The international operation of these [multinational] corporations is consistent with liberalism but is directly counter to the doctrine of economic nationalism and to the views of countries committed to socialism and state intervention in the economy.
—Robert Gilpin, “The Multinational Corporations and
International Production”1
FDI AND THE COMPETITION IT CREATED between regions and firms affected the way state leaders thought about state ownership, leading to a radical reformulation of one of the key debates of socialist transition: the role of public ownership in a global, market economy. In other reforming socialist economies, the debate over public ownership leads to mortal divisions both within the Party-State and between state and society. A decision to abandon public ownership and privatize signals the death of socialism—for what is socialism if not a commitment to public industry for the improvement of the entire economy and the protection of the working class? Transitions from socialism generally begin with a struggle to allow a limited role for the private economy in the hope that it will contribute to a general improvement in economic conditions and lessen some of the negative attributes of the plan—shortages, lack of consumer goods, and low-quality goods. In the 1980s, however, in most reforming socialist economies, the plan continued to falter, while the private (or mixed) economy spawned greater subversion and increased corruption, and led to decreasing legitimacy of the regime. Thus in the debate over public versus private, public ownership’s standing continuously fell and further contributed to the dissolution of socialism in the USSR and Eastern Europe.
What we see in China is, empirically speaking, not entirely different. The SOE sector of the economy has lost out repeatedly under reform. Many SOEs have shown themselves to be immune to reform and still operating under incentives from the socialist era: problems of corporate governance and control, continuing state support for failing firms, irrational investment, and politically determined personnel appointments.2 The nonstate economy, including the foreign-invested sector, has time and time again shown itself to be more efficient, more dynamic, and more capable of bringing widespread benefits like increased employment, rising exports, better goods and services, and higher levels of technological accomplishment.3 In the earlier stages of reform, the debate between public and private ownership, while intense at times, could continue without resolution because the dual-track system allowed both to continue side by side, the nonstate sector in success and the state sector in (often hidden) failure. Resolution of the debate was postponed as the party and the state tinkered with various attempts of state-owned enterprise reform in an increasingly desperate attempt to justify public ownership. By the mid-1990s, it had become clear that SOE reform without privatization had reached a dead end. By the Fifteenth Party Congress in 1997, when the regime finally signaled its willingness to privatize large swaths of Chinese state industry, this debate was reformulated into one over Chinese national industry versus foreign industry. The Chinese regime has retained its legitimacy by refashioning the debate into one of Chinese industrial survival amid ever increasing foreign competition. Privatization (“letting go”) is necessary so that Chinese “national industry” can be enlivened and strengthened to meet its global competitors. A nationalist perspective has replaced a socialist perspective and shielded the Chinese leadership so far from accusations that it has sold socialism down the river.
This reformulation of the ideological debate away from private versus public and toward Chinese industry versus foreign industry marks China’s leaders continued attachment to state-led developmentalism without a concomitant attachment to socialism. At the central level, capitalist developmentalism means improving China’s global competitiveness and building strong Chinese “national champions.”4 State-owned industry is maintained at the “commanding heights” of the economy in order to reach this goal of global competitiveness. The economy remains state-led but state-owned industry is no longer burdened with the goals of socialism.5 This developmental model mixes aspects of both the Taiwanese and Korean development paths. As in Taiwan, the CCP continues to preserve an important role for the public sector at the top while allowing small and medium firms to go private. Admiration for some aspects of the Korean chaebol system has led to the encouragement of mergers between large SOEs so that they form the foundation for large business conglomerates in the hope that they will become internationally competitive.
This shift at the top away from socialism to capitalist developmentalism has contradictory consequences for those below. Despite the central government’s emphasis on China’s national economy, for local governments developmentalism has only increased the importance of foreign investment because even as the state “grasps” the large firms, it now allows the “letting go” of the vast majority of SOEs. Thus at the local level, developmentalism is translated into the large-scale privatization of small and medium failing state firms and a renewed drive to attract FDI to buy up state assets. In the latter half of the 1990s these developmentalist local governments have also turned toward building up the local private economy.6
At the firm level, this developmentalism requires further increasing workers’ sense of insecurity and competition with other workers. This new drive for increased efficiency is justified as the only way to compete with the more efficient FIEs or as a way to attract foreign partners. At each level the notion of competition is visible and integrally related to foreign capital: as the challenge to China’s national economy, as the savior of failing firms, and as the harbinger of a new managerial ideology at the firm level.
Previous chapters have accounted for changes in economic structure, firm practices, and legal institutions, so why is it necessary to examine changes in ideology? The quotation from Robert Gilpin above gives a hint as to why ideology or beliefs might matter. Gilpin argued during an earlier stage of economic globalization that the international production of multinationals is compatible with liberalism, but “directly counter to the doctrine of economic nationalism.” Had the Chinese state undergone a transformation from socialism to economic liberalism, ideological changes might not matter. We would expect the changes that spring from economic integration and FDI inflows to be compatible with a transformation to liberalism. Instead, in the Chinese case, there is only uneasy coexistence between a liberal FDI policy and developmentalism. Examining ideological change is necessary because it demonstrates so convincingly the contradictions between China’s open FDI policy and its overall developmentalist ideology.
As argued in chapter 2, China’s use of FDI did not weaken the state’s capacity. In fact, opening to FDI gave the Chinese state more room and time to implement difficult and politically destabilizing economic reforms. But is also apparent that this path has costs as well. By sequencing FDI liberalization before the development of domestic private industry and before deep and effective reform of state-owned industry, the importance of FDI has been heightened. State-led capitalist developmentalism at the center must coexist with heavy dependence on FDI among local governments and firms. In breaking the social contract with urban workers, the state has subjected workers to a new market ideology of competition and individualism. Its ideological justification has been, however, the threat of foreign competition and the need for strong national industry. FDI is liberally utilized to bring about economic growth and change; at the same time, however, the threat of foreign competition and economic domination is used to justify the state’s developmentalist policies.
