The Local Corporate State

Village, township, and county make up the local corporate state directly responsible for the dramatic growth of rural enterprises in China. Table 4 shows the leadership structures and organizations at the three levels. Each level has its own interests, resources, and accounting—each level is in itself a corporate entity—but the levels are intimately connected. Hierarchy and obligations are explicit; those at the lower levels are subject to the directives of the higher levels; and those at the lower levels turn over to those at the higher levels a portion of their revenues. Control within the local corporate state involves constraints and inducements applied to each level of local government and to enterprises within each level. The distribution of resources follows the hierarchical nature of the state bureaucracy, and the availability of resources increases with the level of the bureaucracy.

While the initiative of each level is crucial, the rapid development of rural industry has been a multilevel process. Each level has had access to inputs for economic activity, but no one level has had sufficient access to all of the key inputs needed for the rapid economic development that has taken place in China during the period of reform. Each level has its own resources and strives to be self-sufficient, but it can appeal to the next higher level for assistance and intervention. Just as no collectively owned enterprise is limited to its own funds, no one level is dependent

only on its own resources. The rapid development of China's rural industry stems from the input of all three levels—county, township, and village.^[10]

The local corporate state is akin to a large multilevel corporation. The county is at the top of the corporate hierarchy, corresponding to the corporate headquarters; the townships are the regional headquarters; and the villages are the companies within the larger corporation. Each level is the approximate equivalent of what is termed a "profit center" in decentralized management schemes used in business firms.^[11] Each successive level of government is fiscally independent and is thus expected to maximize its economic performance. Like a profitable company or division within a large corporation, those townships and villages that succeed in becoming highly industrialized will command positive attention, will be listened to at corporate headquarters, and will have more leverage to be "innovative" in their implementation of rules and regulations. Their leaders will be promoted up the corporate hierarchy. In this sense, China is coming closer to the ideal of the NIC model of development, where subsidies are given to firms judged to have the best potential or are already the best in a particular field.

In contrast to any multinational corporation or East Asian NIC, however, the local Communist Party secretary plays a key role in economic decision making in the local corporate state. But this is not communist politics as usual. Subject to the same incentives as other local officials, Communist Party secretaries in industrially developed areas of the countryside are at the helm of economic development. How involved they are in the details of management varies with the level of government. The lower down the hierarchy, the more intimately cadres are involved. Most visible is the village party secretary, who can be found personally intervening in the economic decision making of the village's enterprises, often chairing the board of directors of the village enterprise management committee.

[10] This view contrasts with that put forth by Yingyi Qian and Chenggang Xu, who stress the independence and self-sufficiency of townships and villages in the development of rural enterprises. They note that "each geographic region [in China] at each layer can be regarded as an operating unit. Each unit is divided along geographic lines and at the same time the unit controls its own enterprises along functional lines. Operating units (regional governments) are semi-autonomous and relatively self-sufficient in terms of functions and supplies in production." Yingyi Qian and Chenggang Xu, "Why China's Economic Reforms Differ."

[11] See Harrison C. White, "Agency as Control."

Corporate Headquarters: The County

Barnett noted thirty years ago that the county is the "most important administrative unit in rural China now, as in the past . . . Most counties have tended to be relatively stable administrative units, because more often than not they have constituted natural centers of transportation, communications, industry, and commerce. Traditionally, the county seat has served not only as an administrative headquarters but also as the economic and social center of a fairly well-defined region." ^[12] This description remains apt today in many respects, with the exception that the county has now taken on a much more active role in fostering local economic development in response to the fiscal pressures and opportunities offered by the reforms.

The county government oversees, guides, and promotes the direction of growth, including that of its townships and villages. As county officials describe their own role, it is to coordinate (xietiao). Concretely, this is to arrange for the necessary inputs and bureaucratic services that allow local enterprises to prosper. Township and village officials appeal to the county for assistance if problems cannot be resolved with their own resources. Officials at the county level often are likely to have the broadest knowledge of developments outside their county and to have the widest network of personal and professional relationships. County officials go on fact-finding missions to developed areas to study advanced models; some even go abroad. They are the ones with whom foreign investors meet, and they guide such investors to particular sites within the county.

