Historical Review: Focusing on the PRCs Political Presence

1.1 Overview

The development of private enterprises in the PRC has its own special background. During the 1950s, the old Chinese capitalist economy nearly died out with the establishment of the PRC and the reconstruction of industry and commerce within the framework of the socialist economy. In December 1978, the third plenum of the Eleventh Congress of the Communist Party of China (CPC) was held, marking the beginning of the reform era. In order to promote the economic development of the PRC, a series of reform policies were launched, along with an opening-up policy to the outside world. A guideline for mutually supplementary multiple economic elements was also formulated, with the public economy as its base. Based on this, the green light was given for the establishment of individual enterprises (getihu). In consideration of the political conditions and limitations of people's ideology and recognition at the time, individual enterprises could only employ one or two apprentices and as many as five helpers, for a total of not more than seven persons. With the development of individual enterprises, seven workers became insufficient for meeting the demand of individual enterprises for labor. In reality, some individual enterprises were already breaking the rule and attempting to employ more than seven workers. To cope with their needs, the central government gave permission for enterprises to employ more than seven workers. Since 1978, the private economy has evolved constantly. Using policy evolution as a basis, private sector development can be classified into three phases.

1.2 First Stage (1978-1986): Launch of Economic Reforms

From 1978 to 1982, although a series of policy measures were launched and the private sector was developed, there were still no explicit economic and political guarantees. As a result two phenomena took place: capital flight overseas and "hong maozi (disguising stateowned enterprise SOE or collective enterprise). This became the major impediment to the further development of the private sector. However, the most important development during this stage was the Constitutional amendments in 1982, placing the private economy as a "supplement to the socialist state-owned economy."

In 1978, the third plenum of the Eleventh Congress of the CPC made it clear that the Party would move from the political struggle of the past to socialist modernization and economic construction. A series of policy favoring the development of agriculture were put forward, stating, "Private plots, family businesses and bazaar sales are necessary supplements to the socialist economy and nobody may intervene against them."

A report issued on April 23, 1979 by the State Administration for Industry and Commerce, put forward for the first time a policy to rebuild and develop the individual economy. The report stated that in line with market demand and also with the agreement of the concerned departments, jobless workers registered in permanent residence could be permitted to undertake individual business, such as repairs, handicrafts and services. However, employed workers were not allowed to do so, and were recommended to work collectively if they so desired.

In November 1979, the CPC Central Committee of the PRC approved the request of The United Front Work Department of The CPC Central Committee and five ministries under the State Council that illegal mongers and small peddlers should no longer be treated the same as "capitalists."

In August 1980, the Central Committee prepared a document on the national labor employment situation, and put forward a policy to encourage and support the development of the individual economy under the guidance and instruction of the state and the rule of voluntary business associations.

On March 30, 1981, the State Agriculture Committee issued a notice encouraging the active development of a rural multi-economic component. It called for "encouragement and active support for individual or partnership units to engage in services, handicrafts, aquaculture, and transport. Let farmers act by themselves." This notice paved the way for the development of the private economy.

On June 27, 1981, the guideline report from the State Administration for Industry and Commerce to the State Council stated, "urban collectives and the individual economy are one of the components of the multi-economic structure." Rebuilding and developing the individual economy was regarded as an important task for the whole economy. It was also expected to solve urban employment. At the same time, the Sixth Plenum of the Eleventh Congress of the CPC, in its "Resolution on a number of historical problems," announced that the changes in socialist production relations should adapt to the situation of productivity, and should be beneficial to the development of productivity. It indicated that while the state-owned economy and collective economy continued to be the basis for the PRC economy, the individual economy was a necessary supplement. However, it also argued that the planned economy was the basis for the public economy, and that the supplementary role of the market should not be developed further in the process of economic adjustment.

On July 7, 1981, the State Council announced a regulation on the development and management of the urban non-farm individual economy. This is the first legal document on the individual economy, and it clarified the management framework of the individual economy. Subsequently, the Central Committee and the State Council repeated their policy of developing the individual economy in order to explore the employment opportunities and revitalize the economy.

On December 4, 1982, a constitutional amendment was passed at the Fifth Meeting of the Fifth People’s Congress. While it maintained the basic idea that the economic foundation of the PRC was the socialist public system, by stating that "the whole people own the system collectively," it is also stressed that in rural and urban areas, the individual economy should be encouraged under the regulations and guidelines of the Administration of Industry and Commerce as a necessary and beneficial supplement to the public economy. It was stressed that since the productivity level as a whole was still low and uneven, "multivariate economic elements" would need to coexist for a long time, and only when the multivariate economic elements developed further could the rural and urban economy thrive and people's life be improved.

