Township and Village Enterprises

Although Chinese leader Deng Xiaoping was reported to have said that TVEs "appear(ed) out of nowhere" in 1987, the industrial development in rural China could be traced back to as early as 1950s.[1] During this period, rural enterprises, often with names "commune and brigade enterprises" and of neglectable size, served as a supplement to those state-owned enterprises (SOE), which mainly focused on heavy industrial sectors, and were established by the people's communes and bridges to support agricultural production and to produce rural social products for local and domestic needs.[2] The political turmoil between late 1950s and early 1960s, like the Great Leap Forward, at one time halted the development of rural enterprises and some were suspended. Nevertheless, encouraged by the Chinese government to produce rural social goods, the enthusiasm of rural enterprises increased again in 1965. According to official records, the number of rural enterprise was about 122,000 in 1965, and quickly increased to 447,000 in 1970.[3] During this period, however, rural enterprises were restricted to certain industrial and agricultural sections, including the production of iron, steel, cement, chemical fertilizer, hydroelectric power, and farm tools.[4]

Most TVEs emerged during the Reform period in the 1980s (Huang, 2008). There were only 1.5 million in 1978, at the start of the Reform period, and after the State Council of the People's Republic of China first officially used the term "Township and Village Enterprises" in March, 1984,[5] number of TVEs had been over 12 millions by 1985. The reforms of 1978 changed TVEs, which became the most vibrant part of the Chinese economy as they experienced significant expansion in the 1980s and early 1990s. TVE employment grew from 28 million in 1978 to a peak of 135 million in 1996.[6] Likewise, production of TVEs increased to 1.8 trillion yuan in 1992 from 49 billion yuan in 1978.[7] More than half of TVE production in the 1980s occurred in the east coastal and central provinces like Guangdong, Fujian, Zhejiang, Jiangsu, Shandong, and Hunan provinces.[8] In Jiangsu and Shandong TVEs employed some 30 percent of the rural workforce.[9] However, it should be noticed that many TVEs are specialized in the production of labor-intensive commodities without higher technological requirement.[2]

In a strategy which came to be known by the slogan "wearing a red hat," some private entrepreneurs obtained permission from townships and villages to register their private enterprises as TVEs in order to avoid restrictions on the number of employees a small private business could have.[10]^: 97–98

As private ownership became less politically-controversial after the mid-1990s, the TVEs' proportionate share of the national economy declined.[10]^: 99 Many were either privatized or turned into shareholding companies.[10]^: 99

Many of these firms were “collectively owned” in the sense that theoretical ownership rested with the collectives, either as a legacy of earlier sponsorship, or because township and village governments took the lead in establishing new TVEs after the breakup of the agricultural collectives. Ultimate “ownership rights” stayed with the collective, while “use rights” were delegated to managers in collective TVEs. The complexity of this arrangement led to the labeling of collective (township and village) TVE property rights as “fuzzy.” This lack of a true system of property rights collapsed in a short amount of time, as townships and villages expropriated the use rights using their ownership rights.

TVEs referred to the location of the enterprises, as opposed to the ownership structure. That is, TVE never referred to only companies owned by township and villages; rather, TVE refers to companies located in townships and villages. Huang (2008) quotes a Chinese Ministry of Agriculture document from 1984 in support of this: TVEs include enterprises sponsored by townships and villages, the alliance enterprises [private stock companies] formed by peasants, other alliance enterprises, and individual enterprises." Some collective TVEs were notable for their unique ownership and corporate governance setup.[11]

TVEs were very flexible in terms of organizational and ownership structure. While some were run by local governments, others were more genuinely independent in nature. Wong has shown that through the 1980s most of the supposedly collective TVEs operated as private enterprises in practice.[12] In this sense, the use of the term collective masked the privatization of rural enterprise at a time when it was ideologically subversive to some.