Leadership

The county party secretary (xian dangwei shuji) and the county magistrate (xian zhang) head the local corporate state. Like most leading local officials, magistrates and party secretaries are rotated from place to place, usually avoiding assignment to their home areas. ^[13] Their term of office varies. Some serve in a locality for less than a year. In one Shandong county from 1949 to 1989, the term of office for a party secretary

[12] A. Doak Barnett, with Ezra Vogel, Cadres, Bureaucracy, and Political Power, p. 117.

[13] There is no law of avoidance as in Qing China, but many of the county magistrates whom I interviewed did not serve in their home counties.

ranged from less than six months to over seven years; that of a county magistrate from a few months to over nine years. The average term of office in this one county for these top positions was only 2.5 years.^[14] While such terms of office may be relatively short, officials may still become deeply immersed in local development. Anecdotal evidence suggests that those in counties that flourish are the ones most likely to be promoted up the bureaucratic ladder. Economic performance has become a key criterion for political promotion.

The duties and authority of the party secretary and the magistrate overlap in their oversight of the economy. The party secretary, as the ranking official in the county, is something akin to a "hands-on" chairman of the board, who sets policy direction, decides development strategy, and makes long-term plans. The county magistrate, more like a chief operating officer, is the head of the government, leads the bureaucracy to implement the broad development goals of the county, and handles immediate concerns of development and problems relating to the bureaucracy. The size and wide range of responsibilities facing both the party secretary and the county magistrate require that their involvement be limited to making the major decisions. The staff of the county magistrate and the county bureaucracy are the people intimately involved in economic work, attending to routine matters and details that affect development.^[15] The key bureaucratic players involved with rural industry are the finance bureau, the tax bureau, the rural enterprise management bureau, and the banks (see table 4). In some counties, the foreign trade companies are assuming increasing importance. The functions that they each perform may be gauged from table 5.

Resources

County government facilitates development of rural enterprises through the provision of services and resources. The inputs that the county bureaucracy controls have changed as markets have matured. After almost two decades of reform, there is an increasing number of alternatives by which the lower levels can bypass the bureaucratic hierarchy for material inputs. An increasing concentration of resources is building up at the bottom levels of that hierarchy; this trend is changing the role of the

[14] Shandong Zouping, pp. 337-38.

[15] The staff consists of the General Office director and vice magistrates to whom the magistrate delegates responsibility for specific areas of decision making, such as rural industry.

county. Table 6 shows the resources at each level of the bureaucracy. The dependence of the lower levels of government on higher levels for material production inputs is determined by the scarcity of the inputs, the quantity of goods needed, and the price the lower levels are willing to pay for them. Furthermore, this dependence is related to the existence of alternative channels that are not under state control. Where there are no alternative sources, and when sophisticated technology or scarce resources are needed, one must continue to go to the county or higher up the bureaucratic hierarchy to secure sufficient amounts.

One source of the county's power that is independent of market growth is its exclusive control of bureaucratic inputs. Some of these inputs (for example, licensing and product certification) are procedures to start up businesses. Others (for example, tax breaks and loan deferrals) provide economic advantages. County agencies critical to rural enterprises, such as the rural enterprise management bureau, spend large amounts of time and energy representing local industries at higher-level key agencies in efforts to acquire technology, materials, funding, and so on. Officials from these county agencies may personally accompany factory managers to the higher-level agencies. The daily routine of cadres at the county-level rural enterprise management bureau is filled with trips to the prefecture, even to Beijing, on behalf of specific enterprises. A diary of an official from a county rural enterprise management bureau shows that in May 1988 he made six business trips to the provincial capital, one to Beijing, three to other townships, and six to various villages. In contrast to political systems where such closeness between government and business would be viewed with suspicion, in China local officials see it as part of their duty to provide direct assistance to local firms, including intervention with higher levels on their behalf.

Moreover, a county government can mobilize not just one but all of its agencies and bureaus to nurture township and village enterprises. Some even provide services well outside their administrative domain. For example, the county tax bureau not only collects taxes and gives tax breaks, but also helps enterprises train accountants and find scarce technical personnel, a pressing problem for rural industry. One agency may use its connections to influence other agencies—for example, banks— to bend the rules in favor of a pet enterprise. Or an agency may use its bureaucratic power as a type of collateral to secure a loan for a favored firm. For example, before the practice was prohibited, the tax bureau would sometimes allow an enterprise to repay a bank loan before taxes

were assessed (shuiqian huankuan) in order to win the bank's support for the loan.