As we also know from chapter 5, labor conflict and societal protest is more frequent when foreign capital is involved. Opening to foreign capital has granted the regime time to implement these difficult restructuring reforms, but it has also led to a rapid increase in labor conflict, particularly in firms with foreign investment. This phenomenon raises questions about the long-term use of foreign investment and global economic competition more generally as “change agents” in China’s domestic reform process. While the use of foreign pressure to speed up internal reform was also tried in Japan, China’s use of foreign competition to speed painful internal reform and restructuring is unprecedented and politically risky. In Japan foreign pressure (gaiatsu) was used to encourage structural changes in Japan’s domestic economy, in particular to make it more open to foreign competition and investment. This kind of pressure was often political, transmitted by foreign leaders and businesspeople. In China some forms of “foreign pressure” are similar to this—for example, when China acceded to the WTO. But there is also a form of foreign pressure that springs from China’s relatively open economy. This foreign economic competition (from outside China’s borders or from within in the form of foreign-invested enterprises) is then used to push forward internal reform.
The transformation from socialism to state-led capitalist developmentalism was a reaction to domestic and international changes during China’s first decade of reform. Because socialism itself has a strong developmentalist component to it, this transformation should be seen as a change in orientation; a change in how development was pursued rather than an abandonment of state-led development. Domestic factors include the way in which early reforms were sequenced and implemented. International factors include the rise of China’s capitalist neighbors and the decline and demise of socialist models of economic development and reform. The East Asian newly industrialized countries (NICs) attracted attention in China because they offered a path to economic development and modernization that incorporated a large role for the state. As will be seen below, China’s growing interest in an East Asian model of development continued even after the Asian Financial Crisis in 1997 spurred a widespread skepticism in the West toward an “Asian model of development.”
Domestically, the sequencing of reform and the strong decentralizing aspect of China’s FDI policy constrained the central leadership’s choices in the later reforms of the 1990s. The sequencing of reforms in urban areas placed liberalization of FDI first, the development of a domestic private industry second, and SOE reform and privatization last. This early sequencing of reform narrowed and constrained the choices for later reform. By the end of the 1990s, China was increasingly integrated into the global economy, but its competitive position was hampered by the lack of a strong private sector and a failing, debt-ridden state sector.7
Due to the lack of state support and political commitment to the development of a real private sector, China’s domestic private economy was weak and small-scale, with private firms finding it difficult to expand out of their localities.8 Not only were firms discriminated against in finding markets and paying taxes and fees; private firms found it difficult to receive state bank loans. The vast majority of state bank credit was doled out to support failing SOEs. As Huang argues, the discrimination against private domestic firms coupled with the long-term protection and subsidization of SOEs dramatically increased the importance of FDI:
First, much of the export-oriented FDI mainly originating from ethnic Chinese firms in Hong Kong and Taiwan materializes because of the severe liquidity constraints on the part of export-oriented Chinese firms. These liquidity constraints arise not because export-oriented Chinese firms are inefficient but because they are private. . . . Private firms have no choice but to raise financing in the only way they can: selling their claims on future cash flow to foreign firms. FDI rises as a result.9
In addition, the delay of SOE reform and the concomitant accumulation of high levels of SOE debt, millions of redundant workers, and a high rate of nonperforming loans to SOEs posed significant problems for the future of China’s economy. While this delay of SOE reform put off politically destabilizing unemployment, it also severely hampered the state’s attempts to pursue greater integration with the world economy and to build a more sophisticated financial system.10 Continuing commitment to socialist goals, in particular the goal of continuing state ownership of large parts of the economy (based on the belief that state ownership was superior) was untenable. Such commitment risked the survival of the entire economy because of the large debt burden of Chinese state banks and the increase in foreign competition that came with WTO membership.
In sum, the early sequencing of reform has constrained China’s leaders at this critical juncture. The lack of support for the development of a domestic private sector early on increased the importance of FDI. FDI acted as a substitute for domestic private industry. Also the delay of deep SOE reform and the general failure of tinkering reforms in profit retention and corporate governance narrowed the state’s options. The state would have to pick and choose which state firms would remain and receive government support. The remainder would be let go.
China’s development strategies have also been shaped by its relatively recent inclusion into the global economic and political system. China is a late industrializer and a developing country, but one with a socialist past. China is also surrounded by and increasingly integrated with states that have championed a development model that varies from the prescriptions of classic Western political economy and liberalism. China’s neighbors, namely Japan, Korea, and Taiwan, developed their economies under heavy state guidance and corporatist societal relations but with strong export-oriented economies. This development model was made possible in no small part by their security relationships with the United States.
China’s development strategies attempt to borrow from the developmental trajectories of its neighbors, but China faces distinct problems. It must negotiate a transition from socialism, thus radically renegotiating the social contract between the state and urban society. In addition, it must operate in a more open and competitive global economy in which export markets are no longer freely opened without a return demand for reciprocal access to China’s large domestic market. Thus China’s current attempt to adopt many of the developmentalist institutions of its neighbors is tempered by differences in current global and domestic conditions.
