«Border Capitalism» with Chinese Characteristics: Past Dependency in strategy-based approach to SOE’s reforms in the Heilongjiang Province1

Peshkov Ivan

PhD, PhD, assistant professor, Institute of Eastern Studies, Adam Mickiewicz
University.

Abstract. This paper is based on the strategy-oriented approach towards company behavior. Using the example of the old industrial base in Northeast China it examines the spread of non-market adaptation strategies as a unique SOE and ex-SOE reaction to the market in the conditions of complete socialist modernization and a lack of access to highly competitive foreign markets. It especially emphasizes the influence of the specificity of the region’s industrialization model (path dependency), its geographical situation and climate, as well as the role of the Heilongjiang Province in the Chinese-Russian relations (the significance of the Russian market). The main thesis of the paper concerns the cumulative character of the barriers regarding the new wave of industrialization owing to which the policy of regional development (i.e. of the revitalization of Northeast China) needs to consider the specificity of the strategic field of enterprises and stimulate restructuration of the latter, a change of financing models, and new quality policy on the Russian market. Going beyond the ownership analysis enables us to consider the reasons for preferring non-market strategies revealed by some SOEs. It also allows for specifying the factors favoring the continuation of non-market strategies, the mechanisms of establishing the anti-restructuration consensus, and the historical, institutional and structural conditions for the differentiation of SOE-performance types in China. The conclusions could be useful for increasing the effectiveness of the restructuration policy.

Key words: SOE reform; conservative adaptation; border; Northeast China.

Қытайлық ерекшеліктегі шекара маңы капитализмі: Хэйлунцзянг провинциясындағы мемлекеттік кәсіпорындардың реформаларындағы
алдыңғы дамуға тәуелділік

Түйін. Қытай реформаларды экономиканы шектеулі қайта құрылымдау және еңбек нарығына тұрақты демографиялық қысым жағдайында өткізуде. Реформалардың бұл моделі даму мәселелерін шешу мақсатында өтпелі қоғам белгілерін сақтап қалады. Мемлекеттік кәсіпорындарды бейімдеудің консервативтік модельдері қытай экономикасында ресурстарды бөлудің рыноктық емес үлгілерінің сақталып қалуына алып келеді. Хэйлунгзянг провинциясы Солтүстік-шығыс индустриялық базасына жатады, оның бейімдеу мәселелері Қытайдың басқа аймақтарына қарағанда, Шығыс Европа және Қазақстан тәжірибесін көп еске түсіреді. 90- жылдардың ортасында «солтүстік-шығыс синдромы» (dongbei xianxiang) термині индустриялдық құрылымдар мен кәсіподақтардың қайта құрылымдауға бірлесіп қарсы тұруын білдірді. Реформалардың қытайлық үлгісі жергілікті даму және Солтүстік-шығыс аймағының Ресей және Моңғолия рыноктарына қайта бейімделуіне мықты мемлекеттік қолдау көрсету үшін кеңістік тудырады. Шекара маңы саудасы және трансшекаралық миграция үшін мүмкіндіктерді дамыту саясаты демилитаризация, деколлективизация және аймақты индустриаландырудың жаңа толқынымен тікелей байланысты. Ол жаңа жағдайда социалистік жаңартудың жетістіктерін сақтап қалу және ауылдық жерлердегі деколлективизациядан кейінгі жаппай жұмыссыздыққа бейімделуге әрекет ету болып табылады. Шекара маңы саудасы және маусымдық трансшекаралық миграция социалистік жаңартудың кейбір жетістіктерін сақтап қалу және ауылшаруашылық коммуналарының ыдырауы және көшпелі малшаруашылығы аясының тарылуы нәтижесінде туындайтын жаппай жұмыссыздыққа бейімделу мүмкіндігін береді. Мақаланың мақсаты шекара маңы аймағының (Хэйлунцзян провинциясының) интеграциясының жергілікті формаларын алдыңғы даму (path dependence) және индустрияландырудың бұрынғы үлгілеріне тәуелділік тұрғысында талдау жасау болып табылады.

Түйін сөздер: SOE реформа; консервативті бейімделу; шекара; солтүстік-шығыс Қытай.

«Приграничный капитализм» с китайской спецификой: зависимость от предыдущего развития в реформах государственных предприятий
провинции Хэйлунцзянг

Аннотация. Китай проводит реформы в условиях ограниченной реструктуризации экономики и стабильного демографического пресса на рынок труда. Эта модель реформ консервирует черты переходного общества на неограниченный период в целях решения проблем развития. Консервативные модели адаптации государственных предприятий приводят к сохранению нерыночных модели распределения ресурсов в китайской экономике. Провинция Хэйлунгзянг входит в Северо-восточную индустриальную базу, проблемы адаптации которой больше припоминали опыт стран Восточной Европы и Казахстана, чем других регионов Китая. В середине 90х термин «северо-восточный синдром» (dongbei xianxiang) обозначал совместное сопротивление индустриальных структур и профсоюзов реструктуризации. Китайская модель реформ создает пространство для сильной государственной поддержки локального развития и медленной переориентации Северо-восточного региона на рынки России и Монголии. Политика развития возможностей для приграничной торговли и сезонной трансграничной миграции не посредственно связано с демилитаризацией, деколлективозацией и новой волной индустриализации региона. Она является попыткой сохранить достижения социалистической модернизации в новых условиях и адаптироваться к массовой безработицы в сельской местности после деколлективизации. Возможности приграничной торговли и сезонной миграции дают возможность сохранения некоторых достижений социалистической модернизации и адаптации к массовой безработице, вызванной распадом сельскохозяйственных коммун и ограничением ареала кочевого животноводства. Целью статьи является анализ локальных форм интеграции приграничного региона (провенции Хэйлунцзян) в перспективе зависимости от предыдущего развития (path dependence) и прежних моделей индустриализации.

