Ivan Szelenyi and Eric Kostello_The Market Transition Debate: Toward a Synthesis?

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The Market Transition Debate: Toward a Synthesis? Author(s): Ivan Szelenyi and Eric Kostello Source: American Journal of Sociology, Vol. 101, No. 4 (Jan., 1996), pp. 1082-1096Published by: University of Chicago PressStable URL: http://www.jstor.org/stable/2782241Accessed: 18-10-2015 03:52 UTC

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The Market Transition Debate: Toward a Synthesis?l

Ivan Szelenyi and Eric Kostello University of California, Los Angeles

THE THEORY OF MARKET TRANSITION In his seminal 1989 article, "A Theory of Market Transition," Victor Nee offered a new theory of social inequality and applied it to the study of the problem of transition from state socialist redistributive economy to market capitalism. Nee claimed that the emergence of markets in state socialist redistributive economies had unexpected consequences. The most privileged stratum or class of state socialism, the redistributors, lost some of their privilege, while those at the bottom of the state socialist hierarchy, the "direct producers," benefited (for earlier formulations see Szelenyi and Konrad [1969], Szelenyi [1978], and Whyte [1984]). As a result, inequality, as measured by income or access to scarce goods, was reduced. Nee's theory identified the mechanisms by which markets generated equality under redistributive systems: if wages are not administra- tively set, but established by transactive relations, then producers are likely to have more power (market power); if markets operate, then human capital is likely to be rewarded more while political loyalty is likely to matter less (market incentive); if there are markets in a redistributive economy, then entrepreneurship becomes an alternative avenue of socioeconomic mobility (market opportunity; Nee 1989).

Data collected in 1985 in rural China offered support to the theory of market transition. Between 1977 and 1985 overall income inequalities in China declined: the income gap between urban residents and farmers shrank; the income gap in the countryside between peasants and cadres also narrowed. The decline of inequality arguably was the result of dereg- ulation of state policies in agriculture. After 1977, Chinese peasants re- ceived land, their production targets were less strictly regulated by plan- ners, and they were allowed to bring their produce to urban markets. As

1 An earlier version of this paper was presented at the conference, The Market Transition Debate: Between Socialism and Capitalism, held at the Center for Social Theory and Comparative History at UCLA, May 22, 1995. We are grateful for the comments of the conference participants and Robert Brenner, Rebecca Emigh, John Logan, William Mason, and Victor Nee. Direct correspondence to Eric Kostello, Department of Sociology, University of California, 264 Haines Hall, Los Angeles, California 90095-1551. E-mail: [email protected]

? 1996 by The University of Chicago. All rights reserved. 0002-9602/96/10104-101 1$01.50

1082 AJS Volume 101 Number 4 (January 1996): 1082-96



Symposium: Szelenyi and Kostello

a result they expanded production, increased their productivity, and their incomes and living standards increased rapidly.

In 1991 Nee published another influential paper, "Social Inequality in Reforming State Socialism." In this article Nee further analyzed the 1985 data and found that some cadres retained their privileges despite the emergence of markets. Nee did not believe, however, that these facts contradicted his initial theory. The 1989 article did not offer a periodiza- tion of market reforms and so left unexplored the question of whether the equalizing effects of markets characterize only certain epochs of market reform or whether they are universal characteristics of marketization. But here, Nee did distinguish different stages of market penetration and introduced the idea of partial reform. In Nee's view sustained cadre privileges was attributable to the partial character of the reform in China during the early 1990s. As reform progresses-according to Nee's 1991 statement-cadre privileges will be undermined. The implication is that the inequalities of state socialism will be overcome.

Nee's 1989 article generated a lively exchange of views among scholars of China (Bian and Logan 1995; Huang 1990; Lin 1995; Oi 1992; Walder 1992) and Eastern Europe (Stark 1986, 1992; Rona-Tas 1994); we refer to this as the market transition debate. While we pay special attention to articles published in this issue, we also try to summarize the market transition debate as it has unfolded since 1989. It is a debate that has been, at times, acrimonious. We suggest that at least one of the sources of acrimony is a lack of specificity about the domain-the concrete socioeconomic conjunctures-that the hypotheses are applicable to. In this paper-in order to identify such conjunctures-we distinguish between three types of market penetration; we hypothesize that little disagreement remains among the participants once they specify which type of market penetration their findings or hypotheses are derived from or applicable to.

