State-Owned Enterprises in Chinese Economic Transformation: Institutional Functionality and Credibility in Alternative Perspectives

Abstract:

The institutions of China’s state-owned enterprises have deviated fundamentally from the principle of individual(istic) property rights. The paradox is that the enterprises appear to have performed well in terms of productivity and profitability. This article examines the institutions in the light of alternative theoretical perspectives. The central message is two-fold. First, regarding functionality, the long-term oriented institutions could be conducive to productive efficiency but could also be detrimental to allocative efficiency. Second, regarding credibility, the actual performance hinges on the appropriate match between the institutions and the broader developmental conditions. The efficiency attributes are thus found to be context-specific. Further discussion on the notion of context-specificity reveals that relative efficiency is conjunctural rather than structural in the determination of the functionality and credibility. In the spirit of Original Evolutionary and Institutional Economics, it is submitted that the attributes of relative efficiency are themselves subject to the particular “social valuation” of China’s prevailing political-economic conditions.

Keywords:

• China
• ownership
• institutions
• development

• JEL Classification Codes: B52
• O12
• O53
• P26

Notes

1 For a recent presentation and application of the Gerschenkron catching-up theory of late development, see Nadia Vanteeva and Charles Hickson (2015). It is of note that the theory emphasizes not only the advantage of backwardness (the opportunity for late developing economies to import technology) but also the required existence of state-led, long-term oriented institutions for utilizing the advantage.

2 At the most general level, allocative efficiency refers to the allocation of the economy’s resources—at a particular point in time—in a way that yields the maximum level of (demand-satisfying) output, subject to the constraint of the existing technical conditions in production. An economic growth path that is based on allocative efficiency can be envisaged as a series of time-points at every one of which the economy allocates its resources to produce the maximum level of output subject to the technical conditions of that time-point. Productive efficiency, in contrast, refers to the allocation of resources in a way that promotes the increase in the output-to-input ratio. A growth path that is based on productive efficiency implies a process of continuous increases in the output-to-input ratio, reflecting technological progress and therefore productivity growth, although the economy might or might not be producing at the maximum possible level of output at every point in time. William Lazonick (1991, especially chapter 5) provides the possibly most incisive exposition on the distinction between the two different concepts of efficiency.

3 The concept of social efficiency, meaning the efficiency of the whole economic system in relation to the achievement of economic aims of the society, is from John Clark (1924). This concept is in the spirit of the emphasis on “social valuation” in Original Evolutionary and Institutional Economics.

4 See Jesus Felipe, Ustav Kumar, Norio Usui, and Arnelyn Abdon (2013); Alberto Gabriele (2010); Sebastian Heilmann (2009); Daniel Poon (2009).

5 For mainstream neoliberal, or market-fundamentalist, interpretations of China’s state-led model, see Joseph Fan, Randall Morck, and Bernard Yeung (2012); Xi Li, Xuewen Liu, and Yong Wang (2012); and The Economist (2012). In the tradition of neoclassical economics, there also exists a body of work that follows a theorem-of-the-second-best approach, rather than market-fundamentalist approach, in interpreting China; see Chenggang Xu (2011) for a review and synthesis. Still, this body of work does not attempt to integrate the analysis of institutions with that of structural dynamics.

6 For a more recent elaboration to take into account of developments in the era of globalization, see Simeon Djankov, Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer (2003).

7 This market fundamentalist view is clearly evident in the policy doctrines of the Washington Consensus (Chang 2007), as well as in the broader political establishments of the capitalist world (Grabel 1999).

8 Ho moves on to posit: “the credibility is not about any desired or predetermined institutional form for economic growth and development, but it is about institutional function in its temporally and spatially determined context.” In this light, this article submits that economic development as the criterion of institutional credibility is only conjunctural, rather than structural. Only in the specific circumstance in reform-era China that the demand for economic development commands the level of political and social supports that are stronger than other alternative demands. By extension, a pattern of development based on productive efficiency (and with it long-term commitments, cooperation, stability…) is more consistent with the social-political conditions than that based on allocative efficiency (and with it short-termism, competition, instability, etc.). See the section below, entitled “beyond efficiency”, for elaboration.