Ключевые слова: SOE реформа; консервативная адаптация; граница; сверо-восточный Китай.

SOEs reforms must be deepened. We must facilitate the concentration of state assets in key areas, industries and enterprises that are of vital importance to economic development and state security. We must promote key industries to restructure with diversified ownership and cross-regional cooperation. We must promote reforms in businesses to separate their auxiliary departments from core business, reform ownership of these auxiliary departments and separate social functions from businesses. We must actively push forward the trial restructuring of SOEs-affiliated collective enterprises, and accelerate the reforms of state-owned forest district through the above-mentioned initiatives.

Introduction. PRC has introduced its model of reforms in the conditions of an unrestructured transition economy with high production potential and stable demographic pressure on the labor market. The specificity of China lies in a very slow market implementation of state-owned enterprises (SOEs) accompanied with tremendously fast development of the private sector and exportation. That caused simultaneously the dominance of China as a global producer and the preference of enterprises negatively verified by the market when making investment decisions. The reforms of the state-owned-enterprise sector have been carried out for three decades. The limited restructuration results from the coexistence of market and nonmarket resource allocation mechanisms in the Chinese economy. Therefore, despite its participation in production, the state-owned sector is a significant element of the economy. The most important challenge concerning SOE reforms was stopping the inert forms of softening hard budget constraints, limiting rent-seeking activities and modernizing the regions with a high concentration of SOEs.

1 Исследование выполнено при финансовой поддержке Национального центра науки (Польша) Грант № DЕС 2012/05/Е/НS3/03527

The broad literature concerning the adaptation of state-owned enterprises to the market in the situation of radically changing economic conditions is characterized by the consensus regarding the key role of the changes in proprietorship and models of management (Balicki 1998; Cao, Yingyyi, Wiengast 1999; Gang 2003; Hassrad, Sheehan, Zhou 2007; Naughton 1995, 2007; Wilczyński 2005). It has assumed a unidirectional process of restructuring SOEs through which the economy is supposed to develop and increase its productivity. It has devoted much less attention to strategic choices available to enterprises, the preferences of the latter, and the reasons for the growing popularity of non-market adaptation strategies. It seems that such an attitude may prove not entirely justified.

A market economy does not develop in an institutional or social void. New market structures need to function next to the old ones, the uselessness of which is not at all obvious to the participants of economic processes. Some situations may happen, in which preserving certain elements of the previous economic model and limiting the destruction of the old industrial base could be the aim of mass adaptation strategies, regardless the policy of the state (Aleksandrov 1999). This can be called a conservative (non-market) model of adaptation to the market, the essential feature of which being the introduction of enterprises to the market without any radical technological and organizational changes. It is worth noting that this situation exceeds the dualism of socialist and market enterprises (the characteristics of the former are routinely attributed to SOEs in post-communist countries). An enterprise employing non-market adaptation strategies can use some elements of both institutional regimes during the realization of its autonomous economic model.

Taking into consideration the reasons for employing non-market adaptation strategies can in a sense help to explain the limited effectiveness of state policies concerning SOEs in most transforming economies. From a broader perspective a company’s preferences in the framework of its strategic field play a more important role than its technological advancement, access to capital or ownership structure. They create a space for choice, in which the state-owned sector carries out its market or non-market adaptation strategies. Given insignificant technological differences and free access to capital companies can differ considerably as regards their choice structures and potential for technological development. The dominance of non-market strategies allows for stopping the disintegration of social structures, but it cannot constitute the basis for new industrialization and in itself it is an obstacle for technological transfer as well as for foreign investment sources.

Thus, answering the key question of «Why do enterprises employ non-market adaptation strategies in the market-economy conditions?» one must take into consideration the special role of the former industrialization pattern, the existing possibilities of softening the strict budget restrictions, and the existing models regarding access to the domestic or foreign markets (the sale of resources or less technologically advanced goods being essential for those strategies). Only considering these factors gives one a chance to understand the real reasons for the resistance to the new wave of industrialization.

Taking into account the historical perspective (the role of socialist modernization) is crucial because of the special character of the process of transferring capital and knowledge to post-communist economies. The power of resistance to enterprise restructuration is proportional to the success of socialist modernization (especially industrialization). In this context the past does not determine the events directly, but it explains the attractiveness of the choice of conservative adaptation strategy to enterprises. Technological and organizational barriers will be analyzed from the perspective of New Institutional Economics, which means that industrialization will be examined as a process of developing the space in which restructured companies aim at the optimal use of knowledge, capital and manpower.

