are derived from the existing or preexisting institutions and result from the interaction or
interplay of institutions with both interior contradictory forces from power struggles among actors seeking
their ends and exterior contradictory forces from the environments. This is particularly true to the case of
Chinas transition, since many institutional changes consist of institutional mutations.
75. Accordingly, since the 1990s such an emphasis has won the loudest applause from the New Institutional
scholarship, upon the basis of the constellation of competing social theories, as Nee and Stark heralded in
the introduction to their 1989 co-edited volume.
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76. See an abstract about Boisot 1998 "Organizations as Adaptive Systems in Complex Environments:
The Case of China": This paper treats organizations as adaptive systems that have to match the
complexity of their environments. The nature of this complexity is analyzed by linking an institutional
Information-Space (l-Space) framework to the work of complexity theorists. The l-Space framework
identifies the codification, abstraction, and diffusion of information as cultural attributes. Codification
involves the assignment of data to categories, thus giving them form. Abstraction involves a reduction in
the number of categories to which data needs to be assigned for a phenomenon to be apprehended.
Information is diffused through populations of data-processing agents, thus constituting the diffusion
dimension. Complexity theorists have identified the stability and structure of algorithmic information
complexity in a way that corresponds to levels of codification and abstraction. Their identification of
system parts and the richness of cross-coupling draws attention to the fabric of information diffusion. W e
discuss two modes of adaptation to complex environments: complexity reduction and complexity
absorption. Complexity reduction entails getting to understand the complexity and acting on it directly,
including attempts at environmental enactment. Complexity absorption entails creating options and risk-
hedging strategies, often through alliances. The analysis, and its practical utility, is illustrated with
reference to China, the world's largest social system. Historical factors have shaped the nature of
complexity in China, giving it very different characteristics than those typical of Western industrial
countries. Its organizations and other social units have correspondingly handled this complexity through a
strategy of absorption rather than the reduction strategy characteristic of Western societies. Western firms
operating in China therefore face a choice between maintaining their norms of complexity reduction or
adopting a strategy of complexity absorption that is more consistent with Chinese culture. The specifics of
these policy alternatives are explored, together with their advantages and disadvantages. The paper
concludes with the outlines of a possible agenda for future research, focusing on the investigation of
complexity-handling modes and the contingencies which may bear upon the choice between them . Also
cf.: Economic development in the PRC is being accomplished through a system of industrial governance
& transaction that differs from Western experience. Here, the broad institutional nature of is distinctiveness is
identified within a framework of information codification & diffusion. The emergent features of China's
economic order are analyzed with reference to the business system developing there, in particular, the nature
of market arrangements, the capitalism, & the role of government within that system. The limited extent of
codification of information in China and its communal property rights and organization of economic
transactions suggest that decentralization from the former state-command system is giving rise to a distinct
institutional form - network capitalism. 3 figures, 86 references. Adapted from the source document.
77. In my opinion, such a perspective could cast more meaningful, dynamic, and constructive lights on
transitions than Boisot and Childs illuminations sticking to the environments of institutions and market
arrangement with no regard for social actors.
According to our perspective of New Institutional Historical Comparison (NIHC ), institutions are human-
designed arrangements corresponding to certain expectations of social actors (broadly in terms of inter
subjectivity) and their settings (in terms of their objectification); changing institutions are the
hypostatization of these changed and changing arrangements that come from the interplay between
institution as actor and institution as arrangement for changes (note: the hypostatization, i.e., a created
existing entity which become ingrained into a certain social structure). Such a dynamic and self-
reproducing hypostatization is at the heart of the transformation of economy and society in a changing
nation. This social-constructive perspective leads us to examine the existing institutional arrangements
and environments as preconditions for institutional changes, and to examine the genesis, processes, and
outcomes of those changes, as well as changing actors and their expectations as to how to respond to
their past experiences, to the emerging nascent institutional environments, and to the rule of law, etc. And
the diverse institutional alternatives could become embedded in a diverse spectrum of social nexuses and
historical contexts.
In this light, we could find many recent scholarly examples. As Whitley stresses, economic efficiency and
success are socially constructed and so vary across different social contexts (Whitley, 1992: 2). Granovetter
similarly pinpoints that those economic institutions can be understood to be social constructions (cf.
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Granovetter 1992), since the institutions are not objective, "external" realities but are the result of slow, social
creation. Zucker further adds that changing institutions come out of certain changing social expectations
along with changing reality (cf. L. Zucker 1986). One of the core efforts of these theses on social
constructions of institutions is to explain how institutions can build momentum through their underlying social
nexus interacting with historical contexts or their "path dependence" as well with actors expectations for
changes (Swedberg et al. 1992,16-18: "When an institution is finally in existence, people orient their actions
to a set of activities sanctioned by other social actors, treating the pattern as one that exists out of time and
could not be otherwise. But this sense of institutions as external and objective is a sort of obfuscation that
society works on its members...'Berger and Luckmann [1966: 54-55] emphasize...that 'it is impossible to
understand an institution adequately without an understanding of the historical process in which it was
produced."). By path dependence, Granovetter demarcates it for the evolution of institutions, underscoring
that institutions could be built in light of resource mobilization through social networks - a process of social
construction, conducted against constraints of background given by the previous forms of society, polity,
market, and technology (cf. Swedberg et al. 1992, 18-9; ibid. 19: "...even giant economic formations -
postwar capitalism in the OECD countries or the national economies in Latin America during the same time
period - are distinct social constructions with distinct consequences for the economic actors"). Overall,
therefore, institutions could be understood as processes of social construction of the real world, processes
through which institutions could bolster economic dynamics and create new economic realities. Granovetter
particularly identifies the importance of network mobilization for the early formation of economic institutions.
However, once their evolution becomes institutionally patterned, and social expectations become
institutionally hypostatized, the strategic salience of network mobilization could have eventually waned with
the passage of time (also cf. Zucker 1986).
From such a social-constructive perspective, economics per se ought to be understood as all about economic
actors (including economic institutions) and their actions in the changing social world (cf. Max W eber 1978,
Chapter II; Joseph Schumpeter 1975; Granovetter 1992). In order to treat institutions as dynamic drivers, one
has to look at how the actors are able to deal with their changing expectations and given conditions specific
to certain contexts, ambiances, and circumstances, historical and cultural. And this gives us a sense that the
changing social world also embraces changes in subjectivity, such as cultural underpinnings, kinship
structures, family values, individual goals, education, social relations, etc. In neo-classic conventions,
however, the entire economic process is addressed as if either market or bureaucracy sui generis entail
some essential forms of institutional arrangements, and as if these forms necessitate and determine
choice-making that follows somewhat universal and prerequisite codes, drawn on certain canons and
rationales a prion. Here social relations, social activism of actors and their dynamic roles are essentially
ignored. Viewed from this angle, many of the early studies of transitional economies and even the
constellation of the currently contesting models are vulnerable to the ignorance of social actors and their
dynamic subjectivities. Transitions as social choices and strategic actions are conceived of in a purely
objective sense. Reality changes, seemingly immunized from changing actors wills and activities in response
to changing social circumstances and changing social expectations and images derived from given historical
contexts.
78. Social actors certainly include members and leaders of social and economic institutions and
organizations, as well as actors who are non-members of any institution or organization. W e are more
concerned with these critical institutional actors, reform planners, and state agents in charge of transitions,
who are able to make a difference. Changing institutions can be regarded as the result of changing social
actors. These critical actors provided the very core of our historical-institutional analysis. The old
institutionalism underlined institutions primarily constructed by environments, but not fashioned by social
actors and their actions.
79. It accentuates the changing expectation of state institutions. However, it certainly is debatable as to
how far the changing expectation could go in China concerning privatization and direction toward a
market economy by Western commercial standard, cf. Whos Hu? - Little know outside China, the
countrys next leader appears to be a skilful political and economic modernizer - but no mould-breaker by
James Kynge in Financial Times, p. 13, Tues. Dec. 18, 2001: ...China watchers now find themselves in a
similar predicament. Barring an upset, it seems certain that Hu Jintao, a 59-year-old- apparatchik, will
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assume the top posts in a 'fourth generation leadership line-up to be decided by early next year. Chinese
official sources, foreign diplomats and academics say Mr. Hu is likely to take over from Jiang Zemin as
general secretary of the Communist party in the latter half of this year and to succeed him as president in
early 2003. So far, Mr. Hu has managed to remain almost invisible. Little is known of his convictions or the
formative influences on his character. His public speeches tend to be orthodox and bland. He gave little away
during his first visit to Europe late last year, and has declined all applications from the foreign media for
interviews. Given this opacity, even relatively minor insights into the political thinking of Mr. Hu, who is
currently vice-president, head of the powerful central military commission, are valuable. The past few weeks
have held several clues. 'His priorities are to show the reformist people in government that he has some new
ideas, says Jean-Pierre Cabestan, director of the French Center for Research on Contemporary China in
Hong Kong. 'On the other hand, he has to be very cautious because, having not yet been appointed, he is
walking on eggshells. According to diplomats who observed him in Europe, Mr. Hu has signaled that he
intends to reform Chinas sclerotic political system and the structure of the Communist Party, which has held
a monopoly on power since the revolution in 1949. In foreign policy, he has appointed an informal taskforce
to seek solutions to the problems that bedevil US-China ties and relations with Taiwan, the island China
regards as a renegade province. On economic issues, Mr. Hu has acknowledged to interlocutors that he is no
expert but he nevertheless acquitted himself well in discussions with European officials. Judging by the few
recent economic decisions that he is known to have helped shape, Mr. Hu believes in state-directed
competition rather than the discipline of the free market. A senior Chinese official who knows him well
describes Mr. Hu as a man who 'supports and encourages all the major reforms and changes. The
president-designate, he adds, respects the needs and demands of the times rather than reverting to the past
for solutions. Young enough to serve two five-year terms, Mr. Hu will need all of the creativity and verve at his
disposal. The next decade may decide whether China is to emerge as an economic super-power supported
by a flexible and responsive government, on whether it will be dragged down by a largely insolvent financial
system, official corruption and a crisis-ridden rural economy. In his first five years, his main challenge may be
to implement the agreement that secured Chinas accession to the World Trade Organization, often against
opposition from local and other vested interests. More broadly, he must implant a political system that can
regulate itself, dispel corruption and ensure economic and social justice. It is too early to tell if Mr. Hu, whose
father was a Shanghai tea merchant and who studied engineering at the prestigious Tsinghua University, is
equal to the challenges. But in his assignments so far, he has shown skill and determination. As the youngest
provincial party leader ever, aged 39, he presided over a period of rising prosperity in the poor south-western
province of Guizhou. Later, as governor of Tibet, he ruthlessly put down separatist demonstrations. Now he is
exhibiting a more subtle side. The taskforce on US-China relations, diplomats and academics say, will
attempt to craft new long-term policies towards the US and Taiwan, defuse negative sentiment towards China
in the US Congress by means of reasoned argument, and present a friendlier face to neighbors in Asia.
There has already been a recognition, says one researcher at a state think-tank, that Beijing's nationalistic
reaction to the collision between a US spy plane and a Chinese fighter jet last year helped to alienate US
public opinion and rekindle Asian concerns over Chinese assertiveness...Dogma, which has already all but
disappeared from everyday life, would be banished. The party's ideology would change so it could represent
not so much the workers and peasants of the revolution but the new urban elite...
80. In the mindsets of the institutional writers like Komai and Nee, the state institutions were etched with
soft budget problems and bureaucratic failures. The images of the inept state hierarchies prevented
them from recognizing their dynamic role in transition, cf. A struggle to stay in front of its neighbor -
Mainland China is starting to erode Taiwans long-established lead in technology products. But the island is
determined to maintain its advantage Alexandra Harney in Financial Times, p. 13, Tues. Dec. 18, 2001:
Chen Po-chih, chairman of the Council for Economic Planning and Development, an economics Ph.D. and
one of the architects of the [Taiwan] government program, angrily defends the governments involvement.
'Economics never denied the necessity of government intervention. Actually, economics tells us that
whenever the market fails, the government should step in to eliminate that failure. Any economists in Taiwan
forget this complicated economic analysis and remember the very simple economics they leamt when they
were freshmen.
81. For example, although Mao launched the first wave of Chinas decentralization in his radicalist eras of
Great Leap Forward and Cultural Revolution, how could anyone surmise that future decentralization would
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follow the same form and pattern as that during Chinas transition, which had undergone many institutional
reforms. There is also a lack of historical vision, because Mao's decentralization was not a product of KMT
regime before 1949.
82. cf. Qian and Xu 1993b, endnote 7, p. 158: W e deliberately avoid the issue of the state sector.
Evaluation of the reform in the state-sector has been controversial among China experts and Chinese
economists.
83. cf. China starts to count up the costs of Joining the W T O by Peter Wonacott in The Wall Street
Journal, A10, Tues. Jan. 15, 2002: ...W hile China is expected to fulfill its W T O promises, says Andy
Rothman, China Strategist for CLSA Emerging Markets and a former US diplomat, 'when it comes down
to a crunch, China is going to modulate implementation to take care of its domestic problems.
84. It is now a global trend that government role is underscored in promoting local entrepreneurship and
innovative industries, cf. The age of enterprise - Globalization and government policy is shifting power
from the conglomerate to the entrepreneur by Geoffrey Owen in Financial Times, p. 13, W ed. Jan. 2,
2002 (emphasis mine): As a reporter on the FT in the 1960s and 1970s I was constantly being told that
this or that industry would, over the next few years, become concentrated in the hands of a few giant
companies. Global economies of scale, it was said, would lead inevitably to the extinction of small and
medium-sized companies, unless they were highly specialized. How boring the world would have been if
this prediction had come true. Fortunately, what is going on in business today points in the opposite
direction. One of the most cheering developments is the deconstruction of the large, bureaucratic
corporation and, along with it, the rebirth of the entrepreneur...W hat we are seeing is more than the
unbundling of overweight conglomerates, a process that began in the 1980s. whole industries are being
reshaped - telecommunications, chemicals and textiles are three obvious examples - under the impact of
international competition, stock market pressure and technological change...These Asian challengers are
doing more than simply imitating what the Americans have done: they are pioneering new ways of
designing and making semi-conductors...One of the great advantages of globalization, contrary to the
views of protesters, is that it reduces the power of established companies and, by promoting new entry,
widens consumer choice. It is a powerful contributor to the gale of creative destruction that is blowing
through many industries today. Allied to this welcome change is the recognition bv governments.
especially in Western Europe, that encouraging entrepreneurs is a better policy than preserving old
dinosaurs...
85. No wonder Boisot and Child admitted the limitations of their typology and cultural space as descriptive but
not explanatory, cf. Boisot and Child 1996, 621: It has been argued that even a superficial examination of
the emerging Chinese economic system calls for a reappraisal of the universal validity of conventional
Western assumptions about modernization. That analysis has largely confined itself to the codified
reaches of the codification-diffusion framework presented earlier. Application of the framework suggests
that we can derive a conceptual language from Western economic and social analysis that is useful for
elucidating the Chinese case but that Western assumptions about the variables identified by the concepts
will not apply, either in terms of the configurations of variables (at one point in time) or movement along
the variables overtim e.
The activism of Chinese banking institutions set an example, cf. BP project in China raises concerns for
foreign banks" by James Kynge in Beijing in Financial Times, p. 1, Fri. Jan. 11, 2002: BP, the oil group,
was expected to sign a $ 1 ,8bn financing package in Beijing today for a vast petrochemical project that
sets a disturbing precedent for the business of foreign banks in China. Bankers said the financing, one of
the biggest since China began to open its economy in 1979, marked the first time domestic Chinese
banks were preparing to extend a large US dollar-denominated loan to a foreign company. Such business
has traditionally been important to foreign banks in China...Foreign companies in China have traditionally
preferred to borrow the foreign currency component of loans from foreign banks. But aggressive
marketing over the past year by Chinese banks appears set to change that. The activism of Chinese
banks has been driven partly by a sharp rise in the number of foreign currency deposits held by the
Chinese, which totaled $136bn in October last year. Rising foreign currency deposits are partly the result
231
of higher US dollar interest rates in domestic banks than in the US. The size of foreign currency deposits
in Chinese banks far outstrips than in some 190 foreign banks in China which, at the end of June 2001,
had total assets of $41 bn.
86. cf. Chinas unpredictable tactics keep metal markets guessing - Many argue the country may have to
change its trading methods as it becomes a bigger world player by Gillian O Connor in Financial Times,
p. 24, W ed. Aug. 15, 2001 (emphasis mine): China has become an important force in commodity
markets over the past decade and is now providing crucial support for many metals and minerals
industries. But analysts argue it may need to change its trading methods as it becomes more integrated
into the global market...Changes to the Chinese economy, however, mean that the actual outlook is a lot
more complicated. Rationalization of the countrys fragmented mining and metals industry is likely to
mean the closure of many small, dirty and uneconomic plants, and the mergence of larger groups... If this
reorganization means that output growth slows, as expected, it could be superficially bad news for the
Western miners selling the Chinese their materials. However, the new modem plants will need high grade
raw materials, so the proportion which is imported could rise... It is a similar story in alumna (the feedstock
for aluminum) and copper concentrates. Jim Lennon, metals analyst at Macquarie Research, reckons that
the massive surge in Chinese imports has been the only factor stopping the alumna price from collapsing
in the first half of this year, and worries that they may have a surplus and stop buying. But in some
contexts China is a bogey rather than a savior. China has the reputation of being both unpredictable and
irresponsible in its trading tactics and its statistics are considered unreliable...China has not yet come to
terms with its new importance. Traditionally the Chinese have exported with no regard to the effect of
their exports on the market. The reason they are now so dominant in minor metals such as tungsten is
that they drove all their competitors out of business. They were not cost-driven, and there was no
coordinated approach to marketing. Each province did its own thing, says one analyst...David
Humphreys, Rio Tintos chief economist, suggests that, as China finds itself more dependent on the
market system, it will want to lock in some long-term relationships rather than dashing in and out. Hitherto
the Chinese have eschewed the long-term contracts typical of many industrial commodity markets. But as
their plants get lam er and more sophisticated they will become more concerned about security of supply.
In late 1999 they were probably the only big users who paid the skv-high spot prices for alumna resulting
from a supply shortage. Other users were protected bv long-term contracts. As vet, however, the Chinese
have shown more interest in taking equity stakes in mining ventures than in tying themselves down with
the lona-tem contracts that are alien to their tradition.
87. Certainly, state activism in transition could turn the story around, causing people to worry that a
counteractive force would emerge, and that government could retreat to the past, perpetuating the state's
hyper-activist intervention in the erstwhile planning economies, cf. Foreign investment not a panacea in
China" by Karby Leggett in The W all Street Journal, A1, Mon. Jan. 14, 2002: ...Foreign investment in
China sometimes happens for the wrong reasons, often comes at the expense of domestic companies
and is direct result of Beijing's attempt to support the most inefficient parts of its economy...many Chinese
companies forge joint ventures simply to win access to bank loans and foreign currency. Chinas state-run
banking system has traditionally denied credit to its private companies but offers it freely to foreign-
invested ones. The problem is captured by Chinas lending statistics: though private Chinese firms
accounted for about 30% of the value of Chinas total industrial output in 2000, they received less than
1% of total credit issued by banks. The attractive tax breaks and protection of property rights Beijing
offers foreign firms give private Chinese companies added incentive to bring on foreign investors. The
dam age wrought is twofold. First, hungry for money, many Chinese companies sell chunks of their
business at fire-sale prices simply to make capital-raising easier. But because many foreign buyers
demand control over the export market, the Chinese side is usually given only limited access to overseas
market information, thus stunting its ability to grow. Second, valuable resources are wasted by
encouraging whats known as round-trip investment - a process whereby Chinese companies form
overseas subsidiaries and then, disguised as foreign enterprises, invest in China in order to enjoy the
more generous benefits. Thus Chinas booming foreign investment helps perpetuate a system tipped
against domestic companies. Despite two decades of economic reforms, many private Chinese
companies are still restricted from operating in certain industries and across different regions. Some of
these restrictions are the result of official protectionism - a problem that some economists say has grown
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over the past decade, due to local-govemment efforts to insulate their regional companies from
competition. Others are the result of Beijing's attempt to protect its largest and most inefficient state
companies. Yet even as China limits its own companies from competing, it commonly lifts many of these
barriers for foreign investors. This corporate discrimination has hurt Chinas economy, too. Though
exports have expanded sixfold in the past decade, thanks to foreign investment, trade and investment
between China's provinces has largely stagnated due to barriers that limit access to Chinas own
markets. In fact, so underdeveloped is interprovincial commerce that government statisticians collect only
scattered data on it. As a new member of the W TO , Beijing has begun rewriting some of the old rules that
have fueled foreign investment, but left its own companies crippled and disadvantaged. But membership
in the global trade body won't fix all the problems Chinese companies face, such as regional trade and
investment barriers. Addressing those problems will require Beijing to end its policy of discriminating
against private companies and scale back its support of inherently inefficient state enterprises...
Yet I might argue that this just underscores the importance of the state sticking to its political commitment to
institutional reforms and to federalism, Chinese style. As mentioned in Chapter 2, the state is crucial to
initiate Chinas transition. It is so not only because the transition was instituted by its preexisting planning
regime, but also because the transition has been such a huge project involving tremendous social costs,
gigantic public expense, and massive investment in the future. All these require the states firm
commitment to institutional reforms. W hat is urgent here is the states need to stick to its commitment.
The commitment could eventually lead to the construction of the rule of law and democratization that
could assure the legal and public leverage with institutional mechanisms monitoring and checking the
commitment (see my Chapter 6).
88. cf. Transforming Chinas banks in Financial Times, p. 10, Fri. Jan. 18, 2002 (emphasis mine):
...China must rapidly overhaul its financial system if it is to prevent corruption, inefficiency and gross
misallocation of capital from wrecking the creation of a modem econom y...A d e a r management structure
would m ake it easier to privatize, recapitalize and regulate the banks. Outside shareholders would insist
on greater transparency and financial accountability. But such reforms can work only if the government is
prepared to abandon control of the 'commanding heights of the bankino industry. For the Communist
party, in the middle of a tricky political transition and a global economic slowdown, that may remain a leap
too far.
89. cf. Macquarie in Chinese homes venture" by Richard McGregor in Shanghai in Financial Time, p. 21,
Tues. March 26,2002: Masquarie Bank, the Sydney-based investment group, has entered Chinas booming
private housing market in a joint venture with Paul Keating, former Australian prime minister. The venture,
Macquarie Securitization Shanghai, which was announced in Shanghai yesterday, will advise China
Construction Bank (CCB), the largest provider of private housing loans on the mainland, on how to process
mortgages and register titles...The initial venture with CCB will be limited to Shanghai, which has undergone
a residential property boom since it was chosen by the central government in the mid-1990s to test the
development of a private housing market. More than three-quarters of Shanghai homes are privately owned.
In the past 10 years, 101m sq meters of new housing has been built. The rapid growth in the secondary
market means that for the first time since the communist revolution in 1949, transactions in that segment this
year could outnumber those for new housing. Secondary market transactions in Shanghai increased by 86%
last year compared with 2000. Mr. Keating said that spending on private housing would be increasingly
important for the economy once the government was forced to wind back the fiscal stimulus packages used
to sustain growth in recent years. 'When this happens, domestic demand is going to have to play a larger role
in the economy, he said. 'And a central building block in that will be private housing. He said an efficient
financial market for housing was important for China 'socially, politically and economically....C C B s mortgage
book has grown to Rmb190bn (US$23bn) in the six years it has been doing the business. Its target this year
is to write Rmb55bn in new loans.
90. cf. How [Chinas Access to WTO] deal could affect industries in USA Today, 10A, May 24, 2000.
91. Chinese to launch new stock market for growth" by James Kynge in Beijing in Financial Times, p. 19,
Tues. July 18, 2000 (emphasis mine): China has ordered that a junior stock market for high growth
233
companies be launched by the end of the year, heralding a new dawn for private enterprise and an
important step towards creating a shareholding culture. The Nasdaq-style market, which will probably be
located in the southern city of Shenzhen but may also be rated in Shanghai, is expected to have many
distinctive features, senior officials said. It is likely to be denominated in local currency, putting it off limits to
foreign investors at least until China liberalizes its closed capital account. This is not expected in the near
term. T h ere will be no preference shown to state companies, said one official. 'Approval for listing will be
granted purely on the basis of the commercial qualifications no matter if the company is state-owned or
private. It will not be restricted to high-tech companies... A second important characteristic of the envisaged
second board will be that all companies listed on it must float the majority of their share capital. Currently,
only around 30% of the shares markets are in free float. A shares are purely for Chinese investors, while
hard-cunrency B shares are for foreign investors. This reform is aimed at ensuring listed companies become
more responsive to their shareholders...There are also expected to be important changes in the approval
process for listings. An earlier suggestion that listing would be approved by officials from the ministry of
science and technology.. .The current preference is for an independent approval body selected from
different professions.
92. This could be a theme developed by Nee in his topic on marketized state-owned sector (i.e., sector 2 of
Table 2.21 d, above Chapter 2). See N ees classification of Chinese enterprises into three types:
nonmarketized firms (NF) or factory directors (FD), marketized firms (MF) or cadre-entrepreneurs (CE),
and private firms (PF) or private entrepreneurs (PE) (1992, pp. 11-3). He then gave a negative account of
the behavior of FDs in Chinas nonmarketized firms: ...factory directors in nonmarketized firms behave
more like bureau chiefs accountable to local government and more distant centers of power and authority.
Their goal is to fulfill the planned production targets on schedule with the factory resources allocated to
them. They strive to increase the allocation of resources through bargaining and lobbying efforts within
the state bureaucracy (W alder 1991). They in their firm are cautious in their interpretation of policy
guidelines issued by the party and state ministries, lest they jeopardize their political reputation, which
remains a crucial form of capital within the nonmarketized redistributive sector of the economy. Moreover,
they are careful to maintain a good relationship with workers and staff, lest they provoke the opposition of
the party apparatus within the enterprise, which champions the interests of workers. As professional
bureaucrats in a nonmarket environment, factory directors are risk-averse in their management of the
enterprise. There is little premium placed on innovation and risk taking when the evaluative process
emphasizes meeting production targets sent down from higher authorities and when access to increased
allocations of capital, raw material, and labor depends on political rather than economic considerations.
93. cf. Boisot and Child 1996, 610: "many state enterprises now engage fully in market transactions and
report to local government authorities." But to Nee, these marketized SOEs are beyond "the bounds of
central planning," and more or less "rely on local government to secure access to resources." The problem is
how to estimate the extent, i.e., how large a portion these SOEs take in the entire economy, since to Nee,
most of marketized firms are non-state owned ones, while Boisot and Child perceive many more marketized
SOEs than exist in Nee's estimation. Because CEOS are "quite large urban manufacturing enterprises that
may in reality have a rather similar relationship with local government to that of a marketized state enterprise
and are to that extent state-dependent" (ibid). That is, most COEs remain state-dependent through their close
ties to marketized SOEs. It seems to Boisot and Child that these COEs actually consist of semi-SOEs.
94. cf. A messenger to China business - US-trained Telecom chief builds a new, hybrid model by Mark
Landler in Beijing in The N ew York Times, C1, C4, Tues. August 21, 2001: Mr. Tian, 38, is no slouch: he
speaks rapid-fire English and holds a Ph. D. from Texas Tech University. And after starting a successful
technology venture in Dallas, he was chosen by the Chinese government to run a pioneering state-owned
company. Perhaps because of his credentials and his keen ambition, Mr. Tian has faced sky-high
expectations ever since he became chief executive of the company, China Netcom, in 1999. And as the
fledgling telecommunications company has hit some bumps, managing those expectations has become
an unavoidable part of his job. China Netcom was started at the urging of Prime Minister Zhu Rongji, who
hoped to create a class of state-owned, but Westem-style companies able to take on the hulking state
monopolies. Netcoms main business is delivering high-speed data communications: its chief rival is
China Telecom, the leviathan that dominates voice and data traffic. Mr. Tian said the investors help by
234
offering him advice on how to build and run a commercial enterprise. He said this was his toughest
challenge - tougher even than navigating the Chinese bureaucracy. Netcom has almost 3,000
employees, and is adding 200 a month. Mr. Tian recruited Western-educated Chinese from companies
like Microsoft, Oracle and McKinsey, the consulting firm, as top executives. Now, he must hire middle
managers able to run a fiber optic network and sell advanced services. Mr. Tian has devised a
performance-based compensation plan for his managers. He says Netcom is one of the few state-owned
Chinese enterprises that draws a distinction between shareholders, directors and executives...'My hero is
Steve Jobs, he said. 'I always wanted to become like him. I wanted to go to the Wild West - and the Wild
West is China.
95. See a report about large business deals that are not in compliance with the rule of law in Chinas
transition, cf. Bank of China investigation could delay New York IPO by James Kynge in Beijing and
Rahul Jacob in Hong Kong in Financial Times, p. 1, W ed. Jan. 16, 2002: An investigation into alleged
wrongdoings by the former president of the Bank of China is set to delay the stock market listing of the
bank's Hong Kong subsidiary, official sources and analysts said yesterday. Other aspects of the
operations of the best-known of Chinas 'big four1state banks could be dismpted, they added. The listing
of the $4bn to $5bn Bank of China in Hong Kong and New York was scheduled to take place in the first
quarter of this year. Now analysts believe it may slip, throwing into disarray the banks efforts to attract
foreign strategic investors to its initial public offering. Wang Xuebing, president of the Bank of China from
1993 to early 2000, was under investigation in Beijing for alleged 'credit irregularities during his tenure at
the bank, Dai Xianglong, governor of the Peoples Bank of China, the central bank, said yesterday. The
nature of Mr. W angs alleged wrongdoings remain unclear, though official sources said that various
cases, including false accounting and money laundering, were under investigation. The Bank of China's
branch in New York was the subject of a probe by the US Treasurys comptroller of currency, officials in
Beijing and London said. Liu Mingkang, the current president of the bank, and Xiao Gang, a PBOC
deputy governor, were assisting US authorities in their probe, Chinese officials said. The mood at the
bank in Beijing was somber. M r Liu was supporting a thorough investigation of the banks domestic
operations to uncover irregularities. Although the bank assets set to be listed in Hong Kong are not at this
stage understood to be part of the probe, the investigation is potentially disruptive, in part because the
listing is being designed and executed by the head office in Beijing, which may now be distracted. In
addition, say analysts, the U S Securities and Exchange Commission may require extra reassurance and
disclosure before it allows the stock to be listed in New York. The larger issue, said an investment banker,
was that questions about alleged money-laundering and false documentation would probably give
investors pause. 'Any issues involving integrity and [compliance with] banking regulations are going to get
a lot of investors very nervous. You could see this deal affected both in terms of the timing and the
valuation [of the shares to be sold], he said.
96. In 1988, Boisot and Child 1988 similarly discredited SOEs. Ibid. p. 521: Managers of Chinese state-
owned enterprises are thus vulnerable. The economic reforms of the past decade have injected some
dynamism into almost all sectors of the Chinese economy, but their own has so far been the slowest to
respond to the treatment. If they wished to respond to the competitive challenges that threaten their firm,
they would need to secure for themselves a greater measure of managerial autonomy than has been
vouchsafed them by their supervising bureaucracy. In equipping them for the challenge of market
competition, that bureaucracy does not serve them well. First, it possesses precious little information on
the firms external environment outside its own jurisdiction. It is ignorant of market developments,
consumer tastes, and market structure. W hatever m eager information it does possess, it tends to hoard in
order to control enterprise behavior. The continued tendency of the firms studied to rely on their bureaus
for the provision of 'impacted and poorly codified information on their external environment was one of
the most striking features of their responses to the reforms. Thus the scope for opportunism and the
constraints of bounded rationality are both considerable at the bureau level; in fact, operating through the
bureau these largely characterize a firms external environment. Second, bv fragmenting the enterprises
objectives and entrusting their implementation in arbitrary fashion to competing groups of workers through
the internal contract-responsibilitv system, the supervising bureaucracy destroys managerial rationality,
discretion, and cohesion within the enterprise. The process is rendered complete by the constant
interference of municipal 'mother-in-law in day-to-day operations. Thus the failure to codify a viable and
235
unified set of managerial objectives opens the door to opportunism and bounded rationality inside the
firm. Yet the pursuit of increased autonomy and managerial rationality is only one of the options open to
enterprise managers. The other is to 'join the system rather than beat it, to accept the protection and
security offered by its embrace. The key skills required here are not those of codification but those of
negotiation; the name of this game is not to economize on bounded rationality or to exorcise opportunism
but to capitalize on them in a linked network of hierarchical face-to-face relationships in which personal
power is traded, using loyalty, compliance, and protection as the medium of exchange. Such is the logic
of fiefs (emphasis mine).
97. As Cao and Qian et al. in 1999, while focusing on the S O E reform for the privatization, contended
(104), many scholars qualify their evaluation of Chinas economic reform by pointing to the huge problem
remaining for SO Es (Qian 1996; Li 1997; World Bank 1997). By the early 1990s it had become evident
that the lack of fundamental SOE reform had seriously undermined Chinas development. In 1994, China
had about 300,000 SO Es (including 100,000 in industry) with about 75 million state employees (including
43 million in industry). These SOEs continue to consume a great portion of bank credit and other
resources; most have excess employment; and close to half are loss-makers. SO E reform has proved a
thorny problem in Eastern Europe and the former Soviet Union in the 1990s, and these former socialist
states are only moving slowly out o f the woods. There are strong reasons to be concerned with whether
China can solve its SO E problem.
98. Nee and Stark 1989 declared: "the increase in agricultural productivity has already resulted in the
diversion of 20% of the total rural labor force - about 76 million peasants, and estimated about 100 millions
peasants at the end of the century - from agriculture to village industry, construction, trade, transport, and
other services in the rural market economy. By 1986 nonagricultural production accounted for 46.9% of the
total output in rural areas." Ibid: 26.
99. But the complexities of the reforms in formal sectors could also be confounded by more alternative
arrangements and institutional mutations co-evolving in China's transition. The moves of o both kinds of
enterprises, SO Es and non-SOEs, underscore a double-prong nature or a reciprocal process characteristic of
a mixture of Chinas changing circumstances, one that resembles "neither the familiar alternative of arm's-
length market contracting nor the former ideal of vertical integration" (cf. here the borrowed citation originates
from Powell, W . W. 1990, 297) but mingles both formality and informality in market transaction and
hierarchical governance. Yet such a mix is arguably neither a new myth nor an interlude. As regards SOEs,
for instance, while becoming decentralized and eventually liberalized, they head for both commercialization
and internal markets reliant on informal networks for local flexibility (cf. Lu, Yuan, and John Child. 1996; cit.
from David Brown and Mark Easterby-Smith eds. Management Issues for China in the 1990s: Domestic
Enterprises. 61-84). Non-SOEs, as they further expand, adopt formal market contracts and increase legal
labor recruitment or formal employment. In this way the boundaries among market, hierarchy, and networks
become more blurred. As Powell depicted, "Outside boundaries of firms are competitions, while inside
managers exercise authority and blur opportunistic behavior1' (Ibid).
Also cf. China accord on how to oversee banks by James Kynge in Beijing in Financial Times, p. 4,
Thurs. Feb. 7, 2002: China yesterday put to rest months of divisive debate on whether a separate
supervisory body should be set up to oversee its banking system, deciding that a new bureau within the
existing central bank would be sufficient to do the job, official sources said. The decision represented the
first key issue to be resolved at an ongoing Central Financial Work Conference, which is due to set the
reform agenda for Chinas financial system for the next five years. Observers said the decision to back
away from splitting the supervisory and monetary policy roles of the Peoples Republic of China (PBOC)
may be seen as relatively conservative. But other commentators said it was merely a practical choice
because the new supervisory bureau would have more clout within the bank than outside it. China has
already devolved responsibility for the supervision of its securities and insurance industries from the
PBOC to the China Securities and Regulatory Commission and China Insurance Regulatory Commission
respectively. The PBOC was opposed to losing its power to regulate the banking industry, official sources
said. Those who advocated a separate supervisory body - including some prominent government think-
tanks - argued that it would make the PBOC more independent in its monetary policy and help to free the
236
state-owned banks from policy-directed lending..."
100. It is arguable that Chinas scale economy is an effective trade-off strategy endowed by its former
planning regime. Chinas state planners have aggressively used its scale economy to gain its low prices, low
taxes, low cost of capital, low interest rates, high investment in R&D, and lucrative big draw of FDI, etc.
available to improve its competitive advantages in labor productivity, product quality, and market shares - a
new efficient model for developing world, cf. Study debunks myths surrounding manufacturing miracle in
China - Comparisons with India show reasons for mainlands superior economic performance by Richard
McGregor in Financial Times, p. 6, Fri. Nov. 8, 2002: Chinas superior economic performance in the last 20
years over India, its only rival in terms of population, is largely due to its investment in of its manufacturing
sector, according to a new comparative study. The report, by McKinsey, the management consultancy, will
make depressing reading for Indias economic managers, many of whom already fret that China has created
a far more efficient and productive model for a developing economy. The report, due to be released today,
dismisses what it says are myths about the rapid growth of China's manufacturing sector, a phenomenon that
has transformed the mainland in barely two decades into the workshop of the world. Far from being built - as
its critics claim - on overinvestment, a singular and often unprofitable pursuit of exports, low-quality goods
and marginal pricing, McKinsey concludes China has found a sustainable model for manufacturing. The
reality is that China's growth has been driven not only by investments but also by a rapid growth in labor
productivity, an emphasis on exports, strong domestic demand and by low prices and a stress by several
companies on quality, says the report. Chinas lower prices are not just due to cheaper wages - an area
where the two countries are competitive - but to lower taxes and cost of capital, and the productivity of its
workers, which is 10-300 per cent higher than Indias, depending on the product. China's lead over India in
export markets is maintained to the last mile, with its shipments reaching the US less than a month after
leaving he factor, compared with Indias six to 12 weeks. The extra time taken by Indian goods is the result of
delays at customs, long loading and unloading periods and high transit times, the report says. Since 1990,
Chinas GDP per capita has grown three times faster than Indias; it has attracted$336bn (216.7bn, 335bn)
in foreign investment in the 20 years to 2000, compared with Indias $18bn; and in the 1990s its
manufacturing sector expanded at a rate of 12 percent a year, double the increase in India. The report
concedes that many Chinese state-owned companies get loans from state banks, and often do not pay them
back, but says cheaper capital costs are mainly due to lower interest rates. But the cheap money available to
state companies does not explain all of Chinas strengths. The truth is that more than 70 percent of Chinas
industrial output comes from the private sector and from multinational companies with prudent cost
accounting sector, the report says. Foreign investment has spurred improvement in quality, which in turn has
attracted multinationals to shift their exclusive manufacturing businesses to China. Nike, for example,
produces 40% of its footwear in China, while Galanz has taken a grip on 30% of the global market for
microwave ovens because of quality enhancements in the mainland. The reports case studies cite the
example of color televisions, where China, responsible for more than a quarter of global production, easily
surpasses India in both domestic sales and exports. The reason, says McKinsey, is lower taxes, import duties
and raw materials costs, a competitive environment and a critical mass of component manufacturers. China's
color T V industry, though, has also suffered from vast over-production, mainly because regional areas have
refused to cut off credit to unprofitable manufacturers in order to preserve jobs. In another study on ceiling
fans, where Chinas annual production is eight times that of India, nearly half the mainlands price advantage
is accounted for by Indias higher indirect taxes."
101. cf. Economic Institute of the Chinese Academy of Social Sciences 1987.
102. Citation to be continuous (Ibid.): ...In fact, some county governments have been unable to pay school
teachers for several months. Keeping inefficient SOEs deters the creation of more employment, another
important governmental objective. It also diverts the attention of local governments from being good
regulators of their local economies, which are increasingly represented by non-state firms. Finally, with
many inefficient enterprises, the same amount of money goes farther in privatization than in maintaining
the old SOEs. The deterioration of SO E financial performance in recent years, in particular at the local
level, is astonishing. This makes privatization of these SO Es a more pressing issue. Between 1988 and
1996, the share of loss-making industrial SOEs nationwide increased from 12% to 38%, and in 1996, the
amount of losses exceeded after-tax profits for the first time in history (Table 6). The financial burden of
237
SOEs on the government thus increased drastically.
103. Ibid. (emphasis mine): ...There are also opportunity costs for the local government in keeping
inefficient SOEs. Traditionally, SO Es are the major source of government revenue and non-sate
enterprises only contributed a tiny fraction to the government budget. This is changing. In 1995, revenue
contributed by non-state enterprises already accounted for more than 40% of the revenue from all
industrial enterprises ( The Third Industrial Census, 1997).
104. Ibid.: ...Loss-making SOEs are concentrated in small SOEs, which are mostly supervised by county
governments: 90% of loss-making SOEs are small SOEs, and 60% of all small SOEs are not profitable (Zhou
and Shen 1997). This is not surprising because SOEs under county government cannot compete with rural
enterprises and foreign firms due to a lack of incentives. They cannot compete with large SOEs either
because they lack the technology, human capital, scale economy or monopoly power. These small SOEs are
squeezed between non-state firms and lame SOEs."
105. In fact the local governments have never been passive as if their changes were forced by opportunity
costs for the local government in keeping inefficient SOEs. Instead, it has been their activism that has
induced efficiency-enhancing privatization and restructuring economy.
1 0 6 .1would like to add here that this weakness also reflects researchers own assorted weaknesses in their
views of the world in which they are participatory actors. Without being engaged themselves, researchers
would find it hard to understand a changing reality. Most Institutional studies have rarely raised research
questions in which researchers could take a stance as participatory actors or reforming planners and
managers, concerned with how to make changes and how to construct new reality in terms of bounded
rationality and feasible strategies. In this regard, all three institutional models are basically those of bystander
critics.
107. cf. Beijing agrees energy shake-up plan by James Kynge in Beijing in Financial Times, p. 4, Mon. Feb.
4,2002: Chinas Communist leadership has approved a long-delayed plan to restructure the countrys power
industry, in a move that may result in downward pressure on electricity prices and a dilution of the State
Power Corporations dominance. The main thrust of the restructuring, which Chinese sources said was so
sensitive an issue that it had to be approved by the seven man politburo, is that the transmission business will
be separated from the generation business and two grid companies will be created by splitting the assets of
the State Power Corp. One grid company, Southern Power, will incorporate the grids of Guangdong, Yunnan,
Guizhou, Hainai and Guangxi regions in southern China. The other, State Power Grid, would include the grid
in the other areas of China, Chinese sources said...Certainly, the main competition to State Power Corp
and its subsidiaries comes from many local or provincial power stations, which often undercut the
expensive electricity offered by the state but are often polluting. The governments hope is that the four
identified power stations will grow strong and competitive enough to buy up the small local generators...
108. cf. T V distributor wins landmark rights victory in Chinese court" by Richard McGregor in Shanghai in
Financial Times, p. 1, Mon. Feb. 4, 2002: ECM, a London-based television distribution company, has won a
landmark court case in China, forcing a state-owned T V station to pay it more than $200,000 for the licensing
rights of a British game-show format. The court order against Shenzhen Cable is an important victory for
foreign media companies trying to sell production formats in the Chinese market. Shenzhen Cable bought the
format for the show, Go Bingo, from ECM in July 1998, but refused to pay the contract fee, according to ECM
officials. After winning an arbitration in Beijing without the matter being settled, ECM took Shenzhen Cable to
court, which ruled in the British companys favor...In China, victorious litigants - both foreign and local - are
often unable to enforce legal orders because the authority of the courts is undermined by powerful local
officials. ECM sold the format, screened in Britain as Lucky Number, to at least four other regional stations
without a dispute over payment. The Shenzhen precedent may help ECM protect another deal in China to
franchise the format of the BBS quiz show, The Weakest Link. A Shanghai station has launched a show
that echoes the W eakest Link formula, prompting the BBC to complain to the channel and central
government. The Weakest Link format licensed by the BBC and ECM is due to be screened across
China, starting in mid-February....Many other western shows have been licensed in China since 1995,
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including Big Brother, Coronation Street, and, this week, the BBCs Tletubbies."
109. Reasonable and flexible alternatives could be made in such a selective process. If optimal conditions
for the ideal arrangements are not feasible, then alternatives might be explored. Feasible alternative
arrangements might be aware of three practical concerns: a. The cohesion of the existing institutions
especially regarding how nascent and mutant segments could be co-opted or integrated into the existing
institutions, b. The domination of the existing institutions over the new segments or vise versa, especially
in regard to whether these new segments could survive, spread, and prevail over the existing structure, c.
the idiosyncratic strengths of the new segments relative to others concerning their survival and success
by institutional fitness. The variations in these three concerns could determine the constructed patterns of
the new institutions and the extent of their impact on the existing structure.
110. W e might first relate this to the early studies concerned about efficiency that initiated the transitions
from the erstwhile socialist economies. But economic efficiency has been both historical derivative and
social constructive. For example, people could ask how Chinas transition could be instituted and its
economy could maintain an average annual G D P growth 7-8% for two and half decades and how China
under its current regime could carry out its overall reforms for construction of the rule of law. Parallel case
cannot be found in other transitions, even among Chinas neighbors with similar histories and
hierarchically-dominant organizations and cohesive institutions. Thus the search for answers could go
beyond the reach of simple short-run efficiency concerns.
111. For instance, China had a long civilization and high cultural contexts prior to its transition. How could
we expect its economy to adapt to the global economy or simply adopt a commercial standard and a level
playing field? Chinas fast market expansion has already kept going for a quarter of century - a lengthy
period in modem standards. Its marketization has steadily expanded in depth and breadth, and this has
happened in institutional environments and conditions quite different from those O E C D countries or other
current market economies. Furthermore, Chinas approach has appeared contrary to those formulated by
neo-classics, which has taken privatization of industrial ownerships for granted. Som e might conceive of
Chinas approach as a stopgap for privatization indispensable to its transition (cf. Cao et al. 1999). Others
might argue that Chinas marketization has been embroiled with many existing macro- and micro-level
conditions that are incomparable with other economies, like Chinas economic size, social heterogeneity,
tight collective structures, uneven regional development, and other factors such as timing
dyssyncronization between central and local governments and among different industries, the fallout from
the past anachronisms, etc. In a rational account, it is plausible that social heterogeneity comes out more
with marketization and development characteristic of social heterogeneity likely appeals for market
approach to retool social bonds from personal-related to institutional-based. The greater the social
heterogeneity, the more likely the process (Note: This perspective may refer to Zucker argument that social
heterogeneity leads an institutional-based trust relying on market mechanism, cf. Zucker 1986: 79; Ibid. 82:
"Why turn so sharply to a previously underutilized form of trust, institutional-based trust? There are three
important reasons, all three conditions under which institutionally produced trust and its market will emerge:
(1) social distance between those engaging in a transaction, i.e., exchange across group boundaries, where
groups have different, highly specific exchange expectations, as in occupational or industrial groups; (2)
geographic distance between those engaging in a transaction, with formal indicators of trust being more
readily transmitted across physical distance; and (3) number of non-separable transactions in a social
system, especially when large networks of interdependent transactions are created."). Skeptics might still
point out that provided that China unique social, cultural ties, and demographic resource could all come
into play as leverage, these factors could move in opposite directions being countervailing forces
attenuating the salience of the arms-length mechanism and market disciplines; and this could make
China more reliant on other ways like informal reciprocity for social cohesion, commercial intercourse, and
information exchange. After all, social heterogeneity is not inconsistent with tight collectiveness. This
seems to vindicate the necessity of recounting those background conditions in Chinas transition. In brief.
Chinas transition has been taking place within, and complicated by. its all-round unique conditions:
historical experiences, social expectations, cultural contexts, institutional predecessors, and local-
patriarchal politics. A major question remains: can these socio-economic processes drive China's
economy up to the level of a typical market economy, as it is going en route to globalization?
239
112. China's hybrid economy in transition cannot be thought of as separated from its previous forms in
the central planned economy. On the other hand, albeit government involvement has played a big part of
Chinas transition, this cannot be seen identical with the part it played that before the transition. None of
the three institutional models took this into account.
Here we might also need to insert a process perspective. W e might start thinking about a demarcation
between the prolonged deficiencies in the state sector suffered from the planning economies, the role of
the state sector during that period, and the rudimental establishment of various infrastructures under the
planning regime. The latter two were indispensable to institute the early industrial base of the national
economy. This was particularly the case in those backward countries with lower productivity and regional
fragmentation. Concerning Chinas historical circumstances, the rudimentary establishment of
infrastructures would be considered one of the cornerstone for its later development, given the fact that it
started out with a fragile industrial base, much more backward than the industrial base in the FSU and the
FEE.
113. Seen in this light, could China in its transition simply jettison these establishments? What could
happen if China took such a surgical operation at one stroke, provided its transition had not rooted in its
own historical continuum but started from a discontinuity or separation from those early establishments?
Then, how could one evaluate the fact that China has ever since pursued its reforms in its own way in
terms of a mix of market and plan mechanisms, or in terms of an integrative strategy attempting to
combine the strengths of both? Could such a mixed strategy, reflected in China's hybrid economy, reach
the worst ends, as Komai and Nee assumed? O r the best ends? Not only were those dynamic
arrangements in Chinas current hybrid economy innovatively adapted from the advanced economies
through institutional learning, but also they were mostly institutional mutants co-evolving from Chinas
state commanding economy.
114. cf. M. Meisner 1996, pp. 520-1 (emphasis mine): ...The township and village industries are a 'socialist
survival of sorts. Although most of the extraordinary growth of this sector of the rural economy occurred
during the Deng era, and while the TVEs might well appear to some as a form of proto-industrialization
preceding the emergence of large-scale capitalist industry, it should be recalled that rural industrialization was
originally a distinctively Maoist policy. It was introduced during the Great Leap Forward, and revived during
the Cultural Revolution, with the announced aim of narrowing the differences between worker and peasant,
and between town and countryside. W hatever the ultimate social role and fate of the TVEs, it is inconceivable
that rural industrialization could have taken place on the scale that it has in China, and in a partly collectivist
mold, in the 'normal course of a capitalist economy developing out of a feudal for other precapitalist) social
formation.-.Another socialist legacy is the century-long effort by the Chinese intelligentsia to avoid the social
evils of capitalism. Further, there is a Chinese population who until very recently was schooled in egalitarian
and cooperative values, values that periodically have been recalled in the post-Mao era during times of
socioeconomic distress and political upheaval...But these are remnants of a guasi-socialist past, not
necessarily harbingers of a socialist future...
115. The new generations of the state planners in Chinas transition are less likely to repeat the states
previously doomed experience, such as parodying FSU s industrialization in Chinas early founding years.
They are more likely to place their institutional learning in acknowledgment of local and historical
complexities. They are more likely to take new methods characteristic of their own terms, so long as the
methods are suited to the state objectives for upgrading and fitting into the local conditions and needs. As
Chinas trial-and-enror experiments have gone further, the locals who are enjoying more discretion and
flexibility would most likely adopt any locally-spedfic model or innovative model fitting in their own local
contexts, while forfeiting the warrant of the legitimacy of any model against the fitness in the local
complexities. Thus how to identify these local and historical complexities and check the ensuing institutional
fitness might hold the key for future generations of Chinas policy-makers. Chaotic situations to Chinas
economic governance have often occurred when the state managers and local agencies became puzzled
by the local complexities, and when their decision making was threatened by the dilemmas growing from
these complexities. As the Chinese managers and planners were often unable to discern the complexities
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and dilemmas in their own circumstances, whichever kind of model (American, European, Japanese, or
indigenous) they adopted might be inadequate and leave them vulnerable to hesitations and unbridled
swings.
116. cf. Cao et al. 1999, 122 (emphasis mine): ...For those locations which have better investment
opportunities, it is the opportunity cost that matters. For example, Shunde county of Guangdong province,
unlike many other countries, started privatization when the performance of its SOEs, and especially TVEs
was not in a state of crisis, but was in good condition...Being close to Hong Kong, the government of
Shunde would like to invest its money in infrastructure in order better to compete with neighboring
countries: that is, the opportunity cost of keeping inefficient SOEs is high. Similarly, the ambition of
Shanghai is to attract foreign investment and become Chinas commercial and financial center. Again, the
opportunity cost to the Shanghai government of keeping old SOEs is too high Also, ibid. 121 (emphasis
mine): In summary, local governments incentives for privatization and restructuring depend on the costs
and benefits of the alternatives. Local governments can be inducement for efficiency-enhancing
privatization and restructuring when they are under hard budget constraints and facing market
competition.
117. Hitherto all three institutional models have not taken into consideration such institutional fitness and
learning very seriously. The term institutional fitness accents institutional changes as historically derived.
whereas the term institutional learning accents institutional changes as socially constructed and open to the
frame re-alignment of social actors as players and agencies in making transitions. Institutional fitness
underscores the historical nature of dynamic institutional construction. It concerns the variations of transitional
processes and outcomes at local levels. Efficiency by performance cannot be perceived consistently and
uniformly across the locales respective circumstances. Put differently, efficiency must be accounted for in a
more complicated wav to include sociological consideration of these variations across space and over time.
For example, efficiency ought to be related to the institutional effectiveness in context-specific variations at
local levels, the variations straddled between efficiency and legitimacy and discerned as a trade-off in
general. In this sense, not optimal efficiency but suboptimal efficiency is most desirable.
118. Komais logic resembles those reductionist theorems of modernization and industrialism. He
maintained that the socialist systems he listed would with no exception follow the four patterns of
socialism. The difference in their paths and progresses could only be perceived in that In some countries
the order of appearance is different, or the stages alternate with one another (ibid, p. 20). In Chinas case,
actually, all the Chinese paramount leaders, from Mao to Deng, had never lived up to their proclamations;
rather, the Chinese leaders had envisaged the solution to Chinas development only in a lengthy historical
process through a couple of generations.
119. Ibid. p. 4: ...There are schools of anthropologists and historians who emphasize this fourth point, in
other words, the uniqueness of each country, society, and culture, and consider it futile to look for general
regularities or the expression of general historical laws." Similarly, Komai clarified that This book [in
1992],..does not address the question of whether theirs is 'true socialism. It sets out to discover what
their system is like, and not whether it merits the description 'socialist according to the criteria of some
school of thought or other... There are other synonyms for 'socialist system in the literature on the subject
as well, for example, 'Soviet-type system, 'centrally administered economy, 'centrally planned
economy, 'command economy, and 'state socialism. Ultimately, the choice o the term is a matter of
semantics, as long as the meaning is clearly defined, and therefore it deserves no further attention (ibid.
p. 10; brackets mine).
120. Komais overwhelming concern as such is vulnerable to a lopsided utterance on general regularities
and appears to attenuate attention to those particular mechanisms functioning in transition. But even
those general regularities, fortunately" working well across transitions still come down to the
effectiveness of particular mechanisms. The bigger regularities on transition might still fall short of
elucidating a transition if scholars fail to make constant modifications and locate these institutionally-
grounded particularities and their local working mechanisms, for which Komai and his associates have
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not vet provided a sufficient account beyond some general descriptions. The general formulations have
often differed from local particularities in a given transition.
121. cf. J. Abegglen & G. Stalk, Jr. 1985; Aoki 1 99 5,1 9 96 .
122. A caveat here is that even a cultural approach could be stereotyped, cf. Economic Scene - Rich
nations have been too insensitive to poverty for too long; the situation can no longer be ignored by Jeff
Madrick in The New York Times, C2, Thurs. Nov. 1, 2001 (emphasis mine): ...Som e critics say that money
is not the issue, that the record of poor nations is an inevitable result of debilitating cultural attitudes. Time
and again, such cultural stereotypes have been defied. Malaysia, a Muslim nation, is a great economic
success. Catholic-France has a higher standard of living than Anglican England, with its celebrated
Protestant work ethic. China has grown rapidly but it essentially eschews private property. Far more likely,
development policies in the last few decades have repeatedly been wrongheaded. In a recent controversial
book, 'The Elusive Quest for Growth (MIT Press), William Easterly, a World Bank economist, traces the
history of these failures...In the early 1980s, the World Bank insisted the failures had to do with inflationary
and protectionist policies. They insisted that countries to which it lent adopt reforms - 'neo-liberal policies
like restrained government spending to control inflation, free trade to foster competition and deregulation to
allow free markets to allocate resources. The average record of success was poor...But there is an
alternative body of literature that asserts that neo-liberal policies are at best only part of the answer. A new
book, 'The Rise of the Rest (Oxford University Press), by Alice H. Amsden, an economist at the
Massachusetts Institute of Technology, asserts that the recent success of many developing countries
required an extensive role for government in supporting business...
123. That is, an economy cannot be explained by economics alone, for an economy is socially embedded
and constructed, whereas society is culturally-bound and historically-specific.
To see a sociological analysis of transitions, the readers may refer to Theodore Gerbers analysis of Russian
labor market transition in 2002. Ibid. pp. 651-2 (emphasis mine): ...it will not surprise the many Russia
specialists who have questioned the impact of privatization because of the particular conditions in which it
has taken place (Blasi et al. 1997). More surprising, in light of such doubts, are the pronounced effects of
privatization at branch level. Taken together, the results reinforce the message of the studies based on
China, which found that the effects of property form on firm practices (such as hiring and firing) are more
complex than implied bv the Komai model (Guthrie 1997; Walder 1995)...By disentangling, both conceptually
and empirically, institutional and structural effects on individuals life chances, the structural perspective on
post-socialist stratification lends insight into why there cannot be universal consequences of market transition
for processes generating inequality. Institutional variations and politics generate different stratification
outcomes in the context of market transition because they combine with another source of variation, inherited
structural legacies, to produce varying patterns of structural changes in the labor market. Others have made
a similar argument, based on institutional variations across -post-socialist societies (Stark and Bruszt 1998;
Walder 1996) and the influence of politics on transitions (Parish and Michelson 1996; Zhou 2000). The impact
of structural change on individual labor market prospects and the dependence of structural change on
preexisting structural and political conditions thus help explain why market transition theory offers little insight
into stratification processes in contemporary Russia (Gerber and Hout 19981. Without Question, human
capital affects the labor market prospects of Russians during the period of market transition, and these effects
vary substantially over time and across locations. But both the main effects and their patterns of variation are
far more complex and inconsistent than implied by market transition theory. Even if the theory applies in
China, there is no reason it should apply to Russia, given the different nature of the structural changes
resulting from market transition there...In addition to critiquing the possibility of a general theory of post
socialist stratification, the structural perspective suggests possible underlying similarities in the stratification
processes of advanced capitalist and post-socialist societies, in that many aspects of structural location have
similar effects in both environments. The framework may help develop testable middle-range theories about
systematic cross-national variation in how market transition affects stratification. Comparative research might
fruitfully proceed in two complementary directions: the elucidation of relationships among particular sets of
preexisting conditions, policies, and patterns of structural change and the analysis, along the line of DiPrete
et al. (1997), of institutional bases of cross-national variation in the effects of structural change on individual
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labor market transitions. Variations in structural change undermine the possibility that market transition will
have a uniform effect on stratification in different post-socialist countries. Nonetheless, it may be possible to
generalize at a lower level of abstraction - about how certain types of prior conditions lead, when combined
with certain types of institutional changes, to particular forms of structural change and resulting
conseguences for life changes.
124. cf. Nee and Stark 1989, pp. 26-7: A central contradiction of reform efforts in socialist economies
derives from the reform leaderships failure to cut back sharply or dismantle entirely the bureaucracy that
managed the command economy. This is largely because inherent in any reform effort is the fear that the
reform may fail to realize desired results...To minimize the risk of failure, reformers tend to move
gradually in carrying out organizational reforms that are aimed at sharply reducing the size of the
economic bureaucracy.
125. Otherwise, one might try to explain the bureaucratic collapse in the FSU and the F E E because of the
absence of sufficient modem experts, highly trained technocrats, and professional personnel. O r one
might try to explain the collapse because of the absent of benchmarking infrastructure that could function
as a supporting system, and because of the lack of institutional leadership in transition. Those state
managers who were mostly ex-state officials, and the reformers, who are preoccupied with dramatic
actions, rushed to demolish the entire bureaucratic machinery without having considered the bureaucratic
infrastructure needed for delivering the transition. But with insufficient human resources, they could only
bear extensive risks to institute the new systems. And the new regime, after such a difficult start, was in a
worse position for recruiting fresh technocrats from universities and experienced experts from high
training programs, to replace old bureaucrats with the vested interests. Furthermore, with such a scarcity
of human resources, it was most difficult to launch those indispensable R&D programs. Therefore,
whatever the explanation for the bureaucratic collapse in the FSU and the FEE during the transitional
period, bureaucratic size - in itself - could not provide the key to making a successful transition from
state socialism.
126. See Boisot and Childs introduction to the context of the debate over privatization in the W est (1996,
614): There is a major debate in western economics about the relevance of property rights to economic
performance. Economic reform in the different socialist countries since the 1970s has intensified this
debate, on which the Chinese case should offer an important comment. Arguably the seminal text in the
modem debate is that of North and Thomas (1973: 157), who maintained that the key factor explaining
the 'rise of the Western world was the evolution of 'a set of property rights that provided the incentives
necessary for sustained growth. They attributed economic failure, including that of 'much of Latin
America, Asia and Africa in our times, to 'inefficient property rights. A large literature has emerged,
arguing on both theoretical and practical grounds that, with certain exceptions, state ownership of
industrial assets is incompatible with efficient operations. This argument has shaped the policy advice
received by developing countries, often as a condition of further aid from the Bretton W oods organizations
(Cook and Kirkpatrick, 1988). Most recently, it has helped shape the advice given to the reforming
communist countries: 'The hallmark of market capitalism is that private capital has wide autonomy to
enter or leave industries by creating or closing enterprises and it has substantial control over the
management of the enterprises it owns (EBRD 1993: 113). Chinas rapid growth, and that of a wide
spectrum of East Asian countries, calls these broad judgments into question...
127. Even the US continues to have lots of problems in its private sector, such as its lately private-sector
financial deficit, cf. Americas slowdown has done little to remove the countrys serious economic
imbalances in The Economist, July 14th, 2001: ...If the private sectors balance reverts to its historical
average within three years, Messrs Godley and Izurieta reckon that this would cause a recession this
year, with annual G D P growth in the five years to 2006 of only 1.1%. Even if the private-sector deficit fell
by only half, to 3% of GDP, [American] annual growth would average only 2% over the next five years. To
keep the three sectors in overall balance, higher net private saving must be matched by either a fall in
Americas current-account deficit or a swing in the budget from surplus to deficit.
128. For example, it could make no sense to herald a unidimensional market transition and delegate
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privatization to any transition with little regard to its given historical and local contexts. At least readers might
pause for second thoughts: how could such a classic path toward capitalism be the sole model for all
transitions, provided all economies are en route to market economies in the future?
129. Privatization has been a heated topic in the economics of transitions since Komai postulated his
well-known "Soft Budget Constraints" (SBC), attributing the universal problems of inefficient allocation of
resource and lack of incentives under state socialism to state ownership. Therefore the only solution was
found in re-privatization, as was done in the former Eastern Europe and the former Soviet Union through
their surgical operations. However in Boisot and Childs view, since capitalism can have variants, such a
transition would have its alternative paths, too. Oriental type capitalism is reliant on its quasi-market
mechanisms, like industrial interfirm obligatory networks backed by the government in Japan, the state-
commanded industrial conglomerates in Korea, and the family businesses either strongly supported by the
state in Taiwan or ran in lasses-faire markets in Hong Kong, as Whitley examines and documents, and
personal networks of information diffusion/codification in China, as Boisot and Child suggest. This affirms that
capitalism may not rely on a unitary trajectory of privatization toward the market economies based on
codification for a rational-legal bureaucracy, Western style or Weber-preferred. If one looks at the economic
transactions embedded in East Asian patriarchal bureaucracy, they are actually largely organized under its
exclusive information systems and mechanisms of coordination, insufficiently codified yet sufficiently diffused.
In Chinas case, its transition to such a type of capitalism would suggest a corresponding search for
organizational and institutional shifts from fief-typed business systems and market firms (e.g., state owned
enterprises in pre-reform China) to clan-typed business systems and market firms (e.g., non-state-owned,
non-private/semi-private-owned, private-owned in the reforming China). In comparison to the vague versions
in Gelb et al.s China's "pseudo-privatization" (1996) and Nee's "mixed privatization" (1989), Boisot and Child
clarify China's currently principal forms of property rights as communal, which are undergoing the
transformation of network systems from fief-like to clan-like through its market reforms. As they claim, many
business deals at different levels are successfully made in such a way, somewhat informal, to favor personal
trust relationships, which are beyond the clear demarcation of property rights and legal terms, and which are
conducive to the configuration of pro-business environments. It is certainly in their mind that the Oriental
collusion, now criticized by many Western scholars, is an alternative form feasible for Chinas transition, even
if it defies the inseparability between privatization and marketization, and obscures the boundaries between
different types of property rights.
130. This dilemma can be seen explicitly from Boisot and Child 1996 comments on others. Ibid. 615-6:
Even a Western write like Solinger (1993), who from a close vantage point suggested that China is
developing a form of capitalism, nevertheless argued that this will not be based on Western institutions
but will depend very much on adaptation by a state that continues to regulate property rights. Faure
(1994: 57) commented: I am not saying that China, by discarding Marxism, is necessarily becoming
capitalist. It is not clear to me that such words as socialism or capitalism are applicable to this emerging
society in any absolute sense. W hether these writers claims are correct or not, their disassociation of
marketization from private ownership reflects a distinctive feature of Chinas economic development that
appears to be socially em bedded...
131. cf. Boisot and Child 1996, 615-6: ...the property rights enjoyed by state-owned enterprises today
are in practice negotiated with higher authorities, whether these concern specific resource
commitments...or the implementation of responsibility contracts in general...In the rapid growing non
state sector, the ownership of collectives has not been clearly defined, and local government retains an
important supportive and supervisory role in their operation (Nee 1992). While state enterprises in China
are officially owned by the whole people, government being the de facto representative of their owners,
the intention of the economic reformers has been to separate public administration from business
management by decentralizing powers of enterprise decision making to the latter through the Contract
Responsibility System (CRS) (Byrd 1991b).
132. Many Western scholars believe that both marketization and privatization could be problematic to Chinas
transition, just as Boisot and Child assume the existing Chinas bureaucracy, in the absence of a rational-
legal framework, is not a bureaucracy according to the highly formal and legalized Western pattern (cf.
244
Boisot and Child 1996, 616: ...The nature of such redefinition is uncertain, since it will depend on the
determination of which groups are entitled to own stock and the percentage of enterprise assets that are
allocated to stockholders. It is therefore quite difficult at this moment to comment on the prospects that
the state sector will be privatized and whether, in this respect, there will be a move toward a capitalism of
the Western variety. If there is, it is quite likely that the institutional basis on which ownership rights are
defined will not accord to the highly formal and legalized Western pattern"). Thereby Boisot and Child
expected Chinese-patterned capitalism, or Chinese network capitalism to emerge. According to them,
capitalism could have its alternative form of property rights as well as its alternative form of marketization
without regard to modem rational-legal bureaucracy in a strictly Weberian sense.
133. As IMF Survey 1992 (230) assumes, "When privatization programs in developing countries have to be
carried out during a period of economic crisis, FDI is often a critical element in the economic recovery
process... privatization must often go hand in hand with the overall promotion of FDI. in addition to the
promotion of domestic private investment" (cit. from Geisa Maria Rocha 1994 "Redefining the role of the
bourgeoisie in dependent capitalist development - privatization and liberalization in Brazil." In Latin American
Perspectives, issue 80, Vol, 21, No. 1. Winter 1994: 72-98. Emphasis mine).
134. cf. cf. CNOOC set to discuss spin-off in Financial Time, p. 21, Tues. March 26, 2002: China National
Offshore Oil Corp, Chinas third-largest state oil company, is meeting investment banks on Friday to discuss
plans for a possible $300m spin-off and listing of field service and shipping assets, people close to the
company said. Reuters reports from Hong Kong. A spin-off would give CNOOC one or two more listing
vehicles to tap strong investor sentiment towards the group and raise additional foreign capital. CNOOC last
year, floated CNOOC Ltd, Chinas largest offshore oil producer, which has become a top performer in Hong
Kongs stock market, rising about 23% last year and another 24% this year...CNOOC executives are
scheduled to meet on Friday six or seven investment banks, including Merrill Lynch and Credit Suisse First
Boston, lead managers of CNOOC Ltds $1.4bn initial public offering last year... Also cf. "in Financial Time,
p. 21, Tues. March 26, 2002: China seeks to allow domestic investors to buy foreign shares in Financial
Time, p. 27, Tues. March 26, 2002: Chinese regulators are seeking approval for new rules to let local
investors buy foreign shares, the Oriental Daily News said, part of plans to also give foreign fund managers
greater access to the $515bn mainland stock market, writes Bloomberg...As a W TO member...China is
trying to bring its securities markets into line with global standards. It also wants to provide more outlets for
the $940bn held by Chinese as personal savings. The restructuring under consideration would represent the
biggest reforms since regulators said in mid-February 2001 that local investors could more easily buy foreign-
currency shares traded in Shanghai and Shenzhen...Two indices that track Chinese hard currency shares
lost more than a 10th of their value this year. Gains of more than 90% in 2001 made them the worlds best-
performing indices. The new rules are more likely to bring more Chinese investors to Hong Kong, boosting
the market, than they are to lure foreign investors to China...
135. That is, the three models are flawed in their ignorance of an ex post facto perspective that recognizes
social construction of institutions in China's transition is historically-specific and derivative. But this further
accentuates the fact that institutional analysis ought to have its retroaction. The three models overlook the
magnitude of historical precedents of institutions, the historical nature of social embeddedness and
institutional fitness, and the historical dialectical relationship between generality and particularity upon the
institutional basis. All these facets could help us further theorize on our criticism and launch an historical
institutional search regarding China's transition.
136. For example, many experiences in these transitions suggest that power relations could be more
important than efficiency, and existing norms can restrict rational choice. As Charles Perrow 1986 (219-257)
and A. Oberschall et al. 1986 (233-253) emphasize, these have happened all the time in capitalist economies
in general and in East Asian economies in particular. My contention is that this incongruity in choosing either
legitimacy, normality or efficiency should not be treated negatively, or anomalously, or pathologically. Rather,
the duality can turn to push reforming planners to search for a balanced strategy conducive to driving the
transition.
137. So-called endogeny refers to dilemmas endogenized as inner diversity, while exogeny refers to dilemma
245
exogenized as exterior contradictions.
138. For example, exogeny could refer to a historical outward search by institutions to tackle domestic
troubles in certain circumstances at the macro-level. But it could also refer to the strategic attempts by
institutions to handle thorny issues of organizations at the meso level. For example, China in transition might
want its state managers to sense some urgency for their performance and obligation to that performance,
which concerns the survival of their working units and enterprises. But in so doing, China might decide that
the best way is to let them to accept market discipline and face arms-length competition. One dilemma is that
marketization in practice is much complicated than the reforming planners originally thought, because market
reforms are immediately concerned with how to protect those numerous people in the inefficient enterprises
and how to transform them into a useful labor force in new establishments. Economic issues are always
accompanied by social problems that concern the legitimacy of economic reforms. Endogeny could refer to
such an inward search and such strategic attempts.
139. See P. Bearmans model of narrative networks in 1999 (i.e., exploiting network methods for doing
history; ibid. 527), analyzing societal and community history fashioned by the interactions of individual
actors of different generations in narrative networks.
140. As Whitley further argued, while comparing particular economies, there exist three fundamental
dimensions that could be sorted out to highlight the various hierarchy-market configurations across
economies. These three dimensions are: a. the autonomy of organizational authority in coordination and
control; b. the way of organizing economic cooperation and competition between the organizations; c. the
way of organizing resources and skills within the dominant organizations in their employment practice. The
corollaries of these three "strongly interrelated" dimensions emphasize institutional cohesion, consistency,
and domination as variables across societies and economies, and define dynamic interrelationships between
economic or business systems. Among capitalist economies, Europe and North America have more
managerial discretion of business firms, and more independence or autonomy of social groups, secondary
associations, and entrepreneurship. East Asia focuses more on state autonomy, social cohesion, or
hierarchical domination. The former economies are thus plural, while the latter ones tend to be cohesive. To
compare the variations between East and W est and within each part: in East Asia, there exist larger
business and institutional variations among Japan, Korea, Taiwan and Hong Kong (Chinese Family
Businesses) with their respective specific characters, although the variations within each nation or area
are smaller, while these nations are in principle less pluralistic, more cohesive and have more
homogeneous institutional constraints. In Europe and North America, there are existed smaller variations
between the nations, relative to their counterparts in East Asia, - with more common features, although
the variations within each country are larger, relative to their counterparts in East Asia. That is, while
Europe and North America have more pluralistic and heterogeneous features within each country than
their East Asian counterparts. East Asia has more pluralistic and heterogeneous features between
countries than its European and North American counterparts. One mav reason that European
industrialization has followed a long process, whereas East Asian industrialization has followed a shorter
process. Hence East Asia seems to a much greater extent influenced by those pre-industrial institutions.
historically and culturally, whereas Europe appears much more influenced bv modem factors, like
formalization, standardization, and legalization across the market economies, etc. But on the other hand.
those missing components and their institutional attenuations in East Asian societies have been more
effectively compensated bv the existing alternative arrangements in their contexts, such as. horizontally-
articulated structure of authority, trust commitments among the firms and market organizations, or those
distinct spinoffs, etc.. bv virtue of complementary trade-offs between legitimacy and efficiency.
In regard to economic action and social change, Whitley found that both intramural changes and plural logic
of action are more likely to develop and endure in heterogeneous institutional contexts and in the areas
where institutional environment is relatively open. According to Whitley, the characteristics and alternatives of
these interrelationships are embodied in three basic features, a. Non-reversibility of interconnections; b. Non-
linearity and discontinuity of interrelationships between economic system characteristics; c. Interconnections
between characteristics of effective, cohesive, and autonomous established economic systems also set limits
on institutional changes. However, radical transformations or major institutional changes are less likely in
246
these pluralistic economies, where the changes are incremental, piecemeal, and mainly driven by competitive
pressures. Pluralistic economies have existed in those societies where large-scale internal conflicts and
widespread institutional failures are less likely to happen, (ibid. 251: "Such [major] changes do not usually
come about in the absence of substantial external pressure or large-scale internal conflict and widespread
perceptions of institutional failure. Competitive pressures alone are unlikely to lead to substantial changes in
business systems, especially in the larger, more self-sufficient economies"). Notwithstanding, Whitley did not
rule out (1992) the possibilities that those major changes could happen in these economies specific to the
certain contexts and the possibilities that the changes could take alternative forms when necessary. In the
case of East Asia, most nations have their institutional contexts homogeneous within the same territory but
heterogeneous between each other. And those major changes across East Asian societies had hitherto
taken either discontinuous forms in light of structural reforms under the state-command (e.g., South Korea) or
incremental forms by way of coordination between the state and banking institutions (e.g., Japan). For
instance, the deregulation of Japanese financial markets is unlikely to be as far reaching as some US
pressure groups would like because it would affect established patterns of risk sharing between kaisha
(industrial groups) and could led to a destabilizing market for corporate control developing in Japan.
141. In fact, Whitley 1992 discussed such institutional comparability in terms of its different contexts and by
virtue of specific theoretical objectives, cf. Whitley 1992, p. 2 (emphasis mine): "...the hypostatization of an
asocial, general economic and/or managerial rationality which determines efficient structures and practices
for coordinating and directing economic activities irrespective of institutional differences is strongly rejected by
cultural/institutional relativists...cultural and institutional relativists regard differences in social conventions,
rationalities and moral codes to be so strong across societies that they generate highly distinctive forms of
successful business organization and practices which are specific to their context. Variations in institutional
contexts are seen here as directly affecting the nature of market processes and how economic success is
achieved so that the sorts of business structures and practices that become established, and remain
dominant, in a particular context reflect the specific features of that context. How the significance of the
socially constituted nature of firms and markets is evaluated is clearly tied to conceptions of markets and
competitive processes as well as to the theoretical objectives being pursued and the level of analysis
adopted. Particularly, once it is agreed that markets are imperfect and firms do matter as economic actors, a
number of consequences follow for the comparative analysis of business organizations." Also ibid. pp. 4-5.
142. The reader may here refer to Walter Powell's 1985 critique of Williamson's sharp contrast between
markets and hierarchies Powell first postulates his "hybrid organizational arrangements," which are close to
his later notion of network arrangements for stability. Also cf. Swedberg et al. 1992,15.
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Chapter Four
Research Methodology and Assumptions Regarding Transitions
his chapter will extend the critiques of the current institutional-transitional models I presented in the last
chapter. Having identified flaws in those models, I shall in this chapter propose an alternative approach
to Chinas transition. I shall begin by exploring the research methodologies and assumptions associated with
new institutionally-based historical comparisons.
4.1 Historical-institutional comparisons - Research m ethodologies and

assumptions
Theoretical context. As we noted in the last chapter, the three studies we examined were vulnerable to
insufficient accounts of the market-state/hierarchy relations, and were affected by the neo-classical perspective
that tends to focus on efficiency issues [1], For example, while Nee was focusing on efficiency-concem-based
market competition as one of the optimal drivers, he became entrapped in a market-state/hierarchy binary
scheme tending toward holistic judgments and methodological reductionism [2]. Despite Nee's intellectual
thrusts, he was more attentive to systemic contrasts and less attentive to the structures of social relations and
historical contexts f3]. This vulnerability was like that of the neo-classics, ignoring the fact that market efficiency
is socially embedded, constructed, and historically derived, and claiming that privately-based market
competition is an historical and logical prerequisite for capitalism f t . The major neo-classical hypotheses on
modem transformations tended to look to either market-oriented capitalist liberalization in place of non
capitalist systems/regimes, or inversely, to the hierarchically-approached abolition of such capitalist
marketization and the acceptance of communist structural transformations in place of capitalist
systems/regimes f t . In 1988 Boisot and Child criticized the assumption that each transition required a
choice between hierarchy and market forces (ibid. 507) and that market forces were a panacea for
healing ailing former planned economies. The overwhelming triumph of this approach was the free trade
globalization in the 1980s f t . But many of this approachs theses depended on those big formulations
that can be criticized for being too rudimentary, tautological, nebulous, or ambiguous [7],
248
In such a context, a proposal for new type of historical comparisons of micro-foundations in place of
neo-classical methodological reductionism logically calls for a paradigmatic alteration from the old formulations
I3]. Not coincidentally, a resurgence of the institutional analysis starting from the late 19U| century has
contributed to this new stream of analysis. As the early market models became obviously more flawed,
contemporary intellectuals focused greater interests on micro- or meso-levels of analysis t5]. Recent
findings in economics and sociology indicated that market economies, even the most liberal ones, were
now in transition. Market-efficiency-oriented economies were likely to turn to more subtle and "softened
ways" to remedy market failures and to buffer tensions and pressures intensified by exogenized,
efficiency-seeking market competition. New terms emerged such as "implicit contract," "internal labor
market," "asymmetric information," "transaction cost theory," "agency theories," "bounded rationality,"
emotional stimulus over rational action, "social embeddedness," etc. [10]. The drive for efficiency alone
was no longer seen as sufficient to generate the momentum of a national economy, because markets
had never even been supposed to have been perfect [11].
With reference to Granovetters definitions in 1992 [12], Table 4.1 provides a comparison between
three different analytical paradigms: (1) neo-classical, (2) new institutional economics popular in the 1970s-
1980s, and (3) sociological institutionalism" emerging since the 1980s (Note: for a more detailed comparison,
see Granovetters 1992 essay) [13]. This table summarizes how the three different approaches view transitional
economies in general and China's transition in particular.
249
Table 4.1: Comparison of three paradigms
regarding transitional economies
Theoretical Neo-classical [14]; New Institutional Sociological Institutionalism

Paradigm Economics
Disciplines Economics & Economics; Sociology in particular,

in use sociology in general [sociology of development,
sociology of organization;
economic sociology,
sociology of law, etc.]
Authors Early Versions: Early Versions: Early versions:

A. Smith, J. S. Mill Coase, Schumpeter Old Soc. Institutionalism [15]
Menger, Marshall, Veblen, Commons, Polanyi
Mead
Later versions: Later versions: Later versions: Selznick,

Heckscher, Ohlin, G. Hodgson, Coleman, Stinchcombe;
Samuelson, Learner Williamson, North,
Becker, Burt, Olson; New Sociological
Institutionalism":
Powell & DiMaggio, Zucker,

R. Scott, Granovetter,
Swedberg, Meyer, Jepperson,
Alchian & Demsertz, Miller
Paradigm of Hierarchy-market Unidimensional Institutions chosen as variables

transitional binary to transition; hierarchy-market based on social actions & choices,
theory free-market continuum; seeking dynamics beyond hierarchy-
liberalization institutions considered market scheme
to be constraints on
transition
Selected Komai, Nove [,6] Nee Qian and Xu, Aoki, Boisot and
representatives Child, Pei
Rational account Market efficiency Efficiency equated Concern for both bounded
of transition in general with legitimacy efficiency and legitimacy -
legitimacy derived from two sources:
constitutive": formal rule of law and
cosmological expectation;
r17i
customary: entrenched interests ['
social solidarity/cohesion,
social embeddedness.
Origin of transition (Both neo-classical and New Institutional Institutionally constructed and
Economics): Economy's own functioning socially embedded in historical &
transcendence taken for granted; cultural context; affected by
economic fundamentals; environmental contingencies;
250
(Table 4.1 to be continuous)
Neo-classical; New Institutional Sociological Institutionalism

Economics
Path of Toward market Uni-directional Decentralization and denationalization

transition economy in radical re-privatization, through both formal institutionalization
general liberalization toward under rule of law and informal
market economy; dynamics, incremental path toward
constitutive-ruled quasi-market economy.
As above shown, sociological institutionalism tried to include the changing realities of the last
three decades (cf. R. Scott 1995, pp. xi, xiv, 4, 31) [18]; whereas neo-classical analysis, that had once
prevailed, was unable to provide a dynamic explanation for the changing realities across market economies
and transitional economies during the past two decades. Sociological institutionalism has tended to collapse or
decompose holistic reductionist models in light of higher-order institutional parameters (R. Scott .1995, p. 4)
[19]. Sociological institutionalism is very good at searching particularities and causal relations across
economies. The emergence of sociological institutionalism ought to be seen as a response to the failures of
neo-classical theory to explore three dilemmas: (1) between market and hierarchy, (2) between ideology and
practicality, and (3) between regime change and reality change. These three dilemmas puzzled people who
were trying to understand transitions. It was these three dilemmas that exposed the narrowness of the neo
classical approach and led scholars to turn their attention to sociological institutionalism.
The first dilemma is between market and hierarchy. Sociological institutionalism casts new light on
market-hierarchy relationships. It underscores the fact that neither market nor hierarchy alone can shape a
societys economic performance [20]. This approach turns neo-classical theory upside-down. According to
neo-classical theory, market-hierarchy binary relations are the major carriers of economic
performance and action. According to sociological institutionalism, market-hierarchy relations are
actually reciprocal and reflective of institutional environments and arrangements. Sociological
institutionalism attempts to sort out institutional environments and arrangements according to
standard codes and routines, comparing the similarities and differences across different realities as
they occur in peoples daily life. The sociological institutionalism tends to probe the social
251
embeddedness of institutional environments and arrangements and provide a dynamic account o f the
embeddedness. For instance, the changes of market-hierarchy/state relations are considered to be driven by
social actors and by institutional reforms and mutations evolving from preexisting and currently existing
institutions [2I], Hence a sociological institutionalism perspective increases ones analytic capacity and
facilitates historical comparisons across different economies.
Figure 4.1a heuristically simulates six plausible and complex scenarios of transitional economies
functioning between market and hierarchy and beyond in transitional economies (Figure 4.1a here) [22]. No
matter whether or not all these scenarios involve market-hierarchy relationships, none of these scenarios can
be explained by the market-hierarchy relationships alone. Sub-figure (1) represents a transitional path, which is
not straightforward but is pulled and pushed by many institutional factors. Subfigure (2) represents multi
directional forces other than market and hierarchy that affect market and hierarchy, such as the fief networks
and clan networks in China's cultural space that Boisot and Child explored in 1996. Sub-figure (3)
represents an economy with polycentric structural holes beyond markets and hierarchies, such as the
alternative networks that R. Burt examined in 1992. Sub-figure (4) represents various types of reciprocal
relations between markets and hierarchies, affected by history, culture, society, etc. Sub-figure (5) represents a
society affected by many spiral-generating contingencies (such as environmental shocks) in its economic
transition toward marketization. Sub-figure (6) represents a situation in which some unknown institutional
sources and forces exist that can affect the economy and the society; but these unknown sources generate a
spinning orbit, independent of local markets and hierarchies. Any of these sub-figures could be the result of
multiple joint influences. As we shall see in Chapter 6, it is plausible that very few of these possibilities actually
exist in social reality. If some do exist, they will almost certainly be socially modified in any given historical
circumstances [23].
252
Figure 4.1a: Institutional configurations of six
possible market-hierarchy relations
sub-figure 1): non-linear sub-figure 2): multi-directional
hierarchy hierarchy
market market
sub-figure 3): poly-centric sub-figure 4): multi-dimensional
hierarchy hierarchy
market market
253
sub-figure 5): spiral sub-figure 6): spinning
hierarchy hierarchy
market market
As market-hierarchy/state relations are deconstructed into interdependent areas and intermediary
institutions f 4], they are no longer dichotomous. In this institutional panorama, market-hierarchy/state relations
are conceivable as sets of particular institutions, complementary, substitutable for each other in a continuum.
In other words, market-hierarchy relations are embedded in a diverse spectrum of organizational configurations
and institutional forms that are comparable across economies [25]. Such delineation has repercussions in
todays reality in that market competition today is increasingly concerned with institutional competition [26]. In
this institutional panorama, the past and the present are placed in dynamic continuity without violent intrusions
such as sudden eruptions or breaks, etc. Neither the market nor the state can be seen as polarized,
unidimensional, unidirectional, or linear [27]. Both markets and state/hierarchies can be treated as fluid [28j,
multi-dimensional, and non-linear. They are pushed and pulled by many cultural, social, and historical
complexities, etc.
The sociologically-grounded institutional analysis ultimately counters neo-classical economics, which
assumes that natural processes underpin the economy and justify capitalist logic with the laissez-faire approach
to the economy. Neo-classical economics assumes that markets are self-regulating and automatically generate
effective mechanism whenever there are excessive supplies or demands of labor, capital, and land. Market
forces create diminishing returns when there is any uneven development of some product, industry, or sector.
254
The mechanisms can be either self destructive business cycles, or increased entrepreneurship, or
technological innovations that help to locate new sources of supply and demand, etc. Historically-speaking,
capitalism has survived multiple forms of historical ambiguity and many geo-political variations in
efficiency, predictability, and opacity [29]. This might even suggest that there is no such thing as pure
capitalism f30]. After the Asian financial crisis in the late 1990s, various debates arose over whether or
not capitalism should develop in Asia or whether some alternative economic form should exist, and if so,
which form? Provided that any particular capitalism is socially embedded in given forms of economic
and political institutions, that capitalism is also constructed and reproduced by those same economic and
political institutions [31], W hile capitalism has historically tried to adopt economic rationality, in every
instance it has also had to deal with on-going social conventions, customs, dominations, and life styles,
and to deal with frequent changes in their structures and meanings. Thus capitalism can exhibit different
forms in different countries; in fact, it is debatable whether capitalism (mostly liberal capitalism) is even
single and only determinant or form of market economies f32].
I must introduce a caveat here: it would be a misinterpretation if I were thought to be annulling
both markets and hierarchies as entities. I only want to point to the futile logic of neo-classical
reductionism that takes markets and hierarchies as binary extremes I33]. As O. Williamson stated in
1975, there would be no reason to treat markets and hierarchies as contradicting with each otherwhere
one can treat them as complementing each other along a continuum (ibid. 8). There is plenty of room for
intermediaries between markets and hierarchies and plenty of alternative strategies to deal with the
issues of markets and hierarchies. Boisot and Child in 1996 urged further recognition of those alternative
forms beyond markets and hierarchies (ibid.). These alternative forms might even generate new forms of
institutions at micro- or meso-levels I34]. There is no reason to stick to systemic, rhetoric, or metaphysical
claims, especially if one has an opportunity to bridge long-standing gaps between micro- and macro
levels of analysis in the social sciences f35].
The second dilemma is between ideology and strategic rationality. The institutional
255
decomposition of market-hierarchy/state relations involves identifying the role of ideology in economic
action. This is particularly the case for transitions from erstwhile planned economies. This recognition is
consistent with Foucaults argument about the diminishing hegemony of ideology in post-modern
discursive discourse (cf. M. Foucault 1977, 1980) I36]. As pluralism has prevailed in post-modern
societies, state planners and rational actors have frequently not follow the narrow line of any particular
ideology. This is what has happened with Chinas development and particularly with China's transition in
the post-Mao era (see our discussion in the next Chapter 5) [37]. Given that transition is conceivable as
strategic action, we need to distinguish between ideology and strategic rationality, since Chinas
transition was initiated mainly by efficiency concerns and later incorporated with a bundle of institutional
reforms and changes. Ultimately what motivates a transition typically combines both subjectivity and
rationality. Subjectivity here could refer to an ensemble of social emotions, values, national
temperaments, tastes or preferences I38], properties of actors such as identities, interests, and
capabilities, and other psychological factors; that might not be fully converted into an ideology I39]. As
W eber noted in his Economy and Society t40], ideology can have a significant influence on economic
action, so long as the action will be judged with regard to its rightness, soundness, and goodness for
society and community. W eber also claimed that culture, while affecting action and choice, was mainly
directed and framed by ideas. But he did not expect ideology to provide a full answer to instrumental
rationality underlying economic action f '] . T. Parsons went further and stated that actors choices and
strategies of action could be limited by objective conditions and governed by normative regulation of the
means and ends of action (cit. from A. Swidler 1986; also cf. A. Swidlers essay in 1986 about the
relations between ideology, culture, and action) I42]. So Parsons too cast doubts on the extent to which
ideology alone can affect economic actions and institutions. I would argue that ideological roles vary
across societies and cultures and are themselves contingent upon given historical contexts f43].
Ideologies, economic actions, and institutions are certainly inter-determinants of each other; they
interplay and have their respective relative boundaries and autonomies. So do ideology, subjectivity, and
strategic rationality. Economic actions and institutions are indeed purposive, but they are not fully subject
to any particular ideological claim and concern I44]. This is always the case, according to Coleman, in any
256
type of social action in the contemporary world (cf. J. Coleman 1986, p. 1312) t*5]. B. Klandermans et al.
in 1987 stated that at the micro-level of mobilization, social action and its associated decision-making
were not all always committed to ideological claims or even to rational motivation (cf. B. Klandermans et
al. 1987; D. Oegema et al. 1994) f46]. An overcommitment to overstating ideological roles could lead to
underestimating or ignoring certain dynamic processes of economy, and could generate some
devastating economic consequences. An extreme case of this could be seen in Chinas economic self
disruption during its radical Cultural Revolution and prior to its transition (see my Figure 1.2.1 in Section
1.2, Chapter 1) I47].
This study contends that whereas ideology can play a significant role in historical conjunctures
I48], expectations and institutions play more significant roles in economic actions and transitions f 9]. As
for expectations, they could combine both subjective and rational motivations for social action, social
choice, and transition. Expectations are shaped through, interacted with, and delivered by public
discourse as communicative actions (cf. J. Habermas 1975, 1979, 1984, 1989). Hence expectations as
well as discourse involve much broader areas, mainly the broadly participatory activism of social
communities, than ideologies. The dominance of an ideology diminishes with the growing salience of
public discourse during an economic transition. I would liken such a transition to a social engineering
project directed by rationalization of institutions, based more on economic fundamentals than on some
extremist ideological claims. Judgments are made of transitions irrespective of their self-proclaimed
doctrines f50]. As for institutions, I here refer that what are imperative to transitions are co-evolutionary,
soft-landing, and endogenous piecemeal reforms rather than sudden surgical operations. Contradictions
between market and hierarchy, economic efficiency and social legitimacy, and economic laws and
ideologies can be melted down to a continuum of institutions that provide endogenous dynamics rather
than the exogenous constraints or antagonist conflicts [51], Chinas regional/local differences, economic
diversity of hybrid sectors, and growing social tolerance of conflicting interests emerged during its
transition. All of them participated in the endogenous cooptation of Chinas current structure. In order to
explain these institutional characters in China's transition, one must unearth complex and broader
257
theorems of market-hierarchy relations and reconstruct China's economic institutions in the transition.
These reconstructed institutions function differently in different contexts, cultures, and societies and in
different contexts have different configurations, outcomes, and implications. In the end, they are not
much like those market-hierarchy institutions assumed by neoclassic premises to exist in all times and
places.
The third dilemma is between regime change and reality change. A major hurdle in the neo
classic market-hierarchy binary paradigm is its failure to make distinctions between regime change and reality
change and to capture the complexities behind those changes. By definition, I refer regime to the entire
political system such as polity, judiciary system, constitutions, the rights and statutes based on constitutions,
etc. I refer reality to the structure of institutions (see my discussion about definition of institutions in Section 4.2
below), institutions which not only include political ones but mainly refer to economic and social ones,
important to study reality change. To tackle the dilemma between market and state/hierarchy, the latest
institutional studies of transitions typically pay more attention to the reality change than to the regime change
and focus on those alternatives that might make the reality change. But I might not want to liken this position to
the separation between political liberalization and economic liberalization. For it is conceivable that some
supporters of this position might cite East Asian economic miracles as similar evidence, arguing that these
East Asian economies must have dealt effectively with the dilemmas between political liberalization and
economic liberalization. They might support the hypotheses that a democracy is not necessarily
economically liberal, and an autocracy is not necessarily economically illiberal, as well as the hypothesis
that democracy might slow down economic development but still in the long run contain self-correcting
mechanisms [52]. In terms of East Asian economic liberalization, they might use export growth as major
indicator. But a much lower ratio of East Asian export growth vs. GDP growth in the decade of the 90s
indicates that the East Asian economies gained much more from their domestic growth than they did
from their exports to the rest of the world t53]. This evidence even appeared to counter the arguments
that East Asia has most liberal economy in the world, since its trade has always expanded fastest. In fact,
East Asian trade patterns in the 1990s (in terms of export growth vs. G D P growth) have consistently
258
differed from the trade patterns of other regions of the world (Figure 4.1b here). East Asian trade
becomes more and more focused on intra-regional trade, as East Asian economies draw more and more
momentum in their own I54], looking for more stable patterns of economic development in place of the
old dependent or current contingent patterns (e.g., growth based on exporting some specific products as
structural niches of the global economy) [55]. It indicates the latest trend that East Asian trade finds
comfort zone in its own than outside I56].
Figure 4.1b: Developing markets
Average annual %
growth, 1990-99 Exports
10
9
8
7
6
5
4
3
2
1
0
All
World developing South East Latin Middle High
countries Asia Asia America East income
Source: World Bank; cit. Financial Time, Thurs. p. 3, Apr. 11,2002
In the past, East Asian economies have often been characterized by their own unique
trajectories. In China, and particularly in Chinas transitional economy, it is important to look at a
dyssynchronization that has actually existed between regime change and reality change. Reality change
often goes through many institutional reforms and mutations. If we want to weigh reality change more
than regime change, we have to concentrate our analysis to micro- or meso-levels of institutions. To
borrow Joseph Nyes parlance, When you are in a three-dimensional game, you will lose if you focus
only on the top board and fail to notice the other boards and the vertical connections among them (cf.
The Economist, pp. 23-25, Mar. 23, 2002) [57]. Political and social trajectories regarding either regime
change or reality change have been inconsistent or even divergent over time. For example, in some
transitions regimes have changed first, while in others realities have changed first through reforms of
259
institutions [58], and only later did the regime change f ) . Transitions might have a lot to do with the
institutionally-related factors, such as economic governance, managerial flexibility, institutional learning,
labor market regulation, capital mobility, access to information technology, etc. Transitional processes can
be very protracted, or extremely painful, depending upon the given conditions and contexts. But as long as a
transitional economy can handle these factorial relationships very well, not only its reality but also its regime
can change. At the very bottom of reality exists public discourse beyond the control of the government,
discourse that is conceivable as an additional source of power. I will provide my arguments regarding public
discourse with some historical evidences in Chapter 5 I60]. For some transitions, a regime change is necessary
to initiate their transitions. But a regime change does not necessarily guarantee successful transitions.
While acknowledging existent dyssynchronization between regime change and reality change
during a transition, sociological institutionalism does not overlook the dynamic role of the formal sector in
changing reality within a given regime. Instead, it calls for institutional analysis of both formal and
informal sources of changes driving the transition f61]. It underlines the activism of social actors in
transition, including institutional actors. It explains that institutions are designed by humans and that, in
turn, institutional changes result in changes in human actions. As K. Polanyi insisted, an economy is a
socially instituted process. The insistence on the primacy of market forces in the West has never
annulled the role of state. The market is institutionally embedded, viz. it is actually ruled and regulated
both formally and informally by states and social institutions (1944) I62]. The formal sector is particularly
important in transitions from planned economies. The state sector evolving from a planned regime has
for a considerable time controlled dominant resources of capital and technologies, compared to the non
state sectors. In such instances the states policies will provide a guiding direction to the transition. The
neoclassical position ultimately fails to see how institutional actors, and particular state's activism, can play
an innovative role in a transition. I would argue that unless one examines institutional actors and their actions,
variations in transitional economies would become unfathomable. The neoclassical formulation presumes that
an economic transition will automatically adopt a market-approach based on purely commercial standards,
since that is the ultimate solution I63]. The neoclassical premise and the recommended strategy are
260
tautological. Furthermore, those who adopt the neoclassical approach obliterate many historical contexts,
social contingencies, and local idiosyncrasies that play critical roles in shaping transitions. I am convinced that
variations exist across transitional economies, and the variations are not accidental t64].
A paradigmatic alteration o f studies on transitions. When research on transitions increasingly
concentrated on intra-mural and extra-mural market-hierarchy relations and concentrated on the
conceptualization of endogenous institutions (such as administrative and power structure) specific to
social contexts and embedded in larger environments, the results were revolutionary. These efforts were
able to break away from the impasse of neo-classic conventions f65]. Not coincidently, the scholarship on
transitions followed a parallel road toward analyzing micro-foundations (see Figure 4.1c) I66], deviating
from the neoclassic path of reductionism that favored a cross-systemic comparison by bifurcating
markets and hierarchies. The new approach decoded systemic totality into more specific constructs or
institutional attributes, while anatomizing the dilemmas and the solutions I6']. The new approach
particularly met growing concerns about cross-bordered comparisons, focusing on micro-processes and
micro-structures and taking inter-organizational or institutional fields as units of analysis, equivalent to
variables and parameters I68]. This helped reshape a viable yet ad hoc historical comparison between
market economies and quasi-market economies, between market economies and transitional economies,
and within these economies (my heuristic Figures 4.1d and 4.1 e here). The reshaped historical
comparisons thus helped overhaul the reciprocity between the markets and hierarchies/states across all
kinds of economies down to reality and the historically specific rather than to the uni-directional and uni
dimensional end points assumed by neoclassical theory.
261
Figure 4.1c: Analytic framework of scholarship on transitional economies
since the 1960s
Neo-Classical Terrains New Institutional Terrains

(Cross-Systemic" Comparison) (Cross-Bordered Comparison)
State vs. M arket----------------------------- 1

(Prior to 1980s) ^
Macro-Institutions-------------------------------
(1980s) I
Micro-Processes of Institutions-------------------------------.
(After 1990s) |
Social Actors
(Future?)
As shown in Figure 4.1 e below, the dimensions of market and the state in Nee's thesis could be
reshaped along the axes of formality (in terms of constitutive-bound dimension) and informality (in terms
of institutional-bound [or de-institutional-bound] dimension) I65]. This new approach possibly covers more
contextual attributes in accounting for transitions across territorial borders. The overlapping juxtaposition
in Figure 4.1d could be further broken down into sub-figure 1 and sub-figure 2 of Figure 4.1e, in which
sub-figure 2 could be regarded as a stretch of sub-figure 1. This figure suggests an institutional-based
historical comparison between two cases - the PRC and the FSU in their respective transitions. The
PRC and FSU transitions differed significantly with respect to their directions, agendas, and approaches
n.
As sub-figure 2 suggests, China's current transition toward globalization and away from central
planning may not be the typical trajectory toward a market economy presumed by neo-classical
economics. Since Chinas transition has been carried out by a codified formal bureaucracy, Chinas
economy may move toward a quasi-market economy through its hybridization and unique market
arrangements [/1], By commercial standards, until 2000 Chinas transition was a quasi-market economy.
As explored by Qian and Xu in 1993, Chinas transition had been local-govemment-driven or induced by
regionally-based decentralized state reforms. Thus China's transition gave rise to properties, characters,
and trajectories different from those in Western market economies. These Chinese properties,
characters, and trajectories were relatively close to their East Asian counterparts with quasi-market
262
economies in terms of local customs and common laws, such as Japanese vertical trust networks for
72,
coordination and control [
Figure 4.1 d: Cross-systemic comparisons vs. cross-bordered comparisons
Constitutional
Level
Institutionally-based Cross-Bordered Comparison

More Space for
Contextual Attributes
State Nees Cross-

Systemic
Comparison [73]
Market Institutional Density [74]
263
Figure 4.1 e: Cross-systemic comparisons vs. cross-border comparisons
Sub-figure 1: N ees Cross-Systemic Sub-figure 2: Our Institutional-based Cross-

Comparison on transitions Bordered Comparison on transitions
Constitutive Level
State f Formality 4
State Market
Socialism: Economies
Planning (USA, EU)
Economies;
SOEs;
FSU
FEE
Capitalism: PRC
Privatization; Quasi-
Market Market (East Asia)
Economies Economies
* >
Market Informality
Institutional Density
One-dimensional Outcome Variations of Outcomes
I plan to use the technique referred to as the newly institutional historical comparison (NIHC) in order
to describe the changes of transitional economies since the mid-1990s [75]. Unlike earlier methodologies, the
NIHC not only opens up queries into the society and economy and their relationships to the state, but also
opens up queries into more specific institutional terrains [76]. As Nee early mentioned, institutional scholarship
on transition ought to broaden the discourse to include subordinate groups, popular cultures, social networks,
markets, entrepreneurship, organizational innovations, political coalitions, local-level administrations, and new
forms of interest [7,J. This analysis can differ from previous historical comparisons (e.g., B. Moore 1966, and
P. Anderson 1978) in that it does not cling to such conventional concepts as feudalism vs. capitalism, state vs.
society, etc. This analysis might also differ from old cross-national comparisons (cf. Ragin 1987;
Reyschemeyer, and Stephen and Stephen 1994) in the sense that the old cross-national comparisons would
likely reduce historical and cultural attributes and configurations to several qualitatively different categories. In
our new account, some of Chinas unique historical and cultural attributes will be identified and configurations
differentiated, which may in turn account for the qualitative differences between Chinas transition and the
264
transitions in the FSU and the FEE. My inquiry will present an alternative view to that of neo-classical
economics.
Toward a sociologically-grounded institutional-historical com parison. A major premise of my
alternative view is that transitional economies vary depending on certain endogenous and dynamic
characters. Accordingly, a more general theory of transitional economies can be both inductively constructed
and deductively inferred from historical comparisons of institutions [78].
By a transitional econom y from a previously centrally planned econom y" I refer to a
transformation o f a societys whole spectrum o f centrally-planned yet unfitted codes, provisions,
rules, procedures, rudders of corporate structures, corresponding bureaucratic bodies, and legislative
support systems into more effective forms o f implementation, in response to intensified competition,
both domestic and global. This transformation can be politically instituted and can lead to
institutional reforms in depth and breadth that are suitable to a societys own circumstances and
situations. A transitional economy may be seen as a social reconstruction of existing economic institutions
mainly through endogenous institutional reforms and changes [79].
A major purpose of this study is to compare the transitions that took place in the FEE and the FSU,
and China. I am assuming that in each case the transitions that occurred were socially constructed and
legitimately designated within their respective social-legal systems f80]. An idea I wish to propose as part of my
sociologically-grounded institutional approach is that three notions, "expectations," "depth of history," and
"thickness of institutions" play major roles in transitional economies. These three notions provide a
sociologically-grounded institutional perspective in understanding certain dilemmas associated with transitions
at macro-sociological levels I61]. As part of my sociologically-grounded institutional perspective, I shall treat
transitions as strategic social actions. W hat kinds of transitions occur depend upon what expectations
social actors have and what kinds of institutions they choose from their social circumstances and
historical contexts [2]. The matter of choosing particular institutions itself suggests that expectations and
265
actions are often historically specific and institutionally conditioned.
Institutions do not exist a priori, nor do they stay put. Institutions change according to social
expectations in given contexts. Hence major social and economic transitions, their robustness, survival and
success, have a lot to do with their histories, expectations, and institutions. These three often have greater
impacts on those transitions than do exterior forces, programs and shocks f83]. History, expectations, and
institutions have constantly come into play, affecting the genesis, processes, and outcomes of transitions. In
the next section I will show how China's unique transition can be explained by analyzing peoples changing
expectations and how those changing expectations affected their histories and institutions. W e will take a
closer look at histories, expectations, and institutions as sources for social and economic transitions. By using
this approach we shall try to explain how Chinas transition differs from the transitions of its FSU and FEE
counterparts.
266
4.2 Transitions and expectations, depth of history, and thickness of institutions
"E xpectations". The term reflects the fact that transition as a set of institutional changes and
mutations is generated by social actors through an ensemble of their meaningful social actions directed
toward attaining certain goals. Expectations bring subjectivity and rationality into consideration.
Expectations can be individual and/or aggregate or collective. W eber in his Economy and Society mainly
paraphrased rationality based on individual action expected to maximize utility (pp. 63, 71). He also
understood that economic action was socially constructed t84]. In this study I refer to expectations in an
aggregate form. I want to examine how mutually consistent expectations among social actors change
over time, especially at the beginning of a transition and during the process of a transition. These
changes of expectations might help explain why social actors make their choices and how their choices
can effect institutional changes.
Expectations have been shaped and affected by social norms, values, the vested interests,
social environments, and other objective conditions. Social and economic actions are motivated by
actors expectations based on their perceptions of choices or decisions related to their social contexts,
perceptions that are not fully attributable to their ideologies. In principle, rational social actors, before
making their choices or engaging in actions such as sanctions or boycotts, etc., would first calculate what
consequences would follow from their choices and actions, and how beneficial those consequences
would be for them t35]. Changing expectations have effected changes in the norms, values, sentiments,
interests, institutional conditions and behavior of social actors. As far as subjectivity is concerned,
expectations not only take a certain benchmark as criterion, but also entail the social characters and the nature
of certain criteria, moral or religious, pecuniary, or materialist f86]. Expectations can be regarded as variables
corresponding to different contexts f87], since they reflect the nature and forms of social construction and
social cohesion embedded in local contexts.
Recently, some scholars (e.g., D. Lai 1998; also cf. E. W . Said 1994, 202-3) have tried to divide
267
the great civilizations of the world into two major groups, Oriental and Occidental, according to their
beliefs and value systems, yardsticks and rationalities that have survived over the years I65]. While
Oriental civilizations have cultivated material-oriented expectations following mainly Confucian doctrines
of social cohesion, Occidental civilizations have nurtured cosmological-oriented expectations, seeking
Western religious meanings and Western analytic clarity I89]. Accordingly, material-oriented expectations
have focused on efficacy, developing more informally-communicative, personally-related pragmatic
institutions in order to devise practical solutions to given dilemmas through endogenous process and
coordination (see Picture 4.2a) I50]. Cosmological-oriented expectations have focused on seeking
constitutive, symbolic, and logical solutions to those dilemmas that set priorities on calculated efficiency,
voting processes, legal codes of laws above persons, etc. [S1], Both kinds of belief systems have
advocated peace and love, have made secular appeals for human happiness, pleasure, longevity,
leisure, and fortune, and have called for frugality and a devout dedication to hard work. Perhaps, through
transitions and histories, these two civilizations might begin to converge. Perhaps todays edge of
information technologies could help accelerate cultural contacts and commercial intercourse so that
these two different civilizations integrated into contemporary global community could shape a higher
civilization [92]. It is not clear that such convergence will automatically happen; the two civilizations would still
be deeply embedded in different social and political environments and related to different historical
circumstances. It might be more realistic to say that such convergence would happen only when there is
universal equality - a utopian ideal.
In the end, all belief systems, whether cosmological or material, constitutive-based or
background-minded, can be traced back to their respective institutional contexts and historical
experiences [S3]. And once expectations based on these beliefs systems come into play, they can
construct social realities and shape civilizations f94].
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Picture 4.2a: Oriental Symbolic Ritual of the
Materialist Faith in Doing Business
m v n a ( ; i :m i :m
Source: Zen and the Art of Profit Making - Faith and Business, cit. from Financial
Times, p. 10, Management, Tues. Aug. 29, 2000.
Readers may refer to recent institutional accounts by L. Zucker 1986; G. Miller 1992; R. Whitley
1992, 1994, 2000; P. David 1994; and R. Jepperson et al. 1991, 1994, 1996, 1996 of the roles
expectations can play in major social and economic changes I95]. I am particularly indebted to Zucker for
her historical institutional search of American industrialization, which presented fascinating ideas
concerning different modes of trust production, background-based vs. institutional-based. Zucker argued
that Americas prevalent constitutive-typed trust production (i.e., institutionally-processed trust in
Zucker's term) was not a priori but was historically derived from a background-typed trust production (i.e.,
characteristic-based" and process-based trust productions in her terms). But this switch, essentially
based on changing social expectations, eventually paved the way for the boom of American
industrialization at the dawn of the last century (cf. L. Zucker 1986, pp. 58, 76) I96]. Chinas current social
269
and economic transition differs in many ways from Americas industrialism at the dawn of the last
century. I shall follow Zuckers approach in linking cultural expectations to major social and economic
changes. I shall look for ways in which Chinas expectations may have played a significant role in Chinas
economic transition.
In such a search for the theoretical sources of social expectation, I also found the work of R. L.
Jepperson et al. 1991 to be very valuable. Jepperson et al. classified assorted institutional contexts into
two-dimensional axes - constitutive [97] vs. institutional Is8]. As previously mentioned (see Figures
4.1c and 4.1d), the constitutive dimension (i.e., y-axis) deals with the analytic level of social
reproductive processes, which might relate to the social legitimacy of social actors, and which varies
from naturally decoupled, functionally Individualist behavior to more aggregate, collective, organic or
organized behavior. By contrast, Jepperson et al.s denotation of the institutional dimension (i.e., x-
axis), particularly in the structural echelon as the high end o f this dimension, is quite consistent with
Zuckers denotation of institutional (i.e., institutional-based") in her trust thesis. Further, Jepperson et
als denotation of the constitutive and institutional dimensions is actually quite consistent with R.
Scotts distinctions o f rational accounts and natural processes in his review of institutions (cf. 1994,
1995). I am planning to adopt Zuckers background-based and Jepperson el al.s constitutive-degree
into my definition of expectations.
Drawing on these literatures, I identify two types of expectations: constitutive-based and
background-based.
The constitutive-based expectations, an optimal model of expectations, focus on uni-dimensional
efficiency, additivity, and convergence against the current regime. Typically they lead to a formal request
for structural state/hierarchical transformation that will alter all institutions at one stroke [" ]. Because the
goal is set for immediately structural transformation, the constitutive-based expectations demand
surgical-like operations for radical change. This kind of constitutive-based expectations is commonly
270
acclaimed by mainstream scholars of economics and sociology who focus on efficiency concerns and
parsimonious calculations [100]. The pioneering volumes on transitional economies by Komai, Nove, and
Nee et al. in 1970s and 1980s had represented this major perspective. These theorists assumed that the
transition could happen when constitutive expectations would reach a high enough level for there to be
consensus among participatory actors. W hen that consensus reached its climax, radical change could
occur.
The background-based expectations, "socially appropriate" expectations, are replete with
historical contingencies, conjunctures, and cultural concerns [101J. They underline the perspective that
development and institutional reforms are constrained and conditional. They are models of hybridization
that tackle the dilemmas between market and state/hierarchy underscore context, plurality,
complementarity, and adaptation, and engage in trial-and-error experiments I 102]. The background-based
expectations are socially constructed, and they pay attention to preparation, operationalization, and
implementation. According to background-based expectations, growth is incremental and not separated
from its background conditions. Continuity is imperative to growth, and this requires reforming planners
or policymakers to take feasible actions regularly for revamping deficiencies of institutions in terms of
"small steps," using maximum "human inventiveness" [103j.
It is unnecessary to see background-based expectations as contradictory to constitutive-based
expectations, especially as long as the constitutive-based expectations are also rooted in social history
[104]. Background-based expectations and constitutive-based expectations are often complementary,
especially when they have to deal with the real problems that include institutional barriers and
entrenched vested interests [105j.
Background-based expectations integrating formality and informality are actually quite consistent with
sociological new institutionalism (cf. Granovetter 1992). This new institutionalism maintains that expectations
cannot be separated from their history. For example, to a country like China with a low-industrial-base and in a
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complex and cultural context, a socially appropriate background-based expectation was essential for its
transition. Chinas background-based expectations made it relatively easy for China to justify the legitimacy of
its transitional objectives [106]. For background-based expectations, legitimacy is always taken as a major
concern, as long as social stability and cohesion are urgent to the game of economic coordination. Such
expectations could entail both inertia and dynamics, and go either way. In Chinas case, for instance, when a
reforming planner as social actor encountered dilemmas between efficiency and social legitimacy, his frame
alignment might lean toward social legitimacy rather than efficiency.
Efficiency, or efficient allocation of resources, can be a central concern that initiates transition (cf. J.
Komai 1956). But taking efficiency concern as major driving force for transition might not catch the real
problems in a transition. As mentioned before, efficiency is reflective of institutional competition," which is
constructed in a given historical context and social milieu. Contrary to neo-classic formulations about
efficiency, institutions do matter to a transition as they are the carriers of the transition [,07]. Transition depends
to some extent on the concepts of social legitimacy as well as on institutional strategies to deal with social
costs and the entrenched interests of the status quo in the current regime, etc. (M. Dewartripont and G.
Roland, 1992, 1995) [108]. Legitimacy involves institutional commitments to social justice, freedom, security,
stability, order, ethics, equity. In this light, efficiency is bound to the limits set by all these issues concerning
legitimacy and ensuing social commitments and obligations.
Legitimacy poses an institutional dilemma in two ways: it is not only directly related to the formal
rules, procedures, and normative decision-making commitments (such as transparency and
accountability) [10S], but it is also substantially concerned with factors behind legal formality, such as
social actors real power, vested interests, altruist as well as non-altruistic motives, propensities, milieu,
contingencies, and risk and cost takings [ ]. Expectations take all these factors into account. For
example, increasing unemployment might be publicly extremely unpopular and highly unacceptable in a
transitional economy from the previously planning regime; and that would force the state to prefer
stabilization and take it into consideration in its plans for reform [111]. Also, people might not want to
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remove their fixations to the past and the current status quo [112]. And this could present a problem to a
transition such as Chinas. People might feel that it is not worthwhile to seek alternatives at the expense
of the current norms and institutional forms that seem to be working moderately. Society will not change
unless people in the society are convinced of the change as worthwhile. In this circumstance, a
legitimate transition would happen only to come along only with changing social expectations. And the
changing of social expectations would entail certain political processes and be carried out by certain
political struggles. Even though people want to change, any transition encounters powerful institutional
barriers. Hence a transition certainly bears social costs and heavy risks [113].
China, for example, even while experiencing an economic transition sustaining fast growth, has
tackled this dilemma of choice between efficiency and social legitimacy. And when the state planners and
decision-makers take the dilemma into consideration, two kinds of related dilemmas are in their minds:
reform speed vs. social stability, and market competition vs. social protection.
As far as the dilemma of speed vs. stability is concerned, obviously, each step of Chinas
economic transition has entailed ethical issues for Chinas economic reformers [114]. W e could borrow W .
L. Davids figure in 1988 about a process of public voting as our heuristic illustration of how rational
reformers might choose reform priority in coping with a dilemma between reforming speed and social
stability (see Figure 4.2a) [115]. This figure illustrates the fundamental dilemma of efficiency vs.
legitimacy in the minds of rational state reformers, the ones who might expect balanced, sustainable
growth and incremental reforms driving the transition.
Below are three ideal-typical planners with their proposed policies:
1. Aggressive reformers (often state planners and intellectual think tanks seeking deregulation), who
would propose: Look, we need to accelerate our competitiveness in the face of global challenges; we
have too many lazy workers sitting around eating up most of our savings; so its better for us to make
resources available only to those critical workers with devotion, energy, and ability;
2. Conservative hardliners (often officials in central bureaucracies and regulators in functional branches),
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who would say: How could you expect agreement from your people for such a proposal saying to them:
'Those of you who are lazy and incapable, we really need your help getting out of here to make room for
those who can sacrifice and work better. Instead, we need a legitimate transition based on the socialist
principles; we have to assure our social cohesion, cultural legacy, life style, and tradition [116];
3. Rational reformers (often state managers, local problem solvers, and the heads of business
organizations seeking both deregulation and regulation), who would say: W e cannot afford to become
divided like in the Cultural Revolution. W e must move on. Lets be realistic. Can we find some mid-
grounds and commonalities, make reasonable moves, m eet some wants, yet avoid high costs and risks
with feasible compromises and cooperation?
Figure 4.2a: A reform opinion model for public confidence and votes
Supporting rate
Optimal point
a>
>
a>
<u
o
c
a)
o
C
c
o
o
Stability P Median C Speed

(Legitimacy) (Efficiency)
Reform Pace
P - protective (or conservative); C - competitive (or radical);
Source: adapted from W . L. David 1988, pp. 189-91; cit. from J. Lin et al. 1996, Figure 9.3, p. 286.
Certainly, most state reformers do not want to gain speed at the expense of stability, or vice
versa, constantly swinging lopsidedly, as in the pre-transitional era. The balance between speed and
stability (including social control) is crucial to keep the reform priority in check for the health of the
economy [117]. As a continental economy, China is currently beset with many daunting domestic
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challenges including problems of energy [11S], population [119], AIDS [12], its far-flung borders, its natural
environment [121], market competition, and social justice, aside from its highly mounting institutional
barriers raised by powerful constituencies with vested interests in manipulating and teaming up against
any reforms in the near future [122]. Chinas rational state reformers are likely to adopt a balanced
strategy to maintain both fast growth of economy and stability of social system (see the optimal point in
above figure), as any serious mistake could threaten Chinas future survival and success [123]. This is
particularly the case since China joined the W TO . If the state want its reforms to bring prosperity to the
majority of the Chinese people thereby winning their support, its leaders have to maintain both speed
and stability, modifying the radical approaches into more moderate ones [124j. From the beginning of its
reforming practice, the state has been aware of the fact that privatization would not occur without
resistance [125]. This has profoundly affected the process of Chinas planned reforms and has brought
about the states hesitation in decision-making, not only depending on market forces but also depending
on the political will and public support of the Chinese people [126]. This could explain why severe
problems, concerning property rights, legal enforcement, corruption, etc. still persist in China [,2'j. But to
many overseas observers China seems to have retained strong government ownership, little reform of
the cultural and political systems and a mix of politics with business [128].
From a perspective of social choice and action, transition entails rational trade-offs [125]. In the
end, Chinas reformers have acted more like Ying-yang" jugglers or hexagram (Tai-ji) boxers. They
have pursued an approach of gradualism to tackle the institutional dilemmas in China's transition. Using Qian
and Xus phrase, this is just, to a large extent, a reflection of these binding limits" (cf. Qian and Xu 1993b,
154). It has appeared to show that Chinas reformers were not aggressive enough. To others, Chinas
reformers have been too radical. Yet as long as the outcome has provided sustainable growth, Chinas
rational reformers could expect to gain moderate supports from both sides - radical reformers and
hardliners. Both protective and competitive checks are equally desirable and indispensable to Chinas
transition, since both of them are complementary to each other in transition and compensatory to the
expense of each other, since middle-of-the-road arrangements could gain staunchest supporters to effect
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the transition [130].
As far as the dilemma of competition vs. protection is concerned, economic booms are apt to
galvanize over-optimism and spur extra-aggressiveness for competition, whereas economic recessions
are prone to reduce public confidence, spread pessimism, and modify competitiveness in favor of
protection. And in China protection has most often occurred in those vulnerable areas, regions,
industries, and sectors, and has taken the form of governmental intervention and subsidies. In this light,
China's economic transition has not followed pure commercial criteria but has generated its own
trajectory of development [ ,31]. In the case of China's transition, as Cao et al. has argued, political
leadership and commitment are imperative in order to reduce the ex ante resistance" to reform and
increases the durability of reform ex p o s t (cf. Cao et al. 105) [132].
I would like to argue here that Chinas transition has benefited from Chinas inherited past. For
China has had long experience dealing effectively with hybrid economic and political phenomena. In the
recent past, Chinas policies have frequently tried to incorporate both efficiency and legitimacy, no matter
how complex the coexistence might appear (examples include Chinas long-standing policy of United
Front, Chinas policy of One Country, Two Systems in Hong Kong, Chinas long-implemented dual
track system of resource allocation and price, China's current economic hybridization, as well as Chinas
medical treatments mixing modem scientific therapies and medicines with alternative traditional ones)
[133J. But more importantly, in a long run, Chinas policies of coexistence have made Chinas transition
impressively incremental and productive (see our further expatiation in Section 4.3 of this chapter and
Section 5.3 of Chapter 5).
As Chinas transition in this pluralist way becomes more incremental, it could open a wider
variety of options available to the public for deliberating the effectiveness of Chinas policies and lending
them stronger support. It might even provide a starting point for China move forward for Chinas social
democratization, as J. Lin et al. suggested in 1996 (ibid.). But this double-pronged nature of Chinas
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policies could also beget some results, unpleasant to both cons- and pros. To avoid such situations,
Chinas rational reformers have to take tim e to listen to public discourse and debates over controversial
issues and to review policies with technocrats and professional experts. In this way, a search for
balanced and incremental growth can help drive Chinas transition even more steadily and stably, giving
rise to a sort of open-minded pluralism, a step forward to populist democratization and the rule of law.
Reformers in China have shared the entire range of reform opinions. Reformers worry that
whereas market competition could help China to avoid productivity shocks and social backwardness, an
accelerated pace of openness would cause problems of over-competition, such as growing social
inequality, conflicts of interest, and public grievances associated with market failures that might directly
affect the smoothness and fate of Chinas transition [,34]. Reformers also worry that whereas certain
protective social programs could help China with its social stability and equalization, a lopsided
propensity for socialist equity could produce problems of over-protection, such as inefficient allocation of
resources and problems of shortages associated with soft-budget constraint. The social cost from such
socialist equity might be a pervasive poverty, slumping productivity, and even the collapse of the regime,
as happened in the FSU and the FEE and in the pre-transitional China. Neither the scenario of over
competition and nor the scenario of over-protection are wanted by rational state reformers. These
considerations require them to keep their eyes on their choices of policies and strategies and to reserve
ample room for a safety zone within which to be able to modify their policies in order to achieve their
desired efficiency and outcomes (Figure 4.2b here) [135].
To illustrate the dilemma of states choice between competition and protection, we might
consider the concepts of a Neo-Schumpeterian workfare regime and a Neo-Keynesian welfare regime
[136]. Both regimes address the dilemma of choice between competition and protection. In Figure 4.2b,
the areas between the two hazard zones (the shaded areas) provide a wide range of options for state
reformers [137]. Areas above the hazard zones reflect aggressive reform strategies that place stability
(protection) at risk. Areas below the hazard zones reflect conservative strategies that place
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competitiveness at risk.
Figure 4.2b: Dilemmas of choice between competitiveness and stability (protection)
Policy and strategy

choices through
permeable boundaries------------- >
Aggressive strategies:
Stability (protection) at ri
(Neo-Schumpeterian wdfkfare regime)
0
O

CL - Upper limit
Marginal balanpdo, bargaining, and beneficial areas

of reform / Lower limit
Hazard
0 zones
Conservative strategies:
Speed (competition) at risk
(Neo-Kyenesian welfare regime)
Welfare burden
In a typical transitional economy, as political antagonisms and social tensions increase, state
reformers and planners are likely to select conservative economic policies at the risk of market
competition [,38]. However, as political antagonisms and social tensions decrease, state reformers and
planners are likely to select aggressive strategies at the risk of social protection and stability. During the
early stages of China's transition, more concerns were focused on the upper limit of a Neo-
Schumpeterian workfare regime, highlighted by economic streamlining, market competition, and
decentralization reform. But this emphasis placed stability at risk. During the later stages of China's
transition, China adopted more of a Neo-Keynesian welfare regime, highlighted by soft-landing policies
involving reduced investments in infrastructure, increased public spending in welfare and security, and
associated social policies, other cautious economic policies of currency convertibility, new taxation
278
system, etc. [139]. The states concerns for both competitiveness and stability, or for both competition and
protection, underlined the double-pronged nature of decision makings during Chinas transition ['4uj.
Chinas reform planners and state managers recognized that they needed a wider range of alternatives
than the narrow ideology could cover. The narrow ideological lines could make choices between
competitiveness and stability as divided and contradictory. The question on which they focused was how
to make reality change for the better. Less efficient choices may not inevitably lead to less productivity
[141]. Reasonable expectations could boost competition. W hy would people want market competition, if it
could not reach a certain goal and bring some tangible outcomes for most of the people, and if other
strategies could provide the same outcomes for most of the people [142j? Hence planners and reformers
need to focus their attention on reasonable expectations.
"Depth o f History". This notion provides a historical vision of transition. But it is different from the
conception of reductionist historicity. It emphasizes the fact that institutions are history-sensitive and that they
act in historical contexts. This notion focuses on the origins, processes, and outcomes of institutions as social
actors and on institutional changes as social actions. It differs from the neo-classical paradigm that assumes
that market competition is the most efficient reform strategy since market competition claims to be the most
transparent and democratically-fair. Neoclassical economics simply ignores the fact that market competition is
actually institutionally conditioned and that market economies have their respective historical origins. This
depth of history" notion can refer to three different kinds of dynamic historical sources, each of which can
affect transitions.
One kind of historical source affecting transitions is concerned with how multiple preexisting
institutions (i.e., background institutions) and existing institutions (i.e., proximate institutions) jointly influence a
transition and how such joint influences can be dynamic and yet vary across societies, as Whitley describes in
1992,1994 [143j. Another kind of historical source affecting transitions is the path dependence of institutions
on meso- and micro-levels, a thesis addressed by P. David in 1994 [144]. David identifies the locked in
historical nature of institutions and their mutually consistent expectations that can provide consistent
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information structures, channels, and codes for integration and coordination of institutions and organizations
and that can provide strong complementarities among institutions and organizations, complementarities that
are required for organizational cooperation and coordination to achieve efficiency [145]. Seen this way, path
dependence may have both retrograde effects and dynamic effects on transitions. Examples of path
dependent retrograde effects might be institutional inertia and sunk costs to new market entries in the
absence of information codes and channels (see discussion below). Example of path dependent dynamic
effects might be socially embedded links and networks that are vital in any given historical context or particular
cultural milieu. In 1996 Boisot and Child studied clan-typed networks in contemporary China. They viewed
their expansion as a co-evolution from or a mutant from fief-typed networks. A third kind of historical source
affecting transition is timing or temporal effects that Skocpol identified in her 1979 volume [M6]. This
underscores the uniqueness of history in the sense that institutions and expectations are unique in terms of
their time of origin [14'] and temporal sequence [148] in given particular circumstances. So-called good timings
or bad timings to different transitions exist (see Table 4.3b below). They would involve time-specific and event-
related contexts, which are also spatially-contingent.
Depth of history concerns time sequences. It stresses the fact that social choices and actions are
made in sequences following previous practices. Such temporal sequences enable current actions to be
tentatively linked to past repeated practices [,4S]. Whether or not measurable space could be brought into
history and could become a factor complementary to historical timings, or as a source of temporal effects,
raises intriguing questions. As D. Harvey argues (2000), geographic sites, geo-structures, and eco-systems
have been significant preconditions for the formations of nation-states and interstate systems, as well as for
regional and territorial variations within the world economy (also cf. Christopher Chase-Dunn et al. 2002). Geo
structures provide social and political endowments for some nations but not for others [150]. Historical
transformation has been easier in some countries than in others. When space is taken into consideration,
some sites, locations, and societies have advantages over others. Even within the boundaries of a big country
like China, aspects of its transition are conceivable in some locations and not in others. Chinas economy is
affected by salient influences from its geo-neighbors. Even Chinas unequal regional development among its
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frontiers, inlands, rocky-mountains, and coastal areas, as well as its growing income gaps between rural and
urban areas can be linked to geo-structures. Chinas geographic levels and units have often been
compounded with different kinds of complexities, all of which interplay with each other but cannot be
substituted with each other [151].
W e can aggregate all these temporal and spatial effects and incorporate them into a notion of depth
of history in order to study transitions [152]. W e could say with certainty that different transitions have been
affected by their different histories [153]. In this sense, history is also regarded as socially constructed; it is
created by an ensemble of human beings [154]. By using the terms depth of history, I want to place historical
actors in a mid-ranged and dynamic process that is also spatially-specific and varies across cultures and
societies. As something that is process-based (a key term used by Zucker in her thesis of trust production),
depth of history emphasizes preexisting institutions, cultural identities, communicative modes, and
ethnographic idiosyncrasies specific to existing institutional environments at the time an event starts and as it
changes over time [155]. For example, the devastating consequences of Chinas Cultural Revolution and the
unique political development hereafter exerted strong influences on subsequent social expectations. The
subsequent social expectations came into play in larger eco-environments, associated with other contingent
factors, such as external threats, wars, non-wars, and historical conjunctures including natural disasters, all of
which can have unexpected effects on economic transitions.
Recent scholarship on China's transition has shifted to a new direction, attentive to critical moments
and particular circumstances such as cultural space, kinship textures, and the regional variations in Chinas
transition (cf. Qian and Xu 1993; Boisot and Child 1996, 1998; Pei 1996; see discussion in Chapter 2). In
addition to these studies particular to Chinas transition, numerous research projects have been investigating
different background institutions for their possible influences on economic development and social change (cf.
H. Garfinkel 1963, 1967; M. Granovetter, 1985, 1992; L. Zucker 1986; P. David 1987, 1994) [156]. Many of
these research projects include historical-comparative studies of East Asian capitalism (cf. Lucian W . Pye
1995, pp. 182-214; Whitley 1992,1994; F. Fukuyama 1995; R. Collins 1997) [157j. These studies are helpful in
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that they provide additional information about Chinas transition. One can assume that China's unique
approach to its transition was partly due to Chinas own historical experiences (including negative feedbacks
from some of Chinas previous radical experiments), and partly due to Chinas unique aversion to becoming
involved in market competition with indispensable "sunk costs [15S], an aversion strengthened by the
entrenched vested interests within Chinas bureaucracies seeking to protect their positions with the status quo.
Chinas rebuilding of its existing institutions cannot be understood without a depth of history perspective
regarding Chinas past.
I want to add culture as another dimension of depth of history. Different cultures have their own
inertias. Cultural inertia can manifest itself in the tenacity of a societys resistance to institutional reforms and
mutations, while causing diminishing returns in performance (V. J. Vanberg, 1986,1989). Normally, the longer
a civilization has incubated a culture, the deeper that culture is embedded in that civilizations history, the
closer are the social cohesion and the social trust in that society, and the tougher it is for organizations and
other institutions in that society to break from their old identities and to adopt new ones, particularly when the
new identities come from the outside world or deviate sharply from the old identities. Culture is historically
contingent. It not only imposes constraints on the present development but also breeds and spreads new seeds
shaping future developments [15s], Pye in 1985 identified the institutional isomorphism of authority in Korea,
Taiwan, and Vietnam as the enactment of aggressive Confucianism. American industrialization could be
viewed as coming out of Americas short history, whereas East Asian industrialization could be viewed as
rooted in, and coming out of East Asias long-standing civilizations [160].
In search of culturally-affected variations, the depth of history could be more appreciated as closely
affiliated with spatial or geo-institutional influences on rebuilding institutions and redefining their dynamic roles
in transitions. With these influences themselves being seen as variations of institutional isomorphisms in larger
environments, transition is placed in an open system - a dimension addressed by R. Scott in his identification
of institutions and organizations as a third dimension in addition to the dimensions of both natural and rational
systems. A transition like Chinas is strongly landscaped by its background institutions embedded in larger
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global contexts and affected by environmental contingencies [161]. By adding cultural variables to an open
system, history needs no longer to be seen as passive. History is made and designed by social actors who hold
conflicting interests and act according to certain patterns and live according to a certain life styles [162]. The
notion of depth of history" suggests that during any transition historical impacts and cultural variations have to
be more carefully and specifically investigated and more closely associated with other dimensions, particularly
with other institutions [1DJ], Depth of history suggests that a transition needs participatory actors to carry out
institutional reforms specific to its historical contexts and cultural circumstances, while changing both the reality
and the regime.
"Thickness o f Institutions". The depth of history addresses historical factors that play a part in the origin
and shaping of institutions. The concept of thickness of institutions refers to the forms and practices of the
institutions themselves. Any transition is instituted by social actors rebuilding institutions. Institutions are both
social actors themselves and the products of the actions made by these actors. Institutions are socially
structured in temporal circumstances and locational contexts. The structural configurations of institutions as
such can be seen as causal variables and as dynamic sources for explaining transitions.
The French sociologist Emile Durkheim defined institutions as social facts, and sociology as the
science of institutions [164]. Durkheim described institutions in practical terms, including their background
environments, intermediary arrangements, social norms, and sanctioning rules, all of which could
operate as social facts external to individuals yet imposing constraints upon them [165]. The utility of the
concept of institutions was re-affirmed by the contemporary work of P. David 1994 who described institutions
as carriers of history, and by Jepperson in 1991 and Jepperson et al. in 1994 and 1996, who attempted to
construct social institutions corresponding to certain constitutive rules and based on a diverse spectrum
of political cultures (1994, 360-2). Chinas economic governance during its transition has been described as a
result of its administration system being much stronger than its legal system. But such attributes of Chinas
institutions were historically traceable to Chinas Oriental/Confucian patriarchic bureaucracy since the Sung
Dynasty over 1000 years ago.
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The natures and forms of Institutions vary across nations in general, and across industries and
economic sectors in particular. Institutions change over time, blending new practices with old practices [166].
Even across market economies there is no singular clear-cut system of universal institutions or variations of
institutions [167].
I use the expression 'thickness of institutions" to study variations among institutions in transitions [,68].
The thickness" or thinness" of an institution here refers to the institutions strengths in driving a transition and
reconstructing the economy in the transition, the strengths that might concern whether or not the institution is
dynamic and fits the transition. Thereby it refers to those institutional reforms and mutations in breadth and
depth during transition. A transition occurs only when institutions change [169]. And institutions change
according to their thickness" - their unique origins, historical dynamics, and the leverage capabilities of their
current structures (Figure 4.2c here). During periods of transition, institutions with leverage capabilities can
often help improve economic efficiency beyond the estimates of market calculations [170].
Institutions can take both economic efficiency and social feasibility into consideration. The desired
institutional environments and arrangements to a transition are based on bounded rationality. Such economic
and social combinations can generate marginal efficiency and institutional fitness [171], and establish a thesis of
"social appropriateness" (see Figures 4.3d though 4.3f below) [172]. Not all transitions are efficient and
innovative, since efficiency and innovativeness are socially embedded in institutions [1(3]. Certain
changes during transitions can be effected only if carried out or delivered by institutional reforms and
institutional mutations, and the institutional proceedings are socially embedded and affected by the given
cultural configurations and historical contexts (see Figure 4.2c; for more details, see the final of Section
4.3, this chapter and Section 5.2, Chapter 5). And the proceedings of institutional reforms and institutional
mutations simply underscore the multiple variations possible during transitions. In some transitions, the regime
change lags behind the reality change (as shown in Chinas transition). In other transitions, the reality change
lags behind the regime change (as shown in Russias transition). And such historical comparisons are
284
particularly important in the study of transitions [174].
Figure 4.2c: Thickness of the current structure of institutions in transition
Institutional isomorphism
Input ^ | Output
Institutional dynamics
Historical contexts Reforms

^ (via i n n o v a t i v e \ ^
social actions by actors)
Social embeddedness Transition
Cultural configurations Mutations

(as self-adjustment of institutions
to the environmental pressures)
Changing institutional underpinnings

Historical origin and Leverage of current structure of
changes institutions
285
4.3 Two modes of transition.
Unlike mainstream scholarship examining transitions primarily by investigating the roles of ideology,
the state, and market relations, and their changes, this study proposes a sociologically-grounded institutional
approach to study transitions in terms of three underlying components: expectations, thickness of institutions,
and depth of history. This study suggests that any particular transition is identifiable by its unique composition
of these three components. Herewith three propositions, regarding those components.
Proposition 1 (to be discussed in Section 5.1, Chapter 5): The higher the expectations for a transition away
from the existing institutions, the more likely the transition will take on a constitutive-based (radical and
structural) mode than a background-based (incremental) mode;
Proposition 2 (discussed in Section 5.1, Chapter 5): The deeper the effects of history on a transition, and the
thicker the effects of those preexisting and existing institutions on the transition, the greater the social cohesion
and trust imprinted on the transition, and the more likely it is that the transition will adopt a background-based
(incremental) approach, and will follow a customary and evolutionary route;
Proposition 3 (discussed in Sections 5.2, 5.3, Chapters 5): The stronger the institutional reforms and
mutations available during a transition, the more likely it is that the transition will gain momentum for a
constitutive-based (radical and structural) change.
The following figures present some heuristic illustrations of these propositions. Figure 4.3a (1)
illustrates a neo-classical model of a transition, in which ideology shapes the state, market relations, and
ultimately the transition.
286
Figure 4.3a (1): Neo-classical model of roles of ideology, the state,
and market relations in accounting for transitions
The State
Ideology Transition
Market Relations'
Our alternative sociologically-grounded institutional model incorporates depth of history,
expectations, and thickness of institutions into the dynamics accounting for transitions [see Figure 4.3a
(2)].
Figure 4.3a (2): New sociological institutional model of the roles of depth of history,
expectations, and thickness of institutions in accounting for transitions
Thin institutions
Constitutive-based (radical)
Depth o Expectations Transition (Regime/Reality)

history
Background-based (incremental)
Thick institutions including
institutional reforms and mutations
The major research agenda thus becomes a cross-bordered comparison of institutions with other
institutions, which is different from the neo-classical research strategies for a cross-systemic contrast of
states with states or societies with societies. The depth of history is an additional dimension in analyzing
transitions. Furthermore, each component may have its own weight (indicated by light, bold, and bolder
arrows): different combinations, according to different contexts. That is, transitions differ according to the
configurations of their components (Figure 4.3b here).
287
Figure 4.3b: Constitutive mode transition vs. background mode transition based
on depth of history, expectation, and thickness of institutions
Constitutive-based transition:
Thin institutions
Regime
Deptn of Expectations Constitutive-based (radical) modes

History p. of transition
Reality
Thick institutions
Including reforms and mutations
Background-based transition:
Thin institutions
Regime
Depth of Expectations Background-based (incremental)

modes
history of transition
Reality
Thick institutions
Including reforms and mutations
Differences between these two modes of transition are illustrated in the following box-portrait
(Figure 4.3c here). These two modes of transition are not mutually exclusive. In fact, there might be
rational trade-offs between these two models at different stages (see my discussion in Chapter 6 below).
Figure 4.3d is a simplified version of varied modes of transitions affected by the three
components: expectations, thickness of institutions, and depth of history. This simplified version with its
dotted line and solid line presents two ideal types of transition that will almost certainly deviate from any
288
real transition. Any real transition would incorporate a more intricate and multi-dimensioned, institutional,
historical, and cultural contingencies [175].
Figure 4.3c: Reciprocity between depth of history, expectations, and thickness of

Institutions varying according their magnitudes & trade-off scenarios
Blend mode
Constitutive (radical)
mode
Background (incremental)
Expectations mode
Depth of history
Thickness of institutions
289
Figure 4.3d: Modes of transition according to expectations,
thickness of institutions, and depth of history
Expectations
Constitutive-based (radical) transition
Background-based (incremental) transition
Depth of Thickness of institutions

history
Table 4.3a and Table 4.3b compare the transition of the FSU (Russia in 1992 and henceforth) and the
FEE with the transition of the PRC, according to the underlying three constructs of expectations, depth of
history and thickness of institutions [176].
Table 4.3a: Social construction of transitional economies by
expectations, depth of history, and thickness of institutions
Mode of transition*
Constitutive-based Background-based
(Radical) (Incremental)
Category
Approximate FSU & FEE PRC

cases in
observation
Level of expectations High Low
Depth of Shallow Deep

history
Thickness of Thin Thick

institutions
Intellectual Neoclassics; Sociological New Institutionalism;

scenario New Institutional Population Ecology [177]
Economics
Note: * As for different modes of transition, see the following text immediately after my tables.
291
Table 4.3b: Social construction of current transitional economies:
FSU & FEE compared to PRC
Countries FSU & FEE PRC
Expectations High, constitutive- Low, background-

based, cosmological-bound based, material-oriented;
Depth of Shallow; Deep;

H istory (O verall) [ ,76]
.Origin of transition 1989; 1978;
.Immediately Many years of gradual Radical chaos came to an end;

preceding events reforms and protracted stability the society began a new search
(time sequence) became vulnerable to for modernizing the country and
regime-crisis, followed by global integration f179J;
system disintegration;
.Legacies Orthodox Marxism-Leninism Long pragmatic civilization recovering

from the havoc of the Cultural Revolution;
.Form of hierarchy U-form hierarchy; M-form hierarchy [lo^;
.Goal setting at the Liberalization; Four Modernizations*;

time of transition
.Anticipated Political-impulse-driven; Economic-efficiency-driven;

momentum (disruptive); (constructive);
.Condition of Weakened Exhausted ultra-leftist regime

domestic regime state socialism; of previously economic planners;
.Background Industrial institutions; Agrarian institutions;

institutions;
.Proximate market Market economies in Market economies in East Asia

economies Europe; strong ties with overseas
Chinese diasporas;
.Linkages Primarily exogenous Both endogenous & exogenous,

linkages (global & European); but primarily endogenous linkages;
Thickness of Thin (de-institutionalized), Thick (institutionalized).

institutions
*See Chapter 5 for details.
As shown in the above table, major tasks in analyzing transitional economies include mapping their
variations identifying their complex characteristics, and evaluating their performances [181]. These have a lot to
292
do with history, expectations, and institutions of these transitions [182]. This is contrary to neo-classic
assumptions of liberalization and privatization, taken for granted as unidirectional and unidimensional to any
kind of economic transition. Not all transitions are moving toward a market economy in a uniform fashion and
effective way; not all transitional economies are moving toward a genuinely-sensed market economy; not all
economies moving toward marketization (either through privatization and liberalization or through
decentralization) are efficient and competitive; not all non-market economies are not effectively free of market
shocks. And not all market economies are effectively free of possible market failures in the face of free
competition [ l53]. The world capitalist stage has never embraced a single market-economy model (cf. P.
O'Brian and C. Keyder 1978) [184].
Table 4 .3 c specifies further the contrasting properties of the FSU and FEE mode of transition
compared to the PRC mode of transition.
293
Table 4.3c: Contrasting properties of modes of transition:
FSU and FEE compared to PRC
Countries FSU & FEE; PRC;
Basis of transition Constitutive based, radical Background based, incremental

("high-road") ("low-road")
Degree of formality Formal, rule-bent; Both formal and informal,

customary, eclectic;
General perspective ex ante, prospective; ex post, retrospective;
Market mechanism Exclusively market Integrative, non-exclusive market

desired exchange; exchange with co-opted hierarchies
and networks;
Degree of information High codification of information Semi-codification of information, and

codification strict adherence to rules; modified adherence to rules, in light of
reputation and personal ties, and in
consideration of contexts &
contingencies;
Basis of motivation Politically motivated for Economically driven & socially embedded,
and orientation structural transformation; to rekindle entrepreneurship through
disruptive; local incentives and social collusion;
constructive;
Transitional strategy Liberalization, re-privatization; Economic hybridization, decentralization,

semi-marketization and privatization;
Main institutions Political and legal institutions, Economic institutions governed through
selected to make social embeddedness, relational-based
the transition * networks, and regional coalitions or blocks;
Scholar analysts Komai, Nove, Nee, Lardy [i55]; Qian & Xu, Aoki, Boisot and Child, Pei;
Incentive mechanism Looking for political access to Looking for facilitators of initiation and
structural changes and rule of law; corporate competition;
Obstacles Participants too deviant Collusion of entrenched vested interests;

from means, resources, &
institutional conditions;
Achievements up to 2000 Economic depression; Sustained rapid growth;
Current problems *** Overall crises and chaos, Soft budgets alongside SOE reforms;
ethnic conflicts, potential unemployment, corruption, rudimentary
half-way reforms vulnerable social welfare system, regional
to restoration of state socialist separatism, yawning inequities among
regime, deinstitutionalization [186J; social strata & between core and
periphery, slump in consumer demands,
deflation, pressure to devalue currency;
294
(Table 4.3c to be continuous)
Direction of transition **** Market economy. Quasi-market economy.
Note: the corresponding illuminations (marked by star[s]) will be unveiled in the following chapters:
* Chapters 2 and 5.
** Chapter 1.
*** Chapters 3 ,5 , and 6.
**** Chapter 2.
The former Soviet Union and the former Eastern Europe chose to follow the constitutive (radical)
mode of transition, (hereafter constitutive transition), starting before 1985 with the "glasnosf [openness] and
"perestroika [restructuring] reforms. Their constitutive transitions were rule-defined, rather than context-
defined. The universal laws were presumptively assured by functionally-specialized state/hierarchies in the
past, and are assured by market-oriented institutions in the present [io'j. Constitutive transition is in line with
increasing expectations for modem differentiation or division of labor that follow the increasing techno-
organizational pressures for specialization, market exchanges, and the task environments corresponding to the
techno-specifications [188]. This rule-bent transition is more in line with the attributes constitutively designated
for task settings and for the roles of social groups (e.g., professional, industrial), is more accommodating to
formal signals transaction-specific to those intermediaries (such as the economic institutions and banking
regulations), and is more reliant upon political and legal institutions for their broad leverages. The constitutive
(radical) mode of transition expects rapid, efficient, and thorough changes from the previously planned
economies.
In pursuit of their ideal-type constitutive (radical) transitions, the FSU and FEE experienced their worst
scenarios in the 1990s [189]. Old edifices were suddenly smashed; but no new infrastructures were instituted to
replace them. The FSU and FEE economies were fully exposed to fierce global market competition [,s0]. Old
institutional underpinnings remained unchanged [191], leaving a big "structural hole" [192]. Those institutions that
were supposed to serve as pillars to construct the new social order melted down [1S3], leaving the situation to
spontaneous, aboriginal, anarchist, and self-protective anarchy [194] - alongside emergent ethnic enclaves
[195], rampant Mafia businesses [196], widespread corruption [197], as well as serious banking troubles [198].
295
These brought on massive setbacks, structural relapses, and social disruption [199], rather than viable, resilient,
and competitive environments [200]. Consequently, the FSU and FEE transitions provided very few solutions to
the existing problems. Institutional ties were severely cut, and common trust was quite fragile [201]. The
deteriorated situation in the FSU transition echoed Chinas earlier chaotic Cultural Revolution, but the FSU
case got even worse than Chinas [202]. According to one report, Ten years after, the fringes of the Soviet
civilization are returning to dust, and to the cruel rhythms of a nature over which communism had once
declared eternal victory [203].
China chose to implement a background-based (hereafter background) small-stepped transition.
Transition in this mode relied on a modified perspective, a mix of backward hindsight or a "path dependent"
background check with a forward prospect looking forward the future to rebuild social institutions including
political and legal systems [204]. Chinas transition is assumed to have been somewhat eclectic and pragmatic.
The transition managed to confirm the legitimacy of existing institutions, the ones in which the institutional
signals such as shared symbols and credits were socially embedded in daily and practical routines. China
followed a low-road small-step approach of piecemeal institutional reforms that co-opted innovative
institutions from previous ones, so that the transition was able to exploit opportunities at little expense. As
shown in my heuristic Figure 4.3e, the background (incremental) transition (approximate to the incremental line
of institutional fitness) may have had a low start but eventually accelerated its development. Background
transitions have particular advantages when there is a high degree of cultural and historical complexity in an
economy and when the infrastructure of information diffusion and codification is backward-oriented (my
heuristic Figure 4.3f here).
296
Figure 4.3e (heuristic): Transitional paths - constitutive-based (radical)
vs. background-based (incremental)
Expectations
High road:
(Constitutive-based Transitional progress
radical transition)/
Institutional fitness
Low road: 1
(Background based incremental transition)
Point of
departure:
Depth of history Thickness of institutions
N o te :.......... Constitutive transitions are apt to take an abrupt downspin, like Chinas Great Forward
Leap in 1958 (see discussion in Section 5.11, Chapter 5); the line of institutional fitness"
is just heuristic.
Figure 4.3f (heuristic): Path of a background-based

(incremental) transition
Expectation High road: Constitutive (radical) transition

Market economy
Transitional Progress
Low road: Background

(incremental) transition
Institutional fitness Quasi-market economy
4 Point of
Departure
Thickness of institutions
Depth of history
1. Impacts of institutional isomorphism (mostly constitutive-bound)

2. Historical push and pull (background-bound)
3. Cultural push and pull (background-bound)
297
High road: driven by constitutive-bound radical expectation and institutional isomorphism

Low road: pushed and pulled by background-bound, incremental expectation, historical and cultural ties
While being able to minimize the risks due to unrealistic goal attainments and control over the sunk
costs (i.e., costs of entry and access to market competition) of background institutions, a background-based
(incremental) transition is expected to maximize palatable outcomes of the transition and then accelerate its
reforms to upward move transition, or parlay its benefits into its future prosperity (see Figure 4.3k below and
the further discussion). In contrast to a background-based transition, a constitutive-based (radical) transition
adopts clear-cut rules and codes on paper, rules and codes oriented to an assumed set of conditions that may
be quite different from those conditions that actually exist. A constitutive-based (radical) transition is inevitably
precocious and is vulnerable to collapse at the expense of its initial political assets or leverages (see Figure
4.3g, Figure 4.3h and Figure 4.3i; in particular, see the bracketed gaining areas in Figure 4.3h and Figure 4.3j;
note: all these figures are heuristic). Figure 4.3g is a combination of Figures 4.3e and 4.3f. Figure 4.3h is a
comparison between Chinas transition and Russian transition. It is still heuristic but close to a statistical-fact-
based simulation, compared to Figure 4.3g. Figure 4.3i supplements a statistical chart of Russian transition
since 1991 by its real GDP % growth. Figure 4.3j further extends the ideas illustrated by Figures 4.3g and 4.3h.
It identifies the background-based (incremental) transition with the gradual reform" model and the constitutive-
based (radical) transition with the big bang reform model. These models are actually pretty much matched
with the 1996 findings and figures, Lin et. al [205]. Figure 4.3j illustrates an instance in which gradual reforms
in a background-based (incremental) transition maximize gains and minimize costs more effectively than
big bang constitutive-based (radical) reforms could. Figure 4.3k contrasts Chinas and Russias
transitions according to their respective real GDP growths (1990=100).
298
Figure 4.3g (heuristic): Transitional modes as ideal-typed models:
constitutional-based vs. background-based in terms of their
projected and actual outcomes in China
G DP % growth 1992
High road
(Constitutive-based radical transition)
Market economy 1997
10% Temporal
institutional
fitness
1999
1989
Low road
5% (Background-based incremental transition)
Point of Quasi-market economy
departure O'
978 85 '95 '97 '99 '00
Time
Depth of history:
1. Impacts of institutional isomorphism as push & pull

2. Historical push & pull
3. Cultural push & pull
Label:
(?) Projection 1 (expected performance assuming a constitutive-based transition with much

greater uncertainties).
Projection 2 (expected performance assuming a background-based incremental transition) with

institutional fitness;
Actual trend 1 (actual performance pursuing a background-based incremental transition);
299
Figure 4.3h (heuristic but fact-based): Transitional modes as cases: constitutional-
based (radical) vs. background-based (incremental) in terms of
projected and actual outcomes in China and FSU/Russia
G D P % growth
(Expectations)
High road
(Constitutive-based radical transition) 199:
Market economy 1997
10% Temporal
institutional
fitness
1999
\ /
Low road
(Background-based incremental transition) 1
Quasi-market economy 1
5%
Point of 1991
departure 0
1978 '80 '85 90 95 '99 '00
s J
1992
Depth of history Figure 4.3i: Russia's Real GDP Growth % 6.2
1. Impacts of institutional isomorphism

as push & pull
2000
2. Historical push & pull
3. Cultural push & pull
(Fact-Based):
Source: Financial Times, p. 13, W ed. Mar. 29, 2000

Label:
Projection 1 (expected performance assuming a constitutive-based radical transition in China)
Actual trend 1 (actual performance pursuing a constitutive-based radical transition in FSU and
Russia); Source: The World Bank, World Development Report, 1997, pp. 112 Figure 7.1: "The World
Had Become Much More Democratic Since 1980"; Financial Times, p. 13, W ed. Mar. 29, 2000;
ibid, p. I, Russia 3, W ed. M ay 10, 2000; The Economist, p. 97, Nov. 25th, 2000
Projection 2 (expected performance assuming a background-based incremental transition in China)
with institutional fitness
300
(Figure 4.3h to be continuous)
Actual trend 2 (actual performance pursuing a background-based incremental transition); Source:

SBC, China, 2000
Label:
S
Area gained by China pursuing incremental transition.
Figure 4.3j (heuristic): Transitional modes as models:

constitutional-based (radical) reform vs.
background-based (incremental) reform
G D P % Growth
Time
Label:
Background-based (incremental) reform; active area: (^ )
Constitutive-based (radical) reform; active area: |||}
Area gained by China pursuing incremental transition.
301
Figure 4.3k: Transitions from planned economies
Real GDP (1990=100)
350 ----------------------
300
250
China
200
Russia
150
100
Russia's devaluation
Source: IMF-, c it Financial Times, p. 13, Wed. July 10, 2002
Label: * IM F forecasts
Finally, by using a utility function model, I attempt a summary, providing a heuristic illustration of
how expectations, thickness of institutions, and depth of history come together to influence an economic
transition. Since I proposed transition as a strategic action, I would liken the strategic action to a situation from
a micro-level perspective of transacting management [206]. It is conceivable here that the background
institutions (combining history and institution) are equivalent to the utility dimension, and expectations are
equivalent to the risk preference dimension. Risk preference can also be broadly thought of as based on social
taste (cf. E. E. Learner 1984), indicating how much risk a society is willing to take for the exploration of such
business opportunities as investment possibilities, specific to its history, its institutional conditions, and its
relationships to other contingent factors. Here I merely refer background institutions to the institutional barriers
to an economic transition. Figure 4.3I represents such a utility model.
302
Figure 4.31: Utility function model of transition
based on expectation, history, and institutions
Late Risk preference

(As expectation)
Risk-averting
Utility (Background transit Late
(As resistance of
background
institutions
against transition) Early
^ Risk-seeking
(Constitutive transition)
Early
Transitional process
As the figure shows, there are three utility function curves, risk-averting, risk-neutral, and risk-
seeking. The risk-averting curve represents a background-based incremental transition, whereas the risk-
seeking represents a constitutive-based radical transition. On the one hand, the risk-averting curve is
concave relevant to the utility function. It means that when a background transition keeps a low
expectation for efficacy of outcome, the transition might find it hard to break through the initial stronghold
of background institutions as barriers to the transition. As the background transition keeps going and
builds crescendo momentum, the resistance of background institutions as utility against such an
incremental transition (in terms of the transitional outcome of the same amount) diminishes. Thus, the
risk avoider can parlay the minimization of risks into maximization of values reflected in successful
capital accumulation (in terms of money returns or G D P growth) in the long run [207]. By contrast, the
risk-seeking curve (represented by constitutive transition) is convex relevant to the utility function,
indicating a reverse situation. It means that when a constitutive-based transition keeps a high
expectation for efficacy of outcome, the transition might find it easy to be initiated because of less
resistance from background institutions after the changing of its political regime. But as the constitutive-
based radical transition continues, the resistance of background institutions as bastions or fortresses
303
against risk-seeking transitions (in terms of transitional outcome of the same amount) becomes
magnified. Thus the risk seeker might find increasing barriers of the background institutions against the
transition (in terms of capital accumulation as money returns or GDP growth) in the long run. In the first
case, the impacts of background institutions could turn out to be positive, facilitating the transitional
outcome. In the second case, the impacts of background institutions could turn out to be negative,
impeding the transitional outcome [208].
The utility function model cannot tell the whole story of transitional realities f 03]. During any transition,
for example, the leaders in charge of that transition, by fully exploiting their opportunities and implementing
actions to make changes happen, can make a significant difference in the transitions ultimate outcomes [21],
The following appendage table compares figures of Russia and China between 1998 and 2000 in
terms of real G DP growth, per capita income, unemployment rate, inflation rates, and exchange rates.
304
Appendage Table comparing real GDP growth and unemployment:
Russia and China, 1998-2001
Real GDP Growth Estimated Level of GDP Unemployment

(%) Real GDP per capita Rate (%)
(1989=100) (US$)
1998 1999 2000f 20011 1998 1998 1999 2000 1998 1999 2000
Russia -4.6 0.0 6.2 4.6 55 n/a 1377 1497* 11.5** n/a n/a
(4000)****
China 7.8 7.2 8.2 7.6 210.9*** 773 794 890 3.1 5.5 7.0
(3970) (4260) (4580)**
Source: EBRD Transition Report 1999. Converted from Financial Times, p. I, in "Central and Eastern
Europe," Wed. Nov. 10,1999; ibid. estimated and forecasted, p. ix, Fri. Oct. 1,19 99 ; p. Ill, in
"Survey", Fri. Oct. 1,1999; p. 4, Mon. Jan. 3, 2000; p. 4, Mon. Feb. 21, 2000; p. 15, May 17,
2000, cit. Institute for International Economics, and WTO. Statistical Yearbook of China,
1998. The Economist, p. 38, Dec. 3rd, 1999; p. 106, Feb. 12th, 2000; t ibid. The World in
2000, p. 38; ibid. cit. p. 128, Oct. 14th, 2000; cf. Financial Times, p. 18, Wed. Oct. 17, 2000.
Note: 1998 data preliminary official government estimates, 1999 data EBRD projections.
* Forecasted (2000) by Financial Times, p. I, Russia 3, W ed. May 10, 2000.
**lt refers 1998 estimate, cit. USA Today, 13A, Fri. June 2,2000.
***The data for the estimated level of real GDP (1989=100) in 1998 for China refer Statistical
Yearbook o f China, 1998, pp. 58.
**** Numbers in parenthesis are those converted into US$ at PPP by World Bank. Russian
number in 1999 refers 1998 estimate, cit. USA Today, 13A, Fri. June 2,2000.
305
Appendage Figure comparing inflation and exchange rates:
Russia and China, 1991-2001
Russias transitional economy (1991-2000)
Yeltsin became president Presidential election Financial Crisis
1600
'Inflation rate
1400 as annual %
in CPI (left
1200 axis)
1000
Exchange
800
rate:
600 25 roubles/S
(right axis)
400
200
91 92 '93 94 95 96 97 98 '99 00
Data Source: Financial Times, p. 13, Wed. Mar. 29,2000; ibid, p. I, Russia 3," W ed. May 10, 2000; ibid, p.
XVI, World Economy 16, Fri. Sept. 22, 2000
Chinas transitional economy (1990-2000)
30
Inflation
25 rate as %
(left axis)
20
Overheat Softlancfing
15
-Exchange
rateryuarVS
10
(right axis)
5
'90 '91 '92 '93 '94 '95 '97 '98 '99 '00 '01
Data Source: Statistical Yearbook o f China, SSB, 1999; The Economist, p. 100, Apr. 1st, 2000; EIU, cit. ibid,
p. 10, Survey China, April 8th, 2000; ibid. p. 116, Sept. 16th, 2000; Financial Times, pp. ii, xii,
China 2, Mon. Nov. 13,2000.
306
Endnotes in Chapter 4:
1. cf. Butler, Richard J. 1983. Also cf. Anthony Oberschall and Aric M. Leifer 1986.
Also cf. In defense of W im Duisenberg - History may yet conclude that, though the ECB has made
mistakes, the Federal Reserves have been bigger by Martin W olf in Financial Times, p. 11, W ed. May
2, 2001: ...m ost Americans are, though they would never admit it, closet Keynesians and detest the
Europeans stubbornly classical position. This U S Keynesianism has three elements: a belief that
monetary policy should be largely aimed at real activity; a hope that economic activity can be fined-
tuned; and most important, a propensity to believe that if one looks after the short run, the long run will
look after itself...
I here refer to the observation that market efficiency and relations, self-interested rationality, economic
reasoning, as well as formal bureaucracy occupy the center of the neo-classic paradigm and its associated
formulations.
2. The scheme is essentially inherited from the classic and neoclassic mainstreams, evolving from Hobbes,
Adam Smith, Ricardo, Hegel, Menger, Marshall, etc. (cf. Menger 1871 [1963], Marshall 1897) two centuries
ago, and from Mead, Coase, Heckscher, Ohlin, Samuelson in the last century (cf. Mead 1934, Coase 1937,
Heckscher 1949 [1919], Ohlin 1967 [1933], Samuelson 1948, 1975). Authors piloting the contemporary
constellations of these theories include Kuznet, Olson, Williamson, Krueger, Learner, and North (Kuznet 1971,
Olson 1965,1982, Williamson 1975,1985, Krueger 1978, Learner 1984, North 1990; see their relevant points
about neoclassic formulations of the market economy and the associated theses building the New Institutional
economics).
Smith and Ricardo referred to British classic economics that regarded economic competition and market
exchange as natural phenomena, like natural selection and elimination assumed by Darwin. In contrast,
German philosophers such as Hegel and Marx embarked on human alternatives over natural economy. Yet
Hegel was to transfigure and acclaim capitalism as the ultimate apex of infinite progress of human reasons or
as the most reasonable system in human history, whereas Marx thought it would be possible to transcend
capitalism to a higher level of humanized society. Marx insisted on his humanist stance to set forth a moral
critique of the nature of capitalism driven by greed and fear. The universal laws guiding human beings toward
their future inherently arose from the irreconcilable inner-contradictions within capitalism per se, viz. those
contradictions between the social nature of production and the private nature of proprietorship.
3. Also cf. R. Scott 1995, p. 5.
4. Both Marxism and neo-Marxism heralded capitalism as an historical and logical prerequisite for
communism.
5. Also cf. G. Hodgson discussion of Hobson's critique of "the fixed utopia and 'free trade' market individualism
of the 19th-century 'Manchester School'", cf. G. Hodgson 1999, 244.
6. cf. Experts: free trade, globalization face obstacles by David J. Lynch in USA Today, 9B, Mon. Jan.
31, 2000: The shattered windows of a McDonalds damaged in a raucous weekend protest against free
trade, are a tangible casualty of the backlash against globalization. Less visible, but equally fractured:
the complacency of trade advocates who thought they had won the debate about open markets long ago.
Decem bers failed W T O summit in Seattle, with anarchy in the streets and acrimony in the conference
rooms, might have seemed a temporary setback in the drive to eliminate trade barriers. Now,
globalization looks less than inevitable and more like the most contentious contest for the worlds hearts
and minds since the Vietnam W ar. 'W e sometimes take free trade and globalization for granted Textron
C E O Lewis Campbell said at a World economic Forum meeting. '[But] this is a quite serious debate and,
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quite frankly, we could lose it. For the USA, the stakes are high. A third of the more than 20 million jobs
the US economy created the past seven years are linked to exports...
7. Formulations such as Neo-Marxian capitalist state, world system, Neo-Weberian state autonomy, or weaker
state vs. stronger state, etc. In 1997 Boli and Thomas criticized those Neo-realist theories or meta-theories
as "reductionist rationalism." According to them, "Action is conditioned by transnational institutions", which are
"as networks of interdependence, controlled by their members." Thereby "stability and change are the result of
unanalyzed actors pursuing primordial interests". My critique of these respected figures is an attempt to
formulate a more powerful alternative to their vintage paradigms rather than to take pot shots at their
stellar past achievements. I do know that their pioneering works were valuable in establishing the
threshold of present-day economics and sociology.
8. As has been well documented, many of the neo-classical conclusions are under fire as rhetoric,
incomplete, and even teleological, drawn from a priori assumptions that market-hierarchy relations are
treated as inversely related, unidirectional, and unidimensional (see our discussion in Chapter 2). As
Boisot and Child emphasized in 1996 (cf. 621): It has been argued that even a superficial examination
of the emerging Chinese economic system calls for a reappraisal of the universal validity of conventional
Western assumptions about modernization. That analysis has largely confined itself to the codified
reaches of the codification-diffusion framework presented earlier. Application of the framework suggests
that we can derive a conceptual language from Western economic and social analysis that is useful for
elucidating the Chinese case but that Western assumptions about the variables identified by the
concepts will not apply, either in terms of the configurations of variables (at one point in time) or
movement along the variables over time."
9. As mentioned an article Rethinking thinking" in The Economist (p. 63, Dec. 18th, 1999), A wind of
change is now blowing some human spirit back into the ivory towers where economic theory is made. It
is becoming increasingly fashionable for economists, especially the younger, more ambitious ones, to
borrow insights from psychologists (and sometimes even biologists) to try to explain drug addiction, the
working habits of New York taxi-drivers, current skyhigh American share prices and other types of
behavior which seem to defy rationality. A similar trend occurred in studies of transitional economies.
See my Chapter 2 about recent scholarship on transitional economies.
10. "Asymmetric information" theorems were proposed by Joseph Stiglitz who won Nobel Prize of
economics in 2001 for work he had done in Kenya in the late 1960s. The theorems applied the used-car
salesman concept, elaborating that market economies are fallible when some people know more than
others. Later on, many institutional economists used this notion to criticize insider trade in stock markets and
bureaucratic collusion that cause market competition failures, cf. A Beautiful mind at the barricades - Joseph
Stiglitz is a hero to the anti-globalization movement; a heretic to the IMF and World Bank" by Julia Llewellyn
Smith, III, in Financial times, Weekend, July 13/July14,2002.
11. cf. Hunt for the rational leads to Nobel prize" by Alan Beattie in Washington in Financial Times, p. 1,
Oct. 10, 2002: Two of the hunters for homo economicus, the semi-mythical creature who behaves as
rationally and consistently as economic theory dictates, have been rewarded for their efforts with the
Nobel prize for economics. Daniel Kahneman, a professor at Princeton, and Vemon Smith, at George
Mason University near Washington, DC - who have worked separately in behavioral science - share the
$1m prize for bringing economics into the laboratory to see if people behave as classical theory
dictates...The implication of many of Prof Kahnemans studies is that markets do not work as theory
dictates because consumers and investors may systematically make mistakes. They repeatedly fail to
leam from experience and behave differently when presented with the same choice in alternate ways -
for example, as making a gain or avoiding a loss. His work can help to explain why people do not save
enough for their pensions, and why stock market bubbles may continue well past the point where almost
any rational valuation says it would be crazy to keep buying...
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12. Also cf. C. Lane further illumination of the notion of institutionalists (1995, p. 10): The institutionalist
perspective. In contrast to the Marxist approach, institutionalism accords overriding importance to
national distinctiveness in industrial organization, attributing this to the influence of historically grown,
enduring institutional frameworks which 'create the lenses through which organizational actors come to
view the world (DiMaggio and Powell 1991: 13). In the process, institutions both constrain and enable
actors, and, in the words of Jepperson (1991: 146), 'are vehicles for activity within constraint. The
concern of institutionalists to understand how social choices are shaped, mediated and channeled by
institutional arrangements has long informed scholars in all the social sciences, and a variety of different
institutionalist approaches are on offer...The New Institutionalists. In common with other institutionalists,
theorists under this label attempt to clarify the processes through which institutions shape organizational
structure and action. They adopt, however, a distinctive view of institutions which then shapes their
analysis of how influence is exerted, as well as moulding their understanding of organizational actors and
processes of change. Institutions, in their view, are not necessarily the outcomes of conscious human
design by instrumentally orientated individuals. They have turned from the 'rational actor model towards
a phenomenological approach which emphasizes cognitive and cultural explanations. Institutions are
viewed as supraindividual units, irreducible to the motives of individuals (DiMaggio and Powell 1991: 8).
Social relationships and actions are seen to possess a 'taken for granted and routine quality, resulting in
shared cognitions which define 'what has meaning and what actions are possible... Ibid, p. 14: In sum,
institutionalist approaches provide a valuable method for understanding the evolution and perpetuation
of distinctive national industrial paradigms and for contrasting the paradigms of different nations in terms
of resulting competitive regimes. They also permit a shift away from the exclusive focus on the capital-
labor relation and to encompass various relations between capitals, as well as drawing attention to the
prevalence of inertia and conformity in patterns of action and social relations.
13. I here adopt Granovetter's version of neo-classical economics, because it has been significantly
instrumental to my current thinking about modes of transition. He makes a distinction between neo-institutional
economics and sociological new institutionalism. He points to the somewhat close proximity and affinity
between neo-classics and neo-institutional economics, cf. His critique in 1990 and 1992 that the new
institutional economics embraces the neo-classic notion of market efficiency and formality of rationality and
institutions. Granovetter here even refers to the new institutional economics (Williamson 1975, 1985; North
1990) as a neo-classic counterattack in the sense that it attempts to broaden economics and narrow sociology
as undersocialized. It treats economics as a baseline of social sciences and institutions as branch of
economics; it is committed to formal economic reasoning and a functional revisionism of social psychology in
that the concept of a self-interested rational actor is central to realistic decision-making, and so on and so forth.
The reader may contrast this view to Polanyis notion that the "economy is a relatively independent sub-system
of society and is integrated with non-economic sub-systems primarily through the set of instituted values
common to all roles..." cf. Terence Hopkins' elaboration of his "instituted process" in Hopkins, 1957: "Sociology
and the Substantive View of the Economy", in Chapt. 5, 'Trade and Market", in Polanyi, et al. eds. 1957). M.
Olson is thus certainly classified in this category (also, cf. R. Scott 1995, p. 26). Some of its primary
propositions follow neo-classical conventional wisdom such as the proposition that a more formalized
hierarchies based on genuine market competition adopt more efficient procedures and more rapidly than do
those less formalized hierarchies (H1) and more capital-intensive industries adopt more efficient procedures
and more rapidly than do those less capital-intensive industries (H2), etc. (cf. John R. Sutton and Frank
Dobbin, 1996). Hence I see new institutional economies as a contemporary ramification of neo-classical
economics. It also must be noted that Granovetters perspective may differ from that of others. For instance, R.
Scott does not make the above explicit contrast between economics and sociology in his description of new
institutionalism (cf. Scott 1995, pp. 1-32), although he concurs with Granovetter's notion of new institutionalism
in sociology: "In sociology, the dominant approach has emphasized cognitive over normative frameworks and
has focused attention on the effects of cultural belief systems operating in the environments of organizations
rather than examining irrtraorganizational processes" (ibid, 31). In Granovetter's phrase (1992), sociological
New Institutionalism focuses attention on the interlocks between formal and informal sectors in terms of social
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embeddedness or the structure of sets of social relations. The "cultural" construction here is rephrased as
"informal".
14. Neo-classical economics concerns so-called narrow rationality - homo economicus -- who was
assumed to be trying always to maximize his general 'happiness or what John Stuart Mill, a 19th-century
philosopher, called 'utility. In other words, given a choice homo economicus would take the option with
the highest 'expected utility....In addition, there is a broader definition of rationality which includes the
notion of a persons beliefs being based on logical, objective analysis of all the available evidence." cf.
The Economist, p. 63, Dec. 18th, 1999.
15. The reader might refer for definitions of old vs. new sociological institutionalism to Swedberg et al.
1992 (p. 9), R. Scott 1994, 1995, and M. Granovetter 1 99 0,1 9 92 , 1994.
16. cf. Nee and Stark 1989, p. 20: ...Alec Noves view that there can be only two alternative forms of
economic coordination in socialist societies, market and bureaucratic...
17. As regards entrenched vested interests, for example, it is said that those senior revolutionary solders
represent the legitimacy of the old regime, enjoying popularity from it (cf. The Economist, p. 86, Feb.
19th, 2000: ...breathing is useful to survival, but this simple elixir is not enough to account for the
endurance of M r Ki and other members of Chinas gerontocracy. It was, they felt, their duty to remain in
power. No matter that they were in their dotage, they saw themselves as representing the Communist
Partys claim to its continuing legitimacy as the ruler of China, the leader of the popular revolution of
1949 that brought it to power. The younger party leaders who now run the country have, in this sense, no
such legitimacy, and have shown no inclination to test their popularity in a free election. It is one of their
problems.).
18. R. Scott 1995, p. xi: "Somewhat to my surprise, institutional theory has become...a top topic." Also cf.
Jepperson 1991, p. 155: ...In historical sociology, institutionalism is apparent in the recently reinvigorated
exploration of the formation and development of capitalism, individualism, and democracy.
19. Now that market and hierarchy are seen to be made up of complex and multitudinous dimensions, they
need to be considered in a deconstructed way. Markets are made up of contracts, intermediaries (agencies,
like brokers, traders, bankers), technological chains (specialization, standardization, supply-demand linkages,
distribution systems, information systems, or communication and transportation systems), industrial/firm flux,
competing incentives for innovation, risk management, property rights, trust or corporate cultures, networks,
routines (rules, procedures, and norms), regulatory authorities, economic legalities (licensing, patent law,
loyalty codes, bankruptcy law, intellectual property law...), as well as unionization, etc. Each dimension could
be viewed as a variable with its assorted forms and contingencies. The conception of market and hierarchy
could proceed upon an overall appraisal of the balance of mixed consequences or an overall appraisal of the
combination of negative and positive outcomes. Thereby market-state/hierarchy relations can be thoroughly
articulated in many alternative ways and integrated into a continuum or a co-evolving process.
cf. R. Scotts 1995 heuristic illustration of institutional levels, pp. 55-6: "For institutions, level may be
usefully operationalized as the range of jurisdiction of the institutional form. Given the complexity and
variety of social phenomena, any particular set of distinctions will be somewhat arbitrary. Nevertheless,
for our purposes it is useful to identify six categories: the levels of world system, societal, organizational
field, organizational population, organization, and organizational subsystem." For institutions and
organizations operating at intermediate levels, Scott explains (1995, p. 141) that: "Figure 7.1 depicts a
layered model of institutional forms and flows. Societal institutions provide a context within which more
specific institutional fields and forms exist, shaping them both as agent and environment. Organizational
fields operate at intermediate levels, providing institutional structures within which specific organizations
operate. And organizations provide institutional contexts within which particular actors are located and
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take action. Generalized models - beliefs, norms, menus, and scripts -- flow 'down' through the various
levels, carried by socialization, social construction, and sanctioning powers. These models are carried
and reproduced, but also modified and reconstructed, by the interpretations and inventions of
subordinate actors; individuals, organizations, and fields."
20. In 1992 G. Miller argued that neither market nor hierarchy become clearer targets in analyzing the efficient
failures in hierarchy or in market than do the underlying institutional specificities of contracting and negotiating,
such as information asymmetry, externalities, property rights, monitoring and enforcing contracts, and market
power, etc., because the functions of market and hierarchy and their relations can be illuminated by these
institutional conditions and specificities (p. 18: "Whenever any of these factors is present, a competitive market
will yield an inefficient allocation of resources. As Coase (1960) demonstrated in his famous theorem, these
allocative inefficiencies could be corrected by contracting, assuming clear specification of property rights and
costless negotiation and enforcement of contracts. However, these transaction costs may be large, and larger
under some institutions than others...Information asymmetry, externalities, and market power can limit the
efficiency of negotiated solutions to competitive market failure. The same analysis points out that hierarchical
authority can be an efficiency-enhancing institutional feature [Farrell 1987b: 120]". Ibid, p. 17: "In the presence
of an an information asymmetry, the consumer and producer of labor may fail to achieve what would otherwise
be a mutually advantageous market exchange; hierarchy may be the b ek way to realize the potential benefits
of these transactions.").
21. Mutations may refer to both the planned reorganizations, such as mergers, contracts, spinoffs, etc.,
and unintended changes within institutions. Such mutations occur along with socioeconomic evolution
due to stochastic accumulation, purposeful imitation, organizational improvement, and acquired
character inheritance, which cause the changes in the "generic" nature of the institutions and the
routines. The sources of the mutation can be either self-generated within an institution or caused by
forces outside an institution. In the economic context, mutational occurrence requires an open system
and involves the creative acts of agents themselves, such as innovation, the development of new
products, the building of new structures and institutions with new dimensions and linkages, etc. cf.
Hodgson 1993, 47-8.
22. In 1990 Powell pointed out that the boundaries between market, hierarchy, and network are rather blurred
(p. 299; note: emphasis mine): "market is more alike a cultural and social entity, and firm's employment is
typically less hierarchical and introducing market compensation for the performance of emplovment...market is
not an amoral self-subsistent institutions, but a cultural and social construction...market cannot be insulated
from social structure because differential social access results in information asymmetries, as well as
bottlenecks, thus providing some parties with considerable benefits and leaving others disadvantaged...On the
one hand, many market exchanges have been replaced by interoraanizational collaborations...not because of
the presence of an untapped market, but because of the existence of a dense, overlapping cluster of firms,
skilled laborers, and an institutional infrastructure... All of these arrangements serve to strengthen the social
structure in which textile firms are embedded and to encourage cooperative relations that attenuate the
destructive aspects of competition...On the other...a firm's relationships with its law, consulting, accounting, and
banking firms may be much more enduring and personal than its employment relationship with even its most
senior emplovees...rin addition,] firms commonly rely in market-like methods as transfer pricing and
performance-based compensation schemes." Pp. 309-310: "The success of these small enterprises p.e., Italian
film firms] rests on a different logic of production than found in a typical vertically-integrated firm...Production is
conducted through extensive, collaborative subcontracting agreements."
23. For instance, w e may find that Boisot and Childs 1996 model belongs to the first case in Figure 5.1a.
Their model assumes a non-linear relationship between market and hierarchy, mediated by cultural
space (C-Space).
24. R. Scott, 1995, p. xi (brackets mine): Institutional theory "...encourages wider ranging scholarship and
311
symbolizes the virtue of interdisciplinary inquiry....[My works] began the process of comparing and contrasting
work on institutions across several disciplines..."
25. cf. Williamson 1975, xi: "...rather than regard the microanalytic study of markets and hierarchies as being
in essential conflict with received microthoery, I am inclined to consider these as complements." Ibid, xv-xvi:
'The question is not merely whether internal organization can be substituted for the market with beneficial
result, but what type of internal organization is to be employed. This second question poses organization form
issues."
26. See Martin W o lfs arguments in his Asias future burning bright in Financial Times, p. 17, W ed. Feb.
23, 2000 (emphasis mine): . . . In this world of speedy communications and free flows of goods, services
and capital, governments are subject to 'institutional competition. They are forced to pursue sound
budgetary and monetary policies, eliminate distortions in their financial systems and upgrade the quality
of their manpower. Those that do so will be rewarded: those that fail will be punished...Economic
development is not just about capital accumulation and technical advance but also putting in place
sophisticated institutions ad behavioral norms, both private and public. It would be pleasant to imagine
that these reforms would emerge spontaneously and smoothly. It is far more consistent with historical
experience for them to emerge from crises. To take just one example, the role of the central banks in
providing liquidity in crises was learned not from theory but from painful experience...Financial crises
have taught the Asian emerging economies the lessons painfully learned by Americans and Europeans
in the 19th and early 20th centuries. As a result, the Asian economies will end up with a more
competitive, more transparent, sounder and more open financial system.
Also cf. Protest against the protesters by Samuel Brittan in Financial Times, p. 19, Thurs., Sept. 28,
2000: ...H e [i.e. Robert Lucas] mentions three possible reasons for this catch-up [i.e., by the later
developers and/or the laggard countries]. One is that knowledge produced anywhere benefits everyone
everywhere. The second is that the governments in the previously unsuccessful countries can adopt the
institutions and policies of the successful ones. Third - and highly relevant to globalization - relatively
high wages in the successful economies can lead to capital flows to emerging ones...This story [by
Lucas] does not tell us much about the policies and institutions that produced growth.
27. cf. O. Williamson 1975, p. 4: "For one thing, he [i.e., Hayek] was anxious to dispel the notion that central
planning is a realistic alternative to competitive market systems (1945, p. 521)." But Williamson also stated,
"...I am interested in a more microeconomic level of detail than he. Given bounded rationality, uncertainty, and
idiosyncratic knowledge, I argue that prices often do not qualify as sufficient statistics, and that a substitution of
internal organization (hierarchy) for market-mediated exchange often occurs on this account. Also, unlike
Hayek, the alternative organizational modes examined here are strictly firm and market; central planning
boards never expressly enter the picture" (ibid, 5). That is, while sharing Hayek's view against the notion of
market-state or state-hierarchy binary to contrast market economies with central planning economies,
Williamson contended that firm hierarchy in the West still can be considered an alternative to markets. But in
my opinion, right now this idea is not applicable for the analysis of current transitional economies when the
state has relaxed its control over markets and further moved toward bureaucratic reforms. In current China, the
market has increased its leverage and predominance, enhancing its function as a basic mechanism to channel
economic growth, rather than remaining as mere policy device or "instalment" of the state's plans, as some
scholars have presumed (Nee and Stark 1989, p. 17). That is, economic operations in most enterprises are
driven by profits rather than being guided by party politics and policed by the army. Economic performance is
mainly assessed on market competition but not by ideology. Moreover, as reported, China's military defense
budget in the current year is equivalent to a ratio of "14 cents for every dollar the US spends on defense" (cf.
Time Magazine, June 7,1999).
28. Evidence of the fluid boundary between market and hierarchy is evident in the evolution from market-
styled hierarchy in the turn of the last century into more formal hierarchy nowadays. There exists a systematic
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flow between market and hierarchy, i.e., those market-oriented voluntary, nonhierarchical contracts in solution
to market failure, such as, interstate compacts, international treaties, joint ventures (cf. Miller 1992, p. 36:
"Indeed, a relatively nonhierarchical form of contractual coordination called 'inside contracting prevailed in
many large-scale industries at the turn of the century. Under this system, an entrepreneur provided raw
materials and a large work space and negotiated contracts with skilled craftsmen and their crews to provide a
specified number of components for the entrepreneur's product. The system had a number of advantages; why
was it replaced by a more hierarchical arrangement?" Ibid, p. 38: "Are there systematic conditions under which
non hierarchical, contractual resolution of market failure must be abandoned in favor of hierarchy?").
29. cf. The opacity index, Jan. 2001" in the Economist, p. 100, March 3rd, 2001.
30. cf. The new battlegrounds for capitalism - Japanese and European models of capitalism have lost
out to the Anglo-Saxon by Ben Hunt in Financial Times, Mastering Management, pp. 12-3, Mon. Oct.
9, 2000: The conflict between capitalism and socialism came to an end a decade ago, only to see a new
one rising from its ashes. Business and academia alike began to argue that capitalism was in fact many
capitalisms, each with its own economies, social systems, cultural values and management styles.
Anglo-Saxon capitalism, which had evolved in the UK and US, was distinct from the version found in
Japan and Germany, occasionally referred to as the Rhenish model. Indeed, the former was frequently
viewed as inferior. In the 1980s and early 1990s, Japan was admired for its management styles and
operational practices. Many US and UK manufacturers tried to emulate Japanese methods such as just-
in-time inventory control and employee involvement. Today, however, something new is happening.
After a decade in which Rhenish capitalism, to varying degrees, has been struggling, both Japanese and
German corporations are restructuring and reforming along the lines of their US and UK counterparts
(see boxes). The argument that Japan and continental Europe have to catch up in areas such as
shareholder value and corporate governance, not to mention information technology, has been won.
Moreover, Japanese business is coming to terms with the fact that US corporations and others have
beaten them at their own game. By designing and building in customer-facing processes to all aspects of
their business, US companies have extended Japanese management styles beyond the shop floor.
Although there is scope for disagreement over the depth of reform taking place, it is significant that
multinationals everywhere champion similar objectives. Increasingly, shareholder value is the measure
of corporate performance and corporations are willing to use similar tools, such as downsizing, to reach
performance goals. Overall, it is hard to dispute that management styles around the world are locked in
to a similar trajectory and, in the process, are becoming more homogeneous.
Changes in the governance environment
Characteristics of Rhenish" business Examples of recent change Anglo-Saxon practices emulated
1. Sales, market share and headcount Greater attention paid to Managing for shareholder value;
dominate performance measures; financial markets;
2. Interlocking patterns of ownership Selling of cross-shareholdings, Higher role ascribed to corporate

and close banking relationships; bond financing and growth of finance and shareholder value;
equity culture;
3. Undeveloped market for corporate Emergence of hostile bids; See above;

control;
4. Employees are most important End of lifetime employment More flexible approach to labor;
stakeholders; systems; downsizing;
5. Large company boards; Shrinking board size; Greater accountability and
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transparency;
6. Salary-based management pay; Legal reform; Introduction of stock options to

