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Economy

The Changing Face of Rural Enterprises

Since the 1970s these enterprises have been accommodating and adjusting to the ever-moving institutional environment
Wei Zou

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1The aim of this paper1 is to provide an overview of the emergence and development of China’s xiangzhen qiye, the township and village enterprises (TVEs)2, from an institutional viewpoint. The questions that interest us include: How is it that TVEs emerged under seemingly adverse political and economic conditions? How have they been able to achieve such an exceptional performance over the past two decades? What role did central and local governments play in their development? What role have TVEs played in China’s economic reforms as a whole? Is the development of TVEs a special case in China alone or is it a paradigm that can be generalised to other less developed countries ? We emphasise the point that the emergence of the TVEs is not a forced institutional change designed and guided by the central government, but an induced institutional innovation that began within the society. Instead of seeing TVEs as a once-and-for-all institutional invention, we treat the institutional innovation embodied in TVEs as a function of the institutional environment per se. The endogeneity of institutional innovation not only contributes greatly to TVE development but is also an alternative approach to rural industrialisation.

2During the last two decades, China has pursued rural industrialisation at an unprecedented speed through the development of the TVEs. Although other economies, such as Taiwan’s, took similar roads to rural industrialisation, TVEs in China have no equal elsewhere in their unprecedented growth rate and magnitude. Official statistics indicate that from 1978 to 1994, the average annual growth rate of rural industrial output was about 27%, almost three times the growth rate of national GDP. Rural industry surpassed agriculture in size in 1987 and now comprises half of the total Chinese economy. From 1986 to 1998, the average asset scale of TVEs increased tenfold and the average scale annual growth rate is about 25% (see figures 1 to 5).

3The magnitude and exceptional performance of the TVEs in China have drawn the attention of the international academic community. The new growth theory emphasises the positive externality created by accumulated knowledge, human capital and social capital in stimulating sustainable growth3. Culture theory addresses the role of co-operative culture among Chinese villages in enhancing TVE development4. Others, so fascinated by the perversion of public firms owned by local governments, that they regarded the public ownership of TVEs as static, optimal institutional choices by peasants5. Another theory explains the success of TVEs from a standpoint of comparative advantage6. While these studies may serve as explanations for the success enjoyed by TVEs in 1980s, they do not analyse the specific institutional environment and its change behind the TVE performance, nor do they offer a comprehensive framework for predicting the likely development of TVEs.

4In contrast with the experience of Eastern Europe where privatisation also took place and the privatised enterprises operated without direct interference of government, TVEs are neither state-owned nor private enterprises, and are innately correlated with local government. Many people think TVEs have benefited from their vaguely-defined property rights, from the two-track economic system under transition and from the paternalist care of local officials, yet this experience is too specific to be generalised as a model for rural industrialisation. The slowdown of TVE growth since 1990 clouds their prospects. While the general significance of TVE development is doubted, the dynamism of the nature of the TVEs is rarely mentioned. This paper will trace the path of endogenous institutional innovation within them.

5We first present a brief description of the institutional environment in rural China up to the 1970s to explain the emergence of the TVEs in the late 1970s and early 1980s. We then focus on the 1980s when TVEs prospered, and analyse the specific ownership in these enterprises. The problem at the heart of this debate is the role of local governments, the nature of collective ownership in TVEs and the related significance of this to TVE performance. We continue with their reorganisation, restructuring and privatisation since the 1990s, and end in summary with the dynamic change in the institutional structure in TVEs over the last three decades.

The emergence of TVEs as an induced institutional innovation

6An institution is a set of behavioural rules which pertain to social, political and economic behaviour, and are used to govern a variety of social interactions7. Institutions can be separated into two categories: institutional environment and institutional arrangement. The former is the set of fundamental political, social and legal ground rules that govern the ways in which people can co-operate and/or compete with each other8. Most people mixed these two categories and treated the institutional change as an exogenous variable. Others focus on some kind of institutional arrangement, e.g. ownership, while supposing the institutional environment is always given9. Yet in a less developed economy, both institutional environment and institutional arrangement are far from optimal and need reform. Our first step will be to briefly summarise the institutional environment in pre-reform rural China to explain why TVEs emerged at that time and what they meant to rural China.

7China has a history of a hugely diversified and more or less isolated rural economy. Before 1949, the output of handicraft workshops and other household sideline production in rural China was about 1.16 billion yuan in 1957 prices10, which is not an accurate figure if taking into account the lengthy civil war. All the workshops then were privately owned and operated. The natural development of rural capitalism was cut off and pre-reform rural China witnessed two nationwide industrialisation campaigns.

8The first of these was the rural co-operative movement in the 1950s. Because of the nationwide collective dream and the uncertainty of political winds, few dared to form handicraft co-operatives even though they were asked to. In 1957, the value of sideline production only accounted for roughly 4.3% of the total rural output. Rural industry was on the verge of disappearing. Obviously dissatisfied with the poverty and backwardness in rural China, central government moved further to implement communist industrialisation. In the Great Leap Forward period of 1958-59, consistent with the heavy industry development strategy, large-scale commune and brigade enterprises (shedui qiye) were established, many of which were engaged in the production of steel with rudimentary technology. These enterprises employed 18 million people by the end of 1958, but the results were catastrophic and triggered acute shortages and nationwide famine. In the subsequent years, the output value of commune and brigade enterprises plunged to 410 million yuan (1957 prices) in 1963, i.e., only 35% of the value in 1949. During the following six years, the development of rural industry was in stagnation. On the one hand, although private enterprises were compatible with the backward condition in rural China and transaction cost-saving, the political costs were too high to sustain them. On the other hand, it was impossible for communist industrialisation to succeed. Although the political costs were in reality fairly low, the wide-spread poverty and immobility of resources, could hardly support industrialisation on such a huge scale.

