BOOK REVIEWS

Susan H. Whiting, Power and Wealth in Rural China. The Political Economy of Institutional Change

This fine book goes back over an important subject (the role played by rural industry in the extraordinary economic development of the past two decades in China) while focusing its analysis on the behaviour of the local officials who created or maintained the “town and village enterprises” (xiangzhen qiye) and often determined their form of ownership (collective or private)((1) according to their own interests, local interests and an institutional framework that evolved over the period. Also according to their heritage from the Maoist period: the subject of the book's second chapter (after an opening chapter that is general and theoretical), which disproves the famous zili gengsheng (“rely on one's own strength”) that had already been challenged in other areas than the production units of the people's communes and brigades((2). Whiting compares three rich eastern counties that are well known for the remarkable contribution made by rural industries to their prosperity: Songjiang, in the suburbs of Shanghai, Wuxi (Jiangsu) and Yueqing (north of Wenzhou in Zhejiang). In 1978, Yueqing's rural industrial production (towns and villages combined) amounted to only one third of that in Songjiang and one tenth of that in Wuxi (p. 67): quite simply because the state had injected capital and technology into the first two counties and had acted very meanly towards the third, which was judged to be too close to the Taiwan Strait. This initial legacy weighed heavily on the choices made subsequently by local administrators who, though equally keen to promote rural industry, were prompted to develop collective enterprises in Wuxi and Songjiang and private ones in Yueqing.

That, among other things, is what Chapters 3 to 6 set out to illustrate, being devoted to the first 15 years of the reforms (1978-1993). The book is structured, within an overall chronology, along thematic lines: firstly, and most importantly, the factors governing the behaviour of rural cadres (Chapter 3); then, the way in which their motivation and the constraints upon them direct their choices when it comes to the system of ownership (Chapter 4), taxation (Chapter 5) and credit (Chapter 6). In contrast with the period of the Cultural Revolution, political attitude and “style of working” become markedly less important as evaluation criteria for the cadres, under the reforms, than their practical achievements—with the promotion of rural industry first on the list((3). Upon these evaluations depend their careers, their pay and, perhaps, the disciplinary measures meted out by those political animals, their senior managers in the towns. The salaries earned by village cadres are far more directly connected to their industrial achievements. However, the promotion of rural industries has to be largely financed out of whatever is available; and, once the industries have been developed, as is well known, they become real money-spinners, providing most of the local administrators revenues. Just like the state enterprises, they can be squeezed until the pips squeak, to provide funding for building and equipping the administration offices and for paying out salaries to a certain number of staff: it is a process that may bring to mind the “fictional posts” in certain Western administrations (pp. 117 and 202). And they are not free, either, to lay workers off, because the local cadres are responsible too for public order, which unemployment may threaten (pp. 115-116). In exchange for these various exactions, the cadres take good care of their nest eggs (“Rural enterprise—that's our second treasury!” says a cheerful Party activist, p. 93) by providing them with illicit fiscal exemption—from that portion of the tax due to the central administration—and with bank loans on insufficient security.

These two points are detailed in chapters 5 and 6. By the start of the 1990s, the fiscal administration was still short of staff, of qualified staff especially, capable of dealing with the explosion of new businesses, private, public and mixed. It was even less able to resist the pressure from local administrators anxious to switch the maximum possible amount of the budgetary income, which was shared with the central administration, into locally controlled extra-budgetary funds. Meanwhile, to compensate themselves for the payoffs to the local cadres, and acting in perfect harmony with them, the managers of collective enterprises were giving new names to their factories or workshops; in this way, they could benefit from the tax reductions or exemptions granted to tide new enterprises over the first few years. Or they could claim—still in agreement with the local administration—that their most profitable offshoot was “managed by a school”, which automatically exempted them from taxation. Or they would inflate their workforces (800 workers were declared for 500 real ones in a factory in Jiangsu, p. 204) so as to expand their claimed outgoings and reduce by the same amount their taxable incomes. We shall not linger over the classic frauds (selling onto the black market, wildly under-estimated declarations of production and profits...): that “tax evasion was the norm among rural collectives” (p. 205) is less troubling than the organised collusion between the managers of the enterprises and their partners, the local administrators, who profited by reducing the firms' fiscal commitments while skimming off the cream from whatever income was diverted from the tax office. There were too many connected vessels between the budgets of, on the one hand, enterprises financing a large amount of public expenditure and, on the other, the budgets of local administrations that granted the enterprises outrageous exemptions from taxation: one could hardly speak of them being completely separate.

The administration used also to arrange credit facilities out of any proportion to the security offered by the enterprises. The security, duly certified by the local authorities, was so often non-existent that, by the start of the 1990s, about a third of the loans agreed by the Agricultural Bank were irrecoverable (Christine Wong, p. 245). The performance of the rural credit co-operatives was still worse, mainly because eminently political criteria were applied to the granting of loans: in this area, at one generation removed, one can truly say that the local cadres were applying the Maoist slogan “politics in command”. As the same political criteria did not encourage the administrations to hand out the same largesse to the private enterprises, which they had far greater difficulty in controlling, the latter would readily assume the fictional status of collectives, which did not always deceive the local banks. In such cases, managers could still resort to giving lavish gifts to the bankers.

