Prof. Gabriel's Home
PageProf. Gabriel's online papersProf. Gabriel's coursesSeminar in Comparative Economic SystemsAsian EconomiesMount Holyoke College Economics

Essay Number 20
July 2003 

The Decentralization and Diffusion of Surplus Value Distribution in China's State-owned Enterprises

by Satya J. Gabriel

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.

Previous Web Essay     Next Essay


[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 Rights Reserved.

Permission is granted to use this text, with proper credit to its author, for non-commercial educational purposes, provided that the content is not altered including the retention of the copyright notice and this statement. If you excerpt text from this or other essays or papers on this web site, you should follow normal protocols for proper citation. Below is an example of such a citation:

Gabriel, Satya J. "The Decentralization and Diffusion of Surplus Value Distribution in China's State-owned Enterprises" Satya Gabriel's Online Papers: China Essay Series
Please make links to this document instead of copying it onto your server. For permission to use it in other ways please contact the author by e-mail.