the political economy of state enterprise relations in china's shaanxi province

The Political Economy of State Enterprise Relations in China's Shaanxi Province

287

Psk K. Lee*

A major feature of China's economic reforms since 1979 has been the decentralization to lower levels of the administrative hierarchy the right to use resources. Central leaders expect that by making greater use of the market, local units would use the decentralized resources in economically productive areas. Local authorities lose no chance in attempting to maximize their control of resources, with which they can minimize conflict in their units or localities. Local governments become key political and economic actors.

In spite of the political rhetoric that emphasizes the separation of state and enterprises as one of the planks of economic reform programme, the government's role is still considerably more direct than that of merely setting the broad rules of the game and influencing the economy indirectly through market forces. There is a Chinese proverb saying that enterprise has to fix an eye on the market (shichang), and fix another one on the mayor (shizhang). The government has a direct and intimate involvement ila the fortunes of the enterprises.

The article is devoted to studying the interaction between government and business enterprises from the perspective of political economy. This study is to shed some light on the relatively backward region in China and therefore supported by a case study of Shaanxi province in northwest China. 1 The attention of this essay focuses on the interplay between the concerns of local officials and the resultant behaviour in assisting the operations of their subordinate enterprises, particularly with respect to capital accumulation and capital investment. The issues addressed here are how and why interior Chinese government officials involve in the running of their enterprises, and in comparison with the East Asian model of development, what the possible impact of the government-business relationships on the long,term economic development of the province will be.

This article argues that although both coastal and inland provinces are committed to promoting economic growth, the economic behaviour of inland provincial leaders is shaped by "situational" motivations: the need to catch up With the prosperous eastern provinces, and to relieve fiscal constraints. However, under the constraints of the Z'simational" motivations, close government-business relations have not brought about industrial transformation in the province.

*School of Arts and Social Sciences, Open Learning Institute of Hong Kong f

Iournal of Conten~orary Asia, Vol. 27 No. 3 (1997)

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In the first section of this article, the incidence of local state intervention is discussed. Section t~a suggests the causes of the close state-enterprises relationships in Shaanxi. Section three explores the impact of government-business interaction on the province's economic development with the East Asian development pattern as the backdrop.

Local State Entrepreneurship

Govemment intervention in Shaanxi's local economy principally takes the form of helping enterprises to gain access to factors of production. The market-oriented economic reforms in China have given enterprises freer access to a variety of means of production, but the costs are significantly higher than those supplied by the state planning system at lower state prices. Thus, the costs and profits of one enterprise will vary, depending on where it secures its means of production. The actions of provincial and local government officials are key in determining which enterprise receives the privileged access to the scarce inputs such as Capital and raw materials or producer goods.

Capital

Following the launch of banking reform in 1984 that granted more autonomy in lending decisions to provincial and local banks, subnational officials put pressure on bank, s within their jurisdictions to extend credit necessary to stimulate growth of locally taxable businesses. Loans to nonstate manufacturing sectors increased considerably immediately following the banking reform. Encountering competitive threats from the nonstate sector, state enterprises also turned to the banking system for increased working capital loans in 1985 and early 1986: Nonstate's claim to credit restored to the ascendancy through 1987 and early 1988. With the economic retrenchment started in September 1988 and a general stringency of credit flows, state enterprises became the sole target of credit extension. 2

In 1985, many rural enterprises in Shaanxi faced an acute shortage of credit when the control of credit was tightened by the central government. The production plans of many rural enterprises were abruptly curtailed) The countermeasures were to give preference to the production of ordinary consumer goods, which could withdraw currency from circulation quickly, an~ to the production of export goods that generated massive foreign exchange/earnings. The banking system in Shaanxi expanded credit in ways that defied ~ e central order to reduce loan growth. Loans granted by the rural credit cooperatives in the province in 1986 increased by more than 40 per cent over the previous year, and lending to rural enterprises soared by a hefty 56 per cent. That made the share of the loans to rural enterprises in the aggregate loans outstanding edge up to nearly 29 per cent in 1986 from 25.7 per cent in 1985 and 19.7 per cent in 1984. 4 Winning the backing of the leaders of Weiyang prefecture and Xi'an, Tanjia township established a financial institution run by locals - - Xi'an Huarong Investment Corpora t ion- during the austerity campaign that started in

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1985. The corporation offered a competitive package of interest rates, ranging from 12 per cent per annum to a hefty 10 per cent per month, to attract idle capital in the society. Meanwhile, peasants who wanted to work in the townsbap~enterprises were required to contribute a sum of money (gongren daizijinchang). A total of twenty- four million yuan was amassed during the year. Huarong helped to resurrect more than thirty factories and to set up seven new plants in 19867

To foster the capacity of locally-owned enterprises to pay taxes, local fiscal authorities were involved in the management of the enterprises. In 1982, Shaanxi Heavy Machinery Factory established a brewery. Before it could start production, the • plant ran into a f'mancial crisis; it was short of working funds and unable to repay bank loans. To help it to go into production as soon as possible, the third tax bureau of Xi'an exempted the plant from product tax for two years, which would have amounted to 2.55 million yuan. After tax exemption, the brewery received a bank loan of more than 2:8 million yuan. As of 1985, it reportedly had reached an annual production capacity of one million tons and generated 1.41 million yuan of tax to the state. The same bureau also granted a similar concession to Xi'an Radio No.1 Plant on its own initiative when the radio factory initiated a colour television production line in 1985. The production line yielded 50,000 colour televisions sets the same year. The tax bureau received high praise for actively supporting enterprise production and thus generating revenue for the state?

Occasionally enterprise managers needed the help of local bank officials to remove the bureaucratic obstacles in developing a profitable undertaking. In Septem- ber 1986, a sulphur mine in Pucheng county applied for a loan of 700,000 yuan to establish a concentrated sulphuric acid plant. Sulphur acid was in short supply yet there was strong demand. But officially the project had to be approved by the provincial Economic Commission before the provincial Agricultural Bank could endorse the loan extension. It appeared that the application was blocked by the provincial Economic Commission. After much bargaining, led by the county head of the Agricultural Bank, L i Guohua, and higher-level governmental units, a compromise was reached: the project was sent to the Economic Commission in Weinan prefecture for approval, then endorsed by the provincial Agricultural Bank; and the loan was finaily granted by the country Agricultural Bank. Li was praised foY breaking the constraint on local economic development imposed by bureaucratic red- tape. 7 Local officials were indeed encouraged, in the spirit of reform, not to follow official regulations, so long as the projects they favoured yielded profits for the state and the community.

Soon after the launch of an economic retrenchment policy :in September 1988, Shaanxi provincial government gave high priority to forty-nine key-point enterprises, in addition to the twelve "pioneer" enterprises experimenting reform measures, and the manufacturing of forty-three key-point products to maintain a stable industrial production. They were given advantages in energy, raw materials and capital (including foreign currency) procurement)

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The cutback on bank loans in September 1988 undoubtedly aggravated the credit shortage problem in the province. The Shaanxi branch of People's Bank conceded that excessive loans had been given to the rural enterprises. Because of cutback on loans, a quarter of some 200 enterprises in Yulin prefecture in north Shaanxi ceased production or were at half capacity because they could not afford raw materials. The commissioner of the administrative office in Yulin called for preferential treatment of the impoverished areas. 9 It was predicted that Shaanxi enterprises faced a shortfall of 14.7 billion yuan in working funds in the second half of 1989. Because of a deficiency in working funds and slump in the sales of commodities, enterprises failed to deliver to the government treasury profit receipts worth 325 million yuan by June 1989, and 565 million yuan__by August i989, and-owed each other five billion yuan in "triangle debt" (sanjiaozhai). 1° Shaanxi enterprises owed enterprises outside the prCAnce 1.97 billion yuan, but were owed 3.02 billion yuan collectively. In other words, Shaanxi enterprises were the victims of the financial credit squeeze. 11

To ease enterprises' shortage of funds, the provincial branch of the Industrial and Commercial Bank injected loans totalling ninety-three million yuan to 457 large and medium-sized enterprises, helping to liquidate the debt chains at the end of November 1989.12 Aggregatively the Bank injected 500-600 million yuan of loans to its client enterprises to relieve the debt strain. 13 The Bank at Pucheng county instituted a task force to recoup receivables worth 7.7 million yuan from enterprises in Shanghai, Nanjing, Sichuan on behalf of its client enterprises. 14 To accelerate progress in liqui- dating the "triangle debt," the Shaanxi People's Bank extended loans of seventy-two million yuan to enterprises in 1990.15 The principle of financial and credit retrenchment was not strictly followed in order not to undermine local industrial production.

The 1989 credit plan handed down from the central government to the province amounted to 5,157 million yuan. But at the end of the year, the net credit extended (loan balance minus savings balance) amounted to 9,105 million yuan, exceeding the planned limit b~ 76.7 per cent. Loans to industrial enterprises in the same year increased by 2.22 billion yuan, by 26.7 per cent.16 Some sectors (including agriculture, communications, energy, raw materials in short supply, daily necessities goods, export goods and import-substitution goods) were said to ha~e been granted priority loans.

