The Political Economy of Service Organization Reform in China: An Institutional Choice Analysis

Tang, Shui-Yan, Lo, Carlos Wing-Hung, Journal of Public Administration Research and Theory

China is widely known for its economic growth in the past two and a half decades. Less well known, however, have been the numerous efforts undertaken, especially in the past decade, to reform its governance system. Many of these governance reform efforts have sprung from the realization that in order to sustain economic growth in the long run and to maintain political order, it is necessary to develop a strong governance system that can provide the institutional support for an effective market economy. Recent reform efforts have been targeted at various widely known problems in the existing governance system. For instance, despite the increasing size of the market-based economy, many government entities have engaged in collecting various types of fees and fines and set them aside as extra-budgetary items for exclusive, and sometimes dubious, use by agency personnel with little transparency or accountability (Tsui and Wang 2004). Another common practice has been for government entities, and most noticeably the military during the 1990s, to engage in various business and profit-making activities, creating breeding grounds for corruption as well as conflicts of interest, especially for agencies that have regulatory responsibilities (Yang 2004).

To address these issues, some government leaders began to endorse the concept of "limited government" or "small government, big society" (Brodsgaard 2002). They began to recognize that the key role of government should be limited to providing those public goods and services that otherwise would not be adequately and efficiently provided by the for-profit sector. Government agencies, especially those with regulatory responsibilities, should be restrained from engaging in direct business activities, which have been breeding grounds for corruption. Central leaders have gradually begun to realize that in order to build a well-functioning market economy, it is necessary to build an impartial and transparent regulatory apparatus. Many local government leaders, however, are known to be resistant to reform efforts initiated by the central government, and many local officials are still committed to profit-making ventures, regardless of their legality and impact on the macroeconomy. But there are signs that, especially among the more economically advanced regions, local government leaders are increasingly seeing good governance as a source of economic competitiveness for their localities, which is key to their career advancement in the government hierarchy (Li and Zhou 2005). This is especially true in recent years as central government policies have increasingly prohibited the use of tax incentives and other preferential financial treatments as instruments for local governments to attract business investment (Yang 2004). Good governance and other nonfinancial incentives such as better environmental quality have become elements of strategic plans for local governments to enhance their economic competitiveness versus other localities. With the drive for limited government and good governance, a key arena for reform has been the ubiquitous service organizations (shiye danwei). As an organizational category that is probably unique to China, service organizations refer to many semi-governmental organizations that perform social or public functions, partly or fully on a self-financing basis. Yet they are not part of the core government bureaucracy as most of their personnel do not belong to the staff establishment (bianzhi) and many of them are not formally accountable to the legislative branch-like core government agencies are. Service organizations also provide services such as education, health, and other social services that are usually provided by either nonprofit or business organizations in western, market economies.

Although largely unknown to people outside China, the reform of service organizations is of critical importance to China's governance reform. Service organizations total around 1.3 million and are embedded within and act as the operational arms of all three pillars of the Chinese party-state--the Communist Party, the government, and the military--employing close to 30 million people (Management World 2005). If for no other reasons than just their huge numbers alone, service organizations occupy a uniquely important position in China's governance reform. Although few western scholars have written about it, service organization reform has been hotly debated by academics and policy makers in China, resulting in scores of books and hundreds of academic and magazine articles, with the latest waves of studies led by the World Bank and the Development and Reform Committee of China (Fan 2004b; World Bank 2005). In addition to their huge numbers, service organizations are important because they are the predominant organizational form for delivering major public services such as education, health, welfare, research, and communications. More important, a significant number of them are assigned different degrees of administrative authority and enforcement power as in the case of the enforcement teams of local environmental protection bureaus (EPBs) (Lo, Lo, and Cheung 2001).

Many Chinese commentators have pointed out that an inefficient and ineffective service organization sector has been a major obstacle for improving China's pubic service delivery capacities, which are deemed increasingly important by the Chinese leadership as they see such capacities as key for building a harmonious society (Cheng 2004). Indeed, the reform of service organizations was so important a topic in restructuring the Chinese government bureaucracy and reshaping the state and society relations in China that the Development and Reform Committee jointly organized an international conference "International Experience on Reforming Public Service Organizations and the Reform of Service Organizations in China" with the World Bank on March 23, 2004 (Fan 2004b). Specifically, the World Bank, in partnership with two other international organizations, commissioned a group of Chinese and western scholars to research this topic, leading to the publication in 2005 of an edited volume on strategies for improving public service in China (World Bank 2005).

