Session 20: Individual Papers: Markets and Government in Contemporary China

Organizer and Chair: Barrett L. McCormick, Marquette University

Clans for Markets: Social Organization of Emergent Market Relations in China’s Automobile Components Sourcing Network

Khan Pyo Lee, Peking University

The conventional approach to China’s post-Mao economic transformation has generally assumed that some abstract, unidimensional process of marketization was ion progress without specifying what exactly the term ‘market’ or ‘marketization’ denotes in China’s reform context. Such an amorphous, undifferentiated view of the market has led scholars to conflate different connotations that can be implied by the term ‘marketization’ and assume that China is in the process of transition to some ideal, universalized form of market economy. This paper suggests that although the Chinese economy has indeed ‘marketized’ in a sense that the market mode of exchange has substantially substituted bureaucratic redistribution as a dominant allocative mechanism, ostensible ‘marketization’ of the economy has not led to the prevalence of a ‘self-regulating’ market system in which an impersonal price mechanism alone plays the dominant role. Instead, exchange relations in China’s emergent market system, far from converging to atomistic, arm’s length bargaining relationships of the neoclassical ‘competitive’ market, to a large extent remain embedded in the institutionalized structure of interorganizational linkages that strongly reflects the past organizational structure of the state, whereby coordinative mechanisms other than price, such as authority and reciprocity, still play a significant role. Through the examination of industrial markets for components sourcing in China’s automobile industry, this paper demonstrates the emergence of a dual structure in market networks for the supply of auto components in which isolated clusters of ‘clan-like’ networks, characterized by long-term bilateral relationships between organizational actors embedded within common administrative backgrounds, persist alongside the loosely connected, emerging national market system.

Housing the Transition: Liberalization and State Stability in China’s Housing Policy

Jeffrey Payne Indiana University

As housing stocks in urban China privatize, is the state leading or following the burgeoning housing market? Is the Chinese state a competent set of institutions tooled to govern an ever-increasing interest society? This article, by analyzing housing policy, investigates how the market expands organized interests and how this process alters the state’s strategies for governing.

Housing policy, an aspect of the state’s administrative role that has universal impact, provides an opportunity to analyze how liberalization creates an interest society and how those interests interact with the state. China is currently transitioning out of the socialist system, but has not reached a level of macroeconomic and infrastructural development matching the postsocialist nations of Eastern Europe. This transition process in China has produced many issues that the state must address and primary among them is how to remain relevant inside a socioeconomic structure that is increasingly dependent upon external processes. Does the population still look to the state for the definitions and organization of its living space? Can the state match public demand with a decreasing presence in the formal economy? If the state cannot match public demand on housing, then does this mean that state stability is weakened and by extension political opposition strengthened.

Well-known among the social sciences, modernization theory, among many things, argues that economic modernization leads to democracy. Housing policy, as a sector of the state interacting with the privatization drive and society at large, impacts the continued form and strength of the Chinese state.

From "Serving the People" to "Serving the Economy": The Co-production of the State and Scientists in China

Wen-Ching Sung, Harvard University

From the Mao era to post-Mao China, the scientific system has transformed from "serving the people" to "serving the economy." On the surface, this scientific transformation is driven solely by state policies; but close-up, scientists negotiate with the state to launch new scientific institutes and projects. Based on my fieldwork at Beijing Genomics Institute in 2002, this paper explores the reciprocal interaction between the state and scientists at close range, and connects the local scene with large-scale historical changes.

"Serving the people" and "serving the economy" represent two different ideologies which substantially influence Chinese life in many aspects. The former marks the socialist morality of collectivism in the Mao Era, and acts as direct ideological pressure on scientists to enforce political conformity. The latter signifies the dominant values of economic development in post-Mao China, and subtly interferes in the practice of science.

The scientific transformation starts from the state-initiated policies; these changes create a new ecology of practicing science and substantially alter the individual scientist’s morality. Accordingly, a new breed of scientist who is an amalgam of scientist, entrepreneur, and patriot is emerging from this transformation. Interestingly, the elusive changes of Chinese scientists then demand the state to change. Therefore, the transformation is by no means a unidirectional process from the top down. Both state and scientists are determining the next step in this co-production of the state, scientists, and scientific system. My research not only sheds new light on social change in China, but also offers a cross-cultural understanding of the interaction between state and society.

The Tax-for-Fee Reform and Its Impact on Local Governments

Wu Zhang, Cornell University

Based on detailed fieldwork in counties and towns in Hunan, I argue in this paper that the tax-for-fee reform, particularly this year’s central policy of lowering the agricultural tax and subsidizing peasants, has indeed lowered peasants’ burdens significantly for the first time in more than a decade. As a result, peasant protests against heavy taxes and fees that were widespread in the late 1990s are disappearing. However, the reform does not tackle the alarmingly heavy debts of counties, towns, and villages. Neither does it tackle the shared tax system that has paralyzed the fiscal capacity of local governments of central provinces since its adoption in 1994. Instead, the reform further decreases the fiscal capacity of local governments. Local governments keep accumulating more and more debts. Thus, local governments are facing tremendous difficulties in providing public goods, such as irrigation, education, roads, and basic health care in rural areas. Finally, the reform cannot shrink the bloated local bureaucracy nor make it less corrupt. To keep functioning, local governments will intensify their efforts in applying for specified project money from both the provincial and the central governments. This will encourage more corruption. Therefore, even though the tax-for-fee reform can bring about rural stability, it cannot prevent local governments of central provinces from losing their legitimacy, their fiscal capacity, and their ability to provide public goods.

Fiscal Federalism and Provincial Foreign Tax Policies in China

Yu Zheng, University of California, San Diego

As the largest developing country with a strong feature of fiscal federalism, China provides an ideal case to explore factors that account for local governments’ economic policies toward foreign investors.

Using provincial data for the period between 1992 and 2000, I analyze the impact of fiscal federalism on provincial tax policy on foreign investment in China. I argue that part of the provincial variation in foreign tax policies is related to their fiscal relations with the central government. Transfer-dependent provinces tend to have lower effective foreign tax rates on foreign-invested enterprises than transfer-contributing provinces, all else being equal. It is because highly unequal intergovernmental transfers create different level of budget constraints for provincial governments. Since transfer-dependent provinces encounter softer budget constraints than transfer-contributing provinces, they are more likely to hold back an aggressive tax collection campaign and offer more tax incentives to attract foreign investments.

These findings have two significant implications. First, offering tax incentives to attract foreign investment is not a magic bullet to improve economic performance. Tax incentives are widely used in China and other developing countries not because they create efficiency gains but because they are one of the most convenient policy instruments governments can manipulate to maximize their political payoffs. Second, fiscal decentralization, which is touted as the secret of China’s striking economic performance, may actually undermine efficiency when transfer-dependent local governments face weak incentives to be fiscally responsible. The fiscal transfer systems designed to combat regional inequality may undermine incentives for provincial governments to recover costs, potentially resulting in overconsumption.