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Government's Budget Constraint, Competition 中国科技论文在线 http://www.paper.edu.cn Journal of Comparative Economics 31 (2003) 486–502 www.elsevier.com/locate/jce Government’s budget constraint, competition, and privatization: evidence from China’s rural industry Hongbin Li The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China Received 28 March 2002; revised 21 April 2003 Li, Hongbin—Government’s budget constraint, competition, and privatization: evidence from China’s rural industry This paper examines the determinants of privatization in Chinese rural industry by using data that we collected from Southern China in 1998. By employing several econometric specifications, we find that the probability of a firm being privatized increases with the degree of product market competition and the hardness of the government’s budget constraint, but that it does not vary with government policies. Our findings highlight the decentralized nature of China’s reforms. Journal of Comparative Economics 31 (3) (2003) 486–502. The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China. 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. JEL classification: G32; G34; L32; L33; P20; P31 1. Introduction Township and Village Enterprises (TVEs) have made an extraordinary contribution to China’s rapid economic growth over the past 20 years. Their contribution to national gross industrial output rose from about 10% in 1979 to nearly 40% in 1996 and increased at an average annual rate of nearly 20% during the 1980s (Chen and Rozelle, 1999). However, during the late 1990s, China’s TVEs were privatized quietly but in large numbers. According to our recent survey in China’s Lower Yangtse Delta region, more than half of all enterprises owned by township governments in 1994 had been partially or completely privatized by the end of 1997. This privatization has not been universal, either across E-mail address: [email protected]. 0147-5967/$ – see front matter 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. doi:10.1016/S0147-5967(03)00070-2 转载 中国科技论文在线 http://www.paper.edu.cn H. Li / Journal of Comparative Economics 31 (2003) 486–502 487 regions or by pace. The government in southern Zhejiang, in particular the region around Wenzhou and Ningbo, started privatizing TVEs as early as 1994 and finished the process for the most part by 1996. On the other hand, southern Jiangsu, including townships in Wuxi that had been upheld previously as a model for China’s TVEs, began privatization only in 1998. The swiftness of privatization and the sharp differences in the rates of privatization over time and across regions raise questions about the determining factors. Moreover, researchers differ sharply on how the process should be interpreted. Qin (1998) and Yang (1999) assert that privatization is the result of central government policy. Others argue that privatization is the result of changes in the institutional environment, including the comparative advantage of management shifting from government officials to managers, increases in product market competition, and hardening of the government’s budget constraint (Cao et al., 1999; Li and Rozelle, in press; Lin et al., 1998). However, these hypotheses have not been tested empirically. This paper examines the determinants of privatization and tests the above hypotheses using a comprehensive set of primary data that we collected from Southern China in 1998. By employing probit and hazard models, we find that the probability of a firm being privatized increases with the degree of product market competition and the hardening of the government’s budget constraint, but that it does not vary with government policies. To control for the potential endogeneity of the hardness of the government’s budget constraint, we employ a two stage least squares (2SLS) model and derive results that are consistent with those from other models. Our findings support the decentralized nature of China’s reforms, including the privatization process (Cao et al., 1999; Li, 2003; Qian and Weingast, 1997). Existing empirical work on privatization focuses on studying the effect of privatization on performance (Anderson et al., 2000; Barberis et al., 1996; Frydman et al., 1999; Li and Rozelle, 2003).1 Megginson and Netter (2001) and Sonobe et al. (2001) examine the determinants of privatization, but they focus on how firm efficiency affects privatization.2 There are two exceptions. Li et al. (2000) use aggregate data to study the effect of competition on privatization and find that privatization increases with product market competition. However, the aggregate nature of their data makes it difficult to make any inference about individual firms. Brandt et al. (2003) study how bank objectives and bank liquidity interact with government incentives and ultimately determine privatization. Our paper uses firm-level data to test whether competition and hardening of the government’s budget constraint foster privatization. Several theories explain the sudden rise of TVEs. These can be categorized into two schools. One school uses the failure of markets to explain the success of TVEs. Both Chang and Wang (1994) and Chen and Rozelle (1999) argue that the success of TVEs is the result of the government’s monopolistic control over input, output, and credit markets. Li (1996) argues that government ownership of township enterprises is the least costly way 1 Djankov and Murrell (2002), Havrylyshyn and McGettigan (1999), and Megginson and Netter (2001) survey this literature. 