The Importance of TVE’s in China’s Early Economic Reforms

It is a generally accepted fact that the 1978 reforms of Deng Xiaoping centered on intrinsic motivations have contributed greatly to the economic expansion of China and have secured the country’s legitimacy as an economic powerhouse.  This shift has allowed for consumption be classified as the main driver of economic growth.  But what seems to be lost in translation of this significant progress are the micro reforms and entities that contributed to the initial growth of China in the 1980s.  One major reform mechanism utilized early on were the Township and Village Enterprises (TVES, 乡镇企业), which were market-oriented public enterprises under the purview of local governments based in townships and villages in the People’s Republic of China.  It is important to remember that TVE refers to companies located in townships and villages, not owned by township and villages.  This allows us to work under the framework of consumption and intrinsic motivations driving early growth (privatization), and contributes to why the TVEs were successful in China during the 1980s.

TVE have been hailed as one of the wonders of the reforms by Chinese and foreigners alike.  There initial success came at a pivotal opportunity where farmers’ incomes by the mid 1980’s began to stagnate, and the best solution to increase income was to stimulate non-grain and non-agricultural production.  In 1978 TVEs employed amount 28 million people, but between 1984 and 1997 they created nearly 100 million non-farm jobs.  Local governments tended to and fostered the developments of these TVE’s for they saw these entities as regular sources of revenues in resource-constrained environments.  The TVE reforms also allowed for the rural area’s labor forces to more efficiently engage in industrial outputs rather than agricultural outputs.  Even Deng noted the unexpected results, “what took us by complete surprise was the development of TVEs.. All sorts of small enterprises boomed in the countryside, as if a strong army appeared suddenly from nowhere” (Renmin ribao, 13 June 1987).  The results seem quite clear for it fuels individual incentives; the decision to relax the state purchasing monopoly on agricultural goods (a hallmark of Mao’s failed policies) to make them available to local rural industry allowed for the efficient usage of excess rural labor, processed agricultural products, and diversified production of a range of consumer goods and products for export.  Statistically, the results are justified as the growth rate was exponential in its explosives, with rural industrial output growing at 21 per cent per annum from 1978 through the early 1990s.

The presence of a ready labor force that was relatively cheap compared to urban areas was crucial to the expansion of the TVEs.  A tight budget constraint meant that there was greater incentive to produce things for the market that would produce a good rate of return on investment.  The strengths of the TVEs also included their flexibility in production but also their organizational structure (some were ran by the government, but most were not).  As Wong (1988, pp. 3-30) shows, through the 1980s most of the supposedly collective TVEs in practice operated as private enterprises (instead of as collective organizations).  If one looks at ownership, of the 12 million TVEs in 1985, 10 million were private.  Though TVEs maintained a presence in areas such as Southern Jiangsu and along the Pearl River Delta (Shanghai), TVEs were most vibrant in the poorest and most agricultural provinces of China.  The role of the TVEs during the 1980s allows us to generalize that private enterprise has played a crucial role in China’s economic development.  Why they are no longer as relevant in today’s Chinese society is another topic of its own.

 

China Economic Yearbook, 1998

 

Sources Consulted:

Saich, Tony. “Governance and Politics of China”. 4th edition. Macmillan Education, Palgrave. UK. 2015.

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11 Responses to The Importance of TVE’s in China’s Early Economic Reforms

  1. Alden Schade says:

    It would be interesting to explore how private enterprise has evolved from TVE’s to larger corporations. I would be interested to explore how the government has handled the growth of huge companies like tencent and Alibaba.

  2. feldsteinp18 says:

    Its interesting to read how rural reformation contributed to massive changes in the economy and as a result tremendous amounts of economic growth. It is interesting to read this post and compare it with the first section of Country Driving and how Hessler largely portrays a negative scene as it pertains to rural reformation yet in the post above it is positive. I am curious as to why this was so prevalent in the past but has since gone by the wayside. I wonder what will be the next big driver in Chinese economic growth as well.

    • march zheng says:

      Peter, I like your comparison with Hessler in the sense he portrays the negative aspects of rural business through the perspective of ordinary workers. Reading deeper along in Part III of Hessler, however, one can see that rural areas has also provided the opportunity for certain individuals to capitalize on business opportunities (people of Wenzhou in China are famous for their business skills- noted in Hessler). This would not have happened without the central Chinese government promoting private incentives, a similar driver that drove growth for the TVE’s early on.

