Jon Elster goes to China

With an American friend I recently spent two weeks travelling in China at the invitation of the Chinese Academy of Social Sciences. Besides lecturing, our main purpose was to understand the economic reforms in Chinese industry. The three cities we visited, Changzhou, Shanghai and Wenzhou, offer three different models of reform. The first two are experimenting with more independence for state and collective enterprises, whereas in Wenzhou private entrepreneurs and capitalism are emerging as the vehicle of change. For the purpose of grasping what is happening in China, the visit was like scratching the surface of the visible tip of an iceberg. We were not able to see much, and our understanding of what we saw was no doubt limited, distorted and superficial. Yet the scale of (intentional) reform and (unintended) change is such that even untrained observers like ourselves could perceive them in rough outline, especially since the Chinese scholars we met helped us sort out many initial confusions.

A dominant impression is that the Chinese do not know what they are doing. First, the leaders do not know where they want to go. One economist we met said that in his opinion the end-state of the reform process was capitalism with high progressive taxation. Others said that the goal was some combination of a market economy and socialism, but none were able to specify the exact mix of ingredients. Only this year, the party leaders have changed their minds twice concerning the basic goals of the reforms. At the beginning, they asserted that the new contract system for state enterprises was merely a transitional stage on the road to a market economy. Then they said that the contract system was the ‘goal model’. Then they changed their minds again and reasserted the transitional view.

Even if the leaders knew where they wanted to go, they would not know how to get there. Economic theory has nothing to say about the transition from communism to capitalism, nor is there any precedent from which they can learn. The official metaphor for the reforms is ‘feeling the stones with one’s feet in crossing the river’. The leaders, as they say themselves, think of the reform process as a gigantic experiment, constantly subject to retreat and revision. Given the lack of firmly-grounded theory, this attitude is probably inevitable. Yet it also threatens to undermine the reform process itself, by inducing a very short time horizon in the economic agents.

Finally, nobody knows what will be the outcome of the reforms that are actually being undertaken. Once again, economic theory has nothing to say about the short and medium-term effects of changes in ownership structure or price-setting mechanisms; and once again, there are no precedents from which to learn. The economics of planning and the economics of market economies are well understood: mixed systems are not. Equilibrium properties of economic systems are well understood: out-of-equilibrium effects are not. In consequence, it is quite possible that the elements of market economy now being introduced will make things worse rather than better.

Post-1949 developments in China can be divided into three periods: golden age, turbulence and reform. The golden age, which ended around 1956, can be compared to the period of national reconstruction in many European countries after World War Two. There was a spirit of national unity, uncorroded by either self-interest or group interest. In particular, the corruption which has since become a serious problem in China was largely absent. Poverty, prostitution and drugs were eliminated. At China’s low level of economic development, the Soviet-style central planning yielded rapid improvements without too much waste and inefficiency.

The period of turbulence included the Hundred Flowers period and the subsequent crackdown on intellectuals, the Great Leap Forward and the subsequent famine, and above all, the ‘ten terrible years’ of the Cultural Revolution. This period left two lasting legacies. First, it created a deeply-held and widely-shared scepticism about policy announcements. The zig-zag policies followed during those years, and the repeated crackdowns on those who had taken the previous policy literally, made people wary of speaking their minds and of using the opportunities that were offered to them. This way of thinking in the future perfect tense rather than in the present has been reinforced by the fact that Chinese law does not exclude retroactive legislation.

The second legacy of the Cultural Revolution is the low work morale. According to Andrew Walder, in Communist Neo-Traditionalism, this period saw ‘the emergence of indulgent patterns of authority’ in the workplace. ‘Out of a mixture of indifference, fear, and considerable demoralisation of their own, and knowing that they could not attack the source of the problems by raising wages or restoring prohibited bonuses,’ he says, managers ‘did little to enforce work discipline’. These attitudes still survive. Although it is doubtful whether workers believe in the collectivist ideology, they use it as a weapon against managerial efforts to extract more labour from them.

The third period is the reform movement from 1978 to the present. The reforms began in agriculture, where the re-introduction of private farming was immediately and strikingly successful. Industrial reform presented an immensely more complicated problem. One of the difficulties stems from the agricultural success story, which created unrealistic expectations about the pace of progress in industry. More important were the intrinsic economic and political problems, which created stop-go patterns and thus contributed to the general climate of uncertainty.

Today, there are five main types of industrial enterprise.

1. State enterprises are directly under the control of an industrial bureau, but need not be directly under the central government. In Shanghai, for example, state enterprises have contracts with the city government, which in turn has a contract with the central government. The core of the contract specifies the amount of profit to be handed over to the Government, usually calculated as a percentage of realised total profits in the previous year or years. In addition, the contract might specify the total wage fund; the part of the output that is to be exported; the expected rate of productivity increase; the development of new products; the proportion of retained profits to be allocated to investment, bonuses and welfare benefits (usually 40-30-30). Today, the contract rarely specifies physical quotas to be realised. These enterprises sell most of their production at prices which are set by the state, although they are increasingly allowed to sell part of their products at (more or less) free-market prices. Workers have low wages, but full job security (see below) and extensive welfare benefits.

2. Collective enterprises proper are owned by a corporate entity, which can be a neighbourhood (e.g. a street committee), a commune or brigade, a local government or a state enterprise. Their products are sold at market prices. Workers and managers have higher incomes than in the state industries, but less security and fewer benefits.

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