From Mao to Market: Rent Seeking, Local Protectionism, and Marketization in China, by Andrew H. Wedeman. Cambridge: Cambridge University Press, 2003. xiv + 277 pp. US$60.00/£45.00 (hardcover).
China can be distinguished from other post-Communist countries not only by its adoption of the so-called gradual approach to economic transformation but also by its success in achieving rapid growth and a sustained, phased marketization drive. The dual-track price system of the 1980s which epitomized the incrementalist spirit of China's reform program was seen by many market theorists as a recipe for disaster. They argued that the coexistence of a deregulated sector and the price rigidities of a Soviet-type economy in selected sectors was creating a complex system of rents, inducing corruption and, worst of all, raising the stakes for bureaucrats to preserve the hybrid system, all of which hindered progress toward full marketization. According to this argument, shock therapy, with its defining features of swift extensive reform, was a preferred alternative. The China success story defies this logic.
Wedeman's book provides a nuanced explanation for why Chinese bureaucrats failed to stall the reform process. In particular, he critically evaluates the dynamics of local protectionism. He shares the market theorists' concern that partial reform can nurture a system of rents, and he argues that, even though by the mid-1980s the number of commodities under the state's purchase scheme had been significantly reduced, there remained a large number of resources subject to mandatory state purchase. The cautious spirit of the early post-Mao years resulted in a dual-track system for selected materials: an administrative price for a state-set purchase quota, and a market price for an above-quota portion. An ability to divert the in-plan portion onto the market held the key to capturing rents.
The most revealing part of the account arises from Wedeman's first-rate analysis of the different possible options available to local governments in capturing these rents. In a highly accessible style, he elucidates the intricacies of the mechanisms of rent-seeking and identifies two different forms: export protectionism and import protectionism. Export protectionism involved the use of barriers to obstruct the outflow of commodities. It was a strategy used by localities which produced raw materials that were under partial price deregulation. A partial price control implies cheaper raw materials and higher profitability for commodities produced from these materials. Local governments in the raw-materials-producing regions could thus enrich themselves either by diverting supplies onto the black market or by processing the underpriced materials locally under their own sponsorship. The dominant strategy was to ensure that these raw materials were not simply shipped through the formal channels to places outside their jurisdiction. However, export protectionism was only part of the story. For these local governments, commodities produced using the diverted in-plan materials must have a market in order to maximize gains. Administrative barriers were therefore imposed in order to restrict the inflow of competing goods so as to preserve the local market for indigenous goods. Thus a two-front resource war inevitably arose between raw-material-producing regions and manufacturing regions.
Wedeman's account also provides a sophisticated analysis of the impact of the economic reforms on the role of the central state. While there may be little theoretical novelty in arguing that the regulatory capacity of the central state has been weakened by the advent of decentralization and the market reforms, the book illuminates the complexities inherent in the central-local interfaces in the market transition process. …