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改造國有企業：俄羅斯和中國的經驗
作者 馬景文
([email protected])
REFORMING THE STATE-OWNED ENTERPRISES:
THE CASES OF RUSSIA AND CHINA
Approved thesis submitted by Mr. MA, King-man
for the degree of
Master of Science (Development Administration)
International Development Department
University of Birmingham, U.K.
2000
改造國有企業：俄羅斯和中國的經驗
REFORMING THE STATE-OWNED ENTERPRISES:
THE CASES OF RUSSIA AND CHINA
作者 馬景文
撮要
俄羅斯和中國是兩個最大的社會主義國家，朝著市場經濟過渡。這篇論文研
究兩國改革國有企業的經驗。國企改革是兩國的整體改革重要的部份。但因為不同
的意識形態和受到改革初期的政治和經濟條件限制，兩國採取不同的政策，後果截
然不同。
為求儘快擺脫社會主義，全速過渡市場經濟和最終與歐洲融合，俄羅斯採取
‘大爆炸休克療法’；在宏觀和微觀層面即時進行經濟自由化，國有企業私有化進度
快速。俄羅斯向全民發出個人認購券，全面推出快速的私有化計劃；但這些私有企
業最終大部份落入內部人的手上。更重要的是私有化沒有改善國家發展。
中國的整體經濟改革和國企改革推進緩慢，私有化進程開開停停。中國逐步
推出改革國企的行政指令，向企業放權，改革企業管治。國家調整意識形態，接受
私有產權可以和社會主義並存。中國‘抓大放小’，把小型國企私有化，繼續控制和
持有中、大國企的擁有權；又把部份大型國企改組為龍頭企業，帶領國家經濟應付
全球性挑戰。
私有產權是資本主義的基礎；理論上來說，快速私有化建立私有產權是走向
資本主義的捷徑。論文討論現今的資本主義已改變，擁有權不等同控管企業。要企
業有效率，競爭更為重要。中國的經驗也證明，只要管理層能掌握資源，有自主權
和適當的激勵，國企是可以改進的。
論文比較兩國的經驗，認為在緊逼的政治形勢下，快速私有化是權宜之計；
但如果沒有改革市場的支援基礎建設和加強市場道德，私有化不是改善國企效率的
捷徑。
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Abstract
This thesis studies the reform of state-owned enterprises (SOEs) in Russia and
China, the two largest socialist countries on transition from planned to market economies.
Reforming the SOEs is one major component of the two countries’ overall reform. Yet
the two, guided by different ideologies and constrained by the initial political and
economic conditions, have followed different policies with contrasting results.
In pursuit of a quick divorce from its socialist past, a speedy transition to market
economy and the eventual ‘integration with Europe’, Russia adopted the ‘big bang’
‘shock therapy’ through instant economic liberalisation, at both macro- and micro-levels,
and rapid privatisation of its SOEs. It implemented a quick mass privatisation programme
through a voucher scheme but the privatised enterprises have remained largely with the
same insiders and, more importantly, privatisation has not improved the country’s
development.
China’s overall economic reform has followed a gradual approach and so is its
SOE reform. The country has been timid with its stop-go policy of privatising its SOEs
and opted for improving the performance of the enterprises through a series of
decentralisation policies and corporation and governance reforms. Having re-orientated
its ideology towards a view that private ownership is compatible with socialism, China is
ready to privatise its small SOEs but the state still retains ownership of the large and
medium SOEs. The country has recently begun to build leading enterprises from its stock
of large SOEs to lead the national economy in facing the global challenge.
Private ownership is considered as the cornerstone of capitalism and, theoretically
speaking, rapid privatisation to restore private ownership is the quickest way to
capitalism. This essay discusses that ownership in today’s capitalism is separated from
enterprise control. Competition is more important in generating enterprise efficiency.
China’s experience also shows that SOE performance can be improved if managers are
given the resources, autonomy and right incentives.
Contrasting the two countries’ experience, the essay concludes that rapid
privatisation may be politically expedient under pressing circumstances but is no shortcut
to improve enterprise performance when this is introduced without reforming the
supporting market infrastructure and enhancing the market ethos.
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REFORMING THE STATE-OWNED ENTERPRISES:
THE CASES OF RUSSIA AND CHINA
TABLE OF CONTENTS
撮要..................................................................................................................2
Abstract ............................................................................................................3
Chapter 1 : Socialist Economies and Economic Reform .................................6
Failure of socialist economies ..........................................................................6
Big-bang reform programme ...........................................................................7
Gradualist reform programme..........................................................................7
Chapter 2: Reform of SOEs .............................................................................9
Privatisation .....................................................................................................9
Privatisation in transitional economies ............................................................9
Privatisation process ......................................................................................10
Problems with privatisation ...........................................................................10
Rapid privatisation .........................................................................................10
Gradual privatisation ......................................................................................11
Chapter 3: Privatising SOEs: the Russian Experience ...................................12
Cooperatives and leasing ...............................................................................12
Spontaneous privatisation ..............................................................................12
The privatisation programme .........................................................................13
Mass privatisation through vouchers .............................................................14
Judgement of success .....................................................................................15
Judgement of failure ......................................................................................16
Reasons for failure of privatisation ................................................................17
Could Russia have done differently? .............................................................18
Chapter 4: Reforming SOEs: the Chinese Experience ..................................19
Characteristics of SOEs .................................................................................19
The reform programme ..................................................................................20
The enterprise reform (1984) .........................................................................21
State asset holding agency (1988-) ................................................................21
Contract Responsibility System (1988-1997) ................................................22
Shareholding companies (1991-) ...................................................................22
Public listing ............................................................................................22
Modern Enterprise System (1993-) ................................................................23
Asset management company (1999-).............................................................23
Grasping the large and letting go the small (1995-) ......................................24
Letting go the small: privatisation of small and medium SOEs...............24
Grasping the big: reforming the large SOEs ...........................................25
Creation of non-state sector ...........................................................................27
Explaining the Chinese experience ................................................................28
Ideological re-interpretation ...................................................................28
Role of the state during reform ................................................................29
4
Ownership ................................................................................................30
The way ahead ...............................................................................................31
Chapter 5: Learning .......................................................................................33
Big Bang vs. Gradualist .................................................................................33
Not all SOEs are the same .............................................................................34
Privatisation, ownership and economic efficiency ........................................34
Possibility to improve SOE performance ......................................................35
Dealing with insider control...........................................................................36
Conclusion .....................................................................................................36
Bibliography ..................................................................................................38
List of tables
Table 1: China’s Economic Reform (1978 to present)………………..…………..
Table 2: Chronology of events related to Russia’s privatisation……………..…
Table 3: Loss-making Chinese SOEs (selected years)…………………………
Table 4: Chronology of Policies and Events related to SOE reform in China……
Table 5: China’s state-owned industrial enterprises by size, 1993……………….
Table 6: China’s industry output of state-owned and non-state-owned
enterprises (1978-97) (selected years)…………………………………
5
10
16
26
27
32
33
Chapter 1 : Socialist Economies and Economic Reform
For more than half a century, socialism and its planned economy existed as an
alternative to capitalism but by the 1980s, the economic degradation in all socialist
countries became obvious. How could its early success and later failure be explained?
Failure of socialist economies
Socialist economy would tend to grow when labour and capital inputs were
increased at low cost. Gradually, however, the potential for extensive development was
exhausted. (Huang 1994:107) Soviet-type economy was not concerned with matching
supply and demand but administering inputs and outputs. (Schöpflin 1990:5) There were
extreme distortions in relative prices vis-à-vis true scarcities as internal prices were
determined discretionally, mostly on the low side, with no reference to world market
prices and seldom adjusted. (Ofer 1992:88)
Kornai (1990) argues that Soviet-style system could not be redeemed because
profit will not pass on to the natural-persons as state ownership is not private and stateowned enterprises (SOEs) behave like bureaucrats. Soft budgets under planned economy
encouraged expansion, attracting ensuing rewards but not risk punishment.
It, therefore, came as no surprise that by the 1980s, most socialist economies
began to experiment with reforms to move towards market economy which has proved to
be more effective, through market price signals, in re-allocating resources, removing
inefficient organisations and easing the entry of new ones. (Murrell1992:39, Poznanaski
1992:59, Ofer 1992:88-9)
Most socialist economies have economic, human and social capacities which, if
used wisely, could shorten the ‘catch-up’ phase to achieve economic advance in the
correct political-economic setting. (Chang 1995:13-20) The taxing question is to find a
way to achieve these possibilities. The difficulty with getting out of socialism is that there
is no ready-made blueprint for transition. There are three options: sticking with socialism,
adjusting towards market and private property or the ‘third way’- market socialism.1
(Prybyla 1991:2)
Eastern European countries, influenced by western neo-liberal economists like
Sachs and Kornai, saw their future in integrating with the Western economies and
rejected the idea of experimenting with a ‘third way’, aiming instead to replicate the
economic models of Western Europe. (Sachs et al.1990:47, Kornai 1990:58)
There are major dimensions for a planned economy migrating towards market
economy: macroeconomics of transition - creating a financial infrastructure, and
developing a new role for the state through the budgetary process and appropriate
1
Market socialism was first proposed by the Polish economist Oskar Lange in On the Economic Theory of
Socialism (1938).
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monetary and fiscal policies to guide macroeconomic performance, microeconomics of
transition - creating markets and market price signals through privatisation, international
trade aided by a convertible currency and a safety net of unemployment and pension
benefits, medical insurance etc. (Gregory et al.1998:276) All could be introduced in a big
bang or gradual fashion.
