Enterprise and Welfare Reform in Communist Asia [1 ed.] 071468399X, 9780714683997, 071465499X, 9780714654997, 9780203005323

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ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

Of Related Interest THE WORKERS’ STATE MEETS THE MARKET Labour in China’s Transition edited by Sarah Cook and Margaret Maurer-Fazio ASIAN POLITICS IN DEVELOPMENT Essays in Honour of Gordon White edited by Robert Benewick, Marc Blecher and Sarah Cook MANAGING KOREAN BUSINESSES Organization, Culture, Human Resources and Change edited by Chris Rowley, Tae-Won Sohn and Johngseok Bae GLOBALIZATION AND LABOUR IN THE ASIA PACIFIC REGION edited by Chris Rowley and John Benson VIETNAM The Incomplete Transformation by Peter Wolff(GDI Book Series No.12) EAST ASIAN DEVELOPMENT New Perspectives edited by Yilmaz Akyűz WORK AND EMPLOYMENT IN A GLOBALIZED ERA An Asia-Pacific Focus edited by Yaw A.Debrah and Ian G.Smith

Enterprise and Welfare Reform in Communist Asia Editors

Peter Ferdinand and Martin Gainsborough

FRANK CASS LONDON • PORTLAND, OR

First Published in 2003 in Great Britain by FRANK CASS PUBLISHERS Crown House, 47 Chase Side London N14 5BP, England This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” and in the United States of America by FRANK CASS PUBLISHERS c/o ISBS 920 NE 58th Avenue, Suite 300 Portland, Oregon, 97213–3786 Website:www.frankcass.com Copyright © 2003 Frank Cass Publishers British Library Cataloguing in Publication Data Enterprise and welfare reform in communist Asia 1. Public welfare—Asia 2. Asia—Economic policy—1945– 3. Asia—Social conditions I. Ferdinand, Peter II. Gainsborough, Martin III. The journal of communist studies and transition politics 338.9′5′009049 ISBN 0-203-00532-5 Master e-book ISBN

ISBN 0 7146 5499 X (cloth) ISBN 0 7146 8399 X (paper) Library of Congress Cataloging-in-Publication Data Enterprise and welfare reform in communist Asia/editors, Peter Ferdinand and Martin Gainsborough p. cm. “This group of studies first appeared in a special issue…of The journal of communist studies and transition politics (ISSN 1352–3279) 19/1 (March 2003) published by Frank Cass”—Verso t.p. ISBN 0-7146-5499-X (Print Edition)–ISBN 0-7146-8399-X (pbk.) 1. Economic assistance—Asia—Case studies. 2. Economic assistance, Russian—Asia—Case studies. 3. Communism—Asia—Case studies. 4. Capitalism—Asia—Case studies. 5. Mixed economy—Asia—Case studies. 6. Industrial policy—Asia—Case studies. 7. Asia—Commercial policy—Case studies. 8. Business enterprises—Government policy—Asia—Case studies. 9. Public welfare—Asia—Case studies. I. Ferdinand, Peter. II. Gainsborough, Martin, 1966– III. Journal of communist studies and transition politics. IV. Title. HE412.E588 2003 338.095′09171′7–dc21 2003006382 This group of studies first appeared in a Special Issue on ‘Enterprise and Welfare Reform in Communist Asia’

of The Journal of Communist Studies and Transition Politics (ISSN 1352–3279) 19/1 (March 2003) published by Frank Cass. All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher of this book.

Contents

Introduction Peter FerdinandMartin Gainsborough

1

Fluctuating Institutions of Enterprise Management in North Korea: Prospects for Local Enterprise Reform Sung Chull Kim

9

Pragmatism in the Face of Adversity: Enterprise Reform in Laos Nick J.Freeman

33

Slow, Quick, Quick: Assessing Equitization and Enterprise Performance Prospects in Vietnam Martin Gainsborough

47

Entrepreneurs in China and Vietnam as Strategic Players in Social and Political Change Thomas Heberer

62

China’s Social Security Reforms and the Comparative Politics of Market Transition Jane Duckett

78

Trade Unionism in China: Sinking or Swimming? Jude Howell

100

Abstracts

120

Notes on Contributors

123

Index

124

Introduction PETER FERDINAND and MARTIN GAINSBOROUGH

The collapse of the Soviet Union in 1991 left only five formally state socialist regimes in the world. Four of these (China, Laos, North Korea and Vietnam) are in Asia. The purpose of this collection is to introduce attempts to reform their systems, so as to lay the foundation for a more comparative analysis. The first point is that at least three of them have sustained economic growth, as can be seen from Table 1. Although their per capita Gross National Incomes (GNI) are still much lower than those of the former communist states of Europe, they have in general been able to grow significantly faster than the postcommunist regimes of the Former Soviet Union and Eastern Europe throughout the 1990s, as the latter have been mired in the toils of transformation. Comparative figures can be seen from Table 1. Russia is included because it is the most obvious comparator for China. Poland has been included for two reasons. First, it is by far the largest state in Eastern Europe and of roughly equivalent size to Vietnam, with a population of 39 million where Vietnam has 79 million. Second, it has been by far the most successful country in Eastern Europe to transform its economy: no other state there has managed an average annual increase in GDP of much more than three per cent. Romania has been included because it is a medium-sized, oil-exporting Eastern European state with a population of 22 million, but it has failed to keep up with Vietnam, another oil-exporting nation. Belarus has been included because it has a somewhat similar population (10 million) to that of Laos (5.3 million), both are landlocked, and historically it has been overshadowed by the larger, more dominant Slav states of Russia and Ukraine, just as Laos has been overshadowed by its larger neighbours in Indo-China, Vietnam and Cambodia. The consequence of these economic achievements has been political stability. None of the governments has felt the need to embark upon major political reforms, although China, Vietnam and to a lesser extent Laos have floated ideas about the possibility of this at various times. The Chinese leadership managed to contain the effects of the suppression of the demonstrations around Tiananmen Square in June 1989 and then, from early 1993, relaunched the frantic drive for economic growth which has buoyed up the economy since then. Contrary to the speculation of most outside commentators when he took over in 1989, Jiang Zemin was able to become the longest-serving General Secretary of the party by the time he

2 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

stood down in November 2002 at the Sixteenth Party Congress. This inaugurated a new era, with the rise to the very top of the party of the ‘fourth generation’ of political leaders. The Vietnamese leadership has continued with the doi moi programme of economic reform, although periodically they have shown nervousness about the possible political destabilization that economic changes might bring. The Laotian leadership has displayed some decisiveness in introducing fundamental economic reforms, while resolutely suppressing any pressure for political change. TABLE 1 COMPARATIVE ECONOMIC DEVELOPMENT FIGURES FOR EAST ASIAN COMMUNIST REGIMES AND FORMER COMMUNIST REGIMES IN EUROPE 1981–2001

China Laos Vietnam Belarus Poland Romania Russia

Gross National Income (GNI) Per Capita 2001

Average Annual Growth Average Annual in Per Capita GDP 1981– Growth in Per Capita 1991 GDP 1991–2001

(in US$)

(in per cent)

(in per cent)

890 320 420 1,350 4,230 1,720 1,750

8.4 1.7 2.5 N/A N/A −0.5 N/A

8.6 3.8 6.1 0.4 4.9 0.7 −2.7

Source: World Bank, World Development Indicators on-line.

The only exception to this general picture has been North Korea, which has been hit by a series of natural disasters. The World Bank has no reliable figures for the North Korean economy, but its government is said to have reported its GDP to UNICEF in 1999 as US$10.3 billion. Given a population of roughly 22 million people, this would make the per capita GDP approximately $470;1 that is still somewhat greater than that of either Vietnam or Laos. The CIA, however, uses Purchasing Power Parity (PPP) methods to estimate per capita GDP, and it put the figure for 2001 in North Korea as $1000. By contrast its PPP estimate for Laos was $1,630, for Vietnam $2,100 and for China, $4,300.2 Most outside observers agree on estimates that, as a result of the various natural disasters that have hit the country in the 1990s and misguided official policies, the North Korean economy has shrunk by between a half and two-thirds, which would make its decline equivalent to the steepest economic declines among states of the FSU, such as Tajikistan. Western governments allege that North Korea is increasingly turning to the export of missile technology and narcotics to keep the economy afloat, but if so, these are probably not included in official trade statistics.

INTRODUCTION 3

Nevertheless, these economic reverses have not led to political reform. The death in 1994 of the founder of the regime, Kim Il Sung, was followed by the gradual assumption of supreme power by his son Kim Jong Il. Although outside commentators had speculated on the latter’s inability to hold on to power, so far he has managed to do so, despite the catastrophic deterioration in the economy. At least in terms of political institutions, therefore, these communist states have displayed relatively little innovation. Yet, although most of them have been successful, their operating environment has been transformed. To some extent the sense of a communist bloc was weaker in Asia than in Europe from the Sino-Soviet dispute in the 1960s onwards. Only Vietnam was a member of the Warsaw Treaty Organization and the Council for Mutual Economic Assistance (CMEA or Comecon). The Soviet Union and China nearly went to war over their boundary dispute in the Far East in the early 1970s, and China and Vietnam fought a brief but bitter border war in early 1979. Nevertheless there had remained a lingering hope of solidarity in these states if one of them ran into difficulties. The example of North Korea shows that the sense of comradely assistance has not completely disappeared. Throughout the 1990s China has continued to support the regime economically, even though China itself has been short of resources for development. When North Korea was rocked by a series of natural disasters coupled with famine in the middle of the decade, China increased its support for a state that occupied a strategically vital place on China’s borders in Northeast Asia. Yet ironically North Korea appears to spend the largest share of its gross national income on defence, with Western estimates rising as high as 25 per cent. North Korea is also the exception that proves the rule. While China has continued to support the regime, it has also made clear its expectation that North Korea should embark upon reform to revive its economy. And, while China has supplied aid for disaster-relief, this has not been sufficient to relieve all of the suffering. Indeed, for most of the 1990s Chinese aid to North Korea was limited to donations of several hundred thousand tons of oil products and grain per year. Consequently North Korea has had to turn to international agencies for additional assistance, for example the World Food Programme. It has, indeed, become one of the largest recipients of assistance in the world from that programme. Very large amounts have been contributed by South Korea and the United States. So the old traditional expectation of at least potentially unlimited solidarity between communist states has disappeared since 1991. This helps to explain the relatively tiny amount of trade that these states now conduct with one another. Table 2 shows the proportion of China’s total foreign trade that is conducted with these three Asian communist partners. It shows that China never depended much on trade with these states, and this has become even more true in the 1990s. The change was brought out clearly during the decade by the contrasting fate of China’s trade with the two Koreas. In 1993 China abandoned barter trade with North Korea and insisted that their relations now had to be based upon the exchange of goods at market prices. By 2000 China’s

4 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

total foreign trade with North Korea amounted to US$488 million, with China exporting twelve times as much as it imported. In the same year, China’s total trade with South Korea (a state that it had officially recognised only in 1992) amounted to US$44.5 billion, over nine times as much. Equally significantly, China was importing twice as much from South Korea as it was exporting there. TABLE 2 PERCENTAGE OF CHINA’S TOTAL FOREIGN TRADE CONDUCTED WITH ASIAN COMMUNIST PARTNERS IN SELECTED YEARS 1980

1985

1990

1995

Laos 0 0 0 0 North Korea 1.8 0.7 0.004 0.002 Vietnam 0 0 0 0 Source: IMF, Direction of Trade Statistics yearbooks, selected years.

2000 0 0.001 0.005

TABLE 3 PERCENTAGE OF ASIAN COMMUNIST STATES’ TOTAL FOREIGN TRADE CONDUCTED WITH CHINA IN SELECTED YEARS

Laos North Korea Vietnam*

1980

1985

1990

1995

2000

0 29.6 0

0 32.4 16.0

0 25.8 12.5

0 27.9 9.8

0 25.4 12.0

* includes trade with Hong Kong Source: IMF, Direction of Trade Statistics Yearbooks, selected years.

More generally, there is an asymmetry China’s trading relationship with its Asian communist partners, since for two of them, North Korea and Vietnam, trade with China accounts for a more significant part of their foreign trade. This can be seen from Table 3. Nevertheless, for none of these states is trade with each other a major dynamic factor in their economic growth. As can be seen from Tables 2 and 3, trade with each other has declined compared with the 1980s. This has meant therefore that these regimes need to rely much more upon their own efforts for economic success and therefore for survival. They have to find ways of integrating themselves more securely within global trading networks. To achieve this, they will have to reform the systems of managing their economies so that they are better aligned with the principles of international trade as understood and practised elsewhere in the world. They hope that this will also lead to greater foreign direct investment (FDI), but foreign investors need to be confident about the security of their investments and about their ability to track the uses to which the investments are put. The most striking symbol of these changes was China’s final accession to the World Trade Organization in 2001: this was intended both to demonstrate China’s full integration into the world trading

INTRODUCTION 5

system and also to ensure that China’s trading partners could have confidence in its intention to abide by its international commitments and to maintain the process of market-oriented reforms. So the old planning systems are being gradually dismantled. In turn this means that traditional communist forms of the management of enterprises, subordinating them to targets determined in industrial ministries, are also being supplanted by more market-oriented arrangements. This also poses a challenge for domestic sources of financing for industry. Banks gradually have to become more sophisticated in the ways that they assess the market prospects for individual enterprises and allocate credit in the most effective ways possible. This also poses welfare challenges for these societies, since hitherto they have relied upon enterprises to distribute welfare benefits to their employees and their families. The main purpose of this collection is to examine the reforms that they have carried out in enterprise management and welfare arrangements. Although lower in their profile than political changes, these arrangements are vital elements in the reform strategy, for if some way is not found to invigorate enterprises, or to provide alternative welfare arrangements for the disadvantaged in society, then any drastic reforms are likely to provoke more protest, or at least alienation. And although they are not in themselves overtly political changes, there is no doubt that, if they succeed, they will have a profound impact upon the ruling party and the ways in which it runs the country. The first two analyses present more comprehensive overviews of reforms in the two least familiar East Asian communist states. Sung Chull Kim argues that the old centralized planning system in North Korea has been approaching a dead end since the 1980s and that this has been compounded by the natural disasters that have afflicted the country since the mid-1990s. As a result, county-level authorities have been urged and able to take greater responsibility for their own economies. To some extent this is a similar development to what happened in China in the 1980s, where local authorities were allowed to set up their own township and village enterprises. The result in North Korea has been that enterprises and work teams have found ways of utilizing materials and resources that are surplus to what is needed to meet plan targets. Thus, according to him, there is now a wide range of groups that have become market operators, even if the nature of the market is quite different from that under capitalism and even if the rewards and products are far more restricted. The extent of these changes can be seen from the fact that a recent estimate has put the size of the informal or shadow economy in North Korea at about 12 per cent of the formal one—others have suggested that it is much larger.3 Even though the concept of the shadow economy covers far more than the activities of these entrepreneurial work teams, it suggests that their operations are a far from trivial part of the Korean economy. Nevertheless, the market reforms so far appear begrudged by the state and more contentious than they were in China. Therefore they are always liable to reversal if circumstances change.

6 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

After that, Nick Freeman looks at reform in Laos. Here the general situation is less bleak, since the economy has performed better in the 1990s, though it still remains a poor country where life expectancy is still only 54 years and illiteracy is 50 per cent of the adult population. He argues that reform there actually began in the mid-1980s, earlier than in Vietnam and only a little later than in China. He also argues that the reforms were introduced relatively smoothly because the authorities focused on leasing out state assets to groups who thought they could manage them, instead of selling them off in a climate where the concept and possible content of private ownership of means of production were questioned, let alone the actual value of property or shares. It also meant that there was no need for a stock market to distribute shares to new ‘owners’. Thus it seems much simpler. This actually marks a big difference from the reform strategies of China and Vietnam, as well as the ex-communist states of Eastern Europe, which have laid much greater stress upon the disposal of equity shares in enterprises for some kind of consideration. Yet, although these Laotian reforms have contributed to what has certainly been impressive economic growth over the past decade, Freeman warns that the actual results are opaque. They have not led to sustained improvements in efficiency, and if anything decentralization of economic management in Laos has had the opposite effect to that in North Korea. It may have led to an increase in the number of state-owned enterprises rather than a reduction in their activities. He emphasizes that there are still major challenges facing the regime if the reforms are to proceed. First, the banking sector will have to be radically restructured, since it is effectively insolvent, although the state has committed itself to carrying this out by 2006. Second, something will have to be done to commercialize the activities of the roughly 30 strategic state-owned enterprises that dominate the economy. Third, the environment in which the private sector operates will have to be transformed. At present, private enterprise suffers from shortages of appropriate and experienced staff, a small domestic market, very limited FDI and high corporate taxes. The third contribution, by Martin Gainsborough on Vietnam, focuses on a key issue in enterprise reform, that of the issue of equity shares in formerly stateowned enterprises—what is called ‘equitization’. In particular, he asks why, after their announcement in the early 1990s, the reforms initially made little headway until 1998, when they began to spread more rapidly. His conclusion is that the business environment was relatively unfavourable at first. Two things then changed: the first was the tighter state control over enterprise assets, which then led the enterprises to more energetic searches for alternative sources of funds; the second was the improvements in the circumstances of the private sector, which made it easier for enterprises to attract assets and people. Gainsborough concludes, however, that there is still insufficient transparency in determining cash flows and property rights when part of the enterprises remains in state hands, which discourages foreigners from investing.

INTRODUCTION 7

The fourth study, by Thomas Heberer, presents a comparison of entrepreneurs in China and Vietnam, concentrating on their role rather than focusing on the process of privatization as such. To what extent have they become a ‘strategic’ group in society as a result of the reforms? Heberer examines various dimensions of this question: economic, political and social, and concludes that the status of entrepreneurs has risen higher in China than in Vietnam so far, and that they have been more open in pursuing their interests there. Both regimes have been reluctant to concede to them significant power over the long-term direction of the development of society. Nevertheless their lifestyle alone influences the attitudes of ordinary people and indeed of some officials: it helps to change social values in ways that favour the future of entrepreneurs. The following contribution, by Jane Duckett, turns to the related issue of welfare reform in China. Mature communist states relied upon state-owned enterprises to distribute welfare payments to their employees and their families. Most of these payments were expected to come from the profits of the enterprises themselves: there was no separate state welfare fund to which individuals or the state contributed and from which the payments could be drawn. This system worked as long as state planning dominated the work of enterprises, because it could factor the payments into business plans. As the system moved towards greater reliance on market methods for distributing resources, those enterprises with large welfare burdens felt increasingly disadvantaged. Now the payments had to come from the enterprise’s own profits, as indeed they had always done in agriculture from the collective farms. New enterprises did not, for instance, have obligations to pay the old-age pensions of previous generations of workers. On the other hand, the state budget was coming under increasing strain and the government felt that it could not afford to create alternative welfare funds. More recently, particularly since the Asian financial crisis of 1997–98, the Chinese state has shown greater determination to push through enterprise reform together with the introduction of unemployment insurance and extra assistance for the poorest in society. It has increased its expenditure on social security fivefold since 1998. Yet the welfare system still shows greater inequality than in the pre-reform era, being biased towards urban dwellers, and there seems an acceptance of the general principle that the state can make a only partial contribution to the financing of welfare schemes. Individuals will also be expected to make their own contributions to a more insurance-oriented scheme. Duckett concludes that in at least some respects the former communist states of Eastern Europe may have done better than the still nominally communist states in Asia in establishing a viable alternative welfare system, although of course this has been made easier by their higher levels of per capita Gross National Income. Although the main focus of this contribution is on China, it is a general problem for both ex-communist and still-communist regimes. Duckett draws some comparisons with developments in Eastern Europe, but similar work remains to be done for the other communist states in Asia.

8 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

The final contribution, by Jude Howell, again focuses on China, but again along a dimension that is also relevant to all the other states. Not only are traditional welfare schemes challenged by enterprise reform, so too is the role of the official trade unions. Previously they were responsible for contributions to enterprise efficiency, and that included the distribution of some welfare benefits; they were not expected to defend the interests of workers against management. In the new circumstances that role is increasingly challenged. Its members used to have their membership subscription automatically deducted from their wages in state-owned enterprises; that cannot happen in private enterprises or foreignowned ones. As Howell notes, the All-China Federation of Trade Unions lost 35 million members between 1993 and 2000, so her discussion of the possible alternative paths in the future is important for China and for the other remaining communist regimes. It would also be interesting to compare developments here with those in the former communist regimes of Eastern Europe. To what extent has the change of regime created different paths for the trade union movements? Some of these analyses have concentrated upon changes at the level of the whole of the state. Others have examined changes within more discrete institutions, such as enterprises. Future work will need to integrate these different levels of analysis into a more comprehensive picture. NOTES 1. Doowon Lee and Sang Jin Hang, ‘Estimating the Minimum Size of the North Korean Shadow Economy’, at , p.9. Although GNI and GDP are different concepts, for a closed economy such as that of North Korea, there is little difference in practice. 2. CIA, The World Factbook 2002, at . 3. Lee and Hang, op. cit., p.21.

Fluctuating Institutions of Enterprise Management in North Korea: Prospects for Local Enterprise Reform SUNG CHULL KIM

Introduction Of the existing communist party-state systems, North Korea is really the last stronghold of centralized economic planning. North Korea’s ideological commitment to economic planning based on self-reliance is no longer comparable to that of any other Asian communist system in particular. With the death of Mao and the end of the Cultural Revolution, the Chinese leadership under Deng Xiaoping took the momentous decision to reform the country’s economy from 1978, allowing peasants and collective entrepreneurs to become significant partners in national development. In the wake of political and economic reform in the Soviet Union and the remarkable economic growth in China in the mid-1980s, Vietnam launched a series of reform policies that kept the system viable following the collapse of communism in the Soviet Union and Eastern Europe. By contrast, North Korea has maintained its rigid ideological commitment to a planned economy. With the end of aid from its former communist allies on preferential terms, particularly crude oil from China and the Soviet Union, the North Korean economy began to decline in the 1990s. The economic difficulties reached a critical point as natural disasters hit grain crops in middecade. Meanwhile a series of events in North Korea has brought about incremental changes in the structure of the economy since the middle of the 1980s. The production drive for consumer goods, initiated by the present leader Kim Jong Il, enhanced the role of the private sector in the planned economy and contributed to the expansion of the second economy. The disintegration of the Soviet Union and the collapse of the East European communist systems accelerated this process of change from below in North Korea. Then the impact of famine in the mid-1990s was so enormous that it came to shake the main elements of the planned economy. It brought massive movements of population in search of food; a temporary halt to public education and health care; erosion of the state’s social control, particularly labour mobilization; an increase in bureaucratic deviance and crimes; a sharp decline in days worked at state-owned enterprises; and, finally, expanded opportunities for illicit private entrepreneurs and their black-

10 ENTERPRISE MANAGEMENT IN NORTH KOREA

marketeering. The recent measures taken by the authorities, such as wage increases and price rises,1 recognize and reflect these developments that the state cannot control. Some observable changes have occurred in the operation of enterprises, as private entrepreneurial activities emerge to enhance the function of the market.2 Despite the lack of statistical figures to compare the value of output between public enterprises (both state-owned and collective) and private entrepreneurs, it seems that the latter have supplanted significant parts of the former during the economic crisis. In particular, most consumer goods are now produced and provided by the private sector. In a sense, the private sector has taken advantage of the devastated public sector. A question raised here is how the contradiction—between a development strategy centred on state-owned enterprises and the illicit private entrepreneurial activities—can be resolved, or what the direction of the transition will be in coping with such a contradictory situation. In an attempt to respond to this question, this study examines the problem of the institution of enterprise management whereby enterprises had to undergo fluctuations in their institutional arrangements. By ‘fluctuation’ is meant that the arrangements established by the party-state were dislocated, on the one hand, and that a new phenomenon emerged in this fluid situation, on the other hand. On the basis of an analysis of institutional fluctuation, the study attempts to assess the future direction of transition of enterprise management. The author’s view is that the direction of any change or transition is not simply decided by chance but supposedly has a ‘preferential correlation’ with institutional traditions. The notion of preferential correlation is adopted from the newly emerging complex systems theory, which posits that no change can be explained by mechanical determinism or by pure randomness. This conception converges with the new institutionalism’s notion of historical dependence or path dependence, although unlike the latter the former gives weight to indeterminacy in the direction of change.3 In this respect, instead of describing the new phenomenon of private entrepreneurship in simple terms of economic crisis, the study will examine the ways in which the formal institutional traditions of enterprise management were dislocated by informal practices from the 1960s to the 1980s and whereby the subsequent fluid situation opened a space for the proliferation of entrepreneurial activities in the 1990s. Then it will look at the prospects for institutional transition centred on local enterprises, which has been embedded in North Korea’s tradition of regional self-reliance, rather than predicting the fate of private entrepreneurship alone. Enterprise Management: Institutional Traditions and Dislocation North Korea has attempted to maintain dual objectives in enterprise management. One is obviously to keep the enterprise within the ambit of central

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 11

planning, but the other has been to grant a limited sense of autonomy to administrative units and work-places. During the period from the 1960s to the 1980s, the authorities sought to realize limited local autonomy through such institutional arrangements as regional self-reliance with local enterprises, independent accounting methods, and collective decision-making in the party committees. Inasmuch as the content of these institutions of limited autonomy has changed, it is necessary to investigate the ways in which the formal norms of the institutions were dislocated by informal practices. As will be discussed, of the three institutional arrangements regional self-reliance based on local enterprises has had the most lasting effect on the transition of the economic system and plays a pivotal role in its continuation. Regional Self-Reliance Based on Local Enterprises A core principle in North Korea is self-reliance, or ‘the Juche idea’. To assess the plausibility of this premise is beyond the scope of this study, but it is true that the party-state has institutionalized self-reliance, even if in a limited sense, in local economic affairs since 1958, when Kim Il Sung first launched the establishment of local enterprises. A goal of this regional self-reliance is that each local unit should maintain the viability of its economic self-sufficiency even in moments of crisis. For this, the state not only dispersed and divided state-owned enterprises to provinces and counties but also urged county governments in particular to establish local enterprises to supply consumer goods within their jurisdictions. What should be noted is that regional self-reliance in North Korea at that time was not same as decentralization in China’s transition economy after 1978. Whereas China has devolved power to local governments to initiate limited measures in trade and investment as well as the budget, finance and tax, North Korea has not sanctioned local governments to take such meaningful measures which might derail the fundamentals of central planning. The only exception is the local government’s budget to promote local self-sufficiency. It seems that North Korea’s regional self-reliance is similar to that of Mao’s China, which aimed at dispersing industrial bases for security purposes and to support rural industrial needs.4 Why was regional self-reliance promoted at the end of the 1950s and early 1960s specifically? Two explanations are possible. One is related to the consolidation of Kim Il Sung’s monolithic power in the party in the mid-1950s, which was now able to grant local governments a limited degree of autonomy and responsibility in economic affairs. Since the vertical party hierarchy had been made strong enough to penetrate every aspect of North Korean society, each level of party organization could intervene in the corresponding level of state administrative and economic units. Therefore, it was a necessary consequence that the adoption of regional self-reliance took place soon after Kim had established his monopoly on party power. Another explanation is linked to North Korea’s security strategy.5

12 ENTERPRISE MANAGEMENT IN NORTH KOREA

Regional self-reliance was further emphasized in the midst of East-West conflict in the early 1960s: the Cuban missile crisis and the American intervention in Vietnam. The success of Major-General Park Chung Hee’s coup in South Korea and American support for Park’s military regime afterwards should also be noted. North Korea now felt its security threatened, and thus it undertook a new policy of the ‘parallel development of the economy and the military’ at a plenary session of the Central Committee of Korean Workers’ Party (KWP) in December 1962. This parallel development policy reinforced the drive for the establishment of small and medium-sized enterprises at the county level. In other words, regional self-reliance based on local enterprises was intended to enhance North Korea’s security. In institutionalizing regional self-reliance, the size of geographical and administrative unit mattered. Kim Il Sung and his eldest son Kim Jong Il, who later succeeded him, regarded the county as the optimal size of unit for selfreliance. For them, a province was too big, while a ri—a county subunit comparable to the commune in Mao’s China—was too small for self-sufficiency.6 In terms of number of units also, the county might be the most appropriate for the central state to deal with. The nine provinces were too few in number, whereas the ri, as an administrative unit, exceeded more than 1000 in number. The 209 counties were optimal in number not only in that they reflected regional characteristics but also that they could be managed by the central state. Here the county level refers not only to counties in rural areas but also to most average urban cities and the districts of such major cities as Pyongyang and Nampo. Kim Jong Il particularly emphasized the county as a self-sufficient unit. In his college graduation thesis of 1964, entitled The Status and Role of the County in Building Socialism’, he described the county as a strategic nodal point that connects urban and rural areas as well as integrating economic and military goals in the face of the continuing confrontation between North and South Korea.7 It is notable that Kim’s thesis was widely publicized in the mid-1980s when some important economic adjustment measures were taken, for example the drive for production of consumer goods, the introduction of independent accounting methods in enterprise management, and spread of enterprises. What should be remarked is that since 1973 regional self-reliance has been practised through local budgets on the basis of contributions from local enterprises. Local governments, which had relied solely on state subsidies, now had to plan their own budget mostly with the revenues from local enterprises. According to the North Korean interpretation, the local budget is a fiscal system under which a local government maintains its own economy taking particular account of ‘local characteristics’ under the supervision of the state. In detail, the income consists of sales tax, income tax, land-use tax, profit, contributions from local enterprises and ad hoc incomes. It is spent not only on local government administration, local commerce and agricultural management but also on the building and maintaining of child-care centres, kindergartens, libraries, health

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 13

clinics and so on.8 It is evident that the local budget system was intended to reduce the state’s fiscal burden.9 For the supply of consumer goods for local residents, the role of local enterprises has been extremely significant as their products range from daily necessities to food processing, textiles, footwear, furniture, school supplies and some machinery. They often employ 30 to 40 people as part-time workers or rural farmers during the slack season. Then, local enterprises entered a new phase with the launch of the August 3rd Production Drive for Consumer Goods in the mid-1980s to increase the production and supply of consumer goods. This campaign aimed at recycling discarded and surplus materials from nearby manufacturing enterprises. It first attracted attention in Kim Jong Il’s speech on the so-called Light Industry Revolution, which was delivered to the Central Committee of the party in February 1984. While Kim did not mean a shift in industrial policy from heavy to light industry, he mentioned that the demands of the people had changed in the long period of development under socialism. He stated that ‘If the rice bowl remains empty, people will not believe in the superiority of socialist institutions and socialist patriotism.’10 It is notable again that the production drive stipulated that consumer goods should be manufactured and consumed within a local administrative unit, essentially the county level. The contrasting fate of the local enterprises and the August 3rd Production Drive can be shown by the following figures: local enterprises mushroomed at the end of the 1950s—some 2,000 local enterprises were established in 1958 and 1959; the number increased to about 3,600 in 1980, but afterwards the expansion slowed down, to show about 4,000 local enterprises in 1994. Considering that the food crisis from the mid-1990s almost paralysed the operation of enterprises in general, it can be assumed that these local enterprises are now functioning only minimally. By contrast, the work teams of the August 3rd Production Drive have outnumbered by far the local enterprises since its launch in 1984. The number of work teams reached 46,500 in the decade 1984–94, and output increased 3.5 times during the same period.11 It was no coincidence that the shift paralleled the deterioration of the official economy and the rise of the second economy that started in the mid-1980s. In other words, it reflected the fact that the private-oriented and profitable small work teams of the production drive gradually supplanted the role of publicoriented and local enterprises. As a result, the production drive came to supply most consumer goods as the official economy declined in the 1990s. However, the basic norm of regional self-reliance mostly remains intact, regardless of the shift from local enterprise to the production drive in providing local residents with consumer goods. This is a significant factor for the direction of change in economic affairs in general.

14 ENTERPRISE MANAGEMENT IN NORTH KOREA

Nugatory Independent Accounting It is well known that in North Korea, as in former communist systems, the State Planning Committee is the locus of central planning in practice, although the party dominates and guides the national development strategy. The committee’s working principle is ‘unified and detailed planning’, whose implementation was emphasized by Kim Il Sung in 1964. While the Daean Model represents the institution of collective decision-making at the enterprise level, as I shall discuss later, the unified and detailed planning rule in theory maps out all the flows of essential resources not only between state and state-owned enterprises and but also among state-owned enterprises. On the one hand, ‘unified planning’ means that the state planning committee and its regional committees have the responsibility of drafting the production quota that each enterprise should fulfil; on the other, ‘detailed planning’ implies that the committee takes a minute interest in the planning procedure. Unified and detailed planning aims at an equilibrium between supply and demand, as well as the effectiveness of resource mobilization, excluding the possibility of imbalance by concentrating the supply of certain products. However, such planning has never succeeded in achieving equilibrium or effectiveness. It has been impossible for the state to harmonize all the flows of resources already numbering more than 100,000 items by the mid-1960s.12 Furthermore, chronic behaviour patterns of bureaucrats, such as false reporting of production capacity and output, along with improper hoarding of raw materials, has impeded proper implementation of the unified and detailed tabulation of the state’s economic plan. In fact, the North Korean version of centralized planning—‘unified and detailed planning’—was a failure. It could not achieve the original state objective of thorough control of the economy; moreover, it failed to encourage productivity increases in state-owned enterprises. This led North Korea to introduce extensive independent accounting methods in state-owned enterprises in the mid-1980s, in order to provide them with a certain degree of financial discretion in general, and to increase productivity through material incentives for workers and managers in particular. At an extended Politburo meeting in February 1973, Kim Il Sung stressed the importance of the introduction of this institution as a feature of enterprise management.13 But it was not actually institutionalized until December 1984 when the KWP adopted a new regulation at the party meeting, stressing nation-wide dissemination of the so-called managerial revolution.14 It should be noted that the implementation of the independent accounting method was accompanied by the establishment of associated enterprises, that is conglomerates of several similar or complementary enterprises. Associated enterprises, which had already been mentioned in the mid-1970s, spread rapidly throughout the country just after Kim Il Sung had delivered a speech in November 1984.15 The nation-wide adoption of independent accounting methods

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 15

and the establishment of associated enterprises was not a coincidence, given that relative independence of economic units is necessary for the activation of a certain degree of managerial discretion. The independent accounting method prevailed in the associated enterprises whose managing office might provide their client enterprises with raw materials through either direct contract purchase from other associated enterprises or procurement from the state. The independent accounting method has yielded few results, however. There are a number of reasons for this. First, the institutional autonomy of associated enterprises was severely limited under the communist economic formula governed by centralism in general, and unified and detailed planning in particular.16 This real situation was essentially contrary to the literal meaning of independent accounting methods. Independence in accounting existed so long as it was compatible with the state planning committee’s guidelines and, more importantly, it was allowed only within the boundaries of instructions from Kim Il Sung and Kim Jong Il. For instance, contract purchases of raw materials from other associated enterprises rarely met needs in full, in so far as the contract itself was circumscribed by the principle of unified and detailed planning. Second, enterprises were forced to achieve production goals while neglecting substantive improvements in productivity, because their performance was judged according to the amount that they produced. They paid attention neither to the qualitative improvement of their products nor to the reduction of costs. Furthermore, enterprises frequently concealed their potential and underestimated production capability in order to ease their efforts to reach targets in the future. Third, attempts to provide incentives for hard work through bonuses, prizes and grants were frequently impeded by the scarcity of inputs, for example shortages of energy and reduced supplies of raw materials.17 Given this situation, it was unthinkable for managers to give various incentives to workers. As a result, the mere adoption of the independent accounting method did not pay off since it was not accompanied by real fiscal and managerial autonomy for the associated enterprises. In sum, the institutional arrangements for the increase in productivity through independent accounting methods distorted the intended objectives. Formally speaking, managers in the associated enterprises should have had room to adjust some operations for the workers in order to enhance incentives for hard work. In practice, most of the enterprises remained state-owned, so that the accounting method was employed only within the restrictions of unified and detailed planning. In other words, the adoption of the independent accounting method has had no impact on reforms of the bureaucratic control mechanisms, which is one of the most important features of reform in communist systems.18 Furthermore, it was vitiated by the economy of shortage.