China’s transformation from socialism to developmentalism is manifested differently at the central, local, and firm levels. First, at the center, the debate centered on the question of ownership and competition. It has led eventually to less and less emphasis on state ownership of industry and much greater emphasis to the development of China’s “national industry” in general. At the local level, implementation of this developmentalist policy underscores the contradictory nature of a developmentalist strategy that utilizes FDI. The local level’s main focus becomes industrial restructuring and the management of unemployment. This need to restructure increased the importance of FDI. It further spurs competition among localities and firms for foreign capital investment in (and even acquisition of) local state firms. Finally at the firm and individual worker level, this transformation is reflected in a changed managerial ideology. Global competition and economic insecurity are used as justifications for layoffs, unemployment and intraworker competition. Workers are asked to accept this new moral economy so that China might become stronger and more competitive. This collectivist ideology, however, differs markedly from socialist collectivism. While socialism was based on the belief that equality and development could and should co-exist, this new managerial ideology justifies domestic inequality for national development.
The thread that connects these macro and micro levels is the presence of FDI and the competition that foreign capital presented both to central leaders at the top, local officials in the middle, and firm managers at the bottom. In fact at all these levels, the notion of competition is the key justification for developmentalism with competition linked to FDI and, increasingly as WTO accession has become a reality, to global competition more generally. The central state rallies around national development and the threat of global competition in order to justify massive privatization. Massive privatization, implemented locally, means greater foreign capital investment and control. Heightened competition at the firm level and growing economic insecurity further divide workers and alienates workers who are left behind.
One of the critical changes from socialism to state-led capitalist developmentalism is the change in the perception of and expectations placed on state-owned industry. What are SOEs for? What are they supposed to do? For the country? For workers? Under socialism and during the period of early reform, the SOE was seen as an institution that, while economic in nature, guaranteed the social and political rights of the working class. Under early reform, economic productivity became more important but productivity was not placed above other broader goals, like the supply of social welfare benefits, full urban employment, and the ideological supremacy of workers and state ownership. Leaders wanted SOEs to be more efficient and to produce higher-quality goods. Leaders wanted to harden the soft budget constraint and make managers more accountable for firm performance. It was thought then that this could be done without changing the ownership structure and without changing the basic employment structure. The changes in employment relations that did occur, limited contracts and greater use of material incentives, occurred as means to improve productivity and grant managers some tools to improve workers’ performance. These were not reforms meant to undo the socialist enterprise.11
As we saw in chapter 3, the perception of SOEs changed in the 1990s as they continued to fail and the tinkering reforms of the 1980s failed to yield the needed results. Most SOEs continued to be in heavy debt. By 1996 over half of China’s state firms were reporting losses.12 With the simultaneous boom of FDI in the early 1990s, the failure of state enterprise began to be placed in a comparative and inherently competitive perspective. SOE managers and reformist state leaders began to examine the performance of SOEs from a different vantage point. How did SOEs perform against China’s burgeoning nonstate sector? Would China ever produce globally competitive industrial firms? Interestingly, SOEs were not often compared against rural Chinese firms, or at least most township village enterprises (TVEs) were not acceptable as models for future SOE reform.13 Despite the fact that TVEs were growing rapidly in the early 1990s, these firms were considered too rustic and unruly to copy. They were also not considered to be examples of “modern” or “scientifically managed” firms. Rather, state managers complained that TVEs earned profits through unfair and underhanded business practices, such as disorderly competition, shoddy goods, and exploitative labor practices that were often based on familial or clan relations.14 Most often, the Chinese urban state firm was placed in a comparative and competitive perspective against foreign companies.15 SOEs faced unfair advantages against FIEs as well, but FIEs were considered to be examples of modern industrial management and more fitting as aspirations for Chinese urban firms.16 while this was reflected generally in the search for “national champions” that could go toe-to-toe with large MNCs, adoption and imitation of foreign enterprise practices extended to increasing use of piece rates, new salary compensation systems, and other “rational” systems of enterprise management.17 Guthrie argues in fact that imitation is a critical stage in China’s transition, finding that “Chinese firms mimic the examples of market actors that they view as being the most market-savvy, namely, foreign investors.”18
As this competitive challenge from nonstate firms grew, the central leadership redefined the meaning of state-owned industry. State ownership of the economy was still to be “dominant” but the definition of dominance was changed. The state began to define dominance not numerically, but strategically. This change was the turning point for ownership structure in China. It meant that state ownership was no longer essential for socialism. As Jiang Zemin proclaimed in 1997, all forms of ownership that contributed to growth and employment “can and should be used to serve socialism.”19 State ownership was justified for developmental and competitive reasons but China could remain “socialist” (and ruled by the CCP) without a large and dominant state sector. By 1997 the “diversification of ownership,” which meant large-scale privatization in practice, was actively promoted by the central leadership. The change was contained in the “Hold the Large, Let Go the Small” policy that was announced at the Fifteenth Party Congress in 1997 but had been in various stages of implementation at the provincial level since at least 1994. This policy approved the sale, merger, acquisition, or bankruptcy of tens of thousands of small-to-medium state firms. Ownership by the state would now be concentrated at the “commanding heights” of the economy, the large state firms. These large firms would be further concentrated “to become flagship enterprises within China and internationally.”20 Thus this period began the leadership’s promotion of industrial transformation directly based on the developmental trajectories of other East Asian economies.21 Through mergers and acquisitions state firms would be transformed into huge, diversified enterprises along the lines of the Korean chaebols.22 Jiang Zemin announced at the 1997 Party Congress that “we will establish highly competitive large enterprise groups with trans-regional, inter-trade, cross-ownership, and transnational operations.”23