To activate the sluggish sales markets and thus boost production of industrial enterprises, the provincial government, in 1990, instructed the provincial Industrial and Commercial Bank to extend credit, to commercial enterprises so that they might purchase surplus products. By the end of February 1990, 1,254 industrial enterprises in the province had stockpiles worth 3.7 billion yuan, some 762 per cent over the same period in 1989.1~ The Bank granted loans of 600 million yuan to the commercial department at a monthly interest rate 1.95 percentage point below the quoted rate. An

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ad hoc bonus system was also introduced in the commercial department. Sales staff would receive bonus equal to 0.1 per cent of the sales volume for exceeding every 10 per cent of the procurement target. The Bank allowed retailers to retain 0.2-0.5 per cent of the profits accruing from sales of industrial goods produced w/thin the province as well. 18

Li Jiayou, director of the Shaanxi branch of the People's Bank, admitted in 1990 that as the leaders of various localities and departments, eager to have a rapid economic growth in the precious few years, called on the banks to cooperate. In a provincial production work conference in August 1990, Governor Bai Qingcai instructed his colleagues that "...so long as (our) products have a good sale, (we) must help enterprises solve the working funds problem. Do not let the production capacity idle. ''~9 Thus, at the end of 1988, banks constituted more than 76 per cent of the fixed working funds of the provincial budgetary enterprises. The ration was only 49.2 per cent in 1983. 20

All levels of government in the province worked out a list of key-point enterprises each year. Those key-point enterprises would receive preferential treatment in receiving loans from the bank. For example, after the southern tour of Deng Xiaoping in early 1992, the Shaanxi government decided in 1993 that with regard to the development of rural areas, during 1993-95 five counties with annual gross social output over two billion yuan; ten counties with annual gross social output over one billion yuan; twenty counties with annual gross social output over 300 million yuan; and twenty villages with annual gross social output over 100 million yuan; and twenty enterprises with annual industrial output over 100 million yuan should be established (the "51222" project). To achieve this goal, the provincial Agricultural Bank allocated 100 million yuan of loans per year to 300 selected enterprises, and the provincial government granted special policies to twenty-six counties. In 1994, the fiscal depamnent contributed twelve million yuan to help enterprise production. In return, the enterprises paid a fee with an interest rate less than the normal bank rate. 2~

The above-mentioned evidence on bank lending practices suggests that banks did not administer loans according to the profit criteria, i.e. they did not use an economic yardstick in assessing loan applications. My interviewees in the Shaanxi branch of the Industrial and Commercial Bank conceded that while their bank had to support the economic development of the province, they also had to maintain social stability. Thus, more than 40 per cent of the Bank's loans were given to state enterprises running at a loss. 22 Frequently banks acted (subject to external political pressures from government authorities) to protect their client enterprises, particularly those vital to the well-being of local economy, from ceasing operation or bankruptcy through extending loans for working funds. 23

In the light of this financial relationship between banks and enterprises, it was hardly surprising to find that overexpansion of fixed asset investment and social aggregate demand could not be curbed.

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Local governments did not always take out money from their coffers and the banking system to support the expansion or production of their enterprises. They might choose to collect less income from the enterprises in the short term. Tax exemption was also commonly used by governments to allow enterprises spare more funds for investment. On the condition that it took the responsibility of the workers of the socks company it annexed, a printing holding corporation in Weiyang district, Xi'an - - said to be the largest one in northwest C h i n a - was exempted to value- added tax on landacquired and tax on land transaction, which would otherwise have amounted to four million yuan. The corporation was allowed to defer the payment of construction tax and adjustment tax on fixed-asset investment until production started. 24

Another practice was to allow enterprises to keep two sets of account books (liangben z.hang). The ledger that showed less profit was for the public finance department to evaluate for tax. Though the government officials that I interviewed in Xi'an stated clear!y that they did not allow their enterprises to do so, the manager of one rural enterprise that I interviewed indirectly admitted when the accompanying government officials were not present that his enterprise had two sets of accounts books and that this also existed in other enterprises. He explained that local government wanted to keep more wealth in their enterprises rather than transfer it to the higher-level government? ~

One county-level government official in Shaanxi conceded that when his government's annual tax obligation to the upper-level government was fulfilled, his govemment would stop collecting tax from the enterprises. He also pointed out that starting from 1986, his government increased the industrial enterprise's depreciation rate to 8-12 per cent. The charge for fixed-asset wastage was set against income. By doing this, production cost of the enterprises would "artificially" increase and their taxable profits would concomitantly decrease. This allowed them to pay less tax to the government. 26

Producer Goods and Other Services

Markets gain influence Over economic decision making when the plans that control over industrial raw materials and agricultural inputs are relaxed. As resource- abundant areas reduced exports of industrial raw materials, Shaanxi was confronted with the problem of materials shortage in the late 1980s. For example, as of 1988, Xinjiang had supplied wool to Shaanxi Woollen Mill No. 1 for twenty-four years, but in 1988 it failed to honour its original commitment to deliver 600 tons of wool to the mill. To put the processing industry's capacity to full use, the solution was thought to develop sheep-raising industry in Shaanxi, as the textile industry was deemed crucial to the welfare of the province's economy.Z7 Textile output value accounted for 20 per cent of the province's gross output value industry; 60 per cent of the province's foreign exhange earnings came from textile industry in the late 1980s. 2g


To meet the production needs of key-point projects and to reduce material supplies to non-key-point ones, the province began in 1989 to impose a mandatory procurement plan on the sales of enterprises' above-quota output of steel products, pig iron, sulphuric acid, soda ash and plate glass. On the eve of strengthening control, only 45.6 per cent of finished steel were allocated by the province. 29 Moreover, starting in 1990, a lopsided policy was applied to key-point enterprises with respect to material supplies, All enterprises producing key-point industrial goods, except those managed by central ministries and by Xi'an governments, were given priority allocations of scarce raw materials such as coal, steel products, wood, cement, caustic soda, soda ash, copper and aluminium. 3°

I have not, however, been able to conftrm in my field work whether this lopsided policy was effective or not. I interviewed the senior managers of a first-grade large textile corporation in Xi'an in January 1995. The textile corporation was one of the pioneer enterprises carrying out economic reform measures in Shaanxi, and was the sixth largest foreign exchange earnings generating enterprise in the province in 1992. The managers pointed out that the corporation had not been granted any privilege in receiving material supplies and capital. Like other textile factories in the city, the corporation had suffered from the shortage of cotton since the late 1980s. The provincial government went twice to cotton-producing provinces of Shandong, Hebei and Xinjiang to "ask for help" (qiuyuan) in 1989. 3t It was reported that the acreage devoted to cotton in Xianyang, the key-point production base of cotton in the province, began to diminish in 1983. In 1989, the acreage was only 144,300 mu (9,620 hectares), less than one-seventh of the average acreage between 1949 and 1984. 32 Cotton acreage in the province had plummeted from nearly four million mu (266,667 hectares) to 1.64 million mu (109,333 hectares) in 1990. Output per Unit area in Shaanxi also fell to 90.3 per cent of the national level in 1990. 33

Guarantors were often needed by the banking System when an enterprise applied for loan without sufficient collateral. Some governments acted as the guarantor if they were convinced that the enterprise would be profitable. Alternatively, some governments used other enterprises within its jurisdiction with good credit rating to be its guarantor. This practice was, however, not prevalent in Shaanxi. One town

• government leader stated that his government ceased guaranteeing their enterprises in 1992 because it was beyond its capability to reimburse the debts. 34 The provincial Management Bureau of Rural Enterprises pointed out that government body was not allowed to come into agreement in which it would assume liability if their enterprises defaulted. 35

Governments could come to the aid of enterprise growth when they vetted the investment projects of their enterprises. One county-level official conceded that since his local government could examine and approve investmet projects under five million yuan, projects originally surpassing this upper limit would be fragmented into ostensibly different projects to circumvent approval from Xi'an municipal government. In that way, expansion plan of the enterprise would not be delayed or stalled by the higher bureaucracy.

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Situational Motivations

The evidence suggested above points out that there is no question that local state in Shaanxi assumed a role of interventionist state in pushing forward economic growth in the study period. Key to the motivations behind Shaanxi government's active intervention in economic affairs were the decentralization of fiscal responsibilities as a result of the fiscal reforms of the 1980s, and the position of Shaanxi as a late industrializing province in China.

The fiscai pressures on locai governments nationwide came from two major sources. The first was the fail of national budgetary revenue in national income. Another source was the expansion of expenditure responsibilitie s of local governments. The primary cause of fiscal decline was slow growth of state industry's contribution to the state budget. 36 Modelling on the Soviet Union in the 1950s, China's pre-reform fiscal system was overwhelmingly reliant on state industry for revenue, and within the industrial branch, dependent on a few thousand state-owned enterprises for government revenue. The fiscal system had not been given any fundamental overhaul during the 1980s. But a survey of the rate of return (profits plus taxes divided by fixed assets) in state-owned enterprises showed that it dropped from 2,4.3 per cent in 1980, to 22.4 per cent in 1985, and to 17.5 per cent in 1989. 37 Profit remittance and tax payment to the budget by industrial enterprises contributed 24.7 per cent of the country's gross national output in 1978; the total contribution fell to 10.7 per cent only in 1989. The industrial profitability had declined in the course of economic reforms because the central government substantially reduced the barriers to entry to industrial sector, allowing widespread participation in high-profit industry by nonstate producers to stimulate their initiative to produce. The rapid development of rural enterprises witnessed the change of the state policy. Part of the industrial surptus on which the state budget relied to finance governmental activities was captured by the nonstate sector.

Further confn-mation of this hypothesis can be provided by studying the change of profitability of different sectors during the 1980s. The profitability of the sectors with initial above-average profitability declined significantly. For example, the garment, drink and textile industries achieved profit rates of 46 per cent, 48.5 per cent and 69 per cent respectively in 1980. Their profits rates dropped to 16.6 per cent, 18 per cent and 15.8 per cent nine years later. Tobacco industry, China's biggest tax reservoir, even experienced a drastic reduction of 174.7 percentage points profit rate during the same period. 38 The managers of the large-scale provincially owned textile corporation in Xi'an said that because of high profitability of textile industry and low technological requirements of establishing textile mills, small-scale textile mills mushroomed throughout the country since the start of economic reforms. Even some loss-making enterprises in other businesses turned to produce textile goods to rescue the factories. As a result, the profit rate of the textile corporation collapsed tremen- dously to only 4.6 per cent in 1994. 39


The central-provincial fiscal reforms intended and worked to make the central and provincial governments increasingly self-financing. 4° Wealthier provinces retained more revenues, 41 while needy provinces could no longer rely on fiscal transfers from the central government. Since the establishment of the state budget system in the 1950s, the budgets of local governments have been responsible for most of the outlays for culture, education, science and health (CESH), agriculture, urban construction, pric e and enterprises subsidies, and government administration. 42 The expenditures of local fiscal responsibilities accounted for only 27.9 per cent of total budgetary expenditures in 1976-80; it rose to 52.5 per cent in 1986-90.