This paper is based on the strategy-oriented approach (SOA) towards company behavior. Using the example of the old industrial base in Northeast China it examines the spread of non-market adaptation strategies as a unique SOE and exSOE reaction to the market in the conditions of complete socialist modernization and a lack of access to highly competitive foreign markets. It especially emphasizes the influence of the specificity of the region’s industrialization model (path dependency), its geographical situation and climate, as well as the role of the Heilongjiang Province in the Chinese-Russian relations (the significance of the Russian market). The main thesis of the paper concerns the cumulative character of the barriers regarding the new wave of industrialization owing to which the policy of regional development (i.e. of the revitalization of Northeast China) needs to consider the specificity of the strategic field of enterprises and stimulate restructuration of the latter, a change of financing models, and new quality policy on the Russian market.

The case of the Heilongjiang Province constitutes a classical example of path dependence – the employed pattern of socialist modernization in the given climate and the geographical-situation conditions have caused the choice of an individual path of development. In this context the problem of the province is not so much the inherited archaic industrial structure or the dominance of private ownership, but a series of historical, structural and institutional circumstances that does not produce sufficient stimuli for market models of behavior. Thus, the «northeastern syndrome» is closer to the experiences of Eastern European countries and it requires individual methods for its analysis and therapy. The Heilongjiang Province plays an important role in the big state program called «Revitalize The Old Northeast Industrial Bases». It can be predicted that the growth vector will move towards the northeast and that the northern regions will follow the central one as the growth pole. However, this process has faced many obstacles. The basic problem of the Heilongjiang Province is completing its industrialization and urbanization with simultaneous overcoming the conservative adaptation of SOEs, transformational poverty and insufficient investments in infrastructure. Solving these problems will determine the success of new industrialization policy in Northeast China.

It is worth noting that SOA is more realistic, because in the conditions of the PRC SOEs will remain an important element of the economy for a long time. Concentrating on the reasons for preferring non-market strategies can lead to better adaptation of SOEs to the market and to limiting the influence of informal institutions on economic decisions. The differentiation of SOE behavior (from adapting the enterprise strategies to the market to continuing non-market adaptation) shows the limitations of determinist attitudes narrowing the SOE-related questions down to the issue of changing ownership. Going beyond the ownership analysis enables us to consider the reasons for preferring non-market strategies revealed by some SOEs. It also allows for specifying the factors favoring the continuation of non-market strategies, the mechanisms of establishing the anti-restructuration consensus, and the historical, institutional and structural conditions for the differentiation of SOEperformance types in China. The conclusions could be useful for increasing the effectiveness of the restructuration policy.

1. The key role of socialist modernization in transition from the socialist model of industrialization to the post-socialist one. In the comprehensive study (1986) of economic transformation of the industrial world by Rosenberg and Birdzell the authors claim that to understand industrialization processes we need to understand the institutional conditions of companies’ behaviour. This thesis is especially important in the cases, in which radical technological changes are accompanied with equally radical institutional and organizational transformations. These cases include the transformation of post-socialist economies, in which the administrative forms of knowledge, capital and labor management need to be adapted to market-economy requirements. It is in fact a new wave of industrialization based on market impulses and openness to new knowledge and skills, which is regulated by international free competition. It is a unique historical phenomenon that means mass acceptance of the new rules of the game, organization models, and the use of resources.

The perspective preferred by some researchers of viewing economic growth as a problem of eliminating social or economic underinvestment and the lack of knowledge (Holton 1985; Lucas 1988, 1993; Romer 1990) has marginalized institutional and structural factors considerably. It refers especially to the countries or regions with complete socialist modernization where the earlier-path dependency is especially difficult to overcome. Passing over historical conditions and making the problems of unfinished restructuring come down to the extreme case of the state’s excessive intervention in the market economy are quite unjustified because of the complex influence of socialist modernization on social life, infrastructure, the character of the workforce, and the applied models of urbanization.

The socialist model of modernization reveals a row of features that differ it from both the classical models of modernization and the «late» modernizations of the South countries in the 20th century (Aleksandrov 1999). First of all, while employing this model of modernization the decisive role is played by the state that determines both proprietorship and the limits of economic choice in return for the guaranteed economic growth and social justice. Monopolizing investment and organizational decisions offers the possibility of a radical increase in the pace of industrialization and urbanization, and the implementation of elementary education structures. Thus, the results of socialist modernization include:

– а socialist model of industrialization that enables the concentration of assets, knowledge and workforce making the structure of the economy change radically in a relatively short period.

– а socialist model of urbanization in the framework of which agricultural countries undergo a relatively fast transformation turning agricultural societies into modern ones. The growth of urban population is accompanied with a broader access to education and health care, as well as with a radical increase in people’s opportunities.

– а new type of workforce socialized in a non-market environment with non-market models of management, enjoying a special social status and social guarantees.