MARKET TRANSITION CONTROVERSIES Three main questions have been at the center of the market transition debate. First, what is the relationship between markets and inequality? Second, do former or current cadres benefit from market reform? Third, are theories of transition teleological? The three papers that constitute the core of this symposium embody one or more of these controversies.

Markets and Inequality There is substantial evidence that the overall degree of income inequality did indeed decline slightly following the introduction of market reform.

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American Journal of Sociology

However, there is also evidence that it began to increase not long after. Data from Eastern Europe and China show a similar pattern: well before a full-fledged market economy is in place, inequality will be higher than it was during the classical model of state socialist redistributive economy. In Hungary inequality fell after 1968 and reached its lowest level some- time around the early 1980s; it then began to climb soon after. In China, the first five years or so of post-1977 reforms produced a slight decrease of inequalities, but since the mid-1980s Chinese society has becoming increasingly inegalitarian.

The existence of an early decline and later increase of inequality is accepted by all sides in the debate. Does the early decline of inequalities support market transition theory? Does the later increasing inequality falsify it? There is little consensus in answering these questions. The controversy then, is over, (1) the cause of the early dip in inequality and (2) the point at which inequality begins to increase again.

The initial decline of inequalities.-The cause of the initial, more egalitarian distribution of income is far from obvious. There are two competing hypotheses. One attributes the change to new market opportunities; the other to fairer state redistributive policies. Szelenyi (1978) and Nee (1989) believed that the initial decline of inequality was a result of market penetration. In contrast, Bian and Logan (1995) suggest that post-1977 egalitarianism in China was the result of state redistribution that sought to buy political peace for market reform by increasing the lowest incomes. Later increases in inequality-so they argue-should be attributed to market penetration.

Why does inequality increase later?-The next disputed question is, What is the turning point in the trend of income inequalities? Is market transition theory challenged by the observed increase in inequality after the initial decline?

The change in inequality is not simply a function of an increase of the markets which first appeared; rather, it is a function of the appearance of markets-such as markets for labor-where they did not exist before and the appearance of new participants. Thus it is important to have clearly defined criteria about the kind of market penetration likely to produce specific social outcomes. The evidence at our disposal suggests that markets have equalizing effects just briefly, when the socialist economy is still dominant. As market penetration continues it becomes more likely that markets exacerbate inequality.

We contend that to understand this U-shaped pattern, it is necessary to specify precisely the institutional conditions under which markets increase or decrease inequality. The questions are markets for what? What are the property relations that set the parameters of functioning of those markets? And, what are the class relations-who are the social actors

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struggling to affect economic outcomes under the given market conditions and property relations? It is not particularly useful to ask whether markets are egalitarian or inegalitarian. Markets as such and redistribution as such do not have inherently egalitarian or inegalitarian outcomes. Their social outcomes depend on the broader macroinstitutional settings in which they are embedded.

Cadres and Markets

One of the most sensational issues in the market transition debate is whether current or former cadres benefit or lose from reforms. It is clearly related, but not identical, to the more general question of changes in overall inequality. Sometimes it is a question of absolute returns to cadre status, especially when there is negative growth, but typically it is a controversy about relative gains.

According to Nee's critics, market transition theory claims that, as market penetration continues (and they understand this process as a lin- ear, evolutionary process) "direct producers" benefit, cadres and former cadres lose out, and return on human capital becomes more and more important to explain who will obtain higher income. Researchers over the past few years have presented evidence that former cadres are the main winners of market transition (Hankiss 1990; Staniszkis 1991; Szalai 1990; Szelenyi and Szelenyi 1990; R6na-Tas 1994); that there is positive association between cadre position, cadre connections, and high incomes (Bian and Logan 1995); and, finally, that return to human capital is negatively related to the degree of market penetration as measured by differential dynamics of economic growth in different regions, but that economic growth does not change the differences in incomes for party members and nonmembers (Xie and Hannum, in this issue). However, in his analysis included here, Nee finds that former cadres do not benefit from cadre status with the establishment of markets when other factors are controlled for. We argue below that these differences stem from disagreement about the type of market penetration as well as how to account for the affects of growth.