Big-bang reform programme
The economic reform programmes followed by the Eastern European countries
and the Soviet Union were largely influenced by the neo-liberals who do not accept that
the state has a critical role in transition.(McFaul 1995:219)
The neo-classical school emphasises the market as an allocative mechanism and
believes in ‘pure market’ within which economic agents interact in a purely exchange
relationship guided by price signals. (Lo 1995:87) It advocates the application of
sweeping simultaneous radical measures, believing that only a consistent set of steps
across the entire economic panorama can produce positive results.(Ofer 1992:83-4)
Under the big bang approach, the major interlinked and interdependent measures
of economic transition, namely stabilisation, price liberalisation, privatisation of SOEs,
promotion of the private sector and trade liberalisation, should move at more or less the
same speed, assuming that “once liberalised, together with the easing of the systemic
constraints, the economy would soon restore its internal coherence and achieve proper
functioning.” (Lo 1995:81)
Gradualist reform programme
The gradualist approach also focuses on market reform but emphasises the
system-specificity of economic information and the widespread existence of linkage
effects. (Lo: 1995:79) A market economy is made up of a network of complementary
institutions such as banks, financial institutions, commodity and security exchanges,
insurance, accounting and law firms. The network is capable of adjusting but will be
greatly disturbed if there are major upheavals. The gradualists prefer a more carefully
prepared sequence of steps, each preparing the ground for a smoother implementation of
the next, and emphasize the need to clear the way for radical steps through intermediate
ones so as to minimise the economic and social costs to the society. (Ofer 1992:83-4)
“Institutions emerges only slowly and sequentially in a path-dependent world from the
behaviour of agents with limited knowledge and foresight.” (Gregory et al.1998:278)
China’s reform programme, aptly coined ‘groping the stones to cross the river’ 2,
is characterised by gradualism, experimentation and apparent success of partial reforms
which became self-reinforcing when one reform pressed for matching reforms in other
areas. Gradualism, however, only refers to the time taken rather than the depth of
reforms. (Harrold 1992) Without going into voluminous details, China’s reform
programme is summarised below.
2
Carrying on the play of words, the big bang approach has been described as “ if you are going to chop off a cat’s tail,
do it in one strike, not bit by bit.” (Bolivian Planning Minster quoted in Sachs et al.1990:56). The question is
whether chopping off the tail is the only way to save the cat!
7
Broadly speaking, China’s reform could be seen in two phases. In phase one
(1979 to 1997), the reform was to create market sectors in agriculture, light and heavy
industries. To ease the pain of sudden price liberalisation, a dual-price system was in
operation for ten years. Other reforms were phased in. As from 1997-98, China’s reform
entered a more difficult phase, aiming at re-structuring the social sector. Whether by
design or default, China has labouriously and cautiously introduced its reform
components one by one to build up an increasingly recognisable form of market
economy.
Table 1: China’s Economic Reform (1978 to present)
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Market
Self-initiated
agriculture reform 3
Goods market
Financial
Agriculture
Dual Prices 4
Enterprises reform
Township & Village
Enterprises
Banking sector
Heavy industry
End of dual prices
Stocks and bonds
Assets market
Civil service
Housing sale
Price control
abolished
Tax reform
Government
administration
Social security
Labour
Labour market
Privatisation of small
SOEs
1998
1999
2000
Society
Light industry
1994
1995
1996
1997
Institution
Insurance
Pension
End of provision of
housing by SOEs
Downsizing of civil
service
Source: summarised from Harrold 1992, Wang 1998, Cao et al.1999, Ma 2000
3
In 1978, 18 farmers in the province of Anhui met secretly and, under oath of common responsibilities, divided up the
land and farming work among the households. The unauthorised informal contract was soon copied by other
villages. This was later sanctioned by the provincial government and, in 1979, promoted as the national policy of
‘agricultural production responsibility system’. (Li 1995: 32-3) This pattern of local experiment-area promotionnational policy becomes familiar in China’s reform.
4
Until the end of the dual price system, peasants were obliged to sell quotas of staple crops to the state at low pricess.
(Walder 1995:966)
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Chapter 2: Reform of SOEs
The cornerstone of the capitalist economy is the market built upon private
ownership. The market creates supply and demand with resultant prices to serve as the
fundamental mechanism for decision making about resource allocation. Private property
is seen as helpful for the proper maintenance of assets on the reasonable theory that
people take good care of what belongs to them and property is essential for personal
liberty. (Prybyla 1991:8, Gregory et al.1998:278-81)
The neo-liberals argue that the market can only function in a private sector and
that this was destroyed in a planned economy. “Note that there are two ways that the
private sector will develop: through the formation of new firms made possible through
economic liberalisation, and through the privatisation of existing state property.” (Sachs
1992:6)
Here, Russia and China differ. Russia chose rapid privatisation and China opened
up the space for non-state owned enterprises as well as reforming its SOEs through a
series of incremental changes while deferring the ownership issue.
The following paragraphs discuss the various aspects of privatisation, leaving
other reform strategies to the later chapter on China.
Privatisation
Since 1980s, privatisation has been in fashion among the developed economies,
like New Zealand and the U.K., who are oriented towards reining in the welfare state.
Nationalised industries were returned to the private sector, reducing the role of the state
and improving the disappointing performance of these enterprises. For monopolistic
enterprises, regulations are put in place to protect public interest. It should be noted that
privatisation is not the only prescription from the new public management school. For
example, internal market and contract through tendering are designed to introduce
competition to a public sector which used to be insulated. (Walsh 1995)
Privatisation in transitional economies
For the transitional economies, privatisation is more complicated. It is not caseby-case micro-privatisation of individual enterprises. Macro-privatisation is about
privatising an entire economy with uncertain social cost in economic dislocation,
unemployment and looting the state asset. (Berliner 1992)
“Privatisation is a great historical development; it is a peaceful and civilised
equivalent of a revolution…implying an end to the nomenklatura as a stable and viable
(and sometimes even hereditary) political and economic elite.” (Egor Gaidor 1994)
These words from the architect of the Russian reform program sum up the
political perceptive of the privatisation of SOEs as a clean break with the socialist past.
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Privatisation is the permanent reallocation of control from bureaucrats to insiders
and outside shareholders with intended benefits of economic efficiency. But privatisation
can only have a positive influence when it takes root in the context of financial
stabilisation, price liberalisation, de-monopolisation, development of financial markets
and pursuit of an active anti-monopoly policy and opening of the economy to the import
of goods and capital. It also depends upon the level of development of the private sector
and the state of the financial markets, the degree of profitability of the enterprises, the
presence of legal guarantees for domestic and foreign investors, the policies of trade
unions, the general state of the economy, and the presence of a favourable institutional
and legal environment. (Radygin 1995:1-2)
The other issue is whether transfer of ownership should be partial or whole. This
takes into consideration the principal-agent relationship and what form of ownership is
the most economically efficient. Economic efficiency requires the creation of an ‘owning
group’ with sufficient power to challenge the prerogatives of management. (Cowling
1995:165)
Privatisation process
Outwardly, Russia and the Eastern European countries followed a similar process.
A state agency was established to deal with the privatisation programme. Legislative
program was put in place. Properties were identified and prepared for sale. The actual
sale was to be followed by restructuring. (Radygin 1995:4, Gregory et al.1998:278-9)
Monopolistic SOEs were to be broken down to create competition. (Bornstein 1999)
Problems with privatisation
There are problems arising from privatisation: post-privatisation change in the
power relations in society; scale of privatisation; absence of rational market competition
environment; vast technological difficulties e.g. in valuation; lack of the required
institutional structure of legal, financial and other services at the initial stage and the
doubtful nature of many initial owners.(Radygin 1995:2, Ofer 1992:98)
Rapid privatisation
For the transitional economies, the decision for rapid privatisation was more
political than economic. “Such an approach vastly cuts the uncertainties facing the public
with regard to the ‘rules of the game’ in the economy. Rather than creating a lot of
turmoil, uncertainty, internal inconsistencies, and political resistance, through a gradual
introduction of new measures, the goal is to set in place clear incentives for the new
economic system as rapidly as possible.” (Sachs 1992:7) The advocates are not unaware
that quick privatisation initially leads to an inappropriate distribution of ownership with,
for example, diffuse ownership or firms in the wrong hands, but maintain that the capital
market will encourage reshuffling of ownerships through takeovers, mergers, and buyouts
so that there is a proper matching of owners and firms. (Lo 1995: 91)
10
Rapid privatisation can be achieved through initial public offer or transferring
ownership to insiders or outsiders. Public offer is time consuming and difficult where
there are no capital market and reliable valuation, low level of household financial assets
and large number of enterprises. Transfer of ownership to insiders can be done through
direct giveaways, leveraged buyouts or some combinations with concessionary prices.
Outsiders include small investors, financial intermediaries such as commercial banks,
portfolio management funds, other industrial enterprises and, lastly, foreign investors.
(Sachs 1992:8-11)
But for a quick sale, the state cannot ask for the full market value, or even just a
fraction, of the assets since the domestic population have miniscule savings which are
often unequally distributed. So some post-communist governments found an easy way
out – divesting assets at fire-sale prices and distributing shares to citizens through
voucher schemes. As a great majority of the privatised assets were acquired by the sitting
tenants, there was a high degree of inequality. The values of the enterprises were also
unequal as only some were profit making. (Poznanaski 1992:56-7, Nolan 1995b:93-4)
Gradual privatisation
If the private sector cannot be created instantly by design but takes time to grow
organically, the state sector can only retreat at the same pace. Privatisation will be
gradual to match the private sector’s maturity and ability to absorb the transfer from the
state. For a lengthy phase, transitional economies have to move through a ‘dual economy’
when the state has to operate parallel economic arrangements for state-owned and private
enterprises through differential taxes and profit arrangements, wage systems, credit
schemes and other financial tools. (Poznanaski 1992:62)
“A more feasible approach may opt for first privatising those sectors that are most
likely to survive even without a full-fledged infrastructure, and that help create markets
and such an infrastructure, and then to gradually turn to the large-scale production
sector.” (Ofer 1992:96)
11
Chapter 3: Privatising SOEs: the Russian Experience
Reform of Soviet SOEs started in the closing days of the Soviet. When Gorbachev
came to power in 1985, he brought glasnost (openness) and perestroika (restructuring) to
the political agenda to reform the efficiency of the ‘administrative command system’.