The Asian financial crisis enlivened the debate about the future of Chinese enterprise reform and the wisdom of following a model that seemed to be in trouble. In general, however, the central leadership continued to support consolidation among large SOEs through mergers and acquisitions and the privatization of smaller SOEs. The most significant lesson that leaders and managers seemed to absorb from the Asian financial crisis was not to overdiversify but to concentrate on several core industries.24 An article in a journal from the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce) for example, continued to support the development of general trading companies in China modeled after the experiences of Japan and Korea:
Since the East Asian financial crisis, the Japanese and South Korean general trading company has been questioned, which has put unprecedented pressure on China’s general trading company pilot program. We hold that, since the problems exposed in and lessons learned from the crisis countries are profound, with their causes being diverse, disclosing as soon as possible the flaws in their system design and development difficulties will undoubtedly be a good thing.25
The Tangshan SOE was an example of this state-directed merger and acquisition activity.26 As Zhu Rongji had made clear in an earlier speech at the Conference on the Reemployment of State Enterprise Employees, “we will standardize bankruptcies, encourage mergers. In order to realize the guiding policy of many mergers and few bankruptcies, the state will increase its promotion of the policy that superior companies merge with inferior companies.”27 The Hebei Province government encouraged a Tangshan SOE to merge with another cement company in Qinhuangdao City. This company, QX Cement, was the oldest cement company in China, established in the nineteenth century, and by the reform era possessed all the characteristic problems of an SOE. It was old, its equipment was decrepit, its workforce was too large, and it had heavy debts. Its brand name, however, was widely known throughout China, and its distribution networks were well established. The Tangshan SOE, on the other hand, was established in the early 1980s, had newly imported equipment from Germany, a relatively low debt burden, and a productive and disciplined workforce.28 These mergers are seen as a safer alternative to widespread plant closings and bankruptcies. The Tangshan SOE took over the debts of QX Cement and also took on the responsibility of settling its four thousand workers. Fifty percent of these workers were let go: “settled” through early retirement and through reemployment in Tangshan SOE’s subsidiaries where they earned lower wages and received fewer benefits than the core workforce. [By 2003 these subsidiaries had begun their own layoffs and labor contract buyouts. The road to unemployment for QX workers was a long and gradual one.] It is too early to tell if these large-scale mergers will be economically successful, but in the short term these mergers have decreased the number of unemployed workers and delayed and probably reduced social instability. Continuing with the merger and acquisition path for larger state firms, despite the Asian financial crisis, allowed the Chinese state to continue its commitment to national industry while winnowing down its commitments to the vast majority of SOEs. In this new globally competitive environment, this model was touted as China’s only chance to do battle in the global marketplace:
Experts point out that mergers and acquisitions are presently underway in many industries with powerful multinationals as major players. If China joins the World Trade Organization, mergers and acquisitions will become inevitable as many industries would be exposed to tougher competition from multinationals. . . . [T]he anticipated merger and acquisition wave will produce China’s own conglomerates, improve its industrial structure, optimize the allocation of resources, and sharpen the competitive edge of the nation’s economy.29
The managers of the Tangshan SOE certainly framed their development strategy in this competitive light. Moreover, this competitive outlook had strengthened dramatically between 1997 and 1999. This was partially due to the Asian financial crisis, which cut Tangshan SOE’s exports from a high in 1996 of one-third of total output to zero in 1998. Domestic competition grew more intense as export markets shut down. It was also a result of the natural expansion of FIEs and TVEs in the cement industry. The Tangshan SOE found itself in intense competition between a recently established Sino-Japanese cement joint venture in Qinhuangdao, numerous TVEs operating in the surrounding countryside, plus an onslaught of competition from neighboring Shandong Province. Much of the competition, they believed, was unfair and consisted of “disorderly competition, underselling, and harassment (saorao).”30 What their complaints signified in economic terms was the breakdown of local protectionism and long-established production contracts between SOEs and their customers. The increasing ability of nonstate firms from nearby provinces and cities to steal traditional customers was clearly creating new challenges for SOEs. The merger between this Tangshan SOE and QX Cement was one response to this challenge. The managers at the SOE believed that their competitive position would be strengthened in the long term if they consolidated production and expanded into other cities and nearby markets. They also planned to further consolidate by absorbing smaller companies, including TVEs. In this way, they would be better poised to compete with the foreign-invested cement firms, firms that by establishing joint ventures in several regions could overcome local concern over new protectionism in a way that traditional SOEs could not. By 2003 this competition was palpable among the managers as large MNCs from both France and Taiwan began to invest in the region.31
A somewhat different restructuring process took place in China’s camera film industry, a process that attempted to make use of FDI as a way to build strong Chinese national industry. This example neatly demonstrates the state’s commitment to “national industry” and its justification to utilize FDI to build China’s own globally competitive firms. It also demonstrates the underlying, fundamental ambivalence of the Chinese state toward FDI.
China’s camera film industry had been ravaged by the earlier opening to foreign film and large-scale smuggling of film into China’s borders. Kodak (United States) and Fuji (Japan) dominated the market, despite their lack of on-the-ground productive capacity. China’s production had fallen, debts had risen, and the factories were badly managed. The industry had avoided large-scale joint ventures, choosing instead to import high-tech equipment that the firms were unable to use properly. China’s industry was losing out to foreign firms and showed no sign of a turnaround.