On January 2, 1983, the Central Committee of the CPC in its promulgated document, "On a number of issues involving current village economic policy," indicated that the individual business enterprises and hand-masters of planting and breeding of villages may employ helpers and recruit apprentices in accordance with this document. However, although companies cannot publicize or encourage hiring more than eight helpers and apprentices, the practice is not banned. In such cases, the partnership economy was advised. On April 13, the State Council issued a supplementary regulation further elaborating the details of the policy on the individual economy.

On October 20, 1984, a decision regarding economic system reform was passed in the Third Plenum of the Twelfth Congress of the CPC. It reconfirmed that ownership by the whole people was the leading power of the socialist economy. However, it also stressed that the individual economy, which was closely related to socialist public ownership and different from the capitalist private economy, should not be excluded. It was called upon to play a very important (unsubstitutable) role and to contribute to the convenience of popular lifestyles, expanding socialist production, and increasing employment opportunities. On January 22, 1985, a decision made by the CPC Central Committee to deepen rural reform, further argued that in the early phase of socialism, the individual economy and some private enterprises would inevitably exist for a long period of time. This was the official document to formally refer to private enterprises.

1.3 Second Stage (1987-1996): The Socialist Market Economy¹

In 1987, the Communist Party Congress reconfirmed that the cooperative, collective and private economies were important supplements to the socialist economy and encouraged their development. Policies, laws and regulations relating to the private economy were to be speeded up in order to reinforce the supervision and management of the private economy. In 1987 and 1988, the "Provisional Regulation of Rural and Urban Business Registration and Management" and "Provisional Act of Private Enterprises of the PRC" were enacted.

In September 1997, the Fifteenth Party Congress changed the position of the private economy from the previous "supplement to the state-owned economy" to an "important component of the socialist market economy." The private economy was now expected to play an important role in meeting the diversified needs of the people, increasing employment opportunities and promoting national economic development.

These acts stated that individual enterprises were allowed to exist and to be protected by the law, and nobody could infringe upon their rights. The constitutional amendment act passed at the first meeting of the Seventh People’s Congress on April 12, 1988 also stressed that "the private economy is allowed to exist and develop within the scope of the law, the private economy is a supplement of the socialist public economy, and the state protects the lawful rights and lawful profits of the private economy and carries out the supervision and management of the private economy."

Under the 1988 Act, private enterprises were regarded as profit-making economic units invested and established or controlled by natural persons and using more than eight employees. The Act reiterated that the private economy was a supplement component of the socialist public economy, and that the state protected the lawful rights and lawful profits of the private economy. At the same time, private enterprises were required to abide by the law and the state’s policy. In the same year, provisional regulations for private enterprise income tax, personal income adjustment tax and labor management were issued.

The Fourteenth Congress of the CPC in October 1992 summarized the main contents of the socialist economy with Chinese characteristics, and made clear the goal of the "socialist market economic system." The congress noted that the goal of economic reform was to build up and make perfect the socialist economic system with the public economy, and to maintain the "principle of distribution according to work" as its main foundation, with other type of economic elements and distribution styles as supplements. In the areas of structure of ownership, the congress also noted that the public economy, including the state-owned economy and collective economy and the principle of distribution according to work, continued to be the main body and that the individual economy, private economy and foreign funded economy continued to be supplements. The idea was that multivariate economic components could mutually develop and coexist over a long period of time or that different economic elements could cooperate and work with each other. Furthermore, the Deng Xiaoping’s famous South China tour (ubNan xun jiang hua) in 1992 accelerated economic reform and the opening up of the market to the outside world.

On February 28, 1993, the State Council, in its decision on speeding up township and village enterprise development in the central-west region, stated that, "the velocity of productivity should not be restricted. In regions with poor and backward collective economies, individual, private and shareholding enterprises will be encouraged to the greatest extent possible. Unfair treatment on individual and private economy has to be corrected. Buying out individual and private enterprises must be banned." The Third Plenum of the Fourteenth Congress of the CPC further strengthened this policy.

1.4 Third Stage (1997-2003): The "Three Representations"

In September 1997, the Fifteenth Party Congress changed the position of the private economy from the previous "supplement to the state-owned economy" to an "important component of the socialist market economy." The private economy was now expected to play an important role in meeting the diversified needs of the people, increasing employment opportunities and promoting national economic development.

The 1997 Party decision was reflected in a Constitutional amendment of March 1999, which ensured the state’s guarantee of the legal rights and interests of the private sector, with the exception of property rights. The amendment enhanced the status of individual and private economy, and the clause stating that, "the individual and private economy is a supplement to the socialist public economy" was left out.

It is likely that for private enterprises, nothing is more important than the speech made by President Jiang Zemin at the 80^th anniversary meeting of the CPC, after the PRC started to carry out it reform and opening policy in 1978. In this speech, President Jiang stated, "private entrepreneurs are now one of the new social classes (hierarchies), and they make great contributions to socialist society through their honest labor and lawful operation, bringing together workers, farmers, intellectuals, cadres and People’s Liberation Army soldiers."

