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Class Structure and Class Inequality in Urban China and Russia:
Effects of Institutional Change or Economic Performance?
Yanjie Bian, HKUST
Ted Gerber, UW-Madison
First Draft: April 22, 2004
Revision: December 31, 2004
*Presented at the Urban China Studies Network Conference, Santa Monica, May 1-2, 2004. Yanjie Bian acknowledges the grants from Hong Kong’s Universities Grants Committee (HKUST6052/98H, HKUST6007/00H, HKUST6007/01H) and the research assistance of Li Yu and Zhang Wenhong.Introduction
This chapter examines whether and how class structure and class inequality have changed in urban China and Russia during their transitions in the direction of market-based economies. Our analyses use survey data spanning 1983 to 2003 in China and 1985 to 2001 in Russia. Thus, we are able to both assess patterns of stability and change within each country as market reforms have progressed and make precise comparisons across national settings at particular stages of the transition process. Our comparative design is well suited to advance understanding of how stratification processes are and are not affected by market transition. In particular, we believe that a China/Russia comparison can provide insights that can inform the debate – which is implicit in the literature – over whether the impact of market transition on stratification is driven mainly by institutional change (the introduction of markets, the withdrawal of state planning and redistribution) or mainly by changes in economic performance (rapid economic growth in China, rapid contraction in Russia) that have accompanied market reforms.
Our empirical analyses will address three questions: First, how (if at all) has the occupational class structure changed in urban China and Russia in the course of their transitions to the market? Second, how (if at all) has the level of class inequality in earnings changed? And third, how (if at all) has the structure of class inequality in earnings changed? That is, which classes benefit most and which suffer most in the course of economic reforms? Once we can answer these questions using our survey data from the two countries, we will attempt to derive their implications for a set of larger theoretical issues involving the effects of market transition on stratification processes: Does the magnitude of inequality tend to increase, decrease, or remain the same as a result of market transition? Which aspect of market transition appears more decisive in shaping the emerging levels and patterns of inequality – institutional changes or changes in economic performance (growth vs. stagnation)? Does market transition have any generic effects on stratification in the different countries that undergo it, or are the trajectories of stratification processes in different countries so divergent that no common patterns can be identified?
In the remaining of this chapter, we first provide some historical background of China and Russia, comparing similarities and differences of the economic transformations of the two countries. Next, we review two competing explanations about whether the emerging patterns of class and income inequalities are mainly due to institutional change or change in economic performance, and outline our analytic logic for empirically addressing these explanations with a China/Russia comparison. After describing our data and methods, we present results obtained to test hypotheses derived from the competing explanations. In the conclusion, we use the China/ Russia comparison to engage larger theoretical issues about impacts of market reforms on stratification processes in transition economies.
China and Russia in Historical Background
Communist regimes sought to eliminate class inequality – at least in principle. Even though we know that class inequalities of some form persisted at the height of Communism in both China and Russia, there can be little doubt that these inequalities were lower magnitude than in most market-based societies (Whyte 1984). Class differences in earnings and, more broadly, material standing were kept at lower levels via administrative means, which, in turn, were based on institutions such as the prohibition of private ownership of the means of production, state planning, and administrative control over nearly all aspects of economic life (as opposed to reliance on the market for the allocation of labor, production factors, goods, and services) (Connor 1979; Whyte and Parish 1984). Of course, Communist systems produced their own privileged groups (Djilas 1957). Members of the political and managerial elite constituted one such group (Szelenyi 1978; Walder 1985); professionals formed (to a lesser extent) another (Konrad and Szelenyi 1983). At the other end of the scale, agricultural laborers and, to some degree, unskilled service workers persistently lagged behind industrial workers in their standards of living (Parish and Whyte 1978). Nonetheless, the absence of “capitalists” in the class structure and the relatively narrow gaps between the classes that did exist under Communism mean that class inequality was substantially more limited than in countries where full-blown market economies prevail.
