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The Emergence of a Market Society: Changing Mechanisms of Stratification in ChinaAuthor(s): Victor NeeSource: American Journal of Sociology, Vol. 101, No. 4 (Jan., 1996), pp. 908-949Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/2782234Accessed: 26-09-2017 05:47 UTC

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SYMPOSIUM ON MARKET TRANSITION

The Emergence of a Market Society:

Changing Mechanisms of Stratification in

China'

Victor Nee

Cornell University

This article examines the effect of institutional change-the shift from redistribution to markets-in altering the mechanisms of stratification. New institutionalists maintain that interests are embedded ip institutional arrangements and change as institutions change. China has undergone rapid and extensive household income mobility, incrementally altering the stratification order based on socialist redistribution. The shift to markets causes a decline in the significance of positional power based on redistribution relative to the gains of producers and entrepreneurs. Comparative institutional analysis is employed to examine the effect of regional variation in the extent of institutional change.

The emergence of a market society in China provides a rare natural

experiment involving change in the stratification order on a scale reminis-

cent of that experienced in the West during the rise of capitalism. Com-

parative stratification research builds on modernization theory in assum- ing that industrial development, whether socialist or capitalist, leads to

convergence (Lipset and Zetterberg 1959; Treiman 1970; Grusky and

1 The research for this paper was funded by a grant from the National Science Foun- dation (SES-930965 1). I also wish to express appreciation of the Russell Sage Founda- tion, which supported work on this article during my year in residence as a visiting scholar, 1994-95. I am grateful to Chen Junshi and T. Colin Campbell for the data set used in this study. Special thanks to Raymond L. Liedka and Rebecca Matthews for research assistance and comments. Deborah Davis, Rachel Davis, Nan Lin, Robert K. Merton, William L. Parish, Jimy M. Sanders, Andrew G. Walder, Yu Xie, and AJS reviewers provided helpful criticism and comments. An earlier draft was pre-

sented at the Eighty-eighth Annual Meeting of the American Sociological Association in Miami, Florida, August 13-16, 1993, and at the Tianjin Academy of Social Sci-

ences, August 24-26, 1993. Direct correspondence to Victor Nee, Department of Sociology, Cornell University, Ithaca, New York 14853. E-mail: [email protected]

?) 1996 by The University of Chicago. Ali rights reserved. 0002-9602/96/ 10104-0004$01.50

908 AJS Volume 101 Number 4 (January 1996): 908-49


Symposium: Nee

Hauser 1984; Hauser and Grusky 1988). Institutional theorists, however,

are skeptical about theories of convergence. If convergence pointed the

way to state socialism's future, the sweeping measures to institute a market economy in industrially developed Eastern Europe and the for-

mer Soviet Union would not have been necessary. Rather than focusing

on the effects of industrial growth, institutionalists insist that research

on state socialism needs also to take into account underlying differences in institutional forms. Such a focus on alternative institutional forms that

provide a deep structure for economic action underlies my argument that

the shift from redistribution to markets gives rise to different mechanisms

of stratification.

New institutionalist theory in sociology maintains that institutions

shape the structure of incentives and thereby establish the constraints within which rational actors identify and pursue their interests (Nee and Ingram, in press; Cook and Levi 1990). It builds on Polanyi's (1944;

North 1977, 1981) insight that economies are embedded in definite institutional arrangements. In Polanyi's view, the problem with neoclassical economics is that its formal models assume the existence of a market

economy. Yet comparative studies of human societies, past and present,

have demonstrated a variety of institutional forms giving rise to econo-

mies organized around fundamentally different operating principles (Po-

lanyi 1957). Hence, the movement of goods and services in an economy

is not simply a product of the aggregation of individual maximizing be-

havior as assumed in neoclassical economics. In societies integrated by

redistribution, goods and services are collected and distributed from a

center in accordance with the customs, regulation, ideology, and ad hoc

decisions of those social groups that hold redistributive power. Producers

pass on a larger share of the economic surplus to the state precisely

because they have less bargaining power over the terms of exchange than in a market economy. Instead, the state requisitions their products and

compels them to work for prices and wages fixed by central bureaus

(Szelenyi 1978). As a consequence, the institutional logic of redistributive economies differs substantively from market economies where goods and

services are exchanged directly between buyer and seller (Polanyi 1957; Kornai 1980), and from economies based on reciprocity where trust and

cooperation in local social orders allow for balanced exchange (Homans 1950; Sahlins 1972). Redistribution, market, and reciprocity, as alterna-

tive institutional forms, incorporate different structures of incentives and

constraints and therefore distinct parameters of choice. Elements of each coexist in every society, at various levels, but Polanyi claimed that only

one can constitute the dominant integrative mechanism of an economy. It is not narrowly economic but is embedded in customs, social norms,

laws, regulations, and the state. Fundamentally, differences in institu-

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American Journal of Sociology

tional framework are reflected in contrasting structures of property rights

(Pryor 1973; Eggertsson 1990).

The transition from one institutional form to another entails remaking

the fundamental rules that shape economies, from formal regulations and

laws to informal conventions and norms. The shift to markets-well

underway but far from complete in China-involves changing structures

of opportunity (Merton 1949). Whereas opportunities for advancement

were previously centered solely on decisions made by the redistributive

bureaucracy and within the economy controlled by it, markets open up alternative avenues for mobility through emergent entrepreneurship and labor markets. Under conditions of expanding markets, economic actors

strive to institute new rules of competition and cooperation that serve

their interests, both through informal arrangements and through formal

institutional channel.s. This entails efforts to change the structure of property rights in a manner that enables entrepreneurs and producers to cap-

ture a greater proportion of the economic surplus, previously transferred to the state by administrative fiat. Political actors contribute to instituting change in the formal rules of the game insofar as gains in productivity increase revenues to the state (North 1981). Such action at the margins is cumulative and gradually results in transformation of the institutional

environment.

Market transition theory (Nee 1989, 1991, 1992; Nee and Lian 1994)

maintains that as power-control over resources-shifts progressively from political disposition to market institutions, there will be a change in the distribution of rewards favoring those who hold market rather

than redistributive power. Compared to nonmarket allocation, market exchange enhances the bargaining power of producers. Incentives are improved as producers retain a greater share of the economic surplus.

Opportunities for gain depend less on the personal discretion of cadres in positional power. Consequently, the growth of market institutions (i.e., labor markets, subcontracting arrangements, capital markets, and

business groups) causes a decline in the significance of socialist redistributive power even in the absence of fundamental change in the political order. In sectors of the socialist economy where a decisive shift to markets has occurred, officials are less likely to gain a dominant advantage from

positional power in the state socialist redistributive bureaucracy. Contin- gent on continuing allocative control over key factor resources, their relative advantage declines as a function of the extent to which markets replace redistribution as the coordinating mechanism of the economy.

In the state socialist redistributive economy, officials act as monopolists

who specify and enforce the rules of exchange by administrative fiat and exclude private entrepreneurs from taking part in legitimate economic activities. Because economic actors depend on resources allocated from

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Symposium: Nee

above, they strive to secure favorable access to these decision makers in

order to maximize their access to scarce resources (Walder 1986). By

contrast, the shift to the market mechanism reduces dependence on su-

perordinate bureaucratic agencies, as producers and consumers increas- ingly get needed goods and services through market exchanges. Market-

based exchanges stimulate the development of horizontal ties between

buyers and sellers, in labor and production markets, resulting in an incre-

mental decline in the relative value of vertical connections-political

capital-and an increasing importance of network ties between economic

actors in society.2 In sum, changes in the mechanisms of stratification stem from the

expansion of opportunities for gain and profit centering on market institu-

tions. Opportunities are more broadly based and diverse when markets

replace and augment the opportunity structure controlled by the state.

The more developed the market economy, the greater the breadth and

diversity of opportunities that develop outside the boundaries of the redis-

tributive economy. Groups and individuals who were formerly barred from advancement in the state socialist bureaucracy and economy gain

chances for social mobility through emergent labor markets and private

entrepreneurship. Such growth of opportunities undermines the political

power of indigenous elites in small communities (Yan 1995). To the extent

that new bases of opportunity expand, resources become embedded in

alternative networks and institutions, dependence on the established elite declines, and excluded groups gain in power relative to the established elite. Importantly, such shifts in power do not entail a direct transfer of

power as in a regime change but do occur as an unintended by-product

of institutional change. Reflecting the changing institutional basis of

power and privilege in society, elements of the administrative elite adapt to the emerging market society by becoming entrepreneurs. The movement of cadres into private entrepreneurship accelerates the decline of

state socialist redistributive power because it contributes to opportunism

and malfeasance among party members, exacerbating a crisis of legiti- macy (Nee and Lian 1994). As in the rise of capitalism in the West,

change in the stratification order is incremental and over time.

LOCAL CORPORATISM AS A SOCIETAL INSTITUTION

Reports of local accommodations that combine redistribution and mar-

kets underscore the importance of hybrid institutional forms in the transi-

2 This argument is consistent with power dependence theories (Emerson 1962; Hechter 1987) and social resource theory (Lin 1982). As China shifts to market coordination, family firms and social networks will grow in importance in economic transactions (Hamilton 1991).

