The Role of Ideology in China's Economic Reform

Li-an ZHOU

Perspectives, Vol. 1, No. 1

I. Some Observations

Since the mid-1990s, Chinese government has become more and more tough on its reform measures in terms of the pace and the incidence of losers caused by these reforms. The most striking example is the large-scale layoff of the state-owned enterprise (SOE) employees since 1994. It was reported that 7.2 million SOE workers lost their jobs in 1996 and 10 million in 1997 due to the bankruptcy, merger and restructuring of the SOEs. At the end of the first quarter of 1998, 6.6 million SOE workers were laid off from their jobs. This swift process of laying off the workers will continue, and it is estimated that there will be approximately 10-15 million more workers flowing into the unemployment pool in the next three years. Although those laid-off workers were compensated to some extent by means of partial subsidy, continued health care and other benefits from the enterprises in which they originally worked, substantial evidence demonstrates that those compensations were either far from being adequate for meeting basic living standards, or simply delayed for so long that they turn out to be an empty promise.

If we look back to the 1980s, we see a different picture. During the entire 1980s, the central government, in fear of potential oppositions at various levels ranging from Politburo members to urban residents, was very cautious of the pace and scope of the economic reform. "Touching stones across the river" was a popular slogan. As a reflection of this gradualist philosophy, a two-track system was initiated in SOE price-setting in early 1980s and gradually spread out to become an overriding reform strategy. The "two-track system" literally means that on one track, the traditional planning scheme continued to prevail; while on the other track, market mechanism was introduced to motivate the SOEs to produce more than the quota set by the government. In this system, nobody was worse off but at least some people were better off (in economics, we call this situation Pareto-improving), because the rents (e.g. monopoly profits, cheap raw materials and subsidized food prices) embedded in the traditional track remained while some privileged enterprises and individuals were able to gain more by being exposed to the new opportunities available in the market track. The essence of the two-track system or gradual reform is to elicit general support for ensued reform initiatives, and the reforms of that period were characterized by gradualism and Pareto-improving. As a result, the government had been relatively soft on the demand for compensation whenever some interest groups, especially urban residents and SOE workers, were negatively affected by a newly implemented reform.

The above observation raises an interesting question: why has the central government recently become tough in reforming the SOEs in contrast to its softness in the 1980s? An easy answer could be that because most of the SOEs had been on the verge of bankruptcy since the mid-1990s, many workers had to be laid off. To be sure, the increasingly troubled situation of the SOEs gave a push to drastic reform measures, but for the politicians who were to make decisions, the political risk of a particular measure had to be taken into account. The layoff of SOE workers ran counter to the long-standing socialist ideology, which claimed the absolute dominance of public ownership and the guarantee of lifelong employment for SOE workers. The breaking of "iron bowl" might encounter a widespread and serious opposition. What enabled the central government to break its promise and confront the potential political risks? More specifically, why did the concern for political opposition, which was very prominent in the 1980s, become less constraining in 1990s? Part of the clue lies in the evolution of the socialist ideology during the course of economic reform in China since the late 1970s.

II. The Ideology and Political Risk of Reform

An ideology can be defined as a set of ideas through which people posit, explain and justify ends and means of organized actions and in particular legitimatize a dominant political power. Once established, a system of ideology provides a focal expectation and belief regarding what sort of action is legitimate, and what should and will happen in response to illegitimate or unorthodox actions. The belief constraints imposed on individual and collective actions apply not only to the general public but also to the dominant political power. In other words, once a particular type of ideology prevails, even the government itself, which holds a monopoly over all coercive state powers, is constrained by the beliefs shared by the governed regarding what is right for the government to do in light of the official ideology. This point is crucial for understanding why ideology matters in economic transition where the governing Party initiated a set of reform measures that deviated from its orthodox ideology.

Drastic deviations from the official ideology by the reform government may cause a crisis of legitimacy if it makes too many people worse off. However, it is worth pointing out that not all deviations give rise to a crisis of legitimacy or create great political risks. There exists a set of precedents in China where big jumps from the orthodoxy ended up with popular support because almost everyone involved was made better off. The spontaneous spread of the household responsibility system in rural China in the late 1970s is a good example in this regard. The situation, however, would become quite different if a sufficient number of people are made worse off by unorthodox reform measures. Although anyone adversely affected by economic reform tends to complain about, or even protest against, reform measures, the strength and impact of opposition may differ dramatically if the opposition is enabled and justified by the prevailing ideology. More importantly, discontent and unrest at gross roots may pave the way for factional power struggles at higher levels. As far as political risks are concerned, factional power struggles are potentially more threatening to the dominant political power than the gross-roots opposition per se.

