Policy Outcomes Under Management-By-Exception
The policy outcomes produced by the Chinese system reflect the structure of the government bureaucracy and the process of management-by-exception. Scholars of communist political systems have noted that policies in such systems tend to be incremental (Hough 1977; Bunce 1981). Drastic changes in policy direction or massive shifts in the allocation of resources are inhibited by the requirement that every agency must agree to them. The consensus rule produces policies under which everyone benefits, or at least no one loses too much. As one high-level policy adviser in China put it, "We must use all our policies to 'coordinate' interests among agencies and localities" (author's interview). Radical change is rejected, delayed, or watered down in the process of building consensus. Party principals occasionally can impose policies on their bureaucratic agents if the issue is of overwhelming urgency. But such instances are rare because the cost of dictating policy to a reluctant agency usually is failure of implementation.
An example of a major policy change delayed by lack of consensus is the restoration of ranks in the Chinese military, first proposed in 1980 but not implemented until 1988. (The military-ranks issue is discussed by Jonathan Pollack in chapter 6 in this volume). In 1984 the People's Liberation Army received new uniforms with epaulets in preparation for
the restoration of ranks. The final decision to restore ranks was delayed until October 1988 because of conflict between retired officers and active officers over whether the retired officers should receive formal ranks. As a Hong Kong newspaper account described the situation, "These two opinions were locked in stalemate for a long time, and a consensus of opinion could not be achieved. This slowed down the process of restoring military ranks." The stalemate was broken by a compromise that restricts formal ranks to active officers but "soothes" the retired officers with special medals and an affirmation of their previous ranks (Fu Meihua 1988).
In China the normative reflection of consensus decision making in economic policy-making is an ideology one might call "balancism" (pinghengzhuyi ). According to this ideology, the function of the state is to balance out inequities among units created by arbitrary policies, particularly administratively set prices. Fairness (gongping ) requires that no unit lose too much because administrative prices make them less profitable than other units or because past decisions (such as investments in fixed assets) work against them under current formulas. All government bodies are supposed to adjust their policies to prevent large disparities in benefits among units. The expression "ku le bu zhun ," meaning "disparity between sadness and happiness," is frequently used by government bureaucrats to explain that a particular policy modification was necessary to guarantee equity. Representatives of ministries, localities, or enterprises who are in a strong competitive position to benefit from economic reforms (i.e., their products are in demand in the market, the irrationalities of the price system work for them, and they are more efficient and productive in their operations) often complain that government organs worry too much about taking care (zhaogu ) of the weak and not enough about promoting the strong (author's interviews). (In chapter 11 in this volume Andrew Walder analyzes this redistributive tendency in economic policy-making at the municipal level.)
The conservative bias of management-by-exception makes the political challenge of economic reform formidable. Introducing a market through a bureaucracy, especially one operating under management-by-exception, is extremely difficult. Under the consensus rule even a minority of ministries or provinces who prefer the status quo to the proposed changes could obstruct progress in reform. The Party principals retain the authority to take significant policy initiatives—the reform drive has been sustained despite short-term economic problems and group conflicts because Deng continues to promote reform ideas—but they must obtain the agreement of at least most of the bureaucratic institutions that will implement the policies.
Zhao Ziyang's political strategy of economic reform was designed to
meet this challenge. First of all, it was a strategy of gradualism. Rather than rushing ahead with a comprehensive, radical transformation of the entire system, which would threaten the vested interests of many, Zhao was extremely cautious. Zhao recognized that there were many political risks inherent in economic reform and that therefore they were "required to act carefully in reforms, like wading across a river by holding on to the rocks in it" (Gongren Ribao , 13 March 1985). He understood that "the reform of the economic structure is actually a process in which various interests and relations are readjusted and redistributed" and that if the interests of a particular department or locality were harmed by a particular reform, it would oppose the reform (Hongqi , March 1987). Gradual reform might be a long-term process, requiring as long as several generations, but no other strategy had a chance of success in the context of China's political system.
To minimize the threat to central economic agencies, Zhao Ziyang made the crucial decision to create a dual-track system, gradually expanding the market sector while maintaining the plan sector, instead of replacing plan with market at one shot. The policy allowing enterprises to sell their above-quota output on their own at market prices created an economic incentive for managers to press for more market opportunities and allowed central planners to save their functions and their face. Stimulated by the new incentives, the economy grew rapidly, especially in the market sector. This strategy of "letting the economy outgrow the plan" (Barry Naughton, personal communication, 1984) created a transitional dual economy, with numerous accompanying economic problems, but it was politically very successful.[24]
The sequencing of reforms also reflects the political realities of the policy-making process. Zhao Ziyang decided to postpone the most redistributive policies, which would create the most intense conflict within the bureaucracy, namely, the "hard budget constraint" (i.e., bankruptcy) and price reform. Forcing enterprises to take sole responsibility for their own profits and losses (zi fu yingkuei ) is an essential component of market rationality, but it is politically infeasible under current conditions. From the perspective of "balancism" it would be unfair to punish enterprises that cannot make profits because of external, "objective" (keguan ) causes (i.e., prices, demands of planners, fixed assets, etc.). The burden would fall mainly on a few sectors (coal, steel, heavy machinery) and the inland provinces where these sectors are concentrated (author's interviews).
Zhao Ziyang began talking about price reform in 1984. He set up a
group to prepare price reform policies and announced in early 1985 that the State Council would soon take action on price readjustment in industry as well as agriculture (Xinhua , 1 January 1985). The fact that a thorough adjustment of industrial prices (i.e., raising the prices of raw materials such as coal, iron, and steel) was continually postponed and has yet to be introduced,[25] whereas food prices have been liberalized, suggests that it is the potential for intense bureaucratic conflict, as well as the public reaction to inflation, that stopped Zhao from pushing ahead with urban price reform.