compensation packages.
31. It has always happened this way if we consider economic actions always involving politics and if we
consider the roles of agents in creation of predictable law and accounting transparency for economic
operations, cf. Bruce Canruthers, 2000; Rudolph, Susanne Hoeber, 2000. For example, Carruthers discusses
the issues behind the Asian crisis. According to IMF, those factors triggering the crisis included: 1. the bubble
nature of an economy driven by short-term capital; 2. a high leverage of domestic corporations as vested
interests; 3. the lack of diligence and the reliance on implicit guarantees by governments; and 4. the laws for
ambiguously lending based on lax regulatory framework. The proposed construction of the rule of laws
focuses on two points: 1. law predictability; 2. accounting transparency. However, Carruthers argues that it is
very hard to reach the level of law predictability required by IMF, even in the West, because: 1. most market
actors tend to avoid the laws; 2. there possibly exist many forms of such predictability, e.g., different countries
may use different measures and methods; 3. some forms of predictability are even undesirable; 4. there also
exist the vested interests of practitioners. A similar case can be made for transparency, which is greatly
affected by factors like: 1. the agents discretion while accepting the rule of law; 2. the rhetorical aspects of
accounting; 3. the existing multiple standards in conventions and rules, which are ambiguous, etc.
32. cf. Some Chinese see the future, and its capitalist - Its not whether to have free markets but what
kind by Joseph Kahn in The N ew York Times, Sat. A15, A17, May 4, 2002: ...If the grandfather of
China's neoliberals is Burke, it is Alexis de Tocqueville who guides many in the New Left. Tocqueville is
quoted often, because as a French nobleman he rejected the excesses of the French revolution but also
saw the British as futilely resisting the 'universal spread of democracy throughout the world. And of
course Tocqueville made it clear that democracy, not capitalism alone, was the key to Americas
success, shaping not just its politics but its society, law, culture, and economy.
33. Here the so-called market approach is considered typical of free market capitalism, while other forms
of capitalism or variants are essentially regarded as deviants from normative capitalism. An example is
found in a report by Financial Times (cf. Japan: Corporate fund-Raising by Paul Abrahams, p. I, Fri.
Dec. 1 7,1 99 9 ; emphasis mine): Japan may have been a liberal democracy for nearly half a decade, but
its commitment to fee-market capitalism has been, at best, cursory. Rather, the countrys post-war
economic miracle has been based on a system of corporatist capitalism whereby capital was directed by
bureaucrats from banks into strategic industries. Shareholders, in a list of executives priorities, ranked
low, well under stakeholders such as suppliers, customers, the groups main bankers, employers , and
even the managers themselves. But that economic model is breaking down, forcing Japan reluctantly
into the embrace of free-market capitalism...There is little doubt the keiretsu system is breaking down.
The banks have promised to ration funds on more rational basis, and already Japanese bank lending is
falling about 6% year on year. Similarly, the hierarchical approach is treated as typical of the previously
central planning economies.
34. cf. Yoshiaka Okada, 1999. "Success in cooperative research is found in assembly-oriented industries, such
as automobiles, not in science-based polymer and idea-oriented software industries...cooperative learning can
be highly effective for developing assembly-oriented industries, while it can be a hindrance to the dynamic
development of science- and idea-oriented industries." Also, cf. O. Williamson 1975, p. 1: T h e common
threads [for a New Institutional Economics]...are...an evolving consensus that received microtheory, as useful
and powerful as it is for many purposes, operates at too high a level of abstraction to permit many important
microeconomic phenomena to be addressed in an uncontrived way...The new institutional economists both
draw on microtheory and, for the most part, regard what they are doing as complementary to, rather than a
substitute for, conventional analysis." A note here is that the New Institutionalism in sociology has partly
evolved from the New Institutionalism in economics (cf. Granovetter 1990,1992).
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35. As Scott underlines, new institutionalism builds social theories along with institutional pillars (i.e., regulative,
normative, and cognitive) vs. earners (i.e., cultures, social structures, and routines), cf. p. 52, Table 3.2.
36. The sphere of discourse that Foucault referred here was much broader than that of ideology. Also cf. M.
Foucault 1970, Discourse and mans being, Section VII, Chapter 9, Part II. P. 335: ...four theoretical
segments (analysis of finitude, of empirico-transcendental repetition, of the unthought, and of origin) stand in a
certain relation to the four subordinate domains which together constituted the general theory of language in
the Classical age... Also, p. 340: In modem thought, what is revealed at the foundation of the history of things
and of the historicity proper to man is the distance creating a vacuum within the Same, it is the hiatus that
disperses and regroups it at the two ends of itself. It is this profound spatiality that makes it possible for modem
thought still to conceive of time - to know it as succession, to promise it to itself as fulfillment, origin, or return.
37. cf. The middle class waits in the wings - The partys mission of serving the proletariat has been shifted -
The 16th party congress jettisoned the fundamental purpose of communism by James Kynge in Financial
Times, p. Ill, Thurs. Dec. 2002. cf. The middle kingdoms class revolution - The Chinese leadership
outline robust expansionary plans for the next two decades with a big emphasis on the middle classes
by Jam es Kynge in Beijing in Financial Times, World Report: China, p. I, Thurs. Dec. 12, 2002
(emphasis mine): . . / Development requires that we do away with all notions which hinder fitl. changes
all practices and regulations which impede it and get rid of systemic drawbacks that adversely affect it.
Mr. Jiang told the congress in an address that serves as a policy blueprint for the next five years. In that
spirit, the congress shed some residual ideological hang-ups, particularly the notion that private
enterprise, private property and income without labor are suspect. For the first tim e since the revolution,
the bosses of private companies were invited to the congress and one capitalist entrepreneur won a seat
on the partys central committee. Mr. Jiang pledged that private property would receive, in future, the
protection of the law and made it clear that all legitimate income 'from work or not was also to be
safeguarded. State assets, meanwhile, are to be gradually sold off, reducing the partys influence over
the economy. A market in the rights to use rural land - if not the land itself - is to be expanded,
potentially creating a new class of relatively wealthy landholders from among 400m peasant
farm ers...Reflecting this shift, a new philosophy called 'the three represents was adopted as a guiding
principle, re-orienting the party from its proletarian roots toward a future serving so-called 'advanced
productive forces, advanced culture and the broad masses of the people. In other words, observers said,
the middle class. By embracing the middle class, regardless of ideology, the party was acting out of
necessity. It had become clear that continuing to ally itself to crumbling state-owned industries, debt-
ridden state banks and corrupt bureaucracies would eventually endanger its survival. Having now linked
arms with societys success stories, it wants to benefit by the association...
Also cf. China dusts off an old enemy - Jonathan Fenby joins the tour groups at the birthplace of Chiang Kai-
shek, who fought for more than 20 years against the founders of the regime that has run China for the past 52
years" by Jonathan Fenby in Financial Times, p. IV, Weekend, Mar. 23/Mar. 24, 2002 (emphasis mine):
...Climb through the words and tea plantations in the surrounding hills up to a summer house on the ridge, and
you are surrounded by a large tour party from Beijing, fitted out in black baseball caps and following a guide
with a blue flag. Down in the village, photographs commemorate visits by President Jiang Zemin. Zhu Rongji,
prime minister, and other luminaries of the last lame Communist government on earth. What makes all this
attention, and the 200,000 visitors a year, extraordinary is that the towns only attraction is to have been the
birthplace of a man who fought for more than 20 years against the founders of the regime that has run China
for the past 52 years. Chiang Kai-shek had headed chinas Nationalist administration for two decades before he
was forced to flee across the Strait to Taiwan, from where he glowered at the mainland. In return, the stubborn,
fierce-tempered leader of the Kuomintang was lambasted by Beijing as a Renmin Gong Di - enemy of the
people - and his years in power on the mainland excoriated as a time of oppression, corruption, and
appeasement of the invading Japanese. But careers and reputations in China are prone to follow a switchback
pattern, with historical verdicts subject to the vagaries of contemporary political needs. So todays stress on
national unity has been extended to encompass even the general who engineered the liquidation of
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Communists in Shanghai in 1927 and forced Mao Zedong into the Long March. Turning things on their head.
Chianqs insistence during his exile in Taiwan that there was only one China is now seen as ideologically
correct. Equally, after Deng Xiaopings praise for the glories of getting rich, the monev-makinq of the
Kuomintanq era no longer seems as misguided as it did in the years of stricter Marxist orthodoxy. If the period
after the fall of the Manchu Empire was the golden age of the Chinese bourgeoisie, it is an era that the
country's growing entrepreneurial class aims to revive. A couple of hundred miles north of Xikou, the relics of
Shanghais heyday of the 1920s and 1930s are being tarted up to try to recapture some of the heady aura of its
years as the Paris of the East. And, though nobody would say so on the record, the rampant corruption that
helped to undermine Chiangs administration has parallels in the scandals that have come to light across the
country in recent years. As for the fight with Japan, the brighter aspects of the record are now being highlighted
- Chiangs co-operation with the Communists after he was kidnapped by an anti-Japanese commander in the
ancient imperial capital of Xian in 1936, or his dogged refusal to entertain defeat as he sheltered in his last
stronghold up the Yangtze awaiting the victory of the US. Hence the official approval of the commemoration
that draws the visitors to Xikou. The old village area by the river where Chiang was bom, in 1887, in the salt
shop run by his father, was devastated twice, by a Japanese air raid and then during the Cultural Revolution.
Now, it has been rebuilt and repainted. A wooden counter has been put up in the salt shop. The ancestral hall
and rock garden have been refurbished in the house down the street to which Chiang and his formidable
mother moved after his fathers death. The riverside house known as Le Pavilion, where Chiang liked to stay
with his third wife, is still fitted with a double bed featuring a mirror set into the bedboard. Across the street lies
a school where the Generalissimo was honorary head master with a platform from which he would harangue
the pupils about the morality of his New Life movement with its emphasis on personal cleanliness, neatness
and respect for authority. The summer house on the ridge remains as it was when Chiang walked in the
surrounding woods, gazed at the waterfall falling from a rock face, stared at the lake below, or just sat in a
wicker chair covered with a blanket contemplating the countryside and cogitating on the future of
China...Visiting Xikow while researching a biography of Chiano. I was hard put to detect any political element
in the Chinese visitors. They appeared merely to be interested in seeing the place where a considerable
historical figure had lived. If the restoration of Chianqs birthplace is part of a master plan to spread the doctrine
of One China so widely that it encompasses the man who was a symbol of anti-communism, this fits neatly
with reaction of one businessman in Shanghai I asked about Chiano: W e are all Chinese. he replied. Or with
a vouno woman in Xikou who pondered for a moment and said: He was a major figure who made bio
mistakes. before pausing and adding, 'like chairman Mao.
38. cf. Industry ready to ring up revenues from mobile data - Asia has led the way, but now operators
elsewhere are hovering anxiously at the starting gate by Ben Hunt in Financial Times, Telecoms," I, Wed.
Nov. 20, 2002: ...M ark Delaney, of Samsung Design Europe, says that Asian consumers are more accepting
of new technology than vary Europeans. Th is difference is reflected in the handsets with Asian handsets being
celebrations of technology while European handsets tend to be more discrete and sophisticated concentrating
upon the service they offer rather than the technology, he says. Those differing attitudes manifest themselves
in the different replacement cycles in the two regions. Mr. Delaney says that it is important to Asian consumers
to have the 'latest phone and they will change phones every six to 12 months while most European
purchasers - the exception is the youth market - view their handsets as a longer term investment that has a
life of up to two years. Given that the usage of multimedia services depends entirely on consumers buying
handsets compatible with such data, the continents operators, with the cost of their 3G licenses hanging
around their necks, know they need to address the replacement issue sooner rather than later. In parallel with
that drive, however, operators and handset manufacturers must also work to ensure that both hardware and
networks can communicate between themselves. At present differing specifications mean that it is difficult, for
example, to send a picture from a Nokia phone to a Sony Ericsson phone or from Vodafone to Orange."
39. I have no doubt that innovative ideologies are capable of playing dynamic roles in historical
conjunctures, especially in mobilizing radical transformations. But with respect to long-run economic
transitions, the bottom line, in my opinion, ought to combine both subjectivity and rationality. Ideology
alone seems unable to provide a full account of rationality behind instrumental action.
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40. Weber attempted to identify those particularities in different economies. For him, the genesis and the
development of capitalism were by chance; what is meaningful for social structure has always been followed
by dominance in either military form, or financial form, or economic form.
41. cf. W eber 1968 [1922], p. 22: The ideal type of meaningful action where the meaning is fully conscious
and explicit is a marginal case. Ibid. p. 24: W eber referred instrumentally rational [social action] in Types of
social action. Here to my knowledge, instrumentally rational social action" is mainly referred to as economic
action (ibid.: ...that is, determined by expectations as to the behavior of objects in the environment and of
other human beings; these expectations are used as 'conditions or 'means for the attainment of the actors
own rationally pursued and calculated ends.). In other occasions (ibid.), he used the term non-ethical action
to denote the Oriental economic actions under Taoism. To Weber, therefore, the term expectation contains
more connotation than ideology in the sense that would affect or motivate economic actions.
42. cf. A. Swidler 1986, pp. 273-6: ...culture's causal significance is not in defining ends of action, but in
providing cultural components that are used to construct strategies of action...Parsons' 'voluntaristic
theory of action describes an actor who makes choices in a situation, choices limited by objective
conditions and governed by normative regulation of the means and ends of action (Warner, 1978:
1 2 1 )...class similarities in aspirations in no way resolve the question of whether there are class
differences in culture. People may share common aspirations, while remaining profoundly different in the
way their culture organizes their overall pattern of behavior (see Hannenz, 1969). Culture in this sense is
more like a style or a set of skills and habits than a set of preferences or wants...One can hardly pursue
success in a world where the accepted skills, style, and informal know-how are unfamiliar. One does
better to look for a line of action for which one already has the cultural equipment...To adopt a line of
conduct, one needs an image of the kind of world in which one is trying to act, a sense that one can read
reasonably accurately...how one is doing, and a capacity to choose among alternative lines of action.
The lack of this ease is what we experience as 'cultural shock when we move from one cultural
community to another. Action is not determined by ones value. Rather action and values are organized
to take advantage of cultural competences...[In Weber,] ends created by ideas (that is, the desire for
salvation) powerfully influenced conduct. If we take seriously the causal model W eber offers (both in The
Protestant Ethic and in his theoretical writings on religion), however, we cannot understand his larger
claim: that the ethos of Protestantism endured even after the spur of the Calvinist quest for proof of
salvation had been lost. If ideas shape ethos, why did the ethos of ascetic Protestantism outlast its
ideas?"
43. Not to mention fundamental economic laws, which to a substantial extent might not be subject to
many particular ideologies. Indeed, these economic laws may instead wield strong effects or impose
stringent restrictions on the roles of ideologies and often in certain circumstances make them
appendages. No matter how these ideological arguments are made, there exists a significant difference
between science and ideology as a sort of system of ideas and thoughts. Social sciences must undertake
to assess the role of ideology in decision-makings and choice-makings. For instance, if ideological claims
could be taken as hypotheses, then science would require certain procedures and methods to prove their
reliability and validity, procedures that are different from those hypothetical doctrines. The doctrines
might be right relative to given historical contexts, but, they cannot be substituted for scientific
procedures and methods in any case.
44. Even economic planning is not fully subject to particular social norms, cf. Eisinger, P. K. 1988, p. 27:
"The emphasis in strategic planning is on specific feasible goals attained according to a timetable.
Normative objectives - what ought to be - and grand speculations about the future play no role in
strategic planning.
45. cf. J. Coleman 1986, 1312: ...Purpose and goal directedness are useful in theory construction [of
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social action], but not if they characterize the entity or system whose behavior is to be explained. They
must instead characterize elements of the system, which in the case of sociology can be regarded as
actors in the system, either persons or corporate actors..." Also cf. T. Parsons 1937.
46. My arguments here, I believe, are fairly consistent with those of B. Klandermans et al. 1987 and D.
Oegema et al. 1994 that social action is determined not only by the motivations of the actors but also by
many other contingent factors. As for motivations per se, they consist not only of ideological claims and
beliefs. They are also framed by individual rational judgments of the actors based on their own
observations with reference to the others (such as friends, neighbors, etc.) and their personal
experiences. In brief, the mobilization of social action from motivation to action is assumed to be a
socially constructed and rather complicated process.
47. cf. Sachs on Globalization - A new map of the world: Todays word is divided not by ideology but by
technology. This demands, Jeffrey Sachs argues here, bold new thinking on development by Jeffrey
Sachs in The Economist, p. 81, June 24th, 2000 (emphasis mine): With the end of the cold war, old
ideological divisions are over. Virtually all nations proclaim allegiance to global markets. But a more
intractable division is taking hold, this time based on technology. A small part of the globe, accounting for
some 15% of the earth's population, provides nearly all of the world's technology innovations. A second
part, involving perhaps half of the worlds population, is able to adopt these technologies in production
and consumption. The remaining part, covering around a third of the worlds population, is
technologically disconnected, neither innovating at home nor adopting foreign technologies. These
technologically excluded regions do not always conform to national borders. They include southern
Mexico and pockets of tropical Central America; the Andean countries; most of tropical Brazil; tropical
sub-Saharan Africa; most of the former Soviet Union aside from the areas nearest to European and
Asian markets; landlocked parts of Asia such as the Ganges valley states of India; landlocked Laos and
Cambodia; and the deep-interior states of China. (My colleagues Michael Porter and Andrew W arner are
currently developing sophisticated indicators of these new technological divisions, and confirming their
importance in accounting for growth.)...lt is time for the rich countries to recognize this and respond.
Note that the worlds new boundaries are not fixed: many of the technologically excluded could soon
become technological adopters, and a few (Taiwan, South Korea and Israel) have graduated from the
middle group to become top-rank innovators. But such transitions are far from automatic. If more of the 2
billion people who live in the technologically-excluded countries are to join in the benefits of
globalization, three things need to happen. First, the new technologically-driven character of the global
economy must be properly thought through: geography, public health, and ecology must be brought into
the analysis of technological change and economic growth. Second, governments need to change their
approach to aid, spending more, and more wisely. Third, participation of international assistance needs
to be broadened and recast. Multinational firms and first-world universities and scientific establishments
need to be engaged, and the official agencies charged with global development (the IMF, the World
Bank and the various UN agencies) must be reformed. Rethinking globalization. Development has
traditionally been seen as a matter of accumulating physical and human capital...But we now know that
technology is less likely to converge than capital. Innovation shows increasing returns to scale, meaning
that regions with advanced technologies are best placed to innovate further. New ideas are typically
produced from a recombination of existing ideas (in the phrase coined by Martin W eitzm anl. so
environments rich in ideas produce chain reactions of innovation. But as with nuclear reactions, a critical
mass of ideas and technology is needed first. Also, the incentive to innovate depends on the size of the
market. Innovation involves fixed costs, such as R&D: a bigger market supports this more readily. The
public-good aspect of ideas - the fact that they can be used again and again without being depleted -
leads to further complexities. Free markets are not enough: successful innovation reouires supporting
institutions. Commercial innovation today is generally a product both of basic scientific insight (based
mainly on ideas in the public domain) and applied engineering (backed bv patents). The first relies on
universities and public laboratories, the second on private, profit driven firms. Successful innovation
requires academia, government and industry to work in harness. The Internet is a familiar case in
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point...Many economists assume that all developing countries are equally well placed to absorb
technologies from abroad, but this is wishful thinking. W hatever the channel, geographical conditions are
important. Successful importers of technology tend to be close to big markets or on principal sea routes
or both. Technology is drawn across borders to countries like Mexico; or to Poland and Hungary,
neighbors of the European Union; or to coastal China, Singapore, Hong Kong, the port cities of South-
East Asia and the coastal states of southern India...Countries that do not keep up with global technology
often collapse, unable even to maintain their standard of living, much less increase it. They usually
depend on a narrow range of exports that lose their profitability in the world economy. Copper is
displaced by fiber optics. Natural rubber and jute are displaced by new synthetic materials. The long-term
decline in the terms of trade of many primary commodities is itself a side-effect of innovation.
Demographic pressures magnify the risks. Poor countries typically experience rapid population growth
until urbanization, education of women, and especially falling childhood mortality lead couples to reduce
their fertility. In technologically-stagnant countries, however, all these factors are subdued...The World
Bank and IM F must adopt a new approach in helping marginalized regions to connect to the world
economy. Both reject the use of special incentives to attract FDI, such as export-processing zones, tax
holidays, and joint ventures between host governments and foreign investors, even though these
methods have worked for others...At the core of the global divide is the vast inequality in innovation and
diffusion of technology. Globalization policy has barely scratched the surface of this central problem.
World Bank lending and grants for science and technology are probably less each year than one-tenth of
the R&D budget of a single large American pharmaceutical com pany...The Bretton Woods institutions
need to be moved away from the old-country-based model of interaction with the third world, and to
concentrate their efforts instead on a world dominated by concerns over technology, disease and the
environment. The World Bank needs to do less country lending and more to create and disseminate
knowledge for development. UN agencies, especially the World Health Organization, must be
redesigned and expanded. The IM F should get out of development altogether and go back to monitoring
global financial markets...Quarrels over ideology have ended. The prosperity of the richest countries is
at an all time high, and so is their capacity to look beyond their own immediate needs.
48. As such, through toppling the whole of old systems of thoughts and displacing them with new ones.
This is so because institutions are designed by human beings and definitely affected by human ideas that
have always delved into what best for human practices, cf. Friedmans theories hold true 40 years later
by George F. Will in Wisconsin State Journal, B2, Sun. July 14, 2002: John Maynard Keynes, whose
preeminence among economists Friedman eclipsed, said the world is mostly ruled by the ideas of
economists and political philosophers: 'practical men, who believe themselves to be quite exempt from
any intellectual influences, are usually the slaves of some defunct economist...
49. cf. W eb er 1968 [1922], p. 22.
50. If one focuses on ideological claims, one can get into endless debates as to whether the new regime
should be judged as neo-liberal, or as remaining state socialist, or being social democratic or welfare-
state-typed.
51. In some particular circumstances, like in Chinas institutional environments during Chinas transition, it is
plausible for exogenous market-hierarchy conflicts to be endogenized as internal "conflicts in the equilibrium.
As conflicts veer inward, institutions can maximize their capacity to serve as effective means of managerial
solution to those conflicts.
But theoretically such conversion has been a moot point. For instance, whereas M arx explains capitalist
development as a transition from informal self-employed labor to formal waged labor, Zucker 1986
perceives it as a transition from informal process-based trust to formal institutional-based trust. That is,
capitalist development is embedded in its transition of trust production. According to her analysis,
therefore, any conflict of the vested interests ought to be analyzed as a form of managerial tension
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between workers and managers, rather than struggle between the capitalist class and the working class
(cf. 1986, pp. 8 7 ,1 0 2 ). Ibid. p. 88: "The reaction to the disruption of process-based trust -- the foundation
of reciprocal understandings between seller and buyer in local market -- was swift and
violent...Fundamentally, then, production of trust across 'long' social distances (e.g., between rather than
within diverse occupational groups and industrial groups) and across long geographic distances provided
the necessary conditions for the mergence of institutional, formal mechanisms of trust production." Thus
this transition from informal to formal had actually increased the social and physical capacity for a
national economy.
While partially sharing with Zuckerts arguments, I want to add that such equilibrium of the converted inward
conflicts ought to be dialectically regarded as temporal and at mercy of the institutional distribution of power,
the equilibrium that would interact with its larger environments, and the equilibrium that would be deeply
affected by escalating social tensions for any institutional redistribution of power. In such a circumstance, the
fitness and success of these institutions and their survival in transition are assured by their solutions to the
"conflicts in [momentary] equilibrium" or by their solutions to the dilemmas in the "coordinative game" through
deliberative actions in the institutional terrains. W e may refer the definition of equilibrium to Elsteris 1983
discussion (p. 13): 'The interdependency of choices turns crucially on the notion of an equilibrium point, i.e., a
set of strategies that are optimal against each other. One may then define the solution to a game as an
equilibrium point toward which all the agents will tacitly converge. Some games have no equilibrium
point...Others have more than one equilibrium point..." Also see Campbell et al. 1990 for a critique of
economic equilibrium, which is not merely regulated by market price, but is also vulnerable to the conditions of
the power structure, or institutional distribution of power", cf. Campbell et al. 1991, p. 8.
52. cf. Democracies slower to fight poverty by John Thornhill, Asia editor of Financial Time, in Financial
Time, p. 5, F it Apr. 5, 2002 (emphasis mine): The democratization process currently sweeping the world
might hinder economic development and poverty alleviation, says a report published by the Asian
Development Bank Institute. Based on a study of the post-war east Asian 'miracle' economies that have
made the most startling progress in tackling poverty, the paper argues that economic success depends
on many factors. These include openness to trade and technology, macro-economic stability, labor
market flexibility, good economic governance and skills formation. However, it suggests that the
authoritarian nature of all the east Asian miracle economies - Singapore, Taiwan, South Korea,
Indonesia and Malaysia - helped foster good economic governance. 'W hen this experience is
juxtaposed against that of India, it appears that whereas democracies have been slow in grappling with
poverty, the authoritarian regimes in the miracle economies achieved spectacular success, the paper
states. The report, which reflects the personal views of its author, M.G. Quibria, rather than the
institutional stance of the ADB, is bound to reignite the debate about the connections between economic
and political liberalism. Western governments, the main shareholders of most multilateral aid
organizations, have long argued that democratization needs to proceed in tandem with economic
development. The paper acknowledges the complex relationship between political regimes and
economic governance. A democracy is not necessarily economically liberal, and an autocracy is not
always economically illiberal. The 'm iracle economies had fewer labor market regulations than most
modem democracies and boasted more flexibility. 'T h e advent of democracy and political pluralism
hinders the adoption of some programs and policies that were feasible in the absence of democracy, the
report states. 'In addition, in a democracy with a thriving civil society, the process of policy consultation,
adoption and execution is much more time-consuming and involves many more procedural formalities
than under an authoritarian regime. However, Surjit Bhalla, a leading Indian economist, said there was
no empirical evidence proving that autocracy necessarily promoted economic development. Indeed,
many autocracies in Africa and Latin America had been disastrous for economic growth. While India had
long championed political freedom, Mr. Bhalla said it had suppressed economic freedom, thereby
hampering its efforts to promote growth and alleviate poverty. The paper concludes that the lessons of
East Asias successful economic development cannot simply be transplanted elsewhere. Changes in the
global trading environment, the increased influence of the World Trade Organization, the development of
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information technology and civil society, and the greater mobility of capital mean that developing
countries today face very different challenges and policy options than existed in the 1960s.
Also cf. Asian values in Financial Times, Editorial," p. 14, Fri. Apr. 5, 2002: ...Bar-room bores
everywhere will tell you that dictators are good for economies. Just look at what General Augusto
Pinochet achieved in Chile. Didnt Mussolini make Italy's trains run on time? Contrast the performance of
Communist China and democratic India. Which country, I ask you has been the more effective in
promoting economic growth and tackling mass poverty over the past two decades? This crude theory has
received a somewhat more elegant exposition in a research paper published by the Asian Development
Bank Institute. It argues that the authoritarian nature of East Asias 'm iracle economies may well have
been an important contributory factor in the regions remarkable rise. East Asias hardmen were good at
creating efficient state bureaucracies and instituting stability. Moreover, the paper suggests, democracy
can even hinder economic growth. Messy politics can hamper good economic governance by making
labor markets inflexible, clogging up the decision-making process and slowing liberalization. But this is
not to suggest that autocracy p er se is good for economic development. Clearly, it is not. For every Lee
Kuan Yew guiding Singapore towards prosperity there is a Mobutu Sese Seko looting Zaire. The danger
of authoritarian regimes is that the absence of accountability and transparency results in a wasteful
allocation of resources and gross corruption. Suhartos Indonesia is a classic example of how an
autocracy at first promoted rapid economic development and then degenerated into an orgy of personal
plunder. In this sense, democracies may be slower to reach the right answers but they also produce
fewer wrong answers. They contain within themselves more self-correcting mechanisms..."
53. The debate over the economic openness in the industrial world could also find another counter
example in the case of EU. cf. Oxfam brands EU bloc as most protectionist by Guy de Jonquteres in
Financial Time, p. 3, Thurs. Apr. 11, 2002 (emphasis mine): The European Union has higher barriers
than any other large industrialized economy to imports from developing countries, despite its move last
year to open its market to products from the very poorest nations, according to Oxfam. A report by the
international aid agency ranks the EU ahead of the US, Japan and Canada on the basis of 10 measures
of trade protection. It accuses the four powers of practicing 'double standards by urging poor countries to
liberalize, while keeping their own markets closed. It finds that the E U s Everything But Arms Initiative,
providing free access to imports from the 48 poorest countries, does not compensate for the impact of
remaining barriers, including high tariff peaks, farm subsidies, textiles protection and anti-dumping
measures. W hile the report broadly accepts that liberalization can benefit developing countries, it argues
that it does not invariably do so and that the multilateral trade system is weighted against their interests.
It challenges recent findings by World Bank economists that economic openness stimulates growth,
saving some developing countries that have dismantled their trade barriers rapidly have reduced poverty
more slowly than others that have liberalized only gradually. The report says that the International
Monetary Fund and World Bank should stop making loans conditional on countries dismantling trade
barriers and give them more credit for their past liberalization efforts. It also calls for a comprehensive
ban on farm export subsidies, stronger national enforcement of core labor standards, tougher
international antitrust enforcement and less stringent application of the agreement on trade-related
aspects of intellectual property (Trips) to developing countries. The report is linked to the launch of a
three-year international campaign by Oxfam aimed at reforming the multilateral trade system and other
policies affecting developing countries economies.
Also cf. The lost (half) decade - Five years after East Asias financial crisis, much of the region seems
to be doing fine. But it still needs banking and other reforms in The Economist, Special report - East
Asian economies, pp. 65-7, July 6th, 2002: ...a t least East Asia no longer seems quite so dependent on
outside forces to keep it flying. The end of Americas run away expansion, marked by a drop in
technology investment, has not hammered the region as hard as many feared. That is partly because
Asias crisis-stricken economies are rebuilding trade with each other. Although Japan remains comatose,
rapid growth in Chinas relatively small trade is adding to demand. These trends have helped exports to
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rebound from their drop in 2001. So far this year they have risen by more than 20% in localOcurrency
terms in South Korea, Malaysia and the Philippines, according to David Fernandez, a regional economist
at J.P. Morgan in Singapore. Mr. Fernandez reckons that growth in exports will soon slow, as demand for
business investment remains weak. His bank forecasts only 6% growth in global capital-equipment
spending over the next 18 months, two-thirds the growth rate of the late 1990s. Yet many East Asian
economies, notably South Korea, have been offsetting America's downturn in another way, by booking
impressive growth in domestic consumption. This combination of local and intra-Asian demand has
bolstered confidence amid the global slowdown, and portfolio capital continues to flow in. Even as
bourses in Europe and America have slid, some Asian stock markets have charged ahead...Even so,
East Asias export orientation and high investment proved more successful, over several decades than
the protection or profligacy that some other emerging-market governments, for instance in Latin America
or India, espoused. Nor should the East Asians fret over China's recent success at attracting the dragons
share of foreign investment. It could yet abate, as it has in many other regions (including emerging Asia)
that seemed perennial magnets. Still, without questioning their commitment to free trade, many East
Asian business and political leaders are wondering how much they need to modify the rest of their
economic model...South Koreans East Asian neighbors have noticed its recent success. Yet there is a
danger that they will draw the wrong conclusions, emulating the changes least relevant to their condition.
South Koreas booming domestic economy has clearly helped cushion it from the global downturn, and
given its consumers and workforce fresh confidence. But it was an all-out effort to reform the financial
system that triggered the change, not the other way round. Meanwhile, without having fully cleaned up
their own bad-debt mess, several of South Koreas neighbors are hoping to bypass the pain and give
their own domestic economies as a direct boost...For South-East Asia, trade, especially intra-regional
trade, still offers the best way forward. In this context Chinas rapid growth should be a blessing, not a
threat.
54. cf. Asia looks to its domestic market to drive growth in exports - It may take some time but Asians
hope to avoid weaker western demand by building strong local outlets by Rahul Jacob in Financial
Times, p. 7, Tues. Oct. 8, 2002: ...Indeed, the dramatic change in consumption patterns across the
region has prompted some economists to argue that Asias domestic growth could provide an alternative
engine of growth to exports for the regions economies if the global economy stalls. Jim, W alker, an
emerging markets brokerage in Hong Kong, has turned this debate on its head by suggesting that
developing Asia's consumer juggernaut could eventually become an engine for global growth. 'The axis
of global growth is about to swing eastwards. This particular Asian upswing will be a driver of growth for
the US and Europe rather than the other way round...a s the likelihood of a slowdown in the developed
world grows, other economists have been arguing that Asias domestic demand is still too small to
insulate it from a hefty drop in global G D P growth. They argue that China, for instance, is still too small
to provide a substantial; market for Asian exports. 'Asian domestic demand accounts for just one-fifth of
total non-Japan Asia export growth and continues t play second fiddle (to its exports) in the current
cycle, says Sun-Bae Kim, an economist with Goldman Sachs. Mr. W alker bases his optimism on a
number of factors. The first is that Asians for the first time in three decades are being encouraged --
'rather than actively discouraged - to spend instead of save. There has been a property boom in
countries such as Thailand and South Korea, driven in large part by a housing finance boom. Producers
in turn will respond to such signals from the market and their investment will be more market- than
government-led as in the past and more efficient as a result. Low interest rates on bank deposits and
rising consumer confidence throughout the region are prompting Asians to spend more on everything
from cars to concert tickets, he says, pointing to a jump in Ticketmaster sales in Thailand, for
instance...These trends amount to a seismic shift where bullish consumers look around and mimic the
extravagant spending around them. Mr. W alker made his bold prediction that Asia would be a new center
of global growth...The increase in domestic demand in Asia is hard to dispute but most economists say it
is too early for it to provide a real buffer against dips in global demand. The simple reason for this is that
'Asias share of world trade is much larger than its share of world G D P , says Prasenjit Basu, an
economist with CS First Boston. Mr. Kim says the recent jump in intra-Asian trade is largely explained by
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the increase in processing and assembling trade of electronics, for instance, through China on goods
destined for developed world markets. The relative size of developing Asias domestic demand is still
small in the global context, at roughly a quarter of that of the US and the European Union, says Mr. Kim
Even accounting for the large underground economies in many Asian countries and the growth in
domestic demand, this difference in spending power suggests it will be some time before the axis of
global swing east.
55. cf. Trade in Asia - Every man for himself: Slow progress on regional trade liberalization in East Asia
is prompting a spate of bilateral deals in The Economist, p. 43, Nov. 2 nd, 2002: Trade in paper and ink,
at the very least, must be booming in South-East Asia, given the number of commercial agreements the
countries of the Association of South-East Asian Nations (ASEAN) are busily signing. On November 4lh,
at a summit in Phnom Penh, they are due to unveil a framework deal to achieve free trade with China by
2013. At the same time, they will make a declaration about strengthening trade with Japan, hold their first
summit with India (with trade high on the agenda) and publish a report about integrating the economies
of 'ASEAN+3," which ropes in China, Japan and South Korea...And on January 1 next year, the
A SEAN Free Trade Area (AFTA) will come into full force among the six original members of ASEAN:
Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Ironically enough though, this
frenzy of deal-making may actually signal a loss of momentum towards free trade in the region. To
varying degrees, South-East Asian governments all accept the logic of cutting tariffs and promoting
trade. As a relatively open, stable and low-cost manufacturing base, ASEAN used to attract much export-
oriented investment. But the Asian crash of 1997, and the instability that followed, reduced the region's
appeal, while investors stampeded off to ever more welcoming China. Since then, ASEAN governments
have accelerated their effort to forge a common market among their 500m citizens, both to lure back
foreigners and to discipline their domestic industries. AFTA, which caps intra-ASEAN tariffs at 5%, marks
the culmination of this effort. Despite their consensus on the benefits of free trade, however, A FTA s
members do not trust one another enough to streamline the current system, nor to negotiate collective
deals with outsiders. Hence the bewildering array of overlapping protocols and compacts. Take AFTA
itself. Trade among its members has doubled over the past ten years, thanks in large part to tariff cuts.
The main logic of cuts and the pact ought to be to consolidate the regions industries and thus make
them more competitive internationally. Yet the few exceptions to the tariff-cap regime are generally used
to protect the most inefficient businesses...Whats more, efforts to draw up shared procedures and
standards for imports lag far behind tariff cuts - even though such non-tariff barriers constitute the
biggest drag on trade in the region, according to a recent World Bank study. Nor is there is any
independent agency, akin to the European Unions commission, to adjudicate disputes between
members. Indeed, A FTA has no enforcement mechanisms whatsoever...Even the new China pact will
entail special exemptions and varying timetables for the different ASEAN members, albeit under a
shared fram ew ork...O f course, the deal is in A SEAN s best interest anyway: trade with China has grown
threefold over the past decade, with ASEAN running a healthy surplus. This boom is helping to lessen
South-East Asias dependence on exports to America, Europe and Japan, which are stuck in the
doldrums. The prospect of duty-free exports to China will doubtless persuade some of those flighty
investors to return to ASEAN. The proposed free-trade area, after all, would be the worlds biggest, with
some 1.7 bn consumers. The hope is that the benefits of even the initial 'early harvest of Chinese tariff
cuts to be announced in Phnom Penh will inspire ASEAN to redouble the pace of integration and trade
liberalization...
Also cf. Asian economies defy world woes as local trade booms by Rahul Jacob in Hong Kong in
Financial Times, p. 5, W ed. Aug. 7, 2002 (emphasis mine): ...rising exports coupled with a surge in
personal consumption in country such as China, India, Korea, and Thailand are powering gross domestic
product growth. Goldman Sachs is predicting G D P expansion of 7.5% this year in China, 4% in Thailand
and 5.8% in Korea. The conventional wisdom - that when the US sneezed. Asia caught pneumonia - is
being revised. The rebound in Asian economies in the face of weakness in the developed world has been
driven in lame part bv the increase in intra-reaional trade. Richard Elmam, the chief executive of Noble
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Group, a global commodities trading firm based in Hong Kong, points to the projected rise in steel
production in China from 143m tones last year to 160m tones this year. To produce that much steel,
China is expected to import about 100m tones of iron ore with the main beneficiaries being Australia,
Brazil and India. 'Asian dependence on the US (economy) remains substantial, but there have been
tremendously lame movements in Asian trade. Mr. Elman says. In fact, the shift in Asia over the past
several months has been that consumers have become a source of growth in their own right. Last year,
personal consumption expenditure in the Asian-Pacific region totaled $4,800bn, against $5,000bn in the
EU. Economists also point out that a closer reading of Asias strong intra-regional trade numbers
suggests there is a lot of passing back and forth of electronic exports, for instance, for the purposes of
processing and final assembly in places such as China, before these products are exported to the US
market. Exports tracked on a sequential quarter-over-quarter basis, which better highlights shifts in
economic momentum, in Korea and Taiwan rose 10.2 and 5.2% in May respectively. While Koreas
figures were weaker than expected in June, Taiwans exports on a rolling quarter-over-quarter basis grew
a staggering 2 0 % ...This growth in personal consumption is a broad-based pan-Asian phenomenon. It is
also growing in China and in India, which recorded an increase of 8.4% in sales of consumer goods in
May. The wheel is now coming full circle, with Asian growth showing up in the income statements of
some global multinationals. Earlier this month, Coca-Cola credited strong growth in China and India for
its second-quarter increase in turnover of 15%. Its sales jumped 25% in India and 18% in China.
56. This trend of increasing intra-regional trades has been attributable mainly to the growing FTA (Free
Trade Agreements), often in form of bilateral agreements, within a region and across the regions, cf. As
countries clamor for bilateral agreements, the prospects of creating a truly open global economy recede
- Governments willingness to use trade pacts to cement diplomatic ties and forge alliances risks slowing
the momentum behind multilateral trade talks by Guy de JonquiSres in Financial Times, p. 11, Tues.
Nov. 19, 2002: ...Bilateral and regional trade arrangements are not new: the European Union, the
biggest, dates back to 1957. The W TO , which lacks effective powers to police FTAs, estimates almost
half of world trade now occurs between countries belonging to them. That proportion looks set to rise
further as the fashion sweeps across the world. Nowhere has interest developed faster than in East Asia,
where most countries until recently spumed FTAs in favor of the W T O . The pace has been set by
Singapore, which has done deals with countries including Japan, New Zealand and Switzerland - and will
soon conclude one with the U S ...fear and insecurity are the driving force behind FTAs. Other factors
have played a role. One is the sense of vulnerability created by Asias 1997 financial crisis, which
prompted countries to seek closer regional ties. Others include frustration at slow progress in the W T O
and at being left outside groupings such as the European Union and North American Free Trade
Agreement. But the most powerful stimulus today is the economic ascendancy of China. The countrys
surging success as a manufacturing center and one of the world's top destinations for foreign investment
has sent tremors through its neighbors, which fear it will drain away their jobs and exports. This month,
China and the 10 members of the beleaguered Association of South East Asian Nations (Asean) agreed
to try to create a free trade area by 2010. For Beijing, the project is an opportunity to strengthen its
regional influence; for its partners, it offers a new channel for diplomatic dialogue with China and the
prospect of preferential access to its vast market. By proposing the negotiations, Beijing has trumped
Japans overtures to other countries in the region. In addition, it has jolted India, which sees itself as
Chinas rival for Asian leadership but until now has eschewed bilateral deals, into proposing its own FTA
with Asean. The US has also joined the fray by holding out the prospect of trade talks with Asean
members. Washingtons enthusiasm for bilateral deals is almost as recent as Beijing's - and even more
vigorous...many US businesses are ambivalent about how much is to be gained from further deals,
particularly with relatively small and geographically remote countries,. Few exporters are ready to turn
down the chance of besting foreign competitors by gaining preferential access to foreign markets. Yet
they also worry that a worldwide network of separate agreements could work against them. 'Bilateral
FTAs are a two-edged weapon, says Caiman Cohen, head of the Emergency Committee for American
trade, a free-trade business group. 'They offer the prospect of expanded trade and investment. But if
their provisions are mutually inconsistent, they create a more difficult trading environment. One of the
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biggest challenges facing future FTAs is how to deal with agriculture, the last great bastion of
protectionism...Agriculture is an even bigger stumbling block for countries with more highly protected
markets, as Japan has discovered. In an effort to make itself a more attractive partner, Tokyo has
recently said it will include the sector in bilateral trade talks...Even when bilateral agreements do
dismantle import barriers, they almost invariably create other obstacles to trade. For companies shipping
products between countries belonging to different FTAs, complying with their divergent standards, duties
and rules of origin - regulations used to determine where the products were made - can be an
administrative nightmare. 'It is logical to conclude that the rapid proliferation FTAs is adding to the costs
of doing business. It is hard just working out which regulations and tariffs apply, says Mary trace of the
National Foreign trade Council, which represents 400 large US exporters. Indeed, the sheer complexity
of bilateral deals is one reason hwy the EU, which has long practiced them as a surrogate foreign policy,
has recently had second thoughts...Among industrialized countries, the US imposes steep duties on
imports such as clothing and footwear, which are fiercely defended by powerful produce lobbies. In many
other developing countries, such as India, tariffs are even higher. Some observers fear the growth of
FTAs will make it even harder to remove such barriers in the Doha round by distracting political attention
and straining negotiating capacity...Even some officials in the US, which has more trade negotiators than
any other country, say Mr. Zoelicks [US trade representative] ambitious agenda will stretch their
resources to the limit...As Ms. Irace of the National Foreign Trade Council puts it: 'The challenge for the
multilateral trade system is to prove its relevance.
Also cf. Southeast Asia starts to flinch at trade with China by Tom Wright in The Wall Street Journal,
A16, Mon. Dec. 2, 2002: ...T he Association of Southeast Asian Nations, or Asean, signed an agreement
with China in early November to work toward creation of a free trade area covering 1.8bn people by
2010. That agreement promises to give Southeast Asian exporters access to Chinas growing middle
class, an important alternative to the US markets on which they have long depended. Already, Chinas
importance as a trading partner with Aseans six major economies plus Taiwan and South Korea grew
50% in the first half of this year, according to the World Bank. Meanwhile, exports to the US and Japan
are flat, the World Bank s aid ...
57. Our position is essentially backed by Joseph Nyes arguments, which criticized those theories of
realism popular in political science and argued for breaking down realist intemational-relations theory,
more specifically, into three realms of power - a political-military realm (uni-polar), an economic realm
(multi-polar), and a cross-bordered realm of transnational relations beyond government control (multi
polar). These three realms combined together can analyze the multi-dimensional interactions of complex
international relations of power distribution and explain those practical changes in realities, cf. The New
Rome meets the new barbarians - The United States is likely to be the worlds top power for many years.
This brings challenges that it should not try to face alone, writes Joseph Nye in The Economist, pp. 23-
25, Mar. 23, 2002 (emphasis mine): ...A number of adherents of 'realist intemational-relations theory
have also expressed concern about Americas staying-power. Throughout history, coalitions of countries
have arisen to balance dominant powers, and the search for traditional shifts in the balance of power and
new state challengers is well under way...Although realists raise an important point about the leveling of
power in the international arena, their quest for new cold-war-style challengers is largely barking up the
wrong tree. They are ignoring deeper changes in the distribution and nature of power in the
contemporary world. Three kinds of power. At first glance, the disparity between American power and
that of the rest of the world looks overwhelming. In terms of military power, the US is the only country
with both nuclear weapons and conventional forces with global reach. American military expenditures are
greater than those of the next eight countries combined, and it leads in the information-based 'revolution
in military affairs. In economic size, Americas 31% share of world product (at market prices) is equal to
the next four countries combined (Japan, Germany, Britain and France). In terms of cultural prominence,
the U S is far and away the number-one film and television exporter in the world. It also attracts the most
foreign students each year to its colleges and universities. After the collapse of the Soviet Union, some
analysts described the resulting world as uni-polar, others as multi-polar. Both are wrong, because each
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refers to a different dimension of power that can no longer be assumed to be homogenized by military
dominance. Uni-polarity exaggerates the degree to which the U S is able to get the results it wants in
some dimensions of world politics, but multi-polarity implies, wrongly, several roughly equal countries.
Instead, power in a global information age is distributed among countries in a pattern that resembles a
complex three-dimensional chess gam e. On the top chessboard, military power is largely uni-polar. To
repeat, the US is the only country with both intercontinental nuclear weapons and large state-of-the-art
air, naval and ground forces capable of global deployment. But on the middle chessboard, economic
power is multi-polar, with the US, Europe and Japan representing two-thirds of world product, and with
Chinas dramatic growth likely to make it the fourth big player. On this economic board, the US is not a
hegemon, and must often bargain as an equal with Europe. The bottom chessboard is the realm of
transnational relations that cross borders outside government control. This realm includes actors as
diverse as bankers electronically transferring sums larger than most national budgets at one extreme,
and terrorists transferring weapons or hackers disrupting Internet operations at the other. On this bottom
board, power is widely dispersed, and it makes no sense to speak of uni-polaritv. multi-polaritv or
hegemony. Those who recommend a hegemonic American foreign policy based on such traditional
descriptions of American power are relvino on woefully inadeouate analysis. W hen you are in a three-
dimensional gam e, you will lose if you focus only on the top board and fail to notice the other boards and
the vertical connections among them ...W hile potential coalitions to check American power could be
created, it is unlikely that they would become firm alliances unless the U S handles its hard coercive
power in an overbearing unilateral manner that undermines its soft or attractive power -- the important
ability to get others to want what you w ant...Soft power is particularly important in dealing with issues
arising from the bottom chessboard of transnational relations. The real challenges to American power are
coming on cats feet in the night and, ironically, the temptation to unilateralism may ultimately weaken
the US. The contemporary information revolution and the globalization that goes with it are transforming
and shrinking the world. At the beginning of this new century, these two forces have combined to
increase America power. But, with time, technology will spread to other countries and peoples, and
Americas relative pre-eminence will diminish... Also cf. Joseph Nye, 2002: The Paradox o f American
Power: why the worlds only superpower cant go it alone. Oxford University Press. 2002.
Thus we ought to avoid a uni-dimensional focus on the change of the regime (on the top board), while
ignoring the multi-dimensional changes of the reality (on the bottom boards) and the vertical connection
between regime and reality.
Also cf. Christopher Chase-Dunn et al. 2002: W e understand structural globalization as composed of
different inter-related dimensions of expanding and intensifying interaction networks - especially political,
economic and cultural globalization (Chase-Dunn 1999). W e specifically reject the notion that these
dimensions constitute completely different aspects of social reality that should be studies separately by
different academic disciplines, but we contend that it is useful to distinguish between them in order to
understand how they have affected one another...The world-systems perspective has long pointed out
that the interstate system -th e system of sovereign national states - is only one institutional structure of
the global political economy. The worid-system is composed of individuals, households, towns, cities,
regions, firms, classes, states, and other non-govemmental and international organizations. It is not
simply a m atter of 'international relations. The worid-system is the whole system, not just relations
among states. Transnational relations occurring across state boundaries between all these social actors
are not a new, or a recent, phenomenon. Intersocietal migrations and trade among individuals, families
and firms have been important aspects of small, medium and large world-systems for thousands of
years... If we think of the world economy as a system the phenomenon of globalization should represent
increases in the intensity of global interaction networks relative to the intensity of local interaction
networks...
58. cf. Asian values in Financial Times, Editorial, p. 14, Fri. Apr. 5, 2002: ...The fascinating aspect of
the east Asian miracle is why, by and large, the region's authoritarian bosses did not indulge in massive
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rent-seeking. It could have been that these leaders were motivated by factors other than personal
enrichment...Arguably, the more important distinction to be drawn for development is not the one
between democracy and autocracy but that between political and economic freedom. As Deng Xiao-ping
argued, it does not matter whether the cat is black or white so long as it catches mice. But I want to add
my arguments here that China might not be an authoritarian regime anymore in its current transition. All
we might need to look at are institutions on the meso- and micro levels. Similarly, if we wonder if China
could succeed in its economic liberalization, we might want to look at such institutionally-related factors
as flexibility, institutional learning, labor market regulation, capital mobility, incentives for information
technology, etc.
59. cf. Anti-communism in alliance with Japan - An inappropriate commitment by Liu Zheng-fan in
World Journal Daily (Chinese language), A5, Sun. May 19, 2002: ...the mainland of China right now only
has a 'communist regime without communist reality. China now is fully committed to capitalism, the
capitalism that is even more capitalist than capitalism.
Also cf. O f laws and men" in The Economist, pp. 15-7, Survey: Asian Business, April 7th, 2001: The
crux of the problem is that 'governance cant improve faster than legislation, but legislation cant move
faster than social practice, says Jerome Cohen, a New York lawyer who advises foreign clients on doing
business in China...best practice within companies depends on best practice outside companies, above
all in the legal system...In the 1980s and 1990s, China went a long way towards filling this void.
Milestones included new statutes for property, companies, contracts and bankruptcy...The Communists
understand that their political survival depends on the success of their economic reforms, and that this
requires fixing the legal system; but they have also grasped that fixing it means making the judiciary
independent, and that such independence will allow the judiciary to turn against the party..."
60. In the current mainstream of social sciences, regimes, so-called, are grouped into capitalist regimes,
socialist regimes, and quasi-capitalist regimes. Economies are grouped as North American, Europe, East Asia,
and China, geo-institutionally-based. Discourses as well as capital flows are grouped as more symbolic and
cross-bordered, or borderless.
61. Sociological institutionalism assumes that institutional analysis enables one to explain the dilemmas
of institutions in specific contexts and to search for institutional dynamics driving transitions. Here I would
like to add C. Lanes warning in 1995 of the limits of the New Institutionalism, which is preoccupied with
the persistence of institutions, while ignoring those tensions among institutions and organizations. Lane
attempts to integrate the New Institutionalism with a Marxist approach. I do not perceive these two
streams - persistence or conformity and tensions - as insurmountably contradictory or irreconcilable.
Rather, I think both could be further integrated within the terrain of the New Institutionalism. Lanes
critique implies that social dynamics reside in contradictions, tensions, or/and struggles. But in the New
Institutionalism, both persistence and tension can be treated as conditions and dynamics of institutions
[ibid. p. 11 (emphasis mine): New institutionalists do not want to rule out change within organizations
and attribute it mainly to the impact of external shocks. But their understanding of institutions as self-
perpetuating and self-reinforcing structures, together with their notion of actors and interests as being
constituted by institutions, makes their new emphasis on change problematic and unconvincing. The
emphasis on common understandings and conformity downplays conflicts within organizations and
hence eliminates one dynamic of organizational change. It does not probe the possibility that some
actors benefit more than others from the perpetuation of institutionalized practices. Also the exclusive
focus on external shocks as sources of institutional change neglects their impact on power relations
within organizations and the creation of new maneuvering space for various groups of actors.
Opportunities for change may be created by external shocks but actual implementation of such change
necessitates the mobilization of internal actors in support of such change. Both differential power and
interests within organizations and 'the active political side of the story need more attention, as DiMaggio
and Powell freely admit (1991: 30-1).].
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62. Also cf. J. Scott 1998, p. 351 (emphasis mine): "..all socially engineered systems of formal order are
in fact subsystems of a larger system on which they are ultimately dependent, not to say parasitic. The
subsystem relies on variety of processes, frequently informal or antecedent - which alone it cannot
create or maintain...The market is itself an instituted, formal system of coordination, despite the elbow
room that it provides to its participants, and it is therefore similarly dependent on a larger system of
social relations which its own calculus does not acknowledge and which it can neither create nor
maintain. Here I have in mind not only the obvious elements of contract and property law, as well as the
state's coercive power to enforce them, but antecedent patterns and norms of social trust, community
and cooperation, without which market exchange is inconceivable. Finally, and most important, the
economy is 'a subsystem of a finite and nongrowing eco-system, whose arraying capacity and
interactions it must respect as a condition of its persistence.'"
Also cf. Margret Somers 2001: Public Lecture in Madison, Apr. 24, 2001, sponsored by Haven Center,
Sociology, UW-Madison.
63. Neo-classical economics assumed all transitions would follow the same trajectories looking for
efficiency solutions through re-privatization and political liberalization. Speaking about liberalization,
average Russian in a recent poll identified one of its major advantages being the permission to travel
overseas (cf. Financial Times, p. 2, W ed. Dec. 15, 1999: Most Russians believe in competition and a
rejection of Soviet-style protectionism and state control in spite of the impact of the financial crisis in
August last year...Russians consider the freedom to travel abroad to be the most important democratic
principle, followed in importance by the elections, critical media, the right to strike and the chance to
resolve conflicts with the authorities in courts...). Yet in the West, for instance, the so-called
liberalization (also dubbed as Reaganism or Neo-Liberalism popular during the Reagan Administration in
the 1980s) was often thought to refer to meaningful global action quite sensitive to deregulation of
financial services (mainly consisting of banking, insurance, and securities) that would allow foreign
insurers and capital investors access to the domestic equity market, medicare, and security or property
ownership. While this is becoming a debating point even in those market economies, however, it has
certainly increased uncertainty in the financial sectors of those transitional economies and newly
emergent markets where financial and market institutions remain quite premature or in the early stage of
institutional development. Yet it is intriguing to see that along with its ongoing institutional reforms in
breadth and depth (particularly after making a deal with the US to join W T O ), Beijing began to award
foreign insurance companies with licenses for access to its financial and equity markets (cf. Financial
Times, p.16, Fri. Dec. 1 6,1 99 9 : Sun Life Assurance Co, the Canadian insurance company, became the
first of four foreign insurance companies awarded licenses in April to announce a business play...The
company said it has agreed to forge a 50-50 life insurance joint venture with China Everbright Group, a
diversified financial institution involved in banking and securities but not yet in insurance. Everbright is
also set to take a 21% stake in a Hong Kong based insurer led by Standard Life of the UK, executives
said yesterday...Sun Life and Everbright are in negotiations to form a joint venture mutual fund...Interest
among foreign insurance firms in establishing mutual fund businesses in China has surged since the
China Insurance Regulatory Commission (CIRC) provided approval last month for insurers to invest
premium income in domestic stock markets. This was seen as a back-door relaxation of a prohibition on
foreign companies investing in Chinas domestic A-share market. The first chairman of the company will
be a China Everbright representative and the first general manager will be nominated from Sun Life...).
64. In this matter, I have a different view from Weber's, who perceived the genesis and the development
of capitalism to be more or less by chance, cf. Weber 1968 Economy and Society.
65. This is parallel to the Western Newly Institutionalist attention on legitimacy that has shifted from the
legitimacy of a particular state authority toward its institutional rules and procedures for making policies
and decisions based on citizenship and civil participation, cf. T. R. Tyler 1990, p. 27: "More recently,
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researchers in political science, sociology, and policy studies have shifted their attention away from
theories of the state and issues of legitimacy and toward citizens' assessments of the benefits and
burdens of participation in society. The assumption that legitimacy is an important element in the
exercise of authority has however remained an essential element in theories of the relationship between
citizens and legal authorities." p. 29: "The basic distinction for our purposes is between the legitimacy of
particular authorities and the legitimacy of the institutions or procedures of government. Easton refers to
the latter type of legitimacy as 'diffuse' support for the system, that is, support accorded the procedures
and institutions of government. He distinguishes it from support for particular incumbent authorities and
their decision and policies, which he calls 'specific' supports. Legitimacy can reside either in a person
who occupies a position of authority or in an institution."
One reason to address institutions is that they are in close proximity to social normativeness. This is
particularly important in the sense that even when a large environment has changed, the normativeness
may remain relatively stable without a drastic shift. Such separation or persistent dyssynchronization
provides "support for institutions and procedures" that, to a great extent, influences the effectiveness of
the governance and economic efficiency during transition and makes a difference across transitional
economies. Such normativeness comes from lifelong socialization of beliefs under pre-arranged
institutional settings. Once established, it becomes "a long-term affective predisposition" to the changing
institutions and environment during transition. It would be eroded by "repeated experiences of unfairness
and eventually replaced only until the maturation of the new type of normativeness (cit. from Tyler 1990:
177). p. 30: "normative judgments could be distinct from judgments of short-term self-interest without
representing enduring values...If enduring values are the residue of socialization, behavior will be guided
by underlying normative values and will have a consistency from one situation to the next: it will not
change as the immediate environment changes...The 'cushion of support' provided by diffuse support
[i.e., normativeness] is...not an absolute protection for authorities; it may, however, be an important
element in their ability to function effectively as leaders in most situations." p. 161: This study
emphasizes the importance of the normative perspective, which focuses on the values that lead people
to comply voluntarily with legal rules and the decisions of legal authorities. Such values, if they exist,
form a basis for the effective functioning of legal authorities. This is especially true of legitimacy - the
belief that one ought to obey the law. If normative values are absent, authorities must use the
mechanisms of deterrence that stem from instrumental control of rewards and punishments."
66. To rectify the deficiencies of methodological reductionism, researchers might need to focus more on
critical and specific institutional dimensions for meso- and micro-analyses. In reality, the institutional
underpinnings are much more sensitive to those practical settings and vital contexts than those opaque
and narrower conceptions that the methodological reductionists insist on. In so doing, we can find more
feasible and useful alternative institutional forms for cross-national comparisons with both transitional
economies and market economies. In contrast, however, some early institutional studies of transitional
economies made holistic comparisons with little regard to derivation from the different contexts across
societies. As an alternative to methodological reductionism, I would like to propose a New Institutional
Historical Comparison (NIHC). The new approach permits institutional analysis to tap variations in
modem institutions, such as different hierarchical forms across economic sectors, industries, and nations
and to examine them as institutional arrangements relative to particular contexts or as mutants evolving
from these contexts in response to changing environments. Thereby the NIHC can address issues across
transitions more adequately at meso- and micro- levels, just as the new institutionalism had done when
comparing market economies (cf. Whitley 1992, 1994; Powell and DiMaggio 1991). This could open a
new direction for the institutional discourse on transitions (For example, we might take a coordinative
mode of governance into consideration, inquiring how to choose and denote its socially appropriate
mode, relative to certain contexts, historical and cultural. As we shall discuss in Section 5.31, Chapter 5,
some transitional economies are more likely to be authoritatively coordinated by virtue of hierarchy than
others [formality], while others might support market coordination or network trust cooperation, which are
culturally-bent, family-oriented, and personally-related [informality]. The differences could be seen as
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differential responses to the organizational failures in the erstwhile planning economies, as much as to
market failures in market economies. These alternative modes could help us further discern institutional
mechanism in differential forms, such as hierarchy, network, market, or those beyond, insofar as they all
generally concern the nature of economic activities and deal with the issues of efficiency, flexibility,
legitimacy, and other challenges of managerial complexities in economic transition. When we carry out
such a comparison on specific coordinative modes or hierarchical forms in transition, it enables us to see
variations in reforms and mutations across transitional economies. Thus we could decode them or break
them down for analysis, rather than treating market vs. state/hierarchy as two different totalities requiring
the support of one by jettisoning the other).
Generally, a cross-systemic comparison is more likely to require a check of regime changes, whereas a
cross-border comparison is more likely to require a check of reality changes. Williamson himself stated
(1994) that
...m ere critique of orthodoxy and mere assertions that institutions matter are not enough.
but must tell economists something that they did not know in this new field and display its
logic, and demonstrate the data line up (emphasis mine).
According to Lant and Baum (cf. Theresa K. Lant and Joel A. C. Baum 1996, pp. 15-6; emphasis mine),
The roles of individual and collective cognition in the institutionalization of organizational

beliefs and actions have a long history (Selznick 1957; Zucker 1977). However, much of
the recent work in institutional theory has emphasized the macrosociological foundations
of institutionalization. 'There has been little effort to make neoinsituttiionalism's
microfoundations explicit...Most institutionalists prefer to focus on the structure of
environments, macro- to microlevel effects, and the analytic autonomy of
macrostructures (DiMaggio & Powell, 1991, p. 16). Recent work, however, has called for
a reemerqence of the role that microprocesses have in creating macro-level phenomena
It is important...to develop a social psychological underpinning in order to highlight both

gross differences between institutional and rational-actor models, and more subtle
departures from established traditions in sociology and from such approaches to
organizational analysis as resource dependence and strategic contingency theories.'
[DiMaggio & Powell 1991, p. 16] (ibid.).
Here microfoundations refer to social actors as managers cognition and shared beliefs of the meanings
of their actions (ibid, 16-7).
Also, cf. P. David 1994, p. 217: 'T o sum up,...the many specific instances of path dependence involving
institutional changes and their influences in economic history are understandable in terms that rather
closely parallel the fundamental microeconomic conditions which I have identified elsewhere (see David
1985, 1988, 1993b) as underlying the positive feedback dynamics typical of path-dependent processes
involving technological evolution.
The New Institutional scholarship of transitional economies has just undergone a parallel experience
taking microprocesses of institutions into account for macro-institutional phenomena, searching for
answers to the macro-institutional issues on transitions.
67. Those dilemmas are essentially rooted in underlying ambiguous and blurred areas in which only
institutional analysis provides an adequately broad research angle. That research angle enables one to
focus on a wide span of data including firm attributes, intra- and interorganizational fields and
relationships, and associated interactive contexts including institutional and larger environments and
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historical origins. These data have direct relevance for institutional survival and competition.
68. In this regard, I think Harrison C. W hites 2000 conception of parameterization addresses somewhat
similar ideas, attempting to frame a meaningful social world, though he builds his contentions on his
vocabulary of natural sciences, mathematical modeling, and socio-linguistics, and though he opposes a
notion of theories of middle-range order. To my understanding, if starting from natural sciences to
design and organize the terminology for the social sciences, the concept of parameterization" could help
construct the social world, then the concept of institutionalization (Zucker 1977) from economics could
help construct generic sociology. Institutionalization might even be considered the parameterization of
institutions. cf. Harrison C. White, Pp. 508-9: ...A key role is played by a parameter for substitutability.
This is a single number whose deviation from unity reflects the feedback between competing tendencies
to growth, exponentiated. I call it gam m a...Social networks are one, still primitive initiative toward
conceptualizing the analogue[s] of space for socio-cultural process. Central to this network effort is the
concept of structural equivalence, expounded in Ronald Burts works, which is surely as distinctive for
the socio-cultural spaces as dimensionality is for the physico-bio-chemical spaces. Other such
constructs, ones more combinatory and stochastic, also are central and also are handled differently from
in other sciences...Cross-cutting, not cumulation, is the central moment. Contingency characterizes
social time, not as an arena for resolution into outcome but instead for the emergence of a theme that
will re-emerge again and again, both in interactive fact and by interpretive construction...The so-called
micro-macro gap is an optical illusion of trying to visualize socio-cultural process through natural science
framings. 'Middle Range Order is what is supposed to be missing. But this vision is on physical, metric
space and time. There is no such 'middle range order for socio-cultural process, which instead is
concerned with interpenetrations that are at once micro and macro." Also cf. Harrison C. White, 1997, p.
1060: ...It is more important to defuse present boundary constructs, beginning with culture and society.
Processes are local, stochastic, and historical, within heterogeneous 'spaces in which social networks
are inextricably involved in situations with strands of interpretation to form netdoms. Persons are late
byproducts of histories in which agency is found in interactions among netdoms. For the sociocultural,
envelope and level and duality and mappings stand in for boundaries, which obtain only vis a vis the
ecological and perceptual contexts. Switchings build from the ecological to include the sociocultural, and
the discourse so generated influences subsequent development as it itself is shaped...
Also cf. Zucker 1977, p. 728: "Unlike many of the earlier approaches, institutionalization is defined here as a
variable, with different degrees of institutionalization altering the cultural persistence which can be expected."
69. See our discussions in Chapters 2 and 3. Formality here could refer to the functions of the formal
sectors, i.e., those sectors in the public with explicit codifications of market and hierarchy as well as those
institutions "proximate" to market and hierarchy that assure the codifications (such as legitimate business
contracts) for hedging off uncertainties and risks in market transactions, bureaucratic regulations, legal codes
and settings, etc. For example, formality becomes growingly salient in Chinas current transition, as those
institutional changes and mutations are palpable evidently. In reality, parallel to the spawned network relations
and widespread information diffusion in transitional China, public attentiona has increasingly called for formal
codification for rational-legal bureaucracy and the rule of law, as shown in increasing formal/legal links of
economic organizations and operations among those non-SOEs and non-private enterprises, like COEs, TVEs,
etc., and particularly among private firms like joint ventures (JVs) with foreign capital. The robust momentum
dealing with the changing legal environment and the growing engagement in capital internationalization during
Chinas transition comes from the larger scaled marketization.
70. Sub-figure 1 is about a cross-systemic comparison, showing how the state socialist planned
economies had excluded market competition and antagonized market economies and had thus retarded
their opportunities for development. Hence their transitions had to call for structural transformation
commanded and orchestrated by the state socialist hierarchy in place of the previous programs of
development. As we may sense, by such a comparison, market and state hierarchy have actually been
331
treated as exogenous establishments, alienated from each other during the transition in a way that
seems to adopt one (market) set of arrangements by jettisoning another (hierarchical) set of
arrangements. And this is susceptible to an illusion of market transition along with a unidimensional
market-hierarchy continuum, from the erstwhile socialist economies towards market economies. Yet such
an approach could run into trouble because of the fact that Chinas hierarchical arrangements during its
fast transition have never been hierarchical in the neo-Weberian ideal-typical fashion. Therefore cross-
systemic dichotomous comparison based on mainstream conventions hardly correspond to the historical
reality.
As shown in sub-figure 2, cross-border comparisons beyond the formal boundaries of market and the
state/hierarchy enable one to engage in more comparisons than cross-systemic comparisons if one
adheres exclusively to the conventions of binary configurations. Countries and societies vary around
their socio-economic institutions by their formal and informal hierarchical arrangements, their markets
and their networks. One needs to bring in many more institutional variables to identify the nature and
properties of economy and society in each particular country (for the relevant arguments, cf. A. Laurent
1983; R.D. Whitley et al. 1981; L. W . Pye 1985; M. Orru 1991; R.D. Whitley 1992; C. Lane 1988, 1995).
Explanations of institutional parameters are more historically specific when they are presented as
meso-institutional events (rates) rather than as macro-economic stages (traits). Macro-economic
performances can be analyzed at the next higher level - the institutional level. If analyses retain on the
same level they can be locked into tautological arguments of the chicken-egg, cat-mouse variety.
According to Andrew Van de Ven and Raghu Garud, social processes are thus "better viewed as a
cumulative progression of numerous interrelated acts of variation, selection, and retention over an
extended period of time." (cf. Van de Ven, Andrew and Raghu Garud in Baum, Joel A.C. and Jitendra V.
Singh, eds. 1994, pp. 425-443). My arguments in this entire study correspond closely with theirs.
71. The term "Quasi" bas two referents: One is an aspect of institutional similarity among all the East
Asian countries, including China (a feature neglected by Whitley) despite their variations and
dissimilarities. The other is the unique embeddedness of Chinas institutions in its structures of social
relations, structures that are not only distinct from their Western counterparts but also from those of their
East Asian neighbors. W e cannot denote a classic market economy and a quasi-market economy as
dichotomous categories, distinctly different from each other. Rather, the term Quasi merely suggests a
specific contextual reference. For example, the risk diffusion in these quasi-market economies is mainly
through endogenized mechanisms of market and hierarchy, which are both formal and informal, rather
than through exogenized market contracts at arm s length, quite formal. And these exist in all East Asian
countries and dovetail with their realities. Yet China's quasi-market economy has emerged mainly as a
result of its unique practice and historical experiences, dealing with its market conditions and institutional
arrangements. Chinas globalization may not be built on either classic market institutions or capitalist
productive relations, as assumed by neo-Weberian theorists and neo-Marxist scholars (cf. G. Arrighi
1997).
72. As for the Asian mode of Capitalism and the philosophy, behavior and possible evolution of business
elites (or tycoons), see an article Asian Capitalism - the end of tycoons in The Economist, pp.67-69,
April 29th, 2000 (emphasis mine): A new generation a new economy, and a new capitalism are changing
the way in which business is done in East Asia...Li Ka-shing and the other mighty tycoons who dominate
Asian business can still afford to ignore demands for clearer corporate governance and
transparency....At the same time, Asias tycoons are coming under pressure to adopt a more western
style of business. The change is gradual, but Asias companies have started to shift away from their old
patriarchal cultures and towards those prevailing in America and Britain. There are four main factors at
work. First, the generation of overseas Chinese businessmen that build huge empires is now preparing to
hand those empires over to their sons or (occasionally) daughters, most of whom were educated far
away from Asias bamboo network of connections in western universities, where they picked up western
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ways of doing business. Second, the financial crisis of the past three years has made big Asian
businesses much more reliant on western, and in particular Anglo-American, equity capital - and thus on
modem notions of shareholder value. Third, although the old tycoons rose to power by expanding into
new industries, they may find the Internet will pose more of a threat than an opportunity. And fourth, the
maturing of Asias legal, regulatory and financial systems undermines the overseas Chinese network that
has been the foundation for the tycoons business success. The word 'tycoon comes from the Japanese
for 'great lord. Asias tycoons are not merely business successes, but something altogether grander and
more imperious. Many people assume that they share certain values, often credited to Confucius. There
is some truth in this: in particular, the tycoons come from a culture with a strong sense of family.
Typically, a patriarch runs a corporate empire with unquestioned authority, and installs sons, nephews
and in-laws to manage the outposts of his group. In his business dealings, an Asian tycoon will prefer
members of his ethnic network to outsiders. Outside Japan and the sub-continent of India and Pakistan,
most Asian business is controlled by the diaspora of Chinese emigrants. So creditors, suppliers and
contractors often speak the same ancestral dialect as the tycoon, whether they are based in Malaysia,
Indonesia, Thailand or Hong Kong. Transactions within this network have traditionally been underwritten
with handshakes and trust rather than with signatures. Similarly, tycoons have favored raising capital
from within the network, for instance from affiliated banks. They have resorted to outside equity
reluctantly but opportunistically. Traditionally, they have considered stock market listings a means to an
end: cash. To secure a listing, they have been reluctant to accept more disclosure and a greater say for
minority shareholders in the running of the business. Auditors are considered a nuisance... The moment
when the founder of a thriving family business hands over power to the new generation is often
difficult...Many of Asias most famous tycoons are now approaching the moment of transition. The
change, it is clear, will be profound...Knowing the West, of course, need not mean being western. 'The
techniques are m odem , says Victor Fung, a m ember of Hong Kongs business elite who also runs Li &
Fung, a Cantonese trading group, 'but the culture is still Confucian. Yet even this is changing...The
recent financial crisis has had effects just as dramatic as generational change. It has forced the leaders
of Asias big businesses to find outside help with management and with finance. During the Asian boom
years, says Mr. Fung, 'You could run a large empire with very few people making few decisions. As a
result, the tycoons can no longer rely simply on their own extended families to run their businesses, but
have to recruit outside professionals...The financial crisis devastated the balance sheets not only of most
Asian companies, but also o f their banks. This means that firms have had to rely in large part on equity
injections from western institutional investors to recapitalize them selves...The presence of foreign
minority shareholders forces corporate change... Although Asia is only now embracing the 'new
economy, its impact on Asian business empires may be even greater...Asia is several years behind
America and Europe in its shift into e-commerce. But once the Internet is really exploited, it may turn out
to be the greatest of all the forces bearing down on 'Confucian management practices, for three
reasons. First, it undermines the tycoons old business models, which are based on networks of Chinese
around the world and on privileged information. Secondly, it allows the rapid rise of new competitors.
Third. Internet businesses rely to a much greater extent than old economy operations on equity funding
by venture capitalists or market investors, as well as on stock options as compensation to employees,
and these groups demand more transparency...Consider first the threat to the old business models.
Many tycoons started their careers in, say, commodity trading; then went into manufacturing as Asia
became the W ests sweatshop; and later into property development, retailing and telecommunications.
At present, their Internet strategies are usually to build on these existing businesses, a task they
commonly delegate to their sons. In Taiwan, for instance, Jeffrey Koo Jr. is planning to take his fathers
banking group online and to introduce business-to-business transactions for its cement and chemicals
operations...But the tycoons past success in these businesses was in large part due to the inefficiency of
the markets they operated in. This created a premium for proprietary information about buyers and
sellers, which the tycoons gleaned from their overseas Chinese network. That network was built on a lack
of reliable information and communications, which necessitated personal relationships and inside tips. By
making information abundant, instantaneous and accessible to all, however, the Internet reduces the
need for well-connected intermediaries, and thus the networks value...B ut information about buyers and
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sellers will be available to anyone who logs on to the site. Moreover, there is nothing stopping new
entrants from building rival portals...Add to that the market driven culture of the new economy.
Dot.coms, by their speculative nature, tend to be financed with equity rather than debt. As the tycoons
have noticed, the high (though volatile) valuations of dot.coms make them a good paper currency if the
shares are floated...In learning to exploit the Internet, most Asian companies rely either on alliances with
western (American, mostly) companies or on western venture capitalists. And most plan, ultimately, to
float their ventures and to attract talent with stock options. So 'm ore Internet means more equity and
more listings, which is bound to lead to more transparency, says Sunil Gupta, an analyst at Morgan
Stanley in Hong Kong. A good example of the new-age Asian company that this produces is China.com.
This is an Internet start-up with roots in the impenetrable world of the Chinese government, since it
began as a venture by Chinas state-owned Xinhua news agency. But China.com last year became the
first Asian Internet stock to list on Nasdaq, after transforming itself into a westem-style company. Half of
its board is now American or British, and the largest block of shares is in the hands of employees.
'Theres keen sense of responsibility now towards all shareholders, says Raymond Chien, its chairman.
Perhaps the biggest blow to the power of Asias tycoons so far has come from the crisis of the late
1990s. That drove Asias governments to make a bigger effort to clean up their financial and regulatory
regimes. As insider laws become stricter, contract laws tighter, competition policies more rigorous, and
capital markets more efficient, the usefulness of the old bamboo network of overseas Chinese, based on
trust and ethnicity, has begun to decline. ' Trust is inefficient. You cant trust enough people. The bamboo
network is based on imperfect markets. says Simon Cartledge, the author of a forthcoming report on the
Asian diaspora for the Eiu, a sister company of The Economist. As Asias markets become more
regulated, its businessmen are increasingly prepared to deal with contacts outside the old network. In the
past... people did business only with people whose ancestors came from the same village in Fuiian or
Guangdong province. 'In mv fathers day everything was done bv handshake. Mr. Fung savs. But these
days, 'w ere moving more into contractual arrangements. The contracts are less watertight than those in
the W est, leaving more to interpretation. And in less advanced markets, such as Indonesia. Mr. Fung
would still call up the network to check on potential business partners. Nonetheless, the bamboo network
is gradually opening up and becoming more like, sav. the ties among graduates of Ivy League
universities or Oxbridge. For the new generation, the Internet may create new networks, savs
China.coms Mr. Chiien. himself a member of the old network, such as the ties between the Hono Kono
business elite and the Chinese in Silicon Valiev. However, although still 'Chinese, these relations differ
from those that developed among the Chinese that came to South-East Asia as coolies or traders. As the
old network passes, so will the world that bred Asias patriarchs - whether they run huge empires or
smaller fiefdoms. This may condemn some of todays tycoons to proving the Chinese proverb that wealth
is made and lost within three generations. A more likely evolution is that the heirs of Asias tycoons will
gradually become modem manages alongside other entrepreneurs. They would no longer be tycoons in
the old sense but bosses running companies along western lines...
73. cf. Stark and Nee 1989: pp. 12-3.
74. As concerns the elaboration of above dimensions - Institutional Density vs. Constitutional Level - in
X axis and Y axis, see the discussion by R. L. Jepperson et al. 1996. In Jepperson et al.s 1996 version,
these two dimensions become Unit/environment relations (i.e., degree of construction of units by
environments) vs. Cultural and institutional density of environments". Here their relevant elaboration is
more about political economy and political culture (Ibid. p. 38). This figure is adapted from Jepperson 1991,
and Jepperson et al. 1994 and 1996 discussions about some models heuristically constructed by degree of
institutionalization (the degree of social constructedness specific to given contexts, cultural, historical) vs. the
level of institutionalization as environments (i.e., the impacts of institutional environments as cultural and
historical contexts on level of social organizations). Accordingly, the X-axis (horizontal) shows how
institutionalization is affected by its surrounding environments, while the Y-axis (vertical) mainly concerns the
level of the effects of social constructedness on institutional environments. Here the position on the
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horizontal axis varied along with a diverse spectrum of cultural attributes, arrayed from natural,
aboriginal and idiosyncratic, toward more, collective, organic or structuralist. The position on the vertical
axis (hierarchical order) varies from relatively loose, "discursive," decoupled layer to a "constitutional"
level with more symbolic, rational, coupled, constraints imposed by socially constructed realities, the
degree of which varies in a hierarchical order. Jepperson 1991 (144) and Jepperson et al. 1996 (40) assume
the two dimensions ought to be understood as continual, rather than discontinuous. Jepperson et al.s chart is
designed to unfold their synthesis of manifold research agendas and their associated social science
hypotheses, such as realisms, neo-liberalism, organizational culture, neoclassical economics, behavior
psychology, neo-institutional economics, network theory, social ecology, institutionalism, etc. Along the
horizontal axis (institutional density) in my figure, the more the cultural attributes in aggregation (that is,
the more heterogeneous the cultural attributes), the more dense the institutionalization. Thus the
horizontal axis describes how strongly institutions and organizations are affected by the surrounding historical
and cultural environments. My figure here attempts to make a contrast between N ees cross-systemic
comparison and an institutional cross-bordered comparison, which could provide more room to cover
contextual attributes across economies.
To clarify his denotation of institutionalization, Jepperson 1991 explained (p. 144) that: In brief, I argue
that institutionalization best denotes a distinct social property or state (and I attempt to specify this
property), and that institutions should not be specifically identified, as they often are, with either cultural
elements of a type of environmental effect...It then becomes possible to represent institutionalization as
a particular set of social reproductive processes, while simultaneously avoiding the opposition of
institutionalization and 'change'. And it becomes possible to represent institutionalism in an entirely
straightforward way, as arguments featuring higher-order constraints imposed by socially constructed
realities, and to distinguish it from other lines of arguments." Hence institutionalization here really
concerns a social reproductive process through social constructedness. I refer to it on the vertical axis of
my Constitutive Level figure by asking how actors follow the rules. With regard to the social
constructedness represented by the horizontal axis, R. L. Jepperson et al. 1996 explained (pp. 40-1;
emphasis mine): The second line of argument...is represented by the y-axis. It focuses upon the
relationship between actors, such as states, and their environments. This relationship is two-sided. It
includes the impact of actors on their environments and the impact of environments on actors...agency
and environment are mutually constitutive - in contrast with primacy that the dominant realist and
rationalist perspectives in international relations theory accord to the effects that actors have on
environments...In thinking about the effects of environments on actors it is useful to distinguish three
kinds of effects, which correspond to progressively higher levels of 'construction.' First, environments
might affect only the behavior of actors. Second, they might affect the contingent properties of actors
(identities, interests, and capabilities). Finally, environments might affect the existence of actors
altogether. Also cf. R. L. Jepperson 1991 (p. 154: Figure 6.1: Lines of theory in organization analysis);
Jepperson and Swilder 1994.
75. This form of analysis favors a substantive analysis rather than a formal logic. Provided transitions can be
grouped by types of outcomes to indicate their variations, it would reveal much more complicated ways in
which reality and regime changes can occur such as drastic changes of reality, partial changes of reality, a few
reality changes, and reality without change or even backward change, and so on. Or reversibly, a regime could
have no change but be accompanied by reality change. Transitional reality could be different from its paper
value. Some economies are undervalued in market paper, and some others are overvalued in market paper.
Regime changes do not guarantee reality changes, and vice versa.
76. This is particularly important to make strategies of international business. An example could explain why.
cf. South Koreans take shine to China - Businesses are embracing the mainland - but not everyone is
pleased by Andrew Ward and Richara McGregor in Financial times, p. 17, Thurs. June 2 0 ,2 0 0 2 : ...Samsung
admits it made mistakes after it first entered China in 1993. 'W e did not understand China. W e expected too
much, too soon. W e lost a substantial amount of money, but also learned a lot, says Mr. Kim. 'W e stopped
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looking at China as a single country and started targeting specific markets, according to demographics,
geography and products,' he adds. 'China has many faces. There are 1.3bn people, but among them are lots
of different kinds...." When Samsung began to look at demographics, geography and products, it suggests
that institutional analysis is more critical than a systemic analysis focusing mainly on a regime or a country as a
whole.
77. As earlier mentioned in Chapter 3, institutional scholarship would select an array of event- and site-specific
institutional parameters affecting the idiosyncrasies of economic systems and organizations and their practices.
78. cf. The Economist, p. 80, Mar. 4th, 2000 (brackets mine): David Colander of Middlebury College, in
an article that looks back on the present from an imagined 2050, blames current discontent on the
orthodox general-equilibrium model that underlies most of todays economic theory. He favors a shift
from the current approach, which has been called 'loose-fitting positivism (propose a model consistent
with standard assumptions, then test), to one based on 'loose-fitting pragmatism(forget about canonical
principles, just search for patterns in the data). Such an approach, he says, would be consistent with 'the
rise of complexity science within the scientific community generally. Researchers sitting at their
computers, subjecting data to a withering barrage of statistical analysis, would still hope to come up with
laws of a sort, or regularities at any rate. But these 'laws would be regarded as provisional and ever-
shifting: indeed, the claim is that changeless underlying patterns do not exist. Complex systems expand
and evolve; even at the most fundamental level, the patterns are temporary. But whether this approach
could still be called 'economics is debatable. In comparison, Richard Thalers approach appears more
eclectic that The second approach is much easier to reconcile with traditional methods. Its most
celebrated exponent is Richard Thaler of the University of Chicago...Mr. Thaler agrees that the canonical
principles of orthodox theory have led economics astray, but he believes these mistakes can be put right.
He seeks...a tighter-fitting positivism. You improve the fit above all, he would argue, by putting a more
realistic account of human cognition at the center of the theory [such as social actors' expectations and
behaviors -- SY]. Orthodox theory famously assumes that people are rational. In reality, they are
not...abandoning orthodox scientific method altogether, may conceivably produce better economic
forecasts - but grinding out statistical patterns sounds a lot less interesting than thinking about what
people do and why" (ibid.).
79. This definition thus contains a much more complete repertoire than definitions of liberalization and re
privatization can cover, especially when mechanically imposed by neo-classical concepts of a transitional
economy.
80. Here I would like to propose that with some appropriate paradigmatic alterations scholars should
conceptualize alternative modes of transition and define their underlying properties so that variations can be
compared. As concerns the definition of legitimacy, the reader might refer to the elaboration by Roberts
Howse in 1999.
81. In fact, I would argue that these three notions are most important in understand transitions and their
dynamic sources. My caveat here is that I do not want to make these three notions create new
controversies against economic fundamentals. Instead, I want these notions to help decode the real
mechanisms working behind transitions and their variations. To borrow R. Scotts phrase, both goal
specificity and formalization should be viewed as variables." cf. R. Scott's definition of organization as
rational system (1998, p. 23: "It is the combination of relatively high goal specificity and relatively high
formalization that distinguishes organizations from other types of collectivities. Note that both goal
specificity and formalization are viewed as variables. Nevertheless, as a structural type, organizations
are expected to exhibit higher levels of formalization and goal specificity than other types of
collectivities, such as primary groups, families, communities, and social movements. In general - there
certainly are exceptions - families and kinship structures tend to rank relatively high on formalization but
low on goal specificity...although the specificity of goals varies greatly from movement to movement and
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from time to time; and communities are characterized by low levels of both goal specificity and
formalization...Organizations are collectivities oriented to the pursuit of relatively specific goals and
exhibiting relatively highly formalized social structures.").
82. The purpose of the means-goal structure here is to try to locate suitable mechanisms of trade-off to cope
with dilemmas that arise from local contexts as well as mechanisms that will create a dynamic and flexible
environment for economic coordination, social justice, and a smooth integration into the world economy. Also
cf. Zhou, Xueguang. 2000b. Reply: beyond the debate and toward substantive institutional analysis.
83. In this matter, the reality-minded NIHC, while adopting a socio-genetic medical approach, would rather
assume the primacy of internal remedies of planning economies suffer most from their own genetic diseases.
The key is to analyze those problems evolving from inside the bodies of the existing and preexisting
institutions. This is the same as the shift in approach from particles or molecular physics to quantum physics in
the physical sciences. As I am convinced, these three notions provide more explanatory power than any
others.
84. E. g., action is thought as linked to de facto distribution of powers of control and disposal, ibid, 66.
85. cf. B. Klandermans et al. 1987; D. Oegem a et al. 1994. Also cf. R. Axelrod 1984, p. 148. As for the
relationships between expectations and norms, see p. 178, ibid: "Over the years, cooperative patterns of
behavior emerged and proved stable. These patterns were based upon the norm of reciprocity. Many other
institutions have developed stable patterns of cooperation based upon similar norms. Diamond markets, for
example, are famous for the way their members exchange millions of dollars worth of goods with only a verbal
pledge and a handshake. The key factor is that the participants know they will be dealing with each other again
and again. Therefore any attempt to exploit the situation will simply not pay". The example of diamond markets
(177), as well as that of Lloyd's insurance brokers of London (179), were also discussed by Zucker 1986 and
Williamson 1994.
86. The former might refer to the degree to which expectations are feasible in terms of the general limits and
normative constraints of reality; otherwise, expectations could turn to illusions, false consciousness,
alienated from reality, fetishism, and unrealizable efforts. The latter might refer to the degree to which
expectations and drawn from particular institutional settings that vary across societies, cultures,
environments, and overtim e.
87. For instance, Zucker argues (1986) that American "constitutive based expectation" loomed large along with
industrialization and institutionalized trust production, when market transactions had drastically multiplied,
scaled meiges had accelerated, and background based expectations became obsolete for trust production
(mainly derived from natural gifts and family reputations).
88. cf. D. Lai 1998. Also cf. a book review written by Martin W olf about Lai 1998: Individualism shows
the way - emerging markets may be able to rival the prosperity of the west without adopting all of its
cultural values in Financial Times, p. 11, W ed. Mar. 1, 2000 (emphasis mine): ... Material beliefs
concern the best wav of making a living: cosmological beliefs concern 'how people view their lives.
W hile material beliefs change relatively quickly, in response to experience, cosmological ideas do not.
Only huge shocks - such as the conversion of the Roman empire to Christianity or the Islamic conquests
- alter such beliefs in anv fundamental wav." As Martin W o lf explains, All of [these civilizations] were
more sophisticated - intellectually, technologically and socially - than any found elsewhere... He
reviews the historical formation of Western cosmological belief and its affinity with the rise of
individualism and capitalism. W hat is intriguing here is his emphasis that, although cosmological beliefs
cam e along with capitalist development in the W est, capitalism and individualism were just an
unintended results of such beliefs (like W eber's assumption that capitalism emerged in some Western
countries by chance). Important for the genesis of capitalism were the material values of those with the
337
cosmological beliefs. These material values were easier for those non-Westem societies. They were
easier for pragmatic Chinese, and harder for Hindus and Muslims. Hence capitalism and market
competition could be universal patterns accepted by non-Westemers without adopting Western cultures
and beliefs. W olf details the contexts of the rise of capitalism and the economic development in the
West. He thus concurs with D. Lai 1998, in Unintended Consequences, perceiving the major differences
of these civilizations in terms of their environmental rather than cultural beliefs: why Europe came first
to sustained rapid economic growth is not cultural, but environmental... W hat are the implications of
their arguments for expectations? I see three major implications: 1. Given different great civilizations had
harmoniously coexisted in the past, they can continue to do so in the present and future. 2. Different
beliefs and value systems had, not accidentally, all derived from their respective institutional
environments and arrangements in their own histories. 3. These differences in beliefs and value systems
will not ultimately impede these civilizations social progress and economic prosperity. This is so
because, to my understanding, there do exist fundamental desires in the backs of the peoples minds in
all these civilizations - they cannot avoid their material interests as human basic needs. The pursuit of
these material interests may take various forms in terms of their trajectories, tactics, and strategies, etc.,
according to their respective cultural and belief systems.
The following is an excerpt from W o lfs review of Lais book: ...[Even] Cosmological beliefs do not come
out of a vacuum, however. All agrarian civilizations need a set of institutional arrangements that tie the
initially scarce toilers to the land and persuade them to hand over a sufficient surplus to the warriors
required to protect them from human predators. Strongly internalized beliefs will, argues professor Lai,
greatly reduce the costs of persuading people to behave in needed ways. So what were the distinctive
beliefs of the west? And where did they come from? The answer to the first question is individualism; the
answer to the second, argues Prof Lai, is the Catholic Church. More precisely, two papal revolutions,
those of Gregory I (the Great) in the late sixth century and Gregory VII, in the 11th, transformed western
society from the Eurasian norm. Gregory I ruled out virtually all the strategies by which families had
traditionally sought heirs: marriage to close kin; marriage to widows of close kin; adoption; and
concubinage. None of this came from scripture; all of it was profoundly in the interests of the church. By
making it difficult for families to secure heirs and by promoting the right of individuals to bequeath
property where they wished, the church made itself the beneficiary of vast bequests. By the end of the
first millennium, it owned almost a half of Western Europe. These enormous estates became subject to
pillage. The response was the proclamation by the second of these two popes of the doctrine - enforced
by excommunication and interdict - of papal supremacy over the secular rulers and clerical
independence from them. This created the church-state and, with it, Europes divided sovereignty. In the
space left by the clash between people and emperor, the Italian city-states began the rise of western
capitalism. The unintended result of the first papal revolution was the rise of economic freedom:
individuals able to bequeath property as they wished could not be prevented from entering into any other
contract they desired... W olf continues, ...Elsewhere in Eurasia, personal values were based on
communalism enforced by shame. Western individualism had consequences beyond the churchs
imagination. Protestantism was one of its fruits; Promethean growth was to be another; and, with the
'death of G od and so of guilt, contemporary hedonism has become a third. W hat might this argument
about the origins of western exceptionalism imply for economic development today? It means, suggests
Prof Lai, that any non-western society able to adopt its material beliefs in science and the market
economy should be able to rival its prosperity. Western individualism showed the way. Others can now
follow, but without adopting the wests faith in the primacy of personal liberty over social obligations. This
partial acceptance of western beliefs proved relatively easy for the pragmatic scions of Chinese
civilizations, but harder for Hinduism and Islam: caste obstructs free competition, just as science and
secularism challenge the authority of the holy book. Yet, insists Prof Lai, neither of these systems is
incompatible with western material beliefs. The same is not true for their cosmologies. Western
individualism, the nuclear family and equalitarianism are culturally specific. Japans social patterns and
norms remain non-western, even though its material culture is modem. This, suggests prof Lai, will
become a global pattern. China will remain hierarchical, whatever economic success it may have; and
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Indians will continue to live in joint families. Most westerners suspect that what Prof Lai evidently views
as the bacillus of western individualism comes with the free market. It is part of the package. But it is
also true that the inhabitants of advanced East Asian economies are not as yet fully westernized. This
may mean that the full effects of their economic transformations are still to work through. It may also
mean that Prof Lai is right. Certainly, he forces the reader to ask whether those who wish to imitate
western material culture are doomed to experience its anarchic individualism, as well.").
Also cf. Financial Times, p. I, April 22/23, Weekend", 2000 (the underlined added by myself): ...Did
religion create morality, or did morality give rise to religion? It is a chicken-and-egg question to which
there is probably no answer. But from witchdoctors to compliance officers, standards there have always
been. Primitive tribes had their rituals and taboos: Homers heroes were judged by their strength,
courage and cunning: in classical Greece the virtues were refined and expanded by Plato and Aristotle to
include moderation, piety, wisdom and prudence. Christianity introduced charity, and interpreted the
Greeks 'natural law1 as Gods law. Secularism arrived with the European Enlightenment, adding
freedom, solidarity and equality. Ethical theories proliferated. Jeremy Bentham invented Utilitarianism, a
calculus of human happiness: Immanuel Kant emphasized duty derived from reason /follow the rules you
would wish to see as rules for everyone): Nietzsche discovered pessimism. As the theories multiplied
they became increasingly detached, until, about 30 years ago, photospheres decided to roll up their
sleeves and get their hands dirty. Today, it seems, everybody wants to reconstruct ethics, to build a
universal morality. Mostly they use the language of 'rights. But rights are unreliable, moral philosophers
sav. because they are inherently inflationary: and in any case, do they not presuppose morality? Perhaps
the old pagan ideas of virtue will prove best suited to a post-religious age. They are showing signs of
revival, at least in academic circles, for all the fashionable concern with values, genetic determinism or
evolutionary compulsion. An honorable man does not commit rape. Business leaders are actively trying
to derive practical rules of behavior from abstract principles. Trust, fairness, integrity, and respect for
people are the concepts they use: and they are clear that morality means more than staving within the
law: as it must, because public morality cannot function without private morality to underpin it.
89. cf. W eber 1968 [1922]: 21-2. Also cf. the associated discourse in PBS, Frontline" program, Tues.
January 2,2001 about the origins of the Book of Revelation that has shaped later Western perceptions of the
apocalypse.
90. For instance, a recent essay provides us with a typical example unveiling an Oriental materialist faith
in doing business, cf. Zen and the art of profit making - Faith and Business: Buddhist beliefs of
flexibility, communication, and equality are central to Kaos management philosophy. In part three of a
series on how faith has influenced business, Alexandra Ham ey looks at how these concepts evolved into
fast decision-making and eliminated hierarchies by Alexandra Hamey in Financial Times, p. 10,
Management, Tues. Aug. 29, 2000 (emphasis mine): ...H is [i.e., Mr. Yoshio Maruta, the former
president of Kao Corporation, the largest toiletries group] personal motto, which is also that of Kao, is
that 'cleanliness is the foundation of a prosperous society. Among his initiatives were: the elimination of
the administrative, legal and human resources divisions, which were combined on one floor, to allow
easier communication and to eliminate hierarchical distinctions; a policy of developing most chemicals
and software itself; and regular Zen study programs for employees. Mr. Maruta also encouraged staff to
seek the truth through testing and investigating business ideas until something was learned, often without
the manager realizing it. This, he believed, was 'the quintessence of information - kangyo ichijo in Zen
Buddhism. He set Kao managers the goal of reaching this intuitive understanding, with the result that
each was expected to become a coach to himself and others...the arrangement was first instituted under
Mr. Maruta in order to give each persons opinion equal weight...Equality extends beyond the
boardroom. On other floors, the cubicles and dividing walls between departments that are the hallmark of
Japanese companies were removed. Instead, Kao has set up tables for easy communication. Mr. Maruta
also eliminated titles to encourage communication between higher and lower ranking employees...Kao
has also strengthened communication with the factory floor and its sales affiliates. It was one of the first
339
Japanese companies to introduce an inventory management system in the 1970s. This system, which
produces daily records of sales of every product, is designed to promote discussion among divisions.
'Data that is a month old has no m eaning...W hen you look at the data every day, you can see when a
product looks like it will be successful and you can make the necessary capital investment [to expand
production] right away, says Mr. G oto...Japanese Buddhists believe that people should find wavs to be
useful...'W e want to make a larger contribution to society, says Mr. Goto, 'to make life easier for
people....These successes would normally pose a troubling dilemma for a Buddhist company since the
more extreme schools of Buddhism advocate renouncing worldly goods and returning to a simpler
lifestyle of meditation and other rituals...'There are people in Japan who are afraid of making a profit.
But profits allow us to reinvest in new products, and to pursue our long-term vision of cleanliness, says
Mr. Goto. This flexibility is a trademark of Japanese Buddhism, which has been adapted to fit local needs
because it arrived nearly five centuries after the Shinto faith...Japans unique religious history has
produced some unusual combinations at Kao: instead of a Buddhist temple outside each factory, there is
a Shinto shrine. And instead of traditional Japanese management theory, Kao has turned to western
concepts such as economic value-added analysis to evaluate the profitability of its investments. The idea
behind the shift to more western management techniques is to become as open and transparent as
possible, consistent with the open communication that takes place within. 'A secretive company is lying
to its shareholders and employees, says Mr. Goto. 'It is imperative that we inform shareholders and our
employees as quickly as possible. This openness has allowed Kao to introduce new management
techniques in recent years, updating some of Mr. Marutas policies to match the demands of the
m arket...The divisions that were combined in the 1970s have since been separated, and Zen sessions
have been replaced by English lessons. The ability to negotiate different philosophies is Kaos corporate
signature.
Also see an article introducing the ideas of trust, cf. Culture is of the essence in Asia - Even global
companies can make major mistakes when dealing with Asian cultures by Leo Dana in Financial Times,
p. 13, Mastering Management, Mon. Nov. 27, 2000: ...individuals were traditionally hired primarily for
their potential over the long run, rather than for their skills at the time of appointment. Corporate
decision-making in Japan also relies on harmony. Westerns have sometimes perceived Japanese
managers as incompetent or indecisive. If a manager knows what he is doing, thinks the westerner, why
does he continually consult his team? In fact, the Japanese tend to resolve issues by consensus rather
than by position papers, memos or the exercise of executive will...The Japanese may prefer to proceed
without being confined to a rigid agenda. This enables them to take a holistic approach, resolving the
whole by shifting discussion and non-verbal communication across issues. To most outsiders, this
approach may be perceived as unstructured, disruptive, confusing and frustrating. However, Japanese
managers and executives function well in such ambiguity. An understanding of such differences is a
prerequisite to successful business dealings. During negotiations, for instance, westerners expect to
focus on problematic issues, such as resolving disagreements. In contrast, the Japanese prefer to
discuss areas of agreement, with the expectation that harmony will lead to the resolution of details. The
concept of wa also explains another statistic: the US has 15 times as many lawyers per capita than
Japan. The Japanese cultural concepts of obligation, indebtedness and loyalty together reinforce that of
harmony. Consequently, verbal agreements are meaningful in Japan, and the need for lawyers is
reduced. Instead, the Japanese feel the need to develop personal relationships within business
transactions.
91. See Kants elaboration of cosmological ideas in his O f the Paralogisms of Pure Reason." cf. Kant,
Immanuel. 1952 [1781], pp. 159-172.
Boisot and Child 1988 had the parallel discussion of Webers substantive and formal rationality, cf. p. 522:
W hat we see at the enterprise level is a struggle between the two types of rationality identified by W eber
(1968, vol. 2: 809ff) as the substantive and the formal. The first is the warm, 'involved rationality of vaguely
defined ethical principles applied particularistically. It places a large amount of discretionary power in a few
340
hands and thus opens the door to the twin hazards of bounded rationality and opportunism. The second is the
cold, impersonal, and detached rationality of the rule universally applied. Formal rationality, however, only
economizes on boundedness by testing itself against the myriad facts of the world; its rules have the character
of scientific hypotheses in perpetual need of corroboration. It economizes on opportunism by making
transparent the principles on which it operates, through the diffusion of information that follows upon its
codification. In the culture space, therefore, formal rationality drives markets and hierarchies, and substantive
rationality drives fiefs and clans...W e have tried to show...that although the outcome is by no means settled,
fiefs [with substantive rationality] start out having a transactional advantage, with both existing institutional
patterns and infrastructure working in their favor... (brackets mine).
Also cf. Boisot and Child 1996 discussion of the role of government from a comparative institutions
perspective (1996, 621): The Western concept of the state in the process of modernization has
envisaged it as the legislator of rules for economic behavior and of procedures for resolving disputes
under these rules. In the liberal interpretation, the state acts on behalf of the majority in society through
the democratic process, and in the Marxist interpretation, it acts on behalf of the dominant capitalist class
(Gran 1994). The state is not assumed to be the natural body either to own or directly to manage
industrial organizations. Ibid. 625: Western capitalism in its mature form has directed its codifying
efforts toward increasing efficiency and managing risk. It has striven toward order and predictability
through both the codification of law outside enterprises and the codification (formalization) of
management structures and systems within them ... If Peters (1992) is correct in seeing Western
capitalism as exhibiting conditions of increasing impermanence and fickleness, with businesses joining in
more and more temporary alliances, then it clearly is not developing toward the long-term clan-like
relationships of Chinese network capitalism. Rather, Western networking is likely to be characterized by
short-term expediency that will increase rather than cope with uncertainty and in which there may well be
an increasing resort to litigation to deal with disputes arising from broken business marriages. These
differences between the emerging Chinese and Western economic orders point clearly to the influence of
the institutional systems in which they are respectively embedded (emphasis mine).
92. cf. J. Meyer et al. 1997; forthe definition of cultural context, cf. also A. Swidler 1995.
93. As earlier discussed, belief systems are broader than ideologies in the sense that they involve
conventions, values, and norms; whereas ideologies refer to some particular commitments in terms of
specific goals-means structures.
94. But the institutional environments in check herein may be also referred to those sensitive to the
richness of ideas and their productions, cf. Sachs on Globalization - A new map of the world: Today's
word is divided not by ideology but by technology. This demands, Jeffrey Sachs argues here, bold new
thinking on development by Jeffrey Sachs in The Economist, p. 81, June 24th, 2000 .
95. For example, Miller points out that "Another condition for the achievement of cooperative equilibria in a
repeated game is the mutual expectation that the relationship will go on long enough to justify the investment
in cooperation." Hewlett-Packard offered its employees with a security of employment commitment that
"confirmed everyone's subjective belief that the relationship was long-lasting and that employee efforts were
not going to be exploited for short-term gain" by the company (cf. 1992, p. 198). Also ibid, "Cooperation in a
repeated social dilemma can be sustained by rational actors as long as the probability of continuation from one
period to the next is sufficiently high and as long as all the actors involved have mutually consistent
expectations about the others' intentions to reciprocate." Ibid, 199: "...why shouldn't the evolution of
cooperation be inevitable? As long as the relationship is guaranteed to be long term, and the participants have
a shared expectation of reciprocated cooperation, then cooperation should be sustainable as a long-run
equilibrium by rational, self-interested players." Ibid, 201: 'The differences [in group norms that support high
levels of efforts, rapid technological advancement, and large profits] seem to be largely the result of differing
expectations and beliefs"). The expectations are thought to be related to social conventions, the conventions
341
"in which rational individuals can react to the repeated social dilemmas that occur in hierarchies, even in
hierarchies that are addressing similar tasks with similar structures of economic incentives" (Ibid).
As a matter of fact, these points based on the level of firm can be extended to the case study about historical
changes on the country level. Certain structures of institutions are certainly built on corresponding mutual
expectations. Without mutually shared and consistent expectations, the social institutions in transition may no
longer function as supporting systems for a cooperative game to overcome social dilemmas.
96. A moot point herein could arise as to why the background-type expectation could be transformed to
the current constitutive-type one in the given context in the US, whereas the conversion has yet to
happen in Chinas current transition or it is taking much longer than people anticipated.
97. I.e., Functional Degree to which Units Socially Constructed from Low Construction to High
Construction, or from Realist to symbolic "Phenomenological".
98. I.e., structurally Featured Levels of Analysis from Individualist to more Structuralist. cf. Jepperson
1991, pp. 153-4. Jeppersons interpretation of these two dimensions, i.e., the functional dimension of Degree
to which units socially constructed vs. structural dimension of Featured levels of analysis (emphasis mine):
Institutional effects are those that feature institutions as causes...One can thus identify two major classes of
institutional effects... It may be best to try to capture institutionalism by contrasting it with other lines of theory.
One way to differentiate sociological arguments is by noting the degree to which they represent units as
socially constructed, and by the levels of analysis most commonly employed in their causal propositions. The
'levels dimension distinguishes roughly between methodologically structuralist and individualist imageries; the
'constructedness dimension distinguishes between phenomenological and realist conceptions of causal units
and processes. These two dimensions define a simple table of lines of theory. Institutionalism invokes
institutions as causes, so it necessarily emphasizes both high social construction and higher-order effects. In
the catchphrases employed here, institutionalism thus tends to be both 'phenomenological and
'structural.'...Hiahlv socially constructed units are opposed to putatively natural or non-contextual ones. That is,
high constructedness denotes that the social objects under investigation are thought to be complex social
products, reflecting context -specific rules and interactions. In low-construction (here, 'realist") imagery, units
may enter into social relations that influence their behavior, but the units themselves are socially pregiven,
autochthonous. In high-construction (here, 'phenomenological1) imagery, the units existence is itself a
framework-specific social creation - in phenomenological parlance, units are 'constituted....The causal
imageries are quite distinct: a natural base, a social superstructure, in realist lines; a nested system of social
programs, in phenomenological ones...By levels of analysis, the second dimension, I refer to the levels of
social organization most commonly featured in causal propositions, namely, higher vs. lower orders of
organization...Methodologically individualist lines try to invoke only low orders of social organization in their
explanations and thus seek single-level explanations; they give relatively micro-orders causal primacy over
more macro-orders of organizations in this fashion. Structuralist lines allow for independent and unmediated
effects of multiple orders of organization..."
Thus here in his constructedness dimension, low order construction may embrace those discursive or
uncodified factors embedded in trust, personal ties, informal and intangible communications, etc., seeking risk
diffusion, whereas high order construction may include those codified and hierarchical factors built on legality,
property rights, and contract law, etc., seeking market efficiency. Apparently, Jeppersons constructedness vs.
structuralist dimensions bears too much resemblance to structural-functionalism. Also cf. Jepperson and
Swinder 1994, pp. 363-4.
99. cf. Zucker 1986, p. 58; Stinchcombe 1990, p. 295: "Constitutionalism in Modem Organizations."
100. cf. A world war among professors - Is American democracy merely one among many or a model
for all? A clash between number crunchers and specialists in a single region" by Stephen Kotkin in The
342
N ew York Times, A15, A17, Arts Ideas, Sat. Sept. 7, 2002 (emphasis mine): ...the absence of regional
experts in political science departments of many elite universities goes back to a long-running, rancorous
debate over the best method for understanding the way the world works: is it using statistics and
econometrics to identify universal patterns that underlie all economic and political systems, or zeroing in
on a particular area, and mastering its languages, cultures and institutions? Answers to this question
affect jobs and resources for thousands of scholars and the education of generations of
students...Increasingly, area studies came under assault for the 'ghetto feel of its world area divisions.
Equally important, economists and political scientists pushed for still greater stress on 'hard science:
universal truths, not culturally specific knowledge. Powerful new research tools emerged, raising
analytical rigor, though often in the guise of magic formulas. 'Som e researchers studying politics did
engage in a megalomaniac view that there was one world-applicable theory, said Gary King, a professor
in Harvards government department, who advocates use of scientific methods for qualitative as well as
quantitative data. Such major intellectual shifts can make or break careers. University social science
departments competing for the top rankings have more and more equated excellence with 'scientific' and
'quantifiable.' If the cold war enabled area studies to flourish, its end meant it had to compete more
aggressively for prestige...Predictably, the area studies establishment initially resisted a shakeup, said
Craig Calhoun, a sociologist and president of the Social Science Research Council, a nonprofit institution
that finances the training of the next generation of scholars. Throughout the 1990s, 'area studies often
reacted to the challenges of globalization defensively, he said, 'falling to make the positive case for why
local knowledge and languages remained important. By contrast, he continued, the core disciplines
'grabbed the globalization theme by saying it was one process the same all over the world, an argument
derived from 'views on the global economy that powerfully influenced the business types who sit on
foundation boards. Thus it was not surprising that eventually even the foundations most responsible for
building area studies reassessed their commitment...Area scholars have begun to catch on that
globalization plays out differently depending on where you are, said Mr. Calhoun. ' You cant generalize
from the local, but you cant generalize without the local. This globalization academia is creating a
moment of flux...As more and more foreign-born as well as non-European descendants enter Ph.D.
programs here, Mr. Prewitt predicts that what he calls the 'parochialism of American social science will
further give w ay...M any experts on American politics are already incorporating non-American case
m aterials...Still, such global collaboration cannot resolve the tension between seeing American-stvle
democracy and markets as a universal frame of reference vs. seeing the US as iust one among many
culturally specific areas, however powerful. Indeed, the trends associated with globalization will hardly
stop the feuding between the modelers and the regional specialists. Still, many of toadys younger
researchers...readily accept the double burden of mastering both regional expertise and social science
tools. Even after 9/11 ...a good political scientist working on the Middle East is considered a hard thing to
fin d ...
101. For a more detailed elaboration of such a new institutionalist approach, cf. Hodgson 1993,47-8.
102. Cf. R. Boyer 1998. Figure 2.2: Diffusion vs. hybridization: two perspectives.
103. The terms are borrowed from J. Scott 1998, p. 345.
104. Boisot and Child, while talking about their ideal typed framework of C-space, described ...fanl
ideal type that is useful for pointing up analytical distinctions. It is not intended to depict the implausible
situation in which all transactions are confined exclusively to one of the four categories. In reality all the
institutional forms depicted in Figure 1 are likely to find a niche within a given institutional order, even if
one of these forms predominates. Thus it is acknowledged that market transacting in the W est can
involve elements of personal trust (cf. Zucker 1986; Portes 1994) and that Western bureaucracies rely to
a degree on informal processes and on-going personal relationships (e.g., Blau 1955; Dalton 1959). The
argument, rather, is that the Western market system is characterized by impersonal economic
relationships, lange-numbers transacting, relatively decentralized self-regulating economic units, a
343
plurality of goals, and the other constituents of the ideal type" (1996, 602) (emphasis mine). Also ibid.
603.
105. One of most powerful case about institutional barriers made by the vested interests in the West was
recently presented by some young sociology and business professors of Stanford University and
University of Chicago. Their study shows a negative association between institutional innovators and
their rankings in bureaucracy. That is, innovations more likely come from those with lower ranks,
whereas higher ranks (with the vested interests) may have their reservations about innovations, cf.
Sociology and status set limits to downgrades" by Alison Beard in New York in Financial Times, p. 31,
Tues. May 22, 2001 (emphasis mine): Simple sociology helps explain the low number of sell
recommendations on W all Street, according to research from Stanford University's Graduate School of
Business. The equity analysts who are most willing to make negative comments are the ones with either
very low or very high social status in their organizations and the investment community. Ezra
Zuckerman, a professor of economic sociology and assistant professor of strategic management at
Stanford, drew this conclusion after comparing analysts recommendations and their rankings in
Institutional Investor magazine. 'This is the revisiting of an old sociological idea, said Prof Zuckerman,
who co-authored the study with Damon Phillips, an assistant professor of strategy at the University of
Chicagos Graduate School of Business. ' As you move up any hierarchy, theres an increase in felt
security, the freedom ...to do whatever you like and still be accepted. On the other hand, as vou move
further down, you start to disinvest and you identify less with community. W all Street analysts have come
under intense criticism in recent years for boosting their ratings to increase their companies investment
banking business. Their compensation is in large part derived from banking fees. The Securities industry
Association is working with equity research departments to develop rules to remedy the problem. But
they are up against human nature, according to the Stanford study. Using data from 1996. Profs
Zuckerman and Phillips found that only 5% of recommendations issued by analysts were sells, and they
rarely cam e from analysts who had mid-level rankings. This tendency to conform to a positive stance
stems from analysts natural desire for acceptance. Prof. Zuckerman said. A negative recommendation
means jeopardizing their relationships with corporate contacts, as well as their own bosses. But unranked
analysts were willing to buck convention to make a name for themselves. 'T h e benefits o f issuing a
dissenting, negative opinion are potentially great. Prof Zuckerman wrote. 'W e re all analysts speak with
one voice, anv analyst who offers a different view and is vindicated is more likely to be recognized for
her wisdom. Examples include Ravi Suria, a Lehman Brothers convertible bond analyst, who issued
negative comments about Amazon.com, and colleague Holly Becker, an equity analyst who down-graded
Yahoo! to a neutral. As analysts become well-known and move to prominent banks, they are increasingly
unwilling to issue downgrades or sell ratings because of stronger ties to the companies on which they are
reporting and to their employers success. But the study found some analysts gain enough clout to go
negative anvwav. 'The highest status analysts, who rarely lose significant status from year to year,
should be less concerned about being eliminated as players. Prof Zuckerman w rote..."
106. cf. Eyes will be on Jiang Zemins likely successor - No separate meeting is planned, but Bush and Hu
are expected to chat by Bill Nichols in USA Today, 7A, Thurs., Feb. 21, 2002: ...China experts will be
watching for any clue on how Hu might govern. His official biography offers only one personal quotation, a
favorite maxim: 'Do not cherish excessively high expectations while your psychological capacity to bear upon
is low.
Also cf. O. Borokh 1998 discussion about Chinese modem economic thoughts. He mentions the permanent
interests of Chinese economic scholarship in the links between ethics and economic behavior. The legitimacy
of China's transition mainly concerns the ethics in such a context.
107. cf. Swedberg et al. 1992, 9: "In the New Institutional Economics, the emergence and maintenance of
social institutions is typically explained through their alleged efficiency... such propositions, popular because of
their apparently parsimonious solution of otherwise intractable problems, appear increasingly inadequate as
344
soon as one starts to seriously map out the social structure involved."
108. cf. Robert Howse 1999. Also cf. Asias future burning bright by Martin W olf in Financial Times, p.
17, W ed. Feb. 23, 2000: ...The [World] Bank makes two central points [about the Asian crises]. First,
such crises impose massive costs on innocent parties, particularly the poor. The costs can undermine
political stability, without which economic progress is impossible; second, the wider economic costs are
large enough to make any early repetition unbearable and sustained recovery a profound challenge. On
the first of these, the Bank notes that changes in aggregate incomes per head have asymmetric effects
on the poor. Their gains in good times are smaller, proportionately, than their losses in bad
tim es...Because governments are committed to rescuing their core financial institutions, they end up with
a significant increase in public indebtedness." Here governmental action is considered as legitimate
action, because of its commitment to social stability and order.
Also, the delay o f high-tech equipped Supercar to American mass market provides a good example that
even American competition in product market has been greatly affected by the politics and local vested
interests, cf. Political obstacle course proves fatal for Supercar by Sam roe in Chicago Tribune, pp. 1,
8-9, Tues. Dec. 10, 2003. Also cf. Battled from all sides, Supercar sputters along - Early versions of the
fuel-efficient auto demonstrate ingenuity and progress, but the project is threatened by turf wars and
unexpected competition" by Sam roe in Chicago Tribune, pp. 1, 6-7, Mon. Dec. 9, 2003: ...the basic
power source of this remarkable invention - the internal combustion engine - has varied little since the
days of Henry Ford. Cars still run by burning a mixture of fuel and air inside a combustion chamber.
Supercar was setting out to perhaps change all that. In theory, all ideas would be considered. But in
reality, the Supercar scientists came to the project with years of experience about what might work and
what might not...Supercar was created by the W hite House and not Congress, the project had no
champions on Capitol Hill who could leverage more funding. Furthermore, the project did not have its
own budget. Instead, existing research programs at seven federal agencies were supposed to be shifted
to Supercar. Many of those projects were approved by Congress with strict rules attached, and Supercar
could not easily claim them as its own...[Supercar chief Marry Good] marched up to Capitol Hill, running
up against one o f the last people she wanted to see: John Dingell, the surly Michigan congressman and
the chairman of the House Energy and Commerce Committee, which controlled a significant portion of
Supercars potential funding. Dingell was skeptical at best of Supercar. He was concerned that the
project might be a backdoor attempt by the government to get Detroit to prove it could build more
efficient cars so regulators could argue for tougher fuel-economy rules - a point he made perfectly clear
when Good came to his office. She argued that Supercar would help, not hurt, the automakers and that
the Big Three needed advanced technologies to complete against the Japanese. But she felt Dingell
wasn't listening. 'His approach to fixing things is to attack you, she recalls. Dingell saw it differently:
'W h at am I supposed to do when bureaucrats come up to talk to me? Am I supposed to make nice or am
I supposed to m ake them earn their salary? Im supposed to be a skeptic. Im not supposed to be running
around buying Brooklyn bridges or goldbricks on the behalf of the taxpayers. Good usually left Capitol
Hill discouraged after her meetings with Dingell, but Dingell felt Supercar got enough. The government
ended up investing about $170m in research projects toward Supercar each year; the Big Three reported
investing a similar amount, with their share rising as the actual building of Supercar progressed. To help
her negotiate the funding headaches and Washington bureaucracy, Good hired Chapman, a former
colleague at AlliedSignal Inc. who had helped oversee government contracts for the auto parts and
aerospace giant. Chapman began calling officials at NASA and the Defense Department, two agencies
that the W hite House had promised would provide key technologies for Supercar, such as lightweight
materials, but which were contributing virtually nothing. NASA repeatedly told Chapman it could not
justify to congress spending money on a commercial car: The Defense Department, he recalls, said its
research was a secret - a claim that Chapman, a form er Pentagon official himself, scoffed at. 'The
secrecy was just a phony excuse for just not collaborating, he says..." Also cf. Supercar: The tanking of
an American dream - Dependence on foreign oil helped launch a historic national effort to build an 80-
mile-per-gallon automobile. But politics and self interest killed it" by Sam Roe in Chicago Tribune, pp. 1,
345
10, 11, Sun. Dec. 9, 2002 (emphasis mine): Before dozens of dignitaries, the president announced that
America was embarking on a technological venture as ambitious as any the nation had ever attempted.
O ver the next 10 years, the US government and the American auto industry would combine the full
weight of their resources - billions of dollars, the best scientific minds and previously secret Cold W ar
technologies - to build an invention simple in concept yet critical in importance: a family car that
achieved 80 miles per gallon. This 'Supercari would not only be tremendous boon to the environment,
reducing pollution and slowing global warming, but it also would cut the nation's reliance on oil imports
from the volatile Middle East and inject new life into a stagnating domestic auto industry. In short,
Supercar would make America a cleaner, safer and more prosperous place in which to live. 'W e do not
have the choice to do nothing, Clinton told the crowd. But nine years after it was bom in pomp and
splendor, Supercar is dead. The victim of bureaucratic turf wars, a hostile auto industry and self-serving
politicians, the car that was supposed to change everything now stands as a sobering reminder of the
forces arrayed against greater fuel efficiency and a cleaner environment. Lost were years of effort,
$1 .5bn in taxpayer money and perhaps the best opportunity the nation has had to address some of its
most pressing issues. In fact, the very problems Supercar was supposed to help solve have only
worsened. American now imports 565 of its oil - the highest share of ever and twice the amount of 20
years ago. And at a time when the nation is poised to go to war with Iraq, oil imports from the Mideast
continue to rise. Scientists increasingly agree that global warming is real and worsening and that
pollution from millions of cars in the US is a factor. The Japanese, who wanted to be part of the Supercar
project but were rejected, have raced ahead of the Americans in auto technology, putting on the market
in five years what Detroit couldn't in 10: an ultra-efficient car. And the average fuel economy for new US
passenger vehicles is the worst in 20 years, largely because of consumers desire for gas-guzzling sport-
utility vehicles and pickup trucks. A review of thousands of government and industry documents,
including dozens of confidential White House records, and interviews with key Supercar participants
show that the Big Three automakers and US government officials repeatedly put their own short-term
interests and political agendas ahead of what was good for the project and what was good for the
country. The Supercar project had been cited as a cornerstone of America's energy and environmental
policies for nearly a decade. When top government officials and automotive executives were pressed
about what they were doing to protect the environment or to conserve energy, they frequently pointed to
Supercar. But year after year, officials neglected the project, telling the public it was making solid
progress when they knew that it was not. When Supercar finally did get on track, government and
industry officials quietly shut the program down. Detroit was more interested in catering to Americas
thirst for SUVs and pickup trucks, while Washington officials perpetuated their reputation as bureaucratic
bunglers by fighting among themselves and leaving Supercar vulnerable to political attack. But this is not
a story simply about government ineptitude and corporate maneuvering. It is also about how an unlikely
cast of characters, from C IA agents to a summer engineering intern to some of the biggest names in
government and industry, came together-often grudgingly so - to attempt a project so technologically
daunting that W hite House had compared it to putting a man on the m oon...The threat of higher fuel
efficiency requirements was perhaps the most powerful weapon in the government's arsenal. Yet for
almost a decade the government failed to use it, even as the industry stalled, fell behind and finally
moved to kill Supercar...For decades, Detroit had been the countrys industrial powerhouse, transforming
the car into a national icon and reflecting for better or for worse, Americas signature values: self-
reliance, competition, freedom. The automakers defended their interests relentlessly, particularly when
Washington demanded new rules on safety, pollution and fuel economy. Detroit complained that
Washington was often seeking new regulations without considering whether the industry had the money
or the technology to meet those standards. But Washington thought Detroit was not trying hard enough -
that it frequently claimed it could not meet new standards, then proved that it could. The fiercest battles -
and some of the most heated ever in Congress - were over fuel economy rules, established in the 1970s
in the wake of the Arab oil embargo and the national energy crisis. Almost overnight, the crisis reshaped
Americas way of life: Thermostats were dialed down to 68, the speed limit was dropped to 55 and
skylines were dimmed. People who rarely though about energy suddenly formed pre-dawn gas lines,
added driving costs to their budgets and carpooled to work. In Detroit, the automakers were caught flat
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footed. Most of their cars were big and heavy, averaging 15 miles per gallon - far below the smaller
Japanese imports. 'Before the oil shock, you couldnt give the Japanese cars away, recalls former GM
executive Craig Mark. 'The day after, you couldnt give away the big cars. Detroit closed factories and
laid off tens off thousands of workers. To save fuel, Congress passed the corporate average fuel
economy laws, or C A F, requiring manufacturers to nearly double the average mileage of their
passenger cars to 27.5 miles per gallon by 1985. The industry rejected, saying it would force motorists
into tiny, unsafe vehicles. But Detroit eventually found a way to cut ca weight and m eet the new standard
without sacrificing safety. In the process, the industry became more competitive. For the next eight
years, from 1985 to 1992, when gas prices were relatively low, Congress did not require additional fuel
economy for automobiles, and mileage figures remained flat. Clinton raised the ire of the auto industry
when he ran for president and advocated raising the standard to 40 miles per gallon by 2000 - a
dramatic increase that the carmakers said would cost thousands of jobs. Later in the campaign, Clinton
softened his position, calling his idea merely a 'goal and not necessarily a proposed law. Automakers
were even more suspicious of Gore. In his 1992 book 'Earth in the Balance, Gore called for eliminating
the internal combustion engine in 25 years, saying the damage it caused the environment posed 'a
mortal threat to the security of every nation. Now, President Clinton and Vice President Gore wanted a
joint research project on fuel economy. Washington and Detroit had collaborated before - to develop
high-tech car batteries, for example - but never on such a contentious issue. And so far, the white House
had not spelled out precisely what it wanted from the industry on this big research project...Disappointed,
government officials went to their final stop: Chrysler, the smallest of the Big Three and therefore the
corporation with the most to gain from a joint R&D project. There, the officials met Castaining, Chryslers
chief engineer. At the meeting, Castaining ordered all the policy analysts, lobbyists and corporate-types
from the room. Only a handful of his best engineers could stay. Castaining told the bewildered
government officials that he was going to treat them like any other design tern with a radical idea. 'Prove
to m e, he said, 'that this 80-mile-per-gallon car is possible. For the next three hours, the two sides
scratched out calculations and equations on a large note board as Castaining and his engineers
peppered the government officials with questions: How do you know that for sure? Where does that
number come from? Has anyone actually done that...W hen the meeting was over the influential
Frenchman was impressed. Supercar would be nearly impossible to build, he said, but it was worth a
shot...With Chrysler appearing to be on board, the talks with the Big Three automakers picked up steam.
O ver the next few weeks, drafts of a deal were exchanged, and lawyers signed off on key language...but
in the halls of the Capitol, trouble was brewing. John Dingell got wind of the Supercar idea and wrote to
the white House to say he had some questions - 48 of them ...the White House responded carefully to
Dingell, knowing that he would have a major say over any funding for Supercar. But Dingell's concerns
did not abate. 'History is replete with government screwing the industry, he told John Gibbons, Clintons
science adviser, according to gibbons notes of the telephone call, Dingell said the white House was
asking the Big three for too much and offering too little, particularly in terms of protection against future
regulation. When Dingell voiced similar concerns to the Big Three, the automakers began to pull back on
the Supercar plan, telling the white House they did not want to get in the middle of a fight between
Dingell and the Clinton administration. Talks slowed considerably. O ver the next six weeks, White House
aides struggled to assuage Dingell. They wrote letters to him, exchanged phone calls, and met with him
at least once/ Aides even decided to get the vice [resident to call Dingell on his birthday/. 'Dingell wanted
to make sure Detroit didnt get sideswiped by the federal government sweet-talking them into some
research project and then turning it into a regulation, gibbons recalls, 'I said, 'Now, John, were not going
to do that, Finally, on Aug. 13, the automakers submitted their version of a new draft proposal for
Supercar. But missing were substantial portions that both sides had already agreed to. The W hite House
was furious. 'In effect, much of the earlier months spent in good faith by government negotiators was
wasted, an aide wrote to Gore. The White House restored the deleted language, but the Big Three
rejected the changes and requested a meeting with the vice president...White House advisers went
home that night thinking Supercar might be dead. 'W e were convinced the whole thing had blown up,
Kelley says...Charles Gray knew what was at stake. Never before, he thought, had the highest office in
the land and the largest manufacturing industry in the country come so close to an agreement that could
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save so much fuel. Unwilling to see the opportunity slip away, Gray decided on his own to do something
that he thought might force industry's hand: He began making threats. He started calling industry officials
who understood his crucial regulatory power and warning that if they did not agree to the Supercar plan,
he would vigorously push for stricter fuel economy rules...Other government negotiators made similar
calls...Shortly after these calls, the Big Three automakers notified the White House that they were willing
to compromise but wanted to meet again with Gore. A meeting was set for the following week. Aides,
according to briefing papers, advised Gore not to waive the governments right to regulate the
automakers. But he could assure them that if they agreed to Supercar, 'it would not be in our interest to,
and we will not, impose short-term fuel economy requirements that would be inconsistent with
achievement of the long-term goal. The Clinton administration position was clear: if it got Supercar, it
would lay aside the 'virtual hammer of forced fuel economy. At the meeting...the CEOs told Gore that
they would agree to build an 80-mile-per-gallon car, but they wanted some wiggle room. They wanted the
agreement to read 'up to 80 miles per gallon...Next, the industry wanted some reassurances on fuel
economy rules. Chrysler C EO Eaton said the automakers would make some incremental improvements
in fuel efficiency, but that they didnt want to be forced by law. 'W e are prepared to be flexible on the
interim stuff, Gore said...In the end, Gore said the administration would back off its campaign promise
as well as veto any legislation that tried to turn the 80-mile-per-gallon Supercar goal into law. In an
interview with the Tribune, Gore says he believes he did not give up much in this trade-off. Congress, he
felt, was not going to approve such a large increase anyway. 'It was a weak bargaining chip, he says.
The deal was sealed with a handshake, and Gore led the C EO s down to the Oval Office to inform the
president...
109. cf. It m ay be an ass, but law isnt for sale - Reform of the legal profession must ensure it meets
social needs, rather than making it a commercial venture by Michael Prowse in Financial Times, p. xxx,
W eekend, M ar.17/ 18, 2001: ...T he 'rule of law is a prerequisite for markets and competition. Yet this
doesnt m ean we should treat the legal personnel necessary to underwrite the capitalist system in exactly
the same way as the commercial ventures that seek profits within its framework of rules. The historical
treatment of the law as 'different may embody more wisdom than we now appreciate...Law can no more
be conceived of as an ordinary consumer good than can medicine. And part of the reason for this is that
good lawyers should be trying to do more than merely satisfy customers desires in the most profitable
way they can d evise...
110. cf. The Economist, p. 24, July 22nd, 2000 (emphasis mine): ...Deng Xiao-ping, Chinas late
paramount leader, once said of economic reform that when you open the window, the flies come in.
Dengs successors, led by President Jiang Zemin, aim to let in as few flies as possible in the Internet
aoe. The degree to which they succeed will shape not only Chinas economic development, but also its
political future.
Also cf. Against all odds: China may struggle to sell distressed assets - Bureaucratic inertia, a poor legal
system and fears of instability threaten to thwart clean up of financial system by James Kynger in
Financial Times, p. 4, Thurs. M ay 24, 2001: ...If a significant portion of the Rmb1,400bn ($170bn) in
non-performing loans (NPLs) transferred from the 'big four1 state banks to four asset management
companies can be sold to foreign and domestic investors, then China will have found one way to reform
state banks groaning under bad assets thought to total 40-50% of their total....There is no doubt at this
stage, however, that the odds are against him [Yang Kaisheng, the man at the forefront of Chinas
biggest offer of distressed assets to foreigners]. Bureaucratic inertia, a barely functioning legal system
and government fear of instability all threaten to complicate the processes by which potential foreign
investors can reap a return. M r Yang says that most potential foreign investors at this sage are
'strategic, meaning that they plan to convert their NPLs into equity and then try to break up the company
and sell off its best assets. But there are numerous problems with this scenario. One is that it has been
common practice in China to ensure that the workers in a factory are the first to benefit from a sale of
assets. 'You are not going to get a business in which a foreigner sells off the assets and walks away with
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the profit while thousands of workers are left without severance payments, says Tim Clissold, partner at
Asset Management and Recovery, a Beijing-based company. In the US in the 1980s it was forced
liquidation that lay behind the success of the Resolution Trust Corporation that dealt with the fall-out from
the collapse of savings and loan companies. But winning a court order for corporate bankruptcy in China
is notoriously difficult and enforcing it against entrenched local interests can be impossible. Even if land
and real estate assets can be parceled off, the bureaucratic barriers to sale appear forbidding. For one
thing, permission to sell land cannot be obtained without payment of a transfer fee to local authorities
that can amount to 40% of its estimated value. No less daunting is the process of transferring debt into
equity. The main problem here is that many Chinese state companies either do not have a shareholding
structure or they have an opaque one. Deciding how many shares a foreign investor should get, and
whether they should be sold at a discount, will therefore be tricky.
Also cf. Chinas star rises - The countrys economy is growing strongly again and there are signs that
structural reforms will help to sustain the recovery" by James Kynge in Financial Times, p. 16, Tues. July
25, 2000: Most economists see a slight easing of downward price pressures later in the year. Price wars
could be eased further by industrial consolidation, but this is still being impeded for political reasons.
Loss-making manufacturing companies are supported by the government and state banks to avoid social
disruption.
111. cf. China struggles to unite its hands - Beijing must overcome its own inertia to reform big state-
owned groups by Kathrin Hille in Financial Times, p. 14, Tues. May 21, 2002: ...Local government are
lobbying the central government heavily on behalf of SO Es located in their cities. In other cases,
enterprises themselves may be willing to restructure but the central government will not let them do so
for fear of rendering workers useless. 'I can hardly make any m ove, says Xu Zheng Jun, chairman of
Kaijie Construction, a building materials subsidiary of the Baogang Steel Group in Baotou, Inner
Mongolia. 'W e are not allowed to fire any workers at all...T he government thinks we would run the risk of
social upheaval if we did...
112. People might keep their fixations until the social costs are proven to be so high that people are
forced to change their minds, attitudes, and resentments, cf. Switzerland admitted to United Nations - It
is the only country to join the assembly after a popular referendum" by Vanessa Arrington, Associated
Press in Wisconsin State Journal, A 1 1, Sept. 11, 2002: United Nations - After nearly two centuries of
neutrality, Switzerland became the 190th member of the United Nations on Tuesday with the unanimous
support of the General Assembly. The admission of Switzerland was one of the first orders of business at
the opening of the new session of the General Assembly...Switzerland was the only nation to decide to
join the United Nations after a popular referendum, which would strengthen 'the democratic premise of
our organization....Early Tuesday, Swiss President Kaspar Villiger said his countrys entry into the
United Nations would not compromise its traditional neutrality. 'The values and aims of the United
Nations are also the values and aims held by Switzerland, he said.
Japans fumbling bank reform provides another example in this regard, cf. Japan hesitates to put
'Zom bie businesses out of its misery by James Brooke in The N ew York Times, C1, C2, Tues. Oct. 29,
2002.
Also cf. Japanese may fumble bank reform again by Paul W iseman and James Cox in USA Today, 5B,
Mon. Oct. 28, 2002: ...Prim e Minister Junichiro Koizumi, a reformer in charge of bank regulation, is
rebounding in opinion polls. The powerful central bank is supporting, indeed demanding, change. But for
more than a decade Japan has again and again proved incapable of taking the painful steps necessary
to solve the problem. The prospects for reform took another beating last week. Under criticism from his
political party, Koizumi was forced to delay release of a controversial bank cleanup plan; his government
might reveal a new version this week. And Koizumis reformist banking czar, Heizo Takenaka, endured a
public flogging in the Japanese legislature three weeks after he took the jo b ...Th e problem is a
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staggering backlog of bad loans resulting from the collapse of Japans financial and property markets in
the early 90s and the ensuing economic slowdown. The government says banks are holding $345bn in
dud loans; private analysts say the real number could be two to four times higher. Japan has been
reluctant to make the agonizing moves most economists believe are necessary; forcing banks to eat loan
losses, pulling the plug on hopeless corporate borrowers and forcing others to restructure their
businesses. The reticence is not surprising. Hundreds of businesses would fail, and perhaps 2 million
Japanese would lose their jobs. But the cost of dithering is also high. Keeping zombie companies alive
ties up people and capital that could be put to better use elsewhere and forces healthy Japanese
companies into profit-draining competition with businesses that have nothing to lose. Thats one reason
Japan is caught in a relentless deflationary spiral: Prices fall month after month, taking corporate profits
down with them. Koizumi took office a year and half ago, promising bold reforms no matter how painful.
So far, hes been all talk. Many analysts say he simply doesnt understand the underlying economic
issues. But recently it looked as if the reform logjam might break. The Bank of Japan made a stunning
announcement last month that it was willing to buy big banks battered stock-market investments to give
them financial leeway to write off bad loans. The BOJs unconventional move put momentum into the
reform movement, and Koizumi quickly installed Takenaka as head of the Financial Services Agency,
which regulates banks, ousting a bureaucrat who had denied there was a banking problem. Takenaka
quickly went to work writing a bank-reform plan. As details began to emerge, bankers and their
conservative allies in Koizumis ruling Liberal Democratic Party (LDP) launched a counteroffensive,
saying the plan would plunge Japan into a full-blown recession. Takenaka didnt help himself by
declaring that no bank or company was too big to fail, pushing the stock market to 19-year
lows...Takenaka also is pushing to dramatically improve the quality of bank capital - the financial firewall
that separates banks from insolvency. Japanese bank capital is flimsy: Under lax accounting rules, banks
are able to generously count as capital some tax breaks that have value only when they report profits.
Tax breaks now account for an astounding 48% of big banks core capital Takenaka reportedly wanted to
force them to cut that figure to 10%. Even some analysts who called for bank reforms considered
Takenakas capital proposal unfair. After all, the government had once actively encouraged banks to use
tax breaks as capital. Worse, writes Goldman Sachs bank analyst David Atkinson, Takenaka's plan
would force banks to cut their loan portfolios by as much as 73trillion yen ($580bn) to keep core capital at
the 4% of assets regulators require. Atkinson figures the banks would do that by calling in loans from
relatively healthy companies that could afford to pay their loans. In short: the plan would hurt healthy
corporate borrowers and add to a credit crunch already punishing the Japanese economy. Analysts say it
makes sense to curb the use of tax breaks as capital, but that the plan should be phased in over several
years to ease the pain. Bankers are fuming. UFJ Bank President Masashi Teranishi, chief of the
Japanese Bankers association, said banks may consider suing the government if it OKs a plan that is too
harsh, Japans Nikkei news service reported. Most economists say any painful bank reforms should be
coordinated with a stepped-up BOJ program to pour money into the economy by aggressively buying
government bonds and other assets. But optimists have been burned before, and many doubt Japan will
seize the moment. T h e bigger and bigger the pressure gets, the less likely anybodys going to do
anything - until theres a shock to the system, says Steve Clemons of the New America Foundation, a
centrist think tan k...The prospect of unemployment might even force ruling party dinosaurs to rethink
their resistance to change." My comments here: Japans lack of adequate plan resolving the insolvency
of banks reflects the vulnerability of its system of institutions to an institutional dysfunction that would
stymie economy by going through such messy debates among different functional branches. This
mechanism is in contrast to Chinas hierarchical proceeding that all the controversial parties are usually
summoned together in the meetings held by the administration of higher levels and allowed to debate in
the meetings so that the higher leveled planners are able to get sufficient information, make resolution as
final consolidation of these arguments, and make adequate procedures to implement the plans. Once the
resolutions are somehow passed, all the parties should recognize the legitimacy of the resolutions and
their obligations to exercise the resolutions and to discipline themselves for not violating them, albeit
bargains and negotiations from these parties may be expected to continue.
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113. cf. In China, economic transition has risks - Capitalism could create jobs or lead to potential revolt
by Michael A. Lev in Shenyang, China, in Chicago Tribune, p. 3, Mon. Dec. 2, 2002: ...Most of the
attention these days is focused on the new Chinese economy, with its booming exports churned out by
efficient private and foreign-owned manufacturers. The blight in Shenyang comes from the slow demise
of the old factory system. China is about halfway in this evolution from communism to capitalism. The
transition represents more than an amazing ideological jump. It is a risky economic and political gambit
with enormous stakes for the countrys huge population. The number of unemployed from the collapse of
the old system may already exceed worker population in countries the size of Britain. If the restructuring
works, the greater efficiency of capitalism will create jobs and industries to replace the old ones, even in
the most wretched smokestack cities such as Shenyang. But if the government seriously miscalculates
and the rising new economy cannot cover the cost of dismantling the old one, unemployment will soar
out of control, creating the potential for mass urban unrest. For several years, illegal protests by the
unemployed have been occurring frequently, raising a serious question: whether China faces an
employment crisis that could wreck the economy and set off a revolt. Shenyang, depressed capital of the
rust Belt hub of Liaoning province in the struggling northeast, is a key part of the equation, where there
are clear signs of both the extraordinary scope of Chinas industrial problems and the government's
resolve to deal with them. Such a drastic transition has never been attempted anywhere on this scale,
and there are no reliable statistics to measure the depth of the challenge, or the progress. For several
reasons, including lax record-keeping and a communist government tradition of hiding bad news, one of
the most important economic experiments n the world is taking place without any clear monitoring. 'A
major transition. 'You could find towns dependent on one dying industry and paint a really bad picture,
said Andrew Rothman, China strategist for CLSA Emerging Market in Beijing. 'The key thing to get
across is that China is going through a major transition, and any time that happens it is going to be
extremely painful. No one can cite an accurate urban unemployment rate or estimate how much higher it
will go before the tide turns. And no one can say for certain how much money the government needs to
cover all the severance payments for the unemployed and future pension obligations. The government
acknowledges an urban unemployment rate of 7% and says about 30 million jobs have been eliminated
in the past five years, though some estimates run much higher. The government says many laid-off
workers have found jobs, though more state-owned enterprises fail all the time as the state abandons
businesses overburdened by the costs of running archaic cradle-to-grave, communist-style factory towns.
In one typical Shenyang industrial neighborhood of idled smokestacks and run-down 50-year-old
apartment buildings, as many as 60% of the workers are jobless. They survive on unemployment
benefits, monthly emergency handouts from the government or meager incomes form the informal
economy...Guo Zhi Li, 46, and his wife, Zhong Chong Lin, 39, barely scrape by on the money they earn
selling used coats and gloves from the baskets of their bicycles. Dinner for them is pickled cabbage and
rice. Eating pork or fish is a fantasy. 'O ur leaders talk about 'building a well-off society in an all-around
way, Guo said, parroting the rhetoric of the recent Communist Party leadership congress, 'Is that really
possible? Across the city, Liu Yu Fan, 49, is about to lose his $50 -a-m onth job at a textile factory where
he has worked for 30 years. His wife is unemployed. He cant afford to buy new clothes. He is bitter.
'Compared with past, the gap between rich and poor gets bigger and bigger, Liu said. 'That is something
I really dislike....T he government has an overarching plan to deal with laid-of workers and protect
retirees, but, again, no one can say whether it will work. The strategy is to scrap the communist
economic system, in which each factory cares for its workers, and create an overall social safety net that
includes pensions, severance pay and job retraining. This will free manufacturers to maximize profits.
The success of the transition is based on the assumption that the economy will continue to grow at least
7% a year. Corporate and employee contributions, along with valuable government stock holdings from
successful state-run companies, will fund payouts. Experts say officials realistic. The framework is in
place, but it will still be a tricky business to keep ahead of the bills. All bets are off if Chinas economy
stumbles. The only assurance analysts can offer is that Chinas government is not in denial. 'The people
at the very top realize this has to be made to work, said Stuart Leckie, a consultant with Hewitt
Associates who is working with officials in the northeast to develop the pension system. 'You cant just
tell a whole population: 'Sorry, there are no pensions. Good luck. In Shenyang, there are sings that the
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government is pushing job retraining and that the private economy is picking up some of the burden of
hiring former workers from state-run factories. At several outdoor labor markets where hundreds of
unemployed gather to find work, several people said they had gotten retraining. A 34-year-old man
named Li, laid off from a printing press and then a construction job, has become a chef. Tang Yao Xian,
the truck owner, was laid off from his job as a driver at a pharmaceutical plant three years ago. He now
runs a business with a $5,000 truck bought with hid savings. He has a cellular phone and regular clients,
one of whom paid him $30 recently to haul a load of iron ore. His business works because just as he lost
his factory job in a restructuring, other factories have fired their drivers and now turn to the freelance
market when they need a delivery. Tang said he earns $125 a month on average, up from $75 in his old
job. His wife earns $100 selling small items on the street. It is just enough to cover expenses and save
money for their daughters education. By Shenyangs hardscrabble standards, that makes Tang a
success story. But he is learning a heard lesion about life outside the protective bubble of government-
run corporations. 'Life is a bit better but much harder, he said from the cold cab of his truck. 'I feel the
pressure all the tim e.
114. As the state has more concerns about practical tactics than about ideology and principles, the
rational state reformers recognize that this dilemma has public repercussion with their immediate impact
on economic governance and reforming practices. Thus when the rational state reformers assume
transition as a strategic action, they know they have to reckon what the risks and costs the public and
business communities are willing to take. In addition to the factors of human psychology and values, they
understand they have to bring rationality into consideration, cf. Chinas economic growth beats forecast
by James Kynge in Beijing in Financial Times, p. 5, W ed. April 17, 2002 (emphasis mine): Chinas
economy grew by 7.6% in the first quarter of this year, considerably beating forecasts. But other official
indicators published yesterday revealed the strain that five consecutive years of fiscal stimulus is
exerting on government finances. Xiang Huaicheng, finance minister, said he personally felt 'big
pressure from the knowledge that the countrys fiscal policy and a 15 fold increase in welfare payments
to laid-off workers and state pensioners since 1998 had significantly weakened Chinas state finances.
'Th e proactive fiscal policy will ultimately fade out. said Mr Xiang. 'Such a fadeout will be gradual. It
might take several years...! cant give you a detailed tim etable. The spending program, which this year
includes Rmb86bn ($10bn. 7bn) in social welfare payments, has resulted in a projected record budget
deficit for this year. Domestic debt has also been growing fast, reaching Rmb1,600bn last year, or 16.7%
of gross domestic product. Economists say this situation mav be sustainable if China manages to
continue a sound record in boosting revenues. But figures for the first quarter were quite grim, Mr.
Xiang said, showing only a 3.4% rise in revenues to Rmb380.78bn, against a 23.9% rise in expenditure
to Rmb351.13bn. 'It is important that we curb expenditures, M r Xiang said. Many economists say that
over the next few years, China may be forced to recapitalize a technically insolvent state banking system
and create a funded pensions system by using central government revenues. The cost of such
operations could amount to well over 50% of G D P, independent economists said. If the government fails
to tackle these issues, it may become vulnerable to an economic slowdown driven by banks reluctance
to lend. For these reasons and others, Beijing is determined to maintain a high level of headline growth.
M r Xiang revealed the contribution the annual fiscal stimulus package has made to GDP growth: in 1988,
1.5%; in 1999, 2%; in 2000, 1.7%; in 2001, 1.8% ...
Also cf. Troubles ahead for the new leaders - Despite predictions of high growth, social stability is
threatened in The Economist, Nov. 16th, 2002.
115. cf. Lin et al. 1996 elaboration (pp. 285-287): In order to gain the support for reform from most
social groups and win the trust of most people, the political party or the government leading the reform
must adopt a reform approach that helps maintain a balance between growth speed and stability during
the reform process, and which too maintains the non-radical nature of reform. W e would like to borrow a
voting model to illustrate this point. Suppose the attitude toward reform may be divided into two types:
one emphasizing stability (left of the median line), and one emphasizing speed (right of the median line)
352
and that there are two different views on reform among the leadership (W and S). Social members with
extreme views toward reform have a clear objective to support. Those at the left side of W support W
while those on the right side of S support S. Under the condition that both policies remain unchanged,
their social members tend to support W and S, with the median line as the boundary. The figure shows
that if W or S moves its views toward the other side, it will win more supporters through shifting the
median line toward the other side. If both sides do this, it will modify the degree of extremity of the two
reform views. The result: advocates for stability also demonstrate concern about speed, and advocates
for speed also want stability. Based on the mechanism illustrated by the model, it can be seen that when
the two views are equally influential, their coexistence and the checks and balances of one against the
other one necessary and useful. However, to function this mechanism requires the incremental nature of
the reform process. Once shock therapy has been adopted, there is no longer any opportunity for social
groups or the population as a whole to make choices. The reform process and its degree of radicalness
cease to be controllable. Chinas reform has been carried out under the guidance of the Chinese
Communist Party. No faction within the leadership is strong enough to challenge mainstream views,
although there are different views within the leadership as to the scope, orientation, and timing of
reforms. The two predominant views are the one stressing stability and the one stressing speed. The
former emphasizes maintaining the stability of the social system and the slow process of reform and
growth and the latter, with its sense of urgency, places more weight on swift changes and trying to build
peoples confidence in reform through a higher growth rate. As China has opted for incremental reform,
people in the society and within the ruling party continuously have opportunities to make choices and to
correct overly radical measures. The mechanism illustrated in the model can, moreover, push forward
reform when it stagnates due to political obstructions. In fact, it is exactly such a correcting mechanism
that has enabled Chinas reform process to move forward steadily over the past 16 years, in spite of
many ups and downs. To maintain the unity between speed and stability is important for building peoples
confidence in the eventual success of reform.
116. cf. Outcasts from China's feast - Millions of laid-off urban workers are getting angry" by David
Murphy in The Wall Street Journal, A19, A20, W ed. Nov. 6, 2002: Shenyang, China 'Happy happy go to
work, safe safe return home exhort the Mao Zedong-era, cast-iron slogans above shuttered factory
gates. Most of those who worked for decades in the smelter, the cardboard factory and the other plants in
this citys Tiexi district have lost their jobs. Rundown buildings lend weight to estimates by local residents
that 70% of the districts workers are idle. They are a small part of a huge groundswell of unemployed
urban poor that has appeared in the past five years. As former urban industrial workers, they were once
the proud vanguard of the proletariat - unlike the rural poor, who always lacked money and status. Under
communist central planning, such steelworkers, miners and oilmen won respect and extensive housing,
health and education benefits for half a century. But things have changed. 'This is not a socialist country
anymore - the gap between rich and poor is too wide, says Xu Ming, 63 years old and laid off after
working 4 0 years in a Tiexi factory. The root of the problem lies in the move to reform, China may be the
workshop to the world, but in the process of turning out cheaper goods, it is purging state workers from
sunset industries. The reform of the bloated state sector began in earnest after the 15th Communist Party
Congress in 1997. Tens of millions of workers lost their jobs with state-owned companies, many of them
in cities across northeast China, the countrys rust belt. The 16th party congress that opens in Beijing on
Friday is expected to see the elevation of a crop of new faces to top party positions as aging leaders
retire. A key policy concern will be how to balance the drive for continued economic reforms with
demands to stanch unemployment. If the challenge isnt met the result could be more frequent strikes
and increasing social disorder. Workers with grievance are no longer just getting mad; they are
organizing. For the first time in recent history, workers in the first half of this year launched a series of
apparently coordinated strikes and demonstrations in several old industrial centers ranging from the
northeast to the southwest. Analysts say that the protests petered out only because authorities were told
to settle them quietly before they could m ar the party congress. That tactic worked for a while, but new
worker protests have flared in two northeastern provinces in the week leading up to the congress,
according to the Hong Kong-based information Center for Human Rights and Democracy. There are no
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recent official statistics on labor disputes, strikes and protests. In 1995, the government labor arbitration
committee dealt with 23,000 cases. This had jumped by 1999 to 120,000. Labor researcher Trini Leng
estimates the figure for 2002 could come close to 200 ,00 0 ...Labor Minister Zhang Zuoji said on Oct. 25
that since 1998, a total of 26.11 million workers had been laid off, and he claimed that 17.26 million had
since been reOemployed. In the early days of dismissals, it was relatively easy to find new jobs. No
longer. The Development Research Center, which is linked to the State Council, Chinas cabinet, puts
urban unemployment at 10%, and warns it could rise to 15% in the next few years. The DRC and Asian
Development Bank estimate that there are 37 million urban poor, 12% of the urban population. W T O
membership and growing competition have brought new pressures. The employment situation is 'very
grim, Minister Zhang told lawmakers, adding that, with population growth, the number of new entrants to
Chinas work force will peak sometime between now and 2005. A World Bank report estimated at the end
of last year that China needs to create almost 100 million jobs over the next decade to absorb laid-off
workers and migrants. As more state industries trim staff, it is becoming harder for workers to find new
jobs. 'The re-employment rate has declined gradually year after year, from 50% in 1998 to 42% in 1999,
35% in 2000, 30% in 2001 and 9% in the first half of this year, Zhao Xiaojian, a vice minister for labor
and social security, told the financial magazine Caijing in September. Despair over unemployment
angers many and official corruption helps to fuel their rage, especially when it involves unpaid wages or
being cheated out of promises made to them when they were laid off. It is no coincidence that the two
provinces with the highest wage arrears in the country, Liaoning and Heilongjiang, were rocked by unrest
this year. More than $1bn in back pay was owned to state workers in those provinces by 2001, according
to John Chen, a labor researcher writing in the China Labor Bulletin in August. Rather than being
organized by a few intellectuals or political activists, the protests were - to the partys alarm - about
bread-and-butter issues and had large-scaled support. 'The mass workers protests which took place in
the spring of 2002 were all economically driven, and the organizing was workplace-based, Ms. Leung
said in June in the Bulletin, which is published in Hong Kong. The government responded with a mixture
of iron fist - smashing protests and arresting leaders - and velvet glove - short-term payoffs and rapidly
expanding a basic welfare system. Twenty million people now receive the government-distributed
Minimum Living Standard Allowance, up from 12.8 million in 1999. The allowance, given to households
with an income below a locally set poverty line varies in size - in Shenyang. It is $36 a month. It is
viewed as the last line of defense against urban poverty and will probably have to keep growing,
particularly in the northeast wastelands, in a bid to keep some kind of lid on simmering unrest. The
government focuses its relief efforts on officially registered urban dwellers. But compounding the
potential for instability, large migrant populations of rural workers are an increasingly permanent feature
of Chinese cities.
Also cf. Boisot and Child in 1996 (623): Redding (1990: 95) has noted how living 'in a collectivist and
group-dominated society is a cultural tradition for the Chinese. The roots of networking as an
institutionalized practice are ancient and extensively developed in China. The fundamental contrast in
the institutional constitution of property rights and transactional safeguards between Western (especially
Anglo-Saxon) societies and China also imply that the nature of the social processes sustaining
networking in China is also quite different from those in Western countries."
Also cf. Opening the floodgates - for decades, global companies have imagined the day when the
Chinese would start buying foreign goods. Its here by Karby Leggett in The Wall Street Journal, R5, R6,
Mon. 14, 2002: ...the countrys economic future rests largely on its ability to create jobs. Unofficial
estimates put the number of unemployed at more than 100 million, and jobless benefits are meager.
Failure to create new jobs could lead to social dislocation and throw a wedge in China's ambitious
development plans."
117. cf. Liberalization pace reined in to reduce risks - China is keen to manage the rate of change
during the year of the horse to ensure the W T O agenda does not foment social unrest" by James Kynge
in Financial Times, China and the W T O , I, Friday, Mar. 15, 2002: Before the event, the impact of
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Chinas entry into the World Trade Organization tended to be seen in black and white tones. Economic
reforms would speed up in the worlds most populous nation, the rule of law would spread and a new
creed of economic Darwinism would ensure the extinction of obsolete companies and the prosperity of
the profitable. The government, meanwhile, would become more transparent and accountable to its
people. Foreign direct investment would flood into China, but social tensions would rise and, after five
years of wrenching change, a stronger and more modem country would emerge. Charlene Barshefsky,
the former U S trade representative who negotiated the key US-China deal, described the W T O accord
as something that 'will open the worlds largest nation to our goods, farm products and services in a way
we have not seen in the modem era. Bill Clinton, her former boss, called it an 'opportunity that comes
along once in a generation. However, just three months after China formally joined the W TO , the future
appears configured in more subtle hues. In some instances, the hopes aroused by headline W T O
commitments have been diluted by subsequent small print. The government - fearful of social unrest in
a year when a new national leadership is to be chosen - appears keen not to speed up economic reform
but to proceed more slowly. 'I believe that the Chinese leadership had demonstrated a high degree of
seriousness [in implementing their W T O commitments], says Don Phillips, a former assistant US trade
representative who was involved in Chinas accession process. 'It is clear, though, that the reformers and
those who want to implement W T O wont have an easy task. The main hurdles in implementing the
agreement, according to Mr. Phillips, are opposition to foreign competition both at local levels of
government and from 'the regulatory agencies who often regard themselves as the protector of domestic
companies rather than the regulator. There are already examples. Foreign companies hoping to break
into the worlds largest mobile telecoms market were promised under the W T O agreement they would be
allowed to take up to 49% in domestic operators. But since accession, two developments have reduced
their ardor. New rules stiffened entry requirements. Applicants would have to wait between 270 and 310
days for authorities to process applications for a mobile telephony permit, and the Chinese partner would
have to put up 75% of Rmb1 bn in capital before permission was granted - an onerous requirement for
many Chinese companies. In addition, the regulator, which is also the owner of the former fixed-line
monopoly China Telecom and the two main mobile companies, China Mobile and China Unicom, issued
an industry blueprint that envisages four large telecoms players instead of the current seven. It remains
to be seen if the regulator can make its writ run. But if it can, the number of joint venture partners
available to foreign aspirants will be limited to four large state companies, which so far have been able to
meet their capital needs on the Hong Kong stock market. 'The regulations seem designed to add as
much complexity and ambiguity to the process as possible, says Dan Brody, director of the US
information Technology Office, an industry grouping in Beijing. 'Forming joint ventures has become
undesirable for foreign companies. Foreign banks have also found their aspirations dulled. Under the
W T O agreement they will be allowed to offer renminbi banking services to Chinese corporations in 2004
and to Chinese individuals from 2007. But regulations published since China joined the W T O last
Decem ber make it clear that foreign banks can only open one new branch a year. Given the fact that no
foreign bank currently has more than a handful of branches, this is a crucial setback. In contrast, the
Agricultural Bank of China has 50,000 branches, the Industrial and Commercial Bank of China has
44,000, the China Construction Bank has 23,000 and the Bank of China has 13,000. Capital
requirements were also higher than expected. Foreign branches must have Rmb600m in operating
capital to conduct a full range of services, including foreign currency and renminbi lending to foreign and
Chinese corporations and consumers. In agriculture, a dispute has broken out over Chinas demand that
it can take as long as 270 days to approve of certificates avowing the safety of genetically modified crop
imports. This restriction, which was under negotiation by US and Chinese officials as this survey went to
press, has held up around $1bn in U S soybean exports to China so far. Such disputes are expected to
proliferate over time but Beijings trade partners are resolved in the short term to avoid an adversarial
approach towards W T O compliance. 'W e know we will have problems; we know they will have problems.
But we have to see this as a positive interaction, says Pascal Lamy, the European Union trade
commissioner. How long the patience of trading partners will last is uncertain, and much will depend on
Chinas record in implementing its promises, diplomats say. This, in turn, will depend to a large extent on
the health of the Chinese economy. Rapid domestic growth will allow China more latitude to absorb
355
foreign competition, but if the economy falters and unemployment surges, protectionist pressures may
intensify. The impact of the W T O on Chinese jobs may be considerable. 'The adverse effects of W T O
entry on output and employment are forecast to be particularly adverse in the motor vehicle industry,
agriculture, and financial services, especially banking, says Nicholas Lardy, senior fellow at the
Brookings Institution, in his recent book Integrating China into the Global Economy. 'Employment in the
auto industry is expected to fall by 500,000 and in agriculture by 11m. In banking, the jobs of a
substantial share of the 1.7m workers in the four largest state-owned banks are thought to be at risk, Mr.
Lardy adds. Nevertheless, some advantages of entry are also apparent. Foreign direct investment this
year has been flowing in at a record pace as formerly closed industry sectors open to foreigners. Actual
FDI rose 33.54% year-on-year in January to $2.966bn, while contracted foreign investment, an indicator
of future trends, soared 47.97% to $7.187bn...aw ay from the booming coastal areas, the prognosis is not
so robust. The deflationary pressures that stalled China during the Asian financial crisis have reappeared
in the recent months. Farmers incomes in many parts of the country are falling. Most manufacturing
industries are plagued by overproduction. Government debts are rising and corruption in the bureaucracy
is rife. These, plus the handover of power at an October congress to a new generation of leaders, are
expected to be the preoccuptations of the Chinese government during a potentially turbulent Year of the
Horse... The danger is that the domestic agenda may start to eclipse the imperative for W T O
compliance, and the five-year timetable for W T O inspired reforms may slip.
118. cf. Thirsting for oil, China is eyeing Russian supplies - This weeks Beijing summit is expected to
yield accord on a 1,500-mile pipe line by Peter Wonacott in Beijing in The Wall Street Journal, A15-16,
Mon. Dec. 2, 2002: As concerns about its energy future grow, China is turning to a neighbor: Russia.
The two countries are expected to sign an oil-pipeline pact this week during Russian President Vladimir
Putins visit to Beijing, which began yesterday. Industry insiders say the 1,500-mile project - to stretch
from Siberian oil fields in Angarsk to refineries in Northeast China - may involve investment of as such
as $2.5 billion for a 25-year deal. 'This is more than a symbol of friendship, says W u Kang, a research
fellow at the East-West Center in Hawaii. 'Energy security has become an obsession for China....[oil]
imports from Russia account for only 4% of the total [oil imports - of which Middle East was 48% , Africa
was 22% , and Asia Pacific 18%]. But in the first eight months of 2002, they jumped 70% to 50,000
barrels a day, according to HSBC Securities...China has been a net oil importer since the early 1990s,
ad domestic discoveries havent kept pace with its surging energy demand. The building of natural-gas
pipelines, and environmentally friendly experiments with coal, havent slaked Chinas thirst for foreign oil,
either. Chinas demand now presents opportunity for Russia, which last year recorded record oil exports
China and Russia are also exploring other energy agreements in power transmission. Still, the bulk of
trade isnt in energy, but in China's purchase of Russian military equipment and the sale of Chinese
clothes and home appliances to Russian border traders. Two-way trade surpassed $10bn last year, and
two-way volume jumped 18% in the first 10 months of 2002, about 10% of what China does with its top
two trade partners, Japan and the US. Boosting economies ties serves other strategic goals. China and
Russia have worked to reassure each other that strong ties arte a top priority, even as both court the US
and other Western countries. Also, the two neighbors face similar problems in battling terrorism abroad
and separatists at h om e...
Also cf. China, now an energy importer, struggles to reduce its reliance on Mideast oil by Keith
Bradsher in The N ew York Times, C1, C4, Tues. Sept. 3, 2002 (emphasis mine): ...Energy security is a
deeply sensitive subject in China, where self-sufficiency was a mantra during Mao Zedongs time. But
officials now acknowledge that this is no longer realistic and are publicly worrying about the implications
of this rising dependence on imports 'will dramatically increase the supply-side risks of petroleum
resources, Chinas minister for state land and resources, Tian Fengshan, said in a rare statement on the
subject in July, 'and that will dam age the countrys capacity to ensure its oil resources as well as
economic and political security....D eals are taking place in the context of a radically changed energy
industry. In the name of deregulation. China has swung from a heavily bureaucratic, centrally planned
economy to one having remarkably little energy policy planning at all. China abolished its energy ministry
356
in 1993, after years of bureaucratic struggles that pitted it against the coal, electricity and oil-refining
industries, which were each their own ministries as well. But with the conversion of many of these para-
industries into state-controlled, for-profit companies late in 1998. the resuit has been a near-absence of
coordination. Another result has been an emphasis on energy production instead of conservation.
Chinese gasoline prices now rank with those in the US as among the lowest in the world for oil-importing
countries, and are a third of retail prices in Europe, where steep taxes push the price to $4 a gallon or
more to discourage gasoline use. The National Peoples Congress, Chinas Parliament, has been
discussing the imposition of steep gasoline taxes here for two years, but has taken no action. The State
Development Planning Commission is now setting China's energy policy on everything from pipeline
routes to liquefied natural gas contracts with foreign nations. But the commissions energy staff numbers
fewer than 20 people, who are hard pressed to address all the issues before them, said Xavier Chen, the
China program manager at the International Energy Administration; the governments Energy Research
Institute employs several dozen more. By comparison, the United States Energy Department has 16,000
employees, of whom at least 40 are involved in some way in the policy-making process, and hundreds
more administer regulations..."
Also cf. C N O O C pins its hopes on its LNG strategy - The state-run group is looking to secure a niche as
the countrys sole producer and importer of the gas" by Joe Leahy in Financial Times, p. 15, Thurs. Aug.
29, 2002 : ...Dem and for gas in Chinas booming economy is rising rapidly. The fuel is expected to
account for about 8% of Chinas energy needs by 2010, compared with only 2% now..."
Also cf. More deals in pipeline after China contract - LNG supply contract just the start of the race for a
massive energy market" by Richard McGregor and James Kynge in Financial Times, p. 6, Aug. 9, 2002
(emphasis mine): Australia was celebrating yesterday after winning a hard-fought battle for Chinas first
liquefied natural gas (LNG) supply contract - a US$14bn deal that secures the future of the countrys
largest resource project, the North W est Shelf. But behind the headlines about this contact is a larger
story about Chinas search for energy security to supply its fast-growing economy, a trend which will have
a big impact on global markets over coming decades. Long reliant on coal for up to 85% of its power
needs, Chinas new enemy policy is being built on two pillars. The first is a partially privatized oil
industry, which is investing heavily overseas as the country's oil imports rise. The second is gas, which
will provide about 8% of Chinas enemy needs bv 2010. This will make China the worlds fastest-growing
LNG market in this decade, lifting its use by 50-60bn cubic meters in the period. The market is expected
to double again in the decade 2010-20. The Australian resource, which will enter the country through
Chinas first dedicated LNG terminal in Shenzhen, will be followed by other deals through supply ports in
Fujian and, later, another near Shanghai. Beijing is using the leverage it gains from large contracts to
make deals with foreign suppliers to take equity stakes in their fields. China has already bought stakes in
oilfields in places like Kazakhstan, Venezuela and Iraq, and invested in large iron ore and aluminum
projects in Australia. In doing so. China is mimicking the strategy of North Asias leading economies.
Japan. South Korea, and Taiwan - resource-poor counties which invested overseas to secure enemv
during rapid development. Australia, which built its post-war economy around resource exports to these
countries, is attempting harness itself to Chinas growth in the same way. So far, the strategy is working.
Even before yesterdays LNG deal, Australia exports to China had been rising by an average 20% a year
for nearly a decade, with the biggest contributor being growth in iron ore sales for steelmaking.
Australia's record of political stability and image as a reliable supplier to North Asia was crucial in
winning the gas contract...Australian governments, bv contrast, have been cultivating Chinese leaders
since the early 1980s to lure mainland investment and win resource contracts. At home, China has a
number of massive projects of its own on the drawing board. There is a $1bn, 4,000km gas pipeline from
the west of the country to Shanghai, and another project to transport oil and gas overland from Russia. In
all of its oil and gas projects - and now, slowly, in its mining industry - China is tying itself both to foreign
partners and global markets, to ensure it obtains the best technology and prices not artificially inflated by
state controls. Nevertheless, the LNG imports are likely to create delicate competition issues within
China. The projected price of domestic oas. to be transported down the west-east pipeline, is expected to
357
outstrip that of imported LNG. putting industries powered bv domestic gas at a potent ional disadvantage.
For example, the projected cost of gas from the west-east pipeline to consumers in Shanghai is Rm b1.35
($0.16) per cubic meter - significantly more than imported LNG, analysts said. Such disparities,
however, will only cheer foreign suppliers, who will be beating down Chinas door for LNG contracts for
years to com e.
119. cf. China thrown off balance as boys outnumber girls - Societys traditions and one-child policy
could drive nation into turmoil - or war by Paul Wiseman in Wuhan, China, in USA Today, 1A, W eed.
June 19, 2002: Chinese traditions, a tough one-child-per-couple policy and modern medical technology
have combined to create a demographic nightmare that threatens Chinas stability and endangers
prospects for greater political freedom in the country with the worlds largest population...
120. cf. China opens door to generic drugs to counter A ID S by Leslie Chang in The Wall Street Journal,
M 2 , Mon. Sept. 9, 2002.
Also cf. The future of A ID S - Grim toll in Russia, India, and China by Nicholas Eberstadt in Foreign
Affairs, p. 24, Nov/Dec. 2002: ...even without approaching the infection rate of sub-Saharan Africa,
HIV/AIDS is poised to exact a staggering human toll over the next quarter-century in the region's three
pivotal countries - Russia, India, and China...the economic costs of the disease in these three countries
will be vastly larger than they have been in Sub-Saharan Africa..." Ibid. pp. 29-30 (brackets mine): ...the
Chinese Health Ministry raised the official estimate [of the total number of people living with H IV/AIDS in
China] to one million...In June 2002, an unnamed UN official told The N ew York Time that there could
be as many as 6 million H IV cases in China today; if that claim proves accurate, China would currently
have the largest HIV population of any country in the world. Given Chinas enormous population, these
huge H IV numbers still translate into relatively low rates of prevalence: a million H IV carriers would mean
a rate of about 0.13 percent; 2 million, about 0.25 percent; and even with the astronomical figure o 6
million, China's H IV prevalence rate would be only somewhat higher than the current 0.7 percent rate in
the US. But whatever the true rate is, there can be no doubt that totals are rising swiftly. Chinese
authorities and UNAIDS, for instance, both suggest that the prevalence of H IV in China has been
increasingly recently by about 20-30 percent per year; the US, Centers for Disease Control and
Prevention also note that at current rates the umber of victims could double in 30 months. H IV is
currently transmitted in China by three main routes: extramarital heterosexual intercourse (abetted by the
ongoing expansion of Chinas commercial sex business), illicit IV drug use, and the sale of unsafe blood.
This latter factor is in many respects particular to China and reflects the realities of Chinas ongoing
economic transition. With the demise of rural commune system and the attendant disintegration of public
health care in the Chinese countryside, both patients and doctors needed new means of financing rural
health care. One such method was the sale of blood or plasma by impoverished farmers to
pharmaceutical concerns, clinics, or unregulated agents called 'blood heads. The transactions typically
took place without the benefit of fresh, disposable needles. Officially encouraged through the early
1990s, this trade in blood was outlawed in 1998 - yet it still continues. The Chinese H IV epidemic
appears to be predominantly heterosexual in nature, and the risk of H IV inflection is disproportionately
high among the rural poor. High-risk subpopulations include IV drug users, buyers and sellers of blood,
and commercial sex workers. Largely at-risk groups many include the so-called floating population (the
more than 100 million migrants from rural areas seeking opportunity on the fringes of Chinese urban life)
and the 'unmarriageable males (the rising number of young men in China who, due to the countrys
growing gender imbalance, have no realistic prospect of finding a bride). Although epidemiological data
on H IV risk factors for China are spotty, there is also no doubt that behavioral mores are rapidly
changing. One telling indication is that between 1985 and 2001 the registered incidence of sexually
transmitted infections in China soared by more than a hundredfold... Ibid. p. 36: ...T he models
illustrative calculations...suggest that China experienced 'only 30,000 new AIDS cases in 2000. By
2015, assuming just a mild epidemic, new AIDS cases in China erupt at a pace of nearly 100,000 per
m onth...
358
121. cf. Chinese will move waters to quench thirst of cities" by Erik Eckholm in The N ew York Times,
A1, Tues. Aug. 27, 2002 (emphasis mine): The booming cities of northern China are parched and
constrained by a growing shortage of water. Yet in Chinas rainy south, the mighty Yangtze River pours
vast volumes, unused, into the sea. So why not, Chinese leaders have long asked cross the country with
new canals, bringing that 'wasted' water to where it is vitally needed for the countrys congress? In a
world short of fresh water, one of the gravest challenges facing governments is that needs and supplies
are often far apart. Now China, with water scarcity reaching the critical stage in sprawling showcase cities
like Beiiina and Tianiin. has embarked on one of historys great water-moving projects. A huge cost and
great risk to the environment, the government plans to rechannel vast rivers of water from the Yangtze
basin to the thirsty north, over three pathways of nearly 1.000 miles each. The official price tag of $58bn,
nearly half to be spent in the next eight years, is more than twice that of the Three Gorges Dam, Chinas
most recent mega-project now nearing completion. Some officials speak of delivering new waters to a
'great Beijing in time for the 2008 Olympics, an indication of the political overtones of the project as well
as the crash tim etable...
122. cf. Tiger China pussyfoots around growth by John Thornhill in Financial Times, p. 28, June 3, 2002
(emphasis mine): ...Rather than resembling a tiger, China is, if anything, more of a pussy cat Fred
Hu, China economist at Goldman Sachs in Hong Kong, argues that it is wrong to view China as a single,
unified economy. The entrepreneurial coastal regions are already expanding at tiger rates of about 10%
a year. But Chinas economy is of continental proportions and contains many other less dynamic regions.
which drag down the overall rate of growth. Mr. Hu compares the restructuring problems facing the
industrialized north-east of China with those in post-communist Eastern Europe during the 1990s.
Massive, state-owned enterprises need to restructure their entire businesses without sacking millions of
workers and shredding the corporate welfare net. Meanwhile, the west of the country is comparable to
the impoverished ex-Soviet states of central Asia...Satisfying the conflicting demands of Chinas Korean,
Polish, and Tajik economies is going to be a monumental challenge for the so-called 'fourth generation
of Chinese leaders that will assume power during the next year. How can China pump enough money
into developing its western provinces without sucking its richer regions dry? How can Beiiino contain
social unrest in the countryside while promoting further growth in the towns? 'It is going to be a very
touoh balancing act. Mr. Hu savs. It will really put the fourth generation to the test."
123. The problem thus is how to handle the dilemma between speed and stability so that the state could
still retain its reform momentum. For instance, a recent breakup with the current system of residence
permit, which could be considered as a bold and critical move from the perspective of Chinese
economic governance, poses new challenges for the government to balance its social costs and benefits,
cf. China to allow more peasants to move by James Kynge in Beijing in Financial Times, p. 7, Thurs.
Aug. 30, 2001: The worlds most comprehensive system to control the movement of people is to be
loosened significantly in October when China starts to allow tens of millions of rural peasants to find work
in the cities. State media said yesterday that from October 1, residents of rural China would be able to
apply for 'residence permits in smaller cities and towns if they can prove a legal home and a stable
source of income in their new urban environment. The planned changes represent one of the most
significant reforms thus far to an ubiquitous hukou (residence permit) system that has served as one of
the main pillars of Communist control since the revolution in 1949. It is believed to have been first
formulated during the Han dynasty around 2,000 years ago. Although its pervasiveness has in recent
years been eroded by various economic imperatives, the hukou still determines where most of Chinas
1.3bn people live, work, attend school and raise their families. The system also provides Communist
authorities with the means to keep tabs on people's lives, track down criminals and root out political
dissidents. Because the location of a persons hukou determines to a great extent the work and education
opportunities on offer, residence permits in large cities such as Beijing are immensely sought after. On
the black market in Beijing, each permit is currently worth around Rm b100,000 ($12,000), according to
touts. A permit in a well-appointed city can also significantly improve a persons marriage prospects.
359
Millions of migrant workers from Chinas impoverished hinterland dream of marrying someone with a
Beijing kukou through which they also win permission to live in the capital. 'W e had to wait seven years
but my son has now got a Beijing hukou. He will never have to live the life of a peasant, said Ma
Zhiping, a native of an impoverished farming village in Hubei, who married a Beijing factory worker. Her
son now attends one of the best primary schools in China and can expect a future unimagined among
the water buffalos and maize fields of his ancestral village. The changes planned in October are
prompted by economic necessity. The number of excess workers in rural areas already exceeds 150m,
according to conservative official estimates. In addition, farming is expected to become less labor-
intensive as the imperative for efficiency grows with Chinas entry into the W TO , expected sometime
later this year or early next. Mindful of these pressures, China plans to expand its smaller cities and
towns into industrial and manufacturing bases, using the labor that an influx of peasants will provide. It is
less clear, however, where the extra funds to finance their welfare needs will come from.
124. cf. A Chinese puzzle in The Economist, p. 33, Apr. 21st, 2001: Gone are the days when a Chinese
leader could establish foreign policy without reference to public opinion or the political
establishment... President Jiang is not a dictator in the mould of Mao or even Deng. He depends more on
rule by consensus... Thus his weapon depends on a skillful and subtle balance between the need for
economic growth and political pressures, such as those nationalists. Ibid. ...That means, among other
things, having to pay heed to nationalist pressures while striving to prevent economically vital relations
with America and Japan going really sour....M r Jiangs instinct in the days ahead will be to try to smooth
over differences with Japan, just as he would like to establish good working relations with Mr Bush. The
problem is that public and institutional opinion in China - an increasingly volatile force as the country
undergoes painful social and economic change - could propel him to adopt a tougher stance than
common sense would dictate in order to ensure he maintains his influence in the years ahead... Such a
balance also exists in the public. Ibid. ...Among students in particular, the US inspires a curious mixture
of respect and contempt. Many are attracted by American culture and wealth, yet resent what they feel to
be American efforts to hold China back. During this latest crisis the authorities made sure that calm
prevailed on the campuses, but at the cost of making M r Jiang seem lacking in patriotic fever, at least in
the eyes of students.
125. cf. Asia banks threatened by $2,000bn in bad debts" by James Kynge in Beijing in Financial Times,
p. 1, Thurs. Nov. 1, 2001: ...T he report, 'Nonperfoming Loan Report: Asia 2002, was made available on
the eve of a key meeting due to start in Beijing today that will attempt to energize Chinas attempts to
tackle its debt problem by selling NPLs to domestic and international investors at a steep discount. The
decision to allow discounts was taken recently by Zhu Rongji, Chinas prime minister, against
considerable opposition from within the bureaucracy in Beijing - who argued the move was tantamount
to allowing foreigners to strip the assets of Chinese state-owned enterprises...
126. cf. Chinas confidence problem by Robert Thomson in Financial Times, p. 31, Mon. Oct. 15, 2001:
...In an attempt to bring order to the markets, Zhou Xiaochuan, chairman of the China Securities
Regulatory Commission, is doubling the number of his investigators and has recently referred two cases
of price manipulation to police for a criminal investigation...Mr. Zhou is keen for the countrys first open-
end fund, the Huaan Innovation Fund, not to be the last. 'It depends on the market, he said. It does,
however, also depend on the political will of the Chinese government, which is keen to restore the faith
of individual investors who have been victims of the habitual manipulation of individual stocks.
Also cf. Beijing still split on delayed exchange" by Richard McGregor in Beijing in Financial Times, p. 17,
Fri. Sept. 7, 2001: Chinas top policy makers remain divided over a delayed new Nasdaq-style
exchange, and a 'strong decision by the leadership is needed for it to go ahead, according to the
mainlands securities regulator. Zhou Xiaochuan, chairman of the China Securities Regulatory
Commission, said the exchange had become 'controversial since being put off just before it planned
launch in mid-2000. 'The problem is that we cannot get an agreed opinion - the experts have different
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views, Mr. Zhou said. 'People may hope to have a perfect preparation for this market, but sometimes it
cannot be perfect. W e still need a strong decision as to whether we do it or not...W ith a growing
corporate sector hungry for funds, and with banks lumbering under bad debts, China has encouraged
rapid growth in the countrys fledgling capital markets. However, senior figures have become wary of a
new board, designed for entrepreneurial companies, after widespread price manipulation and speculation
on the present exchanges in Shanghai and Shenzhen. The sharp downturn in technology stocks in the
US, Europe and Japan has also held back the launch of the new exchange...Several other reforms have
been put off or delayed, including the introduction of futures products. Mr. Zhu said index futures might
be introduced soon, but anything involving derivatives would require approval from the State Council,
Chinas cabinet.
But recently China IT bids or IPOs become aggressively upfront in stock market. See Digital China
prices IPO in Financial Times, p. 16, May 30 W ed. 2001: Digital China Holdings yesterday priced its
initial public offering at HK $3.68 per share, at the top of an indicative range of HK$3.00-HK$3.68,
Reuters reports from Hong Kong. Digital China is the foreign brand distributor spun off from leading
Chinese computer maker Legend Holdings.... Analysts were not surprised by the top-of-the-range
pricing, given current demand for Hong Kong-listed Chinese stocks. 'Chinese stocks are really hot right
now; if you are a shareholder, this looks like a bull market for China. Clearly there is more upside
hanging on to the shares, said Fung-ee Lim, analyst at UBS Warburg in Hong Kong."
127. cf. Asia banks threatened by $2,000bn in bad debts" by James Kynge in Financial Times, p. 1,
Thurs. Nov. 1, 2001: ...several problems persist. Land titles in China are opaque, court rulings difficult
to enforce, corporate bankruptcies difficult to secure, and corruption rife.
128. cf. Stability to the people -Beijing is easing the pace of reform to head off social unrest by James
Kynge and Richard McGregor in Financial Times, p. 14, Fri. Oct. 26, 2001 (emphasis mine): The
Chinese language reveals the imprint that the countrys huge population has left on the national psyche.
One ancient phrase has it that 'an excess of people brings disaster. Another suggests that 'mountains
and seas of people bring chaos. So ingrained is the fear of hunger that families are counted in 'mounts.'
Now, as throughout history, the overriding priority and concern of the Chinese governments is to ward off
chaos by providing for its 1,3bn people. This has created a simple economic dynamic: when growth
slows, Beijing becomes uneasy over potential social instability and tends to slow the pace of its more
ambitious and painful reforms. It happened during the Asian financial crisis of 1998 - and again this
week. Two policy shifts - one to halt the sale of state shares on the domestic stock market, the other
ordering a virtual freeze on the bankruptcies of larger state enterprises - indicate that China is backing
away from some of the most crucial aspects of its reform agenda. 'It looks as if we are facing a difficult
time ahead, following the attacks on American on September 11 and with the global slowdown, says a
senior research adviser to government officials. 'It is only common sense to slow down policies that
seem risky. Several broad observations can be drawn from the policy decisions. First, that China is
deeply concerned over its growth prospects as exports founder on slowing US and Japanese demand.
Second, that safeguarding social stability is taking precedence over free market reform in the fraught
atmosphere of a leadership succession struggle. Third, that by deferring the pain of restructuring its
lumbering state industries and its casino-like stock markets, China may be storing up problems for itself
after it joints the World Trade Organization (W T O ), expected either late this year or early next year. This
w eeks policy shifts are important because they affect the most fundamental of all Chinas economic
reforms: the task of transforming about 300,000 mostly inefficient, overstaffed state-owned enterprises
(SOEs) into modem companies that can compete in international markets. Although they contribute only
about a third of the gross domestic product, SOEs use about two-thirds of the countrys credit resources
and employ 55% of urban workers. Bankruptcies, which are needed to reduce excess capacity and
facilitate the reallocation of resources, have been pursued only sporadically over the past few years
owing to concerns over ballooning unemployment. Nevertheless, the World Bank has called for the
adoption of a revised bankruptcy law to formalize the process. It emerged this week, however, that
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Beijing is moving in the opposite direction. The Supreme Court, the pinnacle of Chinas legal system, has
ordered provincial courts not to take on any bankruptcy cases for companies with assets worth more than
Rmb50m ($6m ) - most large and medium-sized SOEs. There remains no indication on when the long-
delayed bankruptcy law will be passed. Although protests by disgruntled dismissed workers remain
commonplace in parts of China such as the north-eastern provinces of Liaoning, Helongjiang and Jilin,
the governments latest roll-back of reform does not seem to have been triggered by a single incident.
Instead, a complex of concerns is emerging. Li Rongrrong, minister at the state economic and trade
commission, sounded an unusually grim note, 'W e have estimated that the economic situation will be
very tough in the latter half of the year. W e expect economic work will be very difficult next year,' he
said. The World Banks latest assessment of China said annual growth would slow to 6.8% in 2002 from
7.1% this year. The economy grew 7.6% in the first none months year on year and 8% in 2000. The
slowdown will inevitably hit the earnings of China's state companies and reduce the number of jobs
created by the relatively dynamic private sector. It will also deepen a profound malaise in the vast rural
economy, swelling the ragtag ranks of at least 150m drifters from the countryside who travel from city to
city in search of menial jobs. Such stresses may persuade the government to soft-pedal its drive to slim
down state enterprises, which, according to one World Bank report, still employ about 45m workers (out
of a total 140m) that are surplus to requirements. All of this is made even more significant because
China stands on the brink of joining the W TO . Accession to the world trade body will trigger a chain
reaction of tariff reductions and market liberalization followed by an expected surge in foreign
competition that will deal SOEs a rude shock. So Beijing cannot defer economic restructuring for long. Li
Shunguang, a researcher at the China Institute for Restructuring the Economic System at the State
Council, says the plan now is to redouble efforts to merge strong state companies with their weaker
counterparts to create conglomerates after the style of South Koreas chaebol and Japans Zaibatsu.
'T h e road that China is following is very similar to that of Japan in the past. He says, 'There is strong
government ownership, little reform of the cultural and political systems and a mix of politics with
business. Prof Li worries that this industrial model may one day saddle China with the type of
inefficiencies that symbolize some the largest Japanese and Korean companies. But ambitious plans to
launch a wave of mergers among domestic airlines, telecommunications and car companies indicate that
Beijing is unlikely to be swayed from its purpose. One danger is that Chinas commitment to liberalize its
economy under the W T O ordnances will one dav run u p against imperative to control redundancies.
Andv Rothman. China strategist at CLSA Emerging Markets, savs that although Beliina is sincere in
abiding by its W T O promises, domestic considerations weigh heavily. 'W hen the crunch comes and they
have to balance their W T O commitments against domestic interests, domestic interests will win out. All
these problems - the inefficiency of the SOEs and the risk of social unrest inherent in mass redundancy
- would be easier to deal with if China had a viable social welfare system to provide for those who lose
their jobs. But it does not. The decision this week to halt the sale of state shares on the stock market is a
big blow to hopes that Beijing would be able to construct such a welfare system in the foreseeable future.
Ten per cent of the proceeds from selling state shares was destined for a chronically underfunded
national social security fund. But now - unless the scheme is reinstated - a crucial channel for funding
has been closed. Analysts say the decision to halt the scheme was motivated by a desire to prop up the
market, which had fallen by about 30 per cent since the policy was announced in June. Investors
responded enthusiastically to the ban, bidding share prices up nearly 10% on the day the halt was
announced. But the scheme's suspension has done nothing to tackle the underlying problem of the
financial markets: the poor quality of listed companies and the lack of transparency of their management
and finances. Analysts maintain that it has also sent the wrong signal to Chinas millions of retail
investors, that the government will step into the breach to rescue the market whenever prices fall too
far... Again, stock market analysts am ue. Chinas mandarins opted to stave off the risk of social unrest
among investors rather than subject them to the discipline of the market. W hile history may caution
Chinas leaders to be wary of disaffection among the countrys vast population, the cause of free market
reform unoes a bolder approach. In the end, though, as the late paramount leader Deng Xiaoping never
tired of warning: Stability overrides everything."
362
129. W hat China could get is an outcome of pull-and-push balance. It is plausible that pragmatism would
prevail, assuming that the predominant rational reformers want the outcome not at the expense of its
construction of rule of law and not at the expense of its reform momentum.
130. Increasing competition will press the state to accelerate reforms, while growing instability, tensions
and unemployment rate will press the state to slow down reforms. It turns out that there is a balanced
need for managing the pace of institutional changes and reforms, cf. Chinas reforms in Financial
Times, editorial, p. 10, Thurs. Mar. 7, 2002 (emphasis mine): A clear message is emerging from the
convoluted rhetoric at this w eeks session of Chinas National Peoples Congress - the costs and
concerns relating to social stability are rising sharply. Economic reform, as a consequence, is being
placed on the back burner. As outlined in yesterdays address by Xiang Huaicheng, finance minister, the
budget deficit for 2002 is set to soar by almost 20% to Rmb309.8bn ($37.5bn)...it mainly reflects a fiscal
stimulus package covering public works, social benefits and support for rural workers. The fiscal boost
underlines the sensitivities surrounding a period of change among Chinas senior leadership...The surge
in spending reflects their desire to keep growth high enough to absorb the rising numbers of unemployed
displaced by industrial reform and the restructuring of state-owned enterprises. Chinas accession to the
World Trade Organization, and the deregulation that implies, will add to the challenge. The price of this
strategy is high. Chinas government debt has risen to almost 20% of gross domestic product as a result
of expansionary policies. Non-performing loans at state banks take the proportion to at least 70% ,
according to independent economists. Unfunded pension liabilities further compound the debt burden. A
broader worry - for Chinas economic modernization and for foreign businesses eyeing its market - is
that the momentum of reforms could be lost in a period of political transition. Important initiatives to
deregulate financial markets and improve the efficiency of capital allocation are already on hold. From
the international perspective, slower reforms could undermine Chinas ability to satisfy its W T O
commitments. Mr. Zhus expected departure would remove an energetic and frequently lonely champion
of reform. Chinas bureaucracy, riven with factionalism and vested interests, underlines the need for
strong leadership. This is particularly important given the resistance from the regions to central
government directives. It is vital that Chinas new leaders pick up the baton of deregulation. Managing
the pace of change is understandable and desirable. But public spending should be viewed as an aid to
reform rather than a substitute."
131. For examples, those vulnerable developing countries might expect more protection on their core
industries in the world economy than those developed countries, cf. W hy are g lobalizes so provincial? -
A level field for trade favor the economic giants by Alice H. Amsden in The N ew York Times, A27,
T h u s . Jan. 31, 2002 (emphasis mine): ...todays volume of international trade and investment is huge
by historical standards. Yet globalization remains provincial, as will be apparent over the cou se of the
forum. A smattering of rich countries exercises lead esh ip in international organizations and world
markets, despite the principle of a level playing field. The United States appoints the president of the
World Bank and fights with Europe and Japan over the directoship of the International Monetary Fund.
The World Trade Organization is more democratically governed, but its power structure nonetheless
allows rich m e m b es to retain b arries against other m e m b e s ' exports of textiles, agricultural products
and steel. These global institutions are, at their highest levels, surprisingly parochial Globalizations
locomotive, the multinational firm, has similar limits. Its novel technologies and famous brand names
conquer the planets consumers, but the top management and advanced scientific researchers of most
multinationals remain headquartered in roughly a dozen high-income countries. The World Economic
Forums announced theme, 'Leadership in Fragile Tim es, could not be more appropriate, because the
fragility of the times might be reduced by a broadening of global leadership. Forum participants need to
find how to include more people from semi-industrialized, middle-income countries in the ranks of
international business leadership. W hat will it ta k e ? ...For the lame aspiring middle group of developing
nations - countries like Tunisia. Nigeria and Vietnam - the advantage of accepting the doctrine and rules
of a level olavino field is access to world markets. The disadvantage is a loss of the freedom to subsidize
company formation and the necessary learning process. That freedom has been critical to most
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economic modernizations that have had any lasting success. A level playing field may thus entail a false
equality. As the World Economic Forums members ponder the problem of leadership, they have the
opportunity to stimulate debate on whether the one-size-fists-all principle is too rigid to allow newcomers
to enter the world trading system and prosper in it. If the forum succeeds in bringing flexibility to the
system - by recognizing the benefits of different government policies for countries at different
development levels - the result mav be a more inclusive alobalism. one less likely to be passing through
fra g ile times....
132. Rational planner has edge in location control and timing control over decision-making so that she/he
could maximize capacity of exploring prosperity, shortening downhill, and minimizing risk. Very often, it
seems the two gauges (competitive and protective for both efficiency and legitimacy) are quite
ambiguous and even paradoxical. But it could be a virtue of political leadership if it is able to effectively
work in those hazardous and blurring areas and if it is able to persistently commit to sound reforms and
to turn dilemmas into leverage and assets for transition. For example, Cao et al. 1999 observed that the
locals have actually gained from the unevenness of reform speed suitable to the local conditions in the
sense that they could avoid large labor dislocations and the serious political disorder that accompanies
privatization that occurs all at once" [3.3.2 The use of local information and adaptation of reform to local
conditions. Because local governments have better knowledge about local conditions than the central
government, when they are responsible for lay-offs and re-employment, they can make the best use of
local information (a la Hayek). For example, local governments can pursue the reform at the speed
suitable to the local conditions. It is thus critical that the central government is not forcing local
governments to reform all at once or all at one speed. Thus, if the local government finds that workers
are not being absorbed as fast as predicted, it can slow down the pace of reform. This in part accounts
for the unevenness of reform progress across localities. Unevenness mav thus become a political virtue
when it implies an absence of large labor dislocations and the serious political disorder that accompanies
privatization that occurs all at once. Because local governments adapt the reform to local needs, we also
observe a great variety of approaches to reform (ibid. 114; emphasis mine)]. Political activism is always
in the drivers seat of state activism. State activism always involves political processes (see Section
5.11, Chapter 5).
133. As for Chinas history of united front policy, see an associated report of the biography of Jiang
Zhemin, the retired general secretary of Chinese Communist Party, cf. Chinese pilgrims flock to Jiang
family home Hardly a log cabin story, Chinas leader grew up in a solid brick house by Elisabeth
Rosenthal in The N ew York times, International, A3, Sat., Nov. 9, 2002 (emphasis mine): ...the party
secretary, who is expected to retire next week, hails neither from peasants nor workers but from a
cultured and prosperous middle-class family of doctors, scholars and businessman. It is the kind of
worldly bourgeois background that in more hard-core Communist strongholds would have excluded a
young man from party membership. But in a way it makes perfect sense, since Jiang Zemin has
transformed Chinese Communism during his tenure by embracing entrepreneurs and intellectuals and
bringing his country into the World Trade Organization, moving it center stage on world markets... In the
book ['Red Leaf on the Autumn Hill of the biography of Jiang Zemin and Jiangs clan, written by Zhang
Ziqiang, an elderly amateur historian and a big local fan of Jiang, who lives in Nantong, about an hour
from Yangzhou, Mr. Jiangs hometown], Mr. Zhang lays out in great detail the history of a prosperous and
cultured family of outward -looking managers and businessman familiar with W est and Fluent in foreign
languages. Jiang Shixi, Jiang Zem ins paternal grandfather, helped establish one o f he first steam ferry
services on the Yangze River, despite the opposition of local officials who mistrusted the boats as a
foreign invention. In its traditional strongholds deep in the hinterland, the Communist Party often played
up class divisions, encouraging workers and peasants to rebel against those with wealth or learning. But
in this prosperous region, the party made more efforts to attract business executives and intellectuals
into the Communist movement. Indeed, a number of Chinas most liberal statesman today, architects of
the countrys recent reforms, came of age in the more open-minded brand of Communism that prevailed
in this area. Hu Jintao, who is expected to succeed Jiang Zemin this week, went to school in Taizhou,
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just a few miles from here. For the Jiang clan, the principal point of contact with Communist Partys was
Jiang Zem ins uncle, Jiang Shangqing, who joined in 1927 out of an intellectual sense of compassion for
the downtrodden during his student days. He was arrested a couple of years later in Shanghai for
revolutionary agitation. In the 1930s, he was assigned to recruit enlightened gentry and local notables
into the party. He was assassinated by anti-Communist forces in 1939, at the age of 38. Since he had no
son, his wife adopted his young nephew Jiang Zemin, as was the local custom to ensure there would be
a man in the family. That twist of fate made the young Jiang Zemin the son of a 'revolutionary martyr,
giving him an important credential for rising in the Communist Party. But Jiang Shijun, Present Jiangs
birth father, never joined the party. A successful businessman, he took over the family ferry company
from his father and, after the Communists came to power, became a teacher. For his book, Mr. Zhang
interviewed a number of people who had known Jiang Zemin as a boy, gaining entr6e because he was
friendly with several elderly members of the clan. 'H e was just an ordinary kid, Mr. Zhang said. 'N ot the
mischievous type; more the sort who loves to read and recite Tang poetry. Indeed, Yangzhou, which Mr.
Jiang last visited two years ago with President Jacques Chirac of France, is peppered with examples of
Mr. Jiangs calligraphy and his poems. A huge billboard off the freeway exist that leads to Yangzhou
displays a photo of Jiang zemin waving and proclaiming, 'Building Yangzhou into a city where ancient
culture and modem civilization mingle....The Yangzhou municipal government says it has no immediate
plans to develop the site for tourism. But on Sunday, the street was crowded with groups and individuals
trying to understand how the milieu made the man. 'You can see why he was nurtured here, said Zhang
W ei, one of the visitors from Henan Province. 'The feng shui is excellent.
Also cf. W H O global health plan will give boost to alternative medicine by Frances Williams in Geneva
in Financial Times, p. 6, Fri. May 17, 2002. Also cf. Lin et al. 1996 (285-7) (emphasis mine); ...Chinas
reform has a logical order. Once the micro-management units have the right to allocate a portion of the
newly created resources, it is impossible to maintain the unitary system of planned resource allocation
and state-controlled prices. Reform thus naturally extends from the micro-management institution to the
resource-allocation mechanism and macro-policy environment. The dual-track system of resource
allocation and price is the logical outcome of this situation. The formation of the dual-track system and
the expansion of the market role, in turn, will increase demand for a compatible macro-policv
environment. The upshot is deepening reform. In the process, when the dual-track system is in operation,
the areas covered bv the market expand constantly, and the prices of goods covered by plans are
constantly adjusted to get closer to market prices. The impact of a macro-policv environment featuring
distorted prices on the operation of the economy is dwindling. And it will soon be quite easy to abandon
this type of macro-policv environment altogether...
Also see a recent report China tries to soften image while maintaining grip by Steve Friess, Special for
USA Today in USA Today, 6A, Fri. July 27, 2001 (emphasis mine): ...The release this week of three
US-based scholars convicted of espionage marks a new approach by a historically stubborn Chinese
government to show it can compromise and respond sensitively to American concerns, observers
say...At the root of the contradiction may be an impending power struggle within a government bracing
for transition. Successors to outgoing President Jiang Zemin and Premier Zhu Rongji, both of whom will
have reached the retirement age of 70, will be named next year. Hardliners in the security sector
apparently fear some recent reforms are creating risks, while agencies involved with foreign trade and
diplomacy want to project a more moderate imaoe. 'There are debates among the different sections
about how to handle different cases, but neither sector is overwhelmingly dominant. says political
science professor Zhu Feng at Peking University in Beijing. He says the next set of rulers are key
because 'these decisions have to be made by the very top leaders. The moment is pivotal for a country
in the throes of a dramatic economic transformation, one that is accompanied by political concerns for a
Communist Party accustomed to keeping political dissent under wraps...As a result, scholars say,
awkward situations have arisen in which the security forces, focused on maintaining internal control,
have taken actions that the foreign ministry must defend to the world. In the case of the scholars, China
tried to appease both constituencies by convicting the trio, and then releasing them on humanitarian
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grounds. 'If they didnt convict, it would have been loss of face for the security constituency, says
Jerome Cohen, G aos US lawyer. Protecting the image of the various factions within China often can be
motivating factor.
134. A recent report demonstrates a growing negative relationship between Chinas market reforms and
social inequality that concerns the state officials and agencies and conditions the pace of its transition
toward global openness, cf. Chinas communists admit problems - Communist Party report says
relations between party officials and the masses are troubled, a report from Beijing, in N ew York Times,
cit. from Wisconsin State Journal, A8, Sunday, June 3, 2001 (emphasis mine): A startling frank new
report from the Communist Partys inner sanctum describes a spreading pattern of 'collective protests
and group incidents arising from economic, ethnic and religious conflicts in China and says relations
between party officials and the masses are 'tense, with conflicts on the rise. The unusual report,
produced by a top party research group and published last week by a Central Committee press,
describes mounting public anger over inequality, corruption and official aloofness, and it paints a picture
of seething unrest almost as bleak as any drawn by dissidents abroad. It describes a growing pattern of
large protests, sometimes involving tens of thousands of people, and an incident in which a defiant
farmer cut off a tax collectors ear. The report warns that the coming years of rapid change - driven in
part by Chinas plans to accelerate the opening of its markets to foreign trade and investment - are likely
to mean even greater social conflict. It makes recommendations for 'system reforms' that can reduce
public grievances. ' Our countrys entry into the W T O mav bring growing dangers and pressures, and it
can be predicted that in the ensuing period the number of group incidents mav jump, severely harming
social stability and even disturbing the smooth implementation of reform and opening up. states the
report, 'China Investigation Report 2000-2001: Studies of Contradictions Among the People Under New
Conditions.
Also cf. China slows reforms as unrest grows by James Kynge in Financial Times, p. 4, Weekend June
9/June 10. 2001: China is apparently slowing some elements of its economic reform program amid
official indications that anti-government demonstrations and instances of social unrest are growing. Zhu
Rongji, the premier...acknowledged that rural incomes were declining and several other challenges
remained. 'O f course, we have to be on the safe side and slow down a little some of our market reforms
according to the current conditions, he said...He said the government would postpone a plan to replace
local government levies on farmers with a single tax because of worries that revenues would not be
enough to provide free education. Mr Zhu also announced delays to reforms of the severely strained
welfare system, which aims to provide for the millions of workers being laid off as state-owned
enterprises are reformed. A pilot project in the north-eastern province of Liaoning, due to be
implemented in several cities in each province, would now be scaled back to one city per province, he
said. The delay in building a social welfare system means state-owned enterprise reform will also be put
off. 'If you want to reform and you ask two-thirds of the [workers] to go, where will you tell them to go?
he asked, in an indication of the difficulty of pressing forward with state-owned enterprise reform. The
government would also delay a plan to introduce a fuel tax to replace random fees on vehicles because
of a recent rise in oil prices, he said. It has been clear for months that China is slowing down aspects of
its economic reform program, but M r Zhus speech marked Beijings highest-level acknowledgement so
far. Chinese economists said that not only was the reform program being slowed, it was also being re
oriented away from free-market liberalization and towards tackling problems resulting from previous
reform initiatives. The Peoples Daily, mouthpiece of the ruling Communist party, provided a stark
commentary on the social problems that have contributed to the governments softer line...'There are
some among the masses who, out of dissatisfaction with their incomes, housing, consumer prices and
welfare are putting up resistance by stopping work, going on strike, launching petitions, organizing
demonstrations and attacking the government.
Also cf. Reform in China - Quick march, slow march: Is China scaling back its reforms?" in The
Economist, p. 43-4, June 16th, 2001 (emphasis mine): Zhu Ronji, Chinas prime minister, may have a
366
reputation for being a straight talker, but he can still be hard to read. In a speech early last week, Mr Zhu
admitted he was putting the brakes on some of the countrys main efforts at economic reform because of
the difficulties they were encountering. Yet at the end of the week he was giving the nod to an agreement
with the US that is meant to accelerate Chinas long-waited entry into the W T O - an event that Chinese
officials admit is sure to put even greater pressure on some sectors of the economy. The normal practice
of most Chinese officials is to deny any shifts in policy, even when they are abundantly obvious. Yet a
leaked text of an address given by M r Zhu at Tsinahuan University in Beijing on June 5th revealed the
prime minister in a characteristically forthright mood, at least by the standards of his highly secretive
qovemment. M r Zhu said it was necessary to be safe and slow down somewhat a few major reforms in
light of the current situation. Mr Zhu indicated that one casualty would be the government's plans to
promote badly needed tax reforms in the countryside. The aim of these is to eliminate various fees and
levies arbitrarily imposed on farmers by local authorities and rely instead on a single tax based on
income from crop production...[But] these have exacerbated other problems. A report by the State
Development Planning Commission published in March this year found that in one Anhui municipality
farmers had been given permission to keep nearly half the money they used to hand over to the
government. But as a result the revenues of village-level governments had plummeted by nearly two-
third - a devastating blow to an administrative tier that can hardly afford to support its bloated staff, let
alone provided basic services for ordinary citizens. Across China, rural officials are nearly as
demoralized as the farmers they are supposed to serve. The original plan had been to extend the tax
experiment to most of the rest of the country this year. But now, as the prime minister delicately put it, it
seems there are still some problems that need to be looked into. Other reforms to be slowed down (not
for the first tim e) are plans to impose a fuel tax in place of the random charges imposed on vehicle
owners by local governments, as well as the introduction of a social-security system that will remove the
burden on employers to provide welfare benefits. The proposed tax would anger consumers at a time of
rising fuel prices. Rapid changes to the social security system would heighten fears among workers in
state-owned enterprises - no less bitter than their country cousins - that they might lose some of the
welfare provisions they once enjoyed."
135. W hether or not state reformers come to believe that they are able to decrease risks and costs will
depend on their risk averseness and level of confidence in their own professional knowledge, their
flexibility and adeptness of management, their skill o f governance, and what they have learned from past
trial-and-error experiments. I am greatly indebted to D. Soskice for his 1990 article and figures (ibid. p.
202), which are very instructive to my thinking and my drawing of the figure here.
Also cf. China acts to curb corporate bankruptcy by James Kynge in Financial Times, p. 1, W ed. Oct.
24, 2001: China has ordered a virtual freeze on the bankruptcy of its larger state-owned enterprises in a
sign that crucial industrial reforms are being slowed as Beijing seeks to ward of social unrest...signs of
slowing growth and irregularities in the bankruptcy process appear to have convinced Beijing that
liquidations should be all but halted, despite the urgency injected into domestic reforms by the prospect
that China will join the W T O later this year or in the first half of n ext... Ibid. China shares rally on news
of sell-off cancellation by Richard McGregor in Shanghai: Chinese stock prices staged a powerful rally
of nearly 10% yesterday after the government backed away from a controversial plan to sell off shares in
state companies to pay for a national welfare fund...The Ministry of Finance had been battling to keep
the share sales going as part of its plan to find a long-term source o f funds for future welfare
com mitments...Only about 35% of listed shares in China are tradeable, with the remainder still held by
the government.
136. The states concerns about the dilemma of choice between competition and protection actually
address complexities floating in between that are driven by Chinas political economy. The terms of
Neo-Keynesian regime and Neo-Schumpeterian regime" are borrowed from Bob Jessop, 1990. Also cf.
Bob Jessop 2002: Unamerican road to post-Fordism: On the states role in steering the knowledge-
based economy. A presentation for the Havens Center of the Sociology Department, UW-Madison. Mar.
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13, 2002.
137. The straight line crossing hazard zones (shaded areas) demonstrates the range of policy choices
between competition and protection available to state reformers as they face changing reality (see
detailed discussion in Section 5.1, Chapter 5).
138. cf. Chinas changing of the guard halts key reform by James Kynge in Beijing in Financial Times,
p. 4, W eekend, Sept. 7/Sept. 8, 2002 (emphasis mine): ..during a year in which political considerations
are paramount, officials appear less concerned with oversupplv deflation and the misallocation of credit
resources than they are about maintaining social stability..."
139. cf. Chinas currency flexes its muscle by Paul Wiseman in USA Today, 5b, W ed. Dec. 19, 2001
(emphasis mine): The illegal money changers here have never seen anything like it: Chinas currency,
the yuan, this fall muscled aside the US dollar in black-market trading. The Sept. 11 terrorist attacks
undermined confidence in the US. And for the first tim e ever, the yuans black-market rate topped the
official government rate of 8.28 for each US dollar. The yuan has faded a bit from its black-market highs
earlier this fall. But it is still strong enough to signal that the Chinese government is undervaluing the
yuan - a sharp reversal from years past when Beijing had to prop up its currency. The unprecedented
development threatens to delay the Chinese governments plans to ease tight restrictions on currency
trading. Beijings reluctance to let the yuan float more freely is angering Japan, which says a cheap yuan
gives Chinese exporters an unfair advantage in world markets. The vuans strength on the street reflects
more than the dollars weakness. Foreign investment is pouring into China, and the country is running a
big surplus in trade. If the yuan traded in worldwide currency markets, it would almost certainly rise
sharply - maybe as much as 50% , says Chi Lo, economist with Standard Chartered Bank in Hong Kong.
But Beijing doesnt allow the yuan to trade and instead has effectively tethered it to the US dollar at a
fixed rate. The black market - and some informal offshore markets that let investors bet on the
underlying value o f the Chinese currency - offer a reality check on the official rate. Right now the signal
they are sending is c le a r The yuan should rise. The new respect accorded to the yuan is a sign of
China's perceived economic strength. But Chinese official arent gloating. The upward pressure on the
currency is causing: Friction with Japan. Tokyo, already waging a trade war with Beijing over cheap
Chinese imports, is pressuring China to revalue the yuan upward. Official revaluation probably wont
happen. Raising the yuan would undermine Chinese companies bv upping the price of their goods on
world markets and cutting the price of imports. It also could prompt more of the vicious Price-cutting that
damaged Chinese manufacturers in the 1990s. The Chinese government is reluctant to do anything
further to hurt domestic companies now that China has joined the World Trade Organization and must
open its markets wider to foreion competition. A ouandarv over controls. Chinese officials want to let the
yuan trade more freely and were expected to begin loosening their grip on the currency. Now their push
to liberalize has been slowed. If they let go of controls, a rising (yuan) would add to the economys
deflationary pressure and hurt exports already suffering from weak global dem and. savs Standard
Chartereds Lo. Beijing, meanwhile, is taking other steps to ease upward pressure on the currency. It is
considering allowing Chinese to invest abroad for the first time and weighing a plan to let companies
listed on the Hono Kong stock market issue depositary receipts in China. Both moves would cause cash
to flow out of China and undercut the value of the yuan.
140. cf. Chinas changing o f the guard halts key reform by James Kynge in Beijing in Financial Times,
p. 4, Weekend, Sept. 7/Sept. 8, 2002: ...T h e biggest problem associated with the bankruptcy of the
state-owned enterprises is that there is no agreement on what should constitute bankruptcy, how to treat
asset distribution to the workers and creditors,' according to Zhu Shaoping, a director I the law drafting
committee at the NPC. It is not so much solely an economic problem but more of a social stability
issue,' he added.
141. Otherwise, the counter-outcome might have been similar to the recent crash of a bundle of dotcoms
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in the Western stock markets. Had those dotcoms not bypassed available alternatives, there wouldnt
have been so many failures in the stock markets in the first year of this new millennium, cf. W . Chan Kim
and Ren6e Mauborgne in Financial Times, p. 12, Thurs. Jan. 25, 2001: ...The common response to the
dotcom crash is to evoke the need for consolidation. That would allow loss-making companies to cut their
advertising budgets, their staffing and many of their other overheads. But if that is the real issue, we
would argue that it is more important to put right these businesses underlying faults: the lack of a strong
value proposition, of a business model that will really make money and of an understanding of adoption
hurdles...
142. Thus competition is most likely to happen where rivalries match each other with similar reachable
expectations. Otherwise, their expectations and choices are likely to be self-destructive. The palpably
good outcome is efficiency to avoid recurrent setback to the old institutions under the planning regime.
This is particularly important in a more or less open society en route toward democratization like China,
where background institutions remain strong. Once reformers fail, conservative activism would quickly
prevail over the public and reverse its transition and reforms.
143. Numberous historical instances can be found in which macro-institutions established during previous
times, when combined with new institutions, can make new environments that contribute dynamically to a
transition (see Chapter 3). This is quite salient to Chinas economic transition when its blend of former practices
helps generate new outcomes, paths, and directions.
144. Path dependence may contribute to organizational inertia, slack, etc. (cf. W . B. Arthur 1989). Also cf. P.
David 1994 discussion of its origin (208: "...'path dependence in stochastic dynamical systems...a process
whose outcomes are path dependent is 'non-ergodic.' Systems possessing this property, if they remain
structurally unperturbed, are unable to shake off the effects of past events and do not have a limiting, invariant
probability distribution that is continuous over the state space. In other words, they are drawn into the
neighborhoods of one or another of several possible 'attractors,' selections among the latter being made,
typically, by the persisting consequences of some aleatory and transient conditions that prevailed early in the
history of the process. The counterpart of the property of path dependence in the case of deterministic systems
manifests itself most immediately through the (equilibrium) outcome's extreme sensitivity to initial conditions.
Accordingly, its solution is through either technological shock or intrusion (Aoki), or the use of structural holes
(R. Burt), or administrative intervention (i.e., subsidy), etc.
The thesis of path dependence depends upon the nature of the relationships between organizational
constraints and contingencies, with whether they are dynamic or static, rather than the influences of
organizational conventions and patterns sui generis as "path dependent" imposed by the organizations. Path
dependence cannot cancel out the possibilities of dynamic changes if those will become crucial to the future
survival of an institution. From such a perspective, China has its own unique track of path dependence - it has
heavy historical and cultural legacies from its long civilization. But that doesn't mean China is incapable of
dramatic changes.
If I understand it rightly, path dependence" may refer to many respects with assorted implications. For
instance, Hollywood likes franchise movies (i.e., movie sequels) and movie stars with slashes: Youre the
money, Look at that million dollar face, etc. That is, the film industry has a tradition - it maintains a track
record of films and stars in terms of their reputations and box office revenues, and if a blockbuster movie
breaks box office records, then its sequences will follow. Also, the selection of rising stars has always followed
the tracks of their own previous records, each a unique genealogical tree. So I guess Elizabeth Taylor may
have started in the 1950s because she looked alike Vivien Leigh of Gone With the Wind in 1939, Brat Pitt in
the 1990s looked much like Robert Redford in the 1960s-70s, Maddona in the '80s looked a little like Monroe in
the '50s, and Monroe in the 50s looked a little like Lana Turner in the early '40s, and so on. The Godfather in
the 1970s reflected films about the gangsters of the underground world in the first half of the last century. And it
was followed by dark movies like Good Fellows in the early 1990s. The presumption is that success inspires
369
imitation and assures follow-ups, since similar traits increase the likelihood of future success. But also, the
similarity also brings Hollywood its mainstream stereotypes in film makings, cf. Hollywood goes to epic
proportions - Epic failure of Cleopatra crushed the historical genre for decades" by Scott Bowles in USA
Today, 1A, Fri. Nov. 29, 2002: The past is back in Hollywood. Having worn out their welcome with the criminal
underworld and explored virtually every cranny of outer space, movie studios are returning to a genre they
nearly mothballed four decades ago, the historical epic. A quantum leap in computer-generated effects, a
resurgence in historical books and a gladiator who knocked down Oscars door two years ago have rekindled
this town's love affair with a subject that was once known for ill-fitting togas and cheesy sets...There are no
fewer than 14 historical epics - stretching from the Trojan W ar to the Civil W ar - in development or planned
for release over the next two years...For studios, the return to the classics is the industrys biggest gamble
since it tried to sell Elizabeth Taylor as Cleopatra 39 years ago... Hollywood has been clamoring to embrace
the challenge since Gladiator triumphed in the public arena in 2000...The genre is a chance for Hollywood -
and its stars - to revisit its heyday when Ben Hur and Spartacus packed them in and 1962s Lawrence of
Arabia won the best-picture Oscar...Once a mainstay of Hollywood, historical epics - along with the Western
and other pre-science-fiction action forms - fell from grace faster than Cleopatra fell out of theaters after its
1963 debut...When Cleopatra failed to earn back a quarter of its cost, 'the traditional historical epic was
finished, says Tom Adams, president of Adams Media Research...
145. From this perspective, the importance of history can be reviewed in the significant role of past
institutions in the formation and development of present and future institutions in a country, i.e., the
influence of institutional path dependence driven by organizational adaptive expectation, organizational
isomorphism, personal ties for coordination and competition, etc. cf. David, P. 1994, 208-9: I perceive
there to be three main analytical insights concerning the roots of path dependence in economic
phenomena which can take us a long way towards understanding why history matters so vitally where
human organizations and institutions are concerned. The first has to do with the role of historical
experience in the formation of structures of mutually consistent expectations that enable coordination to
be achieved without centralized direction of the actions of individual economic agents. The second is
concerned with resemblance between the information channels and codes that multi-personal
organizations require in order to function with even a minimum viable level of efficiency and durable
physical capital goods. The third involves the implications of strong complementarities, or
interrelatedness - and the consequent necessity of achieving consistency and compatibility - among the
constituent elements of complex human organizations."
146. Also similar discourse appeared in Fruin 1992 volume, cf. Fruin. 1992, p. 57 (emphasis mine):
...Major Japanese corporations are different from comparable Western firms, and they are different for
historical reasons. The first of these involves timing. Japanese companies appeared quite late in the 19th
century, yet by W W I they were already driving ahead the Japanese economy. As a consequence of this later
development relative to the major economies of the West, the macro- and micro-economic climate as well as
the political and social milieu of institutional development were different. The later development of modem
public and private institutions in Japan has given them a highly reflexive quality. That is, as institutions, they
embody a rather self-conscious effort on the part of local leaders to pick and choose from a variety of available
organizational options, and to adapt, modify, and refine these after their introduction into Japan...Japanese
institutions were founded on the basis of learning, choice, and action, and the openly intentional aspects of the
endeavor were quite remarkable. The creation of such modem institutions assumes rather sophisticated
knowledge and appreciation of Western institutions as well as careful consideration of what was possible in
tum-of-the-century Japan. The adaptation and re-creation of Western models of organization, like the
corporation, represent one of the most successful and systematic attempts to pick and choose, design, and
mold the institutional framework of contemporary life...By the third and fourth industrial revolutions, Japanese
enterprises were global leaders in high-tension steel, exotic metal alloys, micro-electronics, superconductivity,
biotechnology, and space-age materials. Thus, timing began to favor rather than hinder Japanese efforts as
industrialization shifted from the first to the second industrial divide and as Japanese entrepreneurs gained
experience with the possibilities of re-creating Western institutions. Indeed, catching and riding the crest of
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gathering industrial waves necessitated a certain size in production units and sophistication of method. These
required an initial period of experience, effort, and education followed bv a period of accelerated growth
culminating in a crescendo of more advanced products. Japan was a follower nation in the first industrial
revolution, a representative nation of the second, and a leader bv the third."
147. Tim ing" is meaningful in the real social life and in the specific location and environment in which
social actors live when the event happens. T im in g may also refer to public attention being paid to a
certain social actions and social choices at certain times, etc.
148. I.e., diachronic analysis, cf. A. Abbott 1997 discussion, p. 1152. Also, cf. R. Axelrod 1984, p. 182: "the role
of time perspectives is critical in the maintenance of cooperation...Just as the future is important for the
establishment of the conditions for cooperation, the past is important for the monitoring of actual behavior."
149. That is, the choices of social actions largely depend on the history of the choices of social actions and
their interaction as causes and consequences. For instance, through interaction, a new strategy chosen with its
successful outcomes would be adopted and imitated by others, cf. R. Axelrod 1984, p. 168. Ibid. p. 12:
"choices made today not only determine the outcome of this move, but also influence the later choices of the
players. The future can therefore cast a shadow back upon the present and thereby affect the current strategic
situation." Ibid, p. 14: "In general, a strategy (or decision rule) is a specification of what to do in any situation
that might arise. The situation itself depends upon the history of the game so far." Ibid. p. 182: "Fortunately, the
ability to monitor the prior behavior of the other players does not have to be perfect." Ibid, p. 182: "It is essential
that the players are able to observe and respond to each other's prior choices. Without this ability to use the
past, defections could not be punished, and the incentive to cooperate would disappear." Ibid, p. 183: T h e role
of time perspective has important implications for the design of institutions."
150. cf. Developing strategy for a not-so-global village - The idea of global economic convergence has
proven to be a myth, making data gathering on emerging markets essential" by Philip Parker in Financial
Times, p. 12, International management," in Mastering managem ent, Mon. Jan. 21, 2001:
...economic indicators are spatially correlated...This spatial correlation is not symmetric in all directions,
however; growth patterns will be more similar among some neighbors than among others...In particular,
the farther a country is from the equator (all other factors held constant), the higher its income and
consumption per capita in the long run. This is called the 'equatorial paradox....The colder countries of
the world (whether adjacent neighbors or not), seem to be converging to the same level of economic
wealth and consumption. Absolute latitude, in fact, explains some 70% of the cross-country variations in
income per head and is the single most important factor explaining economic divergence compared with
many other variables. Convergence clubs are, in fact 'climatic clubs. This effect has been increasing
since the second world war, especially as more countries adopt capitalist economic systems. W hy is
this? First, it is clear that all value chains end with a consumer. All industrial products are transformed
via manufacturing or some other value-enhancing process, which in turn are transformed or distributed to
end users...Countries that are hot all year round will, in the long term, consume less clothing, food,
housing and energy. W hile this view o f conditional convergence may seem obtuse, it has secure roots in
physics and its effects on human physiology. The world is not a set of countries, but climatic zones with
varying resource bases and economic regimes.
151. But those intermediary areas have very often missed linkages with contemporary mainstream mega
theories of the social sciences. For instance, as neo-classics holds to its formal analysis of micro-level
exchanges, it proceeds in the ignorance of many substantive issues of over-riding institutions, related to
a societys geo-structure, cf. Elster 1983, p. 155: "...a defense of the traditional Chinese culture was common
ground between innovators and traditionalists, at least in the first wave of responses to the Western challenge."
152. Because timing is directly related to the specific contexts and opportunities opening to social actions. For
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instance, as reported, [By joining W TO,] China's leaders are rolling the dice at a delicate time. Chinas
economy has slowed dramatically from a breakneck pace in the mid-1990s. Unemployment, officially around
3% is believed to actually exceed 10% in China's cities. Manufacturing employment has shrunk by a third since
1992 as state-owned enterprises shed workers to survive. Nearly half the country's state-owned enterprises lost
money last year. Frightened about the future, Chinese consumers have been reluctant to spend. ...as many as
10 million rural jobs will disappear as China brings down tariffs protecting inefficient growers of wheat and
com ...(cf. USA Today, 2B, Thurs. Nov. 18,1999).
153. W e could say that You can try to import privatization, but if you dont have traditions behind it, its a
tough thing to duplicate. I borrow the expression from Mardi Gras parties turn ugly in Seattle, Philly -
New Orleans comes out relatively unscathed after its celebrations by Brett Martel, Associated Press in
Wisconsin State Journal, A3, Thurs. March 1, 2001: ...'W e ve been doing this for 150 years, so I guess
most of the kinks are worked out, Mardi Gras historian Arthur Hardy said. 'You can try to import Mardi Gras,
but if you dont have traditions behind it, its a tough thing to duplicate...
154. But if we simply refer temporal effects to the timing of those social actions and choices, it becomes
tautological. For time frames are actually filled with contextual contents of actions or meanings of events"
corresponding to their environments (note: I borrow this idea from P. Bearman et al. 1999). That is, the
temporal effects and their magnitudes are to a certain extent indicators of the substance of the actions with
reference to time frames, concerning their changing contents and meanings, their corresponding
circumstances, and their associated subjects.
155. For instance, P. David 1994 in his thesis of path dependence argues that the history of institutions and
organizations and their modes of coordination and communication shape the evolution of the later institutional
arrangements, cf. P. David, 218: "When we probe beneath the facile view that institutions are self-evidentially
'historical,' it appears that history really matters where certain conditions obtain: (1) the durability of learned
modes of communications and role types, (2) the multiplicity of solutions that may be found to yield
coordination benefits and (3) the complementarities that are created when organizations add mutually adapted
procedures, and institutions incrementally evolve precedent-based rule structures to maintain time consistency
in expectations and minimize the obsolescence of organizational capital."
156. But while discussing hers thesis about modes of trust production in American history, Zucker basically
regards background-based expectations as negative results of prior social disruption and dismisses along with
American industrialization. By contrast, she sees constitutive-based expectations as positive for American
future, which generate later institutional-based trust. But as we emphasized, our study here presents a different
case - China's transition; and thus we have different arguments about background-based expectations vs.
constitutive-based expectations.
157. Zucker essentially identifies those background institutions as negative effects on American economy and
society. According to her, along with American industrialization, these preexisting institutions eventually
declined and were replaced by other institutions proximate to industrialization. In contrast, Whitley sees
background institutions as largely responsible for the emergence and growth of East Asian up-dated business
systems, although he also recognizes the negative consequences of the earlier institutions.
Also, Pye 1985 explicitly criticizes Chinese culture, cultural institutions, and their negative impacts on Chinas
politics and the peoples behaviors, although I by no means share with his sweeping conclusions that In
compelling people to repress all aggression the culture puts a moralistic cloak around discussions of power.
Thus politics must be discussed only in ideological terms, even though in practice aggression does surface,
resulting in hostility, backbiting, self-pity, and presumed mistreatment..." I do not think these remarks apply
today to Chinas political culture which is changing along with China's transition. Since the Cultural Revolution,
Chinese people have actually become much more active and aggressive toward individualism. Western
scholarship hasn't paid enough attention to these changes. Pyes viewpoints and judgments are rather
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consistent with popular secondary materials, such as Bellahs volumes in 1970s-1980s, or writings perhaps
derived from them. cf. Lucian W . Pye 1985 about Chinese culture of authority, pp. 184-6: ...The inherent
weakness of local, geographically based authorities has made China unique among political systems in that
historically its political economy has not reflected significantly the profound geographical differences in the
country. The economy of south China has been based on rice culture and a related technology, while the
villages of north China have been organized around wheat and millet farming; the culture of east China has
been the product of massive cities with their distinct economic interests, while west China has been closer to a
nomad culture...The secret of the Chinese ability to preserve the notion of a centralized authority lies in a
combination of cultural factors. First, and perhaps most important, has been their exaggerated ideal of the
great man as le a d e r-th e emperor, generalissimo, chairman - who is an amplification of the Confucian model
of the father as the ultimate authority in the family....Second, the centralization of power has been made easier
by the strong Chinese sense of racial identity, which in modem times has meant national unity. In spite of their
awesome linguistic and other cultural differences, the Chinese have long had an overriding sense of their
common racial roots. Awareness of the importance of ones own ancestry seems to have made the Chinese
feel that they have a bond with all people of Chinese blood. The historic Chinese sense of cultural greatness
was readily translated in modem times into strong feelings of nationalism...This vivid sense of racial identity,
which inspires the illusion among Chinese that it is better to trust other Chinese than 'foreigners, is reinforced
by a third factor that helps to uphold the ideal of centralized power a near-pathological fear of factionalism and
social confusion or disorder. The Chinese are generally convinced that disaster will follow if brothers fight, if
villages have feuds, or if there are factions in their elite politics. Everything should be harmonious, at least on
the surface...the Chinese, unlike the Japanese, have never been able to channel these inevitable tendencies
into constructive payoffs of competition and pluralism. The reason is that they have not been as tolerant of
locally based power as the Japanese have been. They have had some success in this attitude because they
attach such great importance to ideology and symbolism - a fourth reason why the Chinese have been able to
uphold the myth that legitimate power comes only from above. They have a long and well-established tradition
that government and politics should be thought of only in terms of moralistic ideology. For two millennia the
ideology was Confucianism, and then when the imperial system collapsed there was a desperate search for a
new ideology in which to cloak their politics...Then for most Chinese came Marxism-Leninism Mao Zedong
Thought. The reasons why the Chinese cannot talk straightforwardly about power in their politics, but must turn
politics into an ideological question, are complex; but they do go to the heart of Chinese political
psychology... In Japan, Confucian ideology with its stress on sacrifice of self for the interests of the collectivity
elevated the vision of samurai from their particular ties to feudal lords to the higher plane of national loyalties.
In the case of China, the Confucian stress on 'altruism forced people to make the jump from loyalty to family
to loyalty to the emperor, without legitimizing any intervening interests. Consequently, even after the collapse
of the imperial system the assertion of self-interest was considered scandalous by Chinese political thinkers.
Aside from the family, the only other legitimate interest was that of the state. Since in early life ideology is so
closely related to basic feelings toward the supreme authority, it is understandable that in China orthodoxy has
always meant justification of a single national authority...
158. cf. Sutton, John 1991.
159. This has particularly been seen in a special time period of historical transition, cf. Asias nonperforming
loans jump to $2 trillion level, report says by Sara W ebb in The Wall Street Journal, A17, Thurs., Nov. 1,
2001 (emphasis mine): ...In China...about $170bn of nonperforming loans have been transferred from
the four leading banks to four asset-management companies. Emst&Young found that one of these,
China Huarong, has recovered as much as 50% of outstanding principal, with a third of the face value of
loans recovered in cash. The asset-management companies initially focused on helping the most
promising borrowers to recapitalize through debt-for-equity swaps, the report says. Mr. Rodman
attributed China Huaronas relatively high recovery rate in part to the credit culture in China, where
borrowers prefer to avoid legal action bv creditors to seize assets. Huanrona has taken collateral and
sold it in settlement of loans while resorting to the courts in just 7% of cases to foreclose on assets, he
said."
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160. cf. Asian economies: Happy neighbors - Intra-regional trade is fueling East Asias recovery in
Bangkok in The Economist, p. 63, August 26tn, 2000: Although East Asias economies clearly have
some things in common, it is always fun to argue over what those things are. A few years ago, when they
were still soaring in unison, one camp attributed their success to strong and wise governments; another
emphasized the power of free markets. W hen they began crashing to earth, starting with Thailand in mid-
1997, the two camps changed sides, blaming, respectively, hysterical markets or stupid and corrupt
governments. Cultural explanations, too, have been popular, through both ups and downs. Among this
rich array of theories, one less clever but far more verifiable explanation is often overlooked: the
economies of East Asia are, in fact, right next to each other. This cartographic truism seems to be good
news for the region these days. Despite a wide range of responses to the downturn of the past few years,
one economy after another has turned a comer and begun to expand again: from healthy Taiwan and
Singapore to beleaguered Indonesia. Several factors have helped, from stimulus packages to renewed
investor confidence to inevitable swings in consumers behavior. But as the recovery has begun to take
hold, one of East Asias curses in 1997-98 has now become a blessing: half of its trade takes place within
the region. The return of this intra-regional trade has become partly self-sustaining, as growing exports
have boosted demand for each others imports. And it is clearly one important cause - and effect - of
rapid growth in the region this year...Hong Kong, Taiwan and China (three closely intertwined
economies) are expected to grow by 6-8% . And even in South-East Asia, straggling economies such as
Indonesia, Thailand and the Philippines are banking on 3-5% growth this year. It will take more than one
good year to pull Asia out if its troubles. But a big plus point is that, as intra-regional trade has grown
more dependable, East Asia is at last beginning to outgrow its reliance on Americas economy... And it is
not just America that takes electronics exports. Even if its economy does slow down, corporate
restructuring in Europe and Japan should keep demand there growing. Increasingly, therefore, the risks
to Asias economy are coming from factors other than trade. The two most obvious are low levels of
investment and high and rising levels of government debt. The debt problems are especially severe in
Indonesia and Thailand, which started with troubled banks that they have been slow to clean up...As for
investment, the outlook is also gloomy throughout the region. This poses a severe threat to banks
recovery in many countries. Although they have recapitalized their balance sheets, and are ready to
lend, not enough companies are borrowing. The one hot financial market in the region this year has been
for syndicated loans, available to only a handful of big corporate clients. If small and medium-sized
businesses do not invest more, domestic demand will suffer, and essential increases in productivity will
be even harder to achieve. It is these factors, not trade, that have been worrying stockmarket investors
all year. Even as G D P growth has continued to impress, one Asian market after another has take a
pounding...To some extent, the perceptions of individual countries may be wayward, as they are tainted
by failures in neighboring economies. But this may not be as unfair as it seems. If a few countries
disappoint, their trading partners will also feel the p ain...
161. Path dependence mainly involves environmental influences at the time of the events occurrence, and
particularly at the time of the "origin" (cf. Zucker 1986, 69: "...several empirical studies demonstrate that the
internal structure of firms or bureaucracies is most open to environmental influence at the time of their origin").
162. cf. C. Lane, 1995, pp. 12-14: ...the work of Thelen (1991) is more instructive. Although her work is
primarily an empirical exploration of changing industrial relations structures, she provides some
important insights for understanding how change comes about. W hile most institutionalists pay only lip
service to the fact that structures are built and maintained by actors, Thelen again puts actors at the
center of this perspective. She does not simply refer to external shocks as sources of change but
concentrates on how actors within institutions utilize such shocks... She posits that institutional actors are
not completely determined by institutional rules but, given their differential positions within organizations
and their differing interests, engage in strategic manoeuvring within set parameters. Such manoeuvring
becomes particularly pronounced when external changes of an economic or a political kind challenge the
legitimacy of institutional arrangements and bring about a shift in the balance of power between actors.
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Knight (1992) throws further light on the dynamic aspect of building and transforming institutions by
pointing out that all institutions are the unintended consequences of the pursuit of strategic advantage by
unequal actors. The logic of institutions is not to fulfill economic efficiency but to make possible the
interaction of conflicting interests, via the imposition of rules of the gam e. It is, however, to be expected
that institutional arrangements which reconcile conflicting interests are also more likely to generate
economic efficiency.
163. cf. Ownership culture is acquisition barrier by Bertrand Benoit in Frankfurt in Financial Times, p.
21, Mon. May 14, 2001.
164. Durkheim defined sociology as the science of institutions, their genesis and functioning. He referred
to institutions in terms of their crystallization, certain modes of action, and certain ways of judgment
which are independent of particular individual wills, etc. That is, institutions are defined as certain ways
of acting imposed from outside of individuals that in turn shows their conduct, cf. The Rules of
Sociological Methods, 1901 (1894), second edition, p. 45. According to Durkheim, "one may term an
institution all the beliefs and modes of behavior instituted by the collectivity; sociology can then be
defined as the science of institutions, their genesis and their functioning." He also referred institutions to
background environments and arrangements. Ibid. p. 37:"most social institutions have been handed
down to us already fashioned by previous generations; we have had no part in their shaping".
Also cf. R. L. Jepperson 1991 Institutions, Institutional Effects, and Institutionalism in The N ew
Institutionalism in Organizational Analysis, eds. W alter W . Powell and Paul J. DiMaggio 1991, p. 159:
Institutions and institutional effects are core to general sociology rather than peripheral to or competitive
with it.
165. In Durkheim, the notion of institutions was useful to study society as a cultural ensemble or symbolic
representations of assorted collectivities that could pattern their social reproduction process, cf. R. L.
Jepperson 1991, p. 143 (brackets mine): Institution and institutionalization are core concepts of general
sociology. Across the social sciences, scholars reach for these terms to connote, in one fashion or
another, the presence of authoritative mles or binding organization...the core denotation of institution in
general sociology [views] an institution as an organized, established, procedure. These special
procedures are often represented as the constituent rules of society (the 'm les of the gam e1). They are
then experienced and analyzable as external to the consciousness of individuals (Berger, Berger, and
Kellner 1973: 1 1 )...Durkheim did so, for example calling sociology 'the science of institutions (e.g.,
[1901] 1950: 1x]. And one commentator on W eber suggests that 'the theory of institutions is the
sociological counterpart of the theory of competition in economics (Lachmann 1971: 68)." Ibid. 145:
Institution represents a social order or pattern that has attained a certain state or property;
institutionalization denotes the process of such attainment. By order or pattern, I refer, as is
conventional, to standardized interaction sequences. An institution is then a social pattern that reveals a
particular reproduction process. W hen departures from the pattern are counteracted in a regulated
fashion, by repetitively activated, socially constructed, controls - that is, by some set of rewards and
sanctions - we refer to a pattern as institutionalized. Put another way, institutions are those social
patterns that, when chronically reproduced, owe their survival to relatively self-activating social
processes."
Also cf. Jepperson et al. 1994, 362: ...w e see the infrastructure of institutions as something like 'dead
culture (Scot and Meyer 1983). Institutions such as marriage, markets, corporations, universities, or the
family are first and always cultural constructs, but they are constructs that have congealed, assembling
resources (Sewell 1992) and commitments (Selznick 1992) around them ...Codified in charters and laws
are articulated mles that make a set of relations a university, a corporation, or a marriage. But for most
people these are simply objective structures, not matters of 'culture. Our point is that they are indeed
culture, but culture congealed in forms that require less by way of maintenance, ritual reinforcement, and
375
symbolic elaboration than the softer (or more 'living) realms we usually think of as cultural.
166. cf. James Scott 1998 .
167. W e could have a glimpse at a wide variety of institutional differences across European market
economies of their legal and tax systems, implementations, cultural and linguistic problems, legislatures,
national surveillances, etc. Even its geo-political territory would encounter a spate of institutional
obstacles to integrate their securities markets for saving costs, cf. Hopes for unity are diminished -
transaction processing is fragmented in Europe, and is likely to remain so in the near future by Aline van
Duyn in Financial Times, p. v, Wed. Mar. 28, 2001 (emphasis mine): Reducing the cost of clearing and
settling shares traded between European countries has been at the top of market users wishlists for
many years. There have been numerous efforts to reduce these costs via co-operation between the 20 to
30 institutions in Europe charged with clearing and settlement, but hopes that these would yield quick
results have dim m ed...W ith the annual costs of maintaining Europes clearing and settlement
infrastructure amounting to between $1bn and $1.2bn, bankers and investors continue to push for bigger
savings. This compares with the cost in the US of $600m, even though volumes are much higher than in
Europe. The issue of how to achieve consolidation has now come to the top of policy-makers agendas
too...'There will be more consolidation, but it is a gradual process, says Martine Dinne, head of the
commercial division at Euroclear Bank. 'It will require a new look at how all the different markets are
regulated. Regulation is an important part of all this. European countries have traditionally had their own
stock exchanges and clearing and settlement arrangements, and have developed their own regulatory
frameworks too. These differences were one of the reasons market users were concerned about the
planned merger between Deutsche Borse and the London Stock Exchange, which fell apart last year.
The emergence of the international bond market in the 1970s also led to the creation of two international
clearers - Euroclear and Cedel, now part of Clearstream. These have historically settled fixed-income
securities and are moving into equities. Bigger groups, such as Clearstream, Euroclear and Crest in the
UK, are developing links with other European markets in order to provide cross-border settlement
services. But each institution has its own staff and its own systems and it is the market users - the banks,
which are intermediaries and own most of the settlement houses, and the investors - who pay for these
systems...The focus, in the short term at least, will be on securing their own positions, not reducing
overall costs.
168. W e refer to Zuckeris version of institutionalization, cf. Zucker 1977, p. 728: "Unlike many of the earlier
approaches, institutionalization is defined here as a variable, with different degrees of institutionalization
altering the cultural persistence which can be expected."
Also cf. Banking for the worlds poor by Martin W olf in Financial Times, p. 19, Wed. June 21, 2000:
...good governance and good policy have a central role. 'W ith weak institutions, poor governance and
unsound policies, market reforms can go badly awry with great costs, particularly for the poor.
169. cf. The Economist, p. 10, "China Survey," April 8th, 2000: ...The reforms have left the state industrial
sector with a mess of renegade government agencies and unco-ordinated, or unenforced, regulations.
Edward Steinfeld [the author of Forging Reform in China: the Fate o f State-Owned Industry. Cambridge
University Press, 1998], of the Massachusetts Institute of Technology, describes it as 'something of a
Dodge City atmosphere. There are few rules, few responsibilities, strong preying on the weak, and a
tremendous amount of waste. It would be nice to wave that magic wand, privatize everything overnight,
and decree a market economy into existence. But would the change of ownership help? Or might it make
matters worse in an economy with few rules? As Mr. Steinfeld argues, there is little point in worrying too
much about who owns an economic unit before the institution of ownership itself has been firmly
established.
170. Both North and Miller argue fora full separation between economic efficiency and institutions (cf. Miller
376
1992, 10: "political institutions may produce allocations of property rights that do not result in economic
efficiency. A rule may prefer a system of property rights that guarantees him more net tax revenue over one
that encourages economic growth for society as a whole. This claim is isomorphic to a result described in
Chapter 8 regarding conflict between profit maximization and efficiency in the firm." For me, it is merely half
right in the sense that it may be suited to the Russian case in terms of its re-privatization resulting in economic
depression. However, China's background transition shows that institutions do affect economic efficiency in
terms of institutional reforms. The crux herein actually concerns a socially appropriate institutional combination
of efficiency and feasibility.
171. The term of fitness for feasibility also implies the unfree nature of actors themselves constrained by
certain institutional conditions, cf. Elster 1983, p. 41: "We are tempted to say that a man is free if he can get or
do whatever he wants to get or do. But then we are immediately faced with the objection that pertiaps he only
wants what he can get...We may then add that other things being equal the person is freer the more things he
wants to do which he is not free to do, because this shows that his wants in general are not shaped by his
feasible set. There is clearly an air of paradox over the statement that a mans freedom is greater the more
things he wants to do while not being free to do them, but on reflection the paradox embodies a valid
argument. Similarly it is possible to dissolve the air of paradox attached to the view that a collective decision is
more trustworthy if it is less than unanimous."
172. As we early addressed, economic efficiency is bounded to its social feasibility. And the social feasibility
varies with contingencies that affect the occurrence of efficiency and varies with social conditions (including
cohesion, order, legitimacy, and the entrenched vested interests) that affect the proceeding of efficiency. W e
may derive this insight from J. Elsteris 1983 argument (vii): "An action is the outcome of a choice within
constraints. The choice, according to the orthodox view, embodies an element of freedom, the constraints one
of necessity...men sometimes are free to choose their own constraints...[yet] the preferences underlying a
choice may be shaped by the constraints. Considered together, these two non-standard phenomena are
sufficiently important to suggest that the orthodox theory is due for fundamental revision...To some extent it
also connects what I now see as an overly enthusiastic application of the idea that men can choose their own
character...There are limits to what may be achieved by character planning...just as there is an intellectual
fallacy in the view that everything that comes about by action can also be brought about by action." The
constraints may refer here to the existing and the preexisting institutions and their social conditions, the
conditions on social actions. Also, ibid. Chapter II: "States that are Essentially By-products."
173. When the complexities of technology and division of labor have grown sufficiently, transition becomes
even more sensitive to the social appropriateness of institutions and their fitness to their micro-level
environments. Institutional reforms can encounter ethical dilemmas. Transitions cannot be driven by
economy alone. Nor can they be rationalized exclusively by econometric maiginal analysis.
174. It is also instrumental to study institutional isomorphism in the global arena where the corporate world
frequently crosses national borders and becomes a growing driving force in the world, affecting capitalist
economies and transitional economies and prompting various different institutional reforms. For instance, as
the Anglo-Saxon corporate genre - stock exchange market based - has swept Europe since the 1990s,
the continent is in a flurry forced to adjust itself to the emergent new environment under the strong
impacts of institutional isomorphism by American corporate culture, through its own experience of
institutional learning. But rather than converting to American shareholders value approach, most
retooled European economies in transition are inclined to accept a perspective of long-term share-stake
value for their own. That simply means that every member, not merely few stockowners for short-term
interests, could take her/his share from the final earnings, so long as she/he engages in some working for
the given equity stakes. Thus the ensuing new creation could be regarded as an European institutional
reinvention, or an institutional mutation from its own earlier path. That is, such mutation is both an
adjustment to environmental pressures and its own product. Such a historical comparisons have to
consider these micro- or meso-institutions and their co-evolving shades.
377
Also cf. Financial Times, in Europe reinvented, Part 4 - Europes new capitalism, Fri., Feb. 9, 2001
(emphasis mine): ...In the fourth and final part of our special series, the FT describes the birth of a new
corporate culture that combines American-style risk- taking with traditional stakeholder values; ibid. A
new European model - The old continent has adopted many of the tenets of Anglo-Saxon capitalism, but
it has given it a fresh twist by Erik Izraelewicz, Editorial page editor, Les Echos, p. 15: A German
Konzern (Mannesman) converts to telecoms - and to the religion of 'shareholder value creation. A
hostile bid in Germany, the country of consensus, makes this same konzem fly into the orbit of a foreign
group, the British mobile phones giant Vodaphone. A French official from the former Post Ministry
remains a state official but also holds shares in his own company, France Telecom, a semi-public star
listed in Paris and New York. Italian football clubs now have but one goal in life: to be listed on the stock
exchange. These snapshots, unimaginable just a few years ago, confirm that European capitalism
underwent a radical transformation at the end of the 20th century. Faced with the breakdown of their
established models, the countries of the old continent reorganized. Notably, they reformed their financing
circuits. Thanks to the euro and under the influence of the Anglo-Saxon model (a French expression) in
which the capital markets play an essential role, Europes capitalism is transforming itself. Is it
reinventing itself - or is it just Americanization? For continental Europe, the great challenge at the dawn
of the 21 century is contained in this question. In the 1980s, Europe was a mosaic of very different
capitalisms. In Germany, companies were financed, for the most part, by strong bank-houses
(iHausbanky, in Italy, business was dominated by a few large families; in Spain, by a few corporations; in
France, the state was the countrys main capitalist. Not only was it often the only client, it was also both
the owner and the banker of the countrys largest companies. These different models had one thing in
common: they functioned without the market: direct finance - which links the saver and the company
without the intervention of an intermediary, played a marginal role. Frankfurt, Paris, Milan and Madrid
were 'mini-stock exchanges with little influence. During the 1990s, these intermediaries - German bank-
industry conglomerates, Italian families, the French state, etc. - were incapable of financing their
respective national economies singlehandedly. They were replaced - by the stock exchange. Throughout
continental Europe, the market gradually usurped the established channels for financing companies,
especially the larger ones. This revolution was fostered by European governments themselves. From the
left and the right, governments implemented immense privatization programmes. They also favored the
development of new markets and new financial instruments. In Munich, Bordeaux or Bruges, young
people gather for drinks at happy hour and speak without shame of the Dow Jones, the Footsie, the Dax
or the Cac - just like they had been doing for a long time in Dallas and Edinburgh. Shareholders remain
less common than in the U S or Great Britain. But their numbers have risen dramatically. There are
nowadays more shareholders than civil servants in France, than union members in Germany, or than
unemployed people in Italy. W hat revolutions! European citizens have started to gain interest in direct
ownership of their companies because companies themselves have moved towards the stock market in
search of capital. This is the other essential dimension of the transformation. Like their British and
American sisters, Germ an, French, Dutch and Spanish companies are discovering the charms of the
market. Dinosaurs and start-ups are lining up for stock market listings, creating an entire financial
industry from scratch over the past ten years. Helped by a huge influx of Am ericas great professionals -
its funds and managers, its investment banks and golden boys, Europe has little to envy when it looks
across the ocean: it has its own business angels, venture capitalists, analysts and financial magazines.
Like America, continental Europe discovered 'the creation of shareholder value. For Siemens, Alcatel,
Aventis, Danone of Telefdnica, it has become a shared religion. This has created shock waves
throughout the economy. The culture of secrecy burst: principles of corporate governance are required of
everyone. European executives are forced to expose themselves constantly and to permanently justify
their actions. Also, they must be guided by one prerogative: profitability for the shareholder. The Anglo-
Saxon model of short-term management has rapidly spread. 'Core business, 'stock options and
'economic value-added have become the new buzzwords. Continental Europe is becoming more
American - its capitalism has become more financial in very real terms. But Europe remains glued to its
history - the state still plays an important role in the economy, even in the financial system. And history
378
(particularly that of the 2 0 th century) has taught Europe to be wary of dictatorships, even those that
initially present themselves in the guise of democratic traits. M any European bosses have misgivings
when it comes to the creation of shareholder value. Without worrying their Anglo-Saxon shareholders,
they secretly admit that they do not want a shareholder dictatorship to rise in their court under the pretext
of shareholder democracy. Joined by a large portion of European public opinion, these business leaders
would rather see a stakeholder society than a shareholder society. Business think-tanks across Europe
as well as political leaders are debating the merits of the 'citizens company these days. A company,
they say, must not work exclusively for its shareholders - and its short term interests. Rather, it must
take into account all of its partners: including its clients, but also the management, its employees, its
suppliers and its local associates... But between one that sacks its employees without blinking and one
which trains its staff until the end. Europeans dont hesitate: they would choose V W over G M . They are
convinced that in the Iona term, the former will be better off than the latter. W hen America proposes the
business exclusively based on share-holders. Europe replies with the 'socially responsible company.
That mav be the trademark of European capitalism. Unless, under market pressures. America takes the
idea before Europe can make it its own."
175. Certainly, the actual histories and institutional changes would happen through processes of selection
and would become enmeshed with greater complexities that could exert stronger influences on
transitions. These figures that initiate our new approach are only somehow suggestive of transitional
economies. The transitions need to be theorized of broader and deeper levels.
176. Also see Boisot and Childs 1988 relevant discussion (524): Berger (1987) distinguished between
governance choices that favor markets of hierarchies and those that simply favor modernization...Seen in
this light system reform in the Soviet Union genuinely boils down to a choice of first type and the challenge it
faces is to reposition some transactions along Williamsons continuum toward market forms of governance.
Even so, the move up the culture space toward greater codification that accompanies modernization may only
be a partial one, as the continued presence of bureaucratic fiefdoms in the Soviet Union and the quasi-feudal
nature of much Japanese managerial practice (Boisot 1983) serve to remind us. The implication we can
tease out of Bergers distinction is that China does not yet face a genuine choice of the first type because
it has not yet modernized sufficiently. O ur own analysis of governance issues at the enterprise level
broadly supports this conclusion...Chinese bureaucracy, faithful to its traditions, remains patrimonial. It
lacks both the codification skills to handle the transactional volumes entailed by bureaucratic and market
governance and the legal and information infrastructure that might take it beyond particularistic
bargaining. The bounded rationality and information impactedness that result conspire to keep
transactional numbers small and relationships personalized and opens the door to opportunism and
'control loss (Williamson 1970). China remains a land of fiefs, albeit industrial ones."
177. For instance, this study adopts the conceptions of organizational density, larger institutional environment,
and open system from models of population ecology (cf. Hannah and Freeman 1984).
178. cf. Chinas hot economy on pace for 7% growth by Steve Fries Special to USA Today in USA
Today, 13B, W ed. Sept. 12, 2001: ...Tim ing is everything. China is holding up well amid this round of
bad economic weather abroad partly because of remarkable timing. The government spent the 1990s
pushing a litany of reforms now starting to take hold, from allowing the urban public to buy property to
liberalized rules on how foreign companies can operate here to privatizing government-owned
conglomerates.
179. cf. Qian and Xu 1993b, 153-4: Partly due to the unpopular political movements in the Cultural
Revolution, the central government in China has committed itself to economic development as the
'central task since the beginning of economic reform. The government officially encouraged people to
get rich, thereby allowing some people and some regions to become rich earlier or quicker than others.
The reform policies of decentralization, which can be regarded as utilizing the features of an M-form
379
organization, strongly encouraged local governments and entrepreneurs to experiment with various
alternatives and hence opened up the way for a bottom-up reform ...
180. cf. Qian and Xu 1993b, 156: W e have provided a comparative analysis of transition from
institutional perspectives, and have addressed the issues of how initial institutional environments differ
between China and Eastern Europe and the former Soviet Union, how reform and transition strategies in
China depend on institutional conditions; and how the institutional changes of decentralization affect
Chinas transition path and outcomes."
181. cf. Stinchcombe 1990, 295. Also cf. R. Scott 1994 (pp. 55-99, in R. Scott et al. 1994), 1995 (pp. 33-62, in
R. Scott et al. 1995)
182. One reason why it is very hard for China to be integrated into the world economy smoothly and
swiftly through a universal route of market-oriented liberalization or through the commanding central
state is that it is so heterogeneous geographically, demographically, and socio-economically. Also cf.
The Economist, p. 4, China Survey, April 8th, 2000: Lazy editorial writers in the liberal W est assume
that a free-market economy can be introduced, as one exasperated Chinese economist puts it, with the
wave of a central planners wand. And democracy, too, he might have added. This is not to say that free
markets and accountable government in China are out of the question. Cultural impediments to them are
not as serious as political ones. The countrys vast size, its poverty, and its legacy of a command
economy surely need to be taken into account in guessing how swiftly and how smoothly free markets
and democracy can be introduced - and how the interests of the central government and the varied
periphery can be reconciled. Chinas sheer size requires an active effort to comprehend. The countrys
1.3 billion people make up one-fifth of the worlds population, but they live on only one-fifteenth the
world's land. In fact, because a large part of China is inaccessible and inhospitable, the density in the
main population centers is much higher than those figures suggest. Two-thirds of Mainland Chinese live
in the fertile eastern fifth of the country...Think, for a moment, of the provinces as if they were separate
countries. By land area, the biggest is Xinjiang, three times the size of Spain, although with less than half
of Spains population. Chinas largest city, Shanghai, has five times the population of Singapore. The
most populous province, inland Sichuan, has over 110m people, about as many as Japan. Guangdong,
Hubei, Anhui, Hunan, Hebei, Jiangsu, Shandong and Henan each have between 59m and 95m people,
that is, populations very roughly the size of Egypt, France or Mexico. The Guangxi Autonomous Region,
with 46m people, is more populous than Poland, yet how many people would be able to pinpoint it
unhesitatingly on a map? And this paragraph has mentioned fewer than half of Chinas provinces. Or
look at Chinas G D P per head. The national average (excluding Hong Kong and Macao) was $735 at
1998 prices, which makes China somewhat poorer than Indonesia. That average, though, conceals great
regional inequalities. The poorest province, Guizhou, has a G D P per head of $280, on a par with
Bangladesh or Yemen. Sichuan, with a figure of $525, is level with Pakistan. Meanwhile, Shanghais
residents, at $3,400, are up there with Turkey or South Africa. Now bring in Hong Kong, which at $22,990
has a higher per-head income than Britain, its former master. The dozing commuter of the Star Ferry is
likely to be 90 times wealthier than the vegetable-seller in Guizhou. Regional inequalities, then, are a
serious matter, and Beijing's leadership is at last beginning to wake up to them. Equally serious is the
wealth gap between city and countryside. In cities, 90% of households have washing machines and color
TVs. On farms, the most widely owned consume durable, found in 70% of all households, is the sewing
machine. Least remarked upon, but equally serious, are huge differences in wealth within the same
locality, along with dire cases of poverty, even on the prosperous eastern seaboard. Bearing in mind
Chinas sheer scale, variety and relative poverty, it is hard to see how a monolithic leadership in Beijing
can prevail in the longer term, now that the Chinese people are no longer in thrall to Maoism (And
remember that even under Mao Zedong, during the Cultural Revolution, anarchy rather than central rule
held sway for ten years). Indeed, far from being monolithic, Chinas political system, both in the regions
and at the center, is one of sharp elbows and centrifugal forces. Yet at the same time China has refused
to break up into a warring mess of baronries, as many western experts had predicted.
380
According to John Plender, there are two major factors at work here: one is that the emerging markets
are nationalistic; second is their currencies are predominantly US-dollar-denominated and strongly
influenced by American economic growth, cf. Emerging from the gloom - the build-up of official
reserves in Asia has the potential to destabilize a remarkable recovery from the 1997 crisis by John
Plender in Financial Times, p. 14, Tues. April 11, 2000 (emphasis mine): In the more nationalistic
countries of Asia and Latin America, tolerance of direct inflows is more a product of crisis-induced
financial pressure than a belief in the virtues of liberalizing the capital account of the balance of
payments. So rapid recovery is closing a window of opportunity for many foreign investors to the
detriment of financial sector development in emerging economies and thus of more stable flows...The
increase in Asias predominantly dollar-denominated reserves thus coincides with a period in which the
disciplinary power of the global bond market against inflation is waning. Far from acting like bond market
vigilantes, the Asians are accommodating the US when the Feds rate increases are exerting little
restraint over the economy...[Therefore, the Asian governments] claims on dollar paper could be
destabilizing in the same way that foreign claims on Asia were in the crisis. They are both 'hot money.
There is a risk...that having facilitated overheating, the money will withdraw late in the day, putting
upward pressure on U S interest rates when their disinflationary work is already done. This could turn a
downswing into a recessionary hard landing. At the very least, the decline in Treasury yields will require
the Fed to raise rates further than otherwise. These risks could be preempted by policy. Asian countries
could probably now afford to let currencies appreciate and leave their economies more reliant on
domestic and regional demand. Ensuing weakness of the dollar and a weaker bond market might send a
less distorted set of signals to the Fed. But there is no escaping the fact that the biggest risk to the
emerging economies is the same as for the world as a whole: financial shocks arising from US
imbalances run up while the US baled the rest of the world out of its troubles. The peculiarity is that the
US itself should be running risks similar to those in the developing countries before the crisis.
183. Overall, as Whitley 1992, 1994 mentions, there are larger variations between East Asian business
systems (the later developers) than between their Western counterparts (the earlier developers), not to
mention how these systems differ from transitional China.
In capitalist economies, Europe and North American have more managerial discretion of business firms, and
more independence or autonomy of social groups, secondary associations, and entrepreneurship, whereas
East Asia has more state autonomy or state domination. The former economies are thus plural, and the latter
ones cohesive. To compare the variations between East and West and within East and West: in East Asia
there exist larger business and institutional variations between Japan, Korea, Taiwan and Hong Kong (Chinese
Family Businesses) - with specific characterstics but smaller variations within each area - with less pluralistic,
and more cohesive and homogeneous institutional constraints. In Europe and North America in contrast to
East Asia, there exist smaller variations between nations - with more common features, but larger variations
within each country and greater pluralism and heterogeneity. One may reason that European industrialization
has evolved over a long period of time, whereas East Asian industrialization counterpart is relatively recent.
Hence East Asia is to a much greater extent influenced by pre-industrial institutions, historically and culturally,
whereas Europe is much more influenced by modem factors, like formalization, standardization, and
legalization across its market economies, etc. But in many ways East Asian societies have been effectively
compensated by existing alternatives such as horizontal relations in authority, trust commitments of the firm,
and market organizations as complementary for effectiveness and efficiency.
184. cf. One true model? - The world is not converging on a single kind of capitalism in The
Economist, p. 86, April 8th, 2000.
185. cf. Nee 1992, p. 6: "Fundamentally, the controversy has involved the loss of redistributive power by
the central state apparatus to market institutions and local government. This is reflected in a widely
circulated Central Committee document: 'T h e power to distribute capital, foreign exchange and
381
resources is too decentralized and the state's control seriously eroded. Enterprises and individuals have
too great a share in the distribution of national income' (People's Daily, Chinese language, January 11,
1990:1-3)."
186. See those institutional/de-instrtutional barometers selected by Wesley D. Sine 1999. But also, I think that
deinstitutionalization may also refer to the establishment of those counter-institutions referred to by Helper,
Susan, John Paul MacDuffie, and Charles Sabel, due to the increasing costs of specialization and
fragmentation and volatility of market production in advanced societies since 1970s. cf. 1998, p. 23:
"...organizations can establish counter-institutions. For example, internal research and development
laboratories are established to renew crucial aspects of current routines by routinizing the creation of
knowledge. But the very fact that the process of renewing routines must be placed outside the operational core
acknowledges that this defect of organizations cannot be corrected from within. Such counter-institutions, by
their very existence, thus ratify the view that the astonishing accomplishments of hierarchical specialized
institutions are necessarily associated with the danger of stultification."
187. The constitutional-based mode requires trust built through the channels of market institutions. According
to Williamson, in market transactions virtually no real personal-based trust to others exists, while calculated
trust prevails and is coded in written contract (cf. O. Williamson 1993b). Even then there are still many
loopholes and frauds happening that would require legal preventive procedures as supplemental measures.
Each partner has his own right to enter and exit if he reckons that his best chance is to stay with a trust
relationship or to take his options to exit. The decision making happens so quickly in the market that if an exit
occurs, trust no longer exists and uncertainty ensues. So everyone should be well prepared with his insurance
and outlet when he gets into the market. In so doing, institutional-based trust is best choice. Such a trust is
market-induced and is assured by market institutions; the institutions assure that everyone enjoys an equal
opportunity and potential for tapping into market.
188. cf. Garfinkel, 1963:190-192; Durkheim, [1893] 1960:105,129-131; cit. Zucker 1985, 58.
189. cf. Russia upended, for better or worse The Soviet Unions collapse 10 years ago changed millions of
lives in unexpected ways by Dave Montgomery, Knight Ridder Newspapers, in Wisconsin State Journal, A 1,
A4, Sun. Aug. 19, 2001: ...The coups failure raised expectations that Russia was on the cusp of democracy.
Instead, the country careened down an erratic course marked by hyperinflation, rampant corruption, the rise of
the mafia, a devastating financial crisis in 1998 and two wars in the breakaway republic of Chechnya. Ibid.
Picture illustration: 10 years after the fall of the Soviet Union - Yuli Nisnevich, 49, pours tea in his apartment
in Moscow. 'I dont think people realized how difficult it would be to go along this road (to democracy), he
said.
Also cf. The big lie of global inequality by Martin W olf in Financial Times, p. 13, Wed. Feb. 9,2000: The so-
called era of globalization did not secure sufficient growth in many emerging economies, because such a
large proportion of them failed to integrate...Still more did not offer the fundamental conditions: macro-
economic stability, secure property rights, non-corrupt administration and basic public services.
190. cf. The China Syndrome by John Lloyd in Financial Times, p. I, W eekend, Jan. 8-9, 2000:
...W an g Xiaqiang - formerly an economic adviser to the premier, Zhu Ronji - has been studying big
state owned corporations. W ang had himself done an intensive study of Russias experience in the 1990s
- concluding that its sudden opening to the market and its massive, rapid and corrupt privatization
programme were to be avoided at all costs."
As Reported, 'H it hard by the collapse of the Soviet Union and the very painful restructuring period of the
early 1990s, [the Georgian economy] starts from an extremely low base. cf. Financial Times, p. II, in
Survey, Mon. Nov. 22, 1999: ...'T h e end of the Soviet Union was a shock without the therapy, says
Daniel Linotte, economic team leader for the Georgian-European Policy and Legal Advice Center in
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Tbilisi...the national economy today nonetheless remains far smaller than it was a decade ago. The
sharp contraction in trade after Georgia declared independence from Russia in 1991 was followed by a
hugely disruptive period caused by the civil war that gripped the country. GDP fell by 45% in 1992, 29%
in 1993 and a further 10% in 1994, before finally beginning to pick up...But Mr. Linotte says: 'People who
are optimistic about growth do not look at how far GDP had fallen. They confuse the trend with
recovery.1
191. In this matter, the story of the Russian central bank provides a vivid example, cf. Financial Times, p. 2,
Tues. Oct. 12,1999: "More than a decade after communism crumbled, the country's central bank, one of the
most influential institutions of the Soviet era, is facing a challenge to its secrecy and power...The central bank
remains 'a law unto itself,'...Shielded in the past by secretive party apparatchiks, it has survived the transition
to capitalism with its autonomy enhanced and some of its most senior officials unchanged...The bank's
independence from the Russian parliament - and its resistance to the scrutiny of parliaments auditing
chamber - is in step with the growing world-wide belief that monetary policy should be shielded from political
interference. But the result has been to safeguard an institution that is accountable to no one. It controls two
powerful domestic banks, Vneshtorgbank and Sberbank. But the bank's most surprising operations are not
within Russia at all. It has inherited a network of five sovzagran, or foreign commercial banks, from Gosbank,
its Soviet precursor...The history of the banks is very much the history of the communist state...The role of the
network in the post-Soviet era is another matter."
Also cf. Harassed in Soviet Era, entrepreneur still suffers by Michael Wines in The New York Times, A3,
Thurs.June 8, 2000: ...Though Russian Communism has fallen, enterprise is not quite free...[Viktor Kurzmin]
says he is still a capitalist - that he does not blame capitalism, because capitalism really never made it to
Russia. 'The people in office now, he said, 'are the same people who were in office when Communism was
here. They just moved chairs.
192. The term is borrowed from R. Burt 1992 yet here it is used in a different reference. An example is
separation of constitutive laws from the law enforcement or legal practice, which is controlled by the local
vested interests, who are uncontrolled by the laws but often abusing the laws. cf. Using bankruptcy as a
takeover tool - Russian law puts healthy companies at risk - Legal extortion - though overall corporate debt
levels in Russia are falling, bankruptcies continue to rise, in part because politically connected creditors can
use bankruptcy laws to seize assets: ...All over Russia, local politicians and business tycoons have latched
onto the bankruptcy law to effectively seize valuable companies at a fraction of their market value, critics say.
Powerful local politicians start the process by opening the door to a predator business group and pressing
judges to put the target company into bankruptcy and name one of the predator's own employees to manage it.
Through these managers, called receivers, the process is most often abused, critics said. ' In a developed
economy, bankruptcy is a process that eliminates enterprises that aren't effective, but in Russia it doesn't work
like that, said Pyotr Karpov, the former deputy head of the Federal Bankruptcy Service. 'Bankruptcy here has
absolutely no relation to how economically effective a company is or to the amount of its debts.' The law thins
in a Western way, he said, 'but the creditors think only of how to use bankruptcy to grab the
company...Russia rewrote its bankruptcy statute two years ago to try to correct problems caused by a 1992 law
approved soon after the collapse of the FSUs centrally planned economic system. That law let companies
accumulate debts with impunity and resulted in a tangle of unpaid bills that choked the economy. The new law
addressed that problem, critics said, but created others by setting too low a threshold for bankruptcies and
allowing local politicians too much control over the process. Almost 11,000 companies entered bankruptcy last
year, compared with 4,300 in 1997, before the new law was passed, according to Russian research published
by the Center for Economic Policy Research, a private London-based institution. Most of these companies
were liquidated to pay creditors. But more than 10% - most often big companies - were put into receivership,
with their debts frozen and cash flows put in the hands of court-appointed managers. The law lets healthy
companies fall into bankruptcy almost as often as sick ones, the Russian researchers found. Because the
amount of debts required to start the process is so small, Russias bankruptcy process has yet to begin
separating truly insolvent companies from those that can pay their debts. Yekaterina Zhuravskaya, an
383
economist at the Center for Economic and Financial Research in Moscow and a co-author of the Center for
Economic Research study, found that Russian companies under external management were usually no worse,
and sometimes much better, at servicing their debts before being put into bankruptcy than were companies not
pushed into receivership. There is no economic reason these companies are being bankrupted when the
others, which are worse, are not, she said...The new bankruptcy law enables local governments to prevent the
closing of a citys main employer. Under the law, local governments can extend receiverships for companies
with at least 5,000 employees to as long as 10 years, compared with 18 months for other concerns. Companies
with more than 5,000 employees account for 41% of industrial production. Such lengthy receiverships have
given regional governors and their ally's time to manipulate the finances of these largest companies. Often,
they press courts to name a politically connected receiver who is often allied with one of the creditors. The
receiver is motivated to run up its debt, giving the creditor more control over the company. Rather than
restoring companies to solvency, receivers often drive them deeper into debt...Even the harshest critics said
Russias problems were not that different from those experienced in other relatively young industrialized
economies. 'The struggle in Russia now, pitting strong regions against the federal center, closely resembles
the one that was raging in the US in the 19m century, said Eric Berglof, director of the Stockholm Institute of
Transitional Economies. Western economists agree, however, that Russia needs an effective bankruptcy
process. Its economy has never gone through the process necessary to separate companies that can survive
under market conditions from those that cannot. As a result, sick companies are sucking valuable resources
from healthy ones, dragging out Russias transition to a market economy. 'W e have loss-making enterprises
in all economies, said Barry Ickes, a professor of economics at Penn State. 'In the US, we have Amtrak, but it
doesnt matter because its share in the economy is small. In Russia, you have a lot of Amtraks.
1. Overdue payments as a share of GDP for Russian major industries:
1994 1995 1996 1997 1998 1999 2000
6.5% 10% 15% 25% 43% 37.5% 25%
2. First-quarter figures for agriculture, industry, transportation and construction companies in Russia:
Total bankruptcy started each year by case number
1994 1995 1996 1997 1998 1999
100 1,000 2,200 4,300 8,100 11,000
Source: Center for Economic Policy Research Discussion; Davis Center for Russian Studies, Harvard
University; cit. The N ew York Times, B1, Sat. Oct. 7,20 00
Also cf. A journey into the unknown - As the world waits to see how Vladimir Putin will perform, the west must
be careful to keep its distance by Martin Wolf in Financial Times, p. 13, Wed. Mar. 29,2000.
Also cf. How Russia can be helped to help itself by Laurent Fabius and Hubert Vedrine in Financial Times, p.
13, Wed. Mar. 29, 2000 (underlined added by myself): ...Russia is clearly a far cry from a functioning market
economy. Production has plummeted, demand and investment both remain low, living conditions have
deteriorated, and capital flight - legal or not - vastly exceeds the level of foreign aid...An essential reason for
these shortcomings is the lack of institutional and structural reform. Mr. Putin noted that Russia suffered from
the absence of firm and generally recognized rules. While economic stabilization objectives were met from
1995 onwards, priority should also have been given to achieving a functioning judiciary, robust institutions,
clearly defined property and investment rights, and the rule of law. The roles of government and state
institutions were too easily discarded after years of bureaucratic rule. While the disappearance of the
Communist party as the main apparatus of the state was welcome, no other institution has taken its place as
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the backbone of society.. .An efficient market economy requires an authority to enforce the rule of law. Russia
has lacked such an authority for a decade: one that could collect taxes, enforce bankruptcy laws, and provide
social security. Corruption and cronyism have become entrenched, and foreign investors have been scared
off. As a result, many in Europe and elsewhere doubt whether it is worth helping Russia. In fact, the EU has
good reasons to pursue a policy of long-term active cooperation. There cannot be security and stability on the
European continent without a positive contribution by a co-operative Russia. This is unlikely if poverty, misrule
and instability prosper. On the contrary, such a Russia may be tempted to find an outlet for domestic
frustrations in a damaging display of might. The ills of an unstable Russia may also spill over into
Europe...Greater emphasis should be put on Russias building and strengthening effective state structures,
and developing a stable and transparent legal framework.. Russia must commit itself to the rule of law: this will
enable the state to plav a regulatory role within the limits of democracy, and thereby foster development.
Crucial Russian reforms must be completed before it is too late. These include overhauling the tax system and
customs tariffs: fighting corruption and money-laundering: restructuring the banking system to allow greater
transparence and accountability: providing investors with stability and legal security: enacting reliable land
ownership rules: building a respected and functioning judiciary: and providing social security."
193. It is true especially when we consider the social omnipresence of the state government as
indispensable to a national economy, cf. The corporatist manifesto in Financial Time, p. I, W eekend,
Apr. 20/21, 2002: ...all the things that governments control: defense, foreign policy, economic policy,
constitutional arrangements, the electoral system and voting rights, residence, citizenship, the legal
system, cultural concerns, education, public provision for health, pensions and welfare - the list goes on.
In reality, corporations are far more powerful in a cultural sense, and in their grassroots impact, than they
are as big, anonymous institutions. But most of this power is untapped: they dont actively use it for any
social ends, good or bad.
194. cf. J. Scott 1998 critique of the anarchism after the collapse of the FSU. (p. 349: "Even if there was much
in the earlier arrangements that ought to have been abolished [local tyrannies based on class, gender, age,
and lineage], a certain institutional autonomy was abolished as well...classical anarchist claim - that the state,
with its positive law and central institutions, undermines individuals' capacities for autonomous self-governance
- that might apply to the planning grids of high modernism as well. Their own institutional legacy may be frail
and evanescent, but they may impoverish the local wellsprings of economic, social and cultural self-
expression.").
Also cf. Sounding the retreat from Russias rule of wealth by John Lloyd in Financial Times, p. I, Weekend,
August 5/August 8, 2000: ...Machiavelli could teach little to Russias 'entrepreneurs. Now, many fortunes
later, Vladimir Putin is starting to call them to account. They had supplemented their Soviet education with
semi-clandestine reading of the foreign free-market classics. They appealed for support from a society that,
while it has formal democratic institutions, has not leamt to be civil." 'The oligarchs behaved stupidly -
pushing each other at the edge of a cliff. They had become untouchable - but they are so no longer that is the
meaning of what Putin did. Worse could happen - much worse. If Putin does not make the people believe in
the possibilities of order in a civil society again, someone else will make order in an uncivilized way.
Also, cf. Financial Times, p. 20, Wed. Oct. 1 3,1 99 9 (brackets mine): "While Russia's oil industry.Js heading
for a period of restructuring...the recent experience of foreign investors and partners in the country suggests
that the current transformation has far more to do with domestic Russian political and business struggles than
westem-style corporate governance...the whole industry faces enormous challenges. Most companies inherited
old plant and equipment and have oilfields scattered far from their refineries across the vast expanse of the
former USSR. They are burdened by overstaffing and the social expenditure of financing company towns in
Siberia and other remote parts of the Russian Federation. Some observers see scant evidence of an adequate
response to these problems...Russian companies have not even really been able to continue maintenance and
rehabilitation of wells. At the end of last year, it seemed this fragile system would come under unbearable
pressure. The financial crisis of August 1998 triggered huge problems for the many companies that had
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overburdened their cost base with foreign debt...[And even the benefits from the recent boosts by the rising
prices of global oil were squandered.] 'The oil price rise came a bit too early, and has slowed down the process
of restructuring,'...As legislation on production-sharing agreements to create a stable environment drags
through parliament, the global oil companies are unlikely to make significant commitments in the country for
another two years."
Also, cf. USA Today, 17A, Wed. Oct. 13,1999: "[Majority Leader], Richard Armey, R-Texas, said that 'W e put
our resources in the wrong place. Our resources should have been devoted toward helping the Russian people
build institutions and a middle class of opportunity and hope."1The middle class, consisting of Russian doctors,
lawyers, engineers, executives and entrepreneurs, counts for 10% of Russias 147 million population, earning
$350 to $1,000 a month, relative to $150 earnings of averaged worker. Yet as reported (ibid), "this evolving
middle class has had little impact on Russias official statistics because so much of it is hidden in gray-market
commerce, off-the-books second or third jobs, and small businesses operated out of bedrooms or living rooms.
Many Russians moonlight by driving their cars as unofficial taxis, baby-sitting and giving music or language
lessons." And they believe that "Russia is not going to become another America. Russia will develop in its own
way, but in a way that can do business with the rest of the world."
195. cf. Juska, Arenas. 1999.
196. cf. Organized crime threatens Russian reform hopes - I t s time to change our approach to Russia
dramatically. The main threat to reform in that country is not the rise of a crypto-communist government, but
the powerful corrupting influence of organized crime by Peter Schweizer in USA Today, 19A, Mon. Oct. 16,
2000.
Also cf. Andrew Jack recently portrayed the vulnerability of Russian current security institutions to organized
crime, cf. Fears of killing and kidnapping remain - Businesses are employing small private armies, alongside
strict security systems, to protect their offices and homes by Andrew Jack in Moscow in Financial Times, p. V,
in Corporate Security, Fri. Mar. 3, 2000: T h e presence of bulky 'cupboard as bodyguards are colloquially
known - with dark glasses, walkie-talkies and guns, driving the latest model of box-like Mercedes jeep, extends
well beyond the circle of the countrys top politicians...The collapse of communism at the beginning of the
1990s, the crumbling of the states traditional institutions of control and surveillance, and the low morale and
pay of the police created an environment ripe for criminality. With intense fights for control of assets that were
being sold off or stolen, violence was frequent. Companies with high visibility, operating in sectors where
competition was stiff and criminals were already active, such as restaurants, bars and night clubs, ran
considerable risks...The traditional response has been to find a 'krisha a Russian word meaning roof or
protection. In the past, money was often paid to criminal gangs. But security advisers steer businesses away
from such arrangements today. Now contributions are often made instead to licensed security firms, police
charitable foundations or directly to serving policemen...Oleg Maslennikov, director of marketing at Bayard
Security Services, says : 'Human life is, of course, priceless, but having the right information can be more
useful. The struggle for the acquisition of necessary information is becoming more and more important. He
says that 'economic risks such as feuding over clients, bankruptcies, triggered by rivals, hostile takeovers and
companies which use loopholes in Russian legislation as weapons, are rising at a time of intensifying
competition. 'In order to keep their position in the market, a lot of companies use unethical methods. He cites
a multitude of tactics, ranging from rivals paying journalists to ask questions at press conferences through to
phone tapping and directional microphones in order to gather competitive information. He says computers are
frequently tapped, to either gather or simply destroy data. Meanwhile, the FSB, the successor body ot the
KGB, is empowered by law to require all internet service providers to give them access to electronic mail,
allowing them to easily read a vast amount of private information. And as another security consultant puts it:
'There is no coordination or unity of purpose between and even within government agencies. Data might easily
be used to serve private interests.
As reported, alleged money laundering that links Russian organized crime to as much as $10 billion channeled
386
through the Bank of New York could show how Russia's crime syndicates are multinational operations...the
Russian Interior Ministry estimates that organized crime controls 40% of the economy, although other
observers say the figure is higher. Corrupt officials and gangsters work with these criminalized businesses,
helping them get insider deals, avoid taxes and even kill rivals...About 5,700 criminal groups are thought to
operate in Russia and many of them are expanding abroad, according to Russian and Western estimates.
Corruption has been a problem in Russia for centuries. It reached unprecedented levels following the collapse
of the Soviet Union in 1991, when some officials and their cronies divided state assets among themselves...As
a few people became fabulously wealthy, many Russians slipped into abject poverty, souring their beliefs in
democracy and the market system...if a government ministry wants funding, it must allocate up to 3% of the
requested sum for bribes to lawmakers and officials. The lawmakers then approve the request, and the
ministry must then pay up to half of the funding to the lawmakers and officials to get the money...Working
alongside the corrupt officials and businessmen are criminal gangs whose members fit the Hollywood image of
ruthless killers in leather jackets and dark glasses. Their activities include drug, prostitution and protection
rackets, with up to 80 % of Russian businesses estimated to be paying for protection. Corrupt businessmen use
the gangs for contract killings of rivals when there are disputes over turf and political clout." cf. 'Tentacles of
Russian Mob Reach Around the World,'' in Wisconsin State Journal, A1-2, Wed. Sept. 1. Also, cf. USA Today,
2B, Wed. Oct. 13,1999: "Since the fall of the Soviet Union, Switzerland has become a favorite depository for
money flowing out of Russia. Swiss officials estimate that up to $40 billion in Russian capital is deposited in
Swiss banks. The Russian money has been accompanied by an influx of Russians. The government on
average issues more than 70,000 visas a year to people from the former Soviet Union...The Swiss federal
police have established a special unit to track Russian crime gangs. Those investigations often lead to the
bank accounts held by Russian companies...Switzerland now has stringent money-laundering laws to prevent
any kind of dodgy money from being deposited...[Yet] 'Money launderers are not targeting countries like
Switzerland any more, not at the first stages anyway. But associations of organized crime in Eastern Europe
react with the same old ideas: You have to have a house on the Riviera and invest in Switzerland." Ibid:
"Republic National Bank of New York is closing 40% of its correspondent banking relationships with about 100
banks in Russia and former Soviet bloc countries. Its concerned about how well the banks know their
customers. Republic had been a major clearing bank for Russian money. In August 1998, Republic notified
regulators about suspicious transfers from net of its accounts to accounts at the Bank of New York in the name
of a firm with alleged ties to Russian organized crime. The FBI then requested those accounts to stay open so
agents could monitor them."
197. cf. USA Today, 1B, Fri. Aug. 26, 1999, Cover Story by Tom Lowry: "Explosive allegations that the
Russian mob laundered as much as $15 billion here through two leading banks underscores troubling fissures
in the US banking system...In a global economy, where more than $2 trillion a day is wired through banks
worldwide, money laundering is becoming increasingly hard to detect..." Ibid, article by James Kim: T h e
Clinton administration issued a partial defense of the IMF on Thursday as investigators probed deeper into
reports that top Russian officials may have diverted $10 billion in loans...The IMF critics in Congress, including
House Majority Leader Dick Armey, want the agency to suspend further aid to Russia, which has $16.9 billion
in IMF loans outstanding and could draw $4.5 billion more..."
Also see a report about the corruption problems of the Russian oil industry in internal transactions at a discount
with still-secret ownership, cf. ...Russia's oil barons say wildcatter capitalism era is over in The New York
Times, c1-2, Tues. Dec. 28,1999: ...just as with spiffy new logos, not everyone is ready to believe that the
transformations are much more than symbolic...In recent months, the company has issued Russias first
corporate governance charter, a document that sets out rules for treating all shareholders fairly, and agreed to
give outsiders two seats on its board. And in the spring, it began selling its shares on secondary international
markets in the form of American drawing rights....Sibneft is one of a handful of Russian companies whose
books are audited according to 'generally accepted accounting practices, meaning that results are reported
using the same rules that apply to foreign companies. And unlike other big Russian oil companies, it pledges to
make public the identities of major shareholders, probably next year...The problem [in the oil industry]...is that
the competition is not especially stiff. Russian oil companies, Sibneft [the Russias sixth-biggest oil company]
387
included, are saddled with such murky and occasionally devious pasts that international business rules are still
a novelty for many. And even well-run companies are enmeshed in Russias treacherous politics, where a
single misstep can have serious consequences...The [oil] industry is legendary for its schemes to launder oil
money, mislabeling products and manipulating sales prices to move profits into offshore banks and away from
shareholders and government authorities...Oil was one of the best ways in which you could accumulate
financial reserves outside Russia. A lot of private fortunes have been built on that...Sibneft sprang from a now-
notorious program called 'loans for shares, in which the Kremlin handed out stakes in major industries -
almost always to insider friends - as collateral for loans it never repaid. In Sibnefts case, a company tied to
Boris Beezovsky, the tycoon and political lightning rod who was Boris Yeltsins re-election campaign financier,
won the rights to 51% of the stock in 1995. In return for a $100 million loan, he got control of a company then
valued at roughly $600 million, including Russias best oil refinery and proven petroleum reserves larger than
those of Texaco...'Their basic problem of the controlling shareholders is that theyre very sensitive to the
political environment....News reports suggest that it [Sibneft] could receive more favored treatment in a
looming selloff of government oil assets, an apparent pre-election move by the Kremlin to shore up corporate
political backing...In Russia, the wealthy are marked people, by criminals and government alike, and pulling
back the veil on ownership is a long and complex process." Thus some outsiders believe is a transformation is
viewed as only a symbolic gesture by most Russians.
198. cf. Can Putin clean up? - Bribes are paid more regularly than taxes in todays Russia. Vladimir
Putin, likely to be confirmed as president in elections next weekend, has pledged to cleanse the nation,
but he appears to believe any means justifies the ends" by John Thornhill in Financial Times, p. I,
W eekend, Mar. 18-19, 2000: ...Such a state of affairs no longer provokes outrage in society, only a
sense of fatalistic indifference. Russians grimly joke that it took 74 years of communism and one decade
of 'reform to create the capitalism only dreamed about in Karl Marxs worst nightmares...it was
important to understand that Putin was from a new generation of 'conservative liberal politicians, who
realized that only a strong state could ensure the proper functioning of a democracy and a
m arket...W hereas Boris Yeltsin and his contemporaries had come from the ranks of the boorish
provincial Communist party...Putin represented the best-educated generation of the Soviet Union, which
was familiar with the outside world. 'The country needs order. It is essential to stop the chaos...A new
class of entrepreneurs is pressing parliament to introduce clearer legislation to attract investment. Even
Russias oligarchs are publicly expressing concerns that they might have been too rapacious in the past
and should now give more back to society. Russia, as Putin says, is a country of paradoxes. It could just
be, as his supporters argue, that a scion of the KGB - which must surely rank as one of the most cynical
and amoral institutions in world history - presents the best hope for establishing a new set of rules by
which society can live. Putins means-end structure for reconstructing Russian society remains
Bolshevik, revolutionary, and vulnerable to destroying the goals he wants to achieve: ...A 'dictatorship
of the law may sound fine in theory but, as Russias experience in the Stalinist era proved, such
concepts can be abused by the state to legitimize terrible actions. Rudnyev suggests Russia can only
develop a truly law-based state if it roots its legislation in the moral values of its Christian, Muslim and
Jewish populations and conforms to broader conceptions of human rights. 'I have a feeling that our
leaders, Gorbachev, Yeltsin and maybe our present leader, have all wanted to solve our problems like
Lenin. I fear that all Putins declarations about Chechnya illustrate the fact that Putin's administration and
Putin himself want to finish everything quickly. 'They think w ell put our heads together, write a plan,
fulfill it within five years, and the country will live well. But this is a revolutionary, Bolshevik approach,
Rudnyev says. Once again Russia is confronting the dilemma of means and ends. Schooled in the KGB
way of thinking, Putin still seems wedded to the notion that any means justify his chosen ends. But as is
being tragically proved in Chechnya, his means of operation are in danger of destroying the goals he
wants to achieve. As one philosopher noted: 'T h e means employed determine the end results (ibid.).
199. In G. Miller 1992, this state of nature eventually presents a social dilemma in which There is no authority
capable of enforcing contracts," and "individual pursuit of self-interest is inconsistent with group well being." As
a result, it could only prompt the retreat to a centralized, coercive authority, i.e., Thomas Hobbes's Leviathan
388
State to prevent from "the war of every man against every man (Hobbes 1651/1952:85)," in that "he or she will
gladly give up the liberty" (cf. 50). The retreat in Russian suggests its previous regime of the state socialism.
200. cf. USA Today, 10A, Mon. Aug. 9, 1999: "In Russia, food, water and energy shortages are endemic, and
machinery and telecommunications breakdowns are regular events...People in several regions throughout the
country have been living with heating and electricity shortages for years, usually because their local
administrations can't pay the bills. 'M y phone went out last week and this week my power was off for half a
day, says Nataya Ryabova, a Moscow shop clerk who lives in the center of the capital."
201. cf. Russias market economy: Tim e to trade - The European Union and America say Russia is a
market economy. Yet membership of the World trade Organization is still some way o f f in The
Economist, p. 77, June 15, 2002 (emphasis mine): It was a big psychological boost to those in Russia
who want their country to be treated as a normal part of the world trading system, rather than as a
peculiar post-communist place with special rules at home and abroad. Last week America announced
that it now considers Russia to be nothing less than a market economy...On the whole, the
endorsements are deserved. Russias may not be the very model of a modem market economy. It is
governed by forces that might politely be described as unusual - including highly politicized subsidies for
energy, transport and credit, a welter of organized crime, and arbitrary bureaucratic interference. Still,
the laws o f supply and demand certainly matter a lot more than they once did. Some bits of the
economy, such as a growing software industry, are world-class, although admittedly they are still small.
The practical effect of the new status is limited, however. It may give Russia some protection against
anti-dumping measures taken by rich countries. The real prize is membership of the World Trade
Organization, the body that governs global trade. That would put Russia firmly inside a rules-based
system, giving it at least some protection against other countries protection. At home, it would also be a
useful rod to beat back a capricious but overwheening bureaucracy...The other big looming snag is likely
to be protection of intellectual property. After much huffing and puffing, the United States managed, to
get Ukrian, another W T O applicant, to close some of its most prominent factories producing pirated
compact discs. The plants promptly moved to Russia, where the illegal copying industry has close links
to the defence ministry. Counterfeiting of consumer goods remains a big headache, too. Dealing with the
rich and powerful criminal gangs that run these businesses will be a formidable job, and also dangerous.
So far, there is little sioh that the Russian state is up to it..."
But according a recent poll conducted by a group of Russian experts, only 27.5 % were willing to return
to a socialist planned economy. Most Russians believe in competition and a rejection of Soviet-style
protectionism and state control in spite of the impact of the financial crisis in August last year...Russians
consider the freedom to travel abroad to be the most important democratic principle, followed in
importance by the elections, critical media, the rights to strike and the chance to resolve conflicts with
the authorities in courts... , cf. Financial Times, p. 2, W ed. Dec. 1 5 ,1 9 9 9 .
202. cf. Gelb et al. 1993, p. 427: ...European reform socialism denied new entry, developed little real
competition and sustained less conservative macroeconomic policies while abandoning formal planning.
It left agents constrained neither by market nor by plan. In contrast, enterprises in China were
constrained by both, sometimes together, with essentially favorable results.
203. cf. Civilization retreats in the invisible nations - A decade after the Soviet Union's end, the fringes of its
empire are returning to dust by John Lloyd in Financial Times, p. x, Weekend, Oct. 15, 2000 (emphasis
mine): ...Implying a spirited contest for the glory of the nation-empire, it once described the imperial struggle
between the Russian-Soviet empire pushing south and the British empire in India pushing north. It lives on but
is transformed in the aftermath of these empires into 'the new Great Gam e - a more complex but still
principled joust for influence, hegemony, oil and gas, and security. The new Great Games legacy, and effect,
is more malign. It is of dependence, corruption, drug running, civil war and, now, reduction to the misery and
starvation of third would status. Central Asia, composed of tribal and feudal societies formed into 'states by the
389
Soviet Union and liberated as 'nations by its collapse, shows an inability to take control of its own destiny,
except through a repression modeled on - but less civil than - the late Soviet system...I met, in the northern
city of Khofend in the Leninobod region, a doctor named Ikram Davronov, working for a western agency called
Ecologia...He considers the end of the Soviet Union as the largest tragedy of his life. The country fell into clan
wars after the Soviet collapse, not so much among the ethnic minorities as along regional clan lines. The
fighting went on for seven years: at the end of it, President Imamali Rakhmonov, re-elected last year, had
outlasted most of his rivals by allowing them to kill each other. Outside the town of Kangurt, not far from
Rakhmonovs birthplace in the Kulyab, is the weirdest cemetery. About 20 busts stand on pillars, gazing in front
of them...They are the martyrs of the civil war, comrades in arms against the anti-government forces. Or
supposed comrades: among the elevated ones, two - Sanjak Safarv and Faisoli Saidov, both clan
commanders - went to a party together, fell to quarrelling, and killed each other there and then. The civil war
meant that in the 1990s nothing was repaired and a great deal was shot to pieces. Everywhere you go, along
the rutted roads in the industrial areas - including Dushanbe - you pass factories which have been simply
abandoned, the windows shattered, the machinery keeling over and rusting, the doors flapping. In a week, I did
not see one piece of industrial work going on in anything bigger than a small workshop. But this was never an
industrial land. It lived on its cotton, and on the wheat the peasants grew on collective farms on the higher soil
not suitable for cotton. Today, the irrigation system is largely destroyed: the channels are broken or blocked,
and the pumping engines no longer work. The government, which takes the product of the dwindling cotton
crop (for which the world price is falling) and has bought guns with it, has no money for seeds, fertilizers and
machinery. The yield went down everywhere, and the prices for everything went up as the currency inflated.
And then, for the past year, there has been drought. The drought, a regional catastrophe...hit Tajikistan worst
because of its fragility. The UN, which has a large presence here...has appealed for funds of almost $80m for
emergency relief, seeds and other necessities from the usual national donors. They have garnered pledges -
'and pledges are not always cash, says Matthew Kahane, the UN station chief in Dushanbe - worth $2m. It is
the worst response to such an appeal the UN has had...Traveling to some of the worst-hit villages in the north
and south of the country was to see a civilization in retreat: industrialization returning to scrap, lands to desert,
educated (more or less) people into mute peasantry...On the obvious level, the Tajik authorities do not care
much. Two rukomats, or district secretaries, in the Shaartuz areas, rejected any charge of indifference by
saying that 'we have called in the international organizations, and responded to questions about the peoples
despair by saying...that 'people do not understand that we are in a transition period from the Soviet system,
where everything was provided, to one where you must work for yourself. It is true that the pleas of the people
in the villages display an inert quality. But they are also exhausting themselves trying to grow crops on parched
soil and obtain water from drying wells. To be accused of 'not understanding the transition period seemed
harsh...tiny Tajik economy has lost more than $7bn from the civil war...the collapse of the Soviet Union
instantly deprived the economic structure of any logic: and that even if the economy could now start to grow it
would take two decades to return to the Soviet level - brooked no dissent.. .we heard the truth about the drag
trade - 'we catch perhaps 10%, not more - and a defense of a polity which , through it may be corrupt and
static...has succeeded in suppressing the clan wars by giving 'jobs, and thus access to state revenues, to
those clan chiefs who did not massacre each other...In this way, Tajikistan is a pioneer of consensus. In
forming a shapeless government of everyone who aspires to power...President Rakhmonov has ended his
countrys worst scourge. But the exhausted peace shows a country with next to nothing. Nearly a decade after
the Soviet flag went down over the Kremlin. Tajikistan, a Soviet creation, lives on in its ruins. It reminds us that
western celebration of the end of Soviet authoritarianism was largely blind to the effects on those countries
whose living standards had been raised by the Soviet Union, as against those which - as in Central Europe
and the Baltic - it had debased. It niggles, faintly, that we have simply forgotten the 'stans as the weakest of
them plunge towards disaster. In the concrete lines of a village called Victories, there is gathering panic as the
winds grow colder and the aid does not come. Ten years after, the fringes of the Soviet civilization are
returning to dust, and to the cruel rhythms of a nature over which communism had once declared eternal
victory.
204. While the neo-classic paradigm on transition is likely to insist on a constitutive mode of transition as the
most efficient, a sociologically-grounded institutional perspective likes to emphasize the fact that a background
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transition is incubated and precipitated by a blend of practices through interactions between old and new
institutions. It is plausible, though, that along with such a blend of practices constitutive-minded expectation
could eventually prevail and actively prompt institutional reforms moving transition forward. This insight is
clearly evident in CCP's pragmatic route of "Be Realistic and Practical," advocated by the former leader Deng
Xiao-ping who specified China's national goal in the 21st century as 'To Construct a Moderate Developed
Nation, with Unique Chinese Characteristics." See our discussion in Chapter 7.
205. cf. Lin et al. 1996: Figure 9.1 Big Bang Reform and Figure 9.2 Gradual Reform," pp. 270-1.
206. cf. Tooling up for risk decisions by Kiriakos Vlahos in Financial Times, p. 10, Figure 4: Utility
Functions, in Mastering Risk," Tues. May 2, 2000.
207. cf. How Collins describes good-to-great framework by Kevin Maney in USA Today, 5B, Thurs.
Sept. 20, 2001: ...The Flywheel and the Doom Loop. 'There was no single defining action, no grand
program, no one killer innovation. Rather, the process resembles relentlessly pushing a giant heavy
flywheel in one direction, turn upon turn, building momentum until a point of breakthrough. This is just
the case in Chinas transition, in my opinion.
208. Also cf. Lin et al. 1996, p. 295: ...incremental reform has provided the people and political leaders
with continuous opportunities to choose concrete steps for implementing reform measures, thus helping
to ensure that the proper balance between growth speed and stability exists, minimizing social shock and
avoiding excessive friction. Our answer to...why Chinas reform has been successful while the reforms of
the former Soviet Union and Eastern European countries have encountered difficulties, is that China
opted for an incremental reform with low costs and risks, but which yields timely returns. In contrast, the
Eastern European countries and the former Soviet Union opted for the opposite, which caused
tremendous friction and social shock and which up to now has not brought about growth. Also cf. Banks
project: make Falcons Atlantas team by Richard W einer in The USA Today, 3C, Thurs. Sept. 5, 2002:
Dallas owner Jerry Jones: 'It made all the sense in the world. You take a step back so you can move
forward.
209. Often, as we like to punctuate, a transition is politically landscaped and contingent. For instance, any
political event, like the Falung Gong movement and the US spy plane landing, could incur strong
domestic and international reactions that would significantly affect China's politics and its transition, cf.
Bush needs tough China stance, quiet diplomacy by Louis Branson in USA Today, Wed. 15A, April 4,
2001 (emphasis mine): ...China has always responded better to constructive engagement than to
hostility. As Bush handles the current crisis, he should realize that China is right now at a turning point.
The past decade has seen phenomenal growth that is evident just in a visit to the capital Beijing. Ten
years ago, it had the feel of a dusty, bicycle-filled provincial backwater. These days, it looks more like
Hong Kong. The growth is expected to continue at this explosive rate if China...joins the W T O ...T h e
danger now is that a war of words between China and this country could escalate, playing into the hands
of Chinese hard-liners and making it hard to back down.
Also cf. The jokers in Chinas spy plane hand by James Kynge in Financial Times, p. 4, Thurs. April 5,
2001: ...while China seems to be preparing to play hardball, its position may be weaker than it appears.
There are significant international and domestic risks. The first is that domestic politics may skew toward
the more conservative and hawkish elements within the Chinese hierarchy, at the expense of more
internationally minded constituencies such as the Foreign Ministry and the Trade Ministry. So far it has
been Chinas powerful security complex - which includes the PLA, the Ministry of State Security, the
Ministry of National Security and the Ministry of Public Security - that has emerged as the main
influence on decision-making...The possibility of a conservative ascendancy within the Chinese
government is of concern because there are growing signs that the impetus behind Beijings economic
reforms is flagging. Not only has a previously announced three-year time-table for interest rate
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liberalization been quietly dropped and plans for a Nasdaq-style second stockmarket mothballed, but
progress on joining the W T O - once expected early in 2000 - also seems an uphill struggle. Separately
there are growing signs that a creed of economic conservatism is taking hold, or at least receiving
positive consideration. The official Peoples Daily newspaper carried an opinion piece last month
excoriating capitalism and globalization for the wealth imbalances that it promotes. Such sentiments
have rarely, if ever, received such a prominent airing over the past three years...Any adoption of
hawkish, PLA-driven politics also risks undermining a recent move to flexibility toward Taiwan that has
been pushed by Qian Qichen, a vice-premier and Chinas top foreign policy official...Internationally the
risks are clear. Foremost is that a hardening anti-China lobby in the US will prevail on the White House
to approve the sale of highly sensitive weapons to Taiwan, ratcheting up tensions in one of Asias most
volatile flash-points.
210. What really matters here could be related to political leadership in a transition. What really makes a
difference could be up to the reformers in charge of transitions who are ready to recognize and accept the
transition, actively solving those social contradictions facing them so that they could fully exploit their
opportunities and absorb those positive factors in order to make the transition. Whichever mode of transition is
chosen, nothing is more important than those social actors in charge of actions and their changes in
themselves as to how to view, access, and change their realities and how to formulate their strategies and
actions to make changes happen. In this regard, institutions as social actors could play a more dynamic role
than other social actors.
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Chapter Five
Chinas Transition and Expectations. Depth of History, and Thickness of

