AUTONOMY IN CHINESE STATE ENTERPRISES what follows, we use data on reform-era Chinese state enterprises to test this proposition Managerial decision-making autonomy would be meaningles however, if the enterprise were required to remit all its profits to le center. Conversely, the larger the fraction of its profits the enterprise is allowed to retain, the stronger the manager's incen ternal incentives of increases in the enterprise s marginal profit- re differences in managers and bureacrats'objectives provide an additional reason why the grant of output autonomy will be followed by a strengthening of workers'incentives. The industrial bureau may want to maintain excessive employment at the expense of productive efficiency [Boycko, Shleifer, and Vishny 1993].The shifting of decision- making rights to the manager will result in production being organized more efficiently, provided that the manager is at the same time given a stake in the firms profits (which increases in the marginal profit-retention rate and other managerial reforms did achieve--see Groves, Hong, McMillan, and Naughton [1993a]) Bonuses, having been denounced in China as politically unac ceptable in 1966, were revived in 1978 [Walder 1987, pp. 23-24 But giving managers the right to offer bonuses to workers did not ensure that they were immediately used: bonus payments did not suddenly increase but rather rose steadily through the 1980s It is personally costly for a manager to institute an incentive-payment scheme, in that it creates contention between workers and manage ment, as well as among different groups of workers. Rewarding performance usually means increasing disparities among different workers' remuneration. Disputes arise over how to assess perfor- e contract for the worker, and the planner for the manager. H (as myerson cigre s hared. The wert ad therefore ret tt theinfoffe ng e n nager has acquired the worker information rhgotmates with the manager,the Tirole [1986] showed ). By the time the plar 物m ction
QUARTERLY JOURNAL OF ECONOMICS mance, how much to reward seniority, whether it is fair to create income inequalities, and so on. In the wage adjustments that occurred in 1977-1978 and 1979-1980. for instance the"evalua tions often became conflict-ridden, dragging on month after month affecting morale, and creating dissatisfaction among those not chosen to receive raises"[Walder, p. 27]. Thus, managers may be reluctant to introduce incentive schemes, even if they are being ncouraged to do so by the state The managers must be given sor positive inducement to bear the costs involved in introducing yorker incentives. In addition, the rules that govern bonuses may affect the ability of managers to institute effective incentive- payment schemes. When bonuses were first revived, the total amount that could be paid in bonuses was fixed at a specified percentage of the wage bill, typically 10 percent. With total incentive payments limited, and growing only as rapidly as the basic wage workers correctly treated bonus distribution as a ero-sum game and resisted differentiation. In 1984 the limit on onuses was replaced by a progressive bonus tax paid by the enterprise. With this change, workers may have begun to perceive bonus distribution as a positive-sum game, reducing the costs incurred by management in instituting effective incentive-payment schemes. during the course of the 1980s, increased authority and autonomy granted to managers may have increased the effective- ness with which bonuses were used to elicit work effort granting the manager autonomy changes the managers incentives over the design of the workers'incentive system ccording to the MeAfee-McMillan [1991] model. Making it the manager's role to decide output, rather than merely to pass information up to the center, changes the managers personal calculus. When decisions are made at the center, they are made using information supplied by the manager. It is in the manager's interest to exploit whatever bargaining power is to be obtained from his information. Thus, the information on which the center bases its decision is distorted. When the buck stops at the manager, more efficient decisions are made because there are now fewer transmission ch manager would be expected to introduce performance payments to induce more effort from workers As well as immediate monetary rewards, workers can be given rt incentives by facing the prospect of losing their job. An additional consequence of output autonomy, therefore, is that managers will expand their ability to fire workers. Most workers in
AUTONOMY IN CHINESE STATE ENTERPRISES 189 Chinese state enterprises have permanent jobs, but an increasing number have been hired on fixed-term contracts. It is easier for a manager to refuse to renew a worker' s contract at the end of his term than it is to fire a permanent worker. According to aggregate data, a contract worker in 1989 was six times as likely to have a contract terminated as a permanent worker was to quit or to be fired [State Statistical Bureau 1990a, pp 204, 218 The introduction of an incentive-payment mechanism does not by itself guarantee that a factory' s productivity will rise. It might be that in practice bonuses are paid out equally, regardless of individual productivity, so that they have no incentive effect.Often it is difficult to define adequate output measures, and basing ayment on the wrong measures of performance can be counterpro ductive. Workers might collude against management, subverting attempts to