2 Park and Shen (in press) argue that one of the reasons for privatization is the collapse of the group lending schemes that supported the growth of TVEs. 中国科技论文在线 http://www.paper.edu.cn 488 H. Li / Journal of Comparative Economics 31 (2003) 486–502 to secure the state’s help when firms face difficulties in the market. According to the market failure school, the improvement of market conditions, such as increased competitiveness in the input and output markets, and the hardening of the government’s budget constraint in the lending market should decrease the value of government ownership and lead to privatization. The second school argues that local government ownership is a response to state failure. According to this school, when the state is unwilling to make a commitment not to act predatorily against private firms, local government ownership protects the local firms’ property rights (Qian and Weingast, 1997; Che and Qian, 1998a, 1998b). However, the role of local government in protecting property rights may have been weakened or reduced in the past decade because China enacted several important policy reforms to strengthen private property rights. In the Fourteenth Congress of the Chinese Communist Party in 1992, the Communist Party recognized the important role played by the private sector in China’s social-economic development for the first time. Moreover, it stated that the government should create fair market conditions under which firms characterized by different types of ownership structures can compete fairly with each other. The legal status of private firms was improved further in 1999 when a constitutional amendment redefined the private sector from supplementary in nature to an important integral part of the economy (Kung and Lin, 2002). Recently, China’s leaders have encouraged private entrepreneurs to join the Communist Party. Hence, improvements in the legal protection of private property make the role of local government ownership less important.3 The structure of the paper is as follows. Section 2 introduces the survey and the data followed by a brief description of the privatization process. Section 3 presents several hypotheses concerning the determinants of privatization. Section 4 tests empirically the resulting hypotheses from regressions. Section 5 concludes with policy implications. 2. The data and the privatization process The data were collected from field surveys conducted by me and my colleagues in the summer of 1998.4 Most of the information comes from face-to-face interviews with firm managers and government officials at the township level. Historical data were copied from accounting books. The survey focuses on Township Enterprises (TEs); our data cover the period from 1994 to 1997.5 We took a random sample of 59 townships in 15 counties in Jiangsu and Zhejiang; these are two of China’s most developed coastal provinces, one north 3 Representing another school of thought, Weitzman and Xu (1994) assert that TVEs are vaguely defined cooperatives. According to this argument, in a highly cooperative society like China, vaguely defined property rights could even dominate certain explicit written contracts. However, this view can not explain the dramatic privatization of TVEs in the past decade. 4 Li (2001) and Li and Rozelle (in press) provide a more detailed description of the survey. 5 The township or town is the lowest level of government in China’s administrative hierarchy. Township governments established many enterprises in the 1980s, referred to as Township Enterprises (TEs). This paper will use TEs and locally government-owned enterprises interchangeably. Che and Qian (1998a, 1998b), Chang and Wang (1994), Chen and Rozelle (1999), Li (1996), Putterman (1997), and Weitzman and Xu (1994) have also studied township enterprises. 中国科技论文在线 http://www.paper.edu.cn H. Li / Journal of Comparative Economics 31 (2003) 486–502 489 and one south of Shanghai.6 We choose Zhejiang and Jiangsu because they represent the heartland of China’s rural enterprises and contain both well-developed and underdeveloped regions. We chose 3 firms in each township randomly from the pool of all of the TEs and private firms doing businesses in 1998, for a total of 168 firms.7 Thirty-three out of the 168 firms were established as private firms, but these are not considered in this paper. In 1994, the government owned 135 of these firms, denoted government-owned firms. Enumerators collected information for the period between 1994 and 1997. Since most privatization has occurred since the mid-1990s, 1994 was chosen as the starting year.
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