16 ENTERPRISE MANAGEMENT IN NORTH KOREA

Party Dominance without Responsibility The institutional foundation of decision-making in the enterprise has been the party committee under the Daean Model, named after the Daean Electrical Factory where Kim Il Sung made an ‘on-the-spot instruction’ in December 1961. While the Chongsanri Method, which was launched in February 1960, was applied to the management of collective farms, the Daean Model has exemplified collective management of factories and enterprises in other industrial sectors. The Daean Model emphasizes the role of the party committee of each enterprise in the planning and production processes. In the party committee as a collective decision-making body, not only the manager and the party secretary but also the chief technician and other workers are included. It is officially said that the establishment of the Daean Model was intended to realize the ‘mass line’ in economic management. According to Kim Il Sung, it was designed to tap the workers’ wisdom and creativity through broad participation.19 However, the Daean Model centred on the party committee came from the top leadership’s recognition of the limitations of the previous management model, namely the managerial responsibility model, in the new industrial environment. At the beginning of the 1960s, the managerial responsibility model was no longer effective in the rapidly growing industrial environment where more diversified management techniques and skills were needed than before and in which the manager’s scope for initiative and arbitrariness in enterprise management should be eliminated.20 The previous manager-centred model had been inevitable at an early stage of communism, particularly in the period of post-Korean War rehabilitation and industrialization, for the swift implementation of central planning. That is, the managerial responsibility model had been effective during the consistent push for rapid growth of heavy industry.21 With deepening industrialization, however, North Korea now needed a stable model of enterprise management, and the answer was a collective model of management based on the party committee. The Daean Model provided the party secretary with more prominent status than any other committee member, giving him or her the role of supervisor to check the overall operation of the enterprise from the party’s viewpoint. There was also a political reason for the establishment of the Daean Model in the early 1960s: inasmuch as the model assigned a predominant role to the party, there was a close relationship between the prestige of the KWP and the adoption of the Daean Model’s party committee. As soon as severe factional strife within the elite was terminated with the purge of several senior party figures at the August Incident in 1956, Kim Il Sung imposed himself on the party. Since the party was the source of power and new policies, his victory over rivals made him the unchallengeable leader in North Korea. Not only could he exercise power in personnel affairs but also implement his policy preference for heavy industry.22 Furthermore, having the confidence of the leadership of the party, Kim successfully consolidated various levels of the party hierarchy from the centre to

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 17

the provinces, cities or counties, and cells at the bottom as well as in military and police units. Furthermore, he installed a horizontal web of party organizations, especially through party committees at every level of political and social units. Once its vertical and horizontal networks were established, the party had the capacity to control every aspect of society. Given this situation, Kim now came to institutionalize the party committee in every unit, consolidating the ‘party’s guidance’, to use North Korea’s official term. For instance, the institution of the party committee was introduced in the military as soon as Kim Il Sung raised the issue of the party’s political status in the North Korean armed forces in February 1958.23 Likewise, it was natural that the Daean Model of party committee was adopted for the party’s guidance on enterprise management and its supervision on the production process, prohibiting any individual, whether manager or party secretary, from exercising arbitrary power. The party committee’s role in the enterprise had a problem from the beginning. Collective decision-making in the party committee was unable to induce active participation of managerial staff and workers. The rule of collectivity in the party committee, in principle, implied that every member of the committee should equally participate in and be collectively responsible for the planning, production and daily operation of their enterprise. In reality, however, the party’s guidance overrode the rule of collective decision making. The party secretary and cadres have prevailed in the decision-making process.24 Because of their privileged status in charge of personnel affairs and ideological education, they assumed more power than others, while not having formal responsibility. In this respect, the rule of collectivity in the Daean Model blurred responsibility regarding the operation of the enterprise, simply providing the party cadres with privileges.25 For example, nobody has been specifically blamed for not fulfilling a production quota assigned by the state. In practice, it has been impossible for the party committee to handle various types of meetings effectively. Let me give an example. In the associated enterprises, with a party committee containing 30–40 people, it is hardly imaginable that any rational agreement through full discussion can be reached. The party secretary presides over the various periodic meetings: weekly, monthly, quarterly and annual, and special conferences. His or her associate cadres, specializing in organization and propaganda matters, prepare the meetings. Beforehand they obtain resources and materials and put them together to develop into documents and reports: some of them quote Kim Jong Il’s instructions and the central party’s guidelines, and others reflect the enterprise’s production goal and capacity. As a consequence, the party committee meeting frequently ends up as a ritual. Otherwise, it deals with organizational issues that are necessarily accompanied by criticism and self-criticism, putting all the participants into a gloomy and tense mood.26 For the daily management of the enterprise, there exists an executive party committee as a reduced form of the party committee. Even though this provides the high-ranking managerial

18 ENTERPRISE MANAGEMENT IN NORTH KOREA

personnel with opportunities to delve into details, the party secretary still keeps his prestigious position in the decision-making process. This reflects the atmosphere of North Korean society that has been controlled by the party hierarchy. To sum up, the collective decision-making of the Daean Model’s party committee enhanced the party’s dominance over the work-place, while leaving the responsibility blurred. As the party secretary and cadres prevailed on most affairs of the enterprise, the institution of collective decision-making rather hampered the efficient operation of the enterprises. It lowered their productivity by fusing political and organizational matters with economic affairs. Consequently, as the authority of the party’s guidance of the economy significantly weakened in the 1990s, the party secretary and cadres concentrated simply on social order and stability. Institutional Fluctuation and the Spread of Entrepreneurship During the economic crisis in the 1990s, the spread of private entrepreneurs was a distinctive phenomenon. What should be noted is that this may be attributed to increased local initiative and, in turn, to the dislocation of the institutions of enterprise management. First, the meaning of regional self-reliance based on local enterprises was transmuted into the sense that each county has to survive with independently mobilized resources. Second, the independent accounting method, in a genuine sense, began to emerge, as each enterprise has to continue at least to actualize the welfare function for its workers by promoting profitseeking activities. Third, the party committee of the enterprise in general and the party secretary and cadres in particular simply exercised power only for the purpose of social control, as the party’s authority over economic affairs became severely eroded. Given this situation, the local authorities’ freedom of manoeuvre increased to a significant degree, even though it was not backed by legal power. The local authorities came to allow private entrepreneurial activities, believing that these might contribute to the food security and the welfare of the residents. Identification of Entrepreneurs The number of people involved in the private entrepreneurial activities has been estimated by a South Korean scholar at 700,000–800,000,27 meaning that approximately one in thirty people are private entrepreneurs of some kind. A general trend in North Korea today is that the scope of entrepreneurial activities is increasing, illegal and illicit activities get tacit approval from local governments, the variety of products becomes more diverse than before, and these activities range from simple trade and exchange to production making use of private as well as public resources.

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 19

What is the background of the private entrepreneurs? Where do they come from? They developed business skills before the economic crisis broke out. The origin of private entrepreneurs may go back to the mid-1980s when North Korea launched the August 3rd Production Drive. Even though most manufacturing and distributive activities under the production drive were supervised by local governments, some profit-seeking practices started booming in the distribution sector in particular. Farmers’ markets were opened more frequently and wider than before. This encouraged entrepreneurial practices. Some workers even quit their full-time jobs and changed into entrepreneurs moving from one farmers’ market to another. So long as the strict ideological tendency of denouncing individualism and profit-seeking still prevailed at that time, their entrepreneurial activities remained vulnerable to criticism from neighbours. However, the wind of reform from China encouraged the gradual spread of entrepreneurship. With the maturing fruits of reform policies, waves of Chinese pedlars of Korean origin began to cross the North Korean border, taking advantage of the opportunity to visit relatives who remained there. They traded Chinese consumer goods such as shoes, clothes and food for North Korean indigenous fishery or agricultural products. They earned profits twice or sometimes ten or even 20 times their costs from the trade.28 It is certain that the Chinese pedlars introduced not only Chinese products but also the growing profit-seeking entrepreneurial attitudes from China into the minds of people in a still secretive society. The extreme economic hardship in the 1990s, and especially the food crisis in the mid-1990s, contributed to the burgeoning of private entrepreneurs in North Korea. Those who cultivated profit-seeking practices in the second half of the 1980s sharpened their entrepreneurial skills during the economic crisis in the following decade. This is particularly true of those involved more in commercial practices such as distribution, rather than those in productive activities. Meanwhile, many of the production side entrepreneurs are supposedly from local enterprises that have manufactured consumer goods. Since most of the small and medium-size local enterprises stopped their operations just as large state-owned enterprises did, craftsmen in the local enterprises have had a chance to syphon off facilities and materials owned by their workplace. In other words, they can easily extract labour, technology, facilities and materials from their enterprises to produce such items as shoes, furniture and alcohol to obtain more profit in the market.29 It can be presumed that those in the local ‘collective’ enterprises, in particular, may have more advantages than the local state-owned enterprises for transforming the productive capacities into profit-maximizing ones. While playing the role of welfare provider for their fellow workers, skilled workers in local enterprises can easily get consent from managers and workers to mobilize the resources of their enterprises. They can become private entrepreneurs in the sense of their source of income as well as in terms of their motive, even though

20 ENTERPRISE MANAGEMENT IN NORTH KOREA

there is no general rule of profit-sharing between their enterprises and themselves. Those with experience and skills are not the only persons engaging in profitseeking activities. There are also ordinary workers, housewives and even children. As many state-owned enterprises had neither the capacity to employ them fully nor the budget to pay their employees in full, because of scant state subsidy as well as the shortage of energy and resources, workers were driven to go out in search of personal earnings. Also, the halting of food rations, particularly in urban areas, during the food crisis forced people to engage in commercial activities so as to obtain food and consumer goods. It is notable that journeying for food was accompanied by an increase in population mobility between the regions.30 Before the food crisis and the famine that followed, the North Korean authorities had managed to limit movement through residential restriction; the food crisis pushed them to permit local residents to travel around to obtain food and daily necessities. Many visitors to North Korea at that time witnessed that public transport, especially trains, was full of passengers travelling for food, some of whom were perched on top of the train or hanging out of windows.31 A significant implication of these movements of population is that they have encouraged private entrepreneurialism, nullifying the official slogan that championed the principle of ‘one for the collectivity and the collectivity for one’. While most travellers were looking for food for their own family, others were motivated by profit-seeking entrepreneurship. Entrepreneurial activities dealing with grain products and consumer goods now proliferate in legal and illegal forms. Some run their businesses in the market by utilizing the legal titles of their work place, while others engage in profit-seeking activities without following proper procedures. A difference between them is that those with legality on their side may take less profit from their earning than illegal entrepreneurs do. This is so partly because the former have to pay more in nominal fees and taxes to the local government than the latter give as kickbacks to the party secretary and cadres or to local government officials, and partly also because the commercial practice of the legals does not guarantee higher profits than the black marketeering of the illegals. In other words, illegal entrepreneurial activity involves more risks but brings more profit than those with legal title. Regardless of the legality, however, both types of private entrepreneurs are common, able to survive with protection from the party and local government.32 Without that, private entrepreneurs could not put the profit, whether small or large, into their own pockets. One distinctive recent trend is that some entrepreneurs come to run their own enterprises publicly. The type of private enterprise varies, ranging from fishery to transport and trade. A private enterprise is distinguishable from an entrepreneur mentioned above: the latter heavily relies upon the resources of his or her affiliated workplace, such as a local enterprise, in producing products and services, whereas the former uses its own fixed asset, capital and raw materials,

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 21

whether their nominal owner is the state or local government. In fact, the type of private enterprise emerging in North Korea is very similar to a Chinese one that employs eight to ten workers, even though the North Korean authorities do not officially allow them legal status.33 Increased Local Leeway for Entrepreneurship The spread of private entrepreneurial activities in North Korea cannot be explained in terms of bureaucratic corruption alone, even though it is true that illicit bureaucratic behaviour has increased since the second half of the 1980s. Bureaucratic corruption takes place within the domain of a centrally planned economy, eroding the capacity and legitimacy of the regime. In contrast, the proliferation of private entrepreneurs challenges the institutional foundation of the communist economy. Even where entrepreneurial activities are tacitly approved by governmental officials and regarded as non-criminal, they are by and large associated with the spirit of a market economy, such as productivity, competition, and efficiency, which produces mounting pressure for change on the central economic planning institutions. Then how can the spread of private entrepreneurs be explained? The increased local leeway of manoeuvre in the 1990s favoured them. This meant that following the basic institutional norm of regional self-reliance, the county should keep its responsibility for sustaining the day-to-day life of local residents. This was true even before the famine caused by three consecutive years of natural disaster from 1995 to 1997. The increase in local latitude was ignited by a speech that Kim Jong Il delivered to the Central Committee members of the KWP in October 1994: It is very important to foster the creative role of local governments and to mobilize raw materials and other local resources in order to solve the problem of basic living standards, implementing fully the party’s revolutionary economic strategy. In particular, it is necessary to enhance the role of the county in improving people’s daily life, following the principle of self-reliance. The county is a local nodal point in building socialism, and it is an administrative unit taking charge of 1/200 of the whole country… When the status of the county is enhanced and local resources are well explored, even development of the country and rapid socialist development can be achieved.34 This statement is more than a simple reiteration of regional self-reliance at the county level. Given that the distribution mechanism for consumer goods was in disarray, the county government has to make a desperate effort for selfsufficiency of the people under its jurisdiction. The freedom of manoeuvre of local government significantly increased in the mid-1990s when the severe economic deterioration including the food crisis and

22 ENTERPRISE MANAGEMENT IN NORTH KOREA

famine forced the top authorities to rely upon more regional self-sufficiency than before. In other words, the emergence of private entrepreneurs was due to the change in the relations between the centre and local government. At this moment, the increased scope for local initiative in North Korea does not have the same meaning as decentralization in China, but it is now on the edge of a primitive phase of transition towards decentralization. The institutional base of economic reform in China has provided local government officials, party secretaries and cadres with the power to act as members of the board of directors in a large enterprise. Here the county plays the role of corporate headquarters.35 Meanwhile, the county in North Korea as a well-defined self-reliant unit is authorized to seek its own independent survival strategy. With the extended leeway of manoeuvre, the local party secretary and governmental officials allow profit-seeking entrepreneurial activities for the basic subsistence of the local people. The increased local leeway means something more than the regional selfreliance previously imposed by the party-state: it implies more autonomy than the latter intended. This increased local leeway has several implications for enterprise management. First, the regional self-reliance adopted at the end of 1950s came to yield an unexpected result four decades later, namely an interdependent relationship between private entrepreneurs and local authorities at the time of economic deterioration.36 On the one hand, local government officials, party secretaries and cadres are reluctant to give full and open recognition of the deviation of entrepreneurial activities from the principle of unified and detailed central planning. This is a crucial difference from the case of China whose reform policy legally institutionalized private entrepreneurship. On the other hand, both the private entrepreneurs and the local authorities in North Korea find themselves in the same boat in practice, as the private entrepreneurs’ profitseeking motive comes to be compatible with the local officials’ concern for selfsufficiency in their jurisdiction. That concern therefore becomes the guardian and protector of the entrepreneurs’ profit seeking; and, in a sense, the profit-seeking motive is the function of the concern. Second, the increased local leeway accords with the de facto independent budget system at the county level. Each county as an independent unit is to pursue commercial activity and decide the wages of the people who are involved in that. Furthermore, in the midst of the food crisis, each county has to develop its own export-oriented products to earn foreign currency,37 and to allow this the right of trade was endorsed. The county government came to import grain products from China and Russia by establishing its own budget for that purpose; for example, it was allowed to trade copper and wood for wheat flour.38 This shows that the county as a self-sufficient unit seems to operate as an enterprise under the pressure of hard budget constraints. Third, as the party’s authority over economic affairs wanes, the relationship between centre and region in general came to change from the mid-1990s. The party committees of the local enterprise and at the county level no longer

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 23

function for the transmission of the central party’s economic policy but exercise their power only for social control. Likewise, local government, the county in particular, becomes more independent of the central state than before, as the state’s extractive power and redistribution capacity have clearly decreased. The loosening of the centre-region tie has resulted in local autonomy grudgingly conceded, in the sense that it is not initiated by the top authorities but brought about by the force of circumstances.39 One question that can be raised here is whether or not this reluctantly conceded local leeway leads to collusion between the local governmental officials and the party secretary and cadres in the interests of local people alone, bypassing the imperatives of the central party-state. If such collusion between local leaders takes place in diverse regions, it will bring a form of ‘institutionalized pluralism’, to use Hough’s term, which prioritizes local characteristics and sometimes generates conflict between national goals and local self-interest, such as happened in the former Soviet Union under Brezhnev’s rule.40 In North Korea, it is presumed that such collusion does not occur because of the solidarity of the party hierarchy in the grip of Kim Jong Il. In other words, even though the centre-region tie has been weakened, the party hierarchy continues in general to dominate authority relations among organizations. In sum, private entrepreneurs have mushroomed in fluid circumstances lacking stable institutional arrangements. That is, the spread has been due to increasingly effective local leeway, whereas their activities and practices are not institutionalized because of the absence of provisions for legalizing them. Owing to the increased leeway of county-level governments, entrepreneurial activities are rationalized to some extent among the people whose interests are associated with them. County government officials and the party secretary and cadres come to be supportive—even if not explicitly—of the private entrepreneurs’ activities. They believe that advancement of the private entrepreneurs contributes to the well-being of the county, because employment and tax are created and that can help the rehabilitation of the local economy. Furthermore, fellow workers in the workplace consider them social welfare workers who provide daily necessities and consumer goods for themselves. Prospects for Local Enterprise Reform Regarding the future fate of enterprises, it is a moot point whether the top leaders in North Korea have the will to build a new institutional foundation to foster private as well as collective enterprises and to introduce a policy of hard budget constraints for state-owned enterprises. This is an important element of decentralization in a transition system. It looks unlikely that the authorities centred on Kim Jong Il will soon initiate such encompassing reform. They are not so much interested in either domestic economic reform in general or enterprise reform in particular, but rather in openings for tourism and foreign investment in

24 ENTERPRISE MANAGEMENT IN NORTH KOREA

the special economic zones. The adoption of the Law on National Economic Planning in April 1999 shows their strong desire to restore the unified and detailed economic planning that was devastated by the increased local autonomy since the economic crisis. The law denounces economic activities outside the Plan, decentralization and liberalization, apparently reflecting the dilemma posed by the prospect of loosening the centre’s control of the economy.41 In the meantime, there exists evidence that the authorities are gradually accommodating themselves to the recently enlarged private sector and increased local autonomy in economic affairs, recognizing the difficulty of reversing the trend. First of all, the new Constitution adopted in September 1988 included some visible changes in comparison with the previous version. It extended the scope of private ownership by approving the income from all legal economic activities (Article 24); it emphasized the use of independent accounting methods and introduced such concepts as cost, price and profit (Article 33); and it included collective units, in addition to state ones, as independent units of foreign trade (Article 36). Second, according to the Law on National Economic Planning of 1999, local government, along with state planning organizations, can exercise some power in economic planning (Articles 21–24). While giving priority to central planning, it seemingly expects a positive contribution from regional self-reliance to growth in output and the promotion of trade. Here the role of local governments (the Provincial People’s Committee and the County People’s Committee) in economic planning becomes significant, since the positions of the local government head and the party secretary, both of which were previously occupied by the party official, are now separated under the new Constitution. In legal terms, local government and its officials are responsible solely to the cabinet, which is now the managing institution of the people’s highest decisionmaking institution. These legal changes symbolize the acceptance of the irreversible trend of local government autonomy, even if this does not necessarily imply a meaningful change in the party’s dominance over the system as a whole. Third, North Korea has taken measures to reform state-owned enterprises. At the end of 1999 and in early 2000, it reduced in size 44 associated and integrated enterprises in order to halt the knock-on effect of work stoppages in any of them. Considering that these enterprises are apparently operating at only 20–30 per cent of capacity, the separation of enterprises is apparently intended to foster selfreliance in each state-owned enterprise. Furthermore, the reforms included the closure of some bankrupt concerns. For instance, trading companies were reduced from some 300 to about 120 by merger and integration.42 The Nampo Glass Factory, one of the largest factories, was shut down because of its debt and deficit.43 This implies that the authorities may launch another round of size reduction and closure of enterprises if they feel that it is necessary to curtail the state’s fiscal burden.

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 25

Finally, the unprecedented measures of price rises and wage increases, plus the curtailing of food rations, adopted in July 2002, implied a transition from a distribution economy to a money-based one.44 This monetization process would necessarily be associated with the activation of markets in which the supply and demand of resources and products takes place. Whether it is state-owned or collective, each enterprise is expected to become a profit-yielding entity, discarding old habits of relying upon state subsidy. In the system of ideological commitment to central planning, this is a new change that could not be seen before. These changes do not automatically mean that North Korea is attempting to build a new institutional foundation for fostering private and collective entrepreneurial activities. In the light of the experience of systems undergoing gradual transition, enterprise reform in North Korea has to overcome many hurdles. In general, enterprise reform is one of the most challenging tasks in the transition system, because it is intertwined with economic change in other fields. For instance, a prerequisite for state-owned enterprise reform in an economy under gradual transition, as seen in China and Vietnam, is fiscal and banking reform, that is, separation between the state fiscal system and commercial banks. With the creation of credit-based commercial bank loans alongside measures to curtail and end state subsidies to state-owned enterprises, only efficient and productive enterprises are able to survive, reducing the burden on state expenditure. This is why enterprise reform in those transition systems has been protracted and delayed. In particular, Vietnamese enterprise reform was largely forced by the conditionality attached to financial assistance from international donors such as the World Bank and the IMF.45 What will be the feasible path of reform with regard to enterprise management in North Korea? There seems to be a possibility of bottom-up reform, attempting to take advantage of the dissemination of reforms from local enterprises, particularly the local collective enterprises. This may happen since, apart from the complexity of the reform process, the leadership hesitates to take a reform measure against the large state-owned enterprises that are controlled by the central state for security reasons. More importantly, it mostly corresponds to the basic traditional value of regional self-reliance. The reform from below requires institutional change in enterprise management: the gradual transformation of the existing local freedom of manoeuvre into legal power over licences, taxes, contracts and appointments. It is a significant element of decentralization. This institutional transition should be very similar to that of rural China, stimulating local development and prosperity. This does not mean that the initial condition of economic reform of the two systems is identical: of course they are different with respect to local rural conditions and levels of industrialization as well as sociopolitical experience and political leadership. For instance, unlike the rural base of township and village enterprises in China, those of North Korea are not necessarily located in rural areas but mostly near industrial belts in medium and small cities as well as in counties.46

26 ENTERPRISE MANAGEMENT IN NORTH KOREA

Despite such differences, however, North Korean enterprises have already met some conditions that are similar to the Chinese case at an early stage of reform. There exist appropriate human resources, namely private entrepreneurs, who have commercial and business experience that can contribute to increasing the productivity of local enterprises and local economic growth. Therefore, if the institutional arrangements are provided alongside the facilities and material resources, local enterprises in North Korea may survive economic stagnation and bring local development. At the initial stage of institutional change, it can be assumed that ownership remains intact, while the rights over operating surpluses are given to participants based on various forms of contract. This is a truly nonstandard solution, as seen in the Chinese rural enterprises, because the transition begins without clarifying the definition of ownership.47 In this transition, since the enterprises are stateowned or collective in principle and controlled by the local governments in practice, nobody can claim exclusive ownership over any part of the facilities or fixed assets. But there have to be formal and informal contracts for the sharing of profits, in terms of revenue to the local government and of wages and bonuses for workers and other participants. In so far as North Korea keeps the tradition of regional self-reliance for the time being, the county government will become a self-sufficient unit with the authority to determine the rate of tax and fee. Then the income can be used mostly for construction and welfare projects with ‘local characteristics’ as it was before. Local government does not appear to engage in predatory taxation. Not only has this been shown in the Chinese case,48 but also the low-tax policy as an incentive for business is becoming a universal law. In North Korea, recognizing that the successful local enterprises will contribute to growth, the local government officials, party secretaries and cadres are expected to collect suitable amounts of tax from them. The significance of the rights over the operating surplus, from an institutional perspective, can be proved by the success story of the August 3rd Production Drive in the period of stagnating local enterprises even before the economic crisis. While the objective of both local enterprises and the production drive was common, their rights over the operating surplus differed. It is estimated that some 88 per cent of the local enterprises were owned by the state and only 12 per cent of them were in collective ownership.49 More importantly, even the collectively owned enterprises were under the tight control of local authorities for the distribution of profits. Most of the income was extracted by the county government for its own budget. In contrast, the work teams of the production drive were managed by workers themselves, even though they were licensed and supervised by local governments. All the members participated in planning, production, marketing and sales. Furthermore, a work team with fewer than ten people was more flexible in responding to changes in the environment than local enterprise.50 As a result, the rights over the operating surplus contributed to the rapid growth of the August 3rd Production

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 27

Drive and to the burgeoning of its work-teams as profit-seeking entrepreneurial units, especially during the period of economic crisis in the 1990s. Likewise, the rights over operating surpluses are highly significant for the entrepreneurial activities of local collective enterprises. What does not matter is ownership: whether a local collective enterprise is newly established by a group of entrepreneurs, nominally affiliated to relatively large-scale enterprises like the associated enterprises, or belonged to auxiliary organizations such as local units of the women’s league, trade unions, and the farmers’ league. Meanwhile, the introduction of new technology and facilities will further assure local development. Today most of the local enterprises are backward in their technology and facilities, so it is necessary for the authorities of the central party-state to consider the replacement of old ones by taking advantage of various forms of assistance from the outside world. One source is technical and financial assistance from international organizations such as the World Bank, IMF and UNIDO. For this, North Korea must first normalize diplomatic relations with the United States which has veto power in these organizations. Another source may be South Korean enterprises. North Korea has to consider how to link the investment of South Korean businesses in the North Korean special economic zones to the growth of local enterprises. For instance, South Korea’s Hyundai Company is planning to construct the Gaseong Industrial Complex near the border between the two Koreas. When the construction is finished, local enterprises nearby can access modern technology more easily and have a linkage effect from the industrial complex. Meanwhile, looking at the Chinese case of township and village enterprises, the local enterprises by themselves can find a source of help from the technical manpower of the large state-owned enterprises for technological innovation.51 Because of the high level of industrialization, North Korean stateowned enterprises, dispersed throughout the country, have many experts and technicians who are under-utilized in the worsening economic situation. There remains the question of how to deal with private entrepreneurs in manufacturing particularly. With the exception of work teams of the August 3rd Production Drive, most of those who have engaged in manufacturing are definitely illegal according to the North Korean legal system. It is presumed that the top authorities tacitly approve the private entrepreneurs for the time being, looking for a way to benefit from their energy. Since the ownership of stateowned and collective enterprises has remained intact, it is impossible for the local authorities to legalize the ownership of the facilities that have been used or de facto owned by private entrepreneurs. In other words, the legalization of private entrepreneurs will take time and depend upon the success of local enterprises. If the arrangements for fostering local enterprises bring local growth and wealth, these enterprises may absorb the dynamism of private entrepreneurship, workers and experts as well. This will be followed by the entry of new private enterprises, that is the legalized creation of collective enterprises by groups of entrepreneurs with accumulated personal

28 ENTERPRISE MANAGEMENT IN NORTH KOREA

assets. By contrast, if the new arrangements are less successful, private entrepreneurs will continue to spread in an illegal fashion, since they are incompatible with the public-oriented ideology. To summarize, North Korea may begin with institutional change for boosting local enterprise, following the tradition of regional self-reliance and state and collective ownership. This is not necessarily accompanied by the widespread reform policy seen in the ‘big bang’ style of transformation in Eastern Europe in which privatization was the most crucial element. It seems likely that North Korea will follow the path of the Chinese township and village enterprises, while leaving for later the reform of large-scale state-owned enterprises and fiscal and banking reforms. Conclusion In North Korea, as in other transition systems, enterprise reform will be one of the most challenging tasks because of its complexity. One point is clear: the path of transition positively correlates with institutional and historical traditions. North Korea had established three institutions endorsing limited autonomy for local governments and work-places: regional self-reliance based on local enterprises, independent accounting methods, and a collective decision-making body centred on the party committee. Those institutions mostly suffered mixed fortunes in that their explicit norms were not realized because of the shortages, the inefficiency of central planning, and the party’s dominance; furthermore, they were seriously weakened in the economic crisis of the mid-1990s. A noticeable consequence was the revival of the latent value of regional selfreliance: increase in the freedom of manoeuvre of local government during the economic crisis. The increase in local leeway has a dual significance: one is that the county government in particular became an enterprising self-sufficient unit; the other is that local government in general was allowed by the party-state to exercise more power in economic affairs. In this fluid situation, private entrepreneurial activities mushroomed. The foundations of entrepreneurship were already laid by the August 3rd Production Drive for Consumer Goods, which Kim Jong Il initiated two decades ago. It is notable that the success of the production drive in the economic crisis can be put down to the rights over the operating surplus. Regardless of organizational affiliation, the work teams are almost free to manage planning, producing, marketing and—most importantly—profit sharing. This is why the work teams proliferated, to take over the role of local enterprises that had been controlled by local government. The feasible path of transition for enterprise management will depend upon institutional traditions, particularly regional self-reliance, and the history of successful work teams in the production drive. From the perspective of the top authorities, it will be the establishment of legal institutions for increased local leeway; that is, the devolution of legal power to the county governments over

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 29

licences, taxes, contracts and appointments vis-à-vis local collective enterprises, whether new or well-established ones. In reality, several necessary conditions are met. There is a powerful hankering for profits among the people, plenty of entrepreneurs familiar with commercial practices, many underutilized technicians in state-owned enterprises and, more importantly, success stories of entrepreneurial activities tacitly approved by local authorities. In this respect, the focus of transition for the implementation of the new policy will be local collective enterprises. Despite many differences, the feasible transitional path may be similar to that of China’s rural reform. While retaining them in public ownership, either stateowned or collective, the township and village enterprises with rights over surpluses burgeoned in China during the 1980s. Recognizing their positive role for local economy, the local party secretary and officials have had mutually dependent relationships with the managerial personnel of the enterprises. It seems that the Chinese case conforms to the continuing and future change in North Korea. This has been proved by successful cases of work teams in the production drive since the second half of the 1980s. NOTES 1. It was reported in July 2002 that North Korea would increase wages over tenfold and raise the price of rice over 200-fold, reflecting the unofficial market price; the revaluation is so enormous that it seems like a monetary reform: Joong Ang Ilbo, 19 July 2002; Korea Herald, 23 July 2002. 2. The sector of private entrepreneurial activities is, in definitional terms, not the same as the second economy. The second economy is an inclusive concept, since it comprises not only improper activities that take place within the planned economy but also those private activities that derail the fundamental principle of central planning. 3. For the theoretical discussions of such concepts as preferential correlation and path dependence in explaining change, see Douglass C.North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990); James G. March and Johan P.Olsen, Rediscovering Institutions: The Organizational Basis of Politics (New York: Free Press, 1989); Ervin Laszlo, The Age of Bifurcation: Understanding the Changing World (New York: Gordon & Breach, 1991); and Sung Chull Kim, ‘Institutional Change and Systems Theory’, unpublished manuscript. 4. John Wong and Mu Yang, ‘The Making of the TVE Miracle: An Overview of Case Studies’, in John Wong, Rong Ma and Mu Yang (eds.), China ’s Rural Entrepreneurs (Singapore: Times Academic Press, 1995), p.33. 5. On the explanation of the regional self-reliance in terms of security reasons, see Philo Kim, Bukhaneui Jiyeokjarip Cheje (Regional Self-reliance System of North Korea) (Seoul: KINU, 1999), pp.25–9. 6. Unlike in South Korea, there is no myun, a middle range unit between county and ri, in North Korea. During the Korean War, North Korea conducted an

30 ENTERPRISE MANAGEMENT IN NORTH KOREA

7. 8. 9.

10. 11.

12.

13. 14.

15. 16.

17. 18.

19. 20.

21. 22.

administrative reform to eliminate the myun, extending the size of the ri. This was for the establishment of effective transmission and penetration of state policies by reducing the hierarchical levels. Geulloja (Worker), March 1985, pp.3–27. Gyeongje Sajeon (Dictionary of Economy) (Pyongyang: Sahoigwahak Chulpansa, 1985), Vol. 1, p.215 and Vol. 2, p.443. However, it should be noted that the local budget constitutes a part of the local government’s annual income and expenditure. For instance, the salary of local government officials and teachers is paid by the state, and educational expenditures and major construction works are subsidized by the state. More importantly, the budgets for the large state-owned enterprises, mostly energy and heavy and chemical industries, are completely and directly subsidized by the state. Furthermore, the fact that the ratio between state budget and local budget was 85: 15 shows North Korea’s relative low reliance on the locally managed economy: see Philo Kim, op. cit., p.65. Kim Jong-il Seonjip (Selected Works of Kim Jong-il) (Pyongyang: Joseon Rodongdang Chulpansa, 1998), Vol.8, p.4. Suk-Gi Lee, Bukhaneui Jibang Gongeop Hyeonwhanggwa Baljeon Jeonmang (Local Enterprise in North Korea: Present and Future) (Seoul: KIET, 1998), pp.11 and 53–4. Shin-lim Choi and Suk-gi Lee, Bukhaneui Saneop Gwalli Chegyewa Gieop Gwalli Jedo (Industrial Management and Enterprise Management in North Korea) (Seoul: KIET, 1998), p.25. Kim Il Sung Jeojakjip (Collected Works of Kim Il Sung) (Pyongyang: Joseon Rodongdang Chulpansa, 1984), Vol.28, p.125. Sung Chull Kim, ‘Is North Korea Following the Chinese Model of Reform and Opening?’, Institute Report of East Asian Institute, Columbia University (Dec. 1994), p.8. Kim Il Sung Jeojakjip (Collected Works of Kim Il Sung) (Pyongyang: Joseon Rodongdang Chulpansa, 1992), Vol.38, pp.346–62. Tae-il Kim, Bukhan Gukyeonggieopsoeui Gwanriunyeong Chegyeo (Management System of State-Owned Enterprises in North Korea) (Seoul: KINU, 1993), pp.48– 51. Institute for Peace Studies, Dongbukawa Nambukhan, 1988 (Northeast Asia and South and North Korea, 1988) (Seoul: IPS, 1989), pp.182–6. For important structural features of reform in socialist system, see Janos Kornai, The Socialist System: The Political Economy of Communism (Princeton, NJ: Princeton University Press, 1992), pp.360–65 and 387–92. Kim Il Sung Jeojakjip (Collected Works of Kim Il Sung) (Pyongyang: Joseon Rodongdang Chulpansa, 1982), Vol.18, p.505. For the criticism made by Kim Il Sung of the manager’s arbitrariness, see his speech to the Central Committee of KWP on 21 March 1954: Kim Il Sung Jeojakjip (Collected Works of Kim Il Sung) (Pyongyang: Joseon Rodongdang Chulpansa, 1980), Vol.8, p.305. Tae-il Kim, Bukhan Gukyeonggieopsoeui Gwanriunyeong Chegyeo, p.26. Considering the special conditions of the post-Korean War period, Kim’s opponents preferred the development strategy of giving more weight to agriculture and light industry than heavy industry. The clash between the two factions over

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 31

23. 24. 25. 26.

