BOOK REVIEWS

Lin Yi-Min, Between Politics and Market Firms, Competition and Institutional Change in Post-Mao China

In the first phase of the transition period in the 1990s, comparisons were often made between China and Russia and other states of Eastern Europe, contrasting China’s perceived successful development with the haphazard one of Russia and often arriving at the conclusion that China carried out its reforms in the right order, with economic reforms preceding the political ones, while Russia, doing it the other way around, had chosen the wrong sequence.

The dissolution of the Soviet Union in 1991 had eventually contributed to a change in the political and economic debate in Western Europe. Whereas earlier many theories on economic transition from the 1950s until well into the 1980s had focused on how developing and market economies should or ought to be transformed into planned economies, seen as more rational and egalitarian, this line of thought ceased to attract new followers after 1991. Only in Eastern Europe, particularly in Hungary, had a penetrating debate on development the other way, from plan to market, been exposing the drawbacks of a planned economy with its “soft budget” constraints and thereby caused an inability to compete in the world market of “hard budget” constraints. According to some of its most well-known critics such as Janos Kornai (1) and Ivan Szelenyi, what characterised a socialist planned economy was ineffectiveness, a waste of resources, an inability to give its citizens anything but a low standard of living and who had to eke out a living in fear of the all-encompassing and controlling “big brother” state.

Theories discussing transition from a plan to a market economy originally tended to view speed as a crucial factor for a successful transformation, so much so that a model of “big bang” versus “gradualism”, i.e. rapid all-encompassing reform as against small incremental steps, was seen as one of the main alternatives.

However, a decade of change in Eastern Europe showed that some of the most crucial factors for reform were overlooked as they were taken for granted by the Westerners involved. Used to a system of cheques and balances also at the top of society they somehow presupposed that a monolithic system could easily be transformed. In countries where there already existed countervailing forces—such as a strong independent church, for example the Catholic church, and an independent labour movement such as Solidarity in Poland—transformation to a pluralistic society was made easier. The more civil society was developed, the shorter was the transition period. An inverted relationship could be distinguished between the pace of institutional transformation and the growth of the informal economy (2).

The Habsburg legacy in Central Europe—characterised by an efficient public and judicial administration, a strong civil service and a more developed civil society than in countries further to the East—was used to explain the more rapid reforms in the former region, thereby stressing institutional transformation as a sine non qua for further development along the road towards a functioning market economy and a pluralistic society. The prospect of joining the EU was perceived as a major factor contributing to a quicker pace of reforms.

In the debate on transition economies of the former Soviet bloc, different forms of influencing the development process were distinguished such as influence through open lobbying, administrative corruption, and state capture (3).

Few in this discussion stressed stability over democracy or made excuses for different kinds of corruption (4).

Not much of this debate initially spilled over into the China field, where authoritarian “stability” rather than development of democracy was emphasised and wished for particularly when discussing the development of the future China market. Some experts such as Thomas Rawski and Nicholas Lardy dealing with the Chinese economy had all along maintained a critical attitude in this debate and towards China’s growth claims (5).

However, in line with the overwhelmingly positive interpretations of things Chinese, a spate of books and articles were written hailing China’s supposedly glorious performance, while often contrasting it to the abysmal ones of Russia, other East European states and, of late, to that of Japan (6).

In doing this some authors appeared to be led more by wishful thinking in selecting their data than by an unbiased mind while often adopting different scales of measurement for China as against all other countries. Some of the more known, self-proclaimed experts were former politicians who, as representatives of consultancy firms, naturally had an interest in a most positive evaluation of China, while the public at large still tended to see them in their former official capacities, thereby giving them a credibility not commensurate with their current standing, but still contributing to influencing the general positive evaluation of China.

The beginning of a more general re-evaluation can be traced to an almost hidden World Bank publication in 1994 (7).

With a diminishing growth rate, little FDI (Foreign Direct Investment) has yielded profits since the ill-conceived investment boom of the mid-1990s, and a growing lack of internal consistency in the statistical data published a number of books and articles has appeared, calling into serious question the very foundations of the positive predictions for China, the different scales of measurement employed, and the conviction that economic reform was of greater importance than political reform (8).

In this atmosphere of renewed critical interest in China’s economic prospects, no better in-depth study can be recommended than Between Politics and Market Firms, Competition, and Institutional Change in Post-Mao China by Yi-min Lin, associate professor in the Social Science Division of Hong Kong University of Science and Technology. In order to both grasp the depth of the reforms carried out in China after 1978 and to arrive at a deeper understanding of the complexity of the problems encountered in reforming a still monolithic Party-state Yi-min Lin has succeeded in giving us a most valuable tool for a thorough review of institutional changes in China.

For the reader wishing to arrive at an independent understanding amid the wild flora of writings on pros and cons on China’s economy and business prospects, this is a book that explains the functioning of the current Chinese economic system. In analysing the institutional changes that have taken place the author has contributed greatly to sobering the debate.

The gist of this work is aptly summarised by the following quotation from the author’s introduction….“the communist state has been transformed from the central leadership’s tool of social engineering, guided by ideology and organized through close-knit authority relations (Shurman 1968), to a marketlike place where the center loses coherent control and public authority and assets are extensively traded by state agents at various levels for self-defined purposes (p. 6).

The treatise on Backyard Profit Centers is particularly illuminating in explaining why a monolithic Party-state, except during a reign of direct terror, will always fall short of a more pluralistic system in combating abuses of power. To the advantages of this can be added the detailed and lucid treatise on how with growing decentralisation the corruption in society becomes endemic for lack of an outside independent controlling site of authority. Therefore, indirectly this is a work arguing for the importance of political reform before economic reform, showing how increasingly inadequate in the medium to long term the current one-Party state is in promoting economic efficiency and the rule of law.

Some inconsistencies—such as the author’s repeated claim of a diminishing growth rate in the Chinese economy while, at the beginning of Chapter 7, he refers to an increasing growth rate—does not detract from the overall value of this work.

A lasting impression is the grandiose scale of corruption in Chinese society contributing to a widening gap of Latin-American proportions between rich and poor and the impossibility of real reform until those most afflicted by corruption can have a say in combating it.

In returning to the comparisons to Eastern Europe and even Russia, many phenomena described there under great media attention in the West, also occur in China, such as delays in paying wages, the failure to return pension money, and playing with unemployment figures, explanations for which are given in this book, and convincingly. Yet political reform in the former societies has led to the development of alternative loci of authority, contributing to a containment of these problems, while this is not yet the case in China.