Chapter 4, devoted to forms of ownership, recounts the opening phase of an evolution of which the concluding phase—the current one and thus only provisional—is described in the final chapter. In Wuxi and Songjiang (as well as in other neighbouring counties also included in the writer's survey), the solid base of rural industries inherited from the Maoist period has from the outset provided significant income for the local authorities. In turn, the authorities invested by developing the already existing collective enterprises. They even protected them from competing private enterprises by adopting measures that were deliberately hostile to the private investors. At Yueqing, on the other hand (as well as in many poor regions), where the Maoist inheritance was far more modest, the local authorities had nothing to invest: they had to leave things to private enterprise and to encourage it. That included resorting to different forms of ownership, such as the co-operative (in private hands as well), forms that were less disadvantaged in the race for credit. Result: by 1990, private capital was financing 8% of rural industrial enterprises in Wuxi county and 21% of those in Songjiang, as against more than 90% of those in Yueqing (pp. 123-124)((4). The much quoted contrast between the model of Wenzhou and that of Jiangnan is primarily, therefore, the result of divergent choices made by the local authorities, choices that in turn were governed by whatever advantages would accrue to the authorities and by the constraints they were subject to.

Four chapters (3-6) are devoted to the first 15 years of the reforms, while only one (Chapter 7, which also serves as a conclusion) deals with the period subsequent to 1994. And again, this concluding chapter goes back over the earlier period by recalling the fiscal and financial crisis that was exacerbated by the manoeuvring of the local administrators who, as representatives of the central administration in matters of credit and tax, were turning in such a shabby service. In order to arrest the fall in the share of budgetary income actually received by the central administration, and that of overall revenue in relation to GDP, the fiscal reforms of 1994 and 1996 confer on central government increased control over fiscal resources and prohibit local authorities from freely handing out tax exemptions or reductions to collectives. More slowly, the reforms to the banking system reined in the ill-considered sanctioning of loans to the same enterprises. The local administrators are now constrained within a reduced budget that does not allow them to prop up every one of the non-performing collectives and within an environment where competition is becoming more fierce; so they have begun to privatise—and that includes the administrators in those bastions of collectivism, Wuxi and Songjiang((5). Admittedly, the process of change is still in its early stages and has scarcely begun in Wuxi, where the administrators are hanging onto a solid nucleus of collective enterprises to which they extend preferential treatment. Moreover, as with the privatisation of state enterprises, the fear of unemployment tempers the application of the reforms; and the central administration has itself had to ease off its criteria for granting credits. Even so, this has been a sharp shock, and the turning point is significant: once the Centre imposes tougher conditions upon the local administrators, they cannot very well ignore them; and are forced to alter their behaviour.

This change in strategy, in response to institutional changes decreed by the Centre, represents an essential link in Susan Whiting's argument. At one level, this book extends and brings up to date the excellent analysis by Jean Oi published two years earlier((6). Although Whiting makes a point of mentioning a disagreement (p. 266, over the date when budgetary constraints were tightened over the administration at the township level, one can hardly ignore the connection between two studies of which the first is devoted to “the institutional foundations of the economic reforms” and the second to the role played by “institutional change” in a post-socialist developing economy. Both books spotlight the local administrators as, not just profiteers but also agents of development change. Agents who, nonetheless, favour local economic interests, and those of their own career, to the detriment of the national interest: Oi was already emphasising that reality, and Whiting lays even greater stress on it, before concluding (p. 295) that however many jobs, however much wealth, the rural collective enterprises may have created, they were far from representing the “'first-best' alternatives to the large, state-owned enterprises that had dominated the planned economy”. Both books bring out the gradual nature of the most spectacular changes, and both oppose new arguments to ideas about the “big bang” and shock therapy. In this respect and others too, both writers illustrate Gerschenkron's intuition: the more industrialisation is held back, the more significant a role the state has to play in bringing it about((7).

Whiting rounds off and freshens up the work of Oi, by including in her study an analysis of the causes of the current process of privatisation: this contemporary application enriches the theory. The book is also more systematic, and more ambitious, while still founded on a meticulous field study. At times one even comes to find the construction (architectural or geometric) a little too perfect: the study is conceived and carried out like a mathematical proof. When Whiting's competence is taken beyond the limits of her soundly mastered and brilliantly applied speciality, it sometimes seems a bit fragile. An example would be her claim that the Cold War of the 1950s across the Taiwan Strait was hotted up in the course of the following decade, an assertion based on mis-attributing to the 1960s the artillery bombardments of the islands of Quemoy and Matsu in 1954 and 1958 (p. 68). A minor transgression, but one that the writer's self-assurance encourages us to point out.

Translated from the French original by Philip Liddell