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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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This is even more the case when alternative definitions of the private sector are considered. As Heike Holbig states ―[t]he more ideologically correct a term is, the more statistically vague it becomes‖.1357 As will be discussed in more depth in chapter 8, but has already been indicated above, the ambiguity of classification of enterprises was useful for private entrepreneurs who used it as strategy to escape regulatory restrictions and discrimination by the local governments. The most common strategies are wearing a red hat, which means that firms often were registered as collective, for example a TVE, but actually being privately owned (often known and tolerated by local officials). Another method is the leasing of collective firms for private operation and co-investing in state and collective firms.

The latter serves the creation of larger mixed-ownership companies. They were mostly joint-stock or shareholding companies that enabled entrepreneurs to give shares to local officials, which ensured their co-operation and support. Yet another strategy was the socalled ‗round-tripping‘ of domestic capital: the re-investment of capital through offshore companies (or sometimes relatives). This was advantageous as foreign capital was offered tax breaks and other favorable policies (this measures becoming more difficult with the admission of China to the WTO).1358 As recent as in 2005, the private sector still consisted mostly of SMEs with fewer than 1000 employees (in fact, 81 percent of firms that size are privately owned, but only 36 percent with more than 1000 employees).1359 However, the private sector still grows very fast and thus the share of employment, fixed assets and value added of SOEs further decreased.

However, in 2007, SOEs accounted for only six percent of firms but still produced ―31 percent of the value added in the industrial sector, employed 22 percent of the workforce and controlled 47 percent of the stock of fixed assets, suggesting that SOEs tend to be relaHolbig, 2002, p. 32f.

Tsai, 2006b, p. 117.

Holbig, 2002, p. 34 Holbig, 2002, p. 36.

Dougherty and Herd, 2005, p. 9.

tively large and capital intensive‖.1360 Today, capital intensity in the SOEs compared to the private sector is four times higher than in the late 1990s. Together with the larger decline of employment in the state sector, labor productivity growth is much faster (5.6 per year from 1999 to 2007) with the result that labor productivity in the state sector is now higher than in the private sector. However, other indicators of productivity show that overall productivity is higher in private firms.1361 7.2. Case Study: Wenzhou 7.2.1. A short summary on Wenzhou‘s location and history

–  –  –

Wenzhou is located in Zhejiang province, almost at the midpoint of China‘s eastern coast. It is situated on the south bank of the Ou River, about 30 km from its mouth. The Ou long provided the main transport route for this south-eastern section of Zhejiang as 78 percent of the territory is mountainous, isolating the municipality from the rest of Chinese mainland. Wenzhou consists today of an urbanized area (488 square kilometers, four percent of the municipalities 11500 square kilometers) and a large rural region, divided into eight counties.

In 999, the Song dynasty sanctioned Wenzhou to be a foreign-trade port and the Wenzhou people became very skilled in long-distance trade (but also smuggling). Rural household industries thrived and local markets were developed. At that time it had a flourishing shipbuilding industry, and its papermaking and lacquerware craft were well known. Many people migrated out of Wenzhou. After several closings, the Wenzhou's port was again opened to foreign trade as a treaty port in 1876, and for a while there was a considerable tea trade; however, the port never played a large part in China's foreign trade, and there was no foreign settlement. Wenzhou's trade flourished again during the early part of the Sino-Japanese War, as from 1937 to 1942 it was one of the few ports left in Chinese hands;

trade subsequently declined toward the end of the war, however. The Mao administration invested little in Wenzhou‘s economic development. Not until 1955 was sea transport along the Zhejiang coast fully restored, after which Wenzhou rapidly recovered.

OECD, 2010, p. 106.

OECD, 2010, p. 110.

Whiting, 2001, p. 215, fn. 83.

The Wenzhou people never totally abandoned their way of specialized production and long-distance trade under Mao‘s rule. Its citizens started their own household businesses and workshops in the early 1970s, and their efforts redoubled later in the decade as China officially began to liberalize economic policy and to move toward more of a market system. By the end of Mao‘s era, rural Wenzhou had, by and large, gone back to precommunist practices. This became known as the Wenzhou model; there are now tens of thousands of Wenzhou merchants doing business around the country and abroad.