9 Wolfram Elsner (2012, 2) highlights the following as one of the core characteristics of Original Evolutionary and Institutional Economics in explaining institutional change: “[institutional change results from] changes of the degree of ceremonial dominance, where typically there will be either an ongoing (enforced) ceremonial encapsulation (i.e., no change of degree after a counter-movement) or a regressive or progressive institutional change (increasing or decreasing degrees of ceremonial dominance).”

10 Barry Naughton (2018, ch.5 and ch.14) provides a clear and comprehensive narrative account of the reforms and development of Chinese SOEs.

11 Yi-Min Lin and Tian Zhu (2001) document in details the reforms of Chinese SOEs in the 1990s.

12 According to a deputy minister of the State-Owned Assets Supervision and Administration Commission (SASAC), as of 2013, most SOEs were still burdened with a range of social obligations, which makes it impossible for them to be completely commercialized. And one of the main obligations was long-term commitments for the job security and well-being of employees. See Huang Shuhe (2014).

13 See the estimate by Andrew Szamosszegi and Cole Kyle (2011).

14 For the 2012 data of top 500 Chinese firms, released by China Enterprise Confederation on August 31, 2013, see http://www.guancha.cn/economy/2013_08_31_169453.shtml. For the 2018 data of top 500 non-SOEs in China, released by the All-China Federation of Industry and Commerce on August 22, 2019, see http://www.acfic.org.cn/zzjg_327/nsjg/jjb/jjbgzhdzt/2019my5bq/2019my5bq_bgbd/201908/t20190822_138379.html. For the 2018 data of Chinese firms in Fortune Global 500, see http://www.sasac.gov.cn/n2588025/n2588164/n4437287/c9279024/content.html.

15 The ownership-centered story is associated with the work of Wing-Thye Woo, Wen Hai, Yibiao Jin and Gang Fan (1994), Gang Fan and Wing-Thye Woo (1996), Nicholas Lardy (1998), etc. The competition-centered story is associated with the work of Barry Naughton (1995), Gary Jefferson, and Thomas Rawski (1995), etc. See Yuk-Shing Cheng and Dic Lo (2002) for a review and critical synthesis of the literature.

16 The World Bank made the famous assertion: “China’s state-owned industrial enterprises remain a drag on the economy during the reform era—even though their efficiency might be improving.” (See World Bank 1996). This assertion is consistent with the work of Chongen Bai, David Li and Yijiang Wang (1997) which argues that Chinese SOEs has the instinct of excessive pay-outs for inside members over and above their productivity gains.

17 Harold Demsetz (1983) develop the argument that well-defined property rights are essential to allocative efficiency. Kornai (1990) makes it explicit that soft budget constraints can be avoided only under well-defined property rights. For a more recent and much fuller exposition on the theories and realities (in the era of globalization) of soft budget constraints, see Janos Kornai, Eric Maskin and Gerard Roland (2003).

18 For the Post-Keynesian view on “the state as an uncertainty-reducing institution,” see Steven Pressman (2006). Mariana Mazzucato (2013), who frames the concept of “transformative mission-oriented investments” (meaning innovation investments that are of paradigmatic importance) as the main task of the entrepreneurial state, is perhaps the most influential Schumpeterian work in recent years. See also James Cypher (2014) for a schematic review of the modern literature on the role of the state in late development.

19 The development policy literature on the role of the government has had its focus on the debate over comparative advantage-defying (CAD) versus comparative advantage-following (CAF) industrial policies. Ha-Joon Chang argues that CAD policies are often needed for the development of industries that are characterized by dynamic increasing returns. Justin Lin, in contrast, argues that the principle of comparative advantage is good enough to guide late development—it is just because the market as an entity often suffers from intrinsic failures, and hence cannot always function in line with the principle, that government interventions via CAF policies are needed. Both thus agree that the government does have an entrepreneurial role to play in development. See Justin Lin and Ha-Joon Chang (2009).

