The wolves are at the door, the more time passes, the more they come.
—Will Foreign Capital Swallow Up China?1
VIEWED IN A COMPARATIVE PERSPECTIVE, China’s gradual reform path is often characterized as a success story or as “reform without losers”.2 It may be more accurate to say that China’s reform process has been a success story, so far, in spite of the losers. The pain of the economic transformation of the urban state sector was delayed, sparing workers the unemployment and displacement that shook Eastern Europe and Russia. The sequencing of the Chinese reform process has meant a gradual and correspondingly less painful reform process for China’s urban workforce. Reforms were introduced first at the margins, in the newly created sectors, as opposed to the entrenched core of socialism: the urban state and collective firms. The roles of FIEs as a competitive pressure for state firms, as a laboratory for difficult labor reforms, and as an ideological justification for deeper reform pushed reform forward without first endangering those who benefited most from the previous system. The opening to FDI created an entirely new sector with which to experiment with the development of labor markets, salary and benefit changes, and new management techniques.
Growth in the size and importance of the nonstate sector, including FIEs, increased competitive pressure on state firms. State firms competed with FIEs for market share and skilled workers, and they also competed among themselves for FDI in order to boost capital investment and technological capacity. This competition for FDI was heightened by regional competition for FDI flows. Thus, liberalization of FDI had a dynamic effect on the state sector by spreading capitalist labor practices across firms of different types of ownership. As competition with foreign firms grew, the state used this new sense of competition and economic insecurity to justify deeper and more painful reforms of China’s beleaguered state industry. In order to achieve developmentalist goals of national economic competition, these deeper reforms rejected socialist goals of state-owned industry in exchange for strategic state ownership of industry. The “letting-go” policy approved the privatization of most state firms and further expanded FDI in China’s domestic economy. Thus, the delay of urban restructuring strengthened the political position of the CCP vis-à-vis urban society by allowing economic growth to take place while protecting the core, politically important sectors long into the reform process. The delay of SOE reform, however, has had an economic cost; China’s SOEs now face their most drastic reforms, which include the liquidation of firms as well as the wholesale acquisition of firms by foreign and private investors, in a much more competitive and open economic environment.3
This delay in the restructuring also brings with it political risks. The “white-hot competition” from FIEs and the competition that accompanies China’s accession to the World Trade Organization serve as the impetus for deeper reform and privatization.4 However, due to the weak position of China’s private industry, privatization and restructuring of the state sector themselves involve increased foreign participation.5 The rapid increase in labor disputes and conflicts are directly related to the restructuring process and have been on the rise throughout the 1990s. The rate of labor disputes is highest in FIEs, where workers seem to find greater political space and legitimacy in opposing foreign capital.6 A recent example of this phenomenon occurred in August 2000 when six foreign managers were taken hostage at an American WFOE in Tianjin. This company, originally an SOE, had formed a JV with an American company in the 1990s. With the acceleration of reform and the subsequent increase in cross-border mergers and acquisitions, it had recently been acquired by a second American company and turned into a WFOE. Following the logic of competitive liberalization, this company then decided to consolidate its four factories in Tianjin and move to TEDA, the development zone thirty miles away, in order to reap the benefits of the zone’s preferential tax policies. The firm then divided the workforce by age, asking workers thirty and under to accompany the plant to the new location and offering the older workers a one-time severance package. When six managers went to the factory to post the closure notice, seventy workers took them hostage for over forty hours.7 Although such extreme action is rare, less dramatic variations of this dynamic are frequent and becoming only more so as foreign investors continue to participate actively in the restructuring process.8
With China’s accession to WTO in December 2001, the acceleration of reform and restructuring is directly related to foreign capital and China’s integration into the global economy. Workers may increasingly resort to nationalist, rather than class-based rhetoric, to voice their opposition to the reforms and their loss of job security and benefits. This ability to use nationalism as a way to challenge economic reform will open greater political space for workers because it exploits the contradiction between a developmentalist ideology and global economic integration. As we know from the development trajectories of China’s neighbors, the developmental state, despite many internal variations, is defined by its commitment to nationalist economic development and the related abilities to “insulate the domestic economy from extensive foreign capital penetration.”9 As Meredith Woo-Cumings notes, “[T]his state form originated as the region’s idiosyncratic response to a world dominated by the West. . . . today state policies continue to be justified by the need to hone the nation’s economic competitiveness and by a residual nationalism (even in the contemporary context of globalization).”10
The developmental state is also defined by the ability to co-opt and/or exclude important social forces. Labor, in particular, is a critical social force that in the developmental state model is subordinate to the overwhelming nationalist project of rapid growth.11 There was substantial variation in the mode of labor exclusion among the developmental states of East Asia. Postwar Japan achieved relatively harmonious labor relations through an employer-dominated system of enterprise unions, lifetime employment for core workers, and labor market segmentation.12 Taiwan relied on the suppression of independent unions, labor market fragmentation through the subcontracting system, and a paternalistic management style in its many small-to-medium firms.13 Korea, with the most antagonistic labor relations among the East Asian NICs, also suppressed independent unions through repression under authoritarian rule. Even after the democratic transition in Korea, labor relations have remained a flashpoint in Korean politics.14 Despite this variation, none of these states achieved labor subordination with simultaneous foreign capital penetration.