  3. gristt18 says:

    Mac, this is really fascinating. I wonder why the TVEs were so successful in the first place. Were there loose regulations that allowed them to flourish? The numbers you cite are pretty remarkable, and I think it would be really interesting to analyze what, exactly, about the TVEs made them so successful. Obviously a large labor force and shift in focus to intrinsic motivation that you note are extremely important, but I bet there are other explanatory variables that add to the picture.

    • march zheng says:

      There definitely are more variables that account for the bigger picture. The TVE’s ultimately were a micro aspect of the overall reforms, and the numbers are cited are hard data directly from the book I used. Since China is decentralized in the sense that local secretaries have direct control over their counties, I am willing to bet regulations were really loose in the beginning as there were political profits as well. Maybe that is why Xi Jinping is trying so hard to crack down on corruption (corruption mainly in the formal of local politicians profiting significantly from private business entities). Just a theory.

  4. sackettm18 says:

    I think that it is easy to see why these small enterprises were initially so successful: China, pre-reform era, was essentially existing in a stagnant economic vacuum. There was bountiful labor, natural resources, and bright minds (human capital) eager to produce and create. With the relaxation of communist economic planning, TVEs and similar economic agents rushed into fill that void. The incentives for enterprising entrepreneurs revealed themselves to be within reach and the young market grew to reach them.

    If I was to guess why these TVEs are not as relevant today, I would guess that it has something to do with the natural progression of young market economies; a lot of the economic growth in China today is being driven by powerful corporations that hire thousands. Also, what makes these TVEs unique is the “collective” ownership which defined them from a regular small business. TVEs might have been a halfway point between communism and true private business, which would flourish soon after.

    • march zheng says:

      I definitely agree that larger, more powerful corporations now drive China’s economic growth. And I do think that TVEs might have been a halfway point between communism and true private business business etc. I think really what the TVE shows is the power of the invisible hand, and that the Chinese people had the vision to profit and expand their individual businesses.

  5. bonesc18 says:

    This is really interesting. We hear about urban growth in China so often because it’s shocking. These urban centers are really like few other places in the world in terms of size and output. I think we spend so much time reading about them because we’re truly marveling at what we don’t have–particularly given that they are fairly centrally planned in most cases. On the other hand, nearly every country has rural areas that take a fairly similar shape. Sure their outputs and structure (small town or village) may look a little different, but when you read about a rural area anywhere in the world, you pretty much know what to picture. That’s what makes China’s rural development so fascinating. It seems like uncharted waters. In a way, this is why those of us in the West were so shocked by China’s boom outside of urban centers. We simply did not know what to expect. While the era of the TVE has passed, I think the lesson remains; we shouldn’t marvel at the urban while ignoring the complete picture. Rural development is incredibly important, particularly in resource rich China (hydroelectric in this case).

  6. masonw17 says:

    Whereas earlier parts of Reform and Opening were basically limited to Special Economic Zones, it seems like TVE’s were unique able to mobilize the much more populous rural areas towards the goal of rapid economic development. As we have seen in Hessler pt. III, these rural laborers continue to drive China’s economic expansion as they move from rural regions of Northern and Western China to the booming East coast. As always, China’s massive population has been on of its most powerful tools on the path to economic development.

  7. knapkes18 says:

    The establishment of TVEs is another example of China’s extraordinary ability to reorient and expand its economy at staggering rates. The Deng Xiaoping quote you cite encapsulates this phenomenon perfectly. Labor previously unused for industrial production allowed TVEs to quickly grow into a powerful engine of economic growth seemingly overnight. It seems that the stability of industrial production worked as an effective incentive for many rural Chinese to forgo their lives as farmers subject to weather patterns and stagnant prices. Based on this post, TVEs success is due largely to a massive untapped population and perfect timing.

  8. the prof says:

    Most TVEs made goods / provided services to people in their vicinity. They included brickmaking, food processing (noodles), transport, construction and many other activities. Some were begun through the initiative of village leaders, that is, local government. Some were sponsored by local government (including investment funds). Some were private in practice even if on paper they were (local) government owned.

    Under Mao political winds changed quickly, and people remembered that. So few local entrepreneurs wanted to shout out that they were running a private business (which was not officially permitted). Even today it is hard to tell whether a small SOE (state-owned enterprise) is really state-owned or is just a private enterprise borrowing legitimacy.

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