911



tion from state socialism in China. Hybrid corporatist forms proliferate

in mixed economies to capture the gains from trade under conditions of

widespread institutional uncertainty (Nee 1992). Local corporatism is a

societal arrangement loosely coupling the formal rules of the game speci-

fied by the state and the informal procedures devised by local political

and economic actors to promote market-oriented growth. Such corporat-

ist arrangements are characterized by informality and flexibility, with

long-standing personal relationships providing a foundation for complex

economic transactions (Nee and Su, in press). The cement that holds

corporatist arrangements together appears to be generalized reciprocity in network-based social exchanges (Wilson 1994). Reciprocity involves

generalized exchanges based on trust and cooperation; it is fostered in

symmetrical social structures, as in a kinship group or village community

(Sahlins 1972). Reciprocity differs from market exchanges insofar as it does not involve haggling over price, and it differs from redistributive

exchange where the pattern of resource movement conforms to the princi- ple of centricity with goods and services flowing to and from a central

point.

Corporatist arrangements involve both market and nonmarket alloca-

tion of labor, capital, and land and entail a partitioning of property rights

over collective assets between local government and economic actors through leasing agreements and responsibility contracts. As a governance structure, local corporatism conforms to the needs of industrial firms

under conditions of partial reform. It reduces transaction costs by securing credible commitment in an institutional environment characterized

by weak property rights and irregular monitoring and enforcement of formal rules by the central state. Socialist local governments themselves engage in political entrepreneurship, constructing institutional rules and myths to build and legitimize corporatist strategies of economic develop-

ment (e.g., Lin 1995). Rather than producing for the redistributive state,

corporatist strategies are oriented to the marketplace, but they also provide welfare services to the community (Oi 1990). In corporatist local economies, redistribution limits the profit-making activities of entrepreneurs and maintains a safety net for the poor and weak, resulting in lower levels of income inequality; by contrast in other regions, income inequality increased following an initial decline in the early 1980s (Nee

and Liedka 1995). Though it is a loosely coupled societal arrangement, solidarity is manifest in market competition with external groups and in response to predatory encroachment by the central state.

The rapid and sustained economic growth of local corporatist communities has strengthened the capacity of local government. Nonetheless, the development of rural industry is not likely to provide a viable economic base enabling redistributors to reconsolidate state socialist redis-

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Symposium: Nee

tributive power. Analysis of the organizational dynamics of market tran-

sition indicates that change in the institutional environment brought

about by the spread of markets and expansion of private property rights

induces corresponding changes in the behavior of industrial firms (Nee

1992; Qian and Xu 1993). Collective ownership forms coexist and even

flourish in a market environment, but the discipline and incentives im-

posed by market competition lead to behavior more similar to private

firms. As nonstate firms marketize, they are less likely to serve redistribu-

tive purposes (Byrd and Lin 1990). Workers are rewarded on the basis

of performance. Firms compete for better qualified workers in quasi labor

markets. Managers strive to improve profitability and efficiency (Su

1994). Peng's (1992) analysis comparing workers' wages in rural industry

and state enterprises supports this view. He argues that even while rural industry remains under collective ownership, rural firms already display

behavior similar to that of private firms, which is why he classifies rural

industry as "semiprivate." And indeed there is extensive informal priva-

tization of collective-owned assets and firms (Nee and Su, in press).

Higher productivity in marketized firms and increased demand for labor

in quasi labor markets tend to push up wages, resulting in improved

wages for producers (workers and managers) relative to redistributors.

Hence, market transition theory predicts that the transformation of public firms into marketized firms induces a decline in the income advantage

of positional power based on redistribution even in the industrial sector of the economy. Local corporatism to be sure entails strong government, but the role of government is transformed into one similar to corporatist political institutions in market economies (Williamson 1989).

THE LIMITS OF STATE-CENTERED ANALYSIS OF TRANSITION

Social scientists have long highlighted the commanding role of the state in controlling the socialist economy and society. The extreme formulation

of state-centered analysis was the totalitarian model, which portrayed

the Leninist state as imposing total control over Soviet society through the party apparat and mass terror (Arendt 1951; Friedrich 1954). Subsequent

perspectives sought to soften the harsh totalitarian imagery of an at-

omized society subjugated by an impersonal party-state. Skilling and

Griffiths (1971) introduced the idea of interest groups and political competition to dispel the perception of a monolithic party-state. Then by

highlighting the role of patron-client ties through which state control is maintained, Walder (1986) incorporated an emphasis on the informal

mechanisms of state control. Despite such modifications, the focus of

analysis remained centered on political dynamics within the party-state

913



and on the mechanisms, formal and informal, through which the state

controlled the economy and society. The response of state-centered analysts to economic reform and regime

change has been to emphasize structural continuity with unreformed state

socialism. Walder (1995b), for example, argues that it is an intensification

of state control through more effective monitoring and enforcement by

local government, stemming from downward transfer of property rights

in the state hierarchy-and not the action of economic actors in society

seeking higher returns for their investment and work-that accounts for the dramatic improvement of economic performance in industry. Simi- larly, state-centered analysts describe a local stratification order in which

the cadre elite continue to control the economy even under conditions of

rapid market penetration and corresponding decentralization of economic

decision making to firms and households (Oi 1992). These scholars argue

that the marketization of the industrial economy need not diminish the

redistributive power of the cadre elite.

Like modernization theory, state-centered analysis minimizes the effect

of institutional change on the stratification order. Emphasizing the persistence of the old stratification order, state-centered analysts claim that

"the primary beneficiary of marketization is the old elite" (Rona-Tas

1994, p. 44). The main proponents of the "political capitalism" or

''power conversion" hypothesis of augmented cadre advantage elaborate

their arguments in extended discursive commentaries on the Polish (Stan- iszkis 1991) and Hungarian (Hankiss 1990) revolutions. According to

them, the cadre elite adeptly transforms its political capital into economic capital as it faces the impending collapse of state socialism. They engage in various forms of rent seeking in which they utilize their control over public assets and their political connections to reap private advantages in the emergent market economy. As their final redistributive act, cadres transfer to themselves ownership rights in privatized firms, and, by build- ing on their initial control of firms and financial institutions, they are able to establish themselves in businesses and thereby secure increasing income advantage as the economy shifts to markets. Although similar points with respect to the commodification of bureaucratic power were developed in market transition theory (Szelenyi and Manchin 1987; Nee 1991; Nee and Lian 1994), state-centered analysts emphasize continuity in the stratification order insofar as the cadre elite benefits more than

other groups from the transition to a market economy. The evidence supporting this claim, however, is weak.3

I The only systematic empirical study is R6na-Tas's (1994) analysis of Hungarian survey data collected in the springs of 1989 and 1991. This study has several limita- tions. First, as R6na-Tas points out, state-directed market transition in Hungary

914


Symposium: Nee

State-centered analysis focuses explanatory attention on the power of the state and its agents, the administrative elite. Without taking into

account a broader societal perspective, state-centered analysts of market

transition impose on themselves a conceptual blinder. Their analysis of

economic reform focuses only on changing incentives for political actors

in the state organizational hierarchy and overlooks the incentives and

actions of economic actors in society; hence state-centered analyses are

unable to provide a convincing explanation for gains in productivity.

Further, the state-centered lens leads analysts to overlook the societal

outcome that results in a relative decline in cadre advantage. As Kenneth

Burke has said, "a way of seeing is also a way of not seeing-a focus

on object A involves a neglect of object B" (quoted in Merton 1949, p.

252). Focusing on the administrative elite, they are apt to see no evidence

of such a decline in the absence of a statistically significant negative effect

of cadre status on the determination of income. But this is to ignore the

relative position of cadres vis-a-vis others. Power is not zero sum in the re-

lationship between redistributor and producer, as evidenced by the

rapid increase in both state revenues and household savings in China.

commenced in 1989 and was completed sometime in 1991; however, his models dem-

onstrating "cadre" advantage regressed on 1990 income. Because R6na-Tas empha- sized transition from above, the 1990 income data pose a problem for causal inference in the sequencing of events. Second, the "cadres" in his sample were former cadres, not government officials currently in power. This is a limitation because market transition theory is an argument about the declining significance of positional power of current government officials. Former cadres indeed have political capital-vertical networks-which they can mobilize to secure advantages in the new market economy. This is what R6na-Tas actually examines. However, he does not mention that his findings are very similar to those reported in the original test of market transition theory, despite the differing contexts of rural China and industrialized Hungary. In both settings, entrepreneurs from cadre backgrounds are advantaged, but cadres who are not entrepreneurs do not profit from accumulated political capital. The higher proportion of cadres entering into entrepreneurship and an income advantage for cadres operating private businesses were first reported by Nee (1989, pp. 671-73, see tables 3 and 4) and explained as a function of politically bounded markets and financial institutions (Nee 1991, pp. 268-69). Market transition theory interprets the absence

of an income advantage for cadres (current and former) who are not entrepreneurs as evidence of declining relative value of political capital. These members of the cadre status group are far more numerous, and their experience is modal for the administrative elite. Few of the studies R6na-Tas (1994, p. 44) cites as supporting the claim that the administrative elite are the primary beneficiary of marketization actually state this claim as a central point; most of them say so only in passing, and none provide other than impressionistic evidence. This, e.g., from Shirk (1989, p. 340): "Already grumblings can be heard about the unfair advantages of cadres and their families in rural commerce; they can use their connections to gain access to lucrative business opportunities and avoid the extortionary license fees slapped on other rural business- men by local officials."