Counties also have had funds that they could lend directly to enterprises through various bureaucratic agencies such as the tax bureau, the finance bureau, and the science and technology commission. Although banks were still the major sources of credit, local government bureaus in the 1980s could unilaterally provide no- or low-interest loans to help certain industries. These amounts were not large, but they could be significant, particularly if a factory needed circulation funds to purchase raw materials. Such sources of support and funding were critical when the upper levels of government tried to rein in growth by cutting credit, as they did in 1988-1989 (see chapter 6). Enterprises usually had one to two years to repay such a loan. If the loan was repaid on time, there was no interest, only a fee. A low interest rate was charged only if the repayment was delinquent.^[16] Moreover, because the loans were transacted through the county branch of the Agricultural Bank, they qualified for the shuiqian huankuan provision that allowed enterprises to write off repayment before tax assessment.

Regional Headquarters: The Township

Township government, in its economic role, guides and promotes the direction of growth in the township and oversees development in its villages. In its administrative capacity, a township serves as the liaison between village and county, as the first formal rung in the local government hierarchy. Township government acts as the agent for the county, implementing county targets and plans. The township collects industrial taxes from enterprises and agricultural taxes from peasant households. It plays the middleman role but is no longer the gatekeeper through which all resources must pass. Township authorities may be bypassed when a village has the contacts to go directly to the county.

Township government, as an official fiscal unit, receives a portion of the taxes it collects. Its officials are considered state cadres, paid according to a standard scale, and they hold an urban, rather than a rural, household registration. ^[17] The financial wealth of a township depends on the

[16] For agriculture, it was 2.5 percent; for animal husbandry 3.5 percent; and for industry 4.2 percent.

[17] There are many advantages to urban household registration. One is grain supply. Before the dual-track price system for grain was abolished, only those with an urban household registration were granted grain ration tickets that allowed the purchase of lowpriced state grain. For details of the differences between urban and rural household registration, see Whyte and Parish, Urban Life; and Oi, State and Peasant.

amount of rural industry. As I point out in chapter 2, townships not only can collect tax revenues from both township- and village-owned enterprises, but they can also extract substantial extrabudgetary revenues from township-owned firms (xiangban qiye). Most townships inherited an industrial base from the Maoist period and have used that as the foundation for their current firms.^[18] Nationally, the number of township enterprises has grown more slowly than the number of village-owned enterprises. ^[19] This may be explained partly by the fact that townships have less strict budget constraints than villages. Remember that township government is provided a budget by the county to cover basic expenditures, and it is given a subsidy when tax receipts are insufficient (see chapter 2).

Leadership

The leading cadres at the township level are the township party secretary and the township head (xiang [zhen] zhang).^[20] These officials, like those at the county level, are rotated. They have overall control of development, like their counterparts in the county, but they are more likely to participate in micro-level decisions affecting their enterprises. These might include obtaining loans or securing approvals for large development projects.

As table 5 shows, the economic work of the township encompasses a variety of tasks. To the extent that there is a division of labor, township party secretaries tend to be concerned with economic development, specifically industrial development, while township heads deal with civic matters. Regardless of who is most actively involved in the economy, at the township level as at the county level the bureaucracy manages day-to-day affairs. Subordinate offices (suo) of most county-level bureaus are at the township level. A special office, the township economic commis-

[18] In some counties, there seems to be little change in the overall number of township-level enterprises from the Maoist period, although some have changed products, expanded production, and undergone technological renovation. For example, in Zouping county, Shandong, there were 97 commune-level enterprises in 1978; in 1983 there were 110 township-level enterprises. Oi, "Evolution of Local State Corporatism."

[19] Nongyebu xiangzhen qiyesi jihua caiwuchu, 1995 nian quanguo xiangzhen.

[20] If the township qualifies as a zhen, the government head is called a zhen zhang.

sion (jingji weiyuan hui),^[21] working in conjunction with township leaders, manages industrial development.^[22] This commission, a subordinate of the rural enterprise management bureau, has overall responsibility for township enterprises and has jurisdiction over village enterprises.

