BOOK REVIEWS

Jane Duckett: The Entrepreneurial State in China

Jane Duckett’s book is ambitious. On the basis of a survey carried out between 1992 and 1993 in the administration in charge of real estate and commerce in the city of Tianjin, it sets out to criticise the neo-classical theses of the new political economy (Buchanan, Bhagwatti, Bennett, etc...) on the role of the state in the economy of the developing countries and in the countries in transition of the former socialist block.

Indeed in the introduction the author puts her finger on an important problem in economic literature. The analyses offered by these dominant trends in economics lead to an overly narrow vision of the reality of economic development, and the effects as far as economic policy is concerned come down to a quasi religious orthodoxy, which preaches a minimal presence of the state in the economy. When it comes to the economies of the countries in transition, the supporters of the neo-classical school and of the new political economy maintain that the bureaucracies systematically slow the implementation of reforms and seek to establish secure incomes, which are detrimental to economic development and to society. Only a minimal presence of the state, coupled with the massive privatisation of the majority of the activities for which the administration was responsible during the socialist period, are likely, in their opinion, to avoid these problems. These theoretical positions have very largely inspired the “shock therapy” applied in the majority of Eastern European countries and in the former Soviet Union.

Jane Duckett challenges this vision, through the example of the Chinese bureaucracy. Using the example of the administration in charge of real estate and commerce in the city of Tianjin, the author shows to the contrary that the bureaucracy has facilitated the development of reforms. By setting up subsidiary companies operating like private enterprises, the offices of these two administrations have, in her view, speeded up the adaptation of the bureaucracy to a market economy. These subsidiary companies have first of all made possible the absorption of some of the superfluous employees in the original administrations. But they have also, through the profits from their activities, some of which are redistributed to the original bureaucracies, made possible an increase in the resources of the administration, allowing it to increase and improve the services it provides to the community. Thus Jane Duckett puts forward the idea of a model of an enterpreneurial state, which in her view, has become widespread, with the tacit accord of the central government, in most local administrations since the beginning of the 1990s. Nevertheless, she distinguishes her model from that put forward by other specialists like Marc Blecher or Jean Oi who have researched the role of the Chinese state in economic development, and who considered the administration as a whole which favoured the promotion of businesses in the country towns, hence the utilisation by these authors of the concept of a corporatist or “developmentalist” state. The author has sought to differentiate her model from these approaches while admitting that they follow the same lines of a different vision from the neo-classical approach to the state in the economies in transition. She emphasises the fact that the bureaucracy is far from homogenous and that in a municipal administration like Tianjin’s, each office has taken different initiatives when it comes to the creation of subsidiary companies. The offices have also gone into competition with one another by setting up companies which operate in the same markets. In fact, much more so than in the approaches of Blecher and Oi, it is an entrepreneurial bureaucracy, which participates directly in the market economy by itself creating subsidiary companies rather than favouring by its support, the creation of independent enterprises, as in Blecher and Oi’s models. She therefore puts forward a model of a bureaucracy which is itself in transition, and which, rather than slowing the reforms, has decided to take advantage of them, resulting not in the growth of corruption or of privileged situations, but in a progressive adaptation to the market economy. She therefore believes that Chinese-style gradualism, in contrast with the shock therapies applied in the countries of Eastern Europe and the former Soviet Union, makes it possible to limit the costs of the transition to a market economy.

Even though the objective of criticising the theses of the neo-classical and new political economy schools on the role of the state in the economies in transition is of great interest, nevertheless, Jane Duckett’s book suffers from several limitations which considerably reduce the reach of her work.

First, the quality of the data put forward by the author to support her thesis is unsatisfying. Only two chapters out of seven are really given over to the results of research into the administration in charge of real estate and commerce in the city of Tianjin (chapters 4 and 6). The other five chapters deal with the conceptual framework (the introduction), the theoretical implications of the results of the research (the conclusion), the development of the economic bureaucracy of the city of Tianjin since the reforms (Chapter 2), or the development at the national level of real estate and distribution networks (Chapters 3 and 5). From this point of view the ambitions of the author are such that they needed to be supported by much more conclusive evidence than that provided in these two chapters. For example, one of the central elements in her argumentation seeks to refute, by using the example of the Chinese bureaucracy, the theses of the neo-classical school and of the new political economy which maintain that the bureaucracies in the economies in transition systematically lapse into corruption and the search for privileged situations. Now there is no trace to be found in these two chapters, or in the annexes, of any balance sheets or figure on the earnings and profits of these companies. Are they really profitable over a long enough period, in this case longer than the two years covered by this study? What proportion of the profits is paid by the companies to the offices? Even more crucial, what use do the offices make of these profits? The author provides some indications such as the improvement in the services provided by the offices, the increased bonuses of their employees, as well as the construction of brand new buildings for the offices’ activities. But she provides no precise information on this reallocation and on the rules which govern it. In fact there is every reason to believe that no rules exist, and that the leaders of the offices are all powerful when it comes to making use as they see fit of these sums, which amount in fact to genuine “secret funds”. On the same point, the author dismisses much too quickly the possibility of endemic corruption stemming precisely from the use made by those in charge of the offices of the funds distributed by their subsidiary companies. However, a number of studies, among them He Qinglian’s, whose publication caused a considerable stir in China recently, have shown to what extent this galaxy, made up of companies directly created by the administrations, has helped to fund corruption in the Chinese administration since the beginning of the 1990s.