27.

28.

29. 30.

31. 32. 33. 34. 35. 36.

37.

38. 39. 40. 41. 42.

economic policy as well as power relations was so intense at the Third Congress of KWP in April 1956 that the policy priority of the First Five-Year Economic Plan (1957–61) was not fixed until later. Kim Il Sung Seonjip (Selected Works of Kim Il Sung) (Pyongyang: Joseon Rodongdang Chulpansa, 1960), Vol.5, pp.345–6. Sung Chull Kim et al., North Korea in Crisis: An Assessment of Regime Sustainability (Seoul: KINU, 1997), p.57. Keun Lee, New East Asian Economic Development: Interacting Capitalism and Socialism (Armonk, NY: M.E. Sharpe, 1993), p.86. On the party committee meetings, Sung Chull Kim, Bukhan Ganbujeongchekeui Jisokgwa Byeonhwa (Cadre Policy in North Korea: Continuity and Change) (Seoul: KINU, 1997), pp.42–9. Sei-jin Jeong, Gyehoikeseo Sijangeuro: Bukhancheje Byeondongeui Jeongchi Gyeongje (From Planning to Market: the Political Economy of Transition of North Korean System) (Seoul: Hanul, 2000), p.189. Geum-suk Lim, ‘Bukhan Jayeongeobeui Teukjinggwa Baljeon Banghyang’ (North Korean Private Entrepreneurs: Characteristics and Prospects), Tongil Gyeongje (Unification Economy), March-April 2002, p.58. Interview with Cheong-song Koh, Unpublished Data of Interview with Defectors from North Korea (Seoul: KINU, 1997). Andrew S.Natsios, The Great North Korean Famine: Famine, Politics, and Foreign Policy (Washington, DC: United States Institute of Peace Studies Press, 2001), p.99. On the famine train in the mid-1990s, see ibid., pp.78–80. Chosun Ilbo, 21 Aug. 2001. Lim, ‘Bukhan Jayeongeobeui Teukjinggwa Baljeon Banghyang’, p.61. Kim Jong-il Seonjip (Selected Works of Kim Jong-il) (Pyongyang: Joseon Rodongdang Chulpansa, 1998), Vol.13, pp.440–41. Jean C.Oi, Rural China Takes Off: Institutional Foundations of Economic Reform (Berkeley, CA: University of California Press, 1999), pp.95–138. For the case of such mutual dependency between urban entrepreneurs and the state, see Dorothy J.Solinger, China’s Transition from Socialism: State Legacies and Market Reforms (Armonk, NY: M.E.Sharpe, 1993), pp.261–4. Kim Jong Il himself has reiterated the importance of earning foreign currency not only for the introduction of raw materials, particularly crude oil, but also for the import of grain; for example, in 1996 he suggested the cultivation of medical plants to trade for food, if the soil is not fit for grain production: see Kim Jong-il Seonjip (Selected Works of Kim Jong-il) (Pyongyang: Joseon Rodongdang Chulpansa, 2000), Vol.14, p.162. Hangyeorei Sinmun, 15 Sept. 1996. Sei-jin Jeong, Dongasia Gukjegwangyeowa Hnabando (International Relations in East Asia and the Korean Peninsula) (Seoul: Hanul, 2002), p.236. Jerry F.Hough, How the Soviet Union is Governed (Cambridge, MA: Harvard University Press, 1979), pp.528–9. Korean Central News Agency, 9 April 1999. Bradley Babson and Eun Sook Kim, ‘Challenges in Expanding External Economic Relations with North Korea’, paper presented at the conference on the North

32 ENTERPRISE MANAGEMENT IN NORTH KOREA

43. 44.

45.

46.

47.

48.

49. 50. 51.

Korean System at the Dawn of the 21st Century’, University of California at Berkeley, 7 April 2000, p.10. Joseon Sinbo, 14 Jan. 2002. These measures look similar to those taken in Vietnam years before Doi Moi. In 1980, Long An Province introduced a new price policy and suspended ration coupons. The policy increased prices of rice, meat and other consumer goods to reflect market prices, and the price rise was compensated by a wage increase. Since it resulted in a success of production increase, the authorities at the centre approved it as a general model of incentive method: see Gareth Porter, Vietnam: The Politics of Bureaucratic Socialism (Ithaca, NY: Cornell University Press, 1993), pp.123–4. The donor organizations have pressed the Vietnamese government to expedite enterprise reform by either making the amount of aid depend upon the progress of reform or by special funding with specific conditionality: see World Bank, Vietnam: A Progress Report on the Country Assistance Strategy of the World Bank Group, 1999–2002 (Washington, DC: World Bank, 2002); and IMF, Vietnam: Request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility (Washington, DC: Asia and Pacific Department, IMF, 22 March 2001). The difference parallels the urban:rural population composition in the two countries. In China, the rural population constituted 63.9 per cent according to the 1990 population census, whereas in North Korea it was only 36.7 per cent according to a South Korean statistical survey in 2000. The urban:rural ratio in two countries seems quite the opposite. On the resolution of polarized ownership issues through contracts in China, see Chen Jianbo and Gary H.Jefferson, ‘Development of the Hengdian Township Enterprise Group: A Case Study’, in Gary H.Jefferson and Inderjit Singh (eds.), Enterprise Reform in China: Ownership, Transition, and Performance (New York: Oxford University Press, 1999), pp.279–87. On the possibility of learning from Chinese rural reform, see John McMillan, ‘What Can North Korea Learn from China’s Market Reforms?’, paper presented at the conference on The System Transformation of the Transition Economies: Europe, Asia, and North Korea, Institute for Korean Unification Studies, Seoul, 14 Sept. 1996, p.19. Oi, Rural China Takes Off, p.36. Nevertheless, it should be noted that there exists a contrasting reality that predatory state agents impose financial burdens on the peasants in the central and western belts of China: for this analysis, see Thomas P.Bernstein and Xiaobo Lu, ‘Taxation Without Representation: Peasants, the Central and the Local States in Reform China’, China Quarterly, No.163 (Sept. 2000), pp.742–63. Choi and Lee, Bukhaneui Saneop Gwalli Chegyewa Gieop Gwalli Jedo, p.12. Chosun Ilbo, 17 Oct. 2001. The Chinese case shows that a large reservoir of technicians in the state-owned enterprises is helpful for the technological development of rural enterprises; some of them pass over their new technology in exchange of gifts or privileges, and others are engaged in moonlighting after their work: see Wong and Yang, China’s Rural Entrepreneurs, pp.34–5.

Pragmatism in the Face of Adversity: Enterprise Reform in Laos NICK J.FREEMAN

Introduction Relatively little information and analysis currently exists on the topic of enterprise reform in Laos. This study attempts to partially fill this lacuna by reviewing and assessing the process of enterprise reform in the Lao People’s Democratic Republic (henceforth Laos) since the late 1980s. It examines four elements of the enterprise reform process in the country: the state-owned enterprise (SOE) privatization programme of the 1990s; continuing restructuring of the state-owned commercial banks; efforts to ‘commercialize’ the operations of the remaining ‘strategic’ SOEs; and recent attempts to develop the country’s fledgling private sector.1 These four areas are discussed in turn in the following sections, after a very brief profile of Laos’s relatively unusual economic characteristics. A final section provides some concluding remarks. Laos is Southeast Asia’s only landlocked country, with a population of approximately 5.3 million, distributed widely over an area of 237,000 sq. km.2 Although governed by the avowedly socialist Lao People’s Revolutionary Party (LPRP) since 1975, Laos has been undergoing an economic transition process similar to those of neighbouring China and Vietnam since the mid-1980s. This economic reform programme in Laos is commonly referred to as the New Economic Mechanism (NEM). The introduction of NEM in 1985 followed an unsuccessful attempt to introduce a centrally planned economy in Laos, after more than two decades of civil war. The commencement of economic reform in the country broadly coincided with the doi moi economic reform process enacted by Vietnam’s government, which is regarded by the LPRP leadership as its ideological mentor and fraternal ally. With an average per capita income of approximately US$400, Laos is classified as a less-developed country, and is one of the poorest countries in East Asia. More than 80 per cent of the workforce is employed in the agricultural sector, which accounts for about half of the country’s gross domestic product (GDP). Much of this agricultural activity is subsistence-based, with a low level of monetization in many areas. The service sector accounts for roughly 25 per cent, and light industry and handicrafts some 21 per cent of GDR (There is

34 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

almost no heavy industry activity in Laos, beyond power generation and a few small cement plants.) The illiteracy rate is high by East Asian standards, at slightly over 40 per cent. The standard of physical infrastructure in the country is generally very poor, particularly across the highly mountainous parts of the country. Consequently, some of the country’s 18 provinces are quite remote from the capital, Vientiane. Only 20 per cent of the population lives in urban areas, largely in the towns that are located along the eastern bank of the Mekong River, which demarcates much of Laos’s long border with Thailand. The country is heavily reliant on imports of manufactured items, largely from Thailand, China and Vietnam. Privatization of the State Enterprise Sector In 1998, the International Monetary Fund (IMF) stated that the privatization programme in Laos had been ‘one of the most successful parts of the [country’s] structural reforms thus far’.3 However, surprisingly little is known about the privatization process conducted by Laos during the 1990s. This is partly because the privatization process itself appears to have been fairly opaque, and also because Laos tends not to receive as much attention from analysts as other transition economies. The assumption is often made that the economic reform process in Laos, and its various components, closely resembles that of neighbouring Vietnam. To some extent this is true, although there are also a number of marked differences in the economic reform and business liberalization profiles of the two countries, one of which has been the divestment of SOEs. Vietnam’s privatization programme—or ‘equitization’—has been a slow process, having faced a number of obstacles, including difficulties in valuing the fixed assets of SOEs identified for privatization. Laos appears to have side-stepped some of these difficulties, and therefore enjoyed a more rapid privatization process, notably by valuing SOEs on their historic cash flows (and implied earnings potential) rather than on fixed assets, and by often opting for leasing or management buy-out agreements, rather than public share sales. Indeed, Laos’s privatization programme commenced roughly three years before that of Vietnam, and unlike Vietnam, Laos has been much more willing to permit foreign investors to participate actively in the privatization programme.4 Indeed, a number of large and high-profile state enterprises were converted into foreign joint ventures, under the country’s foreign investment law.5 Such decisions were wholly pragmatic, given the limited domestic savings of the country, the undeveloped state of the private sector, and insufficient local investor appetite for large SOE assets. Furthermore, Laos has never had an equity market, and seems unlikely to have one for many years to come. Therefore the use of a stock market as a platform to publicly sell—and later trade —shares in privatized state enterprises has not been a viable policy option for Laos’s state sector divestment programme. As a result, trade sales of enterprises

ENTERPRISE REFORM IN LAOS 35

—to foreign and local investors—was the only sensible route for Lao’s privatization to take. A Profile of Privatization Deals in Laos The total number of SOEs in Laos dropped from over 600 in the late 1980s to fewer than 50 by the end of the 1990s.6 The government began experimenting with operational autonomy for select state enterprises as early as 1983, and by 1987 the majority of state firms were enjoying a greater degree of business freedom, albeit with some targets for output and tax contributions.7 In March 1988, the Lao government issued Decree 19, which formally recognized the autonomy of SOEs to conduct business as they deemed fit, in terms of output, wages, pricing, and investment plans. This was shortly followed by a decision from the Ministry of Industry and Handicrafts to sign two leasing contracts with local and foreign investors, for a corrugated metal factory and a tobacco company. These first two privatizations occurred in late 1989, and subsequently the momentum of divestments was kept up during the first half of the 1990s. Another landmark decree, Decree 17, was issued in March 1990. It dealt with the conversion of SOEs into other forms of ownership. Decree 17, along with two implementing regulations (Decree 1030 of May 1990 and Decree 1807 of October 1990), has been the legal platform on which privatization in Laos has occurred. Initially, privatization activity in Laos was overseen by the NEM financial committee, under the ministry of economy, planning and finance, but this was transferred in 1992 to a privatization committee within the committee for planning co-operation. However, in practice, relevant line ministries and provincial authorities have played a very proactive role in the privatization process, notably in terms of selecting the SOEs for divestment, the divestment form chosen, the valuation process, and the identification of potential investors. Figures 1 and 2 give a profile of the privatization process in Laos between 1989 and 1997, involving 103 SOEs reporting to the national government’s line ministries. There is no information in the public domain concerning the privatization of the large number of SOEs under provincial government authority. From the available figures, it is evident that 1992 was the peak year for privatizations, in terms of the number of divestment deals, although 1996 saw the largest value in divestments, with the partial sale of the Lao Telecommunications Company as a foreign joint venture. By 1998, much of the privatization programme was deemed completed, and Laos claimed to have just 32 non-strategic SOEs left for privatization; these were reportedly offered for sale in the Lao media. A further 30 or so SOEs were classified as ‘strategic’, and a decision was made that these should remain in state hands and not be eligible for privatization (this is discussed further below.) A report by a government research institute in 2001 noted that, while the authorities initially tendered for investors wishing to acquire or lease those state enterprises still eligible for privatization, this proved problematic, especially when it came to valuing

36 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

FIGURE 1 PRIVATIZATIONS IN LAOS, 1989–97

Source: IMF, Lao People’s Democratic Republic: Recent Economic Developments (IMF Staff Country Report No. 98/77, August 1998), pp.60–62. FIGURE 2 PRIVATIZATION FORMATS IN LAOS, 1989–97

enterprise assets. As a result, the government sought to negotiate directly with potential investors on a case-by-case basis. This process has been very opaque.8 Assessing the Success of Privatization in Laos In retrospect, how successful has the privatization programme in Laos really been? On the one hand, both the national and provincial authorities have been successful in exiting from their direct involvement in the majority of SOEs, through various means.9 This in itself is no small achievement. On the other hand, there is at present no thorough analysis of post-privatization performance by former state enterprises in Laos in the public domain. A recent small-scale survey by the National Economics Research Institute concluded that of 20 former state enterprises it visited, three companies reported to be performing ‘much better’ since being privatized, 13 were simply ‘better’, two were

ENTERPRISE REFORM IN LAOS 37

performing ‘as before’, and two were performing ‘worse’ than before privatization.10 The general opacity of the privatization procedure in Laos—particularly at the provincial level—also means that it is hard to tell whether individual ‘insiders’ and officials derived personal gain from particular divestment deals that were negotiated.11 As in Vietnam, it is almost certainly true that Laos was witnessing, prior to the commencement of its privatization programme, a ‘hollowing out’ of the state enterprise sector by managers and employees, as state enterprise assets were illicitly transferred to private companies. In this context, the privatization programme was an attempt to formalize this process, and allowed the state to exit from a range of small businesses in which it held (unnecessary) ownership. The fact that so many SOEs in Laos were divested through leasing agreements also raises the question of whether ownership of these firms was really transferred from the state—and therefore can be regarded as genuine privatization12—or whether some enterprises will return to state ownership and control when the existing leasing agreements reach maturity. The lease agreements typically have maturities of 10–35 years, and some will come to an end in the next few years.13 Whether these individual leases will be renewed, converted into equity investments, or simply allowed to lapse and the companies liquidated, remains unclear. In the early phases of Laos’s privatization programme, the leasing format arguably served as a half-way divestment, appropriate when both the government and potential investors alike lacked sufficient confidence to conduct outright share sales of state enterprises. Leasing agreements also side-stepped difficulties relating to the sale of state land, which was prohibited in the late 1980s and early 1990s. It also mitigated in part the difficulties surrounding asset valuation. For local investors—and particularly enterprise managers—who did not have sufficient capital to acquire the company outright, the leasing and hire purchase forms of divestment were also an attractive proposition. Put another way, if the leasing format had not been adopted, it is likely that the pace of privatization in Laos would have been markedly slower, as in Vietnam, which has not pursued leasing agreements as part of its ‘equitization’ programme. However, as confidence levels rose, leasing came to be regarded as less than ideal.14 A recent government document argued that it has not led to desired improvements in efficiency. Therefore, it suggested, Lao policy-makers intended to ‘examine alternative ownership arrangements at both the central and local government levels’.15 A significant number of other privatization deals in Laos were by management buy-outs, with the existing managers and employees of SOEs effectively taking over control of the firm. As Havrylyshyn and McGerrigan have pointed out, management and employee buy-outs have ‘…the twin advantages of feasibility and political popularity. Insider privatization also has benefits in terms of speed and ease of implementation’—a fact that explains the popularity of this divestment format in many transitional economies, including Laos.16 However,

38 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

international evidence is mixed on whether such divestment forms are ultimately successful in terms of post-divestment enterprise performance, and the limited extent of current research on Laos’s privatization experience sheds no new light. Most recently, there have been a few anecdotal reports that the number of state enterprises in Laos may actually be increasing again, as an unintended sideeffect of a new decentralization programme unveiled by the government in March 2000.17 Under this programme, which is a key component of the country’s national development plan for 2001–2005, the government has granted increased autonomy to the country’s 18 provincial authorities, some of which are believed to be setting up new state enterprises. Although relatively little recent privatization activity has been seen in Laos’s state enterprise reform programme over the past five years or so, there have been some significant developments affecting the state-run commercial banks in recent years; these will be discussed below. Restructuring the State-Owned Commercial Banks Laos’s three state-owned commercial banks are due to undergo radical reform in the period 2002–2006, as part of a performance-related recapitalization programme conducted by the Asian Development Bank (ADB) and the World Bank. Having been used as vehicles for noncommercial ‘policy lending’ to the country’s state enterprise sector, lacking adequate credit evaluation and risk management systems, and too loosely supervised by the country’s central bank, the country’s three state-owned banks are effectively insolvent. In the case of the largest bank, Banque pour le Commerce Extérieur Lao (BCEL), it was also used by the government in a failed bid to try to defend the local currency during the Asian financial crisis of 1997–79, and as a source of funding for national strategic investments. All three state-owned banks—BCEL, Lane Xang Bank (from the north), and Lao May Bank (from the south)—are loss-making, have negative capital adequacy, possess non-performing loan (NPL) levels in excess of 65 per cent of total loans, and have negative foreign exchange positions.18 Some branches of these banks effectively operate as semiautonomous units, with little communication or coordination with head office. Partly as a result, just one of BCEL’s seven branches, only three of Lane Xang Bank’s 12 branches, and none of Lao May Bank’s branches are reported to be profitable.19 Under the impending restructuring and recapitalization programme, Lane Xang Bank and Lao May Bank are to be merged into a new single entity, while BCEL will remain a stand-alone operation, but also as a new legal entity. By forming new entities, it is hoped, the two new banks will not inherit the hidden off-balance-sheet liabilities of the old banks, the full extent of which is unknown. The new entities will cherry-pick the best fixed and performing assets of the former banks, and re-hire roughly half of the existing staff on a selective basis. Full-time foreign advisers will also be attached to the banks, to help ensure the implementation of the restructuring and business plans. A carrot-and-stick

ENTERPRISE REFORM IN LAOS 39

approach will be used to try to motivate the banks’ management and staff to implement these plans. Carrots will include the provision of recapitalization bonds, performance bonuses, continuation of contracts for existing management, and regulatory forbearance; the sticks will comprise the withholding of the same. The attempt to revive these state-owned banks entails no fewer than seven components, from simplifying operational management and branch rationalization to improving human resources and introducing wholly new IT systems. This is the second round of banking consolidation to occur in Laos since 1998, when six state-owned banks were merged into Lao May Bank and Lane Xang Bank.20 This followed a previous recapitalization programme, led by the ADB, for what were then eight state-owned commercial banks in 1994.21 One of the lessons learnt from these earlier experiences is that upfront capital injections do not seem to work if they are not done in tandem with improvements in management. Rather, the recapitalization process should occur in stages, conducted over several years, in lock-step with a series of points-based performance reviews. The current bank recapitalization process is set to occur in three stages, over a four-year period. Points awarded for meeting both qualitative and quantitative goals will be translated into capital injections into the new bank entities. These goals include meeting targets for capital adequacy levels, asset quality, recovery of NPLs, management efficiency, earnings, and liquidity cover. The hope is that, by the end of 2006, Laos’s state-owned commercial banks will have attained positive capital adequacy, and have the sorts of internal capabilities that will allow them to become profitable (at best) or at least remain solvent (at worst). Much will depend on making these state-owned banks more autonomous from government interference, and ending their role as policy lenders (that is, lenders directed by government). As there are no plans to wholly or partially divest any of these banks and introduce any private equity (either local or foreign), it remains to be seen whether the temptations of the past can be resisted in the future. Furthermore, any attempt to improve, and then sustain, the condition of Laos’s state-owned commercial banks will require changes in what remains of the state enterprise sector (see below). Several of the larger, ‘strategic’ SOEs are not yet run on wholly commercial terms, because they provide essential utilities and services at subsidized prices. Others are not profitable simply because they are poorly run. In the past, the losses incurred by these SOEs were often passed on, as NPLs, to the state-owned commercial banks.22 Perhaps 80 per cent of all NPLs in Laos are derived from loans to state-owned enterprises, thanks in large part to policy lending directives by the government. As the IMF notes, although the government is now ‘attempting to stop directed lending, pressure remains to rollover existing bad loans or extend new loans to [state enterprises] on noncommercial terms or for economically unjustifiable projects’.23

40 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

Together, these state-run commercial banks account for about 65 per cent of total banking assets in Laos.24 While they undergo this restructuring process, their ability to perform as financial intermediaries will be substantially constrained. This has potentially important implications for credit provision in Laos, particularly for the country’s fledgling private sector, which is discussed at the end of this contribution. Efforts to ‘Commercialize’ the ‘Strategic’ State Enterprises In 1996, just over 30 large state enterprises—comprising utility companies, eight state-run commercial banks, and three holding companies25—were deemed by the Lao government to be ‘strategic’, and therefore inappropriate for privatization.26 In a few cases, the logic of the decision regarding which enterprises were eligible for privatization and which were not is unclear. For example, the seemingly ‘strategic’ national telecommunications company was divested into a foreign joint venture, while some non-strategic companies, such as a few timber-trading companies, were ring-fenced to stay in the state sector. Simple pragmatism may have been one contributory factor here, as the government was keen to increase budget revenues through privatizations, and there was greater foreign investor appetite for enterprises in some business sectors such as telecommunications. Equally, the decision to keep apparently non-strategic enterprises in the state sector may reflect entrenched political interests. In 1997, a process began to make the operations of 33 ‘strategic’ enterprises more commercially oriented. This involved converting them into public jointstock firms; appointing boards of directors; financial restructuring; and establishing various performance improvement criteria and objectives. Judging from the problems that these ‘strategic’ enterprises have continued to pose for the state-run commercial banks, the ‘commercialization’ process was not very successful. The process also seemed to lack direction. Thus, while there was an authority to supervise the privatization process of non-strategic enterprises, no single government agency was mandated to oversee the ‘commercialization’ of the ‘strategic’ SOEs, and they continue to report to individual ministries or provincial authorities. In 2001, a decision was made to revive attempts to improve the commercial behaviour of Laos’s (now 24) ‘strategic’ state enterprises. Crucially, this included a mechanism to allow the utilities and other ‘strategic’ enterprises gradually to adjust upwards the prices they charge for various services and products, at least to ensure full cost recovery and meet their debt servicing obligations. Prices for water, electricity, petroleum and domestic flights, for example, have all been slowly increasing in Laos over the past two years.27 Nevertheless, attempts to ‘commercialize’ the activities of the remaining ‘strategic’ SOEs are still going on and hence it is unclear how successful it will ultimately prove.

ENTERPRISE REFORM IN LAOS 41

Developing the Domestic Private Sector With the SOE sector contracting, and recent foreign investment activity failing to match the large inflows seen in first half of the 1990s, Laos’s economic wellbeing greatly depends on developing the domestic private sector. Apart from being an important potential contributor to economic growth, developing the private sector would also offer employment for those entering the workforce for the first time, as well as those leaving the SOE sector; increased tax revenue, as other revenue sources (such as customs tariffs) decline; and a generator of export earnings and foreign exchange revenues for the economy. Indeed, some evidence from other transitional economies suggests that new private companies are a more potent engine of growth than privatized firms.28 The sorts of obstacles that confront and constrain the domestic private sector are broadly twofold: first, internal capacity weaknesses inside these companies, largely stemming from a lack of experience and knowledge;29 and second, problems with the host business environment that make it unconducive to entrepreneurial endeavour. In terms of the latter, a number of obstacles can be identified. First, there is inadequate access to most kinds of financing. Beyond various informal sources (such as funds from relatives, friends or customers), official financing is limited to bank credit, as Laos has no capital market to speak of, and little access to venture capital.30 Yet, as has been noted, Laos’s banking sector is not in good health, and is currently both unwilling and unable to be a major provider of funds to the private sector. Even if it were, the average maturity on bank credit tends to be relatively short term, while providing adequate collateral is often difficult for private firms. Banks are hesitant to lend to private firms owing to difficulties in assessing the general credit-worthiness of such companies; concerns over enforcement of foreclosure rights on mortgaged assets; inadequate risk management systems; and the higher transaction costs that are entailed with extending—and managing—relatively small loans. Second, private firms in Laos have problems finding well-educated and experienced staff, particularly for managerial positions. Skills and expertise in some specific areas of business activity, such as marketing and project management, tend to be quite rare. Where they do exist, there is still a general preference among many people to work for SOEs. Third, with such a small economy, population and average per capita income, the domestic market for most products and services is also small. This necessitates that firms break into overseas markets. However, they often lack the information and resources to do so with any success. There is also a general preference by domestic consumers for foreign products and services. Fourth, Laos has not seen the sort of foreign investment activity with which domestic private companies could establish strong linkages, and thereby ‘plug into’ the growing number of cross-border production networks. Where joint

42 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

ventures between foreign and local firms have been established in Laos, many of these have SOEs acting as the local partner, rather than private companies. Fifth, the corporate tax regime in Laos is demanding, with a basic corporate income tax rate of 35 per cent—possibly the highest in Southeast Asia (typically, foreign investors face a much lower rate of income tax than local firms.) Finally, there are the burdensome bureaucracy, corruption and other arbitrary actions by the authorities, that adversely affect the business environment in general, and impede the development of domestic private companies in particular. One sideeffect is that in a bid not to attract the attention of various official bodies and hence incur additional fees, the owners of private firms have a tendency to keep the scale of their business deliberately modest—the so-called ‘small poppy syndrome’. Concluding Remarks The process of enterprise reform in Laos has been influenced in large part by the fairly unusual conditions that exist in this small, transitional economy in Southeast Asia. It has also been influenced by a government that remains avowedly socialist in its approach to economic development, and sensitive to the ideological ramifications of state enterprise divestment. None the less, policymakers in Laos have adopted a pragmatic approach towards enterprise reform, and have recorded some fairly commendable achievements, notably on privatization, given the small scale of domestic savings and a particularly underdeveloped financial sector. The willingness to use foreign capital in the privatization process contrasts with Vietnam, and places Laos’s experience closer to that of Russia and some Eastern European countries. Indeed, state sector divestment has been an important part of the foreign investment ‘story’ in Laos.31 Laos’s privatization programme appears to have been much speedier than that of Asian post-communist economies such as China or Vietnam, but not as rapid as the ‘big bang’ approach of Russia and some other Eastern European states. That said, the scale of the state enterprise sector in Laos was obviously very much smaller than that of China and Vietnam. Thus, privatization in Laos could be enacted without posing potentially destabilizing problems for the national economy, the labour market, and other socio-economic challenges. In retrospect, the heavy use of leasing agreements may not have been an ideal divestment form, but it does seem to have played a useful role in the initial years of the privatization programme in Laos, when the appetite for equity sales was probably insufficient. And this may explain in part why Laos’s privatization programme seems to have been much speedier than in neighbouring Vietnam. However, past progress may now be threatened as existing leasing arrangements come to an end with the possibility that some former SOEs will be returned to public ownership. The recent decentralization campaign being enacted by the

ENTERPRISE REFORM IN LAOS 43

governmental could also see wholly new SOEs being established by provincial authorities, effectively discounting the privatization efforts of the 1990s. Reform of the state-owned commercial banks has also been fraught with problems and disappointments. Even if the current plans for a restructured and recapitalized state banking sector meet with success, Laos’s banking sector will probably not be fully revived until the end of 2006. Part of the problem has been the abuse of the state-run commercial banks by the government, effectively using bank credit a source of subsidy for several of the country’s larger, loss-making SOEs. This practice clearly needs to stop, and be replaced with a more conventional credit culture. Such a culture must extend to the large ‘strategic’ state enterprises, some of which have yet to attain the government’s goal of ‘commercial operations. Efforts have been revived to achieve this, and an important step in the right direction has occurred with the decision gradually to lift pricing ceilings on essential services and commodities. The corollary of any SOE reform programme in Laos is the development of the fledgling private sector, and particularly the rise of domestic small and medium-sized enterprises. A concerted attempt to address this element of the economic reform agenda has only recently begun in Laos, and much still needs to be done to overcome weaknesses in the business environment and internal capacity problems that currently constrain Laos’s private sector.32 Some of these obstacles stem from continuing difficulties faced—and privileges enjoyed—by the country’s SOEs and state-owned commercial banks. The playing field for state and private enterprises is not yet level, and ‘strategic’ enterprises continue to soak up an unduly large proportion of available bank credit. In this context, state enterprise sector reform and private sector reform are interlocking elements of the same, larger agenda of enterprise reform in Laos. Both privatized former SOEs and new private companies alike will require a more conducive enabling business environment if they are to prosper in the years ahead. NOTES 1. Enterprise reform as it relates to foreign-invested companies in Laos is not discussed in this analysis. 2. At an average distribution of roughly 20 persons per square kilometre, Laos is one of the most sparsely populated countries in East Asia. 3. International Monetary Fund, Lao People’s Democratic Republic: Recent Economic Developments (IMF Staff Country Report No.98/77, Aug. 1998), p.12. 4. Although Vietnam now permits foreign investors to have a limited participation in the equitization programme, this was not the case for much of the 1990s. Foreign investors in Vietnam may not own more than 30 per cent of equity in local companies, and no state-owned firm has been partially or wholly divested through a joint venture or wholly foreign-owned investment project. 5. These include the Beer Lao brewery, initially privatized in 1993 for US$10.2 million, and the Lao Telecommunications Company, privatized in late 1996 for US

44 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

6.

7.

8.

9.

10.

11. 12. 13.

14.

15.

16. 17.

$45 million; both enterprises became joint ventures with Thai investors. In 2001, the original investors sold back their stake in the brewery to the Lao government, and it was again privatized as a joint venture in early 2002, for an undisclosed sum. The actual number of state enterprises operating prior to privatization is unclear, and published estimates vary widely. Many of the original state enterprises were small-scale businesses, located in the provinces, and most of these were quite easily sold, leased or liquidated. In a few cases, state enterprises were sold back to their original owners prior to nationalization in the mid-1970s. Only a proportion of these enterprises reported to the national government, through various line ministries. See Ichiro Otani and Chi Do Pham, The Lao People ’s Democratic Republic: Systemic Transformation and Adjustment (IMF Occasional Paper No.137, May 1996), pp.11–12. See Committee for Planning and Co-operation, ‘Final Report on the State Owned Enterprise Issues in the Lao PDR’ (Vientiane: National Economic Research Institute, Nov. 2001), mimeo., pp.2–3. As Otani and Chi note, ‘public knowledge of the privatization programme has been limited, and the overall process has been rather opaque’ (p.47). A report penned in 2001 suggests that there remain 33 state enterprises still operating under the central government; a further 60 are operating under various provincial governments. There are seven state enterprises working as local partners in foreign joint ventures, and about 35 leased or hire-purchased enterprises are expected to return to state ownership when their existing agreements expire: see Committee for Planning and Co-operation, ‘Final Report’, p.4. See Committee for Planning and Co-operation, ‘Final Report’, p.3; no indication is given of how this performance was measured, and may be based solely on the general impressions of the management. The suspicion must be that some individuals did personally benefit in a proportion of privatization deals. Clearly, in strictly legal terms, ownership of enterprise assets does not change under a leasing agreement. Some leases appear to have been as little as three or five years in maturity: see Asian Development Bank, Reforming the Financial Sector in the Lao PDR (Manila: Asian Development Bank, Programs Department (West), Division 3, July 1996), pp.50–51. This notion is supported by Figure. 2, where leasing was the dominant privatization form during the early years of the programme, but declined as a proportion of total divestment deals in later years. Letter of Intent and Memorandum on Economic and Financial Policies, 26 March 2001 . For example, under a leasing agreement with a fixed time horizon, the management of an enterprise will be disinclined to enact long-term investments. Oleh Havrylyshyn and Donal McGerrigan, Privatization in Transition Countries: A Sampling of the Literature (IMF Working Paper, WP/99/6 Jan. 1999), p.20. The decentralization programme envisages Laos’s 18 provinces becoming ‘strategic units’, its districts becoming ‘planning units’, and villages acting as ‘implementation units’. The basic principles of decentralization are contained in Prime Ministerial Instruction 1, of March 2000. It appears that the government had

ENTERPRISE REFORM IN LAOS 45

18. 19.

20. 21.

22.

23.

24.

25.

26.

27.

intended only to pilot the decentralization programme with a few provinces, but the initiative gained increased momentum when other provinces sought to take advantage of the instruction. An earlier attempt at decentralization in the late 1980s was abandoned, after tax revenues to the central government dropped sharply. The capital deficiency of the three banks is conservatively estimated to be 400 billion kip, or three per cent of GDP. Details concerning the state-run commercial banks are derived from presentation materials on the ADB’s Bank Restructuring Committee technical assistance programme, unpublished manuscript, 31 May 2002. For a very detailed analysis of the Lao banking sector during the first half of the 1990s, see Asian Development Bank, Reforming the Financial Sector. When the country’s mono-banking system was dismantled in 1988, BCEL and seven other state-run commercial banks were formed in the period 1988–91; the seven were mostly provincial branches of the former state bank. Under the 1994 recapitalization effort, some cash was injected into the banks and government bonds were issued to finance the initiative. In 1996, an ADB report suggested that ‘having established an adequate capital base, banks can now make the transition to competitive commercial operations and improve their bank management skills’; with hindsight, this outlook proved to be premature: see Otani and Chi, The Lao People’s Democratic Republic, pp.24–6. This is not to suggest that all subsidized prices for essential products and services provided by ‘strategic’ state enterprises in Laos should immediately be removed; rather, the government should seek to phase out these prices in the long term, and in the short-to-medium term it should fund ‘strategic’ state firms’ loss-making operations through the state budget, rather than through the commercial banking sector. See International Monetary Fund, Lao People’s Democratic Republic: 2001 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (IMF Country Report No.02/62, March 2002), p. 13. The remaining 35 per cent of banking assets in Laos are held by the state-owned Agricultural Promotion Bank (five per cent), three joint venture banks (ten per cent), and a handful of foreign bank branches (20 per cent). The utility companies included the mighty Electricité du Laos, Lao National Tourism, Water Supply Company, Postes du Laos, State Printing House, the Bus Company, the State Fuel Company, Industrie Pharmaceutique No.2, and a number of companies under the ministry of defence; the three holding companies largely focused on logging activities. In 1997, these 33 enterprises employed some 12,000 people and were cumulatively valued at 245 billion kip (around US$115m): see International Monetary Fund, Lao People’s Democratic Republic, p.13. A profile of these ‘strategic’ enterprises and banks is provided in the same publication, p.65. Decree 17 defined ‘strategic’ enterprises as those that have ‘importance to the national economy, society, defence, and internal security’: see Otani and Chi, Lao People’s Democratic Republic, p.44. The massive depreciation in the value of the local currency during 1997–99 will have posed particular problems for those ‘strategic’ state enterprises—such as the

46 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

28. 29.

30. 31. 32.