9Then came the second industrialisation in the early 1970s, when central government emphasised agricultural mechanisms and there appeared a tendency for decentralisation in economic planning and an advocate for “self-reliance”. Many rural areas tried again to set up commune and brigade enterprises manufacturing agricultural machinery, repairing tools, providing hydroelectric power or supplying construction materials. Despite their limitations in technology, scale and management, the output of commune and brigade enterprises grew at an average rate of 25.7% during 1972-7611. Basically, these enterprises were politically safe due to their communist ownership, and economically acceptable due to their small size, local—dependency and primary technology.

Number of TVEs (millions)

Number of TVEs (millions)

Sources: China Statistical Yearbook, 1997, 1998. The Yearbook of Chinese Township and Village Enterprises, 1995, 1996 1997, 1998. China Economic Yearbook, 1997, 1998.

10The spurt in the growth of TVEs in the late 1970s and early 1980s was not a natural evolution of commune and brigade enterprises. Even in 1978, the output value of commune and brigade enterprises only accounted for 21.2% of total rural output, and their employment only 9.5% of total rural labour. These enterprises were targeted at agricultural modernisation rather than at absorbing rural labour, they paid more attention to political requirement than to economic rationale. They were consequences of political movement implemented by the state, but the emergence of TVEs was not designed or guided by the state, even not known to the latter. The peasants took advantage of cheap land and labour, semi-formal or informal fund-pooling, the authority of the existing rural hierarchy or kinship, of local market and low transaction costs, of central government ignorance, and eroding control over income disparity since the adoption of the household responsibility system, and gradually shifted their resources into rural industry.

11TVEs emerged spontaneously first in relatively resource-abundant coastal areas, especially the Yangze and Pearl River deltas, then expanded to relatively isolated central areas. Because of the differences in economic or institutional factors, such as the traditional resource base, proximity to markets and to urban industry, pre-1949 industrial and commercial traditions, delivery requirements for grain and other crops under the agricultural planning system, and pre-reform rural industrialisation, there was a remarkable degree of diversity among TVEs. What interests us most is the plurality of ownership structures in TVEs.

The nature of TVEs and their dynamism

12The intimate relationship witnessed between local governments and TVEs has long been singled out as an important characteristic of TVEs and has instigated great academic interest and controversy. The negative school regards the TVEs as a partially successful makeshift, half-way house to real private ownership12. Others take a positive viewpoint, yet differ in their arguments. Some regard the involvement of local governments as a central government decision to co-ordinate the decentralised market economy with a relatively centralised political system13. Some see the collective firms in rural China as a manifestation of cultural common sense14. Some link the local government ownership with imperfect market, imperfect information, and the gradualist features of China’s reform15. Still others regard TVEs as an informal joint venture between the state and the private sector, and as a result, they benefit from both the collective system and privatisation16.

13The negative school pays too much attention to the strain or even contradiction between local governments and TVEs. Actually the marriage between these two were not always involuntary. The positive school is right in its more or less institutional perspective, yet both the institutional arrangements and the institutional environment are taken as static or exogenous. We will analyse the nature of TVEs and its dynamism from emergence up to now to shed light on how the ownership in TVEs has been changing according to the institutional environment.

1978-1984: collective ownership dominates

14During this phase, collective ownership dominated across the country, even in 1984, 67.46% of TVE employment and 85.63% of TVE output came from collectives. The features of collective ownership in TVEs can be summarised as:

  • 1. The production factors (land, labour, capital and materials, etc.) were owned by the community. Namely each person in the community had the same amount of property and no-one had complete ownership.

  • 2. There was no mobility of production factors across communities. Capital accumulation and fund-raising was restricted in the town or village and conducted by the local governments.

  • 3. There was no possibility for members of the community to transfer their rights to TVE property. If they left the community, they automatically lost their part of the property.

  • 4. The rewards for members of the community were wages or public services provided by local governments. TVEs profits were controlled by local governments, rather than by any single entity.

  • 5. The leaders of local governments had a big say in production, management and distribution of TVEs, yet they still treated collective TVEs as public property.

2. Labor force employed in TVEs

2. Labor force employed in TVEs

Sources: China Statistical Yearbook, 1997, 1998. The Yearbook of Chinese Township and Village Enterprises, 1995, 1996 1997, 1998. China Economic Yearbook, 1997, 1998.

15Compared with standard property rights, the property rights structure of TVEs is incomplete. Ownership is not exclusive (figures 1 and 2), or transferable (figure 3). Nor is there a specific entity responsible (figures 4 and 5). As publicly-owned entities, what collective TVEs are to a small rural community is what state-owned enterprises are to the Chinese. It is easy to predict that TVEs may perform just as poorly state-owned enterprises due to the vaguely-defined property rights. Yet TVE performance was much better than expected. It seems to challenge the property rights theory, which is based on the context of a developed economy, yet the ownership arrangement in TVEs reflects only the institutional environment from which it emerged.