In the 1990 draft budget, the'state was prepared to spend 65.758 billion yuan to subsidize the enterprises running in the red, of which 38.666 billion yuan (58.8 per cent) was local governments' obligations. In the same budget draft, the national budget as a whole prepared to bear the costs of 40.558 billion yuan in price subsidies, of which 36.617 billion yuan (90.3 per cent) was local responsibility. Together, both enterprise and price subsidies constituted 38.3 per cent of the expenditures (net of fiscal delivery to the central coffers) of local governments. 43

Costs of education and health, and government administration also skyrocketed in the 1980s. Local governments bore 88 per cent and 90.8 per cent of the costs of CESH and government administration in the 1990 draft budget respectively. Both of them accounted for 39.4 per cent of local fiscal expenditures. 44 In Shaanxi province, for instance, expenditures for education and health grew by 74.2 per cent during the Sixth Five-Year Plan period (1981-85)and by 99.3 per cent in the following Five-Year Plan period. Thus, the share of CESH expenditures in total provincial budgetary expenditure rose from 23.7 per cent in 1980 to 27.9 per cent in 1990. 45

As the economy became more complex, as economic reforms proceeded, there imposed increasing demands on bureaucratic machinery to engage in a variety of activities, including collecting revenue from nonstate sector, gathering data about social and economic conditions and making and implementing laws. These drove up the administrative costs of the bureaucratic apparatus. For example, after the central government announced that a new layer of taxation offices would be established in township to collect tax from rural enterprises in April 1985, Shaanxi established m6re than 2,500 taxation offices in its townships in 1986, employing well over 4,300 cadres. 46 A shift in investment priorities from "productive" to "non-productive" projects to raise overall urban living standards expanded local government activities in improving public utilities. Organizational proliferation also happened as a consequence of defensive institutional adaptation. When government bureau's existing power was undermined by the efforts to increase the autonomy of enterprises, they responded to create new intermediate agencies, companies, to recapture at least part of their previous f'mancial power by drawing off part of the retained funds of the enterprises. 47 In Shaanxi province, the administrative cost grew by 81.7 per cent in

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1981-85 and by 76.4 per cent in 1986-90. Its share in total expenditure climbed from 12o3 per cent in 1980 to 13.4 per cent in 1990. It is worth noting that, as a result of the expansion of costs of education and health, and government administration, expenses for capital construction declined from 18.5 per cent to 6.2 per cent of total expenditure. ~

Growing expenditure responsibilities caused many localities to incur budget deficits in the 1980s, for example, Shaanxi became a deficit province by 1985, and was to receive fixed subsidies of 270 million yuan from the Centre every year. 49 The problem of fiscal resource scarcity was acute in poorer counties. Within the province, seventy counties, some 70 per cent of the counties province-wide, received 290 million yuan of fiscal subsidies from the provincial government a year. 5°

Against this background, the fiscal health of less developed inland provinces was maintained or improved only if the central government increased fiscal subsidies to them out of its coffers. But it was not the case according to the revenue-sharing arrangements between the Centre and provinces in the 1980s. For example, Shaanxi received fixed-amount central fiscal subsidies worth 270 million yuan per annum in the period 1981-85, 290 million yuan in 1987 and 140.26 million yuan per year in 1988-89. The fall in 1988, which was substantial when the effects of inflation are considered, was because planned expenditure for 1988 was reduced by roughly the same amount the Centre borrowed from Shaanxi in 1987, thus cutting the fixed- amounted fiscal subsidies by 150 million yuan. 51 Although the Centre provided "earmarked subsidies" (zhuat~iang bokuan) to poorer provinces, including Shaanxi, the specific use of earmarked subsidy was determined by the cenlxal government, and its purpose was not to equalize expenditure. Another attribute of earmarked central grants was that they were weakly related to per capita income, i.e. they were not targeted at poorer provinces? 2 Even taking all central subsidies into account, starting in 1988 the sizable consolidated budget deficits of Shaanxi had to be financed through other means (see Table 1).

A World Bank!study also revealed that during 1982-86, the central government increased its share in revenue collections while the central government's share in national total expenditure declined. 53 Local governments' expenditure grew at an average annual rate of 13 per cent during the period, compared to arate of 4 per cent only for the central government. Consequently, the central government spent 222.8 per cent of what it collected in 1982, but spent only 104.9 per cent of its collections in 1986. 54 Under the influence of fiscal reforms, China's fiscal system in the 1980s tended to become increasingly centralized in revenue collections and decentralized in expenditure responsibilities. 55 Whether by design or not, it was the impoverished provinces who received minimal benefits or even suffered from the fiscal reforms.

Since fiscal reforms conferred more responsibilities than resources on local governments, some local leaders were resentful of the central government holding dinner parties and sending the bills to the localities (zhongyang qingke difang naqian). Not surprisingly, the increased fiscal pressure forced local governments to


seek ways to increase their revenues. A surplus in the fiscal system would provide government officials with more means to meet welfare demands from local populace, provide allowances to the less well-off areas and to the less profitable sectors of the economy such as agriculture, pay salaries to the officials at the village level and purchase more consumption items such as cars for governments use. The growth of locally owned enterprises was the most direct way to expand local revenue base as profits and taxes paid by industrial enterprises were to go to distinct governments according to enterprise ownership, s6 Making direct investment and directing investment resources towards desired enterprises were conducive to industrial and fiscal growth. These fiscal links between government and business were most visible in the case of rural enterprises.

Table 1: Shaanxi's consolidated budget and central subsidies, 1978-90 (million yuan) Year Budgetary Budgetary Budget Central subsidies Central

revenue expenditure deficit Fixed EM Total subsidies/ budget deficit

1978- 9,392.7 10,864.4 1,471.7 n.a. n.a. 1,607.8 1.09 1983 1984 1,531.2 2,274.7 743.5 n.a. n.a. n.a n.a. 1985 2,029.7 2,750.1 720.4 270 560 830 1.15 1986 2,409.1 3,559.3 1,150.2 270 750 1,020 0.89 1987 2,818.1 3,780.5 962.5 290 845 1,135 1.18 1988 3,387.9 4,458.4 1,070.5 140.3 814.7 955 0.89 1989 3,896.0 5,078.7 1,182.7 140.3 777.6 917.9 0.78 1990 4,440.0 5,711.6 1,271.6 120 760 880 0.69 Note: EM = earmarked Sources: Shaanxi Abstract, p. 555; Shaanxi Yearbook, 1987, pp. 283-84; 1988, p. 231; 1989, p. 275; 1990, p. 252; Statistical Yearbook of Shaanxi, 1991, p. 251; and Albert Park, Scott Rozelle and Ren Changqing, "Distributional consequences of reforming local public finance in China: fiscal crisis in Shaanxi province's ix~or countries," 1995, mimoo. Table 2.

Township-village enterprise development was a principal determinant of income in rural areas. In 1987, township-village enterprises in Shaanxi contributed a total of 678 million yuan to the rural economy as wages and salaries to rural households. That means, each rural person was paid 36.8 yuan, or 11.2 per cent of the provinces's 1987 rural per capita net income of 329 yuan. s7 About 32 per cent of the gross profit (net profit plus all taxes) of 458.5 million yuan went to the state as taxes. Of the net profit, about 35 per cent was remitted to township and village governments and 62 per cent was retained by enterprises. About 60 per cent of the net profit

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remitted to the township and village governments was used in unidentified areas. An enormous portion of the unidentified expenditures was believed to go to cover salaries of rural cadres and administrative and overhead expenses.SSA limited share of the net profit was used to finance the support of agriculture (3.35 per cent), collective welfare (8.63 per cent) and education (3.15 per cent). The expenditure on collective welfare was used to pay, for example, medical expenses of township and village members, and pensions to retired cadres and enterprise workers. Nearly half of the net profit retained by the rural township-village enterprises was reinvested in the enterprises as additional working or fixed capital (see Table 2). Developing rural enterprises was viewed not only as a way of easing fiscal pressure on local governments, but also as way out of poverty.

Table 2: Financial flows of rural township-village enterprises in Shaanxi, 1987

million yuan

Salaries and wages paid to rural households 678.04 Direct and indirect taxes paid to the state 147.45 Net Profit 311.06 I. Remitted to TVGs of which, used for 109.73 supporting agriculture 10A3 small town development 2A6 education 4.27 collective welfare 5.17 TVE development 20.89 2. Retained by enterprise of which, used for 194.31 TVE development 135.10 collective welfare 21.68 education 5.55 3. Unidentified 7.02

% of net profit

100.00 35.28

3.35 0.79 1.37 1166 6.72

62.47 43.43

6.97 1.78 2.26

Notes: TVEs = township and village enterprises; TVG~ = township and village governments. Source: Zhongguo nongye nianjian (China's Agricultural Yearbook), 1988, pp. 317-19.

To Catch Up With the East

The uneven regional development Strategy in the Deng era has contributed to widening the income gap between the more affluent coastal provinces and the impoverished inland provinces? 9 Leaders in western China are, at best, deeply sceptical about the trickle-down benefits of the lopsided regional policy for the west. Inland provinces, including Shaanxi, generally believe that uneven regional develop-


merit strategy generates, on the one hand, artificial barriers holding their development back and special privileges giving coastal provinces an unfair advantage, on the other. At the same time economic reforms have encouraged rising economic expectations and demands among the ordinary people, s°

Local officials and scholars in Shaanxi were concerned with the outflow of capital and work force to coastal provinces. A scholar at the provincial Academy of Social Sciences told me that in 1992, a total of five billion yuan flowed out of Shaanxi to coastal areas to purchase stocks, invest in property markets or establish "window" enterprises. Vice-governor Xu Shanlin revealed in a banking conference in June 1993 that since the beginning of 1993, .Iiangsu, Fujian, Hainan and Beijing had issued high- interest bonds in' the province, draining more than 200 million yuan away from the province. This exacerbated the capital shortage problem, s* In 1993, Guangdong, Shandong and Fujian enterprises launched recruitment campaigns in Xi'an. A total of 2,000 people, the majority of whom were middle-aged and of middle rank, were recruited by Shandong enterprises. 62 Curtailment of resource leakage required robust economic growth and increased investment opportunities within the province.

