When one looks at the restructuring of state-owned
enterprises
the most striking feature of the transformation, in class terms,
is the diffusion of surplus value distribution decisions to the
enterprise
level. The first step in the process was the separation of state-owned
enterprises (SOEs) from the governmental
bureaucracy and their reorganization into private capitalist
corporations. Indeed, the 8th National People's Congress recognized the
former distinction in changing the appellation used to describe SOEs from
state-run enterprises (guoying qiye) to state-owned enterprises (guoyou
minying), although in this paper and elsewhere I have used the convention
of referring to enterprises on either side of this divide by the term
state-owned enterprise. In any event, this separation of the SOEs from
the governmental bureaucracy (the transition from guoying qiye to guoyou
minying) was significant because changing the site of surplus
value distribution to the enterprise creates possibilities for building
stronger and new alliances between firm directors and senior management
and both internal and external agents.
We’ve already discussed, in previous
essays, some of the impacts of this shift in the variant form of
capitalism on ties between the enterprise and external agents,
including the governmental bureaucracy. But what has been the impact of
this shift
on the internal dynamics of SOEs? Has the decentralization and diffusion
of surplus
value distribution decisions (from inside the governmental bureaucracy to
enterprise directors) contributed to solving the internal contradictions
that constrained surplus value production in state-owned enterprises and
placed strains on the central government because of a perceived need to subsidize
these
firms? And are we to assume that the particular direction that this
reorganization/restructuring
of SOEs has taken (towards private capitalism) is the best possible
solution to
the problems/contradictions of the old feudal industrial system it
replaces? In
other words, is the development of private capitalist corporations (with a
high
degree of state ownership) inherent in the contradictions of the
pre-reform structure?
The initial conditions of the current reorganization of SOEs were
shaped, in
part, during the early reform period when SOEs were in the process of
being
weaned from the bureaucracy and from the habit of receiving grants to
cover deficiencies in surplus value generation. Early in the reform
(Dengist) era, the grants
were changed into loans from the state
banks. Presumably, SOE senior managers would be more prudent about
capital budgeting if new investment and, in many instances, operational
expenses were financed with loans, rather than covered by
grants. Unfortunately, SOE senior managers seem to have concluded that
the difference between grants and loans was largely semantic, since state
banks automatically rolled over loans when they came due and the process
of obtaining loans (and the magnitude of the loan) followed a similar
political process to that used to obtain grants. The rule was that
favored firms (whose senior management had close ties to key officials in
the bureaucracy, Party, and/or state banks) received their loan requests
without regard to the underlying value creating potential of the uses of
such funds. The result was the accumulation of large debts
by the SOEs. Thus, the relatively big debt/asset ratios were one of the
Dengist-era legacies left
to the current generation of SOE senior managers.
SOEs also
inherited initial conditions from
the Maoist era and before. Among these other conditions, SOEs
inherited a
legacy of dependence and obligation from the state feudal system, which
was
itself grounded in a bureaucratic history and Confucian culture
that pre-dated the 1949 Revolution
and shaped managerial behaviors that have proven unfavorable to
maximizing surplus
value and minimizing agency costs (and related agency problems).
Decentralization and diffusion of surplus value distribution decisions
were designed to alter the rules of the game within these enterprises, to push
directors, senior management, lower level management, and workers to take seriously
the task of generating surplus value. The elimination of feudal
obligations, in both directions, has meant that SOE directors (led by the
chairman of the board, the most powerful figure in the restructured
corporations, and typically appointed by and associated with the state)
and senior management (led by the CEO)
must rely more heavily upon the value generating potential of their work
force to meet the expectations of managers and workers within the enterprise
and external claimants to enterprise cash flow. This has created a whole new set of responsibilities
(displacing the feudal set of responsibilities) for managers. The board grants
senior managers distributive payments from the generated surplus value that
can be used to invest in new technology, provide bonuses and benefits to managers
and workers, or fund other expenses. For the vast majority of SOEs, there is
no longer any expectation of subsidies from the central government or
easy loans from state banks. This, in and of itself, makes senior managers take
more seriously
the creation of value within the enterprise.