In 1995, after three years of negotiations, Kodak was allowed to buy out three SOEs in the film industry. These firms were radically restructured and absorbed into Kodak’s multinational operations. Of the 5,978 total workers in all three plants, Kodak retained only 1,771, or about 30 percent. The remaining workers were sorted out in different ways depending on their age and ability. Eleven hundred workers retired; 919 accepted a one-time payment and handled their own reemployment; 496 took company stock in lieu of continued employment. Another 1,094 workers had their labor contracts bought out, a controversial practice that is being used more widely now as a way to cut staff who have signed long-term labor contracts.32 The remaining 600 either entered into state-run reemployment centers or “found their own means.” What is interesting and important about the Kodak experience with regards to labor is that this restructuring process had great effects on other firms, even firms that had no connection with Kodak or the acquisition. The state, in a bid to transform the firms that had remained solely state-owned extended the preferential policies reserved for foreign firms to all firms in the film industry. This included more flexible labor policies and the right to lay-off and fire redundant staff. The state justified the extension of these policies to state firms as a way to allow them “to enjoy the same policies as those firms involved in the joint ventures, and creating an environment of fair competition for their development.”33
Above all the Kodak experiment was an attempt by state planners to turn around state firms by subjecting them to the restructuring and management overhaul that comes with foreign investment. By extending Kodak’s practices to firms that remained state-owned, it demonstrates how state leaders hope to utilize FDI to make China stronger. As a report by the State Development Planning Commission stated:
The photosensitive materials industry’s successful use of foreign capital to implement industry reorganization and reinvention is a valuable exploration for other state owned enterprises using foreign capital to stimulate reform, reorganization, and reinvention. . . . So now we want to combine our opening up to the outside with self-reliant development to form an organic whole, and explore the new path by which China’s industry will move from weakness to strength. . . . After the photosensitive materials industry has “cut the cord” with Kodak, this will objectively create conditions for reorganization of enterprises.
This pragmatic policy and the hope that sooner or later China’s national firms would “cut the cord” with Kodak exposes the deep developmentalist roots of China’s FDI policy.34 Kodak first introduced labor reforms and the end of socialist labor practices but the Chinese state allowed SOEs to follow suit in a bid to improve their global and domestic competitiveness. In the end, the state envisions a turnaround of the remaining SOEs in the film industry and a “self-reliant” Chinese national industry. Unfortunately by 2003, the Chinese camera film industry was no closer to cutting the cord. Instead Kodak became one of the first foreign investors to take advantage of the new rules allowing foreign purchase of state shares. It acquired a 20 percent stake in its main domestic competitor, Lucky Film, with the acquisition likely to be only the first step in a series of acquisitions. At the time of the purchase, Kodak held 50 percent of China’s domestic film market with Lucky holding 20 percent.35
Jiang Zemin’s enthusiastic embrace of the East Asian development model in 1997, although inconveniently timed just prior to the collapse of the Korean economy, signaled the end of socialist ownership in China. State ownership of firms would continue in a limited way, but its mission was redefined as a developmental one. The vast majority of state firms that were not included in the “commanding heights” of the economy were given up to various kinds of privatization. In 1997 the leadership saw this as an economic imperative (and actually a fait accompli in many coastal provinces). China was increasingly integrated into the global economy, WTO accession talks had already begun in earnest, and FIEs continued to boost market share and ownership control in China’s domestic economy.
The irony is, of course, that the “letting go” policy would only further increase foreign investment and control within the domestic economy. China’s private sector is weak and endemically short of capital due to the monopoly of state bank funds enjoyed by the state sector. One entrepreneur in Shenyang, in northeastern China, who helps turn around state firms in order to attract foreign buyers maligned the difficulty that domestic Chinese entrepreneurs face in getting loans. “If only I could get banks to lend to me, I would not just be a tiger but a tiger with wings.”36 Foreign investors were in a much better position to take advantage of the bargain basement prices for many small-to-medium state firms.37 Local governments, responding to the policy change from above, simply looked for capital where it could be found. The mayor of Shenyang toured Europe to find buyers for 18 Shenyang SOEs with a total workforce of 309,436.38 In total, 3,000 SOEs in Shenyang were put up for sale. In 1998 the deputy mayor of Shenyang stated that of its 232 large SOEs only 16 were to remain state-owned, “eventually coalesc[ing] into 5 large diversified groups that might be modeled on Korea’s chaebol.”39 As chapter 3 shows in greater detail, grafted joint ventures and various modes of foreign participation in stockholding firms increased dramatically in the late 1990s. You Ji, writing on Liaoning Province’s use of grafted joint ventures, calls it “using capitalism to save socialism.” As he notes, other provinces quickly began to adopt similar measures:
What Yue (the governor of Liaoning Province) did was simple: he encouraged the factories to offer their land and facilities fairly cheaply to foreign investors and transform themselves partly or wholly into joint ventures. On the basis of this “grafting” the joint ventures would be further transformed into joint stock companies. . . . As the profit rate of the province picked up visibly, the Liaoning experiment has been seen as the “dawn light” for China’s state sector and followed by other provinces.40
Indeed the experiment of Liaoning was seen in other provinces as well, including Fujian, Guangdong, Tianjin, Chongqing, Shandong and others.41 The dawn light of reform in 1994 was no longer so bright by 1999, when layoffs and unemployment in Liaoning and its neighboring rust-belt provinces had reached levels of over 30 percent of the total workforce.42 While investors who acquire SOEs often agree at the onset to take on the burden of the state firm’s employees, the use of short-term contracts allows the firm to begin to downsize fairly quickly. Some cities and regions allow the acquirer to buy out the workers for a one-time sum, with the worker forfeiting any pension or additional support in the future. Shenyang, the capital of Liaoning, reported the use of these severance packages for employees as a way to entice foreign investors to come in and invest without the added headache of state firm employees.43
This state-led capitalist developmentalism is reflected in the ideological debates and policy changes that take place at the top. At the local level, however, as SOEs and their local government owners find their mission redefined and their economic surroundings undergoing rapid change, these policy changes are manifested differently. Local governments and state enterprise managers are developmentalist too, but in their local context; this means beating the competition by joining it, which included finding foreign investment, restructuring and selling of firms, and laying off workers.44 Like Taiwan, China’s leadership places great political importance on state ownership of strategic sectors of the economy. Like South Korea, it hopes to build large, diversified conglomerates but also to avoid the problems of overdiversification and heavy bank debt. Like both Korea and Taiwan, China finds rapid growth through export markets and global integration. Unlike the other East Asian NICs, however, China allowed foreign investors to exploit China’s domestic market and invest directly into the Chinese economy. The importance of this decision was only enhanced with the “let go” policy as thousands of SOEs were “freed” from their state ties and told to sink or swim.