20 The edited volume by Yu Zhou, William Lazonick and Yifei Sun (2016) collects a range of case studies of the development of high-tech industries in China and the crucial role of the state thereof. In a similar spirit, William Lazonick’s (2004) work on IT industries, and Michael Renner and Gary Gardner’s (2010) work on the development of high-speed railway are studies that support the argument that, in the Chinese experience, the closer to the world technological frontiers the stronger is the need for government helps for the development of the industries in question. For theoretical underpinnings for this argument, see Aoki (1990, 2001) and Chang (2007).

21 Amsden (1989) has gone so far as to develop “the learning paradigm of late development,” meaning that the capability to learn to assimilate and improve upon imported technology is a necessary condition for late development, as is evident in the successful experience of East Asia. Michael Best (1990) relates the capability of learning to different forms of firm organization, including the organization of work and the employment relation.

22 Complementary to Veblen’s concept of the “merits of borrowing,” both Erlich (1960) and Gerschenkron (1962) argue that large-scale industrialization together with its appropriate institutional conditions –big firms with long-term oriented financing and governance, in the view of Gerschenkron—are essential to the dynamism of technology in late development.

23 Dic Lo and Guicai Li (2011) explicitly analyze the interaction between structural changes and institutional attributes in China’s economic growth. Their econometric work reveals that, in the context of large-scale, capital-deepening industrialization, SOEs tend to be more capable than non-SOEs in generating productive efficiency but being less able in reaping allocative efficiency. This finding is consistent with the propositions of the present article.

24 For the fundamental changes in social development in China since the turn of the century, see Wang Shaoguang (2013). For the fundamental changes in the policy-institutional regime and actual performance of labor employment during this period, see Chang Hee Lee (2009).

25 Andrew Glyn (2006) further compares and contrasts the “Golden Age Model” with the “neoliberal globalization model.” William Lazonick (2009) provides a complementary, more micro-focused work by comparing what he calls the “Old Economy Business Model” with the “New Economy Business Model.” These studies inform the discussion in this article on comparing the model of “State Socialism/Capitalism, Chinese Style” with its neoliberal alternative. Dic Lo (2016) provides a detailed account of China’s convergence to the “Golden Age Model” since the turn of the century, and the systematic forces to undermine the convergence arising from financialization particularly after 2010.

26 Yuezhi Zhao (2012, 6) suggests that “the Chongqing Model attempted to find a way that allows the complementary growth of state, transnational, and domestic private sectors in a mixed economy.” The demise of the model thus leads to her worry that it could “represent the last milestone in the Chinese path of negating socialism.” (16)

27 Data from China National Bureau of Statistics, China Statistical Yearbook and Annual Report from the Monitoring and Survey of Migrant Workers, various issues. It is of note that these trends of growth in productivity, wage rate, consumption and investment are consistent with China’s outstanding performance, by international comparison, in the major indicators of social development (human development, life expectancy at birth, etc.). The performance in economic and social development, both in the short and long term, is at any rate far removed from the perception of China being bogged down in a great social-economic crisis.

28 Clark (1924, 102) makes the point: “We may describe existing institutions, but we cannot know their effects on man without knowing what alternative institutions would be like.”

Additional information

Notes on contributors

Dic Lo

Dic Lo is Reader in Economics at the School of Oriental and African Studies (SOAS), University of London. He is also a member of the Center of Comparative Political Economy at the Renmin University of China. The author wishes to thank Peter Ho, Ben Fine, Yu Zhang, and the anonymous referees of this journal for their comments and suggestions in the writing up of this article. The research for this article received funding supports from the Institute for State-owned Enterprises Tsinghua University, China (research project number 2018 THUISOE 02, “The economic nature and trends of development of China’s state-owned enterprises.”)