Solve the Problem or Escape Responsibility? The Politics of Chinese Privatization Reform

Abstract

This article investigates the Chinese privatization reform in the late 1990s, when the privatizations were implemented among small-and medium-sized state-owned enterprises and pushed by the local governments. Even though the Chinese privatization reform has been intensively discussed, few studies can fully explain how China's local governments could increase fiscal surpluses through privatization under the condition that the policy burden of redundant workers was persistent. Hence, this paper proposes three hypotheses that reflect different motivations of the local governments. Testing the hypotheses via the method of process tracing for causal inference, I find that due to comparatively fewer subsidy payments, China's local governments could have a fiscal surplus after privatization reform. By unveiling the mechanism, this article can help people to understand why China's central and local governments had conflicting interests in the process of privatization. More importantly, it re-evaluates the role of China's local government in the process of privatization. The original intention of the local government was to escape the responsibility of paying subsidies rather than solve the problem of bad performance in state-owned enterprises.