The senior managers can then attempt to pass along these incentives to
factory
managers and workshop directors by linking the sum of secondary
distributions
of surplus value to the performance of related factory units and the
factory
managers can do the same with workshop directors. All along the
hierarchy, there
is greater local control over distributions (primary, secondary,
tertiary) of
surplus
value, providing each layer of management with
a mechanism for disciplining their charges
and creating incentives to engage in activities that generate more
surplus value
in the future. Thus, at the enterprise level the contradictions that
impeded
surplus value creation have, to some extent, been resolved.
On the other hand, new contradictions have arisen. The perception of a
zero
sum game between different factories, workshops, or other work units
within
the SOE can result in negative interaction between factory managers and
others.
The manager of factory A, who at one time may have considered other
factory
managers to be “comrades” within the feudal bureaucracy, may
now
see these other factory managers as threats, particularly in an
environment
of retrenchment, where some factories may be closed. Information sharing
and
other forms of cooperation among factory managers may be stymied if that
is
the case. This is exacerbated if higher level managers create the
perception
that bonuses must be divided among the various units from a relatively
fixed
amount of surplus value. Unit A gains, then, only at the expense of
other units.
The adoption of bonuses as incentive-creating supplements to the
salaries of
managers and workers has created just such a sense of a zero sum game
within
many SOEs, as well as the perception that bonuses are not always
determined
in an “objective” manner. In other words, to the extent
lower-level
managers or workers perceive the allocation of bonuses as biased by
favoritism,
rather than determined by job performance, the result may be to create
more
dissention within the SOE and trigger behavior that continues to dampen
surplus value creation.
Another way to do an end run around the harder budget constraints
is for directors to use their new powers to distribute surplus
value to cement closer ties to local government officials in return for
favorable treatment (similar to the arrangement that we have already
discussed for township-village enterprises and local authorities). Local
government officials can help to create an uneven playing field that
advantages firms whose management has this sort of distributive
relationship with the officials. To the extent that this sort of
"corruption" exists, firms might waste considerable resources on bribing
local officials with no positive impact on surplus value. Similarly, the
local officials may misuse public assets (including regulatory authority
--- which can be defined as an asset) for their own personal gain,
resulting in a loss for the local community and/or larger social
formation.[1]
This reminds us that there is nothing innate about “profit
maximization”
in capitalist firms. This isn’t simply the case in China or even
the so-called
developing world. It’s often difficult to push directors and
senior management
to engage in behavior that maximizes surplus value (and/or accounting
profits) in firms incorporated and
headquartered in the United States. For example, capitalist firms with monopolistic
powers may neither maximize surplus value or profit. The same may be true
of firms with long-term government contracts. And even firms selling into
relatively competitive markets may be run by senior managers who are more
focused on their own perqs, golden parachutes, and status may be less
interested in surplus value maximization than shareowners would like, if
they had the power to determine enteprise priorities.
In Chinese SOEs, senior managers may work diligently to generate
more bonuses and benefits for their workers out of habits formed during
the feudal "iron rice bowl" period or
simply because they want to
be liked
or out of a desire to preserve internal stability within the firm as a
whole
or their specific unit. This may push senior managers or factory
managers or
workshop directors to do whatever they can think of to get a bigger
slice of
the surplus value pie for their unit, including lots of actions that are
not
in the overall interest of generating more surplus value for the SOE as
a whole.
The contradiction is that if the SOE faces hard budget constraints and
does
not generate a larger surplus value, then it may be impossible for all
the managers
to succeed at such efforts. We’re back to a zero sum game with all
the
possible negative consequences.
But the crucial point is that senior state officials do not want to
resolve
these contradictions by subsidizing SOEs, as was done in the past,
including
forcing state bank officials to provide easy loan rollovers. Thus, from
the
standpoint of these state officials, the reorganization and
restructuring of
SOEs is unsuccessful if these contradictions cannot be solved internally
by
firm directors and senior management. SOE directors and senior
management must
devise a strategy that results in the creation of enough surplus value
to meet
internal needs, including investment in new technology, and to satisfy
their
existing debt (and other) obligations. Of course, the CPC-led government
also
wants a larger positive surplus value flow from SOEs to the state. After
all,
the state occupies at least three different positions (in traditional
Marxian
terms) vis-à-vis the SOEs: the state is majority owner, landlord,
and
provider of key political conditions of existence of the firms. State
officials therefore want to obtain sufficient surplus value from SOEs,
in the
form (implicitly) of dividends and ground rent and (explicitly) taxes to
not
only finance the role of the state in these different positions, but to
also
finance other conditions for the existence of the CPC monopoly on
political
power, such as the modernization of the Chinese military to guarantee
national
sovereignty and respect from state officials of the United States.
