The China Review, V ol. 1, No. 1 (Fall 2001), 111–135 Entrepreneurs and Politics in the Chinese Transitional Economy: Political Connections and
Rent-seeking*
Eun Kyong Choi and Kate Xiao Zhou
This paper investigates the question of how state policy influences the interactions between cadres (party bureaucrats) and private entrepreneurs in China. We argue that state legitimization of private business has led to the interpenetration of the cadres’ political power and the entrepreneurs’economic power. We propose that the importance of political connections for entrepreneurs to run their businesses has increased at the legitimized Eun Kyong Choi is a Ph.D. student of Politics at Princeton University. She received a M.A. in Political Science from the University of Hawaii and a M.A. in Asian Studies from Hankuk University of Foreign Studies in Seoul. Her research interests include government-business relationships in China, Chinese politics and East Asian politics.
Kate Xiao Zhou is from Wuhan, China. She received her B.A. in English from Wuhan University, a M.S. in Sociology from Texas A&M University and a Ph.D. in Politics, from Princeton University. She is now an associate professor of comparative politics and political economy of East Asia in the Department of
Political Science at the University of Hawaii. Her main research interests include the dynamics of transition from central planning to market economy, Chinese economic development, Chinese business, globalization in East Asia, comparative studies of businesses and Asian entrepreneurship. She has published articles on political economy and women’s studies, along with a book titled How the Farmers Changed China: Power of the People (Westview Press, 1996).
112Eun Kyong Choi and Kate Xiao Zhou stage, compared with the initial stage. We also propose that entre-preneurs’ profits have a positive effect on their political participation when markets develop. We test our hypotheses by using a 1993 nationwide survey of a sample of 1,440 entrepreneurs. Our findings suggest that state legitimization has led to the formation of a loose coalition between cadres and entrepreneurs, which in turn fuels rent-seeking behaviour.
Introduction
While China’s economy has made great strides over the past 20 years, the transition from the planned economy to a market economy is far from over and continues to have profound social, political and strategic effects. In order to take a close look at the complexity of this economic transition, we examine the evolving relationship between government and entrepreneurs.
One of the most important developments in China is the rise of the private sector. By 1997, there were 961,000 private enterprises and 28,500,000 getihu (self-employed labourers) in China and 18% of employ-ees were employed by the non-farming private sector.1 A large number of Chinese entrepreneurs have achieved considerable economic power as the private sector has come to possess an increasing percentage of the economic pie.
Most writing on the transformation of the communist state can be divided into two opposite schools of thought. The state-centred approach focuses on the close linkage between the state and the rise of entrepreneurs. By analyzing data from Hungary in 1992, Rona-Tas, for example, claims that political power is converted into economic power in the market tran-sition period in which markets are instituted by the state.2 Scholars study-ing China have also credited the Chinese state with the rise of private business as it embraces a developmental role.3 According to Oi, fiscal decentralization from the central government provides an institutional basis for local government to support economic development.4 Some even claim that cadres (party bureaucrats) have made use of their political capital to grab market opportunities.5 For them, local governments and government officials themselves are entrepreneurs.6
The other school of thought investigates the power of entrepreneurs to transform the state.7 Market t
ransition theory, for example, maintains that the market increases entrepreneurs’ power at the expense of cadres’ power. Cadres become less privileged as the market replaces the redistribution system on which their power relies. According to Nee, “Not only are the
Entrepreneurs and Politics in the Chinese Transitional Economy113 direct controllers of the redistributive mechanism likely to experience a relative loss, but the value of their political capital accumulated through prior experience as cadres is likely to diminish as well.”8 In his study analyzing Chinese rural household data collected in 1984, Nee supports this theory by demonstrating that current and former cadres have no sig-nificant advantages in incomes. But he finds an anomaly in the fact that former cadres who became entrepreneurs earn high incomes. Nee attributes this contradiction to a mixed economy and contends that this will disappear as markets thicken.
The market transition school is very much in line with the study of entrepreneurs in the West and in the United States (US). Entrepreneurs’role in economic development has been taken for granted. For example, Schumpeter, in his classic work, Capitalism, Socialism and Democracy, claims that the essence of capitalism is the process of “creative destruc-tion” — the perpetual cycle of destroying the old and less efficient product or service and replacing it with new, more efficient ones.9 Thus many assume that the development of private entrepreneurs in socialist China would be at odds with
the interests of a privileged party elite who are determined to perpetuate their power monopoly.