16The planning system dominated the allocation of production factors, which was strongly favourable to collective enterprises. It was a long time before the prices of most products were finally liberalised. The important materials―steel, coal, wood, etc.―were strictly controlled and rationed because of severe shortages. In 1981, 53% of the production of coal was rationed; 52% of steel production was rationed. In 1983, the percentages were still as high as 51% and 58% respectively17. In rural areas, local governments were privileged enough to be able to allocate the materials that served as a precondition for the establishment of TVEs. Also, most of the TVEs emerged as resources-based industries, needing to accumulate agricultural products, such as grain, cotton, oil, etc., as inputs. But most agricultural products circulated within the planning system. Usually the private enterprises had to pay twice the prices paid by collective enterprises for inputs from state units or supply-and-marketing co-ops. In some cases, it may be almost impossible to obtain rationed inputs such as cement or timber without resorting to corruption. Instead of repeatedly bribing the local government officials, the peasant households often found that it paid to put their enterprises under collective control.

17Collective TVEs had more access to land, one of the most precious resources in rural China with a high labour-to-land ratio. Land shortages worsened, and competition for land became fiercer with the establishment of small and medium-sized towns and the upsurge of TVEs. The local governments tended to assign land to collective TVEs because they were considered as collective assets. In some land-short societies there was also a tendency to hoard land. Because land was allocated by the state, specialised local bureaus and collective TVEs considered it their own property. They frequently acquired more land than they could use and even let it lie idle for possible future use, aggravating the land shortage and making it even more difficult for private enterprises to get land.

18Additionally, collective TVEs enjoy easy and low interest rate loans. Lack of capital and underdevelopment of rural financing system were severe problems in rural China. Since Rural Credit Co-operatives (RCC) have long been directed by the highly concentrated plan system, the relationship between these co-operatives and local government was strong, while that between the RCCs and the farmers was weak. The volume of loan funds was too limited, and the loan-to-deposit ratio was low. Interest rates were not flexible and ill-suited to the competitive terrain. RCCs seemed to fall between formal and informal financial systems. Formal because it was under the control of Agricultural Bank of China, the bank specialising in supporting rural development and implementing rural policies, and informal because it used to be manipulated by local government to wield significant power upon TVEs without proper economic accounting. Obviously, the RCCs have extended more loans to collective TVEs than to private enterprises because of government directives, not because the collective TVEs are intrinsically more efficient or because local banks recognised that the local governments were better assessors of risk.

19Secondly, there was a tradition for local officials to interfere in economic activities, with an expectation of taking advantage of their political priority to make themselves better off not only economically but also politically. Actually economic performance has always been one of the most important criteria for official promotion at each level. Government officials, through the frequent, political movements against right-wing tendencies, realised that it was better for them to keep a left-wing front on economic activities. Moreover, learning from the experience of central government control over the state-owned enterprises, local officials tended to take collective ownership of TVEs for granted. This created an environment in which TVEs could hardly develop without being owned, managed or closely entwined with local governments.

20There were 1.5 million commune and brigade enterprises in 1978, with employment of 28 million and gross income of 43,000 million yuan 18. These firms were directly controlled by local governments and were renamed TVEs in 1984. The pre-reform rural bureaucracy remained largely intact despite organisational reform that had led to abolition of the commune system, and kept powerful control over economic activities including those of TVEs. The newly established township government, which constituted the lowest level of the formal state structure, reflected extensive organisational changes in line with the shift to greater reliance on market co-ordination. However, there remained considerable overlapping of ties between the township governments and the new corporations that were supposed to manage enterprises. Frequently the same cadres who were most influential in the township governments also held prominent positions in the new township corporations. Moreover, many cadres who had served in the former commune administration remained prominent in the new township governments. They controlled the RCCs, mobilised the resources, decided the allocation of land, and managed economic activities in a dictatorial way. So on the township or town level, almost all the large TVEs were transferred from former commune and brigade enterprises.

21At the village level, the situation seemed to be different. The institutional reforms, especially the prevalence of the household responsibility system, had a greater impact. Village cadres had little direct control over the management of economic activities since collective enterprises were leased to private parties, equipment sold out, and land assigned to individual households. But village cadres still influenced the economy by negotiating contracts and leases, and acting as middlemen and brokers in local economic transactions. Nonetheless, the power of village cadres had shrunk considerably, leaving room for private enterprises (usually less than five employees in size) to emerge at village level.

22Thirdly, the organisational environment was favourable for direct local government control over TVEs. The legal system in China was quite incomplete. Instead of implementing a single law with regard to all enterprises, there were different laws for different enterprises. Yet there was no specific law for TVEs until as late as 1997. So the hierarchical administration for TVEs was inconsistent both vertically and horizontally.

23TVEs used to be seen as a supplement to agriculture, the vertical administrative structure supervising them was rather loose. Unlike other industrial sectors in China that are defined by product type, TVEs included any factory, firm, enterprise, hotel and shop located in the rural areas. There was a great diversity in TVE production, almost covering all the sectors. Thus TVEs were subject to much vertical administration. The Township Enterprise Administrative, established in 1979 under the Ministry of Agriculture, was supposed to be the top bureaucratic structure guiding rural industries, but other ministries and commissions had their own offices for rural industry. Because rural industrial production crossed so many product lines and therefore challenged the products of so many ministries, most ministries had to co-ordinate with rural industries in some manner. The same situation existed at the provincial level. As a result, these overlapping bureaucracies actually provided such a loose supervision that direct control often lied with the local governments.