From late 1986 to early 1988 there were organisational changes. The Law of the State
Enterprise was enacted in mid-1987 to give more freedom to managers. The role of the
state was confined to long-term issues such as investment and technological upgrade. The
enterprises changed to economic accounting and were expected to be self-responsible and
self-managing. Co-operatives and leasing were introduced. (Gregory et al.1998:255-64,
Radygin 1995:7-19)
Cooperatives and leasing
The development of co-operatives was slow and not a serious alternative to the
state sector. Practically all these co-operatives were sponsored by SOEs and became
vehicles for spontaneous or de facto privatisation to exploit transfer pricing and transfer
property rights to management. The cooperatives became the first transitional form of
property rights but its boom in 1988-89 declined when, in 1990, Russia introduced
statutory regulations on enterprises, joint stock companies and limited liability
partnerships. Many cooperative turned themselves into these new legal forms or lapsed.
(Radygin 1995:10, Alexeev 1999:455)
Leasing, “the last safety valve of reform of the state sector and the economic
system as a whole without launching any model of real privatisation and formation of a
private sector as a real alternative to the state sector” (Radygin 1995:11), was recognised
in 1989. There was a boom in 1990-1 as managers tried to get rid of state control. Some
lease conditions allowed eventual buy-outs.
These two transitional forms, cooperation and leasing, “ with all their excesses
and negative features, nevertheless made a positive contribution, making the whole
process of the subsequent reforms irreversible and facilitating the accumulation of capital
for new pro-market strata of the population, partial legalisation of the shadow economy
and partial transformation of the SOEs and their management in the direction of at least a
non-administrative system of relations among economic agents.” (Radygin 1995:12)
Spontaneous privatisation
These early reforms soon degenerated into spontaneous privatisation, or
nomenklatura privatisation by another name, when the old establishment privatised state
property by dubious means to its own benefit. Directors began to acquire de facto
property rights to consumption and profit retention, aided by the black market and
creation of hived-off smaller enterprises feeding off the parent enterprises. They did not
have the rights of disposal but this would be meaningless as long as the state remained
the one and only owner for all. (McFaul 1995:220-4) The pace of spontaneous
privatisation accelerated when it was not stopped by the ministerial supervisors who
12
shared the rent-seeking behaviour. (Solnick 1998) From this nomenklatura deadlock,
“there are two ways out: an explosion (a new dictatorship) and the ‘unstitching’ of the
social space, i.e. going to an open market, absorbing its mechanisms, moving away from
the nomenklatura-type privatisation towards a democratic privatisation.” (Gaidor
1994:vi)
The privatisation programme
The quick pacing of Russia’s privatisation process is illustrated by the following
chronology of events.
Table 2: Chronology of events related to Russia’s privatisation
1985
1986
November
Gorbachev succeed as General Secretary of Communist Party
Legislation approved, with effect from May 1987, to allow citizens to engage in private
enterprise to manufacture certain consumer goods and provide basic services
1987
May
1988
October
1990
May
June
August
October 16
October 19
October 26
1991
June
August
November
December
1992
January
October
Legislations to relax mandatory state planning and introduce self-financing to enterprises
Citizens allowed to obtain local licences and sell their skills for profit in forty business
categories
Gorbachev confirmed as Soviet president
Yeltsin elected as Russian president on a platform of ‘real economic and political
sovereignty’
Soviet legislation approved to support, in principle, transition to market economy: setting
up joint stock companies and other reforms; corporate income tax introduced
Shatalin’s ‘500 Days plan’
Shatalin plan rejected. Supreme Soviet approved modified plan
Russian parliament approved Shatalin’s ‘500 Days plan’
Gorbachev decreed to allow foreigners to operate wholly-owned subsidiaries in USSR and
lease real estates; Soviet citizens allowed to invest in enterprises
Yeltsin elected to executive presidency of Russia in the first free election
Failed coup to oust Gorbachev
Russian legislation approved to remove price control, immediate privatisation of small and
medium-sized state farms and industries
Soviet Union collapsed; Commonwealth of Independent States formed
Price liberalisation: state subsidies on most goods and services eliminated
Phase I of privatisation
Russia issued vouchers to 148 million citizens in a programme to privatise up to 70% of
state-owned factories
1993
October 3
Yeltsin shelled parliament to defeat coup of the legislators
1994
June
End of phase I of privatisation: 100,000 SOEs privatised; end of voucher scheme
July
Phase II of privatisation by auctions and tenders
1996
February
End of phase II of privatisation: 20,000 SOE privatised
Summarised from Åslund 1995, Gregory et al.1998, Solnick 1998, Filatotchev et al. 1999
13
Market reform appeared on the political agenda when discussion on reforming the
socialist market economy reached deadlock at the end of 1989. Privatisation was first
mentioned late 1990. The famous Shatalin’s 500-day programme 5 was proposed. The
plan, with its merits of gradualism, was rejected by the Soviet legislature who later voted
for a modified form to preserve central government authority over banking, taxation and
currency. (Åslund 1995:227-8)
After the failed coup on Gorbachev in August 1991, Yeltsin rose to power and
announced a bold new program for Russia to privatise, immediately, 50% of its small and
medium SOEs and the beginning for the large SOEs. Under the big-bang ,wholesale
approach, state enterprises were given three months to be transformed into joint stock
companies and the ownership shares transferred, through a state agency, to the new
owners as quickly as possible. There were four possible classes of owner: government at
all levels, governmental and fiduciary institutions, privately owned enterprises and
private persons including workers, management and outsiders. The program was more
de-nationalisation under mixed ownership rather than strict and pure privatisation. Under
this proposal, state ownership may be reduced and diversified but still assumes a
dominating role. (Berliner 1992:215)
Mass privatisation through vouchers
The reasons for a voucher system, equity considerations apart, were due to the
lack of effective demand from the domestic population and foreign investors and the
large number of SOEs, 240,000 in total. It also served to block intensive spontaneous
privatisation and ensure an irreversible change. Public opinion was also relatively
favourable. (Radygin 1995:58)
The scheme of privatisation voucher, seen by Yeltsin as ‘a ticket to free economy’
was the outcome of political wrangling over two years. The voucher scheme was
designed to be simple, equal, comprehensive and market-conforming. Each of the 148
millions of Russian citizens was to receive freely distributed voucher of nominal value of
10,000 rubles. The voucher was fully transferable and tradable, valid until end-1993
when the scheme ended. Soon some 650 voucher funds were registered. To bar corporate
raiders, voucher funds were not allowed to possess more than 10% of the share in any
enterprises. 144 million Russians, 97% of those eligible, picked up their vouchers.
The ministries opposed privatisation on the basis that some enterprises were too
important to be privatised. As the domestic population did not have the necessary capital
and there were dangers of foreign ownership, they proposed cross-holding of shares
among enterprises in the same industry to form enormous holding companies. This would
ensure technical and supply links with a stress on stability rather than competition.
Eventually, some holding companies were formed, attracting enterprises that were losing
5
On privatisation, it envisaged to take 15-20 years to achieve a balance of 25% SOEs, 45% corporations,
15% partnerships and cooperatives, 10% collectives and 5% private enterprises.
14
money and requiring continuous subsidies or those too big for management buy-outs. But
otherwise, the ministries lost their way.
The privatisation programme was entangled in the political struggle between the
failing and weakened central Soviet and the republics, with Russia taking a lead in
pursuing individual programmes. The approach became pragmatic (or unprincipled) and
tactical , rather than strategic. (Åslund 1995:235-41)
The merits of the privatisation package have to be assessed by its contents. The
original government proposal, later known as Option 1, allowed free preferential nonvoting shares (25%) to employees who could buy another10% at 70% of book price and
pay within 3 years; management could buy 5% at book price. This met with strong
opposition from the employees and managers for fear that outsiders could own a majority
share and force enterprises to undertake unwelcome, job-threatening restructuring. Under
pressure from the employees and management, Option 2 was introduced to allow
employees to buy 51% voting shares at 1.7 times of book price with concessionary
payment terms. The remaining 49% was divided into two parts: 29% to be sold by
voucher auction by June 1994 and 20% retained by the state to be sold off through cash
auctions or investment tenders. As an incentive to management, there was Option 3
limited to medium-sized enterprises whose managers could buy 20% of voting shares,
then additional 20% shares at 30% discount with payment deferred up to 3 years.
(Radygin 1995, Aukutsionek et al. 1998)
The privatisation programme was launched in June 1992 and implemented in
October 1992. Apart from the three options, complete employee buy-out was permitted
until mid-1993 and many enterprises were transformed into closed joint stock companies
or joint partnerships. By April 1994, about 80% of the large and medium SOEs eligible
were privatised. By 1 July 1994 when the first phase of the privatisation programme was
concluded, many enterprises were headed by managers and owned by employeeshareholders.(Gurkov 1998:260)
The preference for option 2 (79% by the end of 1993, against 17% for Option 1
and 4% for Option 3) is dangerous from a medium-term perspective “ that the controlling
interest rests with the work collective may well lead to a situation when the diktat of the
worker-shareholders (or of a narrow group of managers who are not controlled by a
formal owner) will mean the prevalence of current consumption at the expenses of longterm development, or management may pursue its own policy to the detriment of the
interests of shareholders.” (Radygin 1995:62)
Although western ideology heavily influenced the privatisation programme,
foreign investment did not have much involvement and only showed a modest increase in
the first quarter of 1994. (Radygin 1995:53-4)
Judgement of success
If privatisation is just meant to effect rapid transfer of state asset to non-state
ownership within the shortest possible time, the Russian program can be described as a
15
qualified success. “The underlying assumption was that what was not privatised would be
stolen. Therefore, a somewhat irregular privatisation was preferred to a halt in
privatisation …The transfer of half the economy from the state to private hands in just
two years was an extraordinary achievement…Speed was the top priority, and it was
adhered to.” (Åslund 1995:247-66). Rapid privatisation reduced the likelihood of asset
stripping and avoided a management vacuum in which enterprises might collapse due to
mismanagement.
The other factor in favour of fast early privatisation is that most enterprises
appeared profitable before the effects of stabilisation begun to be felt. The voucher
system was fairer than sale that would benefit a few investors with money to spare.
