Introduction
China's transformation from a socialist market into a capitalist economy cannot be easily classified into any of the widely known theoretical models of comparative political economy. The two major reforms, the 1980’s market socialism reform and the 1990’s capitalist restoration, elude any well-defined theory of capitalism. However, among the five main theoretical approaches-- the VoC approach, constructivist political economy, the SSA approach, Hemerijck's welfare state transformation scheme, and Esping-Andersen's/Rice's welfare regime typology-- the VoC approach and the SSA approach are the two best theoretical models that can shed light on the continuity and discontinuity between these two reforms. This paper examines the similarity and dissimilarity, as well as the connection between the two major Chinese reforms, within the perspective of the VoC approach and the SSA approach.
Apparently, the dynamics of capitalism, which underlie the two key reforms, are ideally analysed and discussed in the two chosen approaches. The VoC approach, especially its discussion of institutional complementarities, has the suitable principles to explain how the Chinese state in the 1980s dealt with the absence of institutional complementarities-- a strong relationship between state-owned enterprises and SOEs, for instance-- and how it pushed the movement of later reforms, especially in the 1990s, toward capitalism. The SSA approach has been chosen primarily because it can demonstrate the prolonged economic cycle of the 1980s and the 1990s, and how it eventually resulted in the transformation of the Chinese economy from a socialist market to a capitalist one.
On the other hand, the three other theories do not thoroughly cover the components of capitalism, which make them less suitable for the analysis. The constructivist theory is not relevant to the topic because it focuses on the social construction of the global order, and not on the economic actors' rational-choice behaviour-- the two Chinese reforms can be better explained through the latter. The Hemerijck's welfare state transformation scheme is also irrelevant to the analysis because the transition of China does not directly or clearly follow the three separate stages of welfare state remodelling. And, Esping-Andersen's/Rice's welfare regime typology's discussion of conservatism-liberalism axis can actually be used to analyse the case, but it is better matched with the Voc approach's LME/CME binary.
Theories
A. Varieties of Capitalism (VoC approach)
Hall and Soskice, in their influential theory 'varieties of capitalism' (VoC), describe the wide-ranging domain of inter-firm relations. This area is illustrated as “the relationships a company forms with other enterprises and notably its suppliers or clients, with a view to secure a stable demand for its products, appropriate supplies of inputs, and access to technology” (Hall & Soskice, 2001, p. 23). As stated in the theory inter-firm relations and their consequent policies or approaches greatly depend on the institutional environment wherein these firms are situated. The informal and formal norms or criteria are key prerequisites for firms' behaviour on the market. As summed up by Hall and Soskice, “strategy follows structure” (Elsner & Hanappi, 2008, p. 26). The value of institutions is viewed largely as their ability to shape up strategic relations between economic entities and successfully addressing coordination issues of firms—inter-firm relations, corporate governance, vocational education and training, industrial relations, and internal employer relations (Hall & Soskice, 2001)-- while others claim that institutions are either sources of income, mediators of power, or socialising entities.
The theory also explains that institutional complementarities lead to the flocking together of clusters of mutually dependent institutions in different forms of political economy. The theory recognises two absolute forms, namely, Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs), each one with its own institutional structures. Both types are distinct in the manner firms address coordination issues-- either through strategic relations or through market networks-- and structure their inter-firm relations (Hall & Soskice, 2001). Competitive market situations that are usually administered by rigid antitrust policies define LMEs. Such policies must discourage firms from collaborative actions like appropriation of territories, distribution of market shares, fabricating overall industry output, and price fixing (Hall & Soskice, 2001). Markets are volatile and push firms to capitalise on their opportunities, assets, and capabilities.
In contrast, firms within CMEs are encouraged to build value, yet they operate in an environment that is governed by close inter-firm relations. Firms are interlinked by all forms of systems, and the flow of information is critical for the operation of the market economy. Instability and risks are largely counterbalanced by means of negotiation (Hall & Soskice, 2001). CMEs, as further explained by Hall and Soskice (2001), are known for power distribution within the firm, increased level of coordination among employers, inter-firm systems, stakeholder control, lifelong bank-led 'patient' funds, substantial financing of certain skills, solid internal labour markets, and bargaining relationship between employers and unions.