reward good performers by imposing social sanctions on anyone who works too hard. Similarly, although workers on contracts in principle can be laid off at the end of their term so that they have some incentive to exert effort, in practice it may be that their contracts are always renewed, and thus they are effectively the same as permanent workers. Thus, it is necessary to look at the data to see whether the strengthening of worker incentives was real or just apparent and whether the new incentives actually succeeded in improving productivity II. TRENDS IN AUTONOMY, INCENTIVES, AND PRODUCTIVITY The data we use come from surveys conducted by the Institute of Economics, Chinese Academy of Social Science(CASS),in consultation with the authors of this from the University of Michigan and Oxford University. Annual data for 1980-1989 for 769 enterprises in four provinces(Sichuan Jiangsu, Jilin, and Shanxi)give details of the firms'internal incentives, the firms cost and revenue accounts, and the nature of lationship between the firms and the state. The questi naires were sent out by the provincial System Reform Commis- sions (which are responsible for assessing and implementing reform measures)to 800 enterprises, and 769 valid questionnaires were returned. The System Reform Commission does not directly supervise enterprise activity, but it is an official government body with which the enterprise has regular interactions, which may account for the esponse rate. The questionnaire had two parts. The first part, directed specifically to the factory manager
190 QUARTERLY JOURNAL OF ECONOMICS sked 70 questions, mostly qualitative, relating to the firm Incentive s system and its relation to governmental supervisors.The second part, designed to be answered by the enterprise accountant asked 321 quantitative questions covering almost every aspect of enterprise activity during the years 1980 through 1989 All the firms sampled are state-owned, and large firms are overrepresented in comparison to state-owned firms in general The sample therefore covers the core of the traditional state-run economy, the set of enterprises for which it is generally held that progress in reforms has been modest, compared with the small- scale, nonstate sector. The sample appears reasonably representa- tive of state-run industry as a whole in dimensions other than enterprise size. Output per employee in 1980, the first year of the sample, was 11, 329 yuan, 6 percent below the national average. B 1989 output per employee had increased to 18, 891 yuan (in constant 1980 prices) and was now 3 percent above the national average. Between 1980 and 1989 real output per employee in creased 67 percent in the CAss sample slightly better than the 52 percent increase recorded for state-run industry as a whole Beginning in 1979, the Chinese government began granting expanded autonomy provisions to selected enterprises nationwide Initially, enterprises were granted rights to retain a share of profits and to sell some output outside state delivery quotas. Additional autonomy provisions were extended throughout the 1980s. Most state-owned firms in China are controlled by provincial and municipal governments, and expansion of autonomy occurred unsystematically. The factory managers answering the question- naire were asked when they achieved autonomy to plan activity in six areas: value of output, physical quantity of output, product mix production technology, production scheduling (quarterly or monthly), and exports. With the exceptions of production schedul ing, which came earlier, and exports, which came later, the answer to the questionnaire show that the other four types of autonomy were tightly clustered, usually being achieved simultaneously. In the regressions reported below, we take explanatory variables the date of achieving autonomy to plan output value Autonomy is a multidimensional construction, but autonomy is a crucial element, particularly in the Chinese cor The grant of output autonomy implies that the enterprise's production activity is clearly separated from the obligation to turn over a certain amount of output to state delivery channels With
AUTONOMY IN CHINESE STATE ENTERPRISES 191 production autonomy, the state delivery plan is a compulsory contract, rather than the basis for surveillance and control of firm activity by government superiors. In other respects, the firms achieved a measure of "autonomy"very early in the reform process. By the early 1980s nearly all firms were retaining a share of profits and had the authority to sell some portion of their output outside the plan. We hypothesize that, in such an environment, the grant of output autonomy was a crucial component required for a qualitative increase in overall autonomy, since it allowed firms to integrate incentives, sales, and production.(Conversely, most firms by the end of the 1980s still did not have clear rights to fire ermanent workers .) There is considerable diversity across the firms in the CASS chey were granted output autonomy The number of firms in the sample receiving output autonomy in each year is shown in Figure I In each year between 1980 and 1989 some firms were granted output autonomy but it occurred most commonly between 1984 and 1988. While a few of the firms had output autonomy before 1980, some had not received it by the end Firms with output autonomy still operate with a number of obligations to bureaucratic superiors. Firms must deliver output at 100 60 SNN 6978 982984 1990 FIGURE I Output Autonomy