Resources

The township facilitates the provision of services and access to selected inputs that it controls, as well as to those that exist at higher levels. To obtain county-level agency loans, collective enterprises apply to their township finance office, which then passes the application on to county finance bureau officials. The licensing process is also started at the township level, even though the county makes the final decisions.

As table 6 shows, compared to the county, townships have relatively limited state-provided resources to help rural industry. Each township is provided with one official credit cooperative and a branch of the Agricultural Bank to serve its township and village enterprises. More recently, some townships have established semiprivate financial institutions to provide local enterprises with nonbank funding.

Because of increasing demand for credit in a time of frequently tight monetary policy, townships (and villages) have had to raise supplementary capital within their own corporate economy. Like a large corporation, each township pools its resources and risks, using the same strategies I describe for villages (see chapter 3). It can use the profits of its richer enterprises to see poorer enterprises through a downturn in the market or to start new enterprises.^[23]

Companies: The Village

At the bottom of the local corporate state are villages. The village is distinctive in that its officials must act as the agents of the township and the county, but as I indicate in chapter 2, it is not accorded the status or the resources of an official level of government. Village officials have no formal bureaucratic positions (bianzhi) and receive no state subsidies;

[21] The name of this office differs by locality. Sometimes it is known as the township industrial corporation.

[22] A party vice secretary or township vice head is often the head of the township economic commission. He or she is frequently the only state cadre on the commission. The rest of the staff are considered local cadres and paid from extrabudgetary funds.

[23] This only applies to collectively owned enterprises.

their salaries come entirely from village revenues.^[24] To reiterate an earlier point, village-owned enterprises (cunban qiye) pay taxes to the upper levels,^[25] but villages have no right to keep any portion of those revenues. They have a hard budget constraint, but they also have an exclusive right over the residual after taxes. This helps explain why village enterprises have been among the fastest-growing sectors within rural industry.

Leadership

Like all levels of the bureaucracy, the village is headed by a party secretary and a government head. The government head, called the chairman of the village committee (cunmin weiyuan hui zhuren), was formerly known as the village head (cun zhang) (see table 4). Unlike county and township officials, village leaders are longtime village residents who have strong ties with those over whom they have administrative control. Because they are not rotated, their actions have long-term consequences for both their own positions and for the village's economic well-being. This makes the incentives for village-level officials more direct than those for officials at other levels of local government.

The bureaus at the county level have no representatives at the village level. The village bureaucracy is composed of a committee (cunmin weiyuan hui) of five to seven members, each of whom has specialized tasks. Since 1987 the members of this committee, including the chairman, are supposed to be elected directly by the members of the village. The election of these individuals has received attention as an important step in the democratization of village politics.^[26] In practice, the committee's power is still limited and under the firm control of the party secretary, who is exempt from popular election.

The party at the village level, more than at any other level, is at the forefront of China's rural development effort. Where there is industry,

[24] Village cadres have rural rather than urban household registrations. Up until 1993, when grain rationing was abolished, this meant that they had to grow their own grain rather than receive grain ration coupons that allowed access to low-priced grain sold by the state.

[25] Village enterprises do not pay any fees to the township economic commission, even though they are nominally controlled by them.

[26] See, for example, Tyrene White, "Reforming the Countryside"; Kevin O'Brien, "Implementing Political Reform"; Oi, "Economic Development"; Melanie Manion, "Electoral Connection." Daniel Kelliher, "Chinese Debate," provides a nice review of much of the writing on the subject.

the party secretary often personally makes key decisions regarding the operation and management of enterprises, sometimes temporarily taking charge of a factory. In more than a few villages, the party secretary is the chairman of the village enterprise management committee (see table 4). The government head, the chairman of the village committee, is left to tend to agricultural matters. But even there, if necessary, the party secretary will intervene when needed. The hands-on attitude of village party secretaries has led to authoritarian one-man rule in a number of highly industrialized, wealthy villages.

Whether a village economy is successful depends heavily on village leadership. The initiative, skill, and connections of the top officials determine whether the village can successfully mobilize needed resources, be it funds from inside the community or assistance from the upper levels. But these top officials are a different breed from the highly polished elite who have led development in the NICs or in Japan.^[27] These individuals are usually not particularly well educated; many of the older leaders are lucky to have had even a primary school education.