institutions
perennial enigma for Western social scientists is the question: how did communist China embrace
A capitalism and triumph in the age of globalization more effectively than did Russia [1]? This study calls
for more attention to Chinas depth of history, its changing social expectations, and the thickness of its
institutions to account for Chinas transition [2]. I would argue that fast and sustainable growth in China would
be inconceivable without taking these dynamic sources and domestic conditions into consideration. This is
contrary to the mainstream conventions of development studies that tend to attribute economic growth to some
success in a single program, or to successes in particular economic sectors, industries, and strategies.
In this chapter I take a close look at Tables 4.3b and 4.3c in the previous chapter. My overriding
concern now is how to apply a sociologically-grounded institutional approach to explaining the institutional
dynamics involved in Chinas transition. Throughout Chinas transition, one could see the dominance of
Maoism ideology fading away and being replaced by growing entrepreneurship. The commanding role of the
central government was subdued to the role of a proactive regulatory institution. And Chinas reality changed
drastically through extensive institutional reforms and mutations. These drastic changes sustained the rapid
growth of Chinas economy for nearly two and half decades. Section 5.1 will outline how China had
disentangled itself from ultra-radical Maoism with Utopian expectations and brought back itself to earth and
economic practicality. It will outline how such a change affected Chinas transition. Section 5.2 will examine
how China inaugurated institutional reforms on an unprecedented scale. It will observe how entrepreneurship
had emerged as a result of the reforms, and how the state government came to play a strong role in facilitating
Chinese entrepreneurship. Section 5.3 will explore the dilemmas facing China in its economic governance
(such as the dilemma between market and hierarchy) and the methods China used to tackle the dilemmas
through decentralization and hybridization, seeing as an example rts recent enactment of the so-called
Xiagancf system f t .
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5.1 The initiation of Chinas transition
Many historians and economists have documented China's extensive transition since 1978 (interested
readers might refer particularly to M. Meisner 1986, 1996, and 1999). There is no need to reiterate those
descriptive details.
My position is that Chinas changing social expectations had a lot to do with the timing of Chinas
transition, and the ups and downs of Chinas experiences during the transition. I want to analyze Chinas
changing social expectation on two levels - political and economic. I see Chinas changing social expectations
as part of Chinas soul-searching as it examined its political strategies embedded in its historical continuum, so-
called a brilliant departure and a faithful continuation" ft. I also see China's changing social expectations
affecting the states responses and strategies as it tackled the dilemmas between efficiency concerns and
legitimacy concerns during the different phases of its transition.
5.11 Turnabout o f C hinas social expectations: From the pursuit o f a Maosit Utopia (1949-1976) to its
period o f transition (1976-2000)
History is not simply a static replica of the past practices. It is important to check the expectations of the
current social actors and their historical formation in account for those historical changes. Related to our
examination of transitions, such a check, first of all, is embroiled with its theoretical context and is affected by
larger environments, i.e., affected by the rest of the world. It needs to address that the changing of social
expectation in the erstwhile planning economies started from so-called Marxist-Leninist belief crisis, a crisis
derived from their respective historical contradictions in these economies to the orthodox precepts of Marxism-
Leninism.
According to classic Marxist historical materialism and Lenin's doctrine about socialism and capitalism,
capitalism is a product of social production at a certain stage of human history; and socialism and/or
communism are the inevitable results of historical development in advanced capitalist societies. This Marxist-
Leninist logic rests on a belief drawn from Marxs (as well as Lenins) "scientific projection" that communism
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(in Marx) or socialism (in Lenin) will ultimately prove to be superior to capitalism that productivity under
socialism and communism will outgrow productivity under capitalism, and that communism and/or socialism
will bring to the majority of people more material goods and spiritual satisfactions than capitalism ever could
(cf. M. Meisner 1996). Yet the on-going developments of capitalism and capitalisms astonishing performances
seemed to contradict this orthodox Communist utopian expectation. None of the so-called "state socialist"
countries such as FSU, FEE and China outperformed their capitalist counterparts. The outcomes proved to be
contrary, instead. Also, in these economies, incentives systems became degenerated, industrial structures
became distorted, the mechanisms of resource allocation became inefficient, and social institutions became
inept and leap backward (or de-institutionalized). As their classic Marxist-Leninist-Maoist utopias collapsed,
these planning economies embarked on their transitions.
Critics like Komai and Nee explained the collapse of these economies as consequences of soft budget
constraints. But I would like to add that this relationship cannot be seen as direct. In fact, the concept of a
communist Utopia had long been used as a powerful weapon by the socialist regimes to resist Western
intellectual influences and to bear with the syndromes of suffering resulting from their bad-performing
economies. The doctrine of communist Utopia was once taken as spiritual pillar guiding those principles and
rational codes of the economic governance in these planning economies. Its collapse could never be
automatic or taken for granted, especially in the places where the politics had so dominantly infiltrated in the
public and private lives and the governments' micro-interventions were hyperactive everywhere. Hence people
might have to look at what actually happened to the other fields of these economies, beyond ideology and
economy per se, in this particular time period (prior to and during their transitions), especially to look at what
actually happened to their political processes at the time of their transitions, and to look at those complexities
arising from the interactions between political process and economic process in a larger institutional
environment. Changing of social expectations in these economies cannot separate from their political
processes as well as from their economic processes j5]. In this light, different political processes may insert
their respective inputs and affect different transitions in different ways, thereby bringing different outcomes.
Only in so doing, we are able to understand why those erstwhile planned economies were such unique in the
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way that most people in these economies had long been thoroughly indoctrinated with the communist ideas of
Utopia, whereas most people in the capitalist economies had long lived with Darwinist notions of competitive
survival under capitalist Leviathan. Only by recognizing these sharply different social expectations are we able
to explain how the collapse of classic Marxist image in the public is a linchpin to explain how the transitions in
these planned economies were initiated and how the transitions fared.
A chronological outline. The changes of a nation cannot be separated from the changes of its people's
expectation. This might involve a dismissal of old images in the minds of the majority of people and their
replacement with new social identities. Chinas transition started from a Marxist belief crisis and peoples
serious concern about how to prevent a recurrence of the devastating consequences of Chinas Cultural
Revolution. This concern was furthered by Chinas institutional learning from the outside world, the tacit growth
influence of American pop culture, and the politicized public debates in China in the 1980s (Warren Cohen,
2002). In the late 1980s, fervent democratic-political activists launched student movements against the
rampant corruption of state and local governments. Chinas government wasted no time in crushing these
movements, possibly fearing a return to the chaotic Cultural Revolution and its disastrous experiment in mass
democracy I6]. The situation then became quickly settled down to consensus between both sides on a rational
solution so that it warranted the state to set its priority to economy in command. After 1989, the state created
a stable macro-economic environment that paved the way for an entrepreneurial frenzy throughout the nation,
a frenzy that drove Chinas rapid growth in the 1990s.
Chinas chronology of changing social expectation can be linked to three critical moments of political
process in its transition: 1. The C C Ps 1976 decision to Term inate chaos and return to the normality (a C C P s
slogan at the time) right after the Cultural Revolution, a decision sealed by The Third Plenary Session o f the
Central Committee o f the Eighth National Congress of the C CP in 1978, when the CCP formally announced
that the Cultural Revolution was over, and replaced Maos politics in command with its new priority
committing to the economy. In this moment, the majority of Chinese people wanted social stability and
economic bread and butter fundamentals. 2. The Marxist Belief Crisis beginning in the late 70s following
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C CPs campaign for the liberalization of peoples minds in the C CPs fight against the ultra-leftist spiritual
poisoning; and the belief crisis in the early 1980s spurred spate of political debates and public discourses that
eventually led to the subsequent student demonstrations in Beijings Tiananman Square, calling for democracy
and political liberalization. During this period the state launched its decentralization reforms offering incentives
to local groups and non-state sectors to engage in entrepreneurship. 3. Dengs Southern Trip in 1992 that
heralded the arrival of a new era, prompting a nation-wide entrepreneurial frenzy and all-around state activism
in driving Chinas economic transition forward [7], Stunned by the severe aftermath of the student movements
and fearing a return of the chaos that had accompanied the Cultural Revolution, the state, the student activists,
and the intellectual avant-gardes framed a strategic re-alignment endorsing the states openness policies and
vouching for its priority of the Four Modernizations (i.e., industry, agriculture, science and technology, and
defense). From 1992 on, economic practicality has prevailed over the political ideology, and entrepreneurship
and privatized state enterprises have escalated to an unprecedented level throughout the country.
Historical context up to 1976. A transition is an institutionally collective and strategic action. It starts from
changing social expectations and is delivered by the collective actions of institutions. Collective institutional
actions can occur only when a nationwide collective consciousness and sentiment mount to such a high level
that some fundamental changes are publicly warranted as reasonable, feasible, and possibly even essential. I
believe that a concern for efficiency alone cannot generate fundamental changes. Changing social expectation
is actually intertwined with particular political process; it could be either delayed by this process or facilitated by
the process. Consequently, transitions are directly affected and defined by certain different political processes
in their different ways j8].
Social cohesion has long been cherished and endogenized within the structure of Chinas
institutions. In 1996 M. Meisner wrote, The Communist Revolution in China can also be described as a
combination of capitalist and socialist elements I9]. But how can capitalist and socialist elements ever to
be combined? W hatever the answer, the fact is that after the founding of the PRC, an eclectic and
pragmatic mix of capitalist and socialist elements has been treated as both feasible and essential [10J. I
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prepare to argue that one reason why China has followed such a pragmatic line is that throughout history
it has been motivated by a strong commitment to social cohesion [11]. Whether this commitment has
been drawn from materialist conventions or a nationalist ideology, it has provided China with a pragmatic
way to cope with dilemma of selecting between ideology and rationality [,2]. For example, this
commitment provided the CCP with a feasible guideline that had worked very well during its crucible years of
guerrilla combat before the founding of the PRC. This guideline helped China survive the three-year-long
natural disasters it suffered in 1960-1962. This guideline was later incorporated in the early 1970s into China's
economic recovery and restructuring plans (cf. Willy Kraus 1991). Thus this guideline epitomizes one of the
mainstays of Chinas spiritual traditions. It has provided China with a cautious check against responding
to other kinds of expectations, such as radicalist, complacent, utopian, symbolic, cosmological, or
individualistic expectations [13].
Many Chinese people like to judge the reality facing them in the present and the future with the
realities of their shared past and Chinas history [14]. Indeed, Chinese people have often drawn comfort from
comparing the present and the past [15j. Yet in the recent decades, they might no longer see back to history is
back to conservatism. They might no longer see Chinas history as a spiritual burden for its development but
a spiritual incubator for its moving up. Even the PR C s founder Mao himself in his later years, when he
was trying to determine Chinas strategies and efficacious policies, spent more time studying Chinas
ancient classics than Marxist classics.
Hence it is not difficult to understand that Chinas collective commitment to the nations prosperity
chiefly accentuates its recently historical experience. Particularly, Chinas turn on its incremental transition and
gradual reforms resulted from the failing of political fanaticism and radicalism prior to its transition, 1949-1976.
It might further explain that even when a torrent political maelstrom severely broke down China's
mainstream, the aberrance could never easily endure and replace the norm of mainstream. W e could
refer Chinas Cultural Revolution to the extreme example of such aberrance, the one imbued with Maoist
utopia and ideological fanaticism and in an attempt to revert to the era of his revolutionary guerrilla.
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People might wonder how this could even happen in China and why this could all of a sudden vanish.
People might also wonder how and why China could change tune from a political radicalism to a new
national sentiment for bread and butter* economic construction, decisively taking a down-to-earth
approach, market-oriented. But people's wonder might disappear if they could realize Chinas recent
political history, and if they could realize China's change was really drawn on its own serious lessons
learned from the former planning economy and particularly drawn on its severe sufferings from the rule
of the ultra-leftist radicalism.
In China, the ferocity of the Great Leap Forward in 1958-1960 and the internecine Cultural
Revolution in 1966-1976 had generated devastating consequences for national development [16]. From
the twin peaks of ultra-leftist fanaticism China has paid its heavy toll. The big drop in Chinas social
production and Chinas uncompetitive performance in this period of doldrums (see Figure 1.2.1, Chapter
1) could find its parallel only in its Russian counterparts transition up to 2000. Although the two cases
happened in different time periods and in different countries, the social expectations in both cases were
quite high. In China there was also a haunting nightmare of what had happened with rampant fanaticism
under the ultra-leftist ideology.
Right after the C C P s rectification movement in 1957 that purged a clutch of the rightist
intellectuals and dissidents from within the CCP, the great helmsman Mao remained convinced that
Chinas new regime remained full of class struggles, old and new. Under the aegis of the so-called
proletarian dictatorship, Chinas socialism still needed incessant revolutions extending into future
generations, revolutions often in Chinas superstructure as well as in its political and ideological forms
[17]. Mao was convinced that revolutionary ideologies and socialist class struggles could be the ultimate
driving forces for national development [18]. Under such a philosophy, he eventually launched the ten-
year-long 1966-1976 Cultural Revolution.
China reached its first radicalist peak when Mao outlined an economic Great Leap Forward in
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1958. His goal was "Surpassing the Britain in 10 years and catching up America in 15 years." His goal
was propelled by the new regimes complacence of independence and the later successful boycott of the
Soviet Unions "Socialist Chauvinism and Imperialism" which had evolved in the 1950s along with
surging nationalisms in the developing world, nationalisms that had peaked throughout the 1960s (cf.
Economic Research Editorial Board, ed. 1981). China reached its second radicalist peak during the
Cultural Revolution. The radicalist emblems were everywhere during that period and were particularly
evident in Maos slogans such as Politics in command, "Social revolutions alone are the locomotive of
production!", Class struggle is a panacea healing economic syndromes, and "Caution: as soon as
satellite is ejected to the sky, red flag is doomed to falling down the ground!" (meaning: so long as
socialist China becomes wealthy and owns modem technology, the country will change the revolutionary
color of its national banner to revisionist one). But few of these programs ever materialized. Promises
made by the C CP during the founding years of the PRC seemed to fade away, leaving myriads of
political tragedies and social disasters suffered by many of Chinese people.
Starting from 1967 even Mao himself seemed half-conscious of his troubles and the illusory nature
of his doctrine of "Incessant Revolution" (cf. Maurice Meisner 1996, Ch. II, III). He attempted to ease the CCP's
missionary obligation to the third world. He even sent the People's Liberation Army (PLA) to intervene in some
of the incessant local power struggles, to halt the intensified radicalism incited by the Red Guards, and to urge
civilized criticism rather than military fights. In late 1969 Lin Biao, his so-called "most intimate deputy, partner,
and legitimate successor, plotted an unsuccessful coup against him. Since then the public resentment to the
hollow utopian ideology and the treacherous adversity from inside his Party had escalated to a new height. In
time Mao began to budge and succumb to Chinas grim reality and to abandon his policies of "the Politics in
Command." He eventually unseated ultra-leftist Gang of Four, headed by his wife Jiang Qing. In 1970 Mao
came adopted a more pragmatic line close to that of the then-popular Premier Zhou En-lai. Subsequently, in
1972 he released Deng Xiao-ping, who had been denounced as the biggest unrepentant revisionist and had
been under house arrest since 1966. Deng was quickly nominated as Vice Premier and he became Acting
Premier in 1974, when Mr. Zhou was seriously ill from his prostate cancer.
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Yet at the moment China quietly stepped up for a bigger strategic move, a change from inward power
struggles to outward pursuit of its opportunities in the global arena. This strategic frame realignment was
apparently motivated by the domestic power struggles and for the regimes survival with its autarky economy.
But when Chinas door opened to the outside, its significance was far-reaching. In the end it was Chinas
aggravated predicament in the 1970s following the Cultural Revolution that forced Mao to reach out to the
opulent West in order to find some new options. Mao sought detente with the US, while protesting America
demonstrators were calling on the Nixon Administration to seek Chinas help in ending the Vietnam W ar as
soon as possible [19J. The detente helped China bring in several ways. China needed to tackle a more
formidable adversary on its northern border, i.e., the Soviet Union [20]. America could become Chinas
strategic partner and help it deal with the Soviet Unions of "Socialist Chauvinism and Imperialism." All of a
sudden, China and the US, the old enemies, became allies but with their respective raison d'dtats [21],
Globally, China in alliance with the US against its archrival the FSU in a triangle competition at the time
endowed it with a strategic leverage to tap the worid economy [22]. But this new alliance suggested Chinas first
step in abandoning the hegemonic roles of Marxism and Mao Zedong Thoughts (also known as Mao Tse-
tung Thoughts). With Nixon's visit, China jettisoned its isolationism as the Middle Kingdom. In 1975, China
announced its priority for the Four Modernization. Despite many ebbs and flows since then, China has never
retreated back into its former isolationism.
Under the havoc of the ten-year-long Cultural Revolution, China had experienced primarily a great
leap backward instead of a "Great Leap Forward" (see Figure 1.2.1, Chapter 1). Much of the public vexed at
the constant turbulences and economic stymie had lost confidence in the proletarian dictatorship. There was
growing skepticism of Maos doctrine of "Incessant Revolution." While surviving so many "sacred" struggles,
the Chinese people and even some "orthodox" state officials had become tired of the incessant chants and
odes to Mao. Many realized that the intensified inner struggles under the veil of mass democracy during the
Cultural Revolution could ultimately ruin each another, leaving people bitterly suffering, mentally and
materially. Many longed to end the chaos of the ultra-leftist rule [23]. Many sensed some profound changes as
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inevitable. Their reactions then were so visceral and real.
In view of Chinas depth of history and the thickness of Chinas institutions, we might find it
understandable that China would hark back to its pragmatic tradition to deal with such cosmological
conceptions and contemporary issues as utopia and modernity. Although other planned economies have had
to deal with same issues (R. Lowenthal 1970, pp. 60-6), they might not have adopted Chinas pragmatic,
eclectic, and elastic approach [24]. W e could argue that China chose the path it did because of its unique
political episodes and historical situations directly prior to its transition. W e could argue that this was so
because the CCP exploited psychological factors right after the Cultural Revolution in 1976 and determined to
select Stability and solidarity as its policy cornerstone to guide its transition and reforms. W e could argue
that this was so because the CCP apprehended that those calamitous feedbacks just happened from the
Cultural Revolution could have even longer intimidated the future Chinese generations to consider any "big-
bang" strategies without first checking its high risks and costs with the Chinese people. The CCPs desire to
avoid risks made a low-key approach compelling. Thus from the start of its transition, China was quite
comfortable with establishing policies based on the lessons it learned from the peoples experiences and from
its preexisting and existing institutions. The year 1976 was a turning point in redefining and reinventing China.
1976-1979: the end of upheaval and the resumption of social justice and order. Following the Cultural
Revolution, the Chinese people began to question Maos system. Chinas new policies started with the
reinstatement of former cadres and leaders who had earlier been removed from their pedestals as unrepentant
"revisionist elites" or "capitalist relics." Many of them were returned to their former offices. Historically, Chinas
choice for its transition was essentially made in 1978, when the CCP held The Third Plenary Session of the
Central Committee of the Eighth National Congress o f the CCP. At that time Chinas overwhelming concern
was how to prevent a recurrence of the Cultural Revolution. The principal slogan posed by the Party was To
end the upheaval, resume social justice and order, and bounce back to the right track," legitimating an
urgency to establish new social order and put the economy in command. Since then, Chinas social
expectations had definitely changed, and they set the tone for Chinas transition. The new leaders now
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consisted primarily of those once purged state elites and reformers who had united together to campaign
against ultra-leftism [25]. At that point the CCP put forward the slogan: "Banish all superstitions of
dogmatism and buoy up dauntless thinking," attempting to cultivate a vibrant social milieu that would pave
the way for imminent reforms, economic openness, and liberalization. Up to this moment, China's cultural shift
bore a striking resemblance to the French "Enlightenment" of the 18th century. It provided China with a kind of
spiritual incubator for the subsequent institutional reforms in its transition. W e could sight a series of critical
reforms embarked on in the early 1980s.
In this light, Chinas transition started from a political breakthrough from those fetters of its old planning
regime, a breakthrough as a humanitarian relief from China's numerous catastrophes. In the eyes of many
Chinese people, particularly of many Chinese young students and intellectuals, such an appeal for back to
normal simply captivated their minds for freedom, for decent quality of life, and for social democracy that they
had long desired [26].
1980-1989: R esu rg en t political antagonism and th e s ta n d o ff betw een governm ent and
students. By and large, China started its transition with a national mood that embraced the arrival of a new
social identity [27]. Such a mood had been shaped by its recent historical experience (endogenous) and
the increasing impacts of Western cultures (exogenous). With its past bitter experience and so much
negative feedback China seriously craved alternatives. But the search itself was a painful process. In the
1980s, the nation had been twisted with frequent spiritual battles. As ultra-leftism had faded away, Chinas
social expectations had quickly shifted to new directions charactered by the surging entrepreneurship. But the
centerpiece in the 1980s was an overwhelming Marxist belief crisis that spread across China. This occurred
along with growing infiltration by the Western cultures, in particular, American pop cultures, that played a
salient role in demolishing Maoist fanaticism [28].
When China entered the world markets in the 1980s, no country but affluent America could be so
alluring. Partially, the influence heightened a spiritual escape by Chinese people from their past tortures. But
403
mainly, the growing influence ought to be hailed as Chinas own humanistic renaissance, refreshed secularism,
and spiritual celebration of modernism at the dawn of its new era [2S], But the humanistic renaissance was
initiated by a contagious public disbelief about Marxism as doctrine of universal truth. While the majority of
Chinese people woke up, they had still severely suffered from the devastative chaos and material shortages
during the Cultural Revolution. People came to envy the staggering growth performance of the post-war
capitalism I30]. Admiration for abundant life style in the West and the attractiveness of America pop culture had
nurtured a spiritual undercurrent in China since the mid-1970s, especially in the minds of the younger
generation [31], The Chinese student activists and avant-garde intellectuals became increasingly critical of
socialist governance, and to talk seriously of Chinas social democracy. Widespread public discourse
helped China move its politics away from the politics of man" to the politics of men.
In the early 1980s a semi-public debate emerged, initially more academic and cloaked in the
protective veil of Marxist jargons [32]. It started as a philosophical forum among Chinese avant-garde
intellectuals about the Western Marxian debates in the 1920s over the early Marxs conceptions of
Humanism vs. Alienation (see the volumes of such western Marxian scholars as, G. Lukacs and A.
Gramsci). Under such a vibrant social milieu and fresh public discourse, China revised its Constitution in 1982,
ratifying the market-approached Four Modernization as fundamental to its national development.
During the next two years or so, the state regulations seemed to be more liberalizing and granting
individual citizens more rooms to pursue further freedom. But the ongoing academic debate became
increasingly vigorous and even hostile that thus aroused the publics great attention. For these seemingly
opaque philosophical notions in then-Soviet age had sparked the scathing satire and intellectual critique on
the repressions once undergone by the the-tormented academia long ago, who sought intellectual freedom in
the former Soviet Union and the Eastern Europe under the state socialism. The re-examined then-debate thus
had begot strong reactions from Chinas intelligentsia and the rising middle class, who found that they faced
the similar situations and shared the same feels. The debate was particularly compelling to those young
students most sensitive to the issues of human rights and freedom and to their individualistic opportunities,
404
emulating Western style in their thinking and speeches [33]. The debate was soon labeled as a misleading to
Spiritual Pollution and thus was suspended. After the mid-1980s the state apparatus strengthened its control
over media and press. But as the belief crisis of Marxism continued to spread out, people even began to self-
criticize their own culture, authentic tradition, as they searched their spiritual souls and addressed their agonies
from the past years. Such a spiritual search had motivated young Chinese students and eventually triggered
their full-throated demonstrations in 1989 in which they called for the structural reforms and social democracy.
To the student demonstrations, the state apparatus supplied its riposte with an iron fist and steel stick. The
CCP felt it had to set limits to spiritual freedoms. It launched an all-out attack with all the means at its disposal
to crush the student protests and to muzzle free press.
After the governments squelching in Beijings Tiananman Square in 1989, the free discourse
continued to flood into civil society under the influence of the information revolution and globalization [34].
However, Chinas public now turned vigorously to address their underlying economic problems. The CCP now
brought nationalism back in, advocated patriotism as a virtue and defending state reforms and national
development goals - such as the Four Modernizations. Such a combination of economic rationality and
morally-minded entrepreneurship buoyed up by a state government is reminiscent of Calvinism encapsulating
the protestant ethic in early European capitalism (M. W eber 1930). It also reminds one of Japans Meiji
Restoration in the 1860s as well as of the later East Asian take-off in the 1970s. However, Chinas
economic momentum was politically contingent and landscaped. It was driven by and infused with complex
political impulses, including a fear of the recurrence of the Cultural Revolution and a widespread desire for
social democracy.
1990-2000: Self-reflection in the post-1989 era, rational trad e-o ff, and entrep ren eurial take-off. In
principle, Chinas fast economic development in the 1990s could be seen as a result that both the central
government and Chinese intellectual activists gambled and sought rational trade-off for their respective stakes
specific to the circumstance created by Chinas certain political process. The emergent stability of Chinas
macro-economic environment was not only the product of the states tightened control, but also outcome of
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Chinas prevailing economic practicality that the state elites favored in the 1990s as a response to the students
movement in 1989.
Shortly after repressing the Students demonstrations in Tiananman Square in 1989, Chinas political
situation became tranquil and even stable. China looked the way it had in the years shortly after the Cultural
Revolution. The new tranquility provided both the government and the political activists with a chance to frame
re-alignments, to deliberate new strategies, routes, and to rationalize new trade-offs. As both the state
government and the political activism realized the antagonism could only bring them with the worst scenarios,
both sides backed off from their antagonistic face-off f35]. Both sides attempted a feasible alternative for more
or less cooperation, restraining their respective fervent ideological commitments and maximizing their
respective but plausible wants. As the two sides frame alignments were rationalized and prevailed, economic
agendas looked preferable to political agendas.
The state government had been stunned by the students demonstrations in the heydays of their
campaigns. They were well-organized, and the movements were able to sustain themselves for almost four
months. The central government was particularly impressed by the fact that students anti-corruption
sentiments were widely supported. The central government realized it could not stand by the commitment to
Liberalize peoples minds" that the CCP had promised in the late 1970s when the CCP needed to launch a
political campaign against the Gang of Four. While still worrying that an infinite pursuit for liberalization would
turn to be politically subversive, the central government also feared now that if it continued to take anything
lightly, including anti-corruption campaigns, and if it could not succeed in the economy afterward, particularly
after the collapse of the FSU and the FEE, it could face the same doom as the central governments had in the
FSU and the FEE.
In 1989 the betrayal of the central governments and the rattles of spate of tanks in Tiananman Square
woke up Chinese avant-garde intellectuals and student activists. They had been hit very hard; they saw the
new regime just as the same old. As their dream of political freedom had been destroyed, they found again the
406
obduracy of the current regime and the vulnerability of their own I36]. To many of the current Chinese
generations, democratic-political activism was somehow reminiscent of Maos scary experiment of Mass
Democracy during the chaotic Cultural Revolution (note: which turned out as great terror). In this
circumstance, Chinese avant-garde intellectuals and student activists came to realize that too rushed process
could be self-disruptive. They felt what they could do now had to be realistic and reasonable. It was essential
for them to reach some kind of consensus with the government if they wanted some feasible outcomes.
On the side of the central government, it did not want those chaotic fanaticized situations happen
again. It knew it had to keep its GDP growth at an 8% level to maintain a safety net against growing
unemployment and other social welfare problems. While continuing to pursue Four Modernization and social
stability, the central government set about accelerating its marketizations and its institutional reforms.
In such a context, many of student activists turned to savvy entrepreneurship f37], as they recognized
the current timing as good for them to seek individual opportunities I38]. The middle class had substantially
grown during this time period (see Figure 5.22d below). In fact, one of the main theses in the public debate
heated up in the 1980s was that all of China's past troubles in its politics resulted from its backwardness of the
semi-feudalist culture and, particularly, from its economic underdevelopment. This thesis suggested that
political democracy coveted by students now was a product available only in advanced capitalist societies,
therefore any political progress in China toward democracy had to be preceded by its economic development.
Modernization theorists as well as neoliberal theorists here found themselves in surprising agreement,
asserting that economic change would ultimately bring political change in and that democracy would sooner or
later arrive with the boom of Chinas economy, but only after substantial growth in Chinas economy.
Both the central government and the political activists now had their new frame alignments focused on
economic liberalization. The pervasive ideology" throughout the nation was pro-business. If this was so-called
as neoliberal I39], it was because the economy of the country hit the bottom line for both sides, and the pursuit
of material interests simply captures the hearts of the both sides. Both political activists and the central
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government realized that they had to back to economic fundamentals for a reasonable solution. Both people
and the state acknowledged that the country had to be economically prosperous in a competitive world. Both of
them were tempted to engage in economic games and to avoid political risks I40]. With such consensus, the
government justified that only an innovative openness could boost its chance for national development.
All of a sudden, Chinas entrepreneurial activities reached unprecedented levels. Many Chinese
including even those previous student activists and avant-garde intellectuals became obsessed with excessive
materialism. The state took five critical steps in the 1990s. They included: 1. Dengs Southern Tour in 1992
calling national attention to the goals that the CCP had set for the transition, offering greater incentives and
more economic freedom to the Chinese people. 2. Accelerating the state institutional reforms and furthering
the breadth and depth its institutional-leaming experiments that accompanied a series of anti-corruption
campaigns launched by the central government from 1993 on. 3. Extending industrial privatization to the state
sector, i.e., to the SOEs that started in 1994. 4. Deepening marketization: Actively attracting foreign capital
investment throughout the 1990s and finding new ways to accelerate capital marketization, e.g., opening new
sites for China's stock and capital markets, increasing joint ventures with foreign capital, expanding overseas
IPOs (initial public offerings), and establishing new programs and agencies for regulation and management,
e.g., China Security Regulation Committee, joining the W T O , etc. 5. Creating new channels in the 1990s to
promote R&D, e.g., expanding human resource and halting brain drain, while continuing an openness policy
and buoying up overseas academic exchange programs, aggressively attracting through overseas networks
many Chinese scholars and students studying abroad back to the mainland for socialist construction,
promising not to intervene in their individual freedoms and not to check their prior political backgrounds and
records. Deng's Southern Tour in 1992 delivered a strong message throughout China of the C C Ps
determination to institutional reforms and re-affirmed the state's future economic openness, snubbing the
conservative hardliners after the 1989 Tiananmen Square turmoil, and reassuring public confidence in
Chinas transition I41]. As a result of these steps, Chinas social and economic system stabilized and its
economy took off. From 1992 to1995 Chinas economy reached double-digit-GDP-growth.
408
It seems a perennial maze to the overseas scholars that how China could dizzily bounce back from its
political maelstrom and easily escalated such an economic height for only two years or so. But the speedup of
economic liberalization since 1990 cannot be separated from Chinas political processes in the 1980s. The
early success of Chinas economic reforms in the 1980s convinced the CCP of the correctness of its policies.
That had the CCP gained its political leverage in restructuring Chinas economy. But economic liberalization
became particularly imperative right after 1989, when nobody believed in the virtues of orthodox precepts of
Marxism-Leninism. The collapse of the FSU and FEE in 1989 underscored for the current regime the urgency
of economic success to cement its status and seal its legitimacy. The CCP began to nurture patriotism and to
take advantage of the popularity of economic rationality f42]. From the gambling perspectives of the political
activists, economic development could eventually spread to political development. Economic development
was seen as an initial step toward social democracy f43].
Summ ary. Chinas transition drew heavily on two legacies from its depth of history: the continuity of its
long pragmatic civilization and the havoc of its Cultural Revolution. Chinas transition and its ensuing
institutional reforms can be regarded as the states functional imperative for survival after the self-destructive
nature of its preexisting institutions f44]. The self-destructive nature had been evidenced by a series of political
campaigns of self-rectification against intellectual dissidents and frequent interruptions of economic production
in the 1950s-1970s. Chinas transition began with its disengagement from the rigid Maoist policies and its
collective commitment to tackle thorny bread and butter issues. According to some Chinas watchers
and academic critics familiar with Chinas intelligentsia, this disengagement triggered a "Marxist belief
crisis. This crisis ultimately led China to abandon "holy" orthodox Marxism, move toward vulgar
secularism f45], and walk away from the shadow of the Cultural Revolution. In this light, I want to liken
Chinas disenchantment with rigid Maoist policies and ultra-leftist fanaticism to a kind of spiritual
enlightenment" that prepared China for its transition. And this helps explain why China's transition and
reform from the start differed so much from Chinas FSU and FEE counterparts, countries that took a top-down
approach to their transitions and featured all-around re-privatization t46].
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The statistical data in Figure 1.1 (Chapter 1) show that Chinas two-year economic growth in the early
1990s underwent an abrupt jump, from 2.3% in 1990 to 14.6% in 1992. How could such sharp U-tum occur
right after the student demonstrations of 1989? There are at least three parts to an explanation: 1. Chinas
economic momentum had been building up throughout the decade of the 1980s through a series of state-led
institutional reforms. 2. The jump reflected the states full commitment to national economic development in
the 1990s, following its abandonment of doctrinaire ultra-leftism. 3. Chinas new direction was part of a
consensus reached by both the government and the Chinese democratic-political activists through substantial
public discourse and rational trade-offs. The diminution of ideological and political antagonism paved the way
for Chinas fast transition. As we might find, Chinas transition epitomized its changing social expectation
through the interplay between regime, institutional structure, and public discourse; and this proceeding further
articulated the interplay between regime change and reality change.
Overall, therefore, it was Maos need for his regimes survival that forced him to look for rational
alternatives, to approach the West, and to open Chinas gates, that led eventually China to end its Cultural
Revolution. It was the CCPs attempt to avoid a resurgence of the Cultural Revolution that led it to set its
priority on economy and to initiate Chinas transition, including the privatization of state sectors of Chinas
economy. As far as Chinese political activists, including those avant-gardes intellectuals and students, were
concerned, their disillusioning with Chinas grim reality and their craving for palpable economic benefits led
them to make rational concessions, and ultimately to turn to entrepreneurship. In sum, it was in these two big
moments (shortly after the Cultural Revolution and shortly after the squelching of students demonstrations in
Tiananmen Square in 1989) that China timely reframed its rational alignments and thus dynamically shaped its
historical momentums. As a result, Chinas entrepreneurship rapidly spread, its economy boomed, and its
transition was speeded up.
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5.12 Chinas economic transition (1976-2000)
This section will discuss the relationships between Chinas changing social expectations and Chinas
economic transition. W e shall analyze how the state in this proceeding had responded by virtue of its
development strategies in the different phases of the transition, strategies to tackle the dilemmas facing its
reforms. W e shall examine how the state had changed its expectations in response to the emerging
dilemmas in China's economic transition. Three different phases of Chinas economic transition can be
identified as follows: 1.1976-1979: Preparation for Chinas transition, from politics in command to economy
in command. 2. 1980-1985: States efficiency concern and the initiation of the economic transition. 3. 1986-
2000: From states primary concern for efficiency to states institutional reforms tackling the dilemmas between
efficiency and legitimacy.
1976-1979: Preparation fo r China's transition - from politics in com m and to economy in
com m and. Immediately after the Cultural Revolution, the CCP revitalized its slogans Be Practical and
Realistic and Seek Truth from Facts once popular during its revolutionary guerilla era. The years from
1976 to 1979 were highlighted by the CCP's efforts to adjust its political and economic fundamentals and to
rectify its past blunders I47], revamping the infrastructure of those damaged during Cultural Revolution.
The state commenced its reforms in 1978 when Deng Xiaoping, Chinas new leader, announced "To
get rich is glorious" as CCPs platform for economic modernization, renouncing Mao's ideological battle cry
of incessant revolutions under the proletarian dictatorship. In 1978 the CCP, in its The Third Plenary
Session o f the Central Committee of the Eighth National Congress, made historical resolutions about launching
Chinas transition.
Although China's social expectations changed, and the CCP re-prioritize its policy to the economy,
and China achieved a stable macro-economic environment, China had not prepared a blueprint for its
transition. It was only able to take a trial-and-enror approach, learning by doing, or "Crossing the River by
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Groping th e Stones" (J. Lin et al. 1996, 166; we will discuss it below). Consequently, its search for reforms
became open-ended and allowed it to act with greater flexibility and creativity j48]. China sent a number of its
elite economists and [hen-avant-garde researchers to some of the reforming FEE countries to learn lessons
from their reforming experiments. China also invited thinkers from those countries to China to lecture the
prospects and problems of market reforms in socialist economies (Nee and Stark 1989, p. 2). The reforming
theories and practices in Hungary and Yugoslavia attracted special attention from the Chinese leading scholars
(cf. X. Richet 1981; Peter T. Knight 1983; Halpem 1985:77-109).
Chinas leaming-by-doing approach without a ready blueprint posed problems for Chinas
development. It increased the likelihood of uncertainty of transition-direction and inefficient allocation of
resources f49]. But this was also affected by the CCPs then-on-going debates within its inner circle, when the
state elites took time to deliberate the approach to the next step - China's transition. The debate took time
because it was really implicated more seriously with the contexts of China's own since the years of its founding,
the debates that involved the power struggles within the CCP and went back to political re-alignments in the
late 1950s, early 1960s, and late 1970s. These debates happened to Chinas crossroad and involved Chinas
future direction and choosing approach. In the late 1970s, many senior cadres and old revolutionary solders
(who later became conservative hardliners), headed by influential Chen Yun, then-vice premiere, had rallied to
restore the planned economy of the 1950s, drawing on the Soviet Unions long experiences of socialist
construction. This was obvious setback for the majority of Party members and the majority of Chinese people,
who just recovered from the havoc of the Cultural Revolution. A simple adoption of the Soviet-modal planned
regime was already considered obsolete. It had been questioned by Mao even before the Cultural Revolution
as the parody of Stalins model (cf. Moss Roberts1977) I50]. Years earlier, Deng Xiao-ping and his former
intimate colleague, Liu Shao-qi (then-the PRC President) had committed themselves to a semi-capitalist,
market-oriented, alternative approach. In 1962 they had advocated experiments of allotting small plots of land
to Chinas peasants in the rural areas in an attempt to remedy the disastrous aftermaths of the three-year-long
Great Leap Forward." This had proven rather effective, as Chinas economy quickly recovered from the 1960-
1962 three-year-long natural disasters, and in 1963-1965 China's production gained moderately-high growth.
412
During the Cultural Revolution, however, Mao criticized Deng Xiao-ping for his attempt to follow the Nikita S.
Khrushchevs revisionist route against the legitimacy of Marxist doctrine and to spread the rotten and poisoning
effects of those FSUs then-reforming experiments in the early 1960s. After the Cultural Revolution Dengs
reputation was restored. More importantly, his revisionist vestiges were legitimized and they ultimately
prevailed over Chen Yuns views that China should return to a state-commanding economy.
In the 1980s Deng's market approach to China transition could be appreciated in his timely capturing
the current trend of global market competition. The global changes and new streams included: the fashioning
of global commodity chains and supply manufacturing chains, he fast upgrading of technologies, the growth of
high tech capital investments, the rise of equity diversity and stock-market information technology, and
financial booms and crises in newly emergent markets. These generated needs for new types of governance
capable of dealing with localized flexible deregulation, large scale global capital movements, and regional
coordination among rising trading blocs, etc. It became quite obvious to Chinas leaders that without acquiring
market leverage, China could fail to capture its competitive edge, losing its global opportunity. China might find
itself in peril of autarchy and backwardness that could drag it back to the "les Miresable" of the1960s. Thus the
threat from the increasing global competition led China's reformers to turn their attention to marketization as a
critical factor in Chinas transition.
1980-1984: Chinas early reforms and its efforts to introduce efficiency, in retrospect we come to
acknowledge that in many ways China's initial check of economic efficiency in post-Mao era remained as a
preventive measure and politically motivated. It aimed to abolish the sway of the ultra-leftism over its economy
and to resume the economy to the normal conditions. Deng Xiao-ping once specified that China's national goal
in the mid-21st century should be "To construct a moderate developed nation with unique Chinese
characters I51]. Deng's then-best-known motto was: it does not matter whether the cat is black or
white so long as it catches mice. Rephrased differently, this motto meant that an economic plan had to be
evaluated in terms of its outcomes, not in terms of its ideological correctness. As Deng explained, When a
window opens, flies will [inevitably] come in. According to this pragmatic reform policy, China had to learn
413
advanced technologies from the West, even if, by doing so, China opened Pandoras Box, allowing Western
capitalism to flow into China I52].
Chinas historically-grounded transition contrasted sharply with the transitions of the FSU and the FEE,
transitions that attempted structural transformations and included "glasnosF' [openness] and "perestroika"
[restructuring] reforms. China's reformers wished to avoid any kind of radical-at-one-stroke approach like that
of Chinas Great Leap Forward back in 1958. Based on its own experience and institutional learning, China
faced the formidable tasks of economic recovery and restructuring I53], by re-prioritizing its policy on economy,
visiting mainstream business conventions, and focusing on improving efficiency in an ailing economy.
By tapping efficiency improvement, China could effectively put economic performance in the front by
directly counting the ratios of investment vs. earnings and measuring risks of economic transactions. And that
would require state planners to follow calculated rationality and restrain their respective ideological agendas.
And that would require the state reformers to put market-oriented approach and all-around commercialization
into front, when they deliberate plans, implement productive operations, an engage in economic activities. For
market could assure economy with natural selection through price mechanisms, as much as market could
facilitate these commercial-based circulation of capitals, distribution of commodities, and production of goods.
Market competition thus became a matter of pith for Chinas reformers to revitalize Chinas economy and
initiate its transition. The state reformers realized that the states competitive edges at micro level are
dependent upon the market performance of economic players. Market competition act like the mechanisms of
disciplinary actions to punish those whose performance fails to meet market standards.
But Chinas economic reform started first in the rural areas, initiating a new system of household
responsibility in place of the old "People's Commune" system f54]. That is, let the rural areas first get market
access. Chinas rural sector then suddenly became most vibrant part of Chinas economy. The system was
instituted in 1979 to offer strong incentives to the peasant masses, by providing them rural productive materials
and means, such as the small plots and domestic animals. The peasants were granted property rights and
414
sufficient economic freedom to pursue their material interests, including selling their surplus crops, engaging in
nonagricultural activities, and even migrating into townships and cities. The CCP's plan was that economic
reform would be extended eventually to the urban areas. And the urban reform was designed to streamline
inefficient SOEs, cut off those superfluous bureaucrats, and rescind the "Iron Bowl" system they had lived with
[551-
Such an initiation was foremost, feasible, and dynamic. China's spacious rural areas have provided
major venues for China's radical and rebellious movements. Famines and starvations have always been a
scourge of many major disasters in populous China. Rural reform has often been a primary source of social
stability in China. The CCP hoped that increasing rural productivity would release surplus rural labor forces into
industrial activity and further drive China's entire economy toward industrialization and prosperity in the world
economy. Therefore the CCP saw rural reform as the first strategic step in Chinas overall entry into the world
economy. In Chinas parlance, rural reform revitalized the entire economy."
Then vice-premiere Deng realized that China lacked mature market institutions capable of tackling
domestic and international market competition. So China had to build market institutions. But in so doing,
China also needed to initiate its bureaucratic reforms. In the early 1980s China launched its bureaucratic
reforms and that paved the way for the later construction of a modem legal system based on the rule of law.
Dengs approach was both proactive and prospective.
Chinas bureaucratic system had a long history and was traceable to the full-fledged Confucius-
scholastic bureaucracy of the Sung Dynasty more than 1000 years ago (Susan Mann, 1987). In some of
Chinas rich regions and coastal areas, particularly in South China, where commercial activities had been
relatively developed, the local governments had often been found in a strong collusion with the local
merchants, seeking their own respective stakes, higher official position or wealth, rather than in opposition to
the local merchants. With such an historical origin, Chinas administration of its economy had been quite
different from the FSU and the FEE administration of their economies (cf. Boisot and Child 1996). Chinas
415
economy had consisted of scattered and fragmented industries under relatively weak central control. It was
impossible for China to centralize and specialize its bureaucratic control as much as the FSU and FEE had
done under their U-form hierarchies. During the Cultural Revolution, then-Chairman Mao even moved Chinas
industries further inland and moved them to China's western frontiers, based on his fear of a possible nuclear
war with the FSU, its north-bonder enemy f56]. All these factors made Chinas proceeding of market competition
easier than was the case in FSU and FEE.
It is not surprising that China took up bureaucratic reform early in its early transition. In China, state
agencies and officials had often served as surrogates or actual law enforcement agents. Some state agencies
and officials had become responsible for arbitrating inter-personal quarrels and reconciling any of potential
conflicts that otherwise could lead to litigations and other legal battles. This had been evident in the magnitude
of the C C Ps secretariats in which each administrative unit in Chinas bureaucracy had an attached cell. Prior
to Chinas transition, the legitimacy of this arrangement was unproblematic as long as the Party organization
remained intact and the orthodox doctrines of Marxism and Mao Zedong remained hegemonic as powerful
guides of peoples ideas and behavior. But now that the Marxist belief crisis was beginning to spread and
becomes potentially explosive since the transition, the role of the surrogate law-enforcement agents became
questionable. Each local Party cell and its secretariat might no longer assume its morally persuasive roles in
mobilizing people and workers, as assuming key roles in economic transition decision making and reconciling
potential social and inter-personal conflicts. After the Cultural Revolution, the Party acquired many new
agendas. It could no longer take everything for granted. Orthodox doctrines no longer dictated peoples
mindsets and regulated their behavior, particularly, their economic behavior.
Thus these new scenarios and situations emerging from transition had the central government come
to realize that it had to take new approach to boost the local activism and economic growth. The central
government realized that it had to provide more incentives to the economic enterprises and the locals and
harden budget constraints to them, otherwise, it would be no way to improve the countrys overall economic
performances. As we shall elaborate in Section 5.3 of this chapter, both the government and the political
416
activists (mainly from the Chinese intellectuals) sought ways to avoid both the risks of direct market
competition and the costs of strict bureaucratic control. For gaining efficiency, local activism, and cost saving,
China had to generate new policies and pay attention to economic relaxation, affecting the incentives and
taxes of different industries and economic sectors. China had to do so, because prior to the policy relaxation,
many economic changes already happened to these local industries and economic sectors that went beyond
the central governments control, the changes that came along with Chinas booming urbanization, burgeoning
rural industrialization, increasing regional diversification, growing economic specialization, the newly emerging
industries capable of competing internationally.
By the 1980s, the state had realized that a certain degree of central control had to devolve to the
locals in order to boost their activism. In the 1990s, the student movement and Chinas rapid economic
expansion had the government rethink its core development strategies. In 1992, Deng took his famous
Southern Tour" touting his new strategies that further accelerated and extended market-oriented institutional
reforms.
The mid-1980s: Rising social concerns and institutional barriers to improving economic efficiency.
Following Chinas economic reforms, the income-distribution gaps between urban and rural areas had
continued to climb, and uneven regional development between coasts and islands had kept growing.
Numerous surplus rural laborers flocked to townships and cities. China's cities acquired 120 millions of floating
population from the rural areas. When the state took market-oriented reforms more seriously and when the
public debate about social democracy became more politicized, the state elites began to worry that they could
lose social control during transition. The state also faced more seriously institutional challenges when it
attempted to tackle those social issues arising from market competition. For example, as unemployment rate
and social tensions reached a new high, Chinas planners asked how the state-owned enterprises might be
streamlined. This invoked strong social reactions and public debate and raised serious challenges for the state
planners. Could China address efficiency improvement and market transition differently from the West? Or
could only one approach be taken toward formal economic organizations and capital-intensive market activities
417
[57]? China's economic infrastructure and hierarchies differed markedly from those of the current market
economies. But Chinas state reformers were also cautious that all East Asian economies had been vulnerable
to the defects in their economies under bureaucratic collusions and hyperactive interventions. Efficiency-
minded streamline was thus susceptible to the encountering highly-mounted institutional barriers.
Mainstream critics might blame East Asian countries for their lack of a clear-cut boundaries between
their markets and their bureaucracies. They might even accuse East Asian countries of being unfair to
international competition and joint partnership I58]. Miscues, confusions, ups-and-downs, and uncertainties
frequently dampen market operations and can severely cut down efficiency, as shown in the recent Asian
financial crisis [59]. However, such blame ignores the fact that Western markets arose as a response to both a
search to simplify economic transactions (Powell 1990) and to changing social circumstances that gradually
loosened some constraints of the pre-industrial period and ended some other historical linkages (P. David
1994). In P. Davids view, the Western market emerged in response to the exigencies of market sanctions
through explicit contract enforcement as external mechanism for consistent expectations and mutual
commitments along with its industrialization when personal interactions weakened and family ties that had
accompanied increasing commercial transactions began to break I60]. Zucker 1986 underscores "the gradual
erosion of earlier social forms" during the 1800s and early 1900s along with American industrialization that led
to the dramatic acceleration of business transactions, the formalization of industries, and other changes in
American economic institutions, e.g., developing an institutionally-based trust relying on market mechanism,
which had a critical impact on the contemporary American economy and its institutions f61]. China reformers
chose not to follow the Western model. They recognized that their society was filled with dose personal
relations, embedded in Chinas unique depth of history, replete with family ties, informal networks, and
dependent upon a huge homogeneous population and cultural cohesion (cf. Boisot and Child 1996), which
might provide some less risky and less expensive mechanisms to temper the hits from market competition.
The challenge fadng Chinas reform planners was how to improve effidencv within the given structure of
Chinas thick social institutions and the depth of particular Chinese historical and cultural traditions.
418
In the West, after more than two-hundred years of industrialization, the market is reckoned as the
ultimate vehicle to maximize profits and pursue economic and political power. By contrast, China's market, so
its reformers claimed in the early 1980s (cf. Nee and Stark 1989,17), was merely as a tool of adjustment to
heal Chinas ailing economy of the damage generated by central planning, "soft budget" problems, and
consequent inefficient resource allocation. In Chinas official parlance, the purpose of its new market-oriented
policies was to serve the end of a "socialist" market economy.
As Chinas marketization proceeded and deepened, its state planners recognized that the current
stage of Chinas economic transition remained a far cry from full-fledged marketization. They doubted if, in
China's case, full-fledged marketization provided a final answer. They recognized that China's economy was
largely driven by its internal market and that foreign trade generated only 20% of its annual GDP growth f62].
China's 1.3 billion population, with is widely varying population density, in itself provided a huge market
demand for goods and services I63]. In response, Chinas state planners and social-science researchers raised
three serious questions regarding Chinas ongoing marketization.
First, old regime in Chinas economy had attempted to use their revenues and internal reserves to
boost exports, restrain imports, and subsidize certain critical industries and troubled financial sectors with
massive amounts of locked-in non-performing loans. Market supply-demand chains eventually lost their
linkages based on natural and ad hoc selective mechanisms in equilibrium f64]. From the mid-1980s on,
China's reformers became increasingly preoccupied with institutional changes against these locked-in
arrangements (cf. Gelb et al. 1996, Table 1, viz. Table 5.22c of this study below). These problems were also
thought of as partially embedded in Chinas patriarchic culture characteristic of long-coevolving family- and kin-
structure ownership and management arrangements I65]. Economic efficiency was socially embedded both in
the social structure of market institutions or/and in sets of complex social relations specific to Chinas deep
historical and cultural contexts I66].
Second, evidence has shown that rapid marketization in China's transitional economy generated
419
mounting concerns about the legitimacy of seeking efficiency, and ways of measuring efficiency. Efficiency
itself might vary widely, affected by a diverse spectrum of assorted hierarchical and governance forms, such
as contract and property rights structures, information and investment networks, risk management
arrangements, bankruptcy laws, etc. Different forms might call for different incentives, innovations,
competitions, and other institutional and organizational actions specific to different task environments [7].
Efficiency can be seen as institutionally bounded efficiency rather than narrow economic efficiency or
technologically maximized efficiency I68]. In this sense, efficiency is not merely a single-form response to
market competition. The efficiency issue can be converted to the issue of effective regulation and
management, which might vary according the arrangements and environments of chosen types of institutions
and organizations. Furthermore, given the social embeddedness of the institutional arrangements and
environments, the concept of efficiency must be seen within a given cultural and social context f69].
Third, Chinas state planners and researchers wondered about market competitions ability to address
critical social problems. Could market competition solve problems such as deflation, layoffs, an urban floating
population, and uneven regional development within China? To what extent are market mechanisms universal
across different societies and economies? What alternative mechanisms might work in Chinas transitional
economy? What about subsidizing programs by state bureaucracy or banking intermediaries (cf. Boisot and
Child 1996 arguments of Chinas transition toward network capitalism)? What non-market channels and social
mechanisms might be available to protect China against market failures [70]?
In principle, grappling with efficiency problems would lead the state planners and researchers to fully
uncover the problems related to institutional barriers, fitness, and inertia. Thereby they began to focus on the
China's institutional reforms in breadth and depth.
1985-2000: Chinas institutional reforms. Contrary to Western conventions and the experiences in other
transitional economies (the FSU and the FEE), China's transition never followed the panacea prescribed by
both neo-classical and modernization theorists who maintained that the transition had to be inaugurated by
420
tackling bureaucratic failures first and then focusing on solutions to economic inefficiency [71], For China, this
prescription would have meant reverting to the CCPs previous formula of "politics in command, economy in
subservience," a formula that had already failed. Instead, China experimented with numerous piecemeal
reforms, starting with a series of preliminary trial-and-error experiments in the late '70s (such as Chinas early
rural reforms and the early establishments of special zones in cities Shenzhen and Juhai of Guangdong
province; cf. Erza F. Vogel and George C. Lodge, eds. 1987), and shifting to segment-focused (rural, non-
State-owned enterprises) and issue-oriented (economic efficiency) experiments in the early '80s. By the mid
1980s, Chinas reforms had extended to larger institutional environments and organizational fields, economic,
political, bureaucratic, legal, etc., thereafter the institutional changes came about in China through the
establishment of effective and flexible governance (Qian and Xu 1993), the evolution of hybrid structures such
as property rights (cf. Nee 1992, 19), and the advancement Chinas social overhead sector (cf. N. Lardys
discussions of Chinas financial sector in 1991, 1997), etc. Chinas transition has been sustained through
feasible reforms emerging from preexisting and currently existing institutions.
Certainly, there had been always a big concern about reformers leverage, limited resources, political
contingencies, social instability relevant to China's particular conditions and contexts. From the beginning,
Chinas hard-liners still possess major power to control over key departments and many branches of the state
government. But as succeeding reforms proved their viability, a growing demand for more fundamental
institutional reforms overwhelmed the hard-line conservatives. Institutional reforms gained widespread support,
in part because of the ways they had evolved from Chinas historically deep and thick institutions, the
preexisting and existing institutions [72J. W e will leave a discussion of these state-led institutional reforms for
the next section.
In summary of Section 5.1, Chinas transition resulted from surging social expectations for
economic recovery following the devastations of the Cultural Revolution. It has proceeded indigenously,
not through social disruptions but through institutional reforms, prompted by the states efforts at
economic streamlining. Thus Chinas transition reflected Chinas historical context, particular
421
circumstance, and continuity. It was not rooted in any desire for re-privatization, as presumed by the neo
classic paradigm [73]. But as we discussed earlier, Chinas economic momentum, prompted by Chinas
changing social expectations, was also deeply implicated with political impetus and contingencies. In its
own way, China's marketization policies precipitated the rebuilding of Chinas institutions under the rule
of law. Most importantly, after China had undergone so much chaos for the recent decades, the Chinese
people know how to cherish the peace and stability. They also know how to prepare for changes, even
changes that would drastically affect their political, economic, and cultural lives. And I think this might be
most important legacy they inherited from the past.
422
5.2 China's institutional reforms during its transition
In the last section I argued that Chinas disillusionment from the Cultural Revolution [M] and
peoples acceptance of a series of institutional reforms that shaped Chinas economic transition and economic
liberalization.
In this section I would like to explore the relationship between economic liberalization and
political liberalization, especially in East Asia. Another way of describing this is to call it the relationship
between reality change (economic change) and regime change (political change). To what extent does
regime change automatically lead to a reality change, or vise versa? And how quickly is a reality change
followed by a regime change? As I argued in an earlier section, I believe Chinas transition presents a case of
dyssynchronization between regime change and reality change. Two possibility are plausible here: 1.
Reality change occurred, but it was not immediately followed by regime change. 2. But I like to conceive
of the relationship this way that Chinas regime has already somewhat changed during the reality change
and will continue change in the future; social democracy will sooner or later arrive in China. I believe that
economic development has facilitated but not impeded political development in China. I believe the
process might not be straightforward and might need a much longer time period in order to occur. But in
the end, I cannot imagine Chinas economic transition not affecting Chinas political process and political
transition.
My Chapter 4 proposes that Chinas current transition has tendency to take reality changes as priority
and thereby it has helped China take institutional reforms as driving forces. By reality changes, I describe
them as the institutional changes and mutations through institutional reforms. That is, reality could change
by rebuilding institutions or institutional reforms. In this section I will analyze how in China, the state carried
out its institutional reforms, tackling the dilemmas between efficiency and legitimacy. As economic
changes occurred in Chinas early transition, the commanding role of the central government began to fade
away and be replaced by a less directive state which was then followed by a more proactive state playing a
423
regulatory role in Chinas later transition. During the less directive period, when the state adopted a leaming-by-
doing approach, or Dengs motto "Crossing the River by Groping the Stones, it reflected the states
agnostic stance in the early transition and the states already weakened central control. Thus this circumstance
made it easier for the state to decide for the devolution of its decision-making power to the locals, a process of
decentralization that allowed the locals to devise their own economic governance [75].
5.21 Historical perspectives o f institutional reforms: State activism, divergent momentums, and
characterizations
This section will provide a historical justification for states activism in modem transformations, a
historical comparison of contemporary institutional reforms in global arena, and a historical
characterization of various institutional reforms across transitional economies. This section will serve a
context for the next section about chronology and taxonomy Chinas institutional reforms.
State activism in m o d e m tran sfo rm atio n s: Parallel trajectories betw een early Western capitalism,
East Asian later developers, and transitional economies. What made China's institutional reforms so
remarkable was the collective commitment of Chinese people to the nation's prosperity, a commitment that
cannot be explained simply by economic rationality [76]. The state played a strong role in Chinas institutional
reforms but the state's role might be seen to epitomize the collective commitment of the Chinese people
[77].The strength of this collective commitment, its historical origins, and the effects of the commitments on the
states policies are often overlooked by the Western scholars in their studies [78].
In terms of the strong role of the state in the development of capitalism in modem China, one can find
historical parallels in the development of capitalism in the West. W e can even find the historical parallels
between contemporary transitional economies and early Western industrialization [79]. I would argue that
throughout recent world history, state activism has been a common phenomenon in any kind major
economic transformations. This is contrary to mainstream Orientalist scholars (cf. Edward W . Said, 1994)
I80] who assumed that in places like China the strong role of the state was one of Oriental cronysm. In the
424
minds of these mainstream scholars the parochial consciousness of China's peasantry and the backwardness
of Chinas patriarchy accompanied by Oriental cronyism would dampen Chinas transition and any efforts
to move forward I81]. According to these scholars, only constant crises and environmental shocks could
provide an adequate impetus to break down those old bastions of cronyism and to bring about changes
in the structures of institutions (Whitley 1994) f82]. Most mainstream scholars fail to see how Western
unfettered capitalism in its own odyssey experienced such a "cronyist stage [83]. Thereby they are
hardly-pressed to explain why Western capitalism took hundreds of years to move from subsistence to
[todays] affluence t84].
When mercantilism was rife in the Western Europe in the 16th and 17lh centuries, the state took a
strong role in shaping the early market economies. At that time, Western fledgling market institutions had
just evolved from the pre-capitalist period and perhaps a reason was that either the modem hierarchy or
market institutions were quite feeble and fragile, or even non-existent, and kings in Europe were still
feudal monarchs (M. Foucault, 1970; P. Anderson 1974). City guilds were fragmented and typically were
under the aegis of those monarchs (E.E. Rich and C.H. Wilson, eds. 1977). Economic transactions or
exchanges usually occurred in a few trading places or so-called markets limited to towns that were
much smaller than todays urban centers [85]. In order to assure the rudimentary institutional conditions in
the late feudal Europe, to facilitate primitive capital accumulation, and to mitigate the expenses of
market transactions that were prerequisites for the early industrialization, it was imperative to centralize
state apparatus, enlarge nation-states, and constitute interstate exchange systems so that the state could
act as a surrogate middlemen (Boisot and Child 1996) I86]. The nascent capitalist class, when it faced so
many unprecedented exigencies and labyrinthine uncertainties, had few options but to cooperate with either
the late feudalist monarchs or the early merchant states. The early capitalists in Europe had to rely on
the then polity, or the contemporary version of the state, to help them break down local fragmentations
and barriers, establish formal linkages and standards, forge social network, attain social cohesion, and
be provided with a protective shield. Without the support of the regime (earlier the monarchs and later
the capitalist state), the nascent capitalist class might have found itself at the mercy of uncontrolled
425
historical and environmental events. Hence, I would argue, rising mercantilism in Western Europe helped
seed capitalism that eventually generated an impulse toward democracy throughout the Europe [7].
From our modem perspective, the early capitalist states" were at most quasi-states, because their
systems of governance could hardly function like contemporary bureaucratized states (J. Adams 2001)
I88]. Many writers have noted that in Western Europe the nascent capitalism was politically nursed into
existence with the help of local states and their armed militias (cf. P. Anderson 1974; T. Skocpol 1979,
1982, 1994; cf. I. Wallerstein 1980; G. Arrighi 1989, 1 994,1997; C. Tilly 1990). Transitions to capitalism
were evolutionary in some countries (e.g., the Great Britain and Japan), radical in others (e.g., France),
and mixed in some others (e.g., Germany and the US), though all these transformations were somewhat
painful and socially costly in different ways. Once the transition had been established the way was paved
for the thriving of capitalist markets and the incoming maturation of market institutions (cf. Weingast
1993) I89]. By and large, then, the emergence of market economies in both the Oriental and the Occident
was accompanied historically by the formations of nation-states and interstate systems. This was a result
of the fact that in most instances these nascent market economies had actually been nurtured in their
earliest stages by their respective nation-states and their contemporary interstate systems (cf. P.
Anderson 1974; cf. I. Wallerstein 1980; G. Arrighi 1994; C. Tilly 1990; also cf. L. Zucker 1986) [ j.
Nonetheless, despite such historical parallels between early capitalism in both the Oriental and
the Occident, the later forms of capitalism that evolved in the Orient were never the clones, replicas, or
products of Western capitalism. The evolution of capitalism in contemporary China has to be explained
by examining Chinas own social origins and trajectories along with myriads of institutional mutations and
changes that have evolved during the deep history of Chinas civilization [91], Take Chinas collective
commitment. W hether this commitment is considered to be as a product of materialist conventions or of
nationalist ideologies, we recognize it as a pragmatic expectation embedded in a secular culture, a
culture that has always been the mainstay of Chinas spiritual tradition and that has, through the
centuries, resisted other traditions, be they ultra-radical, complacent, communitarian, utopian, or
symbolic, cosmological, or individualistically-based humanistic.
426
In stitu tio n al reform s in th e g lobal arena, up to 2000: cap italist eco n o m ies, fo rm er planning
eco n om ies, an d tran sitio nal eco n o m ies. Institutional reforms per se are an integral part of any
economy, designated to help an economy improve both its competition and its protection. It is so because
both competition and protection are indispensable mechanisms of an organic economy system. A mature
and advanced economy needs to nurture both of them and to build their balance. Competition and protection
are two sides of the same coin, concerned with both efficiency and legitimacy and dealing with the pressures
for profit maximization on one hand and for social equity, cohesion, and inclusion on the other. When either of
these pressures gets out of balance, both that society and its economy become vulnerable to being
92
challenged, since their legitimacy is thought of as breached [ ].
According to mainstream economics, capitalism operates in a competitive market driven by an
"invisible hand" (Smith, A. 1867) [93]. But less-than-perfect competition inexorably brings many dilemmas to
capitalist societies, dilemmas that are often beyond the reach of neoclassical economics. As Marx analyzed,
capitalism contains an inherent contradiction between productive forces and relationships of production (cf.
Marx 1845: German Ideology). Market exchange in capitalist economies can lead to social contradictions that,
if combined with class conflict, can trigger class warfare and eventually social revolution. During the last
century, when capitalist economies became relatively mature and stable (mainly due to the growing
institutional maturation of market regulation and economic governance), many reforming activists treated
capitalist crises as normal symptoms of market competition or, at most, as anomalies or downturns in business
cycles, rather than as reasons to call for massive social disruptions. Some economist like Schumpeter even
considered creative disruptions as dynamic catalysts in capitalist economies that might prompt needed
structural adjustments and provide new entrepreneurial opportunities indispensable to capitalist development
t94]. Some supporters of capitalism assumed that the capitalist state could generate its own self-sustaining
mechanisms for long-standing success; thus capitalist crises and social contradictions were not irreconcilable.
Such supporters assumed that institutional reforms would serve as major channels, whereby the capitalist state
would eventually become the welfare state - exhibiting an advanced and more humanized form of capitalism.
All
In the end, institutional reforms in capitalist economies (up to 2000) would bring about a balance of social
protection, providing both a reliable shield for the poor and a vital catalyst to market competition for the rich.
From the point of view of transaction cost theory, this balance could be explained as a trade-off in
terms of allocation of resources or redistribution of national income I95]. According to this theory, therefore,
when market competition is imperfect and social protection is fragile, it is imperative for capitalist states to
balance the imperfections through non-market channels, e.g., through hierarchically-established state
interventions and government subsidies. If, however, the market functions more efficiently, then, transaction
governance stays within market channels (cf. Williamson 1975; ito 1995) f96]. According to these theorists,
alternative mechanisms are available to deal with uncertainties in social structure or any other dilemmas that
arise as a result of market competition [97].
But in the case of transitional economies moving from a centrally planned economy to a market-
driven economy, the balance and trade-offs work in reverse I98]. Many social problems arising in capitalist
economies have been attributed to market failures, such as problems arising from over-competition
resulting in lay-offs, unemployment and groups of people with insufficient social protection (Figure 5.21a
here). In contrast, many social problems arising in the former planned economies have been attributed to
governmental over-protection that caused soft budget constraints and inefficient allocation of resources
(Figure 5.21b here).
428
Figure 5.21a: Dynamics of transitions in capitalist market economies, up to 2000
Protective
(Stability and
welfare) Contemporary welfare state
economy
Capitalist market
economies
Competitive Classic laissez-faire

(Speed and market economy (Over-competition)
efficiency)
Competitive Protective
(Speed and efficiency) (Stability and welfare)
Figure 5.21b: Dynamics of transitions in centrally-planned economies
Protective
(Stability and
welfare) Orthodox planned
economy (Over-protection)
Centrally-planned Quasi-market
Economies transition (China)
Competitive Neoliberal
(Speed and market transition (FSU and FEE)
efficiency)
Whereas market economies pushed for market efficiency that inevitably caused massive layoffs with
resulting social disruption, planned economies pushed for equity of income distribution that stimulated
inefficient allocation of resources and declines in standards of living. Whereas market economies prompted
spinoffs from parent firms and political interventions in forms of "welfare" adjustments ["] to avoid market
failures [10], planned economies turned to conventional laissez-faire wisdoms in order to redress hierarchical
failures and boost market competition [101]. Planned economies might introduce new measures such as
bankruptcy law, equity and bond markets, local incentives, modem managements training, etc. [102], while
abandoning formerly-used micro-interventions and state confiscations (cf. descriptions of these strategies by
Sun, Yefang 1979, who was a most-renowned and pioneering reform economist, in China; P. Desai and R.
429
Martin 1983).
Throughout history, economies have borrowed from other economies when trying to come to terms
with problems that have arisen within their own systems [103]. Occasionally this process produces a novel
alternative, a hybrid, or blend, or "metis (the term borrowed from J. Scott 1998) [104] that can embroil and co-
opt rival economic strategies. This complementary trend through reciprocity is illustrated in Figure 5.21c [105].
Such a trend reflects a kind of historical dialectic or a the world spiritual development, as Hegel called it,
claiming that every economic system contains the antithesis of another, which will supersede it [106].
Figure 5.21c: Dynamics of transitions across economies, up to 2000
Protective L
(Stability and Orthodox planned
welfare) economy (Over-protection)
World economies
Syntheses of new alternatives
Competitive Capitalist laissez-faire