915



In other words, state revenues can improve even while the significance

of redistributive power in shaping the distribution of rewards declines.

Despite appearances, the "power persistence" hypothesis is consistent

with the declining-significance-of-redistributive-power hypothesis (Nee

1991, p. 268; Bian and Logan 1996).4 Cadre income need not decline-

and can even increase, as it has in China-for the declining-significance-

of-redistributive-power hypothesis to be verified: if the earnings of many economic actors in society increase at a faster rate than that of political

actors, the advantage of the cadre elite declines. For this reason, analysts

of the postreform/revolution stratification order need to examine the rela-

tive gains and losses of both political and economic actors, as market

transition theory does. The new institutionalist framework incorporates

the state as a potent causal force but also assigns an independent role to social and economic forces, which in a period of societal transformation

exert a growing causal influence on the state (Nee and Matthews 1996;

Stark and Nee 1989).

ADJUDICATING THE COMPETITIVE HYPOTHESES

The "power conversion" hypothesis of state-centered analysis, asserting

that the administrative elite are the primary beneficiary of marketization, predicts increasing income growth for cadres (relative to producers). Be-

cause markets purportedly enable cadres to convert political capital to economic capital, the predicted income advantage of the administrative elite should be evident for cadres holding positional power as well as

former cadres, especially those who establish private businesses. Not only should current cadres qua cadre derive income advantages for their positional power, but cadre entrepreneurs should be advantaged and

obtain greater income gains from operating private businesses than do noncadre entrepreneurs.

Market transition theory predicts that the administrative elite's con-

trolling position in the stratification order will decline and the value of their political capital depreciate incrementally following a shift to markets and corresponding changes in property rights.5 The declining-

significance-of-redistributive-power hypothesis would be verified by a higher-income growth for producers (including entrepreneurs, managers,

I The power persistence hypothesis states that market action can reinforce and even amplify redistributive power. In the original test of the theory, the mean household income of cadres more than doubled from 1980 to 1985 but so did that of ordinary farming households, while that of entrepreneurs increased at a more rapid rate.

5 The ability to buy and sell in markets assumes private rights to assets, including one's own labor power. Hence changes in the structure of property rights accompany marketization.

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Symposium: Nee

and technicians) relative to current cadres. This key reversal in relative income advantage would reveal that social inequalities structured by

redistribution are declining, even while inequalities generated by market

forces increase.6 Such predicted trends will not be linear because no

economy is purely coordinated by markets, and mixed economies combin-

ing markets and redistribution are the likely outcome of market transi-

tion. In other words, redistributive power will persist as a source of

advantage, even while its significance declines as a function of the shift to markets. Another obvious caveat is that income gains for producers

are adversely affected by economic downturns.

Both arguments recognize that during the course of market transition,

cadres often strive to broker redistributive power to establish themselves

in private businesses. Another way in which the hypotheses differ is with

respect to the predicted trends of the cadre advantage in entering private

entrepreneurship. The declining-significance-of-redistributive-power hy-

pothesis predicts a diminishing cadre advantage in entering into and

profiting from private entrepreneurship as markets thicken and a market

economy is instituted. The "power conversion" hypothesis makes the

opposite prediction, arguing that cadres are more likely to shift into and prosper from ownership of private businesses when the institutional

framework for a market economy has been instituted by the state.

COMPARATIVE REGIONAL ANALYSIS

Regional variation in extent of institutional change-market penetration

and the structure of property rights-complicates the analysis of the

effect of markets in changing the stratification order in China. The pre-

dicted decline of redistributive power is likely to be more apparent in

areas where markets are more developed, while in regions where markets are less developed, there may be a greater continuity with the old stratifi-

cation order based on redistribution. The maritime provinces-targeted

by Beijing as the experimental grounds of market reforms-have experienced a more rapid shift to markets, which sparked more rapid economic

growth there. Though the maritime provinces were more developed eco-

nomically prior to economic reform, the gap between coastal and inland provinces increased through the 1980s. Thus the ratio between industrial

and agricultural output value of the coastal and inland regions widened, resulting in growing interregional income inequality. Even within prov-

inces, there is considerable variation in the extent of market penetration

and institutional environment. In both the highly marketized Pearl River

6 The decline of income inequality following the shift to markets is transitory. The predicted initial decline was also found by Bian and Logan (1996) in their study of income inequality in Tianjin.

917



Delta in Guangdong Providence, near Hong Kong and Macao, and the

"Golden Triangle" area of Fujian, there is a surprising diversity of mar-

ketized forms (Johnson 1994; Huang 1989; Nee and Su 1990). Further

north along the coast, Zhejiang and Jiangsu provinces show a variety of

local corporatist institutional arrangements (Huang 1990; Brown 1992;

Liu 1992; Liang 1994). Analysis of the effect of regional variation in

marketization needs to take such provincial and community-level varia-

tion into account. On this scale, does the extent of institutional change

covary with a declining significance of redistributive power in shaping

the stratification order?

INSTITUTIONAL CHANGE AND INDUSTRIAL GROWTH

There may be important factors exogenous to market transition theory

that explain the declining significance of redistributive power under con-

ditions of market reform. According to modernization theory, the more

industrialized a community, the more similar the mechanisms of stratifi-

cation will be to those found in other industrial societies. In other words, the accumulation of capital, rising income, and new jobs, not institutional change, explain the decline in the significance of positional power.

The industrialism hypothesis maintains that without change in the

structure of property rights or economic institutions, a rise in the num-

ber of high-paying factory jobs will improve the relative income of pro-

ducers (workers and managers) and diminish that of the administrative elite.

However, prior to market reforms, industrialized regions and urban

centers provided a strong economic base for state socialist redistribution (Whyte and Parish 1984; Walder 1986). Hence, there is no inherent in- compatibility between an industrial economy and socialist redistribution. By contrast to petty commodity production, the factory regime enables

the socialist state to monitor and enforce communist rule more effectively (Burawoy and Lukaics 1992). Indeed, state socialist redistributive power is well suited for organizing extensive industrial growth as long as surplus

labor power can be shifted out of agriculture into industry (Szelenyi

1989).

In any case, whether industrialization and redistributive power are

positively or negatively correlated, an attempt to verify a causal link between institutional change and the declining significance of redistributive power must control for the level of industralization.

These unresolved issues point to the need to test propositions from market transition theory using a national data set collected at a different point in time than the original 1985 survey that was used in the preliminary confirmation of the theory. The 1985 sample involved households

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Symposium: Nee

in two periurban counties in a highly marketized southeastern coastal

province. A national sample, with far greater variation in both the endog-

enous and exogenous variables, offers a more nearly definitive test of

the theory. It allows a quasi experiment controlling for community-level

variation in the level of industralization and taking into account regional

variation in the extent of institutional change. With such more detailed

analysis, it may be possible to test the new institutionalists' claim that

in transition societies, underlying differences in the mechanism of strati-

fication are caused by changes in the institutional framework that shape

the structure of incentives and opportunities, and hence the parameters

of choice within which political and economic actors strive to optimize

power and plenty.

DATA AND MODEL

The data for this study come from a multistage, multilevel nationwide

social survey of 138 administrative townships (xiang), 138 villages (cun) and 7,950 households in rural China carried out in the fall and winter

of 1989-90. Twenty-five of China's 29 provinces were included in the

survey. The data were collected by the Chinese Academy of Preventive

Medicine (CAPM), using trained teams of public health field interview- ers, and provide a multidimensional view of a society in transition. The first survey, involving principally nutritional and biological samples to

study the relationship between nutrition and cancer, had been conducted in 1983. Sixty-five counties were selected nonrandomly; within each of

these counties, two townships and then two villages were selected ran-

domly, as were the households interviewed for the survey in each village (see Chen et al. 1989; Parpia 1994). The 1989 resurvey added four addi- tional counties and incorporated multilevel socioeconomic question-

naires.

The household as opposed to the individual is the unit of analysis, for in Chinese rural society the household serves as the production and

accounting unit. Regression analyses of household income employ maximum-likelihood estimates of multilevel models. Structural models utilize

both a static and dynamic approach employing a lagged dependent vari-

able. Static mixed models are used to examine the effect of selected vari-

ables on household income in 1989. When lagged income variables are used, the regression analysis points to net returns of the exogenous variables on change in the dependent variable.