III. Ideology as Coordination Mechanism in Organizing Opposition

The unique role of the official ideology can be better understood if one takes into account the fact that in a typical socialist country, society consists of unorganized interests that contrast with the organizational apparatus of the state. The absence of effective communication and organization structures among individuals makes it impossible for people to identity stable interest groups and resort to institutional resources for collective actions.

In the absence of organized and institutionalized means of coordination among isolated individuals, the prevailing ideology supplies a unique coordination mechanism necessary for successful collective actions in socialist countries. The collective action literature suggests that the strength of political opposition depends not simply upon the number of potential opponents involved, but more crucially upon how they coordinate their individual actions. In the context of SOE reforms, an individual worker's decision regarding whether to participate in a protest or demonstration against an adverse reform measure rests on his or her belief about the degree of toughness of the reform government in handling the demand for compensation or reversal of planned reforms. If the government is generally perceived as soft and submissive to the interests articulated by the workers, then the probability of winning a protest against a planned reform is relatively high, and the worker's incentive to participate in the protest consequently becomes strong. Given the opposition of a large number of workers, the scale of protest tends to be large, and the government is therefore more likely to surrender. Here we assume that the larger the number of opponents in the protest, the more likely that the government will concede. But if the image of the government somehow turns tough, then the probability of winning a protest becomes small, and consequently the scale of protest is likely to be insufficient to induce the government to give up the attempted policy. Note that the government is constrained by the shared beliefs among individuals and it will strategically choose corresponding reform strategy (gradualism versus big-bang) based on the shared belief about its own image. That is to say, if the soft image is prevalent among people, then the best choice for the government is a reform package with compensation, i.e. a Pareto-improving package. Otherwise, radical changes may be more beneficial. Therefore, the belief about the nature of the government is self-fulfilling.

The attitude of the government toward the demands of workers is virtually unobservable, but it can be largely inferred from the prevailing ideology. The official ideology forms a focal expectation about the extent to which the government is committed to the traditional economic system and the welfare of SOE workers. Whenever there are significant reform measures forthcoming, the CCP will invariably issue an official document through the Party Congress, which is to be distributed and propagated nationwide. From our standpoint, the main purpose of this official documentation and propaganda is not simply to defend and justify the reform agenda, as is usually interpreted, but more importantly it is to convey the information necessary for revising and updating people's belief about changes in government's commitment to the traditional socialist system. From the official documents issued by the four most recent Party Congresses (1982, 1987, 1992, 1997), it is clear that the Chinese government has been moving toward breaking the promise of lifelong employment for SOE workers.

The shift in China's reform regimes mentioned above can thus be explained by the accumulation of ideology evolution across a critical point, which evolution is characterized by gradual toughening of the government's image in accommodating workers' demands based on the traditional system. In the early stages of economic reform, the traditional values and ideology dominated and the government's commitment to the welfare of SOE workers was well maintained and widely perceived. Trapped by this shared belief, the government had to implement a gradual and Pareto-improving reform in order to minimize the political opposition. In fact, several reform measures under the slogan of "breaking the iron bowl" were seriously attempted during the late 1980s and early 1990s to reallocate the redundant SOE workers, but these measures eventually failed due to the fierce resistance from SOE workers. As reforms moved on, the hardening of the government's image through the continual modifications of the government's commitment lowered the probability estimates of winning a protest against radical reform measures, and consequently reduced the incentives to participate in the costly protest. Based on this change in shared beliefs among workers, the government eventually initiated a radical reform of reducing subsidies to the financially troubled SOEs by laying off workers.

Before concluding this essay, I would like to make a remark on the economic transitions in former Soviet Union and the Eastern European economies. Before the collapse of the Communist Party rules, the former Soviet Union and Eastern European countries attempted gradual economic reforms in varying degrees in fear of potential political opposition, similar to the first reform stage in China. One of the crucial conditions that pushed these countries to favor radical reforms later was the collapse of the Communist regime and its quasi-socialist ideology. With the socialist system abolished, the old commitment to lifelong employment was no longer believed to be serious and credible by the general public. Protests for compensation by laid-off or adversely affected workers might gain some sympathy from the general public but would stand a small chance of winning the battle against the government. Relieved from the socialist belief constraints, Russian and the Eastern European governments could then become tough on their reform moves. The presence of the socialist belief constraints in China's early reform stage explains why China was so different in its reform path when compared with other transition economies.