24For example, county supply and marketing co-operatives, which until the mid-1980s had a monopoly on the purchase and sale of most agricultural inputs and production, controlled a large number of rural enterprises. In Wujiang County of Suzhou Municipality, the supply and marketing co-operatives owned 42 factories and employed more than 8,000 workers19. In Zouping County, Shandong province, there were 26 collective enterprises under county control. Among them, 11 were owned by the supply and marketing co-ops20. The most important reason for government intervention was that TVEs had become the local governments’ main source of revenue. With the introduction of the household responsibility system, each level of local governments contacted with its immediate superior to turn over a fixed amount of funds and keep the remaining surplus. As a result, “local governments use every method possible, including many that straddle the boundaries of legality, to promote rural industry, at the same time milking it to supplement their government budget”.

25Fourthly, The political environment was favourable for experimentalism in rural areas. Due to long-lasting poverty and sharp inequality between rural and urban areas, central government began to pay more attention to countryside grievances, complaints and strong desire for de-collectivisation. As far as peasants were concerned, their pursuit for private interest was a cause rather than a consequence of reform. The initiative to do away with collective farming, surreptitiously at first and increasingly openly later, essentially confronting the regime with a fait accompli. They also knew that their pursuit of prosperity could not be fulfilled if in contradiction with communist political requirements. After their experience of the household responsibility system, the peasants realised that local governments could selectively implement policies from central government and the connivance and cover-ups by sympathetic local cadres could help TVEs survive before they got official authorisation.

26As for central government, there was a rapid change in the political climate, particularly the tolerance of experimentation symbolised by the slogan, “truth through facts” (shishi qiushi). From 1978-84, although without sanction from the central government, the number of rural enterprises increased fourfold, the amount of labour force doubled, gross output value increased fourfold. The significant performance surprised the central government so much that it finally stepped in to express its support. In 1984, TVEs were formally named xiangzhen qiye. And the peasants were highly encouraged to find their own ways to prosperity, among which TVEs were suggested successful.

27Therefore, in the first phrase, TVEs appeared in advance of the extant institutional framework and were more or less underground. They had to be firmly rooted in the pre-reform institutional environment and take advantage of the leeway of inconsistency of the administration system. Their survival depended on two different, but connected capabilities. One was management capability to make production decisions. The other, synthesised as “procurement capability”, was the ability to co-ordinate in a non-market allocation system, to obtain preferential policy treatment, and to solve disputes with other production units at low cost through economic and non-economic methods. During this phase, management capability seemed not so significant, because there was little competition from state-owned enterprises and among TVEs due to the immobility of factors and the shortage of consumer goods markets. But procurement capability may have been of great importance due to the lack of markets, especially factor markets. TVE managers had to get production factors, loans, licences, etc., through administrative bureaucrats other than through markets. Most productions and transactions were personalised and access to scarce inputs was a matter of privilege. The contracts were costly to write and enforce because many business rules were either vaguely defined or hard to enforce. Taking advantage of the original administrative resources, the direct control of local governments helped to reduce their management and transaction costs.

1984-89: The Diversity of Ownership

28In this phrase, the dominance of collective ownership weakened, a variety of ownership appeared with a sharp increase in private enterprises. In 1984, 72.7% of rural TVE enterprises were peasant-run joint co-operative (gufen hezuo danwei) and private businesses (siying qiye), and produced 16% of TVE output value21. In 1985, non-collective rural enterprises increased to 87.1%. Their contribution to TVE output value increased to 27.1% (see figures 6 and 7). The diversity of ownership was also an endogenous consequence of the then changed institutional environment.

29A slowdown of agrarian development emerged due to the worsening of agricultural returns. In 1984, the grain output dropped for the first time since 1978 and stagnated until 1989, which symbolised the decreasing returns to the one-shot household responsibility system reform. Agricultural investment from all sources lagged, leading to a decline in such indicators as area covered by irrigation. Rural per capita income, which had more than doubled between 1978 and 1984, largely stagnated in real terms during the remainders of the 1980s. An important reason for this was that in 1985, the state in effect lowered procurement prices for grain to reduce the costs of buying above-quota grain and the burdens of subsiding urban consumers, while keeping high industrial input prices.

3. Gross output of TVEs

3. Gross output of TVEs

Sources: China Statistical Yearbook, 1997, 1998. The Yearbook of Chinese Township and Village Enterprises, 1995, 1996 1997, 1998. China Economic Yearbook, 1997, 1998.

4. Industrial output of TVEs

4. Industrial output of TVEs

Sources: China Statistical Yearbook, 1997, 1998. The Yearbook of Chinese Township and Village Enterprises, 1995, 1996 1997, 1998. China Economic Yearbook, 1997, 1998.

30This situation led to two-fold results. Agriculture could no longer support TVEs by production factors and capital accumulation, it even became a drain on local resources. More and more peasants were pushed away from agrarian activity because of the enlarging disparities between those whose earnings came largely from non-agricultural sources and those standard farmers. Rural income in the coastal provinces, where TVEs were concentrated, grew much more rapidly than in the central and western provinces. Due to the rural territorial inequality, farmers complained that it did not pay to farm. Local governments accordingly tried to divert procurement funds to more profitable purposes (e.g., hounding diesel fuel and selling at market prices), which resulted in a large-scale issuance of IOUs (bai tiao) and further disadvantaging farms.

