From Federalism, Chinese Style to Privatization, C

TheauthorsgratefullyacknowledgeDavidD.Li,RamonMyers,JeanOi,MichaelOksenberg,andtheseminar1participantsatStanfordforhelpfulcomments,Li-AnZhouforhisresearchassistance,andLisaMcIntosh-Sundstromforhereditorialassistance.FromFederalism,ChineseStyle,toPrivatization,ChineseStyle1YuanzhengCaoInstituteofEconomicSystemReformStateCommissionforRestructuringtheEconomicSystemsBeijing,[e-mail][e-mail]:December,1997AbstractIn1994Chinabeganaprofoundreformofitsstate-ownedenterprises.Wefirstdescribeandcharacterizethisprogressintwoareas:privatizationofsmallstate-ownedenterprisesatthecountylevelandmasslayoffsofexcessstateworkersatthecitylevel.Localgovernmentshaveinitiatedthesereforms,whichareproceedingineconomicallyandpoliticallysensibleways.Wethenarguethatprivatization,Chinesestyle,restsonanadequateeconomicandpoliticalfoundation--federalism,Chinesestyle.WesuggestarangeofincentivesthatpropellocalgovernmentstowardSOEreform,includingtheirharderbudgetconstraintsandincreasedcompetitionfromthenon-statesector.Inthissense,federalism,Chinesestyle,hasinducedprivatization,Chinesestyle.KeyWords:Privatization,Restructuring,Federalism,LocalGovernments,ChinaIn1993,exceptforfewjointventuresandjoint-stockcompanies,firmsinChinahadoneofthethreetypesof1ownership:state-ownedenterprises(SOEs);collectiveenterprises(includingurbancollectivesandruralcollectives;thelatterarealsoknownasTownship-VillageEnterprises,orTVEs);andprivateenterprises(includingforeignfirms).Thelattertwotogetherarereferredtoasnon-state-ownershipoffirmswhilethefirsttwotogetherarereferredtoaspublic-ownershipoffirms.SOEsareallownedbythecentralgovernment,buttheyaresupervisedbythecentral,provincial(includingthreeprovincial-levelcities),city,andcountygovernments.(Althoughsomecountiesrecentlyhavebeenrenamedascities,theiradministrativestatusremainsascounties,therefore,inthispaperwecontinuetocallthemcounties).MostSOEsaresupervisedbythecentral,city,andcountygovernments,andafewbyprovincialgovernments(excludingthethreeprovincial-levelcities).Townshipisonelevelbelowcountyandvillageisonelevelbelowtownship;neitherofthemsuperviseSOEs.Inthispaper,provincial,city,andcountygovernmentsarereferredtoaslocalgovernments.FromFederalism,ChineseStyle,toPrivatization,ChineseStyleYuanzhengCao,YingyiQian,andBarryR.Weingast1.IntroductionHavingexperienceddouble-digitgrowthfornearlytwodecades,China'ssuccessintheeconomicreformiswidelyknown.Beginningwithagrarianreforminthelate1970sandproceedingtomarketreformandopennessinthe1980sandespeciallythe1990s,ChinahasmadegreatstridesintransformingitseconomyfromtheMaoistera.By1993,growthofthenon-statesectorhadtransformedChina'seconomy,withoutclosinganystate-ownedenterprises(SOEs).Between1978and1993,theshareofSOEemploymentwasdownfrom75%1tolessthan60%intheurbanareasandfrom60%toabout30%withtheinclusionofnon-farmemploymentintheruralareas.Duringthesameperiod,thestateshareofindustrialoutputdeclinedfrom78%to43%(ChinaStatisticalYearbook,1994).Yet,manyscholarsqualifytheirevaluationofChina'seconomicreformbypointingtothehugeproblemremainingforSOEs(Qian,1996;Li,1997;WorldBank,1997).Bytheearly1990sithadbecomeevidentthatthelackoffundamentalSOEreformhadseriouslyunderminedChina'sdevelopment.In1994,Chinahadabout300,000SOEs(including100,000inindustry)withabout75millionstateemployees(including43millioninindustry).TheseSOEscontinuetoconsumeagreatportionofbankcreditandotherresources;mosthaveexcessemployment;andclosetohalfarelossmakers.SOEreformhasprovedathornyprobleminEasternEuropeandtheformerSovietUnioninthe1990s,andtheseformersocialiststatesareonlymovingslowlyoutofthewoods.TherearestrongreasonstobeconcernedwithwhetherChinacansolveitsSOEproblem.Cao,Qian,andWeingast2Weneedtoclarifyouruseofthetermsprivatizationandprivateownership.TheChinesedonotusetheterm2privatization(siyouhua),relyinginsteadonseveralotherterms:(i)zhuanzhi,orchangeofownership;(ii)suoyouzhigaizao,orownershiptransformation;and(iii)gufenzhigaizao,ortransformationofownershiptoajoint-stock/shareholdingsystem.(Similarly,theChineseoftenusenon-publicownership(feigongyou)asasubstituteforprivateownership(siyou).)Eachofthesetermsmeansachangeofownershipfromstateorcollectiveownershiptovariousformsofnon-stateandnon-collectiveownership.Thelattercanentailownershipbyanindividual,bymanyindividuals,orbygroupsofindividualstogetherwithsomeinstitutions;itcanalsoentailotherhybridormixedownershipforms.Becausetheessentialfeatureofthisownershipreformistomoveawayfromstateandcollectiveownership,ouruseofprivatizationisconsistentwiththatintheliteratureonthetransitioneconomiesinEasternEuropeandtheformerSovietUnion.AlthoughprivatizationofurbancollectivesandTVEsisalsoon-goinginChina,thispaperfocusesonSOEs.Thethirdareareformcontainsmoredifficulteconomicandpoliticalproblemsfacingthecentralgovernment.Some3ofthereformpractice(suchasmergerandconglomeration)maynotevenbeintherightdirection