With multilevel models, to the extent households share common attri- butes by virtue of residence in the same locality, the assumption of uncor-

related error terms of household-level observations is violated, primarily

affecting the standard errors of contextual variables (Mason, Wong, and

919



Entwisle 1983). To deal with this problem, multilevel models were

developed, allowing researchers to test hypotheses on how contextual

variables at one level affect relations at another level (Searle, Casella,

and McCulloch 1992). The multilevel model (Aitkin and Longford 1986)

used in the analysis is

Yi= j o + IXlij + yx2YX . . . ,+ x +

where x indicates the explanatory microlevel variables and (xx are the township/village contextual effects, assumed to be a random sample from

N(O,U2), and independent of the household-level errors Eij [E(ox) = 0; var(oxX) = o2; var(Ei) = os]. To examine the cross-effect of the macro context on the micro variable, interaction between the macrolevel and

microlevel variables are employed (Bryk and Raudenbush 1992; e.g., interacting the marketization variable with cadre status tests for the effect

of a thicker market environment on advantage stemming from positional

power in the administrative elite). Mixed model computations employ the SAS/STAT MIXED software, and in the case of the poisson and logistic regressions the GLIMMIX SAS macro was used. In a large sam-

ple, the difference between restricted maximum-likelihood (REML) and

maximum-likelihood (ML) estimation procedures are minimal; both are

maximum-likelihood based. Searle, Casella, and McCulloch (1992) write that "with balanced data REML solutions are identical to ANOVA esti-

mators which have optimal minimum variance properties-and to many users this is a sufficiently comforting feature of REML they prefer it over ML" (p. 255).

Hierarchical poisson and logistic regression analyses are employed to

test hypotheses on the effect of cadre power in securing nonfarm jobs and establishing nonfarm private businesses, the principal means by which households can achieve income gains in the era of market reform. Poisson regression models are used where the dependent variable is a count (e.g.,

the number of nonfarm workers). The nonlinear model employed in the hierarchical discrete regression is

p. = f(Xox + Z13),

where ox is a vector of p unknown fixed-effects parameter with known

model matrix X, P is a vector of f unknown random-effects parameter with known model matrix Z, and the function f are evaluations of g -1, where g() is a link function (Wolfinger 1993). The model assumes E(y | p) = p and

cov(y I .A) = A jL.R 112RR /2 .

920


Symposium: Nee

R is a diagonal matrix that contains evaluations at pu of a known variance function for the model and R is unknown. The estimation involves a

generalized linear mixed model with a log link and poisson error em-

ploying the Lindstrom and Bates (1990) algorithm derived from Laplace's

approximation. Restricted pseudolikelihood (REPL) procedures are used

in estimating a., P, D, and R (Wolfinger and O'Connell 1993). In Wol- finger's approach, a. and P are estimated from the mixed-model equa- tions, and D and R are estimated using REML. When evidence of over-

dispersion is found, an overdispersion parameter is estimated and

standard errors adjusted accordingly (McCullagh and Nelder 1983). Following Lenski (1966), who maintained that the distribution of re-

wards-income-is a function of the distribution of power in society, I

measure change in relative power by reference to 1989 income and the

change in household income from 1983 to 1989. The income variables are the natural log of total deflated household income for 1983 and 1989.

All income data were collected at the time of the 1989-90 resurvey.

Although retrospective income data are known to be prone to error,

informants are better able to make accurate comparisons by reference to

years well etched in their memory: 1978, the start of post-Mao reform, and 1983, the year of the last survey when provincial public health workers visited the villages and collected data from the same households sur-

veyed in 1989. Separate analysis was conducted using the 1978 household

income variable. The results were largely identical to those when 1983

household income was used as the lagged dependent variable. Household income is the sum of the net income from the sale of agricultural products, the cost of food produced by the household, and the contribution of

nonagricultural income-private business, cadre salary, factory jobs, ser-

vice, sidelines, and an unspecified "other" category.7 Cadre households reported the highest mean income in the sample, reflecting their continu-

ing elite status. In 1989, 29.5% of cadre and 50% of cadre entrepreneur

I The income reported for cadre households is not likely to be biased downward. First, the income questions were placed in the middle of a long household questionnaire administered by public health field-workers. The items inquiring whether a cadre is present in the household appeared near the end of the questionnaire. Cadres and cadre-entrepreneurs reported the highest median income of any group except noncadre-entrepreneurs. In comparing cadre- and noncadre-entrepreneur households there is no statistically significant difference between the size of their homes and the pattern of ownership of most consumer durables (tape recorders, televisions, washing machines, sewing machines, motorcycles, and cars). Where there is a difference, all entrepreneurial households are more likely to own an electric fan and a refrigerator. On the other hand, cadre households are statistically more likely to own the above consumer durables, excepting cars, when compared to nonentrepreneurial households. For these reasons, it is unlikely that cadre households systematically underreported their rewards.

921



households reported household income that placed them in the top in-

come quintile.

The human capital of the household head is measured by the levels of

formal schooling and by work experience. Primary, junior, and advanced

are dummy variables for household heads who either attended or gradu-

ated from primary school, junior middle school, or senior middle school,

technical school, college, or university. Because there were so few house-

hold heads with education above the senior middle school level, those

attending technical school, college, or university were pooled together

with those who received senior middle school education. The omitted reference category is household heads who never attended school. Age

squared is added to the model in order to adjust for the assumed nonlinear relationship at the effect of age of the household head on household

income.

Chayanov (1966) demonstrated the importance of change in household labor power and composition in the determination of the rural stratifica-

tion order. Respondents were asked the gender of the current household

head and the composition of the household labor force, male and female,

for 1978, 1983, and 1989. Household characteristics are controlled for by reference to dummy variablesfemale head (female = 1) of the household

and male household labor: 83-89 and female household labor: 83-89-

the change in the number of male and female adults contributing income to the household from 1983 to 1989. Because I use household income as

a measure of power, the control for the number of income earners is more satisfactory than the number of adult laborers and children. Farm

labor measures the number of adults who derive income from agricultural work. Nonfarm labor is the number of male and female peasant workers who contribute nonagricultural income to the household, excluding cadres and entrepreneurs.8 Most of the nonfarm workers in the sample find

jobs in the local economy in township industry, service, and construction,

but others migrate to find jobs in county towns and cities, and some leave the province altogether. Another major source of nonfarm income

is private entrepreneurship. Entrepreneur is a dummy variable indicating

whether a household has established a private nonfarm business (entrepreneur = 1). The foregoing variables include all adults in the household

(except current cadres) and thus serve as a control for the number of producers contributing income to the household.

In a socialist redistributive economy, cadres maintain direct control

over the allocation of resources. They embody the elite group at each level of the state-constructed hierarchy. Cadre is a dummy variable pointing to

8 Part-time nonfarm workers earning less than 500 yuan per annum, however, were not included in the above category.

922


Symposium: Nee

the presence in the household of a current cadre holding positional power in local government. All the various ranks of cadres comprising the local

administrative elite are represented in the cadre variable, from county-

level officials down to cadres in the natural village. The specifications of

the cadre variables are the same as those used in the preliminary verifica- tion of market transition theory. This facilitates comparisons between the results reported in this article and the earlier study. Separate analyses using the rank of current cadres were conducted, and similar results were

obtained. Since the start of reform some cadres have sought profit in the marketplace as private entrepreneurs.

The model has three variables that purport to measure the political capital of households other than those of current cadres. Former cadre

is a dummy variable identifying households with members who in the

past held positions as redistributors and who still have political capital

insofar as they still belong to the cadre status group. Their political

capital provides them with greater ease of access to redistributors who

currently hold power in local government. Cadre relation is a dummy variable identifying households having close relatives as redistributors.

These households have a strong informal tie with officeholders in local

government. All of the political capital variables identify households that are likely to enjoy advantages from ease of access to officials who hold

formal power in the local bureaucracy. In addition to the above set of household-level variables are contextual

variables that control for the institutional environment. These data were gained through key informant interviews with township and village officials. Production market is the number of private and collective firms in the township. This variable serves as a measure for marketization at the local level, conforming to White's (1981) specification of a production market. As a measure of marketization, it focuses analytic attention on

the effect of firms in creating a market environment. This is particularly important with respect to the emergence of labor markets. Given the

skewed distribution, I use the natural log of the number of private and collective firms. Collective firms are pooled with private firms because they also depend on markets for their survival and growth. The higher the number of private and collective firms, the thicker the local market environment. Production market is used in hierarchical models for the nation as a whole (table 2) but not when the extent of marketization is

operationalized by regional grouping (table 5). Labor market measures the extent of the market for nonfarm labor by reference to the proportion of the village population engaged in nonfarm work outside the village. It is based on the sum of peasant workers in construction, factories, and

workshops and the self-employed engaged in private business, traveling craftsmen, and peddlers outside the village. The higher the proportion

923



of off-village nonfarm workers, the greater the extent of the local labor

market.