Lao State Fuel Company—incurring some or all input costs in US dollars or Thai baht, given their limited ability to increase their local currency prices accordingly. See Havrylyshyn and McGerrigan, Privatization in Transition Countries, pp.27–9. See Nick J.Freeman, ‘Developing Entrepreneurship and SMEs in Southeast Asia’s Transitional Economies’, paper presented at the ASEAN Roundtable 2002, ‘Entrepreneurship and SMEs in Southeast Asia’s Economic Development’, Institute of Southeast Asian Studies, Singapore, 7–8 Nov. 2002. For further details of the main internal capacity constraints that private companies in Laos commonly face, see ibid.; also ‘Mekong Project Development Facility: A Survey of Medium and Large Private Companies in the Lao PDR’ (Hanoi: Mekong River Development Facility, March 1997). A notable exception would be the Mekong Enterprise Fund; for details of this fund, see . Also see Nick J.Freeman, ‘The Rise and Fall of Foreign Investment in Laos, 1988– 2000’, Post-Communist Economies, Vol.13, No.1 (March 2001), pp.101–19. One of the leading initiatives in this field is the Mekong Project Development Facility; for further details, see .

Slow, Quick, Quick: Assessing Equitization and Enterprise Performance Prospects in Vietnam MARTIN GAINSBOROUGH

Introduction Since the late 1980s a debate has raged regarding the relative merits and demerits of big-bang-style reform versus a more gradualist approach in the transition from a state-owned command system to a private market economy. While there are still die-hard advocates on both sides, the debate has generally become more sophisticated. The manner of Russian privatization in the early 1990s and its aftermath has led to greater recognition of the dangers and potential pitfalls associated with big-bang-style change.1 In particular it is better understood that it depends on quite specific conditions whether things work or not.2 Equally, it is increasingly recognized that China’s apparent success—at least as measured in its economic growth rate—cannot necessarily be accounted for by its more cautious approach to reform.3 Many China specialists now present a much more equivocal portrait of reform there, emphasizing that beneath rapid ‘headline’ economic growth rates there is in fact widespread inefficiency and asset-stripping.4 In its review of the lessons of reform in the former Soviet Union and Eastern Europe over the past decade, the World Bank echoes many of these concerns. In its chapter on privatization, it specifically notes that whether a country opts for continued state ownership ‘in a situation of eroding control rights’ or whether it shifts to private ownership ‘with an inadequate institutional framework’ there is in both cases ‘a substantial risk of asset-stripping and losses of economic value’.5 In the light of this, it is clear that much research is still needed in order to clarify the benefits—and practical consequences—of different approaches to reform. With this goal in mind the present analysis seeks an assessment of Vietnam’s partial privatization programme, known locally as equitization (co phan hoa). The main puzzle about equitization in Vietnam concerns why, after proceeding so slowly for the first six years of the programme’s existence, it suddenly accelerated, at least in terms of the numbers of enterprises formally completing equitization procedures. This issue is addressed in the first part of the contribution. While there are many possible reasons, we suggest that a key one is unwillingness on the part of the political and business interests associated with

48 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

state enterprises to do anything that would remove them from what they regarded as the ‘best space’ for doing business.6 During the period 1992–98, the majority calculated that this remained the state sector; however, a few years later this calculation had changed and hence equitization speeded up. The analysis sets out what led to the change in thinking, emphasizing a mixture of policy and nonpolicy developments. By way of supporting evidence, it also presents new information that highlights the increasingly hard nature of the budget and credit constraint faced by provincial firms remaining in the state sector in 2001–2002.7 By pursuing equitization, Vietnam is very much associated with the gradualist approach to reform. Thus, although Vietnam does not usually attract the same eulogizing as China in terms of the achievements of reform, many of the same concerns exist in relation to exactly what equitization will produce in terms of a reformed enterprise sector (in other words, equitization is no guarantee of enhanced dynamism or efficiency). This issue is addressed in the second part of the contribution when data on the performance of equitized enterprises are considered. The analysis also considers the likely prospects of equitized enterprises, comparing the manner of equitization in Vietnam with World Bank conclusions on what worked and did not work in the former Soviet Union and Eastern Europe in the area of enterprise reform. While the conclusions must necessarily be tentative, the exercise is useful in highlighting areas of likely weakness in relation to Vietnam’s equitized firms, and important areas for future research. Slow, Quick, Quick: Why Did Vietnam’s Equitization Initially Proceed So Slowly Before Speeding Up? In the period from the launch of the government’s equitization programme in 1992 until February 1998, just 17 state enterprises completed equitization formalities.8 Equitization picked up momentum in 1999 and 2000 so that by September 2001 some 700 state enterprises had reportedly completed equitization proceedings.9 However, even by that date, equitization had involved just 12 per cent of state firms by number and just two per cent in terms of capital, highlighting the way in which it has so far largely involved small and medium enterprises.10 Slow The literature on Vietnam offers many reasons why equitization proceeded slowly in the period 1992–98. The most common include: reluctance on the part of enterprise managers concerned at losing privileges associated with being in the state sector; fear on the part of enterprise managers that asset-stripping or other corrupt practices would be uncovered if the books were scrutinized for the purposes of equitization; fear of enterprise workers about losing their jobs if the company underwent restructuring after equitization; the absence of tried and

EQUITIZATION AND ENTERPRISE IN VIETNAM 49

tested administrative procedures relating to equitization; and difficulties in valuing enterprise assets.11 There is probably an element of truth in all of this. However, a lot of the time one suspects that the reasons which are most commonly emphasized—such as unclear administrative procedures, difficulties in valuing enterprise assets, or opposition from workers—represent a distraction from more fundamental obstacles. Moreover, most explanations are simply too vague for it to be clear where the key obstacle or point of conflict is occurring. While it is conceivable that opposition from workers was a genuine cause of delay, it seems more likely that this was a reason put forward by company managers, their controlling institution, or both, to conceal or lend respectability to their own particular reasons for opposing equitization. For most of the 1990s, such opposition derived from the view that the state sector still represented the best place to be located in order to do business successfully. This in turn was linked to the belief that remaining in the state sector afforded a company the best chance of receiving state budget support, accessing other forms of protection, or avoiding the discrimination faced by private firms in obtaining bank credit, land use rights, licences or contracts. The sources of opposition to equitization during the 1990s varied from one enterprise to another. In some cases, it involved enterprise managers-cum-owners;12 in other cases, where managers were merely political appointees, opposition could be seen coming from the bureaucratic institutions with authority over the enterprise.13 The explanation favoured here for why equitization moved forward so slowly until the final years of the 1990s implies that difficulties relating to valuing enterprise assets or unclear administrative procedures could be overcome if there was the will. This is rather confirmed by the fact that 17 firms did complete equitization proceedings before early 1998. That some enterprises did equitize underlines the fact that, while equitization was alarming for some firms, for others it represented an opportunity to clarify uncertain or ambiguous property rights, enabling them to do business with greater confidence. This, one suspects, lies behind the willingness of REE, along with some of the other early entrants, to equitize, although there is still much we do not know regarding their precise motives.14 Quick If equitization proceeded so slowly prior to 1998, what changed for it to accelerate thereafter? Part of the reason may be that many of the earlier bureaucratic obstacles had been overcome: procedures were simpler, incentives were clearer and there was now greater experience of the best way to go about valuing enterprise assets.15 There is certainly evidence that it took less time for the second batch of companies to complete equitization proceedings compared with the first.16 Moreover, it makes sense that, once companies started to equitize in larger numbers, the process developed a momentum of its own as new entrants

50 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

were able to draw on the experience of those that had gone before and draw reassurance from them. However, these explanations are not sufficient on their own to explain why equitization accelerated. If one returns to the issue cited above, namely that deciding whether to equitize or not involved a calculation on the part of the dominant interests associated with a given state enterprise on the best place for the enterprise to do business, then it is clear that by 1999–2000 the circumstances underpinning this calculation had changed. This has to do with changes occurring in both the state and the private sectors, which exerted a ‘push’ factor and a ‘pull’ factor. The Push Factor: Less Hospitable Conditions in the State Sector First, there is evidence that state control over enterprise assets has been tightened. The passage of the State Enterprise Law, the creation of institutions such as the State Capital Management Department (tong cuc quan ly tai san nha nuoc tai doanh nghiep) under the Ministry of Finance, and the drive to establish general corporations (tong cong ty) from the mid-1990s, were part of this.17 In a move that resembled the establishment of the chaebol in South Korea, the formation of the general corporations was designed to create economies of scale by grouping enterprises in a similar sector so that they could compete on the international stage. It also envisaged that capital could be moved around within the group to firms that needed it. However, the establishment of the general corporations created problems of its own, with member companies often finding the involvement of corporation management more trouble than it was worth.18 More rigorous state management of enterprise assets by the late 1990s also meant that the opportunities for asset-stripping had diminished, while the lesson drawn from major corruption cases such as Tamexco or Minh Phung-Epco in 1997–99 was that there was now a greater danger of being penalized for such activities.19 In addition, fiscal pressures associated with the Asian financial crisis of 1997– 98 saw a tightening of access to budget subsidies or cheap bank credit for state enterprises, with the result that subsidies were now available for a much smaller core of firms. This tightening appears to have been sustained even after the immediate effects of the crisis subsided. That conditions in the state sector were no longer so hospitable in terms of access to budget subsidies comes across clearly in discussion of the state sector in both northern and southern Vietnam. In the northern municipality of Hai Phong, where about a dozen companies have so far been equitized, the state had VND3751bn (US$245m) tied up in the city’s 211 remaining state enterprises in mid-2002, according to provincial statistics. This worked out at an average of just VND33.7bn (USS$2.2m) in centrally managed state enterprises and VND7bn (US $457,500) in locally managed firms; in many cases, firms had considerably less than this. Commenting on this situation, an article in the Hai Phong newspaper

EQUITIZATION AND ENTERPRISE IN VIETNAM 51

notes that enterprises consequently have little scope to invest or upgrade technology. Nevertheless, shedding light on the way in which enterprises have responded to harder budget constraints, the article says that firms have not just sat idle but rather have gone after other sources of capital (nguon von khac): To talk in this way does not mean to imply that businesses are just waiting for state capital. In fact, there are a lot of firms which dare to think for themselves, dare to act on the own initiative and dare to borrow money from the bank in order to invest to upgrade technology, to expand production or produce new goods, and they get good results. […noi nhu vay khong co nghia la doanh nghiep chi trong cho vao nguon von nha nuoc. Thuc te, co nhieu doanh nghiep nang dong, dam nghi, dam lam, dam vay ngan hang de dau tu doi moi cong nghe, mo rong SX-KD, phat trien nganh hang, mat hang moi dem lai hieu qua cao].20 A similar reliance on non-state sources of capital by state enterprises facing hard budget constraints is also evident in relation to southern Can Tho province, where in June 2002 some 56 state enterprises and nine firms had completed equitization.21 According to an article in the Can Tho newspaper, registered capital is ‘just a legal calculation’ and businesses actively deploy lots of different sources of business capital (su dung nang dong nhieu nguon von kinh doanh khac).22 If state enterprises can no longer rely on the state to provide them with capital and instead have to look elsewhere, it would appear to be a small next step for them to consider the possible benefits of equitization, particularly if the shift to hard budget constraints has occurred in tandem with a perceived improvement in the climate affecting the private sector. The Pull Factor: Improving Private Sector Climate The other side of the coin was that by 1999–2000 the climate for the private sector had improved, and was widely recognized to have done so. This represented the culmination of a whole series of changes introduced in the wake of the Asian financial crisis. Much has been made of the Enterprise Law (luat doanh nghiep) which came into effect in 2000 resulting in the abolition of large amounts of red tape when setting up a private business. However, other changes, such as the ending of the ban on private firms exporting directly, and a gradual tempering of official hostility, were also important.23 Vietnam’s business environment is still not easy for any company regardless of ownership type. Moreover, discussions of the Enterprise Law in the provinces suggest that implementation remains a problem as old regulations that contradict the Enterprise Law continue to be enforced.24 However, in 1999 non-state-sector industrial growth eclipsed that of the state sector for the first time since Vietnam’s reform began. This has been maintained every year since and brings Vietnam in line with a trend that has been evident in China for some time.25

52 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

In our view, it is no coincidence that the acceleration of equitization has coincided with the shift to more rapid private sector growth since 1999. Enterprise managers, their controlling institutions and their labour forces all recognize that, in the absence of budget subsidies and cheap bank credit and amid dwindling levels of protection, there are now few advantages to be had from remaining in the state sector. The fact that they are former state enterprises may also help as they make the transition to being private firms.26 At the same time, there are advantages to be had from not being in the state sector, such as the reduced danger of being accused of ‘corruption involving socialist assets’ (tham o tai san xa hoi chu nghi) and perhaps on balance the likelihood of less interference by state institutions with regulatory powers in the private sector compared with the state sector. With reference to the large state enterprises, including many associated with the general corporations which remain in the state sector, the fact that they are not all lining up for equitization can be explained largely by the fact that they have no choice, since the government wants to keep them in public hands for the time being.27 Moreover, being big and regarded as important, these companies are still eligible for benefits such as access to subsidies that are no longer available for their smaller counterparts, who are now leaving the state sector.28 Assessing the Performance of Equitized Enterprises Data on enterprises in Vietnam after equitization generally point to improved performance, indicated by higher turnover, increased profitability, employment growth and higher wages.29 However, one must be careful before drawing too many conclusions from these data. First, all such data are provided by the firms themselves and released by the government; they have yet to be independently scrutinized or reproduced via independent research. Second, given the short time that has elapsed since the majority of state enterprises completed equitization, the data cover only a short period (often no more than a year). Third, of the companies that equitized first, all were profitable before equitization;30 most of these would probably have done well whether they remained in the state sector or not. Fourth, much of the data on enterprise performance is published, one senses, in order to demonstrate the benefits of equitization to those enterprises unwilling to put themselves forward; this was especially the case during the mid-1990s, when equitization was moving forward very slowly. Fifth, the enterprises that equitized first were also small-scale, and privatization of smallscale enterprises has been generally successful all over the world.31 Data collected by the author on the performance of provincial enterprises after equitization reveal a more mixed picture. Many have achieved better results but some are still struggling with debts and others have seen business fall away (see Table 1).

EQUITIZATION AND ENTERPRISE IN VIETNAM 53

The Manner of Equitization: Implications for Future Performance In the absence of more reliable performance data, it is helpful to look at preliminary findings from three provinces concerning the manner in which equitization has taken place in Vietnam. This will be linked to lessons drawn from the privatization experience in the former Soviet Union and Eastern Europe in terms of what works and what does not, asking what, if any, are the implications for future enterprise performance. This will enable us to highlight potential problem areas, which are likely to have an impact on the performance of equitized enterprises in the future, and to suggest areas for further research. In its review of the lessons from the former Soviet Union and Eastern Europe, the World Bank has identified a number of different criteria which, on the basis of experience so far, it judges to be important in determining the success or otherwise of privatization: (1) Privatization, it says, should be part of an overall strategy of discipline and encouragement. TABLE 1 POST-EQUITIZATION PERFORMANCE: THE VIEW FROM THREE PROVINCES Tay Ninh 1.

2.

3.

4.

Lao Cai

1.

2.

Cty co phan (CP) Khai Thac Khoang San Tay Ninh. In 2001 the company achieved turnover of over VND9bn, which represents a threefold improvement on the period prior to equitization. Profits were VNDlbn, up eight times on pre-equitization. Cty CP Cong trinh giao thong. Turnover in 2001 was VND40bn, up 50 per cent on the period prior to equitization; profits were just under VND800m, up 60 per cent on the pre-equitization period. Cty CP Cap treo Nui Ba. Turnover in 2001 was VND12.3bn, up 15 per cent on the period prior to equitization; profits were VND2.8bn, representing approximately a threefold increase. Two equitized firms, Cty CP Van tai and Cty CP Det bao bi, encountered difficulties in 2001. Cty Van tai had the most problems, with turnover nearly half of what it was prior to equitization and profits roughly the same as previously (dat xap xi truoc day). Cty CP van tai Lao Cai. Completed equitization in July 1999. Since equitization turnover has begun to ‘move in the direction of stability’. In 2001 the company had turnover of VND 18bn, remitted VND518m in tax, and bought eight new vehicles and two boats and invested in building new factories. The average wage for the firm’s 165 workers was VND524,000 per month. Cty CP cong trinh giao thong. Completed equitization in September 2001. Since the beginning of 2002 the firm has signed contracts worth VND 10bn, including one for over VND4bn with Lao Chau province relating to national route 4D. Turnover for the year is expected to be VND15bn, double what was achieved before equitization. Average

54 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

monthly wage is VND800,000 compared with VND 100,000 before the company equitized. 3. Cty CP xay dung so 1 Lao Cai. Completed equitization in February 2002. Since the beginning of 2002 has signed 20 contracts with a value of VND6bn. Turnover for the year expected to be VND12bn. Can Tho According to the acting director of So Ke hoach va Dau Tu tinh Can Tho, Nguyen Van Duoc, some of the province’s nine equitized firms are lossmaking, with the province presently overseeing their consolidation (tinh dang chi dao cung co). Sources: Bao Tay Ninh, 2 April 2002; Bao Lao Cai, 24 May 2002; Bao Can Tho, 31 May 2002.

(2) Privatization in which enterprise assets are sold to ‘insiders’ (that is, enterprise managers and workers) or where post-privatization ownership is diffuse has generally not benefited enterprise restructuring and led to improved performance. Where privatization has worked best, the World Bank argues, is where assets have been sold to outsiders, notably foreigners, and where ownership is concentrated. (3) Enterprises sold through transparent tenders or auctions have generally attracted better owners, which have outperformed enterprises sold directly to politically connected parties, frequently at highly subsidized prices. (4) Where the state continues to hold a stake in a privatized firm it is important to clarify the cash flow and property rights existing in the enterprise. Let us examine each in turn. Discipline and Encouragement Discipline refers to such things as hard budget constraints, market competition, and the application of commercial rather than political criteria in bank lending. Encouragement refers to an appropriate regulatory and fiscal regime, security of property rights and opportunities to obtain business finance via the banking system or the stock market. Available evidence would suggest that Vietnam performs badly in many of these areas. High tariff barriers, the existence of monopolies or oligopolies in key sectors, large amounts of red tape, an unpredictable and often arbitrary tax system, and a poorly developed financial sector are all characteristics of Vietnam’s business environment.32 However, the climate is not all bad. As we have seen, budget constraints affecting provincial state enterprises are now quite hard in Hai Phong and Can Tho. Moreover, data gathered by the present author in relation to property rights in Ho Chi Minh City suggest that, despite the absence of a law-governed framework upholding the security of property rights, they were secure enough, thanks to informal arrangements, to enable the emergence of new state business interests in the city during the 1990s. In this respect security depended on the

EQUITIZATION AND ENTERPRISE IN VIETNAM 55

ability of an enterprise’s de facto owners to resist the encroachment of outside interests—something they were able to do quite effectively.33 In addition, there have been concerted efforts since the second half of the 1990s to tackle weaknesses in the business environment by reducing red tape, strengthening bankruptcy legislation and reducing anti-competitive practices. Moreover, as the recent performance of the private sector indicates, progress has been made.34 In sum, therefore, the outlook in terms of discipline and encouragement for equitized enterprises could be worse. The Nature of Ownership: Insiders or Outsiders? According to the World Bank, privatization has worked best where assets have been sold to outsiders, notably foreigners, and where ownership is concentrated. Where shares have been sold to insiders, there has been less enterprise restructuring, and enterprise performance has been less impressive. Government data, as yet unpublished, on the ownership breakdown of 336 state enterprises that have completed equitization reveal that outsiders have played a relatively small role compared with insiders and the state, which on average have bought more than 80 per cent of shares (see Table 2 for full details of the ownership breakdown of these enterprises.) The state’s role in equitization has ranged from complete divestment to maintenance of an 80 per cent equity share. The average size of state equity in the 239 firms where it has retained a share (that is, just over 70 per cent of the 336 firms profiled here) is 32 per cent. The share of equity purchased by insiders has ranged from none to 100 per cent, with an average of 59 per cent. The data presented here do not distinguish between type of insiders (that is, managers versus workers) although anecdotal evidence suggests that where workers have bought shares—as they often have—they have frequently been bought out later.35 The share of equity bought by (domestic) outsiders has ranged from none to 100 per cent. Where outsiders have obtained shares, the average share purchase has been 31 per cent, falling to 18 per cent overall. The data TABLE 2 OWNERSHIP BREAKDOWN OF 336 EQUITIZED FIRMS State

Insiders

Complete divestment=29% of firms Over 51%=9% 11–50%=86% 1–10%=5% Average where state retains a stake=32% Average overall=23% Complete divestment=0.6% or two firms 100%=19% 51–99%=38% 11–50%=40% 1–10%=3%

56 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

Outsiders

Foreign

Average where insiders retain a stake=59% Average overall=59% No stake=41% 100%=1% 51–99%=9% 11–50%=38% 1–10%= 11% Average where outsiders retain a stake=31% Average overall=18% No stake=99% 100%=None 51–99=None 11–50%=0.3% or one firm 1–10%=0.7% or two firms Average where retains a stake=17% Average overall=0.15%

Source: Official sources.

do not provide details regarding the identity of outside shareholders; however, outsiders are generally individuals rather than institutional investors. Foreigners have played a tiny role, with foreign share purchases equivalent to an average of 0.15 per cent of equity. Foreigners have bought shares in just three of the 336 equitized firms profiled here, with the total foreign stake ranging from 10 to 30 per cent. Shares are continuing to change hands in the 15 or so equitized firms now listed on Vietnam’s stock market. This is not reflected in the data cited here, although press reports suggest that foreigners have been increasing their share holdings within the limits imposed on them by the State Securities Commission.36 The Nature of Ownership: Concentrated or Diffuse? The World Bank also emphasizes the importance of ownership being concentrated rather than diffuse. Discerning the situation in respect of Vietnamese equitized enterprises is difficult, mainly because the precise identity of the different shareholders remains hidden. On the face of it, the average 59 per cent insider equity, 23 per cent state equity and 18 per cent outsider equity would suggest quite diffuse ownership. However, it is quite conceivable that they are all effectively the same people, with the state share held by the former controlling institution, insider shares by managers appointed by the controlling institution, and so-called outsider shares by their business associates or relatives. This would point towards much more concentrated ownership and, in the World Bank’s view, potentially better economic prospects. Prior to equitization, some state enterprises suffered from disputes between different institutional interests with rival claims to rights over a particular enterprise. A key question is whether equitization has merely reproduced these

EQUITIZATION AND ENTERPRISE IN VIETNAM 57

rival interests or whether equitization moved forward only when such disputes were resolved, with the capitulation or buying out of one (or more) of the parties. There is some reason to suspect the latter. After all, it is questionable whether anyone would want to run a former state enterprise as a private firm with disputes over property rights unresolved. Moreover, the fact that equitization initially took so long to advance may be explained by the fact that such disputes needed to be resolved before the process could move forward. This is an area that requires further research. However, if equitization has to some extent resolved previous institutional disputes, this would suggest that ownership is more concentrated than first impressions might suggest. Transparency The World Bank suggests that enterprises sold through transparent tenders or auctions have generally attracted better owners, which have outperformed enterprises sold directly to politically connected parties, frequently at highly subsidized prices. Equitization in Vietnam appears to fall down in most of these areas since it cannot in any way be described as transparent. The process has largely occurred via closed, non-competitive bidding, with shares going to politically connected parties. The Hai Phong People’s Committee, with the permission of the central government, requested assistance from the World Bank’s private sector lending arm, the International Financial Corporation, to oversee the auction of a number of state enterprises in the city by way of a pilot project. However, the project was unsuccessful in so far as no enterprises were ultimately auctioned. People connected with the project have cited a range of reasons, including ambiguous or unclear political support. Vietnamese staff involved in the project have said that state enterprises in Hai Phong opposed the auction method because they feared that it might take ownership away from them.37 Valuing State Enterprise Assets The lack of transparency in the equitization process is also evident in relation to the valuation of enterprise assets. Although there is a recognized formula for valuing assets (Adjusted Net Worth±Advantage/Disadvantage Value +Equitization Expenses), we do not know the value put on each enterprise nor what horse-trading was involved to get there.38 Even official information on this is not publicly available. However, it is generally accepted that equitization in Vietnam has not resulted in ‘give-away’ divestment, although assets have usually been sold at a discount to fair value.39 The World Bank has not made explicit the thinking behind its assertion that, where assets have been sold at highly subsidized prices, enterprises have performed less well. However, where new enterprise owners have had to pay to obtain enterprise assets they are more likely to view the company as a valued resource and treat it accordingly. In this

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respect, the idea that the valuation process was not entirely without teeth may count in Vietnam’s favour in terms of the future performance of equitized firms. Continued State Ownership: Cash Flow and Property Rights Issues The World Bank also says that, where the state continues to hold a stake in a privatized firm, it is important to clarify the cash flow and property rights existing in the enterprise. Given the continued prominence of state ownership in equitized enterprises this is clearly an important issue in relation to Vietnam. In particular it remains unclear what impact equitization is having on the relationship between enterprises and their former controlling institution. While equitized firms appear to struggle like any other in obtaining long-term credit— reflecting systemic weaknesses in the banking sector—a number have reported that the formalities for short-term borrowing have included a requirement from the banks that the firm receive authorization from their former controlling institution before they may borrow. This is somewhat puzzling, but seems to suggest a less than complete severing of ties with pre-equitization influences. In addition, some 40 per cent of the first companies to equitize said that the state remained a significant influence in their company after equitization. Such issues remain equally hazy for the 600 or so enterprises that have completed equitization proceedings in the past three years or so. Conclusion To date, writing on equitization in Vietnam has mainly concentrated on why the process moved forward so slowly. Why equitization suddenly speeded up has been rather neglected. This analysis offers an explanation for this, suggesting that it primarily has to do with a changed calculation on the part of largely autonomous state business interests concerning where the best place to do business was. By the end of the 1990s, many of the reasons for remaining in the state sector had disappeared while life in the private sector was no longer regarded with the trepidation it once was. Drawing on data not previously in the public domain, the study has also looked at the manner in which equitization has occurred considering the implications this may have for enterprise performance. Drawing on lessons from privatization in the former Soviet Union and Eastern Europe, the analysis suggests that there is good reason to believe that the performance of equitized firms will turn out to be much less favourable than the impression created by official data released so far. To some extent, this can already be seen to be the case in relation to data collected by the author on the performance of provincial firms that have undergone equitization. Given the untransparent way in which equitization has occurred, combined with the tendency towards secrecy in the Vietnamese business environment,

EQUITIZATION AND ENTERPRISE IN VIETNAM 59

there is much that remains hidden about Vietnam’s equitized firms. A key challenge for future scholarship is to look more closely at the identity of ‘state’, ‘insider’ and ‘outsider’ shareholders and the nature of their claims over a given enterprise. This will enable us to judge more clearly whether ownership is concentrated or diffuse and the extent to which equitization has resolved or merely reproduced prior institutional conflicts. NOTES 1. See Peter Nolan, China’s Rise, Russia’s Fall: Politics, Economics and Planning in the Transition from Stalinism (Basingstoke: Macmillan, 1995); Barry Naughton, Growing Out of the Plan: Chinese Economic Reform 1978–93 (Cambridge: Cambridge University Press, 1995), pp.16–18; World Bank, Transition: The First Ten Years: Analysis and Lessons For Eastern Europe and the Former Soviet Union (Washington, DC: World Bank, 2002). 2. World Bank, Transition, pp.71–80. In particular the point is made that changing the ownership of enterprises in isolation is not sufficient: also important is the overall business and political climate, the specific type of ownership, and a willingness to engage in restructuring. 3. Ibid. The World Bank suggests that initial conditions may also be important. It also suggests that there may be unforeseen costs associated with China’s approach to reform (for example, a heavily indebted banking system). See also Xiaolin Pei, The Contribution of Collective Landownership to China’s Rural Industrialisation: A Resource Allocation Model’ (Paper presented at the Second International Convention of Asian Scholars, Berlin, 9–12 Aug. 2001); Pei places emphasis on massive increases in labour inputs as explaining township and village enterprise growth in China. 4. Jean-Francois Huchet, ‘The Hidden Aspect of Public Sector Reform in China: State and Collective SMEs in Urban Areas’, China Perspectives, No.32 (Nov.-Dec. 2000), pp.37–48; Xiaobo Lu, ‘Booty Socialism, Bureau-preneurs, and the State in Transition: Organisational Corruption in China’, Comparative Politics, Vol.32, No. 3 (April 2000), pp.273–94; Christopher A.McNally, ‘Strange Bedfellows: Communist Party Institutions and New Governance Mechanisms in Chinese State Holding Corporations’, Business and Politics, Vol.4, No.l (April 2002), pp.91–115; Russell Smyth, ‘Asset-Stripping in Chinese State-Owned Enterprises’, Journal of Contemporary Asia, Vol.30, No.l (2000), pp.3–16. 5. World Bank, Transition, pp.71–80. 6. This interpretation is premised on the assumption that state enterprises operate rather more like private businesses than is commonly thought: see Adam Fforde, Vietnamese State-Owned Enterprises: Real Property, Commercial Performance and Political Economy, report for CIDA (Canberra: Aduki, 2000); Martin Gainsborough, Changing Political Economy of Vietnam (London and New York: Routledge, 2002), Ch. 2. On China, see Peter Nolan and Wang Xiaoqiang, ‘Beyond Privatisation: Institutional Innovation and Growth in China’s Large State-Owned Enterprises’, World Development (1998), pp.169–200.

60 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

7. These data are drawn from a larger research project being pursued by the author looking at the relationship between intergovernmental fiscal relations and politicalbusiness conditions in Hai Phong, Lao Cai, Can Tho and Tay Ninh. 8. Webster and Amin, Equitisation, pp.1–77. 9. World Bank, Vietnam’s Economic Reforms: Progress, Next Steps and Donor Support: Background Note for Mid-term Review (Dalat City, Vietnam, 22–23 June 2000). 10. Saigon Times Daily, 17 Sept. 2001. For official data on state enterprises in Vietnam, including changes in the numbers of firms over the years, see Nien Giam Thong ke [Statistical Yearbook] (Ha Noi: Nha Xuat Ban Thong Ke [Hanoi: Statistical Publishing House], 1989, 1992, 1996 and 2000). Large numbers of state enterprises (more than 5,000) were closed or merged in the early 1990s: see Nick Freeman, ‘The Role of “Equitisation” in Vietnam’s Reform of State-Owned Enterprises’, Communist Economies and Economic Transformation, Vol.8, No.2 (1996), pp.217– 35. 11. For a review of the different obstacles to equitisation, see Freeman, ‘The Role of Equitisation’, pp.223–5. 12. Martin Gainsborough, ‘Understanding Communist Transition: Property Rights in Ho Chi Minh City in the late 1990s’, Post-Communist Economies, Vol.14, No.2 (June 2002), pp.227–44. 13. Ibid. 14. Freeman, ‘The Role of Equitisation’, pp.220–23. 15. World Bank, Vietnam: Preparing for Take-off? How Vietnam Can Participate Fully in the East Asian Recovery, An Informal Economic Report of the World Bank Consultative Meeting for Vietnam (Hanoi, 14–15 Dec. 1999). 16. Webster and Amin, Equitisation, p.9. 17. For discussion of the State Enterprise Law passed in 1995 and the establishment of the general corporations see Freeman, The Role of Equitisation’, pp.218–20, and Anne Jerneck, The Role of the State in a Newly Transitionary Economy: The Case of Vietnam’s General Corporations (Report prepared as part of a collaboration between SIDA, Stockholm, the Department of Economic History, Lund University, and the Embassy of Sweden in Hanoi, Vietnam, Sept. 1997). Freeman has spoken in terms of enterprise reform representing an attempt to bring off-balance sheet activity ‘back on’ (e-mail communication 14 May 2002). 18. See Gainsborough, ‘Understanding Communist Transition’, p.235. 19. While evidence for this is still limited, a similar point was made on a number of occasions by participants at the Vietnam Update held at the Institute of Southeast Asian Studies, 19–20 Nov. 2001. 20. Bao Hai Phong, 4 June 2002, pp.1–2. 21. Bao Can Tho, 31 May 2002, p.3. 22. Bao Can Tho, 5 Feb. 2002, pp.1–2. 23. Business Monitor International, Asia Monitor, South East Asia, Vol.1 (June 2002), pp.6–7. 24. Bao Hai Phong, 31 May 2002, and Bao Tay Ninh, 22 June 2002. 25. Nien Giam Thong Ke, 2000. 26. The implications of holding ‘former state enterprise’ status is discussed below. 27. Vietnam News, 6 Dec. 2001. The government says it plans to equitize about 50 per cent of remaining state enterprises by the end of 2006. The state is to retain a

EQUITIZATION AND ENTERPRISE IN VIETNAM 61

28.

29. 30. 31. 32. 33.

34. 35.

36.

37. 38. 39.

monopoly in the production of explosives, toxic chemicals and cigarettes, and power transmission and the telecommunications network; it is to hold a controlling stake in oil and gas, including petrol retailing, insurance, and parts of the mining sector. This comes across in the data presented above about the extent of state capital in state enterprises in Hai Phong. The fact that many companies have considerably less than the average naturally implies that others have considerably more, highlighting the two-tier approach to state enterprises as some continue to be nurtured and others are effectively cast off. Webster and Amin, Equitisation, p.13. Ibid. World Bank, Transition, pp.70–81. Economist Intelligence Unit, Vietnam Country Forecast, April 2002. See Gainsborough, Changing Political Economy, Ch. 2, and Gainsborough ‘Understanding Communist Transition’, pp.237–8. In this respect, Jean Oi’s comment in relation to China, that there is no inherent reason why property rights are effective incentives only if they are assigned to non-government entities, seems appropriate in explaining the growth of new state business interests in Ho Chi Minh City in the 1990s: see Jean Oi, Rural China Takes Off: Institutional Foundations of Economic Reform (Berkeley, CA: University of California Press, 1999), p. 10. See Business Monitor International, Vietnam Quarterly Forecast Report, third quarter 2002. The effective marginalization of workers comes across clearly in the literature on Russian privatization: see Simon Clarke and Veronika Kabalina, ‘Privatisation and the Struggle for Control of the Enterprise’, in David Lane (ed.), Russia in Transition: Politics, Privatisation and Inequality (London and New York: Longman, 1995), p.146. The limit for foreign share ownership of companies listed on Vietnam’s stock market is 20 per cent of total equity. For discussion of increased foreign share purchases on the Vietnamese bourse see Saigon Times, 8 July 2002, at [1 Aug. 2002]. Confidential correspondence with people connected to the project. Webster and Amin, Equitisation, p.15. E-mail communication with Nick Freeman, 14 May 2002.

Entrepreneurs in China and Vietnam as Strategic Players in Social and Political Change THOMAS HEBERER

Introduction In recent years the role of entrepreneurs in processes of development and transformation has become an important research theme not only in economics but in the social sciences more broadly. The radical changes in Eastern Europe and the reappearance of a new form of private entrepreneurship in the socialist states of China and Vietnam have contributed to this. Following its re-emergence, the private sector is now the fastest-growing sector in both countries. Nevertheless, until now, the role of entrepreneurs in the process of political and social change has been generally neglected in social science research. Neither in economic theory nor in sociological or political science theory have entrepreneurs as ‘agents of change’ been assigned a significant role. This is particularly true as far as the social and political function of entrepreneurship is concerned. From a sociological perspective entrepreneurs differ from other groups through lifestyle, behaviour, consciousness, other groups’ appraisal of them, and so on. Therefore, one can speak of ‘entrepreneurdom’ in terms of the formation of a new social stratum. Indeed, the more successful and larger private entrepreneurs in China and Vietnam possess a striking group consciousness that can be clearly differentiated from that of other social groups, as well as from smaller or less successful private entrepreneurs. Larger entrepreneurs are aware of their economic importance and not shy of articulating their views in relation to economic decision making. A handful of entrepreneurs also have views on more overtly political subjects, including establishing a multi-party system. However, this is quite rare and the political climate is such that entrepreneurs generally do not offer such opinions openly. Owing to their growing economic significance, private entrepreneurs have developed into an independent social group from which pressure for change stems. Some entrepreneurs argue that they have no choice but to take on such a role, which they see as an inevitable consequence of the introduction of the market economy. For them, socialism and the market economy are more and more regarded as incompatible.