Although China is clearly a socialist market economy it has steadily progressed towards private property legitimisation. Nevertheless, it is still a state ruled by the Communist Party. China's fairly indefinite polarity-- a socialist state with capitalist features-- is unique due to its extraordinary economic growth and development (Fewsmith, 2010). The VoC approach would thus be helpful in analysing various factors in the process of transformation from a socialist state to a socialist market economy. Several of China's reform programmes resemble the LME approach. The financial structure of China is definitely bank-based, depending largely on state-led banks for financing. For instance, in 2005, roughly 78% of capital accumulated in China's domestic market originated from banks (Witt, 2010, p. 5). Even though this would appear to place China directly into the CME group, more profound analysis reveals that the issue is more complicated than it seems.
B. SSA Approach
Fundamentally, the SSA approach aims to give an explanation of both the prolonged durations of faster growth and the prolonged durations of recession or stagnation. The SSA approach offers a new means of examining the growth and system of capitalist economies. The concept of SSA denotes the network of institutions that facilitate the mechanism of capital accumulation. The core premise of the SSA approach is that a prolonged duration of quite accelerated and durable economic growth demands an appropriate, efficient SSA. Although an SSA brings about security and progress for certain duration of time, sooner or later the SSA disintegrates. This would then usher in a period of insecurity and stagnation until a newly developed SSA can be established (Kotz & McDonough, 1994). Moreover, the SSA approach presumes that durable economic performance is basically determined and regulated by institutional networks and arrangements. Growth in the long run requires the formation of appropriate institutions which generally build the needed circumstances for continuous productivity, growth, and capital accumulation.
China and other socialist states, similar to capitalist economies, promote investment and development through accumulation. Both socialist and capitalist economies prosper by encouraging producers to generate surplus. Investment decisions in socialist states are politically established based on the norms that are paramount at the moment for those whose making the decisions, such as welfare (Wu & Lansdowne, 2009). The SSA approach is the specific arrangement of social power within which the process of accumulation occurs. Such arrangement defines a relationship among social groups within the system of production by which extraction of surplus occurs (Kotz & McDonough, 1994). Such power relations support the institutional systems by which the process functions.
Policy Reforms
A. The 1980’s Market Socialism
The first major move toward state-led reform or 'market socialism' occurred under Mao's appointed heir, Hua Guofeng. Hua was considered an economic reformist. With ample backing from Chinese leaders, particularly Deng Xiaoping, Hua brought forth his economic modernisation policy (Lin, 2006). Fundamentally, it was an investment-oriented, state-centred policy, with an emphasis on major industries (e.g. massive buildings, huge machineries, heavy equipment). Hua's policy has been dubbed as the 'big-push industrialisation' (Naughton, 2007, p. 55). As stated in the big-push industrialisation model of economic growth, the vicious cycle of underdevelopment can be cut off through publicly regulated investment by pushing economies toward the elimination of deficits in private incentives (Naughton, 2007) that discourage industries from taking up modernised production processes and attaining economies of scale.
However, Hua's policy was aborted in 1979, in part because of change in leadership-- Xiaoping and Chen Yun supplanted Hua as China's paramount leader. The 1980s is characterised by continuous reform under Deng Xiaoping's leadership. Deng and his colleagues abolished the Maoist revolutionary framework and launched reforms of momentous importance in almost all sectors of the external and internal political economy of China (Coase & Wang, 2012). Re-established in 1976, the 'four modernisations' policy was proclaimed by Deng in 1978. This reform comprised limited foreign trade liberalisation, the designation of specific economic zones aimed at exports, the creation of an agricultural market led and regulated by the state, and the abolition of the 'people's Communes' (Coase & Wang, 2012)-- a generally provincial, Communist governmental and social system in China brought together for shared livelihood.
However, the reforms reached three major crises in 1987: food insecurity caused by the inadequacy of staple foods (e.g. corn, rice) in spite of an exceptional agricultural production in that period; an enlarging disparity between agricultural and industrial prices resulting from the inadequacy of the industrial goods generated by the public domain to fulfil the demands and needs of the labourers in the newly formed agricultural market; and, a rise in accumulated consumption greater than raised inflation and economic development (Zhong & Wang, 2016). Hence, China's economy in the latter part of the 1980s was generally a diverse structure. It may not be precisely defined as either a market economy or a centrally planned economy. According to Zhong and Wang (2016), the government was devoted to additional extensions of the reform effort as a precondition for average economic development, yet simultaneously it was obligated to firmly sustain major components of the economy-- especially the production of grain and inflation-- in order to inhibit the occurrence of severe political conflict.