Provincial and municipal government leaders tended to compare their present economic situation with that of the national average rather than with their past. 63 In addressing a seminar on Shaanxi's economic development strategy in October 1994, Governor Bai Qingcai said that "although a comparison with our past shows that our growth rate for 1978-93 was not slow at all, we still lagged behind (the coastal provinces) as they grew much faster than we do....Now the broad masses of the people and cadres strongly call on us to fLrmly grasp this historical opportunity (i.e. the fairly lax macroeconomic environment constraining provincial economic growth after Deng's 1992 southern tour) to catch up with the national average level of development".u

Not surprisingly, with rich material resources in hand and enlarged operational autonomy, leaders in hinterland provinces, including Shaanxi, had strong incentives to construct and expand enterprises and projects that required minimum funding and yet brought quick returns. Even large, loss-making indusU-ial enterprises were given administrative protection. This was because, with their large industrial output, they still constituted a principal source of provincial fiscal revenue and provided employ- merit opportunities for local people.

The Relevance of Governn~nt Interventionism for Economic Development

The economic miracle of-East Asian economies has revived an age-old debate in development studies about the appropriateness of market-oriented policies or state- led industrialization in solving the problems of economic backwardness. The right- wing neoclassical theory of economic development attributes the miraculous economic growth of the capitalist East Asian newly industrialising economies (NIEs)

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since the end of World War 11 to a limited government intervention in the economy and the use Of market forces. A model of free market economy is posited for the rest of the developing countries? 5 But the validity of this argument was proved to be problematic when various studies since the late 1970s have pointed to Japan and the East Asian NIES, particularly Singapore, South Korea and Taiwan, as examples of successful developmental state-sponsored economic development. ~

Conscious 0f'the possibility of a trade-off between patterns of resource allocation that are Ricardian efficient in the short run and those that are growth and Schumpeterian efficient in the long run, the statists argue, Japan's interventionist targeting strategy masterminded by the Ministry of International Trade and Industry (MITI) has assumed the role of effecting technological progress and promoting growth-dynamic industries by influencing current patterns of resource allocation. 67 In the East Asian NIES, the export-oriented, labour-intensive industrialization strategy encountered politico-economic problems by the early 1970s. As income elasticity of demand for low-cost light induslrial products was low, the prospects of such manufactxu~s as the engine of long-term economic growth was limited. Addition- ally, .the advanced industrialized countries were entering into a period of economic recession, and other late developing countries in Asia were following the successful development experience of East Asia by engaging in the production of low-cost manufactures. Domestically, the East Asian NIEs began to experience demands for real wage rise as the supply of surplus labour from the rural areas dried up. This combination of external and internal pressures prompted the East Asian NqEs to undergo industrial restructuring. The states in Singapore, South Korea and Taiwan played an expanded role in guiding the process of industrial upgrading and in supporting production in new technology-imensive sectors. 68

Through the powerful tripartite organization of the National Wages Council, which was formed in 1972, Singapore government allowed wages to rise at an accelerated rate in 1973 to discourage industrial investment in labour-intensive manufactures, and forced firms, particularly foreign ones, to create more skilled positions and adopt more capital- and technology,intensive production. Although the policy was interrupted by a world recession of 1974, it was reactivated in 1979. Sectors like computer software, specialized chemicals pharmaceuticals, and elec- tronic instruments were singled out for privileged treatment ....

At about the same time, South Korea and Taiwan also pursued a policy of upgrading the induslrial structure. Partly because of having larger domestic markets, they chose to develop intermediate and capit~ goods industries. South Korea attempted a big push in heavy and chemical industries (HCI) in the Third Five-year Plan (1971-76) to achieve industrial self-sufficiency? 9 The plan was predicated on direct state involvement and assistance from the Japanese, and was steered by President Park Chung Hee and a small coterie of his advisers, bypassing the liberal economic bureaucrats on the Economic Planning Board. As consequences of thebig


push, the share of heavy industries in manlffacturing output increased from 39.7 per cent in 1972 to 54.9 per cent in 1979. The share of exports of heavy manufactures in total exports rose nearly threefold from 13.7 per cent in 1971 to 37.7 per cent by 1979. 70 Partly as a result of the negative effects it brought on the Korean economy, the plan was criticized in 1979, and ended with the assassination of park in the year. 71 Subsequently, the Chun Doo Hwan regime (1980-88) formulated a new development strategy to liberalize foreign trade and investment. 72 But both Park's and Chun's policies shared in being committed to upgrading the industrial structure by moving into high-technology production. The liberalization of foreign investment initiated by President Chun served to encourage foreign investors to bring in their most up- to-date production technology.

Taiwan noted the looming difficulties of being outstripped by lower-wage developing countries in labour-intensive light industries and the importance of industrial deepening in the late 1960s. Its move into skill-and capital-intensive production was, however, more cautious than that of South Korea. The state was directly involved in the production of upstream products like petrochemicals, steel, shipbuilding and heavy machinery, and made substantial investments in infrastruc- ture (highways, railway, telecommunications and ports) and energy generation in an attempt to support the establishment of more technologically sophisticated down- stream enterprises. By establishing a science-based industrial park in Hsinchu, an hour's drive from Taipei, in 1980, the state tried to encourage both foreign (mostly expatriate Taiwanese and overseas Chinese) and local firms to engage in research and development activities in Talwan and to forge linkages between research institutes, local firms and foreign companies in high-technology industries. 73 The state also made up for the" private sector's caution or lack of capital in taking up the development of semiconductor industry since the 1960s. Through the arm of Electronics Research and Service Organization (ERSO), the Taiwanese government launched the first manufacturer of integrated circuits on the island, the United Microelectronic Corporation (UMC), and financed the establishment of the Talwan Semiconductor Manufacturing Company (TSMC). 74

Despite a significant debate as to the contributions of the state-led transformation by the East Asian NIEs of simple labour-intensive processing industry into one that has higher value-added, it is certain that economic development in East Asia has not been sustained by low-cost light industrialization. State-led industrial transformation from the production of labour-intensive light industrial goods such as textiles to the production of capital-intensive, higher value'added products such as steel, electronics, and automobiles is necessary for the economies to attain continued economic growth to counter the loss of competitiveness in labour Costs. However, the state is necessary but not sufficient for the process of industrial transformation to succeed. The preceding brief account does not intend to show that state activity must be efficient, but it certainly demonstrates that it is not necessarily inefficient and that the state was active in the promotion of industrialization in East Asia, particularly in the process of moving production up the chain of value-added. 75 In other words, it is

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not state intervention or free market which accounts sufficiently for the superior economic performance of East Asian NIEs; rather it is the character and quality of state intervention. In the following pages, I shall make a comparison between the industrialization paths of East Asia and Shaanxi. The purpose of this comparison is not to put forward East Asia as model for Shaanxi or China; instead it is simply to let us rethink the viability of Shaanxi's industrial policy in the 1980s. 76

The preceding section demonstrates that levels of governments in Shaanxi, like those in East Asia in post-World War II period, used a variety of interventionist mechanisms to promote industrial growth in the study period. Despite this similarity, several differences stand out in comparison. Unlike Japanese, South Korean and Taiwanese governments that have encouraged investment in high value-added, strategic (the term is not used in the military sense) industrial sectors, such as steel making, producing a different industrial structure that would result under the logic of prevailing comparative advantage, Shaanxi government only induced investment in the quick-return, labour-intensive industries such as textile and clothing, tobacco and liquor. Investment in industries that required long-term commitment and significant capital was made much more reluctantly. Although the interventionist policy was rb.ildly effective, it generated a higher-than-the-past rate of economic growth in the reform era, ~7 the provincial government evaded from investing in the "bottleneck" sectors that would be vital to the provincial economic well-being in the long tenn. When the large-scale textile corporation I interviewed understood that it could not hold with the familiar product lines, it moved into quick-yield fields such as tourism, transportation and real estate.

Looked at historically, the Japanese prewar government induced the zaibatsu (privately owned industrial empires) to enter into industrial areas where it felt development was needed. 78 By contrast, Shaanxi's local government paid less attention to promote the provincial industrial structure that would enhance the province's domestic and international competitiveness. They did not provide material incentives to favour the establishment of large advanced enterprises that were capable of rapidly adopting new technologies, and of producing goods with high income elasticity of demand and with good export prospects. Though a close relationship between banks and enterprises, coordinated by the government, was observed in the case study, it did not enable fn'ms to explore risky investment opportunities in the high-technology sector. Instead, it served to rescue enterprises from closing or helping to enter into currently profitable sectors. It seems that the province's industrial policy over 1979-90 was dictated bythe concern to generate immediate revenue or income for the government and the people rather than by the need to enhance product competitiveness in domestic and international markets. The provincial government did not ensure that a high proportion ~ of investment resources such as finance is invested in'productive activity as opposed to real estate29 Nor was the Shaanxi government able or, more precisely speaking, willing to restrict entry of new producers to reap economies of scale.