Scholars have also split over the issue of entrepreneurs’ autonomy in the transition from plan to market. One school of thought stresses indepen-dence for entrepreneurship. The drive to be autonomous pushes the entre-preneurs to explore market opportunities. The other school focuses the state’s close alliance with entrepreneurs, naming this alliance the “entre-preneurial state.”10
This paper investigates the interaction between the state and entrepre-neurs in China. Building upon the existing theories of transitional economy and public choices (rent-seeking), we divide entrepreneur development into two stages. The first stage is the informal entry stage in which entre-preneurs invaded the state to gain entry into the market. The first period covered 1978 to 1988. The second stage started in 1988 when the state legitimized private enterprises and permitted them to hire up to eight employees.11 Deng Xiaoping’s 1992 southern tour ended the anti-market environment following the Tian’anmen crack-down. By the end of that year, the report of the Fourteenth Party Congress stated that various types of ownership should develop together over a long period. The Fifteenth Party Congress in 1997 confirmed that the non-public sector is an impor-tant part of the socialist market economy and that individually owned businesses and private enterprises should be encouraged and developed.12
114Eun Kyong Choi and Kate Xiao Zhou In the amended Constitution passed by the People’s National Congress in March 1999, the phrase that individually owned and private business is a “complement to the public economy” was replaced by a phrase identifying it as an “important part of the socialist market economy.”13 Unlike the initial stage, the state no longer restrained cadres from entering into private business.14
The main theme of the paper argues that while in the initial stage entrepreneurs gained entry to and limited autonomy from the state, a deepening interaction between entrepreneurs and the state after the state legitimization of private businesses has turned entrepreneurs and political leaders into a loose coalition. This coalition extends national markets while at the same time fuelling rent-seeking behaviour. Our findings suggest that entrepreneurs in a transitional economy like China have a dual role: while entrepreneurs were crucial to break the state’s monopoly in the commodity market, their alliance with the state led to rent-seeking and prevented the old institutions from collapsing.ihu
Thesis
We propose that cadres’ political power and entrepreneurs’ economic power are interpenetrating at the legitimized stage, while at the informal entry stage interpenetration is limited. At the first stage, du
e to state restrictions on the private sector, the chances of exchange of political and economic power are limited. At this stage, it is politically less safe for cadres to support private businesses. Moreover, because private businesses are restricted to a small scale, cadres seem to lack a strong incentive to support entrepreneurs. With the state legitimization of private businesses, cadres become more accessible to entrepreneurs. The interpenetration of political and economic power implies the importance of political connec-tions for businesses. Entrepreneurs with political connections are more likely to be successful in their businesses. For this reason, they endeavour to make political connections.
We develop three sets of hypotheses to look at the relationship be-tween entrepreneurs and political linkage in these two stages. Our first hypothesis states that there is a limited effect of entrepreneurs’ cadre experience on profits at the initial stage of private business development. Our second research hypothesis is that entrepreneurs’ past cadre experi-ence is linked to profits at the legitimized stage of private business development. In the first and second hypotheses, we assume that former
Entrepreneurs and Politics in the Chinese Transitional Economy115 cadres increased their profits through political connections that they accu-mulated when they served as cadres. The third hypothesis suggests that entrepreneurs’ profits have a positive effect on their political participation w
hen markets develop.
Data and methods
We rely on the 1993 nationwide survey of a sample of 1,440 entrepreneurs (siying qiye zhu) in China, which was conducted by the Federation of Industry and Commerce (FIC). Because the FIC is not an administrative organization, entrepreneurs under the survey were more likely to express their opinions candidly. We supplement this data with data from our field work interviews conducted in the summers of 1996, 1997, 1998, and 1999.
The sampling method of the nationwide survey was multi-stage strati-fied random sampling. For a sample frame, the lists of private enterprises registered with the Industry and Commerce Bureau was used. The sam-pling ratio was 1.2%. At the first stage, the sampling units of province were decided according to the ratio of urban-rural and industries. At the second stage, the sampling units of city and county were decided according to the proportion of private business in each province. At the third stage, for all selected cities and counties, private enterprises were grouped according to two dimensions of rural-urban and industries, and in each group, private enterprises were chosen randomly. The survey was conducted in 1993. Response rates were 84%.
Multiple regression analysis is used for the tests of the three hypoth-eses presented in the previous section. To test our first hypothesis, the 1987 profits are regressed on entrepreneurs’ status as cadres and other variables. For our second research hypothesis, the 1992 profits are regressed on entrepreneurs’ cadre experience and other variables. The test of our third hypothesis is conducted by regressing the self-reported degree of political participation on 1990 profits and other variables.
For the regression of 1987 profits, a subset sample of respondents who registered their businesses before 1987 is used to exclude those who had not started in business until 1987. For the regression of 1992 profits, the total sample is used. Table 1 and Table 2 report the description of variables for the total sample and the subset sample. The characteristics of test variables for the subset sample are similar to those for the total sample. 14% and 13% of entrepreneurs are former cadres in the total sample and in
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