Within such conditions, dynamics in the economic structure functioned against one another, resulting in what China's leaders referred to as domestic 'contradictions' (Coase & Wang, 2012). The economy, on the one hand, was not strongly regulated by the state programme anymore due to the massive and expanding market domain. The market, on the other hand, could not work productively due to the fact that numerous commodities remained under the jurisdiction of the government and almost all prices remained fixed or limited by the public sector (Coase & Wang, 2012). Under Xiaoping's administration, the whole of China was experiencing remarkable growth yet not fully stable or efficiently regulated, and thus incapable of cutting off the mechanism without threat or uncertainty.
B. The 1990’s Capitalist Restoration
For the most part of the 1990s, the public sector was plagued by the unsteady growth of urban private businesses, designated economic zones, and the rural industrial quarter. In addition, it was intentionally looted by the provincial public officials who, in an environment of widespread fraud and corruption, engaged in the pilfering of social resources and capital of the public businesses reliant on the central finances to sustain the flow of investments and financing in their provinces' private domain (Fewsmith, 2010). In order to sustain their finances, the provincial agencies can merely collect taxes from their private enterprises, while the needs and demands of the provincial bureaucracies widened as central financing declined.
The central government eventually realised that its ability to acquire social surplus goods from the public domain had weakened, and had to work out or discuss with the local governments their inputs to the central budget. Agricultural privatisation resulted in massive unemployment, social inequality widened, and regional imbalance escalated (Lin, 2006). The reforms launched in the early 1990s stressed the importance of a well-built and stable macroeconomic foundation for sustainable progress and growth. Thus, the Chinese Communist Party (CCP) proclaimed the programme for public sector privatisation, and, from then on, the restoration of capitalism became a permanent reality.
A generally neo-Keynesian approach was adopted by the Chinese government to meet demands, fixed particularly in the western and central areas, whose governments had appealed to a policy reform due to their lack of ability to bring in market gains (Wu & Lansdowne, 2009). Public spending increased from 1997 to 1999, as the budget deficiency rose at the same time. The consumer price index dropped in 1999. China encountered completely the outcomes of a capitalist economic period (Zhong & Wang, 2016). In such crisis situation the China's government made the decision to set into motion the final stage of the privatisations and the streamlining of the public sector.
Discussion and Analysis
The VoC approach can offer a basic framework for examining the features of institutional complementarities in the 1980s' market socialism reform and the 1990’s capitalist restoration in China. Yet, there are several issues that have to be taken into consideration. As a number of scholars have mentioned, the dichotomy of LME and CME classification neglects significant differences within each kind, especially considering the varied types of integrated capitalism in the CME group (Elsner & Hanappi, 2008). In fact, attempting to identify whether China is advancing toward a clear-cut framework of LME in contrast to CME blurs the key function that the state fulfils in the reform transition of China since the leading premise of the VoC approach is basically centred on the firm. In the VoC approach, actions towards industrial relations, finance, vocational training, and corporate governance (Hall & Soskice, 2001) are determined by firms in strategic relationship with other players.
Yet, under the 1980s' market socialism reform, the Chinese state limits and deliberately manipulate the environmental criteria of those actions. Therefore, institutional complementarities are relevant to China's transition from market socialism to capitalism, yet such complementarities preoccupy the decisions of state actors. Indeed, while China was transferring market foundations to its economy during the 1980s reform, the state tries to take a hand or get involved to either undermine the issues or to counteract the problems brought about by the absence of institutional complementarities. Furthermore, with regard to the reform of state-owned enterprises (SOE), the choice to undergo privatisation or reorganisation is seldom made by the public bureau itself. Rather, the underlying policy choice is made by the central government, and local bureaucracies are then assigned to restructure public firms. There definitely were institutional complementarities during the 1980s market socialism reform-- for instance, the relationship between state-led banks and SOEs-- yet these were a mere minor feature of the 1980s reform.
On the contrary, these institutional complementarities, which, according to Hall and Soskice (2001), only exist “if the presence (or efficiency) of one increases the returns from (or efficiency of the other” (p. 17), are dynamically present during the 1990’s capitalist reform in China. Under the VoC approach, firms, as core players in the economy, should be involved in a number of political economic domains. Regional competition emerged as the key transformational mechanism in the 1990s, transforming China into a capitalist economy. In 1992, China enforced price reform; in 1994, tax reform; and, started to execute the privatisation of state firms in the latter part of the decade (Fewsmith, 2010). These reform programmes led to the emergence of a collective national market, which enforced market control over all economic players (Coase & Wang, 2012), transforming regional competition into an institutional complementarity dynamics. Such dynamics were absent from the 1980’s market socialism reforms or, more specifically, this form of regional competition did not exist in the 1980s that could have made possible the formation of a common national market.