Also, a government assuming the role of industrial leadership was almost nonexistent in Shaanxi. Evidence supporting this is no less clearly found than in the


shirking size of textile industry in total industrial output of the province and sluggish development of industrial deepening in textile industry, a priority sector in the province. Whereas the real output value of all-industry in the province grew at an average annual rate of 13.2 per cent between 1981 and 1990, the corresponding rate for textiles was only 3.0 per cent? ° The composition of textile products of the province remained stuck at the relatively low-end, with labour-intensive and low-technology goods making up l~y the largest share. In 1989, the share of high value-added products in the province's total textile exports was less than one quarter? 1 In 1992, the industry experienced an unprecedented crisis of enterprise losses. The situation deteriorated in 1993. Profits and taxes generated by the industry fell from 562 million yuan in 1989 to a meagre 50.36 million yuan in 1993. The industry generated profit worth 366 million yuan in 1989, yet it incurred a loss of 239 million yuan in 199332 Production technology of Shaanxi's key textile mills had not been improved in the 1980s, as evidenced by the stagnation in the labour productivity of the induslly (see Table 3 and 4).

Table 3: Labour Productivity in Shaanxi's State-owned Textile Enterprises (vuan per employee: measured in 1980 constant orices) Year Labour Productivity %changeover

previous year 1981 ~" 19,079 - - 1982 17,568 -7.92 1983 17,636 0.39 1984 17,970 1.89 1985 18,973 5.58 1986 18,816 -0.83 1987 18,904 0.47 1988 19,095 1.01 1989 ! 7,243 -9.70

Sector Machinery Textiles

, Electronics and communi- cation Transport Tobacco "

Source: Shaanxishcng guomin jingji tongji ziliao (Statistical Materials on Shaanxi's National Economy), 1984, p. 106; Statistical Yearbook of Shaanxi, 1987, p. 164; 1988, p. 151; 1990, p. 274.

Table 4: Labour Productivity of Independent-accounting Industrial Enterprises in Major Sectors as a Percentage of Provincial Average

1985 1988 1989 1990 1991 1992 87.04 8 7 . 6 6 82.74 78.36 67.71 72.09

166.72 133.35 118.12 110.38 1 t6.56 106.85 183.90 307.66 333.44 345.58 288.05 273.34

75.40 85.29 94.18 85.68 75.93 87.51 384.56 485.77 526.27 517.59 584.96 581.20

Note: Provincial average = 100; Source: Statistical Yearbook of Shaanxi, 1988, p. 150, 1990, pp. 274-75; 1991, pp. 430-3 I; 1993, pp.279- 80.

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Whereas in the case of South Korea, companies receiving state-guaranteed credits are subjected to rigorous performance standards, s3 the same character of state- business relationship did not appear in the study of Shaanxi. State involvement in the economy in the process of industrial deepening whereby economically inefficient firms are to be squeezed out did not take place in the case study. Although the goals the provincial leaders put emphasis on are similar to those embraced by the economic bureaucrats of the capitalist East Asian countries/areas--high-~eed growth, full employment, rich country and escape from backwardness--the provincial leaders took a rather "short-sighted" perspective.

As argued by Gordon White, the desired change in China is not so much a move from "more" to "less" state intervention in the economy, but from one form of developmental state to another, s4 The Shaanxi case has some implications for other less developed provinces in China and for China as a whole. It reaffirms that a case can be made that government intervention in the economy in the process of economic development, particularly in its early stages. Without the state actions to mobilize funds and provide credit to designated enterprises, industrial growth would have been slower than what had been attained because of the outflow of investment and human resources to the better-off provinces along the coast. In an inland province like Shaanxi where industry has been dominated by the production of more sophisticated heavy industrial products, the possibility of generating industrial growth through a non-imerventionist approach is less promising. Moreover, it is highly problematic that a full-fledged marketization with a small public sector is good for such less developed province as Shaanxi in a national environment where provinces and enterprises do not compete on a level playing field. However, it is not the size or the pervasiveness of state involvement in the economy that determine the results of industrization efforts. Rather, the rationale of state involvement in the economy should be predicated on "escape from poverty" through promoting strong and competitive industries. The state should provide the support necessary to enable enterprises to pursue this goal. The observed situation in Shaanxi was that its politico- economic environment became a constraint against the government officials there having the foresight to attain such a concept of industrialization. Therefore, it is doubtful whether the observed form of developmental state in Shaanxi, which placed heavy emphasis on maximizing short-term fiscal revenue, was beneficial to its long- term development. 8s

To be fair however, at the heart of development is a time-consuming process of government's learning about how to be'an effective government, s6 No country starts with the characteristics of an effective government already in place. It may take time for central and Shaanxi officials to learn how and where state involvement in the economy should be, and how to create a favourable politico-economic setting for interventionist policies. 87


Conclusion

The preceding account suggests that the shared commitment of government and business in Shaanxi to an escape from poverty led to a unanimity of interest and close working relationships between them. There was room for benign and somewhat altruistic government policies in Shaanxi. In an inland province like Shaanxi where the economy is dominated by more sophisticated heavy industrial products, a state- led industrialization strategy seems to be more suitable. Whereas all levels of government in the province stressed the role of development state in their quest for economic development and the leadership was dedicated to economic growth, government intervention in the economy took a form that is quite different from that which evolved in the developmental states of Japan, South Korea and Taiwan in East Asia. Government interventions were not directed at promoting higher value-added, more sophisticated industrial sectors. Labour-intensive manufacturing industries, such as the textile and clothing industry, and tobacco production, remained the backbone of the provincial economy, whereas Japan, South Korea and Taiwan used higher value-added production as the springboard for further industrialization.

The decisive influence inducing the observed form of state intervention in the economy in Shaanxi was the politico-economic context in wtaich the state intervention took place. Working in a national politico-economic context that, first, glorified rapid economic growth; second, delegated fiscal expenditure responsibilities to local governments; third, included a drop in the profitability of budgetary enterprises - - thus exacerbating the unemployment problem - - and, finally, widened the regional wealth gap, local government officials were inclined to place priority on projects that could yield a rapid rise in industrial output and tax revenue at the expense of developing higher value-added manufacturing, and were reluctant to cooperate with higher level governments to make more effective coordination of investment. Short of capital, government officials in Shaanxi had therefore little room for manoeuvre to provide material incentives to favour the establishment of large advanced enterprises that would be capable of rapidly adopting new technologies to produce goods with high income elasticity of demand and with good export prospects, The, provincial government had also not ensured that a high proportion of investment resources such as finance was invested in productive activities as opposed to real estate. It had not imposed discipline on investment practices to discourage short-term speculative, nonproductive investments, and thus ensuring the flow of investment into manufacturing. It is thus questionable whether intervention would have a positive net impact on the long-term economic development of the province.

Without an overhaul of the politico-economic context in which the state at local level interacts directly with its enterprises, it is doubtful whether a form of developmental state that generates positive net impact on the long-term development of China's economy will evolve. To provide indicators to the possible directions of

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study in the pol i t ical e conomy of development in China in the future, this s tudy

concludes in suggest ing that it is worth noting the possible impact of the new round

of central-provincial f iscal reform in 1994 and the n e w regional development strategy

enshrined in China ' s Ninth Five-Year Plan (1996-2000) that emphasizes coordinated

or harmonious regional deve lopment (xietiao q u ~ fazhan) on the patterns of state-

business economic relations. 8~

N o t e s

This is a revised version of a paper delivered at the fourth Biennial Conference of the Chinese Studies Association of Australia at Macquarie University, Syduey, Australia, July 1995. I am-also, grateful to the Research Committee of the University of Macau for sponsoring my field work in Xi'an, Sham~xi.

1. The issue of local entrepreneurship during China's economic reforms has been studies by, among others, William A. Byrd and Alsan Gelb, "Why industrialize? The incentives for rural community governments," in William A. Byrd and Lin Oingsong (eds.), O2ina's Rural Industry: Strucawe, Developtr~n& and Reform (Oxford: Oxford University Press, 1990), pp. 358-87; Marc Blecher, "Development state, entrepreneurial state: the political economy of socialist reform in Xinji municipality and Guanghan county," in Gordon White (ed.),/he Chinese State in the Era of Economic Reform: ~he Road to CYisis (Honndmills, Basingstoke: Macmillan Press, 1991), pp. 265-91; Michael Hubbard, "Bureaucrats and markets in China: the rise and fall of entrepreneurial local government," Governance: An International Journal of Policy and ,aAministration, Vol. 8, No. 3 (1995), pp. 335-53; Victor Nee, "A theory of market transition: from redistribution to markets in state socialism," American Sociological Review, Vol. 54, No. 5 (1989), pp. 663-81; Victor Nee, "organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China," Administrative Science Quarterly, vol. 71, No. 1 (1992), pp. 1-27; Jean C. Oi, "The Chinese village, inc.," in Bruce L. Reynolds (ed.), Chinese Economic Policy: Economic Reform at l~dstream (New York, NY: Paragon House Press for Professors World Peace Academy, 1985), pp. 67-87; Jean C. Oi, "Fiscal reform and the economic foundations of local state corporatism in China," World Po//tics, Vol. 45, No.1 (1992), pp. 99-126; Andrew Walder, "Local bargaining relationships and urban industrial finance," in Kenneth G. Lieberthal and David M. Larnpton (eds,), Bureaucracy, Politics, and Decision Making in Post-Mao China (Berkely, CA: University of California Press, 1992), pp. 308-33; Gordon White, "Urban government and market reforms in China," Public Administration and Development, Vol. 11, No. 2 (1991), pp. 149-7~, and Christine Wong, "Between plan and market: the role of the local sector in post- Mao China," Journal o£ Conrparative Economics, Vol. 11, No. 3 (1987), pp. 385-98.

My approach is different from theirs in two ways. First, the majority of the data in the cited studies are drawn from coastal areas whereas my study is concerned with less developed area. Second, with the possible exception of Blecher, the above-mentioned Westem literatu~ on the state-enterprise relations fails to address the issue of whether governments play the role of a developmental state in their intervention in the working of the economy, given the prevalence of state intervention in the economy in post-Mao China. Both Wong and Nee assert that provincial and local govemment intervention in the economy, perticulafly in industrial production, undermines the allocatNe efficiency goals of the reforms. Although Nee mentions in the last paragraph of his 1992 article that the East Asian development model rests on continuous and selective state interventions in the economy, he does not elaborate on the relevance of the East Asian experience to China, Hubbard anticipates a fall of local stale entrepreneurship in the future. He remarks that if development spreads inland from rapid growth in the coastal region, incomes and entrepmaeuriai prospects in inland areas may improve. But quite to the contrary, it is the perceived failure of the tricide-down that invites the rise of bureaucratic entrepreneurship in inland areas.

