Since 1978, China Has Followed a Distinctive Path of Economic Reform and Liberalization
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NEOLIBERAL DEVELOPMENTALISM: STATE-LED ECONOMIC LIBERALIZATION IN CHINA A Dissertation Presented to the Faculty of the Graduate School of Cornell University In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy by Mi Ji May 2006 © 2006 Mi Ji NEOLIBERAL DEVELOPMENTALISM: STATE-LED ECONOMIC LIBERALIZATION IN CHINA Mi Ji, Ph. D. Cornell University 2006 On the question of state-market relations, the neoclassical economic view regards a minimal state as essential for economic growth. The statist view in political economy studies, on the other hand, stresses the active role of the state in promoting economic development. Both views tend to treat “state” and “market” as opposing forces: A developmental state is associated with industrial planning and active interventionist measures to “govern the market”, whereas market-conforming liberalization is usually seen as a sign of the state’s retreat in the face of globalized market forces. My study of economic reforms in China, however, indicates that a state may pursue market-conforming liberalization to advance its developmental goals. This dissertation seeks to account for the logic behind the apparent anomaly of state-market relations in the course of China’s economic reform through examining the reform processes of key economic sectors. The study pays special attention to the historical and institutional contexts where reforms took place and evolved and uses institutional change and the ensuing socioeconomic dynamics to explain the course and outcome of the reforms. It argues that administrative decentralization in China changed the Chinese state’s internal structure and in turn adversely affected the central state’s autonomy and policy enforcement capacity. To regain state authority and control, central policy makers resorted to market-conforming liberalization. Rather than the state intervening in the market or the state giving way to market forces, this process entails the Chinese state’s effort to re-create a developmental state through the creation of a liberal market. BIOGRAPHICAL SKETCH Mi Ji was born in Beijing, China. She received her Bachelor of Arts degree from Foreign Affairs College (now China Foreign Affairs University) in Beijing, China in 1993 and her Master of Arts degree from Cornell University in Ithaca, New York in 1999. In 2000, she went to Fontainebleau, France to study in the MBA program at INSEAD, and was awarded a Master of Business Administration degree in 2001. iii ACKNOWLEDGMENTS I wish to express my sincere appreciation to my committee chair and members, Dr. Peter Katzenstein, Dr. Vivienne Shue, and Dr. Jonathan Kirshner, for their guidance and support. Special thanks go to Dr. Shue and Dr. Katzenstein, who supervised my study closely throughout my academic program, gave their time freely, and offered me a great deal of insight, inspiration and encouragement. Thanks are also due to Dr. Kirshner for his support and thoughtful insight. My appreciation also goes to Dr. Allen Carlson for his valuable suggestions and comments on my work. iv TABLE OF CONTENTS BIOGRAPHICAL SKETCH.................................................................. iii ACKNOWLEDGEMENTS ....................................................................iv LIST OF FIGURES..............................................................................vi LIST OF TABLES...............................................................................vii LIST OF ABBREVIATIONS................................................................viii CHAPTERS CHAPTER 1 – Introduction ......................................................... 1 CHAPTER 2 – Foreign Trade Reform ......................................... 40 CHAPTER 3 – Banking Reform.................................................. 95 CHAPTER 4 – The Repackaged Ideology .................................. 158 CHAPTER 5 – Conclusion ....................................................... 207 REFERENCES ............................................................................... 221 v LIST OF FIGURES Figure 2.1. China's Foreign Reserve 1979-2003 ................................. 42 Figure 3.1. Banks as State Agencies ................................................ 105 vi LIST OF TABLES Table 4.1. Neoliberal Discourses and State Policy Goals ................... 