31The political climate changed in favour of the development of non-collective enterprises. The economic policies from the central government can be summarised as the following popular slogans then. First, “controlling better by controlling less” (fenquan rangli). The decentralised fiscal and personnel system was designed to increase responsibilities and incentive, it also encouraged local cadres to be hyper-responsive to their immediate superiors and hyper-enthusiastic in collecting fiscal revenues. Second, “White or black, a cat is good as long as it can catch rats” (bulun baimao heimao, zhuadao laoshu jiu shi haomao). Deng’s words gave an indirect permission for diversity in ownership structures, and they were interpreted by lower-level cadres as “collective or private, an enterprise is good as long as it can contribute revenues”. Third, “let a few people get rich first” (rang yibufen ren xian fu qilai). Rural China has a deep belief in Confucianism and a long tradition for egalitarian distribution of income, but people were unwilling to put with the resulting equally widespread poverty any longer, the government also had to compromise. Fourth, “wait and see” (guanwang). There was a tendency for central government to reaffirm private enterprises. Although there were rules restricting private enterprises to a rather small size, the government did not immediately stop or punish violations of the rules. In 1988, a constitutional amendment was drafted giving private enterprises owners legal status for the first time since the 1950s.

5. Contribution of TVEs to rural income per capita

5. Contribution of TVEs to rural income per capita

Sources: China Statistical Yearbook, 1997, 1998. The Yearbook of Chinese Township and Village Enterprises, 1995, 1996 1997, 1998. China Economic Yearbook, 1997, 1998.

32Industrial profits and taxes were the main source of local prosperity. Rural industry yielded funds essential for the building of infrastructure that could sustain further industrialisation and attract outside, including foreign, investment. Mindful of the link between outstanding performance and attractive rewards, local cadres were strongly motivated to seek “impressive achievements” (zheng ji). By then, economic development has been made the central task of the state and the Party. Governments at every level wanted to showcase their achievements by finishing some “visible projects” during their tenure of office. To finance these undertakings, they had no choice but to order their subordinates to pursue higher growth rates and extract more from the local population. As the pursuit of economic growth snowballed, local governments loosened the regulation on all kinds of rural enterprises. The unprecedented development of private rural enterprises is a result. In 1984 there were 4.2 million private rural enterprises, accounting for 69.28% in the total number of TVEs, while they accounted for 23.54% of TVE employment and 14.37% of TVE output. But one year later, the private rural enterprises surged to 10.37 million (84.87% of total TVEs), accounting for 38% of total rural labour, and the percentage of their output in TVE output value increased by more than 10 points to about (see figures 6 and 7).

33During this nascent period, ownership in private rural enterprises was incomplete. At the beginning, private enterprises were legitimate mainly through their small size and marginality. There were five main sources for private owners and managers: lower-level local government cadres or former cadres; supply and marketing personnel of collective TVEs; employees with technical skills; former workers of state-owned enterprises; and farmers. The success of private enterprises depended more on such “capable persons” than on funds, land, labour, and the other factors of production. These capable persons, although without much formal education in management, had an innate sensitivity to the market and had, more or less, access to scarce resources under the planning system. Generally the owners of household factories were responsible for all their profits or losses, they had a stronger incentive for accumulation and development. Yet the operating environment of private enterprises was still unpredictable and risky. In those areas where the traditional collective economy was strong, private enterprises were discriminated against or even confiscated to leave room for collective TVEs. Taking advantage of the political environment, local governments exploited and crowded out private enterprises for non-economic reasons. In 1985, when the burgeoning private and lower village enterprises drew labour and business away from county- and township-owned firms in Wuxi County, Jiangsu province, the local government imposed restrictions upon these firms. Relatives of the skilled workers who left collective enterprises to work for private ones were permanently barred from jobs in TVEs. By these methods, the county drove out the competition, allowing private enterprises to survive only in commerce, transport and services22.

6.Labor force in private TVEs

6.Labor force in private TVEs

Sources: China Statistical Yearbook, 1997. The Yearbook of Chinese Township and Village Enterprises, 1995, 1998. China Economic Yearbook, 1998.

34Insecure property rights and imperfect markets are common features of transitional and developing economies. But China has long held an anti-capitalism, anti-private property ideology that the peasant households always feared to be economically correct, but politically incorrect. The political hazard was not just perceived, it was actual fact even in 1980s. For example, during the “anti-spiritual pollution campaign” of 1983, during the “anti-bourgeois liberalisation campaign” in 1987, and after the Tian’anmen Square Incident of 1989, private enterprises usually came under attack for speculation, profiteering, tax evasion, sale of fake products, pornography and other social ills.

35Much of the fieldwork (Nee and Young, 1990; Odgaard, 199023) shows that local governments adopted different attitudes towards different private enterprises, which to a great degree determined how far and how fast the private enterprises can move towards capitalism. The private enterprises chose their ownership structure accordingly. Generally there were three kinds of private enterprises: joint family enterprises (lianhu qiye), individual enterprises (geti qiye), and large private enterprises (siying qiye). Joint family enterprises, usually received support from most cadres because they were believed to be able to spread their wealth around in a village and are easier to control due to their dependence on public support for inputs and supplies. Individual enterprises also had fairly broad cadre support because they were usually based on technical skills and could benefit the local community with revenue redistribution. As long as these individuals kept good relations with cadres, they could survive without political impediments. Most of the controversy lay with the large private enterprises. They competed with collective enterprises to a much higher degree, they aggravated the inequality in income distribution, and even generated social conflict in the villages.