Is Market Transition Theory Teleological? This controversy is probably the least clearly articulated in the market transition debate, but it is potentially an important metatheoretical difference between market transition theory and its critics. The very idea of transition was challenged by David Stark (1992). Stark rejected the notion of transition as teleological, since it assumes that postsocialist societies are prog- ressing towards a well defined end-some clear, or ideal, type of market

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capitalism. A transition theory measures the degree of "success" of transition by contrasting concrete East European or Chinese economies with pure models of market capitalism. Those who subscribe to such ideas believe it is possible to "build capitalism by design." Instead, Stark suggests that socioeconomic change under postsocialism should be understood as a path-dependent transformation, a process of readjusting existing institutions to the changing socioeconomic environment.

The question of whether to assume evolutionary or involutionary (Huang 1990) characteristics of postcommunist or late socialist socioeconomic change is a metatheoretical issue, not testable by the means of empirical social science. Even without Stark's work on recombinant forms in Hungary included here, we would prefer not to use an evolutionary framework because it precludes making discoveries about possibly new social phenomena and reduces all such variation onto a single scale with socialism at one end and capitalism at the other. If it is indeed the case that the socialist societies will become or already have become capitalist it should be an achievement of the theory and empirical research, not an assumption.

Because of the limitations of space, in the concluding section we present our hypotheses about the social implications of market penetration of redistributive economies, and we focus our attention on the question of the degree of inequalities and explore who benefits from more markets and under what conditions. The scheme we present below is informed, however, by the debate about evolution/involution, or teleology. Since we are still doubtful about the empirical accuracy of teleological assumptions (see Szelenyi 1988, 1990), we do not write here about stages but about types of market penetration.

DYNAMICS OF INEQUALITY CREATED BY MARKETS: SOCIAL IMPLICATIONS OF THREE TYPES OF MARKET PENETRATION

Do markets create equality or inequality? And, do cadres, direct producers, or ordinary workers benefit from increasing marketization? We believe these questions are too vague to be useful.

The questions we should pose are, Which types of markets and market penetration are likely to have compensatory effects on inequalities? Under what circumstances will certain social actors be the winners or losers? What are the institutional arrangements of markets and redistribution? What are the class capacities of actors who are the likely winners or losers? Posing these questions fosters empirically testable research hypotheses. We present a typology of market penetration and attempt to identify as concretely as possible the actors in each type of economic subsystem.

We distinguish three types of market penetration: (a) local markets in

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redistributively integrated economies, (b) socialist mixed economies that feature the coexistence of market and redistributive system under the hegemony of redistribution, and (c) capitalist-oriented economies with the stated aim of the establishment of market capitalism and the elimina- tion of state socialism. Below we elaborate what these types are, how markets in each type effect inequalities, and who the social actors are who gain or lose in each type. Again, we are not suggesting that the types we present can be arranged in some necessary evolutionary sequence, and we do not assume that progress from one stage to the next is inevitable, necessary, or desirable.

We distinguish the three types of market penetration by describing the institutional characteristics of each type. We pay particular attention to the kind and combination of market institutions in place in each type. In table 1 we offer hypotheses about the characteristics of three different market institutions in different socialist and postcommunist countries. Market reforms usually begin with petty commodity markets: producers are allowed to sell products or services in places where prices are regulated by supply and demand. Such commodification of consumer goods and services can go a long way, while allocation of factors of production-labor and capital-remain redistributive. The greater the proportion of deregulated prices (prices set by the mechanisms of supply and demand), the more highly developed commodity markets are. In Marx's terms, labor markets exist when actors are legally free to sell their labor power and are also compelled to do so by virtue of their separation from the means of subsistence. The more the price of labor is set by supply and demand, the more developed the labor market is. Capital market refers to the allocation of capital goods. In a socialist redistributive economy, surplus is typically first appropriated then allocated by central plan- ners through budgetary means. Reduction in the proportion of state- regulated investment is an indicator of the making of capital markets. In capital markets competitive investors allocate capital goods in expectations of higher returns on their capital investments. Following Polanyi (1957) we call an economy market integrated, or capitalist, when labor and capital markets are the dominant allocative mechanisms. If labor and capital are primarily redistributively allocated, commodity markets only constitute what Polanyi called local markets.