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Articulation by entrepreneurs of their interests takes place first and foremost through entrepreneurial associations which at the moment focus on offering views on economic policy matters, including contributing to the legislative process. Such contributions are taken seriously by politicians and are being implemented at both the central and local levels. The opportunity for entrepreneurs to adopt a more overtly ‘political’ stance—as parliamentary deputies, for example—is theoretically possible but in practice much restricted. Although both countries have recently declared that entrepreneurs may join the Communist Party, membership is still in reality quite restricted. Of course, social transformation resulting from rapid economic growth has not been limited to private entrepreneurs but has spread to other social groups as well. Nevertheless, entrepreneurs are situated at the epicentre of this process and hence merit special attention.1 Group Behaviour: Different Types of Capital and Conspicuous Consumption The rigid Marxist classification that views private entrepreneurs as capitalists and exploiters no longer finds majority support in present-day China and Vietnam. This, we could say, is because entrepreneurs are now regarded as social necessities. Thus, if an economic crisis is to be avoided, the development of the private sector also cannot be avoided. Moreover, for this to happen, it is necessary that old ways of viewing the private sector give way to new ones. This is something the Chinese leadership has certainly understood. The position in Vietnam is somewhat different. There, private entrepreneurs have until recently been seen in more negative ideological terms. However, this is beginning to change, so the situation is now closer to that of China. Although the entrepreneurial stratum is not a homogeneous force in either country, common traits can nevertheless be recognized. Here, we draw on the writing of Pierre Bourdieu on different types of capital. Economic Capital First, entrepreneurs in both countries share a certain level of commonality in terms of economic capital in the form of ownership of assets, real estate, and being in receipt of an above-average income derived from their business activities. Evidence of entrepreneurs’ economic capital can be seen in a wide range of areas. In the mid-1990s, the families of Chinese entrepreneurs spent 600 yuan every month on food, 300 yuan for maintaining relationships, 235 yuan on clothes and 50 yuan on recreational activities. For families of non-entrepreneurs the equivalent figures were 147 yuan (food), 40 yuan (clothing) and six yuan (recreational activities); they did not spend anything on maintaining relationships.2

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Although Vietnam is at a lower level of development, the existence of rising levels of economic capital among entrepreneurs can also be identified there. The average per capita income in 1996 was US$250. However, 40 per cent of entrepreneurs surveyed in 1995 said they earned US$2,000 or more from their business activities. As with China, the real figures may be considerably higher since, as respondents indicated, the level of one’s income is a sensitive matter. According to our own survey, 94 per cent of Chinese and 96 per cent of Vietnamese entrepreneurs owned at least one house; about a third of the Vietnamese and a significant proportion of the Chinese entrepreneurs listed additional properties as well. Over half of the respondents in China possessed more than 100 square metres of residential space, 13.5 per cent of them over 200 square metres and 5.1 per cent more than 300 square metres. This contrasts with statistics for the population as whole which put the average residential occupancy during the 1990s at 7.5 square metres in urban areas, rising to 21 square metres in rural areas. Cultural and Cognitive Capital Second, we can speak in terms of cultural capital. This is concerned primarily with issues such as educational background. Generalizing about this in relation to entrepreneurs in China and Vietnam is more difficult because there is no single level of educational attainment. That said, educational levels obtained by entrepreneurs are generally higher than the average for the population as a whole in both countries. It has been argued that the level of education individuals obtain can be seen to influence their values and attitudes while at the same time enhancing curiosity and innovative behaviour. This may also precipitate greater freedom of thought and action, leading in turn to strivings for political liberalization.3 Since cultural capital can be defined only with difficulty, it is helpful to speak of cognitive capital.4 Understood here, cognitive capital includes legal knowledge or awareness of government regulations. Social Capital Continuing our review of different types of capital, one can also talk in terms of social capital. Many entrepreneurs have previously held public office in either the government or the party, or have parents, spouses, siblings or friends who hold or have held such posts. This represents an important component of social capital. Another key element of social capital are people’s social relationships (Chinese: guanxi; Vietnamese quan he). Particularly important in terms of the emergence of a new social group is the idea of group consciousness, which is created through the common experiences of being an entrepreneur. The career biographies of many entrepreneurs indicate that the road to success is often a rocky one. Shared experiences, such as coping with bureaucracy and corruption,

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or the difficulty of obtaining capital, contribute particularly strongly to a sense of group identity.5 Conspicuous Consumption Shared lifestyle and common tastes or preferences on the part of entrepreneurs are also important in terms of contributing to a sense of group identification. This can include the notion of conspicuous consumption, which has its own set of rules that distinguish entrepreneurs from other social groups.6 What products are identified as conspicuous consumption is in a process of constant flux. In the 1980s, televisions, fridges, washing machines and video machines were important status symbols. In the first half of the 1990s, these products were displaced by music systems, air-conditioning units and video cameras, while in the second half of the 1990s mobile phones, computers, automobiles and luxury condominiums took centre stage.7 Today, modes of behaviour associated with the entrepreneurial lifestyle include owning a luxury home complete with the latest consumer goods; purchasing expensive, often imported, brands of alcohol or cigarettes; wearing foreign designer-label items, including watches; and visiting expensive restaurants and karaoke bars, usually accompanied by an attractive, young girlfriend. Visiting exclusive sports and golf clubs, fitness studios or swimming pools is part of the same phenomenon. The purchase of expensive foreign cars is another way of conspicuously displaying wealth. In one area in China where we did research, the most expensive car was owned not by the party secretary but rather by a private entrepreneur. The population marvelled at his limousine, which they regarded as evidence of his success. There is a similar case of a private entrepreneur in Ho Chi Minh City acquiring a top-range Mercedes-Benz which he had imported from Germany notwthstanding the vast amount of tax he had to pay. A growing number of entrepreneurs in both China and Vietnam have also been sending their children to expensive private schools or universities, including some abroad. According to a survey carried out by the Chinese People’s University in the late 1990s, 50 per cent of the expenditure of entrepreneurs in Beijing went on entertainment, usually in hotels, restaurants and karaoke bars.8 However, visits to such places are not just concerned with personal enjoyment: rather, they represent a ‘social investment’ aimed at cultivating business contacts and officials. This came across clearly in the comment of one Chinese enterpreneur whom we asked about his collection of prestigious brands of alcohol on display in his living room: ‘Actually, I don’t like alcohol but I need them for social intercourse… When I stockpile—and am in a position to stockpile—big-name alcoholic drinks, then this is an indication of my social status’.9 Equally, eating in expensive restaurants serves a number of different functions, ranging from cultivating contacts with business partners and officials to forging group consciousness among entrepreneurs and enhancing their status in the eyes

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of their guests.10 In a study of the banqueting behaviour of entrepreneurs in China’s special economic zone of Shenzhen, Wang Gan describes how the hierarchical barriers between functionaries and private entrepreneurs evaporate in the social space provided by restaurants: It is [the entrepreneurs’] place where they have authority and prestige. They often know the restaurateur, or some waiters and waitresses. They know how to order and how to eat some rarity. The principles and rules permeating the place are different from those in the bureaucratic sphere: you have to pay high prices to get in, and you have to fork out even more to come again and again and get familiar with the environment. The overarching theme is not power but wealth. Therefore, the hierarchical relationships between the hosts and the guests can be transformed into more or less equalized ones. The service as well as the themes of money hegemony contribute to the transformation… Conspicuous consumption enables them to forge a high-class identity shared by them and their guests.11 The possession of capital assets and education, access to officials and the accompanying resources, the existence of entrepreneurial networks, and similar lifestyles and interests: these all point to the existence of a nascent social stratum as described by Bourdieu. Nevertheless, we cannot conclude from this that this emerging social group is necessarily a political actor with common interests. All we have done so far is highlight various points of commonality among entrepreneurs which suggest an emerging group consciousness. Symbolic Capital: How Entrepreneurs See Themselves A final form of capital is symbolic capital understood in terms of reputation, prestige and social status. This, we believe, is playing an important part in the formation of an entrepreneurial identity in both China and Vietnam. In response to questions posed in our survey about the economic, social and political standing of different employment groups, entrepeneurs in both China and Vietnam put themselves at the top in economic terms. While the results were similar in both countries, respondents in China ranked national-level cadres lower than similar surveys in the 1980s. Meanwhile, national-level cadres were ranked more highly in terms of their perceived economic standing in Vietnam than in China. Also noteworthy is the fact that local cadres were placed only slightly above workers in both countries. From this we can conclude that officials are unable to keep up with entrepreneurs in terms of economic capital.

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TABLE 1 ECONOMIC STANDING OF EMPLOYMENT GROUPS China

Vietnam

1 Private entrepreneur 2 Manager in state firm 3 Manager in rural firm 4 Individually employed 5 Scientist or technician 6 Cadre (central) 7 Local cadre 8 Worker in private sector 9 Worker in state firm 10 Peasant 1=highest value 10=lowest value Source: Author’s survey.

1 2 3 4 5 6 7 8 9 10

Private entrepreneur Manager in state firm Cadre (central) Individually employed Scientist or technician Manager in rural firm Local cadre Worker in state firm Worker in private sector Peasant

In terms of their perceived social standing, entrepreneurs awarded themselves a middle position. This contrasts with Chinese surveys in the 1980s which placed entrepreneurs lower down the pecking order. In the results for this category, there were clear differences between large and small entrepreneurs. Larger enterpreneurs positioned themselves in second place just below national-level cadres, while smaller entrepreneurs placed themselves much further down, in sixth place. (The results presented in Table 2 represent an amalgamation of the reponses of all entrepreneurs, large and small.) Entrepreneurs in rural areas placed themselves higher in terms of social standing than those in urban areas. Regional differences were more marked in Vietnam than in China. For example, scientists and technicians occupied second place in northern Vietnam in both urban and rural areas, perhaps reflecting the fact that the party has always emphasized the role of science in the north; in Ho Chi Minh City, by contrast, scientists and technicians ranked only fourth. TABLE 2 SOCIAL STANDING OF EMPLOYMENT GROUPS China 1 2 3 4 5 6 7 8

Vietnam Cadre (central) Scientist or technician Manager in state firm Private entrepreneur Local cadre Manager in rural firm Worker in state firm Individually employed

1 2 3 4 5 6 7 8

Cadre (central) Manager in state firm Scientist or technician Local cadre Private entrepreneur Manager in rural firm Worker in state firm Individually employed

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China

Vietnam

9 Worker in private sector Peasant 10 1=highest value 10=lowest value Source: Author’s survey.

9 10

Worker in private sector Peasant

In political terms, entrepreneurs ranked themselves in the middle, although entrepreneurs in Vietnam generally placed themselves lower down the scale than in China. In the case of the China this suggests an improvement in entrepreneurs’ perceived political standing since the early 1990s when entrepreneurs still viewed themselves near the bottom of the heap. At the top of the political rankings were central and local cadres and managers of state enterprises. In Vietnam, state enterprise managers were placed higher than local cadres while state-sector employees in the north were afforded more political prestige than in the centre or south (see Table 3). TABLE 3 POLITICAL STANDING OF EMPLOYMENT GROUPS China

Vietnam

1 Cadre (central) 2 Local cadre 3 Manager in state firm 4 Manager in rural firm 5 Scientist or technician 6 Private entrepreneur 7 Worker in state firm 8 Individually employed 9 Worker in private sector 10 Peasant 1=highest value 10=lowest value Source: Author’s survey.

1 2 3 4 5 6 7 8 9 10

Cadre (central) Manager in state firm Local cadre Scientist or technician Manager in rural firm Worker in state firm Private entrepreneur Individually employed Worker in private sector Peasant

In summary, the results show that private entrepreneurs in both countries view themselves as the top social stratum in terms of their economic capital. This view was expressed consistently across all regions surveyed, as well as in urban and rural areas, indicating that in this respect there already exists a relatively homogeneous consciousness among entrepreneurs. Private business people also classified themselves relatively highly in social terms. In China, for example, they viewed themselves as higher than local officials despite the fact that they are —at least theoretically speaking—dependent on them to perform certain bureaucratic functions. Only in political terms do entrepreneurs perceive

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themselves as being of middle or low standing. This clearly has ramifications for how they view their ability to influence events or participate directly in political life. Entrepreneurs as a Strategic Group Entrepreneurs in both China and Vietnam can be viewed as constituting a strategic group. This approach refers to a group of persons who are ‘connected through a common interest in the maintenance or expansion of their shared chances of acquisition’, whereby acquisition refers not only to material goods but also to non-material factors such as power, prestige, knowledge or religious elements. What the members of the group have in common is a shared, long-term programme, an appropriate strategy of action, and an image of themselves as significant social players.12 Although entrepreneurs do not yet constitute a clearcut social class, they do represent a nascent group which is capable of acting strategically. The term ‘strategic’ refers to the design and implementation of a long-term plan with a specific aim. The aim is likely to embody social, economic and political goals. This multi-dimensionality is required because optimal chances for asset accumulation and growth cannot be guaranteed simply by the government accepting economic development but must also involve campaigning for legal safeguards and social acceptance, and bringing political pressure to bear. Thinking in terms of strategic groups also contributes to our understanding of how interest groups develop into classes. According to Evers and Schiel, classes can be distinguished from groups in so far as they have a basic programme and are organized into political parties. Their efforts are directed towards bringing about social change or ‘system change’.13 Strategic groups, by contrast, are not seeking to change the system. Their goals are more circumscribed and have to do with maintaining or expanding opportunities promoting their corporate development. In states in the midst of societal upheaval, such as China and Vietnam, analytical approaches utilizing the terms elite and class are less fruitful because all social groups and strata find themselves in the process of radical change. Strategic groups emerge primarily in conditions of social change and upheaval (that is, in periods with a high degree of social mobility). As new groups and new opportunties for acquiring assets come about, groups with a strategic orientation try to improve their chances of success through altering the context in which they operate. This process is necessarily political. In summary, the following points appear to be important in the definition of a strategic group: (1) a strategic group is concerned with both social and political change;

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(2) it appears as an organized interest group with the authority to push for change; (3) a strategic group works ‘strategically’ in the sense described above although this can occur either formally or informally; (4) strategic groups have a clear plan and the capacity to implement that plan; (5) the attitudes and behaviour of group members have the effect of changing social values. Symbolic Role: Entrepreneurs as Role Models As well as acting collectively, entepreneurs can also be viewed as serving a symbolic function. Keller conceives of this in three ways: the cognitive level (specialized prowess and knowledge), the moral level (values and attitudes) and the expressive level (emotions, forms of behaviour).14 Extrapolating from this, entrepreneurs can also be seen as role models, standing for such things as economic authority, professionalism, the making of economic decisions, entrepreneurial success, wealth and a specific lifestyle. The symbolic also includes particular moral expectations (for example, the employer being concerned about the welfare of the workforce). The symbolic aspect of entrepreneurial identity was clearly expressed by one entrepreneur writing in the party newpaper, People’s Daily (Renmin Ribao) at the end of 1999. The entrepreneur argued that as China entered the twenty-first century entrepreneurs needed to be at one and the same time politician, thinker and artist. Politician, he argued, because their work was indivisibly associated with politics in the sense that they operated in a particular political and legal context; thinker because the development of a company depends upon a corporate philosophy; and artist because entrepreneurs have to encounter other people with understanding and empathy.15 Here, as in many other writings in the press by entrepreneurs, the universal, strategic and exemplary aspects of entrepreneurdom are brought to the fore, contributing in the process to the sense of entrepreneurs serving as a social role model. Such a view was clearly expressed in one of our own workshops when the director of our Chinese partnership institute, Cao Yuanzheng, declared that the most important role of the private sector was to ‘transform the thinking, the ideas and values of people’.16 This idea of entrepreneurs transforming society has largely been overlooked in the academic literature to date. Entrepreneurs and the Political Realm Entrepreneurs also use their economic capital to expand their social and political capital (for example, through donations in areas of public concern or to build contacts with officials). The strategic use of guanxi can also be regarded as part of this process. Furthermore, the fact that the majority of entrepreneurs view as desirable the creation of an organization not controlled by the state to represent

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their interests indicates their wish for a stronger and more independent voice in the shaping of policy. Many entrepreneurs are also active in formal political structures, such as the party and parliament, highlighting another important avenue through which entrepreneurs seek to influence the policy-making process. In 1994, the leadership in China noted that the purchase of political office and votes and the bribing of officials by private entrepreneurs were assuming ever more serious proportions in both rural and urban areas. In behaving in this way, enterpreneurs had recognized—so China’s leaders argued—that business and politics could not be separated from one another.17 One prominent entrepreneur summarized this in the formulation, ‘Entrepreneurs in China have to be politicians; if they do not understand how to be political, they will fail.’18 Nevertheless, the extent to which entrepreneurs are operating strategically for the good of the group varies greatly. Larger companies led by better-educated entrepreneurs are likely to be most active.19 They tend to be more self-confident than smaller entrepreneurs. They possess leadership qualities and are beginning to stand out as recognized spokesmen or group representatives. Small-scale entrepreneurs, who may at some point in their lives have fallen foul of the authorities, are often cautious about getting involved politically or socially; instead, they tend to behave in a politically conformist manner. Whatever entrepreneurs’ views on this, it is important to note that they can pursue a whole range of strategies—most of which are not overtly political. In responses to our questions, entrepreneurs distinguished between the following different strategies: growth strategies (in the interests of growth of the group, their organizations, or both), business strategies (to assert market and business interests), stability strategies (in the interests of societal or group stabilization), political defensive strategies (to ward off various perceived disadvantages), political offensive strategies (for the assertion of interests, formally, informally or a combination). Since the choice of strategy in each case depends on the specific circumstances, one cannot ascertain any consistent or uniform pattern of behaviour on the part of entrepreneurs. Moreover, entrepreneurs will very often pursue a combination of different strategies at the same time. Examples of Strategic Behaviour by Entrepreneurs We will now examine the process by which entrepreneurial interests are represented or brought to bear on the legislative process. We will look at China first followed by Vietnam. China In 1998, the Industry and Commerce Daily (Zhongguo Gongshang Bao) described the passage of a law designed to protect the rights and interests of the private sector.20 According to the newspaper, the legislative process began with the tabling of a motion by the Association of Industry and Commerce—acting in

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response to representations by entrepreneurs—at a session of the national Political Consultative Conference (PCC) in 1998.21 In the motion, the Association of Industry and Commerce expressed the view that the non-state sector needed more than just political support if it were to flourish: what was needed, the association argued, were legal safeguards in order to put the protection of private property on a par with that afforded to public property; otherwise, it reasoned, it would be difficult to implement the party’s policies in a ‘determined’ way that would ‘maintain stability’. Thus, in making its recommendations, the emphasis was clearly on upholding party policy rather than on the rights of the private sector per se. Since drawing up new legislation usually requires a long process of consultation, implementation is generally easier if an identifiable ‘prototype’ already exists. In this respect, the motion tabled by the Association of Industry and Commerce at the PCC session noted that the southern city of Guangzhou already had such legal safeguards, suggesting that this should be extended nationwide. According to the Industry and Commerce Daily, the Association of Industry and Commerce had in fact introduced an earlier motion at the PCC of Guangzhou. This followed representation by private entrepreneurs acting in the wake of the decison by the Fifteenth Party Congress affording equal treatment to the state and the private sector. The Guangzhou motion also had proposed equal status for the private and state sectors. Having gained the support of the majority of PCC deputies in Guangzhou, the motion was then forwarded to the city’s people’s congress. This followed conversations between representatives of the PCC, leading political figures in the city, and the Association of Industry and Commerce. The party’s United Front Department was also brought on side during this period, and prepared an appropriate resolution for the Guangzhou party committee, which in turn also gave its approval for the proposed legislative change. After the successful implementation of the measure at the city level, private entrepeneurs then oversaw its extension to the provincial level, which came into effect in July 1999.22 This episode illustrates the way in which organized ‘strategic’ activity carried out by the associations representing entrepreneurial interests exists. Moreover, because this was an action that concerned the interests of all entrepreneurs (namely, ‘equality under the law’) it also illustrates the way in which entrepreneurs can be seen to be acting in the interests of the entire social group. Figure 1 details the institutions through which entrepreneurs’ wishes were transmitted in order to get the legislation passed. Another example of conscious, collective action on the part of entrepreneurs concerns a series of petitions produced by PCC deputies at their conference in spring 1998. One petition drawn up by the deputies—many of whom were also entrepreneurs—called for the setting up of a special department with responsibility for small and middle-sized enterprises. According to the petition, the department would be responsible for everything from assisting enterprises in

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FIGURE 1 INSTITUTIONAL ROUTES THROUGH WHICH ENTREPRENEURS MAY EXERT INFLUENCE

marketing or obtaining credit to marketing to drafting relevant legislation. Unlike the Association of Industry and Commerce, which represents both state and private companies, such a department would be responsible exclusively for the private sector. As a result, it was felt that it could represent their interests more effectively, bringing pressure to bear when needed at different levels of government and in the bureaucracy. Vietnam In Vietnam, the role of entrepreneurs in the legislative process has been less clearly documented.23 However, as in China, entrepreneurs and their associations endeavour to make their views known through lobbying and via the media. In Vietnam, too, legal safeguards, the rights of the private sector and the need to obtain trading terms comparable with those applying to the state sector are at the top of the agenda. More than in China, government institutions and organizations charged with representing their interests have been accused of neglecting the private sector and discriminating against it.24 However, there has been an improvement in attitudes since the late 1990s when private sector growth outstripped that of the state sector for the first time. After the Eighth Party Congress in 1996, the deputy chairman of the Vietnam Chamber of Commerce and Industry (VCCI) declared in an interview with the magazine, Weekly Business Forum (Dien Dan Doanh Nghiep) that a representative of his organization had for the first time been allowed to

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participate as a delegate at the party congress. He argued that this indicated the growing status of the VCCI. He also said that the representative concerned had been very active in working for increased state support for small and mediumsized enterprises and proposed that the VCCI should continue to be entrusted with this duty. At the Eighth Party Congress, the number of members of the business community represented on the party Central Committee also increased.25 Ahead of the Eighth Party Congress, organizations representing the interests of entrepreneurs like the Hanoi Association of Industry and Commerce had called for a greater role for the private sector. It made its views known through petitions and in the media. The general secretary of the organization went on record as saying that their goal was to alter fundamentally the attitude of party and government towards the private sector. Prejudices against the private sector, such as that it was based on exploitation, had to be abandoned, he said, adding that without the private sector Vietnam’s modernization would not succeed.26 In 2002, entrepreneurs who were nominated as candidates for the elections to Vietnam’s National Assembly declared that if elected they would lobby for the interests of entrepreneurs.27 Thus, in Vietnam, it can be seen that entrepreneurs are seeking to safeguard their commercial activities. In order to reduce insecurity and minimize transaction costs, they are also concerned with strengthening the legal framework governing private sector activities. At the moment, this determines the full extent of entrepreneurs’ political activity. Concluding Remarks On the basis of our research findings, it is evident that entrepreneurs, so far as they act as members of associations representing their interests, conceive of themselves at least partially as an interest group. This involves coordinated activity, pursued to all intents and purposes with a view to achieving shared political goals. However, extravagant conclusions should not be drawn from this, particularly in relation to the prospects for democratization. Vanhanen put forward the hypothesis that democratization occurs under conditions in which power is so widely dispersed that no group is a position to hold back its competitors or to maintain its hegemony.28 This thesis certainly has much to recommend it. Looking at China and Vietnam, we can say that entrepreneurs without doubt strive to obtain more power for themselves, even if to begin with they do this primarily in the economic sphere. Since access to economic resources is still largely controlled by political elites, it makes sense for entrepreneurs to try to obtain access to those elites or to seek to influence the way they operate. While this clearly brings entrepreneurs into the political realm, they are purely operating in pursuit of their commercial interests.

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Viewed politically, entrepreneurs are still relatively powerless, even if their political influence has increased recently, notably at the local level. In addition, entrepreneurs generally lack the desire to change the system, so that they cannot be described as actively working for democratization. So long as the current political set-up does not deprive them of acceptance, integration and, with that, a certain degree of participation, this is likely to remain the case. On the other hand, most entrepreneurs would support changes that dealt with corruption and red-tape, both of which undermine their business activities by increasing costs. Even if entrepreneurs, acting as a ‘strategic group’, wanted to intitiate more farreaching political change, they could not do so on their own. Such a development depends rather on the distribution of power between different social groups, and entrepreneurs would need to form a coalition with other social groups. In economic terms, entrepreneurs are undoubtedly at the top of the pecking order as far as income and local economic power are concerned. In this sense, they can be viewed as a strategic elite. As the economic clout of entrepreneurs is increasingly recognized, they are starting to influence the norms and values of society, in turn contributing to a wider transformation of the economic, social and political realms. However, we need to be clearer about what we mean by ‘political transformation’. Gabriel Almond understands it as a political system which ‘develops capacities which it did not possess before’. He argues that basic changes in political culture and structure are associated with such a transformation.29 The strategic group approach pursued in this article contributes to our understanding of this process by naming actors beyond the state, who through their actions develop such capacities. While the activities of entrepreneurs still cannot be termed systemchanging, they are, nevertheless, a group that influence politics and structures so that we can certainly speak of strategic action. At the same time, we can be more precise about how we understand strategic action, distinguishing between ‘strategies for maintaining power and/or expanding power’.30 This can be clarified still further with a distinction between (a) system-changing strategies, which aim for a fundamental alteration of structures as a pre-condition for the assertion of interests; (b) participative strategies, which have as their object a greater degree of participation and increased opportuntities for reshaping the business environment; and (c) status quo-maintaining or restorative strategies, which for the purposes of particular interests oppose structural changes or wish to restore traditional relations. Entrepreneurdom in China and Vietnam is at present pursuing a participative strategy.

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NOTES 1. This analysis is based on the findings of a major survey among more than 200 entrepreneurs in three provinces each in China and in Vietnam in 1996 and 1997. The results were published in Thomas Heberer, Unternehmer als strategische Gruppen (Hamburg: Institute of Asian Affairs, 2001). An English edition is to be published by Brill (2003). 2. Zhang Xuwu, Xie Minggan and Li Ding (eds.), Zhongguo siying jingji nianjian [Yearbook of the Chinese private economy] (Hong Kong: Xianggang jingji daobaoshe, 1994), p.146; Zhongguo tongji nianjian [China’s Statistical Yearbook] (Beijing: Zhongguo tongji chubanshe, 1995), p.289. 3. See Clark Kerr, John T.Dunlop, Frederick Harbison and Charles A.Myers, ‘Industrialism and Industrial Man’, in D.Grusky (ed.), Social Stratification: Class, Race, and Gender in Sociological Perspective (Boulder, CO: Westview, 1994), pp. 659–69. 4. See Barbara Zschoch, Entwicklung von Kleinunternehmen in Ruβland (Frankfurt am Main: Lang, 1998), pp.202, 203. 5. Heberer, Unternehmer als strategische Gruppen. 6. Pierre Bourdieu, Praktische Vernunft: Zur Theorie des Handelns (Frankfurt am Main: Suhrkamp, 1998), pp.23–4. 7. For more detail on the lifestyle of the urban middle class see Duan Yiping, Gaoji hui. Zhongguo chengshi zhongchan jieceng xiezhen [Superior grey: The truth about China’s urban middle stratum] (Beijing: Zhongguo qingnian chubanshe, 1999). 8. Li Tongwen (ed.), Zhongguo minsheng baogao: Zhongguo shehui ge jieceng de xianzhuang yu weilai [Report on China’s people’s welfare: Situation and future of all strata in China] (Beijing: Jinyu chubanshe, 1998), p.260. 9. Conversation on 6 Oct. 1996 in Luohe/Henan, China. 10. K.C.Chang (ed.), Food in Chinese Culture: Anthropological and Historical Perspectives (New Haven, CT: Yale University Press, 1977). 11. Wang Gan, ‘“Friends Eating Together”: Banqueting and Networking for Entrepreneurs in Shenzhen’, paper presented to the 50th Annual Meeting of the Association for Asian Studies, Washington, DC, 26–29 March 1998, p.15. 12. See Hans-Dieter Evers and Tilman Schiel, Strategische Gruppen: Vergleichende Studien zu Staat, Bürokratie und Klassenbildung in der Dritten Welt (Berlin: Dietrich Reimer, 1988), p.10; and Hans-Dieter Evers, ‘Macht und Einfluss in der Entwicklungspolitik. Neue Ansätze zur Theorie Strategischer Gruppen’, in Entwicklung und Zusammenarbeit, Vol.1 (1997), pp.15–17. 13. Evers and Schiel, Strategische Gruppen. 14. Suzanne Keller, Beyond the Ruling Class: Strategic Elites in Modern Society (New York: Random House, 1963), p.154. 15. Wei Jiafu, ‘Qiyejia xuyao shenme suzhi’ [What kind of qualities do entrepreneurs need?], Renmin Ribao [People’s Daily], 27 Dec. 1999. 16. Cao Yuanzheng, Duisburg (Germany), 14 May 1999. 17. Lu Yusha, ‘Xin zibenjia de zhengzhi yaoqiu’ [Political demands of the new Capitalists], Dangdai [Present Time], Vol.6 (1994), pp.4–5. 18. James Tyson and Ann Tyson, Chinese Awakenings: Life Stories from the Unofficial China (Boulder, CO: Westview, 1995), p.54.

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19. Christopher Jahns, Integriertes strategisches Management: Neue Perspektiven zur Theorie und Praxis des strategischen Managements (Sternenfels: Wiss & Praxis, 1999). 20. Zhongguo Gongshang Bao, 6 March 1998. 21. The Association of Industry and Commerce is the most important organization for larger entrepreneurs; it is attached to the party’s United Front Department. 22. Zhongguo Gongshang Bao, 9 July 1999. 23. However, see Jonathan R.Stromseth, ‘Reform and Response in Vietnam: StateSociety Relations and the Changing Political Economy’, doctoral dissertation, Columbia University, 1998. 24. Viet Nam News, 6 Aug. 1996 and 13 March 1997; The Saigon Times Weekly, 2–8 March 1996, p.25. 25. Viet Nam News, 20 July 1996. 26. Vietnam Investment Review, 10–16 June 1996, pp.13 and 18. 27. Margot Cohen, The Business of Politics’, Far Eastern Economic Review, 9 May 2002, pp.21–2. 28. Tatu Vanhanen and Richard Kimber, Predicting and Explaining Democratization in Eastern Europe’, in Geoffrey Pridham and T.Vanhanen (eds.), Democratization in Eastern Europe: Domestic and International Perspectives (London and New York: Routledge, 1994), p.63. 29. Gabriel A.Almond, ‘Politische Systeme und politischer Wandel’, in Wolfgang Zapf (ed.), Theorien des Sozialen Wandels (Cologne and Berlin: Kiepenheuer & Witsch, 1970), p.216. 30. Rüdiger Korff, Macht der Symbole, Symbole der Macht: Zur symbolischen Dimension strategischer Gruppen, Working Paper No.166 des Forschungsschwerpunkts Entwicklungssoziologie an der Universität Bielefeld (Bielefeld: University of Bielefeld, 1992), p.4.