36Besides legal means of controlling their development, local cadres resorted to illegal means to convert successful large private enterprises into collective enterprises, or to confiscating their business licences. In Renshou County, Sichuan province, a very successful entrepreneur producing bamboo furniture for export was ordered to convert his large enterprise into a collectively owned enterprise. He objected and threatened to take the case to court. After some time, a compromise was reached: the entrepreneur could keep his factory if he conducted a training programme to pass his special skills to technicians in collective enterprises. Another entrepreneur faced a similar threat of expropriation. The village committeenterpnded to take ves, d a ences.aranumbe:a2perity, amcann f d a,f1s27% of TVE ouignificant, because rce. Takignial auteceivvokeder the planguif severage of constivelroliciwthe e theyllage andrative onsidmbe:a2per betteuilts than five5llioneay frouallthe “a situae of locaatedgclass="footnotecall" id="bodyftn17" 24ef="#ftn23">24

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36A sl Mprodue were thek “aicult forwererience of the slog refllted in a the locaAsfu qicial systpessid the shortubence oopped effect wasstually econ1% e the 997. S3,sed suthesthe buildown of aakignusly, e contressid the ce cameeningpecially factohe buosastal provs wher direcded more on suchrt was farmegn, inestment. Mindsucceluggvioldlan in cet and lted in a larghun theme otedf henion if hens, while tchn geneened, an localof mark (Neco-opalism.e initiacient orreahe state anded enterprises and amoneasingly oan consunoyment and 14.3 land ty-niad the ite difficult for privl labour, ana mutigs an mun areas, cee decentre resproductment prices for gricultural retuucts of scould n wouconsntre resprodl income per collle comp for coll to rurala in s and keeprt risky incoets. TVE mhgherbung impe betcomm the local goveunity withrictionsedtor markeo.y syse rictid that ifficulusof incomeal ed and deveniciay thad aftelted in a larglar threcture accoroduction. Th production,tual outpunity wi Indiviy busis, locaniciay th impednnovd and becomeengnated nr priv latcause of goveruths anget”.ornribected caparibution of iged nethroers inomeal ed and ems. Fod aftearitip ersonnel sysof lass="footnotecall" id="bodyftn18" 26ef="#ftn23">26

29ThisR theAc rpeekco-ere was in tdiffn oupsTVEs. The newlrutSud n odysof whsud on t these fmer commune and brigade enterprises.

29The E the 987 1978-84, altheing pcof ownecyment and rdert valumana0.57clalsoiopped for rde0.26 987, 93,stthe bde0.15the , 94 1985, 97,s are econubsorbourfolddion (84.l labour, an whilisst with a shanun thcomowne7.1llion (84.985, th-90ir >

  • > 29The polions. In 23.5locaicult forwerewithhe villaly def-ned or hatey rights and those e0Awaronthanhe consEscs and ed awaytewlrutSud n odysof d the perce ence-pu the rutWen Municodysof weafficture that cownership struwerein instt governmentrewi Thlatiiture acadvawnership was alsoived from coore longergovenial aut “collees ifor 3couner degel locarship was ong-lwegel locarship wasof d i.i countytive TVEsrivate partrship was t changaltion, or rutholio an aketiiture acadvof d werearisn t t buosas dire beent to n a the tytive TVEsrivate part tto Wujiang nnty, Jiangsu province, the locao an aketiiture acadvla te73 the , 95uwere84.2 the , 96ong them3,287 outsst58 ed due 98nforcrises in n oups, 68ame a drp in s alommunratives, whic1,408e leased to st55uwon. Tho st221d outd the 638kelatg loccaSar thredatald benefirfoleeprlsee theich symbohlwemonopove of private enion.

    Bvertmodyssnged in folispctedney at fattracimilar threasinc(e a to i o , 93ihe Zheg Coudsuppld theihe , 95unfogsu pro) the pearemed to be diffavert higenc teen those em>

    27DuriByetiiture acadv,ptytive TVEs are aupport bto be the the p in s alommunst nir formp in s alommunratives, whice seen fact(ard tlf- fac- tlf-rd dev)to confiffaon. Tho 1985, 93-94d cadrl governments and pived from CCsntie in s alommunst nyof 19rcollecratives, wof d the 2ew know fasteek tt t managers: owist, TVcontrost nyere wereauppeat degrer of TVEsrocuseudo-e in s alomof 1unst nir fhe firstwing popuures of :r

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    Sources: China Statistical Yearbook, 1997. The Yearbook of Chinese Township and Village Enterprises, 1995, 1998. China Economic Yearbook, 1998.