(Speed and market economy (Over-competition)
efficiency)
W e could see that Nees 1989 model (back to Figure 2.2, Chapter 2 of this study) reflected such a
process, suggesting that the welfare state in market economies is both an alternative form of capitalist
development (see the dotted line of the figure) and an antithesis to the market competition, the antithesis that
was an alternative strategy associated with centrally-planned economies, and the market competition that was
an alternative strategy adopted by centrally-panned economies (see the solid line of the figure). Different kinds
of economies require different approaches to address their own problems in accordance with their different
momentums. Their market momentums can be seen by the percentage of change in volume of merchandize
trade in any given year. As shown in Figure 5.21 d, in 2001 transitional economies showed the greatest market
momentum through their global trades; some economies even decreased their market momentums and global
430
trades that same year.
Figure 5.21d: Differing momentums - Transitional

economies, market economies, and others
Volume of merchandize
trade, % change between
2000 and 2001
Transitional
economies
Latin America
Imports
Western Europe
Exports
Asia
North America
e -3 0 3 6 9 12 15
Source: WTO; cit. The Economist, p. 60, Sept. 7th, 2002
Combining these two aspects together, Nee foresaw a long-run possibility of advanced capitalist
development toward convergence between capitalism and state socialism (cf. Figure 2.2, Chapter 2 of
this study; also cf. V. Nee, 2001, p. 846) [10']. Above Figure 5.21c implies the possibility that in the
contemporary world institutional reforms could provide an alternative to social revolutions in response to
regime crises in market economies [108]. Similarly, in centrally-planned economies, this figure implies the
possibility that dilemmas that could trigger violent legitimate crises could be more easily tackled through
endogenous and normative institutional reforms.
It is now apparent that there exist substantial variations of institutional reforms in transitional
economies. The variations in the transitions of centrally-planned economies are even more substantial than
are the variations in Western market economies. But in principle, competition and protection are keener sought
in centrally-planned economies than are their counterparts in market economies. In 1992 and 1994 R. Whitley
provided a similar comparison between East Asian business systems and their counterparts in West Europe.
Both transitional economies and East Asian economies fall into the categories of late developers, which are
431
more affected by their preexisting institutions than by their existing institutions. Thus both transitional
economies and East Asian economies are more sensitive to those historical contexts, social expectations, and
institutional conditions than are market economies. But this seems particularly true in China's case as well as in
the case of other states with their patriarchal regimes. In such cases the relationships between the state
bureaucracy and the market through personal intermediaries (like brokers and trust relationships) seem more
blurred and flatter than the relationships between their counterparts in Western market economies (as well as
in the FSU and FEE) through formal intermediaries (like banking institutions and market contracts). W e could
call Chinas transitional economy and other East Asian economies sort of quasi-market economies (see above
Figure 5.21b), because in many instances their markets and hierarchies through personal intermediaries seem
function more effectively than Western markets and hierarchies through formal intermediaries.
Historical trajectories o f institutional reform s in transitional econom ies: the FSU, FEE, and
C hina. In the FSU and the FEE, the institutional reforms were in essence a capitalist restoration from state
socialism under the edifice of a giant bureaucracy. The planning bureaucracy was established by smashing the
entire old semi-feudalist and semi-bourgeois state apparatus. Reforms in the FSU and the FEE were logically
treated as incompatible with any Western counterparts. The institutional reforms in the FSU and the FEE were
structurally undertaken as a discontinuous break with the previous planning regime under state socialism, a
break that smashed the established bureaucratic edifice in order to initiate the institutional reconstruction from
the scratch. The institutional reforms in the FSU and the FEE had to rely on political elites and intellectual
avant-gardes. The reforms had to work their way down through state interventions to introduce capitalist
conventions that had once been jettisoned as "moribund" and "rotten." But the main problem of the institutional
reforms in the FSU and the FEE was that although their regimes had decided to terminate state socialism and
rejuvenate capitalism and an all-around re-privatization, their economic realities had undergone little change.
China's institutional reforms started from a repudiation of previously utopian, radical social changes.
These reforms persisted, China never lost its effective control over the situation, and China eventually
managed to relax its tight governance and to accelerate reforms [109j. In contrast to the FSU and the FEE,
432
where there was political turnaround, and ardent sentiment erupted, China's institutional reforms were well
timed and were carried out a decade earlier. Many of them underwent multiple trial-and-error experiments. By
and large, Chinas reform priorities targeted its economy in general and its local initiatives in particular (Jinglian
W u, Xiaochuan Zhou, ed. al. 1990.). This was contrary to the FSU and FEE, where reforms were introduced
through bureaucratic politics.
Table 5.21 roughly outlines some characters of Chinas institutional reforms in contrast to the FSU's
institutional reforms.
Table 5.21: institutional reforms in the FSU and China
Direction Ownership Path Outcome

structure
FSU Market economy Dominant Radical Stagnation and

private re-privatization; collapse [110];
sectors;
China Quasi-market Hybridization: Evolutionary Gradual

economy SOE, COE, TVE, market reform; acceleration.
private sectors,
etc.;
The underlying contrasts between Chinas and the FSUs transitions can be highlighted as follows: 1).
Industrial system before transition: In the FSU, 80% of industrial enterprises were state-owned, whereas in
China 40-50% of industrial enterprises were state-owned (rising to 70-80% during the Cultural Revolution). 2).
Structure of economic hierarchy during transition: U-form prevailing in the FSU vs. M-form prevailing in China.
3). State- building during transition: the FSU smashed the old state socialist system and reconstructed a
nascent system completely, whereas China basically maintained the old planning system and utilized most of
its old technocrats and personnel as long as it could.
China's institutional reforms were unique in four ways: they were based on trial-and-error experiments,
their boundaries were blurred, Chinas initial institutional conditions were unique, and timing played a critical
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part in the effectiveness of the reforms.
First, Chinas reforms were based on trial-and-error experiments. One reason why China was
immunized against internal crises can be traced back to Chinas constant trial-and-error experiments. The
experiments trained people to become very resilience in the face of potential crises. The FSU remained stable
for 70 years until it finally collapsed in 1989 [111]. Its regime had never changed since its founding years
following the Russian Revolution in 1917. China underwent many trial-and-error experiments to pursue its
goals, including the People's Commune systems during the Great Leap Forward under 'Three Red Flags" in
1958-1960, the Cultural Revolution in 1966-1976, the rural-urban reforms after 1977, etc. Some of these
experiments had precipitated structural crises that threatened the end of the regime. The argument can be
made that, ironically, Chinas earlier radical Cultural Revolution had indeed somehow rescued the regime from
an avalanche of criticism. With its social stability and more young technocrats recruited into the new regime,
11?
Chinas reforming momentum has continued into the new Millennium [ ].
Second is the boundaries of Chinas institutional reforms were blurred. Chinas reforms have steered
a path toward balancing old and new, formal and informal, market-oriented and non-market-oriented,
competition and protection, etc. In 1950s, China tried to copy the FSU model of a planned economy since it
had little experience with "socialist practice" [113]. But shortly after it split with the FSU in 1957, the PRC began
its own "socialism with Chinese characteristics" Note: To understand these experiences, the reader may refer
to Mao's famous 1956 arguments regarding the Ten Major Relationships that unveiled his ambition for
"Socialism with Chinese characteristics" and his defiance of a dogmatist FSU model [114]. Deng, one of Mao's
chief disciples, had in essence inherited Maos aspiration for China's prospect and shaped his own reformist
ideas and agendas after Mao [115]). Politically, the CCP had enacted a realistic "United Front" policy in the
1950s, attempting to generate a solid alliance among workers, peasants, petty bourgeoisie, intellectuals, and
nationalist bourgeoisie for Chinas socialist construction. At times this alliance was rather fragile and
fragmentary; eventually it broke down during the Cultural Revolution. Yet maintaining this policy preserved
considerable entrepreneurial momentum and introduced numerous dynamic capitalist components into market
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competition. This was much more than its counterparts in the FSU and the FEE had done prior to their
transitions (cf. Gang Fan 1993). Chinas experience prepared China for its later transition, a transition
consistent with a PRC instituted economy differed from the FSU Model [116]. Furthermore, China felt no need
to smash its old state apparatus totally, as the FSU and the FEE had done. Instead, it cautiously developed
institutional mutants that could work with extensive elements from the old 1950s establishments. Such a
pragmatic approach reflected Chinas practical acknowledgement of the technical nature of the bureaucracy
inherent in the old regime. China logic was that by co-opting some of the old regime, China could gain its good
chance for institutional learning, thereby obtaining necessary knowledge of governance and management.
That could make Chinas transition easier and smoother (cf. W . Kraus 1991).
Third, China's initial institutional conditions were unique. Qian and Xu attributed these conditions to
the early PRCs establishments of institutions in an M-form hierarchy, particularly those that were decentralized
in favor of the mass mobilization and mass democracy approach popular during the years of the Great
Leap Forward and the Cultural Revolution. These reflected institutions invented during Maos guerrilla-war era.
As Qian and Xu pointed out, such establishments under an M-form hierarchy turned out to be conducive to
Chinas transition, when Chinas ultra-leftist radicalism was phased out.
Chinas decentralization reforms under an M-form hierarchy came into effect in two ways: 1. They
helped streamline China's economy by providing the locals with both incentives and hard budgets constraints
and by tackling SOEs issues of the inefficient allocation of resources; and thus it prompted an incremental
approach to Chinas transition (Cao, Qian, and Weingast 1999, pp. 104-7) [117]. They created plenty of rooms
and opportunities for the locals and the non-state sectors, encouraging their entrepreneurship. 2. They also
reduced the pecking order and the redundant layers of existing bureaucracy to provide more timely responses
to problems as they arose from the work floors and play fields. They helped the state break through institutional
barriers set by the vested interests against Chinas transition, thereby enhancing market competition. They co
opted plenty of innovative mutations from the preexisting structures into the new structures to help restructure
Chinas social, economic, and legal systems. It could be said, therefore, that steps taken by China during its
435
previous planning regime had somehow eased its later decentralization refonms and the decentralization
reforms made Chinas transition more incremental and resilient.
As Cao et al. 1999 illuminated (cf. 116), Chinas decentralization according to its logic of
federalism eventually heiped the state induce privatization through a series of reforms, such as tax,
monetary and banking, and through increased competition from the locals and the non-state sectors. As
Cao et al. 1999 argued,
Federalism. Chinese style, is therefore a key to the understanding of economic and

political dynamics underlying privatization in China... W e begin by defining a specific
form of federalism called market-preserving federalism. This type of federalism requires
that, first, local governments have the primary authority and responsibility for t:heir local
economies: second, they are subject to hard budget constraints: and third, they are
unable to insulate their economies from outside competition (Weingast, 1995; Qian and
Weingast 1996) (ibid. 115).
...federalism, Chinese style (Montinola, Qiann, and Weingast 1995; Qian and Weingast
1996), has created an adequate economic and political foundation for the earlier reforms
in China. In this paper, we argued that federalism, Chinese style, has also induced what
we call privatization, Chinese style (ibid. 106).
Hardening the budget constraint has been a major object of the reform. In Eastern
Europe and the former Soviet Union, reformers attempted to use privatization as a way
to harden budget constraints of enterprises. In China we observe a different path: the
hard budget constraint of local governments induces privatization of enterprises under
their supervision. W e emphasize that both fiscal and financial reforms between 1994 and
1996 in China have played important roles in hardening the budget constraints of local
governments. These refonms effective corrected some problems arising from the
decentralization of the 1980s (Qian and Weingast 1996). Yet, the fundamental feature of
decentralization remains: local governments continue to assume primary responsibility
for managing the local economies and have their own revenue sources (ibid. 116;
emphasis mine).
The PRCs decentralization reforms under its M-form hierarchy had been rooted in Chinas own
institutional contexts and its so-dubbed mass mobilization conventions (cf. T. Skocpol 1979).
Conventionally, in China right before (and even after) each critical measure was enacted, the state had
drummed up a public campaign to tout that measure, engaging the people in incessant discussions of
that measure and its corresponding documents to make sure that the public fully understood the new
measure and the ideas behind it, and to clear up any doubts in the peoples minds. Though such a
process had been mandatory and time-consuming and had to go through the local cells of the CCP
436
propelled by the state propaganda machines, the state believed this was the most effective way to deliver its
policy measures and insure their implementation. Through this complex procedure the state could guide the
public debate and convince people of the soundness of the measure, generating as broad consensus as
possible and soliciting mass support [118]. The state badly needed the public support, particularly in the
critical years of its eariy reforms. The public reactions during the debates on reform measures were often
crucial, especially when they helped the state identify potential problems in adopting the reform
measures and thus make some subsequent supplemental adjustments. If the proposed reform measures
were sufficiently unpopular and generated sufficiently resistance, the state had a chance to consider
other options in place of the proposed refonms. Thus when Chinas institutional reforms were being adopted
in the mid-1980s, the reforms rationales, tactics, and policies had already been thoroughly deliberated. The
widespread understanding of the rationales, tactics, and policies provided the state reformers with greater
resilience and flexibility. In the mid-1990s, it enabled them to hold down the overheated economy while
maintaining an adequate tempo of growth. And in the late 1990s it enabled them to outlast the Asian financial
crisis and to withstand the pressures of its currency devaluation.
Not all the institutional conditions in China in the 1970s and 1980s facilitated Chinas transition. Some
of them obstructed Chinas transition. One of such obstruction stemmed from the vested interests entrenched
in Chinas bureaucracy. During those decades many of the senior revolutionary generation were still alive and
in a strong alliance with the agrarian classes, holding bureaucratic powers (cf. Stacey 1983) that could affect
the transition and its related reforms. What institutional reforms really mattered to these senior solders was not
complete liberal privatization, but was tapping markets as adjustment mechanisms for restructuring incentive
systems [119] and exploring Chinas global opportunities so that they could survive and retain their power O'ust
as the Oriental patriarchal bureaucrats had done during the East Asian industrialization). When the entrenched
vested interests came to feel the reforms were becoming a real threat to the continuation of their power, they
became a powerful block of resistance, opposing institutional reforms, discrediting marketization, and
obstructing any attempt at liberalization and privatization. Taking these entrenched bureaucrats into
consideration, China's reformers had to maintain a balance between efficiency and legitimacy, speed and
437
stability, and competition and protection as they cautiously made transitional moves [120].
Fourth, timing played a critical part in the effectiveness of Chinas reforms. An effort at reform could
fail or succeed depending on its timing and the generational cohorts that accepted or rejected that reform [121].
While examining the transitions in China and Russia, for instance, one is led to ask why the radicalist-
maelstrom in the years of Chinas Great Leap Forward (1958-60) and the Cultural Revolution (1966-1976) did
not lead to re-privatization, whereas the radicalist-maelstrom in the years following the disintegration of the
Soviet Union in the 1990s did lead to re-privatization. The immediate answer to such a question would be
because these radicalisms happened in different periods of time, entailed different social contents, and
represented different political dynamics and social orientations. In China the radicalism at the culmination of
the Cultural Revolution was an ultra-leftist angry response to the intellectual dissidents within the CCP and the
FSU's revisionism and socialist Chauvinism, whereas in Russia radicalism was a neo-liberal and rightist
reaction to the FSUs previously planned regime. The 1960s and early 1970s had witnessed a global surge of
Third-World nationalism and a rise of anti-war sentiment in the US that prompted leftist radicalism in the US
and around the world. China had pursued seclusionism and launched its Cultural Revolution. It was hard to
envision a rise of rightist radical liberalism advocating a market economy. However, in the 1980s numerous
events occurred that were often considered victories for the neo-liberal Reagan Administration. The stage was
set for a world-wide flirtation with the neo-liberal capitalism and globalization. This was the global milieu within
which the Soviet Union experienced the collapse of its old regime. Following this collapse, the FSU adopted
the in-fashion policy of all-around re-privatization.
In section 5.1 above I argued that it was impossible for China, in the wake of its Cultural Revolution, to
execute a big bang reform as was done in the FSU and FEE. The Chinese people badly needed relief from
their recent mental and material suffering. The Chinese people were willing to tolerate the regime's
omnipresence in return for regime stability. This provided Chinas leaders with the socio-cultural cohesion (at
least on the surface) that was a useful prerequisite to its transition. To the majority of the Chinese people, after
the beginning of the transition, the governments control and surveillance became much more relaxed than it
438
had been in the recent past. Chinas patriarchal bureaucracy has a long and tenacious history of two thousand
years. Changing China's bureaucratic regime could never happen quickly. Furthermore, many Chinese citizens
still had publicly maintained confidence in the current regime. Many of them, particularly urban residents (most
of whom were the employees of the SOEs), still believed that the state would provide them with public
subsidies and social programs that would protect them from market failures and consequent insecurity.
During the long span of history, the Chinese people had experienced a constant sequence of wars,
foreign invasions, humiliations, and political ordeals. They had learned resilience from these crises and a
desire to improve their countrys material conditions (cf. Entrepreneur, April, 1995, p. 67-69) [122J. They were
used to challenges, structural changes, and institutional learning to a greater extent than most outsiders could
understand. Their history had taught them to identify feasible strategies for incremental growth while
maintaining social and political stability [123]. The timing of Chinas transition was good. The Chinese people
were ready for extensive, government-supported, widely decentralized institutional reforms and economic
changes.
5.22 Profile of China's institutional refonms in transition: Chronicle and taxonomy
In Section 4.3, I made a proposition on the thickness of social institutions to the effect that the
stronger the institutional reforms and mutations available during a transition, the more likely it is that the
transition will gain momentum for a constitutive-based (radical and structural) change. Accordingly, this
section will investigate China's piecemeal reforms, both extensive and intensive, in its transition. I shall
examine those policy goals, basic strategies, and major reform measures to see how they rebuilt Chinas
institutional infrastructure and made Chinas reality changed.
C hro nicle o f C h in as institutional reform s. Chinas history has hitherto been marked with an array of
trial-error experiments, institutional reforms, and legal changes [124]. Generations of Chinese people have
experienced life-changing reversals, relocations, and migrations [125]. Throughout these years Chinas cultural
and economic environment have become more diversified, tolerant, resilient, and dynamic.
439
As China initiated its transition, the state made efforts to improve the efficiency of its economic
performance. The economic problems faced by the state did not "arise only 'exogenously' to the market"; nor
were inherent in "the economy's own functioning" [126]. Problems that occur in the planned economies, like
those that occur in other kinds of economies, underscore interplay between markets and other economic
institutions and non-economic institutions socially embedded in their larger environments [127]. To explain
market failures in planned economies, one cannot attribute them to exogenous problems, functional
deficiencies, or environmental shocks and contingencies. One has to attribute them to the shortcomings in
existing institutions and their infrastructures, calling for serious measures to heal the ailing economy [128J.
Chinas transition is regarded as both a response to the deficiencies of its internal structure of
institutions in allocation of economic resources and a response to the failure of the existing structure to deal
with external shocks in global competition [129]. When China set about improving efficiency, it put reforms of
institutions and organizations ahead of economic streamlining, beginning with the renewal of certain
bureaucratic regulations. As the state cut down onerous regulatory burdens, local institutions and business
organizations became more and more active with greater flexibility and discretion to make economic
transactions. It thus could expect more fundamental changes to come in, the changes that could expedite
Chinas fast growth. But while wrestling with those institutional obstructions, particularly those inherited from the
planning regime, they were willing to try solutions beyond the neo-classic prescriptions for market efficiency.
For our purposes, we can now examine how Chinas institutional experiments fared, and to which extent they
addressed the dilemmas between economy and society in the transition.
Basically, Chinas institutional reforms followed policies of practical rationality in order to
minimize the potential risks and social costs. Chinas reforms moved through four stages (see my
discussion in Section 5.12 of this chapter; Figures 5.22a, 5.22b here): Phase 1 (by 1979) prepared for
Chinas transition; Phase II (1980-1984) included the early economic reforms, featuring easy catch up,"
govemment-policies-led; Phase III (1985-1993) was marked by early state-led institutional reforms,
440
highlighted by China's economic takeoff; and Phase IV (since 1994) included the later institutional reforms,
highlighted by Chinas transitional upward move through its restructuring economy and its rule-of-law-based
reconstruction of institutions. Different phases followed different foci and highlights, and thus presented
different modes and/or models of development. Chinas early institutional reforms were efficiency-minded in
order to produce fast growth, whereas Chinas late reforms followed the states policy of soft-landing and
counted on both competition and protection for a balanced growth that addressed social tensions arising from
the efficiency-minded reforms and the growing social gaps they produced between the rich and poor in rural
and urban areas.
Figure 5.22a: Chinas institutional reforms in economic transition, 1976-2000
Real GDP Growth

Annual % Change
16
14 Phase II: Phase III:

1980-84 1985-93
Phase IV:
12
1994-00
10
8
Phase I:
6
by 1979
0
1 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
2
As we previously noted, China's state-led institutional reforms started from trial-error experiments, learning
by doing that epitomized Deng's aphorism crossing river by crouching stone. This happened in 1978
when the state re-prioritized its policies, attempting the Four modernizations without certain knowledge of its
strategies, tactics, practical steps, and agendas. Thus the CCPs leaders were able only to follow the ideas of
Chairman Mao, the former founder of the PRC, some of which he had enunciated in the 1950s. At the
beginning, the CCP leaders made structural adjustments and co-opted some mutants co-evolving from
the existing institutions, mutants that were so-dubbed by Mao in 1958 as Making News from Olds
441
(or translated as Promoting Mutant Novelties Co-evolving from Preexisting Institutions). Chinas early
reform measures were quite rudimentary, and were limited to less-controlled sectors of the economy such
as the rural sector, e.g., the CCP enacted the so-called Responsibility System of Rural Household
Production, attempting to remove the old Peoples Commune system established under the previous
planning regime [130].
442
Figure 5.22b: Path o f C h in as Econom ic Transition Since 1978
Phase IV: Prosperous upgrade --

Rule-of-law-based reconstruction
of institutions, competitiveness-
oriented, quality-of-growth-
concemed;
Defining momentum: Dengs
Southern Tour," soft-landing
policies disciplining capital mobility
and regulating trade, access to
W T O & globalization, boom of IT-
led New economy: cellular phone
and chip making, etc.), financial and
fiscal reforms to ease access to
market recapitalization and IT
stocks (1994-2000)
Phase III: Fast Growth----------------------------------- ^

State-led-institutional-reforms,
economy take off;
Defining momentum:
boom of non-state sectors,
marketization in breadth and depth
through a bundle of institutional
reforms to cope with those
dilemmas between efficiency and
legitimacy (1985-1993)
Phase II: Easy catch u p ----------

Government policy-led,
Economic-efficiency-concemed;
Defining momentum:
Rural reforms, streamline-
initiated market competition,
local initiatives & hard-budget
constraints, followed by
decentralization reforms and
economic hybridization
(1980-84)
Phase I: Preparation for ---------------

transition - states structural
adjustments, re-prioritizing
policies from politics in
command to economy in
command, revamping the
damaged infrastructure of institutions;
Defining momentum: The Third
Plenary Session o f the Central
Committee o f the Eighth National
Congress of the CCP in 1978
(by 1979)
443
The states determination to accelerate the Four Modernizations prompted a succession of Chinas
economic efficiency-related refonms. In the early reform stage (Phase II), Chinas economic streamlining was
treated merely as a series of supplemental steps, backed by existing institutions, with few connections to the
enduring problems of the existing institutions. But in later stages, when the refonms reached certain levels, e.g.,
when they moved from rural sectors to the entire non-state sectors in both rural and urban areas, the state
became more attentive to factors like market competition, incentive structure, and local activism [131J. The
ensuring boom of the non-state sectors prompted Chinas diversification of ownership structure that eventually
paved the way for Chinas economic hybridization and decentralization reforms which were integral parts
of Chinas transitional economy. Cao et al. in 1999 recorded the diminishing share of local government
revenue in total revenue that followed Chinas decentralization, the one that was designed to provide both
fiscal incentives and hardened budget constraints to the local economy and thus to promote local
entrepreneurship. In 1994, China's new tax reform made a clear distinction between national and local taxes
(cf. Le-yin Zhang 1999). The fixed tax rules between the national and local governments led to some
reduction of local government revenue shares in the official budgetary" and extra-budgetary accounts. As
shown in Table 5.22a, the share of local government budgetary and extra-budgetary (i.e., the unofficial off-
budgetary accounts) revenues in total government budgetary and extra-budgetary revenues dropped from
64% in 1988 to 59% in 1995.
Table 5.22a: Share of local government revenue in total government revenue
(1=100%) 1988 1989 1990 1991 1992 1993 1994 1995 1996
Budgetary 0.67 0.69 0.66 0.70 0.72 0.78 0.44 0.48 0.50
Budgetary and 0.64 0.64 0.63 0.64 0.63 0.79 0.55 0.59
extra-budgetary
Source: China Statistical Yearbook, 1996; cit. from Cao et al. 1999, p. 116.
According to Cao et al., although some reduction of local government revenue shares indicated the
hardening of the fiscal budget constraints on local governments, it does not remove the major revenue
sources of local governments," which included enterprises income tax (except SOEs under the central
444
government supervision), personal income tax, and other business taxes (1999, 117). Therefore, local
governments had instead significantly increased their leverages in total fiscal control and resource allocation
through states financial and fiscal reforms. In 1995, China officially warranted this reform practice through
enacting of Budget Law." In 1996, China introduced an independent auditing system (i.e., State Auditing
Agency") to ensure enforcement of its Budget Law. As Cao et al. elaborated,
In 1994. China introduced a major tax reform which ffl introduced a clear distinction between
national and local taxes: (ii) established a national tax bureau and local tax bereaux each
responsible for its own tax collection: and (iii) determined that value added tax (VAT) would
become the major indirect tax to be collected by the central government and shared by local
governments at a fix ratio of 75:25. Before this reform China did not have a national tax
bureau; all taxes were collected by local governments. Local governments often reduced or
exempted taxes which were supposed to be paid to the central government. The tax reform
has made it very difficult for local governments to reduce national taxes as in the past (Doung
1997). The tax reform has established some fixed tax rules between the national and local
governments. It has also led to some reduction of local government revenue shares in the
official budgetary and extra-budoetarv accounts (Table 2). Although the tax reform hardens
the fiscal budget constraints of local governments, it does not remove the major revenue
sources of local governments. In addition to the 25% of VAT, local governments revenue
sources include enterprises income tax (except SOEs under the central government
supervision), personal income tax, and other business taxes. Local governments also have
important revenue sources in the unofficial off-budgetary accounts, which are not recorded
and cannot be monitored by the central government. These accounts are about equal in size
to the official budgetary accounts in some counties, according to a recent study (Yang
1996). In 1995. the new Budget Law" took effect. It prohibited the central government from
overdrawing the central bank and from deficit financing its current account. The central
government was allowed to have deficit financing in the capital account but it had to be
financed by government bonds. The requirements for local governments were more stringent.
Local governments at all levels were reouired to have their budgets balanced, and
furthermore, the law strictly controlled bond issuance and restricted borrowing in the financial
market by local governments. In 1995, Songjiang county of Jiangsu province proposed a
budget with a 30 million yuan deficit, which the county People' Congress (the local
parliament) later vetoed (Dong 1997). To ensure enforcement of the Budget Law, an
independent auditing system was also introduced. For example, in 1996. the State Auditing
Agency audited the Ministv of Finances implementation of the state budget for the first time
since the founding of the Peoples Republic in 1949 (ibid. 116-7; emphasis mine).
Inasmuch as I have already discussed Phase I and II to some extent, from now on I will mainly
focus on Phases III and IV.
Starting from the mid-1980s, i.e., from Phase III, when market competition became fiercer, Chinas
reformers concentrated their attention on the economic policies, market regulations, and managerial
deregulations that could increase local discretions and incentives. But when Chinas reforms inevitably
445
encountered the mounting institutional banners from the existing structures of institutions, China's further
economic development was blocked by the vested interests of status quo and by the legitimacy concerns of
security and social solidarity. Thus merely favoring efficiency was shown to be insufficient for enhancing
economic performance [132]. China's reforming planners and state managers found themselves under constant
pressures to extend institutional reforms in breadth and depth, integrate all-around concerns of bounded
efficiency, governance effectiveness, and market fairness, and to disperse opportunities equally [133].
Chinas first 15 years of reforms (1978-93) witnessed remarkable progress, with a sustained GDP
growth rate of 8-9% (cf. Jiao Jihong 2002) [134] and a significant drop in rural poverty. According to the World
Bank (cit. Financial Times, p. 14, Fri. June 14, 2002), in 1978, 260 million Chinese people (out of total
population of 960 million) were living in poverty (i.e., $0.66 per head living a day). By 1998 the figure had
dropped to 42 million (out of total population of 1.21 billion). If the minimum standard of living became $1 per
head per day, then the number of those living in rural poverty rose to 106 million in 1998) [135]. Chinas rural
poverty dropped from 31.7% in 1990 to 11.5% in 1998 (ibid. using the poverty standard of $1 per head per
day; Figure 5.22c here; also cf. S. Rozelle, Albert Park, and Vincent Benziger. 1998).
Figure 5.22c: Rural poverty reduction in Chinas transition, 1990-99
350 35 3500
300 30 3000
250
200
25
20
1 2500
2000
150 15 1500

100 10 1000
5
I I II II II I 500
0
I II 0
1990 91 92 93 94 95 96 97 98 1990 91 92 93 94 95 96 97 98 99
Number of rural poor, Million (left axis)

Poverty reduction program funds {million
- Share of rural population, % (right axis)
Source: Worid Bank; cit. from Financial Times, p. 14, Fri. June 14.2002
446
Economically, the states share of the total GDP continued to shrink, from 78% in 1978 down to 47%
in 1993, mainly due to the surging of Chinas non-state sectors in the same time period. But this is partially
affected by Chinas on-going financial reforms resulting in diminished non-agricultural new loans to the state
sector, down from 84% in 1988 to 72% in 1994 (Table 5.22b here).
Table 5.22b: State sectors share of non-agricultural loans in China, 1988-94
(1=100%) 1988 1989 1990 1991 1992 1993 1994
Total loans 0.83 0.84 0.84 0.84 0.83 0.82 0.80
New loans 0.84 0.89 0.86 0.83 0.78 0.78 0.72
Source: Almanac of Chinas Finance and Banking, 1193 (p. 356); 1995 (p. 483); from Cao et al. 1999, p. 118.
Yet throughout this period, the SOEs remained dominant, while the non-state owned enterprises
continued to languish, relative to the access to resource and information. Therefore the CCP could still call
Chinas economy a socialist market economy. However, the new situation called attention to the urgent need
for SO E reforms. Chinas economy that had been boosted by its non-state sectors in the past two decades now
badly needed to move forward through improving its SOEs performance. In order to expand its capital
accumulation, China now needed to link to overseas capitals through globalization. So long as SOEs remained
substantial contributors to the national economy, they remained major employers and were one of China's
major sources of revenue. Thereby Chinas incremental reforms started from the non-state sectors and moved
to the state sector, and from outsiders to insiders (or so-called outsiders pushing insider, cf. Jiao Jihong
2002), similar to Maos guerrillas strategy of using rural areas to surround urban centers during the 1930s.
The term outsiders here refers to those sectors of the economy outside central planning (i.e., the local
sectors, the non-state sectors, small enterprises, and traditional industries), whereas the term insiders refers
to those sectors of the economy under the control of central planning.
After the event of 1989 Chinas state leaders were still recovering from the students democratic
demonstrations throughout Chinas big cities. Somehow amazingly, China managed to respond to its 1989
legacy by a dynamic economic transition [,36]. The formal signal for this transition was delivered by Deng
447
Xiaoping, Chinas paramount leader, in his speech in 1992 when he took his famous Southern Tour, re
affirming the need for reform [137]. Deng's then-strategy was to use the successful experiments in the east
coastal cities (including those in advanced special economic zones) as examples to be imitated in other parts
of China.
China now began Phase IV, trying to change its entire central planning economy to market economy,
in part through enacting its new Enterprise Law (1992). This law was, indeed, critical to Chinas transition,
since it required re-defining the ownership and authority of state enterprises. Through Enterprise Law, the
state hoped to turn state enterprises into modem enterprises" (a terminology invented by the CCPs pundits).
This could be done by adopting scientific internal management that requires a separation of enterprise control
and management from the central government. Subsequently, China embarked on its re-privatization
experiments [138]. Before 1992, CCP even did not approve the legitimacy of private enterprises (note: but only
those cells going to privatization were then tradable in the public, while the state cells were though as legal
cells and non-tradable). Starting in 1994, China stepped up the privatization of small- and mid-sized state
enterprises at local levels. The initial plan was to sell off any poorly-performing small enterprises. In this regard,
China had taken a bundle of associated trial-and-error experiments in breadth and depth. In 1997, the state
decided to adopt privatization as a pillar of its economic policy for restructuring Chinas economy. The state
assured private enterprises that could become substantial parts of the national economy, whereas previously
they had been merely supplemental parts [139]. According to Cao et al. (1999), China had fewer institutional
constraints on privatization than did Eastern Europe or Russia; it had a more mature structure of corporate
governance conducive to privatization than did Eastern Europe or Russia; it had an unique economic culture
with high private savings rates; and its private enterprises had relatively attractive and higher P/E ratios (i.e.,
ratios of investment stock price vs. earning returns). Furthermore, Chinas privatization provided new job
opportunities for those laid-off from the bad-performing SOEs; and Chinas privatization helped its SOE
reforms [140]. As Cao et al. stated in 1999,
...W e identify three features of this privatization. First, the liquidity and wealth constraints
on the potential buyers of firms seem to be less a concern in China than in Eastern
Europe or Russia. The reasons are Chinas high private savings rate; and the net worth
448
(and hence sale price) of most small and medium SOEs is typically small due to its large
debt-assets ratio. W hen the liquidity constraint is a concern, non-cash mortgage sales
are used in some cases. Second, a large portion of privatized firms has taken the
corporate form known as ' stock co-operatives (gufen hezuochi), which are essentially
employee/manager ownership with some features of co-operatives. Third, new
investments typically accompany privatization, which helps to produce profits and
growth. W e argue that two important political consequences of these three features of
reform are that they reduce the ex ante resistance to privatization, and that they allow
the great majority of the parties involved in privatization to realize benefits quickly, which
increases the durability of reform ex post (Ibid. 105; emphasis mine).
...The combination of privatization of the existing stocks, together with adding new
investment, is highly significant, because in this way, privatization not only transfers
asset ownership, it also simultaneously adds new resources. As a result, some former
SO Es quickly turn to making profits after privatization. Chinas high savings rate and the
large amount of foreign direct investment have clearly contributed to this feature. The
change in enterprise ownership combines with the injection of new investment to suggest
that privatization may soon bring benefits to most, if not all, major parties whose
interests are at stake. Privatization is thus not only economically efficient, it also has
significant political implications. Making most parties better off in a short period of time
reduces the change or reversal of the reform ex post....most provinces see some growth
of former SO Es after privatization; at the very least privatized firms stop making losses
(ibid. 111-112) t141].
In Phase IV, the state decided to extend privatization to large-sized SOEs, while continuing its
restructuring of economy. Such as, in 1997 it targeted 100 selected large-sized SOEs to make them diversify
their monopolistic ownership, even though 80 of them subsequently remained state-owned, mainly because of
their privatization experiments mired in many thorny issues (cf. Jiao Jihong 2002) [142]. The old authority in a
particular state enterprise usually included its party committee, workers union, and administrative body within
the unit. The state hoped that whereas the new authority of a state enterprise would consist of a board of
directors, a board of shareholders, and supervisors, many of whom would come from outside of the unit.
However, the creation of a new authority was susceptible to many new problems [143]. Even when some of
large-sized SOEs were sold in 1998, many problems coupled with privatization were exposed, including the
malfunctioning of operations, management, and accounting practices because managers and administrators
lacked sufficiently experience, scientific knowledge, and managerial skills, and disagreements emerged
between managers and administrators in terms of authority, discretion, and execution, etc.
Such problems persisting since the beginning of China's privatization kept Chinas G D P growth rate
449
around a moderate level of 7-8% in 2000-2001. After Chinas entry into the W TO , its privatization became
further complicated by the fierce global competition it faced. In fact, some TNCs (trans-national companies)
considered dropping their financial services and joint venture partnerships with China due to the mounting risks
and costs of their capital investments. In this regard, Chinas pressing for privatization also reflects the new
urgency for compliance with W T O s international rules. Chinas reformist elites have actively used Chinas
entry into the W TO to generate new momentum for further reforms, enforcing Enterprise Law, diversifying
the ownership structures of the large-sized SOEs, and constructing modem structures of corporate governance
in China [144].
But enduring problems with Chinas privatization are deeply rooted in Chinas corporate culture with
problems arising from the lack of transparency and incentives to the transparency in state-owned enterprises.
Thus when Chinas privatization continues to break down the predominance and monopoly of the state owned
enterprises, it puts Chinas reforms of its judicial system in front. In March, 1999, Chinas Constitution was
amended again. This was the fourth amendment since 1982. Both private ownership and the rule of law were
officially written into the provisions of the Constitution, emphasizing the fact that private enterprises are an
indispensable part of Chinas economy [145]. In 2001 the CCP proudly declared that it had become the first
communist party in human history that had voluntarily allowed private entrepreneurs to join the party. Chinas
President Zhiang proclaimed that the CCP now represented all the people in China - not just some of them -
and that private owners and rich people ought to be welcomed to join the party [146].
To speed up its market access through privatization, China might need, more than ever, institutional
learning from its past and from overseas [147]. Fierce market competition requires China to balance
economic concerns through soft-landing policies and to tackle market failures associated with fast growing
unemployment and public debts [148j. In the future China will have to focus more on increasing tax
revenues through fiscal reforms, creating additional channels to raise taxes, and focusing more on improving
the quality of competition through financial reforms, breaking up bad loans [149], escalating fluidity of banking
capital, selling off state assets, reducing bank lending to SOEs, recapitalizing SOEs on a more commercial
450
basis, etc. [15]
Taxonomy o f C hinas institutional refonms. The following chronologically-based table presents some
of Chinas key institutional reforms since its transition (Table 5.22c here) [151]. The first three phases in the
table mainly adapt Table 1.1 of Gelb et al. in 1993, while the fourth phase (since 1994) presents cases I have
collected from the press and media in more recent years.
Table 5.22c: An overview o f C hinas institutional reform s since 1978
Phase 1:1978-1980 (initiating transition)
Events Policy goals Institutional reforms: strategies &

measures
The Third Plenary Revitalizing -- Burgeoning of rural household

Session o f The Central Agricultural sectors responsibility system;
Committee o f The To switch priorities from command in - Adjust agricultural product prices;
Eighth National politics into command in economy; -- Passed joint venture law;
Congress o f The C C P start a hybrid economy allowing -- Allow SO Es to sell and buy in market
petty land proprietary (1980);
-- Open 4 special economic zones;
- Experiment with contracting land use;
- Begin to reduce scope of materials
distribution system;
Phase II: 1980-1984 (economic efficiency-centered and state policy-led)
Agendas & events Policy goals Institutional reforms: strategies &

measures
Economic efficiency To introduce market-oriented - Began to reform commercial system:

as priority measures and new industrial deregulation of entry/exit and
policies; to stabilize the privatization of state commercial and
achievements of service companies;
agricultural reforms - Deregulate price by introducing 2-tier
pricing system for industry, lifting
guidance price ceilings; then,
removing them in 1985 [152];
-- Progressively lengthen land lease
terms;
- Administer agricultural trade to tax
producers (rice) and subsidize
consumers (wheat);
-- Permit state enterprises to market
directly;
451
(To be continuous)

measures
-- Establish central bank to create a 2 tier

system;
- Permit local governments to establish
industrial enterprises;
- Reform taxes to create 4 new indirect
taxes;
-- Reform enterprise taxation - replace
profit remittance to the state by partial
taxation (at negotiated rates) of profits
with depreciation and post-tax profits
retained by enterprises;
- Remove prohibition against creating
foreign trade corporations;
Phase III: 1985-1993 (easy catch-up-focused, state institutional reform-oriented)

measures
Beginning of To introduce rule of law: - Introduce central government "fiscal

institutional new measures in financial sector, contract responsibility system" with
reforms in taxation system, legal system; local government;
some key areas: progressive diversification - Temporarily re-impose controls on
of industrial ownership toward prices & internal trade during
strengthening non-state sector; stabilization (1988-9);
- Temporarily relax controls on price and
trade (1990-2);
Democratic effective coordination based on - Raise planned prices towards markets
students devolution and streamlining; prices to merge the dual price system
demonstrations to introduce profound SO E (1988-92);
in 1989 reforms (1992) [153]; reform grain and offseed prices to
convert agricultural product subsidies
intowages (1991-2);
-- Progressively enlarge the role of
market prices for industry (1985-8);
-- Relax mandatory production plans in
agriculture in favor of purchasing
contracts (1985-7); progressively relax
restrictions on interregional &
international trade in agricultural
products;
- Decentralize remaining controls on
prices of most consumer goods to
local government (1986); decontrol
according to local conditions;
China application for - Establish foreign exchange center
GATT membership opening to all enterprises for buying
(1991) and selling at floating rates (1988-92);
452
(To be continuous)

measures
-- Reduce black market premium to only

6% by 1991 from 100% in previous
years;
- Establish trade contracting system
(1988);
-- Eliminate central export subsidies;
increase local retention of foreign
exchange; accelerate trade reform
(1991);
- Introduce industrial commodity markets
from 1987 onwards;
-- Legalize transfer of land use rights
(1988) (mechanisms to facilitate a land
market came into existence only in
1991, and this market is not operating
yet);
-- Adopt contract responsibility system for
industry (1987), 3-5 year targets;
-- Pass Enterprise Law (1988);
-- Temporarily retrench enterprise reform
measures to reduce investment at all
levels (1988-9);
-- Merge 3000 inefficient state enterprises
with others (1991); ease direct credit
restraints, initiate enterprise reform;
-- Increases autonomy of state enterprises
by new operating mechanism (1992);
-- Pass Bankruptcy Law (1987);
Dengs Southern -- Create stock markets (1989-92),
Tour in 1992 first for secondary trading of
government bonds and then for shares
(Shanghai 1990, Shenzhen 1991);
- Reinstate stock market in Shanghai
(1990)
- Streamline hierarchy through Xiagancf
system (since 1992);
Phase IV: 1994-present (competitiveness-oriented, quality of growth-concerned, reconstruction of

rule of law-based)

measures
Entrenchment of overall To privatize the state sector - Privatization of small- and mid-size
institutional reforms beginning in 1994; state enterprises at local levels after 1994;
453
(To be continuous)
Agendas & events Policy goals Institutional refonms: strategies &

measures
- Select 100 large-sized SOEs to

experiment with privatization (1997);
-- Speed up overall SO E reforms: market
listing, Buy-out, A&M, IPO, etc. (2000) [154];
To reform stock ownership structure: -- Diversify ownership to include
shareholders (1993);
- Open equity stock and bond market
(2001) [155j;
To take soft landing measures and -- Retool budget plans and investment
make further structural adjustments structure (1995);
of market relationships between -- Suspend projects of over-production
supply and demand; (1995);
-- Exempt duties on key imported capital
goods and investment funds (1998) [156j;
- Adjust interest rates, exchange rates,
etc. (2000);
Asian financial To rationalize the regulatory -- Establish securities regulatory
crisis in 1997 environment for transparency, justice, commission (CSRC) (1993) and widen
cohesion; fraud inquiry [157];
-- Restructuring of financial sector and
system (1998) [158];
To construct the rule of law; - Strengthen disclosure requirements for
listed companies (2000-) [159];
-- Introduce regulations and rules on
telecoms [1^, and on encryption of
technology (2000) [161j;
Zhu Rongji To initiate substantial reforms in -- Reform banking system (1998):
becomes premier, financial & fiscal sectors (1994-1996) transform banking ownership, e.g.,
in 1998 [162]; to join global capital markets; debt-to-equity swaps programs (2000),
A&M [163]; permit foreign entry into
banking services [164], open domestic
interbank market (2000); introduce
regulatory demarcation between banks,
insurance companies, and brokerages
(2001) [165];
- Reform taxation system to counter
deflation, stimulate market demand, and
mass consumption (1998);
~ Reform of domestic bond market (2000)
[1661;
-- Commit to looser fiscal policy (2001)
[167];
- Introduce tax breaks to protect infant
and core industries;
- Prepare for W all Street-like bourse
center (2001) [168j;
454
(To be continuous)

measures
To extend fundraising sources and - Raise funds by IPO & market

revenue base; recapitalization: bonds, securities,
equities shares, treasury bill, insurance,
etc. (1995-) [169];
- Deliberate new procurement strategies
including e-commerce solutions;
To restructure Chinas industries - Open competition in core economic
thoroughly (since 1998) [170]; sectors [171];
- Introduce incentives to telecom and
internet owners, overseas investors [ ];
China enters W T O To open China fully to global - Provide for full compliance with the
in 2002 markets; rules of W T O membership (2001);
- Continue reforms in the judicial system
(since 1998);
- Reform currency toward full convertibility
(2007?) [173];
Invite overseas famous scholars to teach
in universities and lure back China-born
overseas brainpower to the country [174];
China successful bid To increase the participatory role - Develop a national welfare system
for the Olympics in of citizens; (1995) [175];
2008 To establish new social security - Reform the pension system and
system to ensure workers rights prepare for the import of foreign
and protect them from market management of pension funds in the
failures; security market [176];
Continue anti-corruption campaigns
(since 1993) [177];
Ratify human rights pacts (2001) [178];
Increase fiscal stimulus to spur conomic
growth and meet welfare obligations
(2001) [179].
As can be seen from the above table, Chinas institutional reforms have been carried out in depth and
breadth, significantly shaping Chinas transition. From a macro-institutional perspective, the reforms have
involved six steps:
1). The structural adjustments of industrial policies in the early era of the transition: e.g., subsidizing
agriculture after previously excessively squeezing it as well as reducing SOEs subsidies and gradually
eliminating export subsidies;
455
2). The early creation of efficient incentive mechanisms and the promotion of rural and urban
entrepreneurship through hardened budget constraints, accelerating access to markets, streamlining the state
sectors, and diversifying industrial structures to boost non-state sectors such as private sector, TVEs, and joint
ventures (JVs), including local joint ventures with global capitals, etc. In the meanwhile, the state provided
sufficient protections for its scale economy, its core and infant industries, including its high-tech and high-value-
added industries such as communication and information technology, and its critical programs such as, R&D,
etc.;
3). The creation of effective and resilient macro-economic governance since the mid-1980s through
bureaucratic decentralization and economic deregulation, including relaxation of price controls and promotion
of managerial discretion and local activism. Those decentralized and deregulated measures eventually
weakened ideological rigidity and hyperactive bureaucratic micro-interventions of the previous planning
regime, while elevating the roles of market competition conducive to economic growth and horizontal and
vertical integration.
4). The establishment of openness toward the world economy through accelerating economic
liberalization [180]: e.g., introducing a rural household responsibility system (since 1979) and (since the mid-
1980s) permitting the transfer of land use rights and introducing commercialization to the state enterprises.
Since the mid-1990s, the state reformed Chinas financial and fiscal sectors and opened capital, bond, and
security markets for new capital procurements [181]. The state also attempted to convert fundraising from the
banking system to the equity and security markets; and, lately, the state tried to extend its revenue base by
issuing things like M2 money and IPOs, thereby preparing for currency convertibility, increasing foreign
shareholders equity in some core industries, and adopting flexible monetary and trade policies, including
floating interest and foreign exchange rates, etc. All of these measures were backed by aggressive refonms of
fiscal and financial systems to strengthen market competition in the global arena and lubricate the free flow,
and facilitate the accumulation, of physical capital [162].
456
5). The privatization of the state sector. Since the mid-990s China has steadily implemented some
daunting reforms of the state sector, heading for privatization of the SOEs as locomotive of its transition,
although the state-owned sector...still managed a 10.9% rise in production in April, 2002, as reported [183].
6). The rationalization of Chinas economic governance and legal system through instituting a cluster
of new laws regarding finance, global trade, prices, taxation, investments, bankruptcy, and enterprises since
the 1980s, as well as instituting a cluster of new knowledge/information-based laws concerning intellectual
property rights, information technology on encryption in the 1990s, etc. The establishment of the rule of law
also introduced the establishment critical of new market institutions, such as the China Securities Regulatory
Commission (CSR C), the contract system and management in the labor market, innovative distribution
systems in product market, and capital market and information regulatory enforcements through agencies,
brokers, and other intermediaries, etc. The erection of a rational bureaucracy in China and the boom of the
social overhead sector have contributed much to Chinas macro-institutional environments while advancing
China's background-based transition [184]. To reinforce these new measures, the government since the 1990s
has repeatedly launched anti-corruption campaigns, seeking effective governance and an honest" reputation
[185]. For detailed documentation of Chinas institutional reforms, reader may further refer to Lin e al. 1996,
Chapters (pp. 125-167).
O f all the above efforts toward changes, openness, entrepreneurship, flexibility, sustainability, and
stability can be discerned as the pillars of China's institutional reforms and the keystones guiding China's
transition.
457
How Chinas economic reality have changed through institutional reforms since its transition.
As a result of Chinas institutional reforms, a hybrid economy has emerged and prospered in China: its COEs,
TVEs, JVs proliferated; its SOEs become more open to society and global economies. Although the industries
and economies have been regionally built and locally coordinated, they become inevitably integrated into its
national hybrid economy. From the early 1980s Chinas contemporary economy began to take shape, in terms
of major components such as competent industries, service economies, and goods markets. And so did the
regulatory role of the state in governing the economy, when the state functions became more dependent on
market institutions for rational allocation of resources. According to Nee in 1992:
A continuing shift from redistribution to markets, however, induces change in the

comparative costs of governance. As market institutions become more dominant in the
transition economy and as the institutional foundation of a market economy is
incrementally constructed, these parameter changes result in a relative increase in the
cost of hybrid governance structures and reduction in the cost of transacting for private
firms. The organizational dynamics of market transition, I maintain, are driven by such
parameter changes in the institutional environment (North, 1986, 1990; Williamson,
1991). Key factors that explain the rapid arowth of hybrid forms and Private enterprise
are the expanding relative scope of market institutions in coordinating the economy,
changes in the structure of property rights, and the incremental shift from a redistributive
to a regulatory state (Nee, 1989b). These institutional changes explain improvements in
economic performance in China after the initiation of economic reform in 1978 (Nee and
Su, 1990). Changes in the institutional environment account for why state-owned
enterprises undergo declining economic performance, while marketized and private firms
experience rapid growth (cf. V. Nee 1992, p. 2; emphasis mine).
As market institutions have become dominant in Chinas transition economy, its macro-economic
institutional environments have changed, resulting in a relative increase in the cost of hybrid
governance structures and reduction in the cost of transacting for private firms [186]. Although plenty of
the reforms and changes remain rudimentary, they all led to a new direction - en route to market economy, no
matter whether it was called a quasi-market economy or a socialist market economy. As Chinas market-
oriented economic fundamentals come into play, incremental growth became accepted as a new form of
Chinas economy generated by its current structure of institutions. As this process has continued, China has
drastically changed its overall socio-economic outlook.
It is noteworthy that Chinas latest transition accompanies a flourishing of social overhead sector, a
458
new sector annexed to its hybrid economy. The sector includes those intermediaries for legal protection and for
capital management, such as legal services, real estate services, financial services, and insurance services, all
of which have multiplied since the 1990s [,87]. The social overhead sector has become an indispensable part
of China's modem economy; its strength can be regarded as the benchmark of its transitional progress. Its
strength reflects the further spread of commercialization with increased professionalization, entrepreneurship,
and managerial discretion. The growth of the social overhead sector has generated the fledgling laws such as
the new established Administrative Law, Bankruptcy Law, Contract Law, Enterprise Law. These are designed
to facilitate transactions in equity stocks and security markets, and to build up innovative taxation systems and
currency systems and floating interest rates and exchange rates, etc. Hence the boom of the social overhead
sector, like the establishment of the rule of law and the buildup of rational bureaucracy can be recognized as
prerequisites for the advancement of China's transition.
No doubt, China's macro-economic institutional environments since the 1990s become much
more free and open than during the 1980s, while its economic governance becomes much more potent
and effective than ever before [188]. China's institutional reforms provided the country with more
leverages to sustain its economic momentum, as they broke up with those institutional inertias locked in
its previous planning regime [189]. China's achievements in this regard are in sharp contrast with those of
Russia, which is suffering from the lingering consequences of its drastic re-privatization, and with those
of Japan, which is experiencing an economic recession due to its reluctance to make major changes in
its financial institutions.
From micro-institutional perspective, we can recognize a series of institutional changes in the business
environment of core industries during Chinas transition (Table 5.22d here). These changes have been
associated with the latest innovative reforms and trends, of which many now remain at a trial-and-error stage
and can be scrapped or changed at any given time if found inappropriate [190].
459
Table 5.22d: Chinas institutional changes in the business environment
of core industries during its transition
Typical characteristics of existing Recent change with institutional New streams along with
business systems in the PRC reforms market-oriented experiments
and innovations
1. Business focus: products, Greater attention paid to Beginning of management for

distribution, and headcount- market sales and stock shareholder value [191]
bound performance measures market performance
2. Ownership pattern: Regionally Ownership hybridization, lately Stronger role given to

based interlocking, in collusion with Including IPO listing in equity, corporate finance; high
banking institutions & administrations bond, and security markets, and marks given to shareholders'
the rising of an equity culture views [192]
3. Market pattern: both formal and semi- Rising of hostile bids Reconstruction of market
formal (or internal) under surveillance of ensured by bankruptcy law institutions and increase in
the central and local governments and court rule the rule of law
4. Attitude toward employees: consider End of Iron Bowl lifetime More flexible approach to
employees as most important employment system, labor, more efficiency-
stakeholders downsizing of labor forces in a mindedness
unit {Xiagang" system)
5. Governance structure: large directory Devolution to the local level (in Growing managerial
boards often staffed with administrators M-form hierarchy) and local discretion, accountability,
businesses, shrinking of board and transparency, focusing
size, streamlining of adminis on knowledge, expertise,
trative procedures; hiring of and experience with
foreign consultants for core competition [193]
sectors & firms [194]
6. W age system: wage-based Legal reform for promoting Introduction of stock options
management pay, with more parity managerial meritocracy to compensation packages
instead of hierarchy for bank directors and core
company managers [195]
In China, when businesses focused on innovation, execution, and performance, resources were
distributed according to the merits of individual workers, managers, and enterprises. As their individually-
based achievements were more appreciated, workers, managers, and enterprises committed themselves
to entrepreneurship for their survival and success [196]. As entrepreneurship prevailed to the business
environment, the enterprises become more reliant on market institutions and the legal system to facilitate
economic transitions. Logically, these enterprises turn to search transparency and accountability and
acclaim the rule of laws. Thus we might say that institutional reforms changed the incentive structure and
460
197
thus energized Chinas business boom [ ].
China's current problems in economic transition and social changes through reforms. As we
elaborated earlier, Chinas transition has been double-pronged in nature. Each of its achievements has run into
problems with the existing structure of institutions. For instance, this happened with Chinas regional
fragmentation after its decentralization reform. Initially, one goal of Chinas bureaucratic devolution was to
revitalize local branches. But the prevailing power of local authorities was partially responsible for the
decline of state revenues in recent decades and for the local fragmentation of economic planning and
coordination. This had seriously challenged Chinas economic governance seeking horizontal and
vertical integration. In this light, Chinas recent institutional reforms reflected the states renewed efforts
to re-centralize the power structure for the rational allocation of resources and for effective regulation
and deregulation. The reforms were designed to correct some problems arising from the
decentralization of the 1980s by reducing the political influence of local governments on the central
regulations and by hardening budget constraints to buoy up competition from the local and the non-state
sector (ibid. 118) [198]. This was particularly the case with Chinas monetary and banking reforms in the
1990s. According to Cao et al. 1999,
After Vice Premier Zhu Rongji [note: Chinas current Premier] took over the governorship of
the central bank, he centralized its operation. The central banks local branches were no
longer under dual supervision - reporting to both the headquarters of the central government
and the local government of the region in which they resided. There were now only
supervised by the headquarters of the central bank, which set national monetary policy.
Before 1994, 70% of the central banks loans to state banks were made by the central banks
local branches. This authority of the local branches was revoked after 1994. The reforms
substantially reduced the local government's influence on monetary policy and credit
allocation decisions (Xie 1996). Starting in July 1993. the central bank imposed a tight
monetary policy to fight inflation. The total annual credit increase was reduced to around 24%
in three consecutive years between 1994 and 1996. substantially down from 43% in 1993. As
a consequence, inflation was reduced from 21% in 1994 to 2.8% in 1997. Moreover, the tioht
monetary policy apparently also affected the proportion of (non-aoricultural) loans going to
SOEs. During the previous credit crunch in 1989. the share of new loans to SOEs increased
from 84% in 1988 to 89% in 1989: while during this credit crunch, the share of new loans to
SOEs decreased from 78% in 1993 to 72% in 1994... Local governments were hurt even
more because their influence over credit allocation was substantially reduced... In 1994. four
major state specialized banks became commercialized when they adopted the international
standard for bank assets and risk management (i.e.. the Basle Accord). They also started to
compete with each other since their businesses overlapped. These banks became more
461
conscious of profitability and the quality of loans. Furthermore, internal management of these
banks became more centralized, and this also reduced the political influence of local
governments on their local branches in loan decisions, which had often happened in the
1980s (ibid. 117-8; emphasis and note mine).
After Chinas entry into the W TO , Chinas re-centralization became more pressing than ever.
The W T O insisted on Chinas full commitment to W T O s requirements and codes [199], particularly those
requirements for complete financing information disclosure and sufficient company transparency [200]. As
such, Chinas financial reforms included the creation of independent agencies to regulate those corporations
listed on the stock market and the requirement that all financial information from the listed corporations be
reviewed by Big Five global accounting firms (such as PricewaterhouseCoopers, KPMG, Ernst & Young,
Deloitte & Touche, Arthur Andersen Accounting Co., etc.), even though Chinese accounting firms had already
audited the information. Using the words of China's Premiere Zhu Rongji - there was to be no falsified
accounting (cf. Shen Sibao 2002; ibid.). The state realized it could use these W TO agendas to re-tighten its
budget control, strengthen market competition, and solve those thorny issues such as inside trade problems.
Persisted inside trading had tended to turn Chinas stock markets into legal person stock markets
where SOEs, because of their official status, were favored with more timely and easier access to information
and resources. Some managers and executives of SOEs (under client favoritism) could use their extensive
social ties with fund managers and trading brokers and engage in institutional collusion with those state
regulators in pursuit of their personal profit. Such inside trading, for example, has often been spotted in
assorted arbitrages among different parties. Ordinary citizens as individual buyers and/or minority shareholders
became outsiders and were most vulnerable to being the victims of market speculations and stock arbitrages.
Things could get even worse, when badly-performing SOEs used their status of legal persons to engage in
illegal stock trades, protected from the state and even from their own trading partners at the expense of other
healthier firms. These SOEs could follow their hidden agendas legally and safeguard their illegal stock trades
due to a legal loophole in stock market regulation - the absence of certain transparent procedures. One result
of such a lack of transparency was found in 2002 in the discounted sales of Chinese shares in stock and
security markets, as shown in Table 5.22e.
462
201
Table 5.22e: Discounted sales of Chinese shares in stock and security markets [ ]
Date Company Listed Off-market Discount % shares

Price (Rmb) sale price (Rmb) transferred
Sep 30, 01 Shanghai Jintai 7.06 1.60 77% 56.8%

Feb 5, 01 Jintai Development 15.80 2.80 82% 54.2%
Jan 10, 01 Emeishan Diesel Engine 15.83 3.21 80% 50.3%
Jun 18, 01 Tianyu Electric 14.12 3.12 78% 46.0%
May 23, 01 North International Co-op 23.73 2.21 91% 40.2%
Jun 22, 01 Fujian Dongbai 15.45 3.69 76% 39.4%
Oct 7, 01 Yunnan Jinggu Forestry 14.19 3.20 77% 38.1%
Jun 14, 01 Si Sha 14.67 2.04 86% 34.5%
Jun 11, 01 Hunan Ansu 23.88 2.87 88% 29.9%
Jul 30, 01 Shenzhen Capstone Ind. 19.29 3.17 84% 29.8%
May 8, 01 Jinan Dept. Store 22.98 2.14 91% 29.8%
Nov 21, 01 Beijing CCID Media 12.15 1.69 86% 29.0%
Nov 13,01 Chongqing Tongjunge 12.78 1.61 87% 28.5%
Apr 26, 01 Shijiazhuang Intl Building 15.29 2.39 84% 28.5%
Source: Chinese Academy of Social Sciences; cit. from Financial Times, p. 22, May 14,2002.
The amazing stock discount rates and transferred shares by the listed companies showed that
even after China established certain regulatory procedures and associated market institutions, their
operations and functions remained rudimentary [202]. And even when the China Securities Regulatory
Commission (CSRC) formulated a regulation system to strengthen the transparency of the securities
market and to protect the legitimate interest of investors, the CSRC implementations of corporate law
against violations remained far cry from the commercial standards used in overseas markets and their
penalties were regarded as too light [203]. A very slow progress of Chinas reforms of financial and legal
system will greatly retard its potential of further economic growth in the near future [204j.
Through a two-decades-long transition, Chinas institutional reforms nurtured and sustained rapid
economic growth, growth that was followed by drastic social changes. Table 5 .22f presents the changing
composition of Chinas workforce between 1952 and 1999. After 1978 there were increases in the proportions
of Chinas private entrepreneurs (categories 2 and 3 in table 5.22f), administrators and technicians
(categories 1 and 4) [205], and white collar workers (categories 5 and 6), a stagnation of manufacturing
workers (category 7), and a contraction of farmers and peasants (category 8).
463
Table 5. 22f: Chinas Social Strata, 1952-1999
Composition of Chinas
workforce, %.
Category 1952 1978 1988 1999
1. Administrators/managers 0.6 1.2 2.2 3.6

2. Owners of private enterprises * 0.2 0.0 0.0 0.6
3. Owners of private enterprises t 4.1 0.0 3.1 4.2
4. Technicians/specialists 0.9 3.5 4.8 5.1
5. Office workers 0.5 1.3 1.7 4.8
6. Business/service workers 3.1 2.2 6.4 12.0
7. Manufacturing workers 6.4 19.8 22.4 22.6
8. Agricultural workers 84.2 67.4 55.8 44.0
9. Unemployment/unemployed n/a 4.6 3.6 3.1
* Eight or more employees;

t Fewer than eight employees
Source: Report on a study of contemporary China's social strata, Chinese Academy of Social Sciences,
Jan. 2002; cit. from To get rich is glorious - Chinas middle class is expanding rapidly. But what does it
want? in The Economist, p. 33, Jan. 19, 2002.
Figure 5. 22d: Chinas Social Mobility, 1952-1999
Composition of Chinas workforce,

% (Logarithmic scale)
100 0.5
80 0.4
60 0.3
40 i 0.2
20 0.1
0 0
^ ^ ^ R u ra l in c o m e a s u rb a n in c o m e , p e r h o u s e h o ld % (le ft axis)
--------------- In d e x d iffe re n tia l of h o u s e h o ld in c o m e c h a n g e s , ru ral o v e r u rb a n a s % , 1 9 7 8 = 1 0 0

(left axis)
D o c u m e n ta ry ru ra l G in i in d ex, 1 9 7 8 -9 4 (rig h t axis)
" " D o c u m e n ta ry u rb a n G in i index, 1 9 7 8 -9 4 (rig h t axis)
R e p o rte d rural G in i in d e x , 1 9 8 0 -9 9 (rig h t axis)
R e p o rte d u rb a n G in i in d ex, 1 9 8 0 -9 9 (rig h t a x is )
- A m e ric a n G in i in d e x , 1 9 7 8 -9 9 (rig h t axis)
Source: ibid.
464
The changing of Chinas social strata poses uncertainty for Chinas political future. It seems, as
reported, that most private entrepreneurs, who are the direct beneficiaries from Chinas market reforms,
have strong desires for political changes. By contrast, China's middle class tends to be apathetic to
current politics and social movements for democracy [206], and more interested in savoring and securing
7H7
their just hoarded up wealth [ ]. One could argue that Chinas changing social strata have serious
political implications to Chinas future, as the private sector is booming and state sector is crumbling. It is
noteworthy that China in the late 1990s has witnessed an increasing number of protests, mainly of laid-
off workers from the state sector in the old industrial cities, reflecting deepening social rifts after many
state-owned enterprises went bankrupt, market competition has become fiercer, and the government
budgets constraints have hardened.
The changing composition of Chinas social strata is more discemable in the increasing gaps
between Chinas rural and urban areas and across geographical regions [208]. Picture 5.22a (cit. The
Economist, A survey of China, p. 4, June 15th, 2002) illustrates income distribution in 2000 across
different regions in China's transition. Inland and frontier areas, those hardly opened and sparsely
populated are most impoverished, in relative terms (cf. Andrew Watson1992). Coastal areas, those most
open and populous, are best off (Picture 5.22b here) [209]. It is possible that uneven development in some
of Chinas already impoverished regions has aggravated the income inequalities.
465
Picture 5.22a: Chinas GDP per capita by geographic distribution, 2000
KA ZAKH
Gross domestic product

per person by province, 2000, $
>3,000 0 750-999
| 1.500-3.000 500-799
H 1.000-1.499 B <500
Source: The Economist, p. 4, A survey of China, June 15th, 2002.
466
Picture 5.22b: Chinas Peart River Delta - One of most dynamic industrial regions
in the world, 2002
Deep-
Huada water port
Airport
(undei cc n stw ctkn ) ProptKi
Shallow- *
water port bridge
Huugpu
Guangzhou
Dongguan
Huiznoa
D O
HpQngtmn\
rw r.
) e s tu a ry '-
, ,,, kohg; :
C M Lap ^ '(
Source: NVA Hong Koog Ltd

Zhultai0. . VV
o u t h
Macaa
n i n a
ZhubaS
Savzda 100 km
Source: The Economist, p. 37, Asia, Oct. 12th, 2002.
Increasing gaps of income distribution are evident both between and within Chinas rural areas.
Nevertheless, the overall income enhancement of the rural households is palpable (Figure 5.22e). in
1978 33% of the rural population earned less than 100 yuan (on the value rebased for the currency yuan
in 1978). In 1998 only 1% of the rural population earned less than 100 yuan. This trend supports Gelb et
al.s finding about decline of Chinas rural absolute poverty (1993, 421) [210]. The average income per
rural household (not converted to PPP) rose from 500 yuan in 1978 to 2500 yuan in 1998 [211]. However,
in 1978 there had been a poor with equity pattern of rural income distribution. By 1998 there had been a
transition to a richer with growing gap pattern of rural income distribution. This was a source of deep
concern addressed by R. W ade (cf. The Economist, p. 74, Apr. 28th, 2001) [212]. Figure 5.22e below
shows the variations among different rural strata as beneficiaries of different levels of income from the
overall growth in Chinas economic transition. Those annual frequency distributions of rural household
income became skewed toward higher income strata ever since 1985, suggesting, as Gelb et al. 1993
467
213
noted, increased rural-rural inequality with the richest areas growing faster (421; also cf. Gelb 1996) [ ].
But this situation could be even worse if the state kept a weak and slow response. In the 1990s China's
central and local governments hesitated to cover the social costs of Chinas transition and the heavy
expense of subsidies necessary and sufficient to reduce rural poverty. As the states tax revenue
dramatically dropped off in the 1980s and 1990s, China lacked adequate strategies, measures, and
resources to deal with these problems.
Figure 5.22e: Rural rich and poor - Distribution of household

income, per capita (yuan), 1978-98 Selected
years
Parity with poor
Richer with growing gap

o - - 1992
1995
o*
o
1998
"S>
Source: SSB series, 1985-2000
In contrast, Chinas urban residents as a whole benefited most from Chinas transition through
institutional reforms. Chinas fast growth of G DP per capita was due primarily to the growing G DP per
capita in urban areas than the growing G DP in rural areas (Figure 5.22f here) [214]. Figure 5.22f gives us a
complex view at the overall disparity between urban and rural income per capita and of income index (i.e.,
annual growth rate of income per capita in rural households or in urban households given 1978=100). It is
notable that the changing gap in terms of income per capita was not matched with the changing gap in
terms of income index. This was so partly because the much faster growth of income
468
per capita, denominated by Chinas currency yuan, had been inflated by currency depreciation a couple
of times since 1978 [215].
Figure 5.22f: Growing disparity of income distribution between urban and rural
households, 1978-98 (yuan and index: 1978=100)
yUan index (1978=100)
Urban annual
per capita
income (yuan)
(left axis)
Rural annual
per capita
income (yuan)
(left axis)
Urban index
(right axis)
Rural index
(right axis)
1978 1985 1987 1989 1991 1993 1995 1997
Source: Table 10-3, SSB, 1999, China.
Figure 5.22g: Urban rich and poor - Household income ratio, lowest deciles as % of
Highest decile, 1988-98
0.40
0.35
0.30
0.25
0.20
1988 1990 1992 1994 1996 1998
Source: SSB series from 1989
But the urban income pattern equally entails its transitional dilemma (cf. Yu Xie and Emily
Hannum 1996). Figure 5.22g shows how the income gap between urban rich and urban poor sharpened
between 1988 and 1998 (note: perhaps the reverse turn in 1995 reflected the states soft-landing policy
measures for inflation adjustment in 1994). In relative terms, Chinas urban richest became even richer,
the poorest became even poorer.
469
Overall, the income gaps between urban areas and rural areas in the 1990s showed a little
widening, relative to the 1980s (Figure 5.22h here; see the statistical trends of rural income as urban
income, per household % and of Index differential of household income changes, rural over urban, as
%"). This might be explained by the fact that in the 1990s rural household income rose slower than urban
household income than it had in the 1980s.
Figure 5.22h: Income gaps between urban and rural, 1978-99

%
100 0.5
0.4
0.3
0.2
m- 0.1
m
Rural income as urban income, per househdd% (left axis)
Index differential of household income changes, rural over urban as%, 1978=100
(left axis)
Documentary rural Gini index, 1978-94 (right axis)
Documentary urban Gini index, 1978-94 (right axis)
Reported rural Gini index, 1980-99 (right axis)
Reported urban Gini index, 1980-99 (right axis)
- American Gini index, 1978-99 (right axis)
Source: SSB series; also cf. Lin et al. 1996 (for documentary data), Figures 7.8 and 7.9, p. 228; also cf.
The Economist (for reported data), p. 44, June 2nd, 2001; Financial Times, p. 5, Sept. 6, 2001.
In Figure 5.22h, the Gini coefficient Indices (where 0=perfect equality and 1=perfect inequality)
in both rural and urban areas increased between 1978 and 1999, but the increase in rural areas was
wider than in urban areas sector [216]. By the turn of the century the increasing Gini figures, despite a
slightly lower level than the Gini figures in the US (see above Figure 5.22h), were now becoming a threat
to Chinas transition and were raising the public concerns about Chinas reforming regime [217]. The trend
470
had the state hardly justify the transition as being en route to socialism. These inequalities do not raise
as much public concern in the UK and the US, though, with their long traditions of social inequality.
S um m ary o f S ection 5.22. In recent world history, we can find only Japans Meiji Restoration (1864)
as comparable to Chinas transition, comparable in breadth and depth, in pace of change, and in
endogenous institutional reforms to modernize their respective countries [218]. Those key Chinese reform
measures listed above Table 5.22c are extraordinarily comprehensive, including: promotion of rural and
urban entrepreneurship; administrative devolution to local levels; the boosting of the incentive structure;
promotion of local discretion and responsibility; relaxation of price controls; deregulation of the economic
system; introduction of new market procurements (through stock capital and bond markets, and joint
ventures); reforms of fiscal and financial systems; reduction of SO Es subsidies and elimination of export
subsidies; promotion of expanded non-state sectors and promotion of infant and high-tech, high-value-
added core industries; introduction of the rule of law to rationalize economic and legal systems (through
a series of new laws, such as bankruptcy laws, enterprise laws, etc.); applying for G A TT and joining the
W TO ; setting up a floating system of interest rates and foreign exchange rates and preparing for the full
convertibility of the currency yuan, etc. Thus Chinas flood gates were open wide to international capital.
Eventually, through so many of its trial-and-error experiments and institutional reforms, China incubated
its formidably historical momentum, built up its transition, and changed its reality in a systemic way [219].
It is important to note that China's rebuilt institutions co-evolved from preexisting and existing
institutions; they are induced by the states reforming policies in which the central government played an
active role, initiating various trial-and-error experiments. Numerous innovative measures remained in
their experimental stage; and plausibly, more than a half of them were aborted or abandoned early [22].
Chinas institutional reforms primarily followed a bottom-up approach and carved out major role in driving
Chinas transition [221]. It occurred because Chinas transition began shortly after the Cultural Revolution
was over. It started from the state, but the state was quite weak, and the economy was on the brink of
bankruptcy. Subsequently Chinas institutional reforms were enhanced by the boom of non-state
471
economies and backed by a kind of entrepreneur-mania throughout the country. As Chinas transition
grew in breadth and depth, social gaps increased and raised ethical concerns. These gaps (in terms of
Gini coefficients) might be normal to many advanced capitalist societies. But they were alarming in a
transitional economy like China. They could become an explosive threat to its future. China thus has to
do something to assure social justice and continue its transition, not allowing welfare programs to wait
too long [222].
472
5.3 Strategies fo r rebuilding institutions in China's transition
n the last section of this chapter, we return to the market-hierarchy dilemma posed in the last
I chapter. Instead of treating the market-hierarchy relations as binary or unidimensional, as neo
classics assumed, I treated them as multi-dimensional, affected by many factors beyond the reach of
market and hierarchy (see our Chapters 2 and 3). In this section I would like to focus on Chinas
economic governance and decision-making processes. I would contend that China has tended to treat
those institutional arrangements from a practical point of view, looking for strategic options for tackling
those market-hierarchy dilemmas arising from Chinas reconstruction of institutions.
This section will explore how the state launched its decentralization to promote local activism,
tackling those dilemmas between individual interests and group efficiency existing within hierarchies. It
will explore how the state initiated its hybridization to provide leverage to the non-state sectors,
promoting Chinas market competition during transition. It will analyze Chinas recent adoption of the
X/agang system (i.e., an institutional approach to job turnover and retirement) as one example of
Chinas search for institutional options.
5.31 Bringing social choice back in: the social structure of institutions in China's transition
My earlier sections of this chapter emphasized, Chinas transition from a planned hierarchical
economy to a competitive market economy started from its bureaucratic streamline. According to O.
Williamsons transaction cost theory, economizing on hierarchy could be seen as universal concern for
all modem market economies. It might be worthwhile to compare hierarchies in transitional economies
with those in market economies [223j. W e might ask: to what extent is a modem firm hierarchy
indispensable to market transactions - a question pondered by R. H. Coase in 1938 (cf. 'The Nature of
the Firm") [224]?
China chose decentralization and hybridization as two major alternatives to help it deal with
473
those social dilemmas arising from its early transition. Chinas reformers realized that a breakup of the
former planned economy and a transfer to a market economy should not be taken for granted; either a
breakup or a transfer might entail tremendous economic costs and social consequences. With the same
political regime in place, it was very difficult for China adopt shock therapy as a way to transfer its
planning economy directly into a classic market economy f 25]. Chinas reformers tended to treat
transitional strategies as important as transitional objective. Thus reformers explored a wide range of
options to deal with dilemmas between market and state/hierarchy. An alternative had to be found
through exploring options feasible to the existing institutions - devolving hierarchical controls to the local
groups and increasing the scope of non-state sectors. It was not hard to understand why the mid-termed
decentralization and hybridization could be a proxy for market institutions, providing market-like
incentives to the local and non-state sectors within the reach of Chinas hierarchies. As Cao et al. 1999
stated, the political logic behind such decentralization reform was federalism, Chinese style, to which
the state had a strong commitment. The state had to prepare necessary sanctions and interventions in
favor of reform and against possible institutional barriers. Thus it is important to examine whether or not
Chinas choices for non-market-like proxy institutional arrangements was capable of delivering market
like incentives, promoting local activism, and channeling market competition without creating expensive
transitional costs.
W e need to consider Chinas transition is an institutional search for feasible arrangements
through trade-offs between existing options such as markets, hierarchies, networks, etc. In some
circumstances, existing networks could be considered indispensable to compensate for the inflexibility of
formal and vertical hierarchy, or to compensate for the loss of organizational cohesion in making market
transactions [226]. Further, we need to consider such a search as a process of changing institutions that
are themselves social actors producing further changes. Given these considerations, we can understand
how market openness could succeed in the absence of sufficient market conditions and institutions, and
how decentralization reforms could provide market-like incentives, and streamline bureaucracy and
mobilize local activism, while buffering the pressures from the current bureaucracy.
474
5.31.1 Markets, hierarchies, and networks as alternative coordinative arrangements
The choice of institutions does matter in transitions. This is so because institutions are
strategically designed and reflect social choice in given social circumstances and historical contexts.
China's practice of rebuilding institutions -- the enactment of institutional reforms, starting from
decentralization and hybridization - has to be explained by a series of social choices in given
circumstances and contexts. The reforms were designed to facilitate and boost managerial discretion,
organizational activism, and individual freedom [227].
Earlier in this chapter I described Chinas transition in terms of political and economic process.
Now I shall attempt to describe Chinas transition in terms of choices of markets, hierarchies, and
networks, since these three kinds of arrangements are most talked by mainstream scholarship [228].
In 1975 O. Williamson suggested that the relationships between markets and hierarchies are not
dichotomous but instead are continuous. This implied that markets and hierarchies could be
complementary or even, under some conditions, be substitutive for each other through a sort of quid pro
quo trade-off. But Williamson did not explicitly develop these arguments by further specifying how they
could become substitutive for each other and under what kinds of conditions and contexts. In 1983,
Granovetter proposed the concept of social embeddedness to define markets and hierarchies, i.e., sets
of social relations described in terms of network structures. Granovetter then assumed the networks were
prevalent arrangements over markets and hierarchies. Not only did markets and hierarchies need to be
explained by their social embeddedness and contexts, but also networks themselves constituted
independent mechanisms affecting economic transactions [229]. Networks are able to act as
intermediaries between markets and hierarchies, either supplementing markets and hierarchies or
substituting for them.
In 1990 Powell noted (see my Chapter 2) that theses on markets, hierarchies, networks, and their
475
reciprocity had created many debates in mainstream economics, addressing puzzles about an array of
economic operations (1990, p. 301). Recent discourse in this regard helped us outline these three
arrangements and their relations to guide our investigation [230]. Markets, hierarchies, and networks as
institutional arrangements can be viewed as:
1). Alternatives that can also be substitutable or complementary;
2). Systematic and symbiotic within a social structure;
3). Convertible or transferable with each other on some occasions by way of transaction-cost-based
trade-offs [231];
4). Variables characterized by efficiency, transitivity, coherence, and delegation in dealing with interplay
between industrial organizations, markets, institutions, and legal systems (cf. A. K. Sen 1970,1977,1983,
1986);
5). Variables characterized by their respective centralities in terms of authoritarian centrality
(e.g., by hierarchies dealing with social dilemmas arising from asymmetric information) [232] or
transaction costs (by markets dealing with social dilemmas arising from market domination), or trust
and/or coordination (by networks dealing with social dilemmas arising from weak regulation);
6). Variables characterized by given cultural underpinnings, social structures, contexts and environments
and affected by such contingencies as historical conjunctures, productivity shocks, natural catastrophes,
etc. [233].
In these three different arrangements, markets correspond to goods-oriented exchanges with
sanctions of legal contracts and ownership rights; networks correspond to relational-oriented exchanges
with sanctions of norms, whereas hierarchies correspond to position-oriented exchanges with sanctions
of coercive authority. In 1990 Stinchcombe made similar observations about the relations between
markets, hierarchies, and production, although Stinchcombe framed his observations according to his
own themes of information-processing and decision-making systems [234]. Table 5.31.1a outlines the
centralities and variations of hierarchies, markets and networks.
476
Table 5.31.1a: Three m ajo r institutional arrangem ents in com parison:
centrality and variations
C ategories Hierarchies M arkets Networks
Exchange modes Position-oriented; Goods-oriented; Relation-oriented;
Incentive of Authoritative Voluntary, Reciprocal,

social choice effective efficient; flexible;
Regulatory Coercive penalty, Sanctions, Termination of

regime status-related; exist & voice; relationships;
ownership rights & restrictions by
legal contracts; norms;
Monitoring Visible hands: Invisible hands": Reputation:

Regulators supervisors, agents, decided by
delegated to contractors; members of n
administrators;
Dominant game Group Individual Both group

strategy* efficiency; discretion; efficiency &
individual
discretion;
Coordinative Vertical, Horizontal, Flat,

structure internal; external; both internal
& external;
Bargaining Weakest; Strongest; Reciprocal [235],

contracts employment law enforced; trust-based;
commitment;
Information Controlled by Diffused among Technologically-,

symmetry insiders; outsiders; commercially-, ar
culturally-linked;
Operation Managed; Transacted; Interacted &

embedded;
Sectorial Low-tech nology Stocks and Subcontractors

concentration infrastructure; mobile capital; & consortia;
A ssessm ent
Social benefits* Consistency, Flexibility, Lower information

transitivity, anonymity [236], costs, flexibility with
corporate intransitivity, economic relations,
control, public hybridity with
delegation, transparency, intermediary institutions;
coherence; natural & individual
discretion;
477
(Table 5.31.1a to be continuous)
H ierarchies Markets Networks
Social costs Dominant Laissez-faire Collusion, hard

vested interests, decision-making, budgets constraints,
soft budget minority vulnerabi "team production
constraints, lity, high risks, externalities";
weak individual uncertainties, &
& natural instabilities,
discretion; incoherence,
no delegation;
Alternative Incentive Both regulation & Coordination, induced and

solution to system [237]; deregulation monitored by institutions.
the "Sen paradox" * decentralization;
or social choice [238]
* See our discussion below.
If social structure is conceivable as variable, these three arrangements with reference to social
choices may represent three corresponding ways of coordination in organizing a national economy:
1). Hierarchies: they provide a formal employment-focused coordinative structure (see Miller 1992 and
Komai 1989), involving vertical relationships with long-term commitments between employers and
employees. The incentive of hierarchies is authoritarian effectiveness. Their dominant strategy is to
enhance group efficiency. The associated institutional arrangements are compulsory or coercive through
managerial "visible hands" and political processes. Hierarchies require stable and coherent relations
regulated by bureaucratic power that, in the final decision, can fire employees. The group efficiency
hierarchies assume is actually based on a Pareto suboptimal Nash equilibrium [239] (see the endnote of
Pareto optimal Nash equilibrium below). Hierarchies alternative solution to the "Sen Paradox is to
promote an incentive system by way of power devolution, encouraging market competition.
2). M arkets [240]: they provide opportunities for formal contract-focused coordination (see Williamson
1975, Zucker 1986, and Komai 1989), facing horizontal or non-vertical dilemmas (among equal players),
regulated by agents or contractors linked voluntarily. The dominant strategy of markets is to promote
478
individual discretion by contract law and other economically sanctioned arrangements to facilitate the
operation of the "invisible hand. Markets require flexible and contingent relations, and they are
vulnerable to forces producing oligarchies, monopolies, and increased consumer expenses. Markets
attempt to pursue economic efficiency based on a Pareto optimal Nash equilibrium (see endnote here)
[241]. For markets, an alternative solution to the "Sen Paradox" is to reinforce regulation-monitoring
economic structures.
3). N etworks: Their centrality is "coordination without central authority" [242]. Their incentives are
reciprocity and trust relations, which present most by flat and loosened relations (among equal players),
relative to tightened structural relations, since reciprocity is embedded in social ties and based on
reputations (Figure 5.31.1a here). Networks end (or exit) when trust ends. Trust in China has evolved
from the idea of Guanxi (social nexus) [243]. Networks dominant strategy focuses on both group
efficiency and individual discretion - for a win-win game instead of zero-sum gam e through cooperation
between groups and individuals. Networks signify the convergence of both collective (or socially
cohesive) works and individual works. Networks realize economic efficiency in a Pareto suboptimal Nash
equilibrium; the way is similar to the way of hierarchies. Networks alternative solution to the "Sen
Paradox" is to promote institutionally monitored coordination among partners (also cf. Derong Chen 1995
Chinese firms between hierarchy and market - The contract m anagem ent responsibility system in China,
p. 162, Figure 9.1: Chinese firms between hierarchy and market about market coordination and
bureaucratic coordination).
In the final analysis, hierarchies, markets, and networks represent trade-offs between group
efficiency and individual preferences in terms of delegated authority (hierarchies), transaction costs
(markets), and coordinated trust (networks) [244]. One dilemma facing economic governance lies in the
fact that individual freedom is never absolute; it is always relative and constrained. If absolute freedom
did exist, then there would be no such thing as group efficiency. Rational individual actions would be
pitted against others rational individual actions.
479
Figure 5.31.1a: Structural reciprocity among hierarchies, markets, and networks (heuristic)
Label:
Institutional arrangements by organizational verticality:
H ie ra rc h ie s ; Markets; ............. Networks
(Steep) (Moderate) (Flat)
5.31.2 Chinas decentralization reforms - From a perspective of firm hierarchy
In Chinas former planned economy or state commanding economy, the economy could not be
separated from the structure of the state hierarchy. According to Boisot and Child 1988 (512), China was
a single big firm. As such, hierarchical reforms and strategies could be critical to Chinas transition from
a former planned economy in both theory and practice. In terms of theory of hierarchical reforms, one
could back to the Sen paradox, posed by A. Sen in 1970, 1976 (also, cf. K. Arrow 1962, 1963, and
1986; A. Alchian and H. Demsetz 1972; and G. Miller 1992) [245]. According to Miller (1992) the Sen
Paradox recapitulates those rationales of game theory for alternative firm/hierarchy strategies based on
rational choices [246]. In my view, the Sen Paradox could even go beyond choosing hierarchies on other
institutions in general. The dilemmas of choice between group efficiency and individual preferences are
in many ways analogous to hierarchy-market dilemmas.
According to the Sen Paradox, hierarchy per se is an unbalanced arrangement in favor of
480
authority rather than individual preference. A balanced alternative is desired and could be chosen in the
form of hierarchical decentralization through a sort of trade-off between individual choices and collective
choices, the trade-off that is decided by authority in favor of retaining authoritys control. As Miller
stressed, "a trade-off must be made in decentralized hierarchical decision making" [247]. This is so
because any choice and arrangement has its weaknesses and costs as well as its strengths. As Miller
perceived, decision making by a delegated authority or/and in the back of rational plannersand
individual actors minds becomes convoluted with the institutional dilemmas between group efficiency
and individual preferences and the dilemmas between Pareto optimality and transitivity that affect
organizational choices (see endnote here) [248]. It is conceivable that such institutional dilemmas are also
associated with dilemmas between stability and speed and between protection and competition, as state
managers and reform planners choose their strategies and plans (see Chapter 4). And as I have already
argued, these dilemmas are embedded in social structures, institutional environments, and historical
contexts.
To a delegated authority or an hierarchical arrangement, the Sen paradox provides a
background for organizational choices and decision-making.
1). Decision making is bound to four characteristics - efficiency, transitivity, coherence, and delegation -
all of which are combined [249].
2). Decisions made by a hierarchy are often mutually inconsistent, favoring either inefficiency or
intransitivity in social/group choice [250].
3). Each decision generates trade-off of efficiency, transitivity, coherence, and delegation. And the trade
offs themselves may be either substitutive or complementary. For instance, market-oriented
arrangements with individual incentives can be regarded as either alternative arrangements to
hierarchical control and group efficiency or supplementary arrangements to hierarchical
control and group efficiency.
4). As shown in Miller's arguments regarding the Sen paradox, if the net outcome is an aggregation of
individual preferences, the decision-making by a delegated authority may not be particularly
481
efficient but may still be the preferred arrangement.
5). Any social choice in hierarchical arrangements entails certain social costs. Once an hierarchical
choice arrangement becomes established and legitimated into the formal structure of institutions,
it becomes very hard to break down unless it generates extremely heavily social costs. The legal
procedures and rules make such an effort at institutional change very costly and time
consuming. The greater the breadth and depth of such a change, the greater the risks and costs
the changes would entail.
To select a proper hierarchical arrangement, either formal or informal, one has to m ake a cost-
benefit analysis that considers trade-offs between group efficiency and individual rationality, reliability
and flexibility, and stability and instability [251]. In principle, group efficiency corresponds to formality,
stability, reliability and coherence, while individual rationality corresponds to informality, instability,
flexibility and discretion. Figure 5.31.2a illustrates the trade-offs between flexibility/reliability,
stability/instability, and formality/informality when as a firm hierarchy chooses its organizational design
Figure 5.31.2a: Tradeoffs in organizational design
* Flexibility Reliability Reliability Flexibility

fhiahl (high) (high) (high)
Reliability
ility Flexibility Flexibility Reliability
(low) (low) (low) (low)
Informality Formality Stability Instability
Organizational Environmental
Note: Arrows indicate trade-offs between selected categories.
The above figure suggests that the greater the environmental stability, the greater the need for
reliability, and the greater the need for organizational formality. Similarly, the greater the environmental
instability, the greater the need for flexibility and the need for organizational informality. But what
482
organizational design is actually selected depends upon given circumstances and the preferences of a
variety of actors that could include the state, institutions, organizations, and individuals [253]. And at any
given time in history, political, historical, cultural, or ethnographic factors will affect what kinds of trade
offs are desired specific to the institutional environment.
According to the theorems drawn from the Sen paradox, Table 5.31.2a constructs a simple
heuristic four-cell model based on game theory. The four cells correspond to different dominant
strategies for desired institutional arrangements -- market, network, U-form hierarchy, M-form hierarchy.
These strategies are shaped according to information and resource accessibility (to which the thickness
of institution matters), according to the preferences of players (to which expectations matters), and
according to particular contexts and timing (to which the depth of history matters).
Table 5.31.2a: Dominant strategies for desired

Institutional arrangements (heuristic)
Group efficiency
No Yes
1. Market 2. Network . Scenario of 1 & 4: horizontal

Yes competition & vertical coordination
Individual (formal mechanism)
rationality
No 3. U-form 4. M-form Scenario of 3: conflict
centralized decentralized (formal mechanism)
hierarchy hierarchy [254]
. Scenario of 2: trust
(informal mechanism)
As indicated in Table 5.31.2a, the dominant strategies (market, network, U-form hierarchy, M-
form hierarchy) are outcomes of searches for combination of delegated authority, incentive, and
coordination with reference to the given respective social structures and contexts [255]. Cells 3 and 4
distinguish between U-form hierarchy and M-form hierarchy, as Chandler elaborated in 1966 [256]. In
1993 Qian and Xu contrasted Chinas M-form hierarchy with the Former Soviet Unions U-form hierarchy.
The scenario for Cell 1 (market competition) and scenario for Cell 4 (M-form decentralized hierarchy), for
example, address different strategic approaches to efficiency, transitivity, coherence, and delegation in a
483
national economy. Cell 3 (U-form centralized hierarchy) represents a scenario of vertical conflict between
the central government and local authorities in a former planned economy (as Qian and Xu criticized in
1993) as well as an hierarchical form of vertical integration between bureaucracy and management in a
firm (as Chandler explored in 1966) [257]. Cell 2 (network) represents an intermediary arrangement in
bridging gaps between Scenario 1 (market cooperation) and Scenario 4 (M-form hierarchical
cooperation) and works in both formal and informal ways, while leaning toward informality. As regards
the dominant strategy or social choice in a national economy, the demarcation between these scenarios
may not be clear-cut, inasmuch as they sometimes substitute for or complement each other [258].
The ideas of Table 5.31.2a can be used to explore transitional paths across societies, a thesis
that Boisot and Child proposed in 1996. Table 5.31.2b makes the same heuristic constructs to locate
different scenarios using the countries as approximate cases.
Table 5.31.2b: National dominant strategies for the desired

Institutional arrangements (heuristic)
Group efficiency
No Yes
1. Market 2. Network . Scenario of 1 & 4: horizontal

Yes competition (N/A) & vertical coordination
Individual (USA) (formal mechanism)
rationality
No 3. U-form 4. M-form . Scenario of 3: conflict
centralized decentralized (formal mechanism)
hierarchy hierarchy
(FSU) (China) . Scenario of 2: trust
(informal mechanism)
In the above four grids, Scenario 4 supposes that China chooses its method of M-form hierarchy.
Scenario 3 assumes that the FSU chooses its method of U-form hierarchy. And Scenario 1 assumes that
the US chooses its method of market competition [259]. As far as scenario 2 Network is concerned, so far
no country has selected such a method as its dominant strategy. Given all the above scenarios, it needs
to be remembered that any chosen strategy is not unalterable but is always contingent, open to
alternative changing environments and contexts [260]. This has been the case in both Chinas and
484
Russias transitions, as follows.
China's transition: 4 --> 2 - > 1: China moved from an M-form hierarchy, through an intermediate
network stage toward a quasi-market economy becoming less reliant on kinship and
family networks through secondary markets;
Russias transition: 3 --> 1 --> 2: The former Soviet Union moved from a U-form hierarchy
Toward a de-institutionalized laissez-faire market economy, a backward move that
market transactions and business deals, often made in informal settings, are mainly
reliant on kinship and family networks through secondary markets.
Therefore, China's strategic moves toward a market economy are seen to be moving indirectly.
Unlike Russias transition since 1991 through surgical-like operations, Chinas transition has followed a
low-key approach for risk diffusion, relaxation of central control, and delegation of authority to local
settings. Chinas decentralization and devolution have wound up in a de-facto federal system [261]. As
China started its decentralization reforms, it tried to maintain a balance between group efficiency and
individual preference. China realized it had to provide incentives both to boost local activism and to
inspire individual, citizenship-based, entrepreneurship.
W hen China attempted a decentralized, market-oriented approach, it selected a flattened out M-
form hierarchy with a two-pronged end [262]. To self-interested rational individuals, Chinas decentralized
hierarchy confronted entrepreneurs with a social dilemma, since the more talented entrepreneurs
wanted to start their own activities in order to maxim ize their profits [263]. To China's state managers and
reforming planners, however, relaxation of controls to permit individual activism could not be made at
the expense of group efficiency (the "group" being either the communitarian collectivity or the national
public) [264]. According to Chinese perspectives, the state could both encourages individuals with
entrepreneurial incentives and conjures up and restructure collective activism through bureaucratic
devolution.
485
In the eyes of Chinas leaders, the FSU's radical transition was untenable and dangerous
threatening national security and social order and inhibiting both short-term and long-term opportunities.
Such a radical transition by China would generate enormous social costs and leave the country with few
self-sustaining mechanism [265], capable of regulating the free fall of market transactions and balancing
individual incentives, group efficiency, and national cohesion and social equity.
During the last two decades of the 20th century, China appeared to manage its evolutionary
reforms effectively. So the question would be why it could not continue to do so [266]. Chinas
decentralized reforms seemed to be safer and more feasible than immediate market transitions, while its
economic hybridization en route toward a quasi-market economy facilitated the transition of state and
non-state sectors and helped them deal with the social dilemmas of efficiency and legitimacy. Chinas
current regime might still take stability and control as priorities, assuming that too much individual
freedom and too many entrepreneurial incentives would only thwart social cohesion and diminish group
efficiency.
The social dilemma that Chinas reform regime faced was similar to Millers "managerial
dilemma" (1992), or Millers version of the Sen Paradox. Miller points out the managerial dilemma is
apparent even within a hierarchy, when the hierarchy needs to screen out problematic individuals whose
preferences are in conflict with collective commitments. Organizational decisions are often vulnerable to
obstruction by the collusion of individually-based vested interests [267]. It is particularly hard for
organizations to maintain collective commitments at sam e tim e as they are boosting individual
incentives. In the case of a transitional economy, one might infer from Millers "managerial dilemma" that
it would be hard for any state government to streamline its economy or for a firm hierarchy to reduce
transaction costs to the extent that Williamson contemplates. The upshot might not be an "ideally"
efficient for organizations [268]. It is, however, possible that decentralization as an alternative to
hierarchical group efficiency is able to reach Pareto suboptimally if not optimally. By delegating partial
486
discretion as incentives to local individuals, groups, and institutions, the state may find suboptimal
approach as desirable to promote its institutional reforms. The incentives might promote not only
individual entrepreneurship but also activism of organizations and institutions of all levels. Albeit such an
improvement of group efficiency might not be structurally perfect, it might be able to deliver palpable
benefits to locals and individuals and make them better off.
A couple of scenarios revealed by the Sen Paradox between individual incentives and group
efficiency suggest options from which the state government might choose in order to establish desired
institutions and implement dominant strategies (Table 5.31,2c here).
Table 5.31.2c: Desired hierarchical forms to implement

dominant strategies (heuristic) I269]
Choice Individual preference
Non-incentives (Iron Bowl) Incentives
Centralization X: Y:
Hierarchy's best outcome N/A
individual's second-best (in conflict)
Hierarchical outcome;
choice
Decentralization Z: W:
N/A Hierarchy's second-
(Implausible) best outcome
individual's best
outcome
Note: The above scenarios letters (X, Y, Z, and W ) are the same ones used by Miller (1992) [270].
The 4 cells in the above table list different scenarios: X, Y, Z, and W . These scenarios illustrate different
strategic choices through trade-offs between individual employees and a firms authority (cf. Miller 1992,
86-88). According to Miller, once a dominant strategy is chosen, one scenario prevails over another (see
Table 5.31.2d and discussion below).
According to Table 5.31.2c, hierarchies and individuals have two options each in decision-making.
Assuming that hierarchies represent state governments, hierarchies have to choose either centralization or
487
decentralization, and individuals have to choose either incentive systems or non-incentive systems. Note: the
non-incentive system dubbed the Iron Bowl system in China, referred to Chinas life-time employment system
under its former planned regime, a system that provided state employees with life-time protection (equal
wages and job opportunities, rationed goods, medical care, and other subsidies) but restricted individual
entrepreneurial activities. This represented in Scenario X. In Scenario W individual within the hierarchy select
the incentive system as their dominant strategy, as they espouse decentralization reforms. These two
scenarios illustrate Chinas early transition from its previous planned regime en route to its transition. Table
5.31.2d illustrates transitive preference ordering for both hierarchy and individuals:
Table 5.31.2d: Transitive preference ordering for both hierarchies and individuals
Individuals Hierarchies
W X
X W
Y z
Transitive hierarchical choice ordering:
X beats W (hierarchy is decisive; in favor of the established regime and central planning)
W beats X (individual is decisive; in favor of the reforming regime and decentralization)
Y is eliminated (centralization and incentive are in conflict and thus this cell is vacant)
Z is eliminated (implausible or illogical and thus this cell is vacant, see Table 5.31.2c).
For instance, when Chinas state leaders were committed to transition, it was imperative for the
government to pump up individual entrepreneurship and local activism. Hence the states dominant
strategy was "W beats X" in favor of decentralization and the relaxation of state control. This was
contrary to the scenario under the former planned regime favoring an X beats W" strategy for
maintaining state dominance.
The linchpin to an economic transition is to solicit economic coordination instead of
economic conflict; decentralization ought to encourage players coordination and discourage
their conflict and solicit both hierarchy and individuals for their consensus, activism, and
cooperation. In China, the decentralized hierarchy accepted individual preferences as an increasingly
488
larger part of their consideration of decision-making during transition. But the state officials recognized
that both local constituencies and individual employees might still feel unsatisfactory and attempt to
retain the Iron Bowl system as long as they sensed their work remained exploited by the
government/hierarchy officials. These same officials recognized that they might feel the same way if the
local constituencies and individual employees were allowed full discretions, and they themselves lost
control over resources and information vital to the scale economy of the state and/or the firm (such as a
capital-intensive R&D program). Together, these new situations could affect the scenarios characterizing
Chinas transition toward a (quasi-) market economy. Thus a modification of above Table 5.31.2c might
be necessary to reflect these new situations and scenarios, with an increased amount of individual
preferences and a reduced amount of hierarchical control. Table 5.31,2e reshuffles the above transitive
hierarchical choice ordering in Table 5.31.2c as follows,
Table 5.31.2e: Modified desired hierarchical reforms to

implement dominant strategies (heuristic)
Individual Preference
Choice Incentive Non-incentive (iron bowl)
Decentralization X: Y:
Individuals best scenario, Net profits of both individuals
hierarchy's best scenario and hierarchies decrease
Hierarchical
choice
Centralization Z: W:
Increase in individuals shares, Individuals worst scenarios
Decrease in hierarchy shares hierarchys worst scenarios
Suppose Chinas state/hierarchy wished to promote local activism and individual
entrepreneurship [271], despite the Chinese hierarchys traditional reluctance to interfere in local affairs.
For many centuries, a succession o f central governments has lacked capacity to interfere. There is an
old Chinese expression: Heaven is high and the Emperor is far away (cf. Boisot and Child 1988, 512).
But Chinas new regime launching decentralization as its dominant strategy wanted to promote local
activism and individual entrepreneurship by providing more economic incentives and managerial
discretions [272].
489
Thereby Table 5 .31 ,2e proposes a couple of scenarios facing both state/hierarchy and individual
employees in transition. Cell Z emphasizes that if individual workers and local cadres take
entrepreneurship as their best strategy but their state/hierarchy stays with centralization, those individual
workers and local cadres are still likely to increase their shares of net profits; and the state/hierarchy will
come to realize that its share of net profits will decrease if it fails to change its policies. This was the
situation prior to China's decentralization. Cell Y offers a scenario in which the state/hierarchy realizes
that hierarchical change as indispensable, while most individual workers and local cadres resist the
changes and are hostile to the states decentralization. If most individual workers and local cadres
continue to play the "iron bowl" gam e, then, the hierarchys net profit will drop for two reasons -
slackened hierarchical regulation and excessive costs from the inactive individuals. But individuals
share of the net profit would also decrease due to their inaction or slack that would threaten the net profit
growth and the survival of the hierarchy. This scenario most likely happened during the S O E reforms.
Given that these two scenarios are either unpopular or unfeasible, a rational choice for both groups and
individuals would be for the hierarchy to select decentralization and for those individuals to select
incentive for competition - a scenario that Cell X offers. Then the gross profits of both individuals and
the state/hierarchy would multiply due to their cooperation and coordination, since social chemistry (as
such, trust and consensus-based activism) would greatly reduce the social costs associated with
irreconcilable antagonism or conflicts. As Chinas decentralization reforms have shown, the net outcome
could assure a win-win situation to both individuals and state/hierarchy instead of a zero-sum game for
both sides. Cell W describes the worst scenario for both sides due to the lack of such social chemistry.
This scenario could occur only when Chinas transition would abort, leading to a setback to its pre-
transitional era.
Table 5.31.2e can be further modified (see Table 5 .31 ,2f below) to analyze the rationales of
Chinas strategic choices regarding its state sector and non-state sectors through decentralization reform.
490
Table 5.31.2f: Non-state sectors and state sector before and after
reforms (heuristic)
Non-state sectors State sector
Strategic Before reform W: X:

choices Limited incentives Non-incentive (iron bowl)
State-dependence Centralization
Increase in individuals shares, Individuals worst scenarios

decrease in hierarchical control hierarchy's worst scenarios
Y: Z:
After reform Incentives Limited incentives
decentralization decentralization
Individuals best scenario, Net profits of both individuals

hierarchy's best scenario and hierarchies relatively increase
As Cell W reveals, although the non-state sectors prior to reform were partially state dependent,
their semi-autonomous nature was attractive to those individual workers and local cadres because, with
less hierarchical control, they were able to enjoy limited economic freedom and increase their income
shares. By contrast, as Cell X shows, under the command of a centrally-planned economy the workers
and cadres in the state sector had no incentive to improve their performance and make their
contributions. That led to economic stagnation. During the transition, the state/hierarchy realized the
importance of individual incentives and a hierarchical change in the economy. As seen in Cell Z, the
state sector gained some incentives through decentralization reform. But the incentives to the state
sector remained limited, since the reform was retarded by the resistance of vested interests among
workers and cadres in the state sector who resented the states decentralization. Individual workers and
local cadres played the "iron bowl" game during the SOE reforms; and the hierarchy's net profits were
reduced by slackened hierarchical regulations and excessive costs from inactive individuals. The
individuals share of the net profits also decreased due to their slackness or inaction that threatened the
growth of net profits. Given all these scenarios, Cell Y s scenario in non-state sectors was most rational
for both groups and individuals, because the states decentralization reform offered those individual
workers and local cadres in the non-state sectors sufficient incentives for market competition through
harder budget constraints. Thus the gross profits of both individuals and enterprises multiplied through
491
their cooperation and coordination with the state after reform. This Cell Y describes the best scenario for
both individuals and the hierarchy; whereas Cell X describes the worst scenario for both individuals and
the hierarchy due to lack of such chemistry in terms of cooperation and coordination.
Since this game is not "dominance solvable," no answer is actually found to dictate an ultimately
dominant strategy. The solution thus involves a search for Nash equilibrium. And such a search, while
imposing certain requirements for the game, would elicit coordination between the state/hierarchy and
individual workers and local cadres and certain institutional mechanism to enact and reinforce the
coordination. It is however debatable as to whether or not China through its decentralization reform is en
route toward a segmented society, as Boisot and Child expected in 1996, a segmented society that
assures an economic system that is vertically as well as horizontally networked [273].
My caveat here is that the complexities in choosing hierarchical arrangements cannot be
reduced to a number of analytic options listed in tables and drawn on game theory. Social choice-making
is not identical to game-playing, since reality is much more complicated than an analyst could expect.
Choice-making is sensitive not only to the theoretical assumptions but also to timing, information
availability, actors' bounded rationality, and many other contingencies [274].
My above analysis provides some theoretical insights into how different players might react to
the states dominant strategy for choosing hierarchical arrangement in transition. It also shows how the
choices made by state government could deal with market-hierarchy dilemmas. As I mentioned in
Chapter 3, further research needs to pay more attention to contents than forms [275]. The remainder of
this section will provide a substantive analysis of how Chinas economic hybridization and
decentralization reforms emerged during its transition, and how they fared in tackling the dilemmas of
Chinas transition, specific to Chinas historical contexts, circumstances, and contingencies.
492
5.32 Chinas hybridization
In earlier chapters I held that institutions as the drivers of transition are rooted in social choices,
which are historically derived. Nothing could better illustrate this thesis than the emergence of Chinas
hybrid economy during its transition [276]. As Boisot and Child stated (1996, 617),
Another feature of growing importance in the Chinese economy, in which government

agencies are often active partners, is the development of various forms of hybrid firms
(cf. Borys and Jemison, 1989; Su 1994). These organize business activities across
ownership forms and systems and include Sino-foreign joint ventures, Sino-Sino joint
ventures, and partnerships between state, collective, and private ownership forms...
The emerging hybrid economy could be viewed as an endorsement, rationalization, and
977
promotion of what is already going on in many local areas [ ]. As Nee et al. explained (1989, p. 31),
The plurality of property forms in reforming socialist societies thus is giving rise to a
hybrid version of socialism that accepts practical compromises and mutually
contradictory principles as a given condition of social life.
5.32.1 Chinas hybrid economy
As R Boyer perceived, hybridization facilitates geographical expansion and diversification through
flexibility and innovation specific to certain contexts [278j. The contexts of Chinas transition include its
huge continental economy, complicated local contingencies, long civilization, and constant error-and-trial
experiences. Consider China's regional economies alone; some of China's regional economies are
comparable in size to some southeast countries (Figure 5.32.1 here). And uneven regional development
in China has been the main source of Chinas increasing gaps of income distribution.
493
Figure 5.32.1: Chinese regions vs. Asian countries or areas
GDP, 2000 ($bn) 0 100 200 300 400 500
South Korea
Taiwan
Yangtze Delta
Indonesia
Hong Kong
Thailand
North-East China
Pearl River Delta
Beijing Metro
Shandong
Singapore
Malaysia
Phlippines
Fujian
Vietnam
Chinas regions
= 3 Other Asian countries or areas
Source: Consensus Economics; Ohmae & Associate; cit. Financial Times, p. 22, Tues. June 18, 2002
To deal with these complexities, Chinas economy simply could not function well under a single
design [279]. Even though Chinas conservative hardliners wanted the planned economy to remain intact,
the state had to find out a wider range of options for survival. The most available options were those
non-state activities already taking shape and activities rising in local economies such as rural enterprises
(TVEs, COEs, and individual and private entrepreneurs), and joint ventures with SO Es and foreign
partners. These sectors became much more dynamic than the state sector. In this way Chinas hybrid
economy evolved from a fragmented industrial base, dispersed agricultural production, that was
localized and flexible, and flourishing rural industrialization that accompanied the shareholding-
cooperative system (SC S) or the so-called emergent moebius-strip collective ownership [280]. Each of
these hybrid forms could be considered another way in which Chinas continental economy had
responded to emerging localized complexities within its wide-ranging boundaries.
Another unique feature of Chinas hybrid economy is its M-form regionally-based hierarchy. This
494
can explain how Chinas reforms in different sectors varied in terms of dyssynchronization and
uneveness according to different hierarchical levels and geographical sites. As Cao et al. summarized in
1999,
...over time the reforms expand in scope to include new issues, often being initiated at
different levels of government: Agriculture reform began at the household level; TVEs at
the village and township level; privatization of SOEs at the county level; lay-offs of state
workers at the city level; and marketization at the provincial level. This vertical non-
uniformity has progressed steadily and has continuously generated substantial pay-offs
over the past two decades. Together, these reforms have led Chinas transition into a
new stage.
The emergent hybrid forms entailed dynamic interplay between markets, hierarchies, and
networks. During Chinas transition, its economy has actually differentiated into hybrid sectors in terms of
ownership structures. With new divisions of labor and ownership, each sector has evolved in its own way
in pursuit of its own entrepreneurship, although overall, hybrid sectors complement each other in their
contributions to Chinas national economy. According to Nee (1992), SOEs are more likely to be
hierarchical and to follow central plans, whereas COEs, TVEs, private enterprises, joint ventures, and
others are more likely to make arrangements with local markets and networks. Table 5.32.1a compares
nine types of hybrid economic enterprises that existed in Chinas pre-transitional and transitional eras,
281
according to their approaches to coordination and their actual administrative structures [ ].
495
Table 5.32.1a: Some of Chinas hybrid economic enterprises (heuristic)
Approaches to coordination
Administrative
structures
State-led Company-led Negotiated/ Individual
(hierarchy-based) (hierarchy-based) Ambiguous (contract-based)
(consensus-based)
Centralized executive: 1. Pre-transitional n/a n/a n/a
Semiautonomous with central SOEs
extensive discretion (large; statist)
Centralized executive: 2. Pre-transitional 3. Pre-transitional n/a n/a

Semiautonomous with local SOEs urban COEs
limited discretion (medium; statist) (small; flexible)
Decentralized executive: 3 .Transitional 4. Transitional 5. Pre-transitional n/a

Limited autonomous central SO Es central SOEs rural COEs
executive (large; flexible) (medium; flexible) (small; flexible)
Decentralized executive: n/a 6. Transitional n/a n/a

More autonomous local SOEs
executive (large/medium/small;
flexible)
Virtual discretion of n/a 7. Transitional SOEs 8. Transitional 9. Private

executive /COEs/TVEs/ COEs/TVEs
(large/medium/small;
private (medium & small; deregulated)
(large/medium/small; deregulated)
deregulated)
As shown above, most SO Es were those large-sized enterprises, while most COEs/TVEs were
medium-sized and most private enterprises were small. But things changed rapidly, particularly in the
late 1990s, when more and more larger private firms emerged. Because of applied methods of
administration and coordination, each sector underwent its own transition, following the states
decentralization regulations. Many SOEs, including some larger SOEs, were transformed from their
previous state-led governance to flexible governance, either currently state-led or company-led, while the
COEs/TVEs were transformed to operate with deregulated governance, or flexible and negotiated
coordination. By type and degree of administration (i.e. actual structure of administration"), SOEs after
decentralization remained relatively hierarchical, whereas COEs/TVEs gained more discretionary powers
and engaged in consensus-building negotiations with the state for resources and information. Private
496
enterprises mushroomed after decentralization. They could be either hierarchy-based, or contract-based,
or network-led, depending on what kind of administration base they had, either company-led or
entrepreneurial-individual-led.
Here hierarchy-based administration could mean either executive control from a parental
center or executive control from firm hierarchy such as a board of directors. Contract-based
administration could mean monitoring by a third party such as accounting, banking, or insurance
institutions or individual trustees. Consensus-based" administration could mean a greater role for
personal trust relationships in monitoring and reinforcing agreements. In summary, hybrid transitional
SO E s, a ltho u g h hierarchy-based, were flexible; w hereas C O E s/TV E s and private enterprises w ere
m ore deregulated, m arket-induced a nd /o r local netw ork-em bedded.
In 1992 Nee compared individual factory directors (FD), cadre-entrepreneurs (CE), and private
entrepreneurs (PE) in terms of their individual entrepreneurial behavioral indicators (see Table 5.32.1b).
T ab le 5.32.1b: N ees com parisons o f factory directors (FD ), cadre-entrepreneurs (CE),

and private entrepreneurs (PE)*
Behavioral indicators FD CE PE
Autonomy 0 + ++
Risk taking and innovation 0 + ++
Entrepreneurial incentive 0 + ++
Profit maximizing 0 + ++
* ++ = strong; + = semi-strong; 0 = weak.
Source: Nee 1992, p. 13, Table 2.
In the above classification, individual factory directors (FD), cadre-entrepreneurs (CE), and private
entrepreneurs (PE) correspond to marketized firms (MF), non-marketized firm (NF), and private firms (PF),
respectively. Som e large-sized SOEs continued to be non-marketized firms (NF), while most of medium-
and small-sized SOEs, TVEs, COEs, and private firms were marketized firms (see my Chapter 2).
497
Overall, therefore, marketized firms edge over non-marketized firms in pursuit of their entrepreneurship.
Hybridization in China facilitated economic interconnections and internal mobility, and
tantamount to or synonymous with the creation of a quasi-competitive milieu when China had not yet
established its mature market institutions. This quasi-competitive milieu was sufficiently dynamic and
innovative to upgrade performance among various economic sectors, reduce transaction costs, lower
social risks, provide more options, and thus maintain social cohesion [
282
]. These processes in turn saved
,
costs, eased resource access, and channeled information flows. Hybridization required economic players
as joint partners incorporated into an economic game. At the administrative level (a constitutionally
divided power system), these players included a central power and regional and local constituencies. At
the economic organizational level, these players were SOEs, TVEs, and COEs, as well as joint ventures,
some of which included foreign capital, overseas Chinese capital, etc. After Chinas entry into the W T O ,
the ownership of these joint ventures will most likely be shared by both China as the host country and
foreign partnerships from other countries, as China will eventually remove all restrictions on the sharing
ownership according to its agreement with the W TO .
The political economy of hybridization points out that the hybrid sectors like any supporting or
supplementary sectors, could functionally uphold China's exit from a politically-based polarized economic
system, either under its previous centrally planned economy, or under a shock therapy of sweeping
privatization. Hybridization helped China avoid a transition that might have led to a total economic
collapse and crisis. W hat makes hybridization especially important to transitional economies is its
creation of middle constituencies (e.g., those non-SOE and non-private sector constituencies arising
from decentralization reforms under an M-form hierarchy), not necessary middle classes - a Western
notion ~ , since the intermediary areas could cushion possible polarized tensions so that makes transition
could be easier, more gradual, and more feasible [283]. These intermediary areas may further multiply
alternative and/or complementary trajectories for transition while minimizing their costs. In this sense, the
hybrid economy functions like a quasi-federal system through power devolution and re-centralization that
498
helps to sustain and support social cohesion, a prerequisite for any national economy. But I have to add
a caveat here: hybridization is not ultimately a root cause of economic development. W hen an economy
is on a downturn, hybridization might even lead to social fragmentation. If social cohesion is mission,
social exclusion could surface, social solidarity, diversity, and stability could decrease, and de
institutionalization could follow [284j. Consequently, hybridization could be destructive to an economy (see
my discussion about the varied possibilities of an economic hybridization in the next section below).
Kornai's (1989) and Nee (1989, 17) might criticize Chinas hybridization reforms as being, at
most, "partial reforms with "dual dependence [285J upon both hierarchical governance and market
competition. They worried that, sandwiched between two divergent or contradictory ends, hybridization
would generate the worst scenarios rather than tapping the benefits from both hierarchical governance
and market competition [286]. Despite their criticisms, Chinas state government adopted hybridization as
a moderate approach to minimizing the costs of transition and buffering the social tensions
accompanying the growing gaps. China has managed to integrate its intermediary strata, even with little
support from an ascendant middle class or still vulnerable capitalist class, classes that appeared to be
prerequisites for Western industrialization. These intermediary strata function as surrogate agents
complementary to the state/hierarchy. They help the state mobilize more strata and strengthen the
economy, since those intermediary areas draw a larger share of the capital investment and the G D P and
thereby help guarantee the survival of the entire system.
Chinas hybrid economy has helped state agents maintain the confidence of Chinas cost-
conscious public. It has enabled China to rid itself of the legacies left by the former ultra-leftist regime
during the Cultural Revolution. Without the hybrid economy, it would be very tough for Chinas state
reformers to rebuild institutions, having led earlier reforms and then jettisoning the preexisting systems,
in 1992 Nee modified his model and softened his stance by clarifying that "under conditions of partial
reform," "hybrid forms enjoy a transaction cost advantage over alternative governance structures"
(1992a, p. 4). And he further underscored some particular institutional dynamics in China hybrid
499
economy [287]. Nee added that "a mixed economy characterized by a diversity of organizational forms
and a plurality of property rights will be a persistent feature of transitions from state socialism" (Nee
1992a, 1) [288]. Nee further predicted that such an economy would eventually be dominated by a "state
marketing system" (ibid, 11) and would "become vulnerable to legal complications arising from these
blurred property rights" (ibid, 17), since a mixed economy would be susceptible to ambiguously or
vaguely defined property rights [289]. As such, Nee worried that that loopholes would be left whereby in
the future the state could encroach and expropriate portions of the private sector in the disguise of the
public good [29], and that would exacerbate the problems of inefficient soft budgets [29i], But as Qian and
Xu contended in 1993 (157), this worry could be challenged because it was "less clear at this point
whether such a hybrid economy with decentralized reforms was "a mere transition phenomenon" or was
sustainable for a long time" I292]. One could argue that the longer a hybrid economy can be sustained de
facto, the greater the likelihood that the hybrid economy could be locked or etched into the structure of
ongoing "metis forms dejure.
From an historical perspective, the preexisting institutions are ineradicable shared parts of the
existing institutions and of any future mutations evolving from the existing institutions [293]. Thus any
institutional search for ends-means structures should not be separated from their preexisting institutions;
and that makes the study of hybrid economies extremely important, since hybrid economies are
relational, compromising, and bargaining through constant trade-offs. Chase-Dunn in his 1993 "Global
Formation" underlined the constructive role o f "semi-peripheral" strata in the world system that could
help lower-strata countries (peripheries) move up to compete with upper strata countries (cores).
From this perspective, a hybrid economy could facilitate competition among all existing strata or
economic sectors and thereby avoid the dangers that Komai and Nee perceived. To the contrary, the
intermediary strata might enable all strata to move up and thereby benefit the entire economy, as Qian
and Xu envisaged. Along with hybridization and decentralization, the commanding role of the state
apparatus gradually eclipsed, as the role of regional governments and local agencies became salient in
setting market prices as well as in arbitrating the local quarrels of interests conflicts I294].
500
Certainly, a hybrid economy might have its negative side, as Komei and Nee assumed, and that
the intermediary areas could turn their active roles to dilemmas and negative backlashes [295]. For
instance, Chinas hybrid economy showed such a tendency when it pursued the bankruptcy of non
performing and badly-performing SOEs and the abatement of the Partys orthodoxy ideology.
Decentralization and economic hybridization further aggravated regional fragmentation and local
anarchism and dramatized the dilemmas between relaxation and control and between economic
competition and power devolution [296]. However, in face of the increasing local anarchism and regional
separatism, China continued to promote grass-roots entrepreneurship through constructing the rule of
law. W hat was crucial here was the states capacity to incorporate fragmented interests and to pursue its
integrative goals and new opportunities, rather than abandoning its current hybrid economy either by
returning to its former central planning regime or by jumping on the bandwagon of a full-fledged market
economy. Thus China might feel it is imperative for the state to move forward, seeking effective and
flexible ways to solicit cooperation from assorted sectors, industries, enterprises, and from secondary
OQ7
associations of all levels, regional and local [ ].
5.32.2 The feasibility of a hybrid economy for rebuilding of institutions
During the past three decades, China has had to figure out how to initiate and sustain its
transition, while monitoring and minimizing transition costs. China has selected a hybrid economy as a
feasible gambit for its transition. A hybrid economy has enabled China to tackle other critical problems
such as the dilemmas between privatization and centralization (tantamount to dilemmas between market
and hierarchy and between individual incentive and group efficiency), and the dilemmas between
allocating property and controlling rights. In China, if the state reserves a full control of the economy
through its commanding hierarchy, it must pay the extra costs of managing the hierarchy and regulating
restrictions on economic freedom and local entrepreneurship, as Chinas former planned regime did prior
to transition. But when it came to allowing local discretion during the transition, many state officials
worried that the central government might lose its controlling leverage and weaken its resource capacity
501
and advantage.
Particularly during the beginning of China's transition, many institutional barriers were varied by
the centers conservative hardliners who attempted to maintain the states full control, accusing
reformers of inviting extreme high costs for market competition [298]. Taking transaction costs into
account, however, it was possible that a hybrid economy combining the strengths in both market and
hierarchy and in both central and local focus, could reduce total costs further than the regime adhering to
either market or hierarchy alone. The costs of transaction within a hybrid economy could be saved in the
boundaries between the hierarchies and markets, since intermediate arrangements could balance the
costs created by the dilemmas with either hierarchy or market alone. Only if given situations could make
such balances impractical, or if a hybrid economy became not practical, then a full-fledged market
economy in the Western sense or a complete state socialism in the orthodox Marxist precepts would
surface. In 1986 Grossman and Hart argued that residual rights (in terms of a full access), if controlled by
either hierarchy or market, might create structural distortions and lead to redundant uncertainties and
risks. According to this logic, a hybrid economy provided an option to transition that made it possible to
minimize potential risks and costs. Subsequently, China adopted the strategies of joint ventures that
introduced privatization in collaboration with foreign capitals enabling China to reduce investment risks
and cumulate learning experiences [299].
In 1988 Boisot and Child attributed Chinas easier access to decentralization (compared to the
FSU) to the fact that China lacked a formal and rational bureaucracy and thus China never attained a
fully planned economy like the FSU f300]. Accordingly, Chinas transition could not move toward a typical
market economy, as the FSU could, because China lacked the formal conditions and institutions that a
market economy required. Following this argument, when central planning does not function very well,
diversified and decentralized structures might emerge to offer alternative ways to deal with complexities
and uncertainties (Susan Shirk 1989, p. 357). The emergence of a hybrid economy could be seen as an
alternative arising from institutional failures in the previously planned regime. Subsequent occurrences
502
could even reinforce this tendency toward hybridization, for example, when the relations between local
subsidiaries and centers become weaker and weaker and even decoupled, when the national conditions
were available to shape such an economy badly needing balancing between centralization and
decentralization, concentration and deconcentration, nationalization and denationalization, stabilization
and contingencies I301].
Chinas economic hybridization, in tandem with hierarchical devolution, was not only driven by
institutional reforms during transition, but also was an institutional mutation derived from self-adjustment
of the preexisting institutions to the changing environments in given contexts (see Figure 4.2c, Chapter
4). In 1996 Boisot and Child proposed their frame of cultural space to denote Chinas transitional path
and initial approach. I want to add that China took its stand for hybrid economy out of its own concern
that a Westem-style market competition at arm s length would intrude into Chinas social life and break
down its social cohesion. Chinas concern could be traced back much earlier to 1957, when Mao in his
well-known volume To Correctly Handle the Inner Contradictions among the People" identified the
merits of social solidarity to endogenize and reconcile social antagonisms and thus facilitate China's
socialist construction. M aos arguments addressed Chinas strategic culture, reflecting its pragmatic
nature for resilient trade-offs in wrestling with those social contradictions in China's history and its
modem era I302]. The baseline was laid down to minimize the social costs and to institute the nascent
economy so that it could succeed in fighting political obstacles to nation/state building. Mao was
convinced that only such a pragmatic approach could help the new regime survive.
The situation right after China's Cultural Revolution was similar to that in the PR C s founding
years, in that the state attempted its rejuvenation through a short recovery from its past chaos and
devastations. For a nationwide recovery, the state expected a similar political coalition and frame
realignment, co-opting those conservative hard-liners (who committed themselves to the old dogmas of
the FSU), as long as they favored the Partys priority for Economy in Command and opposed the
radicalist Gang of Four. The state needed similar priorities to reduce the risks during its transition, to
503
alleviate the national suffering from the Cultural Revolution, to revive vital sectors of the economy and,
to promote innovative mutants evolving from the previous regime. In so doing, the state realized it
essentially needed similar incentives for the devolution of power from the center to provide the locals
with discretionary power. As Qian and Xu in 1993 witnessed (1993b, 154), Chinas hybrid economy
emerged from such a context:
...the central government is pragmatic and it accommodates its policies to the new situation.
The attitude of the central government toward township and village enterprises is a good
example: it discriminated against township and village enterprises in the early 1980s, then
turned to support them several years later after discovering their vitality.
Informal monitoring and horizontal coordination have been integral parts of Chinas economic
governance embodied under M-form hierarchy. Unlike its Western counterparts, Chinas social networks
contain enough coherent strength to impose certain social pressures on individuals and to solicit social
cooperation from them at same time, albeit the extent of homogeneity in Chinese society is weaker than
other East Asian countries (i.e., Japan and Korea). Chinese society and culture embrace so many poly-
idiosyncrasies associated with geographical heterogeneity and a much longer history of civilization (see
Table 5.32.3b below) f303]. By comparison, Chinas centrally-planned economy was plausibly more fitted
in market arrangements than other centrally-planned economies and Chinas hybrid economy was
plausibly more heterogeneous- and poly-idiosyncratic than its East Asian counterparts. Chinas hybrid
economy under its M-form hierarchy generated and amplified a pluralistic institutional milieu in a way
that provided incentives for regional and local managers to seek profitable activities without
[expensively] ameliorating the existing hierarchies (cf. Chandler 1966). The economic operations under
Chinas decentralized hierarchy were cheaper and more efficient and competitive than those in other
transitional economies, like the FEE and the FSU, that fully subjected themselves to self-regulated
markets.
Historically, Chinas economic governance functioned more through its administration system than its
legal system. Nee used the phrase neolocalist to denote Chinas economic governance that had been
administrative-planned and regionally-based (cf. 1992a, p. 6). Hence taking what kind of hierarchical
504
form for the regionally-based governance is decisive. As Qian and Xu 1993 emphasized, the transaction
costs to manage an economy such as Chinas hybrid economy and to develop regional core
competencies within a decentralized, multi-tiered structure were relatively less expensive than they were
in the FSU and FEE. With its decentralized M-form hierarchy, China could fit into its fast-growing
economy and diversified sectors various actual linkages for coordination, cooperation, competition, and
flexibility while still maintaining existing control. Otherwise, either retaining a strong control and close
collusion or arranging legal contracts among the different parties would demand unaffordable expenses
of monitoring and controlling and limit the development of core competencies and diversification at local
and central levels. It turned out that China started its transition from economic hybridization and
decentralization in terms of bureaucratic reforms. Another benefit of this approach was the fact that
economic units refrained from rapid and frequent changes in ownership as was the case in the structural
transformations in the FSU and the FEE, or like frequent acquisitions and mergers in the W est I304]. A
frequent consequence of ownership instability is the erosion of economic performance in production,
management, and service, something that China could ill afford in its transition.
One might note that many of Chinas early trial-and-error experiments occurred in this arena. In
1993 Qian and Xu identified the benefits of M-form hierarchy and decentralization for Chinas early
transition that could help the locals hybridize their economies and that could serve as an experimental
approach in a less costly way of learning to establish and to use market institutions in transition."
According to them:
...a competent and limited central government combined with many vigorous and
competitive regional governments is the right balance of power for the state in transition.
This amounts to reducing and restricting the discretionary power of the central
government and strengthening the local governments authority in regional reforms and
development at the same time. The scope of the central government's authority should
be restricted, and the central government should be competent in executing only those
reform programs that regional governments cannot or are unwilling to do, for instance,
reforms that are related to maintaining macroeconomic stability and preventing regional
protectionism. The balance of power between the central and regional governments has
several benefits: (1) Decentralization helps to create competition among regions, (ii)
With less discretionary power by the central government, regional transition and
development will be less affected by fluctuations in central government policies. This will
reduce uncertainties resulting from politically opportunistic behavior or from power
505
struggles between different factions of the central government. And (iii) a better
commitment can be achieved with the limited discretion of the central government, so
the problems of the ratchet effect and the soft budget constraints can be
mitigated...given the unprecedented and complicated nature of the transition from
centralized to market economies, an experimental approach may be a less costly way of
learning to establish and to use market institutions in transition. Economic theory does
not provide sufficient guidance for the transition. Other countries experience may be
relevant, but must be adapted to each countrys own situation. By the decentralized
nature of market economy and by the very nature of the transition, a large amount of
bottom-initiated institutional experimentation is needed to acquire knowledge in
transition...To avoid interfering with the normal operation of the economy, these regions
should be located outside the old industrial bases and fa r awav from the central control,
as was done in China. Alternatively, after decentralization and deconcentration of the
state sector, the economy will be more suitable for local experiments (1993b, 158;
emphasis mine).
Chinas existing legal environment alone provides another reason for why Chinas hybrid
economy could be a feasible strategy to start its transition as an alternative to an all-around market
transition considering the high expense of a complete market transition. Comprehensive written contracts
are hard to implement without sufficient professionals, enough expertise, adequate procedures, and
institutional infrastructure in the existing environment. It is worth recalling Williamsons theorems of
economizing on transaction cost (TC T). China chose a different method of controlling and managing
transaction costs than did its Western counterparts. For instance, many of Chinas monitoring operations
and consulting practices could proceed through the existing social networks based on tightened informal
channels and stronger cohesion, mixed with sort of traditional Confucian ethics, communitarian
doctrines, and collective consciousness. In the W est, monitoring operations resorted to those legal codes
and expensive procedures to restrict the opportunism of individual slackers and punish them f305]. Put
differently, China could maintain cheaper and more effective control over individuals shirking behavior
through unique Chinese mechanisms, whereas Western countries had to invest heavily in enacting legal
specificities or pursuing litigations against breaches of contracts f306]. Certainly, the Chinese pragmatic
approach contains negative aspects, including preferential treatment, protection from outside
competitors, and negotiable performance goals - what Komai in the Hungarian context (1986) labeled
soft budget constraint and Boisot (1987) has termed industrial feudalism" (Boistot and Child 1988,
514). In this regard, Boistot and Child have noted in China
506
...the absence of a sophisticated administrative mechanism through which the fiscal
obligations of industrial enterprises could be computed and revenues collected have
pushed the central government to practice a form of tax farming in which state revenue
requirements are defined and then allocated to provinces, cities, and thence to firms in
ways essentially unrelated to their taxable capacity (ibid.).
In pursuit of its horizontal integration and coordination, Chinas hybrid economy has entailed
some social costs that deeply affect the current transition. Chinas economic diversification or economy
of scope may heavily depend on costly coordination and cooperation for success, since it has operated in
various institutional settings I307]. The coexistence in various institutional settings potentially incurs
duplicated costs of operations, incorporating economic inefficiencies derived from the old inferior
systems I308]. Even American diversification, for which Chandler argues, is equally vulnerable to costly
and inefficient "diseconomies of scope", so-called, not to mention those costly inter-firm collusions in
proceeding of decision-making within Japanese industrial groups (Y. Futatsugi 1986; G. Hamilton, Zeile
W ., and Kim, W .J. 1990; K. Ito 1995: 437). Provided that it can ultimately lead to economize on
transaction costs, hybridization can be viewed as a strategic trade-off to tap opportunity and generate
economic expansion. In Japan, for example, business activities and opportunities are usually promoted
through dynamic interactions between parent firms and spinoffs I309]. Similarly in China, as Qian and Xu
1993 contend, the geographical shape of Chinas multiple-tiered hierarchy fits into the current regime of
economic coordination and cooperation at various levels of administration. As such, the current situation
in China is tantamount to a geographically loose yet united corporate federalism, or so-called "industrial
pluralism" [310].
As a final note, taking costs and risks into consideration, hybridization could perform in multiple
ways, relative to its combined strengths and weaknesses, and relative to its institutional settings [311]. In
the case of China's transition, one could hypothesize multiple possibilities for hybridization as follows
(Figure 5.32.2 here),
507
Figure 5.32.2: Hypothesized assorted performances of hybridization.
G D P growth or P/E returns
1.
300%
a>
u
c
<0
E
o
t
4)
Q.
T3
V
3.
<*-
o
X
<u
o
c
100%
5.
0
Time
Projected trajectories of hybridization:
1. Hybridization as desired optimal innovation (most unlikely);

2. Hybridization with convergent functions to diffuse innovations (most likely);
3. Hybridization with partial convergent functions to diffuse innovations (most likely);
4. Initial success of hybridization followed by deteriorated performance due to increasing inertia and
costs for coordination (likely);
5. Aborted hybridization due to stronger institutional barriers (likely).
Performances of hybridization 2 through 5 could be understood as being contingent upon
whether the institutions and the governance could successfully tackle thorny institutional issues and
barriers for social justice and legitimacy, including negative feedbacks in response to massive layoffs,
high unemployment rates, the exacerbated plight of lower classes due to market failures, uneven
regional development, corrupt corporate cultures, as well as other environmental shocks [312].
508
5.32.3 Hybridization, decentralization, and the Xia-Gang system
With fiercer market competition and widespread SO E reforms, many state employees, including
senior technocrats and skilled workers, were laid off. One innovative solution to the unemployment
problem in China was the Xia-Gang system.
A direct translation of "x/agang' (from the Mandarin Chinese language) is "leaving the home
office" or leaving ones post for those cadres and workers in the government and the SO Es (also cf.
Cao et al. in 1999, p. 112, "x/agang1 is translated as stepping down from ones post) [j13j. Yet the
definition has varied with different references over different time periods. An earlier version of the
definition implied that the state government pursued, advised, and encouraged redundant workers,
clerks, and cadres in the core SOEs and administrations who were living in the big cities to leave their
current posts and seek other job opportunities. By streamlining the state bureaucracies, the government
aimed at overcoming institutional barriers to reforms. In time, the updated version of "x/agang' became
mandatory. Its focus shifted to the formal laying offs from the SO Es (cit. from State Statistical Bureau,
China, 1999) and the compensation ex ante of those laid-off workers whose jobs had evaporated in a
credible way in the absence of social welfare institutions (cf. Cao and Qian et al. 1999, 106). The
change actually reflected a switch of the states reform policy in order to make x/agang a formal and
permanent solution to the routine job turnovers. Another interesting change since the late 1980s was the
fact that the term x/agang (laid off system) became increasingly associated with zaijiuye gongchentf (a
re-employment program). Together "x/agang and zaijiuye gongchencf constituted Chinas all-around
employment system reforms in place of Chinas old iron bowl employment system. As Cao et al. 1999
elaborated,
Privatization is mainly about assets; lay-offs and re-employment are about people. W e
present evidence...on mass lay-offs and re-employment from SO Es to non-state firms at
the city level. This process is again driven by the local government and has two inter
related components, known as x/agang ('stepping down from ones post1) and zaijiuye
gongcheng (re-employment program). W e observe two interesting features. First, these
components address both ex ante and ex post political issues concerning S O E reform.
Under the former, laid-off workers are compensated ex ante in a credible way in the
509
absence of social welfare institutions. Under the latter, the local government helps laid-
off workers to find new jobs, which creates an ex post political environment in which
workers, having new jobs, are less likely to oppose the reform and demand subsidies.
Second, when the local governments are responsible for lav-offs and re-emplovment.
they can make best use of local information and pursue the reform at the speed and in
the form according to local conditions (ibid. emphasis mine).
In the earlier version, x/agang was enacted with the follow-up measures of re-employment and
subsidization according to the then-state's wage system. Separating zaijiuye gongchen g from x/agang
marked progress in the breadth and depth of Chinas reformed employment system. The reforms
became more institutionalized and issue-specific. People under the X/agang category were referred to
laid-offs, early retirees, and those absent from their posts," whereas people under the zaijiuye
gongcheng1 category were referred as high-school-drop-outs or graduated youths waiting for work,
though they may have to wait a long tim e [314j. Eventually, the state wanted to take the x/'agang and
zaijiuye gongcheng1 as experiments and institute a new employment system able to routinize market-
oriented job turnovers in the state sector. The state also wanted to use them to bring market competition
to core and local enterprises, and to motivate core workers, support local programs, and promote local
activism and entrepreneurship in both state and non-state sectors along with the state's decentralization
reforms and economic hybridization. At this point, my study will focus only on Chinas x/agang system.
Enacting x/agang hastened job retires and turnovers to local subsidiaries. The new initiative
was also boosted by surging local activism and entrepreneurship. To initiate the x/agang system, local
enterprises offered lucrative and/or profitable options to lure core state workers and senior cadres with
widespread social ties (social capital) and rich working experience (human capital) away from state
employment in the centers and the parent SOEs. The new approach contrasted sharply with old system,
seniority-based and equally-paid employment system that the previously regime had exercised in state-
owned enterprises and state bureaucracies. However, as more and more layoffs came with the reforms
of SOEs, the system eventually became mandatory. The lucrative options waned, and state subsidies to
x/agang workers and cadres also were reduced.
510
More significantly, the initiative to turn over superfluous workers and cadres amassed in the
center and/or the parent SOEs to local and subsidiaries also provided incentives to encourage
experienced state managers/professionals to work in the local economies [3' 5]. The state then
encouraged workers, cadres, and managers/professionals to contribute their expertise, knowledge, and
experience to the locals while sharing the growing fruits with them. Xiagang" cadres, workers,
technocrats, professionals, and senior workers looking for entrepreneurial x/agang could now still be
regarded as public treasures and assets. With the large capital investment in their job training and their
extensive work experiences, it would be wise for the state to provide them with opportunities rather than
discard them as liabilities [3,6j.
By providing innovative options to these superfluous technocrats and professionals in the
alternative local places, China could buffer the rising tensions between bureaucratic streamlining and
social legitimacy [317]. Without such entrepreneurial opportunities, many senior employees, who once had
their lifetime security within the iron bowl" employment system, might have objected to impending
layoffs, job turnovers, and early retirement. They would probably have seen x/'agang as a threat to their
life security, perceiving any job termination as a permanent layoff that could end their chances for
survival and promotion. Within the context of x/agang not only its retired professionals but also the
state could encourage its competent managers to accept new challenges and dedicate themselves to the
prosperity of the local economies. According to Nee (1992), these cadres and professionals became
cadre-entrepreneurs. According to N ees survey in 1996, cadre-entrepreneurs" households had kept
relative higher returns than do cadre households in Chinas rural areas (also cf. Andrew G. W alder 2002:
Table 2 and 3, pp. 244, 246, and 250). In 1993 Qian and Xu noted that
...many entrepreneurs in the non-state sector were in fact Party cadres or former
commune leaders, and their organizational experience and connections in the local
government have been turned into assets for the non-state enterprises (1993b, 154).
Government bureaucrats knowledge and information about local economies and

government policies, their connections with the local community, and their past
experience in coordination, are all valuable assets. In China, the existing organization is
not destroyed at one stroke and government bureaucrats are transformed into
511
entrepreneurs in the reform. Hence, the valuable organizational capital and human
capital accumulated and embodied in the M-form hierarchy are better utilized in
developing non-state enterprises (Qian and Stiglitz 1993). This is particularly important
for China because of the scarcity of human resources (1993b, 153; also cf. 1993a, 547).
The new initiatives enabled opened to those laid-off workers, senior cadres, and experienced
professionals to feel felt safe and be willing to be reallocated to local subsidiaries (Susan Shirk 1989, p.
359). Some of them were re-appointed as advisors or consultants with their old working units or
subsidiaries. Previously in the central bureaucracies, senior workers, staffs, and officials spent their life
careers vying for the sparse positions at the top of the bureaucracies [318]. Any state wishing to
streamline its bureaucracies could not afford to give promotions to those who had waited their entire
careers for those scant promotions. Xiagang provided both the state and its senior employees with a
viable solution to several pressing problems [319].
Chinas xiagancf system in place of its old employment system was the follow suit of Chinas
political economy, as it faced tremendous pressures from all-round market competition and institutional
changes. Chinas job market became increasingly restricted as its unemployment became increasingly
explosive. As Cao et al. 1999 reported,
...The ex ante and ex post political economy of xiagang and zaijiuye gongcheng. The
combination of xiagang and zaijiuye gongcheng can be viewed as an attempt by local
governments to address both the ex ante and ex post political issues surrounding reform.
When the local government uses xiagang to lay off workers, workers receive credible
compensation for a given period of time because they still maintain some relationship
with the enterprises where they were employed. This is especially important given the
absence of well-functioning social welfare institutions. Although such compensation
addresses part of the ex ante political constraints of reform, it alone may not be enough
to address the ex post political problems: laid-off workers may continue to demand
subsidies when they do not have new jobs. When a local government helps laid-off
workers, having new jobs, they are less likely to oppose the reform and demand
subsidies. In this sense, the reform of combining xiagang together with zaijiuye
gongcheng not only buys workers, but it buys them out (ibid. 114; emphasis mine).
As already reported, some reforms of the SOEs and the state bureaucracies had suffered
significantly setbacks, as these units decided to terminate the system of life-time employment, close
doors for senior workers, and suspend their pensions. Increasing layoffs had multiplied social demands
512
for placed tremendous welfare burdens on the state, which was otherwise attempting to reduce its budget
expenses [320]. W ith its xiagang system followed by job relocation and reemployment measures, the
state eventually reduced the risks of social instability and the costs of social welfare programs.
Furthermore, the xiagancf system promoted the prosperity of local economies. From the bottom up,
Chinas economy became more diversified, its micro-economic environments became more locally-
focused and flexible, and its growth becam e more pattered and sustainable. As Cao et al. 1999
summarized,
...Because local governments have better knowledge about local conditions than the
central government, when they are responsible for lay-offs and re-employment, they can
m ake best use of local information 0 la Hayek). For example, local governments can
pursue the reform at the speed suitable to the local conditions. It is thus critical that the
central government is not forcing local governments to reform all at once or all at one
speed. Thus, if the local government finds that workers are not being absorbed as fast as
predicted, it can slow down the pace of reform. This in part accounts for the unevenness
of reform progress across localities. Unevenness may thus become a political virtue
when it implies an absence of large labor dislocations and the serious political disorder
that accompanies privatization that occurs all at once. Because local governments adapt
the reform to local needs, we also observe a great variety of approaches to reform (ibid.
114) [32,j.
Seen in this light, Chinas xiagancf system further justified the hybrid nature of its economy,
since it indeed provided some labor-market managerial tactics and market-competition practical
solutions to tackle certain social dilemmas during Chinas transition. Because of the xiagancf system,
many capable workers and staff members became new entrepreneurs; and many of the local economies
in which they worked experienced a faster growth rate than the average of the national economy (see my
Chapter 2). This top-down flow of workers and cadres without excessive compensation in Chinas internal
labor markets actually facilitated Chinas market-oriented job turnovers, labor movements, and thus
social mobility [322]. Chinas xiagancf solution to this problem has differed from the solution in the West,
where the solution to the dilemma of economic and bureaucratic streamlining is simply to lay off
excessive workers and staffs without much compensation in order to save transaction costs.
513
5.33 An overview of China's hybridization: Toward a quasi-market economy
In China's vernacular, its hybrid economy is moving toward a socialist market economy [323]. Yet
whether and to what extent China might call that economy a standard "market economy" is historically
contingent [324]. But the problem is more empirical than theoretical, since the demarcation actually
involves much more practical complexities that go far beyond the formal boundary between market and
hierarchy and their defining properties.
Tables 5.33a and 5.33b provide heuristic cross-bordered comparisons of different economies.
They summarize those economies in a diverse spectrum of cultural complexities, social and historical
contexts, related to points that have been discussed in this chapter. The tables group the contemporary
world economy into three major geographic regions: North America, the EU, and East Asia [325]. Table
5.33a is about institutional configurations, economic strategies, and social trajectories across market
economies and quasi-market economies. Table 5.33b focuses on market institutions across market
economies and quasi-market economies. Table 5.33c displays statistics of the relative performances of
market economies and quasi-market economies.
514
Table 5.33a: cross-border comparisons -
institutional arrangements across societies and cultures
East Asian Free Trade Area: O E C D (excluding Japan)
Quasi-Market Market
economies economies
Japan China USA North-Western Europe

(Germany, France, Britain,
& Nordics)
Homogeneity High, Medium, Low, Medium (national)/low

(social, collective, communitarian, individualistic, (continental);
cultural) corporation, family networks, independent,
intermediary intermediary clear cut
links; links; boundaries;
Linguistic Implicit and ambiguous, Explicit: one-to-one (yes/no),

expression confirmist, systemic, skeptical, analytic,
metaphor, high context; low context,
except: German -- similar to
Oriental -- systemic and speculative;
Hierarchical Mix of horizontal Geographically M-form U-form

Integration and vertical multi-tiered divisional vertical
integration or integration in integration; integration;
vertical network; hybrid economy;
Boundary Boundary Boundary Dichotomous, Dichotomous, clear-

between blurred in blurred in clear-cut at cut yet with
market and trust bureaucratic arms length hierarchical
hierarchy relations; control; [326]; interventions;
Intermediaries Spinoffs; Hybridization; Middle class; Middle class;
Labor market Internal, Semi-Internal, External, External,

and other leading firm toward enterprise firm discretion, a mix of administrative
key control over discretion mixed high turnover; control, business
institutions spinoffs, with transitional corporation manipulation,
semi-life-time "iron bowl and sharing power of
employment; employment; trade unions, hostile to
outsiders or guest workers;
Dynamic External shocks, Hybrid economy, Equity markets, MNCs, EU, R&D,
drivers & core industrial mainly non-SOEs, R&D, high-tech, high-tech, productivity;
sectors groups, R&D; joint ventures, productivity,
R&D; entrepreneurship;
Growth Market share, Scale economy, Scale and scope, Broad coordination,
strategy spinoffs, unique hybrid economy, high-techs, high-techs, market
market niches vs. competent sectors, entrepreneurship, competition, state
market expansion; cheaper laborers, market intervention, public
state activism; competition; sharing;
515
(Table 5.33a continued)
East Asian Free Trade Area: OECD (excluding Japan)
Quasi-Market Market
economies economies
Japan China USA North-Western Europe

(Germany, France, Britain
& Nordics)
Dilemmas Financial: bad & Soft budget in Fragmented Lower productivity growth,
& problems non-performed banks and SOEs, interests heavy public burdens,
loans, heavy public high social costs, conflicts, high conflicts between domestic
burdens, hard hidden unemploy layoffs, interests and outsiders;
market entries, ment and "iron business exits,
corporate bowl" system, & uncertainties;
corruption; government too many & ex
corruption; pensive litigations,
big corporations
high stakes;
Types of Structural. Fragmented Mixed; Mixed;

crisis locally-based;
Reform Big bang reform Contracting Welfare; Flexible deregulation;

scenario & deregulation in SOEs, capital
financial systems. marketization;
As shown above, historical contexts and cultural and linguistic impacts have played a
conspicuous part in varied institutional configurations of the contemporary economies and their assorted
economic developmental scenarios. Table 5.33b further outlines various defining features of market
institutions in market economies and quasi-market economies.
Table 5.33b: C ross-b ord er com parisons:
m arket institutio ns across eastern and w estern econom ies
Dominant institutions Country Historical Business Types of

of business system context organization governance
to
<D Banking Germany Homogeneous U-form Cartel &
E associations hierarchy centralization
o
c
o
u Central France Medium U-form Centralization
UJ
administrations homogeneous hierarchy
re

re Business USA Heterogeneous M-form Decentralization
2
companies hierarchy
Kinship Taiwan Heterogeneous Kin-networks, Taiwan and Hong Kong:

institutions Singapore fragmented deregulation;
<n
re Hong Kong diasporas Singapore:
E centralized regulation;
o
c
o
u Regional PRC Heterogeneous Multi-tiered, Decentralization
UJ
institutions regionally-based
a>
w
co
.!
in
State Korea Homogeneous Unitary-form Centralization
re institutions hierarchy
3
a
Industrial Japan Homogeneous Horizontal-form Group coordination
groups hierarchy & decentralized
(or vertical spinoffs
networks)
Table 5.33c: Relative performances of US, EU, and East Asia, 1997, $bn
Output
Market Purchasing Trade with Official

exchange power rest of monetary
rates parity world reserves
East Asia* 6,382 9,431 1,380 668
EU 8,093 7,559 1,640 380
US 7,834 7,665 1,586 71**
Source: F. Bergsten; cit. from The Economist, p. 24, July 15 ,2000.
517
* ASEAN 10 plus China, Japan and South Korea.
** With gold at an official value of $42.42 per ounce; the total would be about $140bn with gold valued at
market price.
A comparison between China and Japan.
In 1996 E. Westney claimed that Japan's spinoff economy was built on a base that was neither total
market nor total hierarchy, but on an intermediary area between them, or a so-called "quasi-market" (also cf.
relevant arguments in Imai and Itami 1984; Walter W . Powell 1987, 1990; Gary G. Hamilton and Nicole W .
Biggart 1988, 1992; S. Clegg and G. Redding, eds. 1990; Robert L. Cutts 1992; Paul Krugman 1994; K. Ito
1995). Through their spinoffs big Japanese companies have aimed to harness unique entrepreneurship in their
trees and twigs - central and local branches. By contrast, China's hybrid economy is built on a similar quasi
market base that reduces two types of costs simultaneously: transaction costs associated with market
competition and transaction costs associated with firm hierarchy. In both Japanese and Chinese economies,
market-hierarchy configurations are socially embedded and specific to their respective politico-cultural
contexts. Both economies have worked out their own ways, through respective institutional configurations, to
reach their economic competencies (cf. Gilbert Rozman, ed. 1991a; Gilbert Rozman 1991b).
Meanwhile, both economies have been haunted by the similar syndromes of deflations, bad loans,
expensive public sectors, and porous legal systems [327]. At surface, Chinas transitional economy has pressed
deeper problems of potential crisis than its Japanese counterparts in Japans bubble economy (Figure 5.33
herein), as some analysts assumed f^ 5]. But in Japan, the real symptoms with spinoffs have ever since
emerged much more structural [329J. In recent decade huge amounts of capital accumulation have been held
by the Minister of Finance (MOF) and the Bank of Japan (BoJ) in charge of reallocation of resources in terms
of industrial and financial sectors such as investments, subsidizing, bailouts, etc. f330]. The associated
institutional rules and market-hierarchy configurations have remained virtually unchanged since the W W II
(Masaru Yoshimori 1992,1990; Maruyama Yoshinari 1992) I331].
518
Figure 5.33: Estimated non-performing loans in Asia
As % Of GDP
China
Malaysia
Thailand
Japan
South Korea
Taiwan
Indonesia
India
Philippines
o 10 20 30 40 50
Source: Non-performing loan report A sia; cit. Fiancial Times,

p. 5, Wed. Oct. 30. 2002.
Similarly in China, to a certain extent the states bureaucracies had retained some old ingredients and
old constituencies on behalf of their planned regime. Hence Chinas reforms from the beginning have been
concerned with old ingredients and constituencies. In Japan, the financial sector has forged powerful
institutional barriers against all-around reforms I332]. In China, vested interests within the state bureaucracies
after the Cultural Revolution came to realize that their survival was heavily dependent on the states
institutional reforms so that China could compete for a position in the world economy. Both Japan and China
are now standing at the crossroads, attempting more effective reforms, building on the public consensus. If
there is no reform, then there will be no progress and development. Both countries welcome international
competition and treat it as a win-win game rather than a zero-sum game. Both countries are cost-conscious
about the long haul consequences of their reforms, avoiding too radical social and economic changes (for
Chinas experiments, see Xue Muqiao 1982a). Along with increasing layoffs and bankruptcies, the reformers in
both countries have encountered growing social disgruntlement and skepticism that could bring unprecedented
threats to social order, security, and cultural life. In China, the central government has been cautious of the
resurgence of hardliners, admonishing the Chinese people that uncontrolled reforms are doomed to structural
decay. Chinas flexible local economies, state activism, and SOEs entrepreneurship in the 1980s-1990s have
519
been more dynamic than have the Japanese Minister of Finance, the spinoffs of big industrial incorporations,
and Japans main banks in the 1970s-1980s. Consequently, while China is making an incremental transition by
means of piecemeal reforms en route toward a quasi-market economy similar to Japans t333], Chinas gradual
reforms have generated more significant internal structural changes than have Japanese reforms with
unsuccessful attempt to pull Japanese economy through its decade-long doldrums in the 1990s.
S u m m ary o f Section 5.3. Strategically, decentralization can be thought of as the states bounded
rational response to the need for regional flexibility I334]. Decentralization includes two processes. One
process removes superfluous layers of bureaucracy within its central, regional, and local branches. The
other process devolves hierarchical powers from higher levels to lower levels. As depicted in Table
5.32.4a, this devolution follows the spinoffs of the SO Es from their centers at the higher levels of
administration to their local branches or subsidiaries, more or less like the Japanese [335]. In this way the
centers may keep close and informal ties to their local spinoffs or discretional subsidiaries, and the
centers can promote local economies through intra- and inter-coordination across regional and local
boundaries, and through vertical and horizontal cooperation in production, acquisition of knowledge,
innovation and technology, and capital mobility [336]. In this way, the state prompts solutions to the
problems of inefficient SOEs. Chinas decentralization has activated widespread entrepreneurship and
business smart-ups throughout the country. If China had chosen another strategy, either total market
self-regulation (laissez-faire) or total central control, the state would have either stacked up huge
expenses regulating and monitoring market operations, or would have drastically diminished productivity.
Once the role of Chinas economic governance becam e changed from redistributor to
gatekeeper, its hybrid economy emerged, and China becam e increasingly distant from its authoritarian
regime. By economizing on vertical and horizontal coordination, Chinas hybrid economy was able to
impose competitive pressures for innovation and activism on local cadres and individual workers, who
had to learn how to pursue entrepreneurships in order to compete and survive. In the end, these policies,
as hastened all-round marketization that, in turn, helped increase Chinas regional and national
520
prosperity.
One could also take a close look ac the effectiveness of Chinas xiagang" policy. China used this
xiagang policy to streamline its state bureaucracies and its SO Es yet avoid expensive compensations
and seniority systems as in order to keep employees loyalty. X/agang thus became a norm to maintain
continuity and solicit long-commitments from employees without squandering scarce human capitals or
other resources [33']. Indeed, the state came to expect these "xiagancf' cadres, workers, and
professionals to contribute to the local prosperity while continuing to pursue their own successes [338].
5.4 Summary
Chinas economic transition since 1978 supports my proposal in Chapter 4 that the diminishing
fanaticism of ultra-leftist ideology in the post-Mao era played a prominent part in re-prioritizing Chinas
fundamentals to economy and thereby starting Chinas transition. As Chinas political processes in the
post-Mao era navigated changing social expectations, China initiated a series of institutional reforms so
broad and deep that they enabled China to tackle the dilemmas between efficiency and legitimacy and
thus facilitated Chinas transition. Strategically, Chinas decentralization reforms and hybrid economy
buffered social tensions and initiated its transition toward a quasi-market economy and toward a
reinvented system of institutions. One could find in Chinas xiagang" system invented by China a good
example of rebuilding institutions for dealing with market-hierarchy dilemmas, while stimulating Chinas
SO E reforms.
521
1. cf. Individualism shows the way - emerging markets may be able to rival the prosperity of the west
without adopting all of its cultural values by Martin W olf in Financial Times, p. 11, Wed. Mar. 1, 2000.
Also cf. Chinas hot economy on pace for 7% growth" by Steve Fries Special to USA Today in USA
Today, 13B, W ed. Sept. 12, 2001: ...China, once the capital of communism, now has the worids hottest
market economy. The most populous nation, almost immune to the slowdown gripping the USA, Europe
and most of Asia is on pace for 7% growth this year. Japan, by contrast, is struggling with negative
quarterly economic results. 'This is a country that has doubled its standard of living every 8 years or so
over the past two decades,' says Deepak Bhattasali, a China expert at the World Bank. 'That has not
happened in history before in a sustainable way. Even if you take (Chinas) lagging western provinces,
therere lagging behind eastern provinces, but with 5% growth rates, therere among the top performers
in the world. Consider...China overtook the USA this summer as the nation with most cellular phones in
use, at about 120 million. About 5 million new subscribers sign up each month. By 2005, 300 million
phones may be in use, which must make market-leader Motorola giddy. Legend Holdings, the top
Chinese personal computer manufacturer, reported its second-quarter profit rose fivefold from the year
before. Chinese are expected to buy 9.5million PCs in 2001, a huge leap from the 3.9 million sold in
1999, according to Internet technology market research firm ID C ...'T h e 1990s in China proved to be a
massive growth period, and companies that came in and accelerated it turned out to be correct, says
Woodard, citing Motorola, Volkswagen and Procter&Gamble as huge successes. 'Its my personal belief
w ere in for another strong decade in the Chinese economy."
2. Insofar as marketization, privatization, and globalization are concerned, Chinas corresponding engagement
remains a far cry from the most of advanced countries and its East Asian neighbors. See the associated
discussion in my Chapter 2.
3. I.e., a recruitment system for re-appointing and relocating those turnovers from the SOEs and from the state
bureaucracies, or an innovative employment system for recycling human resources or capital, as I like to call it.
4. cf. Chinas president may be reluctant to cede his power - Clouds over succession - Media praise may
mean Jiang Zemin, like Mao, envisions himself as retirement-proof by Erik Eckholm in The New York Times,
A1, Sat. July 13,2002.
Also cf. Some Chinese see the future, and its capitalist by Joseph Kahn in The N ew York Times, Sat.
A15, May 4, 2002: ...there is the same one that engaged court intellectuals at the end of the Qing
dynasty, when China first began opening itself to the W est at the end of the 19th century: how to make
the country modem.
5. In Chapter 4, transition is explained as an interplaying process of different inter-related dimensions