China’s Social Security Reforms and the Comparative Politics of Market Transition JANE DUCKETT

Introduction Market transition and social security reform are both fundamentally political because they change the way resources are distributed and redistributed across a society and so in turn affect the social contract between governments and their people.1 This study examines China’s social security reforms during the period of marketization since the late 1970s. It sets out what the main policies have been and discusses why they have been adopted. It does so from a comparative angle by assessing to what extent and why these reforms resemble and differ from those of post-communist marketizing economies in central Europe. At its core is the question of whether continued one-party politics in China and democratization in central Europe have produced different social policies and social security systems during market transition. A number of studies have documented how social security systems in central Europe have been reformed in the dominant context of market transition that began after the collapse of communist regimes from late 1989. These studies have described how since then governments in Poland, Hungary and the Czech Republic have introduced assistance for the unemployed and the poor, and reduced or eliminated the public goods provided by former state enterprises.2 While governments across the region initially sustained their significant fiscal commitments to pensions and health care, reform of these provisions has been on the agenda since 1997. Hungary began transforming its pensions in mid-1997 and Poland in 1997–98. And so far, although pension reforms have advanced ahead of those in healthcare, ‘most countries appear to be moving away from collective to individualized solutions’.3 In other words, governments are tending to move away from reliance on taxbased systems by introducing features whereby individuals pay into funded systems of insurance for their own future old-age and medical needs. For example, in pensions, Poland and Hungary have introduced, alongside their collectivist tax-financed system, Chilean-influenced compulsory savings and voluntary private old-age insurance, while the Czech Republic has adopted

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German-influenced social insurance that links benefits to an individual’s contributions.4 Social security reforms in central Europe are commonly argued to have been shaped by a range of economic, demographic and ‘technical’ factors. First, rapid market transition produced negative GDP growth, and rising unemployment and poverty,5 and hence demands for unemployment insurance and povertyalleviation measures. But it has at the same time limited government fiscal income, while marketization of the health sector has increased healthcare expenditures by the state and individuals. In Hungary, for example, this put pressures on systems for financing health care. Second, pensions reforms have been both catalysed and constrained by ageing populations across the region that are forecast to increase spending.6 Third, ‘technical’ difficulties in social security reform, for example the complexities of health systems and lack of good international models for workable health financing mechanisms, are argued to have delayed health insurance reform in Poland and slowed its progress in Hungary.7 Central European social security reforms are also argued to have been shaped by a range of political factors, notably vested interests, ideological changes, and new, more democratic political institutions. Social groups privileged in the communist era, for example pensioners, miners and railway workers in Poland, have often successfully resisted the erosion of their benefits. The interests of government ministries have also shaped policies. For example, Poland’s ministry of finance pressed for a greater role for private pensions, opposing the ministry of labour’s initial attempts to defend the tax-based pay-as-you-go system. In both Poland and Hungary, the ministry of health defended the interests of certain health-service providers, hindering reform. Ideologically, a widespread backlash against the statist, interventionist approach of the communist era has benefited those who prefer individualist or privatized options for reform in both pensions and health. Finally, democratic transition has meant that the process of social security reform in central Europe has been characterized by consultation and lobbying, although to different degrees in different countries. In Poland, for example, a tripartite commission for social insurance reform was set up to help build a consensus on the reforms among unions, private employers and the government. In Hungary, although there were fewer formal channels and less transparency, a ‘council of elder affairs’ was created to deal with pensioners’ concerns, and consultation was important to the reform process.8 China has undergone a similar market transition to the countries of central Europe, but under continued communist party rule rather than democratic politics. This study examines China’s social security reforms and the factors— economic, demographic, technical and political—that have shaped them. It asks to what extent, and how, this different political context has influenced social policy in China and set its social security system on a different trajectory from its counterparts in post-communist Europe. I confine my comparative discussion to

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central Europe, particularly Poland and Hungary, since these are the countries most discussed in the literature on European post-communist social policy and are among those where the democratic transition has been most thoroughgoing. For reasons of space, I discuss pensions, health and unemployment insurance, and poverty relief, but not other types of social insurance, housing or education. I use ‘social insurance’ to refer to state-mandated old-age, health and unemployment insurance, and ‘social security’ to encompass both social insurance and poverty relief.9 I argue that despite its different political system, social security reforms under market transition in China have resembled those of central European countries in terms of broad content. China too has introduced unemployment insurance and new means-tested poverty assistance, and has reduced state enterprises’ role in delivering social security. It has also reformed pensions ahead of health insurance and moved away from collective provisions towards more individualist social insurance. These similarities are due to the common experiences and constraints of market transition, demography, technical problems, vested interests and ideology. However, there have been some significant differences, notably China’s greater urban bias and erosion of benefits, and its slightly different sequencing of reforms during a more protracted process. The main causes of these differences lie in China’s distinctive rural, agricultural starting-point, lower per capita GDP, and pre-reform system of enterprise-based social security provision. Differences are also due to China’s political institutions, most notably one-party rule and fiscal decentralization, which have meant less consultation, popular participation and transparency in the policy process. Although only one among a range of influences, political systems have been an important shaper of social policy. Paradoxically, however, social security provisions developed in the era of communist party rule may have been better preserved under post-communist governments. The study first sets out China’s experience of social security reform and discusses the main factors that have shaped its pace and content. Section II briefly describes China’s pre-reform social security system and section III examines the introduction over the past two decades of unemployment insurance and means-tested poverty assistance, and also reforms in the spheres of pensions and health insurance. Section IV then discusses the main similarities with the experience of post-communist central Europe and the reasons for them, and Section V examines the distinctive features of China’s social security reforms. In the conclusion I consider what difference political systems have made to the social policies of the market reform period. China’s Social Security Under a Command Economy In the 1950s, after the Chinese Communist Party (CCP) established the People’s Republic of China, it began to create a command economy and on this basis a

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new social security system.10 In both tasks, its leaders drew heavily on the Soviet experience, so that the resultant economy and social provisions resembled those of European communist-ruled states in aiming to deliver security to citizens in old age, illness or injury, and on death. The core features of the emergent Chinese system were full employment (at least in principle), labour insurance for enterprise workers and their dependants, and public employee insurance for those on the non-enterprise state payroll (such as teachers, doctors and government officials). Labour insurance, set up gradually in the cities after 1949 and extended in scope until the mid-1960s, provided pensions, free health services and paid sickness leave, maternity benefits, and compensation for injury at work, disability and death. Under this system, enterprises financed labour insurance for their employees, with some contributions paid to a national social pool and some payments made directly by enterprises under the supervision of the All-China Federation of Trade Unions (ACFTU) and local government labour departments.11 Workers did not contribute to their pensions or pay for medical treatment.12 The system for public employees was similar, but funded from the state budget.13 During the Cultural Revolution (1966–69), however, the labour insurance system collapsed. Labour Departments and the ACFTU ceased their social security-related work, and from 1969 enterprises were given the responsibility for paying directly for their own workers’ pensions, medical treatment costs and other welfare.14 In this way, the Chinese social security system diverged from the tax-based model used in central European countries. Enterprise delivery of social security in China persisted into the market reform period, but has been subject to scrutiny and reform since the early 1980s. As we shall see below, it has had an important influence on the post-Mao reforms. By 1978, 99.8 percent of urban employees worked in state and collective enterprises or other state institutions.15 Since dependants were provided for, by the late 1970s the employment-based labour and public employee insurance schemes reached a majority of urban residents, although provisions differed in their generosity from workplace to workplace. A further ‘residual’ system of state welfare assisted the narrow segment of the population who were unable to work (and therefore had no workplace), and had no source of income and no family —the so-called Three Nos’, usually elderly or disabled people and orphans. Social relief was also extended to urban households in particularly straitened short-term circumstances, but only for brief periods, and the number of households eligible was always extremely small. For example, in Tianjin in 1997 —when this system was still in place—in an urban population of about five million, only 500 households received such relief.16 There was a strong urban bias in China’s pre-reform social security system. While provisions to urban residents were generous given China’s level of economic development, only about one-fifth of the population lived in the cities in 1978, and those living in rural areas and working in the agricultural sector were not eligible for benefits derived from labour insurance, notably pensions

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and medical care. Instead, following the formation of the communes in the late 1950s, there was communal or collective provision of basic healthcare and lowlevel social safety nets for the very poorest rural households—usually the elderly, disabled and orphaned children—again using the criteria that recipients should be unable to work, and have no family and no other sources of income.17 Assistance was provided also in times of natural disaster and famine. Marketization and Social Security Reform in China New Unemployment Protection Unemployment benefits—non-existent before market reforms began—were introduced in 1986, relatively early in China’s marketization process.18 However, at first they were limited to urban industrial workers in state sector enterprises, who were eligible to register as unemployed only if their state enterprise was actually declared bankrupt. They were then eligible for unemployment insurance benefit for a maximum period of 24 months, depending on how long they had worked. This was paid from a fund into which state enterprises contributed one per cent of their wage bill. It was not until 1999, when new national rules were issued, that unemployment insurance participation became in principle mandatory for all urban enterprises and their employees.19 Employers now contributed two per cent of their wage bill and employees one per cent of their wage (see Table 1). Individuals who had paid contributions for one year, had been involuntarily made redundant and had registered as unemployed could claim benefits, which were paid for up to two years, depending on the length of time for which premiums had been paid.20 In practice, however, many enterprises, particularly private ones, have evaded participation. Thus even according to official figures, only 104 million people were making contributions in the unemployment insurance scheme in 2001, some 43 per cent of the employed urban population (see Table 2). TABLE 1 PREMIUMS CONTRIBUTIONS FOR SOCIAL INSURANCE

Enterprise* Individual**

Unemployment

Old-age

Health

2 1

20 8

6 2

* Percentage of wage bill ** Percentage of wage Sources: State Council, Labour and Social Security in China (White Paper) (Beijing: State Council Information Office, 2002).

ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA 83

TABLE 2 PARTICIPATION IN SOCIAL INSURANCE SCHEMES, 2001 (OFFICIAL)

Participants (millions) As % of urban employed pop. As % of urban population

Unemployment

Old-age

Health

104

108

76

43

45

32

22

22

16

Sources: State Council, Labour and Social Security in China (White Paper) (Beijing: State Council Information Office, 2002), State Statistical Bureau, 2001 nian guomin jingji he shehui fazhan tongji gongbao [Communiqué of National Economic and Social Development Statistics, 2001] (February 2002), at .

However, central and local governments have limited unemployment by controlling bankruptcies. In the 1990s, they also developed policies targeted at so-called ‘laid-off’ (xiagang) workers, who were distinguished from the unemployed because, although they were no longer needed for work, their enterprise was still operating and was therefore required to provide them with a ‘basic living allowance’ and pay old-age, health and unemployment insurance contributions on their behalf.21 Laid-off workers received this allowance for a maximum of three years if they did not find new jobs, and then became eligible for unemployment benefit for a maximum of a further two years if their former employer had paid premium contributions on their behalf. A total of 2.4 million laid-off workers were reported to have benefited from these provisions by the end of June 2001.22 From that year, the laid-off worker provision system began to be abolished and in most localities those losing their jobs now, at best, are eligible for unemployment benefit or receive one-off redundancy payments. New Means-Tested Poverty Assistance Means-tested poverty assistance has been introduced in China as it has in central Europe, although to a lesser extent in rural areas and later in the market reform process. Initially, from 1985, rural poverty reduction programmes mainly involved investing in the development of local economies.23 They identified poor counties or townships on the basis of local average per capita incomes and provided them with poverty-reduction loans and food-for-work programmes. But while they have helped focus efforts on the most deprived areas, these programmes have been criticized because they ignore the fact that there are many poor families and individuals in areas where incomes are on average above the poverty line. For this reason, means-tested poverty assistance has been initiated in some rural areas.24 In line with the view of poverty as mainly a problem of underdevelopment and therefore of poor rural areas, urban poverty relief was limited in the pre-reform

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period to those who satisfied the Three Nos’ criteria. As market reform has progressed, however, urban income inequalities have grown, and—particularly during the 1990s, when unemployment increased—urban poverty began to be recognized as a problem that would not be solved simply by economic growth and development. In the latter part of the decade, the Chinese government therefore introduced a new national system of means-tested ‘minimum living security’ (MLS), provided on the basis of a locally-defined minimum subsistence level. In households where the average per capita income falls beneath that level, the local government provides financial assistance to bring people up to it. Locally-defined levels range from about 140 yuan per month (in the cities of the poor Gansu province) to 320 yuan (in more affluent Shenzhen).25 Although they are sometimes drawn also on the basis of how much governments can afford, and not all those falling beneath the line actually receive assistance, by the end of 2001 this new programme had assisted almost 12 million urban residents.26 A Shift Towards Contributory Social Insurance As in central Europe, pensions were one of the first elements of the social security system to be considered for reform. There were trials in cities across China by the mid-1980s, and a new old-age insurance system was extended and refined in the 1990s.27 Also similar to central Europe, notably Poland and Hungary, is the direction in which pension reform has moved. China has opted for a state-administered social insurance type of system, which, although it contains significant city-by-city risk-pooling of employer contributions, also involves (since 1994) mandatory individual savings, and a role, albeit still small, for voluntary private pensions. It has therefore weakened what Fajth has called in the post-communist European context the ‘solidarity features’ of pensions.28 In any case, in China the scheme is only for urban enterprise employees, 108 million of whom were said to be participating by the end of 2001 (see Table 2).29 Separate rural pensions schemes have been developed only in relatively wealthy rural areas.30 As in central Europe, health system reforms have lagged behind those in pensions.31 This has been particularly the case in rural China, even though the rural commune-based system of health provision suffered much more catastrophically than the urban one in the process of transition to the market. When communes were dismantled in the very early stages of market reform, the early 1980s, the collective medical system (CMS) collapsed rapidly. While some three-quarters of villages had benefited from the CMS in the early 1970s, just after it was introduced, by the mid-1980s the number had fallen to about six per cent.32 Since then, repeated efforts to rebuild rural CMS have met with only limited success, and by the late 1990s 86 per cent of rural dwellers were understood to be paying for all their medical treatment themselves.33 In urban areas, too, the pre-reform system of labour and public employee health insurance provided through workplaces was eroded in the post-Mao

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period. Owing to measures that allowed hospitals to generate revenues by charging fees for treatment and medicine, marketization of pharmaceuticals production and distribution, and older state enterprises’ difficulties in meeting the medical costs of their employees, urban dwellers have increasingly been paying for their own medical treatment. While reforms of problem-ridden urban health insurance have been more successful than those in the countryside, a new system is far from fully established. Although there were local experiments in the 1980s, reform gathered momentum only in the mid-late 1990s, and not until December 1998 was a national ‘urban employee basic social health insurance programme’ announced. As with pensions, the new health insurance system has several ‘pillars’ and it increases individual responsibility. Its core is compulsory social insurance involving risk-pooling of employers’ contributions, and employees paying individual contributions into their own health accounts. Less developed are the other pillars of supplementary insurance organized by employers and private insurance.34 By the end of 2001, 76 million employees were said to be participating in the state social insurance system.35 Like pensions, health insurance is available primarily to urban employees. However, in a major departure from the comprehensive coverage of the pre-reform health insurance system, dependants’ medical treatment is not included in the new scheme. For those who are enrolled, the scheme pays for specified medicine and treatment, but patients must make supplementary payments alongside payments from the social insurance fund. Reduced State Enterprise Role in Welfare Provision In the pre-reform period, state enterprises financed and delivered pensions and medical treatment to their employees, and often provided their own hospitals, clinics and housing. As in central Europe, over the post-Mao reform period, particularly in the 1990s, there have been growing efforts to reduce the state enterprises’ role in providing these benefits. Enterprises are still the main funders of insurance for unemployment, old-age (pensions) and health benefits through premiums payments that are calculated as a percentage of the wage bill, effectively a payroll tax (for amounts, see Table l).36 However, these new social insurance programmes are administered by local governments, enterprises are having their health service providers turned over to the ministry of health, and housing reform has sought to end the formerly widespread employers’ provision of subsidized housing. Overall, therefore, there has been a significant reduction in the public goods that enterprises provide.37 However, in many state and perhaps also some private workplaces, employees will still receive other extras, often in the form of goods in kind or bonuses on top of their basic wage.38

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Explaining Similarities in the Social Security Reform Experience of China and Central Europe Broad similarities in the content of the social security reforms in post-communist central Europe and China can be traced to similarities in the experience of transition to the market, in demographic trends and technical issues, and in political institutions and interests. The introduction in China, as in central Europe, of unemployment insurance and new (if rather parsimonious) meanstested poverty assistance is a response to the similar problems of unemployment, inequality and poverty created in the process of marketization.39 Even though China has sustained economic growth at an average of 9.7 per cent each year between 1980 and 2000, whereas the economies of central Europe contracted sharply in the early 1990s and have since grown more slowly, China too has faced rising unemployment and increases in urban poverty.40 Although its official national unemployment rate has remained below four per cent as labour markets have been introduced, this is still high in comparison with the pre-reform situation, and real unemployment is much higher.41 Similarly, inequalities have increased significantly in the marketization process; and, although hundreds of millions of people have been lifted out of poverty in rural China in the post-Mao period,42 it is now recognized that urban poverty has begun to rise.43 Similar demographic and technical factors account for the fact that pensions reforms—usually attempting to move from a pay-as-you-go system to a partially funded one—have tended to precede those in health care in China as they have in central Europe. First, in both cases, pension reform has been forced on to the agenda by a realization that ageing populations mean that in the future fewer current workers effectively will have to support larger numbers of pensioners. In China, predictions are that an unreformed system is unlikely to be sustainable in the future because of increases in the numbers of pensioners. The ratio of workers to pensioners declined from 30.3 in 1978 to 7.5 in 1985 and 4.8 in 1995,44 and better longevity and the one-child policy are likely to continue to add to the problems of the balance between pensioners and current workers. The urban population aged 60 and over will reach 13 per cent in 2010,45 and there will be an estimated 400 million pensioners by 2050.46 Even since the reforms, however, China has not overcome the problem of how to pay for the current generation of pensioners while funding a system for the future. The central government has created a national social security fund to help with this task, but it has had problems raising finance for it.47 As in central Europe, it had hoped to raise income from the privatization of state enterprises, but China’s stock markets have reacted badly to announcements of these plans and so they have repeatedly been shelved.48 Similarly, the fund was to be invested in capital markets, but this was delayed because markets were deemed too unpredictable.49 Second, technical difficulties involved in adjusting health financing systems have contributed to health reform in China lagging behind pension reform as it

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has in Poland and Hungary. As Joan Nelson has noted, health care is more difficult to reform than pensions because it involves decisions about health service treatment priorities and funding mechanisms that are prone to creating perverse incentives among patients and health sector workers. Furthermore, health policy-makers face the problem that there are no obvious good international models to draw on in health system reform, as those in most wealthy industrialized nations also seem to have significant problems of one kind or another.50 Government policy-makers and researchers in China have looked at many systems internationally and are still considering such fundamental questions as how to manage health service providers and whether to allow the expansion of private sector provision.51 Similar vested interests have shaped the reform of Chinese and central European pre-reform social security systems. As in central Europe, China had created pensions and health schemes when the planned economy was in place, and so rather than starting from scratch as it did with unemployment insurance and means-tested poverty assistance, it was reforming existing programmes.52 As a result, Chinese reformers have encountered problems withdrawing the privileges that some industries and employees had under the pre-reform system.53 For example, as in Poland, the Chinese government has faced opposition to reform from some industries and their workers. Successful state sector enterprises, particularly those with young and relatively healthy workforces, were unwilling to join new social insurance schemes that would increase their pensions and health spending by making them effectively subsidize older state enterprises with more retirees. Similarly, employees in these successful enterprises were against the schemes because they meant paying premiums contributions for pensions and health care while provisions were less generous than in the past.54 For this reason, certain enterprises, and in some cases whole industries, successfully resisted or delayed participating in the new schemes. Similarly, just as employees in the legal system won concessions in Poland’s pensions reforms, so cadres and civil servants in China have retained their generous healthcare privileges.55 Finally, in China as in Poland, pensioners have challenged the erosion of their pensions.56 Reforms in China have also been shaped by bureaucratic interests as they have in central Europe. In pensions, for example, the ministry of finance has been unwilling to expose itself to the prospect of potentially steeply rising budgetary commitments. It has therefore been against tax relief for pensions contributions.57 Similarly, in health insurance reforms, its (and local governments’) attempts to contain state spending on health may have contributed to decisions to introduce mandatory individual premiums contributions, copayments (that is, patients’ contributions to health care costs) and private insurance. This was particularly the case in the early 1990s when, despite China’s economy sustaining high growth rates, state revenues declined as a share of GDP.58 In contrast, the ministry of health’s leadership of health insurance reform in the late 1980s and early 1990s is understood to have failed to control

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the spiralling healthcare costs encouraged by its constituency of doctors and hospitals.59 Similarly, the ministry of the pharmaceutical industry and local governments, which seek to maintain the viability of medicine producers, have also limited attempts to control medicine prices and have thereby jeopardized early health-financing reforms by contributing to rising healthcare costs.60 During market reform there has been a comparable backlash among domestic reformers in China and central Europe against ‘collectivist’ social security policies, for example those that involve risk-pooling and a strong state role. In China as in central Europe, the planned economy had been closely tied to a collectivist ideological vision that encompassed social security. Despite continued communist party rule, Chinese policy-makers, like their central European counterparts, have tended to reject that vision, and have been critical of the ‘dependency’ that they say a welfare state can create. Although there have been some—especially officials in the ministry of labour, the ACFTU and public sector workers—who have argued that redistributive fairness should underpin social security reform, and that the state should guarantee it, for much of the 1990s a more efficiency-oriented position that favoured a reduced state role was in the ascendant.61 As part of this, many reformers saw reducing the welfare burden as essential for state enterprises to compete on open markets.62 Thus, although enterprises remain an important source of funding for social security and there is risk-pooling of their contributions, individuals must now make mandatory premiums contributions for their own old age or health insurance, and must supplement basic state systems with voluntary private insurance. There may have been a return to greater acceptance of the role of the state in the late 1990s, however. Although there has been no move towards a tax-based system, this is now discussed in some circles, and the central government has begun to subsidize old-age and unemployment insurance as well as minimum living security payments, increasing expenditure on social security fivefold between 1998 and 2002.63 The Distinctiveness of China’s Social Security Reforms and Their Explanation The Distinctiveness of China ’s Social Security Reforms Despite the similarities, there are some significant differences in social security in China and central Europe. First, in China there has been a greater erosion of pre-reform provisions to certain social groups. States retained their commitments to health and pensions provision in central Europe. For example, Fjath argues that in Poland (and also in Slovenia and Lithuania) the ratio of average pensions to wages has risen even though generally benefits—including pensions—have often lost value.64 In comparison, the erosion of benefits in China is much more evident in both rural and urban areas, although rural dwellers have probably been

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the hardest hit. The collapse of CMS and other safety nets with the dismantling of the rural communes has left most of them paying privately for healthcare in clinics and hospitals that are run on a profit-making basis, and dependent entirely on their children and on personal savings. Although the communes never provided pensions and unemployment benefits, their collective ethos and redistributive mechanisms meant that the elderly were less self-reliant than they are under household farming. But many urban dwellers, too, have seen their pre-reform social security provisions removed or eroded. A social survey across 11 cities in 2000 by the central government’s state planning commission revealed that the proportions of urban dwellers with social insurance were extremely low, and much lower than is indicated in the official statistics (see Table 3).65 In addition, uncounted numbers of people retired from failing state or collective enterprises have not received the pensions they expected.66 Similarly, even now that new social insurance schemes have been developed for urban employees, many—particularly the growing numbers working in the private sector—are not participating because their employers do not make contributions on their behalf. They must therefore pay for their own medical treatment, and are ineligible for pensions or unemployment benefit.67 TABLE 3 PARTICIPATION IN SOCIAL INSURANCE, FROM A SURVEY OF 11 CITIES

% of urban household heads in work % of urban household heads not in work

Unemployment

Old-age

Health

18

52

18

3

14

8

Source: State Planning Commission Macroeconomic Research Institute, ‘Jianli shehui baohu tixi shi woguo shehui wending de guanjian’ [Establishing a system of social protection is the key to national social stability], Neibu canyue [Internal reference], 5 May 2000, pp.8–14.

As indicated above, a further difference between social security provision in China and in central Europe is China’s greater urban bias. Although pensions were extended to rural labour ‘relatively late’ in some central European countries, they did reach most of this group by the end of the 1980s.68 In China, however, where urban bias is a legacy of the pre-reform social security system, the reforms have as yet done little to reduce the gap. Although pensions have been introduced in some more affluent parts of the countryside, employees in rural industries are now permitted in principle to join health insurance schemes, and there have been attempts to rebuild the rural collective medical system, the proportion of rural dwellers actually participating in such schemes remains small. Meanwhile there is no insurance cover for unemployment, work injury or

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maternity leave for farmers and other rural dwellers, rural migrants to the cities are ineligible for means-tested poverty assistance provided there, and embryonic means-tested rural poverty relief is much less generous.69 Third, although as in central Europe pension reforms in China have preceded those in health insurance, there have been differences in the pace and sequencing of China’s social security reforms. Chinese marketization began in 1979, earlier than in most parts of central Europe, and has been gradual and protracted in contrast with the post-communist ‘big bang’ transition. Similarly, while social security reform in China has been protracted, unemployment insurance and poverty assistance were introduced very soon after central European marketization began in the early 1990s. As a result, although urban pension reforms began in the mid-1980s in China as labour markets began to emerge, it was not until the late 1990s that there were significant developments, and the widespread introduction of unemployment insurance and poverty assistance occurred comparatively late. Explaining the Distinctiveness of China’s Social Security Reforms China’s greater urban bias in social security reforms is perhaps best explained by the different problems its policymakers have faced while marketizing their economy. Most significantly, they have been managing market transition simultaneously with industrialization and urbanization. At the beginning of the market reforms some 70 per cent of China’s population was engaged in agriculture,70 compared with between 12 and 30 per cent in central and eastern Europe.71 Although the figure today is closer to 50 per cent,72 rural incomes remain on average significantly lower than urban ones, making it practically difficult to set up social insurance schemes in the countryside, and politically difficult to set up national schemes that would redistribute resources from the cities to rural areas. Although in health insurance there is now a move towards including rural enterprise employees, there is no indication that agricultural labour will be integrated into social insurance schemes in the near future. China’s social security reforms have been protracted in part because state enterprises have been so central to the process. Unlike in central Europe where marketization and privatization proceeded in tandem, in China efforts were made to retain and reform the state sector. Despite the many de-collectivizing, individualizing policies introduced since 1979, the party has needed to retain some claim to a ‘socialist’ orientation, and from the late 1980s this claim was staked clearly on a dominant role in the economy for public sector enterprises. This complicated social security reform efforts, however, because from the late 1960s enterprises had provided welfare to their employees out of their own operating expenses. This meant that enterprises with an older workforce had high expenditures on both pensions and healthcare, while new ones with a young workforce spent little.73 Urban social insurance reforms in the 1980s and early

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1990s therefore focused on redistributing the social burden among state enterprises through risk-pooling schemes rather than on more thoroughgoing changes. In central European countries such as Poland, where the state paid for social security from the national budget so that state enterprises did not have such markedly varied social insurance burdens, pressures for change came instead from a growing state burden.74 China’s introduction of comprehensive unemployment and means-tested poverty assistance relatively late in the market reform process also is linked to the retention of state enterprises. Because enterprises were not privatized early in the process, and indeed continued to be subsidized by the state while efforts were made to make them competitive, a wide-reaching unemployment compensation system was less urgent. Urban unemployment was controlled as enterprise reform was repeatedly postponed and bankruptcies limited. It was not until economic growth slowed following the Asian financial crisis (1998) that leaders sought to press for more thoroughgoing state enterprise restructuring and pushed simultaneously for an unemployment insurance system and poverty assistance that would cushion the effects. Urban bias, the erosion of benefits for many, and the late introduction of unemployment insurance and poverty assistance may also be traced to China’s political institutions, however. Lack of transparency and representation under continued one-party rule in China means there has been no open consultation over social security reform, nor are there independent trade unions or NGOs to lobby policy-makers. While different views on reform are voiced within the state bureaucracy, and academics and the party-controlled ACFTU are consulted, stakeholder interests are not permitted a free voice at the stage of policy formulation. As a result, these interests are mainly articulated through protest, often at the stage of policy implementation.75 While protests are often suppressed, they can sometimes be effective in achieving local solutions to social security problems. Even so, they are routinely ignored in the wellcontrolled media that consistently present positive coverage of social policies and allow more comprehensive responses to be evaded or delayed. In any case, articulation of interests through protest is more effective for urban than for rural dwellers. Although they are not dependent on elections to achieve and remain in office, leaders have been sensitive to dissatisfaction that might lead to unrest and threaten communist party rule. Moreover, particularly since 1989, the leaders’ awareness of the risks of unrest in the cities have been an important factor driving urban social security reform.76 Decisions to retain and reform pensions and health insurance, and to introduce unemployment insurance and means-tested poverty assistance, have been influenced by the many labour protests that have taken place over the past decade.77 By contrast, rural protests, though common, are not perceived to be as threatening.78 Without formal channels to articulate their interests, rural dwellers, even despite their large numbers, are marginalized in the reform process and have seen their social security more eroded than other groups have.79

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Also related to the question of the urban-rural divide and differential erosion of provision, however, is the matter of China’s sheer size. In a country of almost 1.3 billion people, establishing and operating a unified national system would always be a challenge. It will be particularly difficult in practice owing to the fiscal decentralization introduced in part to help deal with this very problem of scale. In making local governments more self-reliant (also part of a strategy to encourage them to promote economic growth), the centre has allowed regional inequalities to develop, most notably between coastal areas and the interior of the country. It has also made wealthy areas unwilling to subsidize poor ones, so that social insurance schemes are unlikely to move soon to national level riskpooling.80 Finally, through fiscal decentralization and permission to develop social insurance with flexibility for ‘local conditions’, the centre has devolved responsibility for social security to local governments. Nonpayment of pensions or unemployment insurance can now be portrayed as a problem of particular local governments’ implementation of policy, rather than of the central government’s policies themselves. Conclusion: Market Transition and the Difference Democracy Makes Marketization has profound implications for social security systems because it redistributes resources and re-stratifies society, thereby creating new social welfare needs. We would expect the way that governments deal with these issues of redistribution through social policy to be influenced by the ideologies they espouse as well as by the way that political systems allow interests to be articulated and influences to be represented. It has been argued, for example, that social security provisions have been defended in post-communist central Europe because democratization led to more open consultation and negotiation of social policy.81 How much difference has it made, then, that marketization and social security reform in China has taken place in the context of continued one-party rule? First, despite differences in their political systems, there are some significant similarities in the social policies adopted in China and in central Europe. In both, governments have introduced unemployment benefits and new means-tested poverty relief, and reformed old-age and health insurance in the direction of greater individual responsibility. China’s leaders, although not dependent on the ballot box as their central European counterparts are, have been motivated by the threat of unrest to retain or introduce provisions. Moreover, when designing and introducing reforms, its policy-makers have faced similar fiscal and demographic problems and vested social and bureaucratic interests. Finally, with ‘socialism’ increasingly staked on the dominance of public sector enterprises in the 1990s, individualistic, market-led solutions were favoured in China in a backlash against excessive state intervention much like that in central Europe.

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Second, the differences in social security between China and central Europe can be often traced not only to political institutions, but also to other factors. For example, China’s greater urban bias may be due in part to its large agriculturedependent population and fact that it is simultaneously marketizing, industrializing and urbanizing. It may also be explained by China’s relatively low per capita GDP and consequent inability to finance social security for all. Despite high growth rates throughout the period of market reform, China’s per capita GDP in terms of purchasing power parity even today is only about onethird of that in Poland, Hungary and the Czech Republic.82 And although China has risen from ‘low’ to ‘lower middle’ income economy by the World Bank’s measures, over the past 20 years, it still lags behind the ‘upper-middle-income’ economies of those three central European countries.83 ‘Democracy versus non-democracy’ is not therefore the only issue in market transition and social security reform.84 But political systems do make a difference. China’s more protracted reform process and later introduction of poverty assistance and unemployment insurance can be traced in part to its leaders’ decisions to retain a semblance of ‘socialism’ through the retention of state enterprises. The erosion of benefits that took place in the meantime has in significant measure been due to the lack of channels for interest articulation, poor transparency in the policy process, and the state’s ability to suppress dissent. In the context of transition to the market, political ideology and institutions intersect with economic, demographic and technical problems, and make it difficult to say definitively that another political path would have produced better results. What is clear, however, is that the poverty and vulnerability of many in China have increased. Paradoxically, perhaps, pretransition social safety nets may have been better retained and developed by postcommunist governments than they have under continued communist party rule. NOTES 1. See also Stephan Haggard and Robert R.Kaufman, ‘Introduction’, in János Kornai, Stephan Haggard and Robert G.Kaufman (eds.), Reforming the State: Fiscal and Welfare Reform in Post-Socialist Countries (Cambridge: Cambridge University Press, 2001), pp.1–22 (p.2). 2. Jerzy Hausner, ‘Security Through Diversity: Conditions for Successful Reform of the Pension System in Poland’, in Kornai, Haggard and Kaufman (eds.), Reforming the State: Fiscal and Welfare Reform, pp.210–34; Joan M. Nelson, ‘The Politics of Pension and Health Care Reforms in Hungary and Poland’, in ibid., pp.235–66; Martin Rein, Barry L.Friedman and Andreas Wörgötter, ‘Introduction’, in Martin Rein, Barry L.Friedman and Andreas Wörgötter (eds.), Enterprise and Social Benefits After Communism (Cambridge: Cambridge University Press, 1997), pp.1– 22; Giovanni Andrea Cornia, ‘Income Distribution, Poverty and Welfare in Transitional Economies: A Comparison of Eastern Europe and China’, Journal of International Development, Vol.6, No.5 (1994), pp.569–607; Jon Elster, Claus Offe

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3.

4. 5. 6. 7. 8.

9.

10. 11.

12. 13.

14. 15.

16.

17.

18.

and Ulrich K.Preuss, Institutional Design in Post-Communist Societies: Rebuilding the Ship at Sea (Cambridge: Cambridge University Press, 1998). Gáspár Fajth, ‘Social Security in a Rapidly Changing Environment: the Case of the Post-Communist Transformation’, Social Policy and Administration, Vol. 33, No. 4 (1999), p.433. See also Haggard and Kaufman, ‘Introduction’; Elster, Offe and Preuss, Institutional Design in Post-Communist Societies. Fajth, ‘Social Security in a Rapidly Changing Environment’, p.428. Cornia, ‘Income Distribution, Poverty and Welfare’, pp.586–7. In Poland it is predicted that in 2020 there will be 1.8 working people for every pensioner: Hausner, ‘Security Through Diversity’, p.212. Nelson, ‘The Politics of Pension and Health Care Reforms’, p.262. See, for example, Jerzy Hausner’s account of Poland’s pensions reform and Joan Nelson’s study of pension and health reform in Poland and Hungary. Hausner, ‘Security Through Diversity’, p.227; Nelson, The Politics of Pension and Health Care Reforms’, p.246. Both pensions and old-age insurance refer to provision for the retired. I use ‘pensions’ (tuixiujin in Chinese) to refer to the pre-reform system, and ‘old-age insurance’ (yanglao baoxian) to refer to the reformed system. For a detailed account, see John Dixon, The Chinese Welfare System, 1949–1979 (New York: Praeger, 1981). Gordon White and Xiaoyuan Shang, ‘Social Security Reforms in Urban China: A Preliminary Research Report’, in Gordon White and Xiaoyuan Shang (eds.), Issues and Answers: Reforming the Social Security System (Brighton: University of Sussex, Institute of Development Studies, 1996), pp.21–2. They paid only a very small fee for medical consultations; medicines and treatment were provided without charge. Because the burden of labour insurance on state enterprises has been an important factor in social security reform in China, I shall focus in the discussion below on this rather than the provisions for public employees. White and Shang, ‘Social Security Reforms in Urban China’, pp.21–2. The proportion stood at only 37.3 per cent in 2001: State Council, Labour and Social Security in China (White Paper) (Beijing: State Council Information Office, 2002), p.6. This was before Tianjin introduced the minimum living security system discussed below: author’s interview, Tianjin government, Jan. 1997; see also Gordon White and Xiaoyuan Shang, ‘Reform of the System of Social Relief and Social Services in China’, in White and Shang (eds.), Reforms in Chinese Social Assistance and Community Services in Comparative Perspective (Brighton: Institute of Development Studies, University of Sussex, 1996), p.5. Linda Wong, Marginalization and Social Welfare in China (London: Routledge, 1998). Recipients of rural poverty relief were usually referred to as wubaohu, or ‘five-guarantee households’, because they were guaranteed food, fuel, clothing, education and, on death, burial. ‘Provisional Regulations on Insurance for Workers Waiting for Employment in State-Owned Enterprises’, effective from 1 Oct. 1986, cited in Shangquan Gao and Fulin Chi, China’s Social Security System (Beijing: Foreign Languages Press, 1996), p.103. The urban market reforms are usually dated from 1984.

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19. State Council, ‘Shiye baoxian tiaoli (Unemployment insurance rules), 22 January 1999’, in Shehui baozhang: changyong zhengce fagui [Social security: frequently used policies and regulations] (Beijing: Falü chubanshe, 1999), pp.219–25. 20. State Council, Labour and Social Security in China (White Paper). In practice, local regulations sometimes allow length of employment to be taken into account. 21. Although local governments set the level of payment, the central government has instructed that it be higher than unemployment benefit: Renmin ribao, 25 April 2002. Basic living allowances and insurance premiums contributions are also partfunded by the local unemployment insurance risk-pool and the state budget: see Renmin ribao, 26 April 2002. 22. Renmin ribao, 26 April 2002. As Dorothy Solinger has argued, laid-off workers who receive basic living allowances and the registered unemployed receiving unemployment insurance do not account for all China’s jobless: see D.J. Solinger, ‘Why We Cannot Count the Unemployed’, The China Quarterly, No.167 (Sept. 2001), pp.671–88. 23. X.P.Guan, ‘Poverty and Antipoverty Programs in Rural China since the Mid-1980s’, Social Policy and Administration, Vol.29, No.3 (1995), pp.204–27. 24. State Council, Labour and Social Security in China (White Paper). 25. Levels in 2000, when the exchange rate was about 12 yuan=£1 sterling. 26. State Council, Labour and Social Security in China (White Paper). Officials will sometimes refuse MLS to those who are capable of work. Means-testing is rather crude, and involves the public display of applicants’ financial details; it is therefore likely to discourage applications: author’s interviews with government officials, 2001. 27. Lorraine A.West, ‘Pension Reform in China: Preparing for the Future’, in Sarah Cook and Margaret Maurer-Fazio (eds.), The Workers’ State Meets the Market: Labour in China’s Transition (London and Portland, OR: Cass, 1999), pp.153–83. 28. Fajth, ‘Social Security in a Rapidly Changing Environment’, p.428. In July 1997 a national old-age insurance scheme was announced. 29. State Council, Labour and Social Security in China (White Paper). In 2001, 34 million people were reported to be receiving pensions, and the average basic monthly pension was 556 yuan. 30. Ibid. 31. Experiments with new industrial injury and maternity insurance have continued, but trail behind pensions, health and unemployment insurance reform, so that by late 2002 fewer employees were participating in them than in the other types of social insurance. Official figures state that industrial injury insurance, formally begun in 1996, covered 43 million employees by 2001, while maternity insurance, begun in 1994, covered 35 million (ibid.). 32. Sheila Hillier and Shen Jie, ‘Health Care Systems in Transition: People’s Republic of China. Part 1: An Overview of China’s Health Care System’, Journal of Public Health Medicine, Vol.18, No.3 (1996), pp.258–65, citing D. Jamison et al., China: The Health Sector (Washington, DC: World Bank, 1984), p.179. 33. Hengjin Dong, Lennart Bogg, Clas Rehnberg and Vinod Diwan, ‘Health Financing Policies: Providers’ Opinions and Prescribing Behavior in Rural China’, International Journal of Technology Assessment in Health Care, Vol.15, No.4 (1999), pp.686–98.