Local Markets in Redistributively Integrated Economies Local markets in redistributively integrated economies can be observed in Hungary and Poland from the mid-1960s until around 1980 and, with some differences from the East European cases, in China between 1977 and the mid-1980s. The emergent local markets were usually for food

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and services and were peripheral to the economic system. They were highly insecure; activity in such markets often bordered on the illegal, so that participation was risky. Production required little skill and very rarely any credentials. The typical actors in such markets were peasants and peasant-workers. Thus, the producers in these markets were those unskilled or semiskilled industrial workers who in Eastern Europe had been forced out of full-time peasant existence and had to take urban industrial jobs but who remained in their rural residences close to the sites of agricultural production. Under these circumstances local markets were likely to have equalizing effects (Szelenyi and Konrad 1969; Szelenyi 1978). Actors who produced for local markets, while rarely at the very bottom of the society, were usually fairly low in the social hierarchy.

These facts are consistent with most of the expectations of Nee's 1989 market transition theory: direct producers under the conditions of local markets in redistributive economy do indeed have some "market pow- ers" and certain "market opportunities." Under the conditions of local markets the expectation of market transition theory that "redistributors" were likely to experience a change in relative fortunes also seems to be true. Indeed, cadres soon became very resentful as they saw actors in the second economy, especially those with low levels of education, sometimes earning higher incomes than local cadres themselves.

In brief, under the conditions of local markets, most of the predictions of market transition theory seem to be accurate. Only the hypothesis concerning higher return to human capital seems to be incorrect-though as Xie and Hannum point out above, this hypothesis is internally incon- sistent anyway. It is implausible to argue that returns to human capital increase at the same time that the degree of inequality declines. Indeed the initial decline of inequality was followed with a decline on return of human capital. As table 2 shows, Nee (1989) and Szelenyi (1978, 1983) offered hypotheses that were derived from economies in which local markets were expanding, but the allocation of labor and capital remained primarily redistributively regulated.

Socialist Mixed Economies In Eastern Europe between 1980 and 1989 and in China after 1985 a new type of market penetration emerged. The crucial change of circumstances was that private economic activities became legal (or nearly so).

Under the conditions of the socialist mixed economy (Stark and Nee 1989; Szelenyi 1988) a new, more heterogeneous set of actors entered the marketplace. As market competition began to play a greater role and risks decreased, better qualified people entered business activities-those with more to lose but also more to gain. Some of the early pioneers, the

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least educated and socially most marginal, were pushed aside or wiped out altogether.

Some cadres also oriented to markets. In particular, some members of the technocratic fraction of the cadre elite began to build bridges to the emergent new private economy (Manchin and Szelenyi 1987). They "com- modified" their bureaucratic privileges. For example, some early capital accumulation was possible in the emergent new real estate markets.

Thus, in a socialist mixed economy, the market is far from a simple, compensatory mechanism. Even though some relatively uneducated, low-income groups can still benefit from the secondary markets of a still-dominantly redistributive economy, a socialist mixed economy can more accurately be described as a dual system of inequality (Szelenyi 1988; Walder 1995).

There is additional controversy evident in the papers of Nee and Xie and Hannum over economic growth in this type of economy. It is unclear how to separate the effects of growth when measuring differential gains after reforms are implemented. In this discussion, Xie and Hannum use economic growth as a proxy for reform, which means that their findings about reforms are findings about the effects of reforms that are successful at producing growth. Thus, as they point out, they are not able to draw conclusions about the relationship of income inequality to the intention to reform, although an advantage is that their results are not limited to "market" reforms. Still, they are not able to resolve whether acts or effects of reform are more important to differential income gains.