(Åslund 1995:268)
Judgement of failure
The success of any reform cannot just be measured in pure political terms.
Reform is supposedly to improve the lives of the people and the Russian programme
failed badly. Even Åslund later admitted that, except in 1997, GDP decreased in
subsequent years, accompanied by high inflation and unequal wealth distribution. He
acknowledged that privatisation was riddled with insider dealings but went on to blame
the West for failing to use its power “to push for all the measures necessary for Russia’s
complete economic reform – liberalisation of commodity prices, de-regulation of exports,
unification of the exchange rate, and establishment of market exchange rate.” (Åslund
1999:71) This is a tacit acknowledgment that privatisation could not be successful
without the necessary accompanying reforms on other economic fronts. It is naive for
policy makers and advisors to expect and rely on heavy external assistance without first
putting one’s house in order.
The serious drawback with Russian privatisation is the predominance of insider
ownership as revealed by the post-privatisation ownership pattern (management 8%,
employees 58%, outsiders 21% and voucher funds 13%) By 1994, 83% of industrial
employment were in de-nationalised enterprises where the state held minor or no shares.
Privatisation was, in effect, mainly a transfer of property rights from the state to the
sitting tenants. (Hanson 1997:28) Due to the lack of the usual disciplinary devices
common in market economies, widespread asset stripping ensued, following the
breakdown of state control. (Earle et al.1997) Insider control enables management and
employees to collude to beat the tax system, keep wages high and maximise fringe
benefits, thus keeping the market price of shares low. Common to many privatised
enterprises is that the managers are not up to the new problems they face in a market
economy. (Åslund 1995:269, Dyker 2000:21) The incumbent managers are hostile to
outside ownership and accumulate shares to avoid outside ownership. (Filatotchev et
al.1999) The wide distribution of shares has not led to greater outsider control and the
development of an effective system of corporate governance to stimulate efficiency and
improvement in performance through effective monitoring of management performance.
16
(Aukutsionek et al.1998: 495, Alexeev 1999:456) The embedded insider ownership also
makes future corporatisation difficult.(Sachs et al. 1990:50) 6
Even after privatisation, by the summer of 1993, state subsidies to these
enterprises still accounted for 22% of Russia’s GDP and little restructuring (bankruptcy,
downsizing and unbundling) had taken place within enterprises and few market
institutions had been created. The state failed to implement its original version of
privatisation, enforce hard budget constraints for large enterprises, and stimulate the
creation of market-supporting institutions such as a legal code regarding private property
and corporate governance or a social safety net. (McFaul 1995:210-38) The change in
ownership did not lead to change in decision making. Enterprises resorted to barter as
there was no funding and the pricing signal was not working. (Gregory et al.1998:281)
Russian GDP in 1997 was 73% of 1989. (Smyth 2000:733) Stiglitz (1998)
attributes the decline in income in Russia, with the same underlying resources before and
after the reform and a supposedly better system based on property rights, to the continued
destruction of its organisational and social capital.
Reasons for failure of privatisation
Critics point to the failure of the privatisation programme as having little
reference to the Soviet historical experience and only marginal input from societal forces.
The programme was heavily Western, mainly American, biased. The planners were
inexperienced young economists with no experience in industry. The managers and
directors were effective in lobbying to acquire controlling interests and continuing
subsidies which remained a major drain on fiscal resources. The post-privatisation market
was rendered less effective by the huge inter-enterprise debts and enterprises resorted to
barter trade. There was also lack of market-supporting institutions such as a wellresourced legal system to protect property rights and enforce contracts. Other supporting
institutions, such as banks, commodities exchange and stock markets, emerged
spontaneously in a climate of weak regulation. There were no effective retirement
schemes and other welfare programmes to deal with unemployment and re-training. The
emphasis was on the quantitative rate of privatisation with a loose link to financial
stabilisation, anti-monopoly policy, structural change and attraction of new investment.
Privatisation per se was no basis for future growth. (McFaul 1995:225-238, Radygin
1995:6, Lo 1995:79, Hanson 1997:34-5, Alexeev 1999: 455, Dyker 2000:19)
Privatisation is only one, admittedly an important one, of the reform programmes.
The poor performance of the economy could not be attributed to failed privatisation
alone. There are weakness in Russia’s emerging capitalistic order- weak rule of law,
weak public administration and insufficient openness and contestability in Russian capital
markets. These interact in ways that threaten to impede future economic growth despite
the relatively favourable conditions of a high education level, modest infrastructure of
transport and communication and a technology base which otherwise would make longterm growth a possibility. (Hanson 1997:28)
6
Sachs actually referred to the Polish experience but this is equally applicable to Russia.
17
Russia’s effort to build up a private sector needs not be confined to denationalisation of SOEs. However, the state did not actively encourage the development
of a ‘real’ private sector. It relied on ‘permission’ rather than ‘registration’ to administer
the entry of new enterprises. This encouraged bureaucratic corruption and capital flight
compounded by a wrong currency control policy. As one insider comments, “ the most
serious obstacles include the entrenched interests of the old bureaucratic structures…the
public’s residual hostility to the private sector...the peasantry’s deep-seated distrust of
change in any form; the egalitarian, parasitic traditions of our entire society; the scale of
government corruption and of organised crimes; the paralysis of central authority; the
explosion of narrow regional or local interests; and finally, the plain incompetence of
many of those piloting the ship of the state today.” (Shmelev 1995:173)
The assumption that the market will self-correct the ownership structure through
post-privatisation transfer of shares in the open market does not happen in Russia as in
the West where, typically, employee shareholders in employee and management buy-outs
gradually sell out. The important difference is that “ in the West, insiders generally only
have control of the firm if they also have the confidence of outside investors ” such as
venture capital and commercial banks. (Filatotchev et al.1999:482)
Public response to the outcomes of privatisation was largely negative, equating it
to ‘robbery of national property’ as the process resulted in very unequal re-distribution of
wealth with rent-seeking insiders gaining the most. The unequal distribution led to the
emergence of a large group of ‘new poor’ who are relatively well educated and politically
active. The political pressure for re-distributive fiscal policies would be strong and
impede future growth.(Alexeev 1999)
Could Russia have done differently?
Russia probably could have a better chance for success if the state was strong, in
the authoritarian or democratic sense, to act against the interests of entrenched social
groups and implement a programme to create a new system of property rights, develop a
social safety-net and create conditions for the creation of new assets and new entries.
(McFaul 1995:238-43)
A gradualist, at least more gradual, approach would allow price revision before
liberalisation to avoid the cost-push inflation spiral and reduction in production. The
Soviet government had a sound stabilisation and price reform programme but failed due
to the utter distrust of the population and political struggle over the nature of the reform.
If the Soviet government had had greater public support in 1991, it could have achieved
better stabilisation followed by restructuring. (Ofer 1992:101-4)
18
Chapter 4: Reforming SOEs: the Chinese Experience
Reviewing China’s reform of its SOEs is like reading test reports of possible or
conceivable policies. Since privatisation was not on the agenda for quite some time,
China reformed its SOEs through a series of policies, initially loosening the total control
from the centre, delegating limited power to the management and creating a supervisory
structure. Improvement was limited and sporadic but this did not deter China from further
experimenting with further delegation and newer supervisory structures. All these
progressed within a state-dominated economic framework where a fast growing private,
or rather non-state, sector was exerting tremendous competitive pressure on the state
sector. This review begins with an understanding of the characteristics of the SOEs in
China.
Characteristics of SOEs
Like other socialist societies, Chinese SOEs have to spend significantly, estimated
to be as high as 91% of after-tax profit, on social functions such as providing housing,
education, health care and pensions for workers and their families. (Lo 1999:705)
The party-state not only owns the enterprises, but also appoints their managers.
Government officials, however, are not in the primary business of getting value from
investment but in balancing the competing calls on their resources. The bureaucratmanagers feel obliged to follow orders from those high above to enter into investments
which are perceived by their respective ministries or local governments as socially vital
but not necessarily in the best business interest. Some SOEs were ordered to take on other
loss-making SOEs as political assignments. So long as these managers comply, they are
left alone – hence the buying spree and, in many cases, corrupt practices, in recent years.
(FEER 6 May 1999:46) SOEs are generally criticised for their inefficiency. This is also
true for China.
Table 3: Loss-making Chinese SOEs (selected years)
1988
% of SOEs
Loss / after-tax profits
1990
1992
1994
1996
12
32
25
33
38
0.09
0.90
0.69
0.58
1.74
Source: Cao et al. 1999:122
Here, however, a clear distinction must be made between the large SOEs and the
rest. Loss-making is concentrated in the small SOEs; 90% of loss-making SOEs are small
enterprises and 60% of all small SOEs are not profitable. Most of these small SOEs
operate under the local governments and lose out to the non-state enterprises that are
more competitive and the large SOEs that have better technology, human capital, scale
economy or monopoly power. (Cao et al. 1999:122) If the performances of the large and
19
medium SOEs are assessed on their own, they are positive and comparable to the
collective ownership enterprises. (Putterman 1995:1057, Lo 1999, Zhang 1999) For the
first time in five years, large SOEs reported profit of remenbi (RMB) 96.7 billion 7 in
1999, representing a staggering increase of 77.7% over the previous year. (Zhu 2000:13)
The reform programme
China’s reform programme for its SOEs is summarised in the following table
which charts the development of one reform, or partial reform, after another, covering a
span of two decades and still ongoing. The reform programmes have not followed a
linear fashion and many ran in parallel, interacting with each other. Some were partially
implemented; some were dropped and later re-emerged. It is easier to trace the origin of a
programme than to pinpoint its termination.
The Chinese programme differs from the Russian experience not only in its
gradualism but also the contrasting emphasis on reforming the SOEs. Since 1979, the
country’s reforms were mostly micro-based, trying to increase the incentives for
efficiency in production, without resorting to structural reform. Privatisation was only
pursued after 15 years of reform and limited to small enterprises. For the large and
medium SOEs, China opted for corporatisation and marketisation. Competition was
introduced through opening up a self-generating non-state sector and foreign trade.