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34. Only 3.17 per cent of urban dwellers and 1.41 per cent of rural dwellers had private health insurance in 1998: Y. Liu, ‘Reforming China’s Urban Health Insurance System’, Health Policy, Vol.60, No.2 (2002), pp. 133–50. 35. State Council, Labour and Social Security in China (White Paper). 36. Rates can vary from locality to locality, especially for health and old age insurance. Some employers also pay for industrial injury and maternity insurance for their employees. 37. C.B.Francis, ‘Visualizing the Visible Hand: The Creation of Commodity Markets Through Fiat in a Post-Socialist Economy—The Case of China’s Urban Housing Market’, paper presented at the Association of Asian Studies conference, Washington, DC, 2002. 38. Corinna-Barbara Francis, ‘Reproduction of Danwei Institutional Features in the Context of China’s Market Economy: The Case of Haidian District’s High-Tech Sector’, China Quarterly, No.147 (1996), pp.839–59. 39. Fajth, ‘Social Security in a Rapidly Changing Environment’. 40. Official People’s Bank of China figure, cited in Financial Times, 8 Oct. 2001. On the central European economic contraction, see Cornia, ‘Income Distribution, Poverty and Welfare in Transitional Economies: A Comparison of Eastern Europe and China’, pp.586–7. 41. China’s unemployment rate was officially 3.8 per cent in mid-2002: Renmin ribao, 30 July 2002. 42. The number of people living in poverty was reduced from 250 million in 1979 to 30 million in 2000 according to official government sources that use a $0.66 a day poverty line: Renmin ribao, 12 July 2002. The World Bank, using its definition of the poor as those living on less than a dollar a day, puts the present number in poverty at 106 million, but agrees that there have been significant reductions in poverty since 1979: Financial Times, 17 June 2002. 43. Azizur Rahman Khan, Keith Griffin and Carl Riskin, ‘Income Distribution in Urban China During the Period of Economic Reform and Globalization’, in Carl Riskin, Renwei Zhao and Shi Li (eds.), China’s Retreat from Equality: Income Distribution and Economic Transition (Armonk, NY: Sharpe, 2001), pp.125–32. 44. West, ‘Tension Reform in China: Preparing for the Future’, p.155. 45. BBC, 29 Jan. 2002, at . 46. West, ‘Tension Reform in China: Preparing for the Future’, p.156. 47. At the end of 2001 the fund contained 80 billion yuan: Sina.com News, 23 July 2002 at . However, pensions spending in 2001 alone was 35 million yuan: Renmin ribao, 7 March 2002. 48. Financial Times, 23 Oct. 2001 and 30 Jan. 2002. 49. Now instead there is just a pilot scheme in Liaoning, probably to invest in government bonds and bank deposits: Financial Times, 9 Feb. 2001. 50. Nelson,‘ The Politics of Pension and Health Care Reforms’. 51. Author’s interviews with Chinese health officials and researchers. 52. There have also been lesser developments to reform maternity and work injury insurance, as well as new rural poverty alleviation policies; these will not be discussed in this analysis. 53. Note that workers are affected differently according to whether they work in state, collective or private enterprises, in the formal or the informal sector: see Gordon White, ‘Social Security Reforms in China: Towards an East Asian model?’ in

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54.

55.

56. 57. 58. 59. 60. 61.

62.

63. 64. 65.

66.

67. 68. 69. 70. 71.

Roger Goodman, Gordon White and Huck-ju Kwon (eds.), The East Asian Welfare Model (London and New York: Routledge, 1998), p. 184. Ibid.; Min Qi, ‘Reform of the “Public Medical Care System” and “Labour Insurance Medical Care System” in China’, in White and Shang (eds.), Issues and Answers, pp. 121–54. Hausner, ‘Security Through Diversity’; White and Shang, ‘Social Security Reforms in Urban China: a Preliminary Research Report’; Jane Duckett, ‘Re-shaping StateSociety Relations Through Social Security Reform: The Case of Health Insurance’, mimeo, 2001. William Hurst and Kevin J.O’Brien, ‘China’s Contentious Pensioners’, China Quarterly, No. 170 (June 2002), pp.344–60. White, ‘Social Security Reforms in China’. The decline has been reversed since 1997, and, perhaps as a consequence, central government spending on poverty relief has increased. This set back health insurance reform until it was transferred to the ministry of labour and social security. For a discussion, see Jane Duckett, ‘Bureaucratic Institutions and Interests in the Making of China’s Social Policy’, Public Administration Quarterly, forthcoming. See White, ‘Social Security Reforms in China’, who says this position was favoured by some liberal policy-makers in the former commission for economic restructuring and supported by the World Bank mission in China. There are also sometimes other reasons, of course: for example, it may be beneficial to the process of health system reform to have all hospitals under ministry of health control. Qinghua University economist Hu Angang, cited in South China Morning Post, 10 Aug. 2002. Fajth, ‘Social Security in a Rapidly Changing Environment’, p.426. State Planning Commission Macroeconomic Research Institute, ‘Jianli shehui baohu tixi shi woguo shehui wending de guanjian’ [Establishing a system of social protection is the key to national social stability], Neibu canyue [Internal reference], 5 May (2000), pp.8–14. This source notes that the discrepancy between official figures and the survey findings is due to the fact that official figures are gathered from employers and local governments, whereas the survey addressed recipients. There are no comprehensive figures for unpaid pensions, but for an indication of the widespread nature of the problem see Hurst and O’Brien, ‘China’s Contentious Pensioners’. Author’s interviews with labour and social security department officials in the provinces of Sichuan and Liaoning, 2002. Fajth, ‘Social Security in a Rapidly Changing Environment’, p.419. Author’s interviews with officials handling poverty assistance in Sichuan and Liaoning, 2002. Peter Nolan and Robert F.Ash, ‘China’s Economy on the Eve of Reform’, China Quarterly, No.144 (Dec. 1995), pp.980–98. Fajth, ‘Social Security in a Rapidly Changing Environment’, citing G.EspingAnderson and J.Micklewhite, ‘Welfare State Models in OECD Countries: An Analysis for the Debate in Central and Eastern Europe’, in G.A.Cornia and S.Sipos (eds.), Children and the Transition to the Market Economy: Safety Nets and Social Policies in Central and Eastern Europe (Aldershot: Avebury, 1991).

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72. Athar Hussain, ‘Social Welfare in the Context of the Three Transitions’, unpublished manuscript, 2000. 73. West, ‘Pension Reform in China: Preparing for the Future’. 74. Nelson, ‘The Politics of Pension and Health Care Reforms’. 75. David Lampton, ‘The Implementation Problem in Post-Mao China’, in David Lampton (ed.), Policy Implementation in Post-Mao China (Berkeley: University of California Press, 1987), pp.3–24. 76. Elisabeth J.Croll, ‘Social Welfare Reform: Trends and Tensions’, China Quarterly, No.159 (Sept. 1999), pp.684–99. 77. On labour unrest in China, see Ching Kwan Lee, ‘pathways of Labour Insurgency’, in Elizabeth J.Perry and Mark Selden (eds.), Chinese Society: Change, Conflict and Resistance (London and New York: Routledge, 2000), pp.41–61. Large-scale demonstrations in March and April 2002 in Daqing are an example. Up to 50,000 workers protested at problems with their redundancy packages: China Labour Bulletin, 6 March 2002, at . At the same time there were protests in Liaoyang, Liaoning Province over inadequate pensions payments. On pensioner protests, see Hurst and O’Brien, ‘China’s Contentious Pensioners’. 78. In any case, rural dwellers may be suspicious of government social insurance schemes, perceiving them as just another way of extracting resources from them: author’s interview with Shanghai-based social scientists working on rural social security in 1999. By contrast, a survey in 1995 found that 74.2 per cent of Shanghai residents thought that the government should be responsible for medical expenses, 89 per cent thought that it should provide jobs to those in need, and 95.8 per cent thought that the state had a responsibility to provide for people’s retirement: see Chack-kie Wong and Peter Nan-shong Lee, ‘Economic Reform and Social Welfare: The Chinese Perspective Portrayed Through a Social Survey in Shanghai’, Journal of Contemporary China, No.28 (Vol.10, 2001), pp.517–32. 79. While the CCP-controlled ACFTU does not represent the interests of industrial workers well, farmers have no dedicated organization at all: see Thomas Bernstein for a discussion of this and how the Farmers’ Daily newspaper does sometimes articulate farmer interests, in Thomas P.Bernstein, ‘Farmer Discontent and Regime Responses’, in Merle Goldman and Roderick MacFarquhar (eds.), The Paradox of China’s Post-Mao Reforms (Cambridge, MA: Harvard University Press, 2000), pp. 197–219. 80. See State Council, ‘Guanyu shixing qiye zhigong jiben yanglao baoxian shengji tongchou he hangye tongchou yijiao difang guanli youguan wenti de tongzhi [Notice concerning problems implementing enterprise employee basic old-age insurance provincial pooling and the transfer of sectoral pooling to local government management]’, issued 6 August 1998, in State Council (ed.), Shehui baozhang: changyong zhengce fagui [Social Security: frequently used policies and regulations] (Beijing: Falü chubanshe, 1999), pp.96–9. 81. See for example Fajth, ‘Social Security in a Rapidly Changing Environment’, p. 426. 82. It is $3,976 in China, in comparison with $13,991 in the Czech Republic, $12,416 in Hungary, and $9,051 in Poland: UNDP, Human Development Report 2002 (Oxford: Oxford University Press, 2002), pp. 149–52. 83. World Bank, World Development Report 2000 (New York: World Bank and Oxford University Press, 2000).

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84. Argued also by Haggard and Kaufman: see Haggard and Kaufman, ‘Introduction’, p.6.

Trade Unionism in China: Sinking or Swimming? JUDE HOWELL

Introduction From the 1980s onwards, trade unions in most countries have experienced declining memberships and diminishing power. The rise of hegemonic neoliberalism in the 1980s and the subsequent end of the cold war combined to vindicate the inevitability of market economies and the concomitant supremacy of liberal democracy. In the context of the increasing internationalization of production and ever-confident global capital, the task of enforcing international and national conventions and laws on employment rights has become even more difficult. The concepts of class and class analysis seem increasingly irrelevant as new technologies demand more skilled and educated workforces and consumerism fuels the expansion of service industries. Trade unions appear as constructs of a past modernist era, rooted in Fordist manufacturing processes and ideological conflict, struggling for survival in a fragmented and diffused global jungle. In the context of increasing globalization, the decline of manufacturing, and the triumphalism of capitalism, the future of trade unions looks bleak. With one of the largest federations of trade unions in the world—the AllChina Federation of Trade Unions (ACFTU)—and a communist party at its helm, China might seem to offer some grounds for optimism. Yet reports of strikes, slowdowns, demonstrations, workers injured and killed in factory fires and poorly maintained mines, suggest that the Chinese government may have more on its plate than it can handle. As laid-off state workers, unpaid pensioners and aggrieved workers take to the streets to make their claims independently of the ACFTU, the legitimacy of the state-sanctioned trade union and its ability to tackle the new challenges in the reform period look increasingly questionable. Moreover, the emergence of new forms of independent labour organizations, despite continuing repression, are a constant reminder to the ACFTU that its capacity to represent workers is overshadowed by its relationship to the Chinese Communist Party. In this analysis we explore the challenges that confront the ACFTU and their implications for internal reform. We describe the changes that the ACFTU has already undertaken over the past two decades that provide some grounds for

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optimism. We consider also the factors affecting the prospects for further reform in the ACFTU. We contend that the most likely scenario is one where the ACFTU struggles to reform in the direction of state corporatism, attempting to relinquish the coat-tails of incorporation and don the garb of representiveness. In all its activities, the ACFTU is dogged by its relations with the party-state and challenged by spontaneous labour protests and the relentless rise of new, independent labour organizations.1 New Times, New Challenges China’s gradual shift away from a planned towards a market economy over the past two decades has brought about far-reaching changes in the structure of the economy, social relations and the institutional architecture of the party-state. The rapidity and depth of these changes has placed pressure on the old institutions of intermediation, representation and participation such as the All-China Women’s Federation, the ACFTU and the Communist Youth League. In this section we focus on some of the key challenges which have called forth—and continue to call forth—changes in the way the ACFTU prioritizes its interests, defines its agenda, and relates to its members. These include the increasing fragmentation and diversification of workers; the prioritization of workers’ interests over party interests; the declining legitimacy of the ACFTU as reflected in independent labour actions and the continuing emergence of new forms of labour organization; the financial sustenance of the ACFTU; and entry into the World Trade Organization (WTO). In the pre-reform period the main factors differentiating Chinese workers related to whether the enterprise was state-owned or collectively owned or belonged to the street committee or neighbourhood.2 At the pinnacle of the working-class hierarchy were state enterprise workers, who enjoyed an ‘iron ricebowl’ of life-time employment, welfare benefits such as access to schooling, kindergartens, medical care and pensions, highly subsidized housing, and high political and social status. Next in line were workers in collective enterprises, who, depending on the size of the enterprise, enjoyed a similar range of benefits to state workers, although often not as complete. Apart from enterprise ownership the other main distinguishing feature among workers was the permanence of their employment. Although most urban state and collective enterprise workers had permanent jobs, enterprises also kept a ‘reserve army’ of temporary and seasonal workers, who could be recruited and dismissed according to need.3 Twenty years of reform have radically undermined these hierarchical certainties. The expansion of the private sector, the establishment of special economic zones on the eastern seaboard, and the relaxation of residential controls and internal migration restrictions, have shattered rigid urban-rural divides of the past and given birth to new categories of workers such as ‘migrant workers’ (mingong), workers in foreign enterprises, workers in township and

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village enterprises, workers in private enterprises or individually owned enterprises, and contract workers.4 With the acceleration of state enterprise reform from 1993 onwards came the new distinction between the unemployed (shiye renyuan) and retrenched workers (xiagang gongren5). Chinese workers have become increasingly differentiated and stratified.6 Once the heroes of socialist revolution, enjoying considerable social and political status, state enterprise workers have now plummeted to near the bottom of the ladder, losing their iron rice bowl on the way. Illustrative of the demise of state and collective enterprise workers are the repeated allusions in the media to their supposed lack of skills, their backwardness and even their tendency to shun hard work—motifs that construct state enterprise workers as a drag on modernization. The diversification and stratification of Chinese workers and the proletarianization of the rural farmers7 creates a fundamental problem of representation for the ACFTU. This problem is twofold: first, it is not clear whom the ACFTU should represent; second, it is not clear how the ACFTU should represent such a differentiated and diffuse workforce. Traditionally the ACFTU has represented urban workers in state and collective enterprises, and such workers have represented the majority of the urban enterprise workforce. With the vigorous growth of the urban domestic and foreign private sector, the number of employees in private enterprises and foreign-invested undertakings has expanded, reducing the total proportion accounted for by state and collective enterprises. At the same time, partial or total closures of state and collective enterprises have led to the retrenchment of well over 21.4 million workers, reducing further both the absolute number of workers in this sector, from 103.46 million in 1990 to 81.02 million in 2000, and their proportion of the total urban workforce from 62 per cent in 1990 to 38 per cent in 2000.8 The changing character of the Chinese workforce thus requires the ACFTU to clarify which segments of China’s working class it does and should represent. The second, and related, issue—the diversification of types of workers—also poses a practical problem of how the ACFTU should reach such employees, given that its traditional base has been in the state and collective sectors. Workers employed in joint ventures or wholly-owned foreign enterprises are often recruited on short, one-year contracts, and therefore frequently change their posts. Moreover, the ACFTU has been unable to set up unions in many of these firms owing to the high turnover of workers, the lack of trade union staff to initiate such processes, and the reluctance of some employers to permit the establishment of trade union branches.9 Given that the ACFTU has been part of the institutional fabric of the political economy for over 30 years, with authority, institutional channels and resources to reach out to workers, the rapid change in the urban production force presents the ACFTU with fundamental problems of institution building. How can it build a base among migrant workers, who frequently change their workplace and whose needs differ from those of workers in state enterprises or laid-off workers? How

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can it organize unemployed or laid-off workers, who can no longer be located at the workplace? How can it mobilize migrant workers on construction sites, or workers employed in small-scale private enterprises and individually owned enterprises, who are physically dispersed and employed often only on a daily basis? Furthermore, how can it forge a degree of unity among workers when their needs are so diverse and their expectations so different? While employed state enterprise workers may be concerned primarily about their pension or health care or the security of their position, the main concerns of a young, female migrant worker in a foreign enterprise in Dongguan are likely to be the non-payment of wages, the provision of decent living conditions, or the demand for excessive overtime work.10 For a middle-aged worker in a state enterprise, the trade union leader may be one of the persons he or she turns into when aggrieved, although there is some evidence that union leaders are not the first port of call.11 However, a young migrant worker may have little knowledge about the work of the ACFTU or have no expectations that it might defend his or her interests in the event of a dispute. Fragmentation and diversification push the ACFTU to redefine not only its goals, priorities and tasks, but also the way it recruits its leaders and cadres, and the way it relates to workers. In the 1980s, local trade union leaders in the special economic zones had to deal with a new structure of labour relations that rested on a fundamental division between workers and managers and owners, or in classic Marxist terms between labour and capital. In the 1990s, the retrenchment of state enterprise workers and the introduction of collective bargaining further called for a rather different profile of a trade union leader from that demanded under the former planning system, where the main duties of trade union officials consisted in assisting in the allocation of housing, attending to the welfare needs of workers, especially impoverished workers, and distributing entertainment tickets. To bargain and negotiate requires not only recognition that the interests of workers and managers can be opposed but also willingness, courage and skills to confront representatives of management. To bring about such a change in behaviour demands fundamental changes in the pattern of incentives offered to trade union leaders. Underlying some of these problems of institution building is a basic dilemma, namely whether the ACFTU should give priority to the interests of workers or to the interests of the party. This dilemma has haunted the ACFTU since its inception and is rooted in the dependent relationship of the ACFTU upon the Chinese Communist Party (CCP). After the Liberation of China in 1949, the CCP sought to reassert its control over a still deeply divided society by prohibiting organizations deemed counter-revolutionary and in turn establishing new institutions of intermediation and representation. In this spirit it created nine mass organizations (qunzhong tuanti) representing key social interests in society. The three main ones are the ACFTU, the All-China Women’s Federation (ACWF) and the Communist Youth League (CYL), representing respectively the interests of China’s urban workforce, women and youth. These mass

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organizations formed a fundamental part of the new institutional infrastructure of the Leninist party-state and continue to do so. Their staff are appointed and remunerated by the party. They function as ‘transmission belt’ organizations, relaying party directives and policy downwards and transmitting grassroots opinion upwards.12 Fused with the party-state, the ACFTU is far removed from the voluntaristic trade unions that characterize many parts of the world. The tension between these two sets of contradictory interests has surfaced increasingly in the reform period as the gap between these dual interests has widened. The introduction of foreign investment in the 1980s drew attention to this basic dilemma. On the one hand, the trade union was supposed to ensure that production proceeded smoothly and party policy was carried out. On the other hand, local trade unions had to deal with complaints of excessive overtime, unpaid or delayed wages, instances of sexual harassment, or failure to grant leave days. The responses of local trade unions have been ambivalent, reflecting the basic dilemma they face. Sometimes they have actively defended workers against the employers; on other occasions they have succumbed to pressure from the local authorities to take the side of the employers for broader interests of local economic development.13 In the 1990s, the acceleration of state enterprise reform has again challenged the ACFTU to resolve the dilemma of contradictory, dualistic interests. In general, trade unions at the local level have been unable to negotiate effectively with employers for satisfactory redundancy packages, or to provide a platform for challenging the illegal depreciation of assets, or defend workers against non-payment of pensions or redundancy allowances. The gnawing tension of this fundamental dilemma leads us to the third major challenge confronting the ACFTU, namely maintaining its legitimacy. Presiding over a monopoly of representation, the ACFTU has a considerable responsibility to its constituency of urban Chinese workers. However, whenever the ACFTU gives priority to party interests over those of workers, its claim to represent and defend workers is weakened. The problem of declining legitimacy is reflected in the increasing number of spontaneous worker protests and the continuing formation of new labour organizations. Worker protests in China are not new. Workers are reported to have gone on strike in the 1950s, 1960s and mid-1970s, demanding improved working conditions and the right to form independent trade unions.14 What is different in the 1980s and 1990s is that the incidence of such spontaneous protests has become more frequent and more widespread across China. In the 1980s, wildcat strikes, sit-ins and spontaneous protests occurred primarily in foreign-invested enterprises in the special economic zones. Not only did the ACFTU not have representation in many of these factories, but the dilemma of contradictory interests was further complicated by the additional factor of foreign capital. While such protests continued to occur in foreign companies in the 1990s, the new phenomenon in this decade was the almost daily occurrence of street demonstrations and extended protests by retrenched state enterprise workers, aggrieved at losing their jobs, not receiving appropriate redundancy payments,

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allowances or pensions, or a combination of such grievances. In the spring of 2002, for example, thousands of laid-off workers from several factories in Liaoyang city, Liaoning province, took to the streets to protest against corruption, insufficient severance pay and unemployment. Similarly, thousands of workers from Daqing oilfield in Heilongjiang province demonstrated repeatedly over several months from March 2002 against inadequate welfare benefits, poor severance deals, and increased premiums on pension insurance. The failure of the trade unions in many instances to resolve such disputes, or to represent workers’ interests during discussions of retrenchment processes, has contributed further to perceptions among workers that the ACFTU is neither effective in promoting their interests nor truly representative of workers. The following extracts from interviews with 50 laid-off workers in Chengdu in May 1999 reflect such perceptions: ‘I didn’t go to them [trade union] for help when I was laid-off. The trade union doesn’t have any strength. The trade union and leaders are one and the same’ (a former state construction company worker). Or, in the words of a former female state enterprise worker: ‘Nobody thinks of going to the trade union for help. The trade union can’t speak for you. We didn’t think of going to them at all.’ Indicative of the declining legitimacy of the trade union is the continuing formation of new labour organizations throughout the 1990s and early in the new century, despite almost immediate suppression. The demand for independent labour unions and attempts to establish autonomous labour organizations again is not confined to the end of the twentieth century. In the 1950s and 1960s workers’ protests were often accompanied by calls for autonomous trade unions. The most long-lived and successful attempt to establish independent workers’ organizations occurred during the democracy demonstrations of 1989, when autonomous workers’ organizations sprang up in Beijing and other major cities in China, the most frequently cited case being the Beijing Workers’ Autonomous Federation.15 Although they lasted for only a matter of weeks, their formation fundamentally challenged the authority and legitimacy of the ACFTU. Moreover, even though many of the leaders were detained and sentenced to prison terms and sent to labour re-education camps, others such as Han Dongfang fled to Hong Kong, from where he has continued to call for autonomous trade unions and the defence of workers’ rights. Despite this repression, there were further attempts during the 1990s to set up independent workers’ organizations. For example, in 1992 the Preparatory Committee of the Free Labour Union of China was formed and it distributed leaflets in Beijing calling for free trade unions. In 1994 Liu Nianchun was sentenced to three years of re-education for attempting to set up the League for the Protection of the Rights of Working People. In 1998 Zhang Shanguang was arrested for attempting to establish the Shu Pu Association for the Protection of the Rights of Laid-Off Workers. One year later Yue Tianxiang and Guo Xinmin initiated the China Workers’ Monitor in Gansu to expose corruption and mismanagement in the enterprise from which they had been dismissed in

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consequence of retrenchment. In June 2002 Di Tiangui, a former state enterprise worker in Taiyuan city, Shanxi province, was detained on suspicion of setting up a national federation of retired state workers. In the same month migrant workers in Zhejiang province attempted to set up an autonomous migrant workers’ organization. Such attempts are a constant reminder to the ACFTU at both national and local levels that its claim to represent is questionable and its power to defend the interests of workers weak. Although the ACFTU, like other mass organizations, is an integral cog in the wheel of the party-state, it is also subject to the tremors and quakes that are part of economic and state reform processes. Of particular relevance here are efforts to streamline party-state institutions and state enterprise reform, both of which have implications for the financial integrity and capacity of the ACFTU at national and local levels. Between 1993 and 1996 and again in 1998, concerted efforts were made to reduce the scale of government, starting at national level and working down to the county.16 In 1999 mass organizations, too, were directed to reduce the size of their establishments through early retirement, transfer of staff, and non-recruitment from the end of 2000 onwards.17 Although such central directives aim to enhance the efficiency of government offices, they also reflect a squeezing of budgets. Given that the ACFTU needs to expand rather than contract, so as to reach workers in non-state enterprises, the reduction of staff and budget raises questions about the organization’s future capacity to address some of the new challenges arising out of structural economic reform. Furthermore, the acceleration of state enterprise reform is likely to undermine the financial and structural basis of the ACFTU. The organization’s revenue comes primarily from a two-per-cent levy on the wage bill of enterprises. Under the economic planning system, raising this levy from state and collective enterprises was automatic and virtually unproblematic. However, in the reform period two problems have emerged. The first is that the majority of state enterprises have been under-performing and since the early 1990s increasing numbers have closed, thus removing a key source of revenue. Second, although the levy is supposed to be drawn from all enterprises, there is no effective means of enforcing this in private and foreign firms, where in any case trade union representation barely exists. In his speech to the executive committee of the ACFTU in 2000, Wei Jianxing, chairman of the ACFTU and member of the Politburo, revealed that only five per cent of workers in the private sector belonged to the union and in township enterprises a mere 3.4 per cent. Indeed, compulsory extraction of such a levy could be a disincentive to some foreign investors and one that local governments might well be prepared to forgo. Given the declining legitimacy of the ACFTU, raising membership dues directly from workers is likely to prove difficult. Moreover, trade union membership was declining in the 1990s. Between 1993 and 2000 the ACFTU lost 35 million members, and recruitment rates have also declined sharply since

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the early 1980s.18 The legitimacy and the financial security of the ACFTU are thus fundamentally related. The final key challenge for the ACFTU relates to China’s recent entry into the WTO. This will accentuate many of the tendencies already described above, such as the need to clarify its relation to the party and to workers; the need to be more forthright and active in representing workers’ interests; the importance of finding new ways of communicating with and reaching out to workers; and the urgency of establishing its legitimacy in the eyes of workers.19 The expected increase in the number of failing, uncompetitive enterprises after entry into the WTO is likely to heighten grievances among workers suffering under retrenchment. Without effective channels of representation and participation, such grievances will find expression in further demonstrations and protests, raising doubts again about the legitimacy and capacity of the ACFTU. This will put further pressure on the ACFTU to give workers’ interests the highest priority and to institute new incentive patterns to encourage trade union leaders to behave differently. The greater opportunities for international exchange will no doubt benefit the ACFTU, as has been the experience of the ACWF,20 but it will also put the federation under pressure to take seriously the idea of ‘the right to associate’. In the next section we look at the attempts by the ACFTU to tackle some of these challenges through internal reform. Plus ça change, plus c’est la même chose? ‘The more it changes, the more it is the same’? It would be wrong to suggest that the ACFTU has not attempted change, or that it has not changed in any way, over the past two decades of reform. However, it would also be incorrect to suggest that the changes that have occurred amount to any substantial or significant transformation of the trade unions’ structural position in the institutional architecture of the party-state. Here we are thinking of the basic way it relates to workers and its effectiveness in functioning as an institution of representation and participation. In this section we examine the key changes in the ACFTU since 1978, reflect upon how far these have taken the ACFTU in the process of institution building, and identify what remains to be done. In response to the diversification of ownership systems, the ACFTU has established new departments to deal with issues that arise in foreign-invested enterprises, township and village enterprises and the private sector. In this way, staff can focus their attentions on the specific problems emerging in these enterprises and develop specialized skills. In the reform period laws and regulations have become increasingly important in the management of enterprises, resulting in the growing prominence of the legal section in the ACFTU. Although efforts are made to resolve disputes between management and workers within enterprises, the number of cases taken to arbitration committees steadily increased during the 1990s.21 Similarly, with the introduction of collective bargaining, a new department was created within the ACFTU in 2001

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to steer the development of this new tripartite system.22 These structural changes within the ACFTU in turn require cadres to gain new skills such as negotiation, bargaining, and knowledge of labour regulations, relevant laws and their practice.23 As well as establishing new structures within the ACFTU to deal with new issues, trade union leaders at local level have sought new ways of reaching workers. As managers in foreign-invested enterprises usually do not permit the trade union to hold meetings during working hours, trade union cadres have started to organize meetings after work or during lunch hours. Former internal publications can now be purchased at newspaper stands or through subscription.24 Caught in the dilemma of having to ensure production and carry out party policy while also representing workers, trade unions at local levels have reacted with ambivalence to work stoppages, strikes and go-slows. In some cases trade union leaders have acted on behalf of workers, defending their interests and arguing for improved working conditions.25 However, in other instances, trade union cadres have taken the side of management, emphasizing the importance of stability and production and playing down or even denying the validity of workers’ grievances. This ambivalent behaviour reflects the structural dilemma facing the trade union as a Leninist transmission-belt organization directed both to represent workers’ interests and to ensure the stability of production and the implementation of party policy. At the local level of the factory floor this dilemma has to be resolved by individual trade union officials. The situation is further complicated by the tendency in foreign-invested enterprises for the trade union leader to be appointed by, and even closely related to, the manager of the company—indeed, in some factories the union leader may also be the company manager.26 The urgent need to redefine the role of the trade union so as to address the rising number of disputes in enterprises lay behind both the move towards collective bargaining and various legislative changes in the 1990s concerning labour relations and trade unions. Experiments with collective bargaining in state enterprises began in the early 1990s. Collective bargaining and equal consultation marked an important step in recognizing that the interests of workers, trade unions and employers were distinct, and potentially in conflict. In the early reform period there was considerable reluctance to the idea that workers, trade unions and employers did not share a unified interest, a position that was deeply embedded in an ideology that claimed the state to represent, inter alia, the interests of the working class. By June 2001 more than 510,000 enterprises had set up systems of equal consultation and collective bargaining, covering 70 million workers.27 As part of the move towards collective bargaining the ACFTU has also tried to shore up the otherwise ineffectual workers’ congresses as institutions of workplace democracy, sites for interest articulation, and platforms for holding enterprise managers to account. Aware of the need to establish around labour relations a legal framework that reflected the changing reality in China, the ACFTU has initiated and participated

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in the drafting of several new laws and regulations since 1978. The landmark piece of legislation for governing regulations is the January 1994 labour law, which came into effect in July 1995. By specifying maximum working hours and overtime, and also entitlements to holiday, maternity leave and sick leave, the new law sought to deal with the unacceptable practices of excessive overtime and hours reported to occur in many foreign-invested enterprises. The law also required the establishment of trade unions in all enterprises, regardless of their ownership form. Apart from this piece of legislation, the ACFTU was also consulted in the drafting of the 1988 regulations on the protection of women workers, the 1992 law on the protection of women’s rights and interests, and numerous other national and local labour regulations.28 Illustrative of its greater role in legislative processes, the ACFTU participated in the drafting of over 1, 200 laws and regulations between 1993 and 2001.29 The ACFTU has also initiated changes in the legal framework governing its own activities. In 1992 a new trade union law was passed, which, after a consultation process of almost three years, was substantially revised in October 2001. At the core of the revised law is a recognition of the role of the ACFTU as protector and representative of workers’ rights and interests. This is particularly significant in the case of Article 27, Chapter III, which clearly states that, in the case of work stoppages or go-slows, the trade union should ‘on behalf of the workers and staff members, hold consultation with the enterprise or institution…, presenting the opinions and demands of the workers and staff members’. In the past, trade unionists have sometimes sided with management in disputes, not least because of the lack of clarity in their role. The revised law also emphasizes the right of workers to organize or join trade unions, although independent trade unions are still prohibited. The additional clause in Article 3, Chapter I—‘No organizations or individuals shall obstruct or restrict them’—and the stipulation in Article 11, Chapter II that higher-level trade union cadres can assist workers and staff in enterprises to establish trade unions, are both aimed at undermining efforts by private, township and village, and foreign-invested enterprises to resist the establishment of trade unions. Similarly the requirement in Article 9, Chapter II, that trade union committees should be democratically elected is aimed at reducing the emerging practice of company managers doubling as trade union leaders and at weakening the close affiliation between managers and trade unionists. These changes in the legal and regulatory framework on the one hand reflect the growing significance of nonstate enterprises and on the other hand attempt to redefine the role of trade unions in this changing context. These changes in internal structure, operational style, legislative and regulatory framework, and micro-level labour-management structures emerge out of, and in turn highlight, the fundamental dilemma afflicting the trade union in China. By this we mean, on the one hand, the pull to act as an institution of representation and participation while, on the other, the push to serve as in integral cog of the party machine. Concerned about the spectre of social

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instability, top party leaders have urged the ACFTU to represent and protect the interests of workers more firmly. Yet, in doing so, they have not wished to query or unsettle the ACFTU’s cosy relationship with the party, a crucial structural factor shaping the very nature of the ACFTU. In the history of the ACFTU, however, there have been leaders such as Li Lisan in 1950–51 and Lai Ruoyu in 1957 who tried to push for a more autonomous role for the ACFTU, giving priority to the interests of workers.30 Aware that changing employment conditions and the rise in factory disputes called for a different approach, and in particular one where trade unions gave priority to workers’ interests, more liberal reformers in the party and astute trade union leaders have pressed for greater autonomy for the unions from the party. In the wake of labour unrest in 1980 and 1981, Liao Gailong, an ally of Deng Xiaoping, argued in a report to high-ranking officials that workers should be able to elect their leaders and thereby form their own trade unions.31 At the Tenth National Congress of the ACFTU in 1983, Ni Zhifu, head of the ACFTU, pushed for a stronger role for unions in factories and enterprise management. Reformist leaders such as Zhao Ziyang and Hu Yaobang supported these moves towards strengthening the role of the trade union and redefining its relationship, and that of other mass organizations, to the party. Over the next three years the ACFTU instigated studies of workers’ attitudes, using the results to back their demands for greater power. In 1987, the vice-president of the ACFTU, Luo Gan, complained about party interference in the elections for grassroots union officials and called for a new Trade Union Law. At a meeting of union leaders at the end of the year, Luo Gan spoke openly about the failure of the union to represent workers properly and the urgent need to allow workers to establish unions themselves. Ni Zhifu continued with this refrain throughout the following year, linking trade union reform to the broader issue of political reform. The push for greater autonomy peaked at the eleventh national congress in October 1988. Key conclusions at this congress were that trade union reform was imperative, and that the union should become more independent of the party, have a greater say in policy-making processes related to labour, and make greater efforts to represent workers. As student demonstrations intensified during the late spring of 1989, the momentum of trade union reform inevitably got tangled up in these broader political events. The ACFTU held meetings with student representatives and donated 100,000 yuan to the Red Cross to support students on hunger strike in Tiananmen Square. Some trade union leaders participated in the student demonstrations of 1989 and signalled their support for autonomous trade unions. After the events of June 1989, the party-state prohibited autonomous trade unions but refrained from imposing any harsh punishments upon trade union cadres who had joined the demonstrations and sympathized with the students. The snowballing of demonstrations in 1989 highlighted the failure of existing intermediary institutions to function as organs of representation and participation and the resulting vacuum of authoritative institutions. Unwilling to concede a new