The introduction of market reforms by the Chinese leadership under Deng Xiaoping in the early 1980s and by the newly independent Russian government under Boris Yeltsin in 1992 eliminated the institutional bases for the relatively low level class-based inequality. At the same time, the reforms created the opportunities for a new class of proprietors to form. By virtually all accounts, these reforms have been accompanied by sharp increases in the levels of economic inequality in both countries (see reviews by Bian [2002] on China and Gerber [2003] on Russia). But what has been the impact on class-based inequality? There has been little if any systematic analysis of this particular question, despite the considerable scholarly attention that has been devoted to overall levels of inequality and other particular forms of inequality such as inequality based on education, Communist party membership, social networks, and gender.
The lack of scholarship on class inequalities in contemporary is particularly surprising because class conflict has become a mainstay of Chinese politics and culture. In China, private owners and waged labor are increasingly divided when the Communist factory regime (Walder 1986) was giving way to a capitalist pattern of “disorganized despotism” (Lee 1998). New forms of class exploitation, such as the severe oppression of “peasant migrant labor” by management and capitalists, have become widespread (Pun 2003). Labor protests and official corruption are an everyday phenomenon and are the main theme of political movies and TV plays (Chan 1995). Class boundaries are reflected in housing, car ownership, and whether kids are sent to overseas boarding schools (Davis 2000). And class closure is behind class-bound “New Year greeting networks” (Bian et al. 2005). In Russia, class conflicts have been less evident in political and cultural life: the working class has done little to challenge the new class of wealthy owners and managers. That does not necessarily mean, however, that class inequalities have not increased – rather, it could simply reflect a deeply ingrained culture of acquiescence and apathy on the part of workers.
China and Russia are similar in some respects: both are large, militarily powerful, former state socialist countries characterized (during their Communist eras) by a planned, state-administered economy, Communist Party rule, and relative isolation from the global capitalist economy. Both introduced major reforms beginning in the 1980s with the intention of introducing market mechanisms into their respective economies. However, there are also a number of significant differences between the two countries. In table 1 we present official data from China and Russia that reflect their divergent patterns of institutional change and changes in economic performance during the course of their respective transitions.[1]
(Table 1 about here)
In China, market-oriented reforms have been introduced in a gradual and incremental fashion, with the aim of achieving rapid economic growth without damaging the social-political order of the Communist party-state. While rural reforms started in the early spring of 1979 and received a welcoming outcome of the enlarged harvest in the fall, reforms in the cities, which we focus in this paper, started as late as 1983 when state factory profits were turned into tax, so that after tax earnings could partly be retained by the factories, something that was disallowed by the state planning under Mao (Naughton 1995). Workers’ salaries and raises were still determined by the government, and bonuses, which resulted from retained earnings by the factories, were distributed rather equally among workers within the factory (Walder 1989) but increasingly unequal between factories (Bian 1994, chapter 7). The spread of small commodity markets, the introduction of managerial responsibility system, and the emergency of labor contracts and “talents markets” in the late 1980s increased income for household business owners and the high classes with managerial authority and professional skill. After Deng Xiaoping’s 1992 South China Tour that spurred a new wave of capitalist-oriented market system, private ownership was legitimized, labor markets emerged, inter-firm mobility began rising, “peasant migrant workers” flooded cities and towns, financial markets diversified and grew locally, and foreign direct investments increased squarely year by year through the first years of the new century. The late 1990s saw significant property rights reforms in the state sector, and subsequently laying off in the state sector and reemployments in non-state sectors were parallel developments.
As a result, China has enjoyed a great deal of regime stability and the state has remained strong despite the institutional changes associated with market reforms (Bian and Zhang 2002). Perhaps in part due to this very political stability and state strength (Burawoy 1997), the Chinese economic reforms have indeed stimulated rapid economic growth (Walder 2003). It is also noteworthy that China began its reforms at an earlier stage of development: 80% of the population worked in the agricultural sector and the per capita GDP placed China in the ranks of developing countries rather than advanced industrial societies. China’s earlier starting point may also help explain its rapid growth rates, particularly as market reforms were initially introduced in the agrarian sector. In any event, in China market reforms and strong, persistent economic growth have gone hand in hand. This is the main theme of a comprehensive review by Wu Jinglian (2003), one of the few respected Chinese economists who contributed to reform policies.