While Nee's paper is critical of this approach, we believe he may be in a similar position. Nee uses the logged number of "market dependent" firms as an indicator of the level of marketization, and thus of reform. (He combines private with cooperative firms-a convenient, but teleological action. In addition, he does not explain why he does not normalize this variable, and that lack of normalization calls into question the validity of the results that depend on it.)2 This measure (production market), however, is surely related to economic growth since reforms precisely are able to bring about forms of enterprises that were not possible when only local markets were allowed. When starting from a very low level, the difference between growth and the absolute level is likely to be minimal. Nee attempts to control for growth itself by using the level of industrial output, but it is unclear why growth in industrial output was not used.

2 As does the fact that an aggregate version (community income) of the dependent variable (household income) appears on the right-hand side of the equation (this problem crops up again in the model for determinants of nonfarm job, which uses "labor market" as a contextual variable). Without reassurance that the possibility of corre- lated errors between the micro and macro levels has been investigated, it is necessary to withhold judgment on the usefulness of the results.

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In China, growth has been positive and the controversy has been about who has a higher rate of return from different activities. In Eastern Europe growth has been low or negative and the question of who has suffered a worse drop arises. We are unsure how to solve the problem of the relationship between growth and inequality in either of these two cases. The effect of growth needs to be controlled for, but reforms are indeed implemented very much with the goal of spurring growth in previ- ously stagnant economies. The high growth rates that occur in all three sectors of China's economy indicate clearly that growth is not simply a function of how much of the economy is officially market oriented.

Both for theoretical and empirical reasons it is vital not to conflate the measures of economic growth with the type of market penetration. This is particularly important in analyzing economic change in China today. China's economic growth is still in the extensive stage of development, and its large population resources may enable an extensive growth strategy to be carried on for a long period of time. It is not that surprising, therefore, that Xie and Hannum find underdeveloped labor markets (and, consequently, low return on human capital) in rapidly growing areas of China. This finding is consistent with the historically observable capacity of socialist mixed economies to grow under the condition of extensive development.

We believe that most of the recent literature on market transition in China accurately describes the characteristics of socialist mixed economies (see table 2). Walder (1992, 1995), Oi (1992), Bian and Logan (1995), and Lin (1995) capture the coexistence of market and redistributive mechanisms and the resulting duality of the system of social inequalities. If we interpret Nee's concept of partial reform this way, Nee's contributions (1991, in this issue; see also Nee and Peng 1994) can also be read as demon- strating the duality of inequalities under hybrid property forms and in an economic system where both markets and redistribution operate.

If Nee's theory of partial reform implies that further reform-and thus the ascendance of markets to the dominant mechanism in allocating labor and capital-leads to gains by direct producers and losses (even if only relative) by cadres or former cadres, then it is likely to be wrong. Empirical evidence from postcommunist Eastern Europe seems to suggest that extrap- olating trends from local markets or from socialist mixed economies into capitalist-oriented economies is likely to be inaccurate and even misleading.

Capitalist-Oriented Economies

After 1989 in Eastern Europe a very different type of market penetration took place, one that does not appear in China. The unique feature of East European development after 1989 is that it does not simply allow

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or encourage the growth of new private sector. In all East European countries, the privatization of the public became state policy after 1989. In China the public sector is maintained. Stark's work in Hungary continues to undermine any assumptions that these changes will automati- cally bring about a market-coordinated society. Stark also demonstrates that Walder's (1994) distinction between property reform and privatization holds as much for Hungary as it does for China. However, without assuming that the new capitalist orientation will bring about capitalism, we contend that it qualitatively changes the dynamics of market penetration in postcommunist societies.

