Redistributive Politics: Bargains And Strategies

Bargaining closely follows the design of local fiscal and planning processes. Since these processes are essentially ones of revenue redistribution, bargaining is designed to affect marginal changes in redistributive decisions. Managers have an identifiable set of strategies, but their effectiveness is limited by the enterprise's bargaining position—something that cannot be changed by the manager.

Bargaining Positions

The enterprise that enjoys the best bargaining position is the one on which the city depends substantially for the supply of scarce inputs for local industry. Steel foundries and rolling and stamping mills, for example, enjoy an excellent bargaining position if they are not located in a major steel center, and if the city has a substantial heavy-manufacturing base. Here the city will be highly dependent upon the firm for the completion of local production plans, and the factory's arguments for favorable treatment and complaints about "objective conditions" carry considerable weight.^[45] When profit rates are low because of a firm's price niche, as for steel mills, such pleas are even harder to resist. In one of the cities I studied, one large metal-fabricating plant, with only a fraction of

[44] Enterprise director (interview 97, June 1986).

[45] One manager boasted, "The banks can't really refuse us. Our products are urgently needed for the development of the city's economy, so we never meet resistance from the bank. There's no problem borrowing more. If they give us a hard time, how can our economy develop?" (interview 94, June 1986).

its annual production, could supply all the needs of local industry. When the local bureau of material supply needed an urgent shipment of its product for a local enterprise, that firm could use its assistance as leverage in financial negotiations with the city.

Size, however, is not an unalloyed advantage. In another city, a large metal-fabricating plant, relatively profitable and the largest of its kind in the country, turned out a product urgently needed throughout the nation. However, local demand for that firm's products was not high: the city had a small industrial base. In fact, this firm was so large that its taxes contributed 25 percent of the city's annual budget. Its size and profitability, however, were too tempting for the city: not only did the firm pay a high adjustment tax, it was also required to turn over 40 percent of its retained profits. The city justified this by arguing that support costs for such a large plant were a great burden for the relatively poor city. Whether this was true, I could not tell, but the manager of the firm complained at length.^[46]

These cases illustrate the vagaries of size and dependence as an advantage for the firm. If the firm is large, is relatively unprofitable, and is a crucial supplier for local industry, it will consistently obtain the most favorable of financial conditions. If, however, it is large, is relatively profitable, and supplies national rather than local industry, it can be preyed upon as a cash cow for the local budget. The only recourse a firm in this situation will have is to appeal to the relevant ministry, and perhaps even to the state planning commission, to bring pressures upon local officials. I suspect that in this last example the matter could only be resolved if pressure from central agencies was accompanied by a concession in the revenue-sharing agreement between the finance ministry and the city.^[47]

National priorities also appear to affect bargaining positions of enterprises, although to what degree I cannot measure. While objective conditions are often difficult to separate from subjective ones, the price niches of most sectors are relatively well known. Reform plans at the national level specify certain sectors as suffering from distorted prices, and others as having an unfair advantage. If you plead "objective conditions" to gain favorable treatment, your task is made easier if you are in a sector that does suffer from the price system. If you are not in such a position, you may be in a sector—such as most machine-building industries—that is experiencing rising materials costs but steady product prices. Central policy mandates that these firms "absorb" (xiaohua ) new costs through

[46] Interview 128, August 1986.

[47] In fact, I wonder in retrospect whether the city's blatant predation upon the ministry's firm was from the beginning part of a bargaining strategy to redraw the rules of caizheng baogan .

increased efficiency. Officials will be less immediately attentive to pleas from these firms, unless there are additional objective conditions that affect them.

Whether they are profitable or not, some sectors are designated in each city as "key points" for local development. Sometimes these are determined by long-standing local needs; in other cases, they may represent a response to the priorities of the national five-year plan. It was evident in some cities that certain sectors—especially electronics and the computer industry—were receiving preferential treatment as a matter of both local and national policy, relatively independently of their profitability. As new growing sectors, they were being given favorable conditions for rapid growth.

On the other hand, unneeded industries perennially operating in the red will be gradually phased out. In Beijing in 1986 such a sector comprised the small, antiquated, and unprofitable chemical-fertilizer plants that could not sell their poor-quality products. The city had for several years been phasing out this sector. Heavy-industry plants in the city center were receiving the same treatment that year because the city had a beautification plan that sought to relocate polluting firms in the suburbs.

Bargaining Strategies

When an enterprise manager seeks to improve his firm's position, his bargaining strategies are constrained by the objective bargaining position of the firm. An effective bargainer might be able to compensate somewhat for such disavantages, or might be able to capitalize on a firm's inherent advantages better than a poor bargainer. But the general odds of success are limited by one's objective position.