Within Chinese firms, state managers were attentive to the debate at the center about what was wrong with state ownership and what options were available to change the internal workings of the state firm. They were also aware of the growing competition from nonstate sectors as they watched their monopolies erode and their products go unsold on stores’ shelves that were also lined with flashy foreign brands. Moreover, they were acutely aware of the preferential policies granted to firms with foreign investment and the greater flexibility that foreign firms had in internal management decisions. Notions of unfair competition that touched on labor relations revolved around several issues, including the welfare and employment burdens of SOEs, the salary controls on SOE managerial and skilled staff, and the ability of FIEs to buy state assets at low, bargain-basement prices yet avoid taking on the personnel burdens of the acquired firms. Proponents of deeper SOE reform argued that this institutionalized unfair playing field not only turned FIEs into successful exporters but also beat out SOEs on their turf, in China’s domestic market.45
Firms were driven by the knowledge that in regard to labor issues state firms had the heaviest burden. Unlike other issues of corporate governance, firms were relatively clear about how to improve the labor problem: use employment contracts, control salary and welfare increases, lay off noncore workers, hire younger workers, and hire migrant or rural workers for low-skilled positions. These were all practices that FIEs had employed from the beginning. A report by the Chinese Academy of Social Sciences stated that “if SOEs’ welfare payments were brought in line with private or foreign-invested enterprises, many more would be profitable.”46 And internal study by the Labor Science Research Institute, a government organization affiliated with the Ministry of Labor, also reached the same conclusion:
There is a long way to go in the reform of labor and social security system to meet the demands of establishment of market economy [sic]. As things stand now, the backwardness of labor and social security reform seriously conditions the state enterprise reform. . . . Especially with the nonpublic economy becoming stronger and stronger, more and more foreign products (including foreign invested enterprises’ products) pouring into China’s market, the competitions between state enterprises and nonpublic enterprises, the domestic enterprises and foreign enterprises are becoming white-hot. Now the greatest problem faced by state enterprises is poor competition capacity.47
The poor competition capacity of SOEs and some of the underlying reasons have been well known within China for some time. However, analysis of SOE constraints was increasingly placed in a comparative perspective, with greater attention on SOE profitability vis-à-vis competition from FIEs and the need for a level playing field.
Changes at the firm level were driven by several other factors besides the unfair competitive position of FIEs versus SOEs. First, firms that had already absorbed foreign investment implemented reforms as dictated by the foreign managers. They took for granted that foreign managers knew best how to reform and restructure an enterprise.48 If anything, the Chinese managers were there to make sure the reforms did not go too quickly and alienate the workers completely.49 State firms were also driven to reform their managerial practices to accord with foreign practices because it increased the likelihood that they would attract foreign capital into their firm. The investment hunger that drove state firms and local governments alike to attract FDI cannot be underestimated. Foreign investment not only brought cash, equipment, and knowledge, it also brought political prestige, economic independence, more flexible policies, and even some ability to expand across regions: something that Chinese state and rural firms have great difficulty doing due to levels of local protectionism in China’s provinces.50 Douglas Guthrie has argued that FDI has an impact that goes beyond each individual company’s investment. In Shanghai, he shows that “firms both mimic the practices of their foreign partners and adopt formal rational bureaucratic structures to attract new partners.”51 Guthrie’s choice of wording is instructive. Mimicking is the adoption of practices that have been effective in a different context with the connotation of blind imitation.
Reinhard Bendix’s work on ideologies of management in Russia, England, and the United States is useful as a way to characterize the changes at the firm level, changes that reflect the larger macro debate about the meaning of firm ownership and the nature (and target) of competition.52 Bendix defined these ideologies of management as “attempts by leaders of enterprises to justify the privilege of voluntary action and association for themselves, while imposing upon all subordinates the duty of obedience and the obligation to serve their employers to the best of their ability.”53 In Chinese SOEs, the managerial ideology that prevailed under socialism has been replaced by a developmentalist ideology. This developmentalist ideology is different in its rationale from the previous socialist ideology but it is also different in many ways from managerial ideologies that prevail in market economies. Socialist managerial ideology was a collective ideology that espoused the dominant rule of the CCP and the subordination of enterprise management to the CCP’s leadership. Workers, as the elite class in whose name the party rules, were empowered by this definition as long as they too could claim to be faithful followers under the party’s leadership. This struggle over political credentials was, of course, the reason for the intense politicization of the Chinese factory under socialism. Legitimacy and power were granted from above in recognition of party allegiance, not economic performance.
Managerial ideologies in market economies are again different from developmentalist ideologies. These ideologies justify dominant-subordinate relations through the glorification of the individual and through the assumption of meritocratic attainment of position. Managerial ideologies have changed over time, of course, as the economy has matured in most market societies. In the post–World War II period in the United States, enterprises incorporated methods of human resources management and corporate training and culture to inculcate a sense of belonging as firms became bureaucratized. More recently, with the growth of high technology and information industries there has been the rise of managerial ideologies that glorify work as creative and (therefore) all consuming. With the rise of globalization and a strong economy in the United States, both employee and employer are perceived to be cutthroat. Workers leave for better pay or more interesting positions. Companies lay off at the earliest sign of an economic downturn or a dip in stock price.