194 vii LIST OF ABBREVIATIONS BOC (Bank of China) CCB (China Construction Bank) FTCs (Foreign Trade Corporations) ICBC (Industrial and Commercial Bank of China) MOF (Ministry of Finance) MOFERT (Ministry of Foreign Economic Relations and Trade) MOFTEC (Ministry of Foreign Trade and Economic Cooperation) PBC (People’s Bank of China) PCBC (People’s Construction Bank of China) RCCs (Rural Credit Cooperatives) SEZs (Special Economic Zones) SOBs (State-Owned Banks) SOEs (State-Owned Enterprises) TICs (Trust and Investment Companies) UCCs (Urban Credit Cooperatives) viii CHAPTER ONE INTRODUCTION Since 1978, China has followed a distinctive path of economic reform and liberalization. Over the years, China has maintained an average annual growth rate of 9.7%.1 The reform years have witnessed a transition from a command economic system to a market one. By the mid 1990s most of the agricultural and industrial consumer prices were free of government control; and the scope of mandatory production planning fell to only 5% from 95% of total industrial output prior to reform. Meanwhile, the Chinese economy has been internationalized. Its total trade increased by 24 times in the past two decades.2 Having emerged from its previous seclusion and isolation, China ranked as the 3rd largest trading nation in the world in 2004. 3 In 2003, China surpassed the United States to become the largest recipient of foreign direct investment with a total FDI inflow of US $54 billion. 4 Institutionally China formally joined the WTO in 2002, committing itself to free trade and further liberalization of its domestic economy. Underlying the dramatic changes that have happened in China are three major processes: development, marketization, and liberalization. China’s economic takeoff is often regarded as another successful example of late development. Yet compared with earlier “late developers” 1 Source: State Council Development and Research Center. 2 Zhu Rongji, “Report on the outline of the Tenth Five-Year Plan for national economic and social development at the 4th session of the 9th National People’s Congress, March 5, 2000. 3 Source: State Council Development and Research Center. 4 UNCTAD. World Investment Report. 1994. 1 such as Japan, Korea and Taiwan, China has faced different international and domestic conditions. Whereas the favorable political conditions of the Cold War allowed the latter countries to pursue an export-led strategy while keeping their domestic markets relatively protected, the internationalization of the Chinese economy has coincided with the trend of globalized trade and finance. Internally, China’s drive for economic development since 1979 has been accompanied by the transition from a planned economic system to a market one. The question for the Chinese government, therefore, is not only about the relative position of the state vis-à-vis the market, but also about creating a market in the first place. On a more general level, China’s economic transformation is part of the nation-states’ experience with globalization. In China, as in many other developed and developing countries, the national economy has undergone the process of liberalization.5 What is special about the Chinese experience is that the processes of economic takeoff, marketization and liberalization have been taking place almost simultaneously rather than sequentially as is the case with most NIEs and developed economies. The Chinese experience itself, therefore, provides an opportunity for observing and assessing the effect of the interactions of these processes. Unraveling the logic of the reform experience in China may also serve as a starting point for further comparisons and investigations along one of the three dimensions of development, market transition and liberalization. 5 For liberalization in developing economies, see Alex. E. F. Jiberto and Andre Mommen (1996); Will Martin and L. Alan Winters eds. (1995); Rob Vos, Lance Taylor and Ricardo Paes de Barros (2002). For deregulation and liberalization in developed economies, see Steven Vogel (1996); James Malcolm (2001); Louis W. Pauly (1998). 2 This study focuses on the Chinese experience itself and starts with a few intriguing questions that the three intertwining processes have posed to China scholars and political economists: Whereas the Chinese reform has been generally described as following an incremental approach, how does the Chinese government eventually take the decisive step towards full marketization and liberalization of its economy? What factors caused the Chinese government to prefer a relatively hands-free approach to an active interventionist one in fulfilling its growth objectives? The Chinese reform has been a story of growth. During the reform years, the Chinese state has focused on “economic construction” and taken economic growth as its primary policy objective. Accordingly, people tend to view the Chinese state as a socialist developmental state and expect it to assume an active role in “governing the market”. Indeed, at the onset of the reform the Chinese state was in full command of the economy through micro management. Even today, the state still has a strong presence in market activities. Yet over the