,b-~ate Enterprise Relations 307

2. Calla Wiemer, "Price reform and stmcmral change: distributional impediments to allocation gains," Modern China, Vol. 18, No. 2 (1992), pp. 171-96.

3. Shaan~ ribao (Shaanxi Daily), 1 September 1985. 4. Shaanxisheng tongjiju (ed.), Shaanx/sishi nian, 1949-1989 (Shaanxi's Forty Years, 1949-t989)

(Beijing: Zhougguo Tongji chubanshe, 1989), p. 492. 5. ~aan~ ribao, 25 June 1986; 22 January 1987. 6. Ibid., 24 July 1986. 7. Ibid., 3 April 1987. 8. Ibid., 16 and 28 February 1989. Senior management of a large-scale textile corporation, which was

included in the priority list, however, categorically rejected the claim that the textile corporation received any preference from the government in getting capital and other resources. Another management officer told me a story that might prove that the corporation had not been granted any special preference by the government. The textile corporation developed a plan to annex a dyeing factory in the city in the early 1990s. Since dyeing yielded more profits than weaving, it was anticipated that the annexation would improve the profitability of the entire corporation. However, due to a number of obstacles, the plan was stalled. Among th obstacles was the reluctance of the banking system to extend loans to the corporation to annex the loss-making dyeing plant since the corporation had borrowed several hundred million yuan to expand business into other areas (author's interview in Xi'an in January 1995). This points to the possibility that the provincial government might not have been able to achieve what it consciously wanted to do.

9. Shaan~ ribao, 27 April 1989. 10. An example of the "triangle debt" is that a steel plant owes a coal mine that supplies coal; a machinery

plant owes the steel plant that supplies steel; and the coal mine owes the machinery plant which supplies mining equipment.

11. Shaanx/ribao, 25 July, 9 September, and 21 October 1989. 12. Ibid., 7 December 1989. 13. Author's interview in Xi'an in January 1995. 14. ~aanx/ribao, 9 December 1990. One senior official in the Shaanxi Industrial and Commercial Bank

conceded that their banks in the localities had sent staff to the debtors' banks to see whether the debtors had enough funds to repay the debts orthe debtor's banks could release funds to the debtors so that they could repay. But later the Bank found that it was beyond their capability to do so for all of their client enterprises (author's interview in Xi'an in January 1995).

15. Shaawd ribao, 15 December 1990. 16. Ibid., 29 April and 2 May 1990. 17. Another report said that by the end of 1989 these enterprises had bills payable amotmting to 2.22 billion

yuan, and were in default on delivering profits and taxes to the state totalling 550- million yuon (Shaanx/ribao, 12 April i990).

18. Ibid., 6 April 1990; China Daily, 28 April 1990. 19. Shaawd ribao, 1 September 1990. 20. Ibid., 2 May 1990. 21. Authors interview in Xi'an in January 1995; Shaanx/zhensbao (Shaanxi Government Report), No. 11

(1994), p. 18. 22. Author's interview in Xi'an in January 1995. 23. Throughout China, enterprises are liable to losses only ff it can be shown that the losses are caused by

"bad management." Its other"objective" factors, regarded as being outside enterprise control, are the caused of the losses, then enterprises are able to shift the bleme for the losses to the govenunent and lending continued. Such ~objective" factors include price dis t0 _rtions caused by Ofina's irrational pricing policies, tmavailability of raw materials, poor quality off,purse!use of old tedmulosY (resclting in a higher consemption of raw materials and energy), and unexpected fall i n demand.Likewise, itis

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rather easy for banks to abdicate responsibility for bad loans by ascribing them to "objective" factors beyond their control. See Paul Bowles and Gordon White, "Contradictions in Chiua's financial reforms: the relationship between banks and entezprises," Cambridge Journal o£Econom/cs, Vol, 13, No. 4 (1989), pp. 481-95.

24. Author's interview in Xi'an in January 1995. 25. Author's interview in Xi'an in January 1995. 26. Author's interview in Xi'a n in January 1995. 27. Shaanx/ribao, 13 March 1989. 28. Ibid., 9 August 1989. 29. Ibid., 9 March and 3 April 1990. 30. Ibid., 2 May 1990. 31. Shaawd nianjian (Shaan~d Yearbook), 1990, p. 148. 32. Shaanx/rihao, 26 August 1989. 33. Chang Feng and Dang Shuangren, "Dui Shaanxi mianhua fazhan xingshi zai renshi (To understand

the developmental trend of cotton production in Shaanxi again)," J/hun yu shichang yanjiu (Planning and Market Research), No. 3 (1991), pp. 10-11. Local protectionism was another major reason for the entto n shortage in the city. Numerous small-scale textile factories were set up in the cities of Xianyang and Weinan, another major production base of cotton in the province, to process the raw material. I was told by another member of management in the Xi'an textile corporation that the price of cotton raised from 3,000 yuan per ton in the late 1980s to 18,000 yuan per ton in late 1984. Although the central government decreed that the supply of cotton be monopolized by the state supply and marketing cooperative in 1994, in practice the textile corporation did not receive enough cotton and it was forced to make deal with peasants in defiance with the state order (authors' interview in Xi'an in January 1995).

China's Nongmin ribao (Peasants' Daily) spoke of the "most serious cotton crisis since 1978" on 21 February 1994, and reported that the cotton crisis threatened the cotton textile industry nationwide. Production remained unstable in the early 1990s. Production picked up in 1990 and 1991, but in 1992 it began to deteriorate. In a State Council conference on cotton production held in August 1993, Vice- premierLi Lanqing announced the state decision to raise the procurement price for standard cotton by lOper cent. Cotton was not to be placed on the market until the state procurement quotas had been fulfilled. Only the supply and marketing cooperatives were entitled to procure and sell the cotton under state procurement quotas (see Nongain ribao, 24 August 1993; China News Analysis, no. 1506, 15 March 1994).

It was reported in May !995 that most of China's large and medium-size state textile mills were either closed or working at half-speed because of the worsening cotton shortage. Shortage were serious in Shandong, Heuan and the three northeast provinces. According to official figures, Chiua's cotton harvest in 1994 was 4.25 million tons, an increase of 13.6 per cent over 1993. But, as of the end of March 1995, the state had purchased only 2.99 million tons of the total, with farmers and localities retaining the rest for use in local factories or sell at higher prices. Consequently, high grade cotton fetched at least 17;000 yuan per ton, against an official ceiling of 14,000 yuan. Instances of low grade cotton being sold at high grade price were widespread (Hongkong Standard, Financial Review, 8 May 1995).

34. This argument was echoed by a county-levd government official in Shaanxi (author's interview in Xi'an in January 1995).

35. Author's interview in Xi'an in January 1995. 36. BanyNaughton,~ "Implications of the state monopoly over industry and its relaxation," Modern

Ch/ua, Vol. 18, No. 1 (1992), pp. 14-41; Christine P. W. Wong, "Centrsl-loeal relations in an area of fiscal decline: the paradox of fiscal decentralization in post-Mao China," Odna Quarterly, No. 128


(1991), pp. 691-715. 37° Wong, "Central-local relations in an era of fiscal decline," fn. 9. 38. Naughton, "Implications of the state monopoly over industry." 39. Author's interview in Xi'an in January 1995. 40. AWodd Bank study noted that the central government through the revenue-sharing arrangement

eliminated its dependence on remittances from provincial government for its own expenditures. See World Bank, China: Budgetary Policy and Intergovernmental Fiscal Relations. Report No. 11094- CHA (Washington, D.C.: World Bank, 1993), p. 82.

41. This can be seen from a review of the changes in the revenue retention rates for Beijing, Tianjin and Shanghai in the course of fiscal reforms.

42. The division of state budgetary expondimre responsibilities among levels of government has remained fundamentally tmchanged through the various cycles of fiscal centralization and decentralization. The central government has dominated the expenditures for economic construction, geologi- cal surveys, national defence, and repayments of foreign loans and credits. See Nicholas R. Lardy, Economic Uro~h and Distribution in China (Cambridge: Cam bridge University Press, 2978), pp. 71-73; Christine P. W. Wong, "Public finance and economic decentralization," in Walter Galenson (ed.), China's Economic Reform (South San Francisco, CA: The 1990 Institute, 1993), pp. 177-96.

43. Renmin ribao, 8 April 1990. 44. Ibid. 45. Data are taken from Shaanxi tongji nianjian (Statistical Yearbook of Shaamd), 1992, pp. 153, 155-

56. The rapid growth of budgetary expenditures on education was the consequence of the decentralization of educational administration over the 1980s and the implementation of the Law of Compel- sory Education in 1986. Central government remained responsible qfor the key universities but decentralized the responsibility for secondary education to local governments. A goal of the compulsory education, which would strain the fiscal conditions of poorer areas, was to extend the duration of compulsory education from five to nine years. Moreover, it was reported that in 1986 Shaanxi set up four new tertiary institutions and employed almost 4,500 more lecturers (Shaanxi Yearbook, 1987, p. 285).

46. Wong, "Central-local relations in an era of fiscal decline," and Shaanai Yearbook, 1987, p. 286. 47. White, "Urban government and market reforms in China." Companies were a kind of "half-way

house" between a state organ proper and all enterprise. They were "quasi-state" organizations in terms of ownership and responsibility. The right to appoint managers and other skilled personnel rested with the government. Companies levied management fees or a percentage of profits from their constituent enterprises.