How privatization plays out depends to a significant degree on the class capacities of actors involved in postcommunist social and political struggles. In Hungary and Poland the technocratic fraction of the nomenklatura has been quite powerful and has succeeded in establishing close ties with the emergent new postcommunist political elite. Hankiss (1990) noted as early as 1988 that spontaneous privatization is a strategy of the cadre elite to establish itself as the new grand bourgeoisie (see also Stan- iszkis 1991). He proved to be mostly correct (Rona-Tas 1994). We would only add that, in order to understand this process precisely, we need to make a distinction between the old and new elite of communism- between the bureaucracy and the technocracy. While it is quite true that the command positions of the new corporate sector in Poland and Hun- gary are held almost exclusively by the members of the old technocratic elite (about 90% of the managers of the 3,000 or so largest firms in these countries come from former management) it is also true that the old bureaucratic elite lost big. About half of those who managed the largest firms in 1988 in Hungary and Poland were by 1993 out of elite positions (Szelenyi and Szelenyi 1995).

Can we conclude that, in capitalist-oriented economies, markets are a major source of new inequalities and the former cadres are the winners? For the first part of the proposition the answer is yes. Inequality is growing rapidly and generated primarily by markets. Those still reliant on the redistributive mechanism rapidly lose ground.

The answer to the second part of the proposition is more complex. First of all, it is simply untrue that the cadre elite converted their old privileges into new ones. As we pointed out before, a substantial fraction of the old elite are losers by any measure. Furthermore, when we consider who the winners are we need a more complex theory.

Hanley (1995) pointed out that in capitalist-oriented economies there is evidence of the formation of not one, but two new classes in the top or middle of the social hierarchy: a new corporate bourgeoisie and a new petty bourgeoisie. Hanley also presents robust data to show that the recruitment process into these two classes is quite different. The new

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corporate bourgeoisie is likely to come primarily from the technocratic fraction of the old nomenklatura; the new petty bourgeoisie on the other hand is more likely to be recruited from the former middle and lower middle class.

In short, the big winners of market penetration in capitalist oriented economies are members of the former technocratic elite; descendants of the precommunist middle class also benefit, as do those who entered the second economy during late socialism. The big losers are the bureaucratic fraction of the cadre elite, the poor, and most workers. Workers who were employed in those sectors of the economy that were the most heavily subsidized by the redistributive mechanisms (e.g., the highly skilled workers in heavy industries) are certainly losers. Some workers, those with marketable skills in the restructuring postcommunist economies, can benefit from the increasing competitiveness on the labor market.

CONCLUSIONS After distinguishing the different types of market penetration, little disagreement remains among the participants of the market transition debate. First, all participants are likely to agree that markets have an equalizing effect only as long as markets are those we defined above as local. As markets penetrate the economy more deeply, they became a major source of social inequality. Second, all participants seem to agree that "direct producers," in particular ordinary people, benefit from market penetration under the conditions of local markets. When capital accumulation becomes possible in socialist mixed economies, cadres, former cadres, and members of precommunist elites begin to enter into and gain from market transactions. Thus a dual system of inequality emerges. Third, there is little disagreement concerning the social consequences of postcommunist transformation in Eastern Europe after 1989: researchers tend to agree that the technocratic fraction of the cadre elite is the main beneficiary of this transformation. It uses the policy of privatization as a mechanism of "primitive accumulation" of capital. It converts public property into its own private wealth, even though there can be ambiguity in the newly emergent forms of private property. Other players of the economic system-in particular those who invested in market transactions in earlier times-are pushed out of (or marginalized in) the newly emergent markets.

To what extent contemporary Eastern Europe is the future of China remains unclear. This is a question, however, beyond the scope of empirical social research. At this point we suggest the following: if the communist state begins to disintegrate before a new bourgeoisie has a firm grip on the command positions of the new economy, it is likely that the Chi-

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nese communist elite will not behave differently from its East Euro- pean counterparts: it will try to grab as much from the public good as it can.

The window of opportunity to change positions in social spaces, to counteract effects of inequality, is a narrow one. It is limited to the time of transformations. As a new social order settles, it is likely that those who are on the top will find themselves able to maintain that position, and those at the bottom will end up on staying there as well. Change is the exception and reproduction the rule of social orders, be they communist or capitalist.

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Ivan Szelenyi and Eric Kostello_The Market Transition Debate: Toward a Synthesis?

Documents

theory of market transition

market capitalism

market incentive

power market power

problem of transition

urban markets

state socialist hierarchy

income gap