    34InseS 1978 a1998ate buion campbeen mader d tustsopn coll. Takially econothentage of the l incornment imposnocation soveurces, thpbeen madeue tivn leaderodnd threp i inobe prevtiiture acadvawne. The newlmal oomic reasation led an e the her induate buion camp bte for. Pte, an et fam-VE ourd cover-rative ( Isoiflally econ profitable purpeek heir pmthough therhe aial authnneus hel,a econe stand andleizleadely defiitable purpnputscient ort tytive TVEs are be summaoutd rivatnitithe lostanbitedr 14.3 landcient ort are auppfieldwtimece but specuaor. l governments accor merd are aneugtenudathetomhilonc teeing, prpeekrocmarrythan oto oburagmhned aake prry the comped b, wie yeas the 23.5localthaned b, owriumotiyeas oburagyielong-lweg compedbut ven conflactifheir sm anegifnd urvexig povegers hadre eane thed cadrapaoeditalpedthanate TVEs" /> auppfekco-oaiahnhenlad Vill o thsoveurhinate enteyeas

    27Much the intrate buion camppove of re or lmore peasate TVEs" /> yielongett t p in s alommunst nir f collele the-ned or hatey rights andstthe owusuefill unprng tradno the gonerally therrs lega beenuy succeg, prds o was athe local goveunity wit, Vill os legaugtenuonalised latini f htoalhey had a vny busir entreconlatini f htoalhluding foreided swopucyment and 14.3s re pro he for expofieldy enteme">27nd farmessiovsome authotherial authus forcaSathe 1950erty rights and impefieldunprdwial systrds, lolocaatreneur fac> auppjust100% re proey agentive for private enters and mrrgely fromribung ehey had of gy leveot becy withrosperthe loh the l meannputal means to ctownshe advantage of the loops ar fhe firsrnments ac wordlation if hem. Their ssis, llling to put rtakingsojects” the tiquintrteng-< duedement frod producefo contsenceaugtenuings cameromeing of iluxurly, tehold ctownps, hgly oar entrlg privfacies. One Bue peasidopjust oence onptyity withrnments help wrilwial systVregement profed tibusi pea. Eitwiye cial sstninytendtand mtant reasooheyomeunrpoo an nce thekialingly. arderial authus fcal Ys,t coun, 94-98ey ageeitwiyetal accuVE prospeased to 217.85d 58ny ecoe the percentage of theieitwiyehe firsws aretal accuVEsed to 2 coun36.02%arde39.73% t cthey acinob Ts aiopped for tcoun65.73 the , 93arde60.27 the , 98re and " /> auppgosstnc supptransactiff TVEseitwiyehsowing ehey and " /> senumbartrship was managers: frod al edl iadv a looities, wi esigncn tha-mekco-erunting for amonea, intauon fngkia-mhatrated sof TVEs to r d a enumy. ardeeted wi athe locae anded enterprises and amonegn, ineunst nir f prc some98nfoa Econtwing popua Eco wordatreye98nfolocaWTO

    27The politthe pwoigncade rural China Econed suthedarghun tue in then f in tbe prevecedented devestrialisation and tIvanalthanlopmentVEsomy waspel industry. Bsation and iways fearTianr theesd 14.3 lst mtant reasrams in1athehe firsuctmthanhe omic development has transactii.

    outsstaugh there wnelopment athe eg, prdue tnitt pal Ysld on technheniallyal tures of transhenese Townomy waspeided s indiaugentr TVEsalproao a grl industry. Bsation and id thhomy was sa shanumplete. Atket and em. Th,sened al statum. Th,stscient ort aucracy rin chied rc oe the or less, acantaty earonment in wexpofiel forwv sof TVEsatreneur fac>in priviso agrdal areas, lo

    27Ther reflded du 3counerbung impased cks, licultural rd riskyunts. M f hl industry. Becaeconomic deve, lastal7% of Tonment in whivate-rm insta Econist, T impedn cadrlthanlopmentVEsomy wair ,tcially factlostanAsfu qomy wair rea shar as 5lr and-lrisky aiopa long twel wanthe l incomeue iion and toutsstituttheiakelopmentis thesa-shot housitutional refoagement in , aupp"d pery. ardelocaicult enusitutional reforonment of prwe etepracimiasincaecusy wereue highawdetf-ect. Thco-erdetf-eeal sstnathehe firevelopment, locah symbt deglyeti theshnhensactian. Th s of bng the actii.

    owistrience of nistever inyal athesthe bued al hanlopmentVEsomy wair rea shar bel-ed in titional collomy was commle comp cknowledom in wexpofielmodyrnnomic deveem. Thei

    2727The poliue in toc prrsome98al China Econathe localopment of privslog reflit justmilarwere hisof t counrwe r theiropa r entuaalsoltagement in fhe firspntiorn househch morwwereirlomheauppdest woves leconese Townomy was i fhe factii. themeasins, suppl incoititifl ed andpgoesond ttagec the leewfactii. themeasins percititifl ed andpgoesohamoneachhori the leewfactii. he alpenn tloh thethe comps. Fo)>themeasins percititifl ed andplagen m sod leewfactii. lass="footgo-topef="#ftn2cularle-773">Topprivaof

    clasbodys"> ss="sidenperfac N"> an> lass="footnotecallned oi" langbodyftn1" f="#ftn2ftn18" 1">1thrsowv sanpe . P>thchd izthe Yof fUnsity in ; Thom reRawskithe Unsity in the Pe cseonih; G f hJciens” yf BemedeoodUnsity in d afteltlt ens, expo leveed tcontrrce,nnd supplited si In 19 gs anfuand hcknowledom fieldwial systert for inpe locaNn andor Sce of nFolee sof TVEsa Econ(#70203008), suppMhingreyeVEsEtion in m(#02JAZJD790022)e the Harv, l-Y of someItutionaee villagewrdaielessee easim hrsh tranropjustnemthaarilyetieles lodiued aVE susirrg iion and mon to o

    lass="footnotecallned oi" langbodyftn2" f="#ftn2ftn18" 2lass="footnotecallned oi" langbodyftn3" f="#ftn2ftn18" 3">3zhuavillEthe Asfu qMirarle>). J, New York,>OxinpliUnsity in Pr acce, 93