Table 4: Chronology of Policies and Events related to SOE reform in China
Policy and events
1979
1980
1980
Profit retention scheme experimented
Dual price system
Transfer of decision making to SOE managers in 10 key areas related to production,
pricing, material purchasing and employment. Enterprises allowed to sell over-quota at
market or negotiated prices.
Special Economic Zones 8 created
1983
Earnings retention scheme Profit sharing and tax-paying system replaced mandatory
profit remittances
Interest-bearing loans replaced direct grants from state
1984
SOE Director Responsibility System
Township and Village Enterprises created spontaneously
First SOE joint stock company formed
Pricing de-controlled
1985
1987
Bankruptcy Law
Direct trade rights delegated to some SOEs
1988
State asset holding agency
Contract Responsibility System
7
Official statistics from China are notoriously inaccurate and unreliable. Even these figures from the Premier’s
government report is expected to contain a lot of ‘water’. But still this shows that the general performance of the
large SOEs has probably turned the corner.
8
There are now 4 Special Economic Zones on the southern coast where enterprises, including joint ventures, operate in
a free market environment.
20
1988
Enterprise Law
1991
Shareholding System
1992
Regulations to delegate 14 rights to SOE management 9
1993
Modern Enterprise System policy endorsed
Private property endorsed
1994
Company Law to define corporate ownership and governance structure
1995
Grasping the large and letting go the small policy endorsed
1997
750 shareholding companies listed, mostly state owned
120 enterprise groups to experiment with debt-equity swap
1999
Asset Management Company
7,000 medium and large SOEs (50% of total) corporatised
Source: summarised from Harrold 1992:13-14, Broadman 1995:22-3, Ma 2000:95-100, OECD 2000
The enterprise reform (1984)
The urban enterprise reform started in 1984, aiming to transform the economy
from strict command structure to a market-oriented economy, to reform the SOEs by
increasing managerial autonomy, to shift emphasis from heavy industry to light industry
and tertiary industry, and to allow the non-state sector to grow while the state sector
remained dominant. Enterprises were allowed to retain a greater share of the profits
which, disappointingly, were spent more on wages and bonuses, rather than investment.
(Mok 2000:3) A shift in policy followed to strengthen ownership control.
State asset holding agency (1988-)
This is a conservative solution to transfer public enterprises to indirect state
ownership, an attempt to separate government ownership from direct control. The
concept is that the agency represents the state in exercising ownership rights with a view
to improving the enterprises’ efficiency and encouraging them to simulate the behaviour
of private enterprises in competitive markets.(Kumar 1992) In China, such holding
companies were formed through mergers of SOEs to achieve economies of scale. (Zhang
2000) It also serves as a centralised agent, a buffer against too many government
‘mother-in-laws’ interfering with the company’s operation. This was China’s first attempt
to tackle the ownership issue in the belief that if ownership rights were exercised
properly, this would lead to improved performance.
9
The 14 rights refer to production and management decision-making power, price determination, output sale, purchase
of goods and materials, import and export, investment decisions, distribution of retained earnings, disposal of assets,
entry to joint ventures, mergers and acquisitions, hiring of staff, personnel management, wages and bonuses,
organisational structure, and refusal to pay unauthorised charges by government.
21
Contract Responsibility System (1988-1997)
Under the system, contracts were introduced to deal with delegation of control of
enterprise operation, leasing contracts of small SOEs and performance contracts for
managers. The most popular were the performance contracts for managers and,
sometimes, workers. The system lapsed in 1996/97 when the Company Law and
corporatisation were introduced. (Broadman 1995:23)
As a management tool, negotiated performance contract is seen as logical in
spelling out the expected outcomes and outputs versus reward and punishment. The
disappointing reality is that the great majority have led to no noticeable efficiency
improvement. Managers take advantage of the information asymmetry in their favour to
negotiate contracts that are easy to achieve or difficult for outsiders to monitor and
evaluate. Performance contracts fail to motivate these managers to achieve efficiency or
convince them that government’s promises are credible. Governments often underestimate the social cost and are reluctant to make the contracts work. (Shirley 2000a) As
at 1994, China had 103,000 performance contracts in force, compared with 565 similar
contracts in 32 other countries. Like other practising countries, China also found that
performance contracts could not be relied upon as an effective tool to reform the SOEs.
Signing of these contracts was stopped in 1994. (Shirley et al 2000b) The contract system
served a useful purpose in introducing a dividing line of financial and investment
responsibilities between enterprises and the state, as well as signalling a gradual divorce
of state ownership from management control. (Wang 1998:122)
Shareholding companies (1991-)
To overcome the limits of state ownership, China began to transform the SOEs
into shareholding, or joint stock, companies. Shares were issued to domestic institutions,
as well as individuals. The state also encouraged employee ownership by issuing
government bonds that could be exchanged by workers for shares in their employing
enterprises. The idea of the ‘employee stock ownership plan’ was seen to be in line with
socialist ideology that ‘employees become master of enterprises.’ (Gates 1998:256-9)
There are problems with share holding companies where the state remains the
majority holder and control is weakened when managers gain more autonomy. Insiders’
interests, in the form of easier wage increases, are enhanced. Employees and individual
shareholders are still reluctant to make long-term investment in the absence of legal
protection and the uncertainty of the future. The ad hoc and weak corporate governance
structure does not protect the state, the ultimate owner. Local governments, to which
many SOEs report to, are more interested in raising funds through share issues than in
reforming the corporate governance. (Ma 2000:98-9)
Public listing
Listing of large SOEs in equity markets is a central element of China’s strategy to
modernise the enterprise system. About 850 of the 880 companies listed in China’s two
stock exchanges in Shanghai and Shenzhen are SOEs and an average of 30% of the
shares are floated while the state remains the major shareholder. Public listing helps
improving corporate governance with the market taking over the monitoring role. It
22
radically improves the companies’ access to external finance, now no longer confined to
bank loans and internally generated funds. The spread of public listing will also help
considerably the development of financial markets and institutions. However, the pace of
flotation of the SOEs has been slow and investors are discouraged by the majority
holding of the state. (OECD 2000)
Modern Enterprise System (1993-)
The policy of the ‘Modern Enterprise System’ endorsed in 1993 is an ambitious
plan to create a governance and management structure based on corporatisation, to
provide for full separation of the state’s exercise of ownership rights from the enterprises
and to encourage diversified ownership forms. (Broadman 1995:25) In 1994, under the
10000-1000-100-10 slogan,10,000 large and medium SOEs participated in a programme
including asset valuation, grant of financial autonomy and adoption of a new accounting
system; 1,000 enterprises were to adopt the new asset management regulations; 100 large
enterprises 10 were targeted for introduction of the shareholding system and 10 cities 11
were to introduce comprehensive enterprise reform. (Bouin 1998:143, Zhang 1999:63)
The Chinese government has re-confirmed its top-priority commitment to corporatise all
large and medium SOEs by early 2000. (Zhu 2000:18)
The Company Law enacted in 1994 sets out how the large and extra-large SOEs
can be re-structured through corporatisation with a clearly defined ownership and
corporate governance structure. The hypothesis is that once commercial and government
functions are separated, a properly instituted governance will reduce short-term
behaviour and develop better long-term strategies. But this has not worked out as planned
and the enterprises are still responsible for many government functions and the new
governance structures are simply recycled from the old management, thereby providing
no solution to the insider’s problem. (Ma:2000:99-102) The governance institution
remains weak and ineffective as senior corporate positions are filled by insiders in many
enterprises. (Liu 2000)
China has recently spelt out its long-term goal of limiting complete state
ownership to only a few monopolistic and strategic enterprises. Most SOEs will,
eventually, be opened to outsider shareholders though the format has not been specified.
(Liu 2000)
Asset management company (1999-)
To overcome the problem of bad debts 12 and bank liquidity, China has devised an
institutional system of asset management company (AMC) which has taken over the bad
10
A 1998 survey of the 100 enterprises included in the initial experiments reveals that the enterprises are
still burdened by excessive staffing, government functions, huge debt and investment gap, difficulty in
attracting investors due to the state’s majority share, interference from government and lack of
motivation to the management. (IIER 2000)
11
Later extended to 111 cities.
12
The official estimate of 20% of all outstanding loans of the big four state-run banks are bad loans is
generally acknowledged to be on the low side. Moody’s estimate is about 1/3 with other estimates
23
debts from banks. The AMC 13 has the power to restructure the SOEs, including forced
lay-offs to make them more efficient and better able to repay their bad debts. The scheme
will force the overhaul of management, accounting and risk assessment practices in state
banks and SOEs, fundamentally changing China’s corporate behaviour.
Grasping the large and letting go the small (1995-)
In 1995, the state began a quiet reform in restructuring and privatising the SOEs
under the slogan of ‘grasping the large and letting go the small’ but the central
government spelt out no details which were left to the local governments. (Cao et
al.1999:105)
Letting go the small: privatisation of small and medium SOEs
The central government’s endorsement of the ‘letting go the small’ policy, in fact,
only formalised the privatisation of small SOEs with which some local governments
began experimenting in 1992 and became widespread in 1994. As small and medium
SOEs accounted for 60% of SOE employment, their privatisation was quite significant.
Table 5: China’s state-owned industrial enterprises by size, 1993
Number (%)
Large
Medium
Small
4,009 (5)
10,508(13.2)
65,214(81.8)
Output
(%)
56.7
23.6
19.7
Employment
(%)
43.2
25.6
31.1
Net value of
fixed assets (%)
62.0
18.6
19.5
Profits and
tax (%)
66.7
19.4
13.9
Source: The first ‘number column’ from Nolan and Wang:1999:185; other columns from Cao et al.