The social and economic structures developed on the basis of socialist modernization revealed: a low capability of technological change (they depended on basic technologies), a high social risk of enterprise restructuration, and a consensus between employees and management structures concerning the priority of preserving the existing jobs (Wilczyński 2005). Thus, the processes of winding up the elements of the former economic system do not regard solely technological or organizational changes, but they constitute an overall process aimed at reorganizing the foundations of social life.

In this context introducing of the above-mentioned social structures into the market must cause numerous difficulties. First of all, the legal situation of enterprises needs to force the establishment of rational economic strategies. Secondly, the technological base has to undergo radical changes, which in some cases equals to changing the line of business of some enterprises or liquidating them. Thirdly, employees need to pass through the restructuration qualifying round which is extremely complex because of the social functions of each enterprise. An additional, but by no means less important factor is the natural-resource- and labor-consuming character of the employed technologies being the main reason for the non-market cost structure as well as the dependence on concealed or official state subsidies.

Establishing a modern industrial base in such conditions requires not so much the access to new technologies or capital as starting a new wave of industrialization. The scale of this process and its requirements are often underestimated or misinterpreted as a problem connected with liquidating heavy industries accompanying society development that seems typical of any market economy. Nonetheless, the process of establishing a new industrial base is a separate phase of industrialization the realization of which can prove highly complicated taking into consideration the resistance to changes revealed by business entities, the lack of external investors and social responsibilities of the state. It is also worth noting that the process of implementing new technologies constitutes only an element (a result) of the whole industrialization process. New industrialization should radically change the basis for economic decisions. Its objective is establishing institutional and structural conditions making enterprises constantly aim at getting new technologies, knowledge and capital rather than at obtaining new technologies and capital as such.

2. The hybridization of the strategic fields of enterprises. The conservativeadaptation path. System transformation caused by a market economy can be considered in a situation when an economy is dominated by restructured enterprises, proprietorship is clearly defined and the existence of competition is included in enterprise strategies (Wilczyński 2005). According to the forerunner work by Coase (Coase 1937) a market enterprise is an administrative structure functioning on the market. It differs from other administrative structures in its ownership structure, hard budget constraints and dominant market strategies. A socialist enterprise also constitutes an administrative structure being a part of a broader administrative structure with selective monetization of some practices and soft budget constraints (Naughton 2007, 309). A transition to market economy requires radical changes in organizational structures of enterprises, both from a legal and organizational point of view. In the new conditions enterprises need to be verified by the market and function in the framework of hard budget constraints, which proves quite complicated taking into consideration the specificity of the socialist production base and the habits developed by manpower during socialist modernization. A state-owned enterprise of a reform period is an administrative structure still constituting a part of a larger administrative structure and simultaneously operating on the market in the conditions of growing budget constraints. In a favorable situation it can be restructured regardless its ownership structure, at the same time employing market models of adaptation. It can also use inert strategies trying to soften budget constraints, avoid restructuration and choose non-market models of adaptation. In such a case a regime of hybridization of company’s strategic field can be observed, in which adapting some strategies to the market is accompanied with an explosion of informal practices and out-of-market activities.

The experiences of the countries with mass hybridization of enterprises’ strategic fields allow for listing certain general regularities of the process. Because of the dual character of enterprise strategies non-market strategies are preferred provided that enterprises have sufficient bargaining power (concentration), rentseeking opportunities, and some possibilities concerning «softening» hard budget constraints and functioning on the administrative market. Additional favorable conditions include: earning alternatives in the form of seasonal migration (greater acceptance of low pay), favorable government policy (industrial feudalism), and a market for goods on offer.

An accumulation of such specific conditions results in the development of an «anti-restructuration» consensus of local authorities (reduced unemployment), employees (employment and a benefits packages), and boards of directors (continued careers, rent-seeking). All that makes the choice of a non-market path more advantageous, since it offers some possibilities of entering the market on conditions acceptable to the participants of the process. It is a rational (considering the participants’ knowledge and priorities) reaction to the existing stimuli.

The non-market (conservative) path of enterprise adaptation has been taking different forms depending on the time and place of its implementation and on the employed model of reforms. Nevertheless, one can specify a set of common features and present the essential mechanisms of non-market adaptation. Based on the cases of Russia, Ukraine, Kazakhstan and to a much lesser extent Poland, Hungary, and China one can determine the following characteristics:

– the hybridization of the strategic fields of enterprises;

– retaining the non-market cost structure (transferring costs to customers, manpower and the state); – the continued dependence on basic technologies (high consumption of natural resources and low work output);

– informal contractation and a rent-seeking tendency;

– a tendency to soften strict budget constraints through subsidies, credits that are unlikely to be repaid and tax privileges).

Conservative adaptation is a path taken by countries where socialist models of modernization, urbanization and industrialization were introduced in agricultural societies in the conditions of long-standing isolation and mass political indoctrination. The common features of the group included:

– complete socialist industrialization;

– high concentration and a significant social role of SOEs;

– access to low and medium quality goods on the domestic and foreign markets;

– access to cheap natural resources and manpower.