The developmentalist managerial ideology in China retained some socialist ideals while incorporating much of the market ideology familiar in the United States. China has also learned from the experiences of its neighbors as states that were able to inculcate a sense of collectivism at the firm level that yielded rapid growth with social stability. This developmentalist ideology employs a sense of collectivism, as did socialism. Unlike socialism, which was a collectivism that was predicated on a high position for workers in the firm and in society, this developmentalist collectivism builds on a feeling of economic nationalism and economic insecurity at the global level. It justifies the contractualization and commodification of labor in SOEs on the dire position of state firms in the national and global economy and more generally, on China’s weak competitive position. This ideology, in fact, blames the workers for the dire position of the factory and asks that the workers make sacrifices so that state firms can survive. While workers were asked to sacrifice under socialism as well, accepting low wages and consumer shortages, their own employment security and compensation were not linked to firm performance. Under the current capitalist developmentalism, however, workers are asked to do badly so that the factory can do well.54
Borrowing from market ideologies, this developmentalist ideology employs practices from foreign firms that extol meritocratic achievement, individualism, and internal firm competition. Using these practices, workers that fare the worst are responsible for their own failure. This individualism of course goes hand in hand with a market ideology that is presented as natural and infallible. The inevitability of the market is itself used as further justification for labor restructuring. A worker fails the market; the market does not fail the worker. This ideology of the market’s hegemony and inevitability is reflected both in the state-controlled media and in the practices that state firms have adopted in order to compete.55
The media and state managers alike criticize state workers for their passive dependency on their work units. “Waiting, relying, demanding” (deng, kao, yao) is a popular label in the media, used to demonstrate the passivity and arrogance of state workers who continued to assume their previous employment relationship with the state. Managers echo this criticism, sometimes genuinely surprised that workers have not realized that the rules of the game had changed. A manager in Tianjin laughed when asked about the redundant workers in his collective, and said, “Don’t these workers know? Wait? Nobody comes. Rely? No one’s there to support you. Demand? They have nothing to give you.”56 His comment typifies the popular belief that unemployment and redundancy are unavoidable because neither the state nor firms are willing to continue to support workers at the risk of delaying reform even further. The message from the state through the media is at times almost refreshingly honest: workers are no longer protected from the market and those who continue to wait passively for the state to distribute new jobs lose out in this new economy. Newspapers herald laid-off workers who find new employment on their own and chastise those workers who refuse to accept work they consider to be “beneath the status of state employees,” for example, employment in rural areas, in foreign or private enterprises, or in the service sector.57 Sounding not unlike critics of welfare in the United States, the state embraces individual responsibility and a hearty work ethic:
We should pay attention to fostering and giving wide publicity to typical examples of vigorous efforts among laid-off workers and staff members; we should guide them in doing away with the idea of “waiting for, relying on, and asking for assistance” and help them foster a correct concept of obtaining employment; and we should help them understand that within the limits permitted by state policies and laws, there is neither lowliness nor nobleness in any work one does, and any occupation in which one is engaged is glorious.58
The Shenyang Daily ran an article by a union cadre that was more direct in its suggestions for Chinese workers. In a city with an unemployment rate that surpassed 30 percent the last line is particularly ironic:
The party and the government cannot forget the unemployed, but the market economy doesn’t pity the weak. Facing up to unemployment, what should Chinese workers do? Straighten up one’s back, become one of the strong! As long as one is willing to endure hardship, the ground will be beneath your feet. As long as you use your head, work isn’t hard to find.59
The official trade union newspaper, the Workers Daily, has also been active in promoting the idea that the main problem of unemployment and reemployment is the outlook of the workers. A 1997 front-page editorial proclaimed:
The enterprise is the source of workers’ employment, but the enterprise itself also must rise or fall by the market, it is a life or death problem, so workers should stay or go, be hired or be laid off according to that [the market]. Under these conditions, if a worker acts according to the past, looking for the factory (gongchang) not for the market (shichang), [if he] only waits for the upper level to arrange, but doesn’t understand the demands of the market, then it will be very difficult to realize reemployment. . . . The core is that the worker fits the market, not that the market fits the worker.60
This message of “blame the victim” used the market as justification for the reforms and for the hardships encountered by SOE workers. It placed these hardships secondary to the hardships that the nation as a whole encountered in its bid to compete in the global economy. Competition in a global context meant both achieving Chinese economic strength abroad through the development of Chinese MNCs as well as making Chinese state firms competitive within the domestic economy. Workers were asked to accept these changes in state goals from socialism to competitive developmentalism as a matter of course. When they did not accept it—for example, when they failed to find new jobs on their own, or refused to work in another sector that did not supply benefits, or stayed in their factory-supplied housing living on subsidies—they were disparaged.