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architecture of representation and participation, the party-state instead gave the ACFTU the go-ahead to emphasize workers’ interests, recognizing that to do otherwise would only risk further social unrest. This laid the ground for the various legislative and regulatory changes in the 1990s that attempted to refashion the roles and functions of the ACFTU. In return for better representing workers’ rights and interests, the ACFTU would have greater room for manoeuvre. Moreover, by taking labour and trade union legislation as its reference point, the ACFTU could weaken its reliance on the party-state at the grassroots level and justify its actions through legal means rather than using the political system. Although the ACFTU has adapted its structures and operational style, initiated legislative and regulatory change, and sought to redefine its relationship with the party, change has been slow and piecemeal in some respects. Unlike the ACWF, which benefited from the hosting of the fourth world conference on women in Beijing in 1995, there has been no significant international event that has heightened the exposure of the ACFTU to the workings of trade unions in other countries and their enterprise-level strategies. Although the ILO has provided many an opportunity for training and exchange, the effects of this have not penetrated the organization to the same degree as the preparations for the 1995 women’s conference in relation to the ACWF. Furthermore, although China’s Labour Law is exemplary in many respects, the key problem lies in implementation. Of particular salience in this respect is the capacity of the ACFTU and the Ministry of Labour and Social Security to enforce legislation and the willingness of existing trade union cadres to take on new roles. Establishing trade union branches in all enterprises is labour-intensive, and given the current streamlining of staff, it is unlikely that the ACFTU will be able to achieve this. Similarly, the inspection of workplaces requires an adequately staffed and trained contingent of inspectors. Defending and protecting the rights and interests of workers will sometimes require union leaders to confront management, a form of behaviour that will be uncomfortable for many grassroots union leaders used to a more cosy relationship with enterprise managers. In addition, taking up the interests of aggrieved workers can potentially put trade union leaders at risk of harassment or even loss of their job. Although Article 51, Chapter VI of the revised trade union law seeks to address this, such a risk is likely to be a strong disincentive to a trade union leader to respond to the grievances of workers. Thus, although much has changed in the structure of the ACFTU and in labour and trade union legislation over the past two decades, certain fundamental tendencies and characteristics persist. The ACFTU remains locked in an intensive and dependent relationship with the party, relying upon it for legitimacy and policy guidance. It has not managed to redefine itself as an organization that gives priority to the interests of workers. Neither has it been able to extend its reach to the increasingly diversified workforce. Its staff are schooled in practices and forms of behaviour that were appropriate to the

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planned economy but that are no longer adequate for the needs of a competitive, market economy. It continues to enjoy a monopoly of representation as alternative forms of labour organization are quickly repressed. Moreover, the ACFTU has been complicit in preventing the emergence of any alternative unions, fearful that such organizations would threaten its authority. In the next section we consider what the future holds for trade unionism in China. Prospects for Trade Unionism in China: Grounds for Optimism? In what direction is trade unionism in China heading? What are the scenarios for the ACFTU and what factors are likely to influence its trajectory? It is argued in this section that current attempts to reinforce the representative dimension of the ACFTU’s work are unlikely in the context of continuing rapid socio-economic change to stabilize labour relations, not least because of the ACFTU’s continuing dependency on the party for its legitimacy and authority and the limited interpretation of representation as protection. The theory of corporatism is often applied to describe and explain the pattern of state-society relations in China. This theory, first developed by Philippe Schmitter in relation to Latin America, describes a particular type of relationship between states and intermediary organizations. Schmitter defines the key characteristics of corporatism as follows: Corporatism can be defined as a system of interest representation in which the constituent units are organized into a limited number of singular, compulsory, non-competitive, hierarchically ordered and functionally differentiated categories, recognized or licensed (if not created) by the state and granted a deliberate monopoly within their respective categories in exchange for observing certain controls on their selection of leaders and articulation of demands and supports.32 Corporatism is counterposed to a pluralist system of interest representation, in which a multiplicity of competing organizations, voluntarily formed, determine their own agendas and raise their own demands. Schmitter further distinguishes between state corporatism, which is more typical of authoritarian societies, and societal corporatism, more characteristic of democratic societies.33 In state corporatist systems, the state tends to be dominant and its relationship to societal organizations top-heavy. In contrast, in societal corporatist systems, social organizations have greater power and autonomy, and more room for manoeuvre in relation to the state. Schmitter also tentatively poses a third system of interest representation, namely, the ‘monist’ model, to describe corporatist arrangements in Leninist-type regimes.34 The party-state’s response to the proliferation of new forms of more independent associations in the reform period and the events of Tiananmen

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Square (1989) has been to reshape the corporatist regulatory framework governing social organizations. The 1989 and 1998 regulations on the registration of social organizations require there to be only one organization per interest, thereby ensuring a monopoly of representation for the registered association. However, it has been only partially successful in controlling the growth of new social organizations. In practice, new forms of association such as networks, centres, projects, and second- and third-level affiliated associations have emerged that bypass the need to register formally as a social organization.35 Moreover, associations have defined themselves as marginally different from other registered organizations, thereby circumventing the monopolistic restrictions of the regulations. In the case of women and gender issues, the ACWF continues to be the largest women’s organization in China, although since the mid-1980s there has been a proliferation of women’s groups and women’s studies centres across China. The ACWF continues to have a privileged position in the political system, but the particular configuration of state-society relations around gender and women’s interests is best described as societal corporatist. In other words, the party-state takes the ACWF as the prime organization representing women, but the ACWF is no longer the only women’s organization representing women in society. The case of the ACFTU is different. The ACFTU not only continues to enjoy a privileged position in the political system but also is the only legal organization representing workers’ interests. While scholars such as Anita Chan have argued that the ACFTU is moving towards an entity of the societal corporatist type,36 it is suggested here that the ACFTU is steering away from being an ‘incorporated’ institution towards becoming a state corporatist entity. By ‘incorporated’ institution we mean a societal organization that is co-opted by the state to the extent that it loses its capacity to represent its constituents: it is so dominated by the state that it becomes virtually indistinguishable from the state. We say ‘virtually’ indistinguishable because there are episodic moments when it recovers its consciousness of its particular mission. Testimony to its incorporated character are the frequent refrains, or hidden transcripts, of workers who lament that the trade union is but the mouthpiece of the government. When reformist leaders in the party urge the union to take up workers’ interests, they do not intend that it should become a confrontational union as in other countries, challenging business owners and government. The intention is rather that the union should better represent and protect workers’ interests so as to maintain social stability and production. In this way, the union is to recover its essence of representativeness, gain some power in relation to blameworthy mangers and owners, but remain subordinate to the party-state. Furthermore, representativeness is constructed in the limited sense of protection: in other words, the trade unions are to represent workers when their legal rights and interests are being infringed, but not to represent them when they resist fundamental policy changes. To illustrate, in the case of state enterprise reform, the desire of party leaders is for the union to protect workers in the process of retrenchment by

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providing training for re-employment, or assisting the very poorest workers, or ensuring that workers receive the relevant allowances and compensation. However, they do not wish it to question the very policy of state enterprise reform or mobilize workers to resist the implementation of such a policy. What is occurring is a redefinition of the social contract between the partystate and labour. In the early 1950s, the social contract forged between the partystate and trade unions centred upon guaranteed production in return for a monopoly of representation. The party-state’s claim to represent the interests of Chinese workers in the end rendered redundant the representative function of the trade union. In the reform period the party-state and trade unions have been redefining this pact so that the guarantee of production is extended to social stability, and the function of representation is revived, but with the limited goal of protection. The path of state corporatism is one scenario for the future of trade unionism in China, and the most likely. However, it is a precarious one. The issue of autonomy is unlikely to disappear. At some point the exercise of protecting workers’ rights will inevitably lead to conflicts of interests between local governments, domestic and foreign capital and workers, and to an inevitable weighing up of priorities. The fundamental dualistic dilemma bedevilling the ACFTU will remain. Moreover, some astute trade union leaders will question the limited scope of protection and dig more deeply into the causes of grievances and conflicts. Internal pressure for a more indirect relationship with the party will continue to punctuate the evolution of the ACFTU. Another scenario may be that the ACFTU separates itself from the party. This seems unlikely on two grounds. First, there is not a sufficient groundswell within the ACFTU for such a separation. The benefits of a close relationship to the party, such as access to the political system, prestige, and legitimacy, still outweigh the disadvantages, namely being perceived as more representative of the party than of workers. Second, any such separation would imply a fundamental divergence of values and interests between the party and the trade unions. Furthermore, the separation would deprive the party of a key, albeit weakening, structure of intermediation with society. Thus the prospects for a genuinely autonomous ACFTU are low. There is a further scenario, namely that the domain of labour relations becomes more plural and diverse, as has occurred with women and gender issues. In this situation, the ACFTU might remain the privileged player but the field would be populated by competing, independent, legal trade unions. Given the current repression of independent labour activists in China such a scenario might seem unlikely. However, the destabilizing effects of entry into the WTO, coupled with China’s increasing exposure to practices in other countries, might persuade the party that such a solution would be preferable. As increased international competition causes domestic state enterprises to reduce their workforces and workers increasingly take to the streets, despite the ACFTU, then finding mechanisms and institutions for stabilizing unrest and negotiating conflict become

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of prime importance. Imprisoning labour activists may be a short-term measure to address a perceived threat to the regime, but it also sullies China’s reputation in the international arena. As China becomes even more integrated into the global economy, party leaders are likely to become more concerned about China’s image on the world stage. Such a concern with ‘face’ may provide the lever for a loosening of approach towards independent labour activism. If this were to occur, there still remains the question of whether a more plural arena of trade union activity would benefit the rights and interests of workers. Such an outcome is more assumed than proven. A pluralization of the field of labour organization may not necessarily leave workers with a better deal, or unions stronger.37 The protection of workers depends not only on the activities of strong, representative unions but also upon the values of the political party in power, the degree of political leverage that unions can exert upon governments, the systemic mechanisms for articulating and influencing policy processes, the links between unions and political parties, and the power of competing forces such as business and their links with government. An autonomous trade union that does not have channels of influence on government or cards to bargain with at both the macro- and micro-levels is next to useless. Conclusion This contribution has sought to outline some of the key challenges facing the trade union in a context of increasing economic liberalization and globalization. It has drawn attention to the numerous reforms in the structure and functioning of the ACFTU and the legislative and regulatory framework governing labour relations. All these suggest that the ACFTU has moved a considerable way towards enhancing its capacity and legal rights to address the emerging problems in a rapidly changing economy. However, as a relic of the planned economy, the ACFTU has not been able to adjust at a sufficient pace to quell the rising tide of grievances among workers. Street protests by aggrieved pensioners, demonstrations by laid-off workers, and strikes by migrant workers in foreign enterprises point to an institutional vacuum of representation and articulation. At the same time the persistent surfacing of alternative labour organizations that are quickly repressed highlights the weak legitimacy of the trade unions. All these problems reflect a fundamental problem of institution building in a context of socioeconomic change. The pronouncements of senior party leaders over the past five years, urging the ACFTU to take a firmer stand in protecting workers’ interests, reflect a recognition within the Chinese Communist Party that the organizations of interest intermediation need also to be reformed if they are to play an effective role in social control and stability. However, they also reveal a particular normative vision of the functions and purpose of trade unions. According to this, trade unions should focus their attention on the protection of workers’ rights and interests. The trade unions can have more room for manoeuvre, but only so long

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as they confine their activities to protection in order to preserve social stability. So far, the ACFTU has gone along with this vision. Increased international competition after entry into the WTO will lead to enterprise closures, further redundancies and renewed social unrest. The pace of reform within the ACFTU has been slow to date. It is unlikely that the ACFTU can establish branches in all enterprises, or that it can muster a force of union activists who are sufficiently competent to dampen the tide of unrest and negotiate compromises with success for all sides. For the future, then, we can expect further increases in labour protests, the continuing rise of independent labour organizations, and a protracted shift towards state corporatism in the ACFTU. NOTES 1. The article draws upon interviews with trade unions and workers carried out as part of two projects: first, a study of the re-gendering of the labour market, involving interviews with trade unionists and 100 workers in Chengdu and Shanghai in 1999 and 2000; second, a continuing project on the impact of WTO entry on labour organizations in China. I am grateful to the Leverhulme Trust for funding the fieldwork in Chengdu and Shanghai and to the Development Research Centre on the Future State for funding the second project. 2. Andrew Walder refers to the different categories of workers as status groups, delineating permanent workers in state enterprises, urban collective enterprises, temporary workers and rural workers; Michael Korzec distinguishes six different types of workers: permanent employees and workers, contract workers, temporary workers, seasonal workers, peasant workers and workers contracted from the countryside: see Andrew Walder, Communist Neo-Traditionalism: Work and Authority in Chinese Industry (Berkeley, CA: University of California Press, 1986), p.40, and Michael Korzec, Labour and the Failure of Reform in China (Basingstoke: Macmillan and New York: St. Martin’s Press, 1992), pp.30–35. 3. Apart from these major fault-lines, the size and performance of the state or collective enterprise also affected workers’ conditions, such as whether or not the enterprise had a school, medical care or decent housing, and the status of workers. 4. By 2000 there were 78.78 million state enterprise workers, 14.47 million workers in urban collective enterprises, and 19.34 million in privately owned enterprises, accounting respectively for 70, 12.9 and 17.1 per cent of the labour force: see Zhongguo Zong Gonghui Yanjiu Shi Bian, Zhongguo Gonghui Tongji Nianjian 2001 [Chinese Trade Unions Statistics Yearbook 2001] (Beijing: China Statistics Press, 2000), p.41. 5. The category of xiagang gongren (laid-off workers) was created in 1995 when a pilot reemployment project, begun in 30 Chinese cities in 1993, was extended throughout the country. Laid-off workers are distinct from unemployed workers in that they technically still have employment relations with their enterprise. In 1998 the central government issued Document 64, outlining a three-year scheme for laidoff workers, which enabled them to claim minimum living expenses and

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6.

7.

8. 9.

10.

11.

12.

13.

14.

encouraged them to participate in training and reemployment programmes (interview, Sichuan Academy of Social Sciences, May 1999). For a detailed discussion of some of the differences between workers in state enterprises, foreign-invested enterprises and private enterprises see Zhao Wei, Qiye Zhigong Jieceng Fenhua de Yanbian [Evolution of Division in Stratum Among Enterprise Workers] (Beijing: Zhongguo Wujia Chubanshe, 2001). Illustrative of the proletarianization of the rural workforce is the decline in the proportion of the workforce engaged in primary industry. Whereas in 1978 70.5 per cent of the economically active population were employed in primary industry— agriculture, mining and fishing, 17.3 per cent in secondary industry and 12.2 per cent in tertiary industry, by 2000 only 50 per cent were employed in primary industry, and the percentages in secondary and tertiary industries had risen to 22.5 per cent and 27.5 per cent respectively: Zhongguo Zong Gonghui Yanjiu Shi Bian, 2000. Ibid., p.37. Zhang Yunqiu, ‘State Power and Labour-Capital Relations in Foreign-Invested Enterprises in China: The Case of Shandong Province’, Issues and Studies, Vol.36, No.3 (2000), pp.50–57; and Qiao Jian, ‘Chu Zai Gaige Qianyan de Zhongguo Gongren’ [Chinese Workers Confronting Reform], in Ru Xin, Lu Xueyi and Li Peilin (eds.), Zhongguo Shehui Xingshi Fenxi yu Yuce [The Book of The Chinese Society] (Beijing: Shehui Kexue Wenxian Chubanshe, 2002), pp.243–51 (p.247). For an excellent account of the experience of workers in the reform period see Anita Chan, China ’s Workers Under Assault: The Exploitation of Labour in a Globalizing Economy (Armonk, NY: Sharpe, 2001). For example, in research conducted on trade unions as part of a large research project on civil society, only 10.6 per cent of respondents from state and collective enterprises stated that they would go to the trade union to resolve differences with their superiors: see Gordon White, Jude Howell and Shang Xiaoyuan, In Search of Civil Society: Market Reform and Social Change in Contemporary China (Oxford: Clarendon Press, 1996), pp.58–9. For further details on the Leninist style of trade unions see Paul Harper, ‘The Party and the Unions in Communist China’, The China Quarterly, No.37 (Jan.-March 1969), pp.84–119; Jude Howell, ‘Looking Beyond Incorporation: Chinese Trade Unions in the Reform Era’, Mondes en Développement, Vol.25 (1997), pp.73–90; Lee Lai To, Trade Unions in China: 1949 to the Present (Singapore: National University of Singapore, 1986). Jude Howell, ‘Looking Beyond Incorporation’, pp.73–90; and Jude Howell, The Chinese Economic Miracle and Urban Workers’, The European Journal of Development Research, Vol.9, No.2 (Dec. 1997), pp.148–75; and Zhang Yunqiu, ‘State Power and Labour-Capital Relations’. Elizabeth Perry, ‘Shanghai’s Strike Wave of 1957’, The China Quarterly, No.137 (1994), pp.1–27; Elizabeth Perry, ‘Labour’s Battle for Political Space: The Role of Worker Associations in Contemporary China’, in D.S.Davis, R.Kraus, B.Naughton and E.Perry (eds.), Urban Spaces in Contemporary China (Cambridge: Cambridge University Press, 1995), pp.302–25; J.L. Wilson, ‘“The Polish Lesson”: China and Poland 1980–1990’, Studies in Comparative Communism, Vol.23, Nos. 3–4 (1990), pp.259–79.

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15. P.Lu, China: A Moment of Truth (Hong Kong: Hong Kong Trade Union Education Centre, 1990); Andrew Walder, ‘Popular Protest in the Chinese Democracy Movement of 1989’, UCLA-CSA Working Papers, No.6, (June 1991). 16. John Burns, ‘Governance and Civil Service Reform in China’, in Jude Howell (ed.), Governance in China (Lanham, MD: Rowman & Littlefield, forthcoming, 2003). 17. Interview, ACWF, Oct. 2000. 18. Huang Hetao, ‘Post-WTO Challenges to Workers and Trade Unions and What to Do’, unpublished paper given at Workshop on Collective Bargaining, held at Great Britain China Centre, Nov. 2001; and Zhongguo Zong Gonghui Yanjiu Shi Bian, 2000, p.79. 19. For further discussions of the impact of the WTO on workers and labour see Qiao Jian, ‘Chu Zai Gaige Qianyan de Zhongguo Gongren’, pp.243–51; Marc Blecher, The Working Class and Governance in China’, in Howell (ed.), Governance in China, forthcoming; Li Deqi. ‘WTO Accession and Choice Facing Trade Unions in China’, unpublished paper given at Workshop on Collective Bargaining, held at Great Britain China Centre, Nov. 2001; Feng Tong Qing, ‘Jiaru WTO Dui Wo Guo Laodong Guanxi de Yingxiang’ [The Influence of WTO Entry on Labour Relations in China], Gonghui Lilun yu Shijian, Vol.16, No.4 (Aug. 2002), pp.49–53. 20. For a detailed analysis of the impact of the 1995 Fourth World Conference on Women, see Jude Howell, ‘Post-Beijing Reflections: Creating Ripples, but not Waves in China’, Women’s Studies International Forum, Vol.20, No.2 (1997), pp. 235–52. 21. For example, the number of cases brought to labour arbitration committees rose by 50 per cent, from 8,150 in 1992 to 12,368 in 1993, by 1994 this increased again to 19,098. In 1999, 120,191 cases were presented for settlement, almost 45 per cent of which were related to state-owned enterprises and foreign-invested enterprises: Zhongguo Laodong Shehui Baozhang Nianjian Bianji Weiyuan Hui, Zhongguo Laodong He Shehui Baozhang Nianjian, 2000 (Beijing: Zhongguo Laodong Shehui Baozhang Chubanshe, 2001), p.651. 22. Gong Wen, ‘Chinese Trade Unions Committed to Protecting Workers’, Chinese Trade Unions, 2002, No.1, pp.6–15. 23. On the implications of WTO entry for the training of trade union cadres see Cheng Zhi Biao, ‘Gonghui Ganbu Jiaoyu Peixun Gongzuo Ruhe Ying Dui Jiaru WTO de Jiyu yu Tiaozhan’ [How to Face the Challenge and Opportunity of China’s WTO Entry in the Work of the Union Cadres’ Educational Training], Gonghui Lilun yu Shijian, Vol.16, No.4 (Aug. 2002), pp.49–53. 24. For example, the trade union in Xiamen Special Economic Zone in the late 1980s had already started to sell its newspaper on stands in the city as a way of reaching out to workers: Jude Howell, China Opens its Doors: The Politics of Economic Transition (Hemel Hempstead: Harvester-Wheatsheaf and Boulder, CO: Lynne Rienner, 1993). 25. Solomon M.Karmel, ‘The Neo-Authoritarian Dilemma and the Labour Force: Control and Bankruptcy vs Freedom and Instability’, Journal of Contemporary China, Vol.5, No.12 (1996), p.129. 26. Zhang, ‘State Power and Labour-Capital Relations’, and Howell, The Chinese Economic Miracle’.

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27. Fang Dan, ‘Labour Relations and the System of Equal Consultation and Collective Contracting in China’, unpublished paper presented to a workshop on collective bargaining held at the Great Britain-China Centre, London, Nov. 2001, pp.1–5. 28. Malcolm Warner, ‘Chinese Enterprise Reform, Human Resources and the 1994 Labour Law’, The International Journal of Human Resource Management, Vol.7, No.4 (Dec. 1996), pp.779–96; Qiao Jian, ‘Chu Zai Gaige Qianyan de Zhongguo Gongren’. 29. Gong Wen, ‘Chinese Trade Unions’, p.10. 30. Lee Lai To, Trade Unions in China, 1949 to the Present (Singapore: National University of Singapore, 1996); Ng Sek Hong and Malcolm Warner, China’s Trade Unions and Management (Basingstoke: Macmillan, 1998). 31. Wilson, ‘The Polish Lesson’, p.265. 32. Philippe C.Schmitter, ‘Still the Century of Corporatism?’ The Review of Politics, Vol. 36, No.l (1974), pp.85–129 (pp.93–4). 33. Ibid., p.102–5. 34. Ibid., p.97. 35. Howell, Governance in China. 36. Anita Chan, ‘Revolution or Corporatism? Workers and Trade Unions in Post-Mao China’, The Australian Journal of Chinese Affairs, No.29 (1993), pp.31–61. 37. For example, in India and other South Asian countries, an abundance of rival trade unions, affiliated to competing parties, has hindered the forging of common interests between workers in the same factory, region or sector; moreover, most of these unions have failed to organize among the substantial numbers of informal economy workers.

Abstracts

Fluctuating Institutions of Enterprise Management in North Korea: Prospects for Local Enterprise Reform SUNG CHULL KIM In the midst of the economic crisis in the 1990s in North Korea, private entrepreneurial activities illicitly utilizing public resources spread in both the distribution and the manufacturing sectors. This new development resulted from rapidly increased de facto local autonomy, which was largely indebted to fluctuations in the institution of enterprise management. Not only have local governments had greater leeway thrust on them by the state, but also they are expected to become entrepreneurial self-sufficient units, even if this is not backed by legalized power and capacity. Under the effect of the economic crisis, local authorities tacitly permit profit-seeking activities by entrepreneurs, believing that the latter may contribute to local economic recovery and the welfare of the residents. Considering that the North Korean authorities are reluctant to introduce wide-ranging enterprise reform, it seems that a feasible transition will have a certain preferential correlation with the institutional tradition of regional self-reliance: that is, the gradual transformation of the existing local leeway into legal power over local collective enterprises through licences, taxes, contracts and appointments. This measure supposedly begins with granting rights over the operating surplus to local collective enterprises but without clarifying the ownership issue, thus attempting to capitalize on the dynamism of private entrepreneurship. Pragmatism in the Face of Adversity: Enterprise Reform in Laos NICK J.FREEMAN Enterprise reform undertaken by Laos during the past fifteen years of economic transition has largely entailed a relatively successful privatization programme for the country’s state-owned enterprises (SOEs). However, problems remain with the larger ‘strategic’ SOEs that continue to operate, and the state-run commercial banks that continue to fund their loss-making operations, despite on-going attempts to ‘commercialize’ the

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business activities of both. The development of a private sector in Laos has also been slow to gain momentum, although increased emphasis is now being placed on creating an enabling environment conducive for such companies. Slow, Quick, Quick: Assessing Equitization and Enterprise Performance Prospects in Vietnam MARTIN GAINSBOROUGH In the late 1990s the number of companies completing equitization procedures in Vietnam’s partial privatization programme (equitization) suddenly accelerated, after proceeding at a snail’s pace until then. A key reason was an unwillingness on the part of political and business interests associated with state enterprises to do anything that would remove them from what they regarded as the ‘best space’ for doing business, which until the late 1990s was seen as the state sector. Equitization had an impact on enterprise performance. However, examination of the manner in which equitization has taken place in Vietnam set alongside conclusions reached by the World Bank on what worked and did not work in the former Soviet Union and Eastern Europe in the area of enterprise reform suggests that the performance of equitized firms is likely to prove much less favourable than the impression created by official data released so far. Entrepreneurs in China and Vietnam as Strategic Players in Social and Political Change THOMAS HEBERER In the process of social and political change in China and Vietnam, the role of private entrepreneurs is of particular interest. While entrepreneurs cannot yet be said to possess the attributes of a social class, they can be identified as an emerging social group, notable by its members’ lifestyle, the different types of capital to which they have access, and how they perceive themselves in terms of their economic, social and political standing relative to other employment groups. In the light of what is evidently growing group consciousness on the part of entrepreneurs, they appear to constitute a ‘strategic group’, working to increase its members’ political influence, mainly through lobbying but also by direct participation in political institutions. While entrepreneurs are generally not interested in radical political change in the direction of democratization, the very visible nature of perceived entrepreneurial success is having a transforming effect on society and its wider values. China’s Social Security Reforms and the Comparative Politics of Market Transition JANE DUCKETT

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China has undergone market transition like the countries of central Europe, but under continued one-party rule rather than democratic politics. What have been the consequences for its social security system? Like the post-communist central European states, China has introduced unemployment insurance and new means-tested poverty assistance, and has reduced state enterprises’ role in delivering social security. It has also reformed pensions and health insurance in the direction of mandatory, contributory social insurance. However, there is greater urban bias in China’s social security, benefits have been more eroded, and unemployment insurance and means-tested poverty assistance have been introduced relatively late in a more protracted reform process. There are similarities between China and post-communist central Europe due to the common experiences and constraints of market transition, demography, vested interests and ideology. The differences lie in China’s distinctive rural, agricultural starting-point, lower per capita GDP, pre-reform system of enterprise-based social security provision, continued one-party rule and decentralized fiscal system. Although only one among a range of influences, political systems have been an important shaper of social policy. Paradoxically, however, pre-transition social security provisions may have been better preserved under post-communist governments than under continued communist party rule. Trade Unionism In China: Sinking or Swimming? JUDE HOWELL The period of neo-liberalism in the 1980s and the post-Cold War context of the 1990s have challenged trade unions throughout the world. With the onset of market reforms from 1978 onwards, the All-China Federation of Trade Unions (ACFTU) began to revitalize its activities. However, reform and entry into the World Trade Organization (WTO) have posed new challenges to the functioning and legitimacy of the ACFTU. In confronting its various challenges in the reform context and making gradual attempts at internal reform, the ACFTU is shifting from being an incorporated organization to a state corporatist entity. Furthermore, although entry into the WTO has accentuated the need for the ACFTU to become more active in representing workers, the ACFTU is unlikely to reshape itself institutionally to guarantee either the protection of workers or social stability.

Notes on Contributors

Peter Ferdinand is Director of the Centre for Studies in Democratisation, Warwick University. Martin Gainsborough is a British Academy Post-Doctoral Fellow, Department of Politics and International Studies, Warwick University. He would like to thank Peter Ferdinand, Nick Freeman, Nolwen Henaff, Jakob Lindhahl and Lotte Thomsen for helpful comments on an earlier version of this work, which was presented at the Euroviet V conference on the theme ‘Modern Vietnam: Transitional Identities’, held in St Petersburg on 28–30 May 2002. The study has been substantially revised. Naturally, responsibility for all remaining errors of fact or judgement rests with the author. Sung Chull Kim is a Senior Fellow at the Korea Institute for National Unification, Seoul, and was recently a Visiting Professor in Political Science at the University of Wisconsin, Madison. Nick J.Freeman is an Associate Senior Fellow of the Institute of Southeast Asian Studies in Singapore. He wishes to thank all those who generously shared their perceptive views on Laos’s enterprise reform efforts during a research trip to the country in August 2002. Thomas Heberer is Professor of Politics with special reference to East Asia at the Gerhard-Mercator University, Duisburg, Germany. Jane Duckett is Senior Lecturer in Politics at the University of Glasgow. Her recent publications include The Entrepreneurial State in China (1998), and articles in Social Policy and Administration, World Development, and Provincial China. Jude Howell is a Fellow at the Institute of Development Studies, University of Sussex, United Kingdom.

Index

All-China Federation of Trade Unions (ACFTU) 8–9, 83, 91, 94, 102–19; dilemmas over leadership under reform 104–10, 116–19; internal reforms 110–15 All-China Women’s Federation (ACWF) 103, 106, 110, 116 Asian Development Bank (ADB) 40 Asian financial crisis 52, 54, 94 Association of Industry and Commerce (China) 74, 76 August 3rd Production Drive 14–15, 20, 29, 30, 31

Cultural Revolution 83; decentralization 95; democratization 95–6; differentiation of workers under reform 104–5; distinctiveness of Chinese welfare reforms 91–5; economic reform 6, 20; economy 2, 3, 88; enterprise reform 28, 34, 45, 54, 88, 90; entrepreneurs 7, 28, 64–78; foreign trade 4, 5; labour laws 112–13, 114; new forms of worker organization 108, 118–19; peasant protests 94, 95; pension reform 89; population 1; poverty assistance 86; ranking of social groups 69–71; social insurance or social security 82; social insurance participation rate 92; support for N.Korea 3; township and village enterprises 30, 31; trade unions 8–9; trade union law 112–13, 115; unemployment protection 84–6; unemployment rate 88, 104; welfare reform 7–8, 80–96; welfare reform comparison with Central Europe 88–91; welfare under system under command economy 83–4, 103;

Banque pour le Commerce Extérieur Lao (BCEL) 41 Belarus 1; economy 2; Beijing 67, 108; international women’s conference 114 Beijing Workers’ Autonomous Federation 108 Bourdieu, Pierre and different forms of capital 65–8 Cambodia 1 Can Tho 53, 56, 57 Cao, Yuanzheng 73 Chaebol 52 Chan, Anita 116 Chengdu 107 Chile welfare reform 82 China 1; border dispute with USSR 3; border dispute with Vietnam 3;

124

INDEX 125

workers’ protests 94, 102, 107, 108, 119 China Industry and Commerce Daily (Zhongguo gongsheng bao) 74 China Workers’ Monitor 108 Chinese Communist Party (CCP) 2, 102, 106, 109, 115 Chinese Communist Youth League (CYL) 103, 106 Chongsanri Method of collective farm management 17 Corporatism 115–16 Council for Mutual Economic Assistance 3 Cuban Missile Crisis 13 Czech Republic 80, 96 Daean Model of Enterprise Management 15, 17, 18 Daqing 107 Deng, Xiaoping 113 Di, Tiangui 108 Doi moi 35 Entrepreneurs as separate social group 64– 78 Gansu 86, 108 Guanxi (social relationships) 67, 73 Guangzhou 74, 75 Guo, Xinmin 108 Hai Phong 53, 57, 60 Han, Dongfang 108 Hanoi Association of Industry and Commerce 76–7 Ho Chi Minh City 57, 67, 69 Hong Kong 108 Hu, Yaobang 113 Hungary economy 96; welfare reform 80–82, 86–7, 89 Hyundai 29 International Monetary Fund (IMF) 27, 29 International Labour Organization (ILO) 114 Jiang Zemin 2

Juche idea 12 Kim, Il Sung 3, 12, 15, 16, 17, 18, 33 Kim, Jong Il 3, 13, 16, 23, 25, 26, 33; ‘Light Industry Revolution’ (1984) 14; ‘Status and Role of the County in Building Socialism’ (1964) 13 Korean Workers Party (KWP) 18; party committees 17, 19, 24, 30; party secretaries 19, 22, 24, 25, 28 Lai, Ruoyu 113 Lane Xiang Bank 41 Lao Cai 56 Lao May Bank 41 Lao People’s Revolutionary Party (LPRP) 2, 12, 35 Laos 1, 35; banking sector 7, 40–42, 46, 48; commercialization of strategic state enterprises 42–3, 48; decentralization 40; economic growth rate 2; economic reform 6, 7; economy 2, 3, 35–6; foreign trade 4, 5; private sector 7, 43–6; privatisation of state enterprises 36–40, 45–6; social conditions 6, 35–6 Lao Telecommunications Company 38 League for the Protection of the Rights of Working People 108 Li, Lisan 113 Liao, Gailong 113 Liaoyang 107 Lithuania 91 Liu, Nianchun 108 Luo, Gan 113 Mekong River 36 Ming Phung-Epco 52 Nampo 13 New Economic Mechanism (Laos) 35 Ni, Zhifu 113 North Korea banking and credit reform 27;

126 ENTERPRISE AND WELFARE REFORM IN COMMUNIST ASIA

barter trade with China 21, 24; bribes of officials 22, 23; Constitution 26; constrained ‘institutional pluralism’ 25; county (ri) as key level of government 13, 24, 28, 31; defence spending 3; economic disasters 10, 23; economic reform 6, 10–30; economy 2, 3, 6, 10; enterprise reform 11, 15, 26–31; ‘independent accounting’ methods 15– 17; informal economy 6; Law on National Economic Planning (1984) 26; local autonomy 12, 13, 20, 23–6, 28, 31; planning system 6, 10, 15, 26; population 2; population movement 22; private sector 11, 20–25, 27, 28, 30; property rights 28–9 Park, Chung Hee 13 Poland 1; economy 2, 96; welfare reform 80–82,86–7,89,90,91,94 Political and Consultative Conference (PCC) 74–5, 76 Preparatory Committee of the Free Labour Union of China 108 Pyongyang 13 Quan he (social relationships) 67 Red Cross 113 Romania 1; economy 2 Russia 1; economic reform 49, 55–7; economy 2, 45

Slovenia 91 South Korea 4, 29 Soviet border dispute with China 3 Tajikistan 3 Tamexco 52 Taiyuan 108 Tay Ninh 56 Thailand 36 Tiananmen Square 2, 113, 116 Tianjin 84 Ukraine 1 UNICEF 2 UNIDO 29 US aid for N. Korea 4; support for S. Korea 13 Vientiane 36 Vietnam 1; border dispute with China 3; economy 2; Enterprise Law 54; enterprise reform 27, 34, 45; entrepreneurs 7, 64–78; ‘equitization’ 7, 36, 46, 49–61; foreign trade 4, 5; National Assembly 77; ranking of social groups 69–71 Vietnam Chamber of Commerce and Industry (VCCI) 76 Vietnam Communist Party (VCP) 2, 76 Warsaw Treaty Organization 3 Weekly Business Forum (Dien Dan Doanh Nghiep) 76 Wei, Jianxing 109 World Bank 27, 29, 40, 49, 55–7 World Food Programme 4 World Trade Organization 5, 103, 109–10, 118,119 Yue, Tianxiang 108

Schmitter, Philippe 115–16 Shenzhen 86 Shu Pu Association for the Protection of Rights of Laid-Off Workers 108

Zhang, Shanguang 108 Zhao, Ziyang 113 Zhejiang 108