The number of nonstate firms, however, is not a reliable indicator of

the level of industrialization because the nature and size of the firm-

commercial or industrial-is not revealed. Also 4% of township firms in

the sample are state owned. The correlation between the number of

private and collective firms with industrial output per capita is .04 and

.03 respectively. Industrial output-the per capita industrial output- measures the extent of rural industrialization in the township. This vari-

able is a useful indicator of the level of local economic development,

permitting a control for the effect of industrial growth on stratification.

As a control on local economic development, it is employed in analyses

both of the nation as a whole (table 2) and of specific regions (table 4).

Although China has made more rapid progress toward instituting a

market economy than Eastern Europe and the former Soviet Union, it

remains a mixed redistributive and market economy. Government finds nonfarm job is a village-level variable that specifies how most people

find nonfarm jobs outside the village. If "most people find jobs through

government" (findjob + 1), this indicates that the village government retains substantial redistributive power. If most people find jobs through

friends and relatives or through advertisement or private job agencies,

then findjob = 0, which I interpret as indicating weak local redistributive power insofar as the local government controls neither the agricultural

economy nor the allocation of nonfarm jobs, the highest-paying jobs. Community income provides a control for the mean household income

in a village. This allows us to distinguish household income gains net of

the community mean. By controlling for the mean village income, we are able to assess cadre income relative to other households in the community, as opposed to households in the region.

The emergence of a market economy is better operationalized as a regional, rather than a local, phenomenon. Controlling only for local conditions fails to take into account the full scope of institutional environ- ments that shape incentives and opportunities for rural households. The substantial internal labor migration reported by households in the sample, for example, highlights the importance of extralocal demand for nonfarm labor. Also, marketization should be operationalized at the re-

gional level insofar as local firms compete with firms in other areas. The coastal region includes provinces that experienced significant and often decisive shifts to reliance on market coordination and rapid integration with global markets (Yang 1990). Substantial foreign investments have accompanied market reform here, especially in the southeast coastal provinces, the Yangzi Delta region near Shanghai, and the Bohai Bay region, resulting in rapid incorporation into the world market economy.

924


Symposium: Nee

I examine the effects of regional variation in the coastal provinces by

distinguishing between relatively laissez-faire (Fujian and Guangdong), corporatist (Jiangsu and Zhejiang), and redistributive (Hebei, Shandong,

Shanghai) provinces. I contrast these with the much less marketized inland provinces. These regional groupings represent a preliminary clas-

sification scheme for the extent of institutional change in the structure of property rights in the industrial economy after the first decade of market

transition. They were identified by cluster analysis of provincial data on

the relative industrial output of private, collective, and state-owned firms from 1987 to 1989.9

In the inland regions, state-owned firms produced 65.9% of the indus-

trial output in 1989, with collective and private firms producing only

27.2% and 6.9% respectively. The dominance of state-owned firms in the

industrial economy is also found in the coastal redistributive provinces.

State-owned firms in the coastal redistributive provinces produced 53.8% of industrial output, while 37.6% and 8.6% were accounted for by collective and private firms. This contrasts with the dominance of collective

firms-owned by local governments-in the corporatist provinces, where

60.8% of industrial output was produced by collective firms and 33.9% and 7% by state and private firms. Only in the laissez-faire provinces do

we find a mixed industrial economy in which no property form is dominant, but the output of firms that rely on markets is over 50%. There

19.4% and 35.8% of industrial output were produced by private and collective firms, with 44.8% produced by state-owned firms. Market- driven economic growth has stimulated growing internal migration and urbanization in small towns and cities (Liang and White, in press; Parish 1994). The shift of surplus labor from agriculture to industry is fueled to

a large extent by the increasing share of industrial output and demand for labor of the nonstate property forms, growing rapidly in the coastal provinces. By contrast, state-owned firms, which acquire labor through

bureaucratic allocation, are less likely to generate labor demand that reaches beyond the urban population.

Table 1 shows that townships located in the relatively laissez-faire

I The cluster analysis confirmed that the industrial economy of inland provinces should be treated separately from the coastal provinces. It also confirmed the existence of the three coastal subregions-laissez-faire, corporatist, and redistributive. The results of the cluster analysis were supported by F-tests using the China-Cornell-Oxford data set. By estimating modified human capital and household composition models of household income for regional distinctions as an analysis of covariance and then estimating the model by pooling the regions a second time, it is possible to test whether regions exhibit different processes of stratification. They also conform to the qualita- tive studies of market transition written by field researchers: laissez-faire (Vogel 1989; Nee and Su 1990; Su 1993; Johnson 1994), corporatist (Huang 1990; Oi 1990; Brown 1992; Liu 1992; Liang 1994; Wilson 1994), redistributive (Lin 1995).

925


TABLE 1

MEANS AND STANDARD DEVIATIONS OF SELECTED HOUSEHOLD AND INSTITUTIONAL

CHARACTERISTICS

COASTAL

INLAND Redistributive Corporatist Laissez-Faire

N ........ ............... 4,840 823 1,086 1,146

1978 household income ........... 576.17 668.64 695.31 1,127.13

(638.00) (794.00) (704.37) (1,131.34)

1983 household income ........... 1,065.90 1,075.87 1,153.14 1,761.37

(931.92) (1,003.86) (981.12) (1,338.93)

1989 household income ........... 1,103.02 1,386.08 1,387.85 2,159.53

(1,332.87) (1,323.43) (1,012.16) (2,451.46)

1989 agricultural income ......... 747.62 572.44 571.90 882.55

(721.09) (604.15) (501.59) (943.64)

1989 private business income ....................... 51.78 80.05 132.97 244.87

(260.28) (437.29) (444.10) (1,009.29)

1989 nonfarm income ............. 87.72 647.56 544.07 425.84

(323.74) (960.44) (817.03) (1,596.98) Age .......... ............. 47.99 46.86 47.27 49.00

(9.88) (10.49) (10.71) (9.68)

% primary SChOOl .................. .428 .447 .466 .508 (.495) (.498) (.499) (.500)

% junior middle school ........... .185 .250 .194 .176

(.388) (.433) (.396) (.381)

% advanced schooling ............ .050 .050 .047 .067 (.218) (.218) (.212) (.250)

% female head of

household ....................... .169 .182 .165 .211

(.375) (.386) (.372) (.408)

Male household labor:

83-89 ....................... .059 .015 .008 .048

(.847) (.676) (.841) (.945)

Female household labor:

83-89 ....................... .036 .069 .062 .065

(.865) (.762) (.869) (.928)

Farm labor ....................... 2.687 1.829 1.855 2.309

(1.725) (1.563) (1.410) (1.690)

Nonfarm labor ..................... .222 .884 .732 .609

(.553) (1.080) (.962) (.918)

Entrepreneur ....................... .060 .067 .081 .103 (.237) (.251) (.273) (.305)

% cadre ....................... .134 .170 .117 .196 (.341) (.376) (.322) (.397)

%cadre entrepreneur ............. .008 .009 .006 .018 (. 091) (.092) (.080) (.134)

% former cadre ..................... .186 .222 .183 .204 (.389) (.416) (.387) (.403)


Symposium: Nee

TABLE 1 (Continued)

COASTAL

INLAND Redistributive Corporatist Laissez-Faire

% former cadre

entrepreneur ..................... .015 .015 .008 .021

(.122) (.121) (.091) (.144)

% cadre relation ................... .128 .089 .103 .181

(.335) (.284) (.304) (.358)

Industrial output per

capita .............................. .004t .045 .021 .014

(.009) (.075) (.033) (.019)

Median N nonstate firms

(interquartile range)* .......... 8 22.5 47 83.5

(23) (51) (63) (269.5)

Median N collective

firms (interquartile

range) ....................... 4 21.5 23 32 (10) (56) (49) (162)

Median N private firms

(interquartile range) ............ .5 0 13.5 29

(12) (9) (35) (86)

% government finds

nonfarm jobs ..................... .459 .571 .500 .050

(.501) (.514) (.514) (.224)

Labor market ....................... .048 .134 .141 .144

(.055) (.120) (.080) (.108)

Mean community

household income ............... 1,098.45 1,396.15 1,388.35 2,172.12

(625.796) (791.317) (432.438) (724.879)

NOTE.-SDs are given in parentheses. * The remaining six variables are measured at the village and township levels. The corresponding

Ns are inland (N = 86), redistributive (N = 14), corporatist (N = 18), and laissez-faire (N = 20).

t Defined as the industrial output per capita divided by 100,000.

provinces have the highest median number of market-oriented nonstate

firms (83.5), followed by the coastal corporatist (47), and coastal redistrib-

utive (22.5) provinces, with townships in the inland provinces (8) showing the lowest number of such firms. Disaggregating this category (separating private and collective firms) reveals that townships in the inland and

coastal redistributive provinces report virtually no private firms, whereas

townships in the corporatist and laissez-faire provinces already have well- established private economies, with the ratio between collective and private approaching parity in the laissez-faire subregion. Similarly, the highest percentage of village-level private entrepreneurs reside in the laissez-faire provinces, followed by the corporatist and then the redistrib-

utive coastal provinces, with the lowest percentage of private entrepre-

927



neurs in the inland provinces. This pattern is seen also in the mean

household income derived from private businesses. With well-established

rural labor markets, the laissez-faire market provinces are the least reli-

ant on redistribution in the allocation of off-village nonfarm jobs; only

5% of village governments in the Guangdong and Fujian sample find

most of those jobs, whereas elsewhere it is close to 50%. Combined, these

data confirm the utility of the regional groupings arrived at through

cluster analysis. They indicate that the shift to a market economy has progressed furthest in the laissez-faire provinces, followed by the coastal

corporatist and redistributive provinces, and least in the inland region. The level of rural industrialization, however, follows the reverse order,

with the redistributive coastal townships in the sample having the highest

per capita industrial output and the laissez-faire townships the lowest

among the coastal provinces. This is reflected in the mean number of nonfarm laborers by region reported in table 1. Overall gains in house-

hold income from 1978 to 1989 were largest in the laissez-faire provinces.

