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able property rights are a sheer illusion. There can be no competitive behavior, real or simulated, without dispersed power and responsibil- ity.’’ That is why he called the idea of market socialism ‘‘a grand illusion.’’3

To ‘‘revitalize’’ SOEs, China has begun to establish large, state-run holding companies, called ‘‘state asset operating companies,’’ which are supposed to substitute for real capital markets (Walker 1997: 6). In this setup, the state retains majority ownership, restricts the trans- ferability of ‘‘shares,’’ and limits the restructuring process to what is politically acceptable. Thus, politics, not the market, prevails. That approach to SOE reform is akin to the experiment with perestroika in the former Soviet Union: it is a pseudo-reform that tries to dress SOEs in market garb but never really changes the underlying owner- ship structure from state to private property. Commenting on the Soviet effort to revitalize state enterprises, Alexander Tsypko (1991: 289) wrote,

It took us five wasted years of perestroika to understand that, essen- tially, the revitalization of Stalinist socialism is impossible; there is no third way between modern civilization and socialism as it is. The market cannot be combined with . . . public ownership of the means of production. A return to the market is impossible. . .without broad- based privatization.

The same criticism applies to China’s experiment with market socialism.

China’s state-owned enterprises cannot be revitalized; they have a terminal disease that is eating up China’s scarce capital. In 1996, for the first time since 1949, state enterprises as a whole suffered a net loss—‘‘the state received no return for its massive investment in SOEs’’ (EAAU 1997: 10). SOEs absorb more than 50 percent of state investment funds, employ 66 percent of the urban workforce, but produce less than 30 percent of total output (EAAU 1997: 338). China’s leaders should have the courage to go beyond the policy of ‘‘grasping the big enterprises and giving a free hand to the small ones’’ (zhua da fang xiao). All SOEs should be candidates for privatization.4

3Almost 60 years ago, F. A. Hayek ([1940] 1948: 203) observed, ‘‘To assume that it is possible to create conditions of full competition without making those who are responsible for the decisions pay for their mistakes seems to be pure illusion.’’

4Fan Gang (1997: 7) argues that China’s ‘‘bottom-up’’ approach to reforming small SOEs may also work for medium and large SOEs, but it will take a long time. That approach allows market forces to bring about spontaneous privatization and then, once proven successful, to legalize it at higher levels. Fan points out that de facto privatization of small SOEs began three years before formal government approval. The ‘‘bottom-up’’ approach is politically attractive because politicians do not have to precommit to ownership reform, so they can take credit for success without having to bear the risk of failure.


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