Participants in economic policy-making often explain the delay in these two key dimensions of reform as a reflection of Zhao Ziyang's caution on tackling issues that would be opposed by the most powerful agencies within the government bureaucracy, namely, the State Planning Commission, the Ministry of Finance, and the heavy-industry ministries. Zhao pushed up against the stone wall of the state bureaucracy, they say, and he went through only where he found loose stones; he did not waste time pushing against stones that would not move (author's interviews).
The policies that have emerged from the bureaucracy since 1980 suggest that the progress of economic reform was sustained by appeasing the powerful heavy-industry ministries. When reform proposals were first introduced, heavy-industry interests expressed open opposition to them (Solinger 1982). As the prime beneficiaries of the Soviet-style command economy, they viewed economic reform as a direct threat. By replacing some ministers and making reform the ideological line, the Party discouraged outright opposition from the heavy-industry ministries. And over time, the bureaucrats in these ministries came to recognize that they could do better by demanding a larger share of the benefits of reform than by opposing all reforms (author's interviews).
In exchange for their support of various reform policies, the heavy-industry ministries received valuable side-payments. The clearest example of such a side-payment is the "departmental contracts" (bumen chengbao ). The ministries in charge of fuels, raw materials, and transportation perceived that they were falling further and further behind under the dual economic system. Sectors with many enterprises operating under low (or no) plan quotas could sell on the market and reap high profits from the higher market prices, while their sectors had to continue to produce almost entirely for the plan. The petroleum, coal, metallurgy, railroads, and communication ministries, and the airline, petrochemical, and nonferrous metals corporations demanded and received special "departmental
contracts." The ministries contracted with the State Planning Commission to receive a certain amount of investment and inexpensive plan inputs in exchange for delivering a certain amount of output to the plan for the next five years. Any production above this amount the ministries and their subordinate enterprises were free to sell on the market at higher prices (Xinhua , 10 February 1985; Shijie Jingji Daobao , 25 May 1987). The contracts guaranteed access to the market and higher profits to these particular agencies, which allocated the plan burdens and market opportunities to the enterprises under them. The departmental contracts were very popular with the State Planning Commission, because they helped guarantee plan procurement (the lure of the market sector had made this task increasingly difficult), and naturally with the ministries, which benefited from them (author's interviews). The departmental contracts violated the reform principle of increasing enterprise autonomy from administrative control, but they were politically expedient.
The need to obtain the support of the influential heavy-industry ministries for the package of economic reforms probably also explains the striking stability of the shares of central budgetary investment allocated to economic sectors during the period of economic reform. Heavy industry, which claimed the lion's share of state investment under the old system, found its investment allocation cut drastically in 1979–80 when top leaders sought to improve proportional balance by shifting resources to light industry (Solinger 1988). The blow to heavy industry was so severe, and its representatives complained so persuasively, that heavy industry's share of investment was increased again after 1982 (State Statistical Bureau 1985). Since that time heavy industry has continued to receive favored treatment by the Center, and light industry has increased its share of total investment only because most investment is now controlled at the local, not the central, level. Meanwhile, agriculture, which is weakly represented in the central government, has seen its share of central investment reduced despite a 1979 promise that it would be increased (Xinhua , 5 October 1979).
Many reform policies bear the mark of consensus decision making. One example is the decision to create a new tax system for industrial enterprises with a policy called "substituting tax for profits" (li gai shui ). The goal of this policy was to place the financial relations between enterprises and the central government on a stable, institutionalized basis. Instead of each enterprise bargaining for a particular rate of profit retention, all enterprises producing the same product would have to pay at a uniform tax rate. When this policy was originally proposed in 1983 the Ministry of Finance recommended a moderately high tax rate. At a series of meetings called to discuss the proposal, representatives of
heavy-industry ministries and inland provinces complained that under such a heavy tax burden their many unprofitable enterprises would be forced to close. To achieve consensus it was necessary to revise the policy. The tax rate was reduced, but then the Ministry of Finance came in with simulations predicting that the policy would reduce state revenues. The revenue gap was filled by tacking on a so-called adjustment tax (tiaojie shui ), which was applied only to the most profitable medium-sized and large state enterprises (most of them in coastal cities like Shanghai). The adjustment tax was set on an individual-enterprise basis, thereby violating a fundamental principle of reform but creating the compromise necessary to win approval of the policy (author's interviews).
The constraint of consensus building also requires that every policy change leave no one substantially worse off than before. The li gai shui tax regulations guaranteed enterprises that they would pay in taxes no more than the profit they remitted the year before. Whenever the li gai shui policy resulted in a loss of revenues to a particular province, the central government made compensation by reducing the share of total revenue the province was required to remit to the Center (Lieberthal and Oksenberg 1988). Officials agree that the only politically feasible approach to price reform is to compensate those who are hurt by it, with wage subsidies to urban consumers in the case of food prices, and with tax exemptions for manufacturing enterprises in the case of raw-materials prices. One reason that industrial price readjustment has become more elusive over the course of reform is that as the central treasury becomes increasingly strained (because local governments and enterprises are allowed to retain a larger share of financial revenues), it is more difficult for the Center to come up with the financial side-payments necessary to make the package broadly acceptable (author's interview).
Gradualism, postponement of the most divisive issues, side-payments, and compromise—all are the marks of a market reform filtered through a political system characterized by management-by-exception. Zhao Ziyang's strategy recognized the necessity of building consensus of support for economic reform. As he himself put it, "When adopting a reform measure, we must do our best to benefit all quarters concerned so that our reform will always have the support of the broad masses of the people and its success will be guaranteed" (Zhao 1987a).[26]