The idea was that the superior among them could be absorbed into the CPC. The spirit of his speech was reflected in the 16^th report of the CPC, and the party constitution was revised accordingly. This speech definitely further promoted the social status of the owners of private enterprises, constituting another milestone in the development of private enterprises after the Fifth Congress of the CPC.

This idea was reflected in the "San ge Daibiao" (Principle of Three Representations). According to this principle, the Party represents the most advanced economic forces, the most advanced elements of culture and the basic interests of a wide range of people. In our context, the most important factor seems to be the third, namely a wide range of people including private entrepreneurs. The implications of the "advanced economic forces" are also very important. The Communist Party has now come to realize that the most advanced economic forces and high economic productivity necessarily comes from the private sector.

In 2002, the Communist Party opened Party membership to entrepreneurs and businesspersons. It is widely expected that in the near future, more and more private entrepreneurs will take senior positions in the Party under the "San ge Daibiao" principle.

1.5 The NPC in March 2004

The proper way to protect the property rights of private enterprises was discussed within the CPC, and an amendment to the Constitution was passed at the National People's Congress (NPC) in March 2004,with Article 13 being amended. According to a report in People's Daily dated March 9, 2004 [51], the main points were first an expansion of the scope of protection of the means of production (in the past only individual consumer assets were protected). Secondly, the terminology "ownership rights" was changed to "property rights" to make the concept of "rights" clearer and broader. This was a major step forward. At the same time, some legal experts pointed out that the old constitution already included such a clause, and that the 2004 amendment merely attempted to improve the situation. It was also reported (South China Morning Post, March 20, 2004 [27]) that a national business association stated that while it was a great step forward, it was not yet sufficient. The association said it would continue to lobby for equal treatment in the area of taxation, bank-financing entry to state dominated sectors, etc.

Table1.1. Chronology: Historical Development

1.6 Politics of Private Sector Development

There has been increasingly active participation by private entrepreneurs in the political process. According to the "Fifth sample survey on private enterprises" in 2002, 17.4% of private entrepreneurs become representatives of the NPC, and the proportion of Party members to total private entrepreneurs rose from 19.8% in 2000 to 29.9% in 2002. It should be noted, however, that this includes managers of privatized SOEs.

Why do entrepreneurs actively participate in the political process? The primary motivation seems to be economic, i.e. to protect and promote their economic interests through close relationships with various authorities. In connection with this, it should be noted that market intervention by authorities or under laws and regulations deeply affects the economic activities of entrepreneurs, resulting in bribery and corruption among bureaucrats. Political motivations also seem to be important, i.e. gaining promotion to senior governmental positions and being recognized as prestigious members of society.

For example, China Central TV Network (CCTV) disclosed a case in one county where some private entrepreneurs were promoted to official positions in exchange for tax payments double those required by the local government. If this type of phenomenon continues, market competition will be distorted. Such distortions must be eliminated to promote sound economic development. The increasingly active involvement of private entrepreneurs into the political process is envisaged in the near future.

Some experts have argued that under the transition political process, laws and regulations have still not been perfected, and social networks or informal personal connections (guanxi or) are still dominant. One survey found that although private entrepreneurs had become active participants in the formal political process, after their businesses developed, their interest in politics seemed to diminish.

It is difficult to predict how the development of the private sector will affect the changes in the political process. A recent observation conducted by the China Academy of Social Sciences (CASS) found that the Communist Party is very flexible in handling matters concerning this. What was believed in the past is no longer considered important. The most important matter is the stability of the nation, the consolidation of the regime, and the maintenance of the power of the Party. The Party is apparently ready to accept anything that appears to be helpful for these purposes. With the development of the PRC's economy, the Communist Party has been making much progress of its own, in a trend called "go ahead with the time" (yu shi ju jin). One could also argue, however, that many factors and conditions have changed as time goes by, and the Communist Party has simply accepted these changes and adjusted itself to them. This is a very pragmatic and realistic approach. In the past, the Party only claimed to represent the interests of workers and farmers. Now it aims to represent the broader people’s interests, including those of private entrepreneurs. The inclusion of private entrepreneurs into the party means that fewer people will oppose the Communist Party politically, and this is clearly beneficial for the party’s attempt to hold power. As time goes by, the only difference between the Communist PRC and the developed capitalist countries may only turn out to be politics. If the day comes when private entrepreneurs are no longer interested in joining the Party, the political situation and the society as a whole may become more stable and mature in terms of laws and regulations, as private entrepreneurs no longer need to rely on the Communist Party to achieve their economic interests. The diminishing interest in Party membership will also mean that personal values can be realized in many ways, and participation in the Party and interest in politics is no longer important.

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