State Intervention and Business in China: The Role of Preferential Policies (review)

Those who study the Chinese economy or who do business in China may be bewildered by its preferential policies. What is the role of these policies? The authors of this book approach this neglected question in a way that is quite new: they examine preferential policies as a vehicle of state intervention. These policies "were designed to influence firms' decision[s] on issues such as what to produce, how to produce, where to produce and for whom to produce" (pp. 102-103). The influence of state intervention has been a source of controversy for neoclassical economists and others interested in this topic. The former contend that state intervention brings about market distortion, and thus that the role of the state in the economy should be kept to a minimum. On the other hand, others argue that state intervention, if adequate, can facilitate economic development. The authors take the first position, although they do not explicitly state this, and demonstrate how preferential policies have created market distortion in China.

This book focuses on the description of preferential policies in China, but those who are looking for a theoretically based and empirically rigorous study on the subject may be disappointed. The book lacks such a theoretical frame and is not well referenced from secondary sources, relying instead largely on government documents and newspaper accounts. However, its strong point is that by tracing changes in, and covering a wide range of, preferential policies, the authors provide a good overall picture of the nature and extent of these policies.

The authors place preferential policies into three categories: investor-oriented, region-oriented, and industry-oriented. An examination of the policies in these categories occupies much of the book. After the introductory chapter 1, chapter 2 deals with the investor-oriented policies, detailing the unequal treatment given to enterprises of different ownership types. Among several styles of ownership, state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) are the most privileged. For example, SOEs enjoy easy access to raw materials and low-cost credit while FIEs receive a low tax rate. The scope of preferential treatment for SOEs and FIEs has narrowed as the reform of SOEs proceeds and China begins to emphasize equal treatment for FIEs compared with its own national enterprises. The 1994 tax reform made strides toward this goal by stipulating the same tax rate regardless of ownership type. However, a privileged tax rate is still offered to FIEs, although on a smaller scale.

Chapter 3 deals with the regional dimension, as manifested in the policies directed at foreign direct investment (FDI). As is well known, China has set up Special Economic Zones (SEZs) as economic windows to the outside world and has guaranteed preferential treatment for the enterprises operating within these zones. As China has expanded these open zones into the inland provinces and emphasized coordination in the development of regional economies in the 1990s, region-oriented preferential policies have waned.

Chapter 4 explores how China gives preferential policies to certain industrial sectors such as construction and telecommunications. While investor-oriented and region-oriented preferential policies are somewhat unique to China, industry-oriented policies exist in other countries such as Japan and the Republic of Korea.

Uncertainty in preferential policies is examined in chapter 5. It is pointed out here that policies are often interpreted and enforced arbitrarily in the implementation stage since the Party and the state are not sufficiently restricted by existing law. Bureaucratic rent-seeking frequently occurs because political responsibility in the Chinese bureaucratic system is not well defined. The authors' approach to this uncertainty in preferential policies is somewhat inappropriate since the factors involved, as presented, seem to be more related to the overall business environment than to the reasons behind the formation of the preferential policies.

In chapter 6, the authors deal with trends in policy change and the future prospects for preferential policies. Investor...