48. Statistical Yearbook ofShaan~d, 1992, pp. 153, 155-56. 49. Chert Rulong (ed.), Dangdai 22~ongguo caizheng ( Conteng~orary Chinese Fiscal System) (Beijing:

Zhongguo shehui kexue chuhanshe, 1988), pp. 1: 375-76. Another source suggested that sinca 1978, Shaanxi had experienced budget deficit each year. Between 1978 and 1983 the province received a. total of 1,607.78 million yuan of fiscal subsidies from the centre, The principal reasons for the plight were the transfer of ownership of profitable electric power enterprises to the central government, costing the provincial budget 140 million ynan per year, and the rapid increase of price subsidies in the early post-Man years. Between 1949 and 1977 Shaanxi handed over 2,815.38 million yuan to the centre. See ~aan qing yao Ian (~aanxi Abstract) (Xi'an: Shaanxi renmin chubanshe, 1986), pp. 555, 564-65.

50. Twenty-three counties- were in central Shaanxi (receiving seventy million yusa in subsidies), another twenty-three in south Shaanxi, and twenty-four in north Shaanxi (receiving 110 million in subsidies respectively). Shaanxinsheng remenin zhengfu jingji yanyiu shongxin (ed.), Shaanaisheng jingji shehui fazhan zhanlue y~njiu (A Study of the Socioeconomic Development Strategy of Shaanxi) (Xi'an: Shaanxi renmin chubanshe, 1987), p. 425.

51. ~aanxi Yearbook, 1987, pp. 283-84; 1988, p. 231; 1989, p. 270, 1990, p. 252. Data on fLxed-amotmt

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subsidies in 1986 were not available from the yearbook. 52. The following examples illustrate this: Shanghai and Guangdong received substantial amounts of

earmarked grants, 171 yuan and 57.5 yuan, respectively, per capita in 1990, while less developed provinces of Guizhou and Guangxi received 23.9 yuan and 28.3 yuan per capita respectively. One of the major reasons for this was that part of earmarked grants was used to co-finance with local governments central priority projects, therefore poorer provinces might forgo central eammarked grants. World Bank, China: Budget Policy, p. 86; Chen Yongjun, Zhongguo diqu fian shinchaag fengsuo wenti yanjiu (A Study of the problem of Regional Market Blockade in China) (Fushou: Fujian renmin chubanshe, 1994), p. 63.

53. World Bank, China: Revenue Mobilization and Tax Policy (Washington, D.C.: World Bank, 1990), pp. 92-93. Central government increased its share of total tax collection through a variety of meuns. They included the transfer to the centre of state enterprises in certain sectors (including automobiles, petrochemicals, nonferrous metals, and shipping) whose profits accrued directly to the central treasury; the recentralization of certain indirect tax revenue such as coal, petroleum, nonferrous metals,

and electric power, and the rapid growth of import duties and taxed on foreign ventures. See also Wong, "Central-local relations in an era of fiscal decline." Shaanxi's fiscal health was undermined by the transfer of the ownership of several profitable large electric power companies to the centre in the early 1980s and the recentralization of the tax revenue (author's interview in Xi 'an in August 1993; Shaanxisheng tengjiju, Shaanx/'s Forty years, p. 110).

54. In the Fifth Five-Year Plan period (1976-80), the central government spent 334.4 per cent of what it collected, being highly reliant on the revenue transfers from the provinces. During 1981-85 (the Sixth Five-Year plan period), it spent 162.6 per cent of its revenue collections. It spent only 3.6 per cent more than it collected in the Seventh Five-Year Plan period (1986-90). One is tempted to conclude that the central and local governments were spending about what they collected.

55. Gordo White n~es that the administrative and managerial burdens of subnationai governments have burgeoned since the onset of economic reforms. Provincial governments in general and urban guvem-

• ments in pallicular have been given prime responsibility for the new priority sector such as commerce and services, housing and environmental issues (White, "Urban government and market reforms in China").

Biencher, Shue and Wang point out that in Shnlu county, Hehei, the size of the local state apparatas nearly over the period 1978-89, and the size of the local economy with which the apparatus was charged administering was increasing to somewhere between four and five times its original size. Shulu's gross value of output rose from 266.5 million yuan ha 1978 to 1.4 billion yuan in 1989, with an average annual growth rate of 16.3 per cent. Total budgetary expenditure by the county went up from 8.9 mill/on yuan in 1978 to 37.9 million yuan in 1989, with an average annual growth rate of 14.1 per cent. Marc Blencher, Vivieune Shue and Wang Shaoguang, "New statist configurations in China's reform socialism: a closer look at the local state," paper presented to the American Political Science Association Annual Meeting, Washington, D.C., 2-5 September 1993.

56. Since the bulk of extrabadgetary funds is the property of enterprises and their supervisory agencies in the form of retained profits and depreciation funds, local governments have strong financial reasons for PrOmoting the growth of locally owned enterprises. The share of extrabudgetary funds accounted for by local governments is only a miniature. But, as argued by Wang and Wong the influence of local governments on the use of extrabudgetary funds should not be judged simply by the minuscule scale. Local governments can appropriate the funds by imposing a variety of legal and illegal levies on the enterprises. For instance, responsibilities for and costs of road-building and environmental protection may be shifted to enterprises from revenue-starved governments. See Wang Shaoguang, "Central- local fiscal politics in China," in Jian Hao and Lin ~mfin (eds.), Changing Central-Local Relations in China: Refvrm and State Capacity (Boulder, CO: Westview Press, 1994), pp. 91-112 Wong, "Central-local relations in an era of fiscal decline."

State Enterprise ReJations 311

57. In 1987 Shaanxi had a rural population (nongctm re~ou) of 18.45 million. See Shaaxisheng tongiiju, Shaamd's Forty Years, pp. 219, 541.

58. Samuel P. S. Ho, Rural China in Transition: Non-agricultural Development in Rural Jiangsu, 1978- 1990 (Oxford: Clarendon Press, 1994), p. 231.

59. It is generally accepted that income disparity between coastal and interior regions has been enlarged in the course of economic reforms, though some still maintain that divergent regional growth is self- righting and inevitable as a country develops its economy. See, for example, Jiang Qinghai, Zhongguo quyu jingji fenxi (An Analysis of China's Regional Economies) (Chongqing: Chongqing chubanshe, 1990) pp. 106-107.

60. Doak Barnett remarks that with the spread of television to the remote areas in western China, millions of people there have a clear idea of how much their provinces lag behind the more wealthy areas in coastal China. See A. Doak Barnett, China's Far West: Four Decades of Change (Boulder, CO: Westview Press, 1993), pp. 578-80.

61. Shaanxi G o v e r ~ t R e p o r t , No. 16 (1993), p. 7. 62. Liu Shiwen and Zhou 2lairong," Shaanxi rencai 'youshi' hai neng han jishi (How long can Shaanxi

shout that it has 'superiority' in human resources)?" ling~i gaige (Economic Reform), No. 1 (1993), pp. 35-37.

63. My observation contradicts that of Donk Barnett, See Barnett, China's Far Wesg p. 75. 64. Shaanxi Government Report, No. 23 (1994) p. 3. 65. For an accotmt of the neoclassical theory, see Bela Balassa, "The lessons of East Asian development:

an overview," Economic Dewlopment and Cultural Change, Vol. 36, No. 3 Supplement (1988), pp. $273-90. See Bela Balassa, "Reforming the system of incentives in developing countries," World Development, Vol. 3, No. 6 (1975), pp. 365-82, of the neoclassical position opposing the strategy of selective promotion of infant industries.

66. The statist theorists argue that the East Asian experience is not a "model" of free market economy since ]tbe state vlay a key role in directing the economy. For example in South Korea, manyfirms exported ( at a loss and were effectively subsidised by the state from the 1960s. Once export targets were me/, losses would be compensated through sales in the protected domestic market. For critiques of the neoclassical account of the East Asian success, see, to r~ne but a few, M. Shahid Alan, Governments and Markets in Economic Dewlopment Strategies: Lessons from Korea, Taiwan, and Iapan (New York, NY: Praiger, 1989); Alice H. Amsdon, Asian's Next Giant: South Kor~ and Late Industriali- zation (Oxford: Oxford University Press, 1989); Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton, NJ: Princeton University Press, 1990); and Gordon White (ed.), Developmental States in East Asia (i-loundmills, Basingstoke: Macmillan Press, 1988).

67. Dosi, Tyson and Zysman have suggested three notions of economic efficiency, namely Rieardian efficiency, growth efficiency and Schumpeterian efficiency. A Rieardian efficient allocation of resources among industries, activities, and regions is one that maximizes current economic welfare according to current measures of profitability; the second is concerned with the allocation of resour~s according to their effects on long-term rates of economic growth; and Schumpeterian efficiency is concerned with the effects on the pace and direction of technological change.

A product with a higher growth potential is one that has a higher income elasticity of demand for the product. Although demand responds positively as income rises for nomaal goods, higher value-added industrial products usually have higher income elasticities than agricultural products. See Giovanni Dosi, Laura D'Andrea Tyson, and John Zysman, "Trade, technologies, and development: a framework for discussing Japan," in Chalmers Johnson, Laura D'Andrea Tyson, and John Zysman (eds.), Politics ,

Product/v/ty: HowYapan's Develotmaent Strategy Works (New York, NY: Ha~rBushess,1989),pp. 3-38.

68. The following account of industrial upgrading in Singapore, South Korea and Taiwan is taken from Stephan Haggard and Tun:jen Cheng, "State and foreign capital in the East Asian NICs," in Frederic C. Deyo (ed.), The Political Economy of the NewAsian Industrialism (Ithaca and London: Comell

312 JCA 27:3/Lee

University Press, 1987), pp. 84-135; Jung-en Woo, Race to the Switt: State and Finance in Korean Industrialization (New York, NY: Columbia University Press, 1991), chapter 5.