1999:108
These small and medium SOEs are geographically evenly spread and operated
mostly under the supervision of county and city governments. As in other socialist
economies, these SOEs used to operate under soft budgets and the failing ones were a
great burden to the local governments. As long as subsidies and soft loan continued to be
available, there might be some pressure to improve but no strong drive to privatise. In
1994, China introduced a major tax reform and a two-tier central-local tax base, thus
putting the local governments under hard fiscal budget constraints, making it more
difficult for them to support loss-making enterprises. The growth of the non-state sector
(see Table 6) is putting the small and medium SOEs under tremendous competitive
pressure as most operate in the same industries. To solve these constraints and
competition problems as well as tackling the recurring occurrence of ‘asset stripping’ by
some SOE management and workers, the local governments moved towards
privatisation.(Cao et al.1999:117-21) ‘Letting go the small’ also means closure of some
running as high as 40% or 2.5 trillion RMB (US$300 bn). 70% of the bank loans are to SOEs. (FEER
9.9.99:74)
13
On the authority of the State Council, a pilot asset holding company, Cinda Asset Management was established in
April 1999.
24
small SOEs which are producing sub-standard products and causing serious pollution.
(Zhu 2000:17)
Table 6: China’s industry output of state-owned
and non-state-owned enterprises (1978-97) (selected years)
Year
1978
1985
1990
1995
1997
Total output
(RMB bn.)
423.7
971.6
2 392.4
9189.4
11212.8
Percentage
SOEs
77.6
64.9
54.6
34.0
26.5
share
Non SOEs
22.4
35.1
45.4
66.0
73.5
Non-state
COEs
22.4
32.1
35.6
36.6
40.5
Owned
IOEs
1.9
5.4
12.9
15.9
Enterprises
Others
1.2
4.4
16.6
17.0
Source: (extracted from Ma 2000:93)
COE: Collectively owned enterprises, mostly Township and Village Enterprises,
including joint ventures with foreign investment
IOE: Individually owned enterprises
Others: mostly joint ventures and foreign investments
There are no national statistics on the extent of privatisation but surveys suggest
that by the end of 1996, 50-70% of the small and medium SOEs were privatised in
different provinces. Taking into consideration the high debt-equity ratio, some lossmaking enterprises were sold at discounted prices or even at zero price transfer. The
others were sold to small investors who had accumulated savings during 15 years of
economic reform. Management and employee buy-outs were common. The privatisation
process was not just by transfer or sale of existing stocks but, more importantly, also
designed to attract new investment, thus enabling many former SOEs to make profits
after privatisation. This was made possible by China’s huge saving rate and foreign
investment, initially led by investors from Hong Kong and, later, Taiwan. (Cao et al.
1999:108-112, Lau 1999:90)
As privatisation did not have to follow a tight schedule, this allowed the authority
to better prepare enterprises for privatisation, thus ensuring a better chance of success. 14
Grasping the big: reforming the large SOEs
In 1997, China had about 80,000 SOEs, including 15,000 large and medium
enterprises. Industrial output from all SOEs amounted to 35% of the country’s total
output, employing 1/3 of the total work force or 2/3 in the urban sector. SOEs contribute
70% of the state’s revenue but also consume ¾ of bank loans. (Zhang 1999) About 1/3 of
the employees are considered excess. (Wu 1999:4)
14
To quote one example, rust-belt city Shenyang has set up a joint venture company, with the city
government a minority holder, with a British investment banker to introduce greater transparency and
professionalism into the process of selling state-owned firms. Due-diligence reports were prepared with
input from foreign accountants, lawyers and financiers. They also take on pre-sale restructuring plans and
offer solutions such as excess staff, debts and hidden auxiliary assets like hospitals. The city government
is also flexible with debt waiving. (FEER 11 November 1999:21-2)
25
‘Grasping the big’ means that the state will focus on the top 1,000 super-large
SOEs which account for 40% of total assets, 51% of net assets and 66% of profits from
the state sector.(Cao et al. 1999:104-5) These large SOEs are not dying fossils. “This
sector has undergone large change due to enhanced enterprise autonomy, the impact of
market forces, rapid growth of domestic demand for upstream products, strategic
integration with the world economy and the state’s policy to promote large business.”
The large enterprises are mostly in heavy industrial sectors. 15 The rationale is to build up
‘upstream’ heavy industries to provide inputs such as electricity, coal, machine tools and
equipment, crude steel, plastics and cement etc. for ‘downstream’ producers of final
goods in the state and non-state sectors. (Nolan et al. 1999:170-84) The state has included
in its 2000-1 budget 170% increase in funding for SOE technological upgrade (from
RMB 6.1billion to 13.7) and double the social welfare allocation (from RMB 36 billion to
70) to cushion the social shock following the expected downsizing of the SOEs.
(Financial Times 7.3.2000)
In the medium term, the state plans to establish, by 2000, 3-5 firms qualified as
the world’s largest 500. A pilot scheme, modelled on the Japanese practice, has
introduced a form of ‘main banking relationship’ to 300 large firms each of which will
maintain a longstanding relationship with a particular bank that is committed to finance
the enterprise’s long-term plan and the bank may be represented at the board. 512
enterprises 16 are to develop as enterprise groups 17 in strategic sector. The strategy is to
create a number of enterprises big enough to compete in international markets and avoid
duplication. In the wake of the perceived failure of enterprise groups in Japan and South
Korea, this approach of promoting large enterprises is criticised for giving too much
emphasises to low-cost expansion and too little on internal management reform. The
other criticisms are that the debt-asset ratio is too high, that these enterprises receive
preferential funding and that the relationship among the enterprises, the state and the
banks is too close for comfort. These criticisms may be valid but the alternative of downsizing the large enterprises and rapid privatisation, as practised in Russia, has not proved
to be working. (Smyth 2000)
In this era of globalisation, a country like China must have some big businesses to
spearhead its industrial development and compete on the world market. With China’s
pending accession to the World Trade Organisation, it does not have the option of
allowing its enterprises to grow over time and behind protective barriers. Nor do any of
the private enterprises have that capacity or potential. Creating big business groups by
merging existing large SOEs is a sensible policy forward.
15
Ferrous metal, tobacco processing, transport equipment, machinery, chemicals and coal mining.
16
In 1999, these 512 enterprises contribute 86% of the total profits from all SOEs. 200 of them are listed companies.
150 more are to be listed in the next 5 years.
17
At the centre of an enterprise group is a core company with investment in numerous ‘second-tier’ supplier firms. The
core company has the incentive in upgrading the technology and product quality of these second-tier companies and
may get involved in their management as well.
26
Creation of non-state sector
While China has held on to all its SOEs until mid-1990s when the small ones
were let go, it has also pursued a policy, different from Russia, to create space for newly
emergent small and medium enterprises in various sectors of the economy so as to absorb
rural unemployment as agriculture strives to improve its efficiency through farm
consolidation and the shedding of marginal producers. (Prybyla 1991:15)
Since 1978, China has allowed parallel markets to co-exist, with the private sector
gradually taking over a larger share in internal and overseas markets without any wide
privatisation of state assets. (Poznanaski 1992:64-5) “Rather than focusing on the
privatisation of existing enterprises, [China] focused on the creation of new enterprises.”
(Stiglitz 1998:3) By restricting privatisation of the SOEs, China is, in effect, directing
private investment to the non-state sector.
The phenomenal growth of the non-state-sector was led by the post-1984
spontaneous establishment of town and village enterprises (TVEs). The ownership of
TVEs is ambiguous in the Western interpretation as they are owned by either the local
governments 18 or, more recently, the local population and funded by domestic savings 19.
They remain largely led and operated by local officials. Their behaviour is different from
‘pure’ private enterprises in that they pursue both economical and social objectives, for
example generating employment and funding local social services. (World Bank 1996:51,
Bowles et al. 1999) For the purpose of this study, these TVEs are considered as non-state
owned. The success of the TVEs, receiving little government direct assistance but
facilitated by local bureaucrats, further illustrates what free entrepreneurship can achieve.
(Ma 2000: 114-6) The boom in TVEs can be explained as an indigenous solution to solve
local problems, such as rural unemployment, and to provide investment opportunities for
local savings. (Harrold 1992:11, Wu 1996:145-7)
Since 1992, foreign direct investment 20 has further fuelled the growth in the nonstate sector. (Cao et al. 1999:119) Many SOEs have been transformed into joint venture
enterprises with foreign investment, another form of mixed ownership. This has been a
more noticeable development in the coastal cities. (Wang 1998:124-5) Private enterprises
are not confined to production and can now be found in social service provision such as
education 21 and nursing homes 22.
18
As at 1994, the local governments owned 70% of the TVEs. (Walder 1995:966)
19
Saving rate at 22% between 1992-5 rose to about 40% of GDP in 1999, total saving deposits 8 trillion
renminbi (or US$1 trillion), but the public only owns stock at only 600 bn. RMB, just 7% of GDP. The
state is still a majority holder of the great majority of 843 listed companies.
20
This includes investment from Hong Kong and Taiwan which the Chinese government defines to be part of China.
21
Private education institutions in 1996: 20 780 kindergartens, 3159 primary/secondary schools, 672
secondary vocational schools and 1230 higher education institutions. (Mok 2000:133)
22
600 of the 40,600 homes are privately run. (FEER 10.12.98)
27
Behind the façade of ‘private enterprises’, large number of state agencies,
including the army, are engaged in running ‘back door profit centers’ 23 or ‘satellite
companies’ (White 1996:152) that are registered as private enterprises but funded by
diverted capital from the public sector and operated by bureaucrats, present or past. The
agencies justify their ‘diversification in economic activities’ by the need to generate offbudget revenue to supplement the inadequate budget. In principle, the state is against this
‘unhealthy development’ which is blurring and eroding the regulatory functions of the
government agencies as well as diverting capitals from the public sector. Despite the
government’s repeated decrees to force de-linking of these for-profit enterprises from
their sponsoring agencies, the result is inconclusive. (Lin et al. 1999)
Explaining the Chinese experience
To understand China’s reform programme, one must be aware that China, unlike
Russia and the Eastern European countries, has never accepted western capitalism as its
future. While ‘groping the stones when crossing the river’, China has no clear destination
in sight or on plan. As long as China maintains its political doctrine as a socialist country,
state ownership of the SOEs, in particular the large enterprises, is more than just
economic. These enterprises perform important social functions and social responsibility
is more important than economic efficiency. (Li 1999:3) The primary objective of all
reforms is not a convergence with capitalism but reducing poverty and improving the
livelihoods of the people.