So it is not enough to simply staunch the flow of cash from the state
to the
SOEs, state officials want more cash flow from the SOEs to the
state. For this
to succeed, the contradiction of managers wanting to spend more surplus
value
internally within their firms/units and state officials wanting to
capture more
surplus value must be resolved in such a way that it neither results in
instability
within firms (from unhappy stakeholders or inadequate investment) or
insufficient
surplus value flowing to state officials such that the reforms are
deemed unsuccessful,
creating pressures to find an alternative set of social
arrangements.
One of the strategies for resolving these contradictions has also been
one
of the biggest sources of internal antagonism between management and
workers.
SOE directors and senior management have moved to dramatically end
another of
those legacies from the state feudal system, the “iron rice
bowl”
or danwei system that guaranteed workers a basic set of social welfare
services.
Thus, under the danwei system, the wage of the feudal workers was a
composite
of the money wage, W, plus these guaranteed benefits, B. In Marxian
terms, the
value of labor power, V, under the state feudal system was W + B. As
part of
the separation of SOEs from the state bureaucracy, directors and senior
managers
were given the authority to restructure benefits provided by the
enterprise
to workers. This power to alter benefits, coupled with harder budget
constraints,
has resulted in benefit reductions at virtually all SOEs with many of
these
firms eliminating certain benefits altogether. Again, in Marxian terms,
B became
optional and no longer part of V. Indeed, B can now be considered as
financed
out of the surplus value and, as such, competes with all other claims on
surplus
value. V = W. Workers are guaranteed only their wage.
It may, in fact, be worse than that. SOE senior managers have also
exercised
the power to lower wages (imposing a negative efficiency wage element,
We).
It is therefore possible for managers to lower the wage below the value
of labor
power, W < V. This presents new contradictions in the internal
dynamics of
the SOE. The lack of any independent labor union representation is one
of the
conditions for the imposition of We. This is a condition that the
CPC-led state
provides to all capitalist firms in China. Nevertheless, it also creates
animosity
towards managers from workers. On the other hand, it also creates
another possible
avenue for generating the level of surplus value necessary to satisfy
state
officials and other claimants.
Senior managers in the corporatized SOEs now have the flexibility to
compensate
workers with a complex composite payment, including both a payment for
the value of labor power
(necessary investment, variable capital, to gain the employment
of capitalist wage laborers
in such an enterprise at a specific time and place) and a share of
surplus value
or a deduction that takes total compensation below the value of labor
power,
which problematizes the ability of the firm to continue purchasing
sufficient
labor power to meet enterprise reinvestment or incremental new
investment needs.
This composite payment is made up of all the elements mentioned above,
including
the bonus, X. Thus, the payment can be decomposed in the following way
(using
previous variables plus X): TWC = W + B + We + X, where TWC represents
total
worker compensation. The trick is for senior management to find that
optimal
level of TWC that spurs the behavior from workers necessary to
generating maximum
surplus value for the SOE. However, there is another
contradiction. Unless there
is a mitigating rise in the productivity of workers and/or the quality
of the
final products, then the higher TWC, the lower the surplus value. There
is no
mechanism by which senior managers can know the optimal level of TWC,
any more
than they can know the optimal strategy for any other aspect of their
corporate
strategy.
As indicated, workers are not in a very strong bargaining position, so
there
are not many forces pushing TWC up, other than some floating minimum
below which
workers become so disenchanted that it becomes
counter-productive. Workers in
China have been known to go on strike, even without any independent
labor unions,
and work slowdowns or sabotage is hardly rare. On the other hand,
increased
layoffs from SOEs are swelling the ranks of the unemployed and creating
more
insecurity for those still employed. This would tend to reduce worker
militancy,
although it hardly guarantees docility.
The evidence so far seems to indicate that the combined strategy of SOE
managers
(wage flexibility, layoffs, etc.) has resolved some of the
contradictions of
the pre-reform structure and resulted in higher average productivity and
more
surplus value. After a period in which the reforms did not seem to be
having
much positive effect on SOEs, lately there has been a significant
improvement
in that sector. SOEs, as a whole, are not out of the woods yet, but many
SOEs
that had been on the brink of bankruptcy, saved only by state subsidies,
are
now fully capable of withstanding the conditions of hard budget
constraints.