69. The plan was motivated in part by military concerns. Park's decision to launch the HCI drive was led by U.S. President Richard Nixon's withdrawal of a whole division of U.S. troops from Korea in the early 1970's, President Jimmy Caaer's declared intention to withdraw the rest in the late 1970's, and the fall of South Vietnam to communist rule. See Walden Bello and Stephanie Rosenfeld, Dragons in Distress: Asia "s Arltracle Econon~es in Crisis (San Francisco, CA: Institute for Food and Development Policy, 1990), pp. 57-58; Yoon Je Cho and Joon-Kyung Kim, Credit Policies and the Industrialization of Korea. World Bank Discussion Paper No. 286 (Washington, D.C.: World Bank, 1995), p.17.

70. Woo, Race to the Swift, pp. 132-33. 71. The plan believed that South Korea could undergo indus~al deepening through import substitution

and upgrading of industrial exports simultaneously. Bu t the plan gave inadequate attention to the fact that foEeign ~ wee seeking aeoess to the guaranteed Korean market, having tittle interest in developing Korean firms' abilities to complete in export markets directly with what they produced in other locations. The Korean economy in 1979-80 faced three problems: huge excess production capacity in heavy industrial sectors as a result of the global recession, inflation fuelled by the inflow of the foreign capital into heavy industries and infusion of foreign exchange enmed from massive export of labour to the Middle East, and the external shock of increases in interest rates and petroleum prices. To absorb the external shock, South Korea increased foreign borrowing, making it the biggest borrower in Asia (second largest in the Third World after Brazil ) by the end of 1980. Liberal economists at home and international financial organizations such as World Bank and International Monetary Fund blamed this poor performance on the HCI drive.

Nevertheless, the plan also had positive results, the state-owned Pohang Iron and Steel Company (POSCO) being a case. It was reported that by the end of October 1992, POSCO had grown into the third largest steel company in the world, with an annual production capacity of twenty-one million tons. POSCO pro~,ided related industries with a steady supply of steel products at low prices, enabling such industries as shipbuilding, automobiles, construction and electronics to grow rapidly. The chaebols that evolved in the drive became the leading exporters in the second half of 1980s when South Korea ran a large trade surplus. Therefore, Woo argues that the big push held a promise of great recovery with the end of global recession. For her, the big push was over "because it was a success and nut because it was a failure. It was dismantled because its mission was largely completed, so its raison d'etre was no more-- and not because the economic 'reformers' willed it" (p. 182). President Jimmy Carter's policy of withdrawal of troops from Korea was subverted through the concerted effort of the U.S. army and officials in the Department of State. When Ronald Reagan took office in 1980, he re-emphasized U.S. support for Korea from the perspective of anti-Soviet strategy. Consequently, the military reasons for the HCI drive evaporated. See Bello and Rosenfeld, Dragons in Distress, pp. 57, 59; Haggard and Cheng," State and foreign capital ," pp. 124-25 ; Cho and Kim, C~edit Policies, pp. 25, 87; Woo, Race to the Swit~ chapters 5 and 7.

72. Economic liberalization in the 1980s was unlikely to be a correction of the "mistakes" of the big push. It is worth pointing out that trade liberalization was done under the pressure from the U.S. In the face of U.S. threat to retaliate by restrictingKorean commodity exports, the imports-substituting HCI drive was scrapped. Liberalization may be regarded as the quid pro quo for the U.S. politico-economic suFport for tbe Chun regime. See Woo, Race to the Swi/~, pp. 187ff.

73. As of 1994, Hsinchu had two universities, four of Taiwan's six national laboratories and a huge technology institute. The overriding research emphasis in Hsinchn was on electronics. The Taiwauese government had invested US$500 million in the park (The Economist, 21 May 1994, pp. 101-103).

74. Constance Squires Meaney, "state policy and the development of Taiwan's semiconductor


industry," in Joel D. Aberbach, David Dollar, and Kenneth L. Sokoloff (eds.), The Role of the State in Taiwan's Development ( Armonk, NY: M.E. Sharpe, 1994 ), pp. 170-92.

75. There were instances of failure of state-led development from above in East Asia. The fiasco of Taiwanese Big Automobile Plan Project in the late 1970's was a case in point. For more details, see Walter Arnold, "Bureaucratic politics, state capacity, and Taiwan's automobile industrial policy," Modern Ch/na, Vol. 15, No. 2 (1989), pp. 178-214. For a survey of the limitations of industrial deepening in South Korea and Taiwan, see Bello and Rosenfeld, Dragons in Distress, chapters 6 and 15. To summarize, Bello and Rosenfeld argue that apart from a few successes like the chaebols in Korea and UMC and TSMC in Taiwan, industrial deepening to attain a self-sustaining product innovation in both states is handicapped by the reluctance of Japanese and U.S: corporations to tranfer advanced technologies, shortage of capital of most firms, low level research and development,, obsession with quick returns (revealed by the fact that firms prefer to invest their funds in stock and real estate markets), and lack of high-technology personnel.

To a large extent, the success of industrial deepening depends on the willingness of firms with the state- of-the-art technology (in most cases, Japanese and American firms) to transfer real technology to other developing countries. It was reported that some large Japanese and U.S. multinational companies in Taiwan like Hitachi and Zenith sourced their parts from Japanese-or American-invested firms, generating a close system of foreign manufactures and suppliers, and resulting in limited technological diffusion. In addition, Korean and Taiwanese firms had paid large amount of royalties to Japanese firms for technology transfer, while complaining Japanese unwillingness to engage in real technology transfer. In South Korea licencing and royalty payment doubled from US$58 million to US$115 million between 1977 and 1982. The figure rose to US$1.2 billion in 1989. See Bello and Rosenfeld, Dragons in Distress, pp.l14-15, 253-55; Haggard and Chang, " State and foreign capital," p. 127.

76. There are strong grounds for suggesting that the developmental paths of East Asia is unlikely to be replicated in China because China does not possess the unique favourable conditions enjoyed by South Korea and Taiwan in the latter's industrialization. During the Cold War, South Korea and Taiwan were regarded by the U.S. as bulwarks against "communist expansion" in East Asia. Both were consequently highly favoured by successive U.S. administrations in terms of the volume of assistance they received. In the period 1946-76, the U.S. provided US$12.6 billion in economic and military aid to South Korea (it was US$5.6 billion for Taiwan); Japan contributed an additional US$1 billion, and Korea borrowed US$2 billion from international financial institutions. For three decades, South Korea received foreign assistance worth US$600 per capita (US$425 per capita for Taiwan). The aid was used to finance five sixths of South Korea's trade deficit in the 1950s. No other country in the world, except Israel and South Vietnam, received such large sums in per capita terms. Korea's special relationship with the U.S. and Japan gave it easy access to foreign borrowing when it launched the HCI drive in the 1970s. See Bello and Rosenfeld, Dragons in Distress, p. 4; clm and Kim, Credit' Policies, pp. 9,17; Woo, Race to the Sw/ft, p. 45.

77. Shaanxi's gross output value of industry grew from 286.45 nfillion yuan in 1949 to 9,647.83 million yuan in 1978 at an average annual increase rate of 12.9 per cent. The gross output value rose to 100,975.61 million yuan in 1994. The average growth rate between 1978 and 1994 is 15.8 per cent per year (Statistical Yearbook of Shaanxi, 1991, p. 380; 1995, p. 257).

78. Chalmers Johnson, M/T/and the Japanese lt~racle: The Growth of Industrial Policy, 1925-1975 ( S t ~ o r d , CA: Stanford University Press, 1985), pp. 17,23.

79. Real estate was regarded as the most lucrative undertaking of the large-scale textile corporation interviewed.

80. Statistical Yearbook of Shaanxi, 1991, pp. 381-383. 81. Shaan~ Yearbook, 1990, p. 149. The share in 1986 was 16 per cent only ( ibid., 1988, p.135).

314 JCA 27:3/Lee

82. Ibid., 1994, p. 134. 83. Amsden notes that".., in direct exchange for subsidies, the state exacts certain performance standards

from finns. The more reciprocity that characterizes state-firm relations in these countries, the higher the speed of economic growth". Export targets are the most objective and transparent criteria by which finn performance is judged. See Amsden, Asia's Next G/ant, p. 146.

84. Gordon White; "The road to crisis: the Chinese state in the era of economic reform," in Gordon White (ecL), 7Iw Chinese State in the Era ofEconomic Reforn~ The Road to Crisis ( Houndmills, Basingstoke: Macmillan Press, 1991), pp. 1-20.

85. Managerial performance in Japan is evaluated according to criteria of good management other than short-term profitability. The criteria include full employment, smooth labour-management relations, increased productivity, expansion of market share, cost reduction, and long-term innovation. See Johnson, M/T/and the Japanese Mtracle, pp. 313-14.

86. Henry L Breton, "Intemational aspects of the role of govemment in economic development," in Louis G. Puttennan and Dietrich Rueschemeyer (eds.), State and Market/n Development: Synergy or R/va/ry? (Boulder, CO: Lynne Rienner Publishers, 1992), pp. 101-30.

87. Even in Japan where social supports for govemn~nt-business cooperation are deeply entrenched by common education among government and industrial leaders--"old boy" connections--- and cross- penetration of elites, there has been difficulty in keeping government-business relationship on track. See Johnson, M/T/and the Yapanese ~fzracle, pp. 309-14.

88. A tax assignment system (fen shui zh/) was formally introduced in 1994. For more details, see Jae Ho Chnng, "Beijing confronting the provinces: the 1994 taxsharing reform and its implications for central- provincial relations in China," China hformatfon, Vol. 9, Nos.2/3, (1994-1995), pp. 1-23, Tsang Shn- ki and Cheng Yukshing, "China's tax reforms of 1994: breakthrough or compromise," Asian Survey, Vol. 34, No. 9 (1994), pp. 769-88: Christine P.W. Wong, " Fiscal reform in 1994," in Lo Chikin, Suzanne Pepper and Tsui Kai-yuen (eds.), China Review 1995 (Hong Kong: Chinese University Press, 1995), chapter 20.

POWER AND ECONOMY IN SUHARTO'S INDONESIA

by Richard Robison

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the political economy of state enterprise relations in china's shaanxi province

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