between expectations, depth of history, and thickness of institutions. In this chapter, one could see such
interplay in Chinas transition involving complex interactions between political, economic, and cultural
processes. My caveat here is: albeit it is necessary to distinguish these processes for analytic purpose, it
might not appropriate to conceive these processes could happen separately or independently in Chinas
transition. It ought to treat China's transition in its changing reality as a whole. Such recognition will lead
this chapter to both interrogate these processes and understand their interactions as to how these
processes could affect each other, cf. Christopher Chase-Dunn et al. 2002.
6. cf. Some Chinese see the future, and its capitalist by Joseph Kahn in The N ew York Times, Sat.
A15, May 4, 2002: ...After M aos Cultural Revolution, which many in China view as a disastrous
experiment in mass democracy akin to the Jacobin terror that roiled France, most Chinese became too
alienated from politics...Too few people pay attention to public policy. It is that vacuum that allows local
officials to steal state funds with impunity, or mass movements like Falun Gong, the exercise and
522
meditation society, to enchant millions of people...China became politically quiescent in the 1990s, at
least in part, because neoliberals endorsed the governments authoritarian agenda. More diverse views,
even those expressed in Chinas wobbly ivory tower, could rattle the countrys carefully managed political
edifice. 'It still matters a great deal, Mr. Gan writes, 'if a nations intellectual mainstream considers
democracy theoretically worth defending."
Also cf. Seeds of change? - Deep in the countryside, China is experimenting with local democracy in
The Economist, A Survey of China," p. 8, June 15, 2002: ...M any of China's current leaders remain
unconvinced that democracy helps to defuse social tensions, and given the way it is being introduced
they may have a point. A one-party dictatorship cannot coexist with a parallel democracy without
arousing political conflict. This has already happened at the village level, and could happen at the
township level too. It is only by good fortune that in Buyun the elected chief gets on well with the party
secretary. And even in Buyun, not everyone is happy with this kind of democracy. 'Since this township
chief took power, to tell you the truth life for ordinary people is still very miserable. Although hes
improved some roads and hooked us up to cable TV, its still tough for ordinary people, says a skeptical
schoolteacher...
7. Deng's Southern Tour in 1992 advocated his pragmatic calling for "Let som e people g et rich first"
that had further exalted a pro-entrepreneurial milieu throughout the country.
8. In the case of China, one might find its social expectation is bonded to a collective commitment. In its
transition, one might find the collective commitment to the nation's prosperity behind its social expectation.
One might find the collective commitment motivating the public and the government to reach a social
contract for Chinas economic development. And one might also expect such a collective commitment to
direct China economic transition toward a market economy on its own terms, Chinas so-called quasi
market economy. But the emerging of Chinas currently collective commitment to the nation's prosperity
was not by chance.
9. Ibid. pp. 21-3: But in China the objective forces favoring a capitalist-type revolution were far stronger
than they had been in Russia and the socialist content far weaker. At the time of the Communist victory
in 1949 China was a much more backward country than Russia had been at the time of the Bolshevik
trium ph...The essential precondition for socialism, it always has been assumed, is the dominance of
productive processes which have a social character, which is to say, a well-developed industrial
economy. With little modem industry and an overwhelming peasant population, China obviously lacked
that necessary precondition. If the economic foundations for socialism were inadequate in Russia, as
Lenin and the Bolsheviks repeatedly emphasized, they were virtually absent in China. The extreme
material backwardness of China dictated, even more strongly than in Russia, a bourgeois revolution
(which presumably would be followed by an era of capitalist development), not a socialist one. It was not
only economic and material underdevelopment that appeared to confine the Chinese revolution to
bourgeois limits but also the character of the revolution itself and the social composition of the
revolutionaries. W hereas in Russia the Bolsheviks came to power primarily on the basis of the active
support of the urban proletariat, a class presumably socialist in its aims, the Chinese Communist Party
and the Red Army were composed mostly of peasants, a 'petty bourgeois class by Marxist definition.
The Chinese proletariat was not only tiny but, after 1927, politically inactive for the most part, having
been terrorized into passivity by Chiang Kai-sheks counterrevolution. As the rural-based Maoist
revolution neared its climax in the late 1940s, the urban workers, passively awaiting their liberation by
peasant armies, could provide no socialist content to the revolutionary cause. In view of the backward
agrarian state of China and the mostly peasant composition of the Chinese Communist movement, the
Chinese revolution, from any Marxist perspective, could be no more than a bourgeois revolution. Maoist
theory, as has been noted, formally recognized this elemental Marxist truth, emphasizing the bourgeois
character of the revolutionary process, at least in the Partys official ideological pronouncements, and
523
drew a seemingly firm distinction between the 'bourgeois-democratic and the socialist stages of the
revolution.
Also cf. Kornai 1992, p. 393, Table 16.1 for a comparison of revolution and postsocialist transition.
10. cf. Gelb et al. 1993, p. 427: ...European reform socialism denied new entry, developed little real
competition and sustained less conservative macroeconomic policies while abandoning formal planning.
It left agents constrained neither by market nor by plan. In contrast, enterprises in China were
constrained by both, sometimes together, with essentially favorable results.
11. Since its founding years, the PRC backed by China's strong social cohesion has survived a number
of social crises more severe than Chinas current situation, which includes painful S O E reforms,
mounting unemployment, and a growing AIDs population. China underwent three-years-long-natural-
disaster in 1960-1962, when the CCP called for the Chinese people to save their pennies to repay the
huge sums that China had borrowed from the FSU during the years of their friendship in the early 1950s,
the P R C s founding years. At that time Chinas economy suffered a further blow from the FSU's
insistence that China repay those debts. But it turned out that the C C P made a rather compelling case to
the public. China not only paid off all the debts in about one year, but also gained its economic
momentum through its timely economic adjustment. China quickly boosted its economy with double-digit
growth rates in 1963-1966 (prior to its disastrous Culture Revolution). Chinas survival from its
devastating Cultural Revolution (1966-1976) had provided evidence, even though the country was on the
brink of collapse throughout the time period. Evidence can also be seen in the persistent support by
Chinas public of the states One Child policy of family planning, when the countrys development has
faced tremendous pressure from its growing gigantic population. Chinas recent huge projects, including
its Three Gorges Dam project, arguably made another case for itself through appealing to the public
that this would solve Chinas shortage of water resources among its most populated east-coast and
north-eastern regions (cf. To quench Chinas thirsty north, waters and people will move in The N ew
York Times, A1, A7, Tues. Aug. 27, 2002). These policies and projects were carried out by numerous
campaigns of C C P s propaganda and cross-regional migrations of millions of the local people. In these
cases, the Chinese people were admonished to sacrifice themselves for future generations and for the
countrys long-term prospects. Implementing these projects was ultimately compulsory; but it was also
backed by peoples trust and public support.
12. This accentuated Chinas strategic culture, which evolved from Chinas long pragmatic civilization,
cf. Jepperson et al. 1996 on Variations in state identity, or changes in state identity, affect the national
security interests or policies of states" (pp. 61-2).
13. cf. The China Syndrome by John Lloyd in Financial times, p. I, W eekend, Jan. 8-9, 2000: ...I
spoke, at that reception, to a young man named Richard Liu, chief operating officer of the Sanjiu
G roup....H e is driven, as are the others, by national pride. Throughout the seminar, this was a recurring
theme. Competition was perceived in national, not in company terms: one western participant, Samuel
Van Vactor, a US economist, told me a young Chinese executive he met had said in puzzlement: 'I dont
understand how you in the west are successful. W e in China are taught to work hard for our country; you
have no such incentives How do you do it? Liu, with his western business education and dispassionate
view of his company, says that 'this is not about money; its about pride. To build exports is about
national pride - if we bring Chinese medicines to the world then w e bring pride to the country. It will take
a great deal of pride to do it.
14. cf. R. Lowenthal 1970, p. 107: ...w e may speculate also about the role of a cultural factor - a
profound resistance to the acceptance of certain types of economic rationality and of institutional stability
based on codified law that are seen as Western imports alien to Chinese tradition. However critical Mao
524
has always been of the Chinese past, we cannot overtook the fact that ever since his assumption of the
party leadership in 1935, Westernized or Russified intellectuals from the coastal cities have steadily lost
influence in favor of a clan of leaders from the 'backwoods of Hunan, who consciously proceeded to
'Asianize' Marxism.
15. See an article describing Chinese intellectual and spiritual traditions, imbued with the sufferings and
tortures from Chinas tumultuous political past in its long civilization, cf. In old China's stormiest times,
nature was the eye" by Holland Cotter in The N ew York Times, B27, Fri. Sept. 13, 2002: Before any drastic
moves are made toward a United States war on Iraq, may I suggest that all parties involved drop by the
Metropolitan Museum of Art for a tour and a briefing? The meeting place will be in the galleries for Chinese
painting and calligraphy. A tour of the landscape show on view there will cover roughly 1,000 years of turbulent
history. The briefing will touch on the cyclical rise and fall of political power, the myth of territorial sovereignty;
the effect of violence, justified or not, on individual lives. The point of the gathering isnt to hash our policy, but
to look in a quiet, unhurried way at the present through the eyes of the past. In this case, the eves belong to
artists in China centuries ago, many of whom were intimately engaged in the politics of their day. Some
benefited mightily from that association: others suffered, losing homes, families, even their lives. Still others
withdrew into solitude and turned their full attention to painting. In their pictures, the image of nature, as a
moral force or as a being animated by human emotions, noble and abject, carried the burden of their anguish,
disillusionment and resignation...The artist himself lived at a cataclysmic moment in Chinese history, when the
war-ravaged Tang dynasty was disintegrating. A charge of high anxiety surged through the culture, and that
seems to be the real subject of 'The Riverbank. In fact, whatever the works historical status - it has been
variously called a lO^-century original and a 20th-century forgery - one thing is certain: the landscape as a
mirror of human existence has a long tradition in Chinese art, and Dong Yuan was one of its early exponents.
This theme remains consistent throughout the show, even as landscape painting as a genre undergoes
conceptual changes, becoming increasingly expressive, emblematic, abstract...The graceful paintings of
shoots and branches are from the Yuan dynasty (1279-1368), a time of social crisis and psychological trauma
as china came under foreign Mongol rule. Artists had to choose between serving new overlords or remaining
loyal to a fallen dynasty, which often meant going into exile. Coded images from nature spoke to their
dilemma, providing ethical guidance. The bamboo was understood as an emblem of embattled survival; it
weathered the most devastating storm through resilience. The flowering plum, harbinger of spring, bloomed
even in the snow. Such traditional motifs have continued currency in the paintings that form the Weill gift,
though they dont necessarily carry a sense of emotional urgency. A polished mountain landscape by the
painter Wang Yuanqi, who served as a high official in the Qing dynasty (1644-1911), conveys an attitude of
rock-solid poise and self-confidence. A handscroll by a masterful contemporary, Liu Yu, similarly aims to
please. Conceived as an ingenious obstacle course of mountains and waterways, it at one point magically
opens out onto a paradisiacal universe, then resolves itself in an upward curl of earth and sky as a delicate as
a harp glissando. Other Weill paintings are more anecdotal and personal, as in the case of a delightful hanging
scroll by W en Zhengming, one of the leading scholar-artists of the Ming dynasty (1368-1644). Titled 'Living
Aloft: Master Lius Retreat, it shows two men chatting away in a garden pavilion. The scene is imaginary but
has connections to real life: it depicts the still-on-the-drawing-board dream-house of an old friend who had just
retired from a public career. It also embodies the paradoxical desire to live apart from the world in order to
study it broadly and deeply. Equipped with all the requisite scholarly icons - books, scrolls, a servant bring tea
- the pavilion is well protected: you would need to cross a stream, enter a gate and climb halfway up a
mountain to reach it. And a poem written at the top of the scroll makes its function d e a r 'Down below, douds
and thunder are vaguely sensed. Redining on a dais, a glimpse of Japan; Leaning on a balustrade, the sight of
Manchuria. While wordly affairs shift and change, In their midst a lofty man is at ease. Not everyone could
afford such comfortable detachment; for some artists daily life felt like a threatening proposition, and, however
subtly, their insecurity finds a voice in their work. In an extraordinary landscape by Dai Benxiao, a Ming loyalist
whose father had committed suicide under Qing rule, the sheer face of a mountainside fills the entire pidure
like a slab of raw tissue pressed against glass. Pine trees, yet another andent symbol of endurance, ding to
the mountains surface, but they are withering away and, according to the artists fatalistic inscription, doomed
525
to extinction...The subject is...the winter-surviving flower of old, here rendered in a series of fleet, ali-but-
abstract brush strokes and set against a plain ground that might be read as celestial light, or bleak, empty
sky...China imbued mountains and flowers with moral consciousness...
16. cf. David D. Buck in "Milwaukee Journal Sentinel', Section J, Sunday, September 2 6,1999: "One folly -
known as 'The Great Leap Forward' - sought in 1958 to socialize all agricultural and industrial production in
China within months. China, almost completely isolated from 1958-1972, trumpeted the supposed
achievements of the Great Leap to its own people and to the world, while tens of millions died in one of the
greatest famines of the 20th century."
A15, May 4, 2002: ...M ao s brief romance of the nations top minds while the Communist Party
consolidated power gave way to repeated purges and persecutions that continued through his death in
1976.
18. As he advocated, revolution is in tandem with production upholding realization of communist society.
19. cf. Records dispute Kissinger on his 71 visit to China - US backdown on Taiwan status reported by
Elaine Scioline in The New York Times, Feb. 28, 2002: ...Mr. Kissingers meeting with Mr. Zhou in July also
makes clear the secretarys eagerness to bring the Vietnam W ar to an end and to enlist Chinas help in making
it happen. With or without negotiations with North Vietnam, he said, 'we will eventually withdraw - unilaterally.
20. cf. Patrick Tyler 1999, p. 55 : Within weeks of Nixons taking office, the intelligence community
presented the White House with its top secret Review of the International Situation, a benchmark
assessment of foreign policy by top government analysis. In plain language, they told the White House
that the deepening strains between Moscow and Beijing would send both adversaries running to
Americas doorstep, and therein lay an opportunity for US policy...The study concluded, Given the fact
that the Soviets and Chinese appear now to regard one another with more active hostility than they
regard the US, it is possible that each will become more active in seeking to prevent the other from
aligning too closely with US, and to use its own relations with the US, as a means of checkmating the
others policies. Ibid. p. 55: ...anyone paying close attention could see that China was concerned about
Soviet aggression and that this concern was driving the Chinese to open the channels of communication
with the US, if only as a hedge.
21. cf. David D. Buck in "Milwaukee Journal Sentinel', Section J, Sunday, September 26,1999: By siding with
the Soviet Union and through its participation in the Korean W ar on behalf of the North Koreans, the new
China found itself isolated. For more than 20 years, Mao Zedong (also known as Mao Tse-tung) and the
Communist leaders seemed to relish their exclusion from world affairs. But in the early 1970s, when it seemed
that former Soviet allies might attack China, a remarkable opening to the United States took place. President
Richard Nixon, in a master stroke of Cold W ar diplomacy, went to Beijing and met with Mao and Chou En-lai.
When Nixon went to China in February 1972, China was poor and isolated but immensely proud of its
independence and the purity of its socialism."
22. cf. Asias shifting balance in The Economist, p. 15, Sept. 2, 2000: When the old Soviet Union was
everyones enemy, most countries, including eventually China, clustered round America for protection."
23. It is very interesting to read Peter Montagnons 1999 Catching the next wave - The future of Asia,
asserting that If there is a choice between chaos and dictatorship, nowadays you choose chaos."
Unfortunately, however, this was not the case for Chinas social expectation that motivated Chinas
transition right after its Cultural Revolution, which ended up with the arrest of Gang of Four in charge of
the Revolution who had created so much social chaos. Chinas transition was then initiated by the
526
reformers looking for social stability and new order.
24. Ibid. The Communist dilemma: utopia vs. modernity and The dilemma in practice. Pp. 50-73.
25. cf. Color me grey - Chinas leadership is becoming ever more oligarchic - and ever less charismatic
- no revolutionary" in The Economist, A survey of China, p. 6, June 15th, 2002: ...Li Cheng of Hamilton
College in upstate New York, who has written extensively on Chinas 'fourth generation, argues that
leaders in this category are likely to have been influenced by their experience of the ideologically
inspired violence of the Cultural Revolution, making them more cynical about ideology, more open-
mined and less confrontational than their predecessors in dealing with factional politics and social unrest.
Yet the next generation of leaders also experienced the collapse of communism in Europe and the 1989
upheaval in China, which may have convinced many of them that any loosening of the party grip on
power could unleash violent upheaval. 'Social democracy - without the democracy - is what they are
interested in, says Jean-Pierre Cabestan of the French Center for the Study of Contemporary China in
Hong Kong. If so, sadly for China, that would make the fourth generation not very different from the
third.
26. The political process at this stage was supposedly initiated to solicit social action for humanitarian relief
from the Cultural Revolution and for regime changes, cf. J. Elster 1983 elaboration about the goal attainment
of such a political process (p. 35: "...the central concern of politics should be the transformation of preferences
rather than their aggregation...the core of the political process is the public and rational discussion about the
common good, not the isolated act of voting according to private preferences. The goal of politics should be
unanimous and rational consensus, not an optimal compromise between irreducibly opposed interests. The
fomm is not to be contaminated by the principles that regulate the market, nor should communication be
confused with bargaining." P. 36: "...the emergence of preferences that are themselves shaped by concern for
the common good").
27. cf. Guobin Yang, 2002: The routinization of liminality: identity transformation and the persistence of
activism among Chinas Red Guard generation, Sem inar paper presented for ASA annual conference,
Aug. 16-20, 2002.
28. cf. China emulates some US values - good and bad by Richard Madsen in USA Today, 13A, Wed. Feb.
20, 2002 (emphasis mine): When Richard Nixon arrived in Beijing 30 years ago, China had been almost
completely cut off from the US for more than two decades, and most Chinese knew almost nothing about
American culture. Back then, many Americans hoped that exposure to US culture would make the Chinese
become more like us and thus usher in a new era of friendly US-China relations. When George W . Bush
arrives in Beijing on Thursday, he will find a China that has become thoroughly permeated with such global
icons of the American ways as Coca-cola, McDonald's and Disney. But in many ways, this embrace of certain
US values - a strong will and individualism - makes our friendship more fragile, not stronger. Unless President
Bush can seize the positive side of this delicate dichotomy, our own American characteristics will be used
against us. Thats in part because the Chinese naturally give their own interpretation to American symbols and
selectively focus on those that seem most important to them. For example, one elderly Chinese intellectual
told me that when he was growing up before the communist victory in 1949, 'our favorite character was Mickey
Mouse. But now, the younger generation thinks that Mickey Mouse is too gentle and sweet. They prefer Donald
Duck. The brash, bossy and aggressive Donald Duck is indeed a good role model for Chinese citizens today.
The pressure of a rapid growing market economy push them to hustle, posture, scheme and swagger. The
Chinese are fascinated by the way US popular culture seems to embrace such characteristics. Among the
most popular sports programs in Beijing and Shanghai, for example, are broadcasts of NBA basketball. In
contrast to the self-effacing teamwork of the Maoist-era, the NBA offers flashy self-expression. Chinese youth
are especially fascinated with the slam dunk, and they save their money to buy expensive shoes that promise
to help them achieve such feats of flamboyant individualism, which seem enormously liberating compared to
527
the tight collective discipline of the Maoist era. There is a dark side to this. While a globalized market economy
- intensified with Chinas recent entry into the W T O - brings about increased rewards for winners, it also
increases the penalties for losers. Tens of millions of urban workers have lost not only their jobs but also their
pension benefits. Hundreds of millions of farmers can no longer make a living on the land and must migrate to
the cities in search of work. The communist ideology that once claimed to represent the interests of workers
and farmers has been transformed into a neoliberal social Darwinism. This is captured nicely in an out-of
context quote attributed to Karl Marx placed at the top of a 'layoff special page in a recent Chinese tabloid:
'Life is an ocean. Only those with a strong will can reach the other side. Many Chinese who aspire to be
winners admire Americans because - on the evidence of their popular culture - Americans seem to have such
strong wills. The grandiosity of both American virtue and vice is inspiring to them. Chinese military experts are
impressed by the fierce efficiency with which we demolished the Taliban. Chinas many corrupt officials must
be equally impressed with the audacity of Enron executives. But aggressive, competitive people who set a
premium on the capacity for unilateral action do not often make loyal friends, especially when they have
divergent self-interests. Admiration of American individualism can easily and quickly turn into hatred of
American arrogance. Emulation of American culture can lead to an excess of vice as well as virtue. For now,
the Chinese have buried the anger at American assertiveness that surfaced during last years crisis over the
downed U S spy plane. The Chinese leadership has decided that it is in their strategic interest to cooperate with
America in the war on terrorism. But it is a fragile alliance between a unilateralist America and a China that
would like to be unilateralist, too. For instance, each side wants to expand the war on terrorism in a way that
contradicts the others interests. The Chinese leadership wants the war to include suppression not only of
Islamic separatists in its western provinces, but also of Tibetan followers of the Dalai Lama, non-conformist
religious groups such as the Falun Gong and even political dissidents - a position that contradicts American
commitments to human rights. The American leadership wants the war to include possible military
confrontation with 'axis of evil member North Korea - a position that contradicts Chinese interests in a
diplomatic solution to the Korea problem. Meanwhile, the Bush administration steps up the development of
new weapon systems - including missile defense potentially aimed at China - while asking China to stop the
proliferation of weapons. To keep China and America united in a common cause, Bush will eventually have to
show willingness to compromise some of his publicly proclaimed policies in order to elicit reciprocal
cooperation from the Chinese..."
29. As Martin W olf points out, the American culture could encapsulate the modernism and the
secularism in the Western world, cf. The economic failure of Islam - Muslim animosity towards the West
has its roots in an inability to respond effectively to centuries of financial progress" by Martin W olf in
Financial Times, p. 17, W ed. Sept. 26, 2001: ...In the words of Bernard Lewis, historian of the Islamic
world, 'Ultimately, the struggle of the fundamentalists is against two enemies, secularism and
modernism. The war against secularism is conscious and explicit...The war against modernity is for the
most part neither conscious nor explicit, and is directed against the whole process of change that has
taken place in the Islamic world in the past century or more. The desire for return o a pure form of
religion is not new. But the call to a purified faith has wider appeal today than before. Everywhere in the
developing world, people must respond to the intrusive impact of the ideas and the prosperity of the
western world, in general, and of the US, in particular. But religion makes a difference to the nature of
that response. A universal religion with all-embracing political and social claims offers a lens on the world
different from that available to a Chinese or a Hindu. Most fundamentalists are in no way terrorists, far
from it. But they can offer a reason to die - or to kill."
30. cf. Chinas toys with some American novelties - A nation drawn towards many symbols of American
success, yet still suspicious of its motives by James Kynge in Financial times, p. 2, W eekend, Apr. 28-
29, 2001: ...Bestselling books by Bill Gates and Jack Welch are scoured for the secrets of success.
Many among Chinas top leaders, including Jiang Zemin, the president and Zhu Rongji, the premier,
educated their sons at U S universities. The most popular childrens books in Beijing are translations of
American bedside stories. Touts selling pirated video discs on the streets seem to enjoy panning
528
Crouching Tiger, Hidden Dragon - the Chinese language blockbuster that swept Oscars in the West - but
rave about US action movies such as Mission Impossible II. 'On one hand, there is what I call an
American fetish among people in China, said Jing Jun, a professor of sociology at Tsinghua University.
'O n the other you have calls of down with America. The changes sweeping Chinese society are more
often echoes from the west than revivals from the countrys 5000 years of civilization vaunted in official
pronouncements. Some novelties, like a boom in litigation, carry a distinctly American flavor. A quest for
spiritual compensation is the latest vogue among plaintiffs testing the growing willingness of courts to
award in favor of ordinary people against big business...The focus on individualism - rather than the
drab egalitarianism of 20 years ago - finds expression also in a proliferation of psychiatrists. 'W hen I
started to study psychiatry in 1990, a lot of people asked me if I was insane, says Wang Liqun, a
psychiatrist and professor at Beijing Normal University. The cases she treats would be recognizable to
many counterparts in the west; disorientation after the loss of employment, struggles to bridge the
generation gap, children stressed over parental expectations in exams. The need for psychiatry is
growing because 'the pace of life is faster than before and people are subjected to all kinds of pressures.
As the value system becomes more pluralistic, psychological conflicts are rising, Ms Wang says. Such
are the effects of society chasing a Chinese variant of the American dream. Rows of villa houses
modeled on US homes are springing up in the outskirts of Chinas more affluent cities; sales of Buicks
have been robust and enrolment at 65 internationally approved MBA schools in China is in such demand
that several hundred fly-by-night campuses have also sprung up. But in spite of the growing identification
of Chinese with aspects of western culture, there remains a significant sense of suspicion towards the US
and the west, bom partly from the humiliations that the Chinese suffered at the hands of foreign powers
over the last two centuries. W hether it is the reverence or the resentment that claims eventual
dominance over Chinese sensibilities will depend in part on how the current crisis over arms sales to
Taiwan and the wider strategic competition between the two countries is handled."
31. cf. The Mainland becomes globalized: Taking foreign names becomes a new fashion among the
Chinese people by Associated Press in Beijing in World Journal, Chinese language, A2, Fri. Nov. 8,
2002; China Mainlanders more and more want to take English names. W ang Wui, a saleswoman in a
hotel, took Linda as her first name in the early 1990s. Soon after she found out that her boss shared the
same first name, she renamed herself Vanilla...W ang Wui decided to give up Linda, her first English
name, right after the American movie 'Pretty W om an, staring Juliet Roberts, went blockbuster in China.
W ang wanted to take Vivienne, a female characters name in the movie. But then she found out that the
name was already red-hot in her city. And what she really wanted from her name was to be unique
instead of being a copycat. Finally she chose the name Vanilla. She has used it for seven years since
then and has never gotten herself into trouble duplicating anyone else. This illustrates a tone that is
present in the Mainland China today that has declared its openness, claiming itself, the most populous
country in the world, on the way toward globalization...Wang Quejung, the author of a best selling book
in China, 'Choosing English N am e, pointed out that 'foreigners like a Chinese name for its
pronunciation, whereas Chinese people take on English names according to their meanings. In this
matter, as some Chinese pundits have emphasized, Chinese people having an English name want to
make themselves appear to be different. An office worker named James might appear to be different
from an office worker named Chen Zun, his Chinese name used at home. By having an English name,
some Chinese people might conceive of themselves as foreigners, eating in McDonalds, listening to
Michael Jacksons music, and/or doing business with Western partners...
Also cf. When 1980s China went pop, discovering Pink Polyester and Spandex in The N ew York
Times, A23, Sat. Oct. 7, 2000: The subject of 'Platform is nothing less than the social and cultural
transformation of China in the 1980s, the slow waning of Maoist orthodoxy and the gradual arrival of
Western popular culture and clothing styles...Social change is incremental, and rarely noticed by those
living through it. Mr. Jia shows the commercialization of provincial Chinese culture largely through
incidental details. Pop music videos replace militaristic operas on television and color television sets
529
replace black and white. The drab uniformity of socialist fashion gives way to spandex and pink
polyester...The historical thesis is clear enough: bourgeois domesticity and consumer capitalism have
replaced collectivism.
A15, May 4, 2002: ...Despite the difficulties, some Chinese intellectuals are today engaging in a full
throated debate about the country's future. In academic conferences at home and abroad and in journals
of scholarly opinion that are cloaked in the protective veil of academic jargon (and, often, English)...
33. cf. Chinese media help sell sexy novel by Jacqueline Blais in USA Today, 8D, Thurs. Oct. 4,2001: Wei
Hui, 28, says she was only writing a love story when Shanghai Baby was published in China two years ago. Six
months later, it was banned. The government, she says, turned it into a 'political deal' - too decadent, too full
of sexual description Guess what happens next. According to her American agent, Joanne Wang, the media in
China were going 'crazy over her. They were loving her because suddenly they had a bad girt and she wrote a
sexy novel. But the media also were saying, 'This is bad. All our young girls will live like this. That caught the
governments attention. It also caught the attention of publishers all over the world. In the USA, Pocket Books
just published 20,000 ($24)...True, the twenty something heroine believes sex is the most important thing in
life. Shes also hip literate and thoughtful, quoting everyone from Marilyn Monroe to Sylvia Plath... .She arrived
in New York for a stint as a visiting scholar at Columbia University two days before the terrorist attacks...'New
York, she says, 'is a great city.
34. cf. The New Rome meets the new barbarians - The United States is likely to be the worlds top
power for many years. This brings challenges that it should not try to face alone, writes Joseph Nye in
The Economist, pp. 23-25, Mar. 23, 2002: ...Even more important, the information revolution is creating
virtual communities and networks that cut across national borders. Transnational corporations and non
governmental actors (terrorists included) will play larger roles. Many of these organizations will have soft
power of their own as they attract citizens into coalitions that cut across national boundaries. It is worth
noting that, in the 1990s, a coalition based on NGOs created a landmines treaty against the opposition of
the strongest bureaucracy in the strongest country...Technology has been diffusing power away from
governments, and empowering individuals and groups to play roles in world politics - including wreaking
massive destruction - which were once reserved to governments...The problem for Americans in the 21st
century is that more and more things fall outside the control of even the most powerful state. Although
the US does well on the traditional measures, there is increasingly more going on in the world that those
measures fail to capture. Under the influence of the information revolution and globalization, world
politics is changing in a way that means Americans cannot achieve all their international goals by acting
alone. For example, international financial stability is vital to the prosperity of Americans, but the US
needs the cooperation of others to ensure it. Global climate change too will affect Americans quality of
life, but US cannot manage the problem alone.
35. Imagine that if beleaguered political activists persevere with their staunch ideological commitments and did
not want to make any concession, and if the state government did not timely open new channels to
entrepreneurship, Chinas situations would be much worse.
36. cf. Seeds of change? - Deep in the countryside, China is experimenting with local democracy in
The Economist, A Survey of China, p. 8, June 15, 2002 (brackets mine): ...M r. Li, the researcher, says
that experiments [i.e., the village elections] in rural areas of Sichuan (and to a more limited extent
elsewhere) are unlikely to transform Chinas politics. 'T h e village is not so strong politically. It is isolated.
If urban areas start to reform it will be much faster, he says...Mr. Li predicts that China could have
directly elected city mayors within ten years and a directly elected president within 20 years. For public
consumption, party leaders themselves do not rule out the possibility that China might one day introduce
such reforms. In the 1980s, Deng Xiaoping suggested that China might have general elections within 50
530
years. But to achieve this, it would have to abandon the idea of a one-party dictatorship altogether.
Unfortunately the party so abhors any organization not under its control - whether political, religious or
even charitable - that there is nothing to take its place. Dissidents who tried to organize a nation-wide
opposition party in 1998 were jailed, and no one has tried since, although the Chinese media
occasionally air the idea of more thorough political reform. The leadership is fearful of acting, and will
probably remain so until some colossal social or political shock forces it to change. One potential
candidate is a collapse of confidence in China's feeble banking system.
37. To understand the phenomenon that many Chinese student activists turned to savvy entrepreneurship, see
Guobin Yangs T h e routinization of liminality: identity transformation and the persistence of activism among
Chinas Red Guard generation, a seminar paper presented for the ASA annual conference, Aug. 16-20,
2002. Its abstract is as follows (emphasis mine): This paper extends a theory of the biographical
consequences of social movement participation that I outlined in an article entitled T h e liminal effects of social
movements [77?e Sociological Forum, 15(3): 379-406]. Conceptualizing movement participation as a liminal
experience, I argued there that such experience transforms participants identities due to its liminal
characteristics. Presumably, the stronger the immediate liminal effects of movement participation, the more
powerful its long-term effects will be, and the higher the level of sustained activism. Over the long run,
however, personal biographies will confront historical forces, thus complicating the impact of an early
experience. The concept of the routinization of liminality is proposed here to explain the complications of the
personal consequences of movement participation. I argued that if all social movements are liminal to varying
degrees, they also all undergo a process of routinization. In this process, most movement participants settle
back to the routines of daily life, while a core group will remain politically committed. Both the core group and
the ordinary majority, however, many continue to be engaged in activism, though in different forms. Political
activism may take cultural forms. Struggling to settle down to the routines of daily life, mundane as it may
seem, mav constitute a form of activism in its own right. The meaning of activism itself needs to be redefined
in new contexts. This theoretical perspective is used to examine the long-term biographical consequences of
the Red Guard Movement in China. The paper documents the persistence of activism among Chinas Red
Guard generation over a period of thirty years. These long-term effects are conceptualized as the routinization
of liminality and analyzed in terms of economic, cultural, social, moral, as well as political activism." According
to his thesis on rountinization of liminality, Guobin Yang argued that those previous political activists after
1989 experienced an identity transformation from political activism into other forms of activism such as social,
economic, and cultural. Although those activists remain politically committed, the meaning and forms of their
activism were reframed or redefined in new contexts.
38. cf. For Chinas wealthy, all but fruited plain - From rags to excess" by Craig S. Smith in The New York
Times, A1, A12, Wed. May 15, 2002. Also cf. World Journal Daily, Chinese language, A7, Fri. July 12,
2002: Mr. Yang Bien, the second richest man in China, ranked by Forbes last year, who own assets of
7.5bnRmb and became a black horse in Chinese business world, ascending from raggedness. Mr. Yang,
38, once a military man, was a human rights activist in China. He went to the Netherlands in age 25,
where he studied political science and was a businessman in doing textile trade for 7 years. He had
learned multiple languages such as English, Dutch, and Belgian, etc. He had investments in real estates
and biotech, and became chairman of a publicly listed company in Hong K ong...
39. Note: the economic practicality in China currently refers to those neoliberal agendas, so-called by
Chinese scholars of social sciences. By the terminology of neoliberal the Chinese scholars used here might
be a misleadingly similar nam e, because Chinese neoliberal agendas came up not without the states
tightened control. This was contrary to western terminology of neoliberal" agendas, emphasizing a restriction
on governments role in market economy, cf. Some Chinese see the future, and its capitalist by Joseph
Kahn in The N ew York Times, Sat. A15, A 17, May 4, 2002: ...Aside from a clutch of influential scholars
devoted to finding pragmatic solutions to Chinas vast economic and social problems, intellectuals often
have to choose between quiet irrelevance and public condemnation...China became politically quiescent
531
in the 1990s, at least in part, because neoliberals endorsed the governments authoritarian agenda. More
diverse views, even those expressed in Chinas wobbly ivory tower, could rattle the countrys carefully
managed political edifice. 'It still matters a great deal, Mr. Gan writes, 'if a nations intellectual
mainstream considers democracy theoretically worth defending. Ibid. ...M any of Chinas leading
scholars are not dissidents, and they see their task as constructive, not polemical. Just as China's
economy has begun to resemble those of industrialized countries, intellectuals have focused on issues
familiar to scholars in Europe and the US. Their concern is not whether China should become capitalist,
but what kind of capitalism it should have. One camp, arguably the dominant one, is what the Chinese
call neoliberal. Its proponents argue that China should complete its economic and social evolution that
began under Mr. Deng by selling off state companies, shrinking the government, strictly enforcing
property rights and letting the market work its magic. The neoliberals in some ways tend to echo Ronald
Reagan and Margaret Thatcher, though some also share the antidemocratic tendencies of Augusto
Pinochet, the Chilean dictator who governed with an iron fist but also pushed the development of a
vibrant market economy in the 1970s and 80s. They have enthusiastically embraced Chinas integration
with the world economy...Still, some scholars are not without influence. Some so-called neoliberals have
become advisers to Chinese leaders, including Premier Zhu Rongji, who has supported a faster pace of
reform and who steered the country into the World Trade Organization. The change of leadership that is
expected to take place at the 16th Party Congress in the fall has also provided an opening for a more
general review of future options, even the scope of political change. Neoliberal thinking came into vogue
in the 1990s. Not unlike Russia and much of Eastern Europe, China has an early vision of capitalism,
informed partly by past Communist propaganda, as a system that works only in its crudest form. The
state went from owning assets on behalf of the people to insisting that bureaucrats and well-connected
entrepreneurs had a right to profit from those assets. That approach was reinforced by two events, the
1989 military suppression of dissent around Tiananmen Square and Mr. Dengs 1992 'southern tour,
when he urged people to get rich. The state showed that it would enforce political unity but protect
economic opportunism. One central task was reconciling the need to protect the new wealth of the few
from the demand for equality from the masses. To justify the Communist Partys intervention on behalf
of elites, some neoliberals reached for historical precedent. They disavowed Chinas Francophilic past
and embraced Englands 'Glorious Revolution, which led to parliamentary rule by the aristocracy,
championed by Edmund Burke. Likewise, Isaiah Berlins 1958 essay on freedom, 'Two concepts of
liberty, became a touchtone. Mr. Berlins focus on 'freedom from instead of 'freedom to was treated as
a guiding philosophy for a minimalist state that let the market work. Partly inspired by these ideas,
Chinas economy expanded at nearly a double-digit clip for much of the decade, and it attracted more
foreign investment than any other developing country...After M aos Cultural Revolution, which many in
China view as a disastrous experiment in mass democracy akin to the Jacobin terror that roiled France,
most Chinese became too alienated from politics, Mr. Gan argues. Too few people pay attention to
public policy. It is that vacuum that allows local officials to steal state funds with impunity, or mass
movement like Falun Gong, the exercise and meditation society, to enchant millions of people."
40. cf. China juggles the conflicting pressures of a society in transition by Craig S. Smith in The N ew York
Times, A5, Mon. July 15, 2002: ...The Communist Party maintains a firm grip on most media and is quick to
crush organizations - like the Falun Gong spiritual movement - that pose a potential challenge to its authority.
Yet most Chinese want a strong central government and, despite some cynicism about its anachronistic
ideology, continue to support the party as a unifying force and a check against the 'luan,' or chaos, that all
Chinese most deeply fear.
41. cf. Chinas disguised failure - Statistics can no longer hide the need for Beijing to instigate painful
structural reforms by Arthur Waldron in Financial Times, p. 11, Thurs. July 4, 2002: ...Since 1989,
China has been truing hard to avoid the sorts of traumatic economic and political shocks that brought
down communism in the west. The deep structural changes that have returned those former communist
states to health, however, are as inescapable for China as they were for Russia.
532
42. cf. Guess whos a Chinese nationalist now by Nicholas D. Kristof in N ew York Times, pp. 1, 5,
Section 4, Sun. Apr. 22, 2001: ...'A more democratic China is not necessarily a less nationalistic China,
said Xiao Qiang, the executive director of Human Rights in China, a New York-based group. 'It could
take a very hard line, too. Indeed, if China had been a more democratic country, the recent stalemate
over the American spy plane might have been much more difficult to resolve. As China has become
more open in recent years, allowing citizens to tap out their thoughts in Internet chat rooms or even call
them in to talk radio shows, public opinion has come to matter more. Ultimately, this may make China
more complex, nationalistic and obdurate. Think of France, cubed. The accompanying comments by
university students give a taste of the feelings many young Chinese have toward the US. There is
fascination, respect and envy, but also perplexity about and resentment of those high-handed and
inscrutable Americans. The growing Chinese nationalism did not arise by accident. In the aftermath of
the 1989 Tiananmen crackdown on the student democracy movement, Chinese leaders consciously
cultivated nationalism as a new glue to unite the country. Communism was discredited, so President
Jiang Zemin and others used the education system and the propaganda apparatus to nurture a prickly
national pride and suspicion of the outside world. As He Xin, a commentator with close ties to hard-liners,
said at the time: 'The new unifying force in China is patriotism....the government toned down its
propaganda about the virtues of socialism - which nobody believed anyway, since the children of the
leaders were busy raking in money as capitalists - and focused on warnings about the duplicitous and
predatory West. Those warnings fell on fertile ground, partly because China has been pushed around,
plundered and carved up by one country after another, ever since Britain went to war with China in 1839,
in part to force it to buy opium...This perspective has been encouraged not just by the Chinese
government but also, paradoxically, by the advent of quasi-capitalism in the news m edia...So the
authorities go to tremendous lengths - through propaganda and through cash payments - to appease
unemployed workers and the army. All this makes nationalism a particularly interesting force in China,
given its potential not just for conferring legitimacy on the government but also for taking it away."
43. cf. Beep, beep, yea! In China, freedom is a new car by Joe McDonald, Associated Press in
Wisconsin State Journal, A7, Mon. Mar. 26, 2001.
44. cf. G. Miller 1992, p. 76: "...the possibility of hierarchical failure leads full circle back to markets. The failure
of internal incentive systems is, after all, no news to students of socialist economies. The argument is made in
economics and finance that it is the external incentives posed by the market economy in which hierarchical
firms are embedded that effectively discipline managers and employees. If that is the case, it appears that
paradoxically, markets correct hierarchical failure. This is the inverse of the story told by economists, who seek
to explain the existence of hierarchies as corrections for market failure."
45. The term comes from J. Elster 1983, p. 19.
46. cf. J. Scott 1998, p. 353: "Soviet collective farms, the most draconian case, were finally brought down as
much by the dispirited work and resistance of the kokhozniki as by the political shifts in Moscow."
47. cf. On the great fall of China - in the PRC exists a huge gap in prosperity by Isabel Hilton in
Financial Times, p. 24, Sept. 24, 2000: After a few regrettable periods under Mao...China was back on
track, embracing the economic sanity of the market and growing impressively into the worlds biggest
shopping center.
48. cf. Nee and Stark 1989, p. 26: ...Like the Eastern European reforms, the current Chinese market-
oriented reforms appear to be following a cyclical pattern of development. In striking ways the early
years of Deng Xiaopings reform were similar to M aos trial and error approach, which like the start of
current reform lacked a prior blueprint or clearly charted course of action. This open-ended process of
533
economic reform has allowed the Chinese greater flexibility and creativity in the implementation of their
reform.
49. cf. Opportunity or threat? ADBs delegates keep one eye on China - Beijings leaders insist the
countrys growing economic power would benefit the whole region by John Thornhill in Financial Times,
p. 3, Mon. May 13, 2002: ...Jefferey Sachs, director of Harvard Universitys Center for International
D evelopm ent, also warned that Chinas fiscal position was much more risky than it first appeared. The
government had 'hidden obligations' in the state-owned banking system and unfounded welfare
commitments that would eventually have to be taken on to its books.
50. But it remained a very sensitive issue after the Cultural Revolution, since it was criticized as a move too
close to the FSU, which had a troubled economy and which was still thought as Chinas archrival.
51. See Borokhs 1998 discussion of the conception of three consecutive periods of development of economic
theories in China: the revision of Marxism, the exploration of Western ideas and the current scholarly
'indigenization." cf. Borokh, Olga N. 1998. p. 24. Borokh herein particularly explores the critical links between
the impacts of new institutionalism on the economic scholarship in Taiwan and China and traditional Chinese
concepts, while explaining the congruence of some Western economic ideas with Chinese mindsets, and the
permanent interests of Chinese scholars in the relations between ethical norms and economic behavior and in
the relations between the uniqueness and universality of Chinese economic theories and practice. These
insights are very instrumental to apprehend the formation of post-Marxist scholarly discourse in the associated
issues in the PRC (also cf. Lev Deliusin's book review in The China Quarterly, No. 157, March 1999. p. 237).
52. For the metaphor of Pandora box, see Please accept this gift with our, uh, compliments - Word for
word/foreign exchange by Tom Zeller in The New York times, p. 7, Sun. July 28,2002: The mystical Pandora
opened a forbidden closed box and all the evils of the world inside were released.
53. China is fully aware that its reality has long been tortured and extremely agonized by those non
political agendas in its larger environments, either economic or natural. As reported by US weather
experts, "China experienced three of the century's four deadliest weather-related disasters: two drought-
induced famines that killed more than 29 million people, and a Yangtze River flood that claimed 3.7
million lives (cf. "Century's deadliest disasters hit China" in USA Today, 5A, Tues. Dec. 14, 1999). This
statistics actually needs to add the Earthquake of Dangshan City in 1976, little-known to the world, with
most killed people of virtually a quarter of million in the disaster by official documentation, compared to
the casualties of the many other earthquakes in the rest of the world in this century.
54. The fitness of such a system in China prior to its institutional reforms may be partially elaborated by virtue
of J. Scotts 1998 thesis on "small as beautiful" in agricultural development (cf. p. 354: 'The small family farm,
by virtue of its flexible labor (including the exploitation of its children), its capacity to shift into new crops or
livestock, and its tendency to diversify its risks, has managed to persist in competitive economies when many
huge, highly leveraged, mechanized, and specialized coiporate and state farms have failed. In a sector of the
economy where local knowledge, quick responses to weather and crop conditions, and low overhead
(smallness) are more important than in, say, large industry, the family farm has some formidable
advantages.").
55. Note: "Iron Bowl," so dubbed by the Chinese people, is a non-incentive system of permanent employment
assured by the "socialist" state with flat wages and rationing goods to all individual employees and cadres in
the state-owned enterprises and governmental administrations. China announced plans to slash its vast and
costly bureaucracy. On Mar. 5 ,1 9 9 8 , Thursday, in his opening address to the annual meeting of the National
People's Congress, outgoing Premier Li Peng said the cuts were necessary because China's efforts to move
from a planned to a market economy made many government functions superfluous, c f."Chicago Tribune", 1-
534
2A, Mar. 6, Fri. 1998.
56. Before the Cultural Revolution, most of Chinas heavy industry concentrated on North-Eastern China that
abutted on the bonder of the FSU. cf. Industry baffled by Hondas plans in China by Keith Bradsher in The
New York Times, w1, w7, Fri., July 12, 2002: ...In the 1950s, when China still depended heavily on Russian
technical assistance, Mao Zedong ordered that most of Chinas heavy industry, including auto factories, be
built in northern China, and the pattern has persisted...
57. More formalized organizations would adopt more efficient procedures and grow more rapidly than do
those less formalized (H1); more capital-intensive industries would adopt more efficient procedures and grow
more rapidly than do those less capital-intensive industries (H2), and so on, and so forth (cf. John R. Sutton
and Frank Dobbin, 1996).
58. cf. W hy Japan needs raiders by Paul Abrahams in Financial Times, p. 15, Mon. Jan. 17, 2000:
James Hanson was the UKs takeover king. O ver three decades he transformed a Yorkshire-based
fertilizer and sack-fire company into Britain's 13th largest group with a market capitalization of 11 bn lb.
The scourge of sleepy management, he sniffed out hidden value at poorly performing groups, often in
mature industries, and then launched hostile takeovers. The effect was electrifying. Either Lord Hanson
rationalized the group, or the management did it anyway. Japan may not have invented sleepy
management, but it has perfected the art. The domestically oriented industrial sector is filled with
inefficient companies. Japanese engineers are tightly renowned for their ability to chum out ever larger
quantities of goods at increasing speed and ever-lower cost - but this emphasis on reducing unit costs
and increasing sales and market share is economically bankrupt if the investment necessary cannot
generate a return. All too often in Japan, nobody makes that calculation.
Such wasteful practices would be damaging enough. But the worst excesses come from elsewhere in the
business. Japanese senior staff receive low remuneration by international standards. But the benefits
from the country's corporate welfare state make up for it. Capital is tied up in such assets as golf club
memberships, while cash is squandered on brigades of chauffeurs and company-funded entertainment in
Tokyos nightspots of Akasaka and the Ginza. The result of such profligate behavior is that although the
Topix of all first section shares has rallied 54% since January last year, nearly half of the 1,357
companies are trading lower than this time last year. Indeed. ING Barings estimates that 47% of these
groups have a price to book value of less than one, while HSBC points out there are even 21 trading at
valuations below the net cash on their balance sheet. Effectively, the market is pricing them for
bankruptcy. Such valuations may look cheap, but they are not - at least not with current management.
In any normal market, someone like Lord Hanson would appeal to shareholders over the heads of the
executives, offering to buy the company and force out such woeful leaders...The barriers to even friendly
acquisitions in Japan are well known. The lack of transparency of Japanese accounting makes valuing a
company hazardous. Cutting staff is difficult, if not impossible. Local management still wants to run the
business afterwards. The system of cross-shareholdings by friendly companies means the free float in
many groups is tiny. But such barriers are breaking down. Cross-shareholdings are unwinding as some of
the biggest keiretsu business groupings implode. And shareholders are becoming much more focused on
return. O ffer them a premium and they might well accept. Som e of the leading investment banks in
Japan indicate they have been approached in recent months by potential raiders, both domestic and
foreign...Certainly, Japan would have a lot to gain from a successful unsolicited bid. The effects would
be electrifying. Greed and fear would come into play - greed as investors bought long-underperforming
equities on expectations of further bids, and fear as executives rationalized their own companies before
outsiders did the job for them. A successful hostile takeover would be the most exciting event to have
hit corporate Japan since the transistor. You may not have to watch this space for long."
59. cf. Catching the next wave - Asia is tom between the forces of conservatism or embracing the
535
internet society and greater political freedom. No choice is more critical to the region's future by Peter
Montagnon in Financial Times, p. 8, Tues. Dec. 28, 1999: Asia enters the new millennium weakened by
a financial crisis that will stand out even in the broader sweep of history. Years of dynamic growth
stopped suddenly after 1997 when a wave of financial speculation brought devaluations, disastrous
losses to the regions banks and economic collapse. Although the past year has brought improvement,
recovery remains weak and heavily dependent on the booming demand for personal computers and
other electronic goods in the US. The financial and corporate restructuring that are widely seen as
necessary to lay the foundations for sustained economic growth are not complete. How Asia copes with
this task will determine its future, not only in 2000 but for many years beyond. Currently, the region is
being pulled in two opposing directions. The benign one sees more restructuring and a period of strong
economic growth based on the new internet technology, which would in turn reinforce the trend towards
greater freedom and democracy. The negative one involves failure to complete restructuring with
disappointing growth leading to heightened social and political tensions...The new information age could
not only underpin Asias next phase of high growth. It should also promote the trend towards democracy
that has been a feature of recent years. 'As the market advances you see the devolution of power away
from the elites, says Andrew Sheng, Hong Kongs chief financial market regulator. The closing years of
the millennium have seen important political shifts in Asia with Taiwan and South Korea moving from
military dictatorship to plural dem ocracy...There has been a sea change in public attitudes, Asians have
become less and less willing to accept authoritarian rule, says Frans Seda, a former Indonesian finance
minister. 'If there is a choice between chaos and dictatorship, nowadays you choose chaos, he
says...awareness of the need to latch on to the technology revolution has already caused Singapore to
lighten its heavy-handed approach to censorship and regulation. Its planners realize they must allow
creativity to stay ahead in the knowledge-based business.
But doubt remain both about the durability of the regions recovery and about the power of the internet to
revolutionize economies. The internet has high potential but its benefits are narrow in terms of the
multiplier effect on the economy, says Hung Tran, the Vietnamese-bom chief economist at Rabobank
International in London. This years recovery has depended on exports, weak currencies and low interest
rates. But Asias long-term prospects are still vulnerable to the rise in US internet rates and the lack of
corporate restructuring at hom e...The devastation wrought by the economic crisis has also revealed
more sinister forces at work. There was a hint of religious extremism in the recent Malaysian elections; it
also underlies the separatist movement in the Indonesian province of Aceh. The strain of the economic
crisis has unleashed a more strident nationalism in China, while Japanese voters have started to
question their countrys traditional pacifist role...Above all, China has yet to face the challenge of
allowing more economic freedom without sparking political disruption...Membership of the World Trade
Organization has been seen as a watershed in Chinese history because it will oblige the country to deal
with its faltering banks and creaking state enterprises. But by creating new economic freedoms and
embracing he internet world, the government is also putting its own authority at risk...On the other hand,
failure to reform and economic stagnation would only increase the social tensions and mass
unemployment. The natural response could be a more deliberate retreat into nationalism in an attempt to
rally the people against a common, outside enemy. One big fear is that failure by Japan to recover could
lead to separate build-up of domestic tensions there as well. Although Japan has at last been posting
positive growth rates this year, its recovery remains heavily based on fiscal stimulus. Japan is still not a
final export market for Asian companies in the way that Germany is for Europeans or the US is for
Mexico. It cannot thus play the role of locomotive for the region, says Jean-Pierre Lehnmann of the
Swiss Asia Foundation in Lausanne...No one can be sure how Asia will respond to all these conflicting
pressures as the 21st century gets underway. Asia could choose the benign path, capture the information
revolution and use it to promote prosperity and deeper political reform. O r it could duck the challenge
with all the attendant risks of social and political tensions. The outcome is finely balance, and as Mr
Lehmann remarks: 'There isnt any room for complacency at all."
536
60. cf. P. David 1994, p. 211: "...where is it anticipated that the potential members of an organization will be
drawn from different and varying backgrounds...and that the expected duration of their commitment to the
organization will be brief..., they cannot be supposed to be mutually well informed as to the extent of each
others' prior inculcation with a particular set of commonly held 'values.' In those circumstances, which seem
more to typify institutions governing and supporting a variety of commercial transactions, it is especially likely
that the 'organizational contract' would make explicit to every individual some threat of externally imposed
sanctions in cases of deviant behavior. The sanctions may be varied, according to the severity of the
infractions and may take various forms, ranging from the forfeiture of a bond, to temporary or permanent
expulsion from the organization...and to the exaction of reprisals upon third-party hostages."
61. Unlike the prevailing scholarship addressing American social disruption as a consequence of its economic
change, Zucker argues that it was the earlier erosion of American social forms and the ensuing emergence of
formal corporations, and industrial forms, had led the economic changes of the last century. Social forces
ought to be treated as independent variables, since the structure of the economy is shaped by social forces, cf.
Zucker 1986, p. 68: "When economic historians touch on the cultural changes during the 1800s and early
1900s, they explain changes in social organization as a function of industrial development. Fewer sociologists
have examined early industrial development, but those that have stress social disruption as a consequence of
economic change, principally reflected in the gradual erosion of earlier social forms (Smelser, 1964, 1959).
Similarly sociological theories of 'cultural lag' argued that social change invariably 'lags' behind technological
change (Ogbum, 1924; Orgum & Nimkoff, 1955). The conclusion is unanimous; industrial change, and the
accompanying technological change, leads to social change. I intend to turn the problem on its head. How is
the structure of the economy shaped by social forces?... For a number of reasons this same period is critical
for understanding the impact of social variables, specifically trust. First, modem industrial forms were just
emerging: there was limited use of formal bureaucratic structure before 1840 (Zucker 1983:14-17). After 1840,
the rate of formal incorporation accelerated, followed by an even more dramatic acceleration by about 1860
(Evans 1948: 48). Procedures were not well-established; few aspects of industrial life could be taken for
granted..."
62. cf. The Economist, p. 5, "China Survey," April 8th, 2000: China is so big that its economic potential
might more usefully be compared with continental America's (driven by domestic demand) rather than
Japan's (driven by exports)." Also cf. The Economist, April 22nd, 2000 p. 16: ...After all, a degree of
economic introversion is typical of countries of 'continental' scale and large domestic markets, such as
India, Russia, China or, yes, the United States... Ibid. p. 37: Chinas [economy] is an economy driven
mainly by domestic demand and investment, and exports, in the long run, play only a supporting role...
63. Which becomes characterized by increasing aging population, floating rural laborers into cities, and urban
unemployed youths in the recent decades.
64. For the relevant theoretical propositions on the relations between natural selection and institutions, see W .
B. Seal 1990.
65. It is thus arguable to impute the efficiency problems, derived from these two basic dimensions, to the name
of the state socialism exclusively, since the phenomena exist even in many Asian market economies, e.g., in
Japan, Korean, and South East Asian countries.
66. cf. Another Asian nation battling a crisis in its banking system - China has its own mountain of
nonperforming loans by Keith Bradsher in The New York Times, B1, Sat. Oct. 26, 2002: ...For years, banking
decisions depended not so much on credit worthiness as on personal ties to government officials and even
bribery. China's banks ended up lending hundreds of billions of dollars worth of yuan and renminbi to unsound
enterprises, usually state-owned, that soon defaulted. Chinas government took a big step in 1999 to start
cleaning up the mess, setting up four asset management corporations - modeled after the American
537
government agency that handled the savings and loan bailout - to take over and dispose of $170bn of the
banks worst loans. These focused on essentially hopeless deadbeats, who had failed to repay anything since
at least 1995, and sometimes even longer. But now the cleanup is proving less ambitious than promised, and
is falling far short of its goal of helping push China further toward a market economy. Many of the loans,
instead of being sold for cash, have simply been converted into stock in the bankrupt companies, allowing
even the most inefficient to stay in business under government ownership. Moreover, the asset management
companies are being forced to compete against the state-owned banks themselves, at least one of which has
told potential buyers it may cover as much as half the cost of acquiring assets now being auctioned off here
and in other Chinese cities.
67. Hence these dynamics cannot separate from those institutional arrangements delivering them, and the
fitness of the arrangements into those vested interests, types of economic sectors, organizations, levels of
institutionalization, etc., and their survival. In comparison with types of economic organizations, for example,
performance of economic organizations adopting an institutional innovation likely to deal with the frtness and
effectiveness could enhance more than the performance of those limited to adopting solely a market approach
to efficiency. In this case, performance has less to do with technology and market efficiency than with
innovative institutions as such.
68. Efficiency is institutionally bounded efficiency, because it is related to given contexts, and it could be
undermined by other contexts. Efficiency is institutionally bounded efficiency, because it occurs in response to
internal institutional knots and external economic shocks in given contexts.
69. Bounded efficiency may be further confounded with the case when managers set the agendas for
maximizing the growth of their economic enterprises that appear to deviate from the efficient ends for
maximizing profits. In so doing, growth likely discounts profits. Thus profit maximization may work only under
limited conditions. In this case, performance may relate to the role of the individual managers.
70. cf. W hy capitalism needs to be policed - Critics of global organizations that answer to no one should
not be dismissed as Luddites by Michael Prowse in Financial Times, p. XX VIII, W eekend, April 8/9,
2000: ...There are many hues of capitalism, depending on the degree to which market values are
subordinated to broader social goals and interests. By default the world is now opting for a version of
capitalism in which the profit motive is largely unrestrained. To be blunt, it is choosing an American
flavor of capitalism. This evolved in an individualistic climate that is unique to the U S and for which there
are neither historical nor geographical parallels. W e should not stigmatize as Luddite or reactionary those
who query the universal validity of this social model. They [i.e. the protesters against W T O and IMF]
have a case that deserves a reasoned reply.
71. As Boisot and Child disclose (1996, 606), "If, according to Western experience, modernization requires
institutional changes moving transactions first toward bureaucracies and then toward markets, China cannot be
said to be modernizing effectively. But if China is not modernizing effectively, how does one account for its
spectacular performance on the criterion of growth - an average of 9% per annum in the 1980s and in double
figures since 1992."
72. This historical progress is parallel to DiMaggio and Powells 1983 contention that "structural change in
organizations seems less and less driven by competition or by the need for efficiency.
lnstead...bureaucratization and other forms of organizational change occur as the result of processes that
make organizations more similar without necessarily making them more efficient." Here the phrase "more
similar" applied in China's particular context may refer to the more standardized regulatory codes, rules, and
procedures in its social structure of institutions through its institutional reforms.
73. cf. State industry set to retain its dominant position in economy - Despite the new rhetoric from the
538
congress, private entrepreneurs face problems setting up companies in China by James Kynge in
Financial Times, p. 3, World News," Mon. Nov. 11, 2002 (emphasis mine): ...Private property was
identified in the keynote speech by Jiang Zemin, the party chief, as worthy of state protection - the first
tim e it has been accorded this recognition in such an august forum He also referred to capitalists as 'the
superior elements of societys emerging class. Does this mean China is now ready to accord a status to
the private sector that is equal to that enjoyed by the state industry upon which the partys economic
power still rests? The answer is not yet. Private companies still face policy disadvantages in many
areas, O f the Rmb30bn ($3.6bn) in corporate bonds issued so far this year, none was launched by
private companies, said Zeng Peiyan, minister at the state development planning commission. He
explained that approving private companies for bond issues is problematic because of what he called
doubts over their creditworthiness. Bu t in some regards, private companies are even less favored than
are foreigners. In Chinas five special economic zones - dynamos o f the national economy - foreign
investors are required to pay 15% corporation tax, but domestic companies mist pay 33% . On the
domestic stock markets, all but a handful of some 1,200 listed companies are state-owned. This situation
has arisen mainly because state companies are routinely given precedence by government bodies
entrusted with approving at flotation applications. As Mr. Li points out, the state-owned enterprises need
certain advantages because they remain responsible for the social welfare of their workers. Many must
pay pensions, unemployment benefit, education and health fees out of current revenues. Although Mi.
Jiang mentioned that private property is to receive the protection of the state, the national constitution
does not reflect this and guarantees protection only for state property. This contributes to a wariness
exhibited by state banks that recoil from lending to private companies because of doubts over the legal
status of their capital. The state sector, according to Mr. Jiang's speech, plays a 'dominant role in the
economy, while private enterprise is merely 'an important component part. Although the number of state
enterprises has declined over the past five years, the size of the largest state companies has ballooned.
'Th ere are 514 state-owned and state-controlled enterprises, accounting for 0.3% of Chinas industrial
enterprises, said Mr. Li. 'However, the total volume of their assets in 2001 accounted for 59.2% of
Chinas entire industry - and 49.2% of profits realized. Such statistics suggest that China is not about to
become an economy driven by private enterprise and nor is the Communist party vet in the danger of
relinquishing the commanding heights. It needs the dynamism with which private businesses create jobs,
but it will not allow then freedoms that are inimical to the partys survival instincts. Therefore, as Mr. Li
emphasized, private companies are required to set up party cells that 'lead the trade unions, safeguard
the rights of workers, help enterprises operate in accordance with the law and educate party
m em bers....O n e observer said that while private business was getting into the party, the party was also
getting into private business. 'T h e party and the private business people are coming closer together.
They are unifying to build a new China, said Guo Fenglian, a national icon who was the leader of the
'iron girls production brigade in Chinas model commune, Dazhai, during the Cultural Revolution (1966-
1976). Now she is both the Communist party secretary at Dazhai and the owner of 10 local companies in
tourism, textiles, agricultural processing and alcohol. 'O u r turnover now is RmblOOm a year. This
sweater I am wearing is from our own factory. Do you like it? she said on the steps of the Great Hall of
the People.
74. I.e., disenchantment with fanatic immersion in exogenized and incessant class struggles that led to
aggravating inter-personal antagonism and international confrontation.
75. cf. "Chinese start day trading on the Web" by Jam es Kynge in Beijing in Financial Times, p. 5, Mon.
Dec. 9, 1999: "A few Chinese Internet companies have begun to offer day-trading services for shares
listed on domestic stock markets in anticipation that Beijing's regulators will soon approve the buying and
selling of stocks in cyberspace. Huaging Shitai, Stcok Star, and Shengrun 2000, are all small domestic
internet companies that have begun to offer internet share trading in the hope of replicating the success
of U S internet trading companies such as Charles Schwab. 'W e know that some companies have begun
to offer day trading services, said an official from the China Securities and Regulatory Commission
539
(CSRC), the industry regulator. 'There is no law against it. W e are currently drawing up regulations on
this and they should be published sometime soon, the CSRC official said yesterday. It may appear
strange in the W est - where official permission is a standard precursor for the start of business -- that
some local companies are openly jumping the regulators gun. But it is different in China, where an
official policy of 'crossing the river bv feeling the stones allows some companies too blaze an
experimental trial before government regulators make up their minds on whether a practice is desirable
or not. Indications of whether an experimental business may secure permanent approval can be
assessed bv the number of significant state-affiliated companies that are trying to enter that particular
sector. This is because it is usually the state-affiliated companies that first receive an informal green light
from government authorities. In the case of Internet day trading, Huaqing Shitai, which began operations
without fanfare this week, is such a company. The company has been approved as the first authorized
service agent for stock trading for China Telecom, the nation's dominant state-owned telecoms company.
It operates over a dedicated fixed-line network provided by China Telecom, which should allow tighter
security and faster access speeds for day traders. A senior executive at Huaqing Shitai said yesterday
that with the aid of special computer software, customers were able to buy and sell shares through
designated brokerage houses. It takes a matter of minutes for an order made by a trader to be placed
with the Shanghai or Shenzhen stock markets, and notice of the order's execution to be relayed back to
the trader, the executive said. Settlement of the trade is done automatically through the trader's account
at the brokerage house."
76. Chinese business confidence is more or less built on Chinas connection or national cohesion, cf.
Last of the bulls line up as Bank of China opens shop - Excitement about IPO shows a lot of faith in
Hong Kong market by Rahul Jacob in Financial times, p. 14, July. 23, 2002 (emphasis mine): ...Ms.
Chow is convinced Bank of China (Hong Kong) shares can only move in one direction - up. I am going
to sell it after earning 10% or 2 0 % , she declared. Indiscriminate bull market gamblers like Ms. Chow
may be in danger of becoming an extinct species as a bear market takes hold elsewhere in the world, but
not in Hong Kong where nearly everybody is a day-trader at heart...The discount for retail investors is
especially appealing, as is the belief that its Chinese connections will make the shares irresistible to other
investors...There is certainly plenty of money sloshing around Hong Kong, which boasts a per capita
income higher than the UK. Local banks in the city of 7m people have as much as US$423bn in deposits.
But many complain that with bank interest rates of less than 1%, the money is better used for gambling
on shares...In Hong Kona, even though the local index has declined about 8% this year, faith in the stock
market remains unshakeable. As he lined u p to apply for US$3.800 worth of Bank of China (Hong Kong)
shares. Tin Sing-tuna. a 40 vear-old street hawker, said he planned to hold it for the lono-term. 'I hope it
will be like HSBC some dav. he said.
Also cf. The China Syndrome by John Lloyd in Financial times, p. I, W eekend, Jan. 8-9, 2000: ...I
spoke, at that reception, to a young man named Richard Liu, chief operating officer of the Sanjiu
G roup....He is driven, as are the others, by national pride. Throughout the seminar, this was a recurring
theme. Competition was perceived in national, not in company terms: one western participant, Samuel
Van Vactor, a US economist, told me a young Chinese executive he met had said in puzzlement: 'I dont
understand how you in the west are successful. W e in China are taught to work hard for our country; you
have no such incentives How do you do it?. Liu, with his western business education and dispassionate
view of his company, says that 'this is not about money; its about pride. To build exports is about
national pride - if we bring Chinese medicines to the world then we bring pride to the country. It will take
a great deal of pride to do it.
No doubt, such collective commitment is conducive to entrepreneurship and to regime stability and
national cohesion in terms of Chinas "united front" for its goal of "Four Modernizations," which thus
hastens its institutional learning, trial-and-error experimental reforms in banking systems, state-owned
enterprises, and scale economies, through decentralization-induced coordination, frugal self-restraints,
540
and self-resistance to the market failures in resource allocation, wage, unemployment, social welfare,
etc. Nevertheless, people still need to be cautious, wait to, and to see if China could sustain its transition
in this new century and what alternative expectations and/or new ideologies might evolve, as Chinas
GDP growth multiplies, competition becomes fiercer, people become richer, the new generations
become more open-minded, and their attitude toward consumption changes. As mentioned before in
Chapters 3 and as we shall discuss in the next Chapter 6, although Chinas current transition has
followed an evolutionary route, its further upgrade would inevitably entail certain fundamental social risks
and costs. If costs and risks are too high, that would force people to change their cultural attitudes and
social expectations, doubting if the current model could work in the future. People of the current
generations just cannot afford to see excessive costs caused by fanatical ideological pursuits. Future
generations with different life experiences might expect more individual autonomy and material returns.
77. cf. Boisot and Child 1996, 619-20: ...T u (1993: xi) observed that the collusion of state and
entrepreneur made for a peculiar economic strength: The interdependence of economy and polity is such
that the state plays a vitally important role at all levels in removing structural impediments to
development and building necessary infrastructures for manufacturing industry, commerce, and trade.
78. cf. Wubiao Zhou, 2002: Market reform and the making of an integrated national grain market in China,"
Seminar paper presented for ASA annual conference, Aug. 16-20, 2002. The following is its abstract
(emphasis mine): Market economy will not emerge from redistributive economy automatically once the
state abolishes redistributive system. Because of the cognitive incompleteness of market actors in post
redistributive societies, and also because of the conflicts between the state and local interests and
among local interests, state interventions are inevitable and necessary for a successful market transition.
This paper has examined the evolution of market pattern in the new market transition economies based
on the emergence of an internal grain market under market reform in China. I found that local markets,
tightly 'protected by local officials, always tried to curtail long-distance trade beyond local territories and
thus were not starting points of an internal market in Chinas national grain market. The approximate
internal grain market at the beginning of the 21st century n China is the result of deliberate actions of the
reform-oriented state. Blockmodeling method is used to test hypotheses."
79. See similar arguments by some recent economists on transitional economics regarding the close
resemblance of Russian experiences with those of Western industrialization, cf. The Economist, Even
the harshest critics said Russias problems were not that different from those experienced in other relatively
young industrialized economies. 'The struggle in Russia now, pitting strong regions against the federal center,
closely resembles the one that was raging in the US in the 19th century, said Eric Berglof, director of the
Stockholm Institute of Transitional Economies. Western economists agree, however, that Russia needs an
effective bankruptcy process. Its economy has never gone through the process necessary to separate
companies that can survive under market conditions from those that cannot. As a result, sick companies are
sucking valuable resources from healthy ones, dragging out Russias transition to a market economy. 'W e
have loss-making enterprises in all economies, said Barry Ickes, a professor of economics at Penn State. 'In
the US, we have Amtrak, but it doesnt matter because its share in the economy is small. In Russia, you have
a lot of Amtraks.
80. cf. The Asianization of America by Olivia Barker in USA Today, 1A, Thurs. Mar. 22, 2001:
...Asianization is still seen by many in the USA through the prism of Orientalism. (Social critic Edward
Said coined the term in his seminal 1979 book of the same name to describe the exotic, mysterious and
ultimately racist labels historically applied to the East by the W est.) In some ways, the old forces are still
at work, Gan says: Asian-American actors must fake an accent and leam martial arts to be successful -
they have to look and sound Asian, or Americas stereotype of what is Asian. Stores still advertise
Oriental rugs. 'I see those signs and I cringe, she says. Even the largely lauded Crouching Tiger has
provoked tension: Does the film, custom-made for the W est and roundly panned in the East, celebrate
541
Asian culture or romanticize it?...The issue for many isnt so much whether Hollywood puts Asian faces
on the screen but whether those depictions are three-dimensional. Glamorizing kung fu kick s anim6
action -- 'we call this Asiaphilia, says Darrell Hamamoto, professor of Asian-American studies at UC-
Davis. 'Its all superficial and theres no depth to it. And to Hamamoto, its particularly pernicious when
viewed against decades-long history of anti-Asian bias in America, from the 'model minority myth to the
vindication of Los Alamos scientist W en Ho Lee after nine months in prison. 'Beneath this adoration of
all things Asian, comes this condescension. In its most benign form, its patronizing, and in its most
severe form, its a killer, Hamamoto says. Meanwhile, hes hoping to invert the media power dynamic:
hes involved in trying to launch a BET for Asian-Americans called YE N TV , Yellow Entertainment
Network Television.
81. cf. Mischief or conspiracy - Japanese certificates 'worth trillions of yen have been turning up in
financial centers around the world. But their origin is the subject of secrecy and controversy: are they part
of a complex political plot, or a ploy to trap foreign investors? by Gillian Tett in Financial Times, p. 16,
Weekend, Apr.7/ Apr.8, 2001 (emphasis mine): It looks innocuous enough: a simply worded warning
about 'fictitious bonds sits on Japans Ministry of Finance website. In fact, it is a gateway into a world
swiding with explosive accusations of fraud, conspiracy and political interference...And their origin is the
subject of mystery and controversy. Are these quasi-bond certificates part of a complex political
conspiracy, or are they simply a ploy to trap foreign investors?...In fact, finance and politics in Japan are
deeply murky, and the complete truth may never emerge.
82. cf. Weeding out corruption - Asias crony capitalism came under fire in the wake of the financial
turmoil of 1988 - the reform of corporate governance still has some way to go by John Plender in
Financial Times, p. 16, Tues. April 25, 2000 (emphasis mine): The cause of corporate governance in
Asia received a big boost from the financial maelstrom of 1998. Yet with the growth in the Asia-Pacific
region back to a pre-crisis 6% last year the reformist momentum has waned...During the crisis
companies tried to reduce their cost of capital by promising good governance to entice foreign capital,
but now...the pressure for a lower cost of capital has gone away. It looks as though Western fund
managers have let slip the chance to reap a huge regional corporate governance dividend - the
increased return from enhancing shareholder value. Poor corporate governance was not the prime cause
of the Asian crisis, which was chiefly about exchange rate mismanagement, poor banking practices and
weak financial systems. Yet the turmoil of 1998 did expose a serious problem: the close and often
corrupt relationships between corporations, banks and politicians in the region. Banking systems were
used as a tool of industrial policy regardless of profit bv governments as different as those of China and
South Korea. A narrow equity base, designed to prevent a loss of control in the regions predominantly
family-owned businesses, increased the vulnerability of the corporate sector to shocks. With an
artificially low cost of borrowing and poor accountability to outside shareholders, funds were dissipated in
inefficient investment. Washington led the industrialized countries in campaigning against 'cronv
capitalism. calling for improved governance as part of the attempt to provide a better infrastructure for
more stable capital flows. In fact, corporate governance in Asia is far from a lost cause. The Fund and
the Bank have helped bring about improved companies legislation, better listing agreements, higher
quality accountancy and new bankruptcy laws...the recent investor enthusiasm for Asian new economy
companies, now partly in reverse, was not purely about technology. In Japan and Korea, polarization
between the old and new economies probably reflected internal capital flight from companies with
deficient governance to those less likely to flout shareholder interests. In the Chinese diaspora, in
contrast, investors sought to overcome the information problems in Internet investing by backing 'good
business families. The lack of a half-decent business plan did not prevent a recent scramble in Hono
Kono for shares in Tom.com. backed bv the family of Li Ka-Shino. The Li name operated as a brand,
commanding widespread loyalty. The Internet phenomenon has been helpful to good governance in a
less obvious respect. In Japan and Korea, fortunes made in technology start-ups have caused an exodus
of younger people from big companies. According to Yu Han-soo, secretary-general of the Federation of
542
Korean Industries, more than 1,000 people have left Samsung Chaebol to join venture businesses of
Kosdaq...it will force change on big companies because they will have to boost their own share prices to
make share incentives attractive enough to stop the brain drain. Other forces for change include
shareholder activism... Yet Asia still has governance black holes. Malaysia, despite having clear property
rights, suffers from cronyism and ill-treatment of minorities. Such derogations from good governance are
perversely rewarded bv tracker funds using global benchmarks. At the same time, growing competition
between exchanges creates pressure for weaker listing reguirements...Hono Kong is top of the Asian
governance league table. Yet this...entails risks because too much regulatory rigor can drive activity
elsewhere. ...W ith recovery. Koreans have been under less pressure to sell, so there are too few
incomers to exert influence. A decisive more to an equity culture has vet to happen. Among Chinese
entrepreneurs, the monitoring role of boards takes a poor second place to social and networking
functions. The next challenge in Asian govem ance...is an evolution towards a more professional.
international model. But that is not easv...ln much of Asia the focus of accountability...is on controlling
majority shareholders who dam age minority interests. Yet reform relies on the US tools of enhancing
shareholder rights and having outside directors. While cronyism in Asia has retreated, families still come
first...Only another crisis, it seems, could shorten that horizon."
83. Even today, the symptoms of so-called cronyism still haunt contemporary capitalisms, cf. Bush
calls for higher ethics in business - President wants more aggressive enforcement by Sandra Sobirtaj,
Associated Press from New York in Wisconsin State Journal, A1, A12, W ed. July 10, 2002 (emphasis
mine): Seth Taube, former SE C enforcement chief for the New York region, said increased prison terms
will do nothing to deter misdeeds: Businessmen care about money, not jail. Mark Zandi, chief economist
for the Economy.com consulting firm, summarized Bushs approach as 'All that is needed is to throw the
bad apples out of the proverbial barrel. ' The problems appear more systemic, however, and reguire
broader action. Zaldi said, predicting that Bushs plan will do little more than 'temporarily staunch the
bleeding in financial markets. A one-time oil company executive and longtime opponent of government
regulation of business. Bush was elected to the White House with overwhelming support from corporate
America. That support has become a liability with the recent months cascade of business scandals:
billions of dollars in hidden losses at Entron. a $4bn discrepancy in the books at WorldCom, tens of
thousands of workers out of jobs and retirement savings, chief executive officers refusing to testify to
Congress.
Also cf. Americans crony capitalism - Enrons collapse could prove more damaging to the US market
model than the crisis in Argentina by Carolina Atkinson in Financial Times, p. 13, W ed. Feb. 6, 2000
(emphasis mine): ...Enrons demise, amid daily revelations of misdeeds and questionable accounting,
strikes at the heart of American capitalism...The US recession and stock market decline contributed to
Enrons undoing. But, as we now know, the good times for Enron were a myth. Its earnings were 'almost
$1bn higher than should have been reported, as high-level executives were 'enriched by tens of millions
of dollars that 'they never should have received, in the devastating words of a special report of Enrons
board. Ordinary employees, meanwhile, were in effect robbed of their savings. The sorry tale that is
emerging of special deals and dishonest dealing hits squarely at the reputation of the US capital markets.
Executives, external directors, supposedly independent auditors, bankers, lawyers and market analysts
apparently all fell short. And the system of corporate governance and market scrutiny that is supposed to
allow free markets to flourish to the benefit of all, not just the privileged few, failed. W hy is this more
than just a very big business failure? Because the US markets, and the array of institutions that
constitute them, are supposed to be a model. When the Asian crisis hit, crony capitalism took much of
the blame. The definition o f sound policies was broadened to include a call for countries to put into place
strong market infrastructure, including more rigorous accounting standards, better regulation, stricter
disclosure and stronger corporate governance. As the international community struggled to define this
new consensus, it was often to US examples that it turned, albeit grudgingly. And where there were big
differences, those of us representing the US were typically reluctant to cede the case. This is harder to
543
justify now...Enron's collapse offers a cautionary tale for American capitalism. Even if aberrant criminal
behavior turns out to have been at the root of the problem, the system was too slow to catch it. There are
some signs of underlying strength: Enron was allowed to collapse, its practices are being investigated
with vigor, and accountants and others are scrambling to reform. The changes must be convincing if the
Washington consensus is to retain its authority in the eyes of the wider world."
84. cf. The corporatist manifesto by Steve Hilton in Financial Time, p. I, Weekend, Apr. 20/21, 2002.
85. For instance, as Powell 1990 (298) pinpoints, in history, markets began to emerge in those dense
locations (cities or urban centers) in the medieval age that it "had a highly personal, symbolic, and
hierarchical flavor" (ibid). And firms of highly centralized operations are quite atypical; instead, the
modem history of commerce has been full of family businesses, guilds, cartels, "with loose and highly
permeable boundaries." Hence the boundaries between markets, hierarchies, and networks have
essentially been rather blurred.
86. For instance, Boisot and Child 1996 described the strong role of the centralized states in the
absolutist age as a prerequisite to developing a new market order in late feudalist Europe (601), Prior to
developing a market order, Europe went through an absolutist phase in which emergent nation states
created strong centralizing bureaucracies that codified a rational-legal approach to government
administration (Elias 1939; Anderson 1974). Only with the advent of a liberal ideology in the eighteenth
and nineteenth centuries did decentralization to a market order gradually take place (Kumar 1978). But
then Boisot and Child immediately contrasted Chinas current transition with the early experience of
Western modernization for rational-legal governance through centralization. My contention, however, is
that the W ests early experience through state centralization presents only a historical resemblance to
Chinas. Yet as for so-called rational-legal governance, then-European forms cannot be treated as
equivalent to contemporary forms. The specific rules of European then-codification and diffusion could
be viewed as rudimentary and awkward, viewed from todays Western political and legal systems. It
could have been even worse than the Chinese contemporary counterpart that Boisot and Child described
in 1996.
87. cf. Asian Capitalism - the end of tycoons in The Economist, pp.67-69, April 29th, 2000: ...Victorian
values. In fact this approach [i.e., cronyism] is not so much a product of Asian values as of a certain
stage of capitalist development. Business in Victorian England and Wilhelmine Germany was also
largely in the hands of families. Some prospered, some declined: their fortunes were charted in western
classics such as Thomas Manns 'Buddenbrooks. The names of some families, such as the Siemens of
the Thyssens, still carry corporate weight to this day. Similarly American capitalism grew up under the
'robber barons - the oil, steel and railway tycoons, and their descendants. Some of todays industrial
icons, such as Ford, started as family businesses and have become, over time, modem, transparent,
shareholder-friendly companies.
88. Also cf. Foucault, 1976: Two Lectures in his Power/Knowledge, esp. pp. 99-100.
89. Not until 1933. The US had not even passed its Securities Exchange Act and established its
Securities and Exchange Commission. But even after SEC was established, associated market
institutions and regulations retained their incomplete nature up to the present. In other words,
contemporary capitalist maikets are not supposedly fully self-regulated at arm s length, cf. Could
capitalists actually bring down capitalism? by Kurt Eichenwald in The N ew York Times, Section 4:
W eek in review, p. 1, Sun. June 30, 2002: ...in truth, the corporate calamities of the new millennium
are o f a different ilk, one that challenges the credibility of the financial reporting system, and in turn the
faith of investors in the capital markets - the very engine that has driven capitalism to its success. It
wasnt supposed to be like this. In the wake of the stock market crash in 1929 and the ensuing revelation
544
of the scams and rigged dealings that had helped inflate the market, America faced what appeared to be
capitalism's chief vulnerability. Through Senate hears in the early 1930s with the special counsel
Ferdinand Pecora, investors learned about stock price manipulation, insider trading and profiteering
through so-called investment trusts, all of which had made fortunes for capitalists, while costing investors
their savings...So, the game stayed the same, but the government put in referees. Congress passed the
Securities Exchange Act of 1933 and 1934, and created a new federal agency, the Securities and
Exchange Commission, to enforce those laws. Disclosure became the centerpiece of the system.
Companies could pretty much make whatever business decision they wanted, so long as the material
information was revealed to investors in periodic filings with the S.E.C. The result was an entire bulwark
of protections: the board of directors entrusted with overseeing corporate managements, the independent
accounting firms relied upon to insure the numbers were accurate, the government regulators in place to
supervise the rules. Despite all the apparent bricks and mortar of these protections, they turned out to be
as permanent and impenetrable as smoke... At bottom, the system still relied on faith - just in someone
besides the top executives or company owners. The trust was given to the competence of the directors,
the integrity of the accountants and the abilities of regulators. That was evident back in 1933, when a
m ember of Congress asked Col. A. H. Carter, senior partner of Deloitte Haskins &Sells: if accountants
would be auditing the companies, who would be auditing the accountants? The reply was noble - and
proved to be hollow. 'O ur conscience, Colonel Carter said. By the late 1990s, as is now becoming clear,
that foundation of personal integrity had been eroded by easy profits. Eventually, driven by shareholder
expectations and their own stock-option packages, some executives began hiding losses incurred in the
faltering economy, manipulating the numbers they reported to investors. The fact that their companies
are, in all probability, bad apples among many, many honest corporations makes little difference. By
being deceptive on their disclosures for short-term gain, these capitalists have led investors to question
the reliability of all the reported data - and the reliability of the checks and balances instituted to keep
the data valid. Not only has the accounting branch of the market been tarred by Arthur Andersons
enabling of Enrons schemes, but, from company to company, insular boards of directors, incompetent
internal auditors and underfunded regulatory oversight have allowed the perception of stringent
standards and protections to wither..."
90. In this regard, Zucker in 1986 pointed out the nature of institutions, while resulting from actors
choices, were inseparable with a countrys characteristics in its historical conjunctures. A good example
was American proclivity for market competition and its institutional adoption of arm s-length market
contract system, efficiency-minded and -calculated. It had happened in Americas turn to industrialization
for mass production at the dawn of this century, when the country remained a nascent nation of
immigration, when industrialization eroded social ties among families and communities, and when
different ethnic communities at different times and using different languages degenerated
communications and social connections that became a more and more serious threat to industrialization.
The nascent market contract system had loomed large for the institutionalization of social trust as a
functional imperative to regulate those swift and mass economic transactions, mounting American rapid
industrialization. Also cf. Zucker 1987 and 1988.
91. cf. Komai 1992, p. 393, Table 16.1 for a comparison on revolution and postsocialist transition. Also
cf. Tiger China pussyfoots around growth by John Thornhill in Financial Times, p. 28, June 3, 2002
(emphasis mine): ...Fred Hu, China economist at Goldman Sachs in Hong Kong, argues that it is wrong
to view China as a single, unified econom y...'China is facing a double challenge. Like Korea it is moving
from an agrarian to an industrial economy. But it is also moving from a planned economy to a market
economy. This is a negative constraint on growth. He said. 'If you take all these challenges into account
then 7% is a miracle....
92. Yet the inherent linkages of these two sides and their inseparable nature have often been ignored in the
mainstreams of economics and sociology. In practice, they have long been treated as alienated from each
545
other and have even been judged as two kinds of independent, objectified, exclusively exogenized entities.
93. cf. G. Miller 1992, p. 26: 'The originator of the phrase 'invisible hand1was Adam Smith, who questioned
the value of much governmental intervention in the marketplace: 'As every individual, therefore, endeavors as
much as he can both to employ his capital in the support of domestic industry, and so to direct that industry
that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue
of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it...he intends only his own gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was not part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it (Smith 1976/1952:194)."
94. Schumpeter contended that capitalism needs entrepreneurs as "innovative destroyers" (or "creative
destruction") that would reprimand the monopoly of markets (cf. Schumpeter 1934, 1942). For instance,
Schumpeter's 1934 argued that the driving force behind capitalist accumulation was the ability of
organizational entrepreneurs to develop new activities which enabled them to capture a large share of the
market returns. This may occur in the realm of product development and production, as well as in financial or
commercial realms (cf. Schumpeter 1978).
Also cf. Economic possibilities for our grandchildren - A long-term growth slowdown might be more of an
opportunity than a tragedy, so long as we are prepared for it by Samuel Brittan in Financial Times, p. 11,
Thurs. Jan. 3, 2002 (emphasis mine): ...it is worth going back to an essay completed in 1930 by John
Maynard Keynes, entitled Economic possibilities for our grandchildren. It could equally have been called 'The
miraculous properties of compound interest. Keynes asked his readers to stand back from the gathering
Depression and note that in the 4,000 years up to about 1,700, there had been no great change in the average
standard of living. There had been ups and downs but no progressive improvement. The Industrial Revolution
had transformed the picture. Despite an enormous growth in population, average living standards had risen
fourfold in Europe and the US since 1700. Compound growth could, he said, make us four to eight times better
off still in a further 100 years. Keynes concluded that mankind was well on the way to solving its economic
problem and thereby ending the struggle for subsistence that had hitherto been its most pressing concern. He
viewed this prospect with delight. Eventually we would realize 'that avarice is a vice, that the exaction of usury
is a misdemeanor, and the love of money is detestable, that those walk most truly in the paths of virtue and
sane wisdom who take least thought for the morrow...Keynes anticipated the criticism that human needs were
insatiable and divided such needs into two classes; the absolute ones, such as food and shelter, that do not
depend on what other people are achieving; and the relative ones that we feel only if their satisfaction 'makes
us feel superior to our fellows. ...On the arithmetic Keynes has been proved right, despite wars and slumps.
Between 1929 and 2000 real UK gross domestic product per head grew at a compound annual rate of nearly
1.9%: and the actual level of output per head was about 3.8 times as high in the later year. If growth continues
at this rate, output per head in 2020 will indeed be about six or seven times the 1929 level, or bang in the
middle of Keyness estimate...A slowdown in economic growth that reflects a change in taste is a very different
animal to one that reflects a deficiency of purchasing power. If people want to buy less, they should -
ultimately and rationally - also want to earn less and therefore work less. A structural growth slowdown need
not therefore be accompanied bv a large increase in involuntary unemployment...even in a static western
economy there may still be a good deal of investment and entrepreneurial action... Even in a world of slow or
zero growth a competitive market economy would still be best...A century before. John Stuart Mill had written
that 'elbowing and treading on each other's heels were a passing stage in human development. The transition
will not be an easy one. If we see in it the silver lining that Kevnes and Mill so long ago discerned.
95. cf. Zucker 1986, p. 66: Transaction costs are incurred when exchanges have to be negotiated, monitored
or enforced (Jones 1983). Transaction cost economizing is obtained by assigning transactions to efficient
governance structures. These include efficient boundaries between firms and markets and efficient
546
organization of internal relations (Ouchi, 1980; Williamson et al., 1975)."
96. For example, K. Ito assumes that the spinoffs of Japanese industrial groups could reduce the cost of
coordination between economic divisions. The spinoff assumes a change of relationship from a hierarchical
transaction to a quasi-market transaction with an informal tie to the original hierarchy. Also cf. Aoki. 1988,
1990.
97. For example, through either business firms as ordinary hierarchies made up of employment relations by
market contracts or through temporal hierarchies made up of institutional contracts. As for the interchangeable
relationships between market and hierarchy, cf. G. Miller 1992. Also, cf. Stinchcombe 1990, p. 25. The
uncertainties come from unstable markets of supply and demand, rapidly technological changes, and variable
raw materials, parts, and environments. Ibid, 66.
98. cf. V. Nee 1992b.
99. cf. Lucent to spin off its slow-growing businesses by Stephanie N. Mehta in The Wall Street Journal,
A 3-A 4, Thurs. Mar. 2, 2000: Lucent Technologies, Inc., moving to sharpen its focus on selling hot high-
technology gear to telephone companies, said it will spin off certain slow-growing operations that serve a
broad range of corporate customers. The communications gear m aker said it will create a new, yet-to-be-
named company. It will include Lucents PBX business, which provides switching services for corporate
phone systems; the Systimax business, which sells cabling systems for offices; and the local-area
network business. Lucent said the new company will start with about $8bn in annual sales, and will be
profitable. It will employ 34,000. W all Street cheered the move, pushing Lucent shares up $8.75, or
about 15%, t &68 in 4 p.m ...The spinoff will likely be completed by the close of Lucents fiscal fourth
quarter ending Sept. 30. Lucent continues to face pressure from W all Street to reverse disappointing
results for the fiscal first quarter ended Dec. 31. The company, known for its double-digit growth rates,
reported a 23% drop in profit before one-time items. Analysts believe the spinoff should help put Lucent
back on a rapid growth track by freeing the company to concentrate on hot areas such as optical
networking and wireless networks. 'Lucent can focus its incremental capital on the fast-growing parts of
the business, which are all related to [telephone] carriers, said James Parmelee, a telecom-equipment
analyst with Credit Suisse First Boston. For example, phone companies are continuing to spend briskly
on equipment that helps them manage growing traffic from the Internet. Growth in equipment sales to
corporations is slowing. Lucent said the revenue in the business to be included in the spinoff grew 8%
last year. By contrast, Lucent has said it expects revenue in fiscal 20000 to grow at least 17%, even with
the slow start in the fiscal first quarter...Mr. Peterson [the prospective president and CEO of the new
company and currently serving as chief financial officer of Lucent] said he aims to boost the growth of
the enterprise-networking business by accelerating some cost-cutting already under way at the units,
while pushing sales deeper into overseas markets.
100. The upshot thus appears to be that capitalist market economies become more compassionate" and
ideologically-motivated, curing the dysfunctions due to their undue concentration in the past and present on
laissez-faire brutal market competition regardless of its many negative social consequences. The previously
planned economies in transition tended to move toward neo-liberalism facing hard budget constraints and
more restraining ideological roles and government involvement, because of their previous experience of
excessive emphasis on equalization with ignorance of many soft-budget problems from the inefficient
allocation of resources. That is, in the West, progressive reformers have tried to humanize market economy
away from the dehumanized alienation explicit or implicit in the market self-regulation of Darwinian survival
with capitalist-state subsidies or by virtue of "welfare states" (cf. Elton Mayo. 1933). cf. Axelrod 1984, p. 169:
"In classical Darwinian evolution, the mechanism is natural selection based upon differential survival and
reproduction."
547
101. Prior to the polarized movements of reforming institutions, the ones toward either capitalism or socialism,
the pioneering reformers in the 17* and 18th centuries had commonly devoted themselves merely to alleviating
deterioration of the bygone market economies and to removing the consequential mischiefs. Since the early
19th century, when the early liberal competition entered capitalist crises in embryo, the movements had turned
to take more polarized responses and stances. Among some radical critics, Marx borrowed the utopian critique
of industrial capitalism to construct his radicalist doctrine of "scientific communism," venturing on an
unprecedented project without historical parallel, guiding those radical petty bourgeois intellectuals and labor
movements toward communist collectivism through the structural transformation of capitalist society. But after
the establishment of the planned economies in this century, even most Marxist planners, who had once firmly
wrestled with market alienation, found that their economic practice became handicapped by their planning
regimes. Their commitment to state hyperactive interventions could only bring on market malfunction at the
expense of economic efficiency. Now they had to reeducate and redeem themselves, collecting those Western
cliches, and conventions they had long condemned and repudiated, for remedying, revamping, and
streamlining the ailing economy.
102. cf. Nee 1992, p. 24: "As a result, the central government faces a classic budget squeeze. Insofar as the
state seeks to maximize tax revenues, it favors institutional arrangements that deliver the highest returns
(North 1981)."
103. See the similar experience in the current Europe. Also cf. Courageous reforms for a new era by
Antonio Guterres, the Portuguese Prime Minister in Financial Times, Tues. Mar. 21, 2000: A new period
is beginning in European construction. The European Union is gaining substance economically, socially
and politically. Initiatives in the area of common foreign and security policy and a common area of
freedom, security and justice add to the great achievements of the single market and the single currency.
The enlargement process too is now in full swing. These are major historic milestones in the affirmation
of the European project. Despite the economic recovery, serious social problems continue to exist, such
as unemployment, social exclusion and the risks of a future imbalance of social security systems. These
are also the reflection of deeper-seated structural difficulties calling for courageous reform. These
difficulties are heightened by the unavoidable challenges posed by globalization, technological change
and an aging population. The European social model can only be sustained by building new competitive
factors and the renewal of the social model itself...A new paradigm is emerging [in Europe]: that of the
economy of innovation and knowledge, which is becoming the main source of the wealth of nations,
regions, enterprises and people. Europe is lagging behind significantly and should define its own path for
a new competitive platform while also fighting the new risks of social exclusion. It is necessary to
combine innovation with social inclusion...to define a new strategic goal for the next ten years: to make
the European Union the worlds most dynamic and competitive economic area, based on innovation and
knowledge, able to boost economic growth levels, with more and better jobs and with greater social
cohesion. An economic and social strategy to renew the basis of growth in Europe must combine macro-
economic policies, economic reform and structural policies, active employment policies, and the
modernization o f social protection...adding new dimensions in key areas such as preparing for an
innovation and knowledge-based economy, combating social exclusion and modernizing social
protection.
104. Here J. Scott has his shrewd insights (emphasis mine) that "When it seemed that the plant would fall
short of the quota because it lacked a key valve or machine tool, these knowledgeable dealers would set off
across the country...with barter goods, to secure what was needed. Neither of these roles was provided for in
the official table of organization, and yet the survival of the factory depended more on their skills, wisdom, and
experience than on those any other employee. A key element in the centrally planned economy was
underwritten, always unofficially, bv metis....Collectivized command economies virtually everywhere have
slipped along thanks to the often desperate improvisation of an informal economy wholly outside its
schemata." (1998, 351).
105. Our figure here adopts some of F. Block 1999 ideas to construct his contingent table about the welfare
states in the West. The table is about his conception of the nature of natural economy, i.e., (Neo-liberalist)
capitalism vs. (humanized) capitalism.
Blocks 1999 Vision of Trends of Contemporary Capitalism
Capitalism vs. Capitalism

(Neo-liberalist Capitalism vs. Humanized Capitalism)
Nature
Natural Constructive
Natural Consistent Economic

Naturalism Purism
Economy (Neo-liberalism)
Constructive Environmental Consistent

Purism Constructivism
(Welfare State)
Source: F. Blocks presentation in 1999 ASA.
106. cf. Hegel, Georg Wilhelm Friedrich, 18 History o f Philosophy. Excerpted in The Philosophy of Hegel, ed.
And trans. by Carl J. Friedrich, 1953. New York: The Modem Library, p. Ixii, and pp. 1-173. Also cf., Martin
Heidegger 1994 [1980] Hegels Phenomenology of Spirit, trans. by Parvis Emad and Kenneth Maly.
Bloomington & Indianapolis: Indiana University Press.
107. it thus happens that both kinds of economies, market economies and transitional economies, have
different momentums. It seems plausible to infer that a real utopia might emerge in the future. Now that both
types of economies have moved along their paths toward their respective, opposite directions, one might
assume that they both would have a chance to meet with each other at some mutual point in their future (as
shown in Figure 2.2, Chapter 2, the moves of these economies actually follow the opposite directions from
their rivals' directions). That is, both types of economies, after their divergent experiences and through their
respective reforms, would eventually converge into a higher-ordered synthesis addressing their mutual needs
for both a humanized economy and a competitive society. Both more or less share the ends-means of their
respective opposites (also see Starks 1989 relevant elaboration and our discussion in Section 2.2, Chapter 2).
These two types of economies have hitherto been treated as antithetical ever since the last long century, so-
dubbed as either, the "Marxist century," or the "American century" (cf. Evans, Harold et al. 1999: The
American Century. New York: Alfred A. Knopf. The term was used during Arrighi's presentation in the
University of Wisconsin-Madison, Sociology Department, Oct. 1997).
There is no reason to deny the possibility in the future the two polarized extremes of economies and societies
would vanish and be integrated by mutual reforms from different sides for restructuring the world economy.
And then, social revolutions might no longer be so indispensable for solving social tensions and dilemmas. At
present, the momentums and trends in both types of economies still follow quite divergent directions.
Also cf. Why capitalism needs to be policed - Critics of global organizations that answer to no one
should not be dismissed as Luddites by Michael Prowse in Financial Times, p. XXVIII, Weekend," April
8/9, 2000 (emphasis mine): ...S o far as structural factors are concerned, the problems mainly reflect the
stand-alone character of bodies such as the W T O and IMF. In a national context, a finance ministry or
549
treasury is just one ministry among others. There is usually a Cabinet or some forum in which ministers
with varying responsibilities - social, cultural, environmental and educational as well strictly economic -
meet to determine a collective response to problems. Such political processes are always flawed but
there is a more or less coherent mechanism for trying to reach decisions in the broad national interest.
This is not true at the international level. Bodies such as the IMF and W T O take decisions on strictly
economic criteria even though the implications of such decisions run far beyond the narrow market
domain. They are not effectively bound into a broader global policy-making apparatus. There is no World
Social Organization to represent the interests of the victims of market competition, or to promote globally
effective welfare policies. There is no World Environmental Organization to ensure that policies favored
by global business do not have deleterious ecological consequences. More important still, we lack an
effective forum in which the overall global impact of policies such as the liberalization of financial capital
flows can be assessed. And this, ultimately, reflects the fact that efforts to build transnational institutions
of governance remain primitive. W e do have a political forum in the shape of the United Nations, but it
does not function well, and it does not wield authority in key spheres such as the global economy. Nor
are the discussions of world leaders at Group of Eight meetings any substitute for the permanent
machinery of government provided by national civil services. In a rational world, the IMF, for instance,
would be merely a department of a world government charged with promoting the global good, broadly
conceived. Skeptics will argue that none of this matters. The market liberal agenda that the IMF, W T O
and other purely economic institutions pursue does promote global well-being. It leads to faster growth,
higher living standards and - therefore - more happiness. This is true, but only in a partial sense.
Unfettered global capitalism also has many other effects. It undermines local communities and traditional
ways of living and working. It changes the distribution of income and wealth. It generates tremendous
insecurity for many workers while enriching managerial and shareholder elites. It degrades the
environment unless carefully managed. And it alters people's perceptions and aspirations. Vigorous
market competition helps create human individuals of a particular sort: homo economicus, or egoistic,
maximizing man. Thus although sold as politically neutral, markets in fact encourage the spread of
western materialistic values. Now these various costs may be worth paying in order to reap the many
benefits of faster economic growth. But the protesters in Seattle and elsewhere are surely justified in
complaining that those charged with making global economic decisions often fail to take into account the
many adverse side-effects of market capitalism. And they fail to do so because they are not bound into
properly accountable democratic institutions. This happens in part because of the poverty of
contemporary political and economic debate. The choice presented is stark: either socialism or
capitalism. Since socialism has manifestly failed, we must choose capitalism. But this is to over-simplify
drastically. There are many hues of capitalism, depending on the degree to which market values are
subordinated to broader social goals and interests. By default the world is now opting for a version of
capitalism in which the profit motive is largely unrestrained. To be blunt, it is choosing an American
flavor of capitalism. This evolved in an individualistic climate that is unique to the U S and for which there
are neither historical nor geographical parallels. W e should not stigmatize as Luddite or reactionary those
who query the universal validity of this social model. They have a case that deserves a reasoned reply."
108. For instance, Randall Collins 2000 addresses the fact that W eb er attempted to call for institutional
reforms as alternatives to the social revolutions in response to the Russian regime crisis early in 1905-
06.
Now that capitalist crises (such as the Asian financial storm) can be addressed through endonenous
institutional reconstruction, there is no reason to predict capitalist collapse as inevitable, thanks to the
quick recovery of most Asian countries from their 1997 financial crisis. In 1998 had some people were
worried that capitalism might revert to primitive Darwinism and brutal market competition. The new
revelation of capitalist development confirms the need for welfare reforms in the advanced capitalist
societies. It doesn't diminish the momentums of current humanized efforts for equalization or force
people to retreat and live with laissez-faire capitalism.
550
109. The gradual reform includes a series of takeovers, mergers, and transformations of ownership, cf. Qian
and Xu 1993 argue (156-7) that with such a series of takeovers, mergers, and transformations of ownership,
China's transitional economy "will eventually rely more on the non-state sector," that offers an alternative to
privatization and "a less painful path of transition for China", preventing the immediate collapse of its entire
economy, as occurred in its counterparts in Eastern Europe and the former Soviet Union.
110. Note: Russian G D P growth was -4.8% in 1998; and -7.0% in 1999. cf. USA Today, 1B, Fri. Apr. 23,
1999.
111. J. Scott (1998) describes the severe impacts of the previous institutional arrangements in the FSU: Not
long after the decisive political opening in 1989, in what was then still the Soviet Union, a congress of
agricultural specialists was convened to consider reforms in agriculture. Most participants were in favor of
breaking up the collectives and privatizing the land in the hope of recreating a modem version of the private
sector that had thrived in the 1920s and that Stalin had destroyed in 1930. And yet they were nearly unanimous
in their despair over what three generations had done to the skills, initiative, and knowledge of the kofjhozniki.
They compared their situation unfavorably to that of China, where a mere 25 years of collectivization had, they
imagined, left much of the entrepreneurial skill of the peasantry intact." (350).
112. cf. The Economist, p. 12, Oct. 28lh, 2000: ...At home, after a period of deflationary strain, the
economy is on an encouraging upswing that could last for some time, if China can withstand the shock of
greater competition when it joins the W TO . More important, few in Chinas Communist Party now dispute
the need for continued economic reform if China is to become stronger and more prosperous..."
113. cf. Wang, Chenguang and Zhang Xianchu. 1997. Introduction to Chinese Law. Hong Kong. Singapore:
Sweet & Maxwell Asia. p. 33: "China at that time was constrained by Western countries for ideological reasons,
so it naturally paid its attention to the experiences of other socialist countries in the world, particularly the
Soviet Union." For instance, some scholars thought China's constitutions was closely modeled on the 1936
Constitution of the Soviet Union and emphasized the principles of "socialist legality."
114. cf. Kau, Michael Y. M. and John K. Leung, eds. 1992. The Writings o f M ao Zedong, 1949-1976, Vol.
II - January 1956-December 1957. Also see Moss Roberts' discussion of M aos attack on the Soviet
Unions Model in his Ten Major Relationships in 1956 and the so-called Yenan Model in M aos guerrilla's
years during the early 1940s. cf. Moss Roberts 1977 (emphasis mine): With his speech *On the Ten
Major Relationships. as Mao later said, we "made a start in proposing our own line for construction. Mao
for the first time clearly rejected the idea of development through a privileged sector (heavy industry, and
only later the otheir sectors) and distinct phases (first in material progress, only later in social relations
and ideology). The entire nation, he insisted, must undertake a massive commitment to social, political,
and economic unification that, like the methods used in the years in Yenan, would leave none behind and
not benefit a few at the expense of the many. In this pathbreaking analysis of the contradictions in China,
Mao firmly opposed any plans that would create new divisions in a nation already severely tom bv
imbalances between the various regions, between various social classes and groups, between the center
and the regions, between the political and social spheres. Ibid. While pointing out the dangers of blindly
copying the Soviet model of accumulation. Mao was also criticizing another, closely associated aspect of
that model, its theory of productive forces. Essentially, this theory, as it was formulated in the Soviet
Union during the years of Stalins leadership, maintained that state ownership of the means of
production, together with a rapid growth of the forces of production, opens up the socialist road to
communism. The dictatorship of the proletariat guides the development of the forces of production, while
repressing the old ruling classes and defeating their inevitable counter-revolutionary attacks on the new
order. For the peasants and the workers, the dictatorship of the proletariat is held to be genuine
democracy. The abolition of private property and other forms of class society is argued to have ended all
551
exploitation. Since exploitation is argued to be impossible under such new conditions, the hierarchy,
subordination, and disciplining of the workforce, even when it appears to resemble sophisticated
capitalist methods, is seen as merely the adaptation of rational patterns of work...In essence, the
Stalinist theory of productive forces reduced the concept of the capitalist mode of production to little
more than the system of private ownership of the means of production. And consequently, once political
power is seized and a system of public ownership of the means of production instituted, no thought need
be given to a thoroughgoing socialist revolution on the political and ideological fronts. The creative role
of the masses and mass campaigns are viewed as anachronistic; the struggle to refashion ones
worldview is ignored. Maos attack on this theory of productive forces grew out of the lessons he had
learned about revolutionary transformation during the years of guerrilla warfare. The distinctive features
of the Yenan model are well known: self-reliance, decentralization, antagonism to bureaucratism and
elitism, collective aims and discipline, nonmaterial incentives, and the participation of the masses in all
aspects of social and economic activity. Development was comprehensive, designed to bring up all
sectors, not just a chosen part.
115. cf. 1983. Teng Hsia-Rng Wen Hsuan (DengXiao-Pings Selected Writings) Vol. II, 1975-1982 (Chinese
Language Edition), and the speeches of the current leaders - Jiang and Zhu (cf. World Journal Daily, Chinese,
since 1995). Also cf. M. Mesner 1996.
116. Wallerstein contends (1974a) that this demarcation reflects two socialist political strategies against the
capitalist world-system. Insofar as the CPSU (the Communist Party of the Soviet Union) was concerned, now
that the capitalist maximization of economic profit in short- and long-run would create constant structural crises
for the world systems, the socialist state should annihilate any internal class and class struggles wherever they
appeared. By contrast, Mao accepts socialism as a pre-communist process of class struggles seeking
elimination of political opponents by co-opting oppositional movements, since only communist society could be
class-less. Wallerstein here uses this example to defend his proposition of the world system that capitalism
from the beginning has never been an affair of nation-state but of the world-economy. Accordingly, the CPSU's
assumption that the FSU was class-less was untenable.
117. See discussion in my Chapter 2. As Cao and Qian et al. 1999 documented,
In 1995, China began a quiet reform in privatizing and restructuring its SO Es under the
slogan grasping the large and letting go the small" (zhuada fangxiao). This reform has
proceeded in three areas: (i) privatization of small SOEs at the county level; (ii) mass
lay-offs of SOE workers at the city level; and (iii) mergers (Jianbring),
groupings/conglomerations (jituanhua), corporatizations (gongsihua), and initial public
offerings (IPO) (shangshi) of some large SOEs which often involve the central
government. SO E reform has made significant progress in the first two areas. By the end
of 1996, up to 70% of small SOEs had been privatized in pioneering provinces and
about half were privatized in many other provinces. Furthermore, about ten million
workers from SOEs and urban collectives were laid off in 1996 and an additional 11.51
million workers were laid off in 1997. In these two areas, local governments have been
the driving force underlying reform. Moreover, these reforms have thus far proceeded
relatively smoothly and with fewer social problems than expected. The third area of
reform has not yet made any significant progress, and we will leave it out in this paper
[m ] (104-5).
Chinas particular federal framework provides two major sources of political incentives
for local governments to undertake the reform. First, recent reforms in tax, fiscal,
monetary, and banking policy have hardened the budget constraints of local
governments. The hard budget constraint means that local governments - and the SOEs
552
under their supervision - must survive using their own financial resources. In China it is
the hard budget constraint that prompts local governments to privatize. This reform path
stands in contrast to SO E privatization in Eastern Europe and the former Soviet Union
where reformers attempted to use privatization to harden the budget constraints of
enterprises. Second, increased competition within the state sector and, more importantly,
from the non-state sector raises competitive pressures on SOEs. Because of the fifteen
years of successful reform, the non-state sector in China has already become a major
force in the economy, for example, foreign firms and rural enterprises alone have
accounted for more than one-half of the national industrial output...we argue that harder
budget constraints, together with increased competition, have changed the costs and
benefits to local governments for keeping SO Es...Under hard budget constraints,
increasingly poor S O E performance implies that these enterprises have become
increasingly heavy fiscal burdens for the local government budget. Financing these
losses crowds out other expenditures, thus providing local governments with an incentive
to privatize and restructure SOEs. The recent Fifteenth Congress of the Chinese
Communist Party in September 1997 adopted a national policy to replace state
ownership as the dominant ownership form of firms in the economy and to support
privatization. This policy should be viewed as an endorsement, rationalization, and
promotion of what is already going on in many local areas...With respect to privatization
and restructuring of SOEs. local governments have pushed the central government. This
pattern of reform in privatization parallels many earlier reforms such as the introduction
of the agricultural household responsibility system in the late 1970s. Both the recent
privatization and the 1970s agrarian reform featured a guiet revolution from below. Both
were later promoted bv the central government. This was not an accident. The initiatives
of local governments and the tolerance of. and later promotion bv. the central
government are precisely the predictable conseouences o f federalism (ibid. 106-7;
emphasis mine).
118. cf. Chinas president may be reluctant to cede his power - Clouds over succession - Media praise may
mean Jiang Zemin, like Mao, envisions himself as retirement-proof" by Erik Eckholm in The New York Times,
Sat. July 13, 2002: ...However intense the new campaign praising Mr. Jiang, few think he can attain the
prestige of Deng, who remained Chinas effective leader through much of the 1980s and 1990s even as he
shed formal titles. Status even remotely comparable to that of Mao, who could set off national turmoil with a
single utterance, would be more far-fetched. T h e words may sound similar, but there is a huge difference from
the past, Mr. Wu said. 'In the 1960s, when the party campaigned for an idea, they expected everyone to
believe it. Today, the leaders dont expect that much. If everyone just pretends to believe it and follows the
rules, thats enough. There are times, however, when the new campaign has been almost comically
reminiscent of Maoist days. People's Daily recently earned a full page of tributes to a new play, 'The Vanguard
of the Era, which tells the story of six contemporary heroes who exemplify the spirit of the 'three represents
[note: the original words by Jiangs own theory]...
119. cf. Nee 1992, 24: "One problem is providing adequate incentives for managers to assume responsibility
for the growth of the capital assets of the industrial firm."
120. W e need to understand that institutional infrastructure has a close affiliation with the vested interests and
social cohesion. Any changes in institutional infrastructure would critically affect economic order and social
security. This generates a legitimate concern about how to reduce uncertainty and minimize social costs.
Hence efficiency and legitimacy would jointly affect the social nature of China's market competition and
Chinas background-mined institutional reforms embedded in Chinas social ties and fitted into its historical
contexts.
553
121. For example, we may find that the Chinas public focuses on different topics during the different
time periods. In the US, during the 1950s and 1960s, public opinion focused on the Cold W ar, whereas in
the 1980s and 1990s, it moved to the strength of the Economy, cf. USA Today, 22A, W ed. Nov. 17,
1999. Similarly, in China, the major public concern in 1950-60 was national independence, whereas
since the 1980s it has shifted to the economic competitiveness.
122. cf. Jiang backs Chinese stock markets - President in enthusiastic endorsement of equities role in
modem economies by James Kynge in Financial Times, p. 1, Thurs. June 15, 2000 (emphasis mine):
Jiang Zemin, Chinas president, has given an unprecedented, ringing endorsement of the countrys stock
markets and their role in fostering the development of an efficient private sector...M r Jiang made the
point that robust stock markets were a vital component of a modem economy. He said the development
of Chinas stock markets was important, adding that it would help foster the countrys non-state
sector...H e also seemed to advocate the introduction of a culture of risk within the Chinese economy,
saying at one point that Chinese people are inherently risk-takers.
123. Such a propensity has evolved from their personal leaming-by-doing and inter-generational experiences,
from their learning experiences from historical negative consequences, and from China's lengthy civilization
that cultivated a highly civilized system in ancient times that has been embedded in its patriarchal society from
1,000 C E up to the recent history, cf. The Economist, p. 11, Dec. 31st, 1999: At the start of the 15th
century, Chinas supremacy in science and technology alike was dazzling. The economy was on the
verge of industrializing. Farming was technologically advanced, using sophisticated hydraulic
engineering, ingenious ploughs and other tools, various natural and artificial fertilizers, and carefully
documented veterinary medicine. The casting of iron, requiring blast furnaces, began in China before
200bc, in Europe some 1,500 years later. China invented paper about 1,000 years before the idea
reached the West. It was printing by the 8th century, and using a form of movable type by the 11th, four
centuries before Johannes Guttenberg got round to it (in a superior, cast-metal, version) in Europe. More
mundanely, the Chinese thought of the wheelbarrow in about 200, a fine invention not used in Europe
until the 12th century. And that non-throttling horse-collar dreamed up by medieval Europe was in use in
China from 250BC. And in explosives, ship design, clock making, weaponry and so on, and the list
seems endless. Then, after about 1,400, Chinas technological progress slowed..."
124. cf. Seeds of change? - Deep in the countryside, China is experimenting with local democracy in
The Economist, A Survey of China, p. 7, June 15, 2002.
125. cf. Doing overtime in the workshop of the world: Migrant workers power a vibrant economy by
James Kynge in Financial Times, p. 7, Tues. Oct. 29, 2002: The power behind China's emergence as
the workshop o f the world resides within people like Liu Hongmei, a 19-year-old with ruddy cheeks and a
floral headscarf who recently stepped off a bus in the booming southern city of Zhuhai. She has come
from an impoverished village in the central province of Hunan, motivated by her parents entreaties to
earn enough to pay for her brothers schooling and by her own insight that her marriage prospects would
improve if she managed to save something. 'If you want to marry a man with money, you have to have
money yourself, she says. 'T he dragon accompanies a dragon, the phoenix is a phoenix and the son of
a poor rat will forever dig holes. The migration of Ms Liu to the Pearl River delta near Hong Kong
encapsulates China's surging economic vitality. The old structures of communist population control are
falling away, allowing some 150m migrant workers to seek jobs in the booming cities along the coast.
Their sense of purpose is intense. If they work hard and save money, they can hope for a life far
removed from the subsistence living their parents coaxed from a small parcel of land and a few pot-
belled pigs. The most common complaint voiced by migrant workers in Zhuhai, factory managers said,
was that they did not get enough overtime. 'I have never seen the level of quality and dedication I have
seen in the work force her, says Tim Dinwiddie, the Zhuhai m anager of Flextronics, the worlds largest
contract manufacturer of electronics. His factory employs 7 ,000 people working on 1,6m sq ft of factory
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floor. By the end of this year, as new orders drive expansion, there are expected to be 12,000 workers on
2m sq ft...W hereas previous shifts in global manufacturing capacity from the US and Japan to south
east Asia lasted roughly 10 years, the relocation of factories to China may endure a good deal longer
than a decade. 'Every single major [corporation] realizes this. They have been thinking about [shifting
capacity]. Now they realize that action has to be taken, says Mr. Dinwiddie, whose own career has
followed capacity migrations from the US to Singapore and then, three years ago, to southern China. In
Singapore, Malaysia and other south-east Asian countries, wage inflation followed as labor resources
were stretched. In China, the supply of labor seems almost inexhaustible. In addition to the 150m
migrant workers, around half of the 400m people currently employed in farming are thought to be surplus
to requirements, Chinese academics estimate. Flextronics in Zhuhai - which assembles products for
Motorola, Ericssion, Sony, Nokia, Dell, Apple, 3-Com, RSA Security, Microsoft, Philips and others -
employs young women like Ms. Liu almost exclusively. They earn an average of US$100 (102, 65) to
$150 a month, a fraction of what counterparts in Singapore, Malaysia, Mexico and other manufacturing
economies might receive. On top of that, electronics components are almost always available cheaply
and locally. 'The supply base around Hong Kong and southern China is phenomenal, and because it is
so close you can minimize costs, says Mr. Dinwiddie. 'Also, the export logistics are good. In terms of the
price of shipping a container, Hong Kong is cheaper than Singapore. In other industries, too, the
maturation of the supply chain is fostering dramatic results. Among the best selling cars in Chinas
foreign-dominated vehicle market this year are models from Chery and Geely, two domestic corporations
that were able to source their components from the local market. Such examples unnerve Chinas
competitors. Lee Kuan Yew, Singapores senior minister, sees China replicating Taiwans success but on
50 times the scale. In South Korea, Jin Nyum, the deputy prime minister, has likened China to a black
hold sucking in manufacturing capacity because it is 'capable of producing everything....Som e skeptics,
however, dismiss the shift of capacity to China as little more than the creation of a giant sweatshop. Raw
materials come in, Chinese workers assemble them by hand, and the end product is exported, adding
little value and creating little wealth for China. There is some truth in this characterization. Some 50 % of
Chinas imports are materials destined for re-export and the net export share of Chinas total is small,
averaging only 7% in the last three years, says Qu Hongbin, an analyst at HSBC. But against that,
foreign enterprises have been the driving force behind Chinas export boom, increasing their share of
total exports from 1% in 1985 to 50.1% in 2001. Observers say, however, that it is largely invisible
contribution to Chinas economy that makes the foreign invested enterprises (FIEs) Beijings most valued
sector. FIEs impart management skills, production know how and transfer technology. That is why even
after W T O entry, China collects only 15% in corporate tax from FIEs in special economic zones but
takes 33%from their domestic counterparts. The dividends reaped by such policies are plain to see.
Chinas ascent up the technology ladder has been rapid. Chinese companies now make mobile
telephony base stations, routers and sophisticated internet equipment. The domestic market for 300 M W
coal-fired turbines is supplied entirely by local companies, and 6 0 0 M W generators are soon to be
commercialized. Chinese consumer electronics makers have driven their Japanese competitors from the
domestic market. Motor cycle manufacturers are expelling them from third countries and indigenous
research centers are busy developing a home grown 'm aglev train that floats on a magnetic field rather
than running on rails. Many of the worlds top technology companies, lured by the abundance of talent
graduating from Chinese universities, have established R&D centers that undertake cutting-edge
research. Alcatel, the French telecoms company, will this year spend around 15% of its worldwide R&D
budget in Shanghai. 'China has long been a recipient of telecom technology, says Ron Spithill,
executive vice-president of Alcatel. 'But very soon China will be a source of innovative technology.
James Yeh, head of IBMs China Research Lab in Beijing, says the raw talent available in China is at
least as good as anywhere else in the world. Researchers at his lab are engaged in mainstream IBM
work rather than China-specific projects. With mobile phone users standing at 169m and increasing by
several million a month, foreign semiconductor makers have started to shift production to Shanghai and
Tianjin, near Beijing. Raymond Chang, the Taiwanese head of SM IC near Shanghai, says production
costs are 10 to 15% lower than the next cheapest place in the world. But perhaps the greatest
competitive advantage that FIEs enjoy in China is a lack of government interference. Unlike companies
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in the state-owned sector, they are allowed to employ as few workers as they wish, do not have to pass
on dividends to local functionaries and are often not squeezed for corrupt donations in the same way as
their domestic counterparts. The advantages go some way toward accounting for the extraordinary
success of some foreign companies in China. McDonalds and Kentucky Fried Chicken between them
have some 700 stores in China. Kodak has half the market for film and photographic paper. Procter and
Gamble is the biggest seller of shampoo. Motorola, Ericsson and Nokia have more than 90% of the
mobile phone market. Although some domestic competitors chafe at such dominance, Beijing realizes
that its remarkable economic transformation over the past 24 years is in no small measure due to the
combination of foreign technology and management with a Chinese workforce. In spite of pressures to
increase its tax take from FIEs, government officials appear anxious not to kill the goose that lays the
golden eggs. Pan Yue, deputy director of the Office for Restructuring Economic Systems, a body under
the State Council (cabinet) says: 'China should not only be a workshop for foreign invested enterprises. It
should also be a center for multinationals research and development, a base for manufacturing and a
regional headquarters.
126. Such logic is underlined in Brenner 1998 (p. 12), which is not strange to mainstream economic
conventions. Accordingly, the "appropriate" response is conceivable as either derived from superfluous political
interference with market operations or rooted in some technological failures of the state bureaucracy. This
functionalist/Marxist view assumes that the economy is mainly endogenized in its "own functioning" agenda,
while repudiating other contingent perspectives.
127. These institutions, in terms of environments and arrangements, are not alienated from human history,
society, and culture; they are all designed by humans and devised in the contexts of particular societies. And
the interactions among them are also significantly confounded by the effects of time of origin, time sequence
on a specific process that vary ocross sectors, industries, and nations.
128. It thus underlines the thesis that we proposed in our Chapter 4 that the reality-minded new institutional
historical comparison (NIHC) would rather adopt a socio-genetic medical approach, assuming the primacy of
the internal remedy of the ailing institutional genes, as the planning economy suffers most from its own genetic
diseases. The socio-institutional genes, while being affected by the long-term environmental evolution, much
more evolve from inside the body of the existing and preexisting institutions. W e want to add here that the
endogenized institutional reforms are never processed in isolation; rather, the process is undertaken quite
openly in the larger environments and contingent contexts with which the reforms must interact.
129. Elsewhere, e.g., as John R. Sutton and Frank Dobbin suggest, managerial efficiency and effective
governance are distinct in a new institution, since the former involves instrumental concerns, while the latter
involves normative concerns (In general terms, neoinstitutional theory suggests that law-like rules of
governance appear not as instrumental means to achieve managerial efficiency or to control workers, but
rather as symbolic evidence that the firm is attentive to wider norms of equity and justice." Even in the US, By
the late 1970s or early 1980s, legalized governance was institutionalized as a legitimate strategy for reducing
uncertainty in the legal environment." cf. 1996,798).
130. cf. Seeds of change? - Deep in the countryside, China is experimenting with local democracy" in
The Economist, A Survey of China," p. 7, June 15, 2002: ...Buyuns reformist supporters hope that its
elections will eventually transform Chinese politics. The example they point to is a decision in 1978 by
peasants in Xiaogang village in eastern Anhui province to split up their communal land into household
plots. It was a huge risky move at the time, but the reform had powerful backers in Beijing and eventually
spread across the country, transforming Chinese agriculture. Five years later the disastrous Peoples
Communes that Mao had foisted on peasants were formally scrapped...
131. As for the competition from the non-state sector, as Cao et al. observed (1999: 118), China is
556
known for its rapid expansion of the non-state sector in the early stages of reform (Qian and Xu 1993).
By 1993, the states share of industrial output in the national economy had declined to 4 3% ...Both foreign
firms and domestic non-state firms have become the major sources of the competition. The former are
the result of the rapid increase of foreign direct investment (FDI) to China, and the latter are mostly from
rural enterprises which include both Township-Village Enterprises (TVEs) and private enterprises. Bv the
mid-1990s, foreign firms together with rural enterprises already accounted for more than half of Chinas
industrial output. As a result, competition pressure on SOEs from non-state firms reached a new level.
Furthermore, this competition had a greater effect on SOEs supervised by local governments than on
those supervised b the central government because most of the former are in competitive industries
where the non-state firms entered.
132. cf. Tough Chinese barriers for fund managers by Richard McGregor in Shanghai in Financial
Times, p. 3, W ed. June 5, 2002: ...In line with an earlier draft law, the new regulations stipulate that
foreign fund managers can enter Chinas market through a joint venture or by purchasing a share of an
accredited local company. Under W T O Rules, foreign firms can hold a maximum of 33% in Chinese fund
management and securities firms for three years after W T O entry and 49% after that. The foreign firms
mostly prefer the equity route, as a joint venture may end up competing with the local partners main
fund management company. However, Chinas profitable firms will not easily give up sizeable stakes in
their companies to foreigners. In an interview with the Economic Observer, officials from the Huaan fund
management company suggested they might be reluctant to sell a large share in the company to their
partner, JP Morgan Fleming Asset Management. Foreign partners of local firms face a second
disincentive - the CSRC requirement to put Rmb300m ($36.2m , 38.8m , 25m ) in hard currency as
paid-in capital for the new ventures. Chinas embattled securities firms, however, which are suffering
from sliding trading volumes and price wars sparked by the deregulation of commission fees, may make
for easier, although less profitable, pickings. The C SR C regulations stipulate that foreign firms entering
this business must have Chinese securities companies as their partners. This contrasts with the fund
management area, in which foreigners have partnered Chinese firms from outside the funds industry,
including securities companies.
133. The reforms focused on enhancing the institutional capability of rendering overall viable solutions to the
tensions among those rival entities, either present and potential, or prospective, through erecting both rational
and situationally-specific procedures, rules, standards, laws, contracts, and civil rights, etc. namely, those
institutional solutions that make a background-counted transition available in China.
134. cf. Jiao Jihong, 2002: Chinas economic reform of state-owned enterprises, a public lecture on Apr. 24,
2002 in Libar Commons room, 7200, Law School building, UW-Madison. Jiao Jihong is currently Associate
Dean and Professor of Law, University of International Business and Economics, Law School, Beijing, China.
135. cf. Changing China - The country has had extraordinary success in raising living standards in rural
areas. But it faces a daunting challenge in eradicating some of the most entrenched poverty by John Thomhil
in Financial Times, p. 14, Fri. June 14, 2002: China has lifted more people out of extreme poverty more
quickly than any other country in modem times. According to official estimates, the number of Chinese people
living on less than $0.66 a day fell from 260m in 1978 to 42m two decades later. Brahm Prakash, director of
the poverty reduction division at the Asian Development Bank, says Chinas good governance and fast
economic growth have produced astonishing results, helping to roll back the pessimism about economic
development that has engulfed many other parts of the world. 'It is a totally unprecedented and miraculous
performance, he says. 'They have really helped the world in two ways: by bringing immense relief to millions
of people; and by countering the general despondency that is spreading around the world, especially in Africa.
China is the great hope. China can now be seen as the savior of the global economic system...The increased
prosperity of the [Ningxia] region has enable many local inhabitants to turn their former cave dwellings into
donkey sheds and build themselves brick houses, complete with plaster casts of pigeons and dragons on the
557
roofs. They have also been able to build underground water tanks and are busy renovating the village mosque.
The local government officials, who administer such poverty alleviation programs, appear fluent in both
Communist rhetoric and capitalist practice. 'China has been better than India or Africa at alleviating poverty
because China is a socialist country, says Wei Wnxiao, the poverty alleviation director of the local
administration. 'W e are one big family. The Communist party is concerned about the poor. But Mr W ei is no
advocate of unconditional charity. He argues that the local farmers must provide collateral for their loans and
will be harshly treated if they default. 'If you do not pay your debts, the next time we are not going to lend you
anything and we will not lend anything to your guarantor or anything to your relatives, he says. In practice, the
local government has recently had to soften these threats because of the exceptional circumstances caused by
the drought. It has also had to be careful about how it distributes its funds. Only five of 22 villages in the district
have so far had access to micro-finance loans, spreading resentment that some farmers are growing richer
than others. Some locals also complain that the state-owned Agricultural Bank provides loans only to well-
connected local officials rather than needy farmers. Elsewhere, central government poverty alleviation
programs have become a byword for corruption. An investigation by the Auditing Bureau found that almost
10% of Rmb48.8bn ($5.9bn) invested in 592 poverty alleviation projects between 1997 and mid-1999 had
been misused or stolen. Local Chinese newspapers have even reported instances of local officials financing
fictitious projects, borrowing cattle from other farmers or making fake videos to try to trick the inspectors.
However, Ma Minxia, director of the foreign economy division in the Ningxia finance department, says the
government is becoming increasingly strict about the efficient use of funds...
136. cf. Asian tigers fear Last Supper thanks to ravenous China - The once booming economies of the region
are being quickly overtaken" by Richard MrGregor and Sumathi Bala in Financial Times, p. 14, Tues. June 18,
2002: It took the Asian tigers more than 15 years to build their economies as symbols of new development,
says Kenichi Ohmae, a Japanese consultant. 'It is taking China only a few years to supplant them....Recent
examples include Philips Electronics moving its corporate headquarters from Singapre to Hong Kong to save
costs and to be nearer China, and Japans NEC shifting production of personal computers from Malaysia to
China. Mr. Ohmau cites the decade that Malaysia and Thailand spent painstakingly building the skills and
precision infrastructure to sell components to Swiss watch manufacturers. 'The Chinese took over that
business in a year and the same is happening with electronics and machinery, he says...
137. cf. Y. Cao et al. 1999, p. 118: After Deng Xiaopings southern tour in 1992, expansion of non-state-
owned enterprises obtained a new momentum.
138. cf. Chinas Communist Party, 'to survive,' opens its doors to capitalists by Joseph Kahn in The
N ew York Times, A10, International, Mon. Nov. 4, 2002: In China, capitalism is possibly the future of
communism: As the private sector has become an important part of the economy, the party has taken
steps to include it....In 1995, a new economic team led by Zhu Rongji comes to power in Beijing. It
adopts a new policy that clears the way for privatization of failing state enterprises. In 1997, the party
formally acknowledges that the private sector has become an important component of a socialist market
econom y...
139. cf. China seek jobs role for private sector - Country needs to create employment for tens of
millions of workers by Richard McGregor in Beijing in Financial Times, p. 3, World News, Mon. Nov.
11, 2002: Chinas fast-growing private sector will be indispensable in creating jobs to absorb the tens of
millions of workers cast off by the state sector and new entrants into the labor market, government
ministers said yesterday...The number of registered private businesses has increased from 90,000 in
1998 to 2.3m last year, said Li Rongrong, the head of the State Economic and Trade Commission. At the
same time, the number of state-owned industrial enterprises has contracted, from 102,300 in 1989 to
42,900 in July this year. His colleague, Zeng Peiyan, of the State Development Planning Commission,
said continued rapid economic growth and 'the promotion of the non-state sector1was the key to keeping
the jobless rated down...In further evidence of the expansion of the private economy, Mr. Zeng
558
confirmed the government would allow farmers to earn income by selling, or renting out, their land use
rights. He said that such land transfers were already happening in coastal regions, and that the
government needed regulations to manage the practice. But he gave few other details on what is a highly
sensitive initiative, the first step towards privatization of agricultural land to facilitate the movement of
hundreds of millions of rural workers to the cities. In Chinas relatively wealthy cities, the private property
market has already developed rapidly over the past decade. In cities such as Shanghai, which pioneered
the reform of the property title system, most residential properties are already privately owned. Mr. Zeng
also said that private companies might also be able to issue corporate bonds, as long as they were
'financially strong and had had a good business record. The government has constrained the
development of bond issuance by state-owned companies as well, in favor of a general policy that
dictates the gradual introduction of new financial instruments. Mr. Zeng indicated he wanted to expand
the bond market, but said he had proceeded cautiously because of the need to guarantee the
creditworthiness of the issuers.
140. cf. Nee 1992, p. 24: T h e organizational dynamics growing out of disparities in economic performance
and access to resources among the state, collective, and private sectors is what drives market transition in
China." In particular, it is evident in Nees following observations that "Despite a substantial increase in capital
investment in the early 1990s, productivity and profits in state enterprises continue to plunge. Despite declining
returns on investment, the state must pump in more capital to bail out money-losing state enterprises...The
state-owned sector has responded poorly to the central governments effort to sustain economic growth and
increase revenues. By contrast, private enterprises, which were the hardest hit by the recession, recovered
quickly and constitute the fastest-growing sector of the Chinese industrial economy."
141. Ibid.: Employees became the new owners. Not only did they buy shares at a discount but their
shares have appreciated in growing enterprises. The local government has rid itself of loss-making
enterprises, thus improving its budget. The central government, often as a minority shareholder, get
something back for its invested equity and, if the company grows, the value of its remaining equity
appreciates. This growth-induced ex post political situation reduces the pressure to turn backwards after
privatization." Ibid. pp. 112-3: Privatization mainly concerns assets; lay-offs and re-employment concern
people...SO Es in China are overwhelmed with excess employment... privatization of assets is often not
the main concern; rather, the main concern is reallocation of the labor force. In recent years, many cities
have started restructuring medium and large SOEs by laying off excess workers and helping them to find
jobs in non-state firms. Two new terms have emerged and become the most frequent phrases appearing
in the press to describe this process: xiagang (or stepping down from ones post) and zaijiuye
gongcheng (or re-employment program)...Together with xiagang is zaijiuye gongcheng, that is, the local
government assisted-re-employment for laid-off SO E workers...The re-employment program became a
major job for local governments...
142. The states efforts for ownership privatization and diversification of ownership structure, such as equity
shares, buyouts, and the IPO (i.e., initial public offerings) bids for fundraisings through security and equity
markets, seemed vulnerable to the conflicts of interests in the authorities of these enterprises, as the
authorities experienced a transformation from the old ones into the new ones. cf. Jiao Jihong, 2002: China's
economic reform of state-owned enterprises, a public lecture on Apr. 24,2 00 2 in Libar Commons room, 7200,
Law School building, UW-Madison.
143. Ibid. One such problem was how to deal the potential conflicting interests among the different parties of
an enterprise authority. A proposed follow-up solution was to favor the structure of one-owner-per-enterprise.
But as the larger-sized state enterprises speeded up their IPOs through capital equity markets, more and more
failures were also revealed and often associated with the inside traders who were already members of the
enterprise authority such as those in the board of directors. And some inside traders had illegally provided
inside information to the favored bidders in capital and securities markets so that they were able to make extra
559
profits through secret or unfair stock trades. All these revealed that privatization in China had a long way to go,
and that privatization in China had retained an incomplete nature that could generate setbacks for both
enterprises and the state, like the current corruption and malfunctions arising from the process.
144. cf. Jiang reform pledge aimed at four-fold rise in GDP by James Kynge in Financial Times, Weekend,
p. 3, Nov. 9/Nov. 10, 2002 (emphasis mine): Chinas President Jiang Zemin yesterday exhorted the country to
quadruple its gross domestic product by 2020 and promised a series of reforms, including the deregulation of
Beijings fixed interest rate regime. Mr. Jiang told the five yearly Communist party congress that China must
stick to its policy of stimulating domestic demand, foreshadowing later comments by Xiang Huaicheng, finance
minister, who said next years fiscal stimulus package would amount to about Rmb150bn ($18bn), the same as
this year. Pump-priming has been a mainstay of the economy for five years. To sustain such fiscal
expenditure, China has had to expand its tax take aggressively. In the first 10 t=months of this year tax
revenue rose a year-on-year 13.4 per cent to Rmb1,419bn, according to State Administration of Taxation
yesterday. Mr. Jiang said China should strive to expand its growing middle class and gradually boost the share
of GDP that comes from consumer spending, while lowering that proportion coming from investment. He
indicated that legal guarantees for private property would be strengthened. Reforms to Chinas fiscal and
taxation system, as well as the banking, investment and financing sectors, would be deepened, he said.
Interest rate deregulation, which was put on the reform agenda in 2000 but later dropped, would be resumed at
a gradual pace. The president oave no more details on interest rate liberalization, often regarded as both the
most risky and most crucial economic reform that China must attempt as it develops market mechanisms. The
current fixed interest rate regime means that banks cannot price for risk, and therefore tend to recoil from
lending to relatively risky startups and private companies. Mr. Jiano said venture capital should also be
promoted in China, and bureaucracy reduced. 'Development requires that we do away with all notions which
hinder development, change all practices and regulations which impede it and get rid of the drawbacks of the
systems which adversely affect it. Although he stressed the need for legal protection of private property. Mr.
Jiang stopped short of putting the whole weight of the Communist party behind the dynamic private sector. He
describe the sector as important component part. while the state-owned sector - still the backbone of the
communist partys economic power - Plaved a dominant role. He nonetheless appeared to endorse a process
that has seen many state-owned companies diversify their ownership structure, either bv listing a minority
stake on the stock market or bv selling shares to join venture partners. 'Except for a tinv number of enterprises
that must be funded solely bv the state, all the others should introduce the joint-stock system to develop a
mixed sector of the economy. he said.
145. cf. China to foster protection of private property by Richard McGregor and James Kynge in Beijing in
Financial Times, p.1, Weekend, Nov. 9/Nov. 10, 2002 (emphasis mine): China has made the protection of
private property and wealth a pillar of its economic policy, removing the preferential status given to state assets
since the 1949 communist revolution. Jiang Zemin, Chinas president, said at the opening of the five-yearly
Communist party congress that citizens should be judged on their contribution to society and not penalized bv
their property holdings. Private property already has de facto recognition in China, where private enterprise
contributes about a third of growth. However, this is the first time it has received this type of recognition in such
an important forum. Mr. Jiangs address will have a big effect on the economy, helping more people to use
private property as security to get loans. He said. He said: 'W e need to respect and protect all work that is
good for the people and society and improve the legal system for protecting private property. Mr. Jiangs
statement provides support for the speedier development of legal institutions for protecting private property
and the wealth generated bv an emerging class of entrepreneurs. Chinas constitution explicitly safeguards
state property but makes no met ion of private rights, a prejudice that permeates governance and the legal
system. He Quan, party secretary of Xuzhou, in Jiangsu, a bastion of private enterprise, said: 'From now on
public and private property will be viewed on an equal footing. Such protection is expected to help private
enterprises and individuals secure loans. State banks reluctance to extend credit to private enterprises is
regarded as one of the greatest barriers to the development of business. Mr. Jiang also indicated that farmers
should be allowed to sell land-use rights, which could allow struggling peasants to cash out of their holdings
560
and move to urban areas. At present land-use rights are not transferable and all land is owned by the state.
Andy Rothman of CLSA, a Hong Kong-based brokerage, said Mr. Jiangs comments on land could transform a
rural economy where 800m people live. 'It could prompt some of the 200m-odd under-employed farmers
to...go to the cities. The government wants to encourage such migration to pull the rural economy out of a
deep malaise. Rules on selling rural properties were passed in August but will not take effect until March.
Officials said mechanisms for transferring land-use rights and at what price were to be formulated before then.
In some pilot projects farmers have sold their land-use rights to local farm companies in return for shares.
'Companies are collecting a lot of land with the help of [local] governments - changing the law will make more
large -scale farming possible, said Andy Xie of Morgan Stanley in Hong Kong. The changes are also aimed at
loosening the control of party officials at local level who are often corrupt, a source of great tension in China.
146. cf. Chinese leaders head for the seaside to play power politics - as the elite prepares for the 16th Party
Congress, reshuffle rumors are rife by Richard McGregor in Financial Times, p. 10, Mon. July 29, 2002:
...Such secrecy powers an abundant rumor mill, which in recent weeks has been full of stories that Mr. Jiang
may not after all give up his most powerful post of party secretary. His acolytes have for at least three years
been running a propaganda campaign to place him in the pantheon of Chinese leaders, joining Mao and
Deng. The philosophy says that the Communist party should represent 'the advanced culture and the interests
of grassroots. This is code for a symbolic shift in emphasis, from the traditional base farmers and workers to a
more modem organization, open to entrepreneurs. An important debate at the congress will be over whether to
embrace Mr. Jaings call last year for capitalists to be admitted into the Communist party, which for many
traditionalists takes reform one contradiction too far.
Also cf. Chinas president may be reluctant to cede his power - Clouds over succession - Media praise may
mean Jiang Zemin, like Mao, envisions himself as retirement-proof by Erik Eckholm in The N ew York Times,
A1, A14, Sat. July 13, 2002: ...In the last few weeks, among scores of similar tributes, the Central Party
Schools newspaper described Mr. Jiangs 'three represents theory as 'the basis of our party, its foundation for
governing and the source of its strength. The theory, which was formulated in 2000 and is being extolled as a
breakthrough in Marxism, is an effort to adapt the Communist Party to the vibrant, market-driven society that
China is becoming. It holds that the party should represent 'advanced productive forces, advanced culture and
the fundamental interests of the broad masses of the people - implying that the party can represent
entrepreneurs as well as its traditional constituents, the working class and the peasantry. The theory is Mr.
Jiangs effort to join the pantheon of Communist leaders - his lasting contribution to the sacred texts of Marx,
Lenin, Mao and Deng Xiaoping, which are still used to justify Communist rule and guide national strategy...it is
already almost certain that his 'three represents theory will be the centerpiece at the major party congress this
fall. More important, the theory is likely to be enshrined in the party Constitution - a step that may give Mr.
Jiang enormous influence, even in retirement...The maneuvering does not appear to reflect any deep split
over basic policy. Politicians of Mr. Jiang's generation and the next broadly agree on the need to embrace the
world economy while preserving the partys political grip at home... In a recent newspaper interview, Yu
Yunyao, director of the Central Party School, explained why the partys decision last year to admit capitalists
and private managers did not alter its status as the 'vanguard of the working class. 'Under new historical
conditions, the class character of our party has not changed, he said, asserting that the party 'understands and
transforms the world through the world-view of the working class..."
147. cf. Electricity in China - Power politics in The Economist, p. 39, June 8th, 2002: ...Broadly, China,
like many other countries that are reforming their electricity industries, is looking to Britains deregulation
in the 1980s as a model. Thus China plans to split power generation from transmission, and to let four or
five generators compete to supply the grid (which will itself be split along geographic lines). According to
David Victor, director of energy research at Stanford University, the key variable that determines whether
such a model works in the countries that he has studied is the institutional framework. Is the regulator
genuinely independent? Is there rule of law and sanctity of contract? Are electricity companies properly
and transparently governed? And so forth.
561
148. cf. Tianjin to cut one-third of jobs in Financial Times, p. 23, W ed. June 19, 2002: Tianjin
Automotive Industry, Chinas fourth-largest vehicle maker, said that it planned to cut nearly one-third of
its 50,000 strong workforce this year, Reuter reports from Shanghai...Last week, Tianjin Autor, which has
a joint venture with Toyota, the Japanese carmaker, signed a deal to sell 50.98% of Xiali, its listed small
car unit, to FA W in a landmark alliance aimed at fending off foreign rivals after China joined the W T O
last year and slashed import tariffs. After W T O entry, Chinas car imports surged, sparking a punishing
domestic price war. This hit Tianjin Automotive Xiali, a unit of Tainjin Auto and its main revenue driver,
which said in April it expected to post an interim loss this year after losing Rmb87.05m ($10.5m ) in 2001.
A Xiali official, who declined to be identified, said the listed company had yet to decide how many of the
lay-offs would be from its 5,000-plus payroll...
149. cf. New challenge for Chinas shaky banks - Burdened by bad loans, they face rising foreign
competition by Keith Bradsher in The N ew York Times, C1, Tues. Sept. 17, 2002: Chinas four main
banks, all state-owned, are immense, approaching the size of Citibank, the biggest American bank. But
the Chinese banks already report a huge amount of bad debt, and Western experts say that if Chinese
banks followed international standards, their share of non-performing loans would be 10 and 20
percentage points higher."
150. cf. Chinas debt 'fa r higher than stated by John Thornhill in Hong Kong in Financial Times, p. 3,
Mon. May 27, 2002: Chinas public debt is six times higher than officially stated and could eventually
spark a financial crisis, according to the stock brokers CLSA. In a newly published study of Chinas public
finances, CLSA estimated that the countrys public debt to gross domestic product ratio stood at 139% in
2000 compared with the 23% claimed by the government. The big discrepancy was mostly due to the
states 'off-balance sheet finances, including the debts and unfounded pension obligations built up by
Chinas state-owned enterprises. Once these items were included then CLSA estimated that China's real
public sector deficit was running at 10.4% of GDP in 2000 compared with governments figure of 2.6% .
However, Jim W alker, C LSA s chief economist, said the government was doing the right things to bring
its debt under control by raising additional tax revenues and selling off state assets. 'U p until this year I
was pessimistic about the possibility of China avoiding a major [financial] crisis. But now I think they
have got a chance, he said...C LSA said Chinas official budget statistics were also 'woefully lacking in
detail and failed to reflect many of the state's financial obligations. They were especially complicated by
the blurred boundary between the government and private sectors. For years, the government has forced
Chinas big four state-owned banks to pump credits into the countrys state-owned enterprises to stave
off corporate failures and mass unemployment. As a result, the banks have amassed huge portfolios of
non-performing loans, conservatively estimated at about 28% of total lending. But Nicholas Lardy, a
China specialist at the Brookings Institution who was one of the first analysts to highlight the countrys
looming fiscal problems, said the banks were now reducing lending to state owned enterprises as they
pursued plans to recapitalize themselves and operate as more commercial organizations. The
government was also lifting its tax take as the quality of economic growth improved. 'The bottom line is
that China needs to get continued revenue growth and bring down the rate of new bad loan creation
within three to four years so that the banks can finance their own write-offs, he said. If they cannot do
both of these things then within seven to eight years interest payments on the debt will absorb 80-90% of
government revenues.
151. This table mostly adopts Gelb. et al.s 1996 Table 1.1, except 1997-present phase that myself added.
152. cf.Zo u , Gang. 1992a, 1992b.
153. cf. Y. Cao et al. 1999.
562
154. cf. China moves on debt sales by Richard McGregor in Financial Times, p. 15, Mon. Sept. 16,
2002: China is in the final stages of approving pioneering joint ventures to sell distressed state-owned
enterprise assets, nearly a year after foreign companies won tenders to dispose of debts once held by
the countrys large banks. A consortium led by Morgan Stanley, the international investment bank, has
resubmitted its application for its venture to the Ministry of Foreign Trade and Economic Co-operation
(M O FTE C ) after making changes to its initial plan. The Morgan Stanley-led consortium agreed a deal
last November to buy non-performing loans with a face value of US$1,3bn in a venture with Huarong, an
asset management company (AMC) attached to the Industrial and Commercial Bank of China, the
countrys biggest bank...
Also cf. China Bank shares fall in initial offering" by Keith Bradsher in The N ew York Times, W 1, Fri.
July 26, 2002: Beijing, July 25 - In one of the biggest stock market debuts anywhere in the world this
year, shares of the Hong Kong unit of the Bank of China began trading publicly today. They promptly fell
4.7% on heavy selling by Hong Kong residents. The initial price for the offering was set last Saturday.
Since then, markets around the world have weakened, and the Hang Seng index, the main barometer of
Hong Kong stocks, has fallen by 4.3% , so today's movement in the bank stock caught up with the
broader market. Still, the offering, which raised 19.5billion Hong Kong dollars ($2.5bn), was a milestone
for China, the first international stock listing by a mainland bank. In it, the state-owned Bank of China
sold 22% of the shares in its Hong Kong unit, which are the territorys largest lender and its second-
largest taker of deposits. The Chinese government has been actively selling stakes in state-owned
enterprises even when stock markets have been weak, in the hope that partial private ownership will
improve the business practices at the companies. China Telecom, the near-monopoly provider of fixed-
line phone service in southern China, is preparing an even larger initial public offering for later this year.
Although a third of the shares in the Bank of China offering were set aside for retail investors living in
Hong Kong to buy at a 5% discount; the rest were sold to institutions and foreigners at full price. The
discount allocation, a common feature in large privatization around the world, prompted a frenzy of
activity over the last three weeks. Residents filed 385,000 applications for shares, a huge number in a
territory of 6.8 million people...Despite the first-day drop, investors still valued the Hong Kong unit of the
Bank of China higher than American institutions like J.P. Morgan and Citigroup, as measured by the ratio
of stock price to book value. Yet 9.5% of the units loan assets are classified as nonperforming, even
after the government took some bad loans off its books. That is nearly twice the average for Hong Kong
banks and six times that of American banks.
Also cf. Beijing backs away from stock s ell-o ff by James Kynge in Beijing and Joe Leahy in Hong Kong
in Financial Times, p. 17, Tues. June 26 , 2002: ...M ore than half of the domestic stock market,
capitalized at around $500bn, is held by the government in state-owned shares. Sales of such stocks had
been seen as the main pillar in a scheme to raise an estimated $300bn needed to cover unfounded
pensions liabilities..." Ibid. p. 21: Bank of China plans to raise US$3bn in IPO by Joe Leathy and
Reuters in Hong Kong: Bank of China (Hong Kong) is expected to float 25% of its shares during an
initial public offering next month, raising about US$2.5bn-US$3bn, banking sources said yesterday. The
deal is likely to be valued in the range of 1.5-2.2 times its book value, resulting in a total market
capitalization of more than HK$70bn(US$9bn)...Based on valuation by JP Morgan of a share sale at 1.5-
1.8 times book value, the Bank of China HK IPO could be priced at HK$7.79-HK$9.23 a share, banking
sources said. Bank of China HKs non-performing loans stood at HK$37.09bn, or 11.4%of its total
advances to customers at end-2001, more than double the Hong Kong industry average, a Morgan
Stanley research report showed. Analysts and fund managers have said that getting non-performing
loans under control is key to ensuring a successful IPO. The bank is expected to report net profit of about
HK$2.77bn when it releases its full-year 2001 results tomorrow, down 45% from 2000 after it made hefty
provisions to help tackle its high level of non-performing loans, the Morgan Stanley report said. Morgan
Stanley said the bank's net profit should more than double to HK$6.38bn this year as provisions are likely
to be substantially lower."
563
Also cf. China Telecom considers IPO on world market - Offering of up to $10bn is expected to be one
of the largest in Asia by Joe Leahy in Hong Kong in Financial Times, p. 16, W ed. Dec. 6 , 2000: China
Telecom, the mainland fixed-line operator, is considering an initial public offering on international capital
markets, possibly by late next year, according to bankers in Hong Kong...figures under discussion ranged
from $6bn to $10bn, bankers said.
Also cf. PetroChina delivers on promises with high-octane results - But the oil major trades at a discount
due to caution about China by Joe Leahy in Financial Times, p. 26, Fri. Apr. 27 , 2001: Analysts
scrambled to revise their forecasts for PetroChina after the company, Chinas largest oil producer,
reported full-year 2000 results this week. Not only did the group report higher-than-expected net profit, at
rmb55.2bn ($6.7bn) - double that of 1999 - but it pledged to match the performance this year despite
lower oil prices. 'If the oil price can be maintained for the whole year at this level in the first quarter of
U S$25 a barrel, our company's profit will not be lower than last year, said Ma Fucai, the companys
chairman. PetroChina is one of a new group of Chinese state-run groups that are beginning to jostle for a
place among the worlds largest corporations. Not only have they achieved big earnings - PetroChinas
result would have placed it among the top 15 of the US Fortune 500 if ranked by net profit - they have
also surprised investors by delivering on pledges to cut costs and improve efficiency. In many ways, the
size of these companies earnings should come as no surprise. PetroChina, with proven reserves of
16.5bn barrels of oil or equivalent, is the worlds fourth-largest publicly traded oil company behind Exxon,
BP and Shell. The company is one of five key Chinese state-run corporations - three oil companies and
two telecommunications operators - that have listed on international markets in the past couple of years.
The offerings are part of a government plan to prepare Chinas main industries for greater competition
following the countrys entry to the World Trade Organization, expected later this year. Like PetroChina,
the other companies reported exponential net profit growth of up to 300 percent last year. They are also
big. China Mobile (Hong Kong), the leading cellular operator, is second in size only to Vodafone of the
UK in terms of subscriber numbers...The company [PetroChina] has also been implementing a W estem -
style management incentive programme. Like its peers, PetroChina promised many of these changes in
its prospectus but few investors took them seriously. T h e y all have profitability and cost-reduction
targets specified very clearly in their IPO documents and what we have seen so far from the earnings is
that all three [oil] companies have delivered, said Gordon Kwan, an analyst with HSBC Securities (Asia).
China Mobile, meanwhile, has also been trying to become more competitive. It has introduced a multi
tiered fee structure to encourage customers to subscribe to monthly usage contracts rather than cheaper
pre-paid cards. China Unicom is considering following suit. However, no one can deny the companies
owe much of their success to their controlling shareholder - the government, which is also the regulator
and policy-maker in the oil and gas industries. Competition is carefully controlled and will remain so
possibly for many years, even after W T O membership...
155. cf. China throws open A-shares by Joe Leathy in Hong Kong in Financial Times, p. 20, Mon. Nov.
11, 2002: When China announced reforms last week that will throw its local-currency share markets
open to foreigners for the first time pundits in Hong Kong were quick to hail the significance of the
changes. The proposal, to set up a qualified foreign institutional investor (QFII) scheme, will allow
specially approved offshore firms to enter China's local-currency A-share market, Asia's biggest after
Japan, with a market capitalization of about US$500bn. Previously, foreigners have been restricted to
the tiny, US dollar-denominated B-share market. T h is is a beg event; a very big market has opened,
said Vincent Chan, Hong Kong and China equities strategist with UBS Warburg. The changes are a
signal of Beijings determination eventually to integrate its financial system, which is still protected by
capital controls, into the global market in the same way it is currently doing with trade. Analysts caution,
however, that the way forward will be slow. G FII, which is due to begin on Decem ber 1, is laden with
onerous conditions aimed at ensuring the process stays firmly under control. To become a qualified
investor, a fund management firm, insurance company, brokerage or bank must have had a minimum of
564
US$10bn in assets under management in their last financial year. In addition, fund management
companies must have had at least five years of operational experience while insurance companies and
brokerages must have had 30 years of experience and paid-in capital of at least US$1 bn. Banks,
meanwhile, must be one of the worlds 'top 100 institutions. These high thresholds effectively prelude
many emerging markets specialist funds, which would probably have been among the scheme's initial
investors, Mr. Chan said. Most burdensome, however, is a rule requiring that the capital invested in
closed-end funds (the preferred form of investment) set up under QFII can only be repatriated after a
minimum of three years, and even then only at a rate of 20% of the principal per month. These
conditions introduce a high degree of currency risk into the scheme. The other issue is the poor quality of
most of the 1,200 A-share companies. Many are rust belt, state-owned enterprises and most are over
valued. The A-share trade at an average price/eamings ratio of about 40 times, more than double that of
most Hong Kong stocks. 'Yes, its meaningful that Chinas opening up to the world, said as US fund
manager in Hong Kong. 'W ill there be big flows of money? No. The valuations are pretty rich, the
companies are pretty poor and theres a lot of practicalities that have to be dealt with.
Also China lets foreigners buy local shares by Richard McGregor in Beijing in Financial Times, p. 19,
F it Nov. 8, 2002: China has approved a landmark scheme to allow foreigners to invest in local shares,
the second initiative in a week designed to attract overseas money into its stagnant stock market and
many struggling listed companies. The 'qualified foreign institutional invest (Q FII) scheme will be
launched on Dec. 11, according to a joint statement last night from the China Securities Regulatory
Commission (CSRC), and the Peoples Bank of China, the central bank. Foreigners have been barred
until now from Chinas renminbi-dominated share markets, only being allowed to invest in mostly
unattractive B shares. Chinas A-share market has about 1,200 companies, with only about one-third of
shares being tradable. The rest are held by the state or state-approved bodies. The government
announced last week that foreigners would be allowed to buy into the on-tradable shares of these state-
owned companies in the belief that an injection of foreign capital and expertise would improve
management. The second initiative, announced yesterday, will allow foreign institutions to buy and sell
the companies tradable shares, which have a collective market capitalization of about US$160bn. The
policies amount to a substantial liberalization and an admission that the markets present structure of
tradable and non-tradable shares is not sustainable. The policies also provide another significant avenue
for Chinese enterprises o get access to foreign capital. The QFII system is modeled on similar schemes
that have operated in Taiwan and South Korea. Under Chinas rules, approved investors will also be able
to put money into domestic treasury and corporate bonds. Investors that qualify under the scheme are
foreign fund management companies with five years of operations, insurance companies and
brokerages. All qualified institutions must have had under management at least $10bn in their last
financial year. Securities and insurance companies need at least 30 years of experience and paid-in
capital of at least $1bn. 'Applications for Q FII must have a healthy corporate structure and complete
internal compliance, and must not have been severely punished by their own regulators during the past
three years, the joint statement said. The sensitive timing of approval for Q FII, on the eve of the ruling
communist partys five-yearly congress, may be testament to the growing clout of the C SR C , a relatively
new ministry. Also cf. The N ew York Times, World business briefing, W 1 , Fri. Nov. 8, 2002: China
opened its $500bn stock market to overseas institutional investors, allowing them [starting from Dec. 1]
to buy yuan-dominanted shares for the first time as the government seeks funds to modernize
industries...
Also cf. China launches mutual fund to counter volatile markets by Richard McGregor and Robert
Thomson in Shanghai in Financial Times, p. 1, Mon. Sept. 10, 2001: China will launch its first
mainstream mutual fund tomorrow in an attempt to develop its volatile financial markets. The Rmb5bn
($600m ) Huaan Innovation Investment Fund is launched as the government considers further reforms,
including developing stock market indices to allow the Chinese to invest in tracking funds. Finance
officials, who fear the volatility of the Chinas equity markets and the rampant price manipulation could
565
undermine investor confidence, are keen to experiment with professionally managed mutual funds.
Also cf. China poised to launch first Westem-style mutual fund - The market right now is deep in a
correction, thats why we will only enter the market in a very gradual way in Financial Times, p. 30, Wed.
Sept. 5, 2001: ...The open-ended fund, run by one of Chinas best-performing fund managers, Huann
Fund Management, will have an initial value of Yn5bn ($604). Investors welcomed the news, reported in
China yesterday, as the first positive market development for weeks, spurring a climb in domestic A-
share prices of more than 2 % ...Unlike closed end funds, where invested capital is typically locked up for
more than a decade, open-ended funds have to perform consistently because investors can withdraw
their capital at any time, Huaan officials said. 'I can feel the pressure but Im confident because we have
an able team , said Shang Zhimin, who will head a three-person team overseeing the new fund. 'China
hasn't developed hedging instruments like futures, but we can minimize risk by adjusting our stock
allocations....analysts expect mutual funds to be more popular than the lagging closed funds, as they
allow share capital to be raised. Huaan said the fund would target companies with 'innovative potential,
including high-technology firms in electronic information, network technology, biotechnology,
pharmaceuticals, aerospace, ocean technology and energy. Analysts said the timing of the launch was
positive, since A-share valuations have fallen from as high as 60 times earnings in June to a more
reasonable, but still high, 45 times. 'The market right now is deep in a correction, thats why we will only
enter the market in a very gradual way, said Shao Jiejun, Huaan vice-general manager...Huaan is being
advised on its new open-ended fund by JF Asset Management.
156. cf. China mobile details tariff cuts in Financial Times, p. 20, Fri. Apr. 20, 2001: Chinas largest
cellular operator, China Mobile Communications Corp, will cut Internet Protocol (IP) charges on
overseas-bound calls by up to 50% from Saturday, Reuters reports from Shanghai. Telecoms tariffs in
China are being cut as competition starts to take off in the mainland. The latest move will be applied
nationwide and bring China Mobile's IP fees into line with that of fixed-line giant China Telecom, which
cut its rates in late March.
157. cf. Beijing launches stock price crackdown by Richard McGregor in Shanghai in Financial Times,
p. 1, Mon. Jan. 15, 2001: Chinas securities regulators have targeted several listed companies in a
crackdown on stock price manipulation, in the most public effort of recent years to clean up the stock
market. The investigation launched by the China Securities Regulatory Commission (CSRC) is centered
on Shenzhen-listed China Venture Capital Group, which listed in the early 1990s as an animal feed
company but has transformed itself into a high-tech and e-commerce operator. The C SRC investigation
coincides with a report from the Shanghai Stock Exchange which found that many corporate
restructurings of listed companies involved stock manipulation and false accounting...The companies
commonly falsify their accounts to produce inflated earnings immediately after such restructurings, which
then do not subsequently show up in reported profits. The stock exchange report and the C SR C
investigation together represent an attempt by the authorities to impose some regulatory order on a
market driven by speculators..."
Also cf. China widens fraud inquiry by Richard McGregor in Shanghai in Financial Times, p. 7, Aug. 29,
2001: A flagship Chinese enterprise spawned by the militarys once large business empire has been
caught in the mainland
stock regulators widening investigation into fraud by listed companies. Shenzhen Sanjiu (999) Medical &
Pharmaceutical Co is under investigation by the China Securities Regulatory Commission (CSR C) for
allegedly appropriating Rmb2.5bn ($302m) in company funds and 'seriously violating its duties to share
holders...The listed companys shares have been suspended pending the C S R C s investigation... The
C S R C s crackdown has helped depress shares prices in China after a lengthy bull run which began in
1999, angering many small investors.
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158. cf. Bank of China reduces level of bad debts by Joe Leahy in Hong Kong in Financial Times, p. 17,
Aug. 28, 2002: Bank of China (Hong Kong) yesterday reported sharply lower net profit for the first half of
this year but managed to reduce non-performing loans to slightly better than expected levels...The listed
arm of one of mainland Chinas 'big four state-run commercial banks, Bank of China (Hong Kong) was
formed through a merger of 12 sister institutions last year. Seen as a laggard in Hong Kong because of
its high levels of non-performing loans, the bank generated interest in its US$2.8bn listing by promising
to reduce its bad debt ratio to the sector average of about 4 percent over the next few years. It said
yesterday non-performing loans fell to 8.97% in the first half from 10.99% at the end of December,
slightly better than the 9.5% expected by analysts. Most of the fall was due to the disposal in June of bad
loans to an asset management company set up by its parent..." Ibid. p. 3: N. Koreans in China to learn
about bank system by James Kynge: North Korea has dispatched a delegation of central bank officials
to study Chinas financial system and commercial banking in one of the first signs that Pyongyang may
be considering financial reform ...The Peoples Bank of China (PBOC) is the delegations host
organization. 'There are keen to learn, said an executive at one of the big four. 'But it feels a bit strange
for use as we are students of financial reform too. The student has become the teacher. Questions
asked by the North Koreans had touched on rudimentary notions of commercial banking, including how
many customers a bank branch would need to justify its existence, one Chinese banker said...
159. cf. China plans new market rules" by Richard McGregor in Beijing in Financial Times, p. 18, Thurs.
Apr. 18, 2001: Chinas securities regulators have proposed a detailed set of new rules to reduce
corruption and increase transparency in the countrys growing but scandal-stained stock markets. Laura
Cha, vice chairman of the China Securities Regulatory Commission, told a conference in Beijing
yesterday that measures would include the mandatory appointment of independent directors and a
possible requirement for listed companies to report improved corporate governance. Chinas stock
markets, which the countrys leadership sees as a key to economic reform, have grown rapidly in recent
years, trailing only Japan and Hong Kong in Asia in market capitalization. But the growth has been
accompanied by widespread price manipulation, which Ms. Cha blamed on the 'egregious behavior of
some controlling shareholders of listed companies. 'The concept of corporate governance is not well
understood in this country...partly due to the entanglement of ownership rights with management
responsibilities. Ms. Cha also acknowledged that no matter how strict the C S R C s rules, the process of
improving transparency and entrenching protection for minority shareholders would be slow...Other
measures include new guidelines for shareholders meetings, rules outlining the rights of shareholders in
various corporate actions and rules for fund management companies. 'W e will consider requiring listed
companies to state in their annual reports particular measures of good corporate governance they have
engaged in the previous year.
Also cf. Shanghai Exchange expels a poorly performing stock by Craig S. Smith in The N ew York
Times, W 1 , W ed. Apr. 25, 2001: Chinas stock markets took a step closer to world market standards
today when this citys stock exchange delisted a company for failing to meet minimum performance
requirements. It was the first time in the exchanges 10-year history that it had expelled a stock. The
company, a washing machine maker called the Shanghai Narcissus Electric Appliances Company, was
dropped from exchange trading after reporting a loss for the fourth consecutive year. China's
government controls the vast majority of the companies whose shares trade on the countrys two
exchanges, in Shanghai and Shenzhen, and so far, politics has played a larger role than profits in the
companies fates. Many could never have gone public without political patronage, nor would their stocks
have risen with the overall market over the last two years if not for the expectation of continuing
government support. But China has ambitions for the exchanges beyond merely being allocators of
capital for a semiplanned economy, as they are now. Regulators and some exchange officials are trying
to remake them into truly efficient capital markets. Enforcing listing requirements is part of that effort.
'This is a good step, said James Liu, a senior official at the Shanghai exchange. 'Its something weve
been asking for for a long tim e. Most markets around the world routinely drop companies that fail to
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perform to minimum standards, a practice that protects unwary investors from being sold shares in
companies with no real prospects of profit. China has had similar, though somewhat vague, rules for
years, essentially requiring profits in at least one year out of three to remain listed. But enforcing those
rules would have meant getting tough with state-owned, politically well-connected enterprises, so
regulators and exchange officials shied away. Investors became so sure that the government would
never let one of its companies go under that the share prices of chronic money-losers have often rallied
sharply in the past, usually on expectations of government intervention. Most glaringly, the stock of the
Zhengzhou Baiwen Company, an insolvent retailer, continued to climb after the company posted a net
loss of 957 million Yuan, or % 1 15.6 million, in 1999, the worst annual loss ever for a company in China.
And the speculators were proved right: rather than let it fail, the government stepped in to rescue
Zhenzhou Baiwen by letting it transfer most of its money-losing assets to its parent company and replace
them with healthier assets from another state-owed retail company. China's stock market regulator
clarified the delisting rules in Feb. and added provisions for a 6- to 12-month grace period for companies
to right themselves. It then began warning that the new rules would be enforced this year. But the
enforcement is likely to remain highly politicized, with little clear sign of why some companies are
delisted and not others. On Saturday, the Shanghai exchange rejected Narcissus application for a grace
period, but today, two other companies with four-year losing streaks each got a six-month reprieve...
160. cf. China lists new rules in Telecoms - Caps on investment in Internet outlined; Clarity gets praise
by Leslie Chang in Beijing in The Wall Street Journal, A 21, W ed. Oct. 11, 2000: China published
regulations yesterday that codify a long-promised opening of its telecommunications sector, including a
provision to allow foreign investment in its burgeoning but politically sensitive Internet sector. The State
Council directive, published in the Communist Partys flagship newspaper, Peoples Daily, sets out
clearly for the first tim e which businesses are defined as "value-added telecom services. They include
Internet services and content, e-mail and databases, as well as the reselling of basic telecom services to
third parties. The rules also state clearly for the first time that domestic private investment will be allowed
in this sector. The rules allow foreign companies to buy a 30% stake in value-added companies upon
Chinas entry into the World Trade Organization, rising to 49% after one year and 50% after two. For
Internet firms, China pledged an even faster opening: 49% stakes on W T O entry and 50% the next year.
There is no requirement for state ownership, and the rules say the list of value-added services may be
extended...Industry observers welcome the law as far clearer than an earlier draft that has been
circulating among officials and industry executives. However, the new rules spelled out a more cautious
opening of basic telephone services, such as fixed and mobile telephones, data services, satellite
services and leasing network capacity. Such services must be licensed by the central government and
be 51% state-owned. Foreign ownership will be phased in over several years.
161. cf. Ripples from Microsoft case wash toward Europe, Asia by Stephanie Armour in USA Today,
5B, Fri. May 5, 2000: ...any changes [of Microsoft breakups] that weaken Microsofts ability to put out
product could affect more than stocks. As in the USA, Microsoft dominates the software industry in Asia,
and that doesnt always sit well. "Asia is keen to control its own technology destiny, says Matei Mihalca,
Internet analyst with Merrill Lynch in Hong Kong. China has been among the most active in trying to
develop a locally made operating system. Most recently, it has been pushing development of Red Flag
Linux, a Chinese-version of the Linux operating system, the only viable contender to Microsofts
Windows NT operating system. Last year, about 3% of personal computer sold in China included Linux.
Analysts say that percentage could double this year. National security is one reason China is pushing
Linux. Some government officials fear that Microsofts software could enable the US company, or the US
government, to peek at what Chinese software users are doing. Price is another factor. Linux is free or
very low cost. Windows costs almost as much in China, with much lower per capita incomes, as it does
in the USA. 'Microsofts monopoly is very fierce, so we have to develop our own system, said Beijing-
based Internet consultant Fang Xingdong in a recent interview. The author of Arise and Challenge the
Hegemony o f Microsoft is one of M icro s o fts most vocal Chinese critics. Microsoft contends that its
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prices are in line with the value of its products. It also says that Linux, while being tested by more users,
falls far short of Windows. 'You would be very hard pressed to find anyone in China using Linux on a
desktop PC,' says Michael Rawlings, Microsofts regional director. W e re very comfortable with our
position.
As for the control over information technology and the process of its products, see Cisco systems
agrees to buy ArrowPoint for $5.7bn - Expanding its role and reach on Internet by Lawrence M. Fisher
in The N ew York Times, p. B2, Sat. M ay 6, 2000: ...A s corporations move to an Internet-based
computing model, where not only software applications but telecommunications and transaction-
processing occurs over the W eb, ArrowPoints load-balancing software is just one of several
technologies they will need...Cisco already dominates routing, and is now buying a leading player in load
balancing, but still lacks strong positions in other areas like gigabit Ethernet, for fast transmission of data,
and cache technology, which smoothes and speeds W eb traffic by storing frequently used data closer to
the user...its [thus] highly likely Cisco will have to do more acquisitions to fill in their product lin e...
162. cf. Y. Cao et al. 1999, p. 116.
163. cf. Vicious circle in The Economist, A survey of China, p. 9, June 15th, 2002: ...Officially, non
performing loans (NPLS) in Chinas state-owned banks amount to 25% of total outstanding loans. But
this figure uses an old method of calculating NPLS, and Chinese officials say that if new criteria were
used the figure would probably be around 30% . According to Nicholas Lardy of the Brookings Institution,
an American think-tank, figures published in 1999 using both the old and new criteria suggest that the
real figure might be more like 50% . W hether it is 30% or 50% , it points to a dangerously weak banking
system - and this is after the transfer of about $170bn of NPLS (about 18% of total loans) to asset-
management companies in 2000. China has been putting pressure on banks to reduce the NPLS ratio to
15% (judged by the new criteria) by 2005. This has increased the incentive for officials to distort the
figures...
Also cf. Bank of China listing 'aimed for Novem ber by Joe Leahy in Financial Times, p. 20, Thurs. May
10, 2001: The much-anticipated listing of Bank of China, one of the mainland's 'big four1 banks, is set
for November, according to a banker familiar with the deal. This will follow the merger of its Hong Kong
branch with 10 sister banks operating in the territory, a process scheduled for completion by October.
This merger could act as a trailblazer for Beijings drive to accelerate the mainland's slow-moving
banking reform by leveraging on Hong Kongs more developed financial system. The deal, which will turn
Bank of China into Hong Kongs second-largest financial institution by assets after HSBC Holdings, will
also enable the group to cut costs by reducing infrastructure and headcount. Bankers say Bank of
Chinas Hong Kong-listed vehicle would then be able to act as a conduit for skills and technology back to
its mainland parent. Mainland banks can utilize Hong Kong-based skills and technology by gradually
injecting the parent companys assets into the Hong Kong subsidiary. This method has already been
used by non-banks such as China Mobile (Hong Kong), Chinas largest cellular company. Banks are
already beginning to employ cross-border asset injections. This week ICBC, Chinas biggest state-owned
bank, said its Hong Kong-listed unit, ICBC (Asia), would become its flagship operation in the territory
through an asset transfer plan...After incorporation in Hong Kong, the merged Bank of China group plans
to float a stake of up to 25% on the Hong Kong stock market, possibly as early as November, with the
aim of raising about US$5bn...However, concerns remain. Detailed financial information on the asset
quality of the participating banks and their cost structures are not well known to investors because they
are incorporated in China. In addition, while recent Hong Kong bank sales have achieved big price tags,
the merged Bank of China entity may lack the track record to command the same valuations... Also cf.
China set to lure foreign investors to bad loans sale" by James Kynge in Shanghai. Ibid. p. 17: China is
set to launch an unprecedented scheme to sell off billions of US dollars worth of the bad loans of state-
owned enterprises to foreign investors. Yang Kaisheng, president of the state-owned Huarong Asset
569
Management Company, said a roadshow to Europe and the US would start in June to drum up
enthusiasm among investment banks and other potential investors. Bids for the first bad loans could be
taken as early as September. It is not clear how much debt will be on sale, but Mr Yang said Huarong
would offer an initial $2bn. The three other asset management companies are expected to offer debt. Mr
Yang said foreign investors would be able in most cases to take a controlling stake in enterprises by
converting their debt into equity. The success of the proposed sale will be crucial not only to the
restructuring of many Chinese state-owned enterprises but also to the recapitalization of the domestic
banking system. The four AMCs established in 1999 represented Chinas biggest step to date to whittle
down a mountain of bad debt in state banks - estimated by officials at 20% of lending but put at 40% by
independent analysts. About rmb1.4bn ($170m) in non-performing loans were transferred into the four
AMCs from their parents, the big four state banks. Now the AMCs, which bought the bad loans at face
value from their parents, are preparing to recover as much of their investment as possible. To do this,
they need to convince foreign investors that turnarounds can be achieved even in some of the least
impressive companies that make up China's lumbering state sector. The companies whose bad loans the
AMCs have taken over comprise more than 600 of the states worst enterprises - in areas including
heavy engineering, glassmaking and retail stores. Analysts say the asset managem ent initiative will be
regarded as a success if China is able to recover 30% of the debt offered for sale.
Also cf. Bad debt haunt big Chinese Bank by Jam es Kynge in Financial Times, p. 1, Weekend, May
12/May 13, 2001: The Bank of China is set to announce a sharp increase in its level of non-performing
loans - signaling that the amount of bad debt throughout the countrys state banking system may be
considerably higher than officially acknowledged. An annual report to the published soon by the bank -
one of Chinas 'big four* state banks - puts its non-performing loan (NPL) ratio at 28% of assets. This
compares with a figure of 11% given by top executives in 1998. Total assets were rmb3,340bn ($414bn)
at the end of 2000. The announcement appears to have been driven by the desire of Liu Mingkang, the
governor, to improve transparency ahead of the planned listing of a Bank of china entity in Hong Kong
this year. It coincides with the implementation of tough internal systems to reduce the ratio of NPLs by
several percentage points each year. Mr. Liu said the bank reduced NPLs by rmb18.5bn last year, mainly
by convincing defaulters to pay. It plans reductions of rmb20bn this year and around rmb25bn next year.
It is also understood that Chinas big four will be permitted by the Peoples Bank of China, the central
bank, to issue long-term bonds in a key move to recapitalize the sector ahead of Beijings planned entry
into the W T O . The issuance of recapitalization bonds will follow the transfer last year of rmb1,400bn in
NPLs to four asset management companies affiliated to the big four. Even after that transfer, central
bank officials put the level of NPLs in the state banking system at 25% . Independent economists have
believed for some time that NPLs in state banks were, in fact, around 40% . The sharp increase to be
announced in the Bank of Chinas ratio will tend to confirm such beliefs. Mr. Liu said the bank was cutting
costs and implementing strict internal controls to manage the issuance of loans and the collection of
debt.
Also cf. European banks to share in China Eurobond issue" by Joe Leahy in Hong Kong in Financial
Times, p. 21, Mon. May 14, 2001: ...Confusion over the issue has added to rumors of increasing rivalry
between US and European investment banks for a share of Chinas rapidly growing debt and equity
capital market businesses. Recent tensions between the US and china over defense issues and Taiwan
have heightened market speculation that Beijing may look to direct more of its trade towards Europe.
W hile the US banks remain far ahead on winning Chinese mandates, the European banks have recently
been awarded roles along side US banks in several multibillion-dollar Chinese equity offerings. This year,
Credit Suisse First Boston worked alongside Mem'll Lynch to take public Chinas third largest oil
company, China National Offshore Oil Company."
164. cf. Newbridge, making history, will run China bank" by Jane Lanhee Lee in USA Today, C4, Oct.
10, 2002: ...It is about to happen. Newbridge Capital Inc. of the US has, as expected, taken over
570
management control of Shenzhen Development bank co. - the first step in what is a landmark deal for
increased foreign participation in Chinas banking sector. The San Francisco buyout-and-investment firm,
a joint venture between Texas Pacific Group and Blum Capital Partners, has been negotiating for months
to buy a stake in the bank amounting to about 20% of the companys stock, which is listed on the
Shenzhen stock exchange. Terms of the deal havent been disclosed. If successful, the deal would mark
the first time that a foreign institution would be allowed to lead a Chinese bank. Even before completion
of the takeover talks, the Shenzhen bank's board passed a resolution on Sept. 29 to give full
management control to an eight-member committee of executives appointed by Newbridge, a person
close to the deal said. The move to rush management from Newbridge into the formerly state-controlled
bank indicates the Chinese governments eagerness for the deal, which analysts said could help
accelerate banking reform in China by introducing international 'best banking practices.... Also cf.
Newbridge aims to break new ground in China - US firms plan to acquire control of Shenzhen
Development Bank" by James Kynge in Financial Times, p. 17, Oct. 9, 2002: ...Industry analysts said
that, although the expceptional nature of the Newbridge deal may not be replicated, it nevertheless
signals a new wave of openness to foreign acquisitions of the listed companies. Several similar deals are
in the pipeline, pending regulator approval...Citigroup, the US giant, has been in negotiations to buy a
stake in the Pudong Development Bank, a listed Shanghai bank. All of these proposed acquisitions
would require the special approval of Chinas State Council (cabinet), partly because they involve the
shares of listed companies. A 1995, State Council notice forbids the transfer of unlisted shares in listed
companies to foreign investors. But in the case of Newbridge at least, this prohibition has been
overridden. As the proposed deal stands, Newbridge will buy the unlisted 'legal person shares of the
banks current main state shareholders, including the Shenzhen Investment Management Corp.,
Shenzhen International Trust and investment Corp and the Shenzhen social Insurance Bureau...Beijing
was willing to approve the Newbridge deal, industry analysts said, because it wanted to create a potential
model for the industry - a bank run along purely commercial lines. All but one of Chinas banks is either
completely or partially state-owned and susceptible to government influence, a fact often blamed for their
high levels of non-performing loans. Newbridge plans to institute risk management systems of
international standards, increase provisioning for non-performing loans, boost capital adequacy and
target consumer lending and mortgages as areas in which lean quality tends to be better...
165. cf. HSBC seeks to build on its fame in China by James Kynge in Beijing in Financial Times, p. 19,
Thurs. July 11, 2002: Huifend Yinhang, the Chinese name of HSBC, means 'currency abundant bank.
W hether because of its striking name or its association with Shanghai before the Communist revolution,
the banks brand is better known in the worlds most populous nation than that of any other foreign
financial institution. Stephen, Green, head of the groups corporate finance, investment banking and
markets division, believes the time is ripe to capitalize on this intangible asset. O ver the next few years,
he says, HSBC plans to establish presence in all main branches of financial services, expanding from
retail banking and corporate finance into insurance, asset management and domestic investment
banking. 'Given the fundamental strength of the economy and the astonishing growth performance of
China set against a background of a rather mediocre world growth story, this has to be one of our top
priorities, says Mr. Green. Under Chinas entry last year into the World Trade Organization, Beijing
agreed to open the domestic financial services industry to foreign participation according to a five-year
time-table. But another important influence, which is not in the W T O agreement, is a sense that Beijing
might allow the regulatory barriers that separate banking, insurance and broking to be eroded. The
promise of future 'financial supermarkets has been a powerful but largely unspoken motivator for
domestic banks over the past two years. Citic, a state-owned trust and investment company, recently
received approval to establish a financial holding company to unite its banking, securities, insurance and
fund management operations. The Bank of China plans to open an insurance affiliate in the southern
boomtown of Shenzhen. The Industrial and Commercial Bank of China, the largest state bank in terms of
assets, has a life assurance joint venture in Hong Kong which sells policies in the mainland. The China
Construction Bank, another of the 'big four state banks, has an investment banking joint venture with
Morgan Stanley that underwrites most of the overseas initial public offerings of large mainland
corporations. It also has primary and secondary trading licenses on domestic stock markets...Securing
an entry into the fund management business is regarded as tricky, observers say. Most funds make
significant returns because domestic initial public offerings are almost always profitable for underwriters.
Flushed with cash, the funds see little need to sell stakes to foreign investors. But Mr. Green has no
illusions that establishing a broad presence in China will be quick or easy. 'For us, it is important to get
this right. W e have got far too much at stake in China to do anything other than make absolutely sure
that we get all our investments right.
Also cf. Chinese bank plans to set up insurance group by James Kynge in Beijing in Financial Times, p.
4, Thurs. July 19, 2001: The Bank of China, a leading state-owned commercial bank, is preparing to set
up an insurance company in the southern boom town of Shenzhen in a strong indication that Beijings
regulatory demarcation between banks, insurance companies and brokerages may be set to crumble.
The Bank of Chinas plan is seen as a step towards creating financial super-markets in China, a move
that would stiffen competition among both domestic and foreign participants...The ground-breaking
move has important implications for China's financial sector and for foreign financial institutions
thrashing out strategies to enter the market once Beijing joins the W TO , expected either late this year or
early next...analysts said, the existence of an insurance company within the group could prove a boon
when Beijing allows universal banking. If the Shenzhen company was awarded a nationwide license, it
could sell insurance through the banks branch network...Insurance is not the only business, eyed by
Chinese banks. Ma Weihua, the president of China Merchants Banks, said the number of stock portfolio
accounts with his bank was growing rapidly. With these, investors place an order with a brokerage and
their account at the bank is automatically debited or credited. 'In the end, there wont be any need for the
business department of a brokerage, Mr. Ma said
166. cf. China to reform domestic bond market - Liberalization to give access to foreign institutions by
M. W olf in Financial Times, p. 1, Fri. May 19, 2000.
167. cf. Beijing committed to loose fiscal policy by Richard McGregor in Shanghai in Financial Times,
p. 4, Tues. Aug. 21, 2001: Zhu Rongji, Chinas premier, has reaffirmed the governments commitment to
a loose fiscal policy to buttress the economy against the impact of falling exports and the global
slowdown...Mr Zhu said that China needed 'new strategies to maintain economic momentum in the face
of the slowing global economy, which is already cutting into exports. 'W e should expand demand through
investment and consumption and try by every means to boost exports, M r Zhu s aid ."
168. Bourse is also called as equity market, cf. Beijing aims to build own 'W all Street by James Kynge
in Beijing in Financial Times, p. 4, Thurs. May 17, 2001: ...This was the message yesterday from the
developer of Beijings answer to W all Street, an envisaged precinct of tall towers and square blocks that
will take shape in Chinas capital over the next five years at a cost of $ 1 .8bn. 'All banks have bad loans,
said Liu Jian, assistant governor of the Xicheng district of Beijing. 'But if banks have a building or
headquarters in this area, this will be one of their best assets, Mr Liu added. The area identified for
transformation into Beijings 'Finance Street is currently home to 15,000 households, all of which will
have to be bulldozed in the coming months and years...Those who wonder whether state banks with an
average non-performing loan ratio estimated at 40% should be moving into swanky new offices are
informed that they are out of step with times. 'This project is in the national five-year plan. Said Liu
Xiwen, governor of the Xicheng district. 'It will certainly be successful. The foreign banks will all move
here. In recent years Shanghai has become the financial center of mainland China. But Finance Street,
if successful, could put Beijing on an increasingly equal footing, especially because the head offices of
the central bank and the insurance and securities regulator are all located in Beijing. Four foreign
architectural concepts are being studied for possible adoption, one from Japan, one from Germany, one
from U S and one from Canada.
572
169. cf. Hong Kong bank issue tests investor faith - Beijing sees Bank of China (H K )s listing as the first
step on the road to reform by Joe Leahy in Hong Kong: Corporates braving the initial public offering
market have little option but to express optimism in the current frosty investor climate, but the coming
Bank of China (Hong Kong) listing is asking investors to take a lot on trust...A laggard in a city where
even the better banks are struggling to maintain margins, B O C (H K )s main selling points are its size, its
keenness to restructure and the vague promise of access to the China market. 'Its a low return on equity
business that you hope and expect will be, if not a turnaround story, then at least an improving story,
says one Hong Kong fund m anager...W ith Chinas banking system weighed down by non-performing
loans and poor lending practices, Beijing views the listing as the first step on the long road to reforming
the sector...Liu Jinbao, the banks chief executive, pledged to cut non-performing loans to the industry
average over the next few years. The bank in June sold HK$11.4bn in bad loans to an asset
management company owned by its parent, reducing the NPL ratio to 9%. Measures such as this will
provide a one-off boost to the banks bottom line, but it will need to improve its risk management, and
exploit economies of scale and efficiencies created by the merger, if it is to lift its underlying
performance in the longer term .
Also cf. Cao, Qian and Weingast 1999, 104-5. Also cf. Chinese banks plan bonds to boost capital by
Joe Leahy and James Kynge in Beijing in Financial Times, p. 4, Fri. Sept. 7, 2001: Chinas 'big four
state banks many issue up to Rmb400bn ($48bn) in bonds for sale to retail investors in a move intended
to reinvigorate the countrys almost moribund domestic non-government bond market, a senior official
said. Describing the figure as a 'rough estimate, Dai Xianglong, governor of the Peoples Bank of China,
the central bank, said the bonds were part of a plan to boost the banks capital adequacy ratios to the
internationally recognized level of 8% by the end of next year. '[The banks] will issue long-term financial
bonds in order to increase their capital, M r Dai said in an interview this week. He estimated the banks
non-performing loan (NPL) levels at 28% or more of their total assets. The changes are part of a far-
reaching overhaul of the 'big four state banks - Bank of China, Industrial and Commercial Bank of
China (ICBC), Construction Bank of China and Agricultural Bank of China - which the government hopes
will transform them form one o f the weakest links in the national economy. The planned bond issues
would vastly increase the size of Chinas corporate bond market from its current value of Rmb12bn, Mr
Dai said...In the 1998, the ministry of finance issued Rmb270bn worth of special bonds to help
recapitalize the banks. Last year the banks transferred Rmb1,400bn in bad loans to four asset
management companies (AMC) entrusted with selling the bad debt to foreign or local investors.
However, Mr Dai said the state would not again intervene to bail out the 'big four....China has long been
keen to revive its domestic bond market, which has been all but frozen since a spate of rampant
speculation in the early 1990s. 'The central bank also feels the need for a proper bond market because
we wish to rely more on open market operations in the conduct of our monetary policy, Mr Dai said.
Also cf. Immense opportunities - With the country loosening its restrictions on foreign activity, huge
opportunities are expected. 'W e are champing at the bit to get started, is how one insurance operator
put it" by Jane Croft in Financial Times, World Insurance 3," p. Ill, Fri. May 24, 2002: ...O ne company
which ahs made the furthest inroads in China is AIG, the worlds largest insurer which was in Shanghai in
1919 and at one point it had 75 offices throughout China. It has also had its problems: it was expelled
from the country first by the Japanese during the Second World W a r and then by Chairman Mao after
the 1949 Communist Revolution. However, in 1992 A IG was the first foreign insurer allowed back as
China embraced a policy of reform. That was a personal triumph for chairman Hank Greenberg, who has
led the company for more than 30 years and courted the Chinese for decades. It has licenses in four
cities and recently announced it has been granted license to operate branches in another four major
cities - Beijing, Suzhou, Dongguan and Jiangmen. Other insurers will now be hoping to emulate A IG s
lead.
573
Also cf. China may invite foreign group management of pension funds" by James Kynge and Richard
McGregor in Beijing in Financial Times, p. 16, Mon. Oct. 23, 2000: China is planning to invite foreign
financial institutions to help manage a potentially huge pool of domestic pension funds, opening a new
area of financial industry co-operation after Beijing accedes to the W T O . Liu Zhongli, minister at the
State Council office for restructuring economic systems, said in an interview with the Financial Times
that the expertise of foreign financial institutions would allow China to 'tremendously increase the value
of our pension funds. In addition to helping invest Chinese pension funds in domestic capital markets,
Mr Liu held out the possibility that foreign institutions could invest in overseas stock markets once Beijing
liberalizes its closed capital account. He said the ministry of finance was drafting rules on how pension
funds may allocate assets between domestic bonds, domestic stocks, industrial projects and overseas
stocks. 'Personally, I do think many famous overseas companies are very good in terms of their
reputations, quality of service and operating mechanisms. They have rich expertise and experience, said
M r Liu, who has been given the task of restructuring Chinas patchy and poorly funded social welfare
system. The government has set up a body to decide which institutions should be entrusted with
managing pension funds. Mr. Liu said he had held discussions with foreign asset management
companies, most recently with Shraders Group. China has struggled to establish a funded pension
system to replace inefficient mechanisms in which state enterprises paid pensions out of current
revenues. Attempts to create individual pension accounts funded by contributions hit snags as
companies siphoned RmblOObn ($12bn) from such accounts to meet other payment obligations. But Mr
Liu was confident that a funded system would develop and grow. 'W e are going to collect RmblOObn
every year, he said. 'If people work for 30 years before they retire then, under the new system, the pool
will be Rmb3,000bn, more than $300bn at the present exchange rate....Analysts said the first
management of Chinese pensions by foreigners would probably be by joint venture funds operating in
the domestic market. The creation of several such funds was under discussion with approval likely this
year or some time in 2001, financial industry executives said. Zhu Li,, president of Galaxy Securities,
Chinas largest brokerage, said his company was looking for a foreign investment of up to 33% of its
share capital to boost funds and bring in potentially indispensable expertise."
Also cf. China appoints banks for benchmark bond issues" by Joe Leahy in Hong Kong in Financial
Times, p. 34, Fri. May 11, 2001 (emphasis mine): China has appointed three investment banks to
manage an international bond issue that it hopes will help set a fresh benchmark for local companies
looking to raise debt. The Ministry of Finance has appointed Glodman Sachs, JP Moran, and Morgan
Stanley as joint book-runners for the issue. It gave no details of the likely maturity of the bonds or the
size of the deal but some bankers said the total issue could be valued at about US$1 bn. The bonds are
to be launched in US dollar and euro dollar. The issue will represent the government's first venture into
the international capital markets since it sold US$1 bn in bonds in 1998...Chinas bonds trade at a
premium to other countries of similar investment grade because of their scant liquidity/China has always
been expensive relative to anything you can buy in Asia, and that has always been because Chinese
financial institutions have been a major support-base for that debt, said Stephen Cheng, head of Asian
credit research with UBS Warburg in Hong Kong..."
170. cf. China goes for gold by James Kynge in The Economist, p. 35, The World in 2002, Asia
Pacific Part, Dec. 20, 2001 (emphasis mine): ...China is on track formally to join the W T O some time in
the first half of the year. Entry will mark the first time in thousands of years of Chinese statehood that the
'middle kingdom has voluntarily agreed to push through far-reaching economic reforms according to the
ordinances of an authority beyond its borders. It will mean that almost every sector of the economy will
eventually be opened to international competition. For foreign business people operating in China, it will
provide a level of comfort - and a form of legal redress within the W T O dispute settlement system - that
has hitherto been absent...These difficulties will combine to form a volatile mix. Trade and foreign
investment have formed an increasingly important component o f G D P in recent years, suggesting that a
global recession could be keenly felt. Yet W T O membership commits China to a thorough restructuring
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of its financial, manufacturing and agricultural industries....
171. cf. China changes course on competition - Telecom and cable concerns to vie with each other;
foreign-investor opening?" by Leslie Chang from Beijing in The Wall Street Journal, International, p.
A15, Fr. Oct. 27, 2000: China is starting to allow telecommunications and cable-television companies to
move into each others bailiwick, boosting competition and potentially unlocking opportunities for foreign
investors. In a surprising reversal, a top official at the Ministry of Information Industries said this week
that the two sectors are free to compete with each other. The remarks followed this months publication
of Chinas latest five-year plan, which calls for 'promoting the convergence of telecom, television and
computer networks. The new policies reverse a circular issued by the State Council, Chinas cabinet, in
late 1998 barring telecom and cable-TV operators from each others turf, the result of fierce bureaucratic
infighting that in one province led to riots and deaths. Now authorities appear to accept the inevitability of
convergence, in which voice, data and video all move along telephone or television lines - a trend that
has already taken root in other markets. The policy shift also serves government efforts to spur domestic
competition ahead of China's entry into the W TO , which will open a host of sectors to greater foreign
competition. And with more than 80 million households across the country receiving cable T V - a 25%
penetration rate that surpasses telephone penetration rates of under 15% and computer ownership rates
that are even lower - regulators appear to regard T V as a good bet to wire China. For foreign investors,
the policy reversal could pry open Chinas sensitive media sector. Though the country's W T O
agreements with the US and other nations pledge to open the market for telecom services, including
providing Internet access and content, they make no mention of media, which remain off-limits to foreign
money. But with cable concerns now free to upgrade their networks to allow viewers Internet access and
other services, equipment suppliers could see a big boost in business. Longer-term, greater competition
will feed demand for content and expertise from overseas. Cable is an attractive market in other ways.
While the telecom sector is dominated by former monopoly China Telecom, the countrys cable
operators are surprisingly freewheeling. Though technically answering to the State Administration for
Radio, Film and Television, local cable networks have increasingly relied on themselves to raise money
and build their business. The markets fragmentation could also enhance the clout of foreign companies
seeking local alliances. Plenty of uncertainties remain. China is in the process of a complicated
restructuring of its cable-TV network, including plans to link up local networks on a national scale.
Officials are expected to draft laws that could impose further obstacles to investment...Despite the
government ban, some local cable operators already offer Internet access through customers television
sets. A handful of foreign companies, primarily based in Hong Kong, have made investments in cable
operators or have deals to supply them with equipment.
Also cf. China: Airline stake rules relaxed by Reuters in The N ew York Times, World
Business, W 1, Wed. July 3, 2002: Chinas aviation regulator said it would raise limits on foreign
investments in domestic airlines and airports from Aug. 1 to attract more overseas investors into the
tightly controlled sector. Instead of capping foreign stakes in airlines at the current 35% and in airports at
49%, the Civil Aviation Administration said it would only require Chinese shareholders to retain a
'controlling interest." Ibid. Energy concerns said to be near China pipeline pact - A 2,500-m ile answer
to the countrys heavy dependence on coal" by Keith Bradsher in Hong Kong: Some of the worlds
largest energy companies are in the final stages of negotiations with one another and the Chinese
government to form a consortium that would build a natural gas pipeline across China, people close to
the talks said today. The goal of the talks is to produce a framework agreement for a joint venture this
week or early next week, they said. Such an agreement would allow the venture to begin lining up loans
to help cover the $3.8bn needed to develop a gas field in a remote area of western China and an
additional %5.2bn to construct a pipeline to carry the gas nearly 2,500 miles east to Shanghai. After
becoming fully operational, probably in 2008, the pipeline is to carry nearly $2bn a year worth of natural
gas across China for more than four decades. That would allow China to reduce its heavy dependence
on coal, which is more polluting than natural gas.
575
172. cf. AT&T is first foreign group to enter China by Richard McGregor in Beijing in Financial Times, p.
20, W ed. Dec. 6, 2000: AT&T, the US telecommunications group, will become the first overseas
company officially to offer telecoms services in China, after sealing a joint venture agreement to operate
in Shanghai's business district. The US group hopes the US$25m venture, which has taken nearly seven
years to negotiate, will give it a head-start against Chinese and overseas competitors in the world's
fastest-growing telecoms market. The joint venture, known as Shanghai Symphony Telecommunications,
is between Shanghai Telecom, a subsidiary of China Telecom, AT&T, and Shanghai Informational
Investment. The three partners have 60% , 25%, and 15% of the venture, respectively.
173. cf. China may slightly relax rules on currency by Keith Bradsher in Hong Kong in The N ew York
Times, B3, Sat. Oct. 12, 2002: Hong Kong, Oct. 11 - Chinas government may be closer to allowing its
main currency to be traded by investors outside its borders, if only in a limited way. The government
appears to be warming to be request by Hong Kong banks for permission to begin taking deposits in the
currency, called the renminbi. But it remains wary of allowing the renminbi to become as freely
convertible as the dollar, the euro or the Japanese yen...
174. cf. Beijings Tsinghua University plans to spend a million dollars to invite well-known overseas
professors and scholars to teach in the University" in World Journal Daily, trans. from Chinese language,
A8, Wed. Oct. 16, 2002: Within the next five years, the University will invite about 50 well-known overseas
professors and scholars to teach in school with annul salaries of 1 million Rmb [approximately $130,000] for
each invitee...The invited professors will be chosen to work in school in two ways: 1. Individually, holding a full
time job in Tsinghua University working for a half year or one year with a salary paid according to length of
time worked; 2. Collectively, working with a team of overseas professors and/or scholars qualified for lecturing
who will work in school for a time span of no less than 10 months.. .Their contracts will be for three years. After
signing the contracts, the invited professors and scholars will teach enrolled undergraduates and graduate
students, while actively restructuring curricula, delivering class instructions, evaluating students, developing
research plans, designing scientific projects, implementing and managing the projects, and collaborating in the
projects with associated professors and scholars in the University..."
Also cf. China brain drain begins to reverse - US job downturn helps nation lure back tech experts by
Rone Tempest in San Jose, Calif. In Chicago Tribune, pp. 3-4, Section 2, Technology," Sat. Nov. 30,
2002 (emphasis mine): After two decades of watching thousands of top computer engineering and
science students move to the US, the Chinese government has launched an aggressive push to win back
some of the countrys brainpower from economically stressed Silicon Valley. 'W e think some Chinese
engineers will go back to China because they have been laid off here and have no jobs, said W an
Yanking, Chinas consul general in San Francisco. 'In comparison, the overall situation in China is very
good. Since 1979, when the late leader Deng Xeroxing broke with Chinas isolationist policy, more than
400,000 mainland Chinese students have traveled abroad for graduate study. Only a relatively small
number, estimated at 10 percent to 25 percent, have returned home. Many ended up settling in Silicon
Valley, where they own start-up tech businesses or work as integrated circuit design engineers in many of
the region's most successful companies. The downturn in the US high-tech industry, along with a
booming market in China, has renewed hopes that the people whom former Premier Zhao Zi-yang once
called Chinas 'stored brainpower overseas may be ready to return. Many cities have shiny skyscrapers
labeled hopefully in Chinese: 'Returning Student Entrepreneurial Building. Chinese companies and
development parks now offer salary and benefits for recruits roughly equivalent in purchasing power to
those here in one of Americas most expensive communities. The Chinese government also sponsors all
expenses-paid trips to China, where top officials fawn over visiting engineers, who are sumptuously
entertained. A returning engineer with several years' experience in America can expect free housing, a
car and driver, and other perks not available in the US. 'The benefit packages are smaller but, in the
local economy, still quite good, said Robert P. Lee, chief executive of two Silicon Valley software
576
companies and president of the Asia America MultiTechnology Association, one of several business
associations composed primarily of mainland and Hong Kong Chinese engineers. Many expect the
recruiting push to accelerate now that 59-year-old Hu Jintao, a graduate of the prestigious Qinghua
University engineering school, has been chosen as the countrys new leader. In a rare overseas visit
laden with political symbolism, Hu toured Silicon Valley even before being named general secretary of
the ruling Communist Party this month. The China push was on display most recently at a San Jose job
fair - paid for by Chinese state sponsors - that drew more than 4,000 China-born engineers. 'It was
much bigger than the typical recruiting session that traditional Chinese provincial governments have
been doing over the past two years, said Anna Lee Saxenian, a professor at the University of California
at Berkeley who has done extensive studies of the Silicon Valleys immigrant communities. 'There is a
sense now that they can draw on this overseas Chinese community, who are now willing to go back and
start companies, she said. 'Ten years ago, said Stephen W .Y . Lai, who was manning a booth at the job
fair for the Hong Kong Science and Technology Parks, 'no one would have been interested because
there were too many opportunities in the U S . Chu Jiajin, 69, a retired electrical engineering professor
from China, said he is tempted to return to is native land after being laid off from his $100,000 a-year-
job at Quicksilver Technology, a start-up integrated circuit company in San Jose. But his son, Jeff Chu,
37, is hesitant. The younger Chu and his wife, both engineers and naturalized American citizens, live
comfortably in a $900,000 home in Cupertino, Calif., and are reluctant to give up their combined
$250,000 salaries to take a risk on making it in China. 'There are some good opportunities that I would
consider in China if we were not doing so well here, said the younger Chu, a chip designer with a
graduate degree in electrical engineering from San Jose State University. Silicon Valley has been
destination for smaller recruiting delegations in recent months. Shanghai alone sent several dozen
recruiters into the valley recently. Chinese engineers and their start-up companies play an extremely
important role in the technology economy here, accounting for an estimated $10bn in annual sales. But if
the established by an earlier 'reverse brain drain to Taiwan in the late 1980s and early 90s hold true,
both places can experience some benefits. The engineers will maintain their academic and business
links with the US and the American industry will benefit from the cheaper labor costs and manufacturing
in China. One factor helping the Chinese government effort is that, in the era of globalization and Chinas
acceptance into the W T O , the flow of brainpower is no longer a one-way street. In fact, top executives
travel back and forth between China and Silicon Valley so frequently now that in Chinese they are
jokingly called astronauts. Even if they do choose to return to China to establish businesses, many
engineers will probably maintain their US citizenship or academic connections in North America. 'It used
to be that if you went to the US, it was 'Bye-bye, see you when youre 6 5 , said Ping K. Ko, a former
professor of microelectronics at UC Berkeley who runs a high-tech venture capital company in China.
'But opportunity now is worldwide. Its no different than working in California and looking for job
opportunities in Texas. For that reason, Saxenian said, she prefers the term 'brain circulation to the
classic 'brain drain to describe the immigration shifts affecting the Silicon Valley. 'I f they started to go
back in very large numbers...it could affect the Silicon Valley, Saxenian said. 'But I dont see that
happening in the short run. Most people understand that this is still the center of tech and the biggest
market.
175. cf. China looks for foreign help running welfare fund by James Kynge in Beijing in Financial Times,
p. 4, Tues. Nov. 12, 2002: China extended a welcome yesterday to foreign joint venture funds to help
manage Rmb60bn ($7.3bn) in the national social security fund, and announced a new strategy to finance
the countrys vast welfare obligations. Zhang Zuoji, minister for labor and social security, did not give an
indication as to when foreign joint venture funds would be able to start investing money from the national
fund in China's domestic stock markets but official sources said it was probably 'only months away. Mr.
Zhang said strict rules applied to the allocation of the fund. A ceiling of 50% f the funds total assets may
be invested in bank deposits and treasury bonds, a further 10% may be directly invested in enterprises
and institutions and the rest can be put into the stock market. The minister also outlined three ways in
which the fund would be financed, following the abolition this year of a plan to sell state-owned shares on
577
to the domestic stock markets. One way was to transfer state shares into the fund, but rather than sell
them, accumulate the dividends paid by them, M. Zhang said. Another financing strategy was to sell off
state shares to foreign companies interested in taking a stake in Chinese companies, a move that
became apparent when a prohibition on foreign acquisitions of state shares was scrapped this month. In
some areas, foreign investors may be eligible to buy a controlling stake in state companies. The third
way in which Beijing plans to build up the money in the national social security was by transfers from the
government's central budget, Mr. Zhang said. Observers said these strategies revealed that Beijing time
frame for moving towards a fully-funded pensions and social welfare system has been stretched. 'None
of these three strategies will result in the quick accumulation of capital in the fund, said one Chinese
financial expert. China faces a huge challenge in providing for pensioners and laid-off workers from its
declining state industrial sectoi, but it is difficult to ascertain accurate figures. Mr. Zhang acknowledged
flaws in the government statistics..."
176. cf. China pension system is cause for increasing agitation - Surge in retirees, reforms to economy
distress nationals strained coffers by Karby Leggett in Shanghai in The Wall Street Journal, p. A24,
International, Mon. Oct. 20, 2000: Long bankrupt, Chinas pension system has become one of the main
causes of the countrys growing urban unrest, and that is forcing policy makers in Beijing to embrace
some groundbreaking reforms. When Chinas Communist Party came to power in 1949, it promised its
workers cradle-to-grave support, a pledge that held for everything from housing and education to medical
care and retirement income. Five decades on, Beijings so-called iron rice bowl has been shattered by
economic reforms, and the governments diluted promise to support its elderly and unemployed remains
its single largest liability. As with other countries, the core problem for China is deteriorating
demographics. Yet compared to others, Chinas dilemma is far bigger: The countrys 1.2 billion
population may reach 1.5 billion before it tops out in 30 years, but Beijings one-child policy, coupled with
longer life expectancy, means the number of retired workers will grow much faster than the number of
newly employed paying into Chinas pension system. Indeed, by some measures Chinas retired
population could triple to one-quarter of the total population in the next three decades, even as the pool
of active workers starts to shrink. Taking care of the elderly is only part of the problem. Painful economic
reforms are pushing millions of Chinese out of work and into early retirement each year. And the number
of unemployed, already in double digits, will only increase after China joins the W TO . Without a
functional social security net, many of these individuals survive from government handouts. Most
worrying is the system that stands behind China's demographics: a bankrupt and poorly managed pay-
as-you-go pension network, one that is already draining Beijings strained coffers. Though reliable figures
are almost impossible to come by, industry estimates suggest China's current pension liabilities are
already equal to half the country's annual economic output, or nearly $500 billion, and they will only grow
in the years ahead. Worse yet, lax financial management means existing pension funds are often
squandered by local government officials. And if the moneys not wasted, government regulations mean
it languishes in treasury bonds or state bank accounts, where it grows at just 2% to 3% each year. For
now, the greatest challenge China faces is simply getting existing pension funds into the hands of the
retired and unemployed. Though more than 100 million Chinese are eligible for pension payments, many
never receive any money at all and are quick to take to the streets to register their anger. The reason:
Pensions in China are still paid mostly by state enterprises and government offices, many of which ran
out of cash long ago....Faced with these problems, Beijing has made pension reform a trop priority.
Already, some of the easiest changes are in the works. As part of its piecemeal reform program, Beijing
is handing responsibility for pension payments over to state banks and post offices, which are more
reliable. And lawmakers may even push back the official retirement age to ease the near-term burden,
says Zuo Xuejin, vice director of the Shanghai Academy of Social Sciences and cosultant to the
government on pension reform. But M r Zuo says these are stopgap measures aimed at preventing
severe social consequences of a bankrupt pension system, like street protests. Other reforms, such as
letting foreign companies manage Chinese pension money, are needed in order to build a viable system
for the future, he says. That day may not be far off. Beijing hopes to pay for pension reform by selling as
578
much as $1 trillion in government assets in the local and foreign stock markets over the next two
decades. To get there, it needs help from foreign fund managers with experience in managing large
sums of money. Already, foreign asset managers, including State Street Corp.s State Street Global
Advisers and Chase Manhattan Corp.s Chase Fleming Asset Management, are signing up local partners
and helping them launch the country's first batch of mutual funds, expected in coming months.
Eventually, Beijing also wants these foreign firms to help set up and manage US-style stock market
retirement accounts. Further down the road, these companies may also begin investing Cinese pension
funds in overseas markets, raising the prospects of a huge shift in global capital flows and potentially
giant profits for the foreign firms that China lets into its market.
177. cf. 'Personal conduct cost Chinese minister his job by James Kynge in Financial Times, p. 10,
Dec. 5, 2000: The abrupt dismissal of Chinas justice minister last month was prompted by problems of
personal conduct and does not signify that crucial reforms to the countrys legal system are set to be
slowed down or redirected, lawyers, officials and academics said yesterday. Gao Changli, who is under
investigation for various alleged 'economic wrong-doing at a resort north of Beijing, made political rivals
in high places and was seen by colleagues not as an active reformer but as a man of scant legal
knowledge and little appetite for the huge task of modernizing Chinas socialist court system, people
close to his case said...one official...described Mr Gao as unnecessarily tough on his subordinates and
clumsy at maintaining good relations with his superiors...Some legal reforms such as the opening of
courtrooms to observers have been implemented during M r Gaos tenure but generally the former
minister had a reputation among his colleagues for conservatism. 'This does not signify a slowdown in
the pace of reform, said one court adviser. 'On the contrary, there are a lot of legal reforms that are
being planned.
178. cf. China ratifies major UN rights accord by Elisabeth Rosenthal in Beijing in The N ew York Times,
p. A9, Thurs. Mar. 1, 2001: ...T h e government ratified an important UN human rights treaty today, even
as its own human rights record has continued to come under international criticism and scrutiny. The
Standing Committee of the National Peoples Congress approved the International Convention cn
Economic, Social and Cultural Rights a day after the UN high commissioner for human rights, Mary
Robinson, visited China.
Also cf. China, with an eye on critics, says it will ratify rights pact by Erik Eckholm in Beijing in The N ew
York Times, p. A4, Tues. Jan. 23, 2001: ...A spokeswoman for Mr. Anna, Marie Okabe, told The
Associated Press this afternoon that officials had said that the covenant [on Economic, Social and
Cultural Rights which China signed in 1997] 'might be or would be ratified during the first quarter by the
Parliament, and possibly in M arch....T he treaty on economic, social and cultural rights is filled with
vague calls for self-determination, the equal treatment of races and sexes and the rights to good
housing, food, education and health care. One of its most pointed provisions declares 'the right of
everyone to form trade unions and to join the trade union of his choice. Those conditions are clearly not
met in China, where the Communist Party controls the only legal unions...Sill, rights advocates say they
hope that China will join the treaty because it obligates periodic reports on compliance and opens the
door to formal international questioning of policies. 'Ratification would be welcome and could indicate a
greater willingness on the part of China to adhere to international human rights standards, said Mike
Jendrzejczyk, an Asia expert in the Washington office of Human Rights W atch.
179. cf. China expects 'bloated 2002 budget deficit" by James Kynge in Beijing in Financial Times, p. 8,
W ed. Dec. 19, 2001: ...C hinas finance ministry expects a 'bloated budget deficit in 2002 as the
government launches a fifth year of fiscal stimulus spending to spur economic growth, and meets welfare
obligations for a rising tide of unemployed...By official measures, its budget deficit amounts to only 3%
of G D P and domestic debt totals about 15% of G D P - well below an accepted 'danger level of
2 0% ....One pressing issue is the need to finance a national social security fund, which, through
579
investments in the capital markets, will be able to reduce the burden on state coffers."
180. cf. Seoul sets its heart on being the hub of Asia by John Thorhill in Financial Times, p. 24, Mon.
July 15, 2002: ...Som e analysts argue that Chinas capital markets are developing at such a rapid rate
that there will be no need to tap into outside expertise or markets. Some of Chinas state-owned banks
are already planning to recapitalize themselves by issuing domestic bonds. By itself, this will significantly
expand the countrys underdeveloped debt market. Andy Xue, regional economist at Morgan Stanley,
also remains skeptical of Asian cities - including Seoul, Hong Kong, Taipei and Singapore - touting
themselves to access the Chinese market. He believes that an increasing amount of business and
financial activity will move on shore as the mainland economy becomes increasingly open in compliance
with the rules of the W T O . 'China has passed the stage of restricting the economic freedom of its
citizens, he wrote in a recent research report. 'C hinas middlemen are likely facing unemployment over
tim e.
181. cf. Great Walls of Chinas financial laws may crumble by James Kynge in Beijing in Financial
Times, p. 3, Mon. Sept. 4, 2000: China is considering whether to let insurance companies set up fund
management arms, in a sign that the strict regulatory barriers between banking, insurance and securities
industries may be eroded. State media said over the weekend that the China Securities and Regulatory
Commission, the stock market regulator, was considering permitting insurance companies to set up
wholly owned or joint venture companies to manage investment funds. China may also allow insurers to
enter the bond and currency markets through mutual fund companies, Jin Yang, deputy secretary
general of the CSRC, was quoted as saying by the Shanghai Securities News. 'W e are looking into
allowing insurance companies to launch fund management companies if criteria are m et, Mr. Jin said.
China is keen to introduce more institutional investors into its highly speculative stock market driven by
retail investors with little understanding of the companies whose stock they trade. But any formal erosion
of the regulatory barriers that separate the banking, insurance and securities industries would require
approval from the state council in Beijing, industry analysts said. It may be, however, that insurance
companies are able to exploit the ambiguity in recent internal policy guidelines from Beijing - that banks,
insurance companies and stock brokerages should keep to their own businesses but may be able to
move into each others areas. There are several local and foreign insurance companies in China that are
believed to be interested in establishing a formal fund management presence. At the moment, they are
required to invest through independent mutual funds...These ceilings are expected to be raised further,
mainly as a means to improve the profitability of local insurance companies that have long suffered from
a regulation that, until last year, restricted their investments to bank deposits and fixed interest
bonds...the average return for insurance companies investing in the stock market was 10.52%, several
times that of state bonds and bank deposits, according to the official Xinhua news agency.
182. cf. China accelerates efforts to open up its financial sector by Charles Hutzler in The Wall Street
Journal, A17, W ed. Nov. 20, 2002: Investors may be giving a dismissive shrug to Chinas decision to
allow foreign capital into its domestic stock markets. But behind the lack of interest, a new reality is
quietly unfolding: china is quickening the pace of financial liberalization. After years of talk, Chinas
central bank and securities regulator unveiled this month a plan to let select foreign institutions invest in
Yuan-denominated Class A shares, which are traded on stock markets in Shanghai and Shenzhen and
usually reserved for Chinese investors. The announcement was timed to buoy the flagging markets
ahead of the recent Communist Party Congress. Instead, the markets fell sharply, adding fresh
momentum to a 17-month-long slide that has chopped about 35% off market indexes.
183. cf. China confounds forecasts with powerful performance by James Kynge in Financial Times, p. 1, May
16, 2002: ...the state-owned sector, which is still shedding workers at rapid pace, continued to be the poorest
performer but still managed a 10.9% rise in production in April.
580
184. It was reported (cf.. World Journal Daily, A2, Tues. August 17, 1999; ibid, p. 1, Weekend Edition, Sun.,
Oct. 3, 1999) that China's state government would constantly propose its new economic policies to farther
move its economy toward marketization. Those policies mainly consisted of accelerating SOEs' reforms by
way of "converting debts into stocks"; substantially enhancing the current wage level of state employees;
increasing the incomes of low strata, including workers and peasants (*); multiplying the public bonds issued by
the central governments; sustaining and magnifying governmental investments; expanding the money supply,
e.g., through issuing China's new RMB in October of 1999, which would initiate an expected inflation;
exercising a series of tax adjustments, including elevating the rate of tax withdrawals in order to promote
China's exports, collecting taxes on interest rates of individual savings accounts and the taxes on individual
heritages and bequests to encourage consumption. A high rate (79.6%) of residents took their savings as
personal top investments - including foreign currencies - , which were 64.7% of their total investments (by a
recent poll). China's total individual savings of foreign currencies reached a high of $47bn claimed in June
1999, while the total savings of domestic currencies - RMB - was $0.72 trillion. Within the domestic-currency
savings, 80% were possessed by 20% of the population; stimulating stock markets; augmenting school
enrollments and boosting education as an industry. Those measures would further specify the leverage and
calibre of market mechanism that integrated both supply and demand sides. Under this new direction, Chinas
economy would essentially turn into a civil economy from its previous planning economy governed by state
fiscal and financial institutions and the central banks.
But some critics expressed their suspicions about China's "New Deal" having mixed consequences. For
instance, it substantially enhanced the incomes of state employees by 30%, including the teachers and those
working in military units. This would increase the state financial burden of 80 billions RMB yuans. To many
SOEs, it would be uncertain where such amounts of money will come from. They would face hard budget
constraints. Increasing layoffs would follow. In addition, it would be hard to imagine how social policies and
programs could be extended to those poor and rural areas, those retirees, and those employees from
xiagangf reform (see our detailed discussion in the next section). Insofar as promoting consumption and
animating markets were concerned, China's overall savings reached to a level of 6 trillion RMB yuans. With
the incompleteness of the social security system or the absence of some of its significant parts (such as
comprehensive unemployment insurance and medicare), the savings of the Chinese ordinary people served
as an economic fallback (**). The collection of taxes on interest rates would provoke a new cycle of deflation
and underconsumption. If considering that 80% of savings came from the wealthy people who saw no way to
spend their money, the measure could further prompt capital outflow or conversion of their RMB currencies
into foreign currencies that would increase the pressure on the currency devaluation. The collection of bequest
taxes would certainly reduce the social inequality of income distribution between the poor and the rich. Yet to
what a level to collect such kind of money would be uncertain. If too low, that will further provoke the anger of
the struggling ordinary people. But if too high, that might not be realistic in the sense that China's current
regime has still not exercised a full privatization of property rights. Without its legal system to assure the
corresponding law enforcement, it is not feasible through complete market channels to calculate and collect
such high taxes.
(*) As reported in 1999, 84 million Chinese would get such a raise. 'The pay increases are generally in the
range of 15% to 30% and are retroactive to July 1, according to the announcement on national television news
Sunday night." The raise was considered to be an "effort to goad people into spending more. See Wisconsin
State Journal, 5A, Mon. Sept. 6,1999.
(**) Ibid. as reported, "Insecure about their financial prospects, consumers are saving rather than spending and
the retail price index has declined for some 22 months."
185. cf. Bank of China: cleaning up in The Economist, March 9th, 2002: 'W hats going on inside the Bank of
China is the opposite of how it looks at the moment, says Shan Weijina, an independent director of its Hong
Kong subsidiary. Certainly, the news since January has been awful. The bank's former chairman is being
581
investigated for fraud and corruption, while the bank itself has been fined by Chinese and American regulators,
and is being sued in New York. An initial public offering of shares in its Hong Kong subsidiary has been
delayed. The Bank of China was meant to be the model of reform. Yet, by the late 1990s, something like half
of the loans in Chinas state-controlled banking system were bad...Reform is a priority. The government has
hived off many of the bad loans into separate vehicles where they can be written off, nursed back to health, or
sold. To prevent the state banks from piling on new bad loans, Beijing is trying to tighten their governance and
risk management. The Bank of China was always the natural leader for reforms. Unlike the other three banks,
which for most of Communist Chinas history acted as the central planners cashiers, the Bank of China dealt
most with Chinas foreign-exchange transactions and trade finance. Only the Bank of China has big overseas
operations, which make virtually all its profits...At the same time it suffers capital flight, and there are only so
many exit routes. In the 1990s, rumors grew of suspect transactions by the Banks New York branch. For some
time, the branch was run by Wang Xuebing, who went on to become chairman of the whole bank. By 2000, it
seems, the government saw Mr. Wang as a liability to the banks reforms. It moved him to another state bank;
then, in January, Mr. Wang was detained, under suspicion of so far unspecified crimes. This is now known as
'the Wang incident. The man who replaced Mr. Wang as chairman in 2000 is Liu Mingkang. People who know
both men well say that Messrs Wang and Liu are opposites: Mr. Wang had a reckless streak in his personal
dealings - with expensive hobbies and a taste for power - but displayed conservatism as a reformer. Mr. Liu,
by contrast, is a bit of a puritan. When an American bank, J.P. Morgan Chase, invited him and his wife to a
conference in Hawaii, he insisted that she buy her own ticket, in economy class. Moreover, he has shown
boldness in reforming his bank. Mr. Wang had powerful backing in the state council, China's cabinet, and Mr.
Liu certainly took risks by opening the files. The planned share listing of the Hong Kong operations, perhaps
later this year, is a test of the governance and management models that Mr. Liu hopes to bring to the parent
company. The Hong Kong operations have existed as an identifiable corporate entity only for half a year.
Before that, the Bank of China owned a stable of 13 banks in Hong Kong and Macao, with almost no co
ordination among them. Mr. Lius first step, last October, was to merge them and integrate their back offices.
His next goal is to unify their risk management, putting in computer systems that assign internal credit ratings
for borrowers and allow risks to be managed more professionally; and putting loan officers through finance
courses at Londons City University (where Mr. Liu also studied) to develop a credit culture. Mr. Liu has left his
clearest mark on the subsidiarys brand-new board, which he chairs. Four of the 13 directors are independent
and tough. One, Peiyuan Chia, is a former director of Citibank in New York. Another, Victor Fung, is an
outspoken Hong Kong tycoon and financier who used to lecture at Harvard Business School. Mr. Shan, the
third, is a director of Newbridge, an American buy-out firm that specializes in banks. The fourth, Chee-chen
Tung, is a tycoon who happens, admittedly, to be the brother of Hong Kongs chief executive. Mr. Liu has also
hired two advisers with credibility in matters of corporate governance: Anthony Neoh, a former head of Hong
Kongs securities regulator and current adviser to the mainlands security regulator and Lawrence Lau, an
economics professor at Stanford University. According to the minutes, these independent directors and
advisers do most of the talking (in English) during board meetings. They run the audit committee and sit on the
compensation and risk-management committees. The Wang incident occurred just as they wrapped up their
last meeting, in January. The chairman of the audit committee has since had brought to him details of every
lawsuit pending in any part of the group. At least 15 people are examining the files before the board meets
again, next week. It is the closet scrutiny a Chinese bank has ever had.
186. Any inquiring into Chinas institutional reforms would become embroiled in complex conceptual
problems such as defining the relationships between economic and non-economic mechanisms, and the
relationships between the economy, institutions, and human society.
187. This trend addresses the further maturation of the market and accompanying legal institutions supporting
economic competition and social protection, cf. An article of introduction to Chinas recent institutional
reforms in The Economist, pp. 10-11, "China Survey," April 8th, 2000: "...From the governments point of
view, the cost of state-owned enterprises is unsustainable. That lesson was leamt after the economic
boom of the early 1990s, an indiscriminate lunge for economic growth urged on China by an ancient
582
Deng Xiao-ping to put the trauma of the 1989 Tiananmen crackdown behind it. Investment soared, but
much was wasted. Paddy fields were smothered with concrete and declared 'economic zones. Luxury
buildings went up for which there were no customers. State enterprises produced larger quantities of
goods that no one wanted. The banks printed money, making inflation soar to a peak of 28% in 1994. But
government finances remained in a parlous state. Much of the governments economic policy since has
been designed to avoid a recurrence of the inflation nightmare. Like Germany, which has never forgotten
the hyperinflation it suffered after the First World W ar, China too has collective memories of runaway
prices, in its case in the late 1940s. Indeed, the casual handling of inflation by the Kuomintang, the
nationalist opponents of the Communists in the civil war, helped bring the Communists to power in 1949.
Half a century on, it can be argued that Zhu Rongji and his economic team tamed inflation rather too
brutally. For the past two years prices have been falling, though the worst now seems over. Yet Chinas
inflation was a bigger threat to future prosperity than its deflation, and two institutional changes have put
the government in a sounder position to prevent its reappearance. The first is an overhaul of the tax
system in 1994, which for the first time gave the central government first grab of the revenues collected
in the provinces. In many ways, a government measures its authority by its ability to tax and spend. Yet
the government in Beijing seemed incapable of collecting an adequate amount, with annual revenue
equivalent to mere 11% of GDP (compared with, say, 31% for America). The figure has now crept up to
just over 13%, a slow step in the right direction. The second move will perhaps prove the more
important: a restructuring of the banking system that prevents state enterprises getting easy money.
Chinas central bank, the Peoples Bank of China was organized along the same lines as other central
government agencies, which meant that nearly every level of government across China had its own
central-bank branch. This was usually answerable to the local party barons, so it often became the piggy
bank for their pet projects. That has now changed, because the central bank has been reshaped into nine
regional branches. The rearrangement cuts across local party lines, and allows the peoples Bank better
to monitor the branches of the four state banks, which also faced pressure to supply credit to inefficient
local state enterprises. One Beijing executive of a state bank tells the story of a meeting he had with his
counterpart at a provincial branch, along with the provincial governor. He found the two of them sitting
next to each other and opposite him...Squeezing the banks. The central government it now taking the
legacy of socialism - 1.2 trillion yuan of bad loans - off the state banks books. In return, the banks are
under intense moral and financial pressure to behave more commercially...The loans are being put into
'asset-management companies that are supposed to restructure, package and sell the loans over a
period of ten years. The government hopes it can recover almost one third of the loans that have gone
sour. That seems wishful thinking, particularly since no proper market exists for selling these assets. One
day there will have to be a reckoning. Nicholas Lardy of the Brookings Institution in Washington, DC,
does a back of the envelope balance sheet of the Chinese governments finances. On the liability side,
there is the governments outstanding debt, equal to 20% of G D P if treasury debt is taken into account,
as well as the debt forced on the four state banks to finance the governments non-commercial lending
by 'policy banks. Next, there are the state banks non-performing loans. The government has
acknowledged 1.2 trillion yuan of them, equivalent to 15% of G D P. Mr. Lardy reckons the real figure,
including bad loans elsewhere in the system, may be about double that. Then comes a huge future bill
for urban workers pensions, the responsibility for which is being shifted from state enterprises to
government - say 50% of GDP. In all the governments liabilities are around 100% of GDP. W hat of the
asset side of the balance sheet? Some economists think there is much that can be privatized, but caution
is in order. For a start, there are still intense ideological objections to selling control of the countrys
'strategic assets in telecoms, energy and transport. And what are they worth anyway? PetroChina is
seeking to float a minority stake on the New York Stock Exchange, but fund managers initially were not
keen on the idea. After all, a big chunk of the money raised is meant to go on paying pensioners,
whereas Western institutions like to see their money being put to more productive purposes. True, the $3
billion listing of China Telecom caused much fanfare in Hong Kong over two years ago, and its shares
have since soared. But that, for once, is a company in a growing, forward-looking business, without a
pensions legacy, and with a near-monopoly. The notion of selling Chinas under-invested railroads and
urban-transport networks, says one Western economist is a 'pipedream. That leaves Chinas annual tax
583
revenues (13% of G D P, of which nearly one-fifth goes on paying interest on government debt) as the
main asset. If the government can prevent the state banks from making any new bad loans, says Mr.
Lardy, and if tax revenues continue to rise by 0.6% of G D P a year, as they have recently been doing,
then the central government may well get out of its fix. Government debt will peak a 60-70% of GDP, a
high but still manageable level. But should bad loans increase or tax revenues fail to go on rising, the
debt ratio will spiral out of control.
188. cf. China enjoys trade surplus as direct inward investment surges by James Kynge in Beijing in Financial
Times, p. 6, Tues. Aug. 13, 2002 (emphasis mine): Chinas trade surplus and inflows of foreign direct
investment surged in July, surpassing the expectations of most stock market analysts and displaying the
resilience of the countrys manufacturing-led export sector to slowing consumer demand in some key markets
such as the U S...The declined of the US dollar against the euro and yen in recent weeks has imparted some
impetus to Chinese exports because the renminbi, Chinas currency, is in effect pegged to the US dollar.
Demand for Chinese goods has been further strengthened by the fact that as economies in the west slow,
consumers tend to hunt for bargains, and Chinese-made goods are often the cheapest available...Driven by
buoyant exports and an aggressive government fiscal stimulus program, Chinas economy outperformed
subdued predictions in the first half of the year, notching up gross domestic product growth of 7.8%. China may
become the fastest growing large economy this year. The prevailing environment of rapid growth, coupled with
several market opening initiatives inspired by Beijings accession to the World Trade Organization (W TO ) last
year, has lured record inflows of foreign direct investment... Chinese officials have predicted that foreign direct
investment for 2002 could top $50bn. a sinale-vear record Entry into the W T O opens most industry sectors to
foreign investment according to a fixed and transparent timetable, providing investors with a level of comfort
they have hitherto not enioved in China."
189. The aggressive institutional reforms in Chinas telecommunication industry are reflected in the state
government that efforts to bring more competition in and to enhance the competitiveness of the emergent
industry. First, in the early months of 1999, as reported (cf. USA Today, 1-2B, June 30,1999), Chinese leaders
announced plans to break China Telecom into four separate companies - an effort similar to that of the 1984
breakup of the AT&T monopoly in the USA. Second, they agreed to provide financial and management
assistance to China Unicom, a puny, poorly run company the government established in 1994 to give China
Telecom some competition. Third, they approved a third government-owned telecommunications operator to
compete with China Telecom and Unicom. The third player was backed by the Chinese Academy of Sciences,
Ministry of Railways, Shanghai city government and Fang's radio, film and television administration. Fourth,
they outlined further plans to dismantle some of the barriers that had kept foreign phone companies from
establishing anything more than a token presence in China. Last, and fifth, they forced China Telecom to
provide customers with competitive prices by dramatically reducing charges for telephone installation and long
distance calls.
190. cf. Beijing backs away from stock sell-off by Jam es Kynge in Beijing and Joe Leahy in Hong Kong
in Financial Times, p. 17, Tues. June 26, 2002: Chinese stocks surged higher yesterday after the
government scrapped a controversial plan to sell state-owned shares in listed companies. But market
analysts criticized the decision as a step backwards for economic reform ...The decision to scrap the
planned sale of state shares is also a blow to the cause of improved corporate governance in listed
companies. With the state holding of many companies at about 60% of the share capital, directors often
feel only marginally accountable to their minority shareholders. Disclosure and transparency are
rudimentary in many listed companies. It was also far from clear that the governments decision to shrink
from an unpopular reform would, in the end, have any sustained benefit for market valuations. In spite of
its losses in the past 12 months, China's markets were still overvalued, said Vincent C h an ...
191. Shortly after the collapse of the WorldCom, the shareholder value was highly criticized as investors'
imagination for their expected business confidence in stock market, based on the stock performance of
584
P/E ratios, cf. The dangers of shareholder value by Tony Jackson in Financial Times, p. 17, W ed. Aug.
7, 2002: ...A t the height of the boom in early 2000, some bubble stocks had delivered a staggering
amount of shareholder value, as conventionally measured. The snag was that it existed only in the
punters Imagination - and vanished accordingly.
Also cf. Jiang backs Chinese stock markets - President in enthusiastic endorsement of equities role in
modem economies" by James Kynge in Financial Times, p. 1, Thurs. June 15, 2000: Jiang Zemin,
Chinas president, has given an unprecedented, ringing endorsement of the countrys stock markets and
their role in fostering the development of an efficient private sector...M r Jiang made the point that robust
stock markets were a vital component of a modem economy. He said the development of Chinas stock
markets was important, adding that it would help foster the country's non-state sector...He also seemed
to advocate the introduction of a culture of risk within the Chinese economy, saying at one point that
Chinese people are inherently risk-takers.
Also cf. Last word in Chinas phone industry" by Mark Landler in Hong Kong in The N ew York Times,
W 1, W ed. Dec. 6, 2000 (emphasis mine): ...Last week, official newspapers in China reported that the
government had approved a proposal to replace a system under which both the cellular telephone caller
and the recipient pay for the call to one that would require the caller to pay for it. The shares of Chinas
two publicly listed telephone companies, China Mobile and China Unicom, sank after those reports
because they raised fears that the companies would lose billions of dollars in revenue. The stock fell a
combined $26bn in market value, each plunging more than 20% . Under pressure from shareholders, Mr.
W u [Jichuanm the information industry minister] held a conference call with fund managers on Friday, in
which he said Beijing would not adopt the one-way payment plan for one to two years. China Mobile and
China Unicom embarked on powerful rallies, making up almost all their lost ground. 'I think the media
and the fund managers should have known that the opinions expressed on an individual basis did not
represent the views of the government, Mr. W u said today with visible irritation. 'They should have gone
to the spokesman of the relevant department. ...M r. W u seems to relish his influence, though he tries
periodically, and without much success to play down his role. After the conference call last week, some
economists criticized him for intervening on behalf of state-controlled companies rather than for Chinese
consumers. 'Since Im a government official, I know nothing about the stock market, Mr. W u said. 'I did
not mean to support or raise the stock price. W hatever Mr. W u s motives, analysts said his soothing
words underscored a recognition by Chinese leaders that shareholders can no longer be ignored. China
Mobile and China Unicom are listed in New York as well as in Hong Kong, and they are held in
investment portfolios around the world. 'In China, the idea used to be that foreign investors were merely
a source of capital, said Duncan Clark, a partner at BDA China Ltd., a telecommunications consulting
firm in Beijing. 'The leaders have realized in the last few weeks that shareholders have got to be treated
as a constituency. China has a more immediate reason not to alienate foreigners. Beijing hopes to sell
shares in yet another state telephone company, China Telecom, sometime next years, according to
investment bankers here."
192. cf. Chinese motor group chief is ousted by James Kynge in Beijing in Financial Times, p. 1, Thurs.
June. 21, 2002: ...Minibus maker Brilliance China, which has seen its share price plunge in recent
weeks, said yesterday that Yang Rong, its president, chairman and key state-holder, had been
replaced...on Wednesday, company executives who gave a briefing to analysts in Hong Kong said the
board had removed Mr. Yang because his goals and views were no longer in line with shareholders....
193. cf. Chinese fund managers 'm ade illicit deals in sauna meetings" by Richard McGregor in Beijing
in Financial Times, p. 1, Oct. 18, 2000 (emphasis mine): ...This month the government issued
guidelines on open-ended funds, a new financial instrument in China."
194. cf. Juggling bankers and banquets - When clients are unaware of what a consultants job is
585
corporate change may not be the priority by Rahul Jacob in Beijing in Financial Times, p. 14, Mon.Oct.
25, 2000: ...How ...can companies reward high performers when incentive packages clash with
communist ideology? McKinsey discovered that peer pressure and approval can work nearly as well. At
some companies McKinsey has helped create public forums within the company to recognize good
managers and hold bad ones accountable. Progress reports on McKinsey are mostly encouraging. Dou
Jianzjong, head of Citic Industrial Bank, says McKinsey did a complete overhaul of the banks credit
allocation practices and instituted a system for independent loan evaluation...Mr Dou believes McKinsey,
which says it charges standard international fees in China, was expensive but worth in the context of a
developing country, although the firm charges too much. As many state-owned enterprises tap
international capital markets, some argue that companies are using McKinsey as a 'Good Housekeeping
seal for initial public offerings. Mr Orr admits this is a risk but says the firm has walked away from
assignments on occasion when it thought it was being brought in simply 'to say McKinsey was hired in
the IPO documents....Seven years after it opened its first office in Shanghai, however, there is no
question that the firm is now an important fixture in corporate China."
195. cf. Cao, Qian and Weingast 1999, 105: ...a large portion of privatized firms has taken the
corporate form known as 'stock co-operatives (gufen hezuochi), which are essentially
employee/manager ownership with some features of co-operatives...W e argue that two important
political consequences of these three features of reform are that they reduce the ex ante resistance to
privatization, and that they allow the great majority of the parties involved in privatization to realize
benefits quickly, which increases the durability of reform ex post."
Also cf. 50,000 oil jobs to go as PetroChina cuts costs - Company streamlines operations to improve
profitability by Rahul Jacob and Reuters in Hong Kong in Financial Times, p. 1, Fri. Sept. 1, 2000
(emphasis mine): PetroChina, the main operating unit of Chinas largest oil company, is to cut about
50,000 of its 473,000 workforce over the next five years. The move is part of the companys restructuring
to improve efficiency and profitability as China seeks to streamline its unwieldy state-owned
sector...Ahead of its initial public offering PetroChina sought to shed its image as a dowdy state-owned
oil company by introducing management incentive schemes after calling in management consultancy
McKinsey & Co and announcing ambitious cost-cutting plans.
But some others might cast their doubts that stock options as incentives to managers could bring about
better performance rather than to transfer others wealth, arguing that stock options could be a costly
expense rather than a sensible incentive. See Taking other peoples money - Stock options are not an
efficient stimulus to executive performance but an effective way to transfer wealth in a bull market by
Martin W olf in Financial Times, p. 13, W ed. Jan. 10, 2001 (myself add the underlined): ...analysts
suggest that any popular scheme of executive compensation should be looked at with an extremely
quizzical eye. Stock options can be viewed through two different lenses: as a way for shareholders to
align the interests of managers with their own; and as a way for managers to expropriate the property of
shareholders. The latter is nearer the truth. Shareholders are always ignorant about what is going on in
the companies they own. The situation is quite different for managers. They can use their insider position
either to raise the overall value of their companies or shift an appreciable proportion of that value from
outside shareholders to themselves. Income-maximizing managers will often find that they gain as much
from the latter activity as from the former. But it will help if they can argue that wealth transfer is aligned
with wealth creation. In his classic book The Great Crash 1929, J. K. Galbraith invented the notion of the
'bezzle. In good times, he argued, 'people are relaxed, trusting, and money is plentiful...Under these
circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases
rapidly. Stock options are not a bezzle. They are much more astute than that. They represent a legal
transfer of shareholder wealth whose size is greatest when shareholders mind least and that can be
justified under the rubric of 'incentives....Stock options are a costly expense...It notes that one of the
countrys most successful high-technology companies, Oracle, had spent $2.7bn of company money in
586
fiscal year 2000 to prevent the dilution consequent on exercise of stock options. This sum was equal to
27% of its annual revenue and 43% of its net income for the year. Analysis of the role of options as
incentives reinforces the view that they are predominantly a way for managers to gain wealth, at the
expense of shareholders, in a bull market...optimal remuneration should always include a fixed element
and one that varies with performance. But the variable element must be judged by the quality of the
incentive it provides. Stock options are a strikingly poor form of incentive-creating variable pay, for three
reasons. First, only a very few top executives can expect there to be any direct link between their
activities and the share price. Second, even if executives do affect share prices, that cannot be
measured by the movement of the price itself, but by its movement relative to some relevant
benchmark, such as the share price of competitors. Third, options will increase managerial incentive to
take risks with the company, since managers share in the upside, but not, beyond a point, in the
downside. Thus options neither relate the remuneration of executives closely to their performance nor
align their interests with those of shareholders. While they do help lock valuable workers into the
company, the same effect can be achieved by schemes that are not vulnerable to the vagaries of the
stock market. The collapse of share prices in the high-technology sector has destroyed the incentive
effects of options. Yet the need for such incentives must be as great as ever. The conclusion is
straightforward. Options are more a clever form of wealth transfer than a sensible incentive...Qptions
may prove no more than a bull-market fad.
196. cf. Execution does more than get things done - Honeywell chief talks about making great ideas
work by Larry Bossidy in USA Today, 4B, Mon. June 10, 2002: ...Its not just getting things done. Its
understanding the things that are necessary to be in place in order to get things done. Execution is a
culture. You surround yourself with people who get satisfaction and gratification from seeing things
happen as opposed to just conceptual expression They should be able to conclude for themselves if
they are in an environment that is execution-oriented. Are commitments met? Do you have a good
reputation in the market place?...execution is the foundation of success...
197. cf. Chinas 21st-century cultural revolution - A wave of materialism and consumerism is sweeping
away communist notions of morality from the countrys past by Jam es Kynge in Financial Times, p. 11,
W ed. Jan. 3, 2001: ...M oney is at the center of a value system now emerging from the ruins of the old
Communist welfare state. The once-powerful 'work units, which would determine - and subsidize - the
healthcare, education, housing, pension and holidays of their members, have had to surrender their
influence to economic reality. Most state companies can no longer afford the welfare with which they
bought the loyalty of their workers. Schools, universities, hospitals and a host of public utilities are
increasingly awarding places and services to those who can pay for them, rather than those able to pull
strings within the Communist hierarchy...For many millions of people such as Li Mingzhi, the daughter of
a peasant farm er in the southern province of Hunan, this trend has had a liberating effect. No longer
bound by the strait-jacket of Communist control, she was able to migrate to Beijing seven years ago and
find work as a housemaid. She married a factory worker and they had a son. This year, they pooled their
savings along with money borrowed from relatives and were able to afford the Rmb50,000 entrance fee
for an elite primary school in the capital If their son, Ming Ming, a cheerful lad with gap teeth, does well
at his studies and progresses to a good university, the opportunities that await him will be a world away
from anything available to his Hunanese ancestors. Already the opulence of the new urban rich would
am aze many among some 900m people living much as Chinese have for centuries in the vast
hinterland. The average wage in China is $800 a year but most people in the countryside exist on far less
than that, including about 90m who live on less than one dollar a day. At the Chang An Club in Beijing,
which serves a membership that is dominated by wealthy businessmen and private entrepreneurs, clients
smoke Havana cigars and sip from bottles of Hennessey XO brandy costing up to Rmb8000 each.
Behind antique Chinese screens, conversations at the club revolve around money: the latest stock prices
on the Shanghai stock exchange, the cost of luxury cars and merits of paying Rmb10m for a new villa in
a Beijing suburb. The suburb they are discussing is not far from the Sum m er Palace where the
587
philanthropic M r Liu inhabits his ramshackle house.
198. According to Cao, Qian, and Weingast (1999, 116): Hardening the budget constraint has been a
major object of the reform. In Eastern Europe and the former Soviet Union, reformers attempted to use
privatization as a way to harden budget constraints of enterprises. In China we observe a different path:
the hard budget constraint of local governments induces privatization of enterprises under their
supervision.
199. cf. Opening up China - To meet its W T O commitments, the country needs high-level institutions that will
overcome local trade banners by Susan Shirk in Financial Times, p. 15, Tues. May 14, 2002 (emphasis mine):
Chinas entry into the World Trade Organization signals its intention to expand access to its markets and
make them fairer and more competitive. Yet questions remain about Beijings capacity to implement its W R O
commitments. Tariffs may be reduced but national regulations and local government decisions create non
tariff barriers that will keep out foreign goods and services. Chinas leaders pledge their determination to fulfill
their W T O commitments and they have held national meetings with provincial leaders to impress upon them
the importance of local implementation. But these promises are not backed up by an institutional structure that
can deliver results. To understand the implementation problem, consider the case of selling capital equipment
to Chinese companies. Currently, all companies, private and state-owned, have to submit their purchasing
plans to local governments. These local officials often insist on preferences for local suppliers, thus biasing the
market against both foreign products and products from other Chinese provinces. What could a foreign
supplier do? Responsibility for W T O enforcement has been delegated to Chinas Ministry of Foreign Trade and
Economic Co-operation (Moftec), in particular to Long Yongtu, its able vice-minister, who negotiated Chinas
W T O agreements. Unfortunately, however, the Trade Ministry cannot give orders to economic ministries or
provincial governments, because they are all at the same bureaucratic level. The lesson is clear. Any effective
enforcement mechanism must fit in with Chinas own distinctive hierarchical and authoritarian political system.
The Chinese government needs to establish a specialized institutional mechanism for W T O enforcement. The
leadership needs to act now, in the lead-up to the 16th Chinese Communist party congress this autumn,
because this is when central and local officials have an incentive to be particularly pliant. Only a higher-level
unit of the State Council, Chinas cabinet, can possess the authority to give orders and ensure compliance.
Such a State Council W T O implementation office should be well staffed and provided with the authority to
make ministries and provinces listen. In the Chinese system, ultimate authority lies not with the government
but with the Chinese Communist party. The CCP establishes 'leading small groups consisting of government
ministers who also have high party rank to oversee all policy areas - for example, the finance and economics
leading small group. Sometimes the CCP also establishes leading small groups for priority projects, such as
the current effort to use information technology to improve the efficiency and transparency of governance.
W T O implementation deserves its own C CP leading small group. The best way to empower a State Council
office is to have it backed up by a newly created W T O implementation leading small group of the central
committee of the CCP. To be effective, the group should include representatives from economic sectors,
government agencies and social groups that have an interest in enhancing competition from imports. For
example, manufacturing industries want high-quality equipment at a good price. The functions of the State
Council W T O implementation office under the leading small group would include reviewing national and local
regulations to bring them into line with W T O standards. The National Peoples Congress, Chinas legislature,
has undertaken a similarly ambitious project to revise old laws and introduce new ones to harmonize with W T O
standards. Regulations, such as those for insurance or government procurement, will also have to undergo
scrutiny. The State Council W T O implementation office would also be the place where foreign businesses
address their appeals about locally imposed non-tariff barriers in the event that Moftec fails to meet their
expectations. Such an institutional mechanism for W T O implementation would enhance confidence among
international business people and reduce political friction with foreign governments. Just as important, by
institutionalizing its commitments to open trade, Beijing would strengthen the competitiveness of its own
economy and enhance the welfare of its own people.
588
200. In this regard, as Shen Sibao explained, a Chinese old saying that one ant hole may cause the collapse
of a thousand kilometers strong dam, which means slight negligence may lead to a great disaster...One
important cause of Asian financial crisis occurring in 1997 was the incomplete financing information disclosure
and insufficient transparency of company. The practice proved that in order to protect the investors interest,
the companies founded on the market basis must make their regulatory system completely transparent, while
those based on connections or based on the planned economy will do just the opposite, because this is the
only way to protect them from the challenge and threat of competition. Therefore, for the sake of dealing with
the current critical problem existing in the field of financial information disclosure and eliminating its serious
harm from the very root, we must firstly settle the problem of transforming from the planned economy to the
market economy and gradually establish a real market economy; meanwhile we have to realize the transition
from Rule of Man to Rule of Law and finally build up a real law-goveming society. Only in this way can we
succeed in promoting the integrate quality of the public investors and especially bring the principle of
transparency into the real effect" (note: this was Mr. Shens original text; cit. from Shen Sibao, Dean of School
of Law, University of International Business and Economics, and vice chairman of China International
Economic and Trade arbitration Commission, Beijing, China. Public lecture, Apr. 22, 2002. Law School, UW -
Madison).
201. cf. Institutions seize their chance to buy China on the cheap - Takeovers are taking place at knock-down
prices by Richard McGregor in Financial Times, p. 22, Tues. May 14, 2002 (emphasis mine): Chinas
fledgling M&A market has produced a series of takeovers of listed companies in the past year at discounts as
steep as 91% to the targets quoted price, according to a research center under the Chinese Academy of
Social Sciences, an official think tank. These largely unremarked deals were typified by the sale late last year
of a controlling stake in a listed electrical machinery company in coastal Fujian to another enterprise in the
same business. The straggling Tianyu Electric sold a controlling 46.01% stake to the Xuji group, based in
central Henan, for Rmb200m ($24m), representing a discount of some 80% compared with the then share
price. Such deals, mostly in domestic A shares, happen quietly, often illegally, before they are later registered
with the authorities, and almost never attract regulators security. That they can take place at all, and at such
knock-down prices, is because of the different categories of share ownership in China, an enduring problem
that has confounded all efforts at reform. 'The stock market is basically dysfunctional - you cannot depend on
it to do the job it is set up to do, said Fraser Howie, a Beijing-based consultant. The governments aversion to
full privatization means that, on average, companies listed on the domestic stock market - all of which are
former state-owned enterprises - have a public float of only about 30%. The balance is held in two other
categories - those owned by the government, and so-called 'legal person* shares, which are held by approved
state institutions. It is shares in these categories that change hands in the off-market auctions, or in sales
negotiated bv creditors for enterprises which cannot meet their debts. The three different categories have
produced three often vastly different prices in the shares of the same company. The pricing disparity gives the
lie to the oft-quoted claims about the size of the local stock market. The official estimate of market
capitalization at the end of March, $524bn, is calculated by extrapolating the high prices of the limited number
of tradeable shares to the entire market. But the market capitalization of tradeable shares was only $170bn,
equal to about 15% of Chinas GDP, and about the same as the value of mainland companies listed overseas.
Explaining how the same shares trade at vastly different prices is a straggle even for local experts. The
authoritative monthly, Caijing ('Finance'), recently balked at explaining how to value 'legal person shares,
saying it was 'too complicated. The relatively high prices commanded by the publicly traded shares is at least
partly due to their scarcity. In turn, the 'legal person shares inevitably trade at a slight discount because they
are relatively illiquid and need official approval to be transferred, even if this approval sometimes comes after
the deal has been done. Matthew Rudolph, of Cornell University, says that auctions of non-tradeable shares
are not a good proxy for the markets value overall, as the sales are primarily used bv the government to bail
out straggling companies. 'M y guess is that, in many of these cases, a lamer, healthier firm is being coerced to
buy the shares of a less healthy company with which it has some nominal synergies. he said. 'The radical
discount you see is the central governments admission that the buyer is getting a raw deal. Predictions that
the government would allow full privatization of listed companies created a market in 'legal person stock last
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year, as eligible traders sought to arbitrage the different types of share. 'In the Iona rum we can hold the
shares until they are finally allowed to be traded and profit from the wide gap. said Liu Yiquian, of the Xin Liyi
Asset Management, which specializes in trading legal person shares. ' In the meantime, we can hold the
shares to get dividends. And in the worst scenario, we can sell them, and make our money back that wav.
Wary of the speculators, the China Securities Regulatory Commission (CSRC) banned auctions outside of the
established exchanges in Shanghai and Shenzhen eariier this year in an effort to keep the share transfers
under control. Although the biggest losers in these transactions seem to be the tens of millions of small retail
investors, who pay the top price for shares, Mr Rudolph says they know what they are doing: 'M y research
shows that most investors are well ware of the risks and know that it is a rigged game, he says 'It is just like
betters in Las Vegas. They play anyway.
nonperforming loans by Keith Bradsher in The N ew York Times, B1, B3, Sat. Oct. 26, 2002 (emphasis mine):
...The loan problem lies at the heart of one of Chinas biggest economic problems these days: its financial
system often fails to channel capital efficiently from savers into productive investment. The result is that scarce
investment capital and other resources remain tied up indefinitely in businesses so unproductive that the
finished goods they produce may be worth even less than the raw materials they use. Zhu Rongji, Chinas
prime minister and an advocate of financial reform, has personally championed the sale of nonperforming
loans. But Mr. Zhu is expected to retire soon; Chinese financial experts in Beijing say that progress on this front
will be a bellwether of how committed the next generation of leaders will be to continuing economic
reforms...One big problem is that banks were so lax in issuing many of the loans that collateral was not
properly registered or titles of ownership not checked. This makes it almost impossible for buyers to take the
boirowers to court to force settlements. 'W e went through and did an incredible amount of work and said
'whoa, said one investment banker, who insisted on anonymity. 'Seventy percent of the document has
massive defects in them. An even bigger problem is that many state-owned factories occupy what is now
prime real estate in downtown areas. But these factories, many of them unproductive money losers dating
back to the 1950s, have work forces and well-connected managers whom local officials are reluctant to
antagonize by allowing loan buyers to foreclose, bulldoze the factories and erect higher-value buildings like
first-class office complexes or shopping malls. As a result, the non-performing loans owned by the asset
management companies are nearly worthless. Two consortiums led by Morgan Stanley and Goldman Sachs
are now in the final stages of buying some of the least dubious loans, with a face value of $1.4bn. but the
investment banks will make an initial payment of just 8cents on the dollar, with further payments up to a total of
20 cents on the dollar if they find themselves able to collect an unexpectedly high fraction of the loans
value...much of Chinas growth ahs come from the roughly $350 billion in foreign investment that has poured
into the country over the last decade, which has by and large been efficiently invested. By contrast, Chinas
banking system has bad debts that are larger - in comparison to the size of the economy - than Japan's, which
has suffered for more than a decade from the overtiang of bad debts from its speculative frenzy of the 1980s.
The debt problem, and Chinas halting efforts to address it, can be best seen here in Shenzhen, a sprawling
industrial city near Hong Kong in the southern coastal province of Guandong. The province is one of Chinas
main economic engines, accounting for two-fifths of its exports. Yet it also has one of the highest rates of loan
defaults in the country, the legacy of a commercial real estate bubble in the mid-1990s and a free-wheeling
govemment-business culture in which bankers frequently issued loans to friends or in exchange for bribes. The
Cinda Asset Management Corporation has managed to foreclose on only a handful of properties here that
were used as collateral for loans issued by one of Chinas Big Four state-owned banks, the China Construction
Bank. Cinda and China Construction Bank together are now beginning to auction mishmash of properties here
and around the country to which they have gained title through foreclosures. Cinda has been saddled with
mostly dregs, like several exhibition halls in a small convention center that closed in 2000 and now is being
used as a warehouse. China Construction Bank, by contrast, has somewhat more valuable assets: two floors in
a hotel and office complex that closed about the same time, for example, along with 48 office suites in the 57-
story Tower A of the United Plaza, one of the city's premier addresses. But even those are proving tough sales.
In an unusual arrangement to attract buyers, the China construction bank is offering to lend the money for up to
590
50% of the winning auction bids for its holdings and Cindas...But when the local real estate community
learned that China Construction was dumping its suites, the price for office space in the building fell 50
percent, to 5,000 renminbi a square meter, or $56 square foot. Shenzhen K&C paid nearly twice as much for
its suite when the building opened in 1999, and refuses to sell it at a loss, which might mean that the
company has to stay put for a while...Low prices and subsidized loans from state-owned banks are big
problems for the asset management corporations, which paid the banks full face value for the loans. The
corporations are owned by the Ministry of Finance but raised part of the money in cash by borrowing from
Chinas central bank, the Peoples Bank of china. The corporations raised the rest by giving 10-year bonds to
the banks. But the asset management corporations are having so much trouble selling the loans that they
have struggled even to raise the money for the interest payments on the bonds. They have no money to
repay the central bank, which has lent a sum equal to several times its capital base. A new paper published
by two economists, Guonan Ma and Ben S.C. Fung, at the Bank for International Settlements, the
coordinating agency for central banks around the world, expresses particular alarm. The asset management
corporations have sold just one-eleventh of their loan portfolios for cash over the last two years. Even though
these tended to be the best loans in their portfolios, the corporations collected an average of just 21 cents for
each dollar of face value. The result is that the asset management corporations have only raised cash equal
to 1.9 percent of the original values of all of the loans transferred to them by the banks, according to statistics
in the paper. While many more deals have been done for stock, it is not clear what if any value can be
assigned to stock in companies that have not paid interest on their bank debts since at least the mid-1990s.
The researchers also warned that China may have endangered the financial health of its central bank by
relying on it, instead of directly on taxpayers, to bankroll much of the cost of the asset management
operations. The central banks exposure 'represents no small risk to the institution and its further
development as a modern central bank, the paper says, warning that if the asset management corporations
fail, they could easily wipe out the capital of the central bank. Chinese experts play down this risk. In China.
as in other countries with bad-debt problems, the tab for the bank bailout will eventually be picked up bv the
national treasury and therefore ultimately bv taxpayers, instead of bv the central bank, they contend. Western
banks hope to held resolve the situation - and make a profit for themselves at the same time. Michael
Berchtold, the president of Morgan Stanleys Asian and Pacific operations, said that his company believed it
understood the risks. The Morgan Stanley consortium includes Salomon Smith Barney, a unit of Citigroup,
Lehman Brothers, and real estate funds that they advise. In many cases, it should be possible for loan buyers
to reach a settlement with the original buyer to pay off the loan for some fraction of face value. If a Western
enterprise can buy a loan for 8 cents on the dollar and sell it to the original borrower for 15 cents on the
dollar, one investment banker said, it can make a profit even as the original borrower may improve its
balance sheet enough to tackle other inefficiencies. The international investment banks have found
elsewhere that they have more expertise and more flexibility in reaching loan settlements. The original
lenders often do not want to set a precedent by letting borrowers pay back loans for much less than the
original value. Over the medium term, Mr. Berchtold said, 'we expect to put a meaningful sum to work in
non-performing loans in China.
Ibid. Losing proposition. Since their creation more than two years ago, the Chinese governments asset
management corporations have had trouble selling non-performing loans transferred to them by the four
main state-owned banks. Only a small number of the bad loans have been converted to cash, usually at a big
discount from their face value. That has left the corporations struggling to meet the interest payments on
bonds issued to banks in exchange for the bad loans.
Asset management Face value of nonperforming Face value of Actual cash received Annual interest
Corporation loans received from banks sold loans since 2000 obligations
Cinda $45.0 $3.6 $1.3 $1.0

