Contagious Capitalism: Globalization and the Politics of Labor in China (review)

This book is required reading for those who believe capitalism will bring democracy and a market economy to China. It presents compelling evidence that capitalism actually stabilizes China’s authoritarian rule and command economy. That stability, however, may be fragile.

Professor Gallagher finds that multinational corporations were invited to China to help stabilize its political and economic systems. Furthermore, the approach is working. It is causing state industries to operate more efficiently under new management schemes, it is facilitating an end to the “iron rice bowl,” and it has moderated pressures for labor reforms and political liberalization.

Competition from multinationals has helped promote a political climate that gives large portions of China’s urban population and significant portions of its rural populace incentives to support industry that is competitive in the world market. This allows radical increases in the pay of top management (giving them reason to support the system) at the same time that workers are losing their welfare benefits, yet gaining the option to receive wage increases with improved performance. The process has created losers: whole regions and groups of workers are left behind. But a growing consensus among the minority who have benefited, including the country’s wealthiest individuals, slows reforms that might help those groups and liberalize politics.

As with most late developers, states throughout Asia have played a strong role in promoting development. China has given multinationals an unusual amount of freedom in that pursuit. It has benefited from large infusions of foreign direct investment. The presence of the multinationals gives Chinese firms an incentive to compete and carry out joint ventures with them. Foreign investors provide Chinese firms with capital, intellectual property secrets, and management expertise, which help them compete. Meanwhile, domestic firms are losing skilled workers to foreign firms that pay more. This increases the drive for efficiency and productivity, while focusing worker attention on the right to choose a job rather than the right to work. Workers can now own their own homes, aided by loans and new forms of unemployment insurance and portable medical and pension benefit programs. Thus labor, once afforded job protection and numerous benefits under socialism, is fragmented, and the reforms are not creating a powerful domestic private business class. The foremost domestic business leaders are heavily allied with government, state industries, and foreign capitalists. Foreign capitalists lead China’s integration with the global economy.

Hybrid firms have evolved that combine public and private ownership, using capital from state banks and foreign stock sales. These firms have more managerial autonomy than the old state industries. Foreigners control some of that decision making. Short-term (often three-month) labor contracts, sharply reduced welfare benefits, and wages based on productivity are three results of this autonomy. Older and more skilled workers were attracted to the new system because of the chance for increased wages (which rise as industries compete for scarce skills), opportunity for advancement, and the chance for special opportunities such as studying abroad. Local officials share in the spoils. Top managers are often party secretaries as well. Such individuals no longer clamor for privatization of industry. They become supporters of their own national—actually hybrid—firms. They do not want a return to the domination by foreign capital that occurred after the Opium Wars; this makes them cautious about economic liberalization.

That stands in marked contrast to Russia’s privatization of industry, which created a class of private businessmen operating entirely independent of government, free to fire their workers and strip companies of assets instead of making them more competitive by improving productivity and creating a loyal workforce. Bureaucrats, state managers, and state enterprise workers who are now recalcitrant opponents of state economic control in Russia have become its supporters in China. In Hungary small private entrepreneurs were encouraged, creating a burgeoning private sector; in China, those smaller entrepreneurs are largely in town and village enterprises and urban collectives, which...