Moreover, in her analysis of the costs of the transition, the author does not seem to consider the side effects, which are detrimental to the general interest and to the pursuit of reforms, produced by this entrepreneurial bureaucracy. Even if we leave the effects of corruption aside, this competition between administrative offices to set up subsidiary companies has very largely contributed to the duplication of investment and to the creation of real estate bubbles in the majority of China’s bigger cities. More seriously, the author does not mention anywhere the spreading into the entire Chinese bureaucracy of what has been termed “Moral Hazard”, which has been much discussed since the beginning of the Asian recession, and which corresponds to the fact that economic agents, because of the nature of the working of the financing system, do not feel responsible for the results of the investments they make, thus contributing to a waste of resources. This phenomenon has particularly affected the investments carried out by entrepreneurial bureaucracy. It has indeed been able to take advantage of its special relationship with the local banks to obtain access to finance for the investments of its subsidiary companies, but when the returns on investment have been insufficient, or worse, have resulted in failure with the collapse of real estate bubbles, these companies have been far from taking the responsibility of repaying their loans. It has been the banking system which has had to cover the losses, mainly from household savings. We are thus a long way from the image of the entrepreneur who, as presented by Jane Duckett, assumes a real risk in his investments. The collapse of the GITIC and of the other parapublic companies for the financing of investments in the provinces provides a solid negative example to the Jane Duckett’s argumentation on the private activities of the Chinese bureaucracy. Meanwhile, this entrepreneurial bureaucracy has reinforced a tendency already present in the Chinese economy: the channelling of investment resources into the public sector, thus contributing to the perpetuation of the barriers to entry to some sectors for private entrepreneurs. One figure alone will serve to illustrate this phenomenon: in the province of Guangdong, which is at the cutting edge of private enterprise, those companies that are really private have received a mere 0.2% of the credit granted to companies by the banking sector since the beginning of the 1990s.

Lastly, from a fiscal perspective, it seems somewhat risky that the administrations see their budgets depend on the success of investments made by their subsidiary companies. One can indeed conceive, as does the author, that in the situation the Chinese administrations found themselves in at the beginning of the 1990s, the profits shared out by these subsidiary companies to their tutelary administrations, constituted a vital supply of oxygen. But this kind of resource cannot in any case be a medium- or long-term substitute for a reform of the tax system and more generally of the means of existence of these administrations, which should be decided democratically and openly, and not tied to the vagaries of the market.

All these limitations lead to a more fundamental question about the side effects of this entrepreneurial bureaucracy in the constitution of the rule of law, and which are not raised anywhere in Jane Duckett’s book. The possibility left to these bureaucracies to make “a leap into the sea” and to do business like any other private company, is the natural progression of the philosophy of the reforms promoted by Deng Xiaoping. It is thus no accident that the author states that these companies were set up after Deng Xiaoping’s visit to the South in 1992. But this excessive decentralisation of the competence to manage economic activity given to the Chinese bureaucracy, and which finds its embodiment in the promotion of an entrepreneurial bureaucracy, slows, rather than accelerates, the construction of a rule of law. In such a system, the competence of the bureaucracy is negotiated in a totally arbitrary manner, and not in a democratic framework. Each administration prolongs its management power over the economy, perhaps more indirectly now but in an even more disorganised (as shown by the duplication of investment) and just as discretionary, a fashion as in the past. One can understand Deng Xiaoping’s desire, in order to assure the maintenance of the political regime, to assure himself of the support of the bureaucracy by allowing it the possibility of doing business, but the system to which this leads has a number of side effects which eventually prevent a healthy development of the economy. It is therefore not surprising that the current leadership seeks to re-establish order in the commercial activities of the army, of the local bureaucracies (in the aftermath of GITIC) and of the public sector in general. Thus, despite Jane Duckett’s totally laudable objective of taking on the orthodox schools of economic thought on the role of the state in the economies in transition, it seems difficult to agree entirely with the results of her research, and on the theoretical and practical reach of her model as embodied in the Chinese bureaucracy, which has become much too entrepreneurial.