- Prosper or Perish: Credit and Fiscal Systems in Rural China by Lynette H. Ong
“Follow the money” is a sound maxim when searching for explanations of the vastly different outcomes of the industrialization process in rural China. In Prosper or Perish, Lynette Ong does just that and follows the complicated trail of fiscal transfers and problematic lending patterns in rural China. Through an analysis of the inner workings of the rural banking and fiscal systems, she offers an explanation of the way rural China has developed in recent years. The book provides a compelling argument for the dangers of soft budget constraints created by the intimate linkage between the Rural Credit Cooperatives (RCCs) and the local government bureaucracy.
Apart from providing an analysis of the rural banking sector, this interesting volume offers valuable insights into the political economy of rural China. The scope of the book is much wider than suggested by the title, which could lead potential readers to assume that the book concentrates on the banking sector in China’s villages. In reality, the book covers a much wider perspective and uses the rural banking system to provide an overview of the many processes leading to (or in most cases unfortunately failing to lead to) economic development in the villages. Using the institutional design of the Rural Credit Cooperatives as a point of departure, Ong shows how funding meant to reach farmers is often used as an indirect subsidy by local governments. The book provides compelling insights into the system that allows this to happen. The book is relevant to any reader with an interest in rural China and provides clear explanations of the complicated processes that control the government of rural China, for instance the nomenklatura system and the cadre evaluation system. The investigation of the world of rural finance functions as an interesting case study that helps readers who are unfamiliar with the political economy of China’s villages understand these processes.
The book is divided into three major sections. In part 1, Ong outlines the research questions: “Why have RCC loans been allocated consistently to local government enterprises and projects?” and “What is the local variation in industrialization outcome from savings mobilizations” (p. 10). It also provides background information on the structure of the rural banking sector as well as the turbulent history of the Rural Credit Cooperatives. The RCCs hold about 80 percent of rural deposits and loans and have played an indispensable role in rural development by channeling rural savings into the industrialization of China’s villages.
Part 2 consists of two chapters dealing with the day-to-day workings of the “nexus between rural financial institutions and local government finance” (p. 5). [End Page 655] Chapter 3, “The Design of China’s Rural Credit Institutions,” shows how the dual accountability system governing the RCCs leads to the siphoning of funds into local government-related projects, as the horizontal controls through the nomenklatura system are more powerful than the vertical institutional controls. The objective of the RCCs is meant to be twofold, supporting local industrialization as well as playing a central part in the national government’s strategy for improving people’s livelihood in rural China. However, due to the focus of local governments on revenue-generating investments, emphasis is on the first goal, and the RCCs have become a major source of funding for local government projects. Since these projects meet with limited success, they often contribute to the high rate of bad loans in the RCCs. As any suggestion of the failure of the RCCs would lead to bank runs and social unrest in the countryside, the central government has occasionally been forced to bail out the RCCs, in reality providing an indirect subsidy to local government budgets. Chapter 4, “The Implications of Cadre Evaluation and Fiscal System for Local-Government Behavior,” outlines the problems in the local government system that lead to this obsession with revenue-generating businesses. Basically, the fiscal reforms instituted by the...