The role of township and villages enterprises in China's economic reform

Abstract

An early large scale privatization for China would have been totally unthinkable for obvious political, ideological and economic reasons and a large-scale privatization in China right now may still be ill advised. The experiences of the eastem European countries suggest that privatization is not the panacea that many believed it to be. Privatization turned out to be the most complex part of the change of economic system for these countries politically, practically, and legally (Aalsund, 1992). There seems to be strong evidence, based on the experiences of the eastem European countries that it may very well be in the best interest of China to wait before engaging in a large scale privatization scheme (DaCosta, 1995). There are sound economic reasons why it may still be too soon for a large scale privatization to take place: 1) mass privatization will result in massive layoffs; 2) underdevelopment of capital markets would make privatization unwise; 3) lack of domestic capital; 4) ideological and institutional obstacles. However, China's unique transition strategy engendered innovative altematives to privatization. China, arguably less the govemment than its people found ways of dealing effectively with the limitations, and within the constraints, set by China's own transition policies. The "contract responsibility system," by effectively separating ownership and control, is an innovative altemative to individual privatization. It has been described as "a halfway house to privatization" (Fischer, 1991). And the TVEs were China's (rather effective) altemative to early privatization. ln fact, the TVEs fall between private and public. They arose because of China's own strategy and because the Chinese development model prior to the reform created conditions favorable to their establishment. They prospered, to the point of being referred to as the major engine of China's success, because of considerable autonomy, flexibility, competition (at all levels) and special ties to the govemment and community. And maybe more importantly, since they do not operate under a "soft constraint" like SOEs, they must thrive for efficiency in order to survive. However, as transition progresses, and China's economy and society change, they too are changing. ln fact, insofar as TVEs can use local governments to behave like countries and erect all sorts of barriers to trade and factor flows, they may be regarded as an hindrance to the establishment of a single market. China, far from being an integrated internal market, has yet to reap the benefíts of economies of scale and the benefits derived from industrial "clusters" (World Bank, 1994).