Soviet-era Russia was already a “developed” society, with 80% of the population urbanized and only a small percentage working in agriculture. Russia’s reforms were introduced in a context of great political instability; the collapse of the Soviet Union meant that the Russian government had to forge new political institutions and economic policies simultaneously, while the entire process was contested. The lack of cohesion within the ruling elite and the nascent character of state institutions have made for a very weak Russian state and rampant corruption.
In contrast to China’s gradual market reforms, Russia’s institutional changes have been more radical, following the “shock therapy” pattern first applied to the Polish reforms of the late 1980s. In early 1992, the Russian government abolished price controls, freed the exchange rate, eliminated planning, opened the economy up to imports, and removed restrictions on private ownership of the means of production. The government quickly privatized small enterprises, and by 1993 began the rapid privatization of medium and large enterprises via a complex voucher scheme. The “shock” of these reforms proved more devastating and lasting than the therapy (Gerber and Hout 1998). Prices skyrocketed as the government printed money to finance its growing deficits. Supply chains and distribution networks were disrupted by the chaos that ensued after the collapse of the Soviet Union. Heavily subsidized industries like defense, mining, and steel production could not stand on their own feet. In other sectors, domestic producers lost out in the competition with cheap foreign imports (including many from China). Firms could not obtain capital needed for restructuring, and the state could not collect its taxes. In the scramble to survive and profit in the new environment, managers engaged in asset stripping for their personal benefit, and banks took part in speculative schemes rather than provide capital for investment. Wage arrears and barter reached historically unprecedented heights. While most of the population saw its wages eroded by steep inflation and arrears, a small minority reaped vast profits from insider deals for state property.
In short, the economy quickly plunged into a steep crisis, which lasted until 1997. That was the first year the Russian economy did not contract. The Russian economy suffered another blow in August 1998 when the government defaulted on high interest bonds. But beginning in 1999, a combination of relative stability, some successful restructuring, and high oil prices on the international market produced several years of substantial economic growth. Thus, in contrast to China Russia’s more rapid market reforms were initially accompanied by a steep decline in economic performance. At the end of the 1990s, however, economic growth resumed in Russia, though by then the process of institutional change had essentially been completed.
In sum, Russia and China have diverged in terms of their initial “starting point” at the time reforms were introduced, the rapidity and scope of the institutional changes, and the growth trajectories that have accompanied the transition process. These contrasts mean that a China-Russia comparison has particularly great potential to yield insights into the relative roles played by institutional changes and changes in economic performance in shaping class inequality in transition societies.
Competing Explanations: Institutional Change or Economic Growth?
A lively and sizable literature has emerged examining the impact of market transition on stratification processes in China, Russia, and Eastern Europe. Victor Nee’s “market transition theory” (Nee 1989; 1991; 1996; Cao and Nee 2000; Nee and Cao 2002) has had formative influence on this literature. Nee argues that as markets come to play a greater role in allocating economic resources and, correspondingly, state redistribution recedes in importance, the economic returns to human capital and entrepreneurship will increase, while the returns to political capital (operationalized as Communist Party membership and cadre status) will decrease. In his initial formulations, Nee believed that these two trends would offset each other, and thus overall inequality was not likely to change, if not to decline.
Nee’s theory has generated a great deal of controversy, as other scholars have challenged or refined various aspects of his claims, both theoretically and empirically (Bian and Logan 1996; Parish and Michelson 1996; Walder 1996; Zhou 2000; Bian and Zhang 2002). This literature has focused largely on the issues first put forward by Nee: the returns to education (as a measure of human capital) and the returns to cadre status. There have been some studies of changes in job mobility (Zhou et al. 1996, 1997), elite formation (Walder 1995; Walder, Li, and Treiman 2000), and gender inequality (Shu and Bian 2002, 2003), but these offer fewer broad theoretical guidelines for the topic at hand, and we have seen no systematic analyses of patterns and trends in class structure and class inequality in the course of China’s transition.