Can nationalist economic development coexist with FDI and globalization more generally as a competitive catalyst for reform without creating a political backlash directed at foreign capital but by extension implicating the entire reform program? Utilization of FDI has improved the state’s ability to implement reform and reduced demands for political change from an increasingly fragmented and diverse urban workforce. This reform path, however, now presents significant challenges to the Chinese state, particularly as China’s accession to WTO requires even further opening and competition in the domestic economy. First, it must continue with the implementation of a developmentalist policy that uses FDI to make China stronger. Under this policy, FDI is extremely critical to the reform process, particularly for local officials and managers who must deal with the huge majority of state firms that have been “let go.” There is a need to balance utilization of FDI against the threat of dependence on foreign capital and the disappearance of “national champions” into global production networks. There is a political challenge as well. The presence and growing importance of foreign capital coexists uneasily with the emphasis on nationalist economic development. Nationalist rhetoric is not only a tool of the state to justify reform; it is also a tool of workers who feel the brunt of economic change. The very presence of foreign capital creates an opening for greater societal conflict and protest. Nolan’s speculation on China’s large firms after WTO captures this predicament well: “[A] large fraction of China’s “national champions” face the prospect of, at best, takeover by the multinationals, followed by drastic downsizing and absorption into the production system of the global firm. Many of them will face bankruptcy. There are almost ninety million people employed in China’s state-owned enterprises. It is an open question how many of these will lose their jobs if China’s state-owned enterprises are forced to compete rapidly on the ‘global level playing field.’ ”15
In China’s dual transition from state socialism and to a market economy, the transition processes have been dynamic and interlocking, with early reform cycles circling forward to shape the next wave of liberalization. The dual nature of China’s transition, with the state’s withdrawal from the key welfare and surveillance duties of socialism and its embrace of market principles and tools to regulate labor, makes for difficult analysis. It forces the observer to look for both the “institutional stickiness” of socialist institutions and the transformative power of the market with its liberal concepts of contractual obligations and individual rights. The staying power of socialism is revealed in the resistance of China’s urban workers to this new moral economy of competitive capitalism and insecurity. There is also the strengthening of new institutions like labor contracts and dispute resolution processes that place greater emphasis on individual rights and equal representation. These institutions, despite their different emphases, work in tandem to create a new mode of resistance among workers: workers use new legal institutions to oppose the demise of the old institutions of socialist equality and employment guarantees.16
Up to now, openness to FDI has enhanced the staying power of the CCP. Integration into the global economy did not mean the withering away or “eclipse” of the state. Instead, integration offered the regime a political opportunity. Reformists in the central leadership viewed the institutions of socialism (such as lifetime employment, extensive welfare benefits, and little labor mobility) as obstacles to growth and to economic reform. Reform of these institutions if done directly, however, posed political risks and therefore were done halfheartedly throughout the 1980s, characteristic of the “tinkering” reform undertaken by most socialisst states.17 FDI liberalization granted the regime space to withdraw from the social contract of socialism and to whittle away at these institutions. The institutions of a market economy are gradually coming into place and are founded in a profoundly different ideology of competition, contractual obligation, and freedom of movement.
Yet this story of how FDI played a key role in China’s domestic institutional change is not a tale of the market’s triumph over socialism and the freeing up of Chinese workers through capitalism. The Chinese state continues to resist the dual liberalization of the economic and political sphere. It attempts instead to square the circle of development by continuing with strong state-led development and authoritarian subordination of labor in conjunction with a heavy reliance on FDI and global economic integration. Under this system, legal institutions do not protect workers rights well nor does the trade union structure offer effective interest representation of labor.
From the evidence of increasing labor conflict, however, this is also not a story of the enslavement of the Chinese workforce through capitalism. The institutionalization of market ideologies and a contractual legal framework can have unintended effects on state-society relations by legitimating the discontent of the weak. The ideology of capitalism, in particular, its emphasis on the employment relationship as a contractual obligation, can be a powerful motivator of “rightful resistance.”18 As shown by the rapid increase in labor disputes and the deteriorating labor-management relations at many firms, workers are increasingly likely to use these new institutions to press for the protection of their rights and interests.