In the inland region, rural income stagnated after an initial period of

rapid growth.

FINDINGS

Changes in the mechanism of stratification in the transitions from state

socialism are caused, I claim, by changing institutions-the shift to mar-

kets and corresponding changes in the structure of property rights. Sixty percent of rich households experienced relative decline in economic standing from 1978 to 1989. Even more poor households moved up in their

relative economic standing than the rich experienced decline. Only 34.8%

of the poorest households remained in the bottom income quintile, while 41.7% moved up at least two income quintiles during the decade of reform. The extent of income mobility is even greater in the middle three

income quintiles, where 75%-80% of households experienced change in

their relative economic standing. The transition to a mixed market economy was accompanied by a quickening pace of change in relative economic standing among rural households.

To what extent did the administrative elite hold on to their power and

privileges in the midst of all this change? Table 2 shows that in 1989 in the nation as a whole, cadre households still enjoyed a statistically significant net advantage. Likewise, households gain higher income when

village governments assign nonfarm jobs, indicating persistent local redistributive power. These findings may be viewed by state-centered analysts as evidence of persistent redistributive power and privilege of the administrative elite in rural China, which market transition theory does not dispute. No claim is made that the administrative elite no longer

928


TABLE 2

MAxIMuM-LIKELIHOOD (REML) ESTIMATES OF THE EFFECTS OF HOUSEHOLD

CHARACTERISTICS AND INSTITUTIONAL ENVIRONMENT ON HOUSEHOLD EARNINGS, BY

SOURCE AND TOTAL, 1989

Independent Variable Model 1 Model 2

Intercept .................. ................ -2.489**** -2.701****

(.482) (.489)

A. Human capital of household head:

Age .............. .................... .068**** .068****

(.013) (.013)

Age2 . ................................. -.0008**** -.0008****

(.0001) (.0001)

Primary school ................................. .071* .067*

(.039) (.039) Junior middle school .................0........ 95* .096*

(.050) (.050)

Advanced schooling .......................... .119 .126*

(.076) (.076)

B. Household composition:

Female head of household .................. - .021 - .027

(.042) (.042)

C. Producers:

Farm labor ....................................113**** .113****

(.010) (.010)

Nonfarm labor ................................. .475**** .475****

(.021) (.021)

Entrepreneur .................................. .506**** .505****

(.068) (.068)

D. Redistributors:

Cadre ................. ................. .495**** 1.929****

(.088) (.586)

Cadre x production market ............... -.069***

(.024)

Cadre x community income -.232***

(.082)

Cadre x entrepreneur ....................... -.015 -.029

(.173) (.173)

E. Political capital:

Former cadre .................................. .062 .066

(.042) (.042)

Former cadre x entrepreneur ............. .020 .025

(.149) (.149) Cadre relation .................................. -.063 .061

(.047) (.047) F. Institutional environment:

Government finds nonfarm jobs ........... .129** .128**

(.054) (.054)

Production market ............................ .003 -.007

(.016) (.015)



TABLE 2 (Continued)

Independent Variable Model 1 Model 2

Industrial output per capita. - 1.445 - 1.428

(.884) (.886)

Community income .1.007**** 1.041****

(.055) (.056)

Variance components: Contextual ..061**** .062****

(.011) (.012)

Household .1.543**** 1.543****

(.026) (.026)

N ..................................................... 7,149 7,149

- 2 REML log likelihood ............. ......... 23,621.59 23,619.53

NOTE.-SEs (corrected for dispersion) are given in parentheses. * P < .10.

** P < .05. *** P < .01.

**** P < .001.

have power and privilege. Even in a market economy, bureaucrats have

power and privilege, though much less relative to such an elite in a

socialist redistributive economy. What the theory claims is that cadre power declines incrementally relative to producers and entrepreneurs as a function of the shift to a market economy. This prediction is verified in the interaction between cadre status and the extent of the production

market in equation (1). The cross-effect interaction confirms a negative effect of local marketization on income returns to cadre status. Examin-

ing the cadre advantage a standard deviation above and below the mean

for production markets reveals a contrast of .16 [.495 + -.069 (3 + 1.837)] and .42, respectively. Where the production market is most devel-

oped, cadre status has a net negative effect on household income (-.09) and, in areas with the fewest nonstate firms, the net cadre advantage is greatest (.5 0). These findings confirm that the thicker the market environment, the lower the income return for local cadres. A similar effect of

market-oriented economic growth can be seen in the interaction between

cadre status and mean community income reported in equation (2). (The analysis was done separately due to collinearity between the two cross- effect interactions.) The finding indicates that the more affluent the community, the smaller the income advantage of cadres holding positional power in the county bureaucracy. The cadre advantage is substantially less (.20) in affluent communities than it is in poorer communities (.43) based on the mean community income plus or minus the standard devia-

930


Symposium: Nee

tion. Table 1 indicates that the richest communities are located in the

marketized laissez-faire provinces. Other possible interactions between

the contextual and household variables were not significant. Overall, after taking into account the interaction effects, the betas for

entrepreneur and nonfarm labor are substantially larger than that for

cadres, which suggests a household may now be better off pursuing economic goals, rather than securing positional power in the local bureau-

cracy as in the past. An extra nonfarm laborer in the household has a

much larger effect on nonfarm income than cadre position. None of the

political capital variables is significant, nor is the cadre entrepreneur advantaged. This was not the case in the earlier tests of market transition

theory, and the change reflects the greater extent of the market by 1989.

In the pursuit of plenty, the labor force participation of nonfarm entrepre-

neurs and workers, and the human capital of the household head predict

higher household income. Moreover, female-headed households are not

disadvantaged. In sum, comparison of the income returns of both politi-

cal and economic actors supports the claim of a declining significance of the positional power of the administrative elite as a function of the extent

of market transition.

That nonfarm jobs are secured through local government in many

communities suggests a direct mechanism through which the adminis-

trative elite can benefit their immediate family, friends, and relatives, especially since local government retains formal property rights over collective-owned enterprises. To what extent have cadres used their redistributive power to secure lucrative nonfarm jobs for their own kind? Table 3 reports findings from a hierarchical poisson regression analysis

of the determinants of nonfarm employment. These findings do not show

a statistically significant effect of cadre power or former cadre status on

the number of nonfarm workers in the household in any region of China. The first column shows a weak negative effect of cadre status on obtaining nonfarm work for the nation as a whole. Households in villages where most nonfarm jobs are found by local government have a lower

chance of obtaining nonfarm jobs. By contrast, the labor market variable

is strongly positive for the nation as a whole and in all regions except

the laissez-faire provinces. In other words, labor markets more reliably promote the movement of surplus agricultural labor into off-village non-

farm jobs than local governments, just the opposite from the prereform

period. The level of industrialization in rural townships has a strong

effect on the chances of households gaining nonfarm employment but not in the more marketized corporatist and laissez-faire provinces. The main effects of the contextual variables are consistent with the new institution-

alist model, but cross-effect interactions with political capital variables

931


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932


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were not significant. However, Parish, Zhe, and Li (1995) found diminished redistributive power of the administrative elite in the wake of ex-

panding local labor markets.

At the household level, work experience and household size and com-

position predict the chances of obtaining nonfarm jobs. Except for the laissez-faire provinces, education has a strong effect on the chances of

obtaining nonfarm work. As for households reporting a cadre relative,

this variable is significant for the nation as a whole. In the regional

analyses, only (surprisingly) in the laissez-faire subregion is the variable a statistically significant predictor of participation in nonfarm work. Other

measures of political capital fail to show a significant effect. It may be

that kinship constitutes a bridge tie (Granovetter 1973)-and not the

"strong tie" that opens the door to opportunity for the job-seeker- especially in large lineage villages common to the southeastern coastal provinces where 15% of the sample report a cadre relative. According to this interpretation, kinship ties to cadres serve as a conduit of information

about the availability of jobs outside the village. Turning now to the question of laissez-faire exceptionalism, in these

provinces it appears that none of the contextual and few of the household variables predict the chances of obtaining nonfarm jobs. Why? In the

laissez-faire provinces market-induced economic growth was so rapid

that rural households with surplus labor could readily find nonfarm jobs.