On the other hand, the SSA approach explains the continuity, rather than the discontinuity, between the 1980s market socialism reform and the 1990’s capitalist restoration in China. The SSA approach can shed light on the nature of China's transformation into a capitalist economy, as well as the different phases of capitalism that have characterised each prolonged growth. Since the 1980s, large-scale reforms have been implemented to privatise state enterprises and communes, promote China's involvement in capital movement and foreign trade, and boost private property networks, investment, and competition (Lin, 2006). Enterprises or capitalists need high level of profits to make an investment, but they should also have a significant level of assurance in their anticipated investment returns, an assurance that can be guaranteed only by a cluster of institutions that is advantageous, beneficial, and stable. The SSA is this cluster of institutions that is beneficial to investment. Looking at the SSA of the two major Chinese reforms at issue, it becomes evident that the 1980s market socialism reform was in fact a prerequisite to the 1990s capitalist restoration.
In the latter part of the 1980s, China's economy was a transitional structure, slowly shifting from central planning and eventually setting into motion some of the market economy's processes and institutions. The SSA during the 1980s, as identified in the VoC approach that made this transition possible was the group of strategically related state-led enterprises or SOEs. Major SOEs are described as 'small societies' that carried out various operations, and their productive sector shoulders the financial pressure of those sectors that are non-productive (McDonough et al., 2010). As explained by Wu and Lansdowne (2009), this is one of the key foundations of the 1990s capitalist restoration. Rather than having a single state-led firm carrying out production and the delivery of different welfare-based services, independent firms specialising on a single operation can be formed to provide various goods and services with a market-based wage structure.
During the 1980s, the economic crisis in China was brought about by the absence of institutional complementarities, as demonstrated by the VoC approach, as well as the lack of a comprehensive SSA, such as a strong link between energy and transport. The 1990’s capitalist restoration pursued the growth of infrastructure, institutional complementarities, and SSA to raise productivity and foster long-term economic growth. Basically, both the VoC approach and the SSA approach, in relation to the two major Chinese reforms, demonstrate that industries should build institutional complementarities and linkages in order to achieve stable economic development.
Conclusions
As shown in the analysis, the two key Chinese reform-- the 1980s market socialism and the 1990s capitalist restoration-- have similarities, dissimilarities, and are closely interrelated. The VoC approach reveals that the difference between the two reforms is the concept of institutional complementarity-- the 1980s' market socialism failed partly because of the poor level of institutional complementarity, whereas the 1990s' capitalist restoration flourished because of its large-scale presence. The SSA approach, on the other hand, shows that the lack of productive SSA in the 1980s led to the move towards a capitalist economy, and that the efforts to build an efficient SSA in the 1980s encouraged the formation of a common national market, which further promoted regional competition and, thus, capitalism.
References
Coase, R. & Wang, N. (2012) How China Became Capitalist. New York: Palgrave Macmillan.
Elsner, W. & Hanappi, G. (2008) Varieties of Capitalism and New Institutional Deals: Regulation, Welfare and the New Economy. UK: Edward Elgar Publishing.
Fewsmith, J. (2010) China Today, China Tomorrow: Domestic Politics, Economy, and Society. UK: Rowman & Littlefield Publishers.
Hall, P. & Soskice, D. (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford, UK: OUP Oxford.
Lin, C. (2006) The Transformation of Chinese Socialism. London: Duke University Press.
Kotz, D. & McDonough, T. (1994) Social Structures of Accumulation: The Political Economy of Growth and Crisis. Cambridge, UK: Cambridge University Press.
McDonough, T., Reich, M., & Kotz, D. (2010) Contemporary Capitalism and Its Crises: Social Structure of Accumulation Theory for the 21st Century. Cambridge, UK: Cambridge University Press.
Naughton, B. (2007) The Chinese Economy: Transitions and Growth. London, England: MIT Press.
Witt, M. (2010) China: What Variety of Capitalism? Oxford, UK: Oxford University Press.
Wu, G. & Lansdowne, H. (2009) Socialist China, Capitalist China: Social Tension and Political Adaptation Under Economic Globalization. London: Routledge.
Zhong, X. & Wang, B. (2016) Debating the Socialist Legacy and Capitalist Globalization in China. New York: Springer.