Huarong 42.2 2.8* 3.2 1.1
Great Wall 41.8 6.4 0.4 0.9
Orient 32.3 2.2 0.5 0.7
591
* Face value and cash recovery exclude $1.5bn in face value of loans sold at auctions last November to
groups led by Morgan Stanley and Goldman Sachs but have not been closed on yet.
Source: Bank for International Settlements; cit. ibid.
203. cf. W ider probe feared after illegalities at Chinese bank by James Kynge in Beijing in Financial Times, p.
20, Tues. Aug. 13, 2002: Improper accounting and other irregularities found by Chinas finance ministry at the
China Everbright Bank, a large second-tier state bank, raised concerns yesterday that authorities may subject
other Chinese financial institutions to thorough investigations...Chinese bankers said the ministry investigation
was the first of its kind since a new accounting law was approved. It paved the way for further probes into
irregularities in Chinas opaque financial system...
nonperforming loans by Keith Bradsher in The N ew York Times, B1, B3, Sat. Oct. 26, 2002: ...Fred Hu, a
Goldman Sachs economist who is informally advising Chinas finance ministry on the asset management
corporations, said that continued delay in disposing of bad debts could cost China enough to retard its growth
rate by as much as two percentage points in the coming years. T h e progress has been very, very slow, almost
at a snails pace, he said. 'It has taken too long, and that has translated into lost opportunities....
205. cf. China juggles the conflicting pressures of a society in transition by Craig S. Smith in The New York
Times, A5, Mon. July 15, 2002: With China now a member of the World Trade Organization, foreigners have
focused on what is popularly called the one-billion-man market. The country is already the worlds biggest
market for televisions, refrigerators and mobile phones. Its huge population has the potential to become a
consumption engine that could someday drive much of the worlds economy in the way that the US does
today. The numbers are impressive. Chinas emerging middle class, people with a net income of at least
$3,000 a year, numbers nearly 100 million and is growing about 20% a year. Because of state-subsidized
housing, little of that money is spent on shelter, the biggest household expense in the West, and much of it is
saved. Georges Desvaux, a Beijing-based partner at the consulting firm McKinsey&Company, estimates that
five million or six million Chinese have personal assets of $100,000 or more. Perhaps 10,000 have assets
exceeding $1 million...
206. To this point it is debatable as to whether or not a parallel could be drawn between China and its
East Asian neighbors concerning the rise of middle class in their respective transitions and its political
implications for social democracy. Modernization theorists had long assumed that a rise of a middle
class, following modernization, would change societal attitudes toward political transformation and
incubate social democratization. Yet East Asian countries had long kept their authoritarian systems
through the decades of rapid economic changes, despite the boom of a big middle class in their societies
during the tim e period, cf. Report on a study of contemporary Chinas social strata, Jan. 2002; cit. from T o
get rich is glorious - Chinas middle class s expanding rapidly. But what does it want?" in The Economist, p. 33,
Jan. 1 9 ,2 0 0 2 (emphasis mine): Has China taken in a Trojan horse? The countrys accession last month to the
W T O , optimists in the West often aigue, will make China more prosperous and thereby boost the development
of the middle class. This in turn will lead to demands for democratic reform because middle classes naturally
want a say in government. Many Chinese scholars argue, however, that if substantial political change does
occur in the next few years, the middle class will have little hand in bringing it about. The growing affluence of
urban China would appear to be striking enough evidence that a middle class is already fast emerging. Cities
that 15 years ago were grim, Stalinist backwaters are today aglow with the trappings of middle class life. The
cities that have benefited most from the flood of foreign investment into China over the past decade - Beijing,
Shanghai and Shenzhen - now boast more white collar workers than blue collar ones. The working class,
which according to Communist rhetoric still leads the country, is shrinking. The state sector is crumbling.
Private enterprise is booming. The party itself, meanwhile, remains way behind the times. It still will not use the
592
term 'middle class in its official documents, preferring instead such phrases as 'those with high incomes. To
recognize such people as a class would turn the ideology of the last 50 years on its head. Mao Zedoing sought
to eliminate the capitalist readers and, despite the more tolerant economic climate of the past 20 years, it was
only less than three years ago that the legitimacy of private enterprise was fully recognized in the constitution.
President Jiang Zemin caused a furor within the party last July when he suggested that entrepreneurs be
officially allowed to join. In a study of Chinas social classes published this month, the state-run Chinese
Academy of Social Sciences (CASS) also shied away from the term 'middle class, explaining in a footnote
that the word 'class has negative connotations. The survey says that this 'middle stratum is still very small,
amounting to about 15% of the working population compared with 60% in America. Still, this would amount to
about 110m people, or about half of the urban population in employment. Chinas chief negotiator at the W TO
accession talks, Long Yongtu, boasted last November that within ten years, some 400m-500m Chinese would
enjoy a 'middle income, making Chinas market 'much bigger* than that of the United States. An official from
the State Information Center estimated recently that by 2005 China would have 200m middle-income
consumers. The official was quoted by a state-run news agency as saying this class could afford to buy cars
and housing and spend money on leisure travel. No wonder the foreign business community is salivating over
the promises made by China to open up its markets after entering the W TO ...Som e Chinese officials dearly
do believe that the middle dass could pose a political threat. A study by the partys powerful Central
Organization Department published last May noted that 'as the economic standing of the affluent stratum has
increased, so too has its desire for greater political standing. The report said that this would inevitably have a
'profound impact on sodal and political life in China. President Jiangs gesture to businessmen last July was
presumably aimed at ensuring their loyalty and deterring them from using their economic power in ways that
might threaten the party. But so far, at least, there is scant evidence that the middle dass is seeking anything
more than political security. Some Chinese researchers say that entrepreneurs who have applied to join the
party or sought eledion to legislative bodies want to gain sodal status and security rather than change the
system from within. The CASS study says the government has hailed to give 'full political recognition to the
interests of their sodal stratum as well as adequate legal protection for their property. But private
businesspeople do not look likely to push for such guarantees, at least not colledively. According to Shen
Mingming, director of Beijings Universitys Research Center for Contemporary China, the only groups in China
with colledive political consdousness are those traditionally recognized by the party: workers, peasants and
'intelledual, as graduates are known. In recent years, unemployed workers and downtrodden peasants have
staged frequent protests against corruption or violations of their rights. But for all their worries, private
entrepreneurs are gaining wealth faster than any other group, thanks to market-oriented reforms. 'During this
transitional process, these people are direct benefidaries; they are getting a free ride, so why should they
bother* trying to secure political changes, argues Mr. Shen. Chinese scholars often point to the experiences of
other Asian countries, particularly South Korea and Taiwan, which maintained their authoritarian systems
through decades of rapid economic growth and despite the emergence of a big middle dass. For the time
being, offidals in China seem more concerned about the polarization of wealth. But the experience of those
countries shows that the days of middle dass rage come in the end."
207. Also cf. Li Jizhao, 2002: The making of a new class: a discourse analysis of the ideological
construction of Chinese 'middle class. East-West Center. Seminar presentation in ASA annual
conference, Regular Section 327, (9), Aug. 18, 2002.
208. Also cf. Xie, Yu and Emily Hannum. 1996. Regional variation in earnings inequality in reform era
urban China."
To deal with the issues of uneven development concerning those inland and poor areas, China had
enacted its strategic Go W est policy since the mid-1980s, which aims to ensure that the benefits of the
countrys roaring growth are not limited to the coastal regions, but also spread towards more remote
provinces." cf. China modernization march turns Mekong into battleground - Pressure for dams has
593
pitched poor ethnic minorities against industrial centers by Amy Kazmin and Richard McGregor in
Financial Times, Asia-Pacific, p. 8, W ed. Nov. 20, 2002.
209. cf. The Pearl River Delta: A new workshop of the world - Knitting together the worlds most
dynamic industrial region" in The Economist, p. 37, Oct. 12th, 2002 (emphasis mine): The 46m people
living in the delta of southern Chinas Pearl river have of late been entertained by some noisy sparring
between two majestic tycoons from Hong Kong, just east of the estuary. In one comer is Gordon W u, an
entrepreneur who got rich from mighty infrastructure projects across Asia before the 1997 crash. Mr. Wu
nowadays dreams about building a 19-mile (29km) bridge to connect Hong Kong to Macao and Zhuhai
on the estuarys western side. In the other comer is Li Ka-shing, a legendary investor who runs, among
many other things, most of Hong Kong's container port and the river-barge trade that feeds it, as well as
a younger and faster-growing port in the eastern delta. A road link across the delta would damage these
interests, and Mr. Li would be happiest without it, even though he claims to oppose not the bridge as
such, but only government incentives that favor his rivals. Almost lost in the noise of the debate are two
much lam er points. One is the steady emergence for an industrial region so huge as to transform global
trading patterns and investment flows. Even without counting rich and autonomous Hong Kono. the delta
draws in one-guarter of Chinas foreign direct investment and generates one-third of its exports. It has
become the contemporary eouivalent of 19lh-centurv Manchester - a workshop of the world. From
motherboards to watches or television screens, chances are that most of the gadgets in western homes
were made in the delta bv companies from Taiwan or Hong Kong. The other big point, though, is the
difficulty of knitting together this macro-region to allow it to achieve its full potential. This involves both
physical and bureaucratic challenges. Mr. W u's bridge, for instance, addresses the first of these, but
might easily yet founder on the second. Crossing the waters in question requires approval from the
governments of two 'special administrative regions (SARS), Hong Kong and Macao; from a 'special
economic zone (SEZ), Zhuhai; from Guangdong province; and from the central government in Beijing.
'Its like having five mothers-in-law, sighs Mr. W u. Both the deltas economic dynamism and its
administrative nightmares stem from its convoluted recent history. In 1978, when China began opening
its economy, Hong Kong was a foreign colony and an Asian manufacturing tiger. Guangdong was close
but separate - a poor and backward acreage of farmland, intentionally ignored by Beijings central
planners, who considered it dangerously close in culture and geography to capitalism. Shenzhen was
nothing but a sleepy village of 20,000 fishermen alongside a clean river. Cities such as Dongguan, which
now boasts a population of 1.3m, did not even exist. This changed slowly during the 1980s. Hong Kong
surrendered its factories to cheaper locations in South-East Asia and became an offshore financing
center for the new tigers. In Guandong, the areas next to Hong Kong and Macao became the SEZs of,
respectively, Shenzhen and Zhuhai, with looser regulation and taxation; these attracted investors from
Hong Kong and Taiwan. But the regions dynamism was still centered on South-East Asia, while the delta
remained a limited communist experiment in market reform. In 1992, however, while touring the
southern provinces, Deng Xiaoping, then Chinas paramount leader, gave his blessing to their economic
transformation. Within a few years, says Christine Loh, who runs a Hong Kong think-tank, businessmen
from Taiwan and Hong Kong in effect 'colonized' the delta. Cities such as Dongguan exploded - endless,
depressingly grew sprawls of small factories, massage parlors and karaoke bars, staffed largely by
millions of cheap and illegal migrant workers from Chinas inland provinces. Downtown Shenzhen, now
home to 4m. looks like the citvscapes in Bladerunner. while its western suburbs look like Silicon Valiev.
A network of river ports, container ports, airports and highways has grown at a staggering rate. Much of
the delta today resembles Taiwan a generation ago, savs Arthur Kroeber. a research publication. Its
industrial structure is best understood not as part of Chinas continental economy (still mostly state-
owned and with little economic contact with the outside world), but as a link in the global supply chains of
multinational corporations. It is a tiger, in other words. And an optimistic one at that. Increasingly. Hong
Konas moves and shakers believe they are less tied to Asias broad future than tightly to the deltas.
That, however, requires better integration. It is already happening in some areas. A typical Hong Kong
business now does its marketing, managing and accounting at home, where the lawyers and bankers are
594
clean and good, and its manufacturing upstream on the mainland, where the workers are cheap. At
weekends, golfers take boats up the delta to a dozen new golf courses. Hong Kongs shoppers go to
Shenzhen for fake Gucci bags, while Shenzhens new rich come to Hong Kong for real ones. Elsewhere,
integration is working less well. Almost 100m people a year cross the border between Hong Kong and
Shenzhen, making it the busiest in the world. Most of them are tunneled through a checkpoint at Lo Wu
in a process that is unpleasant at best and dangerous at worst - in August alone, 19 people were injured
in the human stampedes. Trucks carrying containers to and from Hong Kongs port cross the border at
another checkpoint, Lok Ma Chau, and often have to queue for as long as eight hours before getting
customs clearance. Canning Fok, managing director of Li Ka-shings flagship company Hutchison
W ampoa, says such bottlenecks are bigger problems than the travel times of containers by land or water.
So, he implies, why talk about bridges? Many in Hong Kong and Guandong agree and want to make the
deltas borders more porous. But whether the W u or the Li view prevails, and whether or not the bridge is
built, fewer and fewer sympathize with dissenters like Anson Chan, a retired chief of Hong Konas civil
serve, who sees Hono Konas separateness as an advantage, and urges caution in its dismantling."
Also cf. Sony faces a tough test in China push - The company has much to do to compete with rivals on
the mainland by Richard McGregor and Michiyo Nakamoto in Financial Times, p. 20, Tues. Oct. 29,
2002: ...F or Sony, says Mr. Idel, China, Japan, Malaysia, Singapore and South Korea are all to be
treated as a single market, with a synchronized release of products. For china, Sony=y is focused not on
the 1,3bn population but on the 80m or so consumers whom it judges can afford its products. 'W e used
to think of China as a place for [manufacturing] exports, now we have changed, he says. 'If you look at
Shanghai today theres no difference in life-style with people in Tokyo.
210. See their Figure 4. Also, p. 421: Rural-rural inequality. China is a large country with highly
differentiated regional economies. W hereas urban incomes have been very equally distributed (Gini
about 16% in 1980), there have been no effective mechanisms for rural income redistribution. Income
from rural nonagricultural enterprises has become the main factor differentiating rural incomes on a
communal basis. There is no indication that inequality is higher within the most industrially developed
rural areas. The evidence on the evolution of the rural Gini coefficient during the Phase I of reform is
somewhat contradictory, with some studies showing a rise and others a fall. However, the growth of rural
industry in Phase II appears to have increased rural-rural inequality with the richest areas growing faster.
Ibid.
Also cf. The income and living standards of the people have risen sharply" in Lin et al. 1996, pp.172-4.
211. cf. O f rich and poor in The Economist, p. 80, Apr. 28th, 2001: ...Does this worsening of poverty
support Mr. W ad es conjecture about the underlying cause - and so about the perils of globalization? To
answer this, one needs to ask, whether did poverty increase and why? Apparently, it increased especially
in Africa, in rural China and in rural India. It seems odd to regard such regions as victims of globalization.
On the face of it, they are rather the opposite: victims of a lack of globalization. Their geographical and
economic isolation is surely their salient characteristic...Good evidence...suggests that growth reduces
poverty. There is evidence, too, that poor economies can put themselves on a development path that
causes their incomes to converge with incomes in rich countries. The plight of countries, or regions within
countries, that fail to get on that path is indeed a matter of the gravest concern... inequality is a bad thing
in itself, regardless of the extent of poverty. Many people would agree with that though it has some
strange implications. One is that you could regard a country with more equality as a greater success than
another, even if the egalitarian country had not merely lower incomes on average, but also more people
in absolute poverty...
212. Ibid. p. 74: ...It is remarkable how unconcerned the World Bank the IMF and other global
organizations are about these trends. The Banks World Development Report for 2000 even said that
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rising income inequality 'should not be seen as negative if the incomes at the bottom do not fall and the
number of people in poverty falls. Such lack of attention shows that to call these world organizations is
misleading. They may be world bodies in the sense that almost all states are members, but they think in
state-centric rather than global ways. They neglect not only matters of world income distribution, but also
world inflation, world exchange rates, and world interest rates; and in the case of the World Bank, the
global environmental issues of the oceans, the atmosphere, and nuclear waste. It is striking that most of
the organized opposition to more globalization comes from North America, Western Europe and
Oceania. W h y have elites from developing countries for the most part subscribed to the globalization
agenda that western states, businesses, and multilateral organizations have been promoting, if a case
can be made that the gains of free markets for goods and capital tend to be concentrated in the top
levels of the income distributions of their countries? W hy are they doing so little to integrate their
economies into the world economics in a strategic way, not open-endedly? Part of the reason may be
that elites in developing countries, like their counterparts in the rich world, are content to believe either
that world inequality is falling, or that inequality is good because it is the source of incentives. They, like
the multilateral economic organizations (and the reformers of Victorian England), worry about poverty.
But they see no link between widening world income distribution and poverty; and they think that poverty
can be fixed by providing the poor with welfare and opportunities without changing larger structures like
income and asset distributions. Academic analysts have a responsibility to counter the current neglect by
analyzing the relationship between trends in world income distribution and poverty as a way of getting
distribution issues on to the world agenda.
213. Also cf. Changing China - The country has had extraordinary success in raising living standards in rural
areas. But it faces a daunting challenge in eradicating some of the most entrenched poverty by John Thomhil
in Financial Times, p. 14, June 14, 2002: ...by any measure, China still contains a huge number of poor
people. According to the World Bank, 106m people - 11.5% of the rural population - attempt to live on less
than $1 a day. Moreover, it is becoming increasingly difficult to tackle this remaining poverty, Chinas rural poor
invariably live in the most inhospitable parts of the country, include many old and infirm people and often
belong to disadvantaged minority groups. Once-buoyant economic growth rates have also been dropping in
the countryside. In spite of its success, the Communist party leadership acknowledges it must tackle this deep-
rooted poverty if the country is not to be ripped apart by growing inequalities and explosive social tensions.
Already, armies of migrant rural workers - estimated at up to 100m people at certain times of the year - roam
the country threatening instability. A few, small clues about the fate of Chinas poor can perhaps be found in
the north-western province of Ningxia, one of the most desolate regions of the country. Cracked by crevasses,
the monochrome landscape resembles the Grand Canyon - after God has sat on it. Three years of drought
have left the reddish land parched and tree-less. The resultant soil erosion has contributed to Beijings
notorious sandstorms. As one of Chinas poorest provinces, Ningxia has received much assistance from the
central government and outside agencies. The Kuwaiti government has been keen to help the local Muslim Hui
population and provided generous relief. The World Bank, too, has provided $130m in loans since 1985 and
has experimented with a micro-finance program to provide credit to local farmers, a local laboratory for tackling
rural poverty...As China completes its transition from a planned to a market economy, it is now trying to
stimulate parts of the rural economy from the bottom up rather than the top down. 'W e put a lot of emphasis
on helping farmers to live by themselves and - so to speak - make their own blood rather than giving them a
blood transfusion, she says. Jueigen Voegele, a rural sector specialist at the World Bank in Beijing, agrees
that the government and the aid agencies will have continually to improve the mechanisms for targeting
Chinas remaining poor. In the past, the government simply directed its financial resources at the 500 poorest
counties in the country. But many of the remaining poor no longer live in these countries and are scattered
across the country, he says. Poverty alleviation projects will need to be increasingly flexible, focusing more on
improving education, health, transport, the environment and labor mobility. Some remote and infertile parts of
the country are simply no longer capable of supporting large populations, implying massive levels of migration.
For example, Mr. Voegele estimates that Ningxia is capable of supporting only 15 to 20 people per sq km,
compared with the 80 to 120 people per sq km who live there at present. Already, 200 of the 1,300 people who
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normally live in Mr., Mas village have found work elsewhere as truck drivers or factory workers. The bank
estimates that about 50% of Chinas population is dependent on agriculture for a living but that the figure will
drop to 25% within the next 30 years. 'Even if you double incomes in rural areas they will still be poor. And
there will still be a gap between living standards between the country and the towns, says Mr. Voegele. 'Within
a generation, half of Chinas farmers will leave the land. Keeping China's rural population of 900m people - or
about 15% of the world's people - happy surely ranks as one of the most monumental challenges of our times.
Much rides on China being as successful at tackling poverty in the future as it has been in the past."
214. cf. Global inequality - Winners and losers: The global distribution of income is becoming ever
more unequal. That should be a matter of greater concern than it is" by Robert W ade in The Economist,
p. 74, Apr. 28th, 2001: ...The income of urban China grew very fast during 1988-93, which reduced the
gap between Chinas average income and that of the middle-income and rich countries, and so reduced
the world Gini coefficient; but the widening gaps between rural China and urban China and between
urban China and rural India increased world inequality by even more." Also cf. Zhou, Xueguang. 2000a.
215. That is, whereas the gap of per capita income between urban and rural becomes widened in terms
of the currency (yuan), it has not always been the case in terms of the income index. The gap in terms of
income index has even somehow shrunk since 1978, particularly during the late 1980s and the early
1990s, suggesting the magnitude of the non-state sector (mostly dispersed in the rural areas) is related to
the growth of income per capita in rural households in this time period. Thus the growth of the income
index in rural households had been matchable to that in urban households during the same period,
although the gap in terms of income per capita between rural and urban has increased much faster than
that in terms of income index. And since 1995 the gap between urban and rural in terms of per capita
income has even further enlarged, although the rural-urban gap in terms of income index has still
increased only a little.
216. The message sent by Chinas transition is thus clear that with an overall sustainable fast G DP
growth, even led by personal-based income, Chinas wealth distribution became much more unequal
than before and in favor of rich people. The transition provided both the greater opportunity to the rich
and the unequal distribution of wealth among others. Thus it is predictable that China will suffer more
from further splitting into the dystopian extremes between wealth ad poverty in the future. It will be more
likely right after Chinas W T O entry.
217. But another report from China estimates much different official statistics of the late Gini coefficient
with a more pessimist perspective that China could be triggered with a reforming regime crisis by its
increasingly social inequality, cf. To each according to his abilities - Income distribution in China:
Market reforms mean that China is becoming more unequal in The Economist, pp. 39, 44, June 2nd,
2001: Let some people get rich first, was the famous instruction of Deng Xiao-ping, as China struggled
to throw off the shackles of Maoist egalitarianism. Yet the widening gap between rich and poor, and
between urban and rural people is worrying officials, who increasingly fear that it poses a threat to
Chinas social stability. A correspondent for the Communist Party mouthpiece, the People's Daily,
broached the subject at a news conference given by Chinas prime minister, Zhu Rongji, in March. 'The
general public has voiced fairly strong complaints about income distribution, ventured the reporter,
asking what Mr Zhu thought about the issue. In response, Mr Zhu admitted that, according to 1999
figures, China's Gini coefficient (which measures income inequality) was p.39, 'close to the
internationally recognized danger level. This, he said was 'not yet a serious problem. Some Chinese
economists, however believe that the 'danger level has already been passed, and that official statistics
considerably understate the income gap. Their worries are plausible: clad in communist flannel for the
past 50 years. China mav find it harder to tolerate levels of inequality that would cause few problems in a
country like the United States (whose Gini coefficient is about the same as M r Zhus figure) with a long
tradition of social mobility. At any rate, there is no doubt that China is in the grip of widespread
597
discontent. Rising crime and serious, if sporadic, protests are a sign that even though absolute poverty is
declining, at least in the countryside, rising relative poverty is resented. And in the cities, absolute
poverty is increasing as well. The Gini coefficient is a commonly used statistical gauge whereby nought
represents perfect equality and one would mean that a single person received all the income (sometimes
a scale of 1 to 100 is used instead). Chinese officials have tended in the past to accept that a figure over
0.4 should start ringing alarms. Curiously, just a few days before Mr Zhu gave the figure of 0.39, Xinhua,
the official news agency, said the figure stood at 0.458, 'greater than the international warning line. He
Qinglian, an economist who wrote a 1998 bestseller called 'Chinas Pitfall that looks at social disparities,
believes the real figure is 'way beyond the one cited by M r Zhu. Miss He says it could be close to 0.6.
Official figures are unreliable, she says, because they fail to take into account illegal or undeclared
earnings which often amount to a substantial proportion of incomes, particularly among the rich. Even
using M r Zhus figure, Chinas income distribution is slightly more uneven than Indias. If Miss H e s figure
is closer to the market, it is among the worlds most skewed. Most Chinese, however, are less concerned
with international comparisons or the national overview than they are with their own circumstances
relative to their neighbors - in other words, keeping up with the Joneses. Here, even the sharply rising
Gini coefficients provided by the State Statistics Bureau for rural and urban China (0.34 and 0.29
respectively in 1999, compared with 0.21 and 0.16 in 1978 - see chart) do not fully capture the widely
differing pace at which income distribution is changing in different urban areas and in different parts of
the countryside. W hen the economic reform era began in the late 1970s, urban residents enjoyed
guaranteed jobs for life, free housing and health care. Unemployment was virtually non-existent and rural
residents were banned from moving into urban areas. There was no private enterprise. Most peoples
lives were Spartan. But at least most people were not significantly worse off than their neighbors: and in
those circumstances, as Tolstoy remarked, a man can endure almost anything. By the mid-1990s, 9% of
urban residents were living below the official poverty line of 1800 yuan ($217) a year. But in some areas
the proportion was much higher - 30% in Xian, a city of 2.7m people, for example. And in some north
eastern cities that are home to many of the countrys worst-performing state-owned industries, it was
even worse, with 60% of Shuangyashans 1.8 m in poverty. Most of these people were forced into
poverty by factory closures and layoffs. Unemployment benefits, on the rare occasions when they were
provided at all, barely sufficed to satisfy their basic food and clothing needs. At the other end of the
spectrum, Chinese economists reckon the country has about 3m yuan millionaires and over 1,000 yuan
trillionaires. The richest 20% of urban households received 42% of total urban income, whereas the
poorest 20% receive only 6.5% . Such figures are pounced upon bv diehard Maoists who mav have been
marginalized politically in the past two decades, but their arguments - still vigorously expressed in a
clutch of Beijing journals, make increasing sense to the many people in China who are on the losing side
of reform. After China joins the W TO , officials expect inequalities to increase further, as hopelessly
inefficient state-owned enterprises collapse and other companies benefit from improved access to world
markets. Rural incomes will be further depressed by increased agricultural imports. According to official
statistics, the average urban income was 1.7 times its rural counterpart in 1984. By 1999 it was 2.65
times. That gap will continue to widen, driving more country-dwellers into the cities and putting even
greater pressure on the urban unemployed. Small wonder then if Chinese leaders are spooked by
income disparities that are ominously similar to those that fuelled the revolution 50 years ago.
218. cf. China rising as a major player in global economy" by Ted Anthony, a A P business writer, in
Wisconsin State Journal, A9, W ed. Oct. 23, 2002: ...Since last years A PE C meeting, China has joined
the World Trade Organization, considered a pivotal step in its efforts to become a global player. And it
places great importance in casting itself as a leader in regional economic and diplomatic m atters...'It is
the first time in the history of mankind that a country of Chinas size has changed so fundamentally in
such a short period of tim e, Siva Yam , president of the US-China Cam ber of Commerce, said earlier this
year. 'C hina...has become the worlds manufacturing superpower...."
219. cf. Australian groups reap rewards of patience and perseverance - Chinese trade was seen as
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risky; now iron ore exporters are seeing dividends by Virginia Marsh and Richard McGregor in Financial
Times, p. 23, W ed. June 19, 2002 (emphasis mine): ...'C h in a s strong growth means that the typical
industrial inputs are just sucked through. Says Mr. W alsh...advocates of stronger ties with China say the
country offers greater long-term potential for Australia than its north Asian neighbors. They point to
Chinas more open economy, which is far more reliant on foreign involvement than either Japan or South
Korea, which have pursued more self-reliant development models. Mr. Walsh says Australias economic
relationship with China, aided by Australias large and growing Chinese diaspora, is already more diverse
than it is with South Korea or Japan. 'In the past 20 years, Chinas economy, bureaucracy and legal
system have all become much easier to deal with, adds Kevin Hobgood Brown, a partner at Deacons,
the law firm, in Sydney. 'You just do not have that level of systemic change in Japan, or the growth
potential. W hile Australian companies, especially in services, stand to benefit from Chinas accession to
the World Trade Organization, Canberra and Beijing have also in the past weeks begun discussing the
details of a new trade and investment framework. This is aimed at removing specific barriers to bilateral
commercial contacts, including quarantine issues, licensing and harmonization of standards across all
sectors...
220. For example, China had recently allowed Shenzhen to accelerate market access for foreign
investors. China expects this reform step will provide an experiment for its further opening of capital
markets in other cities after joining the W T O . cf. China opens Shenzhen zone early for foreign
investment by James Kynge in Beijing in Financial Times, p. 1, Mon. June 17, 2002: China has allowed
Shenzhen - its most successful special economic zone - to accelerate market access for foreign
investors, an unprecedented step that goes beyond Beijings commitments to the W TO . Permission to
open 20 local service industries is remarkable partly because China spent much of the 15 years it took to
negotiate W T O accession fending off demands for accelerated market access. The W T O agreement,
reached in December, opens most industries according to a staggered five-year program. But
competition among Chinese cities to attract foreign investment had prompted applications for special
treatment, officials and analysts said. Shenzhen is the first to have received Beijings approval but other
special economic zones and cities are likely to press their case. 'Shenzhen has recently been given
approval by the central government to open up 20 key service sectors ahead of the W T O timetable. W e
submitted our proposal [to open up ahead of the timetable] to central government at the end of last year,
said Ye Minhui, director of the Shenzhen Bureau of Foreign Trade and Economic Co-operation. Mr. Ye
said the scheme, if successful, could set an example for the rest of the country. Shanghai had already
applied for similar treatment. Shanghai declined to comment but an official in the northern city of Tianjin
said he thought accelerated market access was a good idea. But other observers warned that allowing
several coastal cities to go faster than the W T O commitment could create loopholes in the agreement's
enforcement, create jealousy among competing regions and widen the wealth gap between developed
coastal regions and the relatively impoverished interior. The areas to be opened early include financial
services, securities, ports, hospitals, procurement centers, tourism and logistics. Details are being
formulated but in several cases, foreign companies would be allowed to assume full or majority
ownership of business operations one or two years earlier than stipulated.
Another example is Chinas recent village elections undertaken in some rural areas, which could be
considered as an experiment for Chinas political reforms on the way, starting from the local levels, cf.
Seeds of change? - Deep in the countryside, China is experimenting with local democracy" in The
Economist, A Survey of China, pp. 7-8, June 15, 2002: ...Already in some places, the introduction of
direct elections for village chief is causing democracy to percolate into party organs too. New methods of
choosing party secretaries are now being tried, with the partys encouragement. 'If there are no
corresponding changes in the method of choosing [the party secretary], and if the level of democracy
and openness is not expanded...[the partys secretarys] prestige and ability to mobilize will be
undermined, said one party journal...
599
Also cf. China suspended its experiments of rural village elections before the C C P s national congress
this fall in World Journal Daily, Chinese language, A2, Fri. July 12, 2002: According to a report in
Washington Post in July 11, Chinese experts in Congress verified that due to the coming changes in
succeeding of Chinese leaders this fall, China temporarily suspended its experiments of village
democratic election. Elisabeth Durham, director of Asian Plan, International Republic Institute, said in a
Session about Chinas village election and Western countries engagements, held by Congressional -
Executive Commission on China, that it is not good time now to China to take aggressive political
reforms... International Republic Institute started its observation on Chinas Grass-Root elections from
1994 and started to study the elections of Townships and Villages in Guangxi Province from May, this
year. Ms. Durham said, 'Because the local leaders had determinations to accomplish fully the principles
of Responsibility, Transparency, and the Rule of Law, those townships and villages in the province took
most advanced and democratic elections in China.
221. cf. Seeds of change? - Deep in the countryside, China is experimenting with local democracy" in
The Economist, A Survey of China, pp. 7-8, June 15, 2002.
222. cf. Beijing backs away from stock sell-off by James Kynge in Beijing and Joe Leahy in Hong Kong
in Financial Times, p. 17, Tues. June 26, 2002: ...Economists have regarded the construction of social
welfare network, led by the creation of a funded pensions system, as perhaps the most crucial of Chinas
reform tasks. Without it, state companies are restrained by fears of social instability from making the
mass redundancies they need...
Also cf. Ferment rises in China as succession date nears" by Karby Leggett and Peter Wonacott in The
Wall Street Journal, A10, W ed. Sept. 4, 2002: ...potential sources of instability...such [as] problems as
unemployment, environmental degradation and the urban-rural wealth g a p ...'if the problems of
corruption, misbehavior by cadres, crime, delayed wages and pensions and the like arent resolved...or a
news blackout is imposed on them, in the end a single nudge will make them explode. Deficit spending.
China is spending heavily to address these challenges, and increases in government expenditures have
outpaced revenue for several years. Despite efforts to improve tax collection, most recently through a
crackdown on rich entrepreneurs, aggressive spending has swelled the national debt to $193bn, or 16.7%
of gross domestic product. W hile that figure itself is not especially worrisome, if the money needed to
fund pension liabilities and to bail out debt-bloated banks were counted, the figure would probably soar
beyond 100% of G D P ...
223. That is, we might ask: does even capitalist market competition take economic efficiency for granted?
Or is the market efficiency generic to these market economies in the sense that they could automatically
guarantee a more efficient way of organizing economy? If so, how should one count those socially costly
Keynesian welfare programs? were the programs dispensable to enhance capital accumulation or
economize on market transaction? Then, how should one explain the states subsidization in the
transitional economies? Since how to count efficiency is Williamson's major concern in his transaction
cost theory, what makes comparison available regarding organizational variations? For instance, Steward
Macaulay (1992) found that in reality there is no "natural'' or "purely" economic model of individualistic
behavior in pursuit of maximization. Granovetter 1992 elaborates the inability of methodological individualism
to understand the assorted institutional phenomena existing in labor markets. Macaulay shows that those in the
business world like to solve their problems privately, through personal contacts with other firms, while
manufacturing industry has rarely used legal sanctions, cf. Granovetter and Swedberg, eds. 1992.
"Introduction," p. 21; Chapter 9 ,1 0 .
Also cf. Williamson, Oliver E. 1983. pp. 101-133 (in J. Ronen ed., Entrepreneurship. Lexington, MA: D.C.
Heath). Williamson contends that efficiency has been main driving force of the economy. Specifically,
economizing on transaction costs is the key concept that has been neglected in prior studies of economic
600
development. Once the transaction is made the basic unit of analysis, and attention is focused on the
economic importance of devising efficient governance structures for mediating transactions, a wide array of
social reforms fall into place within a common economizing framework.
224. That is, to which level are those market failures in market economies attributable to hierarchical
failures and bureaucratic constraints - a concern raised by DiMaggio and Powell in 1983? Because, if
one turns on page one of modem bureaucracy formation, arent those wasteful "soft budgets," inefficient
regulations, ineffective administrations, and hyperactive interventions perceived as syndromes of many
capitalist societies from the beginning? Cui's 1993 article on American Bankruptcy Law asks about these
shortfalls even in Western modem banking systems (also cf. Harrison C. White 1981). In this respect,
New Institutionalism (cf. Powell et al. 1991; Swedberg et al. 1992) has made even more trenchant
critiques of the prevailing "efficiency theorists." For instance, P. David (1994) argues that markets are
essentially invented and arranged by their institutions and yet the arguments is made that markets provide
institutional malleability for reshaping responses to the economic demands, supplies, and profit-seeking
motives of economic players and social actors (cf. P. David 1994: "...such vagueness does mask potential
problems of reconciling the specific mechanisms of incremental institutional adaptation with the other favored
simile that continues to be employed. The latter envisages a 'market' for innovations involving institutional and
organizational arrangements, on which new forms are available to 'demanders' in infinitely elastic supply (with
regard to the variety of functional and distributional attributes) and existing arrangements remain completely
and continuously malleable for reshaping response to the profit-seeking motives of economic agents.").
225. cf. Joseph Stiglitz. 2002. Globalization and Its Discontents. Also cf. A Beautiful mind at the barricades -
Joseph Stiglitz is a hero to the anti-globalization movement; a heretic to the IMF and World Bank" by Julia
Llewellyn Smith, III, in Financial times, Weekend, July 13/July14, 2002. Also cf. Self-satisfied, simplistic,
cogent - Joseph Stiglitzs attack on International Monetary Fund officials for undermining developing countries
is good in parts by Martin Wolf in Financial Times, p. 13, Wed. July 10,2002: ...Mr. Stiglitz contrasts Chinas
wise gradualism with Russia's allegedly speedy reforms. Yet Russia lost a state, an empire, a ruling party, an
economic system and an ideology in a few months. How could a gradual Chinese path have been
followed?...while Mr. Stiglitzs charge against so-called 'shock therapy is exaggerated, that against the tacit
support given by the IMFs and the World Bank for horrifying corrupt and incompetent privatization in Russia
and some other countries in transition is right. The handing over of the natural resources of a vast country to a
few well connected bandits is the greatest scandal in economic policy of the past decade. Equally, Mr. Stiglitz
is right that there has been systematic underestimation of the role of institutions in promoting capital account
liberalization or transition from communism. The tool-box used was too simple."
226. More precisely, in such trade-offs between managerial discretion and group efficiency, or between
flexibility and control, or between consent and coercion, the trust and network relationships, which are as
a third party beyond the certain purviews of hierarchy and/or market and within them, could play an
important role to diffuse risks and reduce transaction costs (Lindberg, Campbell, and Hollingsworth 1991,
p. 21; O. Williamson 1994).
227. cf. David D. Buck in Milwaukee Journal Sentinel, Section J, Sunday, September 26, 1999: "Mao
thought that power could be unleashed by centralized socialist planning. Deng instead favored individual
initiative. He advocated household farming, free markets, production of goods according to market forces and
a renewed policy of state investment in science and technology. The results have been spectacular.
Communes disappeared, markets appeared in cities and rural areas, and factories large and small started
producing what would sell rather than what was in the state plan. Meanwhile, the government backed new
highways and airports and financed an enormous construction boom. This tremendous wave of economic
growth, averaging 10% or more annually for most of the past 16 years, has touched everyone in China. Some
are still very poor, but the vast majority of Chinese have benefited tremendously from the great development
fostered by the policies of Deng and his successor Jiang. That is what is really being celebrated on this 50th
601
anniversary."
228. Distinctions between market and hierarchy, as Lindberg, Campbell, and Hollingsworth notice (1991,
13), include a common theme on the conventions of political economy (Lindblom 1977: on exchange and
authority systems), transaction cost economics (Williamson 1975), and on organization theories (Max
W eber 1978 on social choice and bureaucratic control systems).
229. This implies that social networks function in those intermediate areas between market and
hierarchy. But DiMaggio and Powell 1991 criticize this view that perceives networks as somewhat
midpoint in a continuum between market and hierarchy. Rather, they treat networks as relational but not
as an entity. In other words, the entities remain markets and hierarchies since they are tangible, unlike
networks that are intangible.
230. Our summarized points are drawn from Williamson 1975, 1985, and Miller 1992 and their arguments
about markets and hierarchies, and from others about network analysis, like Powell 1991.
231. Transaction costs refer to the obstacle in negotiated solution to social dilemmas in market
competition. The costs are those of measuring and enforcing agreements to protect from market failures,
cf. Miller 1992, p. 39: "What kinds of obstacles are there to a negotiated solution to social dilemmas?
Coase is most famous for elaborating one obstacle, which he termed 'transaction costs -- defined by
North 1990 as 'the cost of measuring and enforcing agreements' (14)".
Here we want to reiterate the notes in Chapter 2 of this study. As G. Miller (1992) argues neither markets nor
hierarchies become clearer targets in the analysis of efficient failures in hierarchies or in markets than do the
underlying institutional specificities of contracting and negotiating, such as information asymmetry,
externalities, property rights, monitoring and enforcing contracts, and market power, etc. The functions of
markets and hierarchies and their relations can be illuminated by these institutional conditions and specificities
(p. 18: "Whenever any of these factors is present, a competitive market will yield an inefficient allocation of
resources. As Coase (1960) demonstrated in his famous theorem, these allocative inefficiencies could be
corrected by contracting, assuming clear specification of property rights and costless negotiation and
enforcement of contracts. However, these transaction costs may be large, and larger under some institutions
than others...information asymmetry, externalities, and market power can limit the efficiency of negotiated
solutions to competitive market failure. The same analysis points out that hierarchical authority can be an
efficiency-enhancing institutional feature [Farrell 1987b: 120]". Ibid, p. 17: "In the presence of an information
asymmetry, the consumer and producer of labor may fail to achieve what would otherwise be a mutually
advantageous market exchange; hierarchy may be the best way to realize the potential benefits of these
transactions.").
232. In this regard, Scott notes (1995, p. 40): In short, we define bureaucracy as the existence of a
specialized administrative staff. Like formalization and goal specificity, bureaucracy should be viewed as
variable; organizations vary in terms of how much of their personnel resources are devoted to
administrative as compared to production activities.
233. From an angle - the nature of their social and cultural constructions, as Powell 1990 particularly
pinpoints, the boundaries among market, hierarchy, and network per se are rather blurred in light of these
institutional arrangements and environments as assorted intermediaries between and within (p. 299; brackets
mine): "market is more like a cultural and social entity, and firm's employment is typically less hierarchical and
introducing market compensation for the performance of employment...market is not an amoral self-subsistent
institutions, but a cultural and social construction...market cannot be insulated from social structure because
differential social access results in information asymmetries, as well as bottlenecks, thus providing some
parties with considerable benefits and leaving others disadvantaged...On the one hand, many market
exchanges have been replaced by interorganizational collaborations...[Such as, to choose an industrial location
602
is] not because of the presence of an untapped market, but because of the existence of a dense, overlapping
cluster of firms, skilled laborers, and an institutional infrastructure... All of these arrangements serve to
strengthen the social structure in which textile firms are embedded and to encourage cooperative relations that
attenuate the destructive aspects of competition...On the other...a firm's relationships with its law, consulting,
accounting, and banking firms may be much more enduring and personal than its employment relationship
with even its most senior employees...[In addition,] firms commonly rely in market-like methods as transfer
pricing and performance-based compensation schemes." Pp. 309-310: 'The success of these [film] small
enterprises rests on a different logic of production than found in a typical vertically-integrated firm...Production
is conducted through extensive, collaborative subcontracting agreements."
234. That is, these relationships between market, hierarchy, and production are put into his general
equation of arguments on market transactions and information processing. But in R. Scotts 1994
classification of institutional variants, Stinchcombe's version belongs to that of old institutionalism that
accentuates the roles of social function and norms in market transactions and information processing, cf.
Stinchcombe 1990, 148-9: "The core variable to be explained in this chapter is the degree to which the
information-processing and decision-making systems in manufacturing, marketing and engineering have
to be authoritatively coordinated by creating product-line divisions. The basic explanation has been that
when distinct market uncertainties ramify the manufacturing and engineering of distinct products, then
divisionalization and decentralization are necessary...Chandler's implicit definition of a firm as 'in several
distinct markets' was of distinct social structures bringing in information about market risks that affect
manufacturing and engineering. Chandler's real independent variable might be conceived to be (1) the
total uncertainty in a given market, including certain types of uncertainty of the environment of
production and of technical change; modified by (2) a factor that describes how tied manufacturing
uncertainties are to uncertainties in the market; modified by (3) the extent to which the information for
adapting to the uncertainties is located in several different social organizations in the market-place itself;
modified by (4) the extent to which these different social structures actually carry different information,
i.e., are not mere administrative conveniences such as regional arms responding to geographical
distance; modified by (5) a factor that measures whether or not the projection of demand and the
inventory risk are taken by the sellers rather than the buyers in that market.
More formally,
M D = f [(total uncertainty)*(dedicated mfg.operations)*

(social segregation of markets)*(different information in markets)*
(sellers' demand projection an inventory risk)
where MD stands for the degree o f . multidivisional organization, then each variable in
parentheses describes a flow of commodities and is a matter of degree, varying between 0 and 1 for
convenience.
This description gives concreteness to the explanatory side of the general argument. The argument now
says that whenever all five of these conditions obtain to a high degree, then the information-processing
tasks of an organization breaks into separable divisional parts. Consequently, these five conditions
predict divisions with distinct authority and that such divisions will be units in the profit, investment, and
performance measurement systems of the general office, in the case of multidivisional organizations, or
of the stock market, in the case of divisions becoming separate firms. Only if divisions do not become
separate firms will we need to explain the existence of a general office and of decentralization' to
operating divisions."
235. cf. G. Miller 1992, p. 187: "...reciprocity will be a strong norm in successful small work groups.
603
236. See conception of anonymity and appraisal of its functional implications in Financial Times, p. 15, in
Mastering strategy, Mon. Oct. 11,1 99 9 by Colin M ayer "Anonymity is the advantage as well as the deficiency
of control by markets. The fact that one cannot have relations with the anonymous means that markets are not
prone to the special interests and pleading of insider systems. Policy formulation and implementation is simply
determined by share-holder value. It avoids all other considerations that may sway large shareholders, namely
their private interests...Different systems have different merits and deficiencies. Insider systems have
advantages where sustaining relations with other parties through commitment and trust is important. Outsiders
systems dominate where flexibility to be able to implement the best strategy at any point in time is more
significant." By the deficiencies of anonymity, Miller refers to its vulnerability that fails to protect the minority in
market competition. But this also accentuates the problems with majority rule or disadvantages of democracy
in these industrial societies and the problems with the Borda count (1992, pp. 59,62-3).
237. Miller assumes that there is a universal domain for hierarchy - the condition of which is the Sen
Paradox of reconciling transitivity, efficiency, and delegation; and that the violation of the condition of
universal domain is an incentive system (p. 101: "In terms of the Sen paradox, an incentive system may
be thought of as a violation of the condition of universal domain for the purpose of reconciling transitivity,
efficiency, and delegation").
238. As G. Miller 1992 pinpoints (76), "... market failure was explained in terms of information
asymmetry, which provided a prima facie case for hierarchy. However, information asymmetries do not
disappear just because a hierarchical organization is created. The dilemma for those at the top of
hierarchies is to use the expertise of multiple subordinates without allowing the organization to fall into
disarray...Even in the context of hierarchy the pulling and tugging of individuals with informational
advantages relative to other actors can result in Pareto inefficiencies. This notion is concisely captured in
social choice theory by the 'Sen Paradox (Sen 1970, 1976). Economists would naturally look to the
creation of an appropriate incentive system to resolve the problem facing Henry Ford II [i.e., asymmetric
information leading to hierarchy failures],..Of course, incentives are used in every organization and often
with great effectiveness. However, there are a number of disturbing results in the literature on incentive
design that portray the limits of pursuing efficiency through hierarchical incentives. Briefly, information
asymmetries and team production externalities reproduce the same kind...of inefficiency in hierarchies
that they produce in markets..."
239. That is, each player plays the best response to the other player's strategy. No play can be better off
by unilaterally shifting strategies. W e here actually think of applying the rules of Nash Equilibrium game
theory to examine our thesis.
240. cf. G. Miller 1992, p. 20: "Why not simply allow individuals to pursue their own interest in competitive
markets? From an ethical standpoint, markets have the advantage of granting individuals autonomy. Each
person in a free and open market can buy or sell as it suits his or her own tastes, unconstrained by the authority
of king or bureaucrat...in the market place the advantages of individual freedom can frequently be obtained at
no efficiency cost...Central to this efficiency result is the assumption that all individuals act for themselves, in
pursuit of individual self-interest."
241. cf. G. Millers 1992 example of decision making of the "Sen Paradox" by Apex, Inc., p. 88: "From a
social choice perspective, the problem with delegated hierarchies is that, because they are not complete
dictatorships, they logically violate some other desirable characteristic of social choice..." Ibid. T h e Sen
paradox states that these four minimally desirable characteristics in a hierarchy are mutually
inconsistent. That is, in any organization with minimal delegation, there will be some combinations of
individual preferences that lead to either inefficiency or intransitivity in group choice. p. 89: "For any
possible organizational delegation of decision-making power, this problem will necessarily arise for some
possible set of individual preferences. But the universal domain condition requires us to ask what would
604
happen under every possible set of individual preferences. And the overwhelming fact of the Sen
paradox is that, as long as there are two subgroups in the organization that specialize in separate
aspects of the organization's decision problem, there must always be come sets of individual preferences
that require a choice between Pareto optimality and transitivity." Miller explains (89) that "Every
delegated hierarchy must violate Pareto optimality, transitivity, or universal domain. Each possibility
carries with it a set of unpleasant organizational problems. Organizational design in delegated
hierarchies necessarily involves trade-offs between various kinds of unpleasantness (Hammond and
Miller 1985).
242. Note: the phrase I borrowed from Axelrod 1983 but it is used differently here.
243. See an article introducing the ideas of guanxi. cf. Culture is of the essence in Asia - Even global
companies can make major mistakes when dealing with Asian cultures by Leo Dana in Financial Times,
p. 13, Mastering Management, Mon. Nov. 27, 2000: ...G uanxi is of prime importance in Chinese
business circles. The west has known contract law since the 1700s; the purpose of such legislation is to
give business an assurance that deals will be honoured. In the absence of an elaborate contact law, the
Chinese have relied on guanxi for the same assurance. When a relationship is more valuable than a
transaction, then it is likely that the transaction will be smooth. W ho would tamish a relationship for a
single transaction? No contract is necessary. The sense of obligation would come from the relationship,
rather than a piece of paper...In Chinese circles, it is therefore more crucial to monitor a relationship
than a transaction...The long term benefit of guanxi becomes obvious. During the process of cultivating
guanxi within business relationships, customer loyalty evolves naturally, while bonds are created with
suppliers and with creditors. Gunaxi rests on the moral premise of renqing, as a justification for social
exchange. In a Chinese cultural setting, guanxi is the norm for carrying on business.One might argue that
western companies also value relationships and that these hold mutual obligations. There is, however,
an important difference between the Chinese and western views of relationships. In the west, successful
transactions lead to good relationships. In Chinese circles, one builds relationships to initiate
transactions; the common belief is that if a relationship is well built, then transactions will follow. A guanxi
network - referred to as guanxi wang -- provides credit as well as opportunities for business. In
Singapore, for instance, Chinese clan associations traditionally provided opportunities to learn about
trends in product development, as well as price fluctuations. The associations provided social contacts,
training, business ideas, information, concepts, start-up capital and technical assistance. New knowledge
was built on existing knowledge, consistent with the belief that ideas do not belong to anyone but are to
be shared. More recently, this belief - that ideas can and should be shared - has led to a Western
concern with the violation of intellectual property rights. Copyright treats intellectual property as the result
of an individuals effort, and it is socially acceptable that huge profits can be made from patents,
trademarks and trade secrets. Westerners are worried when they see their technology being taken
without payment. In contrast, Chinese culture sees intellectual property as the result of the collective
achievements of generations throughout history."
244. cf. Managers face up to the new era - The lean approach has removed status, power and upward
mobility from the managerial role, in Financial Times, General management, Mastering management
2, Part Fifteen, p. 4, Mon. Jan. 22, 2001: ...Economic theorists assume relationships are adversarial as
people compete and pursue their own interests. Organization theorists have looked primarily at structural
and exchange relationships, deriving a rather sterile, and often divisive view. But the elegance of
economic and sociological models comes at the expense of managerial effectiveness and competitive
advantage....Naturally-occurring communities, rather than hierarchies, have the greatest potential to be
high-performing organizations. When organizations are communal, managers have different roles. Their
main objective is to preserve cohesion and stability. They need to make people feel included and to
prevent coalitions within the group (In-groups) from destructively excluding non-members ( out-groups).
More specifically, managers should foster, coach, protect and support, rather than plan, organize, direct
605
and control...
245. One could illuminate those rationales behind those individual choices and group/collective choices
or social choices, which are "concisely captured" by him, as G. Miller pointed out (1992).
246. The Sen paradox reveals trade-offs in a delegated hierarchy in efficiency, transitivity, coherence, and
delegation, cf. G. Miller 1992 (p. 88: 'The Sen paradox reveals that hierarchical delegation requires trade-offs
between the following characteristics: Universal domain... Pareto optimality...Transitivity ...Minimal delegation."
So-called "Universal domain" is about authority by organization based on combination of all individual
preferences; "Pareto optimality": about consensus based on unanimous agreement; Transitivity": about
consistency of group choice or acyclicity; and "Minimal delegation": about "at least two individuals or discrete
subgroups in the organization, each of whom has the authority to rank-onder at least one pair of outcomes"
ibid).
247. Ibid, p. 86 (brackets mine): "...The decisions of the subordinates with delegated authority contribute to the
final organizational decision." Also, ibid, "It says that 'any organization that delegates decision-making authority
to more than one [group of] individuals must suffer from either incoherent behavior or inefficiency for some
combinations of individual preferences."
248. Ibid, p. 96: "...To the extent that firms can identify the 'hidden' types - hard workers and loyal employees -
- they can more confidently delegate authority to subordinates without triggering the Sen paradox results of
inefficiency and/or intransitivity."
249. cf. G. Miller 1992, p. 76: "Putting these four outcomes together, we have a set of circular (intransitive)
preferences for the hierarchy: Apex believes x is better than w, which is better than y, which is better than z,
which is better than x. Because the hierarchy has intransitive preferences, there is no single choice the
organization can make that is consistent with its 'constitution' or rules of procedure. If it chooses outcome z or
w, then it is choosing an outcome that both members of the organization can agree is inferior. If it chooses
outcome y or x, then it is violating the organization's allocation of decision-making responsibilities -such a
choice would be 'illegal' given the organization's structure."
250. Ibid, p. 88: 'The Sen paradox states that these four minimally desirable characteristics in a hierarchy are
mutually inconsistent. That is, in any organization with minimal delegation, there will be some combinations of
individual preferences that lead to either inefficiency or intransitivity in group choice."
251. Namely, to appropriately "realign individual self-interest with group efficiency" (cf. G. Miller 1992, p. 34).
252. The figure and the points herein are adapted from Marc J Knez: 'Trade offs in organizational
design" and Figure 1: The flexibility-Reliability Tradeoff. For the details, cf. Financial Times, p. 7,
Mastering Strategies," Mon. Nov. 1 5 ,1 9 9 9
253. This is consistent with Millers arguments about political leadership in his 1992 volume about
organizational management cf. G. Miller 1992, p. 12: "...Firms with apparently identical formal contracts,
organizational structures, and incentive schemes may perform quite differently, depending on the nature
of individual expectations and beliefs, social norms, and leadership...Any formal incentive system leaves
room for self-interested behavior leading to persistent efficiency losses. Consequently, a hierarchy that
can induce the right kind of cooperation - defined as voluntary deviations from self-interested behavior -
- will have an important competitive edge over other firms. Ibid. p. 13: "...The firms must be regarded as
an arena for political leadership, ideology, and goal setting rather than simply for managerial
manipulation of economic incentives and formal structure." Also, p. 11: "For all of these reasons, there is
no simple way of extrapolating from the behavior of rational individuals in voluntaristic markets to the
606
behavior of rational individuals in authoritative hierarchies...With the creation of political authority at Ford
Motor Company came a series of other, essentially political problems: the aggregation of disparate
preferences into authoritative social choices, the centralized design of incentives, the inevitability of
group conflict, the creation of social norms, the potentials for political leadership, the necessity of
resolving constitutional issues o f power, and the credible commitment of power."
254. But in Miller, multidivisional firms create bureaucratic inefficiencies (cf. 1992, p. 90: "A classic example of
self-interested subunit behavior aggregating to inefficient bureaucratic behavior, as predicted by the Sen
paradox, can be found in the multidivision firms created in the mid-twentieth century"). Here, in my view, Miller
does not realize that bureaucratic inefficiencies are a possible problem for decision making in the center but
not for decision making in the locals. As some case studies (i.e., Qian and Xu in 1993) suggest, relative to the
centralized forms of hierarchy (i.e., U-form hierarchy), an M-form hierarchy would reduce much more
transaction costs than the U-form hierarchy.
255. cf. M iller 1992, p. 12: "Cooperation and leadership: the deployment of political authority...the
pressures of the marketplace reward those hierarchies than can...achieve the efficiency gains that self-
interested behavior under any incentive system leaves unrealized. If narrow self-interested behavior
under any incentive system cannot realize all potential efficiency gains, there must be a competitive
advantage for hierarchies that can induce non-self-interested intra-firm cooperation."
256. Am ericas Hewlett-Packard Co. could be considered to be such an example, cf. AP. by business
writer Brian Bergstein in Wisconsin State Journal, D11, Jan. 13, 2001: Hewlett and Packard shared
basic beliefs about managing a company: disdain of strict hierarchy and formality, admiration for
individual creativity and initiative, and trust in employees.
Also cf. Hewletts rich legacy - the late founder of H P set the standard for managerial excellence in
Silicon Valley by Louise Kehoe in San Francisco Eagle Eye, cit. Financial Times, p. 10, W ed. Jan. 17,
2001.
257. For instance, it is said that under the former planning economy in Hungary, its structure of business
hierarchy had consisted of 12 managerial layers, cf. Bob Pricers presentation about Doing Business in
Russia, in Business School, UW-Madison, April 26, 2000, sponsored by International Business Student
Association, Business School, UW-Madison.
One o f the major reasons for so many hierarchical layers is the concentration of employment by
the same industries across these different national economies as shown in the following appendix table
about such size differentials:
Appendix Table 5.31: Comparison of Size O f Enterprises

in China, Eastern Europe, FSU and the W est (Employment/Enterprise)
Manufacturing Food Products Clothing
1988:
Czechoslovakia 2930 1609 6600
The Soviet Union 806 290 402
Hungary 460 925 307
607
Yugoslavia 311 243 402
Italy 96 71 71
United Kingdom 35 67 25
China:
1988 145 75 80
Unit: 1000 employees/unit of enterprise
1991-95 54390/461054 4430/18745 1750/;

=118 =234 =87
cf. "Industrial Statistics Yearbook Volume 1," United Nations, Geneva; cit. Qian and Xu 1993: 170; for
the source o f China 1991-95, see China Statistical Yearbook, 1996: pp. 402, 414.
Hence in industrial scale, China's industrialization and economy have mainly concentrated on the
medium and small enterprises, compared to EE and FSU . Thus local flexibility and incentive are more
crucial to the overall industrial growth.
258. For instance, mergers and bankruptcy are forms of coordination in market economies that operate
at top levels of hierarchy for structural reconstruction or regrouping of entire corporations through vertical
or horizontal integration, whereas networks are a bottom level approach to economic coordination for
access to resources and information.
259. Such a choice is made in Americas unique institution environment, which in turn bestows much
greater freedom to individual households than any other country in the world. The following table is an
associated comparison of mechanisms of governance and coordination among China, US, and Russia as
derived from their respective chosen institutions. The comparison is made at various levels of
administration - national, regional, local, and work place.
Mechanisms of Governance and Coordination

in Comparison: China, USA, Russia
China USA
National: Constrained; Neo-Liberalist Regime: Laissez-Faire;
Regional: Relaxed; Horizontal Relaxed and Autonomous: Horizontal

Bargaining; Bargaining;
Local: Semi-Autonomous; Fragmented: Dominant by Secondary

Vertical Bargaining Association; Vertical Bargaining
between Regional & Local; among National, Regional, and
from Bottom; Local;
Work Place: Semi-Autonomous, Relaxed; Autonomous, Tight Up within;

Full of Bargaining; Conservative, Business-like;
Little Bargaining;
608
Russia
National: Neo-Liberalist Regime laissez-faire]
Regional: Most Relaxed and Autonomous but De-institutionalization;
Local: Fragmented: Mafia Rampant;
W ork Place: Autonomous, Tightened inside control; Bargaining through Network; Bargains
and Contracts
are not Formally Guaranteed or warranted.
The overall configuration of these structural differences between China and the US at the
societal level look like this:
China USA
(Bureaucratic Chains) (Commercial Chains)
Central Central
Nationwide Regional Regional Corporations Corporations Corporations
(Rational) (Regional Pluralism) (Industrial Pluralism)
Individual Individual individual

Local Local Local Local Local Firm or Firm or Firm or
(Natural) Subsidiaries Subsidiaries
Subsidiaries
Hence China's coordination and governance basically follow geo-regionally-based bureaucratic

chains, whereas the US coordination and governance follow commercial chains in its corporate culture
and social structure. China has tighter control at the central level than at the local level, whereas the US
has tighter controls over its individual firms than over its corporate structure as a whole.
Control Level in Comparison between China and US
China US
High Central Individual Firm

Control
Level
Low Local Flexibility Corporate Structure (Fragmented)
As a result of their respective economic organizations, China, the US, and Russia have following
structural advantages and disadvantages:
609
China USA Russia
Advantages in Network Functions, Free Choice at C e n tra l, Unknown;

Organizing Nationwide & while Dynamic and
Economies Localized; Entrepreneurship in Local;
Vertical and Horizontal
Coordination;
Disadvantages Little Choice for Greater Fears from Overall De-Institutionalization;

in Organizing Central Policies; Local and Work Hidden U-Form Hierarchy;
Economies Limitations to Place; Market Failure No Regulation and Market
Institutional Problems; Coordination Institution; Network as
Infrastructure; between National & Intergenerational;
Prone to Central Secondary Associations; Informal Sector Dominant.
Inertia; Upgrading
Problems to
Transition: Reforms
of Political Institutions
on the way as
Solution?
Limited to its scope, this study will not plan to offer more detailed elaborations than the above listed
structural differences.
Also cf. Komai 1992, p. 399, Table 17.1: Number of top economic authorities in the Soviet Union.
Number of Number of state Total number of top

Year economic ministries committees and bureaus economic
1939 21 21
1947 33 33
1958 13 11 24
1863 6 45 51
1966 41 12 53
1975 52 14 66
1979 55 20 75
1984 56 22 78
1986 51 27 78
1987 52 28 80
1989 48 30 78
260. cf. Miller 1992, p. 11: "...I agree with organizational economists who state that the reason for the
creation of a hierarchical firm is the failure of market efficiency. Reasons for market failure involve the
different transaction of negotiating and enforcing contracts (Coase 1937). They include team production
externalities (Alchian and Emsets 1972), market power (Kliein, Crawford, and Aichian 1978), and
information asymmetry (Williamson 1975). However, the efficient organizational form in the presence of
these problem is not simply a nexus of ordinary market contracts... the same factors that cause markets
to fail can limit the process of bargaining to an efficient contract. The new literature on mechanism
design points to the desirability of a coercive authority if two mutually dependent sides bargain in the
context of information asymmetries...the literature on social choice theory argues for a rather extreme
centralization of this coercive authority if the firm is to meet certain minimal conditions of rational group
decision making. But how is such an authority to be established...a firm can use long-term contracts to
610
provide a barrier against the voluntarism of competitive markets." Miller here explains that the essence
of hierarchy is the creation of political authority to tackle the social dilemmas in market transactions. He
suggests that without the functions of hierarchy, market transactions would lose their minimal conditions.
An extreme example in this regard is the current Russian transition in the absence of any institutional
protection and hierarchical control. But immediately, Miller adds that such a protection and control would
cost market efficiency. Ibid. p. 12: "...Clearly, hierarchy can at times improve on market inefficiency or
the failure of voluntary cooperative action. But...the same factors that promote inefficiency in the
absence of hierarchy confound the managers of hierarchical organizations. A close analysis of hierarchy,
using impossibility results well known in social choice theory and mechanism design, suggests that the
natural outcome of self-interested behavior in a hierarchy should be persistent inefficiency. Hierarchy
does not permit a perfect realignment of individual with group interests. The theme of persistent
inefficiencies is a traditional one in organizational behavior, but not in organizational economics...Part III
explores the logical limitations on the ability of hierarchies to realize those efficiency gains through
manipulations of formal contractual and incentive systems."
261. As for Chinas decentralization, see Boisot and Childs 1996 elaboration (605-6): According to the
Chinese, the shift away from bureaucracy has taken two forms. The first form is a delegation of
administrative power within the state bureaucracy from the central government to provincial and city
governments. For example, responsibility for large-state-owned enterprises was transferred from central
to provincial governments, while for medium-sized state-owned enterprises it was transferred from
provincial to city or country governments. Powers to enter into foreign trade relations and to approve the
establishment of smaller joint ventures have also been delegated. The second form is a decentralization
of economic power from the state bureaucracy to firms; state-owned enterprises, collective enterprises,
and private businesses. State-owned firms have been given a measure of managerial discretion over
what they produce, over securing inputs, over marketing outputs, and over organizational and personnel
policies (Child 1994). Moreover, there has been a considerable expansion in the share of industrial
output accounted for by non-state firms, which are not formally so dependent on higher governmental
authorities (Qian and Xu 1993).
Also cf. The Economist, p. 4, China Survey, April 8th, 2000: ...Until now, the c e n te r-th a t is, perhaps
no more than 2 00 unelected, often elderly, men - have by and large kept control of the reform process
and of the country as a whole. In simple terms, they have done so by devolving responsibility for
economic growth to the local level, whilst enforcing party discipline by keeping control of the hiring and
firing of local and provincial officials. Crucially, they have attempted to re-centralize the collection of tax
revenues and, more successfully, the rationing of credit to the state sector. W ith implications that have
gone largely uncommented on in the W est, a de-facto federal system may evolve in China that could
possibly form the template for future political and institutional change. It could even help solve what is
currently the biggest threat to regions security: the question of Taiwan. Predicting that political change
will come is the easy bit; predicting how it will come about is harder. And the outcome will not necessarily
be happy. Integration with the world economic order will also mean more opportunities for friction,
aggravating the sores of Chinas formerly centralized economy.
262. See Boisot and Childs 1988 classification of China's choices on economic governance in transition.
Also ibid. p. 524: Berger (1987) distinguished between governance choices that favor markets of
hierarchies and those that simply favor modernization...Seen in this light system reform in the Soviet Union
genuinely boils down to a choice of first type and the challenge it faces is to reposition some transactions along
Williamsons continuum toward market forms of governance. Even so, the move up the culture space toward
greater codification that accompanies modernization may only be a partial one, as the continued presence of
bureaucratic fiefdoms in the Soviet Union and the quasi-feudal nature of much Japanese managerial practice
(Boisot 1983) serve to remind us. The implication we can tease out of Bergers distinction is that China
does not yet face a genuine choice of the first type because it has not yet modernized sufficiently. Our
611
own analysis of governance issues at the enterprise level broadly supports this conclusion...Chinese
bureaucracy, faithful to its traditions, remains patrimonial. It lacks both the codification skills to handle
the transactional volumes entailed by bureaucratic and market governance and the legal and information
infrastructure that might take it beyond particularistic bargaining. The bounded rationality and information
impactedness that result conspire to keep transactional numbers small and relationships personalized
and opens the door to opportunism and 'control loss (Williamson 1970). China remains a land of fiefs,
albeit industrial ones.
263. cf. Venture catalyst searches for synergy - The head of the internet portfolio group tells how he
manages a network of 60 companies by Victoria Griffith and Andrew Hill in Financial Times, p. 11,
Tues. April 18, 2000: The Internet...means companies can no longer afford to operate with an old-style
centralized structure, because the most talented workers want to be with start-ups. 'The one company,
one equity model doesnt scale, or what you get is a brain drain....'H o w many more times will Microsoft
or GE double? A lot of people are leaving these organizations and they have no way of retaining or
incentivising them. Thats whats so magnificent about what w eve done.,..
264. In an official parlance, therefore, China's marketization in pursuit of group rationality can be dubbed
a "socialist market economy."
265. To obtain these conditions and mechanisms, those Balkans since July 1999 have launched pivotal
initiatives to build their prosperity and export credits. They include: an investment charter, to result in
commitments to improve the region's investment environment; an anti-corruption drive; the creation of a
business advisory council (BAC) of CEOs from the region and other member countries to help private
sector development; the identification of infrastructure projects for European Investment Bank support;
task forces to boost good governance, education, freedom of the media, rights of women, rights of ethnic
minorities and return refugees; an initiative to seize and destroy illegal small arms, etc. cf. Financial
Times, p. 2, Thurs. Nov. 18, 1999.
266. See Pyes 1985 description of the contexts of this process of hierarchical devolution in China, cf.
Pye 1985, p. 190 (emphasis mine): The culmination of the Chinese distrust of pluralistic decentralization
is the fear that, either inside or outside the Chinese bureaucratic structure of centralized power,
'independent kingdoms will be formed...Moreover, this fear has been heightened precisely because
such kingdoms do inevitably take shape. In part this is because the country is so vast and the population
so large that no single authority can penetrate all dimensions of the polity. The formation of such
kingdoms is also a response to the Chinese need for greater security than can be provided by the
impersonal system of rule; people need to establish more particularistic ties, based on bonds of mutual
trust or guanxi, which are better able to offer security. There is thus in the Chinese political system a
profound contradiction between the doctrine of legitimacy, which requires consensus and no special
relationships and the informal patterns of behavior, in which people do seek out factional ties. The need
for such ties becomes greater as the higher officials advance, for as they approach the heights of power
they are likely to feel increasingly vulnerable and to need the protection of patrons." Ibid. p. 191: By the
mid 1980s there were signs that the policy initiatives of the regime in the area of political economy were
forcing what had been largely informal, guanxi-based factions to begin very gradually to articulate local
economic interests...Under the Deng administration...there was a shift away from essentially normative
policies, which would all be for universal conformity, to policies related to efficiency and utility...cadres
found it increasingly necessary to take into account the marginal advantages of their local resources. As
a result different localities have begun to favor different policy mixes. If this trend ftoward devolution!
were to continue, and if the Chinese leaders were to acknowledge openly the possibility of different
localities having different interests, it would be true revolution in Chinese political culture, probably more
profound than M aos ideological revolution, which continued to hold in place the Chinese tradition of
honoring consensus and conformity...This is. however, a first step toward a more pluralistic and
612
competitive situation. And I would like to add that Pyes pluralistic and competitive situation actually
refers to that of the de facto federal system.
267. cf. Miller 1992, p. 12.
268. cf. G. Miller 1992, p. 100: "Each of the traditional Weberian elements of bureaucracy - hierarchy,
specialization, and expertise - presents a new manifestation of the Sen paradox...As the structure of the Sen
paradox reveals, the only way around this problem is to violate the condition of universal domain.
Substantively, this means that, in order to have stable, efficient, delegated decision making, organizations
must guarantee that individuals do not present problematic combinations of individual preference to the
organization. In other words, individuals must present 'coherent' preferences. Individuals with preferences that
will create problematic preference profiles must be eliminated from the organization or convinced to change
their preferences. As a result, organizations use selection and socialization to screen out individuals with
problematic preferences. There is no doubt that these techniques allow for a greater degree of coherence and
efficiency in organizational decision making than would otherwise be the case. But these techniques are
insufficient by themselves to eliminate the problematic preference profiles. ...'adverse selection problems
make it difficult to measure the most importance characteristics of potential recruits."
269. This table adopts some of Millers ideas, cf. Miller 1992, p. 44, Table 2.2.
270. W e might refer both cases to the Table 4.1 of Decentralized Choice and Table 2.2 of Sexes Battle
G am e in Millers 1992 work.
271. Ibid. 515: ...There is, in any case, a problem in China of defining the boundary between enterprise
and macro- or system-level transactions. Chinese enterprises in the state-owned sector were centrally
planned and controlled. The reform is attempting to differentiate the two levels more sharply and,
through the creation of supporting institutions such as investment banks, to offer enterprises the
opportunity to initiate their own external transactions...
272. Ibid. 517: Most of the enterprises surveyed, both in Beijing and in the provinces, were
experimenting with one or more of these responsibility systems. In a number of cases the profit target set
by the supervising authority for the firm was further broken down and allocated to individual workshops
the reason given fordoing this was to create employee involvement. Ibid. 518: 'Guidance planning, for
example, was designed to inject some much-needed flexibility into enterprise operations and to reduce
the hierarchical weight of the supervising bureau...[Yet] It is not easy for the central government to
loosen the grip that bureaus have over their charges. Some increase in enterprise autonomy seemed
implied by the fact that firms were now free to borrow from banks instead of relying as they had done in
the past on handouts from the bureaus, and during 1985-1986 much uncontrolled borrowing did in fact
take place, stimulated by low interest rates and the tax d ed ucibility of principal repayment. Things,
however, have now tightened up, and today a bank will not lend to an enterprise without the approval and
also quite often the guarantee of its supervising bureau in its pocket. Many bureaus are risk-averse and
will only approve those enterprise activities that fall within the plan. Ibid. 520: Recently, however, three-
year employment contracts have been introduced for new recruits, and managers have been given more
discretion in the setting of worker bonuses. Thus today more freedom has been given to enterprise
managers in the selection of new workers, even if the labor and personnel bureaus still define the pool
from which the selection is m ade...The question is whether this increment of flexibility at the enterprise
level points toward the market orientation that the Chinese leadership is seeking to promote. The signals
are mixed.
273. cf. Boisot and Child 1996, 620-1: The question also arises as to whether or not local government
enjoys the legitimacy to run economic networks. There can be tensions between government controls
and the aspirations of firms (Ungar and Chan 1995). Within local communities, private businesses can
613
feel exploited by local officials and to be victims of growing corruption, as Bruun (1993) found in
Chengdu. If local authorities do develop this legitimacy, will the emerging system be similar to Geliners
(1981) notion of a segmented society, in which there is a collection of local systems in competition with
each other but coordinated by government at the next level up? The notion of a segmented society
posits a clear functional role for government within an economic system that is vertically as well as
horizontally networked.
274. As Luis Gricano emphasizes, "The extent to which one player can be assumed to have information
about the others before taking his own decision crucially affects the outcome of the game. Gam e theory's
greatest use is in obtaining insights about the structure of interaction between the players, not only the
right way to play the game, but also existing possibilities and consequences of changing game rules." cf.
Financial Times, p. 3, in Mastering Strategy, Mon. Oct. 1 1 ,1 0 9 0 .
275. In this regard, Boisot and Child in 1008 attempted to explain the history of Chinese modem
decentralization and its late development, albeit I might not completely share their insights. For one
instance, they attributed the Western model of economic governance to a hands-off stance by
government towards business, a model that essentially derives from laissez-faire liberalism. But my view
is that it might be an erroneous interpretation when they assumed such a model of laissez-faire neo
liberalism reflected the current style of capitalist governance in most Western regimes.
cf. Boisot and Child 1996, pp. 618-9 (emphasis mine): The post-1949 communist regime saw the most
far-reaching attempts in Chinas history to bring economic and social life under the central control of the
state. The first was via the central planning system that was established in the 1950s but which never
attained the detailed coverage of the Soviet system. The second was via the ideologically sustained
mass mobilizations of the Great Leap Forward and the Cultural Revolution, which while ostensibly
encouraging local initiatives were nevertheless centrally orchestrated. By the late 1970s, it was realized
that both systems of central state control or initiative had failed to provide for sustained economic
development: China had not been able to sustain a satisfactory position in the 'bureaucracies region of
Figure 1 (economic regulation via a central planning bureaucracy), while the attempt to have the state
exercise direct central initiative and control through traditional fieflike social formations proved
disastrous. Since 1979, there has been a steady decentralization of economic initiative to provincial,
municipal, and even more local tiers of government, a shrinking of the state-owned component of the
industrial economy, a consistent decline in the proportion of capital investment controlled directly by
central government, a shrinking share of tax revenue accruing to central government, and an official
aspiration to concentrate central government intervention on turning the economy as a whole through
fiscal and monetary instruments (Naughton, 1987; Economist 1994a). Together with the encouragement
of market transacting, this may at first sight appear to be a redefinition of the states economic role
toward the Western model, which would be an erroneous interpretation. For it does not m ean that
government in China now takes a hands-off stance towards business. Rather, the system that is now
emerging involves a sharper differentiation between the role of central and regional authorities, the latter
comprising layers of government down from province, city, country, and township to village. Various
bureaux and commissions operate at each level within this tiered system, each having its own goals for
the economy. The resulting vertical and horizontal cleavages within the system give rise to multiple
power centers with which enterprises have to deal, depending on their scale, legal status, and sector
(W ank 1995). Government officials at the different levels and in the various units have been enjoined to
support profitable economic developments, and their departments often take a stake in these. Economic
decentralization has meant that only large state-owned enterprises, normally located in strategic
industrial sectors, retain a direct responsibility to central ministries. For other enterprises, it has led to a
closer interdependence between local governments and enterprises led by managers or entrepreneurs
who are part of the same community. Local governments and associations may even sometimes ally
with the enterprise managements under their purview to resist the encroachment of the central state over
614
matters such as investment approval and taxation (Ungar and Chan 1995). W ank (1995) noted that such
local alliances can reduce the need for enterprises to look to the central authorities for resources and that
these authorities are often critical of them. He concluded from an in-depth study of private and
cooperative enterprises in Xiamen that 'entrepreneurial connections with the bureaucracy create
ciinetelist networks that are neither market relationships nor formal command-economy
relationships...They are patron-client relations between actors who control asymmetrical resources and
forge alliances for mutual benefit. The alliances... are embedded in personal ties between entrepreneurs
and officials who know and trust each other (1995: 69-70).
276. Also cf. Jiang, Shanhe. 1999.
277. The sentence is borrowed from Cao et al. 1 9 9 9,1 0 7.
278. cf. R. Boyer 1998, pp. 2 3-4 ,4 6 .
279. W e could even sense this from the deficiencies inherent in those market economies adopting
centralized finance and regulation, cf. Mediocrity flourishes when a inspector calls - British universities
will soon fall far behind their US counterparts thanks to the malign effects of state funding and regulation
by Martin W olf in Financial Times, p. 13, Mon. Apr. 16, 2001: Any service financed and regulated by the
state suffers from under-finance, uniform provision and over-regulation. These three laws of mediocrity
are inevitable consequences of the twin forces of democratic politics and centralized bureaucracy.
280. In 1994 Cui proposed Chinas Rural Industrialization: Flexible Specialization, Moebius-Strip
Ownership and Production Socialism - An Outline of the Basic Arguments of An Ongoing Research
Paper. Mimeo, pp. 9 ,1 2 , 19-21.
281. Note: this table refers to and adopts some categories and ideas from J. Zysmann 1992, Conclusion
and Chart 6.3, p. 302 and D. Soskice 1990, Table 3.1, p. 49.
Also cf. Nee 1992, p. 8: figure 2 about Dynamic transition model of non-marketized firm, marketized
firm, and private firm.
282. cf. R. Boyer 1998. Figure 2.2: Diffusion vs. hybridization: two perspectives.
283. cf. Nee 1992, pp. 2-3: Transaction cost economics explains the emergence of hybrid forms as a
means to economize on transaction costs in interoganizational relationships when 'parties to the
transaction maintain autonomy but are bilaterally dependent to a nontrivial degree (Williamson, 1991,
271). From the perspective of transaction cost economics, hybrids are discrete governance structures
that fall between market and hierarchy and possess their own institutional logic. What distinguishes
hybrids from alternative governance structures is an elastic contracting mechanism that facilitates
continuity and efficient adaptation. According to Williamson (1991), the neoclassical contract regime and
excuse doctrine, which relieve parties from strict enforcement, provide the institutional mechanism that
backs hybrid forms...Critical to the neoclassical contract regime in market societies is the maintenance
of legal autonomy based on clearly specified property rights. This provides the basis for litigation when
losses incurred exceed the level specified by the excuse doctrine of the neoclassical contract. By
contrast, hybrids in forming state socialist societies lack a well-specified structure of property rights and,
therefore, effective autonomy (e.g., Stark 1989). For this reason socialist hybrids must rely more on
personal ties than on legal contracts to provide assurances that the terms of a transaction will be met by
both parties (Carroll, Goodstein and Gyenes 1988). The need for intense investment in personal
connections (guanxi), stemming from having to cope with widespread uncertainties in the institutional
environment, provides the impetus behind the rise of local corporatism in China. Ibid. p. 4 (emphasis
615
mine): The transition economy, characterized by weak market structures, poorly specified property
rights, and institutional uncertainty increases the relative cost of redistribution even while rendering costly
market transactions (Nee 1992). This characteristic condition of partial reform creates an institutional
environment in which hybrid forms eniov a transaction cost advantage over alternative governance
structures.
284. And protesting activities led by the NGOs would surge against the current social order for justice
and for new equilibrium. Social costs would increase for the economy.
285. Komai drew his conclusions from the Hungarian experience of partial reform," as Nee and Stark
summarize, "that without a decisive shift from plan to a structure of market governance, characterized by
hard budget constraints and market competition, there can be no escape from the dilemma of dual
dependence" (ibid, 18). Also ibid. Nee, 169-207; also cf. K. Murphy, A. Schleifer, and R. Vishny 1992.
Also cf. China: 21st centurys sleeping giant by DeW ayne Wichham in USA Today, 13A, Tues. Jan. 4,
2000: Like Cuba, China is trying to create a unique blend of communism and capitalism. It wants to
maintain the political vestiges of an ideology that lost its most important patron when the Soviet Union
collapsed, but it wants to dump its state-run economy in favor of a truncated version of capitalisms free-
market system. Just as the U S s rejection of the League of Nations was a misguided attempt to return to
a policy of isolationism in the wake of World W a r I, Chinas effort to 'have its cake and eat it, too will put
the brakes on its rise as a world power. To realize its great potential, China will have to shed its
communist cloak. If that happens, China may have as much impact on the new century as the US had on
the past.
286. However these opinions are myopic, they actually treats the relationships between "vertical
bureaucratic and horizontal market" (cf. Nee 1989, 17) as squarely contradictory. Ibid. "These allocative
inefficiencies of central planning led early reformers in state socialist societies to advocate incorporating
the market mechanism into central planning. The socialist state would control the commanding heights of
the economy, regulating the market mechanism by manipulating investment credits, amortization rates,
depreciation allowances, interest rates, prices, wage structures, and other macroeconomic controls. With
the correct mix of plan and market, the market mechanism would not generate spontaneous economic
processes but instead would serve as an instrument to reduce the transaction costs of central planning.
In short, early reformers believed that the most efficient governance structure for socialist economies
was a combination of market and central planning. In the words of Brus, 'The use of profitability as the
main efficiency criterion and the basis of incentives is intended to foster rational management in
production and exchange efficiency....The command economy was replaced by a hybrid economy,
which Komai argues...operates in a condition of 'dual dependence in which the economy is coordinated
by both vertical bureaucratic and horizontal market relationships. The essence of dual dependence,
however, is the continued dominance of hierarchical forms of coordination over the socialist firm and the
debilitation of the market mechanism by persistent and pervasive bureaucratic microinterventions.
Komais analysis points to the dilemma of partial reform, that despite giving a greater role to the market,
all of the critical decisions -- entry, exit, investments, prices and wages, output, credit - still depend more
on processes internal to the planning governance structure than on the market."
287. Ibid, Table 1: p. 9; Table 2: p. 13; and Table 4: p. 19.
288. cf. Nee 1992a, p. 22: "Rather than conceiving of market transitions as a linear progression to
capitalism, we may analyze the departures from state socialism as likely to produce hybrid market
economies that reflect the persistence of the institutional centricity of their parent organizational form."
Also, p. 23: "The emergence of the hybrid marketized sector reflects a fundamental structural change
that is still in progress. Accordingly, the transaction costs of such hybrid economy will increase in its
616
future if not transformed into totally privatized market economy (ibid, p. 4: "As market institutions
become more dominant in the transition economy and as the institutional foundation of a market
economy is incrementally constructed, these parameter changes result in a relative increase in the cost
of hybrid governance structures and reduction in the cost of transacting for private firms.").
289. Ibid, p. 24: "Despite the impressive performance of the hybrid marketized economy in the 1980s, it
bears the markings of its origin. The structure of property rights of the collective enterprise is such that
the social benefits of profitable firms exceed by far private returns."
290. Ibid, p. 24: "local governments have become dependent on revenues from the marketized firm to
provide funding for a wide range of activities."
291. Ibid. pp. 22-3: "The deep structures of the reform regime are likely to reproduce important features
of the state socialist redistributive economy in emergent organizational forms. This is the meaning of
path dependence...For the economy as a whole, however, local corporatism may exacerbate problems of
inefficient allocation inasmuch as the institutional arrangements of state socialism that cause Komai's
shortage economy persist, albeit in the guise of paternalism on the part of local government rather than
the central ministry...the structure of property rights of collective ownership involves government in
microinterventions in the firm..."
292. cf. Qian and Xu 1993, p. 517: "...whether or not China offers a socialist alternative, whether such
decentralized market socialism is a mere transition phenomenon, or it is sustainable for a long time,
whether there exists a Western stereotype perception of development, democracy, and capitalism, in
contrast to the reality in China, remain an open question for debate; yet this is clearly a unique outcome
of China's gradual transition process."
293. Seen from the micro-level, this path dependence even seems irrational and accidental, cf. P. David
1994, 209: "'Conventional' solutions to pure coordination problems, such as whether to drive on the left
or on the right side of the road or whether to pass to the port or the starboard at sea, are of this
character; the alternative conventions are not clearly (Pareto) rankable in terms of their intrinsic
economic efficiencies." Path dependence is drawn from consistent conventions, shared experiences, and
mutual knowledge. Ibid. 210: "According to the classic observations of Schelling, when people who
cannot communicate are confronted with a pure coordination problem, they try for a coordination
equilibrium that is in some way 'salient' -- one that distinguishes itself from the other candidates by
possessing some unique and remarkable feature, which need not be held to have any intrinsic value. So
precedent emerges as an important source of salience in such contexts: a solution to a coordination
game can acquire 'conspicuous uniqueness simply by having been part of the players shared history --
because they remember having reached it on a previous similar occasion."
294. cf. Nee 1992a, p. 1: "...fiscal and organizational reforms carried out in the 1980s led to a significant
devolution of power from the central state apparatus to provincial and local governments.
295. See such a counter-argument about Chinas hybrid economy as snafus by James Kynge, who
presumes that these broadly positive signs conceal deep fractures in China's economic and financial
architecture. More worrying still is that underpinning the whole structure is a contradiction that Beijing needs
growth to enable reform but the reforms appear so far to be restraining growth. See his Deep fractures
threaten to bring down pillars of Chinas economic hope in Financial Times, p. 4, W ed. Dec. 2 9 ,1 9 9 9
(Buoyant exports and healthy investment in fixed assets may not be enough to overcome the structural
weaknesses underlying seven consecutive years of slowing growth...But while the need for an end to
economic slowdown is unquestioned, it is less certain that the worlds largest developing country will be
able to cast aside the structural shortcomings that underlie its weakening economic performance.).
617
296. cf. Nee 1992a, p. 6: "Fundamentally, the controversy has involved the loss of redistributive power
by the central state apparatus to market institutions and local government. This is reflected in a widely
circulated Central Committee document: 'The Power to distribute capital, foreign exchange and
resources is too decentralized and the state's control seriously eroded. Enterprises and individuals have
too great a share in the distribution of national income' (People's daily, January 11,1990:1-3)."
297. Readers may refer to J. Rogers's informative discussion about parallel ideas behind American
historical experience in his 1996 volume: "Associated Democracy."
298. Such as massive layoffs and firms market exits along with the speedup of Chinese marketization.
299. But David Faulkner even thinks that in terms of the level and the way of mixed property rights,
strategic alliance can be classified in a typology of joint venture, collaboration and consortium, among
which, as proven by the past experiences, JV could be less successful, whereas collaboration be very
successful, and consortium be quite successful, cf. Financial Times, p. 14, in "Mastering Strategy," Mon.
Nov. 29, 1999.
300. As they observed in 1988 (523), China today no longer has a planned economy and, indeed, by the
more demanding standards of Soviet practice, ever really had one. W here Gosplan, the Soviet central
planning agency, allocates nearly 20,000 raw materials and attempts to keep track of millions of final
goods, the Chinese State Planning Commission now allocates 26 raw materials and tracks 60 final
products. Bureaucratic transactions need statistics, large volumes of well-codified information whose
diffusion can be carefully controlled by administrative centers, yet Chinas State Statistical Bureau has
never been heavily staffed ( The Economist, 1 9 8 7 :1 5 ).
301. cf. R. Boyer 1998, Figure 2.11, p. 44.
302. See M aos The Ten Major Relations in 1956, which has always been seen as the keystone by the
state government in search for Chinas far-reaching strategy of social and economic development. Mao
then called attention for a balanced and decentralized strategy for national planning by way of diverse
alternatives in dealing with those dilemmas between industry and agriculture, between heavy industries
and light industries, and particularly in regional disparities between frontiers and coastal areas. His
arguments and propositions have been proclaimed as Tit For Tat against the F S U s model that broke
away from its economic dogmas and industrial policies leading to a structural skew to favorite heavy
industries at the exorbitant expense of its agriculture and light industries. Clearly it showed here M aos
priority was set for social stability in pursuit of a pragmatic line of the United Front at the time, when
Chinas civic war was just over, and the regime of the PR C was just established.
303. cf. Boisot and Child 1996, 621: The challenge of hierarchical ordering will always be particularly
acute for China simply because of its huge size, topographicai barriers, and tendency for inter-regional
economic imbalance. It is important always to recall that in China government straddles several
hierarchical levels, and the resolution of the relationship between these levels in economic governance is
inherently problematic."
304. The key for a successful M&A is whether it could offer a more effective new division of labor that
would make its operation and management more efficiently in order to save production costs.
Apparently, M&A does not necessary ensure good performance afterwards. In this matter, the collapse of
the WorldCom in 2002 provided us a good illustration. The WorldCom had hurried a series of huge
acquisition binges throughout the late 1990s. cf. For WorldCom, acquisitions were behind its rise and
fall by Kurt Eichenwald in The N ew York Times, A1, C 6, Thurs. Aug. 8, 2002: ...It was Jan. 12, 2000,
and the mood in this room full of journalists was celebratory. M. Ebbers talked of how his company had
618
grown enormously through no fewer than 65 mergers, capped by the granddaddy of them a!!, its
acquisition of MCI. Now, his company was proposing a multimillion-dollar acquisition of the giant Sprint
Corporation. But even as Mr. Ebbers boasted of W orldCom s successes and even as enraptured
investors drove up the companys stock price, behind the scenes the company was already a financial
and operational shambles, according to interviews with current and former executives, lawyers and
government officials, as well as internal documents and court and government records. Dozens of
acquisitions were never consolidated into a single, seamless enterprise, leaving the company incapable
of functioning properly. Moreover, because of accounting maneuvers, each new acquisition allowed the
company to report higher per-share profits, even when its core business was barely growing, or losing
ground. Leading it all was Mr. Ebbers, a man who insiders and analysts said was out of his league in the
rough and tumble world of telecommunications. 'W orldCom wasnt operated at all, it was just on auto
pilot, using bubble gum and band-Aids as solution to its problems, said Susan Kalla, an analyst at
Friedman, Billings & Ramsey. 'B am ie was endearing, but he didnt even have a working knowledge of
the business. Now the company is in bankruptcy, its stock trading for pennies a share, and the way it
was run will be central to the expected prosecution of Scott Sullivan, the former chief financial officer,
and David Myers, the former controller, on charges of constructing a massive accounting...A cycle now
familiar on W all Street was in motion. Investors fell in love with the companys story, pushing up the
price of its stock, which in turn provided the currency for further acquisitions, which made investors
happier, and on and on. With a stock price that was high considering the companys earnings, WorldCom
could acquire companies with lower price-earning multiples, and because of simple math automatically
increase its per-share earnings. The acquisition binge provided other benefits, according to former
WorldCom employees and analysts. After many of the deals, WorldCom would subtract many millions
and sometimes billions of dollars from its profits in what it described as a write-down of the value of
certain assets it acquired. According to former employees, WorldCom included in this charge against
earnings the cost of company expenses expected in future quarters. The result was bigger costs in the
current quarter but smaller ones in future quarters, so that its profit picture would seem to be improving.
The idea that huge charges against profits could be taken in the current quarter yet ignored by investors
obsessed with profits might seem irrational. But analysts said that with WorldCom and other companies
pursuing rapid acquisitions, this was exactly what happened. Moreover, analysts and form er employees
said, the company would take large charges for assets like research and development that through
accounting methods could be converted to a secret fund the company could tap whenever it needed a
boost in earnings. Such cookie-jar reserves, as they are called, were widely used in the late 1990s. 'The
boost from post-acquisition accounting was like a drug, one former W orldCom executive said. 'But it
meant bigger deals had to come along to keep the ball rolling. The biggest deal, and eventually the
largest acquisition charged against earnings, started on Oct. 1 ,1 9 9 7 , when Mr. Ebbers telephone Bert C.
Roberts Jr., then the chief executive of the M CI Communications Corporation, who was already
entertaining a $19bn bid from British Telecommunications. Mr. Ebbers countered with an offer that
topped that and then some. He offered $30bn in WorldCom stock and the assumption of $5bn in debt.
MCI took the offer, and Mr. Roberts became the chairman of the merged company. Even inside
WorldCom, people who analyzed the buyout offer were thunderstruck at the price. 'M C I was purchased
at an unbelievably inflated price, said one person who reviewed the deal while working for the
com pany...To keep the momentum going, WorldCom needed an even bigger deal and found it with its
$145bn bid to Sprint. But despite heavy lobbying by Mr. Ebbers and other WorldCom executives, in June
2000 the Justice Department scuttled the deal, arguing that the combination threatened competition for
long distance. With that, the juggernaut driven by acquisition profits was finally derailed. 'The kyboshing
of the Sprint merger was, for all intents and purposes, the end of W orldCom , said Howard J. Schilit,
whose Center for Financial Research and Analysis conducted several reviews of W orldCom s accounting
for institutional clients. 'W hen you have companies that have to make acquisitions to survive, once the
music stops, the dance is over. Now, all WorldCom could do was figure out how to grow the company by
running a better, more innovative business. But that was not where Bemie Ebberss talent lay...For all its
talent in buying competitors, the company was not up to the task of merging them. Dozens of conflicting
computer systems remained, local network systems were repetitive and failed to work together properly,
619
and billing systems were not coordinated...'Don't think of WorldCom the way you would of other
corporations, said one person who has worked with the company at a high level for many years. ' Its not
a company, its just a bunch of disparate pieces. Its simply dysfunctional... Moreover, people who work
at the company said, an internal battle for control among executives from different corporate
backgrounds - known internally as Legacy MCI executives and Legacy WorldCom executives - resulted
in those with the least experience in change of collecting debts...Indeed, engineering experts at
WorldCom said that, other than with long distance, the company failed to properly merge various
systems in its communications network, creating large technical problems and unnecessary expenses.
Bitter struggles among the various companies undermined efforts to work out the network problems,
current and former executives said. Largely, these executives said, this internal bickering was driven by
the failure of top officers to instill any sense of unity as they dashed off to dig up the next acquisition.
305. For instance, in China, social networks in terms of guan-xi (personal relationships) are so important
in doing business because of the lack of adequate market channels to get access to resources and
information, cf. The Economist, p. 5, China Survey," April 8th, 2000: ...The petty capitalist road.
Historians will point out that Guizhen and similar places have picked up the thread - brutally severed by
Mao - of a kin-based petty capitalism in China that goes back hundreds of years. In Beijing, old street
names still recall the cluster of like businesses for which each alley was famous: Silk-Brocade Hat Alley,
Dry-Noodle Street, and so forth. In southern Guangdong, the model is amplified by an earthy
appreciation of money (but not always its conspicuous consumption) not matched in the north, and by a
fierce sense that someone elses gain is your loss. As a Zhongshan official puts it: 'Once one person in
the village starts to earn money, then everyone piles in. And dont expect brothers to co-operate. They'll
compete. Even fathers will with sons.' Such natural clustering has also been helpful in dealing with the
legacy of socialist planning. 'In the planned period.' savs another Zhongshan official, 'production and
sales were all regulated. It became much more complex after reform...People didn't know what the
demand was, nor where it was coming from. So gathering together was a good wav for small enterprises
of adjusting costs and production to demand. Also, customers at least knew where to go to find the
market.' Intense specialization chased out less competitive manufacturers of other goods from the local
market...'But the point is-.with just one small product you can reach a big market. (emphasis mine).
306. cf. O f laws and men in The Economist, pp. 18, Survey: Asian Business, April 7th, 2001:
...W estern investors tend to assume that Asian tycoons turn to guanxi for deep-seated cultural reasons,
but in fact they do so out of necessity. Both a rules-based and a guanxi-based system of governance
incur expenses. For both, these are made up of the fixed costs of keeping the system running - say,
training and paying judges, regulators and auditors - and incremental costs, such as the effort and
expense of signing one more contract, sealing one more transaction, and so on. Developed economies
have rules-based governance systems that incur enormous fixed but negligible incremental costs. The
fixed costs, however, are spread over huge numbers of transactions and business relationships, so that
the average cost of any single deal is quite low. By contrast, the poor countries of Asia so far have not
been able to afford the investment in the high fixed costs of such a system, and have therefore settled
for the large incremental costs of a guanxi-based system. As long as the number of transactions and
business relationship remained comparatively small, the average cost of the transactions was bearable.
307. This heavy dependence on coordination and cooperation for success among industrial groups leads
to the far greater reliance of Japanese companies on their relationships with bankers than American
businesses. Some critics blame it on "crony capitalism," arguing that this has accounted for the skyrocket
of Japanese banks' bad and non-performed loans, and thus triggered the financial crisis. But in my view,
the crux of the Japan's ailing economy is the uncompetitive nature of its firm hierarchies and
bureaucratic institutions facing growing global competition, but not highly interdependence and
coordination among industrial associations, which are actually indispensable to the current economy.
Particularly at the national emergency, the governmental intervention may be highly regarded as the
620
collective representation of these forms of industrial coordination. For instance, the Japanese
government has recently unveiled a sweeping bailout plan designed to force banks to clean up their bad
loans and debts and will require banks to submit to independent audits and sell off problem assets or risk
being declared insolvent and seized by regulators. The government thus will organize "the Financial
Supervision Agency" and "bridge banks (i.e., temporary, public-funded banks to ensure some loans until
private banks can assume them) to tackle these problems of Japan's financial crisis at the heart of
Japan's current recession. As reported (cf. "Chicago Tribune," Section 1, p.1, Fri. July 3, 1998), "An
independent government body, the Financial Supervision Agency, will be created to inspect banks and
identify which ones are insolvent and should be seized. Insolvent banks that can't be merged or sold will
be converted into government-operated and funded 'bridge banks' that will continue providing loans to
good customers for up to five years while searching for a buyer. Depositors will be protected, but a key to
the plan is protecting borrowers," "The bridge banks will operate using money from a $200 billion fund
created by the government to stabilize banking sector," albeit there is still great skepticism of the
feasibility of the plan and the will to fix the problems. As one analysts point out, "the relationship between
business, the bureaucracy and politicians has been too cozy for too long to expect that they will easily
abandon their ties to the unpredictable forces of the free market" (cf. "Chicago Tribune," Sect. 1, p. 15,
Sat. July 4 ,1 9 9 8 ).
308. cf. R. Boyer 1998, Figure 3.7 From the local to the global: the geographical spread of hybridization, p.
37; and Figure 2.14, p. 50.
309. cf. R. Boyer 1998.
310. Or say, federal system is a Western political term. As such, politically, the elected candidate gains
the majority of voters confidence from both parties; thus the candidate may win the support of the
moderate constituents, taking an evolutionary, gradual, and rational approach in favor of social
democracy and stable capitalist order, while attempting to avoid the conflict and polarization.
It could be, though, a moot point as to whether, albeit transitional China retains the form under the
previous sway of the CCP, its hybrid economy and decentralized governance have offered an alternative
path toward social democracy at the upper end, as it has certainly diffused many risks, long-run and
short-run, maintained China's political stability, and protracted the survival of the current regime at the
lower end. cf. Pei 1996, p. 57: "This organization is a hybrid model blending by market and hierarchical
elements...the evolutionary features of the Chinese reform - which is different from the economic
revolution in Eastern Europe and the former USSR, are determined by this hybrid model. It can link the
different economic systems, and the market elements can gradually overcome the planned and
hierarchical elements. This has been proved by the practice of Chinese economic reform." Also cf. Pei
and C. Gunnarsson 1996. Nee 1992 has similar arguments (22-23) that "Whether in Eastern Europe or
the republics of the former Soviet Union or China, the transitions from state socialism to market
economies are likely to take place over a protracted period during which a hybrid marketized sector
mediates interactions between the declining redistributive and rising private economies. Rather than a
single path, there are multiple paths from state socialism to a market economy in which the trajectories
of transition are shaped by previous institutional forms and the politics of markets..."
311. Cf. R. Boyer 1998. Figure 2.2: Diffusion vs. hybridization: two perspectives.
312. cf. Beijing bans satire on Jiangs philosophy by James Kynge in Beijing in Financial Times, p. 6,
Fri. Apr. 20, 2001: ...China has become a pyramid-shaped society that is increasingly irresponsive to
the plight of the lower class and of what Ms He calls a 'marginalized class,...Such people, the workers
laid off from state enterprises and some 100m rural poor, are being left behind in the process of
economic transformation, raising the possibility of another revolution, Ms He argues. 'If the prevailing
621
social friction continues to be regarded by the authorities as 'an excellent situation and [if] they
extinguish all sounds that differ from their own, then I fear that the 'revolution may not be far away, she
writes, recalling that anger among workers led to Che Guevaras revolution in Cuba. The China she
paints is bleak. Unemployed state workers are cast adrift, with no subsidies for healthcare, education,
pensions or housing. In the countryside, farmers are preyed on by corrupt local officials who bully, extort
illegal taxes and run mafia gangs. But the problems I see, along with those of many writers like Ms. He,
while revealing these market failures and illegal corruption by the local officials, still call for a retreat to
the socialist road under the previous M aos regime of the planning economy.
Also cf. Chinese raid defiant village, killing 2, amid rural unrest by Erik Eckholm in The N ew York
Times, A 1 , Fri. Apr. 20, 2001: Before dawn last Sunday, more than 600 police and paramilitary troops
stormed this village in southern China and opened fire on a gathering crowd of unarmed farmers, killing
2 and wounding at least 18, witnesses and local officials say. The shootings, which have not been
reported in the Chinese news media, were one of the most severe known incidents of civil strife in recent
years, the latest act in a three-year struggle pitting the 1,400 residents of Yutan against township and
county officials. The villagers have refused to pay what they call illegal and impossibly high local taxes
and fees, and the officials have labeled the villagers a 'criminal gang....T h e bitter strife in this village
and untold others reflects the anger and despair among the millions of farm families in China's traditional
breadbasket region. Even as the national economy booms, in villages across central and southern China
incomes have stagnated, most young people migrate to coastal cities to perform menial jobs, and local
governments are so short of money that officials and teachers often go unpaid for months at a tim e...the
evening of the incident a provincial deputy Communist Party secretary was dispatched to the village, and
he promised an investigation. The deadly clash in Yuntang is the latest sign of instability in Jangxi, a
relatively poor province known as a cradle of M aos Communist revolution."
313. cf. Cao et al. 1999, p. 113: According to the State Statistical Bureau, employees in the xiagang
category are those 'who went home from enterprises due to the poor performance of the enterprise but
still maintained some nominal relationship with their enterprises (Song, 1997). The nominal relationship
exists because the former employees continue to receive a subsistence salary and/or other kinds of
benefits (such as housing or health care) from their old enterprises. Therefore, these xiagang workers are
workers laid off from SO Es with some compensation and protection...The number of xiagang workers is
usually smaller than the true number of lay-offs because it does not include those laid off under
bankruptcy or those who had already completed severed their relationship with the enterprises. The
xiagang figures also do not include those workers in privatized SOEs. Ibid. ...the total number of
xiagang workers in 1996 was about 8.9 million, of which 63% were from SO Es with the rest from urban
collectives (Song, 1997). In 1997, an additional 11.51 million workers were laid off, of which 9.4 million
were xiagang workers. By the end of 1997, total xiagang workers were about 20 million (Ma, 1998). W e
also have some information about the subsequent employment of xiagang workers. O f the 8.9 million
xiagang workers in 1996, about 3.6 million had found jobs. Another 2.3 million were not looking for jobs
and were thus out of the labor market. The remaining 3 million were looking for jobs and are considered
to be unemployed (Song, 1997). The groups of unemployed and out of the labor market tended to be
women, junior high school graduates, and people aged 25 to 44. Reportedly, many lay-offs were
concentrated in a few industries, such as textiles, measurement instruments, coal, metallurgy, chemical,
forestry, machinery, and electronics (Wang 1997).
314. Also cf. The Economist, p. 11, China Survey, April 8th, 2000: State enterprises, the 1997 Party
Congress decreed, had to sharpen themselves up for the market, and that meant 'optimizing their
workforce (i.e., sacking large chunks of it). The state banks reinforced the message by starting to cut
credit. As so often in China, these official moves lagged behind what was already happening in the real
world. As early as 1995, the phrase xiagang - literally, those who 'leave their post - had became
common parlance. The term covers people who are sent home on nominal pay, though not yet officially
622
sacked. Similar euphemisms are used for other categories of people whose jobs have evaporated. There
are those 'waiting for work (though they may have to wait a long time); 'early retirees'; and those 'absent
from their posts. In a socialist country, unemployment is not allowed to speak its name. That is why
Chinas official unemployment rate, at 3.1% of the urban workforce, is absurdly low.
315. By definition, the xiagancf system is also designed to erase those superfluous parts for
streamlining organizations and thus the whole economy.
316. As reported, for instance, the Headquarters of the Secondary Artillery", a branch of Chinas PLA, in
charge of Defense Missiles and Space announced it was terminating the system of life time employment
in its institutions throughout the country. As a result, 60 of its 500 just retired senior professionals and
cadres were arranged as Xia-Gang staffs to the locals, cf. World Journal Daily, Chinese language, A7,
Tues. Feb. 1, 2000.
317. A new alternative for settling down is to outnumber those seniors in directory boards, cf. Financial
Times, p. 6, Thurs. April 20, 2000 (underlined added by myself): ...After the completion of a current
endeavor to shift many of the state banking systems bad loans into asset management companies
(AMCs), there will be no more handouts...But as China nears the end of the first stage in its boldest
attempt yet to clean up its banking industry, there are worrying signs that Beijing may fail to tackle the
abuses that have created one of Asias weakest financial systems. A senior Chinese banker said that if
the authorities did not ensure that credit was extended strictly according to commercial criteria - rather
than through political pressure - then asset quality in the state banks would remain impaired. Equally, if
the inefficient state-owned enterprises that have swallowed years of state credit in the service of
socialism - rather than the marketplace - are not thoroughly reformed, then returns on future lending will
continue to be poor. The question is of crucial importance for China's economic future: the creaking,
state-owned industrial sector uses up two thirds of the countrys credit resources to produce just one third
of its output. Yet despite the clear need for greater efficiency, there are few signs so far that the
government has the political will to deal with one of its most painful tasks. The four AMCs that were set
up last year to assume the bad debts of many state enterprises in return for equity stakes in those
companies are expected to sign 600 debt-for-equity swap agreements worth Rmb400bn ($48bn) by the
end of June...But then comes the difficult part. The AMCs will have to ensure that the management
teams that built up the mountains of bad debts now reform their ways. This may not be easy, partly
because the AMCs have not yet been invested with the power to dismiss poor managers....management
team s are replaced. Officials said the question of how much power the AMCs should have to sack
managers and workers was the subject of a dispute between the State Economic and Trade Commission
(SETC), the ministry responsible for the largest state-owned enterprises, and the 'big four1 state
banks...The powers of AMCs to dismiss staff in their client companies are to be similarly circumscribed,
officials said. As chronic overstaffing is perhaps the single largest source of corporate inefficiency, the
limited ability of AMCs to tackle this issue could be critical. There may be some chance, however, for the
AMCs to get their wav not by firing the old socialist-era factory bosses but by outnumbering them - by
creating boards of directors in their client corporations and staffing them with AM C appointees. The
outcome of such maneuvers will determine whether the AMCs clients can be turned around and resold.
318. The existing offices are already filled with so many high-labeled titles that they might not be
affordable with the further excessive remuneration.
319. The state government had faced tough problems as economic governance had tended to be more
autonomous, disengaging from vested interests growing from bureaucratic inner circles. Aside growing
layoffs and other market failures, the over-interferences and self-appointed surveillances by the
entrenched vested interests sui generis had constituted institutional barriers that had seriously threatened
the ongoing reforms.
623
320. The pension crisis would also be confounded by other factors including demographic factors. As
reported, Those in the one-child generation also could struggle to support their retired parents. In 1995,
10 active workers supported every Chinese person living on a pension. The World Bank figures that by
2050 only three workers will support each pensioner, a demographic glitch that will put a huge burden on
Chinas workforce and pension system. Adding to the strain is the fact that Chinese are living longer:
Chinese age 60 and over will account for more than 26% of the countrys population in 2000, up from
less than 9% in 1990. And many state-owned companies are loss-ridden and wallowing in debt. They
have no money for the retirement benefits they are obliged to pay. The World Bank warns that by 2033
Chinese workers will have to contribute more than 39% of their pay toward the retirement system to keep
it running. In short, the bank says, 'the system is unsustainable. Efforts to fix the system have begun but
have a long way to go. cf. USA Today, 10D, wed. Feb. 23, 2000.
321. Ibid. The cases of Shanghai city and Heilongjiang province illustrate different methods used by
local governments for compensating xiagang workers and for their re-employment. Shanghai, with a
large foreign investment inflow, can afford to close down some industries entirely in a short time period,
but it still has to do it carefully because of the sensitive social problems arising in such a large city. To
support re-employment programs, the city government has found ways to raise funds in equal share from
the holding company (which replaces the closed down enterprises), social sponsors, and the city
government itself...Heilongjiang province, in contrast, does not have the luxury of outside investment as
does Shanghai. Further, it is burdened by many sunset industries such as coal mining and defense.
Nonetheless, it too has developed its own approach to re-employment programs...The province uses as
a template a successful experiment in a coal mine called the '3 -3 schem e. Under this template, one-
third of the employees continue their jobs, one-third engage in new tertiary industries, and one-third
develop agriculture. Although Heilongjiang is short of capital, it has abundant uncultivated land. To
support the laid-off workers in new jobs in agriculture, the provincial government has given away 1
million mu, or about 160,000 acres for development, a large quantity of land by Chinese standards."
322. As Williamson argues, simple layoffs fully driven by market mechanisms may still deteriorate long
term trust relationships between employees and employers, which may cultivate problems associated
with opportunistic behavior. To avoid this, it requires developing implicit supplementary contracts to
cover those uncertain risks not covered by formal contract. The implicit contract here is assumed to
promote a relation-specific capital investment. For instance, the employees with ability and job efficiency
may be implicitly rewarded by employers, with promotion, training, and job security ("life-time
employment"). Yet to incorporate such contingent details into a written contract is very difficult and
costly, particularly in the absence of a developed external labor market. It is particularly evident in the
stock options that many firms offer to competent managers as supplementary incentives under the
payment system. As recently found from the scandals of American corporations, the stock options paid to
the managers are not efficiently associated with their competitive performance.
323. cf. Chicago Tribune, 1-2A, Mar. 6, Fri. 1998.
324. For instance, even with the opening of the capital stock exchange in Shanghai and Beijing, it is hard
to define this move as a pure "symbol of capitalist transformation," as optimistically declared by the
Clinton Administration in the 1998 Presidential Trip to China (cf. U S News and World Report, July 13,
1998, p. 32).
325. cf. East Asian Regionalism" in Economist, pp. 23-26, July 15th, 2000 (emphasis mine): ...The
single greatest catalyst for the new East Asian regionalism, and the reason it is moving most rapidly on
the monetary side, is the financial crisis of 1997-98. Most East Asians feel that they were both let down
and put upon by the W est...At the same time, the IM F and the US dictated much of the Asian response
624
to the crisis. Fealty to the 'Washington consensus was seen as necessary to qualify for official help and
to restore access to private capital markets. The visual symbol of all this, captured in a photograph sent
round the world, was the managing director of the IMF looming over the president of Indonesia like some
imperial tyrant from ages past. The widespread view that the IMF programmers made things worse, at
least for a while...m akes Asians still more resentful. And Malaysias recovery without the IMF implies
that acceptance of the global norms may not have been so crucial after all...East Asia has decided that it
does not want to be in thrall to Washington or the W est when trouble hits in future. It is not rejecting the
multilateral institutions, let alone opting out of the international capital markets or the globalization of
trade - which it knows would weaken rather than strengthen its prospects. It seems to want to work with,
and within the framework of, existing bodies. But East Asia also clearly feels that multilateral institutions,
on which it was previously willing to rely, are no longer infallible. It notes that its aggregate economy and
external trade are about as large as those of the US and the EU, and that its monetary reserves are
much larger. Hence it wants its own institutions, and a central sav in its own fate. As East Asia regains its
strength, it is determined never to be totally dependent again. Added impetus for this feeling comes from
the failures of the global trading system. Unfortunately, all the East Asians, including China and Japan,
continue to depend heavily on export expansion for their economic growth. The crisis countries have
become even more dependent on exports as they struggle to recover. In consequence, all these
countries want better access to foreign markets. Moreover, they realize that there is a constant risk of a
relapse towards protectionism if the system does not continue to liberalize. They know that the threat is
particularly acute in the US, their largest market, where domestic support for new liberalization has been
bogged down for five years despite a buoyant econom y...East Asians cannot envisage a revival of
American leadership, or even active American participation, without the imposition of new conditions
they strongly oppose, including serious agricultural reforms (resisted by Japan, South Korea and China)
and trade-related labor and environmental standards (rejected by virtually all developing countries in the
region)...For all these reasons, a growing number of Asians are turning to sub-regional trade pacts to get
the liberalization, and the insurance policies...As yet, none of these pacts poses a particular threat to
American or European trade interests...But continued paralysis in the W T O and A PEC could lead to a
broadening of the new East Asian trade framework and a comprehensive East Asian trade framework
and a comprehensive East Asian FTA; or, at the least, a hook-up between China, Japan, and South
Korea in North-East Asia. Either of these would alter the structure of world trade...Y et those efforts are
also meeting obstacles. The region contains vast differences in cultures, political systems and levels of
economic development. There are at least as many designs and strategies for an East Asian partnership
as there are countries in the region. And the atmosphere is charged with political distrust and even
hostility, notably between China and Japan...T he rest of the world should realize what this revolution
means, if it continues: eventual regional alignments which, even if they fall far short of Europes
integration, will be sufficiently advanced to create the tripartite world that has been expected, or feared,
for some time. An East Asian economic grouping could have many implications for the global system. At
one extreme, it could reproduce much of the European experience. China and Japan, which have warred
as viciously as France and Germany, could obliterate the possibility of future military rivalry and assure
stability in what is, potentially, the worlds most volatile area. Asian economic integration would create a
formidable competitor, but also a huge stimulus to global growth, trade and investment. A uniting East
Asia would be more likely to do its bit to ensure international peace than individual Asian countries acting
alone, and could become an effective trilateral partner with the US and Europe in managing the world
economy. At the other extreme, a unifying East Asia could become a highly disruptive force. With huge
national savings and over $800bn in monetary reserves by now, it could develop its own capital markets
and increasingly ignore the advice, let alone the dictates, of the global financial institutions (as Europe
has been able to do). East Asia is easily large enough to pursue regional development strategies and
discriminate against outsiders (as Europe has been able to do)...Any sign that East Asia is rejecting
transpacific co-operation could strengthen isolationists in the US and trigger an American retreat, from
security arrangements as well as economic ones. So Asian regionalism, like regionalism elsewhere,
could go either way. The outcome will be determined by policy, both in East Asia and in other countries
as they work out a response. The most likely result is an intermediate. quasi-European one: an East Asia
625
with sufficient autonomy to allow independent action at times of crisis, but still co-operating with the rest
of the world, in both economic and security terms, in normal times. It would probably side with the US
against Europe on some issues and with Europe against the US on others, inducino each of the three to
seek a permanent alliance with one of the other two. ..The other obvious course is to energize and
modify the existing global institutions in ways that would answer the complaints of East Asians and make
them less eager to go off on their own. Reform of the international financial architecture needs to go
deeper, and the multilateral trading system needs to be cranked into forward motion again...East Asia
may be on the brink of an historic evolution, as Europe was half a century ago. O f course, Asians
themselves must steer their efforts in directions that promote international stability...The rest of the world
must accept a global role of East Asia, and modify its own intuitions with East Asia in m ind...
326. In this institutional context, the medium in charge of market transaction is agency and that in charge
of hierarchical routine is manager. Both are thus assumed to be necessary roles to work out the
differences between market and hierarchy operations. For instance, as reported (cf. Real dealmakers
werent CEOs - Intrepid pair spent 6 months crafting deal in USA Today, 6B, Mon. Jan. 17, 2000), in
the recent M&A between Tim e W arner and AOL, AOL chief Steve Case refers to Novack, a lawyer who
helped forge a string of deals, as 'A L O s secret weapon, or stealth guy, whereas Bressler, head of
Time W arners Digital Media division, helped launch the companys first major Net entertainment site,
'Entertaindom.... Ibid.: Behind the acquisition of the worlds largest media company by the leading
Internet service provider were two men so committed to seeing the transaction go through that they
pushed each other for six months to work out differences that threatened to derail the deal. But it wasnt
Steve Case, C EO of America Online, or Tim e Warner chief Gerald Levin trying to surmount seemingly
impossible hurdles. It was a little-known lawyer for AOL and the head of Tim e W arner Digital Media who
crafted the biggest merger in history and arguably transformed the media and Internet business for the
next century...Now, after helping to tie the knot, Novack and Bressler will try to bring 82,500 employees
together as part of the four-person transition team working to assimilate two large, very different
companies...Those close to the situation say the deal may have fallen apart if it had been left up to any
other two individuals. Indeed, the deal nearly died over valuation. At a time when Internet stocks are red-
hot, figuring out what to pay for an old-guard media company was tricky. Novack says the question was
'how are we going to reconcile the different metrics? Will there be a collar, or will we be joined at the
hip? Instead of basing the price on a premium, the two companies wanted to value it based on a stock
exchange ratio - how big a piece of the company each would own. So Novack hammered out a deal in
which AOL would own 55%, and Tim e W arner got 45% of the merged entity. Divvying it up took time,
Novack says. But the hard part has just begun. The transition team met for the first time Wednesday
night to eat Chinese takeout and talk about how to organize the new company..."
327. cf. Japanese cabinet reshuffle - Bad loans, a stagnant economy, deflation: Can Heizo Takenaka
get to grips with Japans rotten banks? by David Pilling in Financial Times, p. 14, Tues. Oct. 1, 2002.
Also cf. 'Bold action needed on Chinas bad loans by James Kynge in Financial Times, p. 6, Tues. Oct.
1, 2002: ...E ven judging by the PB O C s (Peoples Bank of China) estimate, China has one of the
weakest banking systems in Asia. The key issue for many analysts has become not the absolute number
of bad loans in the state banks but whether or not the stock of N PLs (non-performed loans) is rising or
falling...In spite of public exhortations aimed at getting state banks to lend according to commercial
criteria...the government still encouraged state banks to lend to state-owned enterprises (SOEs) with the
aim of maintaining employment within the crumbling state sector. Although more than 30m workers from
SOEs have been laid off in the past five years, SOEs remain vastly overstaffed and profits in 2001 fell
slightly. CLSA, however, does not forecast a collapse of Chinas financial system. High savings rates
have meant that banks are awash with liquidity, registering an industry-wide loan-deposit ratio of below
70%. However, if domestic savers lost confidence in the implicit government guarantee for their savings
or China suffered a significant economic shock, then the risk of systemic breakdown would rise, the
report said. There are, however, some relative bright spots. Consumer lending, 80% of which is the form
626
of mortgages, has been growing rapidly over the past few years and has much potential to expand
further in a country where only 400,000 out of a total 20m merchants accept credit cards and there are
just three cars for every 1,000 people. Consumer loans have so far performed much better than those to
industry..."
328. cf. Creaking economy needs stronger foundations - The price China pays to keep people in jobs
and society stable is high. Is a fiscal crisis looming? by James Kynge in Financial Times, p. 6, Tues.
Oct. 1, 2002: ...All of Chinas problems - the high levels of non-performing loans in the banking system,
government debts (plus contingent liabilities such as unfounded social welfare obligations) at over 100%
of GDP, industrial overcapacity and deflation - have their corollary in Japan. The main difference is that
Chinas problems are both better hidden and potentially more serious than in its neighbor to the east... If
China is to avoid slipping into its own version of Japans malaise. It must lose no time in pushing through
structural reform, several analysts say. The most pressing task is to address gross misallocation of
capital that results in two thirds of the countrys credit resources being channeled toward state-owned
companies that contribute only around one third of GDP. Chinas policy makers understand the urgency
of this imperative but are constrained by their fear of social chaos from acting resolutely upon it. No
Chinese leader can afford to ignore the latent tensions among 1.3bn people; the famines, political
upheavals and civil wars of the 20th century have delved deep into the national psyche. More narrowly,
Beijing faces the worlds most onerous responsibility for job creation. An official at the ministry of labor
and social security estimates that some 8m jobs are created annually at a G D P growth rater of 7%. But
this was insufficient for the 20m urban residents who are expected to seek jobs each year for the next
four or five. Although China has laid off as many as 30m state workers since 1998, it cannot risk the
chaos that might spring from halting the drip-feed of state credit that keeps many insolvent state
enterprises from collapse. As one central bank official puts it: T h e state banks still have an unshirkable
responsibility to support the state enterprises.' This being the case, it may be unrealistic to expect that a
genuine credit culture - in which the criteria for lending are commercial rather than social - will emerge
over the next few years. Non-performing loans, therefore, may continue to pile up. The government's
emerging answer to this dilemma - expected to be confirmed at a key Communist party congress
starting on November 8 - is to encourage the development of the non-state and foreign-invested sectors
of the economy, both of which are more efficient and profitable than the lumbering state companies. But
this strategy may not be adequate. Non-state and foreign invested companies re competitors to the state-
owned enterprises, so the profit of one group tends to cause losses in the other. The rise of a non-state
economy is sure to hasten the demise of the state corporations, generating even higher levels of non-
performing loans and redundancies. Under these circumstances, China finds itself peculiarly vulnerable
to a sharp slowdown in growth. Far from sounding overblown, Mr. Zhus warnings over a narrowly
averted collapse in 1998 should be treated seriously and serve as a caution to excessive optimism over
the future of the worlds most populous nation.
329. cf. World views: Economists Joseph Stiglitz and Kenneth Rogoff offer starkly different appraisals of
the hopes - and risks - for the global economy by Christopher Rhoads in The Wall Street Journal, R8,
Mon. Oct, 14, 2002: ...Without a determined effort to clean up its banking sector, encourage needed
corporate restructuring, rein in ballooning fiscal deficits over the medium term and act decisively to end
deflation, Japan could be in for another long decade of painfully slow or nonexistent growth. So far,
Japan has tried a gradualist muddling-through approach, but far more sweeping and ambitious reforms
are needed..."
The structural problems are also culturally embedded, cf. The hidden Japan - Poor disclosure and
dubious financial reporting suggest that some Japanese companies may be concealing problems in their
accounts - David Pilling asks whether there is appetite for reform by David Pilling in Financial Times, p.
10, Tues. Aug. 20, 2002: For centuries, the Japanese have described two types of reality. Honne is
things as they really are, and tatemae is the version presented to the outside world. When it comes to the
627
accuracy of financial statements, that dual concept is one calculated to send panic through Japanese
auditors and investors alike 'Accountancy will always be a mixture of art and science, says one former
Japanese auditor. 'In Japan, the art component has traditionally been much bigger....
Also cf. A mountain of problems behind a golden fagade - The country has successfully staved off crisis
for so long that the threat no longer seem s real by David Pilling in Financial Times, World Reports:
Japan, p. I, Mon. Sept. 30, 2002: ...Japan has been able to stave off crisis for two main reasons. One is
that the government has embarked on an unprecedented spending spree, transforming one of the world's
most prudent bureaucracies into one of its most profligate. As companies cut back savagely on their
investment - turning net investment, financed by borrowing, of 4% of gross domestic product into a net
saving of 5% -- the government has gone the other way, turning a budget surplus into annual deficit
spending of more than 5%. As a result, the national debt has soared from 60% of G D P at the start of the
1990s to nearly 140%, the highest in the developed world. Moodys ratings agency has recognized the
risk by downgrading Japans debt to below the level of Botswana - causing howls of protest in Japan in
the process. Japans profligacy, say many economists, has merely bought time. 'W e have given the
patient the chloroform, but we forgot to perform the operation, says Naoki Inose, the author and high-
profile appointee to the road-privatization committee convened by Junichiro Koizumi, prime
minister...The second reason for the lack of crisis is that Japans exposure to international pressure is
limited. Unlike Argentina, which defaulted because much of its debt was owned by foreigners, an
estimated 95% of Japans debt is domestically owned. Japan does not need to default but can simply
crank the printing presses. It can also count on the worlds largest savings surplus and a current account
surplus of more than 2% of GDP. Moreover, the seemingly endless willingness of Japans savers to lend
to the government at very low interest rates allows Japan to service its massive debt for a modest fee.
And the relatively low tax burden means that, at least in theory, the public can be counted on to
contribute to public finances even more generously through higher taxes. In the meantime, Mr. Koizumis
government is seeking to revitalize the economy through shrinking the public sector and exposing
industry to the full rigors of a market economy. The idea is to remove regulatory hurdles that have
consistently favored incumbents to allow new industrial entrants. These measures are probably
necessary but, say some economists, do not address the fundamental problems of a broken financial
system - paralyzed by bad debts - and persistent deflation, which makes the bad-debt situation ever
w orse...
330. cf. Japans way out may be to spend - Fiscal control must not be undertaken at the expense of
economic growth. Profligacy may be the answer. When prices are falling and money easing is ruled out,
premature fiscal consolidation would be disastrous by Brian Reading in Financial Times, p. 11, Mon.
Sept. 16, 2002: ...Japans economy collapsed because bubble-bloated private investment collapsed.
During the bubble days, the corporate sector ran a record financial deficit - the excess of investment
spending over its own savings (retained earnings) - financed by borrowing. This reached 4% of G D P in
1989. Companies ran up record debts. When the bubble burst, was essential for survival. Investment
was slashed, plants closed, pay and bonuses were cut and jobs were shed. This is a normal reaction in
times of hardship and, as history has shown, the collapse of investment and consumption can often lead
to depression. Yet in Japan, it led only to stagnation...On a national accounts basis, Japanese
companies are now extremely profitable: corporate retained earnings have reached 20% of G D P. But
operating profits have disappeared down a black hold of bad loans, stock losses and pension fund top-
ups. As a result, the bottom line of Japanese company accounts is abysmal. To compensate for the huge
retraction of corporate investment, the government started spending lavishly, turning a budget surplus of
2% o f G D P into a huge deficit of 7%. In other words, the government filled the yawning hole in aggregate
demand left by the retreat of the indebted corporate sector...
Also cf. How a slowly deflating bubble broke Japan's famed iron triangle" by David Ibison in Tokyo in
Financial Times, p. 6, Thurs. Sept. 19, 2002 (emphasis mine): Japan's bubble economy did not burst.
628
Rather it gradually deflated over the last decade. One reasons for this slow motion demise has been the
shares banks hold in leading companies. The stakes were built up when the iron triangle that welded
politicians, banks and companies formed the basis of Japans industrial policy - all under the guiding fist
of the once formidable Ministry of International Trade and Industry. Miti instructions made it clear that
Japanese corporations had little choice but to rely on banks for their capital raising needs. In return, the
banks acquired sizeable equity stakes in the companies and helped steer them in directions they deemed
lucrative. But as Karel van Wolferen points out in his book The Enigma o f Japanese Power, while it may
have appeared that the banks were holding the tiller, the real skipper was to be found elsewhere. ' The
Ministry of Finance and the Bank of Japan exercise powerful control thanks to the nearly exclusive
dependence of Japanese corporations on bank loans for capital. he said. As such, the banks cross-held
shares were an avenue by which the authorities - be they bureaucrats, the Bank of Japan or politicians -
maintained centralized control over Japans lamest companies. This was the essence of Japans ultra-
paternalistic capitalism. When the bubble deflated, the iron triangle slowly broke apart, but the banks
maintained significant stakes in a range of companies. Their holdings are so diverse as to lack a unifying
theme. Shares were bought for reasons that ranged from genuine investment opportunities to deals
concluded in bars or on a golf course. The banks remained almost entirely passive, exercising no rights
putting management under no pressure, demanding nothing in terms of corporate governance and
staying silent as the value of their holdings declined. The impact of these sleeping stakeholders on the
companies was to help create an isolation zone that prohibited many of them from facing up to the need
for structural reform in an increasingly globalized and competitive environment.
For years, particularly in the case of emergency, the Bank of Japan, Japans central bank, has played a
custodial role to bail out Japans financial sector from troubles in its currency and stock markets, cf.
Japan will buy shares from its troubled banks - M ove aims to clean up financial sector by Ken Belson
in The N ew York Times, W 1, Thurs. Sept. 19, 2002 (emphasis mine): Under heavy political pressure to
bail out the nations financial industry, the Bank of Japan said today that it planned to buy stocks from
banks. The announcement, which followed a two-day policy board meeting, is a startling reversal of the
central banks longstanding position on the steps needed to clean up Japans struggling financial sector.
The Bank of Japans governor, Masaru Hayami, had consistently argued in recent years that the central
bank had already done all it could by lowering short-terms interest rates effectively to zero, and that the
nations lawyers, not the central bank, bore the responsibility of acting to help the banks. Significantly,
the central banks decision comes a day before the government is scheduled to announce details of an
anti-deflation package intended to raise stock prices and shore up financial institutions' balance sheets.
The timing of the two events suggested to analysts that the central bank and leading policy makers had
privately worked out a deal to cooperate. 'W e potentially have the long-awaited coordinated effort to
stabilize the financial system and ultimately to combat deflation, said Ryo Hino, an economist at J. P.
Morgan Securities in Tokyo. The Bank of Japans decision was also groundbreaking because most major
central banks, as custodians of national currencies, generally shun equities in favor of bonds and credit
securities. The law establishing the Bank of Japan prohibits it from buying equities, and would have to be
amended before the plan announced today could go forward. Further, if investors begin to suspect that
the central bank will lose money on its stock purchases, as seems likely, the yen could sink in value. Still,
lawmakers here have been publicly calling on the Bank of Japan in recent weeks to buy stocks, because
they fear that low stock prices could prove devastating for the banks on Sept. 30, when they must close
their books for the fiscal half-year and recognize the losses on their immense portfolios...The Bank of
Japans policy board said in its statement today that the banks shareholdings were 'a significant
destabilizing factor1 and that reducing such risk is an urgent task. Mr. Hayami said, 'Japanese banks
have a lot of shares, and as the central bank, we want to help them reduce the impact of falling
stocks....Still, the Japanese stock market is not far above the 19-year lows it touched earlier this month,
and at current prices, Japans largest banks are facing having to book more than $30bn in losses, a
significant erosion of their capital, when the fiscal half-year ends. For years, the Bank of Japan, ruling
Liberal Democrats, financial regulators and bank executives have argued about how to help the banks
629
write off their $500bn mountain of non-performing loans and reduce their exposure to the stock market.
Each has accused the others of creating or prolonging the crisis. The banks, meanwhile, are reluctant to
unload the $200bn in shares they hold. For decades, the banks have held shares of their clients'
companies to forestall hostile takeovers and reduce volatility in share prices, and were allowed by
regulators to count the shareholdings against their capital requirements. This relationship turned into a
noose when Japans asset-inflated bubble collapsed in 1990 and stock prices plunged. Stocks continued
to fall as law-makers started searching for a solution in the late 1990s. But as the economy soured and
bad loans mounted, the banks cut back on lending, starving companies of cash and further choking off
growth. Some analysts expressed concern that the Bank of Japan would find itself stuck with the riskiest
and least salable stocks from the banks portfolios, and face pressure not to resell them - dooming the
central bank to near-total losses on the stocks.
331. cf. A sick banking system resists therapy by Ken Belson in The N ew York Times, C1, C2, Tues.
Oct. 29, 2002: ...Japan is still trying to cure that hangover. After a decade of faking asset prices and
grinding deflation, the banks are running out of capital as they struggle to write off more than $400 billion
in bad loans that their loose lending practices helped create. Their clients, many of the nations largest
companies, are increasingly unable to repay the interest on their loans, and some are going out of
business. As a result, there is less money available to help newer, more promising, companies.
Incredibly, these problems have not persuaded Japanese banks to turn off the taps to deadbeat
borrowers. Despite already writing off $650 billion in nonperforming loans over the last decade, Japan's
largest banks still funnel money into many of the countrys most debt-ridden clients, lest they collapse
and leave the banks with even larger losses. These decision are not driven by rational, linear profit
motives, but instead by an unwritten code called shigarami, in which loans are based more on
longstanding relationships, political pressure and the mutual need to survive, a culture...By some
estimates, one-third of loans are still doled out this way. Repairing this mess is the job of Heizo
Takenaka, Japans top financial regulator, who is facing an onslaught of opposition form the political
establishment. His advisory council is expected to introduce a set of proposals this week to force banks
to more strictly assess their nonperforming loans and to accept public money if they are
undercapitalized. But Mr. Takenaka also knows that if he is ever to put Japan on a safer financial footing,
he must overhaul the way banks lend...By instituting on more transparent, profit-driven lending practices,
Mr. Takenaja is trying to tear down traditional relationships between corporate Japan, the banks and the
government. If his proposals were fully adopted, banks would be forced to push hundreds of companies
out of business and throw thousands of people out of work. To complicate matters further, the most likely
candidates for such tough love would be the companies that form the core of the governing party's
support: the same contractors, retailers and real estate brokers Mr. Yokota lent to. The Liberal
Democratic Party, which has led Japan for virtually all the postwar years, is not rolling over. In a show of
bald political might, stalwart conservatives in the party last week forced Mr. Takenaka to delay the
release of his widely awaited banking plan. They also intend to cushion the blow by providing low interest
loans to small businesses and a reconstruction fund to revitalize companies deemed worthy of survival,
including Daier, a retailer that is one of the countrys most indebted businesses, 'the biggest donors to
the L.D.P are banks and construction companies, so if the Liberal Democrats save the banks, contractors
will be saved, too, said Fumihiko Igarashi, a lawmaker from the opposition Democratic Party of Japan
and that party's fianc6 spokesman. 'Unless we eradicate this structure, the whole issue will not be
solved. For all the initial pain it may cause, lending that focuses more on risk is the key to the banks'
future profitability and the recovery of the Japanese economy. Steps in that direction will also be
accompanied by aid from the Japanese central bank, which has pledged to ease monetary policy further
if private banks get tough with their borrowers. W hile banks in the US and Europe have changed their
ways in response to past losses at home and abroad, those in Japan operate as if it were still the 1980s.
The lack of a strong corporate bond market, coupled with strict requirements for selling stock, means that
companies here still go to banks for the bulk of their financial needs. W hat is more, a paternalistic
corporate culture makes it essential for companies to have a main bank that acts as a financial patron
630
and opens doors in Japans tight-knit business community. Installing new lending systems will take years,
analysts say, even if the Liberal Democratic power brokers relent and agree to enforce stiffer lending
standards. Perhaps the most difficult challenge will be changing the way bankers behave. For years, they
have pooled savers money and directed it to companies as if they were semigovemmental institutions,
secure in an unspoken guarantee that the Japanese finance ministry would bail them out if trouble arose.
For older bankers nearing retirement, putting a wholly different lending system in place is a leap of faith
few want to take. Rieko McCarthy, a credit analyst at J.P. Morgan Securities, said bankers need the
pressure of market discipline to adopt a more profit-oriented model. Yet with short-term interest rates
effectively at zero and the central bank promising easy credit to those in trouble, bankers are under even
less pressure to overhaul their businesses. Though banks are slowly trying to force companies to pay
more for loans a record 20% of loans carry interest of less than 1%, according to the central bank. Some
institutions have started using quantitative methods like risk-adjusted return on capital to determine the
ability of a business borrower to generate enough cash to repay its debts. But this requires people, time
and technology of a sort only the largest banks can afford...'Companies say that if a bank denies them
loans, they may change their main bank, said Hironari Nozaki an analyst at HSBC Securities who
worked at Asahi Bank for 16 years. 'If the company has more bargaining power, bank managers might
lose face so they continue to provide loans to risky borrowers. One such borrower is Haseko, a
condominium builder that lost 123bn yet ($995million) last year as it struggled to write down its debts.
With the economy in a rut, Hasekos operating profits fell 18% and its shares have traded as low as 13
yen (10 cents) in recent years. Yet in Feb., its lead banks, Daiwa, Chuo Mitsui Trust and the Industrial
Bank of Japan, agreed to forgive 150 billion yet of the companys debts - its second bailout in three
years...If Mr. Takenaka, the top financial regulator, gets his way, the endangered list may in time shrink
as banks are forced to stop financing weakened borrows. The key, though, is whether the banks get
tough with new borrowers or continue creating more problem loans with their loose lending practices.
Martin W olf emphasizes a similar comparison in Europe, cf. Europes Constitutional Dilemma by Martin
W olf in Financial Times, p. 13, July 5, 2000: ...H ere then is a profound dilemma. To make the existing
union - and still more the prospective integrated Europe of 30 states and more than 500m people - both
workable and tolerable, it needs a legitimate federal structure. Yet a true federation is cloud cuckoo land.
The integration process then risks undermining the legitimacy of existing states, without putting anything
better in their place. To the dilemma there have been three distinctive responses the German, the
French and the British. The first is to combine maximum integration with some kind of federalism; the
second is to combine maximum integration with control by governments; and the third is to combine
minimum integration with control by governments. The French and Germans agree on what Europe
should do, while the French and British agree on how it should be run. Yet none of the approaches can
work; the German, because the federal ideal is unworkable; the French because bureaucratic inter-
govemmentalism is intolerable; and the British because minimal integration is unavailable. The likely
outcome, however, is the French, the worst of both worlds.
332. cf. China hits back at Japan over claims on cheap exports by Richard McGregor in Beijing in
Financial Times, p. 8, Asia-Pacific, Thurs. Nov. 21, 2002: China has rejected Japanese accusations
that it is exporting deflation, saying such claims represented an abdication by Tokyo of its responsibilities
to reform its own economy and financial system. The response by Chinese officials to claims made by
Japanese and other Asian officials last week reflects rising tensions over the impact of Chinas booming
manufacturing sector on world markets...Chinas consumer electronics and appliance makers have
increase their exports rapidly in the first six months of this year, totaling $4.44bn (2.81 bn), a rise of 28
percent. The categories that have recorded the highest growth include refrigerators, at 29 percent, and
microwave ovens, at 56 percent. Many of Chinas appliance exporters are companies that are local
champions in their areas, as well as big employers. They are able to maintain easy access to bank credit,
even when they are marginally profitable in the domestic market. They also benefit from a cheap,
plentiful and highly productive workforce, and an exchange rate pegged to the US dollar, meaning that
631
the currency cannot appreciate to trim some ot its advantages in export markets. Professor Song
Xiaowum of the State Council for Restructuring the Economic System, said in an interview that China's
share of world exports remained small despite recent gains. 'Japan, by saying this, is abdicating its own
responsibilities. Officials at the think-tank said China had been trying to deal with severe manufacturing
overcapacity by closing down lossmaking industries. 'During the last five years, state-owned enterprises
have laid off 300m workers - its a big adjustment in resources and labor, said W ang Weiwei, a deputy
director at the body.
333. cf. Nee, 1992, 17: T o the extent that retrenchment results in more effective regulation of boundary
transactions across the redistributive and market sectors, it provides a more sustainable basis for
piecemeal, open-ended reform strategy, the hallmark of Chinese economic reform." Also cf. Lin 1989.
334. See Nees revealing observation of China's industrial decentralization in the reforms, cf. Nee 1992,
p. 5: The centerpieces of industrial reform in the 1980s involved the decentralizaton of power to the
enterprise and local government, reflected most clearly in profit retention and sharing arrangements. By
augmenting their decision-making power, the state sought to provide industrial enterprises with the
flexibility and incentives for improving economic performance (Zhang and Zhang 1987). Accordingly,
enterprises were permitted to retain 70% of extrabudgetary funds, which they could invest in the plants
fixed capital or distribute to workers and staff through annual bonus plans. Simultaneously, the state
transferred to local governments greater budgetary and fiscal power (CASS 1989). Like the enterprises,
local governments could retain surplus evenue after paying a negotiated share of local taxes to the
central government. The aim was to overcome administrative rigidities associated with central planning
and to stimulate enthusiasm on the part of local government to support and pursue market-oriented
economic development. The accompanying revenue-sharing arrangements forged a virtual partnership
between local government and industry.
335. Hence while Japan's spinoff economy offers an alternative to market economy, China's hybrid
economy offers an alternative to transitional economy.
336. cf. China Telecom plans to shift 200,000 staff - Five-year blueprint revealed for transformation of
company by James Kynge and Dan Roberts in Beijing in Financial Times, p. 1, Fri. Sept. 8, 2000:
China Telecom plans to spin off non-core businesses and shift about 200,000 staff from its payroll as
part of a plan to turn itself into an 'Internationally competitive company within five years. Chang
Xiaobing, vice-president of the fixed-line telecoms giant, said most of the 200,000 staff would not be
made redundant, but moved off a current payroll of 550,000 as hundreds of subsidiaries running hotels,
schools, shops and other activities are spun off. 'If we can divest 200,000 staff then we will be pleased.
But it is difficult to say over what period these staff will be divested, Mr. Chang said in an interview.
Stripped of its non-core businesses and a huge burden of salaries and pensions, China Telecom plans to
transform itself from a sprawling, socialist-era conglomerate into one of the worlds largest and most
competitive telecoms companies. A new five-year blueprint foresees a stock market listing, heavy
spending on infrastructure, co-operation with foreign companies and an expansion into the mobile
telephone business....However, the company is only modestly profitable and will have to work hard to
make itself as attractive as China Unicom, a state-owned mobile telecoms company that raised more
than $5.65bn with a dual Hong Kong and US listing in June. One way in which China Telecom is hoping
to raise its appeal is by branching out into mobile telephony, in which mainland subscribers are growing
at more than 2m a month...China Telecoms main shareholder is the ministry of information industry, the
sector regulator and main arbiter of which companies are granted licenses." Ibid. p. 17: China Telecom
looks towards Fortune 500 for inspiration - The countrys dominant operator is shedding its closed image
as it attempts to restructure before its listing by James Kynge.
337. Relevant to this point, one may refer to Axelrods 1984 arguments that rapid turnover would result in "a
632
lessening of cooperation" within organization (183: 'The role of time perspective has important implications for
the design of institutions... In large organizations, such as business corporations and government
bureaucracies, executives are often transferred from one position to another approximately every two
years...The result of rapid turnover could therefore be a lessening of cooperation within the organization.")
338. This job reallocation or re-settlement is not a unique invention in China but has long prevailed in the
business practices of other East Asian countries, such as Japan. To compare with Japanese
counterparts, cf. D. Eleanor Westney's 1996 discussion: "The flow of employees from the lead firm into
the subsidiaries of the vertical group is a critical element sustaining the long-term system of the lead
firm...and reinforces and mirrors its diffuse coordination and control system. Long-term employment and
the company's control of its employees careers make the intra-firm and intra-group coordination and
control system possible. The human resource management system, the coordination and control system,
and the vertical group all contribute to the preference for incremental and growth-oriented strategies." D.
Eleanor Westney: "The Japanese Business System: Key Features and Prospects for Change," in Journal
of Asian Business. Vol. 12. No. 1.1996. P. 44.
633
Chapter 6
Transition as an Historical Spiral: Chinas Prospects
The French film Danton," made in 1975m shows a dying Robespierre in anguish, realizing that the
intended democratic French Revolution has evolved into a violent tyranny. Gasping in his bed, he mutters to
himself:
No, I feel that everything I ve lived for has collapsed forever. I dont understand the
revolution is off course. How can you say that? I dont know what I am saying. You
admit a dictatorship is needed. Then the nation can t govern itself, and democracy is an
illusion. I am crazy. No, desperate. So blow your brains out. Good idea. It would end
my troubles. I just want to sleep. Get out quietly. (His mistress then brings a little boy in
the room and says,) My brother has learned something for you (Robespierre finally
finds his peace in the boys reciting of the French Revolutionary Constitution): Article
One: all men are bom free and equal in law. Social differences must be based on the
public good. Article Two: the goal of political parties is to safeguard m ans inalienable
rights. Article Three: sovereignty resides in the people: No group or individual may rule
without their express consent. Article F o u r freedom is the right to do anything not
harmful to others. M ans natural rights are limited only by what assures to others in
society the exercise o f those rights. Only the law can set such limits.
According to Robespierre more than two hundred years ago, only the rule of law could safeguard
social democracy. In China, today, the question is being asked: Does the rule of law provide an ultimate
answer to regime change; can it bring social democracy to China? What is the relationship between the rule
o f law and social democracy? What might be the nature and form o f Chinas future regime?
| n Chapter 4 I examined the dyssynchronization between the reality change and regime change in
Chinas transition. In Chapter 5 I investigated many reality changes in Chinas transition. In this final
chapter I will explore a number of issues regarding regime change [1], I will argue that reality changes cannot
be separated from regime changes for very long. In the case of China, the question becomes to what extent
has regime change already occurred, how can one recognize it, and what should one name it [2],
China still persists that its transition is moving toward a socialist market economy; the CCP is still
the only ruling party in the country and the caucus of the C CPs politburo as the partys top body holds
paramount power over the Partys routine operations [3]. However, we have already seen many defining
634
signs of change ft. In 2000, Chinas President Jiang Zemin announced his own doctrine of Three
Represents ft, declaring that the CCP invited the private entrepreneurials and rich people to join the party
and even share some of the power at the center (which is contradictory to certain Marxist orthodox canons)
f t . Some of Chinas rural areas began to experiment village democratic elections at the grass root level ft.
Nobody denies that China has stabilized for a quite while and has moved from a radical country (under a
proletariat dictatorship) to a more modest nation/state (with four modernizations) ft. Nobody denies that
today the survival and success of any Chinese enterprise, regardless of whether it is state-owned or non
state-owned, depends on its market performance. And nobody denies that China has steadily stepped
forward to become integrated with the global community. As Chinas hybrid economy has emerged and its
economic governance been increasingly decentralized, the country has increasingly distanced itself from
the previous authoritarian regime ft. The mindsets of Chinese younger generations have dramatically
changed from seeking constant class struggles under the guidance of ultra-leftists to pursuing bread and
butter entrepreneurial individualistic-merit-based endeavors to advance their life chances [10]. Moreover, the
state has been active in Chinas privatization, encouraging the privatization of the SOEs and other core
components of Chinas economic structure [11]. And Chinas entry into the W T O has galvanized further such
a structural change, etc. [12J. The rapid growth of capital marketization since the 1990s has hastened China's
industrial restructuring and upgrading. The business corporations began to try stock options, while
shareholders, now formally treated as legitimate business constituencies, have added new dimensions to
Chinas hybrid economy. Currently, China is at a crossroad. Prominent mixed messages have been sent out.
The massive layoffs from recent SOE reforms triggered frequent protests that sometimes became explosive
and dragged down Chinas economy. The Chinese people now become more cautious about the countrys
future and began talking about political reforms and social democracy [13]. And the power succession of
Chinas political leaders this fall, 2002 [14] simply adds more uncertainties to Chinas future [15]. All these
reveal that the relationships between political and economic changes are much more complicated than
mainstream scholars had conceived. Any international political events are now highly scrutinized in China,
as they may be translated into business shocks that influence investors confidence in stock markets [16J, a
new barometer of the economy and an increasingly salient channel for Chinas industrial fundraising [17].
635
6.1 Dilemmas and reciprocities between background modes and constitutive
modes
China transition has followed non-linear path dragged and pushed by unexpected historical events
and certain cultural nexus. Frequent collusion between state/local governments and business corporations
has generated corruption and dampened market competition [18]; but it has also provided a background of
support for the transition from its former thirty-year-long history of planning. Such a transition has retained
many backward idiosyncrasies, though [19]. Chinas gradual transition has also helped China's economy
tap into its comparative advantage in production-cost saving through hardening local budget constraints and
reducing labor costs, particularly taking advantage of labor-intensive industries and export-oriented products.
Strategically, these advantages have put China into a competitive world-wide position that has enabled China
to engage in capital-intensive research and development indispensable for its upward mobility.
Despite some strengths of Chinas macro-institutional environment today, its background has left a
legacy of problems. There remains a comfort zone for the vested interests that make reforms harder to
introduce. There is still too much risk aversion to market exposure and too little sensitivity to potential
environmental shocks. Ambiguous ownership structures in China's economy make them less sensitive to the
streamlining of SOEs, less capable of halting mounting corruption, and less able to deal with legal person"
problems in stock markets (see Section 5.22, Chapter 5) [20]. China's background helps explain some of the
current deficiencies arising from Chinas background transition. These deficiencies could threaten Chinas
economic future. Particularly after China's entry into the W TO , its political reforms have become a more
pressing issue with the need to address corruption and growing gaps between rich and poor [21], Political
reforms have not been listed on state agendas since 1989 when pro-Westem-democracy student
movements were crushed in Tiananman Square. To move beyond its background, China will have to
introduce political reforms in order to accept future challenges. As James Kynge of the Financial Times
pointed out, fostering a common purpose to unify 1.3bn and 55 ethnic minorities, satisfying its commitments
to external authorities such as the W TO will be daunting [22].
636
O f major concern to Chinas current leaders is the fear that Chinas political reforms could instigate
enormous disruption and create social chaos resembling that of the Mass Democracy during the Cultural
Revolution. Reform planners might try to reckon: whether or not a new democratic system would actually
generate a stymied economy and a brainless government. They might reckon that given the fact that Chinas
successor is sufficiently intelligent to manage a relatively resilient system that is sustaining steady growth [23],
why should China try to adopt Western democratic models? In recent years, China has frequently witnessed
failures in advanced societies, while Western democratic regimes had often fallen short in their response to
mounting social problems and overwhelming public concerns. And Western democratic regimes had often
fostered corporate business scandals that have shaken business confidence. Those same regimes have
often been unable to prevent the resurgence of ultra-rightist movements in some European countries [24].
Therefore as these new political routs came to surface [25], China is most likely to take a mid-way approach
and choose a semi-democracy [26].
In my previous chapters, I noted that the FSU and FEES constitutive transitions precipitated their
immediate regime changes, although retarded reality changes could have the regime change fall apart. In
stead, China wouldnt expect its regime change in such a fashion of surgical operation. Chinas background
transition has its regime changed much slower than its reality changes. From its long turbulent history China
has always considered smooth move, softness, and patience as a virtue [27].
Dilemmas regarding reality changes and regime changes are clearly related to dilemmas regarding
background-based transitions and constitutive-based transitions (see my discussion in Chapter 4).
Background-based transitions are designed to focus more on local complexities of the task-environment
and thus are more interactive with the reality changes [28]. Constitutive-characteristic transitions (as in the
FSU and the FEE) focus more on abstract principles of classical market economies along with attaining
other regime goals than on the concretely local complexities and contingencies in reality. When
institutional routines and codes in constitutive-based transition cannot timely respond to these
complexities and contingencies or fit in the existing local conditions, the transition becomes legitimately
problematic [29].
637
Checking the recent scholarships on transitional economies in general, the current transitions in
the FSU and the FEE and in the PRC are attributable to two types of re-institutionalization - constitutive-
based and background-based [30]. The constitutive-based transitions in the FSU and the FEE up to year
2000 turned out to be de-institutionalization [31], whereas the background-based transition in the PRC
proceeded with institutionalization and sustained institutional buildup through institutional reforms. Table
6.1a contrasts these two approaches to transitions.
Table 6.1a: Institutional comparison of alternatively-based transitions:

FSU, FEE, and PRC, 2000
1. Constitutive-based transition 2. Background-based transition
Approximate case FSU, FEE PRC
Direction of institutionalization Deinstitutionalization & leap Institutionalization & move

backward reinstitutionalization [32]; forward reinstitutionalization I33];
Legitimacy* Loss of legitimacy of political Blending practices of economic

functions and abandonment hybridization as warranted by the
of organizational forms in constitution and backed by the
social production - de-integration state institutions;
Symbolic Morality declined, no integrated Emergent new identity:

value** new identity; entrepreneurship among social
actions; ***
Exchange Emergent exchange of Exchange in both formal and

system informal sector as alternative and informal sectors expanded
to the declining formal sector; t through decentralization and
local corporatism;
Social Massive social dissonance due Emergent social contract

appropriateness to nationalist separatism; with commitment to economic
little social trust I35]; priority;
Nascent institutions Re-privatization, liberalization of Economic hybridization, regional

in new regim et political and legal institutions; devolution M-form hierarchy, rise
of social overhead sector;
Remainders U-form hierarchy, economic and Political institutions.

waiting for reforms}: political institutions
Note:
The categories I select here mainly adapt those institutional/de-institutional barometers by Wesley D.
Sine, 1 9 9 9 136].
638
** cf. Definition by A. Giddens, 198 7,1 9 97
*** See discussion in Chapter 5.
f cf. V. Yakubovich, 1999. "Informal sector" here refers to intergenerational exchange network, pension
system, and secondary job market for economic survival.
$ Myself add these last two categories for comparison.
cf. Qian and Xu 1993; U-form hierarchy: unitary-form hierarchy; M-form hierarchy: multi-tiered-form
hierarchy, regionally-based.
Table 6.1b makes further comparisons between the economic institutions in the FSU /F E E s transitions
and the PR C s transition.
Table 6.1b: Remaking economic institutions of alternative transitions in comparison:

FSU and PRC, 2000
County FSU/FEE PRC
Mode of transition Constitutive-based; Background-based;
Early stage: Late stage:

1978-1984 1985-2000...
Expected regime type Market economy Quasi-market economy
Fulcrum of Free market access; Concern for both Bounded efficiency

economic rationales efficiency and legitimacy; and local activism;
Ownership reform Full re-privatization; Boom of COEs & rural Hybridization focusing
household production on the SOE reform &
system; expansion of private
sector;
Managerial discretion Pecuniary power; Geo-based Devolution to local

(de facto regulatory power) decentralization; discretion and
marketization
Type of legal codification Formal; Formal & practical;
Hierarchical Partial reform; market- Geo-based decentralization;

reform approached restructuring; pro-active bureaucratic streamlining;
Critical mass Informal & secondary Rural entrepreneurship; State and local activism
activism; entrepreneurship;
Risk management Informal and private State/public obligations, Two tier system
obligations; protective; (state/public & private),
pro-active;
639
(Table 6.1 b continued)
County FSU/FEE PRC
Mode of transition Constitutive-based; Background-based;
Early stage: Late stage:

1978-1984 1985-2000...
Direction of industrialization Uncertain regrouping or Focus on Focus on high-tech,

restructuring industries; manufacturing; high-value-added, and
knowledge industry-
based economy;
Mechanism for Hard budget constraints Both hard & soft budget constraints
Re-allocating resource (nominal) and soft budget (both formative and substantive)
constraints (substantive)
Economic regulatory Oligarchic-style, and Both market institutions Both market institutions
style and policies hierarchical control [37]; & state institutions; & state institutions;
policy relaxation; both deregulation &
regulation;
Governance type [38] Judiciary; Executive; Legislative;
State/civil Passive/distinct; Active/distinct; Pro-active/integrated;

society relations
As illustrated in Table 6.1b, the FS U s transition toward a regime of constitutive democracy has
shown substantive differences from the PRCs transition toward a regime of semi-democracy or quasi
democracy.
Regarding differences between constitutive-based and background-based transitions, Kornai
argued in 1992 that "In some countries the order of appearance is different, or the stages alternate with one
another (1992, p. 19). If it is so, in my view, it is because of preexisting historical contexts and cultural
configurations that shape the spectrum of options available. Whichever base is chosen, is neither
inevitable (teleological) nor ubiquitous (analytic), and nor haphazard (random or accidental). A transitional
mode is also affected by a nations taste for risk aversion (or in a broader sense, social expectation), a
taste that is warranted by its society and strongly affected by its "path dependent" institutions [39]. The
choice has much to do with which expectations are taken, how thick the effects the existing social
institutions are, how deep their historical roots go, and what idiosyncratic-contingent events occur across
space and over time [40],
640
Once a transition has occurred, both modes of transition may be plausibly alternated, juxtaposed,
or mixed together. According to reciprocity between modes of transition, one might expect a real regime
change to be a structural transformation irreducible to a simple mode of transition [41], Different
transitional modes are able to offset each other for different kinds of institutional trade-offs, while affecting
reality changes and regime changes. The respective advantages and disadvantages of different
transitional modes can also be regarded as having historical trade-offs rooted in unique cultural
circumstances, trade-offs that could change themselves over time as circumstances change. In the final
analysis, the mode of transition is just an ideal-type. In the concrete world, elements of both modes of
transition might be discernable as historical transpire.
6.2 Chinas transitional movements I42]
One might find the background to Chinas transition duly fitting into its long-term trajectory for
social cohesion and sustainable growth by virtue of its historical institutions and population resource.
Such a trajectory is instrumental for Chinas successful exploitation of its long-term opportunities along
with its macro-economic stability [43J. Right now it might be too early to foresee Chinas prospects since its
current restructuring of institutions still is at a very cost-conscious stage. However, as reality changes,
expectations change. And that would press both the reality and regime for further changes. Changing
reality would press the regime to change, establishing the rule of law and social democracy. In current
China, social expectations for a regime change have mounted to an unprecedented high as Chinas
phase of catch-up comes to the end after Chinas entry into the W T O J44]. It mounted very high,
particularly when Chinas domestic corruptions, officials malfeasances, and mafia-businesses become
epidemic, as it accelerates marketization I45].
Table 6.2 compares economic strength and financial transparency on 25 emerging markets,
including China, in comparison with the US, UK, and Japan. As shown in the table, many of China's
current rankings on economic openness, regulatory quality, financial transparency, and accountability
641
remain a far cry from the ratings of other established industrial countries, and even from the ratings of
emergent markets.
Table 6.2: Economic strength and financial transparency of 25 countries

in comparison with the US, UK, and Japan.
Country A B C D E F G H I J K L
*
China 9.4 3.1 7 1 3.7 4.9 n/a n/a 3.8 0.18 0.93
Poland 5.2 4.1 10 16 5.2 6.1 n/a n/a 4.3 0.07 0.16 0.19
*
Taiwan n/a 5.5 8 23 5.4 6.9 6.0 5.0 4.8 1.04 1.55
Greece 3.1 4.9 13 22 5.2 6.0 2.0 2.5 3.9 0.24 0.34 0.82
Brazil 3.1 3.9 15 68 5.1 4.6 6.0 7.5 4.1 0.30 0.30 0.35
India 3.1 2.8 10 15 4.9 5.3 4.0 5.0 4.3 n/a n/a n/a
Korea 3.0 4.0 11 75 4.7 6.9 4.0 2.5 3.9 0.22 1.43 0.42
Malaysia 2.4 4.8 6 90 5.2 6.7 6.0 5.0 3.9 2.08 1.45 0.67
k
Chile 2.4 7.4 12 80 6.0 7.2 6.0 10.0 5.4 0.92 0.68
Singapore 2.2 9.1 10 78 5.6 8.9 6.0 5.0 5.9 1.34 1.14 0.37
k
Philippines 2.2 2.8 10 73 4.8 4.8 8.0 5.0 4.6 0.70 0.56
k
Israel 2.1 6.6 5 35 5.4 6.9 6.0 5.0 4.9 0.41 0.71
k
Hungary 2.0 5.2 11 63 5.0 6.4 n/a n/a 3.9 n/a n/a
Median 1.9 4.0 11 63 5.0 5.6 5.0 5.0 4.0 0.30 0.56 0.36
*
Peru 1.9 4.4 14 74 5.0 4.0 4.0 5.0 5.0 0.23 0.20
*
Indonesia 1.6 1.7 7 57 3.9 3.2 4.0 5.0 2.4 0.30 n/a

Czech Rep. 1.5 4.3 11 48 4.3 6.1 n/a n/a 3.1 0.29 0.60
*
South Africa 0.9 5.0 15 100 5.5 4.3 8.0 7.5 5.2 1.92 1.39

Egypt 0.8 3.1 10 11 4.7 5.3 4.0 5.0 4.1 0.23 0.42
*
Mexico 0.3 3.3 15 64 5.3 4.1 0.0 5.0 3.6 0.33 0.16
Argentina 0.0 3.5 13 40 5.1 5.6 8.0 7.5 4.4 0.16 0.18 0.19
*
Turkey -0.5 3.8 15 44 5.0 5.0 4.0 10.0 3.5 0.24 0.18
*
Thailand -0.5 3.2 12 83 4.7 5.8 6.0 2.5 3.0 0.39 1.50

Jordan -2.1 4.6 11 74 n/a 6.4 2.0 0.0 n/a 0.70 0.75

Venezuela -4.2 2.7 16 42 4.1 3.7 2.0 2.5 3.6 0.14 0.10
Russia -8.7 2.1 15 67 3.6 3.6 n/a n/a 2.3 0.19 0.08 0.11
US 1.3 7.8 4 100 6.4 7.5 10.0 7.5 6.4 1.22 1.89 1.57
UK 1.7 8.7 7 100 6.3 8.4 8.0 5.0 6.3 1.47 1.20 0.59
Japan 0.7 6.4 11 100 5.3 7.8 6.0 5.0 5.3 0.63 2.04 1.10
Label:
A- Real growth of GDP/head 1995-99 (%)

B- Freedom from corruption
C- New business procedures
D- Private ownership of banks (%)
E- Financial disclosure
F- Rule of law
G- Shareholder rights
H- Creditor rights
I - Quality of financial regulation
J- Stock market capitalization/GDP (%)
K- Private credit/GDP (%)
642
L - Bond market capitalization/GDP (%)
n/a data not available
too small
Source: Financial Times, Mastering Investment, p. 13, Mon. July 2, 2001.
The rising social rifts and problems apparent in Chinas current transition have had great
repercussions on the Chinese intelligentsia and have posed serious challenges to the state. In recent years,
an academic debate has raged over Chinas democratic future. Many on China's mainstream intellectuals
have maintained the view that social democracy remains a currently unaffordable luxury. By contrast,
some radical Chinese intellectuals and scholars who call themselves the New Left school have actively
pushed Chinas transition toward such a social democratic regime change f46]. Emerging in the mid-
1990s, the New Left school emulated the Frenchman Alexis de Tocqueville and his doctrine drawing on
American democracy. While questioning the bureaucratic capitalism that dominates the country today,"
the New Left school advocated establishing the rule of law through the states active interventions to
help the marginalized poor people through reforms and to combat the corruption of Chinas central and
local bureaucracies f47]. Other China's intellectual avant-gardes groups calling themselves neo-
liberalists want China's social democracy to be patterned after Western laissez-faire-capitalism (ibid.).
They blame the New Left school for giving the state justification for a new authoritarian regime asserting
that the country is more important than the ordinary people.
From the standpoint of the state reformers and planners, Chinas growing domestic troubles and
social instability raise serious questions about Chinas ability to maintain macro-control over its hybrid
economy and to integrate it smoothly and swiftly during its integration into the world economy. Questions
have also been raised about Chinas capability of complying fully with the ruies of the W TO . In Chapter 5 I
pointed out that China's commitment to its social cohesion has played a unique role in keeping China's
integrated. But as social tensions emanating from soaring unemployment and other conflicts increase,
one might question how long China can sustain its commitment to its social cohesion.
Chinas entry into the W T O not only brings formidable momentum to Chinas economy but also
provides a litmus test for Chinas transition, since it is hard to imagine China passing the litmus test
643
without the rule of law [48]. If China fails the litmus test, then China will not be able to maintain its global
competitive edge. But if China is able to maintain its current commitment, then it is likely that China in its
post-WTO era will continue its hybrid economy [49]. Chinas background transition has eased its initiation
and has enabled China to catch up with much of the rest of the industrial world f50]. But such an
advantage is built on a fact that Chinas current reform leaders were all hand-picked by its charismatic
revolutionary and veteran leaders [51]. That is, Chinas unique patronage politics has been a salient part of
its transition [52]. It is questionable how long China will continue such a patronage politics while
constructing its democratic future. Are Chinas current leaders from the younger generations more
educated, open-minded, reform-oriented, and less orthodox-ideological-bent, or are they not [53]? Answer
to these questions will affect Chinas present and will challenge its future t54]. Once China accelerates its
reforms and more aggressively upgrades its economy, it will doubtless develop some new scenarios and
opportunities with more mature formal institutions and more technologically-advanced conditions. By
then, China will be convinced that only the rule of law based on social democracy can assure its goal
attainment [55]. This higher expectation will push China toward another leap forward" - its own
constitutive upgrade. There are a couple of reasons for this:
First, from a perspective of scientific management, many of the institutional measures currently
regarded as advantages to Chinas transition are basically preventive and risk-aversive f56]. To maximize
input and enhance efficiency, productivity, performance, market capitalization, China needs institutions
built on calculated rationality [57]. Only then can China forcefully press for higher growth rates to cover the
huge expense of its welfare programs and rising costs of its employment and social stability f58]. By all
counts, China might expect the fiscal expense of its welfare state, corporatism, social cohesion, and
stability to contribute to its long-term prospects of economic growth and not to undermine Chinas
entrepreneurial competition or dampen its competitive opportunities. Thus China might want to make its
current preventive-minded and protective-bent measures more active and forward-looking, rather than
continuing to be retrospective or backward-looking. As Chinas modem division of labor has become
more complex and its modern consumers have increased their demands for mass production and other
mass transactions, China might eventually establish full-fledged market-oriented governance and thus
644
carry out a regime change. Particularly emerging into new age of information and technology, China may
attempt to convert its governance into a sort of digital management that would establish a more
democratic regime than ever before (cf. Aoki 1995) [53]. As China badly needs more global information,
China might find itself more reliant on the rule of law and social democracy t60]. As such, Chinas latest
transition hastens the discourse on democracy and freedom in its new era of surfing internets [61]. And
this could contribute to China's further regime change in the future [62].
Second, to maintain social solidarity and protect social cohesion, the PRC, during its founding
years, invented a unique approach, mainly through internal channels, to prevent social tensions from
becoming too complicated and to avoid excessive use of legal forces and public punishments (which
could be traced back to Maos classical work To Correctly Handle the Inner Contradictions among the
People in 1957). To settle conflicts in the work place and within the reach of the state institutions, China
developed a series of institutional procedures, rules, and codes, mainly by espousing peoples self-
education and launching various campaigns of thought-admonition (i.e., so-called criticism and self-
criticism through intense learning of Marxism-Leninism-Maoism, communications, and discourse). In this
way conflicting parties worked together for the common cause of socialist construction. In official
parlance, this was the best way to mobilize activism from all parties and to turn the worst things from
negativity into positivity (or so-called to prevent the recurrence of all diseases and mistakes and save all
patients and the people who committed the mistakes). Obviously, the CCP's communist moral doctrine
played a decisive role in such proceedings. But what was behind in the C C P s doctrine and what took
charge of Chinas central routines was the leadership of the Standing Committee of the C C P s Political
Bureau, who represented C C Ps Central Committee during the recess of its National Congress.
Therefore, those formal mechanism and legal institutions played virtually no independent role during the
pre-transitional era. If any rules and codes existed, they were elaborated according to the beliefs,
consciences, emotions, and experiences of the participants, contrary to any scientific process of decision
making f63]. This vulnerability became more conspicuously in the post-Maos era, when the communist
doctrines no longer convinced Chinese people not to pursue their entrepreneurial dreams. China became
involved with increasingly legal disputes and social conflicts along with its market reforms and massive
645
layoffs. The integration of the Chinese economy into world economy required more and more large-scale
coordination, horizontal and vertical integration, and long-term development goals. Those old procedures,
rules, codes that were primarily reliant upon official reproof, public exhortation, and ideological admonition
and previously regarded as facilitators were no longer considered to be effective ways to avoid conflicts
and provide legitimate solutions. They lacked adequate incentives, economic compensations, and legal
penalties. Moreover, the Chinese people might also feel unfair if the current legal system cannot equally
restrain and monitor the behaviors of the central leaders and put the state apparatus under public
surveillance. W hat China badly needed was a buildup of functionally-equivalent formal and independent
conflict-resoiution mechanisms. Chinas accession to the W T O provided it with an excellent opportunity to
develop these mechanisms and adopt the rule of law.
Third, Chinas transition now is en route toward the reconstruction of the rule of law t64]. But the
bedrock of such reconstruction is Chinas democratization. Democracy not only epitomizes the essence
of market competition, it also underlines peoples volition and freedom through voting, monitoring, and
public discourse and assures the nature of the rule of law. Contrary to the Chinese governments current
approach, the contemporary rule of law cannot be separated from democracy, since democracy provides
the mechanisms to implement the rule of law effectively. From a dialectical perspective, the rule of law
imposes certain constraints that are both mandatory and coercive in order to punish illegal malfeasance
and opportunist opportunism. But while the construction of the rule of law creates myriads of legal codes
and requires effective monitoring mechanisms, rule of law could still be imperfectly implemented, and
human opportunism could still take advantage of infinitely porous legal loopholes. The best way to
accomplish the rule of law is to motivate and mobilize citizens and indoctrinate them with consciousness
of citizenship. For China this is a major task f65].
The devolution of power that moves from hands of monolithic party politics office holders into
hands of the assorted industrial associations or various social and geo-political interest groups can be
considered as an initial level and step focused on reality change. This step can be considered in a way,
more or less informal, that is de facto power-holder-based. It occurred along with the economic
646
hybridization and hierarchical decentralization prior to 1990 (see my Section 5.3, Chapter 5). It was
readily backed by the state I66]. At this stage, both the state and the public could reach a sufficient level of
consensus, a sort of social contract, to initiate democratization procedures, while the centralized planning
regime retained its legitimate powers at least at the beginning of transition [67].
The ensuing step for the reconstruction of institutions under the rule of law I68] required the de
jure establishment of democratic representatives who could spread out to designated social groups at
local and regional levels [69]. Democratization in this stage focused on regime change. It could be
perceived as a transition from the rule of man to the rule of men, based on the rule of law. Voters now
have the right to decide who will be candidates and to select among the candidates by virtue of
transparent voting procedures. This could pave the way for appearance of plural parties (or multi-party
system) [70].
New political expectations may be appearing now in China, as its economic transition ratchets up
marketization, and as the mounting negative consequences and side-effects attract public attention. The
public are critical of Chinas assorted market failures, massive layoffs, extensive corruption, and potential
social unrest [71J. Rapid growth may not be sustainable without the definite assurance of the rule of laws
[72]. The stage has been reached where Chinas regime may not survive without assuring the public that
significant legal charges are occurring in China's social and political institutions [73]. Furthermore, market
expansion chiefly driven by more demanding customers among the majority of the Chinese people
generates greater sensitivity to the ethics and human rights and greater criticism of corrupt officials and
corporate scandals [74]. Eventually, formal procedures for voting rights will not be sufficient to provide a
satisfactory response to the absence of substantive democracy. Substantive democracy needs to be all
round, and needs to deal with both the quantity and the quality of citizen participation. Democracy that
sees the shared use of public goods as its main virtue (a win-win game) might be more democratic than
the rule of law per se that predisposes citizens to abandon coordinative efforts in favor of the pursuit of
private vices (a zero-sum game) [75].
647
An idealized democracy (which ought to be considered as the third stage) is more than Alexis de
Tocquevilles (1945) majority rule and voting. It also involves much more than Abraham Lincolns maxim:
"government of the people, by the people, for the people" [76]. In terms of sovereignty, the rule of law
resides in the universal rights of people. The rule of law must be accepted and enforced upon the basis of
citizens consensus, free choices, and social/moral obligations. It must not be forced by authoritys control or
manipulated by the power of the elite [77]. The core agenda of an idealized democracy favors social
78
inclusion against the deficiencies created by laissez-faire market competition [ ].
Three successive steps were considered indispensable to Chinas transition. The first two steps
were closely tied to the state institutions and relied on social contracts with the state and state
regulations. They drew on China's unique background-characteristics. The last step aimed at eliciting
democratic consciousness and participations from all citizens. It hoped to mobilize resources and activism
from Chinas non-state institutions against bureaucratic inertia and an entrenched status quo. Chinas civil
forces in China may yet detach themselves from the state institutions and resist excessive state
infringement on Chinas civil life.
It is quite possible that Chinas old institutional underpinnings, both informal and formal, will
eventually vanish as a result of more and more effective reforms. Be that as it may, Chinas institutions
might still retain some of their old forms and nomenclatures, those that are collateral to or parasitic of
innovative institutions and mutations. The structure of Chinas institutions during its transition will still be
unique, including a mix of both background-bound and constitutive-bound institutional ingredients [79]. In
the long-run, the constitutive-bound institutional forms pressing for rationalization of institutions will prevail
[80]. The reciprocal dynamics between modes of transition and different stages and different levels of
transition simply articulate the dialectic complexities of such a complex national transition [81],
Existing institutions rooted in background-bound transition and etched into the structure of
organizations give rise to a spate of formidable institutional barriers against any innovation [S2]. No one
expects any office holder or vested interests to resign voluntarily and concede his power, stake, and
648
advantages to others. Initially, China was able to take advantage of its dense population to provide a
cheaper pool of labor. At that time it could use distinct personal networks as alternative channels for risk
diffusion and the facile information flow [83]. This enabled China to use regional diversification for
relatively effective governance and efficient transaction without threatening Chinas survival and
endangering its overall competence I84].
All these concerns about deficiencies [85] evaporated when efficiency and competition concerns
surfaced as imperatives of Chinas transition. The incremental breakup with old world would still be
reckoned as painful and rather costly, socially and culturally. However, such an incremental breakup
becomes prerequisite to future buildups. Ironically, as markets expand and the economy becomes more
complex, the social costs of background-based transitions rise and the expenses of constitutive-based
transitions fall f86]. At some point in the future, Chinas transition will take a U-turn, when loses its current
advantages and needs to undergo a transitional upgrade such as, building a "high-road" codified and
digital management for "efficient" mega-information flows and mass market exchanges f87]. Factors
previously considered to be advantageous in terms of effectiveness and flexibility will become more and
more costly, while a new-rule-approach by management will become less and less expensive [88].
Figure 6.2 identifies a variety of advantages and disadvantages of doing business in China,
including economical transaction costs and institutional obstacles [89]. This figure suggests many possible
scenarios of trade-offs between particular counteracting factors as well as trade-offs in general between
efficiency and legitimacy that strongly affect Chinas transition.
649
Figure 6.2: Advantages and disadvantages of doing business in China (heuristic)
Disadvantages Advantages
1 . - ---------------------------------------------------------------------------------
2. --------------------------------------------------------------------------------------------------
3 , ---------------------------------------------------
4. --------------------------------------------------------
5. ----------------------------------------------------
6. -------------------------------------------------------
7. -----------------------------------------
8. -------------------------------------------
9.
10 .
Advantages:
Cheap labor pool (from young, rural, energetic surplus population), services, lands, and housing;
State financial and fiscal stimuli, such as lower tariffs, duties, taxes, interest rates, fund rates, etc.;
Less local competition;
Stronger forward and backward linkages, and vibrant business environment;
Disadvantages (90):
Hidden agendas and informal restrictions;

Ambiguous official regulations;
Difficulties in hiring capable people;
Difficulties in finding right local partners;
Consumers conservative attitudes and limited awareness;
Difficulties in getting information;
Backwardness in distribution system, including advertising, infrastructure, transportation, communication,
insolvent banks and SOEs with onerous non-performing loans, etc.;
How to reckon these trade-off scenarios over time empirically is important for reforming planners
in order to rationalize their reforming process and to undertake the rebuilding of institutions. For instance,
in order to get a long-term vision of Chinas competitiveness in international trade, it needs to estimate
how long it can maintains its greatest comparative advantages, i.e., its cheaper labor pool, relative to
650
competitive nations such as its SEAN neighbors, Mexico, etc. It needs to compare the growth rate of its
labor wages with its counterparts in other countries over time. It needs take into consideration those
domestic factors that might affect Chinas competitive advantage over time, including demographic
variables such as age dependency ratios, fertility (TFR) and mortality rates, urban population growth
rates, total population growth rates, etc. Given Chinas higher expectation now (based on its previous
decade of 7-9% GDP growth) for a monumental growth that will quadruple its current GDP size by 2020
[91], how important is it to sustain a cheaper labor force in order to reach such an ambitious economic
goal? [92] How can China maintain its own cheaper labor pool in the future in the face of numerous social
and economic challenges from vibrant domestic and international forces? And whether the government
would like to perpetuate such a strategy of maintaining cheaper labor pool as its competitive advantage?
[9 3]
Figure 6.2 also illustrates that even if a certain mode of transition is chosen appropriately in its
own right, transition is still strongly affected by many local uncertainties and contingencies. Thus the
transition is never autonomously taken for granted. However, once a mode of transition becomes
institutionally patterned, it could be self-sustaining, self-reinforcing, self-reproducing, or self-diminishing
I94]. Even if transition succeeds with its positive feedbacks, it could provide conservative insiders and
office holders who control resources and information with greater incentives to entrench the status quo,
and resist reforms, and jeopardize the transition. Corrupt collusion between conservative insiders with
vested interests have frequently counteracted states reform efforts [95], diminishing the transitions
momentum.
Chinas buildup of a new regime under social democracy will be a long institutional battle - a
matter of decades rather than years" I96]. This long process will in many ways resemble a socio-biological
process with changing human habits and changing institutions [97].
651
6.3 China in the information age
Boisot and Child in 1996 brought in their information matrix to account for Chinas economic
governance in transition. By information matrix, they assumed a transition from a fief-typed network to a
clan-typed network. In Chapter 3, I criticized their approach for overemphasizing the primacy of Chinas
informal institutions at the expense of its formal institutions. In Chapter 5, I pointed out that China had
entered a new stage in its transition, focusing on the reconstruction of formal organizations and
institutions for the rule of law and for social democracy. However, if one anticipates digital management to
be a major form of Chinas future organizations and institutions, and if one views digital management as
challenging Chinas unique existing informal sectors, organizations, and institutions, that could create a
moot point.
As people deeply ponder regime change and question the emergence of widerspread democracy
in China, they might have four major concerns regarding relationships between digital management and
human relations in particular in China and regarding relationships between technology and human nature
98
in general in the mankind future [ ]. These relationships involving a complex interplay between
technology, information, communication, and human nature could affect the nature and form of Chinas
regime change. By and large, therefore, these concerns would provide the gauge for appraising Chinas
transition in the future ["].
As Chinas future transition is concerned with a digital management to collect and distribute
institutional signals, more issues will come [10] as to whether it could advance Chinas constitutive leap
and to which extent it could facilitate a humanitarian progress and thereby be realistic to Chinas future
I101].
First, digital management, relying on statistical data and formal procedures, might benefit mass
production and mass transaction in a mechanical way. But digital management lacks micro-flexibility as
well as micro-specific observations of the characteristics of real actors and their actions [102]. Statistics
does not lie and they can be useful to study [103]. But do statistics really convey the most important
652
qualities of individual human beings and their actions? [104] Meanwhile, without face-to-face information,
there is no way to know any individual desire and motivation, very important to predict personal
achievements. Some individuals seeking their self-interests can use some statistics to cover-up corruption
and manipulate institutions [105]. Digital management might benefit some industries, sectors, and
enterprises full of mechanical routines. But digital management might not benefit other industries, such as
creative-ideas-minded scientific disciplines and research businesses [106]. Up to the year 2000, so-called
info-network economy under digital management extended only to those industries related to daily stock
trading, retails, tourist information, etc. [107]
Second, statistically-based data used by digital management cannot avoid categorizing to social
groups and organizations in such a way that quality and important information is lost by the labeling [108].
Statistical formulas involving mathematical simulations are capable of mimicking real human beings and
their actions. But any live object varies from the mean or average. It has its own idiosyncrasies derived
from its own living conditions and life experience or life cycles, generating unique forms of rhythm, pace,
momentum, strength and weakness, incentive, stimulus, and motivation, catalyst, etc., over time and
across space, all of which are socially constructed and environmentally contingent [109]. Very often, how
people could think the same way, agree or disagree with each other, or take certain things for granted,
depends upon the information disseminated by the media. The media could easily be manipulated by
very few elite with access to an information network controlled by some administrative staffs (R. Burt
1992). In China, the media and the press are state-owned. Chinas statistically-based data have
propensity to be biased to favor states propagandas and other agendas [110].
Third, even though digital management is boosted by quality control, it is driven more by quantity
demand for market expansion and mass production [111]. And that could cause many people to worry
about its side-effects [112J. Too many petty regulatory rules and codes made for digital management may
hamper individualistic creativity and activism and lead individual actors to suffer from the syndrome of
over-institutionalization" that I would like to call [113]. Some legal codes are apt to induce excessive and
unproductive litigations and even apt to create some loopholes for legal abuse. Institutional cover-ups for
653
social exclusion and ignorance can be seen as extreme cases of systemic abuse of information. In this
case, digital management could damage social harmony, while the rule of law really requires a certain
degree of social harmony. Given these limitations, therefore, digital management might not appropriately
be appreciated as the exclusive form of Chinas future governance that would fully assure China's
economy to perform better than does Chinas current governance. In my view, however, digital
management with its strengths could be considered as a supplementary form to Chinas future
governance organized according to an organic articulation of both formal and informal, or in a setting,
flexible, reciprocal and/or communicative.
Fourth, digital management does not necessarily guarantee progress in a context of poverty and
social injustice, often degenerated by severe market competition. Digital management may turn to
reinforce fiercer competition at the expense of public goods, individual freedom, and human universal
emancipation [114]. In this case it is hard to convince the people that such a high-tech-aided progress
alone could bring social democracy to the future society, except for the plausible entrenchment of vested
interests for status quo an old predicament of modernity subject to instrumental rationality.
With regard to China, it is hard to conclude that a new regime incorporating digital management
would be more efficient in upgrading transitional economy than is the current regime of information
management drawing upon semi-formally-coded, informally-coded, and/or non-coded information. Even
when an overall "systemic" efficiency (represented by digital management) does exist, it cannot replace
individual efficiency and group efficiency. And vice versa. In reality, however, none of these processes is
an ultimately efficient way to approach a socially-embedded transitional economy. With inevitable market
failures, neither social institutions nor state agents engaging in economic transition could assure optimal
efficiency. Many institutional changes and mutants arise and take shape in unexpected ways with
apparent inefficiencies [115]. And this challenges the generations in the information age to construct digital
management with so-called share-sensitive linkages that can combine natural biological systems and
digital technology" and work more effectively than do the current software-aided systems of artificially
emulating [116j.
654
6.4 A dialectic view of Chinas prospects
At present, several questions remain: Is Chinas current transition a partial transformation or a
structural transformation? If it is structural transformation, does that mean that China is moving toward a
complete market economy? Is a structural transformation indispensable and feasible for China's
transition? The answers to these questions will affect Chinas planners considering their strategies and
options particular to Chinas transition.
Figure 6.4 (heuristic) compares several Chinese and Russian trajectories. In Chinas case, the
trajectories represent various possible future scenarios (e.g., buildup of rule-of-law-based social
democracy), illustrating the dilemmas faced by planners trying to decide between reform speed and
stability (see Figure 4.2b, Chapter 4). If Chinas reform planners prioritize speed over stability, they
increase the risks and costs and endanger the likelihood of a successful transition (as shown in the lines
of Scenarios 1 and 2, Figure 6.4). If reform planners prioritize stability over competition, or if they prefer
the current balance of competition and stability, then the transition will likely be smooth and no more risky
or costly than Scenarios 1 and 2 (i.e., Scenario 3, Figure 6.4). However, if China's reform planners lack a
commitment to dynamic change, and if China loses its institutional fitness to the change, such an upgrade
would not make any sense. A forced upgrade would be vulnerable to failure (i.e., Scenario 4, Figure 6.4).
In reality, both Scenarios 2 and 3 are more likely to happen than others, when China intensifies its current
institutional reforms and hurries its buildup of market institutions after joining the W TO . The formidable
push for institutional competitiveness is hastened by Chinas sustained rapid development, its increasing
demand for industrial employment, its expanding overhead sector, its growing middle class, and its
accelerating capital marketization.
655
Figure 6.4: Multiple possible transitional trajectories (heuristic), China and Russia
G D P growth rate
(%)
Early stage: Adjustment stage: Transitional upgrade (projection):
Initiation Strategic preparation Intensified institutional competition
for upgrade & reconstruction
1998
Spread increases, re van
arjoaSly steepens (1,2)
Spread decreases, curve flattens and then declines

(3 ,4 )
5%
Russia
1990
Spread increases, curve rises (1)
China
1978
0%
Spread decreases, curve declines and then flattens (2)
2001
Tim e
Projections of scenarios for transitional upgrade:
Chinas scenarios:
1. Optimal: hastened by the urgency for constitutive reconstruction of institutions when the existing
institutions present best fitness to the upgrade; the pinnacle for efficient allocation of resources is
possible (unlikely).
2. Secondary-optimal: the transitional upgrade fits the current transition better (more likely);
3. Sub-optimal: transitional upgrade presents partial fitness to the current transition (more likely);
4. Least-optimal: the transitional upgrade with no fitness to the current transition would abort due to
growing institutional antagonism and looming transaction costs (less likely).
Russias scenarios:
1. Success: background-minded checks on remaking institutions and realistic policies better fitted to
Russian constitutive-minded transition (more likely);
2. Failure: Russian transition continues its deterioration due to stronger institutional barriers and
backward conditions (likely).
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China's institutional fitness can be affected by a number of factors:
1. Constitutive-bound reconstruction of social institutions; marketization, SOE reforms, and

privatization;
2. Rational bureaucratic reconstruction under the rule of law;
3. Impending reforms in political institutions along with the growing civil consciousness of social
democracy or participatory democracy;
4. State capacity to cover welfare programs, and reach rational deals with assorted conflicting
interests and political contingencies when addressing environmental shocks;
5. Global impacts with institutional isomorphism, affecting Chinas institutional learning curve.
When we refer to Chinas momentum for transitional upgrade as socially embedded and historically
derived, we cannot ignore that the momentum has been affected by global trends and changes, political
uncertainties, and adverse climates. Chinas transition planners have learned from advanced economies and
societies in the past and at the present [117]. Just as Chinas radicalist surge in the 1960s was fanned by
rising global nationalism, so Chinas current marketization, privatization, and construction of the rule of law
have drawn on models in the international arena. If the signals and feedback China received were negative, it
would turn to other options on its own term [118].
China regularly tried to learn from the institutional experiments of capitalist countries and more
advanced economies (the FSU and FEE as such) in order to decide what was best to its own practice of
Four Modernization. China likes to call its actively learning is the ism that takes whatever it wants over first.
(cit. from Lu Xun, a famous Chinese literati in the early last century). In the 1950s, China had a short
experience of adopting the Stalinist model from the FSU; in the 1980-90s, China tried to adopt the East Asian
model, particularly Singapores. During the latest dotcom heat, China tried the American model of Net-
economy and financial capitalism. In Section 5.1 of Chapter 5 particularly I pointed out that one of main
factors on which China drew initially was Americans amazing economic performance and its pop culture.
From the beginning of the 1990s, Chinese leaders attempted to convey positive images to offset their
embarrassment generated by the state violence against the students demonstrations in Beijings Tiananman
Square. Chinas ensuing rapid growth and entrepreneurial-mania throughout the 1990s were inspired by the
boom of US stock market and productivity based on information technology that reached its apex in the same
period [119]. In the backs of China's reformers minds leaning on privatization of the SOEs was an unheralded
assumption, which was taken for granted particularly after 1989, that American capitalism was most classic
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capitalism (i.e., supposedly typical capitalism of free market) and its success was most sustainable since the
post-WWII era and that the US as only superpower was leading the way of the world economy [120].
Not for years has the capitalist world so challenged the American image of capitalism. When the
world has been so enthralled by the Hollywood movies [121], an upside down image of Americas economy
could derail the trajectories of the rest of the world economy [122]. If corporate America and its democratic
model could not sell [123], it would cloud China's current transition toward privatization, though in its own term.
The plummet of the Wall Street stock market [124] could set Chinas institutional reforms back to the options
other than privatization [125]. It could force China to reevaluate its development strategy and think about its
future marketing policies, shareholder value, stock options, IPOs, etc. [126]. It could even challenge China to
withdraw from "glasnost' [openness] and "perestroika" [restructuring] reforms [127]. Although China might not
want to retreat from its current direction toward a market economy, it might want to reconsider how much it
would like its GDP to be exposed to the capital markets [128].
If the American economy becomes de-stabilized [129], that would change the dynamics of the world
economy and the rules of global capital game [130]. And that, in turn, could further separate the American
economy from the rest of the world economy. The growing differences between the US and the EU, East
Asia, and the rest of the world on such key issues as environment, trade, combating the proliferation of
weapons of mass destruction, and conventional arm control indicate that American capitalism becomes less
popular than it used to be. Today the rest of the world is less likely to take American capitalism as a model
and more likely to try other options [131]. In the capitalist world system, there would be a tidal wave of frame
realignments and/or restructuring. More autonomous Asian economies, including Chinas, might follow suit
And that could reshuffle structural niches and strategic positions across all of Asia [132]. Interestingly enough,
this might enable regional rivals such as China, Taiwan [133], and Japan to become even closer [134].
However, if China expects its transitional upgrade, it might want to reach out more actively and in a
more constructive way. A harmony with the US would be more critical to Chinas current transition than ever
before [135]. China's needs for American capital and advanced technologies and imports will probably be
658
threefold in the coming decades [136]. In many ways China remains an undeveloped country: Its rudimental
legal system lacks complexities and sophistications; its fledgling privatization and capital marketization
lack practical experiences and knowledge; its current political system is mixed with old segments; its
backward industries are fraught with old economies; its overall productivity is at best moderate; its
regional development is uneven [137]. China has much to learn from the American experience [138].
Therefore China might want to get closer to the US in the coming years.
At the opening of the new Millennium, China is becoming a major contributor to the global
community [139]. China has two major events on its current agendas [140]. One is its accession to the W TO.
The other is its hosting the Olympics in 2008. After its entry into the W TO, China is virtually completely
exposed to the global community. China hopes it can help establish the rule of law and welcomes
international competition. China's W T O entry imposes certain external structural constraints on Chinas
transition with respect to the transitions direction and destination [141]. Chinas hosting the 2008 Olympics
will provide it with sufficient reason to protect social security and economic stability, even if that means
imposing internal constraints on its transition. Combining China's entry into the W TO and Chinas hosting of
the 2008 Olympics, China hope that its new Millennium will be full of good feng shut' (Chinese trans. wind
and water, meaning luck). Enabling itself to transform these opportunities into its future assets, China want
to bid for its international reputation and showcase its commitment to the W T O and its ability to comply with
the international rules [142]. But that depends not only on the states determination, political leadership, and
managerial skill, but also on the participation of Chinas citizens in political reforms, making its regime
transition toward social democracy.
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6.5 Concluding remarks
This study of Chinas transition identifies the need for grand social theory [143]. Grand social
theory enables one to contemplate institutions across both market economies and transitional economies
[144]. The sudden collapse of the Communist world has spurred a quest for such a grand theory, a theory
to which both humanists and social activists can contribute [145].
This study proposes a sociological-grounded institutional comparison of transitions through the
conceptualization of two ideal modes of transition and the disenchantment with market-hierarchy
dilemmas. In Chinas transition this raises the question of how Chinas changing social expectations have
affected its transition and how Chinas institutional reforms have addressed the social dilemmas raised by
efficiency concerns on one hand and legitimacy concerns on the other.
The conceptualization of two ideal modes of transition addresses a historical vision of transitions.
Once a transition receives positive feedback, its legitimacy increases, its institutional routines are
sustained, and they become morphed or ingrained in the social structure in such a way that they can
reproduce the process. Chinas transition has already been sustained for a relatively long time. Its forms
of transition ought to be seen as the outcome both of standard market institutional conditions and of
Chinas unique background of institutional learning, trial-and-error experiments, and efforts to invent
institutional solutions to market and state/hierarchy dilemmas. These solutions include hybridization and
decentralization both reflective of Chinas pragmatic and secular culture.
Too much control and an overwhelming emphasis on stability could produce a reversal -
hyperactive micro-interventions and a return to Chinas previous planning regime. This could dissuade
China from further institutional changes, including its regime change, and from its integration into the
global economy to meet international standards. A real test for Chinas current leadership and managerial
skill will be to see if they can maintain a balance in their reform plans and strategies, and whether or not
660
they can sense in a timely way the diminishing of old institutional elements and the emergence of
dynamic breakthroughs [146].
Whatever mode of transition China takes, it is certain that legal-rational bureaucracy, professional
certification, and greater investment in the social overhead sector will help China bridge the gap between
formality and informality [147]. Chinas deeper rooted consumer culture and its socially embedded
commercialism have helped facilitate this general trend [148]. Over time, the social overhead sector will
increase its importance, enhancing the reciprocity between individuals, enterprises, industries, and
institutions [149]. The social overhead sector includes intermediaries such as, insurance agencies, banks,
public relations offices [15], real estate establishments, legal institutions, governmental bureaus, etc. [151]
In terms of legal institutions, a common framework of regulations will emerge that can provide the country
with predictable expectations regarding economic transactions and other social activities [152].
Chinas transition is moving toward the rule of law [153]. Chinas substantive institutional changes
and growing economic competence have generated increasing formalization [154], even though semi-
formal or informal sectors remain while the economy moves forward [155]. Professional certification will
eventually replace informal recruitment, even though informal recruitment will remain indispensable and
supplementary to professional certification. While personal relationships and mutual understanding and
trust generate much of the reciprocity between formality and informality, those relationships need to be
institutionalized through clarifications of legal contracts and specifications of divisions of labor. As for
economic institutions, China has to restructure them through the rule of law [156]. China needs to restructure
its economic institutions if it wants to compete in the global arena of higher end products (i.e., high-value-
added and high-tech products). A competent economy needs to base its legitimacy on property rights
upheld by formal tort law [157]. Chinas reforms can continue to experiment with hybridization, a realist and
complicated process of "metis" (J. Scott 1998) [158].
In China today, the term "quasi-market" economy may be more accurate than the term market
economy, since Chinas "market" is not defined in the conventional neo-classic sense. The growing
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power of the free market in China operates in tandem with the government that, in turn, is embedded in
Chinas unique cultural milieu [159]. In the future, China may be required to take more vigorously
innovative measures against institutional inertias. This may require the state to rely more on local
functionaries and ordinary workers in its efforts to counter administrative hyper-interventions and
bureaucratic redundancies. This in turn might require state regulators to take more appropriate measures
against the opportunism of different parties and the corruption of the entrenched vested interests that look
for ways to thwart the rule of law. More efficient allocation of resources through relatively mature market
institutions alongside inventive social policies and welfare programs would help build business confidence
among investors. This in turn might attract foreign direct investments (FDI) and discourage capital
outflow. All these efforts would work only if China's transition moves toward integration into the world
economy along with growing international coordination and cooperation [160]. Chinas institutional reforms
are preparing the ground for future prosperity. Chinas transition now appears to be irreversible, although
China may still experience setbacks along the way. But the direction is clear as China moves toward a
more formal, transparent, competitive future with a uniquely Chinese style of its own [161].
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1. Following East Asian miracle, including Chinas fast growth, some analysts and scholars began to argue
for a new hypothesis of development: if the East Asian case was not unique, political liberalization might not
be imperative to economic liberalization. Such a hypothesis is partially correct, although in my opinion the
hypothesis remains fragmented and ex post facto rather than dynamic ex ante. I will argue that the
dilemma between political liberalization and economic liberalization is attributable to the
dyssynchronization between regime change (in terms of democratization) and reality change (in terms of
economic freedom). My null hypothesis is that as democracy increases, the economy decreases and vice
versa, cf. Democracies slower to fight poverty by John Thornhill, Asia editor of Financial Time, in
Financial Time, p. 5, Fri. Apr. 5, 2002.
2. Many China's watchers have suspected that China is trying to enact reforms in its economic sphere while
retaining autocratic power in its political sphere and keeping its current constructing of rule of law from
political reforms; or that Chinas fast growth and reality changes only protract the survival of its planning
regime. In my view, however, reality changes only embody regime changes through a unity of form and
substance. That is, reality changes both a regime's form and a regimes substance. As China has undergone
so many reality changes, it hard to say that its regime has remained unchanged. Reality change paves the
way for regime change. In such cases the task becomes one of recognizing change and naming it
Also cf. Chinas ghost of 1989: Chief ousted by hard-liners" by Erik Eckholm in The New York Times, A12,
Wed. Nov. 13, 2002: ...In his opening report to the 16ttl Communist Party Congress on Friday, Mr. Jiang
spoke of fine-tuning procedures within the party but flatly rejected anything resembling western democracy,
which he says would plunge China into chaos. Perhaps the most central debate as china continues
astonishing social and economic changes is whether greater political freedom would be catastrophic, as Mr.
Jiang suggests, or whether it is stead a painful but necessary key to stability...The party can govern, but it
does not inspire support, said Joseph Fewsmith, a China specialist at Boston University, who warns that
waning legitimacy could, in a social crisis, lead to political impasse or collapse, T o build public faith, the party
would have to be very different, he said. 'It needs to articulate a vision that includes social equity and a vision
of where China wants to g o ... 'And political reform, broadly defined, has to be part of the answer, he said.
Optimistic loyalists see hope in Mr. Jiangs proposal to bring new social groups, including entrepreneurs,
inside the ruling councils rather than watching them rise as independent forces. His theory of the 'three
represents, which aims to do that, is being formally written into the party constitution this week. That strategy
will be a political experiment without any real precedent in Chinese Communism, but there is no guarantee
that the end result will be closer to democratic freedom. Bruce Dickson of George Washington University,
author f the forthcoming book 'Red Capitalists in China (Cambridge University Press), found that most of the
successful entrepreneurs, the kind being courted by the party, feel that they do well in the cronyish system as
it is and see no need to push for major reforms. 'Trying to tinker with the system at the margins may not
work, he added. 'Liberalizing changes can quickly escalate out of control, as in '1989. But if you dont open
up, the outside pressures for change will build up....
3. cf. Financial Times, p. 11, Thurs. July 4, 2002: ...Beijing has substituted superficially modem structures
built on foundations that are still socialist. Also cf. As China's economic shines the Communist Party line
loses luster* in The New York Times, A1, A12, Tues. Nov. 5, 2002: ...the benefits of party membership and
of the economic boom have not been evenly shared. Factory workers and peasants - the partys traditional
base - are feeling more and more alienated by corruption, joblessness and the fraying of the social safety
net. Under Jiang Zemin, the party has tried to attack these problems and broaden its appeal, but it is not clear
how the party can be all things to all people. Mr. Jiangs answer has been redefine Marxism itself and
promote his theory of the 'three represents...It is an awkward - some say hopelessly tangled - effort to
reconcile the partys historical role as guardian of workers and peasants with its new aim of ruling an
advanced market economy 'The theory says that the party can represent both the exploited and the
exploiters, said an official of a leading party institute in Beijing. 'How do you do that? Just because you say
you do? The party is by no means in danger of losing its grip. It keeps tight rein on the government, the
police and the military. It remains the vital gatekeeper of routes to advancement for managers of the state
663
enterprises. It controls the patronage that makes things happen in villages and small towns. But Beijing
officials are well aware that, particularly in rural areas, the party is rotting under the weight of corruption and
nepotism and that the popular view of it is increasingly jaundiced. A visit to the decaying smokestack city of
Zhangjiakou, in northern China, like many other old state factory cities, demonstrates the ambivalent view of
the party held among the millions of common floor-hands and managers who run the machine plants that
were once considered the 'pillars of the nation. The faith of many, like Zhu Feng, a 30-year-old machinist,
has been badly shaken. Two-thirds of Mr. Zhus shop-floor comrades have been laid off, he said. He makes
about $80 a month - better than many - but has little faith that his job will last. Mr. Zhu said it had 'never
occurred to him to join the Communist Party, even though his father had, and his interest in the party
congress this week was entirely practical. 'These days, young people like me arent interested in the party
unless they want to be a manager, he said, cradling is young daughter as he spoke in an interview at home.
When the factories are doing so badly, nobodys becoming a manager anyway. The Zhangjiakou City Hall is
frequently besieged by protests and petitions over unpaid wages. 'W e re not so concerned about who the
next leader will be, Mr. Zhu said. 'W hat we care about is whether they will help workers with social welfare
and medial insurance, because thats what everyone here worries about. By contrast, Ji Zhanlei, a 25-year-
old accountant in a large machinery plant in the same city, will marry later this month and is about to enter the
party. In the short term, he said, membership will not mean any difference in his salary of $60 a month. 'In
some ways its the opposite, he said. 'Youre expected to make more sacrifices. He continued: But the party
does give you more opportunities for training and leadership. And of course its essential if you want to join
senior m anagem ent Fan Guojie, 25, who earns $120 a month as a mechanical engineer at the same
factory, smiled as his friend spoke, then disagreed. 'W eve all been educated to believe in the party, but that
doesnt mean well all have to join, he said. 'I dont think it will affect my career. In rural China, disaffection
with the party may be even more widespread, even though most villages remain in the firm clench of local
party officials...Numerous accounts, even in official journals and newspapers, describe village or township
party organizations that have been hijacked by a family or clan, leaving others alienated or bitter. Corruption
makes many people angry. 'Especially in the countryside, the image of the party has declined terribly over
the last 20 years, said an expert on rural politics based in Hong Kong. 'Party cadres used to get respect, but
now they are often looked down upon. People question their motives: why would you join if you arent seeking
power, and for what reason other than to get money for yourself? Despite the recent spread of elections for
village administrators, real power nearly always remains with the appointed party secretaries. A regenerating
influx of dedicated young officials has often been stymied, researchers say, because village party leaders do
not want to foster competitor for their power and corrupt benefits. If you want in to the party, one young
farmer in Liangzhuang said, you must get an introduction. 'The village secretary introduces people he knows
already, he said...In the larger cities, the story is different, particularly among the youths who are the
countrys most ambitious and elite students and who still consider party membership a vital credential. At
Qinghua University in Beijing - known as Chinas M.I.T. and the alma mater of several top national leaders -
more than one-third of students have expressed interest in joining, school officials say. Among
undergraduates there, 12 % are already party members; among graduate students 30% are members.
Students tend to offer idealistic reasons for their pursuit of a party card, though classmates may call them
naive or dissembling. The well-educated youths who flock to join the party almost universally say they expect
more democracy overtime, but they also tend to give the national leadership a great deal of slack. 'China has
a one-party system and decisions are made through the party organization, said Jiang Ji, a sophomore at
Qinghua University who has applied for party membership because, she said, her parents and grandparents
were proud Communists and because 'its seen as an honor and a noble thing. 'In a place as a big and
diverse and China, she said, 'if everyone were allowed to have a say in choosing the leader, the country
would fall into chaos. Their yearning for change - the same students avidly surf the W eb and watch
American films - is tempered by the same cautions that party leaders express. Guo Weian, a political science
students and party member at Peoples University in Beijing, said a 'smooth changeover1 in leadership at the
party congress would be 'a healthy development, a sign of institutional maturity. 'But I think we have to
accept that any political change has to come from within the party itself, he said. 'The 'three represents may
help to transform the party from within, and I think that has to be the next step.
4. cf. Getting a taste of southern comfort - A new refrigerator factory in America shows just how much
China is changing by Betty Liu in Financial Times, A special anniversary magazine, Nov. 2002.
664
Also cf. "Shanghai polishes its PR to woo big business - Tailored policies are paying off by giving the city
a psychological advantage over Hong Kong" by Richard McGregor in Financial Times, p. 6, Fri. Nov. 29,
2002: ...There are signs of change here...with China on the verge of a consumer banking revolution and
a gradual opening of its funds management industry on a time-table laid out by the World Trade
Organization...
5. cf. Chinas stealthy reformer - A talent for concealment has helped the countrys president to manage
a period of profound economic and social change. He is now preparing to hand on power by James
Kynge in Financial Times, p. 5, Weekend, Aug.31/Sept.1, 2002 (emphasis mine): ...M r. Jiang is famous
for supplying content-free audiences to politicians, businessmen and editors who have spent months
trying to see him. In public appearances, he almost always reads from a script and avoids fielding
questions unless they have been vetted in advance. Yet the man dismissed by commentators as a
transitional figure when he took office in 1989 has not only proved his endurance but has also presided
with skill over one of the most tumultuous periods of change in modern Chinese history. This week saw
the realization of some of his crowning achievements. Officials said Mr. Jiangs attempts at a leadership
conclave to win assurances that a groundbreaking new philosophy - called the 'Three Represents -
would be written into the Communist partys constitution had been successful. This means, in theory at
least, that the emphasis of party support will shift away from the poor proletariat and towards the wealthy
and powerful. In addition, it was said, Mr. Jiang prevailed against opposition to ensure that members of
Chinas burgeoning entrepreneurial class would be invited into the party and some would even be
elevated into the central committee, the inner sanctum of Communist control. Such changes are
important on a number of levels. First, observers says that without embracing the powerful entrepreneurs
that have flourished as a result of two decades of free-market reform, the party would have progressively
lost touch with society. Second, including unabashed capitalists into party ranks will shift the orientation of
China's ruling elite, possibly ensuring more favorable treatment for the growing non-state industrial
sector. Third, amending the party's constitution prepares the ground for future political reforms. 'Jiang
Zemin has been good at adapting to the new social and economic realities that the era of economic
reforms has created, says Jean-Pierre Cabestan, head of the French Center for Research on
Contemporary China in Hong Kong. If the Communist party didnt adapt, it really could have died. In this
endeavor, as throughout his career, Mr. Jiang's approach has been characterized by stealth...'It is reform
by obfuscation, says one foreign diplomat in Beijing. 'The trick is to make things sound so inoffensive
and vague that they dont attract much opposition. His talent for concealment has meant that throughout
his career, Mr. Jiang, 76, has climbed the ladder not through bold initiatives or stirring oratory but mainly
by presenting the slimmest of targets for his rivals to assault. By contrast, Deng Xiao-ping and Mao
Zedong, his two charismatic predecessors, uttered a series of pithy aphorisms that most Chinese can still
quote...Overall, Mr. Jiang may find a niche in modern Chinese history as the man who broke the mould of
charismatic leadership set by Mao and Deng and replaced it with a more consensus-driven process that
dispensed almost entirely with Communist ideology and dogma. The approach has been remarkably
successful in some ways. China's gross domestic product has doubled in the past 10 years and large-
scale social disruptions such as the Tiananmen Square massacre in 1989 (which led indirectly to Mr.
Jiangs appointment) have been avoided. This is no small achievement, given that about 6m workers are
made redundant every year in a wrenching reform of insolvent state companies. He helped steer China
into the W TO, despite Sir Leons frustrations, and assisted its winning bid last year to host the Olympic
Games in 2 0 0 8 ...
Also cf. Hu prepares for power in China by James Kynge in Financial Times, p. 1, Sept. 3., Tues. 2002
(emphasis mine): ...H e [Mr. Hu] also extolled the 'Three Represents - a philosophy attributed to Mr.
Jaing that is to be written into the party constitution at the November meeting, alongside ideological
tenets by Mao Zedong and Deng Xiaoping, two former leaders. The move signals a re-orientation of the
Communist partys ideology, so that it will no longer solely represent the proletariat but also entrepreneurs
and other affluent people. For Mr. Jiang, the incorporation of his political philosophy in the party
constitution represents one of the crowning triumphs of his career, securing his legacy and allowing him
to vacate his top Communist post, observers said. While observers say he might stay on as head of the
Central Military Commission, a position that would ensure continued influence over decisions in China,
some officials believe Mr. Jiang favors retirement from all three of his main posts. In the opaque world of
665
Chinese politics, however, disagreements and power struggles might vet erupt as the party congress
nears. But if the current pattern holds, a relatively smooth succession mav be achieved, observers said.
Little is know about the low-profile Mr. Hu. an apparatchik who has worked within the party system all his
career. He has little experience of foreign countries, having traveled to the US for the first time this year.
Yet official sources sav he mav be interested in reforming Chinas political system - the theme of several
quiet discussions at the party school..."
Also cf. Chinas president may be reluctant to cede his power - Clouds over succession - Media praise may
mean Jiang Zemin, like Mao, envisions himself as retirement-proof by Erik Eckholm in The N ew York
Times, A1, A14, Sat. July 13, 2002: ...In the last few weeks, among scores of similar tributes, the Central
Party Schools newspaper described Mr. Jiang's three represents theory as the basis of our party, its
foundation for governing and the source of its strength. The theory, which was formulated in 2000 and is
being extolled as a breakthrough in Marxism, is an effort to adapt the Communist Party to the vibrant, market-
driven society that China is becoming. It holds that the party should represent advanced productive forces,
advanced culture and the fundamental interests of the broad masses of the people - implying that the party
can represent entrepreneurs as well as its traditional constituents, the working class and the peasantry. The
theory is Mr. Jiangs efforts to join the pantheon of Communist leaders - his lasting contribution to the sacred
texts of Marx, Lenin, Mao and Deng Xiaoping, which are still used to justify Communist rule and guide
national strategy...
6. cf. Beijing tears up proletarian roots - Reds are turning a sophisticated shade of orange, says an
observer as the middle class consolidates its grip on power by James Kynge in Financial Times, p. 3,
Weekend, Nov. 16/Nov. 17, 2002: Guo Fenglian, a middle-aged woman in a woolen cardigan, has
experience at first hand many of the upheavals in the last 53 years of Chinese history. In the ultra-leftist
1960s she was the leader of the iron-girls production brigade, a band of young women with hoes who
worked propaganda miracles from the inhospitable soil of Chinas northern plateau. But after her model
commune, Dazhai, was exposed as largely a hoax in 1980, she was forced to lie low. In the 1990s she
resurfaced, following a trend into business and refocusing her skills for communist propaganda on the job
of product marketing. Dazhai woolens warm your heart,' was one of her garment companys slogans.
Although now inured to change, Ms. Guo looked worried last week as she attended the 16th congress of
the Chinese Communist party in a hall bedecked in the blood-red hue that signifies the sacrifice of
millions of revolutionary martyrs. I really hope our beloved party is not going to change its color, she
said. By the end of this week though, it was clear that it had. The party that was founded by a peasant
army and sustained by the workers in Chinas cities has used this congress to distance itself emphatically
from its proletarian roots. You can not say we are red any more, said the editor of an official Chinese
newspaper. May be a more sophisticated shade of orange. Many events in modern Chinese history
appear momentous only in retrospect. But already several Chinese commentators are calling this
congress historic, a watershed in the partys evolution from egalitarian communism to authoritarian
capitalism. At the very least, after this congress the party cannot be thought of as revolutionary. The first
clause of the partys founding charter in 1921 talks of the need to overthrow landlords and distribute their
land among the peasantry. This week Jiang Zemin, the outgoing party boss, officially set in train a
process by which the right to use land, if not land itself, may be sold by peasants to an emerging class of
lad-owner. Private property, which Chairman Mao exhorted people to struggle against the instant the
notion occurs, was singled out by Mr. Jiang for legal protection - the first time it has been accorded such
respect in such a lofty forum as a party congress. Many observers are wondering if the constitution can
now also be amended to formalize protection for private property. Private businessmen, for years
excoriated as members of the exploitative class, were welcomed to the congress as delegates for the
first time since 1921, and one capitalist entrepreneur was elected for the first time to the central
committee, the commanding heights of party power. 'I could never have imagined the day that I, as a
private entrepreneur, would be sitting in the Great Hall of the People at this august congress, said Qiu
Jibao, a sewing-machine manufacturer from Zhejiang, and one of the handful of private businessmen
allowed to attend as delegates. When the final votes were taken, some 98.6 percent of the delegates
elected to the central committee had a university or college degree - a marketed difference from previous
conclaves and a world away from the 1970s when Chen Yonggui, one of Ms. Guos fellow peasants in
Dazhai, rose to the rank of vice-premier despite his inability to read. The pretext for such changes has
666
been the three represents, an unwieldy philosophy attributed to Mr. Jiang that urges the party to
represent the 'm ost advanced productive forces, the advanced culture and the interests of the broad
population. In other words, said David Zweig, professor at Hong Kong university of science and
technology, it signals the end of the peasant-worker alliance. 'The guys who are losing out are the
workers and peasants. This [signals] the emergence of a middle-class party, said Prof. Zweig. From one
perspective, such changes have already happened. There are 68m stock market investors in China, more
than the 66m Communist party members. China spends more on export credits than it does on direct
social welfare. Peasant farmers do not qualify for a welfare system, and neither does the state keep
figures on how many of them are unemployed. Nevertheless, many are concerned that now that the
'three represents has been written into the party constitution, workers and peasants may slip even further
down the list of Beijings priorities. Workers are represented only by trade unions loyal to the Communist
party, which many believe will now exist primarily to serve the managerial class. When things go wrong,
as in the case of Wang Yingjun, a railway worker forced to work 17 hours a day and sacked when he
sought legal redress, there is often little that a worker can do to protect his rights.
A much more favorable view of privatization and entrepreneurship is prevailing right now in China,
because of increasingly growing contributions of Chinas private sectors to the national economy and
because of the C C P s urgent need for integrating the wealthier private entrepreneurials into the
mainstream, cf. Ferment rises in China as succession date nears by Karby Leggett and Peter Wonacott
in The Wall Street Journal, A10, W ed. Sept. 4, 2002: ...In recent years, Mr. Jiang has been preoccupied
with saving the party from the fate of sister Communist parties in Russia and Eastern Europe and of long
time ruling parties that lost out in Indonesia, Mexico and Taiwan. He has commissioned research projects
on those failures. And he has sent delegations to study European parties that have successfully
reinvented themselves for the 21st century, such as Britains labor Party, Germanys Social Democrats
and France's Socialist Party. Mr. Jiangs conclusion: China must co-opt the countrys growing capitalist
classes, lest these capitalists ultimately challenge the party from the outside. Its a dramatic turnaround
for a man who chided capitalists as exploiters who would never have any place in the party when he
cam e to power 13 years ago. Private Enterprises. Two decades of free-market change have put
increasingly larger segments of the economy and society beyond the partys control. Private enterprise is
outperforming state business across the board, and is generating both jobs and revenues that the party
needs to meet public expectations and stay in power. Particularly robust have been high-tech businesses,
which accounted for 12% of Chinas exports last year. Mr. Jiang has inaugurated a campaign to redefine
the Communist states relations with private capitalists by making them insiders: catering to their interests
and now even welcoming them into the party. The effort, clumsily named the 'Three Represents, is at the
center of Mr. Jiangs vision for Chinas future. Due to be written into the Communist Party charter this fall,
it is the subject of a nationwide propaganda campaign billed as a revolutionary theory that will guarantee
the party a long life...
Also cf. Wealthy businessman who became a model worker1- The Communist party is calling for more 'red
capitalists by James Kynge in Financial Times, p. 7, Fri. Nov. 8, 2002 (emphasis mine): Jiang Xipei reads
Jack Welch on management, hopes to surpass Bill Gates fame and describes himself as 'very, very
satisfied with the level of his personal wealth. He hardly fits the profile of the proletariat which officially at
least, the Communist party has championed for the last 81 years. But today Mr. Jiang will join a handful of
private entrepreneurs invited for the first time to attend one of the partys five-yearly congresses. At the
moment our party is calling for more red capitalists, he said, using a phrase that encapsulates the ideological
awkwardness of the partys transition. Mr. Jiang is chairman of the Jiangsu Fareast Group, a private company
that makes electrical cables in competition with lumbering state-owned rivals. His invitation to todays
congress reflects the partys realization that it cannot link its fortunes solely to a withering state industrial
sector if it is to survive. According to a report by the International finance corporation in 2000. chinas private
sector generated 33% of GDP, compared to 37% from the state sector, with the balance being made up from
corporations with mixed ownership, the state sector has shrunk in relative terms since 2000. Although only a
handful of entrepreneurs are among the 1,214 congress delegates in the Great Hall of the People today, their
inclusion has raised hackles among old guard communists, a group of which has sent a vitriolic letter to
national leaders complaining of their 'exploitative' habits, official sources said. In China it is well known that
'people fear to be famous, just as pigs fear to get fat, but Mr. Jiang said he does not feel exposed. 'W hat I
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am doing I am doing for the people. If the government is happy and the people are happy, what should I be
afraid of? he asks. In addition, his record seems to answer anyone who might call him exploitative. His
company earns Rmb2bn ($242m, 241, 155m) in annual sales revenue, generating 70% of the wealth and
60% of the tax revenue of its host town in the central province of Jiangsu. Mr. Jiang has donated Rmb13m to
good works such as building roads, bridges, old people's homes and sponsoring poor students. He joined the
Communist party in 1991 and in 2000 became one of the first private businessmen to be named a 'model
worker, a title that had hitherto been reserved for the selfless paragons of the state sector. His presence at
the congress has more than a cosmetic significance. He said that he will represent the private sector to
improve its policy treatment. Private companies often face discrimination by state banks reluctant to extend
loans to them and local officials who hit them with hefty tax bills. In addition, although state property is
protected by Chinas constitution, private property is not. Mr. Jiang said he thought the government was
drawing up policies to resolve the tax and loOan problems of private companies, and considering ways to
ensure the constitutional protection of private property. This could not be immediately confirmed. For himself,
also, there is a payback to membership in the 66m-strong Communist party, which is held to reside 'above
everything in China. 'I think at least people will think that I am advanced in my thinking. And in many ways I
will receive the recognition of many people, he said...
Also cf. It is a glorious thing to be allowed to join the party...The only thing is, the membership fee is very
high - The Communist partys desire to welcome entrepreneurs into its ranks reflects uncertainty over its
support and influence in a fast-changing society by James Kynge in Financial Times, p. 13, Wed. Nov. 6,
2002: ...the Three Represents - meaning that the party should represent the 'advanced productive
forces, the advanced culture and the interests of the broad masses - is intended to be vague. But
several Chinese political scientists say it means that the party will jettison its proletarian roots and seek a
broader appeal by seeking to represent wealthy, powerful and successful people - even if they are
capitalists. 'The Three Represents provides some space for the Communist party to develop by
expanding the basis of its social support and influence, says Lu Jianhua, vice-director of the research
center for public policy at the Chinese Academy of Social Sciences. Another prominent Chinese
academic adds: 'If the party didn't try to broaden its appeal, it would become more and more removed
from society and the economy and eventually it would die, [as] in the Soviet Union. Having laid the
philosophical groundwork, the congress is expected officially to endorse plans to induct capitalist
entrepreneurs into its ranks, as long as they pay 1% of their annual salary in dues. A few may also be
invited to join the central committee of the Communist party, a body of some 350 officials who comprise
the commanding heights of the political architecture...Commentators say that although such tactics may
be successful in re-invigorating party ranks, they also risk strengthening an already symbiotic relationship
between government and business that is blamed for much of the corruption, waste and moral hazard
that weigh on the economy. Such is one of Mr. Jiangs legacies. He has made speeches during the past
five years that insist business and politics are indivisible in a communist system. His son Jiang Mianheng
is concurrently deputy head of the Chinese Academy of Sciences, a government institution, and
personally involved in a gamut of lucrative businesses...The definition of non-state, though, is important.
Few analysts believe China will at this congress throw its weight fully behind the development of the
privately owned sector that exists mostly outside the direct control of the party. More likely is that Beijing
will seek to further the development of enterprises that are affiliated to the state but not fully state-owned.
Companies such as Huawei, ZTE and Datang are the models in this regard. These high-technology
telecommunications equipment manufacturers enjoy close government ties but have also managed to
institute modern management techniques and climb the technology ladder with impressive speed.
Nevertheless, they are still children of the state, receiving state grants, bank loans organized by the
government and policy support 'The industrial model for China is still pretty near the chaebol of South
Korea, even though the Asian crisis rather discredited that model, says one foreign diplomat in Beijing.
None of the personalities tipped to take key positions in the new Communist politburo is seen as likely to
oppose the generally statist creed. Most are seen as more gradualist, cautious and conservative than Zhu
Rongji, the hard-driving premier who is due to relinquish his politburo post and then step down as premier
in March next y ear...
Also cf. Chinas capitalists get a party invitation - The wording of "the three represents is, intentionally, so
woolly that most ordinary Chinese cannot understand it: James Kynge examines the revolutionary idea
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underlying a vague new ideology now being debated by the countrys Communist leaders by James Kynge
in Financial Times, p. 13, Fri. Aug. 16, 2002: ...The Communist party of Chin, ruler since 1949 of the worlds
most populous country, is trying to change its spots. It will attempt to enshrine a new philosophy into the party
constitution at a key congress to be held sometime between September and the end of November. This is
'the three represents, a concept that is little short of revolutionary...The new ideology and the personnel
changes are inextricably linked. Mr. Jiang is so wedded to the philosophy he is credited with devising that he
would be unwilling to step down before the 'three represents are safely written in to the party constitution,
Chinese officials and commentators say...political scientists say that by dropping all mention of the
dictatorship of the proletariat, it indicates that the party will henceforth exist primarily to serve the successful.
That is why it has begun for the first time in 53 years to court the membership of people such as Mr. Yin -
capitalists with a poor revolutionary pedigree. For Mr. Yin, the new ideology seems as inoffensive as
motherhood and steamed dumplings. '(It means) believing that people should have clothes to wear and food
to eat, that there should be peace in the country and brotherhood within the four seas, he says. '(Our) foreign
friends should like it....
Also cf. China plans bold move to give entrepreneurs power" by James Kynge in Financial Times, p. 1,
Tues. Aug. 27, 2002: China plans to admit a handful of prominent entrepreneurs into the central committee
of the Communist party, in the boldest proposal set in Beijings fledging initiative to change the fundamental
nature of the ruling party, official sources said yesterday. The admission of unabashedly capitalist
entrepreneurs, some of Chinas wealthiest individuals, into the partys inner sanctum may be seen as
signaling an about-face in the Communist partys orientation. Theoretically at least, the party exists to uphold
the dictatorship of the proletariat, as a group of 'workers, peasants and soldiers. The plan, to be
implemented at a key party congress starting on November 8, will for the first time also give Chinas non-state
businesses formal representation at the center of power. In Chinas political system, central committee
members can wield considerable influence. The Communist party outranks everything, including government
ministries, the military, and the National Peoples Congress, which is the legislature. The politburo, the
pinnacle of Chinas hierarchy, is picked from the central committee, but official sources said it was unlikely
that any entrepreneur would become a politburo member...A few captains of state-owned enterprises and
state banks have been central committee members in the past, but the idea of admitting independently
wealthy businessmen into the higher levels of the party is ground-breaking...The Beidaihe meetings also
agreed that 'The Three Represents - a new philosophy attributed to Jiang Zemin, Chinas president, that the
party should represent advanced productive forces, advanced culture and the broad interests of the public -
should be written into the partys constitution. The philosophy provides the ideological underpinning for the
party's shift away from its Marxist, proletarian roots towards a more capitalist future.
7. cf. Chinese villages stand up - Locals now vote for Communist officials who wield real power by
Charles Hutzler in The Wall Street Journal, A20, Wed. Sept. 4, 2002: This struggling village with a
volatile population is the unlikely setting for Chinas latest efforts at political reform: allowing people to
vote for the Communist Party officials who hold the real power in Chinese villages. Three years ago, the
farmers here forced out their Communist Party overlords and twice left their villages for sitdown protests
in the faraway provincial capital. When party officials came to investigate, farmers trapped them inside the
walled village courtyard. The visitors fled into a schoolroom, locking the door for safety. 'People were
demanding: Cant you let us elect the Communist Party secretary? recalls Xiong Qihui, a party
functionary who debriefed the officials. The request was heresy. Unlike nominal village chiefs who have
been elected for years, Communist Party secretaries wield true power and are supposed to be appointed
in a top-down chain of command that ensures one-party rule nationwide. But Mr. Xiong and his
colleagues gave in, allowing the angry farmers to elect their Communist leader. The move was so
unorthodox it was kept secret from Beijing. Now the winner of that election is running openly for re-
election, and similar elections for local party leaders have been held in tens of thousands of villages in
over 20 provinces, by one party researchers estimates. Along the way, these elections have gained
grudging acceptance from Chinese leaders, who see in them a way to win over a discontented public.
This isnt what Westerners would call democracy. Candidates must be party members. Party officials
weed out politically objectionable candidates. And Beijing has stifled most reporting on the elections by
national news media - a signal it may try to reverse the process. But that wouldnt be as easy as it once
was. Far from a country marching in lock step with Beijings dictates, China today is a jumble of
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competing interests unleashed by free-market dynamism. The central leadership is often on the
defensive, protecting its power in a tug of war with an increasingly assertive citizenry. How to repair the
fraying popular mandate is at the top of the agenda for a key congress of the Communist elite this fall. A
policy shift up for endorsement calls on the party to jettison its mission as the vanguard of the proletariat
and instead represent public interests as a whole. 'Elections,' says Mr. Xiong, the Guangshui county
official who helped fashion the Qingdui elections, 'are a way to understand the peoples demand. Qingdui
(pronounced ching-dway) was a textbook case of rural breakdown. Never prosperous, its 450 households
grew resentful of the entrenched party secretary, a former soldier accustomed to issuing orders for tax
payments. His pet project, a three-story building to house the village primary school and party offices,
drew particular ire, as construction dragged on and demands for money rose. Taxes began eating up
20% of the farmers' incomes of about $120 a year. 'Every year we were paying out, but we didnt know
where it was going, says Chen Guangyu, a wiry middle-aged farmer then trying to save for a sons
wedding and feed an extended family of seven. Soon villagers stopped paying taxes and Mr. Chen joined
two dozen other villagers on a three-hour bus ride to Wuhan for sit-down protests outside the guarded
gate of the Hubei provincial government. 'W e yelled, 'Overthrow the village party leaders. Lets start
over, says Mr. Chen. That got the attention of provincial officials, who pressured the county government
to address the grievances. It sent officials to Qingdui, where agitated farmers trapped the visitors in the
walled village courtyard and laid out their demand: the election for party secretary. Mr. Xiong and his like-
minded colleagues in Guangshui had to convince local officialdom, which felt elections would threaten
their interests. They then devised a formula to make sure the party kept control of the process. The result
was a two-step election: village delegates voted in a primary, and the top two vote-getters then went
before the local party branch, whose members voted for party secretary. Yet for all those safeguards, the
election reshaped the political landscape. Qingdui now has an energetic party secretary, 31-year-old
farmer Dou Qinzhou, who has repaired a rutted dirt road, upgraded an aging connection to the electricity
grid and managed a switch from wheat and rice to cash crops. 'I made a promise to raise their standards
of living if they kept their responsibilities to pay taxes, Mr. Dou says. Beijing is also finding that the
elections in Qingdui and elsewhere are enhancing party control, by cashiering obstructionist officials and
promoting popular, more capable ones. That confidence is allowing Mr. Xiong to improve and expand the
franchise. When Qingdui and 550 other villages in Guangshui county go to the polls in December, all
villagers 18 years and older will be able to take part. Mr. Xiong is also sending a primer to other countries
that have inquired about the elections. Qingduis villagers, too, are impressed with the greater
transparency elections have brought to village affairs. But while Mr. Dou has done well, Qingdui lags
behind most villages in the area, and he ticks off a list of needs: capital, technology, skilled labor. 'If he
can get us those things, Mr. Dou says, 'I ll vote for him.
8. cf. Has China become an ally?" by Kenneth Lieberthal in the N ew York times, A35, Fri. Oct. 25, 2002:
...In general China has adopted a more confident overall approach to foreign policy. Beijing seems now
to feel accepted as a major, respected actor in the international arena. It is actively pursuing multilateral
approaches to trade and security issues and is rapidly opening its economy to increased foreign
investment. Its foreign policy is increasingly pragmatic, nuanced and consistent, eschewing the petulant
stances that seemed in times past to reflect an underlying inferiority complex. In the last year, china has
skillfully evaluated and acted on its opportunities for strategic cooperation with U S ...
Also cf. Change means stability for China - If Jiang Zemin gives up power without a fight next month, it
will be a first for the country by David J. Lynch in USA Today, 7A, Mon. Oct. 21, 2002: ...Keeping the
economy growing fast enough to head off popular discontent is the fulltime preoccupation of Chinas
leaders..."
9. cf. China loosens grip on the film industry - Foreign investors are cautiously optimistic about the
advent of a more liberal regime by Richard McGregor and Joe Leahy in Financial Times, p. 19, Oct. 14,
2002: It says a lot about Chinas film industry that the foreign company with perhaps the biggest
investment there is Nasdaq - listed Imax with its tailor - made large-screen films. Imax built two giant film
theaters in the Rmb1.8bn ($217m ) shanghai Science and Technology Museum in 1998, and is planning
to build three more heaters in China by the end of 2003. It has one advantage over other companies - its
films cannot be pirated and sold on the streets in China for as little as U S$1. Piracy is not the sole cause
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of chronic underinvestment in the Chinese film industry, but it helps explain why the industry has
stagnated. In the 1990s, a period of phenomenal growth in consumer incomes, Chinese box office
receipts more than halved - from Rmb2.24bn in 1991 to Rmb810m in 2001. 'The whole Market here is
only about the same as Hong Kong, says Edman Chan, the manager of Kodak Cinema World in
Shanghai, one of the countrys few joint-venture cinemas. Hong Kong's population is equal to 0.54% of
the mainlands 1.3bn. But the paltry figures for last year tell their own story of an industry strangled by bad
policy and lax law enforcement. While the Chinese government seems helpless, or uninterested, in
cracking down on piracy, it has maintained a tight grip on the output of the film industry. Films, and their
content, are regulated like the media, resulting in varying degrees of censorship and periodic bans on
directors who have offended arty bosses. On top of these controls, which sap many local films of edge
and character, the state film distribution monopoly also tightly restricts the number of foreign films
released in China. But these policies are now slowly being would back in favor of a more liberal regime,
something that has sparked cautious optimism among foreign investors. Under Chinas entry into the
World trade Organization, the number of foreign films allowed into China will gradually be increased from
a quota of 10 to 12 last year. That by itself should stimulate demand, as Hollywood blockbusters, which
make up about a half to two-thirds of the import quota, are by far the most popular films. 'In item, maybe
the 10 big titles a year will be lifted to 30 to 4 0 , said Millard Ochs, president o f W arner Bros International
Cinemas, a unit of AOI Time Warner. W arner Bros is testing the Chinese market and prodding consumer
attitudes with a minority share in a three-way joint venture in a Shanghai cinema. Mr. Ochs has been
heartened, for example, to note that cinema-goers have willingly paid double the usual Rmb30 entry price
for films such as Harry Potter and Lord o f the Rings, which run longer than two hours. The thing about
China is that you have to be patient, said Mr. Ochs said. An important change in the wings is the
establishment of a competitor to China Film, the monopoly distributor. The latter has waged a long
guerrilla war against this by trying to take a dominant shareholding in the new company, but seems to
have been thwarted. The cinemas, in turn, want to maximize their choices by being allowed to buy from
both distributors. "If w e have 50% fewer films to buy from, then it could make for a difficult situation, said
Kodaks Mr. Chan. Since the opening of its cinemas last December, Imax has demonstrated that
consumers are willing to pay to go to the movies. Attendance has averaged 60% of capacity, about four
times the 15% occupancy required by a commercial cinema to be successful, despite the higher cost of
tickets. Theyre often sold out at 9am to 10am in the morning, says Richard Gelfond co-chairman of
Imax. On top of their Shanghai cinemas, Imax's planned new outlets include a theater in the Heilongjiang
Science & Technology Museum in Harbin and a commercial cinema at the Peace Cinema site in Puxi,
Shanghai. Mr. Gelfond said that in the longer term, China could become its second or third largest
market, with a potential audience of 350m people and up to 50 cinemas. Imax currently has 112 cinemas
in the US, 23 in Canada and 19 in Japan. Imaxs strategy has been to market itself as a mixture of
education and family entertainment, hence the emphasis on trying to get Imax theaters incorporated into
science museums. 'Chinese audiences are very focused on family, said Mr. Gelfond. they are very
interested in doing things with the family and are interested in new technology....
Also cf. China lets Catholic churches flourish, but under its rules - The new church in Beizhan reflects a
renaissance of roman Catholicism in China, fueled in part by a more relaxed government by Elisabeth
Rosenthal in The N ew York Times, p. 1, p. 8, International, Sun. Oct. 6, 2002: Beijing, China - Han
Tingming, 64, white church spires that shoot up toward heaven from this village of simple mud-brick homes,
towering over the wheat fields. Built by local villagers but paid for largely with donations from Roman
Catholics overseas, Beizhans grand new church has finally replaced a small one destroyed during the anti-
religious fen/or of the Cultural Revolution of the late 1960s. Now, 1,500 Of Beizhans 5,000 residents fill the
wooden pews on a typical Sunday, with up to 3,000 on holy days like Christmas. It took us 12 years to get
our land back and, even after we had the money, for several years we couldnt get approval to build,' said Mr.
Han, a grizzled farmer, who helped lay the bricks for the church. But now look. As I watched it rise up from
the ground, words can not describe my feeling. W e finally had a home. There has been a remarkable
renaissance in the construction of Catholic churches in China in recent years. Behind this development is a
resurgence of faith, a relaxation of government policy toward officially registered religious groups and -
particularly in poor rural areas - better access to money from international Catholic organizations. The
changes, however, have heightened tensions between the 'patriotic' churches, which register with the
government and agree that the Communist Party, not the pope, has the final word in church affairs, and the
671
"underground churches, which assert the supremacy of the pope. In the last few years, hundreds of Catholic
churches have been built in this part of central Hebei Province alone, according to Beifang Jinde, Chinas first
Catholic charity. Through its bilingual Web site and overseas lobbying efforts, the organization has helped
secure foreign financing for 100 churches since it was founded in 1999. But that is not all; Beifang Jinde as
well as a number of parishes in this area are also busily building schools, clinics and nurseries - social
services that Chinas lapsed socialist system no longer provides. It is a striking burst of religious activity in a
country where freedom to worship varies significantly from place to place, depending on the often begrudging
tolerance of local officials, the negotiating skills of parish priests and their willingness to abide by government
rules on registration and practice. Only "patriotic churches can legally worship and accept foreign donations.
Underground churches must gather in secret, and they continue to suffer intense persecution. Over time,
foreign charities have become increasingly willing to assist government registered congregations like the one
here in Beizhan, and to accept congregants as genuine Catholics, albeit Catholics who are forced to live with
compromises. While the revival of religious activity has drawn a number of formerly clandestine Catholics
back to open practice, it has also increased tensions among believers, as defiant underground churches
suffer...Although the Vatican considers the "patriotic church illicit for its rejection of papal authority, it
generally recognizes the validity of rites performed within state-sanctioned churches, said the Rev. Drew
Christiansen, former director of the US. Bishops Office of International Justice and Peace. There about 12
million practicing Catholics in China today, experts say, a number which by all accounts is growing rapidly.
Exact figures are hard to come by, because an estimated 50% of these attend underground churches -
generally in places where officials block worship even by state-registered parishes or where church leaders
regard any degree of government involvement as sacrilegious. The divide between the state-run and
underground churches began shortly after the Communists came to power in 1949. Ties with the Vatican
were severed and religious activity was subsumed under a "Chinese Patriotic Catholic Association. Catholics
who persisted in their allegiance to the pope formed secret "house churches. During the most radical years
of Maos rule, all religious expression, legal or not, came under severe attack.... In 1980, as part of post-Mao
reforms, Chinas government decreed that confiscated land and buildings should be returned to religious
organizations. But churches had generally suffered heavy damage, and local governments for many years
refused to return property they had come to regard as their own...
10. cf. 'Flower drum song budding on Broadway - David Henry Hwangs staging restores "feeling of C.
Y. Lee book by Elysa Gardner in USA Today, 14D, Thurs. Oct. 17, 2002 (emphasis mine): New York - C.
Y. Lee is sitting in a midtown cafe, sipping hot tea and recalling what it was like to watch the legendary
songwriting team of Richard Rodgers and Oscar Hammerstein II turn his first novel, Flower Drum Song, into
a Broadway musical...In Hwangs adaptation, though, the setting is at first a Chinese opera house, owned by
an immigrant whose son uses the premises on off nights as a Westem-style club. Characters have been
altered, and some musical numbers are presented in different contexts. And the shows young heroine, a
blushing mail-order bride in the Hammerstein/Fields version, is now a plucky young woman, played by Miss
Saigon, Tony winner Lea Salonga, who feels China after her father gets into trouble with the Maoist
government. When Hwangs Flower Drum ran in Los Angeles, in fact, Lee admits he was shocked by the
opening sequence, in which a portrait of Mao Tse-tung was ripped down. "Mao did a lot of damage to China,
but people there still worship him because he helped make China a very powerful country, Lee explains.
Hwang, who changed about a fifth of his script after the LA stint, has since substituted the image of Maos
"little red book, which represents less controversially the negative impact of Chinas Cultural Revolution.
"Everyone in China hates that book, Lee says, "because everyone suffered from the Cultural Revolution.
Now Lee, who granted Hwang total creative freedom, is confident that the new Flower Drum is one that fans
of all nationalities will approve of... Lee adds: "A lot of people told me the show would be wonderful in China -
that it could tour there. China is changing, you know. The younger generation is call capitalists. There are
more capitalists than in this country! Everyone has the American dream....11
11. As such, Chinese government continues to support those enterprises in non-state sectors, particularly
those private enterprises, cf. China plans to boost private company loans - Interest rates central bank
applies to State Council for more latitude on lending charges to small and medium sized enterprises by
James Kynge in Financial Times, p.3, Mon. Dec. 9, 2002: China plans to push forward the deregulation
of its interest rates next year to boost lending to private companies, a sector singled out at last months
leaders congress as deserving of more policy support. The Peoples Bank of China, the central bank, has
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applied to the State Council, China's cabinet, to approve a system that would allow banks more latitude in
deciding what interest to charge to small and medium-sized enterprises, officials said. Many such SMEs
are private owned. Chinese banks are currently allowed to set interest rates of 30% higher than the
PNOC fixed rate when lending to SMEs, but only 10% higher than that rate when lending to state-owned
enterprises. This allows them some latitude in pricing for the extra risk that lending to private companies
is believed to entail. The difficulty that SMEs, especially those without links to local governments,
experience in obtaining loans from financial institutions is seen as one of the main factors restraining the
development of one of Chinas most dynamic economic sectors. Jiang Zemin, president, called in his
speech to the 16th Communist party congress last month for policy constraints on the private sectors
development to be reduced. W e must give full scope to the important role of the non-public sectors of
self-employed, private and other forms of ownership of the economy in stimulating economic growth,
creating more jobs and activating the market, Mr. Jiang said. The private sector is thought to contribute
roughly a third of gross domestic product but it is expanding much faster than the lumbering state-owned
behemoths that still employ around 40% of urban workers. Until a few years ago, state banks were often
ordered to disburse loans to state companies regardless of their economic performance. Now, bankers
and analysts said, direct official interference was rare but many loan officers still regarded state
companies as safer than their private counterparts because of a perceived government guarantee.
Private companies, by comparison, often lack collateral such as real estate or other assets, have
questionable accounting standards and are often seen as impervious to government influence. Banks are
therefore chary about lending to them, which curbs development. The interest rate deregulation planned
for next year was part of a gradual program of reform that was supposed - one day - to create a totally
free interest rate environment, a senior financial official said ....
12. cf. V W loses Chinese lead but is still in the race - Sales grow despite loss of market share by
Richard McGregor in Financial Times, p. 15, Tues. Aug. 20, 2002: ...Spurred on by Chinas entry into the
World Trade Organization, which will make imports progressively cheaper, and government policies
encouraging private car ownership, Chinas market has never been more competitive. Two years ago, there
were only 17 locally made models in China. Now there are more than 30, with new cars soon to hit the
market from Ford and Toyota...Changing the competitive culture of the sales side of the joint ventures may
be even more difficult. 'When we sit down to work out how to sell a new car, said one official at SAIC
(Shanghai Automotive Industry Corp) in Shanghai, 'we consider FAW (First Auto Works in the north-east) to
be the enemy.
13. cf. Sewing a seam of worker democracy in China - Free trade union elections in foreign-owned
factories are unprecedented in mainland China: Reeboks experiment may set a pattern for others in
Financial Times, p. 10, Thurs. Dec. 12, 2002: ...Voting pattern: one aim of the elections to the trade
union is to promote better communications between management and shop floor.
Also cf. Li Rui wrote a petition letter to Jiang Zemin regarding Chinas democratization, that all the
incumbent members of the C C Ps politburo and the General Secretary should go through election held by
the Partys National Congress by Zeng Hui-yian in New York in World Journal, Chinese language, A2,
Thurs. Dec. 5, 2002 (brackets mine): Li Rui, a well-known former senior official of the CCP, wrote a petition
letter to Jiang Zemin, the retiring C C Ps General Secretary, making ten suggestions to accelerate Chinas
democratization in the Party and in Chinas political life. The suggestions included one that all the incumbent
members of the C C P s politburo and the General Secretary should stand for the election during the next
C C Ps 17th National Congress. Li was once Maos private secretary and had filled the position of Acting
Deputy Minister of the Partys Branch of Organization right after the Cultural Revolution. He had sided with
the Partys democratic wings. In his letter, Li berated the Partys conservative wings 'for delaying Chinas
democratization, blocking the construction of the rule of law, and fostering the rampant spread of massive
corruptions. He proposed that Chinas democratization should start from the Party inside. Thus beginning
from the current 16th National Congress of the CCP, it needed to limit each elected incumbent member of the
Standing Committee of the C C Ps politburo to a five-year term with possibility of being re-elected for only one
additional term. He also recommended the ending of a tradition among Party officials that allowed unseated
or retired Party Senior officials to take over other positions in the Central Government, the Peoples National
Congress, or the National Consultative Congress...He also suggested changing the primary provision of the
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Partys Charter from 'All the Party members must obey and follow the Central Committee of the Party to 'All
the Party members must obey and follow the Partys National Congress, and all the local party members
must obey and follow the Partys Central Committee. He claimed that Chinas Peoples National Congress,
rather than the CCP, was Chinas only institutional body authorized to enact the nation/states ultimate
legitimate power. Finally, in order to warrant the full legitimation of the Peoples National Congress and the
Central Government, China needed a Constitutional Court with ultimate power.
14. cf. Defying China, Taiwan leader backs a vote on sovereignty" by Keith Bradsher in The New York
Times, p. 5, Aug. 4, 2002: ...Cross-strait relations are so sensitive that Beijing seldom issues official
statements without approval at the highest levels, which often can take several days. Predicting the level
of anger from Beijing is especially difficult now because the party's leadership is at its annual retreat,
preparing for this autumns Communist Party congress, which is held every five years. There have been
signs that the party is embroiled in a struggle over how much power should be relinquished by Jiang
Zemin, Chinas 76-year-old president and Communist Party chief, who is expected to give up at least one
of his posts. Many important decisions, on everything from economic policy to relations with the US, have
apparently been deferred until after the party congress, for which no date has been publicly set yet. So it
is possible that Chinese leaders will be leery o f confronting Taiwan while preoccupied with their own
maneuvering...
Also cf. China to level playing field for its private sector - President outlines policy to open up capital
markets at Beijings Party congress by Charles Hutzler and Peter Wonacott in Beijing, China in The Wall
Street Journal, A11, Mon. Nov. 11, 2002: Ambitious goals: Key economic targets and policies to be
endorsed by the Communist Party Congress: GDP: Quadruple it by 2020, from $1.16trillion last year;
Industry: Support information technology; Private sector: Ensure fair taxation and access to capital;
Private sector: Ensure fair taxation and access to capital; State sector: Sell off all state holdings except
for a 'tiny number of strategic enterprises; Agriculture: Permit farmers to sell the use of their land;
increase support to grain-growers; Environment: Divert water from the Yangtze River to the water-starved
north. Source: Report to the 16th National Congress of the Communist Party of C hina...
Also cf. Markets ignore Chinese leadership infighting by Richard McGregor in Shanghai in Financial
Times, p. 4, Fri. Aug. 3, 2002: The secretive, top-level maneuverings before this years Communist party
congress to choose Chinas new leaders are now affecting every level of the Chinese government. Policy
initiatives are stalled; mid-ranked officials, whose careers depend on senior patrons, are stiffing tight; and
the state-owned media are stiffer than ever, masking infighting by stressing stability. But the area most
sensitive to any signs of change and upheaval, the financial markets, remains undisturbed by the tussle.
Despite Chinas history of instability and the complete absence of accurate real-time information, the fuel
by which markets run, investment banks and foreign investors remain sanguine about the outcome of the
congress. 'W henever you invest in a country without a transparent political system, there is a higher level
of risk, but that risk factor in China has been declining in recent years as the government has tried to
become more rules-oriented, says Andy Rothman, of CLSA in Beijing. In recent weeks, speculation has
reached fever pitch that Jiang Zemin, 76, might not, as long expected, hand over his jobs as party
secretary and president to his designated successor, Hu Jintao, 59. Mr. Jiangs refusal to step aside for a
new generation could unravel a whole series of deals involving other senior leaders and the promotion of
their supporters, triggering the kind of bitter infighting which the party has mostly avoided for more than a
decade. None of this, even the likelihood that the congress may be delayed from September until
November, has touched the markets. The share prices of Chinese companies listed overseas - which
have a market capitalization of around $170bn, according to Credit Suisse First Boston (CSFB) in Hong
Kong - have not been moved by the torrent of rumors...The risk premium attached to overseas listed
Chinese companies by CSFB, as of July 29, is greater than Taiwanese ones, but on par with South
Koreas and less than Thailands...C hinas growing integration into the world economy has also propelled
Beijing to seek more pragmatic relations with the US and Taiwan, another factor in reducing potential
political volatility. At home, Chinas greatest defense is its non-convertible currency, protecting it against
the full impact of global financial markets. Chinese authorities have intervened in any case to ensure that
the local stock market will be in a relatively healthy state, by stopping earlier this year the sell-off of state
shares...
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Also cf. China: not drowning but waving? - Jiang Zemin is fighting vigorously to hold on to more of his
powers in The Economist, pp. 36-7, July 27th, 2002: ...Rumors of a power struggle should be kept in
perspective. There are few indications of the sort of deep divisions within the leadership that led to the
nationwide unrest of 1989. All the same, the current antagonisms do not inspire confidence in Chinas
stability. Mr. Jiangs efforts to promote one of his proteges, Zeng Qinghong, to the Politburo Standing
Committee in order to counterbalance Mr. Hu's power is laying the groundwork for some potentially bitter
feuding in the years to come. W hat had promised to be the partys first ever orderly transfer of power is
beginning to look rather different.
Also cf. "Chinas president may be reluctant to cede his power - Clouds over succession - Media praise may
mean Jiang Zemin, like Mao, envisions himself as retirement-proof by Erik Eckholm in The New York
Times, A1, Sat. July 13, 2002: ....Since May, when Mr. Jiang gave what was billed as a landmark speech to
party leaders, government offices have held mandatory sessions to study the three represents. However out
of sync with Chinas changing society, such exercises remain a part of formal politics here, and otherwise
vacuous phrases can signal important policy trends. Ding Guangen, the chief of the partys propaganda
department, said in a journal that studying, promoting and personally realizing the three represents was the
No. 1 duty of party members as they prepared for the fall congress.
15. cf. Change means stability for China - If Jiang Zemin gives up power without a fight next month, it
will be a first for the country" by David J. Lynch in USA Today, 7A, Mon. Oct. 21, 2002: "Chinese President
Jiang Zemins visit to the USA, which begins Tuesday, may showcase increasingly warm US-Chinese
relations, but it is likely to be his last as Chinas leader. A bid by Jiang and his supporters to prolong his
tenure past a planned retirement next month appears to have failed. Western analysts say...Though Jiang,
76, is regarded as an advocate of closer ties with the US, his expected departure is considered good news.
He is to step down as Communist Party general secretary next month in favor of Vice President Hu Jintao. If
the transition happens as planned, it will mark the first time in the 53-year history of the People Republic of
China that the partys supreme leader has surrendered power without dying or being purged. Chinas
Communists may finally be developing a more predictable way of governing. Succession is always the
Achilles heel of authoritarian regimes, says Susan Shirk, a former State Department official and China
scholar at the University of Califomia-San Diego. 'If the actually manage this one, and everyone follows the
rules, it will show a certain resilience of the regime.' It would also be an indication that China had turned its
back on the power struggles of its past...Maos eventual heir, Deng Xiaoping, never held top government or
party positions. He ruled from lesser posts, such as head of the countrys chief military commission, and
refused to abandon ultimate power until age and infirmity left him no choice. But Deng, himself a victim of
Maos purges, recognized the costs of Chinas chaotic politics and began to modernize by instituting the first
te rn limits and retirement ages for Chinese officials. Hu, 59, is expected to be tapped as general secretary of
the Communist Party at the party congress Nov. 8, ushering to power a fourth generation of leaders who
joined the party after the states founding in 1949. This orderly transition means the US has little reason to
fear abrupt policy shifts. Hu, promoted by Deng to the innermost Politburo circle in 1992, has spent the past
decade polishing his leadership credentials and mirroring Jiangs policies.
Also cf. Hus in charge? in Financial Times, p. 10, Comment & Analysis, Thurs. Aug. 8, 2002: ...the
succession tussle is a striking reminder that China is still run by an archaic Communist autocracy operating
under its own malleable rules. This arbitrariness of power is not confined to the leadership contest; it
permeates Chinas entire political and economic system. The current political uncertainty is in danger of
damaging Chinas economy. Investors are unnerved by the confusion. Important legislation - such as a new
bankruptcy law and other financial sector reforms - has fallen by the wayside. Whatever the outcome of this
succession struggle, the challenge facing M. Jiangs successors will be to introduce a new political system, in
the end, that must provide for a separation of powers, accountability of government, the rule of law and, most
important, the protection of individuals human and property rights.
16. cf. Foreign investment partners stuck on a slow boat to China - Bureaucracy is hampering the launch
of joint venture funds by Richard McGregor in Shanghai in Financial Times, p. 25, Tues. Sept. 10, 2002
(emphasis mine): The rush of foreign fund managers to join forces with Chinese partners hit a bureaucratic
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logjam in July, when the government began taking official applications for joint venture funds... The initial rush
of foreigners into China was backed by the countrys accession to the World Trade Organization late last
year. The W TO agreement initially allows foreigners the opportunity to take a 33% equity in JV funds and up
to 49% by around 2005. Of the 20-odd partnerships with foreign firms for JV funds, only a handful have
submitted formal applications to the China Securities Regulatory Commission, the Chinese market regulator,
and none has been approved. Reasons for the delays are numerous, ranging from squabbling among
partners about the structure of their ventures to the price they would be ready to pay. Another possible factor
is that much of the bureaucracy has been frozen ahead of the Communist party congress in November,
when Chinas leaders for the next five years will be chosen. For the CSRC and the funds themselves - both
foreign and local - the sheer novelty of the logistics of the joint ventures, with their need for large amounts of
bilingual legal documentation, has also been behind the delays. The result is that no JV funds are expected
to be up and running before December, later than many had initially expected. A CSRC official was quoted as
saying that none would be approved before June next year...At present they can only choose between
government bonds, a highly speculative stock market, or bank deposits on which their interest earnings are
taxed. More than a quarter of Chinas national tax revenues come from this tax on bank deposits, according
to researchers at Tsinghua University in Beijing. The interest rate is 0.72P - making the already low returns
on this investment even more miserable after they have been taxed. However, by the time the JV funds are
launched, the market should be better prepared for their operation: reforms to Chinas stock market indices
have boosted the now limited role of institutional investors. On July 1, Shanghai introduced an SE180 index,
replacing a smaller index based on just 30 selected stocks. The new index consist of mainly profitable and
stable medium- and laroe-cap stocks, without the sky-high price/earnings ratios that have been produced by
speculation in many of the smaller stocks. Many funds struggled to outperform the old indices, which
provided neither a good measure of investment nor a broad stock selection. The SE180 index is the
precursor to a more comprehensive national index that is being studied by the CSRC. which will include
selected stocks listed in Shenzhen. The eventual aim is to encourage the emergence of stock index futures
and other derivative products, as well as along trading technioues such as short-selling, which is banned at
present... Chinas efforts to partially privatize its pensions system also add to the momentum in favor of a
larger funds industry.
17. cf. China expected to sell stakes to foreign companies by Keith Bradsher in Beijing, in The New York
Times, p. C1, Fri. Aug. 30, 2002 (emphasis mine): The Chinese government is likely to allow the sale of
government stakes in publicly traded state-controlled enterprises to foreign companies, a senior regulator
said here today, signaling what could be the next big step in China's movement toward a market economy.
Wang Jianxi, assistant chairman for international policy, future trading accounting at the China Securities
Regulatory Commission, also said in an interview at his office today that China would give permission to
multinational corporations to sell shares in their Chinese operations to Chinese citizens. Taken together, the
two measures outlined by Mr. Wang would draw China more into the global economy and give the countrys
securities markets a considerably greater role in bringing Western investment and management practices to
businesses. As Chinas leaders prepare for the 16m Communist Party Congress early in November, when
many current leaders are expected to retire, high-level expressions of interest in international investment like
Mr. Wangs are also a sign that this country remains committed to a market-directed economy. Dennis Zhu,
managing director of investment banking in China for J. P. Morgan Chase, said that while there was little
interest yet by multinationals in selling stock in China, the sale of government stakes in state-controlled
enterprises would have tremendous effects. Although the government had given no hint until today that it
was ready for such sales, foreign companies have been evaluating many state-controlled enterprises
anyway, he said...While some of Chinas largest state-controlled enterprises are traded on stock exchanges
in New York and Hong Kong, where foreigners can buy shares, more than 1,000 are traded only on the A-
share stock markets in Shanghai and Shenzhen, in which foreigners are not allowed to invest. These include
large companies like Baosan Iron and Steel, Xugoing Science and Technology and Shanghai Automotive.
The total value of the shares in these businesses is about $450bn worth, is held by Chinese citizens and can
be traded. The government holds the remaining two-thirds, worth some $300bn, which are designated
nontradable. The Beijing authorities - faced with a large budget deficit, a shaky banking system and a public
pension system with virtually no reserves - have been looking for a way to sell some of the government-
owned shares to raise money. But the domestic stock markets have fallen steeply in the last year, giving up
huge previous gains that may have been partly created through market manipulation by speculators. So,
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regulators reluctantly promised early this summer not to sell any more government-owned shares on the
exchanges for fear of driving stock prices down even further. Mr. Wang said today that the government was
likely to allow the sale of such stakes instead to the Chinese subsidiaries and to joint ventures of
international companies. Chinas State Council - effectively the nations cabinet and the highest level of the
government, though subject to Beijing superseded by the Communist Party leadership - now bans foreign
companies and individuals from owning stakes in Chinese companies traded on the A-share markets. The
authorities are still reviewing whether to lift the ban but are likely to do so, Mr. Wang said. 'W e should allow
the foreign-financed companies here to acquire nontradable, state-owned shares, he said. The securities
commission fills the roles here that the Securities and Exchange Commission and the Commodity Future
Trading Commission together sen/e in the United States. Within the Chinese bureaucracy, the commission
has tended to support greater foreign investment in China. But officials in this country are usually wary of
predicting that something is likely to happen unless the idea has already attracted broad official support
China is likely to sell only minority stakes in the publicly traded state-controlled enterprises to foreigners, and
would most likely require that the stakes be held for long periods as strategic investments, although the rules
for any such sales have not yet been drafted...While there are some struggling state-controlled enterprises
on the Shanghai and Shenzhen exchanges, the exchanges also list many of the countrys healthiest
enterprises. With Chinas economy growing at 7% a year, these businesses, often with nationally known
brand names and excellent distribution networks, have drawn hungry looks from executives of multinational
corporations. Investment bankers and economist said that the toughest part of selling nontradable shares
could lie in deciding how much to charge for them. The A shares in Chinese companies typically sell at a
steep multiple to corporate earnings, in part because of the scarcity created by the governments ownership
of two thirds of the shares. Foreign investors may balk at paying such a premium, but if they are offered a
discount, then the Chinese investors might object. Selling nontradable shares to foreign investors could also
depress Chinas domestic markets, though not as much as a direct sale of extra shares on those markets.
Western experts say that some foreign businesses have managed to buy a small number of A shares by
supplying the money to individual Chinese or companies who then buy the shares. This source of investment,
while apparently modest, could dry up if foreign enterprises are allowed to acquire shares directly from the
government. Mr Zhu said that the government might also be reluctant to sell shares in companies in strategic
sectors, like energy, even if these companies were especially attractive to foreign investors. The Chinese
officials willingness to let multinational companies sell stock here also shows a philosophical change by
financial regulators, even if the multinationals are not actually lining up to do so. Until the last year or two,
regulators here mostly thought that domestic savings should be invested in domestic enterprises. Mr. Wang
said that multinationals should be interested in selling stock in China in their Chinese operations because this
would allow them to raise money in the local currency, the renminbi, instead of exposing themselves to the
exchanae-rate risks inherent in financing domestic operations with fully tradeable foreign currencies. A
consumer goods multinational with a listing here would also receive widespread media coverage that would
serve as free advertising...
18. cf. China discovers high level of IPO bribes" by Richard McGregor in Financial Time, p. 7, Tues. June
11, 2002 (emphasis mine): About half of the listed companies in Jiangsu, one of Chinas wealthiest and
most successful provinces, paid bribes to local officials to secure permission for their share offerings,
according to a recent investigation. Court officials and company executives involved in the probe
yesterday confirmed reports in the Chinese media that a number of top provincial officials have been
jailed by courts in Nanjing for up to 11 years over the incidents. In one case, the wife of a former party
deputy-secretary in Jiangsu, Li Sanyuan, was imprisoned for taking bribes to assist companies to win
approvals for initial public offerings. More than a dozen companies were said to be on what has become
known as Mr. Li and his wifes gift-giving list. The companies all secured their listings in the late 1990s,
when approvals for IPOs lay with provincial governments, which each doled out a quota given to it by
Beijing. This system gave local officials the power to approve the much-sought IPOs for whichever
companies they favored, often regardless of their financial health or business prospects. In nearly all
case, the companies were government-owned. The stock markets in both Shanghai and Shenzhen are
still suffering the effects of this system, with many poor-quality companies listed only because they had
good connections with local politicians. The quota system has now been abolished, with IPO approvals
now in the seemingly neutral hands of the listing committee of the China Securities Regulatory
Commission (CSRC) in Beijing. It was abolished in part because of its abuse by provincial officials of the
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kind uncovered in Jiangsu. The CSRC is itself now the subject of intense lobbying by the hundreds of
companies and their bankers in a lengthy queue to go public. The investigation in Jiangsu was sparked
by the discovery that officials at one of the provinces flagship companies, Little Swan, a white-goods
manufacturer, had paid a large commission to Mr. Li to win approval for IPO. Mr. Li and his wife pocketed
money by being appointed as consultants or 'strategic manager1 to the companies, or through controlling
the nomination of so-called independent board members.
19. For instance, Chinese conventions would like to include more non-judiciary factors, such as, moral
stands, individual traits of the elites, etc., in front to justify actions legitimacy and leadership
empowerment, while looking for practical solutions, which could leave more leeway for partners or other
parties than formal codes could cover.
cf. Four of five residents in Taiwan agree to T h re e Connections Principles' (note: Three
Communications Principles were enacted by Taiwans governments in 1998, allowing Taiwans residents
to have legal economic, trade, and cultural connections with residents on the Mainland) in World Journal
Daily, Chinese language, A4, Fri. July 12, 2002: Taipei, July 12: According to a recent survey conducted
by 'U nder the Sky Magazine in Taipei, one of three Taiwanese residents has relatives working in the
Mainland; and among average 2.5 people, one person has relative doing business with China. The depth
of the economic and trade relationships between Taiwan and China is far beyond peoples imagination.
Four of five interviewees expect the government to exercise sincerely 'Three Connections Principles. In
so doing, the best way suggested is to avoid any talk about politics ...
20. cf. "China bites the bullet over stock market fraud - Securities house face massive shake-up as shock
court case signals end to years of easy money - Ordinary people lost faith because they thought the level of
illegality made it too risky by Richard McGregor in Financial Time, p. 17, Thurs. August 1, 2002: The court
case in Beijing over the countrys biggest ever stock manipulation did not unfold like a typical legal hearing in
China, in which little intervenes between the ritual of reading the charge and the recording of a conviction. In
a deliberate decision by the authorities, the hearing in June produced an avalanche of embarrassing detail
about the involvement of Chinas securities companies in the fraud. Scores of securities outlets were named
for providing about 1,400 false accounts to the scandals central figure, Lu Liang, allowing him and his
associates to generate trades that turned an initial outlay of Rmb20m ($2.4m) into Rmb5.4bn in just two
years. Although the verdict has yet to come down, the case has sent a very public message to the securities
industry in China that the days of easy money and market manipulation are over...The court cases
chronicling the extensive use of false accounts has also confirmed suspicions that the number of investors is
much lower than the C SR C s official count of 67m. The CSRC figure is based on the 67m individual
accounts, but many millions of these have fallen out of use since the market contracted and easy trading
profits dried up.
21. cf. Will Chinas bid to curb corruption be enough? by Kathy Chen in Beijing and Karby Leggett in
Shanghai in The Wall Street Journal, A8, Fri. Oct. 18, 2002: ...Investigations into tax evasion by Chinas
wealthiest citizens may be a gambit by Premier Zhu Rongji, who is set to step down early next year, to shore
up his legacy as an economic reformer...Chinas corruption problem has become bigger due to the fast
economic growth and the proliferation of loopholes in the law as the country moves to a market economy.
And Chinese citizens are growing angrier...While US companies say they havent seen an uptick in corrupt
practices here, corruption ranks among their top concerns, says Christian Murck, head of the American
Chamber of Commerce in Beijing. The government is taking steps to close some of the loopholes that have
allowed corruption to flourish actions expected to intensify under a new generation of leaders to be anointed
at the party congress and as China increases the transparency of its laws and policy-making process to meet
World Trade Organization obligations. Chinese customs, for example, is stepping up computerization of its
systems, which is expected to remove some opportunities for theft. New laws that require competitive bidding
for government projects and public auctions for land allocation could make it more difficult to hand out
bribes...
Also cf. China plans crackdown on illegal capital flight - thousands of officials have been channeling money
abroad by James Kynge in Financial Times, p. 1, wed. Aug. 21, 2002: China plans a concerted effort to stop
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thousands of officials spiriting state funds abroad through an expanding repertoire of illegal activity, officials
have said. Zhu Rongji, the premier, was furious after learning in recent months of the growing levels of capital
flight from China via illegal transfers, money laundering and underground banks, the officials added. As with
most corruption in China, most of the criminals behind various forms of capital flight have turned out to be
government officials or managers in state-owned enterprises. According to Banyue Zazhi, an official
magazine, more than 4,000 people suspected of stealing state funds or using their position to take bribes
have gone abroad, having absconded with more than Rmb5bn ($600m). Typically, the officials transfer
money into bank accounts abroad that are opened either by branches of their company, business associates
or overseas relatives. The usual way for a corrupt official to escape is to send the wife and children abroad
first, transfer illegal assets out of China and then flee when the time is ripe, the article said. In a move to
crack down on the abuses, last July the Peoples Bank of China, the central bank, set up a department to
monitor the transfer of funds abroad and another to counter money laundering. All Chinas commercial banks
have been ordered to set up their own systems to monitor suspected money laundering by January. The
emergence of the problem coincides with a recent focus in official circles on another vexed issue - rampant
tax evasion and avoidance. Official figures on capital flight from China in recent years are not available, but a
study by Beijing University put the amount of money leaking through the countrys supposedly closed, but
infinitely porous, capital account at $36.4bn in 1997, $38.6bn in1998, and $23.8bn in 1999. One official said
that recent official estimates of capital flight in 2000 and 2001 showed an alarming increase over these
numbers. Many Chinese officials have sent their children to study in the UK, transferring money into accounts
their children opened. Some have even bought houses in the UK, the magazine said. Given that their salaries
are less than $1,000 a month, it is hard to see how these officials can legitimately afford school and university
fees. But despite treaties with more than 40 countries around the world on the transfer and repatriation of
criminals, Beijing finds it hard to ensure the return of suspected criminals to China. For example, Xu Guojun,
Yu Zhendong and Xu Chaofan - three men who embezzled $488m from a branch of the Bank of China in the
southern province of Guangdong - are still at large abroad.
22. cf. The 'middle kingdom takes world stage - tough challenges lie ahead for China as it prepares itself for
the final phase of transition to a market economy - For the first time, China is to reform its economy going by
the ordinances of an authority beyond its borders" by James Kynge in Financial Time, Financial Times
Survey: China, Mon. Oct. 8, 2001.
23. cf. Asia reveals its worth amid the US crisis in corporate confidence - Matthews manager tells Prude
Clarke the region will grow in economic global importance by Prue Clarke in Financial Times, p. 27, Wed.
July 31, 2002: ...Gone are the days when Asia was seen as an economic basket case, he argues. 'Now you
have very low valuations by most measures, earnings growth is steady and appears relatively healthy.
Currencies have been stable to strengthening. If it continues to develop domestic demand and remains the
manufacturing center of the world, Asia is going to become more and more important to the global economy
and more and more important to investors. The effort to boost domestic demands has been the key to much
of Asias resilience, according to Mr. Headley. Seeking to shield their economies from export market volatility,
several governments have lowered interest rates, driving property markets and domestic spending. Mr.
Headley says the region has been immune to Americas corporate confidence crisis because corruption was
largely washed out during the Asian crisis. He says the weaknesses of Asias financial system are well-known
and buyers have been realistic about the quality of Asian management...Manager Paul Matthews, with the
help of Mr. Headley, has done so with an unusual strategy that emphasizes convertible bonds (40% of
assets), preferred stocks and cheap common stocks with hefty yields. The result has been significantly less
volatility than all of the funds peers. 'It was an experiment eight years ago when the fund started, says Mr.
Headley, 'but its done exactly what we hoped. Its success is a reflection of what a difficult time Asian
markets have had. 'The most conservative strategies have been the right ones over the last five years. While
many funds have lost money in redemptions this year, this portfolio has attracted steady inflows from
investors fleeing US equities. Assets have risen to $50m from $12m at the end of 2000. About 37% of the
fund is in financial stocks, most of which are in the Hong Kong property market. Offering relatively high yields
of 5 to 6%, 'these are very steady companies, with long histories of paid dividends and the financial strength
to continue to do that, says Mr. Headley. The fund favorites include Cathay Financial in Taiwan (bonds) and
Bangkok bank (bond and equity). Utilities such as Chinas Huanenng power account for 23% of assets. With
annual earnings growth at a steady 10%, with 4.5% dividend yield, 'for us, Huaneng is an ideal growth and
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value play.' Two of the funds largest convertible bonds holdings are telecommunications companies, China
Mobile and Korea telecom.
24. cf. Plan to crack down on dissent stirs debate in Hong Kong by Keith Bradsher in The N ew York
Times, p. 12, "International, Sun. Nov. 3, 2002 (emphasis mine): "Hong Kong, Nov. 2 - A fierce debate
has erupted here over a government proposal to lengthen jail terms and increase fines for people who
make seditious statements, even over the Internet, and to allow some police searches and seizures
without a warrant. The increasingly heated discussion has caught the attention of world leaders, including
President Bush. After meeting with President Kiang Zemin of China a week ago, Mr. Bush said he had
offered his views on the importance of Chinas preserving the rights of Hong Kong citizens. China's
deputy prime minister, Qian Qichen, fanned the dispute when he said in a recent television interview that
opponents of the new rules must have something to hide. The opponents must have devils in their
hearts, he warned, a phrase that has angered and dismayed democracy advocates here. Regina Ip,
Hong Kongs powerful secretary for security and a top aide to Tung Chee-hwa, the chief executive,
increased the controversy when she spoke to students at a local university last Monday. Mrs. Ip
questioned the value of democracy in protecting civil liberties and contended that democracy in Germany
in the 1930s led to the rise of Hitler and to the Holocaust. She said at a public debate on Wednesday that
the remark was a personal opinion, not a government position, but went on to cast doubt again on the
usefulness of democratic processes. 'I dont think democracy is the panacea for all problems. she said.
Tf you look at the countries around the world, particularly in Asia, there are many democratically elected
governments which fail even to protect human like, let alone human rights. Hong Kong was a British
colony until 1997, when it was returned to China. The territory enjoys some autonomy under its Basic
Law, which provides for a separate legal system and considerable autonomy in running its own affairs.
Tightened up by Beijing after the Tiananmen Square massacre in 1989, Article 23 of the Basic Law calls
for the Hong Kong government to put in place laws against sedition and treason. The government put out
a consultation paper last month that outlines in some detail the legislation it plans to introduce in Feb.,
with the goal of winning final passage by the legislature next summer...Hong Kongs government
contends that its current proposal conforms to the International Covenant on Civil and Political rights, as
the United States has urged. Hong Kong currently has a sedition law dating from colonial times that
prohibits people from bringing the government into hatred or contempt, but it has not been enforced for
years. Bob Allcock, the solicitor general of Hong Kong, said the consultation paper called for narrowing
the definition somewhat, to 'incitement to violence or public disorder which seriously endangered the
stability of China or Hong Kong. But the consultation paper does call for harsher penalties against people
who engage in sedition, as newly defined...Critics contend that expressing support or even sympathy for
Taiwan, which China views as a renegade province, could be interpreted as an incitement to violence.
Government officials dismiss these fears as exaggerated. Seditious publications are already subject to
confiscation, though the longstanding rule has not been used recently. But the consultation paper calls for
the same longer jail terms and higher fines as for sedition for the responsible individuals and covers
information published on the Internet. The police would be allowed to search and seize evidence without
a warrant in cases they deemed to involve national security...In a speech on Thursday to four local
chambers of commerce, Mrs. Ip did promise that the actual legislation, unlike the consultation paper, will
have two limits on the polices ability to conduct searches and seizures in national security cases without
seeking a courts approval. The government has decided, she said, that the police should still be required
to obtain warrants before they many conduct searches or seizures of financial information or of
journalistic materials. The consultation paper also says that foreigners living in Hong Kong would be
subject to prosecution n sedition charges and that activities may be seditious even if they occur partly in
other countries, as long as the hub of the activity is here. Audrey Eu, a politically independent member of
the legislature, said at the debate on Wednesday with Mr. Allcock and Mrs. Ip that the antisedition laws
amounted to importing mainland Chinese laws, a contention Mrs. Ip denied. The debate was held at the
Foreign Correspondent Club here. Speaking in Cantonese, Mrs. Ip had said on Monday: Hitler was
returned by universal suffrage and he killed seven million Jews. Did he respect human rights? The
statement has drawn growing criticism for being both callous and historically incomplete. Hitler lost
Germanys presidential election in 1932. While his Nazi Party subsequently became the largest in
Parliament, it did not command the support of the majority of Germans. Partly by fomenting political
violence, Hitler ended up becoming the chancellor of a coalition cabinet on Jan. 30, 1933, and was
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subsequently voted dictatorial powers by Germanys Reichstag. "For some reason people love to imagine
Hitler was voted into power, but it was far more complicated than that, said Mitchell B. Hart, the Padnos
visiting professor of Jewish history at the University of Michigan. He added that most experts put the
number of Jews murdered in the Holocaust at five million to six million, not seven million. My arguments
here are: the fact that Nazi Party became the largest party in the Parliament could still be a moot point,
because it went through the German elections. The phrase voted dictatorial powers by Germanys
Reichstag is unclear and ambiguous here in making judgment and inference. It might need further
clarification whether that fact was attributable to the deficiencies of election system vulnerable to the
Nazis manipulation or to Nazi's direct control through fomenting political violence. In the former case
then-German system and procedures ought to be regarded as democratic, albeit they remained deficient
or rudimentary according to the todays standard. Those existing deficiencies and loopholes had provided
possibility for dictatorial powers to win through elections.
Also cf. No to Brussels, No to immigration: How rightwing populism entered the mainstream - As this
weeks election in Austria confirms, the politicians who burst on to the scene barely two years ago have
often proved conspicuous failures in government. Yet their articulation of deep-seated anxieties continues
to exert huge influence on policymaking by John Lloyd in Financial Times, p. 11, Thurs. Nov. 28, 2002.
Also cf. Kinder, Gentler Fascism by Alexander Stifle in The N ew York Times, A17, Sat. Sept. 28, 2002:
Rome - This summer the president of the Italian state broadcasting system, RAI, addressed the national
congress of the National Alliance, the right-wing party led principally by what are known as post-fascists.
The official, Antonio Baldassarre, announced that it was time to rewrite history - that is as its presented
on Italian television...History, cynics say, is written by the winners. At the end of World W ar II, the anti-
Fascists - who had been kept out of public life for 20 years - got to tell their story and name streets and
piazzas after their heroes. But with the return of a center-right coalition last year, whose second-largest
party is the National Alliance, many on the right feel that it is their turn now. Domenico Fisichella, a
professor of political science at the University of Rome and a senator representing the National Alliance,
believes that the political changes have opened up new possibilities. The right has given up Fascism as
a model, he said. 'And at the same time, the historiographical debate on the Fascist period has grown
more serene, more balanced.' Mr. Fisichella first proposed forming the National Alliance in 1994 out of
what had, up to that time, been a neo-Fascist party known as the Italian Social Movement. He is one of
several scholars who have offered a more mixed judgment of the Fascist era. It was clearly an
authoritarian government but not a totalitarian one, he said in a telephone interview. Fascism committed
serious errors that led to the tragedy we all know, he added, referring to the alliance with Hitler and
W W II. But it also passed a great deal of social and economic legislation that was quite valid, that was
innovative for its time and even copied in part by the New Deal in ending the Depression. The gospel of
left-wing historiography failed to make these distinctions and simply bunched Fascism with Nazism. And
end to the demonization of Fascism by scholar created an opportunity for Italys old neo-Fascist party to
move from the political fringe toward the center...The party leader, Gianfranco Fini, has criticized
Fascisms racial laws and has traveled to both Auschwitz and Israel. Earlier this year, he publicly
retracted a statement he had made 10 years ago calling Benito Mussolini the greatest statesman of the
20th century....The two movements may seem contradictory - the post-Fascists being more critical of
Fascism and the historians treating it more kindly - but they are intimately related. T he rehabilitation of
the National Alliance would probably not have been possible without a gradual softening of the portrayal
of Fascism both in the scholarly literature and the popular media. If the older leaders of the National
alliance were regarded as war criminals like the Nazis, it would have been impossible for them to occupy
positions in the government. But now one former repubblichino, Mirko Tremaglia, is even a minister of the
current government. A less unfavorable view of the Mussolini era is prevailing, partly because of the
political necessity of integrating the former neo-fascists into the mainstream. For example, Prime Minister
Silvio Berlusconi, whose Forza Italia (Go, Italy) party leads the government, justifies his partnership with
the National Alliance by saying that the good in Fascism must be remembered as well as the bad...This
trend is a marked change...
25. For instance, a debate between Neo-liberalism and the New Left recently heated up concerning the
forms and nature of Chinas social democracy, visualizing Chinas democratic future.
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26. cf. Semi-democracy in Financial Times, p. 14, Wed. July 24, 2002: More countries today boast
democratic systems than ever in history. Yet in many developing ones, which comprise the great majority of
the community of nations, embracing the ballot box has produced only meager improvement in the everyday
life of most individuals, politically as well as economically. Some have even gone backwards. What has gone
wrong?... the central message is powerful one: the primary impulse for the attainment of democracy and good
governance - and for economic development - must come from within countries. The rest of the world can
encourage that process. It cannot impose it.
27. cf. In old Chinas stormiest times, nature was the eye by Holland Cotter in The New York Times, B27,
Art Review, Fri. Sept. 13, 2002: ...W hat lessons can a modern visitor, immersed in the aggressions and
tensions that seem peculiar to the 21st century, bring away from these images? Old lessons, universally
taught, and apparently just as universally forgotten: patience really is a virtue; haste does, indeed, make
waste, and waste that politics can expand to unconscionable proportions. And the earth, the natural world
that exists beyond such fictions as kingdoms and nations, is what it has always been: communal terrain, open
to all, responsive to nurturing, nurturing in return...
28. Those institutional routines and operations in a background-characteristic transition have empathized
with a relatively closer system and carved into the fabric of its relatively higher contexts of history and
culture.
29. Constitutive-based transitions are apt to quest for a much wider open social system, while responding
slowly to their backward past and their currently semi-opened reality. The institutional routines and codes
in transitions with such mode are more responsive to the goal attainments and their regime changes than
to their reality changes.
It is interesting to read the similar insights by Tom Foremski in Financial Times, p. VII, in Knowledge
Management 7, W ed. Nov. 10, 1999 saying that (brackets mine) 'Big Bang approach is fraught with
hidden problems, [whereas] a grassroots approach to deployment, rather than imposing knowledge
management systems from above, is a more effective strategy... The main reason that the acquisition
and utilization of knowledge is embedded in social and cultural structure.
30. cf. Walder, Andrew G. 2002, p. 251 (emphasis mine): Transition means different things in different
settings. Rural China is moving from an agrarian subsistence regime to a diversified, market-oriented
economy through rapid growth in household entrepreneurship and even more rapid growth of wage labor
in publicly owned enterprises. Transition in urban Russia, by contrast, has meant contraction of
employment, declines in real wages, economic restructuring of large corporations, and the rapid transfer
of ownership into private hands (Gerber and Hout 1998). The point is not that outcomes of market
transition vary, but that causal processes to be analyzed in each case will have little in common. The
more fully we appreciate that there is much more to transitional economies than the shift from Plan to
market, the better we will understand the consequences of this shift."
31. For instance, as Martin Wolf points out, the Russian economy is now prevalent with a non-cash
economy, which is just a disguised form of the former subsidies in the state socialism; and Behind them,
however lies the collapse of the state, cf. A journey into the unknown - As the world waits to see how
Vladimir Putin will perform, the west must be careful to keep its distance by Martin Wolf in Financial Times,
p. 13, Wed. Mar. 29, 2000: ...A civilized country has a law-governed and effective state. Russia is the
antithesis. Consider two aspects of its weakness. First, there are the 'oligarchs, those masters at using and
abusing the state for their own ends...'the oligarchs dominate Russian public life through massive fraud and
misappropriation, particularly in the oil sector. The business model that they have employed is privatization of
public assets. In enterprises they control, no outsiders are safe. Before their wealth, the law is impotent This
is plunder masquerading as free enterprise. Second, there is the de-monetization of the economy. As the
most recent economic survey of Russia from the Organization for Economic Co-operation and Development
notes, non-cash receipts at 200 industrial companies peaked at over 50 % of the total in August 1'998, before
falling to 43% in April last year. For 2,000 large enterprises and natural monopolies the share of non-cash
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receipts was more than 50% in early 1999. What makes the Russian non-cash economy extraordinary is that,
as the OECD remarks, 'the barter and offset prices of a commodity are typically close or equal to each other
and roughly 40 to 50% higher than cash prices. Why should organizations prefer to avoid cash? A part of the
answer is that non-cash transactions disguise subsidies, mostly for energy. As important, these transactions
are a way for regional and local governments to cheat the federal authorities by operating without bank
accounts. The dominance of the oligarchs and de-monetization are both consequence and cause of todays
distorted, semi-market economy. Behind them, however lies the collapse of the state...'the fundamental
feature of Russian post-communist reforms is that they were implemented at a time of weak state power.
Radical transformation under a weak regime is the definition of revolution - a process that nobody controls.
The collapse of the Soviet Union was the end of a state, an empire and an ideology. Only coffee-house
intellectuals can imagine that this could be managed smoothly. As Mr. Mau argues: 'an economic policy in a
society tom apart by social struggle cannot be stable and consistent. Least of all can it be these things when
the head of government is the ignorant, shrewd, and compulsive Boris Yeltsin." Also cf. Russian economic
reforms as seen by an Insider Success or Failure? (London, Royal Institute of International Affairs, 2000.
www.riia.org) and Re-engaging Russia (London, Foreign Policy Center, www.fpc.org.uk).
32. cf. Jepperson 1991, p. 152 on 3. Institutional Change: There are number of distinct types and
processes of institutional change...every entry is an exit from someplace else, we can distinguish four
major types of institutional change: institutional formation, institutional development, deinstitutionalization,
and reinstitutionalization. Institutional formation is an exit from social entropy, or from non-reproductive
behavioral patterns, or from reproductive patterns based upon 'action.' Examples of these three exits,
respectively, might be the institutionalization of the self, as it is differentiated from nature and the gods
(e.g., in the Greek period [Snell 1960]), or sexuality (as discussed by Foucault 1978 or Elias 1978), and of
class conflict (Dahrendorf 1964). Deinstitutionalization represents an exit from institutionalization, toward
reproduction through recurrent action, or nonreproductive patterns, or social entropy. The crescive
deinstitutionalizations of gender, or of community corporate structures, as central socio-organizational
vehicles, are examples. Reinstitutionalization represents exit from one institutionalization, and entry into
another institutional form, organized around different principles or rules. The long-term transformation of
religion in Western societies, captured in discussions of secularization, is an example of the
reinstutionalization of a persisting social force. There are a number of distinct ways in which institutions,
once established, can change (i.e., develop, become deinstitutionalized, be reinstitutionalized) (see
generally the discussion in Eisenstadt 1968: 418-20). Institutions can develop contradictions with their
environments (as pictured in ecological thinking), with other institutions (as pictured by Marx), or with
elementary social behavior (as pictured by Homans 1961: ch. 16; see also Friedland and Alford, ch. 10,
this vol.). These contradictions, or separately, exogenous environmental shocks, can force institutional
change by blocking the activation of reproductive procedures or by thwarting the successful completion of
reproductive procedures, thus modifying or destroying the institution. Institutions can embody
endogenous change as well: for example, procedural rationality, as a social institution itself, drives social
change by routinizing it.
33. cf. R. L. Jepperson 1991 denotation of institutionalization (p. 144): "In brief, I argue that
institutionalization best denotes a distinct social property or state (and I attempt to specify this property),
and that institutions should not be specifically identified, as they often are, with either cultural elements or
a type of environmental effect...It then becomes possible to represent institutionalization as a particular
set of social reproductive processes, while simultaneously avoiding the opposition of institutionalization
and change. And it becomes possible to represent institutionalism in an entirely straightforward way, as
arguments featuring higher-order constraints imposed by socially constructed realities, and to distinguish
it from other lines of arguments.
34. This de-integration is most evident in the recent Russia election with the resurgence of the
communists who now fiercely chide liberalization and re-privatization . cf. The Economist, p. 50, Dec. 4,
1999: Seldom in their history have Russias Communists been worse led or had fewer ideas. Yet this
hardly seems to matter, for they look well set to repeat, or even improve on, their score in the 1995
elections, which made them the largest party in the lower house of parliament, the Duma. The heir to
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Lenin and Stalin is a dreary apparatchik, Gennady Zyuganov. He has a large potential electorate:
according to opinion polls, nearly a third of the population supports various left-wing parties."
35. cf. Alya Guseva. 2002: Historical cause of the low-level of trust in Russia today, Univ. of California,
San Diego. Seminar presentation in ASA annual conference, Regular Section 272, Aug. 17, 2002.
36. Except that I replace W esleys term "Taking for Granted" with "Social Appropriateness", which refers
to the social warranty of new institutional arrangements as part of larger environments at individual and
collective levels.
37. cf. Russias rising tycoons - As the concentration of ownership in the country grows, the resemblance to
South Korea chaebols suggests a potential for strong growth - but also instability by Robert Cottrell in
Financial Times, p. 12, Aug. 6, 2002: ...According to Peter Boone and Denis Rodionov of UBS Brunswick
Warburg, the Moscow investment bank, an analysis of Russias biggest non-government companies shows
that '85% of the value is controlled by just eight shareholders groups. Such is the concentration of ownership
in Russia now, some analysts are beginning to speak of a 'chaebolization of the economy - comparing the
rise of conglomerates in Russia to the rise of the chaebol business groups in South Korea from the 1960s on.
If so, that is ambiguous news for Russia. The chaebol system in South Korea has proved good for industrial
growth but bad for corporate governance and prone to crashes when over-extended...Russias oil, steel,
aluminum, nickel, car and heavy engineering industries are already dominated by the new tycoons. The last
basic industries, such as coal and timber, are being bought up now...Agriculture is also attracting the
tycoons, especially since Mr. Putin signed a law this year allowing private ownership of farmland across
Russia for the first time since the 1917 revolution. Mr. Potanins Interros group, whose main asset is Norilsk
Nickel, the huge metals company, is already one of Russias biggest livestock producers...This marks a big
change from the initial pattern of Russian privatization in 1992-1994. Factories were sold off individually and
on average employees received about 50% of the shares, management about 9% and the government or
other outside shareholders 41%. Three main factors have encouraged the consolidation of industry and the
concentration of ownership. The first was an early trend among managers to buy shares cheaply from
employees, often using the companys funds. Next came the notorious 'loans for shares' deals of 1995-96,
when the Russian government allowed a small number of financiers to buy the states biggest oil and mining
companies for very little. The aim was to create a business elite loyal to President Boris Yeltsin, who was
seeking re-election. The favored financiers were commonly called the oligarchs. The third big shift in
ownership came after Russias default and devaluation in August 1998. Foreign investors and bankrupt
Russian banks sold their stakes in Russian industrial companies. The tycoons who controlled exports of oil
and other natural resources had the cash to buy those assets at fire-sale prices. Now the dominance of the
tycoons is being reinforced by the underdevelopment of the Russian banking system. The shortage of credit
makes it difficult for newcomers to mobilize cash for acquisition and investment. "There is no channel for
transferring money from cash-rich companies to other sectors of the economy, says Andrei Kostin, head of
Vneshtorgbank, a state-owned Russian bank. A second factor deterring new competition is the weight of red
tape and corruption that suffocates small business in Russia. The big tycoons, by contrast, have the money
and influence to combat or collude with the government. Roland Nash, head of research Renaissance
Capital, a Moscow investment bank, sees the scope for 'price-setting at best and political manipulation at
worst, as one of the main potential dangers to Russia from excessive concentration of ownership. It is not
quite fair to compare Russias conglomerates to South Korea's chaebol, says Christopher Granvile, strategist
with United Financial Group, a Moscow brokerage, because the Russian government plays a much smaller
role in industrial policy. It does not steer investment and credit in the private sector as the South Korean
government did. The comparison does, however, reflect well the degree of concentration of ownership in
Russia, which resembles that of South Korea in the mid-1990s. Then, according to International Monetary
Fund data, the 30 largest chaebol owner two-thirds of the 100 biggest manufacturing firms and produced
16% of GDP. South Koreas chaebol system produced rapid growth from the early 1960s to the 1990s by
mobilizing investment and importing management skills. In Russia, too, the growth of conglomerates since
1998 has contributed to a rise in industrial investment and output. For those reasons, concentration of
ownership does not yet rank high on the Russian governments list of worries. One Kremlin official says if
Russia can emulate South Koreas growth rate, it can worry about the problems later. It may be, as Mr.
Boone believes, that the concentration of ownership will be diluted as new manufacturing and service
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industries grow in Russia and as foreign investment increases. Some tycoons may turn into sellers of assets
as prices rise. Others are less sanguine. Evgeny Gavrilenko, chief economist at Troika Dialog, another
Moscow investment bank, suggests looking back at the record of Russia in the last 30 years of the Soviet
Union, from 1961 to 1991, when investment doubled as a share of GDP but growth collapsed. The main
problem was a misallocation of investment resources. Now, says Mr. Gavrilenko, the growth rate and the
ratio of investment to GDP in Russia are similar to those prevailing in the early 1960s. Russia is at 'a fork in
the road, he says. If it can put a strong banking system in place to allocate investment resources efficiently,
and lower the barriers to new business to stimulate the maximum of competition, it may yet achieve high and
sustainable economic growth. If not, he says, another economic crisis will be 'inevitable.'
38. Note: For the later two selected items (governance type and state/civil society relations) I refer to
W . Streeck and J. Rogers 1999. But the terms are certainly used in different contexts. The most listed
items concerning Chinas transition have been constructed with reference to the process of its institutional
reforms (see above Section 5.2, Chapter 5).
39. W e could appreciate this point from the facts that Gorbachev, the leading reformer of the FSU, came from
the Communist Party, and Putin, the current Russian President, came from the former KGB.
40. W e might find similar arguments here with the discovery and survival of the Sumerian system (note: the
Sumerian system is a calendar system following a septimal law that was framed and instituted by Sargon I,
King of Antique Akkad, over 40 centuries ago; it defined a week consisting of seven days). W e might be
amazed to know how the Sumerian system prevailed over a variety of other ancient civilizations including
the Greeks, Slavs, Christians, Hindus, Jews, and Muslims, as Sumerias 4400-year-old historical feat
continues. It thus became theoretically divided as to how the civilizations could make and accept the system
universally over time and across space. Some may argue for its religious inspiration, while others may argue
for its practical value. Some others atheists just dont believe the Lord of the rings is able to dictate secular
and natural matters, cf. The power of seven" in The Economist, Dec. 22nd 2001/Jan. 4th, 2002, Special
Christmas Issue, p. 102.
41. Even a constitutive transition concentrating on regime change cannot ensure a complete regime
change, since a complete regime change is plausibly a piecemeal and rather protracted undertaking.
42. The reception of the alternative modes of transition implicated with dilemmas between reality and
regime could help us further ruminate Chinas transition. My inquiry so far remains retrospective, a
backward search. I expect to complete its validity now through forward thinking of some prospective
issues.
43. cf. Kicking down growths ladder - Protesters against the World Bank and the IMF are in effect
seeking to deny the poor the benefits of a liberal world economy by Martin W olf in Financial Times, p. 15,
Wed. April 12, 2000: ...growth itself is helped along by...macro-economic stability, and by openness to
trade.
44. China will find a real test after joining W T O as to whether it really roots for globalization and continues
its transition toward marketization, albeit China has hitherto never missed a chance to tap global markets,
cf. China and Japan to tackle product piracy by David Pilling in Tokyo and James Kynge in Beijing in
Financial Time, Fri. p. 5, Apr. 5, 2002: ...China and Japan are working together to crack down on
counterfeiting of Japanese products in what marks a potential shift in Beijings attitude towards the
protection of intellectual property rights, according to Japanese officials...It remains to be seen if Chinese
enforcement authorities will act decisively against violators of the intellectual property right safeguards
that Beijing signed up to in its accession to the W T O secured last D ecem ber...The issue came up
yesterday in talks between Li Peng, head of the Chinese parliament and Junichiro Koizumi, Japans
prime minister 'Mr. Li said now that China has joined the W TO , he wants to see the rule of law prevailing
in China, said Misako Kaji, the prime ministers deputy press secretary. 'W e are closely watching how far
China is going to comply with its W T O obligations, says the trade official, who adds that Japan could take
China to the W T O settlements panel...Opinion is split among foreign companies operating in China as to
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Beijing's sincerity in dealing with the issue, which also affects products from the US, EU, and other
regions. Some say Beijing genuinely wants to resolve its chronic piracy problem but does not have the
power to enforce its will on unruly local authorities, many directly or indirectly involved in the business.
Also cf. China begins career as a W TO member - Pacts stipulations offer cover to reformers; state
interests linger by Peter Wonacott in The Wall Street Journal, A14, Tues. Dec. 11, 2001: After fifteen
years of grinding, occasionally rancorous negotiations, China's formal membership in the World Trade
Organization today signals the transformation of a semi-closed economic system into one going global on
the back of foreign investment and corporate privatization. From telecommunications to banking to retail
distribution, Chinas W T O commitments will diminish state-run monopolies and force Chinese companies
to respond more to competition than to government whims. While there are plenty of worries about the
response of inefficient state companies, Chinas reformers are relishing the prospect of reduced operating
costs, less red tape and more foreign capita. And they welcome the W T O s role in providing political cover
for reforms they say were needed any way. 'W hy do we need a new system? asks Jin Qiansheng, the
vice director of a high-technology zone in the central Chinese city of Xian. 'Because the old one is no
good. Mr. Jin should know. To kick-start business, the barrel-chested official has sought to kill
government approvals that foreign companies once needed for investment. But Mr. Jin grumbles, he pays
frequent visits to the local telecom company to beg for better-quality lines to his zone and regularly sweet-
talks bank managers to speed financial transactions...Chinas W T O commitments call for a step-by-step
dismantling of barriers in a host of industries. In the days before Chinas W T O entry, the governments
cabinet, or state council, has endorsed dozens of revised laws to allow foreign ventures in off-limit
sectors, such as tourism and telecom. The promised market opening has fueled a rush of foreign
investment, reaching $40.8 billion last year. 'There is nothing in Silicon Valley as interesting as China is
now, says Warren Christopher, former US secretary of state whose law firm, O Melveny & Myers, is
helping investors scout Chinas market. Already, though, difficulties are in sight. A few industries still lack
laws needed to govern foreign investment. The absence of law regulating joint venture fund-management
companies, for example, could delay the launch of 18 new ventures, which under China's W T O pledges
are allowed upon membership. Even some prospective Chinese partners argue the government shouldnt
announce the law soon, because Chinas securities markets arent prepared. 'W e dont have the risk
management controls, warns an executive in Beijing with Changsheng Fund Management Co. Chinas
whole fund-management industry is still a baby. Such apparent contradictions between Chinas W T O
commitments and implementation may provide some of the first test cases for how the Chinese
government will handle dispute settlement. Foreign-government arms, chamber of commerce committees
and Chinese agencies have been set up to monitor Chinas compliance with W T O rules.
Also cf. China-watchers look for signs of post-entry strategy - 'A goal of our economic reform is to create
a market economy based on rules by Gue de Jonquiferes in Shanghai in Financial Times, p. 8, Fri. Oct.
19, 2001: ...since W T O members approved its membership last month, China-watchers have turned to
puzzling over what it will do after it arrives...As Chinas chief W T O negotiator for the past eight years,
Long Yongtu, vice-minister of foreign trade, and his team have had plenty of opportunities to study the
organization closely and ponder strategy after entry...Beijings approach, he suggested, would combine
political pragmatism with firm defense of its national economic interests and determination to assert its full
legal rights in the W TO . He warned other countries that if they did not play by the rules, Beijing would be
quick to seek redress through the W T O s disputes procedures...However, he acknowledged that Chinas
own trade practices were likely to face legal challenges in the W TO , and even appeared to welcome the
prospect. 'If we do some things that are inconsistent with W T O rules, we shall have to correct them, he
said. 'This could be healthy pressure. A goal of our economic reform is to create a market economy
based on rules. As a matter of fact we can use [W TO disputes rulings against China] as a kind of
leverage to make our market more stable and predictable. Mr. Long, who thinks China may join the W TO
before the end of the year, admitted that the countrys rudimentary legal system created uncertainties
about its capacity to enforce W T O rules and judgments. 'It will be a learning process, he said...Chinas
experience showed removing trade barriers should be a lower priority for poor countries than generating
domestic growth. 'M arket opening isnt enough. If you work hard to open the market, you may find there
isnt a market to open, he said. However, Beijing did not aim to be a poor countries leader in the W TO.
'Generally speaking we do not want China to be seen as a champion of developing countries - this will
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happen naturally, not as deliberate policy, he said, insisting Chinas tactics would be guided by its own
interests...Mr. Long favored a 'gradual approach to global liberalization in case China faced pressure to
cut its own subsidies before it had created new jobs for displaced farm workers. 'W e have to be realistic
and not think that things can be changed overnight, he said...he appeared to rule out any early additional
liberalization of his countrys market, saying it would refuse to open it any faster than required.
Also cf. China vows to fulfill W T O promises - Nation may join by end of the year by Antoaneta Bezlova
in Beijing special for USA Today, 5B, Fri. Oct. 13, 2000: Chinese leaders reassured the top US trade
negotiator Thursday that they will live up to promises to open their markets to foreign competition and that
they are still committed to entering the W TO , possibly before the end of the year...The W T O sets and
enforces rules designed to ensure freer trade. China wants in because membership would confirm its
status as a global economic power, force other member countries to lower barriers that now keep
Chinese goods out and prod inefficient government-owned Chinese companies to cut costs and make
globally competitive products. But to get into the W TO, China had to make difficult concessions. It will
reduce tariffs and other barriers that protect its inefficient farms, factories and banks. Millions of Chinese
are likely to lose their jobs to foreign competition. For that reason, many feared that the Chinese were
dragging their fe e t...
Also cf. Trade with China takes a delicate step up by Alan Beattie in Financial Times, p. 8, W ed. Mar.
28, 2000: ...in the future, impending Chinese membership of the W T O promises radically to change
business conditions and market access.
Also cf. US seeks to help China over last W T O hurdle - Top trade aide will join talks in Beijing, seeking
to resolve final issues by Lan Johnson in The Wall Street, A21, Thurs. Oct. 12, 2000: Part of the reason
for China's reluctance to even appear to make new concessions is that huge sections of the country are
expected to suffer from the W T O entry. Although it will benefit China in the medium-to-long-term,
economists agree that in the short run, unemployment will rise, especially in the turbulent countryside. An
economic analysis by Salomon Smith Barney, for example, concluded that about 40 million people will
lose their jobs over the next five years as, among other reasons, lower tariffs on agricultural products
make Chinas expensive grain uncompetitive and farmers lose their jobs.
45. cf. Crisis of governance facing Beijings new masters - Limits on economic reform, rural decline,
corruption - all find their roots in political dysfunction by James Kynge in Financial Times, p. 2, Weekend,
November 2/Novermber 3, 2002: ...Shunde is one of a handful of places in china that has begun to
exploit to its handsome advantage the reputation for leaden bureaucracy, corruption and nasty surprises
that still afflicts most of the rest of the country. The creation of a benign "soft environment that stresses
clean, transparent and efficient government has helped Shunde attract impressive investments from
scores of foreign and domestic companies. It has become rich; per capita incomes have risen to around
$1,000 a month (14 times the national urban average) and exports in 2000 were up 28% to $2.8bn. But
there is a bigger point too. In a country where political reform has been virtually frozen since the 1989
Tiananmen massacre in Beijing, Shunde stands as evidence that the structural reform of government not
only works but is also lucrative. The power of this example is considerable. Annual inflows of foreign
direct investment of $46.8bn, $40.7bn, $40.3bn and $45.4bn in the last four years have had a
transforming influence on localities desperate to compete not only for the jobs and tax revenues that
foreign factories generate but also for the technology and management skills that they impart. 'Soft
environment has become the buzzword for many a city mayor trying to lure foreign capital with promises
of transparency, honesty and accountability. Few places, apart from Shunde and its Guangdong
neighbors Zhuhai and Shenzhen, have achieved much beyond a cosmetic trimming of red tape. But, as
David Zvveig, political scientist at the Hong Kong University of science and technology has noted, many of
the key reforms in the last 24 years have started with the popularization of local initiatives. The
disbanding of the agricultural communes began with one bold country that linked peasants' pay to output.
Free market economics were first tested in 'special economic zones' and then applied nationwide. As Mr.
Feng acknowledges, Shundes model will not be easy to replicate. 'W e are not representative of China.
W e are grown up because we are close to Hong Kong and because we have been given policy latitude
by the Guangdong government, he says. Nevertheless, the citys reforms are groundbreaking. Whereas
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elsewhere in China, the process of government is kept secret, in Shunde there are clear guidelines on
how decisions should be made, says Mr. Feng. In addition, the administrations annual budget, the
salaries of officials, and state tenders and other government business are published in a dedicated
newspaper, Shunde Political and Administrative Matters. Elsewhere in China, authorities have been
reluctant to sell down their stakes in enterprises and still own around 70% of the nearly 1,200 companies
listed o Chinas stock markets. But in Shunde the government has reduced its stake in local enterprises to
an average of 20%, and has used the proceeds to fund social welfare liabilities. 'This is the most
fundamental issue. If you dont have a separation of government from enterprises, then you can never
have a real rule of law, said Mr. Feng. He has opened public hotlines to the Shunde administration so
people can raise objections before resentment builds up, and has constructed two halls alongside the
government headquarters so that protesters can be met in person. Western-style democracy, however,
remains as firmly off-limits as it was in the aftermath of the Tiananmen massacre, and the supremacy of
the Communist party is unquestioned. But down the road in Zhuhai, another manufacturing hub, the
authorities have begun an interesting experiment in subjecting its officials to public supervision. In Zhuhai,
for instance, large companies in the area vote very year on the performance of individual government
offices. Staff in the best-performing offices get extra bonuses, while those in the worst get none, officials
say. Ultimately, it is too early to tell if the experiments under way in Shunde and Zhuhai presage a new
wave of governance reform in China. Certainly, officials at the Central Party School run by Hu Jintao - the
man tipped to become chief of the Communist party at a congress starting next Friday - have been
privately debating many of the reforms that Shunde has already implemented. Nevertheless, no single
issue will define the record of the 'fourth generation of leaders to emerge from next weeks party
congress in the same way as how they tackle a deepening crisis of governance, Chinese academics say.
'If China does not have political reforms, then in 10 years time it will collapse like the former Soviet
Union, says Li Shenzhi, an iconoclastic thinker and author of Chinas Road. To varying degrees,
political dysfunction is responsible for many of modern Chinas ills. The mountain of bad loans in the
banking system derives mainly from the fact that banks are state-owned and are obliged to support
companies with official affiliations. Manufacturing overcapacity - one cause of deflation - is also largely
due to the fact that few state affiliated companies are allowed to go bankrupt. The malaise in rural China,
where incomes have been falling for he last four years while Aids, tuberculosis, school truancy and
poverty spread, is to a significant extent attributable to the impact of predatory officials extorting illegal
taxes to finance expanding bureaucratic payrolls and dud official businesses. Corruption, now embedded
in almost every inch of the body politic, is nurtured by the lack of institutional checks and balances that
exist independently of a Communist party still held to reside 'above everything - even the rule of law.
Capital flight, most of it the ill-gotten gains of government bureaucracies, is running at tens of billions of
dollars a year, according to official estimates. The governments entrenched involvement in business has
created moral hazard and inefficiencies, especially where the industry regulator is also the owner of the
key companies it is supposed to regulate as in telecoms, banking, power, some media and others, 'the
government should not be a player and the referee, says Li Shuguang, a researcher at a state think-tank.
His sentiments are well understood in Shunde and other places like it, but the country now encapsulates
so many diverse realities that to describe it in the single word China is misleading. The coastal areas
have for the most part benefited from the last two decades of economic reform and are set to gain further
from Beijings entry into the W T O last year. But much of the hinterland remains mired in the problems of
15 years ago. Complicating matters further, the country is in the throes of not one but several transitions.
Agrarian societies are industrializing in some areas. But in the old industrial heartland of the north-east,
millions of workers are being made redundant every year. Around the booming Pearl River delta to the
south, young women and men from rural backwaters jostle for jobs on the production lines of high-tech
multinationals. Given such a divergent picture, it would be rash to predict whether China will attain the
economic superpower status that it aspires to. But it seems clear that when Beijings new leaders take
their posts this month, they will assume responsibility for a country poised between radically different
visions of its future. According to He Qinglian, an outspoken author who was forced to flee to the US last
year, 'T o solve Chinas problems there needs to be a completely new social movement to change
everything from the system to our way of thinking.
46. cf. Some Chinese see the future, and its capitalist - Its not whether to have free markets but what
kind by Joseph Kahn in The N ew York Times, Sat. A15, A17, May 4, 2002 (emphasis mine): ...Aside
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from a clutch of influential scholars devoted to finding pragmatic solutions to Chinas vast economic and
social problems, intellectuals often have to choose between quiet irrelevance and public condemnation.
Despite the difficulties, some Chinese intellectuals are today engaging in a full throated debate about the
countrys future. In academic conferences at home and abroad and in journals of scholarly opinion that
are cloaked in the protective veil of academic jargon (and, often, English), political scientists, sociologists
and economists are sparring openly about the state of the countrys quasi-capitalist, mostly
antidemocratic government...Many of Chinas leading scholars are not dissidents, and they see their task
as constructive, not polemical. Just as Chinas economy has begun to resemble those of industrialized
countries, intellectuals have focused on issues familiar to scholars in Europe and the US. Their concern is
not whether China should become capitalist, but what kind of capitalism it should have. One camp,
arguably the dominant one, is what the Chinese call neoliberal. Its proponents argue that China should
complete its economic and social evolution that began under Mr. Deng by selling off state companies,
shrinking the government, strictly enforcing property rights and letting the market work its magic. The
neoliberals in some ways tend to echo Ronald Reagan and Margaret Thatcher, though some also share
the antidemocratic tendencies of Augusto Pinochet, the Chilean dictator who governed with an iron fist
but also pushed the development of a vibrant market economy in the 1970s and 80s. They have
enthusiastically embraced Chinas integration with the world economy. On the other side are a loose-knit
group of intellectuals who have begun to refer to themselves by a misleadingly similar name, the New
Left. Many in this school want the government to reduce inequality, provide a social safety net and
intervene more in the market to tam e the economic cycle. They tend to reject the prevailing view among
Chinas elite that popular democracy is a luxury the country can afford only after it becomes rich. Instead,
they argue, China needs the dynamic energy of democracy to force change and combat corruption.
Xudong Zhang, an associate professor of comparative literature at New York University, has compiled a
volume of essays, 'W hither China? that explores the conflict. Mr Zhang and several of the scholars who
contributed essays, including Cui Zhiyuan, W ang Hui, Wang Shaoguang and Gan Yang, consider
themselves proponents of the New Left. They mostly attack neoliberals, though Mr Gan and Wang
Shaoguang were once considered pioneers in the rival camp. If their battle seems a little removed from
the China portrayed in the news media, that's because it is. Many Chinese can read and write only on a
rudimental level...Discussion of China's current problems often hinges on classical, Western views of
development, with scholars debating whether French radicals or British gradualists are better models for
reform. Rousseau inspired thinkers during Maos time; Burke's rejection of the French Revolution and his
support for the aristocracy appeals to many today. There are postmodernists, feminists and libertarians in
the mix...But neoliberalis have begun to encounter sustained opposition from fellow reformers. Like the
neoliberals, many of those in the New Left are Western-educated, and they reject socialism. But this
nascent opposition also questions the dogma of capitalism. There is no sure formula for development,
they say, but surely it is not the bureaucratic capitalism that dominates the country today. Mr. Cui, now a
research fellow at Singapores National University, argues that China doesn't understand the nuances of
American and European economic policies. He cites, for example, Chinas attempts to inject life into
moribund state-owned companies, still the backbone of the industrial economy, as an example of what
has gone wrong. Similarly, W ang Shaoguang, a Yale-educated political scientist now at the Chinese
University of Hong Kong, argues that Chinas leaders have allowed the central government to atrophy by
placing blind faith in the market to provide public goods. In the 1990s, he says, the governments tax
revenue as a share of the countrys overall economic output fell below 10%, as the government failed to
collect taxes. In only three other nations, Peru, Bangladesh and the former Yugoslavia, does the central
government control such a small share of output. This forced even some seemingly essential institutions
to generate revenue in other ways - a phenomenon known as chuang-shou. The militarys efforts to
make money created a fuzzy subeconomy of military-backed ventures that traded on connections and
access to public goods, like the telecommunications spectrum and even missiles. The government has
recently begun to restrain that practice, but the defense budget remains too low to stop it, Mr. Wang
argues. Mr. Wang also bemoans the lack of a comprehensive safety net for the unemployed and
uninsured. The New Left also seems to have rediscovered democracy, which many intellectuals
abandoned as impractical (and politically dangerous) after the 1989 crackdown. The prevailing view is
that while democracy is fine in theory, in practice it risks shattering the stability that has allowed the
country to prosper. But Mr. Gan, a research fellow at the Center for Asian Studies in Hong Kong, argues
the opposite - that China needs democracy to preserve social order. After M aos Cultural Revolution,
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which many in China view as a disastrous experiment in mass democracy akin to the Jacobin terror that
roiled France, most Chinese became too alienated from politics, Mr. Gan argues. Too few people pay
attention to public policy. It is that vacuum that allows local officials to steal state funds with impunity, or
mass movement like Falun Gong, the exercise and meditation society, to enchant millions of people. If
the grandfather of Chinas neoliberals is Burke, it is Alexis de Tocqueville who guides many in the New
Left. Tocqueville is quoted often, because as a French nobleman he rejected the excesses of the French
revolution but also saw the British as futilely resisting the 'universal spread of democracy throughout the
world. And of course Tocqueville made clear that democracy, not capitalism alone, was the key to
Americas success, shaping not just its politics but its society, law, culture, and economy.
47. For example, Cui Zhiyuan, an associate professor of political science at the Massachusetts Institute of
Technology, has voiced such a perspective. Cui has been thought as a main representative of the New
Leftist school, cf. Party of the rich: Chinas congress of crony capitalists capitalist by Joseph Kahn in
Beijing in The N ew York Times, Sun. p. 1, W eek in Review, Section 4, Nov. 10, 2002 (emphasis and
brackets mine): ...Among wealthy nations, the US is considered stingy when it comes to social benefits
and health care spending. But by percentage of its economy, China makes the US look profligate. In
other words, it does not make rich people share their wealth. The gap between rich and poor has grown
almost as fast as overall income, meaning that inequality is increasing nearly in lock step with the
country's development. Such statistics alarm some old-school party members and outspoken
intellectuals. Bao Tong, a former top-level government official who lost his post after the Tiananmen
Square crackdown in 1989, wrote a scathing letter criticizing Mr. Jiangs [i.e., Jiang Zemin, Chinese
retiring general secretary of the CCP] plans to embrace capitalists. It implies that it is now time for the
party to admit the unspoken truth and formally declare that it has become Chinas party for the rich and
the powerful, he wrote. Other critics say that opening the party to businessmen will delay a needed
political reckoning. 'Th e economic elite love money, not democracy, wrote Kang Xiaoguang of the
Chinese Academy of Social Sciences. Such views could be widespread, but it is hard to tell, since Mr.
Jiang has closed the main leftist academic journals where criticism of his policies was being expressed,
including the one that published Mr. Kangs essay. Mr. Jiang would not agree that his party has
abandoned the poor. China, he argues, is still in the 'primary stage of socialism. Later on, contradictions
between the working and capitalist classes may become acute and the poor will vanquish the rich. But not
in the primary stage, which could last 100 years. Capitalism has to blossom before it can be uprooted. It
might be called trickle-down Marxism. The risk of such thinking, some critics say, is that China may aim to
recreate the dictatorships of South Korea and Taiwan and miss, becoming Marcoss Philippines or
Suhartos Indonesia instead. Those two countries also tried to combine capitalist economies with
strongman rule, but were felled by economic stagnation and corruption. To avoid such a calamity. China
should do less for the elite and more to create a populous middle class, said Cui Zhivuan. an associate
professor of political science at the Massachusetts Institute of Technology, who is currently a visiting
scholar at the National University of Singapore. Professor Cui said the test will be whether China's new
leadership, led by the largely unknown Hu Jintao. a longtime party apparatchik, spreads the countrys
emerging wealth. It needs to spend more on rural health care, to subsidize the poor western regions, to
retrain workers fired by falling state companies and to improve education. He cites one statistic to support
his case: to encourage exports of manufactured goods. China now gives up more money each year in
export tax credits than it spends on all social welfare programs combined. 'You over-privilege one sector
like that at the expense of all the others.' Professor Cui said. 'Unless China can create a real middle
class, it will be just another capitalist dictatorship. He may be right, but Chinas Communist Party seems
unable to escape the paradox of its continued existence. It has entered the 53rt year of uninterrupted rule,
and has 66 million members. But in the partys careerist tradition, many new members are successful
capitalists who joined - became Communists - to help themselves make more money. Communism,
then, has become crony capitalism. The party is betting that this shift will help it create enough jobs to
employ the millions of urban unemployed, as well as millions more among Chinas vast, impoverished
rural population, many of whom are seeking better lives by moving to the cities and industrial zones. If
this plan works, power will remain entirely with the Communist Party. Its a vision of Chinas future than
appears to include everything but democracy.
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48. cf. As W T O membership looms, China crams - On its long to-do list: updating laws, rules and
training officials by Staff Reporter Peter Wonacott in The Wall Street Journal, A12, "International," Mon.
July 23, 2001 (Note: Chinese officials and managers are cramming to understand the W TO and the
changes it will bring 1. Five national W T O training centers have been established; 2. 1,413 trade laws,
regulations and rulings are being reviewed; 3. 54 Web sites and 41,438 W eb pages related to the W TO
are on the Chinese Internet portal Sina.com. Yahoo offers 15 such W eb sites and 113,000 W T O related
W eb pages): As China prepares to join the W T O at last, it is facing something more daunting than 15
years of negotiations: implementing the agreement and training thousands of officials and executives to
understand it. In a Beijing conference room one recent afternoon, 40 managers, most from state firms,
listen to an instructor go through mind-numbing descriptions of the Uruguay Round, national treatment
and antitariff barriers...the instructor comes to the heart of the presentation. 'After we join the W TO, we
need to do business according to international standards, he says. 'The principle is very simple, but the
impact will be great. China is bracing for that impact. And like this room full of somnolent executives, the
country is waking up to the magnitude of the change. Sheaves of laws, many drafted decades ago, must
be updated. Hundreds of W T O case studies must be translated into Chinese. And managers must learn
how changes to current trade agreements after China joins the W TO will affect the economy, their
companies and their workers lives. 'W e ve made enormous commitments, says Yang Guohua, a deputy
director at Chinas foreign-trade ministry working on W TO legal preparations. 'Now, we will have to
implement these obligations....The urgency has sent China, characteristically, into mass-mobilization
mode. Training centers, official and unofficial, have popped up, W T O lecturers tour the country and
bookstores are filled with W T O titles. Much of it is government-driven, but the subjects popularity also
reflects voracious demand for information about how W TO membership will affect China. Foreign
governments have chipped in, too, sponsoring overseas study tours and dispute-resolution workshops for
Chinese officials, and textbook purchases for universities and government trade departments. Theres no
shortage of early warning signs. Mr. Yang at the foreign-trade ministry estimates that only a small portion
of the trade rules affected by W T O membership have been revised. His team must comb through more
than 1,400 laws, regulations and rulings, such as import-export quotas on textiles and farm produce. The
group is still months away from drafting all the necessary amendments; they plan to spend the summer
holed up at a seaside retreat trying to complete the work. This massive transformation is more than one
ministry can manage. Throughout the government, key departments have set up W T O committees to
review industry-specific laws under the supervision of the State Council, China's cabinet. The countrys
private sector has also spawned a cottage industry of W TO services. Two years ago, before a US-China
W T O framework pact, few Chinese knew anything about the trade organization, says Zhang Hanlin, vice
chairman of the W TO Research Institute at the University of International Business and Economics in
Beijing. These days, he says, pseudo-experts plug W T O books, copycat training centers proliferate, and
newspaper ads tout private seminars. Chinese businessmen "feel a lot of pressure from these reforms,
Mr. Zhang says.
Also cf. Y ee Kuanz Yew sees rise of Japans influence - Singapores founding father predicts the
emergence of a yen zone as economic gravity shifts towards Japan and China by Peter Montagnon,
Asian Editor, in London Financial Times, p. 8, Tues. Oct. 10, 2000: ...China's decision to push ahead
with membership of the W TO was a very important and positive strategic decision, though it will take a
long time before it has a big impact on the W TO and the broader world economy, Mr Lee said. 'Theyre
under a lot of pressure. They have to restructure their banks and their state-owned enterprises. They
have to open their agriculture to imports. That's a decision for strategic reasons. So does that mean they
would not seek to change the W TO? "I dont see problems in the first or even the second decade. But
when they have grown and are competing in the higher end products then there will be problems. "Also cf.
Chinas gamble in Financial Times, p. 18, Wed. Nov. 1, 2000: ...Chinas accession to the World Trade
Organization will intensify pressure for a more open economic and political system... Allowing a choice of
government officials can only increase pressure for party pluralism. This may be the first crack in a larger
break with Chinese history.
Also cf. Cultural Revolutions by Thomas L. Friedman from Beijing in The New York Times, p. A31, YNE,
Op-ed, Tues., Oct. 24, 2000: ...China is making this leap because the Communist Party leadership
concluded that without external pressure economic reform was not possible, and without economic reform
691
continued growth was not possible, and without growth continued party rule was not possible. Recent
reports that China was getting 11 -hour cold feet about joining the W TO appear wrong. That came
through in a talk I had yesterday with Qian Qichen, Chinas thoughtful deputy prime minister, who
oversees foreign affairs. 'Psychologically we are prepared for it, said Mr. Qian in an interview at
Zhongnanhai, the walled leadership headquarters, 'once we join the W TO , w e will abide by the W TO
rules, while enjoying the rights and obligations. W e should admit that our accession to W T O will bring to
us advantages and disadvantages. Our advantages lie in that we will be able to further expand our
foreign trade and more fully participate in the international market. As for the disadvantages, it means that
state-owned enterprises and other enterprises in China will be faced with fierce international competition.
W e are not afraid of such competition. It will expose Chinese enterprises and help them further develop,
expand and improve. Those enterprises that cant survive clearly dont have the capacity for competition,
so there is no value in their continued existence. 'It is not unusual for a worker to lose a job [as a result of
global competition,] added Mr. Qian. 'W hat we must do is help those workers who have lost their jobs to
learn new skills and find new jobs. That means we have to gradually build a social safety net which would
cover those workers financially. Mr. Qian also made clear that China is not backing away from its rapid
Internet expansion: 'The number of Internet users [here] doubles every six months, said Mr. Qian. 'While
providing useful information, the Internet has some negative contents and may also mislead the public.
But it does more good than harm. So fasten your seat belts. Because having bet on the future, the
Chinese are leaping into it with no bet. Wish them well, too. Because while the Middle Easts Great Leap
Backward truly breaks your heart, its effects can be contained. If Chinas new Great Leap Forward falls,
we will all feel the pain.
49. That is, its current hybrid strains will redefine China" in the future. See similar arguments in Chinas
stealthy reformer... by James Kynge in Financial Times, p. 5, Weekend, Aug.31/Sept.1, 2002: ...without
embracing the powerful entrepreneurs that have flourished as a result of two decades of free-market
reform, the party would have progressively lost touch with society...[Yet] including unabashed capitalists
into party ranks will shift the orientation of Chinas ruling elite, possibly ensuring more favorable treatment
for the growing non-state industrial sector...
Also cf. Asian economies: Reliable prosperity comes to an end - Chinas inexorable growth is sucking
investment away from the once dynamic 'tigers by John Thornhill in Financial Times, p. VI, World
Economy, Fri. Sept. 27, 2002 (emphasis mine): ...China has become Asias undoubted economic star
recording growth rates of above 7% a year. A massive inflow of foreign direct investment - totaling about
$215.9bn between 1997 and 2001 - and a five-year program of government spending has kept the
countrys economic flywheel spinning fast. The country has potentially huge problems with bad loans in its
banking system and unfounded pension liabilities. CLSA, the stockbrokers, estimates that once this 'off-
balance sheet debt is added back on the governments books - as it should be - then Chinas public debt
to GDP ratio amounts to 139% - six times higher than officially stated. But so long as China can maintain
its economic momentum. CLSA argues, it stands a good chance of growing its wav out of such
problems...
Also cf. The Economist, p. 14, Survey China, April 8th, 2000 (emphasis mine): ...B ear in mind that
Chinas growth has been so furious because the economy was so backward to begin with...this survey
has argued that the catch-up gains are coming to an end, and that the Chinese state has yet to withdraw
from the economy. Much of state-owned industry is on the verge of collapse, and the rest faces stiff
competition as W TO membership approaches. The banks are weak. Economic growth has slowed
sharply in recent years, even if there are now tentative signs of a cyclical rebound. The hard part is yet to
come. 'Chinas economy, says Yukon Huang, head of the World Banks mission in China, 'is still a
transition economy. That means the centralized command system is going to clash ever more frequently
with global norms. The greater the clashes, the more glaring the Chinese anomalies and the greater the
potential for corruption...lt puts strains not only on the economic system, but on the political one. The
strains can only get worse. As Mr. Huang explains: 'At the point of intersection with the world economy,
China will have to have the same standards as elsewhere. Ultimately, it will have to have governance
structures, pay systems and rules of conduct that are pretty consistent with world counterparts. That
means separating four deeply entwined strands of Chinas political economy: the party, the government.
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the enterprises and the banks. Will attempts to separate these four strands prove successful, even if the
party remains in control, or will they lead to political and economic chaos? Mr. Huang thinks the answer is
far from clear, but bets on success. 'Y et if they cant do it, then China will not integrate into the world
economy, nor even live up to its W T O commitments. These are strains that wont go away. Rather, they
are strains that will redefine China.
50. cf. The Economist, p. 3, Survey China, April 8th, 2000: Growth from heaven. The first two decades
of reform have in essence been catch-up growth, gains that came from disbanding the agricultural
communes and from allowing capital and particularly labor to be poured into low-end manufacturing and
processing, a lot of it for export. The government did not really have to do anything to foster such growth,
other than to keep out of the way. Double-digit growth rates were the norm, and fast growth created new
jobs for workers made redundant by inefficient state-owned enterprises, migrants from the countryside to
urban areas, and young people looking for their first job. Now those high growth rates are gone, possibly
for good. Growth is not only lower these days, but its 'labor intensity...has also slowed. W hat growth
China is achieving is creating fewer jobs. 'W e have run out of easy things to reform, explains a senior
Chinese official. Laying the foundations for the next phase of growth will be very much harder. The
productivity of the land - and remember that two-thirds of Chinas 1.3 billion people still live in the
countryside - has almost reached its natural limits, given Chinas severe shortage of water. Higher
productivity in agriculture will come at the price of even more people leaving the land for urban areas -
perhaps 8m -10m a year, for whom jobs will need to be found. Another 6m jobs need to be created in the
cities just to allow for the modest natural increase in the urban population each year. Then there are the
4m -7m a year being thrown out of work by shrinking state-owned enterprises. That is a minimum of 18m
urban jobs that the economy must create every year for the next few years. But from where? The woes of
Chinas industrial sector are well known, and the service sector has been so stunted by the countrys
socialist legacy that it is only half the size expected for a country at that stage of development. The
possibility is there for a prolonged industrial slump and a restive population. For Chinas leaders, that
prospect tilts the balance of risk and reward in favor of serious structural change and market reforms -
short-term pain that should, touch wood, lay the foundations for long-term survival. Hence the radical
commitment to a private sector that breaks free from a predatory state, to cleaning up the state sector
over the next few years, and to membership of the W TO ...T h is survey will argue that in the next three to
five years, Chinas close integration with the world economic order will increase the pressure on it to
become much more open, liberal and receptive. That, in turn, will force profound changes on both its
political system and its society. Until now, Chinas Communist leaders have been able to scorn
predictions of political change, and to repress demands for it. They have two decades of growing
prosperity to point to, certainly the swiftest, most extensive rise out of poverty any nation has seen. All the
same, says a senior official in the Chinese government (one of the liberals), 'Given globalization, in all its
meanings, the mainland Chinese are no longer satisfied to look back at the change in the past 20 years.
They want to be like Chinese in Hong Kong or the US, or they want to be like Japan... Politicians are not
given much time these days....
51. cf. The Economist, p. 16, Survey China, April 8th, 2000: ...T h e current generation of leaders was
hand-picked by the last of the charismatic revolutionary veterans, Deng Xiaoping, but the next generation
will not inherit this mantle. Som e of the more liberal party members certainly hope that a more institutional
form of government might evolve. 'D ont judge things by how w e look on the surface, says one of this
younger generation. 'For instance, the language that I use with my minister is worlds apart from the
wooden-speak I used with him five years ago...This new generation, were less ideological than our
predecessors, more open-minded. If we get influence I can even imagine more than one party existing,
like in Taiwan, or institutionalized factions could develop, like in Japans LDP. Look, if society one day
says, 'no Communist party of China, w e may not care by then.
Also cf. The Economist, p. 25, Mar. 10th, 2001: ...W hen the current batch of Communist leaders steps
down late next year, the new generation that will take its place should be much more cosmopolitan and
reform-minded...
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Also cf. The Economist, p. 40, Oct. 28th, 2000 (emphasis mine): ...the rise of a more reform-minded,
often western-educated, cosmopolitan 'fifth generation' that challenges the authoritarian assumptions of
the fourth. These cosmopolitans, in their 40s and early 50s. are starting to take up positions of influence
in government, particularly in the area that makes financial policy. And they are adamant that their
influence will grow after 2 0 0 2 .
52. As described, Chinas current agenda is still to restore its prosperity and power (in Chinese language
- fuqiang), which it has yet realized. Ibid. p. 13: ...T h e agenda, simply put, was to restore to China its
rightful prosperity and power. Half a century on, Chinas Communist leaders still keep fuqiang at the very
top of their agenda...for the simple reason that they have yet to attain it..."
53. See articles describing how Chinas new social identities arise from its young generations, cf. Chinas
leader wont hold on, anonymous author says" by Erik Eckholm in The New York Times, A3,
International, Sept. 5, 2002: ...T he anonymous author, through whom all the information has in effect
been filtered, has in previous works shown a strong dislike for Mr. Jiang and Mr. Li but appears intent in
the new book to describe the talents as well as policy leanings of the coming generation of leaders. The
account portrays Chinas next leaders as highly competent men who have advanced largely on merit and
are "determined modernizers, intent on integrating Chinas economy with the world and on maintaining
good relations with the U S, according to an advanced copy of The New York Review o f Books. At the
same time, Mr. Nathan and Mr. Gilley write, "This is a group of men who believe in authoritarian rule as a
precondition for pushing their country through the turbulent passage to modernization.' According to
Chinese authors account, the future membership of the Politburo standing committee was largely
determined months ago or earlier. The standing committee, which runs the party and the country, now
include seven men, most of whom are to retire because they are older than 7 0 ...Many experts have
described Mr. Zeng as a proxy for Mr. Jiang, but the author says Mr. Zeng appears ready to take his own
place. He is reported as personally urging Mr. Jiang to retire now, arguing that an effort to hold office
would open a Pandoras Box as other aged leaders asserted themselves.
54. cf. The greatest leap forward in The Economist, pp. 18, Survey: Asian Business, April 7th, 2001:
"...economic reform cannot outpace political reform indefinitely; ibid: "...Transition requires political
leadership. Visionary chief executives can set examples and lead the way in their own companies. But
conflicts of interest arise, and bosses are only human. For Asia to achieve best practice in its corporate
sector, governments must therefore penalize bad practice by imposing fines and jail sentences. But
transition also requires a wholesale philosophical change. The governments of Singapore, Malaysia and
China, for instance, should withdraw from the corporate sector so that companies are removed from the
political arena. Ultimately, corporate governance and shareholder rights ring hollow without a genuine
market for corporate control - in other words, hostile takeovers to remove incompetent or fraudulent
managers, whether they are cozy with government or not.
55. cf. Shanghai sees law as key to being commercial hub - but Hong Kongs legacy of English Common
law gives it a big advantage over its rival by Richard McGregor in Financial Times, Hong Kong 6 , VI,
Mon. July 1, 2002.
Also cf. "Chinas changing of the guard halts key reform by James Kynge in Beijing in Financial Times, p.
4, Weekend, Sept. 7/Sept. 8, 2002 (emphasis mine): ...T he adoption of a viable bankruptcy law is seen
as one of the most crucial aspects of Chinas attempts to promote the reform of state-owned enterprises,
the rump of the countrys out-moded Communist economy. The lack of an agreed procedure for closing
insolvent corporations has perpetuated an industrial architecture without clear rules. State banks are
often obliged to keep lending to insolvent state companies, keeping them in production despite chronic
oversupply that affects about 80% of manufactured products, and exacerbating price wars that keep
industrial profit margins thin or negative. A key cause of stubborn deflation is the fact that too few
companies in China are allowed too fa il...
56. That is, these measures are a step short of advancing Chinas economy, since in many ways an
advanced economy needs more far-reaching measures.
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57. cf. A more uncertain utopia - Our vision of the future is founded on the constant quest for change by
Charles Leadbeater in Financial Times, p. 9, Thurs. Dec. 29, 2001: ...W e live in a world of such ingrained
inequality, scarcity and competition that utopia seems a hopeless project. Yet into this world of constraints,
discipline and limited expectations, digital technologies have delivered abundance. There was a time when
technology was furniture...These days, whatever the short-term sentiments of the financial markets,
technology grows all around us, in every crack and crevice of our lives...W e live in a digital Cockaigne.
Moores law states that the power of microprocessors will double every 18 months. Metcalfes law states
that networks self-propagate exponentially once they exceed a certain size. Hard disks are able to store
more and more data, so that by 2010 the average hard disk will be able to store all the songs ever recorded
and every film ever released. The bandwidth at the backbone of the internet is doubling every 12 months, as
is the number of internet hosts in the world (currently 100m). The costs of computer memory are halving
every 18 months or faster, while the global storage capacity of the worlds computers is doubling every year.
The speed at which human genes can be mapped is doubling every year, thanks to advances in bio
informatics. These underlying technological trends are vital because they are one of the few features of our
lives that allow us to be credibly optimistic about the future. Like it or not, and many do not, technology gets
smaller, more powerful and cheaper.
58. In this respect, China might not want to shape its continental economy with either old socialist
schemes of a planning economy or Keynesian formulas of a market economy, attributing economic
dynamics merely to effective demand, expansion of consumption, and investment spending, cf. Europes
stony ground for the seeds of growth - continental nations must cast off corporatism if they are to emulate
thriving economies by Edmund Phelps in Financial Times, p. 11, W ed. Aug. 19, 2000.
59. cf. Aokis discussion in 1995 about potential hierarchical forms based on digital management in the
future. Also cf. The Economist, p. 3, Survey China, April 8th, 2000: ...'W h a t will be required for
economic success in the globalization that is exploding around us - technically dynamic, information-rich,
highly entrepreneurial - then the winners in that environment will be those able to provide us the
following...Free access to global information and markets. Protection of physical and intellectual property.
People able to speak and associate freely. A government that has sufficient legitimacy to feel comfortable
joining the global economy. An educated population. And a rules-based polity...This is a set of qualities
that does not conform to a highly authoritarian system. That, put simply, is the case for political change in
China.
60. And this perspective could help us further appreciate why a new type of economy - the Internet
Economy - looms large with a huge demand created for information technology in this new Millennium,
cf. Japan undergoes e-makeover - Internet economy changes traditional rules of business; change 'a
must for our survival by Julie Schmit in USA Today, Wed. April 19, 2000: ...T h e growth of the Internet is
spurring a wave of entrepreneurism not seen since the building boom after W W II. The economy is
splitting into the 'new 1 and the 'old as investors, despite recent hits, reward companies with Internet
strategies and punish those without them. High-tech start-ups are luring employees from Japan Inc.,
where age and experience, not performance, define careers. And more people realize that Japan needs
to catch up to avoid falling further behind in a globally networked economy. 'The entire society has to
change,' says Koji Nishigaki, president of electronics giant NEC. For years, Japan has been under
pressure to deregulate its economy, the world's second largest. Change has come, albeit sometimes at a
glacial pace. For the firs time, banks are now being sold to foreigners and airlines are discounting tickets.
The telephone monopoly is lowering prices. While historically resistant to foreign investment, Japan
welcomed a record $14 bn last year. The growth of the Internet and network technologies is hastening the
pace of that change. Consider: Spending is rising on software and computer hardware to make Japanese
companies more efficient...Companies are getting into the Net; Toshiba and Fujitsu are retooling to focus
on information technologies. NTT DoCoMo has emerged as a world leader in Internet wireless
connectivity. Next year, NEC expects 25% of its sales to be over computer networks. Sony is pushing into
the Internet from all angles. It even hopes to set up an online bank...Being able to cut costs and move
products quickly in a global market 'is a must for our survival, says Yoshio Tateisi, CEO of automation
device maker Omron. Perhaps more important, Japan is beginning to talk about changes to bedrock
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societal values. In January, a government-commissioned advisory panel suggested that individuals in