For many Chinese scholars, service organization reform has additional significance because one of the main options for reforming service organizations is to dissociate some current service organizations from government supervision and support and turn them into free-standing nonprofit organizations similar to those found in western countries. This represents opportunities for developing a more vibrant civil society, as well as for dealing with some of the current problems of public service delivery in China by drawing on nongovernmental, societal resources private donations, volunteers, foundation grants, etc.--in supporting such services (Tang and Zhan 2008; Zhao 2003).

To assess the prospect for successful governance reform in China, one must understand the current problems with service organizations in China, their reform alternatives, and the factors that may drive the choice of these alternatives. These also relate to a key issue in institutional choice theory--that is, how do transaction cost considerations as well as political and institutional contexts affect the choice of alternative organizational forms for public service delivery? In addition, much of the current institutional choice literature was developed to address issues in the context of the United States and other western, market economies; a key question becomes how existing theories can be adapted to examine institutional choice processes in the transitional context of governance reform in China. Before proceeding to examine how service organization reform and the institutional choice literature may inform each other, we first provide a brief overview of the definitions, size, functions, and problems of the service organization sector in China. Then, we examine as a case the reform of service organizations affiliated with the EPB in the southern city of Guangzhou. This case was chosen because we were able to obtain information on the full array of service organizations affiliated with this one bureau and these organizations represent a wide diversity of reform options.

SERVICE ORGANIZATIONS IN CHINA: DEFINITIONS, SIZE, FUNCTIONS, AND PROBLEMS

Scholars in China disagree on the precise definition of service organizations. One accepted by many, if not all, is the one used in the 1998 "Provisional Regulations on the Registration and Management of Service Organizations" promulgated by the State Council, which defines service organizations as "organizations that are engaged in social service activities such as those related to education, science, culture, and health. With an objective for advancing social welfare, these organizations are organized by state agencies or other organizations, involving the use of state assets" (Zhao 2003, 12). The key policy-making body for service organization reform is the Central Commission for Institutional Bianzhi (Zhongyang jigou bianzhi weiyuanhui), which has the authority to determine the functions and staff establishment (bianzhi) of all government units and party organs at both the central and provincial levels (Brodsgaard 2002). The services provided by service organizations include education (51% of the total), medical and health (17%), public utilities (8%), scientific research and development (6%), culture/education/media (4%), mass organizations and management offices (3%), social welfare (1%), and others (10%)--services provided by a mix of government, nonprofit, and business organizations in the United States (Gu 2005).

A service organization is usually attached to a party or state administrative agency that has the power to appoint for a fixed term the director, and sometimes the deputy directors, of the organization. It usually carries an administrative rank equivalent to one level lower than that of the parent agency. Yet unlike its parent agency, a service organization is less restricted in terms of numbers of established staff positions and engagement in revenue-raising activities. Thus, although a service organization may still rely on the parent agency for funding to pay for salaries and basic operational expenses, it often makes up the shortfall by running profit-making operations. According to one estimate, about half of the total revenues of all service organizations are derived from user fees (World Bank 2005). A service organization can also become an outlet for reassigning surplus staff from the parent government agency, and its employees are usually on noncivil servant terms after the establishment of a civil service system in 1994 (Chan and Li 2007; Lam and Perry 2001; Yang 2004).

According to this definition, service organizations as a form of government-initiated organizations are distinguished from another set of organizations, "private, nonprofit organizations (minban fei qiye jigou)," which refer to privately initiated and run organizations that are engaged in the provision of social services on a nonprofit basis. These organizations are registered under the Ministry of Civil Affairs (Tang and Zhan 2008). While an emerging force, the number of private, nonprofit organizations amounted to less than 10% of the number of existing service organizations--about 110,000 registered private, nonprofit organizations compared with 1.3 million registered service organizations around 2002/3 (Zhao 2003, 17). Although there has been much discussion about the need to further cultivate private, nonprofit organizations as the main deliverer of social services, the key policy question presently still concerns the future roles, functions, and management structures of the currently "publicly run" service organizations and whether and how these organizations can be separated from their sponsoring government units.