On the macroeconomic level conservative adaptation is aimed at slow adaptation of the industrial space that has remained from the previous (socialist) model of economy to the requirements of the market economy. It is a more or less controlled process of degrading this space with long-lasting restructuring of its most viable elements and eliminating others. The process is connected with a growing number of non-market resource-allocation models and rent-seeking strategies. On the microeconomic level the enterprises of the reforms period were characterized by a mixed (conservative) form of adaptation to the collapse of the socialist economy. The institutional environment stimulated restructuring inconsistently. Regardless the existence of the essential elements of a formal legal basis for a market economy, the real institutional and cultural situation encouraged company boards to operate in a mixed regime, combining the characteristics of both socialist and capitalist enterprises. In this context the conservative adaptation path lay in the destruction of the old industrial base without the implementation of normal (market) industrialization. That caused non-market economic behavior, pauperization, retraditionalization and structural obstacles to technological transfer.

Such a situation can be justified structurally. In the conditions of socialist modernization a state-owned enterprise constitutes an element of the social structure financing (or co-financing) welfare, kindergartens as well as apartments where employers and their families lived. A shock model of reforms implemented in such conditions poses a danger of temporary social malfunction of a considerable part of population, a break-up of a given country and the widespread lack of support for its government. Thus, the local elites opt for conservative reforms that suit the existing infrastructure, technological cycles, models of work organization and the values shared by the majority of manpower at disposal with simultaneous consent for the increasing number of «economic guerillas» and the introduction of direct foreign investment. That causes the emergence of a unique synthesis of formal and informal institutions which allows for introducing economic changes on the terms acceptable for the key agents (a lack of restructuration, further functioning maintaining some elements of the previous system, unrestrictive attitude towards intellectual property rights).

The popularization of the conservative-adaptation strategy has resulted in a row of social and economic consequences. Because of the lack of radical technological and organizational changes the basic form to remain on the market is through a nonmarket cost structure. The transmission of costs is regulated in the framework of informal and formal contractation and it is the key cause of selective reintegration and establishing conglomerates. The development of post-socialist conglomerates has enabled SOEs to remain on the market without risking the initiation of debtcollecting procedures by formal and informal institutions. The relationship of these post-socialist conglomerates with local authorities is called “industrial feudalism» and it constituted a permanent feature of the social structures of numerous Russian, Ukrainian and Kazakh regions (Ericsson 2000). Moreover, the slow state-sector adaptation significantly influenced the shape of economic policies , including retaining the dual price structure, the imperatives of pro-export exchange-rate policies and limiting the monetary authorities’ autonomy both on the institutional (privatization and internationalization of banking sectors) and organizational (broadened objectives of monetary policies) levels.

3. The Chinese version of conservative adaptation: the «north-eastern syndrome». The specificity of the north-eastern region of China lay in the accumulative development of the conditions that proved most favorable to preferring non-market strategies, i.e. a high SOE concentration, anti-restructuring attitudes of manpower and access to the Russian market enabling enterprises to continue their conservative-adaptation strategies. The successful socialist modernization of the region resulted in numerous problems regarding the adjustment of the old industrial base to the new conditions. In the early 1990s the term „northeastern syndrome” (dongbei xianxiang) was coined to define the resistance of the old industrial base to restructuration stimuli and the government policy (Lisheng 2005). The stagnation of Northeast China’s heavy-industry-based economy was caused by institutional and structural factors – the form of ownership and the dominant management patterns did not favor capital and knowledge transfer. Additionally, the archaic structure of industry limited the possibilities of radical changes and thwarted state aid. The manifestations of the syndrome were the delayed SOE reforms and their very difficult financial situation.

In 2002, about 40% (371 out of 900) of the large SOEs and their subsidiaries in Northeast China recorded losses. In addition, the liability-asset ratio of SOEs in Liaoning, Jilin and Heilongjiang was 81.8%, 90.6% and 92.5% respectively, far above the national average of 64.8%. (Revitalisation of Northeast China 2004).

The Heilongjiang Province is the most northward part of the region. The adaptation processes there appear additionally complex because of the geographical situation of the province – the climate limits the development of agriculture – and the key role of the Russian market. Apart from the classical problems of the region (the unusually high SOE concentration and its archaic industry structure), its functioning as «the window on the north» has resulted in the fact that both its economic successes and problems relate to its access to the Russian market and the situation there.

The problems of the Heilongjiang Province are caused by the delay in the development of the region. Since the socialist modernization is complete, the society – migratory, and the geographical situation – so unique, the province is facing exceptional problems in comparison to other regions of China, the success of which was based on their unfinished socialist industrialization, foreign investments in the private sector, as well as their reserves of relatively cheap manpower. It made the technological-transfer process easier and allowed for retaining the key social or economic elements of the old industrial base. The Heilongjiang Province is not able to repeat this path because of the high SOE concentration, the domination of capitalconsuming trades and the potential of the Russian market limiting the stimuli for enterprise restructuration. In this context the problem of the province concerns not so much the archaic industrial structure it has inherited as its conservative model of adaptation and the lack of sufficient stimuli to provoke a new wave of industrialization. The obstacles appear accumulative – they stem simultaneously from the employment of conservative-adaptation strategies, the impossibility of introducing radical changes of the region’s production structure and the special role of the Russian market. From such a perspective it becomes evident that the economy of the Heilongjiang Province needs changing the institutional base for economic decisions enabling both technological and capital transfer.

