When Institutions Bounce Back: Implementing Difficult Reforms in China

• In Event: Political Economy in China and Vietnam -- Domestic and International

Abstract

Why are some perennial reforms, such as reforming state-owned enterprises (SOEs), especially hard to push through? Arguments such as the strength of opposing interests or the monopoly of markets beg the question of why institutional change is so difficult to realize. In this paper, I argue that the key answer lies in the rules through which reforms are carried out, or to state it theoretically, the institutions of introducing institutional change. The paper adopts case study and process tracing methods to study the reform of “breaking the three irons” (po san tie) – breaking the iron chair, the iron bowl, and the iron salary – in the state-owned sector. Starting in the early 1990s, the reform continued in the 2000s and 2010s as “three sets of institutional changes” (sanxiang zhidu gaige): personnel appointment, employment, and salary distribution. The goal of the reform was to introduce market mechanisms and healthy competition into the state sector’s internal management and reward system so as to increase personnel performance. However, the results after three decades of efforts are very unsatisfying. Based on preliminary research and interviews, I find that the major obstacles lie in the rules specifying how reforms are supposed to be carried out in the “reshuffling” process. Regardless of whether an enterprise adopted a “one-man decision” style of reform or introduced changes through more democratic evaluations, they were both captured by unfair procedures that went against meritocracy. These unfair procedures were not part of old institutions that reformers aimed to change and thus have often gone unnoticed in policy recommendations. But they played an important role in reinforcing the previous institutions against the future reforms. Therefore, to understand institutional resilience of China’s economy, one should not only examine successful adaptation and change, but also how stubborn institutions persist and bounce back.

Author

• Ling Chen, Johns Hopkins University