“Socialism means eliminating poverty. Pauperism is not socialism, still less
communism. The superiority of the socialist system lies above all in its
ability to improve the people’s material and culture life.” (Deng 1985:37)
China’s reform programme highlights some issues which may explain its choice
of policies.
Ideological re-interpretation
China’s resistance to privatisation as a quick solution of its SOE problems might
be explained in pure economic terms that the country did not have the financial resources
or the necessary infrastructure. But the same did not prohibit Russia from mass
privatisation through its free voucher scheme. The answer to the Chinese puzzle is
primarily political. China has a different perspective on privatisation which is seen as a
means to an end rather than, as in the European transitional economies, an end in itself.
(Cook and Nixson 1995:21) The country does not privatise for privatisation’s sake. It
privatises to improve the economy and an improved economy will safeguard the interest
of the party-state.
23
The business of these profit centres may be spin-off from the sponsoring agency, such as a paging service company
run by a local post and communication department or totally unrelated, such as a real estate company operated by a
university. The largest one of all is the Sanjiu Enterprise Group established by the army’s General Logistics
Department. The group is now a large pharmaceutical producer as well as ‘owning’ 100 second-tier companies,
running a chain of 30 hotels, a construction company and several large food and drink plants. (Nolan and Wang
1999:186) In late 1997, the state ordered the army to a full de-linking but the present status of Sanjiu is not known.
28
For a socialist state indoctrinated for decades, it would not be easy for China to
discard its central belief overnight. Right from its inception, the Party had been riddled
with opposing right and left factions whose confrontation erupted, from time to time, in
the form of major political and economic upheavals in the past. The ideological debate
became more heated when China began its economic reform that the orthodox leftists,
who believed in pure socialism, criticised for going capitalist. (Lau 1999) The debate was
not just academic. The outcome of the debate could change the course of the reform
programme. The reformers needed to square the circle if the reform was to stay on
course.
In 1984, the then General Secretary Zhao Ziyang explained that the Chinese
economy was in fact passing through the ‘primary stage of socialism’. Socialism, it was
argued, had to be built on the basis of developed productive forces, a clear concession to
reality, and, due to China’s economic backwardness, non-socialist methods might be
necessary to develop them. (Lockwood 2000:148) In September 1997, the 15th
Communist Party Congress accepted that reducing state ownership was compatible with
socialism. This cleared the way to formalise the privatisation of small SOEs already
undertaken by some local governments and to prepare for the corporatisation of the large
SOEs. The re-interpretation of ideology is of paramount importance to the Party, if not to
the population, to justify the economic U-turn without undermining its political
legitimacy.
Role of the state during reform
China learned from Japan and the newly industrialised economies the important
role of state guidance in setting development and industrial policies and its influencing
intervention through control of the banking sector, administrative guidance, industry
associations, and other informal networks, rather than through public production or
tax/subsidy schemes. (Chang 1995b:385) China’s reform programmes have gone through
some radical changes and yet remained largely on course. This is only possible with a
stable and powerful state in control.
The party-state has been the driving force determining the scale and sequencing
of the reforms. It has also demonstrated leadership, determination, confidence and
maturity in taking bolder and more decisive steps as the nation proceeds cautiously,
sometimes in a stop-go fashion, but with no signposts to follow towards the direction of
economic reform. And the population have responded positively. Even the student protest
leading to the Tiananmen incident in 1989 was inspired by a desire to bring the people’s
voice closer to the party, not to overthrow the regime. This is in stark contrast with postcommunist Russia where the political role and economic functions of the state were
viewed with hostility.
That the Chinese Communist Party can still command such a degree of respect,
especially after the Tiananmen incident in 1989, may come as a surprise. The political
puzzle could be explained with an economic answer. China’s economic reform began in
1978-9, in the aftermath of the disastrous decade of the Cultural Revolution. The
population was hurt, tired and drained by one political movement after another. The
29
economy was on the verge of total collapse. The nation shared a common aspiration for
stability and prosperity, or at least a decent and peaceful living - an implicit contract with
the Party fully aware that its legitimacy relied on its ability to deliver a reasonable, and
rising, standard of living. As the reform progressed, a great majority of the population
reaped the fruits of improved livelihoods and there was more confidence and readiness to
accept and follow the Party.
The position of Deng, the acknowledged architect of the reform programme,
further cemented the leading role of the Party. He was from the first generation of
revolutionary heroes and held in great respect and sympathy inspired by his own
sufferings, as well as that of his family members, during the Cultural Revolution. When
the fire of reform flickered, he embarked upon his famous tour to the south in 1992 to
rekindle it.
Ownership
The other puzzle is over China’s ill-defined and diverse forms of ownership of
SOEs: from full control by the state to split control between state and enterprise. Here,
‘state’ means either the central or local government. (Putterman 1995:1052) To the
traditional economists, “the uncertainty attending the ownership system is putting serious
obstacles in the way of improved performance.” (World Bank 1996:149) However, it
appears that China’s muddled interpretation of ownership has not jeopardised its success.
Further understanding of this subject may explain the Chinese mindset.
China’s reform started with the agricultural sector. Private land ownership for the
rural population was sidestepped with the introduction of long leases. This is seen as de
facto partial privatisation of the rural sector as farmers obtain most revenue but not the
right to choose land. (Putterman 1995) The Chinese view has been to retain public
ownership, either all people or local community, on important assets but allowing the
contractors (farmers and SOE operators) to reap the benefit of shared profit under longterm contracts. (Smyth 1998)
From the early ‘contract responsibility system’ to the latest ‘modern enterprise
system’, China has progressively moved through ownership reform of its SOEs. The state
still holds ultimate ownership over land and the large and medium SOEs but has
gradually loosened its control on the enterprises and granted more autonomy to the
managers. Ultimate ownership no longer equates with control.
Once the ideological hurdles were moved, China’s position on ownership has
evolved over time: from total state control, through relaxation of collective and private
ownership, on to shareholding. It is likely that China’s future ownership system will be
mixed, with state ownership in the remaining large SOEs gradually reduced on transfer to
institutional owners.
In the foreseeable future, the large SOEs will continue to occupy the commanding
heights in China’s market economy. The closeness of the state may still be a discomfort
to the believers in a pure and free competitive market. However, if this is seen in the
context of building up national industries to complete globally, “pursuing perfect
30
competition domestically does not spontaneously bring about international
competitiveness.” (Wang 1998:134)
The way ahead
Two decades of reform have yielded considerable achievements for China, a
country that has more confidence in itself, gradually discarding the straitjacket of
socialism in economic terms. The force of competition, generated internally from the
non-state sector and imposed externally by globalisation and the pending accession to the
World Trade Organisation, will compel the state to further liberalise its hold on the
enterprises. It is foreseeable that state ownership will be further reduced and confined to a
few strategic sectors. Eventually the large SOEs will be opened up to outsider
participation.
China’s latest corporatisation reform is designed to separate the state from the
enterprises. It may become easier for the state to insist on hard budget and refuse
subsidies but whether the party-state can really restrain itself from interfering with or
seeking rent from the enterprises is a troubling question. In many corporatised
enterprises, the reform exists in form only. The ‘modern’ institutions such as
shareholders’ meeting, boards of directors and auditors are simply recycled from the old
nomenklatura management. In some, the managing director is also the party secretary.
(Bai 1999) Past history shows that local compliance does not necessarily follow policies.
As long as bureaucrats and managers belong to the same party and under the same
nomenklatura management, with the former being more senior in the hierarchy, the desire
and need to share the common wealth is very tempting. There is nothing in the system to
keep the bureaucrats in check. (Jackson 1992:296)
China is plagued by corruption 24 and rent-seeking behaviour by insiders but these
seem not to be on a Russian scale. One explanation might lie in the economic growth
since 1979, allowing the local governments to tap into newly created wealth rather than
stripping state assets. This is vividly illustrated by the village and township enterprises
which represent some form of virtual partnership between the enterprise management and
local government, leading to the creation of a class of cadre-entrepreneurs who owe their
position partly to the Party and are more ready to follow Party decisions. (Solnick 1998:
229, 234-7) The other worrying sign for China is the huge number of ‘back door profit
centers’ operated by state agencies under the façade of ‘private enterprises’. This
weakens the regulatory functions of the state agencies.(Lin et al. 1999:)
In the longer term, there is inherent incompatibility between a liberalised
economic infrastructure and an authoritarian political superstructure. In the foreseeable
24
In 1994, the court sentenced 20,186 culprits for corruption, including a vice minister, 28 bureau directors and 202
branch directors. (quoted in Wang 1998:139) The latest high profile cases included a vice-chairman of the Standing
Committee of the National People’s Congress who was sentenced to death in July, a vice-chairman of a provincial
government who was executed in April and the wife of the mayor of Beijing arrested for syndicate corruption. The
National Audit Office uncovered that US$600m., 12% of the budget allocated for resettlement of displaced residents
affected by the Three Gorges dam project, were siphoned off for and stock and speculation and building offices.
(www.bbc.co.uk.news dated 15.8.2000)
31
future, China will not become a democratic society. Without opposition parties and a free
media, China’s hope of bringing the party-state and state-owned enterprises under
governance control depends a lot on the political will and strength of the Party to control
itself. As the market economy develops, it will create a class of ‘haves’ who demand
greater protection from law and that may eventually force China to reform its political
infrastructure to protect the fruits of economic gain. China will survive and prosper but
the same cannot be said of the Party-state.
32
Chapter 5: Learning
The preceding chapters have painted contrasting pictures of Russia and China
regarding their overall reform programmes and, by extension, how each dealt with their
problems with SOEs. The comparative study highlights some issues for consideration:
merits of the big-bang, shock therapy or all-out approach vs. the gradualist, partial or
phased approach; and the applicability of privatisation as the right remedy to improve the
economic efficiency of enterprises.
