Rural Engine Powers Market Reform

Millions of small, market-driven factories have sprung up in villages since China began breaking up Mao Zedong's communes in 1979. This grass-roots industrialization has social and political consequences that reach far beyond the village. RURAL ENTREPRENEURS TAKE ROOT

NOT long ago, the lives of villagers in Deji commune heeded an ancient rhythm of sowing and reaping that flowed as inevitably as the muddy Yangtze River a mile to the north.

Today, the once-isolated land of rice paddies and canals buzzes with joint-venture factories, pickup trucks shuttling down paved roads, and crowded markets where villagers flaunt city fashions and unprecedented wealth.

China's agricultural reforms are changing the face of thousands of rural communities like Deji with an astonishing speed, condensing to less than a decade a social transformation that took centuries in Europe.

The engine of this change, here in southern Jiangsu Province and across China's vast countryside, is rural industry.

Millions of small, market-driven factories have sprung up in villages since China began breaking up Mao Zedong's communes in 1979. With the return to more productive family farming, only half the rural workforce was needed to till the land, unleashing a huge surplus of 200 million peasants. Soon the idle labor, along with savings generated by a tripling of rural incomes, began flooding into new enterprises.

This grass-roots industrialization has consequences that reach far beyond the village:

* Socially, it is blurring the historically stark contrast between city and country life.

* Economically, it is speeding China's modernization and its shift from a centrally planned to a market system.

* Politically, it is replacing Marxism with the profit motive, as Communist Party cadres take the helm of village-run corporations.

China's transition to a modern, industrial economy would be impossible without such vibrant firms able to absorb growing numbers of rural jobless, according to World Bank researchers and Chinese officials. The 18.5 million rural enterprises now employ 96 million people and account for a quarter of China's gross national product (GNP). By the year 2000, they are expected to provide 150 million jobs and up to 50 percent of GNP.

Small factory towns springing up from villages in Deji and other prosperous rural areas along China's coast play a major role in stemming a mass migration to cities by peasants seeking lucrative work. "Leave the land, but not the village. Enter the factory, but not the city," goes a favorite slogan of local officials.

Instead of walking to the fields each morning, most Deji residents bicycle or ride to factory jobs. Families till small plots in the morning and at night, except during brief "busy seasons," when schools and factories close for a few days of planting or harvesting.

Farming is the main occupation for only 20 percent of the population of Zhangjiagang, the county-turned-city where Deji is located, compared with 80 percent in 1979, says China expert David Zweig. Professor Zweig of the Fletcher School of Law and Diplomacy in Medford, Mass., is doing research in Zhangjiagang.

The new factory workers quickly embrace urban lifestyles. In Deji, women pat on make-up while men sport wavy hairstyles and Western suits.

"When you walk down the street here, you can't tell who's a farmer and who's a city dweller - until they open their mouths," says Zou Jianming, deputy secretary of Deji's Communist Party committee.

Rural enterprises also are a major force propelling reform of China's rigid, centrally planned economic system. Operating in the free market and outside the planning apparatus, the leaner, more flexible rural firms are out-competing China's stagnant state industries.

From 1985 to 1990, rural industry expanded production at more than twice the rate of state-run factories, and now accounts for a third of China's industrial output. By far the fastest growing rural firms are those that are privately owned. Their output mushroomed 10-fold from 1985 to 1990, according to government statistics.

"As the new rural system develops, it will gradually eliminate the state system," says Du Ying, deputy director of the Agriculture Ministry's Rural Economy Research Center.

Finally, the rise of market-oriented businesses is transforming party rule in China's villages. It is compelling local cadres to support a more open, competitive society that is undermining Marxist ideological controls.

China's township governments, formerly called communes, rely on rural enterprises for an estimated 60 to 80 percent of their revenue on average, according to the Ministry of Agriculture. In 1990, township- and village-run rural firms handed over 45 percent of their profits to fund basic needs such as education, welfare, and roads.

If local officials fail to manage rural enterprises well, township finances and the whole community's livelihood suffer. Villagers complain. And officials personally may lose pay, bonuses, as well as informal perks such as banquets, housing construction, and "gifts" paid for by the rural firms.