Historically, service organizations were an indispensable part of China's socialist planned economy. The state apparatus controlled virtually all means of production and societal resources, and it established and controlled most business enterprises and civic associations. Unlike those in the West, governments in China could not rely on private business organizations or nonprofit and civic organizations as partners in providing such social services as education, healthcare, and research because they were almost nonexistent. Instead, they had to establish and oversee almost all organizations that provided these social services. But to avoid having all social service organizations subsumed under the same bureaucratic procedures of the core government bureaucracy, government entities established and financed service organizations, which maintained their connection with their sponsoring government units, while having more flexibility in their operational and financial management.

As the planned economy began to be dismantled, the need to reform the service organization sector has become more apparent. Indeed, this reform needs to be a key element of any effort for reshaping China's governance system for several reasons. Most importantly, it is a huge and growing sector constituting about 25% of total employment and 40% of government/semi-government employment in 2003--compared with 16% and 22%, respectively, in 1990 (Gu 2005). By the end of 2003, there were a total of 1.3 million service organizations employing close to 30 million people (Management World 2005). Among these, about 9.5% belonged to the state level, 9.5% to the provincial level, 23.1% to the prefectural level, and 57.7% to the county level (Management World 2005, 4).

In the first two decades of reform in China, the priority in reform was to separate government from direct ownership and management of most business enterprises. Although China has encountered many difficulties in the transition, it has made substantial progress especially in the past decade. Now, especially in the coastal provinces, most local business enterprises are privately owned, with the central and provincial governments retaining control of some large and mostly profit-making enterprises, some in arms-length relations with individual enterprises. Some of these enterprises are now overseen by management committees resembling boards of directors of private corporations in the West (Koppell 2007; Yang 2004).

With much of the governmental role in directly managing business enterprises shredded, the next question is to what extent service organizations can be further separated from or integrated back into government. Furthermore, reform has become more urgent as problems with the current system of service organizations become apparent. First, many service organizations have become dumping grounds for excess government personnel (Burns 2003). Since 1998, for example, there have been serious efforts to reduce the staff establishment (bianzhi) in the entire government establishment nationwide (Yang 2004). One of the key strategies for many government agencies, from the central to the local level, to meet the downsizing requirement has been to transfer some government functions and personnel to their affiliated service organizations. Partly as a result of this lateral transfer, although the total number of employees in service organizations have remained relatively stable in recent years, the number as a portion of total public sector employment has been steadily increasing in the past decade and a half--from around 22% in 1990 to 40% in 2003 (Gu 2005, 7). Personnel expenses in the service organization sector have remained a heavy burden for governments in China and continue to be a major drain on government resources. According to one estimate, funding to service organizations constitutes more than 30% of total government expenditure, of which 70% is devoted to personnel (Dong and Xin 2006, 8).

Second, although service organizations were supposedly established to serve specific public service missions, many have deviated from them. Some have taken advantage of their government connections and semi-government status to engage in profit-making activities. Such activities may create not only market distortions by granting service organizations undue competitive advantage over private enterprises, they also tend to distract them from their original public service missions. These activities may also create direct conflicts of interest for some regulatory agencies as they are carrying out regulatory responsibilities while providing fee-charging services to the regulated.

Third, although all service organizations were established by party or government agencies, many are not closely supervised by the original agencies. For example, the head of a service organization may be appointed by the supervising government agency for a fixed term, but beyond that, there may not be any formalized mechanisms to hold the service organization accountable to clear performance standards and outcomes. As a result, many service organizations are poorly managed and lack efficiency and efficacy (Dong and Xin 2006, 9).

Although these problems are commonly mentioned by scholars in China as the typical problems facing many service organizations in China, organizations from different arenas do not necessarily face the same set of problems. For example, service organizations in the health care and environmental protection arenas may share some similar problems, but each arena has its own unique set of problems. In the case of healthcare, most hospitals and clinics are set up as service organizations affiliated with different government entities (the military, different functional ministries, departments, etc.) at various levels of government, in many cases serving exclusively their own employees and their family members using public funds. In general, the higher the administrative level, the more funding is available to support such hospitals and clinics. Yet as one goes down the administrative hierarchy from the provincial and city levels to the township and village levels, the number of government-supported hospitals and clinics …

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Publication information: Article title: The Political Economy of Service Organization Reform in China: An Institutional Choice Analysis. Contributors: Tang, Shui-Yan - Author, Lo, Carlos Wing-Hung - Author. Journal title: Journal of Public Administration Research and Theory. Volume: 19. Issue: 4 Publication date: October 2009. Page number: 731+. © 1999 University of Kansas. COPYRIGHT 2009 Gale Group.

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