TVEs developed most rapidly in locations where central planning had produced poor results, either through shortages or non-useful surpluses.[13]^: 88

Source: China Statistical Yearbook 1999

The hybrid status of TVEs as neither state-owned nor privately-owned provided significant advantages within the reforming economy of China.[10]^: 80 Because they were not state-owned, TVEs were not restrained by state planning policies or price control.[10]^: 80 And because they were not private, they were not politically controversial.[10]^: 80

TVEs also provided local levels of government with revenue opportunities after the reform-era introduced fiscal contracting, a system in which each level of government remitted a specified amount of tax upward to the higher level of government and retained the excess.[10]^: 80 TVE profits, however, could be kept entirely at the local level.[10]^: 80

TVEs are solely responsible for profits and losses, obtain all production factors (capital, raw materials, technology, personnel, and so on) from the market, use independent distribution and supply channels and operated under flexible management with little interference of government, etc.[2]

TVEs thrived from 1978 to 1989, and were largely dismantled between 1989 and 1996. Scholars have given a number of reasons for their success.[14] The political institutional environment favored these “public” enterprises during the early years of reform, since private businesses faced severe restrictions and discrimination in terms of resources and regulations. Also, the fiscal decentralization of the early 1980s gave greater decision-making power to local governments and linked fiscal revenue to the career potential of local officials, creating strong incentives for them to promote these enterprises.[15] The TVEs moved in to take advantage of the gaps left in the market by the State-Owned Enterprises to produce colorful elastic bands, ID card holders, etc. The TVEs benefited from first mover advantage as there was no competition in the early stages from private firms due to restrictions on the markets.[16] The pent-up demand in China for a host of products provided ample profit-making opportunities for enterprises operating at this early juncture. Moreover, TVEs were helped by massive loans from the state banking system.

The TVE sector experienced dramatic changes in 1995-1996 (Huang, 2008). Official hostility toward Chinese entrepreneurship during the period of Jiang Zemin's administration caused many to go out of business, with some estimates suggesting that about 30 percent have gone bankrupt.[17] In addition, there has been a massive trend toward privatization.[18] After the mid-1990s, TVEs were forced to restructure substantially. With increased market integration and competition, official discrimination against TVEs, and official preference for foreign-owned enterprises, TVEs lost their competitive position.[19]

Further, the end of directional liberalism in China encouraged local officials to expropriate the TVEs. As competition intensified and credit became harder to obtain, the collectively owned TVE sector grew in comparison to the privately owned TVEs. Rural industries today are more tied to their local government and community and have taken on new forms and roles (Huang, 2008). One of the most striking developments has been the rise of “industrial clusters” of small firms both competing with one another and cooperating to form a relatively complete industrial chain.[20] Industrial clusters have also emerged in places such as Brazil and Italy.

According to the World Health Organization (WHO) and United Nations Development Programme (UNDP), TVEs in China is responsible for more than 10 billion metric tons of industrial waste water, which is more than half of the total.[21] Worse still, this industrial wastewater directly discharges into the water resource without any treatment and control. Polluted water damaged the environment, causing 10 to 20 million hectares of polluted land by 2001.[21] Furthermore, reports showed that artisanal mines, which mostly are TVEs, leak hundreds of tonnes of mercury annually. In the meantime, as many TVEs were built near the population density areas, these pollutions not only cost damaged the environment but also threatened the population's health nearby. In general, the analysis found that TVEs' area residents have a more significant rate of diseases and a shorter lifetime; the unregulated activities made Chinese rural areas pay a huge price for environmental damage.[21]

TVEs' pollution in China 1995[2]

In response to the climate crisis brought by the TVEs, the government passed a regulation in 1979 that "The transfer of products and production involving toxic and hazardous substances to rural areas is prohibited unless accompanied by the transfer of effective pollution control equipment."[2] The result was unsatisfactory: many harmful activities still existed and ignored the regulation. Moreover, TVEs were based on old and polluted types of equipment that were different from urban spaces, so it was hard to control the pollution due to their locations and large numbers.[2] During the 8th five-year plan, the Chinese government enhanced the policy to deal with the worsening climate crisis. Although the changes focused more on urban cities, TVEs pollution was impacted, especially wastewater.[2]