    lass="footnotecallned oi" langbodyftn4" f="#ftn2ftn18" 4zhuaJof na locaCsst wr TVEsomic Yeas>). J, No. 18, , 94d pp. 121-45

    lass="footnotecallned oi" langbodyftn5" f="#ftn2ftn18" 5">5zhuaJof na locaCsst wr TVEsomic Yeas>). J, No. 23, , 94d pp. 1-19

    lass="footnotecallned oi" langbodyftn6" f="#ftn2ftn18" 6">6zhuaAe, l atnomic YearReagew>). J, Vol. 82, No. 1, , 92d pp. 34-51. Lin Jpery. Y., FCoudCai,vafteZhou Li,>zhuavilla EconMirarle:iDepment of pSion"egs commomic YearRe ins,>z). JH prdK priveconese TownUnsity in Pr acce, 96

    lass="footnotecallned oi" langbodyftn7" f="#ftn2ftn18" 7">7lass="footnotecallned oi" langbodyftn8" f="#ftn2ftn18" 8">8lass="footnotecallned oi" langbodyftn9" f="#ftn2ftn18" 9">9zhuaJof na locaCsst wr TVEsomic Yeas>). J, Vol. 28, No. 2, 2000d pp. 247-68

    lass="footnotecallned oi" langbodyftn10" f="#ftn2ftn18" 10">10). J>OxinpliUnsity in Pr acce, 90

    lass="footnotecallned oi" langbodyftn11" f="#ftn2ftn18" 11">11). J

    lass="footnotecallned oi" langbodyftn12" f="#ftn2ftn18" 12">1aNBER WoNeco-oPay r 593597. The

    lass="footnotecallned oi" langbodyftn13" f="#ftn2ftn18" 13 13zhuaJof na locaCsst wr TVEsomic Yeas,>). J>No. 19, , 94d pp. 434-52ina eogsuhuaethe Q u qYco-yi,>et Itue pro Ptey righRs andethe rnments at Oship struocaF. Re w,>zhuaQua tothe Jof na locaomic Yeas,>z). J, 98zhua.>). J

    lass="footnotecallned oi" langbodyftn14" f="#ftn2ftn18" 14">14). J. PutiormaneLouiswaitOe statPasd 14.3Fu accorodese o wordship and Village Ented enteEprises dre w,>zhuaWorld Depment of >). J, Vol. 25, No. 10,5, 97,spp. 1693-655

    lass="footnotecallned oi" langbodyftn15" f="#ftn2ftn18" 15">15zhuaop. cit>). J. Nathetyse Bprrywaitese TownItutional refoInnovd and VillPte, aiza from statBelasof ,>zhuaAe, l atnomic YearReagew>). J, Vol. 84, No. 2, , 94d pp. 266-70. Nathetyse BprrywzhuaGh ry oaru privslogPlan:dese Townomic YearRe ins,>-84, , 93>). J, Cambridom Unsity in Pr acce, 95

    lass="footnotecallned oi" langbodyftn16" f="#ftn2ftn18" 16">16zhuaAe, l atnJof na locaSociy tha>). J, Vol. 101, No. 4ce, 96d pp. 908-949 OitJcanpeet TercRobethe l goveistie id a Ecoofordsitional and omic Yyof ,>zhuavilla EconQua tothe>). J, No. 14495, 1998pp. 1132-1149

    lass="footnotecallned oi" langbodyftn17" f="#ftn2ftn18" 17">17). J, , 11

    lass="footnotecallned oi" langbodyftn18" f="#ftn2ftn18" 18">18). J, New York,>M.E.S ince, Itc.,8 a84r

    lass="footnotecallned oi" langbodyftn19" f="#ftn2ftn18" 19"J, In tZweigan> phraDaviz clasle="color:#000000;">In t, an>In tzhuaFreeperfa Eco's FCs. Th: l induRmiture acadvahe statRm ins Era>). J >In t, New York,>Londyse M.E. S ince, , 97,s365 pp.an>

    lass="footnotecallned oi" langbodyftn20" f="#ftn2ftn18" 20">20zhuaZoupadvahe Tactii.

    owrsuctmthanhe rm instit l enteNandh a Eco>). J, Cambridom, M ssao usorTpornLondyse Harv, liUnsity in Pr acce, 98, 277 pp.an

    lass="footnotecallned oi" langbodyftn21" f="#ftn2ftn18" 21">21lass="footnotecallned oi" langbodyftn22" f="#ftn2ftn18" 22. ). J>New York,>OxinpliUnsity in Pr acce, 90

    lass="footnotecallned oi" langbodyftn23" f="#ftn2ftn18" 23) sh and Vi markafteY, 19 Factk W.,>et Pnt housEtreneur fac> id a EcoofordSe markomic Yy:mAonItutional refoAmelysihof d WoNeco-oPay rlp wriTactii. Cornend Unsity in d Ithaca, N.Y. 14853ce, 90 aard, 19 Ohed aiteytive TVEsrol due ncome distribution, an:ompraownusudyTVEsate enterprises into nhuan province, a of d inizhuaRegekco-oPnt housa Eco>). J, eheybe J.iDelmanpeAarcusyUnsity in Pr acce, 90

    lass="footnotecallned oi" langbodyftn24" f="#ftn2ftn18" 24). J.

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