As a result, capitalist-style business acumen is replacing loyalty to Marxism as the prime criterion for promotion within grass-roots cadres. The gold-embossed namecards of rural officials often gleam with the titles "chairman of the board" or "general manager," but leave off Communist Party or government posts.

Narrow-minded peasant cadres unable to adapt to the more competitive, corporate climate are being outshone by a new rural elite of rich, well-traveled entrepreneurs, Chinese sociologists say. In many areas, grass-roots governments are recognizing the informal power of neng ren, or "talented people," as villagers call them, and recruiting them.

Despite the importance of rural enterprises, political intrusions by Beijing and local bureaucrats may hamper their long-term development.

Conservative party leaders attack the rural firms as "capitalistic," while parasitic grass-roots cadres siphon off their profits. The livelihood of 1.1 billion Chinese depends on whether these hindrances can be overcome through further reform, Chinese officials and Western experts say.

Party hard-liners in Beijing have repeatedly attempted to restrict the growth of rural enterprises, which they view as "capitalistic," corrupting, and dangerous competition for state-owned industry.

"The leftists [conservatives] think rural enterprises have seized the rice bowl from state enterprises, so they dislike them," says a retired, high-ranking agricultural official.

Conservatives charge that rural entrepreneurs bribe city officials to obtain scarce raw materials at low, fixed prices.

Reformers admit the corruption exists. But they contend that rural businesses are victims of discriminatory policies that deny them access to large stocks of cheap raw materials set aside for state-run industry.

In late 1988, hard-liners took advantage of an austerity drive to clamp down hard on rural firms, cutting off new loans, tax breaks, and access to raw materials.

As a result, 3 million firms closed down in 1989, official statistics show. Meanwhile, conservative calls to strengthen central planning gave jealous state bureaucrats an excuse to seize large numbers of the lucrative rural companies, according to Ping Xin, deputy director of the Agriculture Ministry's Township Enterprise Bureau. (Tianmen takeover, below.)

The crackdown proved short-lived. By 1990 a deepening recession forced Beijing to ease the retrenchment and rural enterprises bounced back with resilience. Entrepreneurial output rose 22 percent in 1991 and 36 percent in the first quarter of this year, far outpacing state-run industry.

Nevertheless, the fears of peasant entrepreneurs persist, blunting their initiative and autonomy. Many rural firms are relying increasingly on local governments to defend their hard-won assets against attacks from above. But the protection comes at a high price: the loss of significant financial and managerial leeway to town and village bureaucrats.

"Many rural entreprises are in fact `enterprises of rural cadres.' There is no separation between government administration and company management," says the former high-ranking agriculture official. "Rural enterprises are a good place for cadres to find jobs for their children, and to get reimbursed for wining and dining."

One way to stem the official abuse of rural enterprises is to formalize and clarify peasants' property rights, Chinese experts say.

Under Mao's communes, peasants were forbidden to own property or make money with it. But 13 years after China began dismantling the communes and redividing the farmland, the country's 230 million peasant households have emerged as major property-owners and investors.

Today, the private property of peasants, including the assets of privately owned rural firms, is estimated at $180 billion and is growing at a rate of 10 percent a year, according to official estimates.

Nevertheless, in many rural communities, a weak legal system offers inadequate protection for peasant property rights, the experts say.

"Peasants are especially worried that the collective will confiscate their property," says Chen Xiwen, deputy director of rural development at the Development Research Center that serves China's Cabinet. Farmers slaughter their livestock, chop down trees, and sell off assets to keep them from the government, he says. To halt such practices, the government "must affirm that peasants can own property and earn income from it."

Shareholding, say many Chinese officials, is the best way to secure the property rights of peasants who invest in rural enterprises. Already, 10 to 20 percent of all rural firms have adopted some form of shareholding, many of them in Wenzhou, Zhejiang Province. (Wenzhou model, Page 11.)

"Shareholding can enable rural companies to evade bureaucratic subordination and control," including the random expropriation of profits, says Duan Yingbi, director of the Agriculture Ministry's Rural Economy Research Center.

In the long run, however, the success of shareholding experiments will depend on the further expansion of China's market economy and on political reforms that make the leadership accountable to the law.

"In China, `men rule, not the law,' so peasants lack faith [in government guarantees]," says Mr. Chen, citing a Chinese adage. "What we need most is a stable system."