In 1984 Wenzhou was designated one of China's ―open‖ cities in the new policy of inviting foreign investment, and there was considerable economic growth. Local products now include ceramics, machinery, chemicals, electronics, processed foods, and wearing apparel;

shipbuilding is also important. The total product of society (sum of gross output value of industry, agriculture and commerce) increased from three billion Yuan in 1980 to 13 billion in 1988. From 1978 to 1989, the industrial output rose from 1 to 8.9 billion Yuan. The average income of Wenzhou peasants, which before 1980 was among the lowest in China, was 50 percent above the national average in 1989 (924 compared to 601 Yuan).





The region's transportation infrastructure has been greatly improved. A branch rail line, completed in the late 1990s, links the city with the Zhejiang-Jiangxi trunk line at Jinhua.

Expressways northeast to Ningbo and northwest to Jinhua opened for traffic in the early 21st century. Newer and larger port facilities also have been constructed, including docks near the mouth of the Ou River with berths capable of accommodating 10,000-ton ships.

The city's airport, on the seacoast, provides scheduled flights to many cities in the country.1363 7.2.2. Wenzhou‘s rise after 1978 Wenzhou1364, the ―quintessential capital of China‘s network Capitalism‖1365, was one of the first municipalities to heavily privatize and industrialize after 1978, after being impoverished and endowed with only few SOEs during the Mao era. However, it has a long tradition as a commercial city, a high population density, and a lack of arable land in the region, and thus has always attracted tradesman and merchants. The population of Wenzhou also resisted the collectivization during the 1950s and the collective sector remained weak throughout the communist era. In contrast, ―private petty commerce and handicraft producEncyclopædia Britannica, 2009, Liu, 1992a.

For more information on Wenzhou‘s location and history, see Liu, 1992a, as well as Whiting, 2001.

McNally, 2006, p. 42.

tion‖ prevailed underground ―and were quick to emerge ―above ground‖ in the more permissive atmosphere of the reform era‖.1366 The decision of the Chinese central government to give a high degree of autonomy to impoverished areas such as Wenzhou after 1978 contributed to this development. Peasants quickly established small family-run enterprises, thereby going back to pre-communist practices. Entrepreneurship has a long tradition in Wenzhou and together with the lack of state investment in communist times due to its proximity to Taiwan and weak government control due to Wenzhou's geographic isolation, this led to a the creation of a ―plethora of enterprises…coalescing into vast business networks‖.1367 This generated an economic growth that earned a nationwide reputation and was named Wenzhou model.1368 Wenzhou is therefore a very revealing illustration for a Guanxi-based economy proper.

From 1980 to 1988, the growth of industrial output of Wenzhou increased from 1 to 41 percent and in 2002 was with 366.7 RMB (or 47.1 percent of total provincial output) higher than in most other provinces. From 2002 to 2007 the average yearly growth of GDP in Wenzhou was 13.8 percent. Its tax revenue put it among the top 5 percent of counties during the late 1980s and early 1990s.1369 During the same time, the number of private firms increased from 28.430 to 50.317 and the individually-owned units from 202.458 to 559.400, not including the private firms disguised as collective enterprises. Major industrial products include: footwear, clothing, metal cigarette lighters, razors, locks and plastic products. Pens produced in Wenzhou are estimated to be 30 percent, footwear 20 percent of China's market.1370 In addition, the media proudly claims, there are ―about 500 factories that make almost two-thirds of the cigarette lighters on the planet‖.1371 Reasons for the immediate success of Wenzhou‘s private sector was also that private rural households as primary productive unit produced goods that at the same time could be easily assembled and were commodities disregarded by the SOEs, such as plastic shoes and polyacrylic-fiber clothing. Those products could be manufactured in small-scale production and with simple labor-intensive technology, which required only small start-up capital and gave small profits but a quick turnover. Thus, Wenzhou firms used voids in the Whiting, 2001, p. 31f.

