Abstract
One of the most fundamental issues in Chinese economic growth is the balance between urban and rural development; increasing rural–urban disparities are the root of social tensions and contradictions. However, China is a vast country with a huge diversity of geographical conditions, divergent levels of economic development, and different speeds of institutional changes across jurisdictions; hence, assessing the situation in rapidly changing rural landscapes is a challenging analytical task. The book by Lynette H. Ong is an important contribution to this topic. Ong presents in-depth research on the rural credit sector and highlights a question that has not received sufficient treatment in the literature, namely the relationship between rural credit and local fiscal systems.
The information provided in the book builds on a comprehensive reading of the pertinent literature and secondary data sources, focusing mainly on analysing a series of field studies on eight townships across four Chinese provinces, Zhejiang, Shandong, Sichuan, and Hebei. As the title of the book indicates, one major source of insights is the fact that Ong includes six cases of failed economic development. This alone is a significant contribution, as for obvious reasons there is a general tendency in the pertinent literature to concentrate on success cases. As Ong points out, this bias towards success cases may have resulted in ill-conceived paradigms of the Chinese political economy, such as the ‘market-preserving federalism’ model which the author is particularly critical about. Ong presents a very lucid and accessible analysis that is based on sound reasoning in political economy and institutional analysis.
The book unfolds an intriguing argument that partly deviates from established wisdom. Ong deals with the well-known phenomenon of financial repression in the Chinese rural economy: the rural credit sector does not provide sufficient loans to private-sector development. Also, we know well that alternative solutions in the ‘grey’ credit markets often tend to lead to financial instability. Ong shows that such dysfunctional phenomena mainly relate to the fact that rural credit institutions mostly serve the aims of local governments in advancing economic growth by means of expanding investments. In the majority of cases, the rural credit sector directly or indirectly funds growing deficits of local governments or projects closely linked to government. Given the incentive structures that local government cadres are subjected to, this often results in investments that are not sustainable economically and do not result in revenue increases. So, in the end, rural credit institutions are undermined by the growing share of non-performing loans to local governments. The central government is aware of this problem, but the rural credit sector is the most important institution for rural savings: bail-outs are ultimately unavoidable because a major clean-up and write-offs would result in serious social unrest. Taken in its entirety, the rural credit sector is ‘too big to fail’.
This analysis applies to the different stages of rural development since the start of the economic reforms, in particular the heyday of township and village enterprises until the mid-1990s, the short blossoming of rural credit foundations at the end of the 1990s, and the recent period of fiscal reforms of local finance. Regarding this more recent period, Ong highlights the negative effects of central policies that originally aimed at easing the burden on farmers. As a result, local finance became even less sustainable, and land sales became essential ways of funding local governments. This reproduced the old pattern of investment-driven growth and sustained the strong pressure on indirect government finance via the rural credit sector. The observations in the book end with the most recent stimulus programme after the global financial crisis erupted in 2008.
The reader is left with a gloomy conclusion. Ultimately, the most important reason for the growing loss of sustainability of both the rural credit sector and local fiscal systems lies in the political institutions, especially the overlap of government and credit organizations with the Chinese Communist Party hierarchy in which cadre performance is mainly evaluated. China continues to adhere to the model of government-led investment-driven extensive growth, with substantial extraction of capital resources from the rural sector. Since China is fiscally decentralized to a considerable degree, the resulting dire straits of local finance in many regions impose tight constraints on future development. Industrialization and urbanization still dominate over education, health care, and rural welfare in local decision-making, leading towards unsustainable growth, especially in regions which are disadvantaged by geographical remoteness.
The book is of interest to scholars and practitioners in rural development, China studies, and finance. As it is exemplary in fusing sound and simple theory with meticulous fieldwork, it is also highly recommended as a case reference for teaching purposes in these fields.