So plentiful are nonfarm jobs that these provinces serve as a virtual magnet drawing millions of migrants from poorer inland provinces in

search of nonfarm jobs unwanted by local farm households. In any case, households in the marketized coastal provinces have on average 2.73 times as many male nonfarm workers as households in the inland areas, and this increases to 5.58 times as many in the case of female nonfarm workers. Although kinship ties to cadres in the laissez-faire provinces confer some advantages in securing nonfarm jobs, the greater advantage stems from residence in a marketized region.

Thus far we have focused on the relative standing of cadre and other households in 1989. But the declining-significance-of-redistributive- power hypothesis emphasizes the trajectory of income change, rather than privileges currently held.10 Accordingly, let us now ask to what extent local officials did or did not make exceptional economic gains during the transition period.11 In other words, were households that

10 Because the dependent variable pools agricultural income together with income streams derived directly from market transactions, the test is biased to favor the null hypothesis.

" The same models were computed for a static analysis of household income by region and similar results were obtained. Interested readers may write to the author for copies of these tables.

934


Symposium: Nee

possessed a greater stock of political capital able to achieve an advan-

tage in growth of income relative to other households? By comparing the

betas affecting change in household income, it is possible to identify

which social group-entrepreneurs, producers, or local officials-is likely to gain the most relative to others from the shift to a market

economy.

According to market transition theory, the less marketized inland prov-

inces experience less change compared to the more marketized southeast-

ern coastal provinces, which shifted to a stratification order shaped more

by market than by redistributive institutions. The parameter estimates

in table 4 for the less marketized inland provinces conform to an expecta-

tion of slower incremental change. In the inland provinces, the adminis-

trative elite continue to enjoy positive returns on positional power in

local government (reflected in increase in household income). However,

the betas for entrepreneur and nonfarm labor are larger than that for

cadres, indicating that a noncadre household with an entrepreneur or nonfarm worker experiences greater gains in household income than a

household with a current cadre. 2 Neither cadre entrepreneurs nor house-

holds with former cadres and cadre relations experience advantages in

income growth.

The analyses of household income for the coastal redistributive prov-

inces (table 4, col. 2) show that cadres lack a statistically significant

advantage; however, the interaction between cadre status and entrepreneur shows a net positive return, while entrepreneurs without redistribu-

tive power are at a relative disadvantage. The "power conversion" hypothesis finds support in the finding that the income growth of cadre

entrepreneurs is highest of any group in the coastal redistributive prov-

inces. However, these cadre entrepreneurs (N = 8) constitute .9% of the

sample in this region, whereas households of current cadres make up 17%. In coastal redistributive provinces, the more broadly based source

of relative gains in household earning are nonfarm jobs. The interaction between current cadre and entrepreneur suggests that

local officials may be using their political power to establish private busi-

nesses. Table 5 reports results of a mixed model logistic regression analy-

sis. It shows that neither current nor former cadre status has a statistically

significant effect on the odds of entering into entrepreneurship in the

12 In a separate analysis not reported here, I controlled for the amount of start-up capital used by entrepreneurs and found that it failed to achieve statistical significance in all regions of China. The lack of a significant return to the amount of start-up capital indicates that the commitment to private entrepreneurship is more important than the actual amount of capital invested. In other words, private entrepreneurship results in a higher rate of growth in household income whether a household has greater or lesser accumulated capital to invest in starting up a business.

935


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Symposium: Nee

maritime provinces. Only in the inland provinces does political capital-

former cadres-increase the odds of entering into entrepreneurship; but,

there, cadres entrepreneurs failed to obtain a net income advantage over

other households. When viewed from the vantage of the nation as a

whole, the effect of cadre status on the odds of becoming an entrepreneur

is negative and significant. This is in line with market transition theory's

prediction that over time, the initial cadre advantage in becoming entre-

preneurs declines. Overall, these findings fail to support the "power

conversion" hypothesis of state-centered analysis that cadres readily con-

vert their political capital into economic capital by becoming entrepre-

neurs and thereby becoming the primary beneficiaries of marketization.

The coastal corporatist provinces exhibit processes of stratification that

represent a significant departure from the pattern of social inequality

produced by state socialist redistribution (Szelenyi 1978). Initially it

would appear that the corporatist region is similar to the inland region:

cadre position has a significant effect on change in household income

(table 4). But distinctive to the corporatist provinces, the income returns

of nonfarm workers, entrepreneurs, and cadres fall within a narrow band, with somewhat higher income returns to nonfarm laborers and entrepreneurs. Corporatist communities appear to be able to specify and

enforce rules of income distribution consistent with egalitarian principles, resulting in declining income inequality between households from 1978

to 1989. As a result, income inequality declined steadily as seen in the

coefficient of variation over the three years (1978, 1983, 1989) income

data was collected (Zhejiang, .767 -> .649 -> .674; Jiangsu, 1.103 --

.881 -> .711). In every other region of China, income inequality increased

during the mid- to late 1980s.

Whether the coastal corporatist region can continue to buck the national trend of increasing income inequality is not clear. The institutional

environment giving rise to local corporatism is in dynamic transition.

The collective ownership form remains dominant in corporatist commu-

nities so long as local governments exclude private firms from subcon-

tracting arrangements with state-owned enterprises and control quasi

markets for key factor resources and financial capital. Should barriers

to entry be lowered in the industrial economy, markets thicken, and

competition from private firms intensify, the profits of entrepreneurs in

the corporatist region are likely to increase as they have in the laissez-faire

provinces. Whether local corporatist communities can persist in uphold-

ing egalitarian rules in the distribution of rewards depends on the persis-

tence of social institutions and collective action giving rise to a moral

order that constrains rent seeking by cadres and limits the profits of

entrepreneurs. These include social sanctions, threat of ostracism, pro-

test, sabotage, violence, and other forms of collective action (Lyons 1994).

939



The last column in table 4 reports estimates of change in household

income for the laissez-faire provinces. Cadres do not retain an advantage

in the most marketized of the coastal provinces. This finding replicates

the results reported in the early test of market transition theory. 13 It also

corresponds with the analysis reported in table 2. In the laissez-faire provinces, most nonfarm jobs are secured in labor markets through social

networks and job referral agencies and are not allocated by local govern-

ment.14 Combined, these findings confirm a diminished significance of

socialist redistributive power as a function of the extent of the market. 15

Not surprisingly entrepreneurs here enjoy the greatest gains in household income of all the regions. An increase in the number of laborers, male

and female, has a statistically significant effect on gains in household

income. Hence, the pattern is quite clear: in the coastal laissez-faire prov-

inces, producers and entrepreneurs experience greater gains in income

than the local administrative elite. Moreover, current officials in the southeastern coastal region are not advantaged as cadre entrepreneurs,

nor does political capital contribute to growth of household income.

In the laissez-faire provinces, household heads unexpectedly receive no advantage to education. The income effects of junior middle and

advanced education do not turn statistically significant and negative until after controlling for nonfarm workers. This is because the household head is more apt to be involved in agriculture.'6 Analysis of discrete income streams for the nation as a whole by agriculture, private business, and nonfarm sources not reported here indicates that education has a

13 In a separate analysis not reported here, I control for the rank of cadres. In this analysis village-level cadres exhibit a positive significant effect, while market town cadres show a negative effect. Unlike the inland region where market town, administrative town, and village were significant, other ranks in the laissez-faire provinces show no positive income effect for cadre status.

14 In other regions of China, the absence of a statistically significant income effect of nonfarm jobs found by village governments may be interpreted as evidence of the

emergence of quasi labor markets.

15 Some might point to the smaller sample size between the inland region (N = 4,175) and the coastal subregions (N = 673; N = 1,009; N = 1,098) as accounting for the differences in the statistical significance of test variables. Yet the same pattern of decline in the effects of cadre position on nonfarm jobs and household income obtains when the coastal subregions are pooled (N = 2,780).

16 In the preliminary test of market transition theory, a summary measure of the educational attainment of both husband and wife was employed. When the human capital of only the household head was used, statistical significance was not obtained for education. An index of educational attainment that included the educational attainment of nonfarm workers in industry and the spouse of the household head might have conveyed a different story, one more in line with earlier findings on the effect of education (see Peng 1992).

940


Symposium: Nee

negative effect on agricultural income, though it is statistically significant

only for advanced schooling. It has a significant positive effect in the sectors of the rural economy that experienced a shift to greater reliance

on markets (private business and nonfarm income). Separate mixed mod-

els of the determination of these income streams computed for the laissez-

faire provinces reveal the same negative effect of education in the deter-

mination of agricultural income, but the effects of schooling on private

business and nonfarm income are not statistically significant.