McNally, 2006, p. 42, Herrmann-Pillath, 2002, p.161, 165.

Encyclopædia Britannica, 2009.

Whiting, 2001, p. 35.

Kanamori and Zhao, 2004, p.30f.

Mavin, 2009.

Chinese economic structures, exploiting niches for selling these products, which was supported by "benign neglect" from the state.1372 FDI has not been very important for Wenzhou because of the difficult transportation situation and firms being small in size in lower-end production.1373 In contrast, entrepreneurs in Wenzhou reactivated commercial contacts and soon marketing agents and laborers spread all over the country, creating country-wide distribution and information networks and sending back remittances that helped to kick-start many private enterprises.1374 These transnational networks stemmed from the old Wenzhou tradition of migration. Migrants thus served as important source of financing and creators of stable social networks over great distances. After 1978, ―lively smuggling trade arose between Wenzhou and Taiwan fishermen….Wenzhou traders profited by marketing transistor radios and tape recorders produced in Taiwan in exchange for antiques and other valuables; […] networks provided private resources of raw material outside plan channels. [...] Both local government official and private entrepreneur identified [smuggling] as one important early source of capital‖.1375 These informal markets were complemented by private purchasing agents who organized scarce materials from state enterprises around the country.1376 Moreover, networks on a local level enabled the cooperation between otherwise independent family enterprises, allowing for specialization and division of work and thus overcoming the limitations of a traditional family firm.1377 As official loans were difficult to obtain, entrepreneurs relied on informal sources of finance and the result was ―the rapid development of an underground financial market in which various forms of informal networks act as financial intermediaries…30 percent of all lending in 2003 was extended through such networks‖ (see also next section).1378 Hence, the success of the Wenzhou Model can be attributed to the dynamics of private entrepreneurs and the distribution networks between producers and consumers.1379 Private firms were able to flourish because of the ―evolution of a symbiotic relationship between local officials and entrepreneurs. This created a ―political subculture‖ and semi-formal collective institutions which took advantage of the gaps in the rapidly changing Chinese Zhu, 2007, p. 1512.

In 2004, it was only $209 million. This is very low even compared to other cities in Zhejiang with Ningbo having $2.1 billion and Hangzhou $1.4 billion. Yehua; Li and Wang, 2007, p. 440.

Whiting, 2001, p. 35, 131.

Whiting, 2001, p. 131, fn. 14.

Peng, 2004, p. 1059 and Whiting, 2001, p. 140f.

Herrmann-Pillath, 2002, p. 166ff.

McNally, 2006, p. 34.

Hong Kong Trade Development Council, 2009, accessed 4 February 2009.

economy and society and lags in government control.1380 However, this collaboration is

part of an old tradition as well. Wenzhouese were known to be notoriously insubordinate:

skilled in smuggling throughout their history and never willing to give up trade and household industries, even during communist times.1381 It is also said that the liberation by an independent local guerrilla force in 1949 created a structure of local cadres that are willing to protect local private initiatives against central government policies and discrimination.

This pragmatism and the will to take risks enabled local deviation from state policies and made government control and also tax collection harder to realize. Apart from the fact that its geographical distance and thus its difficult accessibility added to the autonomy given to the private sector already, the cooperation with local authorities facilitated the rise of the private sector long before it was officially sanctioned. For example, as early as in 1986 the Wenzhou industrial and commercial bureau proposed the relaxation of policies toward the private sector, also including the limit of employees (until then a maximum of eight) allowed for individual enterprises.1382 Many of the laws concerning the private sector were also formulated with the Wenzhou model in mind. The passing of those laws was thus ―a rather belated attempt to enshrine in statute practices which had been in operation for several years‖.1383 The predatory practices of local cadres described in the section above were met by giving many leading positions of the local government to natives. Hence, they were embedded into the social structure of Wenzhou through personal ties to family, friends and neighbors and were more likely to take local interests into account when implementing - or deviating from – state policies.1384 Officials helped enterprises to obtain land and bank loans and reduced taxes and states fees for them.



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