The main obstacles to modernizing the old industrial base include:

– the region’s historical conditions – the specificity of industrialization (the patterns of management, the trade structure, the high SOE concentration and the relatively high level of urbanization limiting the possibility of local changes on the urban labor market);

– the specificity of the selective restructuration of SOEs in China (the gradualist path of SOE reforms favorable to conservative-adaptation practices in the oldindustrial-base conditions);

– the geographical situation (difficult conditions for agriculture and the short tradition of the latter; the province’s location far from the growth poles, the role of the Russian market – access to inexpensive natural resources, the possibility of seasonal migration, and the domination of low- and medium-quality goods).

4. The specificity and social results of Northeast China’s industrialization. For centuries the northeastern region of China was a borderline between the agricultural and nomadic-agricultural worlds, the domain of the last Chinese dynasty, and a place of enhanced industrialization and urbanization. It has been undergoing a row of transformations – from the dominance of nomadic-agricultural economy to Chinese-type agricultural one; from the newly developed agricultural region to the industrialized one; from the old industrial base to the new one. As F.Michael wrote, In past history, Manchuria was not a country with either definitive borders or a uniform peoples, but rather area of contact of different types of life and societies. There was Chinese society, agricultural in its economy and bureaucratically administrated. There were the steppe nomads and stock breeders and the forest people, living in tribal and feudal organization. (Michael 1972, P.12)

At the beginning of the 20th century because of the Japanese and Russian attempts of Manchuria’s economic colonization the restrictions regarding migration from the central regions of China were abolished, which changed the ethnic and economic structure of the region considerably. Migration increased especially in the 1950s. Similarly to the northwest, the region became a shelter for refugees during the great famine in that decade (Naughton 2007).

The specificity of Chinese industrialization before 1949 was its dual character, both geographically («Treaty port industrialization and Manchuria») and structurally. Contrarily to the world-market-oriented ports of the south, the analyzed region was subject to two attempts of accelerated industrialization, which did not stem from the international-market impulses and were made largely using the local militarystructure potential. The first attempt took place when northern China was occupied by Japan – to support the Japanese economy at the time of the economic crisis, as well as to develop the «uneasy partnership of Kwantung Army and big business community» (Young 1999, P.185). That quasi-military character of industrialization was accompanied with the narrow orientation towards the Japanese market, the dominance of Japanese capital and the concentration on heavy industry. The specificity of that project was described by B.Naughton the following way:

Investment in Manchuria was carried out primarily by the Japanese government and by quasi-official affiliates of the Japanese government such as the Southern Manchurian Railroad. Japanese government sponsored industrialization in Manchuria was carried out to meet a mixture of economic and strategic objectives. Development was focused on heavy industry and railroads. (…)

Japanese-sponsored industry in Manchuria was expected to be profitable if possible, but strategic considerations were very important. Most Manchurian industries produced raw materials for Japanese domestic industries. Japan was the most important market.(…) Moreover, skilled position within industries were intentionally reserved for Japanese nationals. Thus there were few linkages and spillover effects from vigorous industrialization in Manchuria (Naughton 2007, P.44- 45).

During the last stage of WWII the Japanese industrial base in Manchuria was either destroyed or transported to the USSR. Another wave of industrialization started following 1949. The specificity of the region’s industrialization after 1949 was the key role of the state, the continuation of the former trade profile, as well as the reorientation of the region towards the Chinese economy. The model employed in those years clearly revealed the features of Stalinist industrialization of 1928-1932, i.e. a radical investment increase (at the cost of limited consumption), a heavyindustry preference, combining industrialization with urbanization, and a militaryoriented economy. Nonetheless, there were also some conspicuous differences, including the fact that the Chinese planning system was much less centralized, small businesses played a lot more important role, and local authorities enjoyed considerably greater autonomy. In the years 1949-1978 the region became the industrial base of the PRC, simultaneously undergoing enhanced urbanization and taking in masses of migrants from the central and southern regions of the country. The industrialization project included the Production and Construction Corps, but to a much lesser extent than in the north-west. The dynamics of industrialization processes was slowly decreasing in the late 1950s. The deterioration of the ChineseSoviet relations resulted in a partial evacuation of factories from the borderline regions (especially the Heilongjiang Province). Nevertheless, discovering oilfields in the latter caused another wave of mass state investments and determined the special role of the region for Chinese exportation in the 1970s and 1980s.

The industrial base established in northern China was a completed project of socialist modernization and in that respect it was exceptional compared to other regions of the country. The way of carrying the project out (fast, according to theplan, and with the help of state institutions), its location (the region is characterized by too harsh climate conditions to develop agriculture and with the dominance of migrants), as well as its system-related conditions (access to education, minimal social guarantees) resulted in a unique set of circumstances that made the region (especially the Heilongjiang Province) similar to other countries with complete socialist modernization (Russia and the former USSR countries).