Nonetheless, every manager appears to follow a standard set of strategies. The first is not to let obvious indicators of poor management appear. Make sure that labor-productivity figures do not drop, or that costs of production do not rise. Keep the labor force happy by making sure that their bonus income does not fall, and show them that you are making sincere efforts to build housing and improve other factory benefits. If necessary, let the word out that you are bending state regulations to help out the workers.^[48]

As insurance against the possibility that, despite your best efforts, indicators of "subjective factors" will appear, begin to lay the groundwork for the plea of objective conditions. If there are any delays in the deliveries of materials or components, or if there are any other problems that constitute an objective condition that might explain lower productivity or higher costs, be sure to complain early and repeatedly to your

[48] See Walder, "Factory and Manager" (n. 10 above).

industrial bureau, the materials-management bureau, and even the economic commission, to make sure that it registers firmly that you are besieged by myriad urgent problems beyond your control. If it turns out that your costs stay down and your labor productivity goes up after all, you may convince your superiors of your skill.

Another strategy is an adaptation of traditional "hoarding" behavior: make sure that you do not do so well that you overfulfill your tax quota by a substantial amount. That will provoke an upward revision of your quota in the next period, making your life more difficult. Moreover, under the principle of "whipping the fast oxen," city authorities will be less amenable to your pleas for tax breaks or subsidized credit. Managers commonly work operating surpluses back into costs by engaging in small-scale renovation and construction, purchase materials, and "prepare for next year's production."^[49] Managers commonly admit to this practice and do not view it as illegitimate, and industrial bureaus fully understand that this is going on and acquiesce in it. Tax and finance bureaus view this as a violation of state regulations, but do not have the capacity to monitor the bookkeeping techniques managers use to pad costs. It is also not clear whether, as representatives of local interests, they have a clear motivation to do so.^[50] One tax official explained, "State enterprises are usually guilty of tax evasion. They generally hide funds, enter too many items into costs. We mainly use propaganda to control it, make sure everyone knows the regulations. We can only do spot checks of factory accounts, and rely on reports from the masses."^[51]

Managers can also use the state plan to bargain for favorable financial treatment. Getting into mandatory state plans or "guidance plans" (really

[49] "If you surpass your tax quota by a lot this year, they will only raise it even more next year. So you want to just meet the target, maybe overfulfill it a bit, and build up your reserve productive capacity. ... We do the same thing for our electricity and water allotments" (interview 96, June 1986). An industrial bureau official concurred: "Naturally, factories always will look at whether or not it is advantageous for them to overfulfill their financial targets by much. Their target next year will go up if they do. They consider ... what's in it for me if I do? ... They prevent themselves from overfulfilling by preparing for next year's production" (interview 100, June 1986). "Factories don't greatly exceed it. You just raise costs by engaging in plant repairs. You have to think of next year's production too, not just this year's, so you make preparations instead of pushing to overfulfill" (interview 101, June 1986).

[50] After 1986, as a direct response to this widespread strategy, many managers were induced to sign "responsibility contracts" that bound them to turn over a fixed sum of revenues as taxes over a period of three years. It is too early to tell whether this will prevent managers from working profits back into costs, or whether local financial bureaus can resist the temptation to renegotiate contracts when enterprises begin to reap "excessive" profits.

[51] Interview 112, July 1986.

mandatory plans imposed by local authorities) can be a real advantage.^[52] If in the October planning work conference the planning commission wants you to increase your output of a certain product, or to produce a different one, a manager can use this request to bargain for a subsidized loan or a break on sales taxes for new products. One of the explicit rules of the game is that enterprise-government relations are in a state of moving equilibrium, or as one manager put it, "The standard is not what everyone else gets; its what you got last year. ... If you must accept a higher target, try to get something in return. Ask for approval of a renovation project using imported equipment, and a loan in foreign exchange. Then the (industrial) bureau runs to the economic commission to argue for the loan."^[53] If a request or a demand from the government upsets that equilibrium in one area, it is only fair that in compensation, negotiations proceed in other areas to allow the enterprise to meet that request.

Finally, if city authorities find that "subjective factors" have caused declining performance, try to turn defeat into victory. Are profits down because you cannot sell your poor-quality products? Argue that the root of the problem is poor and antiquated capital equipment; what you really need is a large loan to import advanced Western technology and build a modern new workshop capable of producing the best quality items. Are your costs of production rising in the absence of higher costs for raw materials? Argue that the problem is dilapidated equipment that continually breaks down, requiring expensive repairs and causing delays; what you really need is a large renovation loan to replace your outdated machinery. Managers in this position, if unwilling to accept defeat, can use their situation as an opportunity to display managerial talent. Aggressive advocacy of a project proposal to turn the situation around will often meet a receptive response from local officials, who are also interested in turning a liability into an asset.

No matter how skillfully managers bargain for favorable treatment, successful bargaining further undercuts managerial autonomy. For the notion that drives these bargaining strategies is that of "objective conditions"—a term that justifies the city's responsibility to intervene extensively in enterprise affairs and to redistribute resources among them. No matter how much managers complain that they retain too little profit and have insufficient business autonomy, as soon as they run into difficulty or seek investment they turn to their superiors as supplicants

[52] We often wrongly assume that all enterprise managers will want to get out of state plans and gain the greater autonomy and profits to be enjoyed on the market. But this may undercut your bargaining position, and it should already be evident that much of your increased profits will be appropriated in some fashion.

[53] Interview 93, June 1986.

seeking relief from objective conditions. In China's budgetary and fiscal processes, bargaining strategies reinforce the dependence of enterprises on their superiors.