Market transition theory claims that the shift to a market economy

improves incentives at the individual level. That the incentive to work

has improved a great deal in the laissez-faire provinces is confirmed at

the aggregate level in their unprecedented rates of economic growth. It

is also seen in the higher income returns of entrepreneurs. The logistic

regression results reported in table 5 show that education increases the

odds of becoming an entrepreneur in the laissez-faire provinces. The predicted effect of education is mediated through entrepreneurship. For

whatever reason, what normally should have served as a reliable measure

of the incentive to work-income returns to education-did not perform

as expected for heads of households who are more likely to remain in agriculture. Is the education of the household head not a sensitive mea-

sure of the incentive to work in a household economy in which agriculture comprises a declining source of cash income contributed by income earners? This is suggested by the positive returns to education in the inland region where nonfarm jobs are relatively scarce and agriculture remains

the only source of income for all but a few.'7 Or could it be that the rough and tumble of early capitalism is such that education does not

matter in the pursuit of power and plenty? It may be that under conditions of exceptionally rapid economic growth, opportunities for advance-

ment abound to the extent that formal schooling no longer serves as a

screening mechanism. Across all of the regions, the impact of producers on the household's

earnings is positive and robust. Moreover, the contribution of a nonfarm

worker to the household's income stream is greater than that made by a

cadre. In all but the coastal redistributive provinces, the income gains of private entrepreneurs are greater than those of cadres. The widest gap in income growth favoring producers-farm and nonfarm workers and

entrepreneurs-relative to cadres occurs in the laissez-faire provinces.

17 In the earlier test of market transition theory, the education of the head of household also failed to have a significant effect. Only when the educations of husband and wife were pooled did education show an effect on household income (Nee 1989). This was not possible here because the spouse's education was not available.

941



Such evidence, combined with the control on the level of local industralization, lends support to the new institutionalist causal arguments on

change in the mechanism of stratification.'8 Contradicting the industral- ism hypothesis, the less industrialized and more marketized coastal prov-

inces-Guangdong and Fujian-showed the least continuity with the old

stratification order. Moreover, the more industrialized coastal provinces revealed more continuity with the stratification order structured by redistribution. However, though cadre entrepreneurs were advantaged in the coastal redistributive provinces, officials not in private business were not. Though current cadres experienced significant income returns in the corporatist region, this did not entitle them to a higher growth of

income relative to other groups. Rural industry is more highly developed in the coastal redistributive and corporatist provinces, yet members of

the cadre status group are not advantaged in securing nonfarm jobs for

family members and relatives and in becoming private entrepreneurs.

CONCLUSION

The analysis here confirms that the stratification order of rural China began a transformative change during the 1980s. Especially in the marketized coastal region, households moved up and down in relative economic standing, driven by new rules and mechanisms for getting ahead. The old rules of the game no longer worked as they did in the Maoist

era, and households that followed those rules discovered that they fell in relative economic standing. However, households that were quick to

adjust to an emergent market economy discovered new rules for getting ahead. These households experienced rapid increases in household earning power. By 1989, only 30% of cadre households in the sample were in the top income quintile. That cadre households make up a relatively small percentage of the households in the top income quintile supports the main claim of market transition theory. Most households in the top income group were newly affluent producers and entrepreneurs not from

cadre background. Even in the absence of regime change, a rapid shift to markets incre-

mentally causes a relative decline in the significance of positional power based on redistribution and relative gain in the power of producers and entrepreneurs. The interactions testing the effect of local marketization and resulting affluence on the income returns to the administrative elite

18 The control on industrial output indicates that in the maritime provinces, the level of industrialization does not directly effect change in household income; but it has a significant negative effect in the inland region. Yet, table 4 shows that industrial output has a robust effect on nonfarm income in the nation as a whole, though its effect on total household income is negative.

942


Symposium: Nee

confirm a causal relationship between institutional change and decline in the significance of positional power in the government bureaucracy. In

the relatively laissez-faire coastal provinces, where no direct advantage

was found for cadre position, the decline in the significance of redistribu-

tive power on household earning is more manifest. The contextual vari-

able indicating whether nonfarm jobs are gained through political alloca-

tion or through markets is perhaps the best indicator of the redistributive

power of local government. It showed a net negative effect in the laissez-

faire coastal provinces. However, the more important evidence is seen in

the higher income gains of producers and entrepreneurs relative to cadres

in the country as a whole and especially in the laissez-faire subregion.

Some results were inconsistent with the predictions of market transi-

tion theory. These include the absence of a positive income effect of

education in the coastal provinces. No doubt others will be uncovered in the course of future research. Theory cannot yet readily anticipate

how redistributive institutions combine with market forces (Stark, in this

issue). Hybrid state-controlled markets in which cadres set the price by

administrative fiat, often according to political favor, are a feature of

China's mixed economy; these are likely to persist as long as land and major fixed capital assets remain under redistributive control. An example is the housing market in urban China where quasi markets have

introduced elements of a commodity exchange but within the existing- though changing-institutional framework of state ownership of real property (Zhou and Logan 1994). For these reasons, many of the unantic-

ipated features of the emergent stratification order are likely to stem from the impact of socialist hybrids and their governance structure, local

corporatism, in altering the mechanisms of stratification. In the stratification order based on socialist redistribution, the political

power of cadres entitles them to a greater share of the rewards than

others with the same human capital and household characteristics. This condition persists in urban centers where the structure of property rights remains largely unchanged and redistribution continues to be institution-

ally dominant, as Walder's (1992) analysis of nonwage benefits using 1986 data from Tianjin, a northern industrial city, indicates. In cities,

nonmarket allocation of labor continues, and emergent labor markets are

confined mainly to the second economy. For these reasons, cadre status continues to be associated with controlling the distribution of rewards. In socialist redistributive economies, cadres stand at the pinnacle of the

stratification order. The main mechanism of stratification is bound up

with access to and control over redistributive institutions: mainly the party and state bureaucracies. Households compete to secure redistribu-

tive power, either directly by holding office or through the acquisition of network ties that guarantee ease of access to officials in power. In con-

943



trast, gains in earning power in the emerging stratification order shaped

by market forces are derived through jobs in marketized firms (e.g., joint

ventures) or through entrepreneurship. Like other households, cadres too

strive to adjust to the new opportunity structure created by markets.

Many in fact turn to entrepreneurship seeking to secure a privileged place

in the new stratification order. In the initial stages of market transition,

cadre entrepreneurs enjoy an advantage in the pursuit of market power. Their control over the disposition of scarce resources not available in

the marketplace confers class advantages based on redistributive power.

However, the cadre advantage is diminished as the leverage gained from

redistributive power erodes in the wake of expanding markets and corre-

sponding changes in the structure of property rights. Tests of market transition arguments in the urban context are at an

early stage. Analyses of income returns in Tianjin (Bian and Logan 1996)

and Shanghai (Nee and Cao 1995) report a persistence of cadre power in

the redistributive sector and evidence of decline in income returns to

party membership in the marketized sectors. The extent of decline is greatest in Shanghai where the data were collected in 1994. There party membership shows a significant negative effect in the marketized sector

of the urban economy. Also as predicted by the theory, in both Tianjin

and Shanghai, human capital obtains its largest return in the marketized and private economic sectors. These findings are consistent with results which verify the declining-significance-of-redistributive-power hypothe-

sis in the rural setting. More recently, Walder's (1995a) analysis of career mobility in Tianjin concludes that the power and advantages of the redis-

tributive elite are shallow when perceived from the vantage point of the potential for gain and profit in a market economy. His prediction that marketization will erode the advantages of the redistributive elite, espe-

cially after inflation takes its toll on the salary of government employees, leads him toward convergence with explanations and predictions devel-

oped by market transition theory. Xie and Hannum (in this issue) conflate the still dominant government-

controlled urban redistributive economy with the emergent marketized sectors, resulting in erroneous interpretations of continuing income returns to party membership. Their findings are inconclusive because they

use the wrong exogenous variable to test market transition theory. Their multilevel analysis examines the effect of extensive industrial growth on returns to human capital and party membership in Chinese cities. I use industrial output as a control for the industrialism hypothesis, not as in

Xie and Hannum, a measure of the extent of the shift to markets. They assert their hypotheses are derived from my earlier work (Nee 1989), but market transition theory makes no claim about industrial growth.

The application of the Stalinist growth model produced extensive in-

944


Symposium: Nee

dustrial growth without markets in the Soviet Union and Eastern Europe

(Erlich 1977; Szelenyi 1989). Similarly in China, industrial growth in the

1950s was accomplished through the elimination of markets and bureau-

cratic mobilization of resources (Schurmann 1966). After 1989, Eastern

European societies experienced rapid marketization, yet this did not give

rise to economic growth. Hence, extensive industrial growth is an inap-

propriate, and at best, faulty measure of the extent of marketization.

Market transition theory maintains that institutional change-the emergence of market institutions (e.g., labor and capital markets)-causes the

predicted change in the mechanisms of stratification. In the absence of

such institutional change, it predicts continuity in the stratification order. In focusing almost solely on change in the state organizational hierar-

chy and on the fate of the cadre elite, state-centered analysis overlooks

the pursuit of power and plenty by economic actors in society. Although

the state plays a critical role in initiating and sustaining the transition to

a market society, research needs to move beyond the limits of state-

centered analysis to take into account the societal wellspring of trans-

formative institutional change.

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