5. The specificity of limited restructuration in China. Three decades of reforms in China are well-documented and constitute a peculiar case of socialisteconomy adaptation to the market (Gawlikowki 2004; Gang 2003; Naughton 1995). China initiated liberalization as a mostly agricultural society with unfinished urbanization and inconsistent attempts of socialist industrialization (Naughton 2007) following the socialist industrialization programs (the policies of the Great Leap Forward (1958-1960), The Third Front (1964-1966), the Cultural Revolution (1967- 1969) and the Leap Forward (after 1970), and it introduced its model of reforms in the conditions of an unrestructured transition economy with high production potential and stable demographic pressure on the labor market. The specificity of China lies in a very slow market implementation of state-owned enterprises accompanied with tremendously fast development of the private sector and exportation. It simultaneously caused the dominance of China as a global producer and the preference of enterprises negatively verified by the market when making investment decisions. The situation of SOEs in China shows both similarities and differences compared to other post-socialist economies. Similarly to many other socialist economies, it was not able either to leave the state-owned sector as it had been, or to complete the restructuration. Consequently, most state-owned enterprises have employed conservative strategies for adaptation to the market with soft budget constraints, chronic investment hunger and non-market cost structure (Karlusov 1996; Rawski 1997). Contrary to other post-communist countries the Chinese stateowned sector had a different structure and participation in employment. Unlike the countries with a Soviet model of industrialization China was dominated by small and medium enterprises.

The reforms of the state-owned-enterprise sector have been carried out for three decades. Their specificity lies in their gradualist character and in the government’s treating the Chinese state-dominated corporate governance system as a permanent element of the country’s institutional field. The aim of the policy employed regarding SOEs was to optimize their structure, demonopolize proprietorship, and modernize the technological base (Rawski 1997; Hassrad, Sheehan, Zhou 2007). It is worth noting that contrarily to the governments of the former USSR countries the Chinese authorities aimed at retaining state ownership, at the same time limiting the possibilities of conservative adaptation. The SOE reforms concerned liquidating the monopoly of such organizations, gradual broadening of enterprise autonomy, and guaranteeing the state ownership of the group of large SOEs with simultaneous privatization or liquidation of the remaining ones. Nonetheless, the considerable successes of China’s SOE reforms were accompanied with the inevitable costs of the gradualist path (Zheng, Wang, Shi 2008 2008, P.158).

The limited restructuration has resulted from the coexistence of market and nonmarket resource-allocation mechanisms in the Chinese economy (Perkins 1994; Lin, Fang, Zhou 2001 2001). Governments can secretly subsidize state-owned sectors, have large social expenses, tolerate avoiding bankruptcy and non-payment which is directly connected with the latter (Rawski 1997). The state-owned sector is an administrative structure that generates not only goods or services, but also jobs, interchange within the administrative market, an access to financial means and rent-seeking opportunities. It monopolizes the activities of the banking sector turning all the savings into concealed subsidies. Therefore, despite its participation in production and employment, it is the key element of economy. The most important challenge concerning the SOE reforms was stopping the inert forms of softening strict budget constraints, limiting rent-seeking activities and modernizing the regions with a high concentration of SOEs.

Adapting SOEs to the market in China differed considerably from the situation in other post-communist countries. First of all, regardless the gradual changes the system-related, legal and institutional continuity has been retained. Secondly, China has never experienced any shock models of macroeconomic stabilization or periodical malfunctioning of its monetary system. Thirdly, the tremendously fast and incredible development of the private sector enabled gradual implementation of reforms. One can specify the following features of the Chinese conservativeadaptation strategies:

– their limited scale of functioning (regarding only a part of SOEs);

– their contribution to retaining the former employment structure (the jobs and benefits packages) at the cost of lowered pay;

– their use of lending opportunities offered by state-owned banks, as well as barter as a tool for softening hard budget constraints;

– their functioning as an element of non-market reserves allocation in the economy.

6. The geographical conditions. The geographical situation of the Heilongjiang Province has always played a special role in its history. From the perspective of this analysis the particularly important facts are that it is located far from the intenseeconomic-growth centers, has a relatively poor agricultural base because of the climate (it is the most northward part of China), and the local community that originated only in the 20th century. Because of that old-industrial-base enterprises were not able to use the spillover effects and foreign investments effectively. The urban character of the region considerably limited the possibility to introduce radical changes in SOE employment, since they would have concerned too great a number of inhabitants and could not have been compensated for with the development of agriculture and migrational human resources for new industrial structures.

Nonetheless, the region’s closeness to Russia (formerly the USSR) has proved fundamental for its development. On the one hand the Heilongjiang Province was traditionally a place of Russian-Chinese economic and cultural contacts. Together with Shanghai and Inner Mongolia it gathered the most Russian emigrants in the 1920s and 1930s and became the most involved in its northern neighbor’s life. On the other hand, the complicated Russian-Chinese relations in the 20th century caused a temporary militarization of the border and limited the possibility of economic cooperation of borderline regions. Following 1991 China and Russia eliminated the basic obstacles related to their mutual political relations and initiated developing stable political, cultural and economic relations. The economic ones in a sense depended on the political ones. In the case of the Heilongjiang Province and other borderline regions the question of slow opening of the borders (since the early 1980s) was essential for their future development, allowing them for entering the markets of Russia and other CIS countries. Thanks to that they could function as a «window on the north» (regarding the exportation of goods and services). The role of a «middleman» (connecting the southern economic-growth centers with the Russian and CIS markets) played by the Heilongjiang Province in the early 1990s has often been underestimated.