The changing managerial ideology of Chinese firms was reflected in new practices, often borrowed from foreign companies, which brought competition down to the individual worker. The vocabulary that firm managers used to describe implementation of these competitive practices demonstrates the vast difference between the present system and the previous socialist one. Socialism justified hardship through a sense of collective sacrifice. Now state managers spoke of increasing each individual worker’s “sense of crisis” and of “opening the wage distribution,” which meant distributing salaries that varied widely between individual workers and could even vary widely from month to month for each individual worker.61 For these managers, “scientific management” became a mixture of Taylorist work arrangements and rules that emphasized individual achievement and interworker competition with a collectivist ethos directed at external competition.62 Managers in Tangshan spoke of a new ideology modeled after images of Western firms. We have a “spirit of dedication like GM or Toyota.”63 But to achieve collective dedication within the factory, managers increasingly relied on divisive managerial techniques. The Tangshan SOE personnel manager boasted of a newly instituted hundred-point wage system that ruthlessly deducted points for infractions that were common under socialism: being late, eating sunflower seeds on the jobs, reading the newspaper, or doing one’s wash in the factory bathrooms. Although the actual rules seemed normal enough, the penalties amounted to 30 percent of a worker’s annual wage.64 Moreover, the worker who reported the infraction was rewarded. In a Sino–Hong Kong joint venture in Tangshan, the managers used labor competitions to improve workers’ “zeal.” These competitions were cutthroat attempts to increase competition between workers. In each competition the workers with the two lowest scores would automatically lose their bonus regardless of how well they actually did. This joint venture, the Tangshan SOE, and the rural collective in Tianjin all used a reporting system that rewarded workers for finding mistakes in other workers’ work or in the work of maintenance workers.
Internal factory relations were further changed with the increased use of “the confidential wage system.” Confidential wages were first implemented in China’s special economic zones, then later adopted by Shanghai SOEs, and in the 1990s this system was included within enterprise management textbooks as an acceptable form of wage distribution. Under this system, the wage of each worker is decided upon through “discussion” between the worker and management. Workers are then forbidden to discuss their salary with other workers or any other person; to do so is considered a violation of the labor contract. SOE managers consider it an effective way to hinder the traditional egalitarian thinking and “red-eyed disease,” or the jealousy of other workers. Under socialism and partial reform, bonuses were distributed equally among workers without regard to individual performance to imbue workers with a collectivist ethos and, more realistically, to insulate management from workers’ disagreement about equitable distribution. Union officials who have publicly disapproved of “confidential wages” point out that confidential salary practices dramatically increase the power of management over workers.65
While it is difficult to gauge how prevalent this practice is, it seems to be quite widely used by a range of different companies, including urban collectives, some smaller SOEs, rural collectives, and many FIEs. Combined with the widely reported practices of information sharing (regarding prevailing wages and benefits) between firms in the same locality, workers are severely hampered in their ability to determine what their wage should be.66 It also makes collective action nearly impossible if sharing information is a violation of the labor contract and a threat to employment. Workers are already fragmented along many different lines in Chinese factories: older “permanent” workers, younger contract workers, female production-line workers, male maintenance and supervisory workers, local workers and rural migrants. Increasingly these workers work side by side and under similar conditions of competition and job insecurity. Yet this system effectively makes collective wage discussion impossible.
Several factories included in this study employed a separate system of wage distribution called “vague distribution” (mohufenpei). The Tangshan SOE, the Sino–Hong Kong joint venture, and one of the Sino-Japanese joint ventures used this system. The rural collective used a combination of piecework with a complicated point system for quality control that borrowed from the vague distribution system. The actual rules of distribution are unclear and change month to month and there is also variation between workers as to how much of the monthly wage is subject to variation. Variation can depend on objective measures of performance, like piecework, hours worked, and the quality of the goods. But there is also a complicated system of wage deductions based on various infractions, such as improper uniform, incorrect position at the machine, breaks for the bathroom or meals that are too long, or simply a “bad attitude.” The official Chinese Trade Union opposes these policies but to no avail. Since egalitarianism is a bigger problem in SOEs than inequality, the Ministry of Labor argued, it supported the continuation of these practices in 1994.67 Their prevalence in firms in 1997 and 1999 seem to indicate their proliferation across other firms and regions.
Media messages that blamed the victim and firm practices that intensified competition between workers and a general feeling of crisis were responses to the new goals of state-led development as set by the central leadership. Local governments, eager to find foreign buyers for state firms and to manage growing unemployment as best they could, also promoted this new ideology of competition and insecurity.
Bendix poses a critical question: “[O]n what terms will a society undergoing industrialization solve the problem of incorporating its newly recruited industrial work force within the economic and political community of the nation?”68 China’s experiment with socialism means that the incorporation that is taking place now is a dual process of exclusion and reincorporation. Urban workers must give up the benefits they enjoyed under socialism and be incorporated into a new moral economy of capitalism and competition. Moreover, this incorporation of the working class is not only into the political community of the nation but also into a global economic order, an order that the CCP had rejected and vilified from 1949 to 1978. The state’s relationship with the working class was founded on this rejection of capitalism. The state interpreted development within a socialist, and basically autarkic, context, particularly after the Sino-Soviet split in 1960. Therefore this reincorporation of the working class into a national community and a new global economic order is rife with contradictions. At the central level, a developmentalist state gives up socialism to improve its competitive position in the global economy. At the local level, firms and officials, left to find their own lifeline, go out in search of foreign investors who will take on the burden of turning these companies around and turning the workers away. At the firm level, workers are asked to accept the economic insecurity that accompanies this new competition.
In a review essay of works on developmental states in East Asia, Ziya Onis writes “the power of the developmental state has depended on the formation of political coalitions with domestic industry and on the destruction of the left and curtailment of the power of organized labor.”69 The exclusion of labor from the corporatist-style politics of developmental Japan is also well noted in the literature, as are the repressive labor politics of predemocratic Korea and Taiwan.70 The ideology and policies of state-led capitalist development adopted in China since the 1990s have brought this mark of developmentalism home. The marginalization of labor has been achieved in part through the expansion of the workforce through new ownership types and greater rural-to-urban migration. As this chapter has also shown, however, these structural changes have been accompanied by rapidly changing ideological justifications for state ownership and a radical shift in the state’s relationship to the urban working class. Competition, insecurity, and individual responsibility are the new slogans of the state in its attempt to remake workers to fit the market.