Big Bang vs. Gradualist
One explanation for the different approaches by Russia and China may be their
differing initial economic conditions. Russia was better developed, with 75% of the work
force in industries (Walder 1995:971) which were region-specific. Reform means
‘structural adjustment’: transition from extensive to intensive growth, raising levels of
productivity and technology upgrading. The state is not seen as the appropriate agent.
China, on the other hand, was primarily rural, 75% agricultural, and less developed in
industrialisation. Here, reform means industrialisation and transfer of the economic
emphasis from agriculture to industry. The state is the right agent. (Lockwood 2000:150,
World Bank 1996: 19-21) But this does not really explain why a better developed
economic system like Russia opted for the big bang approach. It could be argued the
other way round that Russia had a sounder foundation and more flexibility to phase in the
reforms.
Even advocates for full scale privatisation like Kornai, Sachs and Åslund did not
foresee that Russia would squeeze the privatisation process into a few years instead of
decades as envisaged. But their text-book advice was flawed in taking the western
experience of micro-privatisation as a base for macro-privatisation for a transitional
economy which lacked the supporting marketing institutions.
Given the contrasting results of the Russian and Chinese reforms, it does appear
that the gradualist approach has a better chance of success. But advocates of the big bang,
or all-out, approach point out that governments may have to move quickly to exploit a
window of opportunity, to push through a critical mass of reforms to build credibility and
to lock in the reforms. The ex-Soviet Union was a case in point. By 1989-90, the country
was in such a state of macroeconomic disequilibrium and the government was so weak
that the all-out approach was the only one available. (World Bank 1996:9-11) The
decision, then, was political and not economic. (Walder 1995:972) But a pragmatic
political decision does not necessarily mean sound economic policies. Of all the
transitional economies, East Germany had the best reasons to go for a big-bang
unification with West Germany, a ready market economy with the necessary institutions
and tremendous resources. Yet, even there, the unification resulted in high unemployment
and lower living standard. (World Bank 1996:10)
33
China’s reform suggests that “small initial changes can have a large impact, and
that theoretically flawed and sub-optimal solutions may nonetheless have highly
beneficial results.” (Walder et al.1999:24) It is important for any nation to adopt its own
reform programmes that suits its initial and changing conditions.
The gradualist approach has its drawbacks. Economic agents are unable to predict
their future economic environment and may opt for short-term behaviour. The time lag
gives time for vested interests to organise, disrupt or even reverse the reforms. Insiders
take opportunities for asset stripping. (Harrold 1992:6) It takes a strong state to overcome
these and steer the reform on course.
Not all SOEs are the same
In stark contrast to Russia whose privatisation programme included all SOEs,
China does not treat the SOEs as one brand and designs different policies to deal with
different groups of enterprises. For the small SOEs, privatisation is reverting to the
owner-operator ownership pattern commonly found in capitalist economies. For the large
enterprises, China’s insistence on state ownership raises an important issue of ownership
and whether private ownership is the key to enterprise performance.
Privatisation, ownership and economic efficiency
The answers to the basic question: why privatise? are more complicated for the
transitional economies than developed market economies. The quick answer may be
economic efficiency and the follow-up question is whether privatisation leading to
private ownership is the most effective solution.
Privatisation is founded on the principle that private owners are better principals
to monitor the performance of the agents. The traditional view of property rights includes
the right of utilisation of such assets (usus), the right of return from such assets (usus
fructus) and the right of disposal of such assets (abusus). (Cowling 1995:164, Putterman
1995:1049) That does not reflect the reality of today’s capitalist countries like the USA
and many European countries where controlling shares of most large firms are
increasingly concentrated in the top few percents of the population and institutions such
as pension funds, insurance companies and trusts. Individuals, ‘real flesh-and-blood
persons’ as defined by Kornai (1990), only make up a small and decreasing percentage
and are practically divorced from the management of the enterprises. Their ownership is
indirect through the widespread shareholding system.(Gates 1998:1-9, Wang 1998:76-8,
83-5)
The Japanese model of ‘cross share-holding’ among firms shows that there is little
direct relationship between enterprise performance and ownership. Such a form of stable
share-holding reinforces managerial control, discourages mergers but maintains a fierce
domestic competition. So when China really moves towards privatisation, a move
towards share holding rather than personalised ownership is the logical next step. “The
simple answer to reform state enterprises is to give them autonomy, in order to let them
compete with each other, irrespective of who owns them.” (Wang 1998:106)
34
China’s SOE reform programme for its large SOEs has focused not on
privatisation but deepening the ownership reform and enhancing competition. It is not
only the nature of the property but the market environment itself, the organisation of the
operation of the firm and the ability of management that determine its performance, while
economic efficiency depends, to a much larger degree, on competition than just on the
nature of property rights. (Radygin 1995:1-2) “Introducing competition does more to
improve performance and productivity than privatisation in a non-competitive
environment.” (Stiglitz 1998:2) “Governments that enforce financial discipline and foster
competition will stimulate re-structuring in enterprises, regardless of ownership.” (World
Bank 1996:47) Experience of China’s enterprise reforms shows that a Soviet-type system
can be rational and flexible in accommodating a competitive contractual system and the
agglomeration among enterprises to form industrial concerns. (Lo 1995:105-6) This can
be easily brushed aside in the transformation debate if it is dictated by the free market
paradigm that ownership is the only thing that matters.
Privatisation, and preferably rapid privatisation, used to be the standard
medication that the Bretton Woods institutions prescribed to developing countries and
transitional economies. But this emphasis now seems to have become diluted. The World
Bank (1996) now acknowledges “privatising large and medium-sized enterprises has
proved far more difficult than originally thought” (p.50) and reviews the problems
associated with all known methods of privatisation such as sale to outside owners,
management-employee buyout, equal access voucher privatisation and restitution (p.53)
The emphasis is now on “major restructuring of their production and re-orientation of
their incentives…In the short run financial discipline can be fostered through the
stabilisation and liberalisation measures…But in the longer run decentralised – preferably
private - property rights and supporting institutions are needed to sustain financial
discipline, to respond to market-oriented incentives, and to provide alternative forms of
corporate finance and governance.” (p.65) Privatisation is no longer the only prescription.
Possibility to improve SOE performance
China shows that SOEs can improve their performance. If managers are selected
on merit, given freedom of operation and performance related packages, then they
respond to competition and market signals. “The key question is the political will of the
government and its determination to improve enterprise performance.” (Nolan 1995b:95)
Privatisation in Britain in the 1980s has been an influencing example showing that
loss-making enterprises like British Airways and British Steel could emerge as profitmaking in the 1990s after being privatised. This inspired the transitional economies to
believe that privatisation would lead to improvement in enterprise performance. Walters,
the economic advisor to Thatcher during that period, pointed out that “this is a misleading
and dangerous simplification” and overlooked the fact that “under Thatcher the reform
of the nationalised corporation was carried through while it was in the public
sector…What privatisation accomplished was to ensure that the corporation would not
slip back into the bad habits of the public sector – such as recourse to subsidies,
monopoly privileges and cheap capital.” (Walters 1992:103, emphasis in original)
35
Privatisation is beneficial in consolidating the reform but, on its own, is no shortcut to
improvement.
Dealing with insider control
The market economy is not just about ownership and institutions. Its operation
has to be guided by market ethos which is driven by greed (individual enrichment) and
decency (general well being). Greed can be instantly released by privatisation but “the
restraining norms cannot be put in place as quickly because they represent tradition – in
fact, they require a rather long time to form. Such norms become ‘second nature’ only
through a very laborious process, since it takes an enormous number of trials and errors
for individuals to eventually accept them.” (Poznanaski 1992:60) Without the guiding
ethos, the market economy will most likely lead to excessive individualism or
disintegrative selfishness.
Russia and China are troubled by insider influence and rent seeking; neither has
found satisfactory solutions. Russia’s rapid privatisation simply consolidated insider
control and China is depending upon its latest ‘modern enterprise’ reform to build a
governance structure to reduce rent seeking opportunities. It remains to be proved that
this will “discipline managers successfully so as to elicit from them performance
consonant with their own goals.” (Putterman 1995:1051)
Conclusion
Amid the global preference for neo-liberal orthodoxy, SOEs are often frowned
upon as inefficient and a burden on the state. Privatisation is generally accepted as the
optimal solution. There is no disagreement on privatising the small SOEs which the
private sector can take over and perform well, given the right political-economic mix.
The issue of large SOEs is different. Granted that the market economy is the
destination for all, the traditional view is to transfer the ownership to the private sector,
the sooner the better. (Putterman 1995:1059) The neo-liberals, with their conviction in
favour of private property as the only solution, have not given a fair share of attention to
the possibility of reforming the large SOEs through competition pressure and incentives.
The Chinese experiment has not yielded conclusive results yet but the interim indicators
show promise. It suggests an alternative that other countries may wish to consider before
going down the one-way highway of privatisation.
The study also suggests that the pattern of ownership is not the only determinant
of enterprise performance which is more influenced by competition and incentives. Given
the political leadership and appropriate policies, the performance of large SOEs can be
improved. This may be uncomfortable to the neo-liberals but for many transitional
economies and developing countries that are not ready to let go of the large enterprises,
the Chinese model is an alternative.
The Chinese experiment with mixed, or ambiguous, ownership suggests that there
are alternatives outside the dichotomy of state and private ownership. There are merits in
the state retaining some form of ownership, or at least presence, in strategic enterprises
36
25
and the mechanism needs to be carefully designed to distance the state from interfering
with the management.
Successful privatisation is not just a technical issue but also depends upon a
network of market institutions which are either weak or lacking in the transitional
economies and many developing countries. If privatisation is seen as the inevitable
solution, gradual privatisation will allow time for these institutions to grow and mature.
25
In Hong Kong, the government is represented on the board of directors of some public transport companies which are
privately owned although the government owns no shares. The rationale is for better regulation through the
government’s being fully informed of the company’s operation.
37
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