Of course, increased competitions from foreign firms and joint ventures
could
continue to pressure the SOE sector and perhaps even worsen conditions
in the
future. The more the CPC-led state “liberalizes” the
economy, allowing
market determined cash flows to determine success and even survival, the
greater
the uncertainty and risk for SOEs.
But the crucial point is that the decentralization and diffusion of
surplus
value distribution decisions has, in the context of other reforms,
generated
results that state officials see as positive, even if not as positive as
they
would like. And, as was pointed out in other essays, the very act of
giving
SOE directors the power to distribute surplus value creates a context
for solidifying
and extending the process of creating private capitalism. It would take
a major
crisis, such as a sharp downturn in the Chinese economy that resulted in
widespread
unrest, to alter this course.
So is this transition from state capitalism to private capitalism
simply the
playing out of some form of historical necessity or, alternatively, are
the
Chinese leaders simply making the best of all possible choices by
playing the
Meiji Restoration story all over again (albeit on a different stage and
with
different actors)? And does the shift from bureaucratic command
allocation to
market allocation always produce private capitalism? The short answer to
all
these questions is no. There is no historical necessity. Marx was wrong
about
that. Fukuyama is wrong about it. And so are all those
neoclassical/neoliberal
followers who worship historical necessity as completely as the
classical Marxists
or those cults that think the end of days is inscribed/encoded in some
text
or other location.
The success of China’s economic reforms, in general, and the
restructuring
and reorganization of SOEs, in particular, demonstrates the complex
interaction
of a wide range of social processes, as well as the effectiveness of
taking
an experimental and flexible approach to the process of creating and
implementing
public policies. I think that is one of the more important lessons
I’ve
learned in writing these essays. I’ve come to realize that
generating
economic development is difficult precisely because it is necessary to
create
a coherent strategy in the presence of initial conditions (legacy) that
must
be taken into account in the formulation of that strategy. Even in
societies
that have undergone dramatic revolutionary changes, such as the USSR and
China,
one can easily find the impact of pre-revolutionary societies on the
shape of
the post-revolutionary society. If orthodox neoclassical economists
studied
history (in something close to an unbiased manner, I might add), then
they would
easily recognize that there was less revolutionary change than the
revolutionaries
would like everyone to believe. There was a massive change in class and
political
processes in the Chinese countryside after 1949. Less so in the
cities. And
even the dramatic transformation to the ancient class process
(self-employment)
in the Chinese countryside was later reversed by implementing state
feudalism
(returning to a discredited class process by simply pretending it was a
form
of communism). The cities also seemed to have a form of industrial
feudalism
(thanks to the danwei and houkou systems, as well as the rigidity of
employment
contracts). And then the CPC “reformed” the economy such
that state
industrial feudalism was replaced with state capitalism (of which there
were
many instances under the Guomindang) and finally private capitalism
(ditto).
Nevertheless, the path of these changes is unique. It is fascinating to
observe
the interaction of changes in class processes with changing cultural,
political,
and other economic processes. It is also fascinating to see the way the
contradictions
change as these combinations of processes changes. And it has been most
fascinating
to watch the way Western observers try to stay ahead of the curve in
their analyses
of China. I’m not surprised that many have come to agree with me
that
China is capitalist (and therefore that one should not essentialize the
CPC
monopoly on government as the determinant of a proper adjective to use
for that
society), although I realize that they do so for very different reasons
than
I have for using that term. Most of them conflate the market with
capitalism
--- that’s the hottest piece of economic propaganda on the planet
right
now. They don’t see the surplus value relationships and therefore
are
unlikely to see the specific effects of decentralizing and diffusing
control
over the receipt and first distribution of surplus value.
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NOTES
[1] Gunnar Myrdal pioneered the economic and social
analysis of corruption. See Asian Drama: An Enquiry into the Poverty
of Nations, 1968, New York: Pantheon. Myrdal's study of Asian
economies provided the evidence for his conclusion that corruption drained
resources, reduced investment, diverted human potential from productive to
unproductive uses, and reduced overall economic growth.
Copyright © 2003 Satya J. Gabriel, Mount Holyoke College. All
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