The positive character of the influence of the 4,209 km of the Chinese-Russian border on the development of the region has been routinely assumed – thanks to that numerous enterprises, seasonal migrants, and small businesses could enter the Russian market and grow in prosperity. It also enabled Chinese entities to access relatively cheap natural resources, which in turn influenced industrial development. However, much less attention has been devoted to the existing models of cooperation and the characteristics of the agents (i.e. to the incomplete economic restructuration in both the Heilongjiang Province and Russia). The specificity of the Russian market influenced considerably the character of impulses for the region. First of all, Russia introduced a model of reforms preserving soft budget constrains for companies and households based largely on high prices for carbohydrogen resources. After long transitional recession Russian productivity has been growing steadily since 1999. The sources of productivity were not connected with microeconomic restructuring. They included the devaluation of the ruble in 1998, the decline of virtual monetary economy (non-payments, barters) and the increase of consumer demand. The microeconomic restructuration was not finished. The problem of Russia’s economy lies in the discrete and inconsistent gradualist path of development with a very week institutional base. In this case the gradualist path of restructuration cannot guarantee radical changes in the efficiency of the economy and its competitiveness on the international market. The eastern Siberian and Far East regions – sparsely populated and natural-resources oriented – have functioned as the gateway to Russia. The degradation of the industrial base and the social regress (poverty) have changed the quality of life in that area radically. The process of reforms was connected with degradation of the industrial base, mass migration to the western regions of the country and the suppressed development of infrastructure. The unlimited demand for natural resources in the Chinese market actually strengthens the deindustrialization of the region in the conditions of the conservative models of adaptation of industrial structures.

This in turn influences the structure of exportation and importation. The former, i.e. exportation, is dominated by processed medium- and low-quality goods, whereas the latter, i.e. importation – by natural resources. The conditions described above resulted in the fact that the Russian market has become a powerful factor adding up to the continuation of the conservative adaptation strategy employed by the Heilongjiang Province because of the access to inexpensive natural resources and the possibility to retain low wages (connected with mass seasonal migration). Besides, limiting Chinese exportation to low-quality market segments has not required radical changes as regards the technological advancement of enterprises. This proves that the constructive influence of the Russian market on the region in concern needs to be seen in a broader context. First of all, it guarantees a subtle social balance in the region without the need for radical structural changes. It is also important that such a model of cooperation depends on the political situation in Russia and on the Chinese-Russian relations. The dominance of natural resources in Russian exportation to China together with the demonization of the extent of Chinese impact on the development of the region may adversely affect strengthening the economic cooperation in borderline regions. In these conditions opening the Russian market will result from weakening the effects of deindustrialization in Russia, reaching a compromise concerning taking in manpower, and limiting the informal practices of natural-resource trade. That shows that the long-term presence of the Heilongjiang Province on the Russian market is strongly connected with the demand for technologically advanced goods, which in turn requires enterprise restructuration and giving up conservative-adaptation practices – otherwise Russia will become a base for the continuation of conservative adaptation in northern China. On the other hand, the tendency of Chinese exportation to the Russian market showing its aspiration to include more prestigious market segments can generate spurs to the new stage of industrialization of the northeastern region.

Conclusions. The model of transformation without enterprise restructuration has been chosen spontaneously by a statistically significant number of postcommunist-country inhabitants. Thus, it cannot be treated as a temporary problem concerning the unadapted part of the society. It appeared as an answer to the deteriorating social situation and an attempt of entering the market retaining the social responsibility of enterprises understood the non-standard way. It was also connected with considerably high social costs in a sense exceeding the short-term advantages, i.e. wages, not necessarily going beyond the poverty line, informal assets division, barriers for technological transfer and private capital. The popularity of this model also proves the fact that business entities have been trying to retain the achievements of socialist modernization in new conditions. In this context socialist modernization turned out to be a powerful historical circumstance conditioning the gradualist path towards market economy.

The policy concerning the old industrial base needs to consider the accumulative character of obstacles and the «rational» nature of non-market adaptation. Thus, the most important issues include: changing the stimuli, short-term support for the reduced manpower, and promoting technologically advanced exportation. Therefore, changing enterprise preferences seems more important than any improvements regarding ownership. The modernization of the old industrial base connects the problems of technological modernization with the ones related to the enterprise adaptation to the market. Out of the processes of establishing the new industrial center of Northeast Asia the decisive role will be played by the one connected with the uniformization of the enterprise strategic field, since it strongly influences the ability of enterprises to search for innovations and capital. The development barriers of the Northeast China’s old industrial base reveal that the new stage of industrialization requires rooting market strategies in company daily routines. Each next technocratic project that will not take into consideration the specificity of adaptation to the market will run the risk of being unsuccessful.

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