While personal ties and political skills are obviously necessary, as the reforms have progressed proven economic performance has been a key to the successful development of rural industry. Sometimes this is difficult to disentangle from political status because of the close connection between the two, even during the Maoist period. For example, a prominent village party secretary who enjoyed privileged access to inputs needed by his village after decollectivization had also been named a model worker during the Maoist period and elected to the National People's Congress prior to the reforms. He had received honors for his good work as party secretary of a very successful brigade that sold large amounts of grain to the state. After decollectivization, he further enhanced his reputation by leading the village in the cultivation of exceptionally high-quality wheat that was sold to the local seed company, and by being among the first to develop village industry. His combination of skill, proven performance, and easy access to inputs brought the villagers among the highest incomes in the area.

But past credentials are not essential. Another highly successful village party secretary built up his reputation only over the course of the reforms. The reason he has become so powerful, not only in the township but even among county officials, is his leadership in developing his village's

[27] For a more extensive discussion of this difference, see Pearson, China's New Business Elite.

enterprises after decollectivization. The village has become one of the richest and most industrialized in the entire county, with the villagers enjoying various subsidies as well as high incomes. This success has brought him numerous honors, including being named a "provincial-level entrepreneur." Eventually he was appointed to be a township party vice secretary (although he still spends most of his time managing the village). Because of his and the village's reputation, he managed to secure credit when others were having difficulty. For example, he was one of only a few able to secure substantial loans from a semiprivate credit institution outside the township when it first opened in 1988. During that difficult period of retrenchment, his village received a short-term loan from the county Agricultural Bank. Such loans were given only to those villages that were considered the most likely to be able to repay on time.^[28]

The ultimate example of a powerful village leader is Yu Zuomin, the now deposed leader of Daqiuzhuang village outside Tianjin.^[29] He rose to become a national model as central-level leaders visited him and praised his success in using the reforms to turn what had been an extremely poor village during the Maoist period into one of the richest villages in all of China during the 1980s.^[30] Without a doubt, its model status brought the village preferential treatment in securing needed materials, contracts, and favors.

Resources

Part of the reason village leadership is so important is that villages have had to be the most self-reliant of the three levels of the local corporate state in the development of industry. Village industry has on the whole received fewer state-supplied resources than have township enterprises. This is especially true of credit. Banks hesitate to loan to most smallerscale village enterprises. As indicated in chapter 3, table 3, bank credit for rural industry in the 1980s went primarily to township enterprises.

[28] There are indications that some of these funds for loans were diverted from other sources, perhaps agricultural procurements, to tide over local enterprises during this period of crisis. Consequently, it was essential that the money be repaid on time. Cl 52090.

[29] He was sentenced in 1993 after harboring two village employees who had killed a worker. His power is reflected in the fact that he was able to hold off Tianjin officials who came to arrest his men. For a press report on this affair, see "CPC Politburo Meets on 'Manslaughter' Case," Ming pao, 7 March 1993, translated in FBIS-CHI-93-044, 9 March 1993, p. 19.

[30] The walls of the reception room where I interviewed him were covered with pictures of him accompanied by various top central-level leaders. His own "collected works" had been published, as well as the story of the success of his village.

In one township in 1987, 30 percent of the loans made by the Agricultural Bank and credit cooperatives went to township enterprises. Only about 10 percent went to village enterprises.^[31] This is where reputation and connections come into play. Officials who have shown themselves to be innovative and successful in developing their village economy are given preferential access to the limited resources.

The need to be self-reliant creates a certain level of ambivalence toward the upper levels, even among those who succeed in getting support. Some villages claim that the success of village industries is due entirely to their own efforts. Successful villages boast that they never sought outside loans to fund development. One village secretary bragged that the township had come to him for loans! While there is some truth to the claims of self-reliance, close questioning reveals that villages, like townships, would not have been able to succeed without assistance from higher levels. Funding alone does not determine whether village industry is successful or not. Licenses, technical assistance, and a slew of bureaucratic inputs are necessary. Furthermore, over time, as entry costs have risen, even once fiscally self-sufficient villages need assistance in procuring large base loans for expansion and technological renovation. Interviews suggest that the most highly industrialized and successful villages are those whose leaders have the best connections and have received the most support from higher levels of local government.