group-oriented Japan be empowered and that students spend more time being creative. It also said that
Japan needs to brush up on its English, the language of the Internet and of the global economy. Time to
change. For decades, Japans traditions served the country well. From the ashes of W W II, it rose to world
prominence in the 1980s as a manufacturer of quality goods. But in todays knowledge-based economy,
different strengths are needed...Strengths like those of Kai Masaki, 29. Five years ago, the economics
graduate shunned a traditional big-company career to start his own software company. Today, he
employs 30 people. Naoko Tomita, 35, chief financial officer of Internet start-up Crayfish, breaks all the
rules. She is an executive in a country where women are expected to quit work in their mid-20s and
marry. She also left a bigger company, IBJ investment in Tokyo, to join a start-up. The entrepreneurs are
chasing a growing market. Japans Internet population, 18.5 million last year, is expected to reach 60
million by 2003. A year ago, NTT DoCoMo started offering mobile phones that connect users to the Net.
Today, 5 million subscribers pay small fees to do such things as read e-mail, trade stocks and access
cartoons...Group mentality. Individualism and risk taking are revered in the USA. Enterprising youngsters
like Bill Gates and Jerry Yang of Yahoo founded high-tech marvels. In Japan, the group and conformity
are highly valued...Japanese companies, too, are ill-positioned. In a global market where an online
bookseller like Amazon.com can change entire industries, companies have to move fast to adapt. But to
maintain harmony, Japanese companies rely on the time-consuming process of making decisions through
consensus. Despite some reforms, Japan's regulations still prevent a lot of fee-market forces. Even book
prices are regulated...And the popping of the Internet stock market bubble could embolden arguments
against the need for change.
Ibid, Asia takes cues from US Net revolution: ...Asia is still home to several of the fastest-growing and
least-developed Internet markets in the world, including China and India."
61. In this matter, Chinas large-scaled launch of Internet has created a social dilemma, forcing the
government to choose between social democracy and placing restrictions on its populous Internet users.
Broadening the Internet user bases has to relax the government's control on speech of freedom and its
bans on those surfers, who might be the dissidents against the governments and yet need the protection
for their privacy. Chinas inexperienced Internet regulators are reluctant to impose bans on the entire
Internet operations for fear China would lose its competitive edge in this new millennium, cf. W eb surfers
find cracks in wall of official China by Julie Schmitt and Paul Wiseman in Beijing in USA Today, 1B, Wed.
Mar. 15, 2000: ...Chinese Internet users are expressing some decidedly unofficial opinions. Three users
banter about Taiwans upcoming election and express grudging respect for a candidate the Chinese
government loathes. Another makes an impassioned cry for freedom of speech in a nation where voicing
unauthorized opinions can mean a prison term. Still another posts a poem that pokes fun at the 'cleaning
ladies -censors who come online to scrub away comments that go too far in criticizing the
government...The Internet is exploding in China and threatens to overwhelm the governments ability to
control it. Chinas online population more than quadrupled last year to almost 9 million. Within five years,
the worlds most populous country is expected to have more Internet users than any other country. The
Internet boom has created a dilemma for Chinas rulers. They realize that China must be wired to the Net
if it is going to thrive in the 21st century economy, and they are investing millions in Internet start-ups to
get the process moving. But the government also wants to keep tight controls on information people can
see and on the things they can say in public...In China, all media are supposed to be sanctioned by the
government, and freelancers operate outside the bounds. W hat China threatens and what it does,
however, can differ. And so many government agencies are vying for control over the Internet - and its
economic benefits - that a ruling by one agency can be changed by another. The governments
inexperience with Net technology also may sometimes lead to poor judgment. Last week, it eased tough
restrictions on the use of encryption technology just months after issuing them. Encryption in software is
used to protect data, such as credit card numbers being sent over the Net, from hackers. The onerous
rules were heavily criticized by software makers and users...visitors exchanging information and opinions
in chat rooms often say things online that would have been unthinkable a few years ago. Much of the
information about a huge corruption investigation in the southern city of Xiamen, for instance, first
emerged online. Chinas newspapers have said almost nothing about the scandal. 'Sometimes you can
criticize the Chinese leaders, even call them names, says Wang Xiaodong, a Beijing researcher who has
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written one book about the Net and is working on another. The government even has created a forum for
political discourse: the peoples Daily chat room, called 'Strengthen the Country. 'In the information age,
if you dont offer people such a service, they will go somewhere else, W ang says. The Peoples Daily
chat room is 'relatively controllable, and [the government] can learn about public opinion. Chat room
visitors argue about whether China needs democracy, whether China is getting bullied by the Unitd
States and whether MaoZedoings Cultural Revolution was a destructive travesty (frequently the view of
those who lived through it) or an idealistic attempt to purify Chinese society (so say many younger users).
Chinas Net users often express virulent nationalism, never more so than after the US accidentally
bombed the Chinese embassy in Yugoslavia last May. In fact, some political reformers worry that the
Internet promotes mindless jingoism instead of thoughtful debate. For the most part, though, Chinas
Internet users care more about e-mail and access to information than they do about political discourse.
Internet user Maria Li, owner of a Beijing firm that supplies interior decorations to hotels, figures 85% of
her time online is spent working. Most of the rest is exchanging e-mail with friends and checking the
news. Li particularly savors the memory of an online video news clip showing Microsofts Bill Gates
getting hit in the face by a pie...The government is vague about whats objectionable. Pornography is an
obvious no-no, though you can find it on Chinese sites, sometimes in the guise of information about
'health or 'beauty. General complaining about government is allowed, but specific criticism by name of
any party official is usually not...Som e Net companies use software to identify when a leaders name
appears in online postings so they can remove any derogatory comments. But...chat-room visitors dodge
that restriction by putting a space between characters or using nicknames. No portal has the people-
power to monitor chat rooms round-the-clock. To ward off problems, theyre assigning employees to serve
as liaisons with government officials. That way, theyre likely to be warned to remove something before
the government takes action to shut down their site. Since 1996, China has intermittently blocked Internet
access to many foreign sites, including news sites such as CNN, and sites sympathetic to Chinese
dissidents, Taiwan and Tibet independence, Tiananmen Square and pro-democracy activities...In 1996,
the government banned any Internet content considered to be 'socially destabilizing or otherwise
'objectionable in nature. Also that year, the government demanded that every Internet user register with
police - an onerous requirement that fell flat as Internet growth exploded. In 1997, China was still serious
about cutting its Internet off from the rest of the world with a China-only intranet. None of those attempts
did the job; thus the reliance on self-censorship... It is hard to close the door on information."
62. The recently striking intensification of market competition and the expansion of network economy,
information-technology-led, have further prompted such a discourse on transparent decision-making,
individual freedom, and social democracy, relinquishing the monopolistic leadership and monolithic
governance.
cf. The Economist, p. 16, Survey China, April 8th, 2000: ...[The Chinese authorities] need to make sure
that the separation of party, state and business is carried out in a reasonably equitable manner, which
includes building a social safety net to catch the victims of reform. The central banks re-organization
along regional lines offers a template for other experiments in federalism which could lead to greater
accountability and perhaps, eventually, to democracy. For instance, Chinas politicized courts could be
reordered on a regional basis to reduce local party influence over the legal process. It is possible, of
course, that the party will refuse to countenance institutional changes that look likely to cause far-
reaching political change. Predictions of political change have been made before, notably after the
Tiananmen massacre in 1989 and the collapse of the communism in the W est shortly after, and were
proved spectacularly wrong. The difference this time, as this survey has argued, is that as China
becomes more integrated into the world economy, its 'clash with global norms, as Mr. Huang of the
World Bank puts it, will bring unprecedented pressures to bear on the political system.
63. There has never been a formal mechanism to monitor the behavior of leaders in the Standing
Committee to make certain they not to abuse and misuse the rules and codes.
64. cf. China to pay for tip-offs in customs fraud crackdown by James Kynge in Beijing Financial Times,
p. 3, Fri. Sept. 6, 2002: Chinese customs authorities are offering 'handsome rewards for valid tip-offs in
a crackdown against domestic and foreign companies involved in customs fraud, an abuse that has hit
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tariff income and boosted smuggling and capital flight this year. 'The customs will donate a handsome
reward to those who supply clues that help bust fraud, said Sheng Guangzu, deputy administrator of the
general administration of customs. He declined to say exactly how handsome the bounty would be. The
incidence of customs fraud has increased sharply since China entered the W T O late last year, helping to
drive down tariff income to just under Rmb161bn ($19,5bn) from January to the end of August, a 3.9%
decline from the same period in 2001. Another reason for the fall was reduced tariff rates following
accession to the W TO . Many ruses are employed. Sometimes smugglers produce fake papers or
contracts that turn high-duty goods into low-duty ones, allowing them to underreport vastly the size or
value of shipments...Capital flight will be another focus of the crackdown...
65. It thus has to rely on the democratization of the society in order to enhance the participatory
citizenship of the Chinese people as a whole. Otherwise the new social order would fall apart, and the
established rule of law would be susceptible to abuse. The proceedings of democracy could be
interrupted after and even during the elections. Legitimacy comes from the people, but particular
individuals elected to office might look out only for their own interests. In Chinas case, the transition to
participatory democracy is conceivable in three sequential steps: from position-centered, to access-
focused, and then, to substance-concerned.
66. The stage was set to establish a political system tantamount to quasi-federalism, a system that
characterized by collaboration with the state and state-sponsored mercantilism moving toward global
trade. Here democracy existed only in a semi-formal sense.
67. cf. Welcoming China to the World by Martin W olf in Financial Times, p. 15, May 17, 2000 (emphasis
mine): In his book, The Tyranny of History, W . J. F. Jenner, the distinguished scholar, remarks that the
religion of the Chinese ruling classes is the Chinese state.' Yet now their sovereign state is to submit itself
to a market-based, multilateral system o trade law...it has already offered much. As Gary Clyde Hufbauer
and Daniel Rosen, of the Washington-based Institute for International Economics, note: Chinese W TO
commitments are much more extensive than those previously negotiated with other big emerging
markets, notably India. The Chinese offer includes: a cut in average tariffs on agricultural products to
17% and a reduction in industrial tariffs to an average of 9%; the phasing out of all geographical
restrictions on paging services within two years, on mobile telephone services within five years and on
domestic fixed line services in six years; permission for foreign property and casualty insurance
companies to insure large scale risks; full market access for foreign banks in five years; greater access
for foreign service providers; and an agreement that state owned enterprises will make purchases and
sales solely on a commercial basis...W hat it does mean is acknowledgement by the worlds most
powerful country of the value of Chinas acceptance of the principles of the trading system. Above all, it
means a recognition that the best way of securing the changes it seeks is through the creation of a
prosperous, well-educated, internationally integrated China. The countrys membership of the W T O is a
vital step along this road.
68. Joining W T O would accelerate the pace of constructing the rule of law in China, cf. House vote on
China trade: the politics was local" by Adam Clymer in The N ew York Times, A3, Sat. May 27, 2000
(emphasis mine): ...supporters like Representative Nancy L. Johnson, Republican of
Connecticut,...quoted a clergyman, Rev. Daniel Baida Su, who told the W ays and Means Committee that
membership in the World Trade Organization obliged ' China to plav by the rules. 'In the process. China
will need to strengthen its legal institutions, train more legal professionals, learn to follow international
legal procedures, and educate its people about the concept of rights, law and international norms. Ms.
Johnson Quoted Mr. Su as saving. 'This process alone is a breakthrough with important philosophical
implications for China as a nation. When a Chinese realizes he has rights as an investor that government
should not violate, then more likely he will also realize that he has other rights as a human being."
69. cf. Semi-democracy in Financial Times, p. 14, Wed. July 24, 2002: ...'electoratisnT is not enough.
Democratic systems take root and confer their full benefits only if citizens are able to exercise their rights,
engage in debate, influence decisions and hold governments to account. Those freedoms must be
underpinned by an infrastructure of strong institutions that are fair, open and responsive to popular will.
698
Also cf. In China, one small step on the way to democracy - Former president Jimmy Carter is hoping
village elections lead to bigger things in China by Julie Chao, Cox News Service, in Wisconsin State
Journal, A13, Thurs. Sept. 6, 2001 : Campaigning lasted less than a week and only one political party
was represented, but Jimmy Carter declared this villages election a small step forward for democracy
Wednesday...the former president sees village elections as a way of introducing the concept of
accountability to hundreds of millions of peasants. 'These villagers have much more authority over their
own life and their own future than they did before, Carter said after about 900 villagers cast ballots.
'Thats a situation that would be impossible to reverse. On his eighth visit to China, Carter and a team
from the Atlanta-based Carter Center are on a four-day-trip to Beijing and Shanghai. One of his main
goals in his meetings with Chinese officials has been to push for expanding direct elections above the
village level...Less than a week ago, Quanwang held primary elections in which all 900 eligible voters
could nominate any one person for village chief and any four people for the four-seat village committee.
For the balloting on Wednesday, the top two vote-getters of 67 village chief nominees and the top five
vote-getters of 166 committee nominees were listed as finalists. Sitting in neat rows of wooden benches
in the yard of the village silk factor, the villagers listened to a short round of speeches before the floor was
open for questions. Not a single person raised their hand for well over a minute. Finally, one elderly man
rose slowly. Wu Rongchun, 76, noted that a kindergarten, an activity center for the elderly and more than
a dozen public toilets had been torn down to make way for new buildings. When would they be rebuilt?
The incumbent village chief, eventually re-elected by a landslide, vowed to rebuild them all. Quanwang,
about 75 kilometers from Shanghai, is more prosperous than most Chinese villages. Many residents are
factory workers, putting in 40 hours a week and making an average annual income of about $700. the
village chief makes $2,420 a year...The method of voting - individual voting booths and public tallying of
ballots - was also new to the village. In Wednesday's election, it seemed political clout counted for more
than qualifications. Both village chief candidates and all but one of the five committee candidates were
Communist Party members, even though less than 4% of the village population are in the party.
70. cf. Chinas gamble in Financial Times, p. 18, Wed. Nov. 1, 2000: ...Allowing a choice of government
officials can only increase pressure for party pluralism. This may be the first crack in a larger break with
Chinese history.
71. cf. Factory closings in China arouse workers to fury by Elisabeth Rosenthal in The N ew York Times,
A1, Thurs. August 31, 20000: ...Although the closing had long been planned, the sudden departure was
prompted by an unusual event here. Last week, desperate Chinese workers expecting layoffs seized six
foreign managers from Meites American parent company and held them hostage in the factory for 40
hours. In the space of a decade, the Meite plant was transformed from a state-owned company making
pipes to a beverage packaging firm jointly owned by the Chinese and an American corporation - and, just
recently, to a factory wholly owned by the foreign partner, the Ball corporation of Broomfield, Colo. And so
this sweltering summer, middle-aged workers who not so many years ago were promised cradle-to-grave
security by the state factory found their livelihoods suddenly threatened by a capitalist corporate
restructuring and felt they had no where to turn...Taking foreign businessmen hostage is rare in China,
despite the thousands of often fractious business partnerships between Chinese and foreign companies.
But the workers frustrations that touched off the incident are commonplace, leading to hundreds if not
thousands of protests in recent years. Under government orders to become economically self-sufficient,
many formerly state-owned factories have tried to transform themselves, often with the help of foreign
partners. The sink-or-swim strategy promoted by Prime Minister Zhu Rongji, who oversees economic
policy, has no doubt rescued thousands of companies from bankruptcy and prepared them to compete in
the global market. It has also often enriched many former state factory officials, who are often offered
lucrative positions in the revamped business. But it has been painful and confusing for Chinas tens of
millions of workers, echoing similar privatization efforts in the former Soviet bloc. The workers are
unfamiliar with the intricacies of buyouts and severance packages, generally lack effective labor unions
and have little outlet for their complaints against new, often absentee, bosses. Workers rights are not
protected much when this happens, said Anita Chan, a labor expert at Australian National University.
These are people who worked for the state and thought they would work and then retire and enjoy
certain benefits: health care, pensions, things like that......The conversion of the state factories has often
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left the workers at odds with new employers, both foreign and Chinese. And protests, though rarely
reported in the Chinese media, are a frequent result. Earlier this month, also in Tianjin, disputes erupted
between workers at a state-owned liquor company and its German partner, which wanted to sell factory
parts for scrap metal. The workers blocked a truck, insisting that the profits from the metal were rightfully
theirs. Late last year, workers at the formerly state-owned Red Lion Paint Factory in Beijing ended up in a
near-fatal standoff with the management after a new private owner, a Chinese company from Shandong
Province, wanted to close the plant and sell the land...'W hat laid-off workers particularly hate to see is
their factory taken over by the factory management and converted to private assets, said Dai Jianzhong,
a specialist in labor issues at the Beijing Academy of Social Sciences. 'They see factory assets being
used to buy cars and houses. Often the desperate acts reflect the dire situation of middle-aged workers
who find themselves abruptly without jobs in a country still poorly prepared to deal with unemployment.
Until a decade ago, nearly all urban Chinese workers received housing, health care and pensions through
state jobs. Although that is changing, China has yet to develop an effective social security net for the
unemployed or elderly. Its embryonic welfare system offers no health care or jobless benefits for people
like those laid off from M eite...The folding of four factories into one meant layoffs, and the company
invited some workers at Meite, mostly people in their 20s, to move with it, a worker who answered the
phone at the plant said. The decision is typical for downsizing Chinese companies, experts say, since the
younger workers tend to be better educated. The rest of the workers were offered a one-time severance
payment of about $1,200, which many considered inadequate, prompting the protest. On Wednesday last
week, when executives from Balls Hong Kong office went to post a closing notice in the factory, workers
detained them in an office and would not let them leave, Mr. McCarty said. He said that the six men had
not been physically harmed but that the workers were verbally aggressive at times. 'Just like in the US,
people were upset that their plant would close - thats understandable, said Mr. McCarthy. 'From our
point of view the incident is over now and its fine....The police did not enter the factory during the ordeal,
calling it an 'internal matter. They would not say today if there had been any arrests...
72. cf. Chinas regulators announce rules to tackle capital flight by James Kynge in Beijing in Financial
Times, p. 3, Weekend, Aug. 24/25, 2002 (emphasis mine): China launched a renewed crackdown on the
growing problem of capital flight yesterday, ordering mainland companies that sell shares or other assets
overseas to repatriate the proceeds within 30 days of the sale. The new rule was one of several
announced in a circular from the China Securities Regulatory Commission (CSRC), the stock market
regulator, and the State Administration of Foreign Exchange (Safe), guardian of Chinas closed, but
increasingly porous, capital account. Until the new rules take effect on Sept. 1, Chinese companies are
required to repatriate only the proceeds of initial public offerings overseas. This left a loophole that
allowed listed companies to sell down their existing stakes, or other assets, and keep the proceeds in
bank accounts or other investment offshore. This and other loopholes have provided the legal cover for
capital flight, which official sources said grew at an alarming rate in 2000 and 2001. A study by Beijing
University put the outflow at $36.4bn in 1997, $38.6bn in 1998 and $23.8bn in 1999. Capital flight has
taken several forms. At its most basic, it is characterized by corrupt officials packing suitcases with dollar
bills received from the illegal sale of state assets and then using a fake passport to flee abroad.
Significant amounts of such funds end up at gambling tables in Las Vegas, official sources said. Some
4,000 such people are thought to be abroad now, having absconded with more than Rmb5bn ($600m,
620m, 390m ), the official media said this week. A more sophisticated method of capital flight has been
through 'window companies' operated by government organizations or state companies in Hong Kong or
other places abroad. Usually the parent organization arranges for the illegal conversion of renminbi,
chinas currency, into US dollars and then sends it to the window company. Another favored ruse is for
Chinese companies to announce direct investments abroad, which are legal, only to divert the money for
other uses. This method circumvents the prohibition on converting the renminbi into foreign currencies if
those funds are intended for use in portfolio investments. The circular announced yesterday that all
investors in Hong Kong-listed H-share or red-chip companies must register their interest with Safe after
C SRC approval.
Also cf. China gears up to halt capital flight" by Richard McGregor in Shanghai in Financial Times, p. 5,
Wed. Aug. 22, 2002 (emphasis mine): By next January, China will have rolled out an armory of anti
money laundering measures in a campaign that suggests it is finally serious about a perennial problem
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that has seen billions of dollars leave the country. Two, quite separate, factors have focused the minds of
top officials in Beijing. The first was the September 11 attacks and the impetus they gave to global efforts
to track down terrorist funds...The second factor prompting change was more recent: one of the famous
temper tantrums of Zhu Rongji, the Chinese premier, furious at the ongoing transfers, mainly of state
funds by officials and managers of government-owned businesses...The Peoples Bank of China, the
central bank, has established new bureaux to monitor money flows, setting various triggers through the
system, tied to amounts of cash, to alert them about suspicious transactions. Commercial banks too will
have new controls in place by early next year, led by the Bank of China (BOC), the countrys biggest
foreign exchange institution. The BoC is setting the pace for good reason - it admitted earlier this year
that at least three former officers had spirited away nearly $500m over seven years from a branch in
southern China, and then escaped overseas. The law will also be overhauled by the National Peoples
Congress to widen the definition of money laundering, which now only covers funds from smuggling, drug
trafficking and criminal gangs. Mr. Zhus anger on the issue derives from the fact that nearly every
corruption scandal in China in the last decade has revolved around officials, or businessmen who have
bribed them, fleeing overseas with large amounts of money... Estimates of capital flight have been put as
high as $20bn a year, a figure calculated by looking at Chinas large trade surpluses, and the wav they
have not been reflected in its foreign reserves. But some analysts believe this amount is exaggerated,
because the numbers for exports and imports are themselves wrong. There is an incentive to exaggerate
exports, to get tax rebates from the government and impress local officials; and also reduce the figure for
imports, so as not to pay duties. W hatever the correct number, the anti-monev laundering campaign may,
according to some analysts, signal a deeper current in Chinese politics, in which the old leadership can
no longer protect their corrupt underlings. 'Someone is driving this campaign, said one analyst, 'and I
believe we will see more Chinas young tycoons ending up in jail.
73. cf. Police agents fail to silence Chinese critic by James Kynge in Financial Times, p. 4, Fri. July 14,
2000: The author of a once-tolerated bestseller, China's Pitfalls, Ms. He is unflinching in her criticism.
She said the government was so corrupt it risked becoming unable to implement a rule of law, that
Chinas poor had become marginalized, and that official scams had replaced formal systems to become
the main conduit for the allocation of resources. The key difference between her commentaries and the
official line is that Beijing insists corruption is not a systemic problem but merely the result of isolated
official excess. Ms He said that Chinas monopolistic ruler, the Communist party, was inherently unable to
police itself. Westem-style electoral democracy was required, she said, to make the party and its officials
answerable to the people. If reforms to Chinas political structure were not undertaken with some urgency,
she warned that the worlds most populous country could suffer a comprehensive breakdown in social
order.
There has been public discourse on whether the current system of capital penalties should be weighted
by discriminating the natures of criminal activities related to violence, cf. China Justice: Swift passage to
execution by Craig S. Smith in The N ew York Times, A1, A10, Tues. June 19, 2001: Jin Ruchao was
convicted of blowing up four buildings in March, killing 108 people, because he was angry at relatives
there. He was executed...Hao Fengqin who unwittingly sold explosives to Mr. Jin, was convicted with
equal dispatch. Here she is being led out of an appeals court in April directly to her execution, less than a
month after her arrest...There is randomness to who dies, given that many technically criminal activities
flourish across China. Those practices are considered only moderately risky because they are so
widespread. But there is always the threat of death for an unlucky few at the ever-shifting perimeter of
tolerance...W hile Chinas mainstream press showed no sympathy in reporting the executions of Ms. Hao
and Mr. W ang, publications and W eb sites catering to Chinas small legal community expressed a
cautious ambivalence. A Beijing University law professor, Xian Han, argued on one site that because Ms.
Hao and Mr. Wang had no inkling of Mr. Jins murderous intentions, there was no direct legal causality
between the sale of explosives and the bombing. He added that the two would have received far lighter
sentences, if they had been prosecuted at all, had Mr. Jin not used the explosives to murder. 'O ur society
can only be truly stable when everybodys basic constitutional rights are guaranteed, professor Xian
wrote. Hu Yunteng, a lawyer and death penalty expert in Beijing, said there is a consensus forming in
Chinas academic and legal communities that the country should use the death penalty less, particularly
for nonviolent crimes. 'Economic crimes can be controlled without the death penalty, he argued. 'The
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rise in these crimes shows that the country's legal and management systems are flawed and that the
legal system isnt playing its proper role. Currently 68 kinds of crimes are punishable by death, including
28 that are not violent. Those include embezzlement, tax fraud, illegal financial schemes and accepting
bribes totaling more than $12,000. As China's once centrally planned economy continues its fitful entry to
a market economy, the incidence of those crimes has soared. From this point of view, the scope of the
death penalty is definitely expanding., Mr. Hu said...
Also see a recent report of public discourse against excessive use o the death penalty in non-violent
cases and against ineffective out-dated method by periodic or episodic use of large-scaled anti-criminal
campaign, and in favor of more modern definitions of economic crimes, cf. China strikes hard, hopes
crime takes a hit" by Paul Wiseman in USA Today, 8A, Wed. June 20, 2001.
74. The new division of labor emerging in transition is also expected to produce a more legal-rational
hierarchical system coming into effect to administer more complicated specializations and to monitor
mushrooming modern professionalization. This development will sooner or later extend into the political
arena (possibly in a multi-party system) to create more effective surveillance against corrupt officials and
corporate scandals, especially with Chinas recent access to the W TO. cf. Tiger China pussyfoots
around growth by John Thornhill in Financial Times, p. 28, June 3, 2002: ...The good news is that the
quality of Chinas growth may be improving as the allocation of capital gradually becomes more efficient.
Nicholas Lardy, a China specialist at the Brookings Institution, argues that wasteful lending to failing
companies is declining, tariff and non-tariff barriers are falling as a result of Chinas accession to the
W TO , internal and external competition is intensifying, and the banks are gradually becoming more
commercial. 'A lot of restructuring and adjustment is going on. And they have borne some of these
adjustment costs already, he said. T h e re are signs that a credit culture is emerging. The banks are no
longer indiscriminately lending huge amounts of funds....
Also cf. China launches broad financial reform strategy" by James Kynge in Beijing in Financial Times, p.
1, Thurs. July 20, 2000: Dai Xianglong, the governor of the People's Bank of China, the central bank, said
yesterday that there was no timetable for the renminbi, which is convertible only for trade reasons, to be
made full convertible. 'W e are improving the macro-economic conditions, the conditions for the balance of
payments and the current financial systems to create the necessary conditions for the liberalization of the
capital account in the future, Mr. Dai said. Chinas renewed enthusiasm about creating conditions
necessary for renminbi convertibility, an initiative that was frozen during the Asian financial crisis, is being
driven in part by its impending membership of the W TO. Five years after Beijing's entry, foreign banks will
be permitted to offer services in renminbi to Chinese individuals. Some bankers said that under such
circumstances Beijing may find it difficult to keep the capital account closed. Mr Dai said that the
liberalization of domestic interest rates was a precondition for renminbi convertibility. 'If the local currency is
a freely convertible currency...the exchange rate should be a floating exchange rate regime and, in turn, the
interest rate should also be liberalized, he said. He said the first interest rates to be freed would be foreign
currency deposit and lending rates. The next step would be to consider the liberalization of interest rates in
rural areas.
Also cf. Communists pledge signals political reform by Beijing - Party promises to involve people more
directly in decision-making" by James Kynge in Beijing in Financial Times, p. 1, Thurs. Oct. 12, 2000:
Chinas Communist party yesterday made a rare pledge to build 'democratic politics over the next five
years, raising the prospect that Beijing may plan to tackle political reform after a decade of virtual
stagnation. A communique from a party plenum published by Xinhua, the official news agency, said: 'W e
must step up the building of democratic politics, make decision-making a scientific and democratic affair and
expand the citizens orderly participation n politics. Private entrepreneurs, still the object of discrimination in
an economic system dominated by state companies, received a boost. The communique said China would
'support, encourage, and guide the development of private and individual enterprises....The type of
democracy mentioned in the communique is socialist democratic politics - much different from the
adversarial, multi-party democracy of the West. Observers said that, although China had not defined
'socialist democracy, the pledge to involve people more directly in decision-making implied a greater
measure of pluralism. Some experiments have begun. The city of Chongqing in central China, in an attempt
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to break away from a system of Communist party appointments riddled with corruption and patronage,
advertised the jobs of senior city officials to all comers. China has several political parties, but they all
remain loyal to the ruling Communists...The plenums communique, which sets out targets for the 2001-
2005 plan, emphasized the need to build a "socialist rule of law to uphold market order and fair
competition...China will also move to "promote all-round and multilevel opening-up to the world in broad
fields and develop an open-style economy to mesh with intended entry into the WTO, expected in a few
months. GDP was targeted to double by 2010.
Also cf. With trade links stronger, US insurers scout for business in China" by Craig S. Smith in The New
York Times, C1, Wed., May 31, 2000: ...As part of Chinas W T O membership, the country has promised
to publish all rules and regulations governing trade and to create clear procedures for acquiring licenses
to do things like sell insurance in the country. If Beijing holds to its promise, China will undergo a sea
change in how business is conducted and take a step toward government by rule of law instead of
administrative fiat."
75. It is more like saying: There is some things money cannot buy, and formulas do not always work,
you have to go with your gut in the end." Having a formal democracy is insufficient. The lack of substance
of democracy or/and substantive democracy might worry many of Chinese current generations who are
seriously concerned about the real problems in prospective China. Sometimes a formal democracy could
even go wrong; it might pay too much attention to issues of quantity while curtailing or ignoring issues of
quality. Substantive democracy has lots to do with the quality of life of the average citizen and with social
and political institutions in addition to state institutions.
76. Hence the next round ought to extend democracy and liberty to civic society as a whole, cf. Richard
Low, 2002: Does China Have Any Democratic Tradition? cit. from Website: Chinese Community Forum
(C C F#2002-14), Wednesday, August 14, 2002. From: CCF Editors ccf@ CHINA-FORUM .ORG To:
C H IN A-N T@ LISTSER V.U G A .ED U . Date: Fri, August 16, 2002 8:43 am. : ...Broadly speaking,
democracy is defined as majority rule in the common English dictionaries or as democracy by the well-
known French philosopher Alexis de Tocqueville in his "Democracy In America. In their "The Lessons of
History, Will and Ariel Durant mentioned that Rousseau considered majority rule unnatural. My own
readings and observations tell me that majority rule is not just unnatural; it invariably transforms so-called
political leaders into unscrupulous hypocrites and demagogs; thereby, resulting in a most corrupt form of
government. In any other form, it is usually not too difficult to spot which government officials and
politicians are corrupt and to even tell how corrupt they are, but it is almost impossible in a democracy to
the same. There are just too many dirty politicians, and the money involved is just too vast. Each not only
takes money from the special interest groups but also competes with one another in raiding the national
treasury for their wasteful porks. As a result, money alone, not integrity nor competence, often determines
who gets the most votes. Majority rule! By contrast, it seems to me that President Abraham Lincoln in his
Gettysburg Address may have given the world the best definition of democracy as "government of the
people, by the people, for the people. Thus, one might consider that democracy reveals itself in three
aspects or faces: (1) of the people, (2) by the people, and (3) for the people. In short, democracy means
that the people are the center of all activities in government, or vice versa.
77. Public discourses is required if substantial measures are to be take in finding institutional solutions to
problems related to the quality of growth in general and democratic decision-making in particular. The
democratic fundamentals address public goods as accessible and affordable for the people, assuring
peoples wills and needs to prevail beyond the confines of those statutory previsions.
78. An idealized democracy is designed to elicit broad democratic participation, public transparency, and
civil community involvement in power structure and decision-making processes It needs to enlist
widespread resources from the state and the locals, from public and private arenas, combined with the
secondary associations together, reallocating adequate investments into those hitherto unnoticed and
ignored strata of social structure, and those dispersed but important frontiers within national territory. It
needs to target universal rights and participatory citizenship to build a democratic civil system, both de
jure and de facto.
703
cf. Imagination and vision 'to carve out future - Singapore's founding father and senior minister talks
about the future prospects for his small country and the direction of its multi-racial people as well as the
importance it attaches to the Association of South-East Asian nations by John Thornhill, Rohit Jaggi and
Sheila McNulty in Financial Times, p. iv, Singapore 4 , Wed. Apr. 11, 2001: ...[Q] Do you think China will
have to become a democracy? [A] I do not believe there is only one road to democracy, or only one kind of
democracy. They have already gone from a monarchy to a republican system on to a one-party dictatorship.
They cannot move backwards to a monarchy. They have to move forward. The ultimate legitimacy is the
support of the people, however it is expressed. While they have large masses in the interior who are not well
educated, over the next 30 to 40 years there is going to be a drift into all the cities, and the small towns will
become big ones, all with access to the internet, access to information. There is no way you can govern a
well informed, large managerial/professional class without taking their views into account. How they take
them into account is another matter.
There is a constant need for a civilian check on citizenship-based governance. Such a check should pay
particular attention to the protection of the minorities civil rights in their residence territories (cf. Enter the
dragon - The influx of Chinese into the Muslim communities of Xinjiang province has brought violence
and bloodshed" by John Congreve in Financial Times, I, Weekend, July 27/July 28, 2002).
In an effort to establish a citizenship-based governance, a society can become more personalized,

adhering to the individualistic idiosyncrasies in organic aggregation or more collectivized, subduing
individuals to an omnipresent social totality as social universality. The former will mobilize individual
citizens activism and potential, whereas the latter will repress individual citizens social rights. In either
case, each individual human being ought to be morally conscious of his or her responsibility to society
and community, and ought to respect the differences of other social groups within the society.
Recognition of rights in one area may lead to recognition of rights in many areas. Each citizens individual
free choice ought to reflect his/her consciousness of such social obligation and awareness of the well
beings of society as an organic community, local and global. As a saying goes, When a Chinese realizes
he has rights as an investor that government should not violate, then more likely he will also realize that
he has other rights as a human being" (cf. China launches broad financial reform strategy" by James
Kynge in Beijing in Financial Times, p. 1, Thurs. July 20, 2000).
There tends to be an association between how a country ranks in terms of GDP per head and its rank on
the Human Development Index (the HDI refers to a combination of three indicators of welfare: life
expectancy, G DP per head, and educational attainment), cf. The Economist, p. 98, July 14th, 2001. In
2001 Chinas HDI rank in 162 countries was only 87, while its rank by GDP per person was 94, compared
to the U Ss 6 and 2, Japans 9 and 11, Singapores 26 and 21, Russias 55 and 55, and Indias 115 and
115.
79. New concerns are emerging about the future forms and characteristics of organizations and
institutions. Martin Dickson makes the following prediction of future business organization: The rise of
corporations specializing in fuel cell technology, gene slicing, and advanced communications has left only
one recognizable remnant of the corporate scene of 100 years ago. CapitalOrg, the global banking and
financial services giant, was originally part of General Electric, a conglomerate broken up in the 2020s.
Like all 21st century corporations, CapitalOrg is less monolithic than it seems. It consists of little more
than a complex array of electronic contracts with its participants (formerly known as employees). The
terms of these contracts vary in real-time along with changes in markets, commodity prices and other
factors. Participants are rewarded solely through movements in the value of their own CapitalOrg tracking
stock." cf. Encyclopaedia Galactica - The galaxys leading reference work, traditionally published in
electronic, paper and gaseous forms on the first day of the year in Financial Times, p. 7, Jan. 1 ,2 0 0 0 .
Whether or not such a prediction will have be seen also see Omens good for India and China - John
Kay peers into his crystal ball and sees poorer countries playing a more prominent role in the future of the
worlds corporate economy by John Kay in Financial Times, p. 13, Global Prospects, Wed. Jan. 5,
2000: ...There was a profile of the worlds largest employer - the Educational Corporation of America.
704
ECA was founded in 2005 when a group of parents and teachers in Seattle organized a buy-out of a
group of local schools. In the bad old days, the article explained with incredulity, the normal means of
instruction had been for individual teachers, largely ignorant of education research or technique, to
harangue groups of 30 or 40 inattentive students. ECAs success was based largely on its management
skills. It had also pioneered new educational technologies, constantly updated and developed in its
research centres internationally. By the end of the 21st century one young person in three in the US, and
many more elsewhere, had enrolled in the ECA programme. Following a franchise agreement with the
State of California in 2022, the ECA Berkeley had rapidly become the worlds leading institution of higher
education. ECA universities in both advanced and poor economies were generally leaders in their fields:
the era of branded education had arrived. Memphis-based General Genetics was the worlds largest life
sciences company. Following the genetic revolution in the early decades of the century, in which
knowledge of gene and cell development had transformed medicine and nutrition, many companies had
entered the new business of managed life care. Traditional pharmaceutical companies and
agribusinesses had mostly fallen by the wayside. After a decade or so, the industry had consolidated
around a few companies - some previously established in other industries, some new - and General
genetics had emerged as market leader. Once personal space travel became economic in the mid-21st
century, many companies, mostly supported by national governments, had entered the business of space
capsule construction and operation...one profitable corporation stood out from the rest - Planetary
Networks. It did not manufacture capsules, or provide services directly to users. The company had
developed space management systems that enabled individuals to plan a safe, uncongested journey.
Although many more sophisticated techniques of space management had been proposed - the
Intergovernmental Space Agency Union had spent decades discussing the ideal intergalactic system for
the 23rd century - the rapid adoption by users of PN software had given the company an unassailable
lead over its competitors. Planetary Networks was a truly international company. It had no corporate
headquarters, in a traditional sense, and was registered under the liberal, and secretive, regime of the
South American Economic Union...In business history, firms and industries change, but many principles
remain the same. New industries emerged in the last century from new technologies - cars, aircraft,
electronics - and from the application of commercial organization to activities previously undertaken in
different ways - as in law and accountancy, consultancy, and waste disposal. W e can expect both these
developments to continue in this century. Hence General Genetics and the Educational Corporation of
America. In the last two decades of the 20th century, privatization and deregulation established new
industries: and utilities, once private businesses, then state controlled, are private businesses once more.
The telecommunications sector is today the darling of the stock mari<et; in 1980 there was one
telecommunication stock - AT&T. Medicine, education and transport infrastructure are the next
opportunities. Activities at the frontiers of todays fundamental research are plausible candidates for
tomorrows commercial development. That makes biology - the most exciting area of modern science -
such a plausible basis for new industries next century...getting these social and scientific predictions right
is not a sure route to business success. It is fashionable to think that large profits can be made by
identifying new industries first and investing in them. But new industries, as a whole, are not more
profitable than others: only more risky. They attract numbers of entrants that match their growth prospects
and most of the entrants fall by the wayside. Leaders ultimately emerge from this process as the shape of
a new industry becomes evident, and the nature of competitive advantage in it is defined. The pioneers
rarely become the leaders. Ultimately, he leader defines the standard - sometimes, not often, in the very
literal way that Microsoft has and Planetary Networks might. More often, firms like General Motors and
IBM define, for the period of their hegemony, the business model for their industry. New industries have
usually emerged first in already advanced economies and, as they reach maturity, their activities are
transferred, first through sub-contracting and then completely, to poorer economies. This process will
continue, with the result that China, India and other countries will play a far larger role in the future
corporate economy than they do today.
80. Although a constitutive mode cannot necessarily be assumed ultimately to be the universal mode of
all transitions, China's currently prevailing mode will may eventually move toward a constitutive mode, as
market competition increases the needs for standardized codes and formal interactions among the
increasingly heterogeneity individuals. The same process may take place in the FSU and the FEE. cf. A
more uncertain utopia - Our vision of the future is founded on the constant quest for change by Charles
705
Leadbeater in Financial Times, p. 9, Thurs. Dec. 29, 2001: ...W hat...all concepts of utopia share is a belief
that the good society would be founded on abundance, or at least a situation in which there were no
significant unmet needs. Abundance is the key to most of the other qualities we admire in utopian visions:
the lack of selfishness, the willingness to engage in open democratic forms of self-governance, the lack of
the imperative to work to make a living...
81. In this sense, we could say that history seems to unwind an inherent dialectic logic. In Hegels phrase,
any thesis simply entails its antithesis which will supersede it (i.e., every economic system contains the
antithesis of another which will supersede it, cit. from Hegel, Georg Wilhelm Friedrich, 18 History of
Philosophy. Excerpted in The Philosophy of Hegel, ed. and trans. by Carl J. Friedrich, 1953. New York: The
Modem Library, p. Ixii, and pp. 1-173. Also cf., Martin Heidegger 1994 [1980] Hegels Phenomenology of
Spirit, trans. by Parvis Emad and Kenneth Maly. Bloomington & Indianapolis: Indiana University Press.
A background-characteristics-prevailing transition or a background-staged transition, initiated by Chinas

existing and preexisting institutions, seems less socially costly than a simultaneous reality and regime
change. Yet a background-characteristics-prevailing transition seems inadequate, when remaking formal
institutions is badly needed. The upward mobility of such a transition will provoke no fewer deficiencies
caused by background institutions and so-called "rent seeking" reforms (cf. Lin et al. 1996; Liu, Carter,
Yao 1998; Aimin Chen 1998). In fact, many Chinese economists are quite conscious of the limits and the
problems of such a transition and the potential setbacks it might incubate. Justin Lin, a major reforming
economist of the PRC, suggests that China's current piecemeal reforms are taking a "second-best option"
approach to its transition, i.e., so-called "gain by rent seeking" (Note here: the term rent seeking was
invented by A. O Krueger 1974). The "rent-seeking" approach essentially mirrors the limits generated by the
semi-autonomous nature of China's resource allocation during transition. The hyperactive micro-intervention
and protection of the state government, by way of its scale economy and market strategy for domination and
monopoly, may prevent the business world from facing hard budget constraints, supposed to be the core of
genuine market competition. Accordingly, China's current hybrid economy is downplayed as an incomplete
form of market transition.
But in my view, some problems resulting from "rent seeking" or a "rentier nation" occur because of a deficient
focus on the unproductive-consumption side rather than on its productive-consumption side (cf. D. Harvey
1982). Unless one focuses on the productive side (e.g., a high growth rate of GDP), it is hard to explain how
and why China maintained its fast growth sustainable for virtually two and half decades. Actually, Chinas
economic strategy and policy orientation aggressively combine both demand and supply and both production
and consumption, rather than lopsidedly focusing on demand and consumption. In a genuine sense, the term
"rent seeking" or the "rentier nation" refers to a state that separates its revenue from production. Its income is
collected not from investment return from production but from rent from its ownership; its expenditures in
unproductive parts of its society is extraordinary irrational. The term is less appropriate for China than it is for
Russia and India, both of which have higher rates of government taxaction and expenditure. Seen in this
light, a Junkie economy" used to describe German and Japanese economies is also not appropriate for the
Chinese economy (cf. Financial Times, p. 20, Tues. Dec. 1999: The latest downturn [in Japan]...raises the
question of whether Japan is becoming something of an economic junkie, increasingly dependent on omni
injections of government spending. Without regular fiscal fixes, it falls into recession.).
My borrowing of the terms refers to the fact that Chinas background-bound transition is filled with
characteristics acquired from its present existing institutions and their social embeddedness and from its past,
including family and cultural ties. The strong role of the state in Chinas transition has had both advantages
and disadvantages, depending on how the state managers and the public are able to keep a balance
between these advantages and disadvantages. Therefore, I would rather here retain the term "background-
bound transition" since it focuses on the uniqueness of Chinas changing social institutions.
Actually, Lin's view in this matter is consistent with Nee's 1992 perspectives (cf. J. Lin 1996, p. 272 (emphasis
mine): "First, it can be characterized as taking two steps forward and one step back, due to the conflicts
between the two sectors of the economy and the alterations in the sector the government endorses...It is a
second-best option suited to China's particular conditions, and it aims to reduce serious conflicts and
706
retrogression. Second, incremental reform is pre-conditioned by the existence of the dual-track system of
resource allocation and prices, which induces economic agents to gain by rent seeking instead of by relying
entirely on market competition. The greater are the opportunities for rent seeking, the less likely is the
formation of a competitive market and the establishment of market behavior." In both Lin and Nee,
competition is treated as market competition for economic efficiency, rather than as institutional competition,
socially structured, as argued by this study. This study argues that institutional competition underlies the
social structure and the nature of market competition. It emphasizes both efficiency and legitimate fitness and
maintains that efficiency is socially and institutionally bounded. It argues that China, despite its deficiencies
and hybrid economy, may be able to attain global competitive edge throughout its entire transition.
82. cf. The China Syndrome by John Lloyd in Financial Times, p. I, W eekend, Jan. 8-9, 2000: A
typhoon is about to rip through Chinese companies as they enter the global marketplace. Hampered by
national pride, socialism and pitiless competition, they have to decide whether to defy the storm or bend
with it...Chinese industrial policy is caught between the devil and the deep blue sea...the pace of
progress in the words leading firms is so great it is hard to imagine any strategy that could lead to a
successful catch-up. Ibid. ...W ang Xiaqiang - formerly an economic adviser to the premier, Zhu Ronji -
has been studying big state owned corporations...At the same time, on the prompting of senior figures in
the Chinese hierarchy, Nolan and Wang have been conducting seminars - mainly in Cambridge - in
which senior executives of Chinese companies hold brainstorming sessions with their equivalents from
British companies with an interest in China, such as Shell, British Aerospace, BP-Amoco and Rolls-
Royce... But Nolan and W angs analysis was hard for the Chinese to take: that they have stuck with the
process says much for their desire to succeed with capitalism. Ibid. For all of its great leap towards
capitalism, China remains socialist, and cannot easily leave socialism behind. Its big plants provide
cradle-to-grave social support: when these cease to make enough of one commodity to keep workers
fully employed, they start to produce something else, often quite different. National social policy means
that slimming down plans and making them more competitive is difficult. Their contrast with the lean,
focused and flexible US corporation could hardly be greater...The work by Nolan and Wang, and the
seminars through which the Chinese have put themselves, have ingrained one lesson above all others:
the global marketplace, into which China will enter when it accedes to the W TO, is pitiless, and wholly
indifferent to pride, or patriotism, or care for the social effects of change. It is, indeed, the coming of a
typhoon. China, determined to withstand the last better than Russia, is still trying to determine how much
it can defy the storm, and how much it must bend before it.
83. cf. Protest against the protesters by Samuel Brittan in Financial Times, p. 19, Thurs. Sept. 28, 2000
(emphasis mine): ...H e [i.e. Robert Lucas] mentions three possible reasons for this catch-up [i.e., by later
developers]. One is that knowledge produced anywhere benefits everyone everywhere. The second is
that the governments in the previously unsuccessful countries can adopt the institutions and policies of
the successful ones. Third - and highly relevant to globalization - relatively high wages in the successful
economies can lead to capital flows to emerging ones. S. Brittan might refer Chinas transition here to
the third strategy for its comparative advantage - with its cheaper labor costs. But it clearly implies that
China also uses the second strategy by adopting more innovative institutions and policies for its success.
Also cf. US workers need the worlds low-priced goods by Henry Wong in The New York Times, A29,
Wed. May 24, 2000 (brackets mine): ...Opening China to the global market can only help reduce these
conditions [i.e., poverty, famine and political oppression], which continue today. While an international
labor standard would be useful, it is too idealistic and impractical, and mandated living wages would rob
countries with cheap labor of the competitive advantage they need to lift their people out of poverty.
84. cf. Trade with China takes a delicate step up - British business is feeling the benefit of improving
relationship by Alan Beattie in Financial Times, p. 8, Mar. 28, 2000: ...Although Chinese industry is
becoming more commercialized,...most industries have a hierarchical structure and personal
relationships are critical.
707
85. Such unique contexts make Chinas continental economy apt to lose some sense of urgency to
allocate resources more efficiently, to meet international standards, and to make their rational-legal
institutions transparent and accountable.
86. See a recent article in The Economist, p. 7, Tangled web", in China Survey," April 8th, 2000. Also cf.
Chinas low-cost labor lures more Japanese companies - Some send billions to build plants with
Chinese partners by Paul Wiseman in USA Today, 1B, Thurs. Nov. 21, 2002: ...economist Kwan, a
Hong Kong native who's spent his career in Japan, says Japanese fears of China are over blown. Its
easy to pay too much attention to China's cheap labor: True, Chinese workers - who usually make less
than $100 a month - earn just 3% of Japanese and 2% of US wages. But because they tend to be poorly
educated, use obsolete machines and toil for inefficient state-owned companies, theyre far less
productive. Chinese productivity is just 3% of US levels and 4% of Japans. Kwan argues that Japan and
China dont compete head-to-head because Japan specializes in more advanced products. He says
Japan and China compete in just 16% of product lines. China and its impoverished Southeast Asian
neighbor Indonesia, by contrast, compete in 83% . (Nor should the USA be worried about being replaced
as No. 1 exporter to Japan; few US firms compete head-to-head with Chinese exporters in Japan). For
now, Kwan says, China is best at assembling sophisticated components made elsewhere. He
distinguishes between two kinds of goods. First, there are those made in China with technology shipped
in from a more advanced country; then, there are products 'm ade in China with Chinese intellectual
capital and raw materials. 'Take a $1,000 computer, Kwan says. 'If you take away the Intel CPU and the
plasma monitor made in Japan, not much would be left (to be) made by China. China faces a critical
shortage of management, marketing and technological expertise. Japanese firms that set up factories in
China usually continue to handle research and development, product design, marketing and quality
control. Ad-Forests Ohara figures it will take another decade before Japanese companies can entrust
sophisticated design work to Chinese firms. Economists say it makes sense for Japanese companies to
focus on the complicated stuff and let China handle labor-intensive assembly jobs. Companies trying to
compete in high-cost Japan might have no choice but to consider China as their workshop. 'They have to
go or die, says consultant Joe Law.
87. It is plausible that some advantages to Chinas current transition will fade away in the future, once
China raises its expectations and accepts fiercer global competition. In Chinas long voyage of transition,
its historical derived current stage might eventually pave the way for a constitutive stage in favoring
formal institutionalization at a higher stage of Chinas ongoing transition. A constitutive-bound transition
might not be a mirage but a realistic picture for China.
88. cf. The Economist, p. 4, Tangled web, in China Survey, April 8th, 2000: In advanced economies,
companies do business within a rules-based system. This means that business is generally conducted in
a publicly verifiable manner (i.e., using contracts), under laws that are widely known and consistently
enforced. Although it may not be apparent to those operating in a rules-based system that has grown up
over decades or even centuries, such a system carries large fixed costs. That is, the establishment of the
legislation and the judiciary, the drafting and interpretation of laws, and the implementation of contracts all
involve high sunk costs. On the other hand, the incremental cost of enforcing an additional contract is
loose change. Once such a system is in place, people take it for granted. China's is not a rules-based
economy, at least not yet; it is still an economy based on relationships. Business transactions are made
on the strength not of contracts but of personal agreements. Transactions are purely private. They are
neither verifiable nor enforceable in the public sphere. How, then, do you avoid being ripped off in such a
system? You thoroughly check a persons background, his status and his assets. If he cheats, you know
how to seize his assets, blackmail him or, if you have to, kidnap him. This sort of governance (a kind of
heavily armed tit-for-tat) can be highly effective in forcing two parties to keep to an agreement, say
Messrs Li. A rule-based system needs a high and costly level of public order. A relations-based system
needs only minimal public order. All you need to know is that you are unlikely to be mugged on the way to
the bank, and that bank manager is unlikely to run away with your money. On the other hand, the
marginal costs of finding, screening and monitoring a potential partner are extremely high. For instance,
the relationships have to be managed personally: you cannot afford to delegate the task. A telling
difference with the W est is that executives in China tend to answer their own phones...By trying to push
708
through tough economic and legal reforms, the Chinese government is attempting to switch from
relations-based to rules-based governance. It is trying to break the cozy links between banks and their
state customers. It is cracking down on the many smuggling rackets that are simply a form of relations-
based trading. It is trying to disengage itself from its over-close relations with business. And it is
attempting to produce laws for the market economy, not the socialist one. Beware, foreigner, beware. The
closest scrutiny is needed just at the point where guanxi appears o become redundant. As markets expand
and the economy becomes more complex, the average cost of relations-based governance rises whereas
the cost of rules-based governance falls. Yet the transition form the first form of governance to the second is
not as smooth as outsiders like to believe. They see the introduction of new rules that protect investment.
Insiders see a state of flux created by changing relations among market participants. Outsiders see an
opportunity to invest. Insiders see an opportunity to loot. This may help explain, says Messrs Li, why you are
finding it so tough to do business in China right now.
89. As Nee and Stark 1989 emphasize, "The history of market reform in socialist economies has been
marked by cycles of decentralization and centralization, expanding markets and restoration of hierarchies,
and alternating periods of reform and counterreform" (25).
90. Label: here are the selected risky items, 1 through 6, with reference to those in A thaw in
relationships by Bayan Rahman in Financial Times, p. iv, Japan investment banking 4 , Thurs. Apr. 12,
2001.
91. cf. The middle kingdoms class revolution - The Chinese leadership outline robust expansionary
plans for the next two decades with a big emphasis on the middle classes" by James Kynge in Beijing in
Financial Times, World Report: China, p. I, Thurs. Dec. 12, 2002: ...Jiang Zemin, the outgoing party
chief, called for the size of the 'middle-income group to be expanded as part of a drive to quadruple
gross domestic product by 2020..."
92. cf. Chinese trade and investment start to slow in The Wall Street Journal, A12, International, Fri.
Dec. 13, 2002: ...'Businesses are gravitating toward China as a low-cost production base for exports,
said Robert Subbaraman, a Tokyo-based economist at Lehman Brothers. He noted that the huge investor
interest is pressuring the country to tackle such issues as corruption...
Also cf. The middle kingdoms class revolution - The Chinese leadership outline robust expansionary
plans for the next two decades with a big emphasis on the middle classes by James Kynge in Beijing in
Financial Times, World Report: China," pp. I, III, Thurs. Dec. 12, 2002 (emphasis mine): ...Much of the
investment has been attracted by the unprecedented market access commitments Beijing made on
entering the W T O in late 2001. Another powerful lure has been a growing sense among multinationals
that China is destined to become the workshop of the world - capable of making almost everything more
cheaply than anywhere else. But with success comes dependence. The foreign-invested sector is now
undoubtedly Chinas best performing industrial asset, contributing about 20 percent of state tax revenues,
50 percent of exports and creating 23m jobs. 'Foreign investors in China have brought benefits both to
China and themselves. That explains why more and more people are coming to China to make
investments. It also explains why the Chinese government has increasingly welcomed foreign investors
in this country. It can be a benefit to all of us, says Mr. Shi.
93. cf. China experiments in trade in rural land by James Kynge in Beijing in Financial Times, p. 6, W ed.
Dec. 11, 2002: ...Rural experts said that at least 200m people living on the land are surplus to
requirement and should migrate to towns and cities over the next 20 years to find urban jobs. Such a
migration would require significant transfer of rural land usage rights for construction. However, the
underlying land is set to remain, at least nominally, property of the state.
94. Also see similar terminology used by R. Burt in his 1992 discussion about business networks.
95. cf. Avoiding the trap of transition - The former communist countries that have done best have
ensured that goods can be bought more freely than judges by Martin Wolf Financial Times, p. 19, Wed.
709
Oct. 11, 2000 (emphasis mine): ...These unhappy countries are stuck in a transition trap. It is no accident
that they were also among those most deeply marked by the communist experience. But it is possible to
describe the trap more precisely. Much attention has been paid to the supposed failure of many of those
advocating reform to recognize its institutional preconditions. But the error is more subtle than that. It
concerns the origins of personal behavior as much as formal institutions. A sophisticated market economy
rests on an understanding of the distinction between what can be bought and what cannot be: goods, yes;
judges, no. The more deeply was communism embedded in peoples brains, the more difficult have they
found it to appreciate this distinction. The scale of the rewards available to those who ignore it has further
reinforced socially maligned behavior. In Russia, for example, the failure to complete price liberalization for
many valuable commodities opened opportunities for huge private gain. So did insider privatization. What
economists call ' rent-seeking behavior* then flourished, to the enrichment of the ruthless few, and
impoverishment of the hapless many. This process is carefully analyzed in a recent paper from the World
Bank, on the basis of a huge sample of enterprises. The authors distinguish between state capture, influence
and administrative corruption. The first refers to the capacity of companies to buy the rules of the game they
desire; the second to their ability to achieve the same aim through their insider connections; and the third to
petty bribery, aimed at influencing the implementation of existing laws, rules and regulations. The conclusion
is that these various ways of influencing the states behavior can be worthwhile for those who use them, but
do great damage to the economy as a whole. Because of the private benefits of state capture, those who
succeed have no interest in promoting a neutral state that would help their competitors or outside
shareholders. Having benefited from the partial liberalization and privatization that brought them wealth, these
interests have a strong incentive to prevent further reform. If the insider succeeds in halting the emergence of
a law-abiding and law-enforcing state, anyone engaged in business is forced to behave in the same wav to
compete. This creates a downward spiral. It also means that privatization of large-scale business undertaken
in the wrong policy and institutional context, far from advancing reform, becomes an obstacle to continued
advance. Transition has been hard. Inevitably, some wonder whether it has been worthwhile. The answer
for all who care about personal freedom and political democracy is that it has been. W e also know that
the combination of liberalization with institutional reform and macro-economic stabilization does work.
Inevitably, however, countries with the longest and most bitter experience of communism have found it
hardest to reform. Some seem caught in a transition trap, with the state no longer capable of purposive
autonomous action but prey instead to self-seeking private interests. The lesson of experience is the
importance of moving as swiftly as possible through this trap. The need is to establish the institutional
norms of a proper market economy before entrenched private interests corrode the effectiveness of the
state altogether. To have the right sort of market-oriented democratic society, one needs the right sort of
state...
96. The terms are borrowed from M. Wolf in his Europe's Constitutional Dilemma" in Financial Times, p.
13, July 5, 2000.
97. See M. W olfs article Europes Constitutional Dilemma in Financial Times, p. 13, July 5, 2000. It is
interesting to ask to which levels and in what contexts and conditions mankind is apt to reach a point of
short-termed breakthrough (as exemplified by a number of so-called social revolutions) or will mankind
stay on a gradual and lengthy trajectory through piecemeal institutional reforms and mutations for its own
incremental progress (as exemplified by a host of institutional reforms and mutations in recent human
history, particularly in China)?
98. cf. Guerrilla Warfare, waged with code - For Hacktivists, blockades on the Net are a call to arms" by
Jennifer Lee in The New York Times, E1, E7, Circuits, Thurs. Oct. 10, 2002: ...S o far many of the
groups have focused on China, which with some 46million users has the third-largest online population in
the world (after the US and Japan) and some of the most sophisticated controls over service providers
(along with Saudi Arabs). Among Hacktivismos current projects is an encrypted file-sharing technology
called Six/Four, a name derived from the date of the Tiananmen Square crackdown. This technology
would provide a layer of encryption that would allow computers to request and pass information without
leaving an easily traceable trail. Six/Four makes it difficult to determine whether a computer is requesting
on behalf of another computer, making it harder to trace the path that information is traveling. The
Freenet China project uses the publishing technology of a broader organization, the Free Internet Project,
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known as Freenet, to disseminate information about China on the W eb. People who install Free-net
software on their computers can anonymously place information in a global information library shared by
the network of Freenet users. While users of the World Wide W eb ordinarily make direct connections with
W eb sites to obtain information, Freenet users make indirect requests to other Freenet computers, which
in turn send the request onward if they do not have the requested document. Among the documents that
have been released through Freenet China are the Tiananmen Papers, a compilation of transcripts of
1989 meetings among Chinese leaders about the protests. Siuling Zhang, a Long Island-based developer
of the project, said that it had received 10,000 requests for the Freenet China software. Since the
program is small enough to fit on a floppy disk, she said, it has undoubtedly been copied many times
over. Because any computer can communicate with any other computer on the Freenet network, the
Chinese government would need access to each individual machine to censor the entire Freenet library.
"So far we havent heard anything about Freenet being blocked, Ms. Zhang said...A shortage of funds
prevents some promising technologies from being widely promoted. Dynaweb, an 'anonymizing' service
that makes it hard for Chinese serves to identify users, was introduced six months ago by Dynamic
Internet Technology and is available at dwang.orgdns.org. that site is more difficult for China to block
because while its W eb address remains the same, its numerical Internet Protocol address (which the
government often uses to identify sites to block) changes regularly. Dynaweb is seeking money from
foundations to promote its service. "We actually hope we can have one full-time programmer to maintain
it, said the 20-year-old Chinese immigrant who runs Dynamic Bill Dong Technology and goes by the
name Bill Dong...
99. As I discussed earlier, Chinas current transition toward a regime change corresponds to an
organizational switch to construct formal institutions. This, however, could be somewhat misleading,
especially if one concluded that China would move swiftly into digital management to deal with human
resources and information in the future (cf. Aokis associated discussion on transitional economies in
1995a, 1995b). Although digital management highlights impersonal and technological advance, one might
not want to overlook the informal side of governance that is socially embedded. It is hard to conceive of
China, while looking for a constitutive switch of economic governance, giving up its hitherto effective
mechanisms of information management through personal communication drawing on existing social
institutions. As long as there are options, choice-makers will look for alternatives that cost less and risk
less.
100. Digital management might inadvertently undermine social cohesion and eclipse humanitarian
endeavors. As such, one might consider human future threatened by overwhelming a paper-registered
data and management largel reliant on institutional signals and symbolic routines. Even an interactive
mode of digital management (e.g., via internet), it would reduce face-to-face human reciprocity. R. Scott
would argue that organizational structures should be viewed as a means, as an instrument, which can be
modified as necessary to improve performance. Organizational designers and mangers draw and redraw
the organizational chart; coaches attempt to improve performance by diagramming plays and giving chalk
talks; and consultants are employed to recommend better arrangements for achieving business goals. In
recent years, highly technical managerial systems, such as management by objectives (MBO), planning,
programming, and budgeting systems (PPBS), program evaluation review techniques (PER T) - all
designed to provide greater visibility and, hence, greater accountability for the critical work flows - have
been developed and widely adopted to facilitate rational decision making within complex organizational
system... But Scott immediately adds that Note that in describing the contributions of formalization to
rational functioning of the organization, emphasis has been placed simply on formalization per se - on the
existence of role specifications - without attention to content, to the particular rules prescribing preferred
behaviors. cf. 1998, pp. 32-33; emphasis mine.
101. Such an optimistic tone is documented and argued for in an essay Digital Democracy in The
Economist, p. 31, Government and the Internet Survey, June 24th, 2000; To date, fewer than 14m
Americans have ever used their credit cards for an online transaction, but as that number surges over the
next few years, candidates will be able to use the web to go straight to the voters wallets. The traditional
party machines will increasingly find themselves disintermediated. Inevitably, much of e-govemment is
about the delivery of services and the governments dealings with the private sector. But there is another
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dimension to it. This is how David Agnew, the executive director of the Governance in the Digital
Economy programme in Toronto, describes it: "You cant build a fence around the citizen as simply a
consumer or customer of government services. That sam e citizen is also an owner or shareholder of
government itself. In the digital age, people have an ability to communicate, to participate and add value.
Mr. Agnew believes that just as the Internet has helped to empower a new generation of well-informed
and demanding consumers, it will challenge the essentially passive relationship that the majority of
people have with government and politics. Just as consumers at first used the web to gather information
and only later took the plunge by buying things online, in due course citizens will move from using the
web to communicate with government to expecting to be able to cast online votes in a national
election...There is support for online voting in Europe too. An e-mail survey of 500 elected officials in 14
countries last year showed that more than half would back the introduction of online voting as long as
traditional channels remained in place. How soon online voting will become routine is hard to say.
Experiments at the local level...will proliferate in both America and Europe as governments learn how to
run cyberpolls...Although those involved declared it a huge success [in Arizonas Democrats voting],
there were enough hitches to give pause for thought. The voting site went down for an hour on the first
day of voting; some voters lost the PIN number that had earlier been e-mailed to them; and the helpline
could not handle the volume of calls from all the people having problems. Users of Apple Macintosh
computers encountered particular difficulties. Thomas Wilkey of the New York State Board of Elections
was unimpressed: 'I call it chaos. Alfe Charles, the assistant secretary of state in California, agreed that
breakdowns of any kind were unacceptable during an election, and added that before Internet voting
systems could be certified, state authorities would have to be confident about the strength of encryption
systems and the overall reliability of the software...Theo Dolan of Forrester Research echoes that
sentiment, arguing that essential requirements are likely to include mass voter authentication, online
databases with accurate, up-to-date electoral rolls, and voting sites that can withstand concerted hacker
attacks. But the biggest uncertainty surrounds the digital divide. Some argue that as long as Internet
access is so heavily weighted towards the better off, online voting will inevitably weaken the choice of the
poor and of ethnic minorities still further. Others...think that it will encourage voter registration, especially
among the young. Opponents may find it hard to argue against something that could help to make
Americas voters less apathetic (only 49% bothered to vote in the 1996 presidential election). Still, there is
more to e-politics and digital democracy than online voting, says Janet Caldow, the director of the IBM-
funded Institute for Electronic Government in Washington, DC. Ms Caldow defines digital democracy as
any electronic exchange in the democratic process. As well as online voting, digital democracy includes a
number of things that are already gaining ground: campaigning and fundraising, as demonstrated by Mr.
McCain; voter registration (so far 1m American voters have registered online, and the number could
reach 5m by November if the service is offered by portals such as Yahoo!); opinion polling;
communication between representatives and voters; wired legislative bodies (such as Wisconsins state
assembly and Belgium's parliament); and feedback from the public on legislative drafts.
102. The micro-specific observations include those detailed information about the dynamics, qualities, and
other idiosyncrasies of individuals, organizations and environments that informal channels could easer
access. In 1992 John F. Padgett acknowledged the prevalence of private coding through informal networks
over formal settings and logical systems that "Labor and customer forms of individuated control, despite
appearances, are actually the same because behind particularistic processing of jobs and people iies a
private coding of whole persons' relative honor or worth. Precisely because codings emerge through informal
networks of conversations among specialists, the logic of the system appears (perhaps blithely) opaque in
the eyes of workers or consumers. Needless to say, intense degrees of structural concentration and
inbreeding can develop within such reputation-coding informal networks (Faulkner 1983)" (ibid, 1469).
103. As some criticized, given statistics is apt to put a belief system in everyones mind. Cit. from an
article Explosive results in Wisconsin State Journal, D13, Sun. Dec.9, 2001.
104. cf. A world w ar among professors - Is American democracy merely one among many or a model for
all? A clash between number crunchers and specialists in a single region by Stephen Kotkin in The New
York Times, A15, A17, Arts Ideas, Sat. Sept. 7, 2002 (emphasis mine): ...the absence of regional
experts in political science departments of many elite universities goes back to a long-running, rancorous
712
debate over the best method for understanding the wav the world works: is it using statistics and
econometrics to identify universal patterns that underlie all economic and political systems, or zeroing in
on a particular area, and mastering its languages, cultures and institutions? Answers to this question
affect jobs and resources for thousands of scholars and the education of generations of
students...Increasingly, area studies came under assault for the 'ghetto feel of its world area divisions.
Equally important, economists and political scientists pushed for still greater stress on hard science:
universal truths, not culturally specific knowledge. Powerful new research tools emerged, raising
analytical rigor, though often in the guise of magic formulas. 'Some researchers studying politics did
engage in a megalomaniac view that there was one world-applicable theory, said Gary King, a professor
in Harvards government department, who advocates use of scientific methods for qualitative as well as
quantitative data. Such major intellectual shifts can make or break careers. University social science
departments competing for the top rankings have more and more equated excellence with 'scientific and
'quantifiable.'...11
105. As some have criticized, computer-managed codification has no human emotion, subjectivity, or
value exchange that is susceptible to reductionism in studying social sciences, cf. F. Fukuyama, author of
"Our posthuman future: Speech in Free Library of Philadelphia, C-Span2, Book/TV, May, 9, 2002.
1 0 6 .1 would like to argue that these disciplines ought to include education and psychology. It seems clear
that codification may not be particularly good to some studies in these fields.
I would like to point out that similar mixed results can be found in modem professions and in modem division
of labor. Each profession is apt to indulge in its own idiosyncratic biases derived from unique aspects of its
occupation. For instance, reporters, columnists, and syndicators may caricature, magnify, and exaggerate the
nature of their news phenomena in order to increase their market shares or viewship. Interviewees boring
personalities would cost the viewship of T V shows. Likewise, doctors may deliberately delay a healing
process. Lawyers may defend really guilty murders. Athletic players and owners would may threaten to move
their franchises elsewhere if the governments and taxpayers do not sponsor new stadiums. Some airline
pilots may fall asleep in the cockpit because of an inadequate union policy regarding rest intervals (cf. USA
Today, Fri. June 25, 1999), and so forth. Each profession identifies its own interests, stakes, and
idiosyncrasies that distinguish it from other professions. Professional rationality and technical rationality are
somewhat vulnerable to reductionist rationalism in that the real world and the real person are often
stereotyped, biased-portrayed, or ideal-typed.
107. See an article about the impacts of the Internet and its ramifications, cf. "What the Internet cannot
do? in The Economist, p.11, Aug. 19th, 2000 (emphasis mine): ...T he mistake people make is to assume
that wars are caused simply by the failure of different peoples to understand each other adequately.
Indeed, even if that were true, the Internet can also be used to advocate conflict. Hate speech and
intolerance flourish in its murkier comers, where governments (as France is now discovering) find it hard
to intervene. Although the Internet undeniably fosters communication, I will not put an end to war. But
might it reduce energy consumption and pollution? The Center for Energy and Climate Solutions (CECS),
a Washington think-tank, has advanced just such a case, based largely on energy consumption figures
for 1997 and 1998. While the American economy grew by 9% over those two years, energy demand was
almost unchanged - because, the C EC S ventures, the Internet 'can turn paper and CDs into electrons,
and replace trucks with fibreoptic cable. No wonder one enthusiastic newspaper headline begged, Shop
online - save the earth. Sadly, earth-saving is harder than that. Certainly, shopping online from home is
far less polluting than driving to a shopping mall. Ordering groceries online, and having them delivered,
means that, if the logistics are handled efficiently, one truck journey can replace dozens of families'
separate car trips. Reading newspapers, magazines and other documents online is more efficient than
printing and transporting them physically. Yet doing things online is more energy-efficient only if it
genuinely displaces real-world activities. If people shop online as well as visiting the bricks-and mortar
store, the result is an overall increase in energy consumption. Thanks to the Internet, it is now easy for
Europeans to order books and have them extravagantly air-freighted from America before they are
available in Europe. And it is more efficient to read documents online only if doing so replaces, rather
than adds to. the amount of printed copy. Furthermore, as more and more offices and homes connect to
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the Internet, millions of PCs, printers, servers and other devices gobble significant quantities of energy.
Home computers are becoming part of the fabric of everyday like, and are increasingly left switched on all
the time. One controversial assessment concluded that fully 8% of electricity consumption in America is
due to Internet-connected computers. The construction of vast 'server farms - warehouses full of
computers and their attendant cooling systems - has contributed to the overloading of the electrical
power network that has caused brown-outs in Silicon Valiev... W hat about the belief that the Internet will
reduce inequality? According to a study carried out by Americas Department of Commerce, households
with annual incomes above $75.000 are more than 20 times as likely to have Internet access as the
poorest households. Bill Clinton, struck bv the 'digital divide between rich and poor, argues that universal
Internet access would help to reduce income inequality...the true reason for the digital divide between
rich and poor will become apparent. The poor are not shunning the Internet because they cannot afford it:
the problem is that they lack the skills to exploit it effectively. So it is difficult to see how connecting the
poor to the Internet will improve their finances. It would make more sense to aim for universal literacy than
universal Internet access...The Internet changes many things. It has had a dramatic impact on the world
of business. Firms can now link their systems directly to those of their suppliers and partners, can do
business online around the clock, and can learn more than ever about their customers. Economies may
be more productive as a result. For individuals, e-mail has emerged as the most important new form of
personal communication since the invention of the telephone. The extent to which the Internet will
transform other fields of human endeavor, however, is less certain. Even when everyone on the planet
has been connected to the Internet, there will still be wars, and pollution, and inequality. As new gizmos
come and go. human nature seems to remain stubbornly unchanged; despite the claims of the techno
prophets. humanity cannot simply invent away its failings. The Internet is not the first technology to have
been hailed as a panacea - and it will certainly not be the last."
108. This might refer to a so-called "statistical discrimination" or statistical bias toward specific target,
persons or things. Polls and associated advertisements might create illusionary images and stereotyped
cliches misleading consumers and voters about the real objects or actual reality. There is no guarantee
that the media will not present biased coverage of strategic events. This happened continuously during .
the internet stock fever and bust of the last decade.
In 1988 Ragin pointed out that the quantitative methods, while assessing net effects based on average
values, may fail to test interactions between levels and are subject to problems of specification and
identification. I want to emphasize that bias may be derived from the statistics themselves, since they so often
miss dynamic and vital micro-information.
109. The loss of micro-specific and idiosyncratic information could make causal analyses spurious and
ambiguous, and make outcomes erratic, unreliable, and unpredictable with mixed consequences. For all
these reasons, one has to be cautious in using statistics.
This mistake is revealed by Stinchcombe in his 1990 discussion about "Noise Reduction," pp. 10-11: "The
basic device for reducing random error is to take a mean (or median or percentage); the larger the number of
observations over which the mean is taken, the smaller the residual random noise. But a large sample of fast-
breaking news is always late. Consequently, the dilemma is to produce the most recent mean possible...it is
oriented to getting noise-free information about that uncertainty that is recent enough to adapt to a changing
and uncertain world...Skills in the division of labor are primarily for dealing with variation in the situation...the
skill composition of the labor force as a response to substantive noisiness of the work process, the amount of
random variation..." Also, see his discussion about 'Trustworthiness and Error Estimation." In that article he
argues that sciences are often susceptible to an absence of evidence and live information (cf. pp. 13-4,
"Scientists do not have to give their readers the basis on which to disagree with their reading of the evidence
unless there is some uncertainty about how to read the evidence...This does not mean that there are no
errors in the information. If there was no chance that scientific papers were wrong, scientists could just
publish the conclusions without the evidence").
Such an absence of live information can be found in human aspirations, habits, and faiths, which seem to
determined by upward social mobility, and yet at the same time are socially conditioned and ultimately
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contingent upon the individual socio-economic status, cf. Americas rich believe in meritocracy, but the poor
know better by Victoria Griffith in Financial Times, p. xxxviii, Weekend, Mar. 24/ Mar. 25, 2001: ...Wealthy
Americans may be more surprised than the poor by these numbers. The rich prefer to think of the US as a
meritocracy; that helps them feel they deserve their money. The sense that its easy for the talented to do well
makes them optimistic about the future of their own offspring. A moneyed Bostonian mother told me recently
she expected her four-year-old to attend Harvard when she grew up. She does not believe she can purchase
her daughters status; she simply has a blind faith in her childs abilities. Poor people, on the other hand, are
skeptical about their own upward mobility, and that of their children, no matter how bright they are ...A half-
century ago, the 'old-boy network set clear socio-economic lines in the US. Most students at Ivy League
universities were taken from elite boarding schools, which in turn took students from elite private elementary
school...The inability of the poor to perform as well on standardized tests limits their access to a top
education later in life, and reinforce class barriers... Life in a wealthy household is very different from that in a
poor one. Moneyed, better-educated parents use a more sophisticated vocabulary. They are more likely to
read to their children, and limit television viewing. Prenatal care, the amount of violence in a child's
neighborhood, the quality of the schools the child attends - even the number of siblings in a family - may,
and probably do, influence academic success. And many of these factors are influenced by socio-economic
status. Yet unraveling the mystery of the precise ways in which wealthy children differ from their poor
counterparts has proved elusive. Extremists see Darwinism at work. The most successful people, they
reason, got where they are because they are genetically superior. The problem is that studies on adoption
tend to negate this theory. Adopted children brought up in wealthy households tend to do as well, on average,
as their natural-born counterparts. Parenting skills have become an area of increasing focus. In the 1990s,
scientists began to push the notion that learning occurs much earlier than previously thought. Expectant
mothers rushed out to buy stimulating mobiles and books for their new-boms. Because most of this material
was presumably purchased by middle-class and wealthy parents - whose children would statistically tend to
do well anyway - we may never know if it makes a difference...So many studies, and back to where we
started: Americans bom rich tend to stay rich; those born poor tend to remain poor throughout life. No one
really knows why. But having witnessed the phenomenon at close range, I am beginning to conclude that it
may be the expectation for social immobility that is itself self-perpetuating...The expectation that their socio
economic status was unchangeable helped maintain the status quo...The rich believe in equal opportunity.
The poor know better. Rags-to-riches may be a popular American tale, but it is one likely told more frequently
to children of the elite than to those of the underprivileged."
110. While making micro-specific live observation about Chinas changing reality, one has to identify more
dynamic and vital information, through substantive and/or supplementary qualitative research, such as
interviews, surveys, field and case studies by way of shared life experience and joint work experience,
etc., in order to avoid reductionist shortcomings and to maximize knowledge based on much more
accurate information about the changing reality.
111. Digital management could provoke human aversion and antagonisms, given the fact that while digital
management and codified organization facilitate mega-information flow, they are in many other occasions
apt to overlook dynamic and vital information, mini-environmental or intra-personal (such as internal,
intrinsic, and impalpable), and often unanticipated, unintended, and ambiguous, and which might affect
the momentum of market operations and affect the behavior of individuals and organizations.
Also cf. J. Scott 1998. Scott criticizes modem high rationality for failing to be aware of practical knowledge,
informal processes, and improvisation in the face of unpredictability and for adhering to "more formal,
deductive, epistemic knowledge" (p. 6. Ibid: 'This truth is best illustrated in a work-to-rule strike, which turns
on the fact that any production process depends on a host of informal practices and improvisations that could
never be codified...The formal scheme was parasitic on informal processes that, alone, it could not create or
maintain." Ibid, p. 7: "my point is that formal schemes of order are untenable without some elements of the
practical knowledge...").
112. Such widening social rifts would reduce the quality of human life. For example, too many gains in
control and too much gaze would be at the expense of individual choice and self-esteem and would
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thwart efforts to reduce the states illicit infringement upon private life (like individuals' owned e-mail
privacy), etc.
Also cf. A more uncertain utopia - Our vision of the future is founded on the constant quest for change" by
Charles Leadbeater in Financial Times, p. 9, Thurs. Dec. 29, 2001: ...There are downsides, of course.
Digital abundance can quickly turn into a cacophony of trivia and distraction. Technology that allows us to
redesign life prompts fears that we are becoming self-centered, intolerant of imperfection and hygienic in our
pursuit of perfection. The dream of an open and accountable community with unconstrained communication
becomes the ever-tele-present society of mass voyeurism, surveillance, exhibitionism and push-button
populism. The promise of innovations means we live in an interim world that is always in transit to
somewhere else."
113. G aze is a form of post-modern management discussed by Foucault, as well as of hyper

microinterventions by the state hierarchy under the previous planning economies.
114. Historical rationality reckons not only on a technological dimension (such as economic and
bureaucratic streamlining) but also on a human dimension. From the sociological perspective, rational
progress is ultimately measured by human dimension. Historical progress is not merely hastened by
impersonal or technological impetus, but also driven by humanitarian consciousness of moral virtues and
social norms. Technological progress does not necessarily produce public goods or humanitarian ends. A
robot cannot replicate a human being of blood and flesh. Impersonality and impersonalization are forms
of depersonalization. In the absence of sufficient human interactions, individual human beings can begin
to feel their alienation from the social world in which they live and work. Such an alienated environment of
high-tech-aided institutions (e.g., gaze" by virtue of digital management) could reinforce fiercer
competition at the expense of the public goods.
115. cf. Porter 1995, 215 (cit. from Bartlett, Christopher and Sumantra Ghoshal 1995): "...What is a
'competitive' nation in the first place? Is a competitive' nation one where every company or industry is
competitive? No nation meets this test. Even Japan has large sectors of its economy that fall far behind the
world's best competitors." Ibid, 216: "No nation can be competitive in everything. The idea is to deploy the
nation's limited pool of human and other resources into the most productive uses."
116. As a response, some critics underscore their opinion that future solutions call for high-tech
procedures based on higher share-sensitive human demands. For instance, the head of the Palo Alto
Research Center (PARC - well known as the hothouse for many of the important advances in computing
and communications over the last 20 years), John Seely Brown, (cf. "Wired coffee pots and share-
sensitive fountains - interview John Seely Brown by Phillip Manchester in Financial Times, p. X, in
Information ad Technology, W ed. Jan. 19, 2000) said: I am getting angry about the profound flakiness
of many modern systems and I think we will have a backlash against technology unless we make it better.
W e must make technology that fits people - rather than expect people to fit the technology. Nonetheless,
he perceives it as an opportunity to enhance information technology in that the innovations will link
natural biological systems with digital technology: ...M r Seely Brown sees two key areas which need to
be greatly improved the user interface and the reliability of systems. 'W e have to make the technology
more robust in addition to being more transparent. Our view is that technology should disappear into the
fabric of the working environment....'W e are looking at ways that we dont have to attend so many
meetings by creating technologies that appeal directly to people...W e want to build inorganic biological
systems so, for example, we can cope with bugs and viruses more effectively. W e are looking at ways
that w e can build an immune system that can detect foreign bodies and create antibodies to cope with
them. W e cant expect systems to be foolproof and this is one way we can face up to the growing
problems of proliferating viruses...W e are trying to blur the boundary between atoms and bits. This
means we can think of building star matter - devices that are both re-programmable and re-configurable.
Obvious applications are in areas like sound cancellation and elimination of vibrations.
Ibid.: [Mr Seely Brown says that] 'Its to remind us that our job is to create technology that fits like an old
shoe, Far from resting on its laurels, Xerox PARC is forging ahead with pioneering research...'Its a
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beautiful interplay of the sociology of how we work and the capabilities of technology. Electronic paper
enables individuals to share work and enables a new form of co-operative working which he sees as one
of the biggest challenges in the new century. 'W e have to start thinking in terms of groups of people - a
shift from personal computing to social computing. The challenge is to find ways that technology can
afford us new forms of participation. Its post-Cartesian in the sense that we replace I think, therefore, I
am with 'w e participate, therefore, we are. Such fundamental change will inevitably mean a change in
the sorts of skills that will be valued...'Those who can interact and bring the components together and
turn them into a sort of brokerage are the ones who thrive, he says. But the technology to enable such
change must be significantly more advanced than that available today. One of PARCs persistent pre
occupations is to make technology transparent. This underpinned the pioneering work on Windows user
interfaces and continues with current projects such as the Hyperbolic Tree Browser, a next generation
web navigation interface which enables users to focus on key information without losing sight of
peripheral data...
117. For instance, China transition planners have always raise a question as to whether Occidental or
Oriental capitalisms are an ultimate answer to the problems faced by China's current regime. They have also
tried to learn how to tap and regulate Chinas own capital markets, and so on.
118. China had always according to the international signals it received evaluated the means and goals of its
transition, making timely and proper adjustments in its welfare and military expenditures, its domestic policies
and political agendas, and its balance with global powers, etc.
119. cf. ''Ferment rises in China as succession date nears by Karby Leggett and Peter Wonacott in The
Wall Street Journal, A10, Wed. Sept. 4, 2002: For Mr. Jiang to continue to hang onto the party job would
guarantee continuity in the US-China relationship. Mr. Jiang has prided himself on keeping relations with
Washington on an even keel, even amid such incidents as 1999s accidental bombing of Chinas
embassy in Belgrade by Nato planes acting on information provided by the CIA, and last years collision
above the South China Sea between a US surveillance plane and a Chinese fighter jet. Though Mr. Jiang
is widely considered a pro-American centrist, U S officials arent keen to be seen as backing any attempt
to keep him in power. For one thing, even though Mr. Hus views on US-China ties are largely unknown,
US officials dont expect Chinas US policy to change if Mr. Jiang retires as president and party chief. In
any case, they figure that over the long term, US interests are best served by a China run by laws and
institutions, not by outsize personalities...
120. It was taken for granted particularly in the 1990s when the entire world had been overwhelmed by
capitalism and the US was seen as the only unbridled empire in the world, that no other country was capable
of competing and challenging it.
121. cf. China is warming to Hollywoods glow by Rick Lyman in The N ew York Times, B1, Wed. Sept.
18, 2002: ...Nothing stirs Hollywoods covetous soul these days quite so much as the mention of China.
With 1.3bn people and only 5,000 movie screens - North America, with one-fourth the population, has
more than six times as many screens - China looks to Hollywood much like the Arctic National Wildlife
Refuge must look to the oil industry: vast, untapped and potentially fat. But potential for profit is undercut
by the flood of illegal DVDs into Chinese hom es...Many believe that the recent trickle of Hollywood films
into Chinese theaters, along with those illegal DVD's, has played a role in spurring yearnings for
accelerated change among ordinary Chinese citizens. Images of prosperous, independent Westerners -
if not explicitly standing up for their rights, at least dressed in cool style and living it up - might have a
fundamental impact on this huge, complex society as it emerges from its cocoon. I dont think there is
any doubt that Western films have had a fairly large, popular impact, said Nicholas Lardy, an expert on
the Chinese economy at the Brookings Institution in Washington. He pointed to obvious changes in
everyday dress and slang, as well as to what may be more subtle shifts. But others fear overstating the
case. To the extent that there are hidden messages in popular culture, that is possible, said Catharin E.
Dalpino, another China expert at Brookings. 'But the problem with buying this argument is that it will be
distilled into saying Hollywood is helping to democratize China. And the truth is, I dont think the Chinese
people are relying on Hollywood to help them develop a social conscience....Hollywood is largely holding
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back, awaiting signs from Beijing that more films will be allowed into the country, and that investments in
infrastructure, like new multiplexes, will be safe and profitable, before beginning to pour in cash and
resources. There are exceptions. Columbia Pictures, for instance, has a Hong Kong subsidiary that
makes films directly for the Asian market. The company says it hopes that this gesture will put it in good
stead with Chinese authorities once the market truly opens up. And W arner Brothers is in a partnership,
still awaiting final government approval, on an up-to-date multiplex in a Shanghai shopping mall, the
theory being that more good theaters will create more movie fans, creating more pressure for more
Hollywood films to fill them. The Hollywood films that have done the best in China Pearl Harbor, for
instance, or 'The Lord of the Rings: The Fellowship of the Ring - have been the kind of giant, special-
effects blockbusters designed to draw fans like Mr. Qui away from their DVD machines. Since China has
no ratings system for films, meaning that anyone can get in to see anything, Chinese authorities and
Hollywood studios have shied away from the kind of overly violent or sexually explicit films that might
upset the countrys conservative bureaucrats. The closed nature of China's bureaucracy also poses a
puzzle. Censorship has not been a huge issue, officials in both countries said, largely because so few
Hollywood films are being admitted...W hy Hollywood turns its covetous eye on China is obvious. You
just have to look at the numbers, said Barbara Robinson, managing director of Columbia Pictures Film
Production Asia. T h e y re humongous. Mr. Han said he foresaw a day, perhaps five years away, when a
swift rise in the number of Chinese cinemas and an increase in the number of Hollywood films shown
here would transform Beijing and Shanghai into rivals of London or Frankfurt in providing box-office
dollars for Hollywood. I believe that China will become, before long, the single most important foreign
market for Hollywood movies, he said. After all, in five years there will be 20 million people in Beijing,
and the same in Shanghai....
Also cf. Sex and the city is a hit in Asia" by Cris Prystay and Montira Narkvichien in The New York
Times, B2, Fri. Aug. 9, 2002.
122. If the American image declined, the thesis of globalization would be more challenged than ever before.
China would have more questions than ever as to whether or not to adopt the American model of capitalism,
or even whether or not to adopt capitalism as a model for its future. For instance, China might not be
convinced that the US has been capable of protecting its citizens from market failures and terrorism. China
might also feel that the US touted competition only if it favored the US. The US withdrawl from international
commitments to the UN, Kyoto treaty, ABM treaty, the W TO, and the International Criminal Court, etc. might
send message to other countries that countries need not observe international rules and codes if they do not
wish to. And if many underdog countries adopted this new doctrine, the present and future world would be a
very dangerous place.
123. cf. Full Marx by Niall Ferguson in Financial Times, pp. I, III, Weekend, Aug. 17/18, 2002: ...In the
words of Princeton economist Paul Krugman: The current crisis in American capitalism...is about the way
the game has been rigged on behalf of insiders. Back in the 1990s, crony capitalism was the label smug
Americans stuck to the former tiger economies of Asia. But if ever there was a crony capitalist, it is the
current US president. The crisis of American capitalism is therefore more social than economic, more
moral than material. It is not that the US economy is about to collapse into a 1930s-style slum p...It is the
social structure of American capitalism that is in real need of attention. You do not have to be a Marxist to
see that something is amiss. Indeed, it is precisely those who believe most fervently in capitalism who
should be most insistent in demanding a shake-up. As Marx might have said, had he taken the right side
in the class war, the bourgeoisie united will never be divided. But right now the American middle class is
split unevenly between suckers and CEOs. W hats more, history suggests that when the suckers strike
back, they usually demand regulations far stricter than is good for capitalism itself...
Also cf. Is inequality good for you? in Financial Times, Weekend, I, Dec. 7/ Dec. 8, 2002: Michael
Prowse, our London-based Weekend columnist, says disparities in wealth are making us ill. But our US
columnist Amity Shlaes vehemently disagrees. Americas gloriously unequal system of capitalism, she
argues, has created a uniquely innovative environment. Michael Prowse: Unequal societies will remain
unhealthy societies, and also unhappy societies, no matter how wealthy they become. Amity Shlaes: US
inequality has been good. It has benefited all of US society, first the fat cats and then, eventually, the poor.
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124. cf. The total volume of the American stock market dropped $2.4 trillion - Foreign direct investment
shrank 44% in the first season of this year" in World Journal Daily, Chinese language, A1, Fri. July 12,
2002: Since this year, the total volume of American stock market dropped $2.4 trillion, almost one
quarter of its annual G D P ..."
125. China may become more reluctant to keep its transition in the current track en route toward privatization
of its many badly performing SOEs. cf. China could open up mainland shares by March" in Financial
Times, Global investing, p. 21, Aug. 20, 2002 (emphasis mine): China may introduce a proposal to let
qualified foreign institutional investors buy shares in mainland companies as early as March, according to
Anthony Neoh, senior adviser to the China Securities Regulatory Commission, Bloomberg reports. 'O f all
the things being discussed, the GFII proposal has matured more than others, Mr. Neoh said in a
presentation to the Hong Kong Society of Financial Analysts yesterday. 'Departments have been tasked
with drafting details of the implementation. A lot of resources have been thrown at it. Chinese authorities
are considering ways of opening up the nation's capital market to foreign investors, who are currently not
allowed to buy A shares, the most common type of share traded in China. Foreign investors are chasing
more than $1,000bn in household savings and $600bn in corporate savings. Options include allowing
foreign companies to sell China depositary receipts, reorganizing the nations stock indices to put the
main board in Shanghai and a secondary market in Shenzhen, and allowing some mainland institutions to
invest in Hong Kong listed China shares - the qualified domestic institutional investor (QDII) proposal.
Investors are wary about investing in the 1,200 companies publicly traded in China, where the
government is still developing mechanisms to regulate the market, and where share trading volumes are
often low. Accounts do not always meet international standards, either. 'W e have accountants in China
that are as creative as anywhere else in the world. Mr. Neoh said, citing companies whose return on
equity consistently reached a median of 10% - just above the 9% requirement to raise further
capital...Many companies have been forced to cut staff after selling shares, with the reorganization often
happening in the third year after listing to avoid breaching regulations by which companies making a loss
for three consecutive years may no longer trade their shares publicly. 'T h eres a lost of skepticism about
their ability to perform. Mr. Neoh said. 'Privatization hasnt resulted in growth but in consolidation.
Also cf. The dangers of shareholder value by Tony Jackson in Financial Times, p. 17, W ed. Aug. 7,
2002: ...stock markets are shrinking in relation to the economies that support them ...the US financial
services industry reached 7.5% of GDP in 2000, according to the Bank Credit Analyst, against 3.5% in
1982. W hile this was plainly a bubble, services are growing in the long run faster than manufacturing.
Investment banking will doubtless shrink further - but it would be surprising to see it reach the levels of 20
years ago. That said, never underestimate the power of the cycle. The strength and duration of the last
upswing not only produced some very odd assumptions about the role of the market; they also firmly
rooted those assumptions...the investment community, fed on the expectations of the bull years, may
have further shocks coming."
126. cf. Chinas stockmarket: A tiny leap forward in The Economist, p. 68, Nov. 16th, 2002: ...China will
continue on its slow and cautious path towards an open capital market and, ultimately, a convertible yuan.
The new scheme - know as QFil, because it is aimed at the qualified foreign institutional investor - is an
import from Taiwan. A decade ago Taiwan, just like the mainland today, badly wanted foreign capital to
beef up its stockmarket. But it was cautious about encouraging volatility (for fear that the mainland would
exploit it). So it added swathes of bureaucratic red tap, which were sufficiently obstructive to deter all but
the most dedicated investors, and cumbersome enough to cool down most 'hot money long before it
could exit from the market. QFII has worked for Taiwan, saving it from the worst of the Asian crisis in
1997-98. Today, foreigners own some 7% of Taiwans stock market, and the government has said that it
is ready to open up completely by 2 0 0 4 ...The barriers are intentional, but that is only one reason why
international fund managers were not exactly fighting in the queue for applications this week. The other is
the peculiar nature of Chinas market. Capitalized at about $540bn and consisting of 1,212 companies, it
is now Asias second-largest, after Japans. But only 35% of this capitalization is tradable, since the state
- the owner of virtually all listed companies - sits on the rest. Corporate governance is widely
acknowledged to be atrocious. And valuations are probably overdone, with an average price/eamings
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ratio of 40, compared with about 12 for mainland companies listed in Hong Kong that is despite a fall in
the market of some 30% over the past 17 months. Chinese investors themselves seemed to acknowledge
these shortcomings this week, by not anticipating a rush of foreign interest: the market barely moved. In
time, Chinas leaders hope, foreigners will support the market and force managers and brokers to
become cleaner and more transparent...
127. cf. Chinas changing of the guard halts key reform by James Kynge in Beijing in Financial Times, p.
4, Weekend, Sept. 7/Sept. 8, 2002 (emphasis mine): China has postponed moves to adopt a crucial
bankruptcy law, in what officials said was evidence the fraught atmosphere surrounding the transition to a
new set of leaders had begun to delay important economic reforms. It had been hoped the law could be
adopted at the meeting of the National Peoples Congress (NPC), or legislature, next March, following
strong calls for speedy progress by the World Bank in May 2001 and from several respected Chinese
academics. But official sources said yesterday that the law, which has been under revision since 1995,
was unlikely to be considered for adoption at the NPC next year because of a mood of caution as the
leadership prepared for a changing of the guard at a key congress in November. 'It is just too risky at the
moment to be embarking on a brave reform like passing the new bankruptcy law. There is no appetite for
this among the leadership right now. said a government official...But during a year in which political
considerations are paramount, officials appear less concerned with oversupplv deflation and the
misallocation of credit resources than they are about maintaining social stability...
128. In this regard, China would be very prudent about its approach to stock markets, attempting to avoid
the crisis American stock markets have suffered since March, 2001 that dumped $2.4trillion from a projected
surplus of $5.6bn when Bush entered office (cf. Daschle sharply attacks Bushs economy policies by
Allison Mitchell in The New York Times, A27, Thurs. Sept. 19, 2002). The reform planners try to figure out
how much limit could be set on the speculative trades in stock market by its central bank and finance
ministry. The limit (e.g., 1/3 ratio of stock trading over total GDP) has to be institutionalized so that it could
avoid the big setback of recession and negative impacts on Chinas transition. In America, for example,
albeit Alan Greenspan early in 1996 issued warning about the skyrocketing in American stockmarkets as
of "the irrational exuberance" (e.g., 1.5/1 ratio of stock trading over total GDP at average in the peak years,
1998-2001) the Federal Reserve, as now criticized, did not take adequate actions against the potential
debacle of the stock markets by such as changing or fluctuating interest rates and fund rates, bond rates,
and exchange rates.
cf. Bubble bubble - such is the exuberance on Wall Street that only a brave man insists that the
American stockmarket is overdue for a crash. Down the long history of bubbles ready to burst, it was ever
thus" in The Economist, p. 84, March 25th, 2000: ...These figures are more or less all it takes to convince
Robert Shiller, an economics professor at Yale and a leading authority on the economics of financial
markets, that stocks are going to pay far, far smaller returns to investors over the next ten years, say,
than they have over the past ten. His new book...is concerned not with proving that the market is
overvalued - given the numbers, Mr. Shiller regards that as all but self-evident - but with explaining how
it all happened. Within those limits, the book is first-rate. Mr. Shiller looks carefully at the factors -
structural, cultural and psychological - that have powered Wall Street to its recent levels. He defines
structural factors to include, first, 'precipitating' forces, such as the arrival of the Internet, demographic
shifts (affecting the pattern of spending and saving), the new political consensus in favor of low taxes,
changes in the pensions business, the declining quality (i.e., increasingly optimistic) of professional
investment advice, and others. The second kind of structural factor 'amplifies' such events. They are
'naturally occurring Ponzi processes that create a self-sustaining circle of rising investor confidence,
starting from the precipitating events, which are of little or ambiguous significance in themselves for
corporate earnings and hence for fundamental valuations. When he turns to cultural factors, Mr. Shiller
has harsh and persuasive criticisms to make of the news media. As he pointedly remarks: 'The history of
speculative bubbles begins roughly with the advent of newspapers. He describes how the media are
drawn into the bubble-inflating process, thanks to their obsession with bogus market 'records of one kind
or another, their remorseless short-termism (financial commentary on television in America now serve as
the media equivalent of day-trading), their fondness for bandwagons and their appetite for 'new era
stories...Mr. Shiller frequently looks back to the 1920s and the 1960s, finding parallels at every turn.
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Every bubble is a new era, it seems - and every new era, by the way, includes revolutionary
improvements in management. Today there is the Internet, the big change that explains everything. Quite
so - just as the 1920s had an accelerating rate of invention right across the economy, the spread of new
mass-production technologies, the proliferation of the car and a growing network of highways, and the
application of new scientific methods of management. The 1950s had world peace, no less, television,
atomic-age science, permanently low inflation (so it seemed), and inevitably, new scientific methods of
management. Mr. Shillers case - stockmarkets can get things badly wrong, and similar mechanisms are
at work each time they do - is very strong. 'Irrational Exuberance should be compulsory reading for
anybody interested in Wall Street or financially exposed to it...Mr. Shiller ought to have a bestseller on his
hands - except that the one thing people wont buy on Wall Street these days is bad news...On the
economics...it is a shame that the book is directed in this way mainly to people who already think that
Wall Street is overvalued rather than to those who have been persuaded by one theory or another that
current valuations make perfect sense. Perhaps Mr. Shiller supposes that these people are by now
beyond the reach of rational argument. Sadly, he may well be right.
129. cf. After attacks, rebound has been spotty - The US economy rebounded more quickly than
analysts expected after the Sept. 11 terror attacks. But while sectors such as housing barely paused, the
airlines and other battered industries slumped even deeper. Almost a year later, the recovery is shaky,
hampered by a volatile stock market and anxieties about terrorism, corporate scandals and a war with
Iraq. Says Brian Westbury, chef economist for Griffin Kubik Stephens & Thompson: 'The fear level is
definitely higher than I have seen in a long, long time. In USA Today, 3B, Mon. Aug. 19, 2002.
Also cf. "Bank chiefs see delay in recovery - Applications for US patents are slowing by Scheherazade
Daneshkhu in Financial Times, p. 1, Sept. 10, 2002: Applications for US patents will slow abruptly this
year, according to projections by federal patent authorities. The forecasts highlight the possibility that the
productivity miracle that fuelled rapid economic growth through the late 1990s could eventually fizzle out.
Central bankers from the worlds richest countries said yesterday that recovery in the leading economies
was likely to be delayed until next year. Acknowledging the slower pace of recovery, the bankers said that
they nevertheless did not expect the global economy to slip back into recession, in spite of fears of a
'double dip in the U S ...
130. cf. Pacific summitry in an age of peril: The US is Mr. big by Tim Weiner in The New York Times,
A3, Mon. Oct. 28, 2002: ...The 21 nations of the Asia Pacific Economic Cooperation today ended a
summit meeting of world leaders with formal statements that showed how much the U S s campaign
against terrorism is influencing the global agenda...The strengths of American power were clear in a
series of promises and proposals to make most of the rest of the world as secure from hijackers and
bombers as the US is trying to b e...The declaration acknowledges that terrorism threatens free, open
and prosperous economies, as well as 'international peace, security and economic sustainability. None
of this would have been written before Sept. 11, 2001. It escaped the attention of no member of this
group devoted to world trade that the main target that day was the World Trade Center. Few failed to feel
the secondary economic shock waves of the attack. And few fail to acknowledge the American imperative
against terrorism, or its warning that no nation is safe from the threat. But weaknesses in the American
agenda against the 'axis of evil also showed. President Bush persuaded no nation to condemn North
Korea or use economic sanctions to coerce it into abandoning its nuclear-weapon program. He won no
new support for his proposed UN resolution on Iraq...The leaders of those and other developing nations
at the conference suggested that poverty remained a root cause of political violence, and that rich nations
owed it to themselves and others to address it. 'T h e war against terrorism is going to be long, difficult and
borderless, said the president of the Philippines, Gloria Macapagal Arroyo. 'Security impedes prosperity,
but at the same time, poverty feeds extremists. That concern about poverty as a source of terrorism
moves few in the White House, though some members of the administration, notably Secretary of State
Colin L. Powell, have acknowledged it as legitimate...
Also cf. How a superpower should use its strength - September 11 must inspire the US to tackle not only
terrorism but also broader issues that damage the worlds well-being" by Samuel Berger in Financial
Times, p. 13, Wed. Sept. 11, 2002: ...If our conduct in the world isolates the US, not the extremists, and
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if our pursuit of victory comes at the expense of other priorities, we, the American people, may find
ourselves no safer than before. September 11 exposed America's vulnerability but it also starkly
demonstrated our interdependence...Using our power to help build a less bitter and divided world is a
national security imperative, not simply because it is morally right but because it defies those who foment
anger against an America they perceive as self-absorbed...we must continue to integrate Russia and
China into the international community. There are historic opportunities here but the future is not
preordained. China is engaged in the boldest economic experiment in human history. Can it also develop
the rule of law and the pluralism that are essential to distribute the costs and benefits of change in a
peaceful and stable fashion? Russia has a leader who understands its weakness and is compelled by
modernization. But will the need for order come at the cost of dissent? Will Russias economic expansion
come at the expense of its neighbors? Of course, these issues will be resolved by the Chinese and the
Russians themselves. But our posture matters - either respectful and principled or dismissive and self-
serving....we must act today to protect the environment we are leaving to the future. W e know that global
surface temperature is rising... If Kyoto is flawed, we should use our influence to fix it. A rising tide will sink
all boats. Meeting these and other challenges depends in no small measure on whether and how America
leads. W e must prevail in our campaign against terrorism...If we use our power only for self-protection,
and in a manner that is self-righteous, we shall fuel the fires of resentment. If we also use our power in
co-operative efforts to advance our shared well-being, our reward will be not only a better, more peaceful
world but also the influence and authority we command within it.
Also cf. Americans deficit, the worlds problem by Richard Clarida (assistant secretary for economic
policy at the US Treasury in Financial Times, p. 15, Tues. Oct. 22, 2002 (brackets mine): "...It is clear
from the evidence that the US current account reflects a lack of growth, and growth prospects, in much of
the rest of the world. Moreover, the present deficit in the US current account does not suggest that a
change in current US economic policy is warranted. Nor would it be welcomed by the rest of the world. ..A
deficit [of current account] is not necessarily bad, nor is a surplus necessarily good. This is because the
US has a floating exchange rate and is well integrated into the global capital market. It can finance its
current account deficit in this capital market by selling equities, private debts and government bonds - all
denominated in dollars - without having to draw down international reserves or incur foreign-currency
obligations. According to official estimates, as a result of the current account deficits in the 1980s the US
became a net foreign debtor in late 1988. Since then, it has accumulated a stock of net foreign liabilities
exceeding $2,000bn - equivalent to 20% of US gross domestic product. According to the national income
accounts, in 2000 the cost of servicing this foreign debt (almost all of which is denominated in dollars)
was only $12.1 bn dollars - 0.6 percentage points of the estimated outstanding balance. Why is the cost
of servicing the debt so low? The most commonly offered explanation derives from the fact that US direct
investments abroad are consistently much more profitable than foreign direct investments in the US. In
2000, for example, the estimated market value of US direct investments abroad was $2,500bn, compared
with the market value of foreign direct investment in the US of $2,700bn. Yet the receipts of direct
investment income from current production of foreign affiliates of US companies in that year was $132bn,
compared with payments to foreign owners of US-located investments of only $37bn. The best way to
interpret the present US current account deficit is as follows. There is a pool of portfolio capital in the
world that has fewer places in which to invest than several years ago and that capital is seeking safety
and acceptable returns in the US. Portfolio capital is not flowing to emerging markets as it did in the mid
1990s. Europe faces long-standing structural challenges (high unemployment, sluggish growth) that have
not gone away in spite of the successful launch of the euro. Japan is entering its second decade of
economic contraction and continuing fiscal and financial difficulties. Given this background, it is hardly
surprising that capital is flowing into the US because of the relatively superior performance and prospects
for growth in the US economy. This process has been reinforced by the strong productivity statistics in the
US during the recession last year, which have confirmed the earlier bet by the markets on the durability of
the productivity rebound first observed in the 1990s...In sum, the US current account is caused, in large
part, by a deficit of growth in the rest of the world. The growth deficit is of course not desirable but, as
long as it persists, foreign capital flows to the US, and thus the US current account, will adjust to bring
global saving and investment into balance..."
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131. cf. Capitalism and Ethics: W hat price virtue? The Anglo-US model has gone off the rails because
the penalties and rewards are skewed - The crisis in capitalism that began with Enron involves more than
a few 'bad apples. Trust and integrity - the restraints on bad behavior - need to be restored by John
Plender in Financial Times, p. 13. Mon. Dec. 2, 2002.
Also cf. World survey says negative views of US are rising by Adam Clymer in The N ew York Times,
International, A11, Thurs, Dec. 5, 2002.
Also cf. Japanese delight as scandals rock the 'American model - But reform may be hit by a new belief
in the old way" by David Ibison in Financial Times, p. 12, Thurs. Aug 15, 2002: ...In the past, state and
company officials visiting Japan from the US have presented the US model as the best and even the only
way. This has sometimes been done with a missionary zeal that has ruffled the feathers of their hosts.
But the business model presented by US policy makers as something the Japanese should try to emulate
is now increasingly being viewed as flawed and corrupt. On top of the scandals, difficulties experienced
by newly created giants such as AOL Time W arner are being savored by some in Japan. Hiroshi Toda,
president of the investment banking divisions at Nomura, said: 'Mergers and acquisitions in the US in the
last two or three years have had nothing to do with a real motivation to change the company, but to justify
the managers....the changes in Japan have broadly copied the US system and that at a time when the
'cases in the US have triggered skepticism about the US model, Japans Asian neighbors appear to be
moving much faster towards adopting best practices in corporate governance. Just as reform is starting
to gather pace, the corporate scandals in the US are threatening to sap the momentum from the process.
Further, if new belief in the 'Japanese way develops and pace of reform slows further, Japan could lose
ground to rival Asian countries at a time when corporate governance is becoming a key factor in any
investment decision.
Also cf. Acquisition measure shows China means business about reforms by James Kynge in Financial
Times, p. 6, Thurs. Oct.. 10, 2002: In the annals of Chinese economic reform, 2002 has for the most part
been an unremarkable year. The tone was set by a financial work conference in Feb. that was supposed
to fix a five-year action agenda but failed to decide anything. In the summer, Beijing announced it was
scrapping a much-trumpeted plan to sell off state-owned shares on the stock m arket...
Also cf. "Europe: Dont let fanatics destroy American optimism by Thomas L. Friedman in Wisconsin
State Journal, A8, Fri. Nov. 8, 2002: ...F or the world, Clinton is another JFK and George Bush is another
Thomas Hobbes, a man who, after witnessing Europes religious wars, became deeply pessimistic about
human nature and concluded that only one law prevailed in the world: Homo Homini Lupus - every man
is a wolf to every other man. If Ive learned anything from living abroad, its that while other nations often
make fun of or scoff at Americas naive optimism, deep down they envy that optimism and rue the day we
would give it up and adopt the tragic European view of history. Because our optimism about human
nature and its commitment to the rule of law, not just power, is the engine of the modern West. It is also a
huge source of US strength and appeal - the soft power that comes from technologies, universities,
Disney Worlds, movies and a Declaration of Independence built on the assumption that the future can
bury the past...other American presidents, like JFK, FDR, and Ronald Reagan, faced enemies more evil
than Saddam or Osam a without losing tough with American optimism and communicating that to the
world. The bush team has lost it - and its a loss for them and for America. 'N ever forger, a top German
official said to me, 'that it was the combination of American hard power and soft power that defeated the
Soviet Union. (Europes) so-called realism is really a deep pessimism that came out of all our religious
wars. If you become like us, America will lose its very power ad attraction for others - the reason that
even people who hate you are attracted to you. W hen the Bush folks sneer at things like the World Court
or Kyoto, and virtually every other treaty - without offering any alternatives but their own righteous power
- they project an arrogance and obsession with power alone, said the political theorist Yaron Ezrahi.
'This undermines the American idealism that made Europe aspire to emancipate itself from the history
that brought us World W ars I and II, it delegitimizes American power as an instrument of justice and
international order and it makes it impossible for the rest of the world to stand up and say: 'I am a New
Yorker. Al-Qaidas whole strategy is to encourage this and turn America into a nation of pessimists by
attacking the symbols and sources of American optimism. The terrorists want us to shutter our windows,
723
reject visa requests from Muslim youth and turn off our beacon of idealism so we will be less attractive as
an alternative to their medieval fanaticism. Because the bin Ladenites know something Bush doesnt: that
it is American optimism and soft power - not American hard power - that really threatens them. No doubt
after 9/11 we cant be naive optimists anymore. But optimists we must rem ain...
132. cf. North Korea to let capitalism loose in investment zone - 'This is an attempt to build Hong Kong
north, and it is an extraordinary leap by Howard W . French in The New York Times, A3, International,
Wed. Sept. 25, 2002: Tokyo, Sept. 24 - In the most significant reversal of economic policy since North
Korea was founded, that Communist nation has announced the establishment of an autonomous
capitalist investment zone near its border with China. According to the official Korean central News
Agency, North Korea has adopted legislation mandating the creation of an 'international financial, trade,
commercial, industrial zone to be built in the northwestern city of Sinuiju, operating free of central
government interference for a period of 50 years. According to news reports from both North and South
Korea, the new zone will seek private capital from China, Japan and South Korea, as well as the West,
and will operate its own legal and economic system, and even issue its own passports. Foreigners will
reportedly be able to enter without visas, although the government will build walls around the city to
control access by North Koreans. In perhaps the biggest surprise of all, the special economic zone will be
run by a Chinese agricultural and manufacturing magnate, Yang Bin, a frequent visitor to North Korea
aboard his private jet, and a confidant of the North Korean leader, Kim Jong II. According to Forbes
magazine, Mr. Yang, 39, is China's second richest m an...M r. Yang has said he will hire Westerners to run
the special zone's legal system along European lines. "This is an attempt to build Hong Kong north, and it
is an extraordinary leap for North Korea, said Marcus Noland, an expert on the North Korean economy at
the Institute for International Economics, in Washington...The current plans involving a site close to the
border with China and right on the rail line to Beijing are, by contrast, ambitious. 'The degree of autonomy
described in the press reports is greater than the independence granted by the Chinese to their new
economic zones in the late 1970s and early 1980s, Mr. Noland said. He called the new venture 'an
enormous gamble for Kim Jong II, who succeeded Kim II Sung, his father, eight years ago...The 132-
square mile Sinuiju zone lies across the Yalu River from the Chinese city Dandong in a relatively
conservative region where the Communist party still holds strong sway, and ethnic Koreans are
numerous. A recent American traveler to the region called Sinuiju 'one of the most barren places in
Korea. On bustling Dandong, by contrast, he said, 'the railroad station is piled high with fruits, and people
are running around with cellphones. Nicholas Eberstadt, a Korea expert at the American Enterprise
Institute, said: 'Chinas opening to the outside world was effectuated by a lot of foreign entrepreneurs,
members of the diaspora, from Hong Kong and Taiwan. The question has always been where does North
Korea get its entrepreneurial talent? 'The obvious answer might seem to be South Korea, but that
represents a terrible ideological peril, Mr. Eberstadt said. 'They seem to have chosen China....T he Hong
Kong newspaper said the new zone would have no import or export tariffs, and a fixed income tax of
14%. Tow month ago, the Nor Korean government announced a radical overhaul of the exchange rate,
wage and price systems. With food production flagging, and industries operating at 10% of capacity,
according to one diplomat, the government eliminated its food ration system, raised food prices and told
factories to make a profit. 'Until recently, you could not even use the word reform, and now not only is it
widely accepted, it is always used with a positive connotation, said a senior United Nations official in
Pyongyang, the capital. Regional political analysts cite a number of factors in the shift. President Bushs
description of North Korea as part of an 'axis of evil may have created a sense of urgency about
overcoming isolation, as has Chinas irritation over an increasing flow of North Koreans across their
mutual border. South Korea holds crucial presidential elections in December, and North Korea is eager to
see a government that favors friendly engagement, rather than isolation..."
Also cf. US leaves North Korea to policy backburner - Diplomacy improved relations between Seoul,
Pyongyang and Tokyo put focus on Washington by Andrew Ward in Seoul and James Harding in
Washington in Financial Times, p. 6, Fri. Sept. 20, 2002: Following historic breakthroughs this week in
North Koreas relations with Japan and South Korea, the focus has shifted to whether the bonhomie will
spread to Pyongyang's even more thorny relationship with Washington. Optimism about prospects for
change in North Korea is at its highest in two years after Japanese prime minister Junchiro Koizumis visit
to Pyongyang on Tuesday, followed on W ednesday by the start of work to reconnect railways across the
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sealed inter-Korean border. However, while Seoul and Tokyo have seized the opportunity to reduce
tensions with north-east Asias pariah state, Washington has been a conspicuous absentee from the
hectic diplomacy. While welcoming Tokyos and Seouls engagement with Pyongyang, the Bush
administration made no effort to disguise its skepticism regarding North Korea, which it considers part of
an 'axis of evil, alongside Iraq and Iran...
Also cf. Koizumi to tread a fine line on his visit to North Korea - Japans premier has taken a bold
diplomatic step by David Pilling in Financial Times, p. 12, Mon. Sept. 16, 2002.
133. cf. Opening the floodgates - for decades, global companies have imagined the day when the
Mon. 14, 2002: ...O ne such company taking advantage of Chinas new role is Compal Electronics Inc. of
Taiwan. A decade ago, Compal was a midlevel player in the global electronics industry and had all of its
manufacturing operations in Taiwan. Today, the company has built a large manufacturing and assembly
operation in a city outside Shanghai. Because costs are lower in China, Compal is increasing production
here. It now produces more than 200,000 laptops a month at one of its factories near shanghai. As its
output soars, so, too, does its global profile. So far this year through September, the values of the
companys exports from China, which are sold under such names as Dell, Toshiba and Legend, have
reached $850 million. Thats already double the total for all of last year, the company says. The
companys low-cost production in China is making new computers more affordable for consumers in Asia,
the US and Europe...Says an assistant to the company spokesman: 'The relationship is beneficial to
everyone...W e provide the technology and, in return, we get access to a low-cost production base....
Also cf. Qian Qishan, Chinas Vice Premier in charge of foreign affairs, said that both sides across the
Taiwan Strait could reach agreement on a 50-year-long peace under the name of One China. In
response to the proposal of Taiwans visiting legislative delegation, Qian claimed that China is ready to
negotiate with Taiwan on its proposal for 'Grand China Federation [as the new form of Chinas future
regime after the unification of both sides] if 'O ne China policy can be taken by both sides as a
prerequisite for negotiations in World Journal Daily, trans. from Chinese language, A1, Wed. Oct. 16, 2002.
Also cf. Wang Yung-ching, a Taiwans best-known billionaire industrial tycoon, talked about Taiwans
business opportunities in mainland China: Taiwanese businesses can only outperformed their mainland
counterparts for 5 years in World Journal Daily, trans. from Chinese language, A4, Wed. Oct. 16, 2002
(brackets mine): Mr. Wang, the founder and chairman of the Formosa Plastics Group, a Taiwanese industrial
conglomerate [the w orlds largest producer of many kinds of plastic and also a large and growing competitor
in health care, chemical production and gasoline retailing], was very impressive of Chinas rapid economic
development after his comeback to Taiwan from his recent visit to Mainland China. On Oct. 15, Wang added
that if Taiwans businessmen want their business expansions into the mainland China, their opportunities can
at most run for 5 years. After the 5 years, the mainlands development will no longer rely on Taiwans
businesses. He also pointed out that the mainlanders approach to doing business in China is very direct and
open. They only talk about economy. They do not want to talk about politics...This approach is in sharp
contrast with Taiwans and that deserves for Taiwans businessmen to learn from it. Wang also pointed out
that if Taiwans businessmen want to go to China, they are better to go now or within the current 5-year-long
time period. Otherwise, many multi-national corporations will sooner or later arrive there and occupy Chinas
emergent markets. And once Chinas local markets are occupied and divided by these international business
forces, it would be too late for Taiwanese businessmen to invest in China and tap its markets...
Also cf. In an unprecedented move, Taiwans three members of the national custodian (or supervisory)
committee are ready to exercise their duties in mainland China - Li Shen and two other members
explained that their trip had no political purpose but was for collecting information regarding the growing
demand of Taiwan's business firms in China in World Journal Daily, trans. from Chinese language, A1,
Thurs. Sept. 19, 2002. Ibid. The chief representative of American-Taiwan Associations in Taipei urged
Taiwan not to boycott Chinas economy - If Taiwan continues to see China as its economic threat, it will be
vulnerable to being isolated from global economy and losing its business opportunities: ...The
representative stressed that...the world markets have always pressed multi-national corporations to allocate
725
their resources and business operations into those locations best for doing business, those locations that now
include the Mainland of China. Taiwan must recognize this new reality in order to realign its business
strategies and make its environments more attractive to foreign capitals... Ibid. A3: Recently China and
Taiwans representatives had delicate and sensitive dialogues and interactions in the WTO: W TO officials
thought both sides could imitate the pattern of India-Pakistan-constructive-relationships.
Also cf. CAL cargo tie-up boosts China links by Mure Dickie in Taipei and Richard McGregor in
Shanghai in Financial Times, p. 17, W ed. Oct. 16, 2002: Taiwans state-controlled china airlines
yesterday won approval for a ground-braking investment in an air cargo venture run by one of mainland
Chinas biggest carriers...The investment plan brings together two companies controlled by governments
that remain deeply divided politically, a graphic illustration of tightening corporate ties across the Taiwan
Strait...The China Eastern official said CAL would bring China Cargo new access to capital and valuable
business experience. 'This tie-up will give us a larger-scale business and be good for further financing...
Also cf. Chipmakers aim for China plants" by Dan Nystedt in Taipei in Financial times, p. 19, Wed. Sept.
18, 2002: ProMOS Technologies and Powerchip Semiconductor, the Taiwanese memory chip makers,
confirmed yesterday that they would seek to build semiconductor plants in China if they met government
qualifications next year...The Taiwan government has stipulated that only three semiconductor plants
may be built in China before the end of 2005 by Taiwans $15bn-a-year industry. TSM C , the worlds
largest foundry producer of made-to-order chips, was the first to submit an application last week and is
expected to win permission. UMC, the worlds second-largest foundry, has not yet revealed its China
plans, but is widely expected to apply early next year. The winner will gain a march on Taiwanese rivals in
accessing one of the worlds fastest-growing chip markets. The burgeoning electronics industry in China
has sparked demand for the microchips that power high-tech gadgets. Dataquest, the market researcher,
said the value of China's semiconductor market would average 16.9% growth each year, reaching $30bn
in 2006. For TSM C and UMC, the move is seen as essential. A number of competitors in the foundry
business have already sprung up in China, including SM IC and Grace Semiconductor...The Taiwan
government has eyed investment in China with caution since much of its PC industry moved there,
draining jobs and capital. Chip plans typically command between $1bn for lower technology plants and
$3.5bn for advanced ones...
*
Also cf. Demand from China boosts Taiwan profits by Dan Nystedt in Taipei in Financial times, p. 15,
Mon. Sept. 2, 2002: ...China surpassed the US to become Taiwans largest export market late last tear,
and shipments for the first six months of this year surged 28.8% to $14.84bn, the Taiwan government
reported last week...Taiw ans growing economic dependence on China, is something the current
administration has taken pains to avoid. And a number of politicians fear that the growing economic ties
could be used to manipulate business leaders and ensnare the local economy. But, despite their
reservations, companies continue to pour money into China.
134. cf. Chinas low-cost labor lures more Japanese companies - Some send billions to build plants with
Chinese partners" by Paul Wiseman in USA Today, 1B, Thurs. Nov. 21, 2002: ...these days, Chinas
lower costs are looking less like a threat and more like salvation to Japanese companies desperate to
regain a competitive edge in world markets. At first reluctantly, but now with gusto, Japanese executives
are descending on Chinese boomtowns like this one across the border from Hong Kong, spending their
nights crooning into the karaoke machines of local bars and their days scouring the industrial landscape
for factories they can do business with. Canon, NEC, Honda, and other big Japanese manufacturers are
spending billions to put up plants in China, usually with local partners. Japanese investment in China this
year could shatter last years record $4.6bn. Largely because relocated Japanese factories in China are
busy sending products back to Japan, China quietly surpassed the USA as the No. 1 exporter to Japan in
the first nine months of this year...after a brief China investment boom in the mid-90s, Japan grew wary
about doing business with a historical rival it sees as an economic threat. For good reason, Japanese
executives saw China as a backwater that could crank out cheap toys but make few sophisticated
products... 'In the past two years, the number of factories that have been able to find (an acceptable) level
of quality has increased dramatically, says Takanori Ohara, executive director of Ad-Forest, an Osaka,
Japan, firm that makes home and car alarm systems. 'This wasnt an overnight change but a slow build
726
up over a number of years. The transformation. Ohara has witnessed the transformation firsthand. One
of his early experiences in China proved disastrous. As an executive for a Japanese electronic-games
manufacturer in the mid-1990s, he placed a big order for handheld computer games with a Chinese
factory. His supplier substituted Chinese computer chips for the Taiwanese chips he had specified,
resulting in 50,000 defective games. Back then, Chinese firms were out for quick cash, partly because
they didnt know if their government would shut down the economic reforms that opened China to trade
and investment in the early 80s. Ripping off Japanese was also sweet for those with memories of
Japans occupation before and during W W II. Now, Chinese are more confident that economic reform is
here for good, and more factory managers know that staying in business means satisfying customers,
whether theyre Japanese or not. The Chinese also have benefited from an influx of investment from
Taiwan. Taiwanese, fleeing rising costs back home, are relocating entire companies to the Chinese
mainland, bringing with them advanced technology and management expertise China lacks. As Chinese
factories improve, Japanese companies are under increasing pressure to cut costs. Japan shows no sign
of pulling out of its economic slump; prices fall month after month, squeezing profit margins. Japanese
consumers, once suspicious of foreign goods, now are willing to seek bargains. The Uniqlo clothing
chain, for instance, rose to prominence in Japan by offering made-in-China clothes at a fraction of the
price of Japanese-made garments. T h e environment has changed in both countries, says Joe Law, a
Japanese-speaking Hong Kong consultant who helps companies from Japan set up shop in China. The
Chinas advantage has worked for O haras Ad-Forest. Two years ago, it was struggling as an operator of
fitness centers and karaoke clubs in Japan. The company ditched the exercise bikes and sing-along
machines and started making car and home security systems in China for export to Japan. Chinas low
costs, combined with popular products, worked: In the fiscal year ended March 31, Ad-Forests profits
rose fourfold. Ad-Forest has plenty of company in China. In July, Honda announced it would put up a
plant with two Chinese partners n Guangzhou near here to build and export small cars. Nissan has
revealed plans to start building cars next year in a joint venture in central Hubei Province. Canon began
making laser printers in Zhongshan in southern China last year, and this year is opening a copier complex
near Shanghai. Pioneer aims to develop car audio equipment and DVD players in Shanghai. Electronics
giant NEC plans to make 80% of its projectors in China, up from 50% now. NEC says [producing
projectors in Chinas Guangdong Province, instead of Nagano, Japan, will cut costs 20%. Chinese
companies and government agencies are eager to make the Japanese feel at home. In Dongguan,
Chinese developers are clearing land for a 40-acre industrial park known as Little Japan. It will offer
tenants access to Japanese-speaking accountants and lawyers along with a hotel furnished with the
tatami mats and low tables Japanese business people are used to back home. Japanese in China tend to
live, work and party together. Restaurants, karaoke clubs and golf courses catering to Japanese
businessmen are sprouting across southern China. Some Chinese prostitutes learn to speak Japanese
and make themselves up to look like the young women who shop in Tokyos ritzy Ginza district. A growing
number of Japanese companies see China as more than a production base. They want to sell products
here, too. Their hopes are linked to Chinas recent entry into the W TO , which requires it to dismantle
trade barriers that have kept foreign products out. Tumbling auto tariffs, for example, sent Japanese auto
imports to China surging 61% the first half of this year... Japanese firms were heartened by a surprise
legal victory in august: A Beijing court awarded Yam aha nearly $110,000 from a copycat motorcycle
maker. Honda is pursuing a similar case. The Sino-Japanese trade relationship can still be tense. Japan
worries that low-cost Chinese imports will wreck local companies. Last year, Japan blocked imports of
Chinese tatami mats, mushrooms and onions, and China retaliated by shutting down imports of Japanese
autos in a dispute that lasted months. This year, China is complaining about Japanese steel imports, and
Japan has barred imports of Chinese spinach, alleging that it failed health inspections. 'Popeye is crying,
quips economist Chi Hung Kwan, senior fellow at the Research Institute of Economy, Trade and Industry
in Tokyo. 'Such disputes will keep happening, as the two countries adjust uneasily to their economic
interdependence, predicts Masaki Yabuuchi, chief of the China division for the Japan External trade
Organization (JETRO), a Japanese government agency...
135. cf. Hands across pacific: US-China ties grows - Beijing seems less eager to pick fights with
Washington by Joseph Kahn in The N ew York times, A12, Fri. Nov. 15, 2002: With its leaders
preoccupied by the most sweeping changing of the guard in two decades, china seems determined to
improve ties with the US even if it means accepting, for now, increased American assertiveness world
727
wide, Chinese and American analysts say. China has had enjoyed robust economic growth and spent
tens of billions of dollars to modernize its military. But it appears to be less eager today than anytime in
the last decade to pick diplomatic fights with the US, even on issues in its own backyard. The attacks of
Sept. 11, 2001, united both countries on a common goal - fighting global terrorism - and at least
temporarily replaced latent fears of an inevitable clash between the Pacific powers with a real and
immediate threat, analysts on both sides say...'w hat is fascinating is that despite all earlier indications,
relations have become remarkably stable, said Kurt Campbell a former Pentagon expert on China now at
the Center for Strategic and International Studies in Washington. 'I have never seen so many strategists
on the Chinese side who are openly expressing their comfort with US relations. Hu Jintao, the new
Chinese leader, seems almost certain to pursue as the reconciliation in the near term as he focuses on
consolidating his power, strengthening the Chinese economy and managing increasingly divisive social
issues. Beneath the surface some real strains persist, China still feel deeply uncomfortable with
Washingtons unilateral approach to foreign affairs. It is nervous about the Bush administrations
overtures to Taiwa-i and worried about military deployment in Central Asia. But the list of common
concerns is at least as long. Not just terrorism, but regional security, international crime, weapons
proliferation and trade all seem to be more vital issues than they did a few years ago. In recent weeks
China has tacitly agreed to allow the US to take the lead in figuring out how to dismantle North Koreas
nuclear weapons program, offering no support to its neighbor and historical Communist ally, analysts
said. Beijing signaled even before France and Russia that it would not oppose a tough UN resolution to
force weapons inspections in Iraq, helping to erode opposition to a top American priority. Last month
China formally established restrictions on the export of missile technology and goods that could be used
to produce chemical or biological weapons, addressing a perennial irritant in relations with Washington.
Chinas new leadership has also come to power facing enormous economic, environmental, political and
social challenges at home. Addressing them will require Western cooperation. Senior officials are unlikely
to do anything to risk the huge inflows of capital, on track to reach a record $50bn this year, that have
kept the economy primed even as nearly all of Chinas Asian neighbors suffer prolonged slowdowns.
'Chinese new leaders realize that they have some very tough issues coming up that will require big
expenditures, said Kenneth Lieberthal, a former Clinton administration National Security Council adviser
on Asia who is now at the University of Michigan. 'There is no way they are going to seek confrontation
with the US. Some Chinese analysts say chinas new attitude in foreign policy reflects a deeper shift in its
psychology: a greater self-confidence that assets itself, paradoxically, as moderation. The confidence
stems from tangible diplomatic achievements. China joined the W TO last year after nearly 15 years of
talks. It will play host to the 2008 summer Olympics - avenging, in Chinas mind, a bitter defeat in the
race for the 2000 Games. 'Especially after Tiananmen Square [Event], China felt as though it was under
attack, said a retired Foreign Ministry official who once helped handle relations with the US. 'China does
not feel like a victim now. China has also taken a softer approach to US relations because its leaders
have concluded that belligerence backfired on its most sensitive matter: Taiwan...M r. Lierberthal said it
was unlikely that new leadership would want to change a policy orientation widely regarded as
successful, especially since the new members of the Politburo standing committee have held top-level
posts for many years.
Also cf. Jiang in Crawford - A meeting of shared needs, if not beliefs in Financial Times, p. 12,
Editorial, Fri. Oct. 25, 2002: George W . Bush hosts Jiang Zemin for lunch at the US presidents
Crawford ranch today but both men should be ready to eat a fair amount of crow. The invitation to
Crawford, a sort-of-retiring Chinese president, is noteworthy in itself. The Texan hospitality ritual is usually
extended by Mr. Bush to people he regards as soulmates and though Mr. Jiang gets only a quick lunch
rather than the full country and western show, the gathering will depict an easy amiability between the
leader of the free world and the keeper of the flame of proletarian revolution. How different from the pre-
September 11 2001 days of the Bush presidency. Then, China, rather than Osama bin Laden or Saddam
Hussein, was in the Bush administrations sights. The incident involving the US surveillance aircraft off
Hainan, increased military co-operation between Washington and Taiwan and a general shift in rhetoric
and posture from both sides suggested a new freeze in relations between the two countries. But need can
thaw even the frostiest of relations and Mr. Bush now needs Mr. Jiang and his successors. He needs
Chinese co-operation in the war on terrorism. He needs Chinas support, or at least abstention, in the UN
Security Council on Iraq. Most pressingly, he needs Chinas diplomatic intervention to help disarm the
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sudden new threat of a nuclear-capable North Korea. This last issue will dominate discussions at
Crawford. Mr. Jiang will not want to be seen to be put under pressure by the US into bulling an old ally.
But Beijing has little to gain from increased tension on the Korea peninsula and so, here too, there ought
to be a confluence of interests. September 11 may have demonstrated that Washington and Beijing have
common concerns but it also dramatically increased US engagement in Asia. The presence of long-term
American bases in Chinas back yard in central Asia, a sharp improvement in relations between US and
Pakistan, Chinas traditional ally, and increased American support for counter-terrorism in south-east Asia
have altered, perhaps irrevocably, the geostrategic balance in Chinas sphere of influence. Nevertheless,
Mr. Jiang has carefully steered Chinese relations with the US into their calmest waters for years and he
has no reason to jeopardize that. The bush team was deeply skeptical about constructive engagement
with China and there is still no evidence that improved relations are leading to the political reform
engagement was supposed to foster. But since Mr. Bush came into office, China has joined the W TO ,
expanding opportunities for US exporters; dramatic changes in geopolitics have produced an unexpected
coincidence of interests between the two countries; and the administration has found more urgent things
to worry about than the long-term challenge from Beijing. It will not exactly be a fond farewell for Mr. Jiang
at Crawford but it will be a lot friendlier than either man could ever have envisaged two years ago.
Also cf. North Korea crisis raises stakes of Jiang visit - Bush to seek China's support in countering
nuclear threat by Bill Nichols in USA Today, 6A, Tues. Oct. 22, 2002: ...The North Korea crisis comes
during a time of almost unparalleled calm between the US and China. When a Chinese fighter jet shot
down a US surveillance plane over the South China Sea in April 2001, the outlook for future US-China
relations was bleak. Some analysts even warned a new cold war was about to begin. Instead, the US-
China relationship has been virtually stress-free in recent months. Diplomats and US-China experts say
two factors caused senior officials in both countries to stabilize a relationship that threatened to spin out
of control: US-China trade that tops $100 bn annually and the Sept. 11 terrorist attacks. T think the
relationship moves toward common ground because its in the interest of both countries to do so, says
Gerrit Gong, a China expert at Brigham Young University in Utah. US officials and Chinese diplomats say
the tension of the spy plane crisis, in which 24 US crew members were detained on the Chinese island of
Hainan for 11 days, caused both countries to decide to accentuate the positive. The most recent example
of this charm offensive: China has privately signaled US diplomats that it will not block a tough US
resolution on Iraq at the UN Security Council, though Beijing will continue to criticize the measure in
public. The main motivation on both sides is economic. US corporations salivate at the prospect of
increased access to Chinas 1.3bn consumers, and burgeoning US economic ties are central to the
continued progress of Chinas plan to gradually open its centrally planned economy. Both countries also
gained an incentive to work together in the aftermath of the terrorist attacks on New York City and
Washington. For the Bush administration, China was needed as a source of intelligence on al-Qaeda
activities in Asia and for its crucial influence with Pakistan, Chinas longtime ally in South Asia. In return,
Beijing won Washingtons blessing for its own war on terrorism. The Chinese government says Islamic
extremists, backed by al-Qaeda, have waged a decade-long campaign of terrorism in an effort to wrest
control of Xinjiang, a northwestern region, to establish their own state.
Also cf. China gives telecoms $1bn boost by Jonathan Moutes in New York in Financial Times, p. 1,
Tues. Oct. 22, 2002: North Americas ailing telecommunications equipment industry yesterday
announced badly needed orders from China Unicom, the nations second-largest carrier, worth a total of
more than $1bn. The contracts for Lucent Technologies, Nortel Networks and Motorola, announced on
the eve of president Jiang Zemins visit to the US, will upgrade Chinas mobile phone network.
ExxonMobil China Petroleum & Petrochemical, a subsidiary of ExxonMobil, also chose the impending
visit to sign an agreement with China Petroleum & Chemical to strengthen their strategic alliance and
boost joint venture projects in China. The telecoms deals will upgrade chinas C D M A technology, which
became the standard for Chinas mobile phone network when the country switched from GSM
technology, which began operating in Jan...Lucent, which announced a reverse stock split on Fri. to
shore up its flagging share price, said its contract was worth "more than $400m . Jim Brewington,
president of Lucents mobility solutions group, said China was the worlds fastest-growing economy with
one of the largest telecoms networks...The deals will delight the US government, which is concerned
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about the home-grown suppliers of telecoms equipment, which have dared particularly badly in the recent
slump in spending by fixed-line telecoms carriers and wireless operators.
Also cf. Change means stability for China - If Jiang Zemin gives up power without a fight next month, it
will be a first for the country" by David J. Lynch in USA Today, 7A, Mon. Oct. 21, 2002: ...'China now is a
collective leadershil. The people of the new generation already have been in government, in different
positions, for years, says foreign policy analyst Chu Shulong, a professor at Beijings Tsinghua University.
'Theres a high degree of consensus among Chinese leaders about relations with the US. Thats largely due
to Jiang, who rose to power after a bloody crackdown on pro-democracy protesters in Tiananmen Square in
1989. Elevated from Shanghai mayor, he was expected to be a weak leader who would soon face ouster.
Instead, he bested a string of rivals and by 1994 consolidated a firm hold on the top party and government
posts. He transformed China from a pariah into a member of the World Trade Organization and the
designated host of the 2008 Olympic Games. Relations with the US are stable, despite crises such as the
accidental US bombing of the Chinese Embassy in Belgrade, Yugoslavia, in 1999 and the midair collision
between a US spy plane and a Chinese fighter jet in 2001. An economy once shackled by Soviet-trained
central planners has been remade in capitalisms image, and Chinas cities are now islands of consumer
abundance... They [the Chinese leaders] chafe at US global dominance but have few resources available to
undo it, Chinese analysts say. 'China is a developing country. W e cant afford to confront the US. Says Zhu
Feng, a professor of international relations at Beijing University. 'If we do, thats a great loss for our domestic
economic construction....
Also cf. In shift, China seems to back a resolution on Iraq by Erik Eckholm in The New York times, A14,
Thurs. Sept. 26, 2002: ...Today an editorial in the main state-run English-language newspaper, The
China Daily, issued an unusually blunt warning to the Iraqi government, demanding that it comply with
United Nations requirements: This is the last chance for Saddam Hussein to deprive the Americans of a
legal case against himself, the editorial said, though it also warned the UN to avoid any reckless action
going beyond its proper authority. China is pursuing closer relations with the US and calls itself a partner
in the war on terror, and American officials hope Beijing will at abstain on any resolution in the Security
Council that would authorize military action if Iraq did not comply fully with the councils earlier
resolutions.
Also cf. Beijing and US in anti-terror moves by James Kynge in Beijing in Financial Times, p. 5, Tues.
Aug. 27, 2002: China and the US took pains yesterday to accentuate the positive aspects of their rocky
relationship, with Beijing expressing its willingness to help in the fight against terrorism and Washington
announcing that it has put a Chinese separatist group on its list of terrorist organizations. Richard
Armitage, US deputy secretary of state, said the US had added the East Turkestan Islamic Movement to
its list, which 'China had noted with satisfaction, and cooperation between US and China in the war on
terror was forging ahead. Beijing, which has long campaigned to have Uighur separatists in its northwest
frontier region branded as terrorists, welcomed the move. Mr. Armitage also gave a preliminary
endorsement to a Chinese announcement at the weekend that it would institute an export control regime
on the transfer of sensitive military technology abroad. He added, however, that the contents of the
Chinese export controls were still being studied to see whether they covered the missile technologies and
components of most concern to the US. The warmer tone between China and the US comes in the run-up
to a summit between President George W . Bush and Jiang Zemin, his Chinese counterpart, in Texas in
late October. Mr. Jiang, who is due to relinquish at least some of his key posts at a Communist party
congress in early November, is keen that the summit should be a success, Chinese officials said. Mr.
Armitage said the decision to list the East Turkestan Islamic Movement as a terrorist organization was
taken 'several days ago after the US determined that the group had committed acts of violence against
unarmed civilians."
136. cf. Made in China: Sneakers, toys, now films by Leslie Chang in The Wall Street Journal, B1, B4,
Tues. Aug. 27, 2002 (emphasis mine): Beijing - On a cavernous soundstage transformed into a
Japanese nightclub, actress Uma Thurman vanquishes a mob of sword-wielding assassins. Her
assailants - appearing in Quentin Tarantinos upcoming action flick, 'Kill Bill - are supposed to be
Japanese, and Japan is where Ms. Thurmans character seeks revenge on a man who tried to have her
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killed. But after Ms. Thurman, in a canary-yellow jumpsuit splattered with fake blood, nails an intricate
sequence of sword thrusts and spins, and Mr. Tarantino shouts 'That was great!' the dead assassins
stand up and begin to chatter among themselves - in Chinese. In fact, they and about 70% of the movie
production crew on the Beijing Film Studio lot are from China. Foreign filmmakers are discovering that
China is a good place to make movies. Just as manufacturers learned before them, lower costs are a big
draw. Shooting a movie here can cost half, even a third, of what it might back home, Western movie
executives say, with savings on everything from crew salaries and set construction to catering fees. Kill
Bill even replaced a team of specially hired Japanese swordsmen with Chinese extras in scenes in which
the characters are slain. T h e y re dead on the floor, so we dont need to pay so much,' a publicist
explains. 'Kill Bill, which is doing about 214 months of filming in China, will shoot only a week in Japan, in
addition to three weeks in Mexico and two months in the US. Costs aside, Chinas political stability also
makes it stand out among Asian film locations, especially after Sept. 11. Marty Katz, the producer of T h e
Great Raid, says that after the terrorist attacks on the World Trade Center and the Pentagon he decided
not to shoot his film in the Philippines, even though the story is about the rescue of 500 American
prisoners from a Japanese prison camp outside Manila at the close of World W ar II. With the presence of
the Abu Sayyalf terrorist group in part of the country, Mr. Katz worried that a Philippines location would
deter some of the cast and crew from coming. T h e re so much talent in China thats there for the
choosing, and its probably one of the safest places in the world. Mr. Katz says. At the sam e time,
growing respect for the quality of films made in China is persuading some in Hollywood to give China a
try. After 'Crouching Tiger, Hidden Dragon became the highest-grossing foreign movie in US history,
'people are seeing the quality of Hong Kong and Chinese films and saying, 'Wow, that looks good, says
Dede Nickerson, who is responsible for co-productions and acquisitions in Asia for W alt Disney Co.s
Miramax Films and also associate producer of Kill Bill, which Miramax is distributing. It doesnt hurt, too,
that the Chinese government is proving easy to work with. Authorities are increasingly comfortable with
green lighting co-productions. State film studios, with whom foreign filmmakers are required to form
partnerships, offer attractive terms, such as allowing their foreign partners to hire their own crews. And
Chinese film crews, who have no independent unions are accustomed to working long hours. In the US,
filmmakers must follow union rules on the number of work hours for actors, and the specific duties of crew
members. W hile international filmmakers have shot China-themed movies here in the past, Mr. Tarantino
is the first big-name director to use China as a low-cost production base dressed up to look like
somewhere else. The film has only one scene that actually takes place in China, which is being shot at an
imperial tomb near Beijing. Other directors are beginning to follow suit: Lee Kwang Hoon, a popular
Korean director, plans to film this year in coastal Zhejiang province for a story set in ancient Korea. And
Miramax Films plans to film in Shanghai next month key scenes from 'The Great Raid. This year, China
will probably see 10 co-production projects completed, up from 10 last year, says Xue Guizhi, a vice
president at state-owned China Film co-production Corp. While last years crop was dominated by Hong
Kong and Taiwan projects, more than half of this years applicants come from farther afield, including
Australia, France, Korea and the Czech Republic as well as the US, she says. Beijing has a strict
approval process for films shot in China that are intended for Chinese viewers. But many productions,
'Kill Bill among them, wont necessarily be shown in China unless they decide to apply separately. This
allows the foreign partner to supply the script and investment as well as hire its own crew, while the
Chinese side provides sets and takes a nominal fee. Though both script and film must be approved by
China Film Co-production, executives say it is more of a formality. Before the filming of 'Kill Bill' started in
mid-June, producers allowed five weeks in China to get acclimated, hire the right crew members, and to
build the elaborate sets designed for fantastic jumps during fight scenes. Adjustments are made for the
local crew. On the set, every shouted instruction in English is echoed in Chinese. Every piece of
equipment is labeled in both languages. And signs instruct the crew about No spitting in Chinese as
well.
137. cf. World views: Economists Joseph Stiglitz and Kenneth Rogoff offer starkly different appraisals of
the hopes - and risks - for the global economy by Christopher Rhoads in The Wall Street Journal, R8,
Mon. Oct, 14, 2002: ...W hy is China able to grow at over 7% to 8% a year when the US can typically
only manage 3% to 4% in a typically good year? The biggest factor is catch-up - there are big returns to
moving from a predominantly agrarian society to a modem economy. Chinas growth performance of the
past 25 years comes off a very low base. Even today, after a sustained period of impressive growth, per-
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capita income is only roughly $1,000 per person, so there is still substantial scope for further
convergence. Certainly, China has benefited enormously from its move to becoming a more market-
oriented economy with greater openness to international trade. However, with the [governments position
on such reform uncertain], continuing catch-up is by no means a given...W hatever spin one puts on the
reasons for Chinas and Indias growth spurts, it would be impossible to attribute them to greater state
intervention or the benefits of a less-liberal trade regime. Ultimately, these countries success is a
reflection, in part, of their willingness to integrate their economies with the global economy...
138. cf. "Foreign influx could benefit Chinese banks by Karby Leggett in The Wall Street Journal, C1,
C13, Tues. Aug. 27, 2002 (emphasis mine): ...The purchase by Citibank and two other foreign banks of
a pile of unpaid bills, or accounts receivable, from a unit of phone firm Telefon AB LM Ericsson sent
shock waves through the banking industry. "The wolf has arrived, blared one newspaper headline.
Though common elsewhere, the idea of paying a discount for - and profiting from - unpaid bills was new
for Chinas conservative, state-owned banking system. W hat rattled Chinese bankers wasnt the deals
size - Citibanks portion was a modest $60 million - but its aftermath. Ericssion, armed with new funds,
retired loans it held with Chinese banks and agreed to push future accounts-receivable business to the
foreign banks. That brought into focus a question Chinese bankers have been mulling since the country
joined the World Trade Organization last year: Can Chinas bank, long considered the soft underbelly of
this nations galloping economy, survive an onslaught of foreign competition? The short answer: They
might not only survive, some may even thrive. Far from crumpling. Chinese banks are proving quick
studies in learning from their foreign counterparts. That suggests China's banking sector may follow a
pattern similar to one that has marked development of businesses ranging from insurance to consumer
products: first, foreigners enter the market by storm, but then Chinese companies fight back and retake
lost around. Indeed, while foreign banks account for less than 3% of all banking assets in China, their
mere presence is forcing Chinese banks to expand into areas they once mostly ignored but are now
finding profitable. Chinese banks, watching their foreign rivals, have beefed up credit-risk systems and
pushed into businesses like loan syndication. Some even have started selling investment funds and
insurance policies through their far-flung branch networks, aping the one stop shopping that foreign banks
pioneered. How Chinese banks adapt to growing competitive threats is critical. The scope of foreign
banks businesses remain limited by severe capital restrictions and other regulatory controls, but under
the terms of the countrys W T O membership, Beijing has promised to let foreign banks conduct any
business they like within five years. Unlike in Chinas insurance or securities industries, foreign banks
wont have to team up with local partners, giving them full control over their operations. Chinas banks
clearly understand that the stakes are high. Several months after the Ericssion deal, the local unit of
French telecommunications firm Alcatel SA is seeking a buyer for roughly $100 million of its own overdue
accounts - a type of financing where banks purchase their clients unpaid bills at a discount and then
handle collection themselves, hoping to profit by collecting more than they paid for the bills. This time
around, at least several Chinese banks are making aggressive bids for the deal, people familiar with the
transaction say. Among the new entrants is Bank of Communications - one of the Chinese banks that
saw its lending business with Ericssion shrink recently. Other banks are following suit. Bank managers
have begun sharing information among branches on how to structure deals like accounts-receivable
financing and other types of deals that involve higher levels of risk. 'The Ericssion case was a shock to
Chinas financial industry, says Li Xianpu, a Shanghai lawyer representing a couple of domestic banks
vying for the Alcatel deal. The lesson they learned, Mr. Li adds, is that 'they just havent been brave
enough in the past. The timidity of Chinese banks has a long history. From the early days of Communist
Chinas founding more than half a century ago, banks have served as little more than repositories for
government funds. True commercial lending was almost nonexistent. W hat lending they did was directed
at state enterprises whose heavy losses have left the banks with a pile of bad debt, now estimated to be
valued at nearly $500bn, or about half of the value of Chinas annual economic output. Over the past
decade, Beijing has approached this problem - which some observers call the worlds largest potential
banking crisis - with occasional capital injections and piecemeal reforms. It has allowed foreign banks to
set up operations in recent years, though they have been limited mostly to foreign-exchange transactions
and local-currency corporate lending in a handful of Chinese cities. But as the competition spills into more
sophisticated areas, the effect on Chinese banks is becoming even more pronounced. Nearly three years
ago, Citibank launched a Chinese cash-management product similar to one it offers world-wide. The goal
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was to offer corporate clients more-accurate information on activity in the accounts they held around
China, including those at Chinese banks. Yet to do so, Citibank had to enlist the support of Chinese
banks, which provided the account information that Citibank compiled and passed onto their clients. The
result: Chinese banks have now begun offering their own, vastly improved cash-manaqement products.
'Obviously, local banks are picking up some of our techniques. savs Richard Stanley, country manager
for Citibank in China. 'And its improved their efficiency. But foreign banks arent standing still. This year.
Citibank began offering foreign currency services to Shanghai residents, which the bank wasn't allowed to
offer previously. The bank also wants to launch credit-card services, a business Chinese banks also
started recently. 'W e re going to introduce a whole set of products that dont exist right now. savs Mr.
Stanley.
139. cf. Opening the floodgates - for decades, global companies have imagined the day when the
Mon. 14, 2002 (emphasis mine): ...Is Chinas growth a good thing, or is Beijing merely sucking up
foreign investment and dominating export markets at the expense of its Asian neighbors? The quick
answer: Fear of China as a vacuum is overblown. While concern about the rapid rise of such a mighty
neighbor is in some wavs understandable, the signs these days suggest that Chinas growth is. in fact.
complementary to the vast majority of countries, including the US and Europe. Indeed, as foreign
investment continues to flood across Chinas border - its expected to reach $50bn this year, according to
government forecasts - the country is fast becoming an integral part of many corporations global
strategies, and even helping some spring to global prominence. And though in some cases the
manufacturing relocation to China means fewer jobs at home, its also boosting corporate profits, creating
leaner and stronger companies and dramatically lowering costs for consumers...Chinas growth, at least
for the foreseeable future, will continue to lean heavily on the twin pillars that have brought the economy
to where it is today: dizzying levels of foreign investment and a fiercely competitive export sector - two
areas that have shown scant sign of fatigue despite the recent slowdown in global growth. With the
worlds largest supply of cheap labor and a deep pool of college-educated engineers and scientists,
Chinas has become irresistible to foreign companies. In the past two decades, the country has sucked up
well over $400bn in foreign capital. Almost every large global company has a presence in China, and
many are now expanding. All this has propelled a sevenfold expansion in Chinas gross domestic product
in the past 20 years. And its leading another round of heady growth this year, with the economy expected
to expand by 7% to 8% according to the Chinese government...Foreign manufacturers like Compal
accounted for nearly half of the $266 billion in exports from China-based companies last year. And the
proportion could continue to increase in the years ahead, as more foreign companies take advantage of
Chinas lower costs and more of the countrys own 800million or so farmers quit their fields and look for
manufacturing jobs...as its economy matures. China's appetite for foreign commodities will only expand,
providing a boost to the global economy in a range of other areas. Natural resources are one example.
China, a net importer of oil for almost a decade now, is a major client of many Middle Eastern nations,
and much of that trade is routed through Singapore, benefiting the islands economy. Chinas demand for
Mideast crude isnt likely to abate anytime soon, but as its economy gallops forward and its own oil fields
dry up, Beijing wants to diversify its energy reliance. Thats good news for countries like Australia, which
this summer signed a $13bn deal to supply China with liquid natural gas, a cleaner substitute to oil.
Indonesia is now negotiating a slightly smaller liquid-natural-gas deal with C hina...O f course, the greatest
beneficiary of all this potential economic activity will be China and its citizens...
140. Chinas wining bid for hosting the World Expo in 2010 can be considered a third major event in front
of its future agendas, cf. Shanghai Expo victory boosts building boom by Richard McGregor in Shanghai
in Financial Times, p. 5, Wed. Dec. 4, 2002: Shanghai, Chinas commercial capital, has won a hard-
fought competition to host the 2010 Expo, a victory which complements the choice of Beijing to host the
Olympic Gam e two years earlier. In a city which has already substantially rebuilt itself over the last 10
years, the winning bid will underwrite a new construction boom in the riverside area allocated as the site.
The city estimates it will directly invest $3bn (1,9bn) in the site, with spinoffs for other businesses, such
as telecommunications and related construction projects worth anything from $15bn to $30bn, according
to city government documents. The last Expo, at Hanover, Germany, in 2000, lost 1.2bn ($1.19bn) after
attracting only 18m visitors, but Shanghai has approached the event as a brand-building exercise rather
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than a profit-making venture. It has promised to draw 70m Chinese and foreign visitors to its six month
long world fair, which it said would 'm ark an unprecedented scales in the history of the event....The city
beat off competition from Queretaro in Mexico, Wroclaw in Poland, Moscow, and Yeosu in South Korea to
stage the event, held once every five years and known formally as the International Worlds fair and
Exposition. Few of its rivals could match Shanghais resources. It invested millions to win the bid, even
taking out full page advertisements in international newspapers on the eve of the vote. Shanghai also
marshaled moral support for its bid from the heads of 35 multinational companies at a conference in the
city in November, including General Motors, Novartis and Coca-Cola...China bolstered support among
developing nations by promising to set aside $100m to help them exhibit at the Expo...
141. cf. China carries out an orderly shift of its leadership - A new generation rises - Hu Jintao is set to
take over as Party chief, but little policy change is seen by Erik Eckholm in The N ew York Times, A1, Fri.
Nov. 15, 2002: ...The countrys top priority remains building an advanced market economy, exemplified
by Chinas recent entry into the W TO , seen here as a risky but necessary step to force the economy to
become more competitive.
142. cf. Chinas efforts to lure investment prove fruitful with big Shell deal by Peter Wonacott in The Wall
Street Journal, A13, International," Mon. Nov. 4, 2002: ...C hinas racing economy and low-cost labor
have proved a powerful lure for multinationals, especially in recent months. As Beijing tried to comply with
its W T O promises, hopes are rising that the Chinese market will open wider, fueling domestic sales. In the
first nine months of 2002, following its W T O membership in December, Chinas pledged foreign
investment has rocketed to $68.4 bn, up 38.4% from a year ago. US technology firms Microsoft Corp. and
Motorola Corp. and Nissan Motor Co. have all jumped into the fray, pledging billions for new projects. The
Chinese government has eased their way, relaxing once cumbersome approval processes for big-ticket
projects. While more foreign competition will add to the woes of beleaguered state companies, the
investment brings capital and promises of new jobs. It also bolsters an image of a vibrant economy and a
Chinese government open for business as it heads into a sensitive leadership transition that will begin at
a Communist Party congress, which opens this w e e k ...
143. See such a proposal in a recent article calling for an historical search for root causes of the
contemporary world and the big ideas, cf. A free world - After Sept. 11, there were fears that the progress
towards liberalization and global trade seen in the past half-century would halt. But Martin Wolf says 2001
was not another 1914 by Martin Wolf in Financial Times, p. 10, Wed. Sept. 4, 2002 (emphasis mine): The
terrorists who attacked the US on September 11 were mortal enemies of the US. But the US is not just a
country, it is also a set of ideas. Among the ideas it has stood for over more than half a century is a liberal
world economy. One of the questions raised by September 11 was whether it marked the end of a second
era of global economic integration during the past 150 years. The answer, I suggest, remains no. W e do not
know our future. But we do know the past. In the late 19th century and early 20 century, the world economy
achieved a high degree of integration. Yet this integration went into reverse between 1914 and 1945. That
breakdown was the consequence of the combined force of ideas, interests, economic instability and
calamitous international relations. The question is whether these same four horsemen will return. First, the
20tn-century collapse coincided with the rise of anti-liberal ideas: militarism, imperialism, nationalism,
communism and fascism were embraced with enthusiasm. There are feint parallels in what David
Henderson, former chief economist of the Organization for Economic Co-operation and Development, has
called 'N ew Millennium Collectivists. But, for all their sound and fury, the anti-liberals of today are very
different from those of a century ago. They are rooted in no powerful social force, such as the organized
working class. They do not seek power but largely reject organized politics. They offer no alternative way of
running an economy. As John Lloyd makes clear in an illuminating recent pamphlet, they have a multitude of
often-contradictory objectives. Some of what protesters say - notably on the hypocrisy of the advanced
countries and the plight of the poor - is valid. But one cannot beat something with nothing. Protest alone is
unlikely to triumph. Meanwhile, the ideas of economists remain strongly in favor of integration. Some, such as
Dani Rodrik of Harvard University and Joseph Stiglitz, former chief economist of the World Bank, express
doubts over how and how far integration should proceed. But no significant economist argues that closing off
an economy makes sense. Doubts are strongest over the management of capital flows. Yet a high level of
integration on the real side of the economy, through trade and direct investment, is perfect compatible with
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some controls over capital movement. The second force causing the disintegration of the earlier globalization
was protectionist interests, notably in the US, which culminated in the calamitous Smoot-Hawley tariff of
1930. Happily, contemporary economic developments have largely tamed these interests. It is no accident
that protectionist interests are strongest in predominantly nationally owned and operated industries, such as
steel and agriculture. The rise of the internationally integrated multinational company has reduced the ability
(and willingness) of many producers to wrap themselves in national flags. Is a Toyota factory in the US less
or more American than a General Motors factory in China? How can one answer such a question? Modem
companies have global interests. This is what many protesters hate about them. The same is also true of
many of their most valued employees. A consequence of investment around the world and the concomitant
flows of intra-companv trade is the breakdown in the ability and willingness of companies to collaborate with
trade unions in the demand for protection. Similarly, inward direct investment and intra-industrv and intra-
companv trade have weakened traditional protectionist interests in developing countries. The decline in
employment in manufacturing and the rise in the portion of the electorate in retirement have reduced the
share of the population whose jobs are directly vulnerable to import competition. Consumers have also
become accustomed to a variety of foreign products. They may complain, as workers, about imports. But
they love the products of foreign companies. Concern about the decline in relative wages and employment
opportunities of the unskilled is widespread in hiah-income countries. But the political power of this group of
people is modest, particularly since they have become a falling proportion of an increasingly educated
population. Moreover, the general consensus of analysts is that this decline in opportunities for the unskilled
reflects changes in technology far more than trade. In addition, multilateral institutions and a web of
international commitments makes it far more difficult for protectionist interests to capture legislatures. China
has joined the W TO . Even the Bush administration, wedded to unilateralism, has never said the US should
simply ignore its obligations under the W TO. Economic instability was the third source of the earlier
breakdown. The decisive events in the collapse of the integrated economy of the late 19th and early 20th
centuries were the series of financial and exchange-rate crises that rolled across the world in the 1930s, ably
described by the Princeton University historian Harold James. Financial crises have come with depressing
frequency over the past two decades. A report from the World Bank published last year wrote of '112
episodes of systemic banking crises in 93 countries since the late 1970s. Japan is still struggling with the
aftermath of its 'bubble economy. The US has suffered its bubble as well, which is now painfully deflating,
revealing a sizeable amount of fraud and deception as it shrinks. All these are signs of stress. Yet the
outcome will not be another 1930s. Japan has avoided a depression. The US will surely succeed in that as
well, even if a period of disappointing growth lies ahead. The move to floating exchange rates has reduced
the risk of exchange-rate-cum-banking crises in emerging market economies (though, as Brazil shows, old-
fashioned fiscal crises can still occur). The woes inflicted upon Argentina by the collapse of its currency board
might better be viewed as the end of an era than as the beginning of a new one. It is also striking that, despite
such crises, no significant country has reversed the commitment to liberal trade or even to freedom from
exchange controls. The fourth cause of the breakdown of the last liberal world order was rivalries among
great powers. Today, however, the world has an undisputed hegemon. There is little chance of a war among
great powers in the near future, except perhaps between the US and China. Yet China is not now a strategic
rival of the US. All great powers have abandoned the atavistic notion that prosperity derives from territorial
gains plus plunder, rather than internal economic development plus peaceful exchange. In todays battle
against terrorism, all the worlds great powers are also on the same side. Some hear that terrorist outrages
on the scale of September 11 - or still worse ones - will end the commitment to open borders. Related fears
concern weapons of mass destruction in the hands of hostile despotic regimes. These are valid worries. If
countries had to be sure of the safety of every shipment or person that crossed their borders, much of todays
economic exchange and movement of people would become impossible. Yet that would hand the victory to
terrorists and their sponsors. At present, it does not appear that the worlds response is to close borders. The
decision to proceed with the Doha round of multilateral trade talks was an encouraging sign of that wise
determination. Global co-operation against terrorists is a more appropriate and effective route. September 11
was an attack on modernity by Islamic fascists. Safety will not now be achieved, in response, solely by
applying force abroad and building fortressed at home. The task, instead, is to combine the search for
security with a wider diffusion of the prosperity and hope offered only by a dynamic global market economy.
This may be hard to achieve. It remains the only same course.
735
144. cf. Wanted - the next big idea - If the world is to survive this century it must find a way to organize -
even to civilize - opposition to liberal democracy and to capitalism" by John Lloyd in Financial Times,
W eekend, p. I, Jan. 121 Jan. 13, 2002 (emphasis mine): Ideas -big ideas - are different from events. They
are produced by events and, in turn, assist in producing events. Communist regimes, for example, were
produced in part by Karl Marx's big idea that history had ended in the inevitably victory of socialism, an idea
whose spur in the real world was the rapid growth in the 19mcentury, of an industrial proletariat with nothing
to sell but labor power. Similarly, the idea that history had ended in a quite different wav - because all states
were tending towards liberal democracies with free markets - was among the most famous of the past two
decades. It was produced by the collapse of communism. Francis Fukuyama, contemplating the torrent of
events in the Soviet Union and in its satellite sates in Central and Eastern Europe in 1989. suddenly
understood that communism had lost its will and purpose. No other political-cum-ideoloqical system with
global pretensions now opposed liberal democracy. On this model of the big idea, changes - incremental and
slow, or rushing in a flood - destroy one large state of affairs and lay the basis for another, which the big idea
then describes and helps make room for. Since we now live globally, changes and ideas operate on an even
greater scale. And, since so many changes are happening and having such a wide impact, we are bound to
produce more big ideas soon...Under the prompting of Canadian chemist John Polanyi they drafted and
published a somber statement. Poverty and a sense of injustice, they wrote, had caused murderous
resentment, and thus if we permit the devastating power of modem weaponry to spread through this
combustible human landscape, we can invite a conflagration that will engulf both rich and poor. When the
astronomer royal and 110 Nobel Prize winners have such dark thoughts, it is time to be alarmed, and to
attempt to grasp fully the idea that we are living in what the sociologist Ulrich Beck has called 'the global risk
society. And to do something about it...Whether alone or among company, the necessity for humankind to
refashion itself for life beyond Earth will have a catastrophic effect on faiths that depend on a creation myth,
such as Christianity and Islam - or at least cause them to redefine, radically, the scope and reach of God.
These faiths have been the biggest of the big ideas that have organized our lives across continents for up to
two millennia. In many countries, the waning of organized religion has stimulated new ideas on guides for the
good - or moral - life. Yet religious faith still restrains us from remaking ourselves, and from fully realizing the
large idea, which is that we can be our own creations. The ability to engineer perfect, or near-perfect, human
beings through genetic manipulation is now at the point where it could become a widespread reality in the
advanced states. But religious faith in these states, even where it is residual such as in the UK, inhibits the
full-throated adoption of the technologies, out of a belief that it is, in the end, a desecration. Even the big idea
concerning the replacement of communism with the monopoly of liberal democracy looks less lustrous than it
did, largely because there was little in Fukuyamas writing that pointed to the greatest danger of liberal
democratic hegemony. That danger is that liberal democracy, shorn of a challenger with a sustainable world
view, such as socialism, instead faces many challengers who do not care to have a world view. Or at least
not one that would be recognized as such by liberal democrats - as socialism was, and Islam is not. W e are
learning that there is something worse than being faced with a force with a terrible world view - and that is
being faced by a force without one. Liberalism has become dominant, but uncertainly so. Since socialism is
no longer a practical possibility, liberalism finds itself confronted bv societies that seek to share the wealth
and freedoms of the west. But they have not evolved the mechanisms or institutions, or do not have the
patience, to begin the long slog through development and accumulation in order to make it work. The
developed world faces such societies in Afghanistan - but less dramatically in much of sub-Saharan Africa, in
large parts of Asia, and in Latin America. Martin Wolf wrote in the FT in November that we should think of a
stretch limousine driving through an urban ghetto. Inside is the post-industrial world of western Europe, North
America, Australasia, Japan and the emerging Pacific Rim. Outside are all the rest. The conundrum for
liberalism is that the only way it can see for all the rest to pull themselves out of the urban ghetto is for them
to become more like those in the limousine. But that means, sooner or latter, the export of these values
through institutions and mechanisms - usually ones that offer aid and loans to developing states in return for
a commitment by these states elites to the mechanisms best suited to make these societies more like the
west. And in so doing, it constantly narrows the effective base on which an alternative to liberalism can be
constructed. At the same time, as the philosopher Mary Midolev savs. 'we are now beginning to feel how
inadeouate is the attitude which assumes that individual freedom is the only unquestionable virtue.
Liberalism has won - and is unable to eniov its victory, so unsure is it of its own ability to solve the problems
of a globe whose finite, fragile Qualities have suddenly become so evident. While liberalism has won the
ideological battle, it has not vet won the moral one - it looks far too much like a convenient set of beliefs for a
736
wealthy world to do that. To prove itself, liberalism must address the pain, misery and suffering of millions in
the world: it must get out of the limousine and into the streets. When it does so. it will find it difficult to
convince electorates that this should be at the expense of their living standards. The mechanisms and
restraints of liberal democracies - the need to find votes - thus inhibit its universal spread. A big, all-
embracing idea will be needed to overcome that conundrum. If liberalism is uncertain but fundamentally
unchallenged, what of capitalism? It would seem to be in the same position: it is less loved than liberalism,
but eniovs as much of a monopoly - more even, since almost every state, including the world's largest,
China, has adopted it. while many, again including China, remain non-democratic. There simply is no idea,
large or small, that would seem able to replace the global economy's dependence on greed and calculation. It
has even been absorbed into a capitalist version of morality - it is seen as best able to relieve poverty,
encourage individual effort and sustain social and family life. Indeed, there is much evidence for this: there is
little evidence of anything else working as well over time. But it has the same problem as liberal democracy:
monopoly makes radicals and idealists ever more desperate to find alternatives to it - and where they cannot,
at least to give it a good fight. The 21st century saw, near its beginning, a foretaste of the horror that grows
from an opposition built on hatred, on a kind of fascism of the fanatically pious. What we need most of all is a
big idea to organize, even to civilize, opposition to liberal democracy and to capitalism. The opposing forces
of the 20m century - fascism/Nazism and communism, all speaking in the name of socialism - created
decades of mass murder, terror and desolation. A big idea that gets more people into the limo while
safeguarding the life, liberties and happiness of those already inside will be a great prize for our young
century: essential, indeed, to our seeing the end of it.
145. Yet so long as capitalist greed and calculation bring market monopoly, uncertainty, insecurity, and
fear to the crisis-torn world, questions of poverty and social injustice remain unanswered. And this could
push humanitarian thinkers to conceive of a more humanized and promising future. Particularly after
September 11, 2001, when the US under Bushs neo-conservative regime suffered from terrorist attacks,
humanitarian thinkers have greater eagerness than ever before to search bigger ideas that will enable
them to understand assorted problems caused by capitalism, fascism, communism, and terrorism of the
past centuries in order to avoid the deterioration of the present destitution, and disintegration that will
threaten this new Millennium.
146. Without such a breakthrough, a transition could lose its edge and even risk its survival. But if the
breakthrough is too sudden, surpassing the absorbent capacity of the existing institutions, the side effects
could become exponential and institutional barriers could multiply. That would make it harder for the
transition to reach sufficient resources or generate public consensus to rebuild the crucial institutions and
would increase the risk of transition failure. And that might trigger more pressures, tensions, and
cleavages among the assorted interest groups with political stakes in the future.
cf. Dotcom omnivore hahaha - Jeff Bezos is as surprised as everyone else at his metamorphosis from
New York banker to founder of Amazon, the online store. 'Successful entrepreneurs are both flexible and
stubborn simultaneously. The trick is knowing when to be one or the other. Andrew Davidson goes
beyond the brainy geek fagade by Andrew Davidson in Financial Times, p. Ill, Weekend, Oct. 12/Oct. 13,
2002: ...'...I think the essence of entrepreneurship is a strange combination of being flexible and
stubborn. Successful entrepreneurs are both, simultaneously - the trick is knowing when Successful
entrepreneurs are both flexible and stubborn simultaneously. The trick is knowing when to be flexible and
when stubborn...
147. cf. O f laws and men in The Economist, pp. 15-7, Survey: Asian Business, April 7th, 2001: ...As
guanxi economies grow and become more complex, however, the incremental costs of doing business
shoot up. W hat worked with a hundred clients, a dozen supplies, two creditors and one shareholder no
longer works with thousands of all of these. So there comes a point, Messrs Li reckon, when the average
cost of doing business in a guanxi-based system of governance exceeds that in rules-based systems.
When this happens, companies and countries that rely on quanxi can no longer compete. Market forces
initiate a transition to a rules-based system. This is probably the largest and riskiest step that countries
and companies ever have to take...In the early months of this year Chinas regulators were cracking
737
down so ruthlessly on insider trading in this domestic stockmarkets that the markets were thrown into
chaos and many investors, especially small ones, lost their savings."
The salience of Chinas institutional rationalization could be seen in its recent low-key approach and quiet
response to a series of international events affecting US-China relations. See a report of China remains
quiet on bugged US-made plane in The Wall Street Journal, A3, Mon. Jan. 21, 2002: Revelations that a
US-made plane supplied to the Chinese president came riddled with eavesdropping devices is
discomfiting China's leaders, but the low-key Chinese response so far suggests it wont upset efforts to
improve ties, or a planned summit next month...While such an incident could easily upset perennially
bumpy relations between the US and China, Beijing hasnt engaged in any public finger-pointing despite
the fact that it has known about the bugs for months. Chinese and foreign aviation-industry executives
said they learned about the bugged plane more than three months ago during routine contacts with
Chinese officials. 'This isnt an issue that just came up this w eek, said Boeing Co. spokeswoman Donna
M ikow...The public silence on a potentially explosive issue suggests that China is especially keen to
nurture good political relations with the US to underpin already robust economic ties. Relations have
steadily improved since their most recent nadir - a diplomatic standoff after a Chinese fighter jet and a
US reconnaissance plane collided in April. Both governments have used the Sept. 11 attacks and
Washington's war n terrorism to voice common cause. And preparations are proceeding for a Bush-Jiang
summit in Beijing starting Feb. 21. Beijing is taking it quietly now, hoping to use it as credit later, said a
Western diplomat familiar with the incident...
Also cf. Beijing draws line under bugs issues by Richard McGregor in Shanghai in Financial Times, p. 4,
Wed. Jan. 23, 2002: ...Sun Yuxi, the spokesman [of the Foreign Ministry]...said if anyone was bugging
China, it was highly unnecessary, as China was a 'peace-loving nation.... Also cf. Espionage? By the
US? China prefers to stay quiet" by Elisabeth Rosenthal in The N ew York Times, A5, Wed. Jan. 23, 2002:
Beijing, Jan. 22 - A Chinese government spokesman offered a muted reaction today to disclosures that
a presidential jet outfitted in the US had been crammed with listening devices, and his comments suggest
that China would not let the incident upset plans for the first state visit by President Bush next
m onth...The effort to play down an episode that many had predicted would lead to a diplomatic crisis
illustrates the depth o Chinas current commitment to cultivating better relations with the US...Cultivating
good relations with the US has become a paramount goal for Chinas leadership since Sept. 11. To a
large extent, the Bush administration has reciprocated. The two countries will insure that this incident has
no big effect, because they understand the importance of preserving their relationship, said Wang Yong,
a foreign policy expert at Beijing University. It would have had a bigger impact before Sept. 11, but I think
even then it would not have been huge. China is now concentrating on stability and developing its
economy, and for that it needs good relations with the U S . Chinas leaders have little to gain and much to
lose right now by publicly protesting - or even publicly acknowledging - any tampering with plane...
148. cf. Giovanni Arrighi and Ho-Fung Hung, 2002: Historical Capitalism East and West, Johns Hopkins
University. Seminar presentation presented for ASA annual conference, Section 216, Aug. 17, 2002.
149. This is particularly evident in the increasingly active role of the investment industry in China's
investments and stock markets, cf. Custodians are casting votes as they take on a more active role -
The investment institutions - and the custodians who hold investors shares in their safekeeping all over
the world and vote at annual general meetings on their clients behalf - are under increasing pressure to
adopt a serious approach to shareholding by Simon Targett in Financial Times, p. viii, Global custody 8
Fri. July 6, 2001.
150. cf. Puffing away - A nation of 1.3 billion waiting to be spun: Public relations in China in The
Economist, p. 51, Aug. 31st, 2002 (emphasis mine): The public-relations industry arrived in China in
1993, reckons Li Hong, the local boss of Fleishman-Hillard, the worlds second-largest PR agency. That
was the year when commercial advertising in print media was liberalized. It was also a time when
memories of the Tiananmen Square massacre had begun to fade - enough, at least, for bosses of foreign
multinationals to resume kowtowing in Beijing. Hardly a week went by without a new joint venture or
product launch that needed professional hype. Since then, China has been perhaps the fastest-growing
738
PR market in the world. PR revenues worldwide fell by 3% last year; but they rose by 33% in China that
now has 10,000 PR people, according to a trade association - but every big international agency is
investing. In June, Ogilvy, part of W PP, a marketing giant, bought H-Line, a leading local agency, to
become the largest PR firm in China. Multinationals investing in China still account for most of the
demand for PR services, and Chinas entry into the W T O helps. Not only are more foreigners hoping to
familiarize Chinese consumers with their brands, from Nokias to BMWs, and hiring PR people to get them
mentioned in the local press. They are also using PR firms for their 'deep localization, says Matthew
Anderson, Ogilvys president in Asia. This includes advice on how to communicate with employees and
even on finding talent. The biggest development, however, is soaring demand for PR among Chinese
companies. For much of China (mostly state-owned) corporate sector, PR remains an outlandish concept.
Increasingly, however, Chinese firms are courting foreign capital. Companies such as Asialnfo, a provider
of Internet infrastructure that was the first Chinese company to list on Americas Nasdaq stockmarket,
happily pay for hand-holding from international PR firms for their first contacts with investors. Others, such
as Haier, the leading Chinese white-goods maker, have international ambitions for their brands and are
hiring PR firms to seek out consumers. Others still, such as the thousands of textile factories that are
springing up as rich-country import quotas fade out, hire agencies to reach western clothes retailers. And
some of Chinas private-sector firms become clients hoping to be introduced to influential party cadres:
quite a few PR people, including Mr. Li, are former government officials. Small wonder that Fleishman-
Hillard reckons its present customer breakdown - 20% Chinese and 80% multinational - will reverse in a
matter of years.
151. Chinas banking system and financial institutions have acted as rational actors in addressing the
problems of bad loans through new regulations and restructuring of investment and trust companies, cf.
Chinas central bank acts to curb bad loans by Ho Swee Lin in Beijing in Financial Times, p. 1, Fri., Feb.
25, 2000: "Chinas central bank acted yesterday to prevent a worsening bad debt situation by requiring all
financial institutions and corporate borrowers to submit credit information on borrowers to the banks
electronic database. The move, aimed at improving risk management, is part of Chinas plans to overhaul
its inefficient financial system. It comes more than a year after the collapse of Guangdong International
Trust & Investment Corporation (Gitic), the mein investment arm of the provincial government of
Guangdong, after racking up debts exceeding $ 5 tn . The countrys state banks are believed to have bad
loans of about $250bn. The government has already ordered a nationwide restructuring of investment
and trust companies, which were also in financial difficulties. By having details of lenders and borrowers
in its central database, the Peoples Bank of China, the central bank, hopes to be able to prevent
companies from using an asset as collateral for more than one loan. Financial institutions would be able
to access the database to investigate the credit worthiness of prospective borrowers...Andy Xie, chief
China economist at Morgan Stanley Dean Witter, said the latest rule was only a preventive measure and
not sufficient to control credit risks. He urged improvements on corporate disclosure, instead, as a better
way ofcontrolling risks. 'Most things in China are about form; not substance,' he said. 'The new rule does
not really do a lot in terms of improving poor credit control. The new regulations require all financial
institutions in China - banks, trust companies, credit cooperatives and financial leasing companies - to
register. New corporate borrowers will be required to submit financial records and details of past
borrowings to the central bank, which will issue a 'loan card as proof of credit worthiness. At present, the
banks central database has records of Rmb6200bn ($750bn) of borrowings, covering 70% of the national
total. The current records involve banks and financial companies in 301 Chinese cities, though China
plans to cover the entire country by the end of the year.
152. This upgrading in the formality of China's financial and legal procedures can be seen in the state
governments determination to tackle corruption" in its own financial institutions, corruption that would
corrode the state power and regulation, by subjecting the corporate sector to more exacting standards."
cf. "China uncovers falsified accounts at state groups" by James Kynge in Beijing in Financial Times, p. 1,
Fri. Dec. 2 4 ,1 9 9 9 : China's finance ministry has uncovered widespread accounting abuses among state-
owned enterprises, the second revelation this month of how deeply corruption is corroding the exercise of
state power. An auditing probe of 100 state companies showed that 81 had falsified their accounts,
according to a finance ministry statement yesterday. O f these, 69 reported Rmb2.75bn ($332m ) in profits
that did not exist. Economists said that if the sample was representative of the 300,000 strong state
739
sector the problem of inflated profits has rendered official statistics virtually meaningless. Net profits of the
sector in 1998 have been put at Rmb40bn. The main incentive to exaggerate profits is the fact that local
political leaders are assessed partly on the performance of the state industries in their city or region.
Reporting profits can also help in securing loans as state banks have begun to tie lending more to
commercial criteria. Exaggeration of profits has not been the only accounting abuse at state companies.
Auditors also found cases of off-book business, unlawful money lending, false reports of assets and
liabilities and the improper use of funds raised from share issues. The revelations may provide pause for
thought for foreign investors considering buying some of the $15bn in stock to be offered overseas by
China's three biggest oil companies, the China National Petroleum Corp (CNPC), the China National
Offshore Oil Corporation (CNOOC) and Sinopec, next year. None of these shows an inclination toward
transparency, routinely refusing media interviews and denying lawyers preparing for the flotation access to
key accounts, said accountants working on the CNOOC and CNPC flotation plans. The finance ministrys
report comes after the National Audit Office revealed this month accounting abuses involving Rmb400bn at
two of China's 'big fouri state banks. The audits under way signal government determination to tackle
corruption and subject the corporate sector to more exacting standards.
153. See a recent report that Chinas banking institutions have now performed effectively under the heavy
monitoring of its legal system. It shows that Chinas transition through reforms is en route toward the rule
of law. cf. Bank of China fraud uncovered by auditors by Richard McGregor in Financial Times, p. 5,
Thurs. Jan. 17, 2001: ...China's national audit office has uncovered 22 serious case of fraud involving
Rmn2.7bn (227m) in its regular review of the books of the Bank of China, one of the countrys four major
banks...The audit results were announced on the offices website...The audit office regularly audits state
companies and also the major banks. This year, it says it will be auditing the China Construction Bank. The
audit will focus on the use by the bank of special Treasury bond issues since 1998. Li Jinhua, head of the
audit office, said the review of the Bank of China had concluded, after looking at seven provincial branches
and more than 150 smaller offices, that the banks asset quality was low and that spending was too high.
T h e main problem is illegal loans, operation outside of the banks main account and illegal letters of credit
and bank drafting, Mr. Lis statement on the website said...Mr. Li, the auditor, said his office was 'keeping
an eye on violations of the law and any waste brought on by poor decision-making and heads of state-
owned companies.
Also cf. China gives banks green light to issue bonds by James Kynge in Financial Times, p. 13, Thurs.
Jan. 17, 2001: China announced plans yesterday to allow its 'big four1 state banks to issue long-terms
bonds and seek stock market listings to strengthen themselves against competition form smaller Chinese
banks and an increasing number of foreign entrants. The announcement by state television comes before a
government conference on financial policy scheduled for early Feb. that should set the agenda for the next
five years of financial industry reform. At present banks books are in various states of disarray. The Bank of
China is the subject of an investigation into malpractice and the Bank of Construction is facing a nationwide
state audit this year. Non-performing loans at the 'big four1 are officially put at 25.37% but independent
analysts believe the true figure is higher - perhaps about 50%. Dai Xianglong, governor of the Peoples
Bank of China, the central bank, told the Financial Times last September that three of the big four were
expected to attain the international recognized capital adequacy ratios of 8% by the end of this year -
suggesting that the first bond issuances could be this year. Permission for the Bank of China, Bank of
Construction, Industrial and Commercial Bank of China and the Agricultural Bank to issue long-term bonds
will help them boost their capital adequacy ratios...Once the big four have strengthened their balance
sheets and capital bases, they may look to list, analysts said. This may involve splitting up the banks - 70%
of Chinese banking assets - into entities with good asset quality for flotation."
154. The substantive institutional changes are derived not only from those institutional reforms but also
from mutations, organizational forms, and hierarchical structures that have been critical for Chinas
economic governance. Those institutional changes have induced organizational innovations and their
diffusion, e.g., the spawning of hybrid economic sectors, the spread of M-form rational hierarchy, the
stretching of new forms of regulation and legislation, based on the rule of law that would hasten such
activities as professional credentialing and further financial and trade intermediaries.
740
Experts recently provided four dimensions to examine the direction and trend of China's development: 1. the
establishment of the rule of law, with the bounds of which enterprises compete for economic efficiency; 2.
further relaxation in price management to promote rational allocation of resources; 3. substantive investment
in physical and social infrastructure, such as transportation, energy, and education; 4. the establishment of a
taxation system and a social welfare program appropriate to the existing economic conditions, cf. World
Journal Daily, trans. from Chinese language, A2, Sat. Oct. 2 ,1 9 9 9
155. cf. A more uncertain utopia - Our vision of the future is founded on the constant quest for change by
Charles Leadbeater in Financial Times, p. 9, Thurs. Dec. 29, 2001: ...in spite of these downsides, the great
difference between our lives and the world our medieval ancestors inhabited is that we live in a society
driven by the systematic search for change and innovation, the creation and distribution of new knowledge.
That allows us to chart different futures. Constant innovation makes life unsettling. But perhaps that is the
price we have to pay for having a sense of hope for the future that requires neither religious nor ideological
fanaticism. In liberal, open and creative societies, uncertainty and hope have to go together."
156. Because Only the law can set such limits (see the above excerpt from the movie Danton),
protecting and assuring each citizens rights and well-beings. The transition would inexorably adopt a
rational bureaucratic structure, providing written rules, formal legislature, and institutional signals.
cf. In praise of rules" in The Economist, p. 3, Survey: Asian Business," April 7th, 2001: Until two years
ago, no one here had heard of conflict of interest' or fiduciary duty, says a top Chinese securities
regulator. Having spent years in America studying law, he knows how the meaning of fiduciary has
evolved over centuries of legal precedent in common-law countries such as Britain and America; but how
is he supposed to explain it to his countrymen? For now, he has translated it into the Chinese characters
for principle of honesty and trust, but he still smiles when he thinks about it. 'W hat on earth does that
mean? he asks. 'Being a good person? Still, fiduciary duty, he continues, is a building block of good
corporate governance, and good corporate governance is what companies in his country are going to
have. So he has drafted a chapter of definitions, and is forcing bosses to read it. He takes the same
approach with other exotic ideas such as independent board of directors, auditing and remuneration
committees, class-action lawsuits and insider trading...His organization punishes 700 companies a year
for falling foul of the rules; the chairman of one, found to have defrauded shareholders, was executed. In
the developing countries of East Asia today, there are a few - not many - people who, like that Chinese
regulator, have seen the light. The light in question is not necessarily that of democracy or individual
freedom as such, at least not yet. Instead, it is that of protecting the rights of individuals and minorities in
one particular area of life: business...If investors are confident that their rights are well protected, they
open their wallets; if they fear that majority shareholders, managers or governments might fleece them,
they hold back...China is a special case, for two reasons. First, the potential rewards are higher: China is
the largest untapped market in the world. And second, investors and analysts claim to recognize in China
a political will to change that is unmatched elsewhere in the region. Tony Perkins, at the Beijing office of
McKinsey, a consultancy, says the main effect of the crisis in South-East Asia and South Korea may have
been that it scared China into getting its priorities right. When Jiang Zemin, Chinas president, recently
received Sandy Weill, the boss of Citigroup, an American bank, he is said to have grilled his visitor on the
minutiae of corporate governance. By contrast, Mahathir Mohamad, Malaysias prime minister continues
to rant against western investors."
157. For more details of the ideas behind such institutional mutations or reforms, the readers may refer to
the contrast between the economic system in ancient China and its Western modern counterpart in The
Economist, p. 12, Dec. 31st, 1999 (emphasis and brackets mine): ...in China the state long continued to
play a central, dominating economic role - and innovators were usually civil servants, with no stake of
their own in growth. Arbitrary seizure remained common in the Asian and Islamic worlds; merchants, in
effect, were forbidden to get too rich. Yet bv replacing arbitrary levies with taxes. Western rulers managed
to raise more money. As their economies grew, so did the tax base. Law-governed taxation proved to be
a better fiscal technology than arbitrary seizure...A host of other innovations followed, extending and
refining that fundamental right of property: laws of contract, patents, company law and so on. With time.
these allowed a flourishing of many [economic organizations! different in size, ownership and method of
741
organization. This organizational diversity is the hallmark of the advanced western economies. Here was
vet another form of pluralism: iust as governments competed, and producers or traders competed, so did
different forms of economic organization. The result was a social framework more effective than any other
in history at fostering technological advance.
158. cf. James Scotts 1998 arguments regarding the importance of pluralism. In this sense, transitions
ought to include those institutional conditions prior to the planned economies (cf. p. 348): "No Taylorist
factory can sustain production without the unplanned improvisations of an experienced workforce...just as
the monocropped, same-age forest represents an impoverished and unsustainable ecosystem, so the
high-modernist urban complex represents an impoverished and unsustainable social system. Human
resistance to the more severe forms of social straitjacketing prevents monotonic schemes of centralized
rationality from ever being realized....The cookie-cutter design principles behind the layout of the Soviet
collective farm,...were designed...to facilitate the central administration of production and the control of
public life." Ibid. p. 349 (emphasis mine): "That authoritarian social engineering failed to create a world
after its own image should not blind us to the fact that it did, at the very least, damage many of the earlier
structures of mutuality and practice that were essential to metis. The Soviet kolhhoz hardly lived up to its
expectations, but by training its workforce more like factory hands than farmers, it did destroy many of the
agricultural skills the peasantry had possessed on the eve of collectivization." Ibid, "...high-modernist
designs for life and production tend to diminish the skills, agility, initiative, and morale of their intended
beneficiaries. They bring about a mild form of this institutional neurosis.Jn the utilitarian terms that many
of their partisans would recognize, these designs tend to reduce the 'human capital' of the workforce.
Complex, diverse, animated environments contribute...to producing a resilient, flexible, adept population
that has more experience in confronting novel challenges and taking initiative. Narrow, planned
environments, by contrast, foster a less skilled, less innovative, less resourceful population. This
population, once created, would ironically have been exactly the kind of human material that would in fact
have needed close supervision from above. In other words, the logic of social engineering on this scale
was to produce the sort of subjects that its plans had assumed at the outset."
159. As I argued in Chapter 2, since Chinas transition started from its previously planning economy
under the mode of quasi-socialism, its marketization would be prone to be a quasi-market economy
that differed from a conventional market economy.
160. cf. Globalization, alive and well by Thomas L. Friedman in The New York Times, p. 13, Sun. Sept. 23,
2002: ...the two biggest countries in the world, India and China - who represent one-third of humanity -
have....decided that opening their economies to trade in goods and services is the best way to lift their
people out of abject poverty and are now focused simply on how to globalize in the most stable manner.
Some prefer to go faster, and some prefer to phase out currency controls and subsidies gradually, but the
debate about the direction they need to go is over. 'Globalization fatigue is still very much in evidence in
Europe and America, while in places like China and India, you find a great desire for participation in the
economic expansion processes, said Jairam Ramesh, the Indian Congress Partys top economic adviser.
'...E ven those who are suspicious now want to find a way to participate, but in a way that manages the risks
and the pace. So w ere finding ways to globalize, to do it our own way. It may mean a little slower growth to
manage the social stability, but so be it...I just spent a week in Germany and had to listen to all these
people there telling me how globalization is destroying India and adding to poverty, and I just said to them,
'Look, if you want to argue about ideology, we can do that, but on the level of facts, youre just wrong. That
truth is most striking in Bangalore, Indias Silicon Valley, where hundreds of thousands of young Indians,
most from lower-middle-class families, suddenly have social mobility, motor scooters and apartments after
going to technical colleges and joining the Indian software and engineering firms providing back-room
support and research for the worlds biggest firms - thanks to globalization. Bangalore officials say each
tech job produces 6.5 support jobs, in construction and services. 'Information technology has made
millionaires out of ordinary people [in India] because of their brainpower alone - not caste, not land, not
heredity, said Sanjay Baru, editor of Indias Financial Express. 'India is just beginning to realize that this
process of globalization is one where we have an inherent advantage. Taking advantage of globalization to
develop the Indian I.T. industry has been 'a huge win in terms of foreign exchange [and in] self-confidence,
added Nandan Nilekani, chief executive of infosys, the Indian software giant. 'S o many Indians come and
742
say to me that 'when I walk through immigration at J.F.K. or Heathrow, the immigration guys look at me with
respect now. The image of India changed from a third-world country of snake charmers and rope tricks to
the software brainy guys. Do the majority of Indians still live in poor villages? O f course. Do we still need to
make globalization more fair by compelling the rich Western countries to open their markets more to those
things that the poor countries are best able to sell: food and textiles? You bet...Two simple truths got lost:
One, globalization has its upsides and downsides, but countries that come at it with the right institutions and
governance can get the best out of it and cushion the worst. Two, countries that are globalizing sensibly but
steadily are also the ones that are becoming political more open, with more opportunities for their people,
and with a young generation more interested in joining the world system than blowing it up.
161. cf. Europes New Capitalism in The Economist, p. 71, Feb. 12th, 2000. My understanding of Chinas
globalization is consistent with Charles Tilly (1995) and Chase-Dunn (2002)s definition of globalization, cf.
Christopher Chase-Dunn et al. 2002: ...Charles Tilly (1995: 1-2) proposes a...definition of globalization
as 'an increase in the geographic range of locally consequential social interactions, especially when that
increase stretches a significant proportion of all interactions across international or intercontinental
limits....Globalization in the structural sense is increasing integration and interdependence.
743
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INFORMATION TO USERS

The quality o f this reproduction is dependent upon the quality o f the

and photographs, print bleedthrough, substandard margins, and improper

Oversize materials (e.g., maps, drawings, charts) are reproduced by

ProQuest Information and Learning

Stanley Zhao-xiong Yang

A dissertation submitted in partial fulfillment of the

requirements for the degree o f

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submitted to the Graduate School of the

S t a n l e y Z hao-X iong Yang

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Approval Signatures of Dissertation Committee

Signature, Dean of Graduate School

PRC - People's Republic of China

Centennial Chronicle of China, 1900-2000

World Depression 1927: Founding of PLA

1945: Surrender of Japan

1958: Great Leap Forward

1960 1959-61: Three Years Severe Famine

1970 1972: Nixons Visit to China

1978: Start of Chinas Economic Reform

1980 1978-85: Reform Priority of Economic Efficiency

1979: Introduction of Rural Household Responsibility System

1985: Start of Overall Institutional Reforms

Apr. 1348 China becomes signatory of the GATT.

Sept. 1949 CCP takes power in Beijing.

Mar. 1950 Taiwan announces withdrawal from GATT.

1957 CCP launches a campaign of anti-rightest intellectuals.

1966-1976 Cultural Revolution.

1976 Gang of Four arrested, China begins its new regime.

1978 China embarks on transition and reform.

July 1989 Chinese students protest in Tiananmen Square.

1991 FSU and FEE collapse.

Mar. 1994 China asks to join WTO.

Dec. 1994 China fails to gain GATT entry.

July 1995 China receives WTO observer status

Apr. 1998 First EU/China summit.

June 1998 US President Clinton visits China.

Sept. 1999 US and China resume bilateral WTO negotiations.

Nov. 1999 China-US reach deal on WTO terms.

Jan. 2, 2002 China officially becomes a WTO member.

Chapter 1: Introduction - Analyzing China's Transition 1

1.1 China prior to its transition

1.2 Chinas economic growth during its transition: 1978-2000

1.3 Structure of this study

Chapter 2: Theories and Models of Chinas Transition 27

2.11 Theories of state socialist economies in the 1950s and 1960s

2.2 Nee: Chinas hierarchy-market dilemma

2.21 Nees 1992 empirical thesis on China's hybrid economy

2.31 Boisot and Childs description of Chinas transition

2.4 Qian and Xu: Chinas M-form hierarchy in transition

2.41 Qian and Xus comparative study of the organizational structures in

2.5 A brief comment on institutional models of Chinas transition

Chapter 3: Criticisms of the Three Institutional Models 156

3.1 A brief review of the three institutional models

3.11 Summary of the three institutional models

3.21 Limitations of Nees model

3.3 Summary of the shortcomings of the three institutional models

Chapter 4: Research Methodology and Assumptions Regarding Transitions 247

96 97 '98 '99* '00 '01 96 '97 98 '99* '00 '01