Prospects for the State-Owned Enterprise in China’s Socialist Market Economy

ASLANPERSPECTIVE, Vol. 19, No. 1, Spring-Summer 1995, pp. 7-35 PROSPECTS FOR THE STATE-OWNED ENTERPRISE IN CHINA'S SOCIALIST MARKET ECONOMY* ElliottParker State-Owned Enterprises (SOEs), which are a fundamental part of China's socialist economy, are in fundamental trouble. Economic reforms have been unable to halt their relative decline, and have in fact helped to accelerate the process by introducing market competition from non-state firms. The decline has seri­ ous implications for China's future, since it is becoming more difficult for the Chinese Communist Party to maintain social and political stability, by keeping growth high and inflation and unemployment low, while simultaneously holding on to politi­ cal power and socialist legitimacy. * This paper was written while the author was a visiting professor at the Johns Hopkins University—Nanjing University Center for Chinese and Ameri­ can Studies. The author wishes to thank the members of the Hopkins Nanjing Center joint faculty research colloquium in general for their helpful questions and comments, especially Professor Russell L. Moses for his criticism of an ear­ lier draft and Professor Li Songlin for his help in arranging factory visits and interviews. The author is indebted to the many Chinese scholars and officials who have helped him to better understand the Chinese economy, though opin­ ions expressed are solely those of the author, as are any remaining errors and omissions. 7 8 Elliott Parker The Socialist Market Economy: An Introduction At the 14th National Congress of the Chinese Communist Party (CCP) in October, 1992, a new vision for the Chinese econ­ omy was announced. With Deng Xiaoping's support, the "Socialist Market Economy" (SME) signalled a return to serious economic reform after the retrenchment begun in late 1988, and helped to encourage a rapid response in the economy that has made China once again a focus of the business world's attention. Since Deng's reforms began in 1978, China has gradually introduced the market mechanism into its socialist economy. By 1992, directive planning in agriculture had been dismantled, and in industry the proportion of output subject to the plan fell from 95 percent to under 12 percent.1 Four-fifths of Chinese out­ put was being sold at market prices. State enterprises were allowed to retain some of their profits, and given increased autonomy. New ownership forms were allowed in addition to collectives, and the opening to the outside world allowed increasing amounts of foreign investment, technology transfer, and the establishment of foreign firms. As change has accelerated, official ideology has struggled to keep up. Initially, the introduction of market incentives was seen in the same way Lenin originally described his New Eco­ nomic Policy, as "one step backward in order to take two steps forward." Markets were a characteristic of capitalism necessary to speed China's future attainment of full socialism. Zhao Ziyang's 1987 theory of the primary stage of socialism finally admitted a legitimate place for the market in the "socialist com­ modity economy," thereby "professionalizing" the debate over China's reform by allowing sanctioned discussion and giving Zhao's reformers the "ideological ammunition" to fight their critics.2 Yet it wasn't until 1992 that the Chinese leadership made a permanent place for the market in China's future. Western economists have had a difficult time describing China's new SME as the problems of combining socialism and markets are philosophical as well as definitional. Socialism's raison d'etre relies on Marx's description of the process by which the capitalist exploits labor's surplus value; if all value comes from labor, profit is only possible if this exploitation occurs. The Prospects for the State-Owned Enterprise in China 9 idea that markets perform a useful social function is fundamen­ tally at odds with Marx's views on value, and as such market socialism and its variants inherently suffer from this ideological contradiction. China's SME is intended to remain "socialist" in a number of ways. First, state ownership is its cornerstone, and socialist forms of ownership—including both SOEs and CollectivelyOwned Enterprises (COEs)—should predominate. Second, earned income (from labor) should be the predominant form of income, and the state should help to provide...