Township and Village Enterprises (TVEs, ) are rural, industrial and commercial enterprises that played a central role in China’s economic reforms during the 1980s and 1990s.Jean C. Oi (1999) Rural China Takes Off: Institutional Foundations of Economic Reform. Although often described as collectively owned, the term primarily refers to enterprises located in townships and villages in China rather than to a specific ownership structure.Chang, Chun & Wang, Yijang (1994) “The Nature of the Township-Village Enterprise.” Journal of Comparative Economics. Emerging from earlier commune and brigade enterprises, TVEs expanded rapidly after the 1978 reform and opening-up policies, becoming a major source of rural employment and industrial output.Lin, Justin Yifu (1992) “Rural Reforms and Agricultural Growth in China.” American Economic Review. By the mid-1990s, they accounted for a substantial share of China’s non-state industrial production before undergoing significant restructuring and privatization.Barry Naughton (2007) The Chinese Economy: Transitions and Growth. MIT Press. Some scholars characterize TVEs as a transitional form between collective ownership and market-oriented initiatives. Others argue that the functionality of TVEs is more akin to private businesses, even though they were officially labeled as "collective enterprises".
History
Before the Reform and Opening Although Chinese paramount 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. 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. 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. Despite the central government's support, the rise of TVEs was primarily a bottom-up venture driven by peasants and local officials. According to official records, the number of rural enterprise was about 122,000 in 1965, and quickly increased to 447,000 in 1970. 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.Saich, Tony. (2001). Governance and Politics of China. New York: Palgrave.
The Third Front campaign had also contributed to the development of the industrial base and human talent for the subsequent development of TVEs.
After 1978 From 1978 to 1988, township enterprises experienced rapid growth due to the preferential treatment under the "reform and opening-up" policy.
Most TVEs emerged during the reform and opening up 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 China first officially used the term "Township and Village Enterprises" in March, 1984,Huang, Yasheng. (2008). Capitalism with Chinese Characteristics. New York: Cambridge University Press number of TVEs had been over 12 millions by 1985, with collective TVEs employing 41.5 million people and private-run TVEs employing a total of 4.75 million people. 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.Naughton, Barry (2007). The Chinese Economy: Transitions and Growth. MIT Press. This rapid growth and expansion is one of the primary reasons that a capitalist-adjacent venture such as TVEs was deemed as "socialism compatible" by the Party. However, from 1989 to 1991, these enterprises faced challenges due to the blending of government administration with enterprise operations, marking a period of transition and restructuring.
After Deng Xiaoping's Southern Tour from 1992 to 1996, the township enterprises entered a phase of accelerated development and emerged with a new image following the transition and restructuring. TVE employment grew from 28 million in 1978 to a peak of 135 million in 1996.Naughton, Barry. (2007). The Chinese Economy: Transitions and Growth. Cambridge: MIT Press. Likewise, production of TVEs increased to 1.8 trillion yuan in 1992 from 49 billion yuan in 1978.Vogel, Ezra F. (2011). Deng Xiaoping and the Transformation of China. Cambridge: Belknap Press of Harvard University Press. 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.Lin, Jifu Lin, Cai, Fang, and Li, Zhou. The China Miracle: Development Strategy and Economic Reform. Hong Kong: Chinese University Press In Jiangsu and Shandong TVEs employed some 30 percent of the rural workforce. However, it should be noticed that many TVEs are specialized in the production of labor-intensive commodities without higher technological requirement.
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. Registering as a TVE also provided these companies with legal protection and allowed them to appear "socialist" during a time when private businesses where highly restricted. This "loophole" allowed businesses to operate on a much larger scale, allowing growth from the private household business that dominated this period.
As private ownership became less politically-controversial after the mid-1990s, the TVEs' proportionate share of the national economy declined. Many were either privatized or turned into shareholding companies.
The decline of TVEs in the mid 1990s was also linked to increased competition from private and foreign firms, which reduced many of the advantages TVEs previously had. At the same time, changes in fiscal policy and market conditions made the structure of TVEs less effective in the growingly competitive economy.
Even after their decline, TVEs played an instrumental role in China's early industrialization and helped lay the foundation for later economic growth (especially in rural areas).
The relative decline of TVEs was also influenced by the 1994 tax-sharing reform.
Notable characteristics
Locations and Ownership 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.” In practice, this meant that managers had a high degree of control over day-to-day operations, which created incentives more similar to that of private ownership. The flexibility of property rights that this institutional arrangement allowed during the reform period became increasingly difficult to sustain as market competition intensified in the mid-1990s.Oi, Jean C. (1992). “Fiscal Reform and the Economic Foundations of Local State Corporatism in China.” World Politics, 45(1), 99–126.
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.
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.Wong, C.P.W. (1988). Interpreting Rural Industrial Growth in the Post-Mao Period. Modern China 14(1).
TVEs developed most rapidly in locations where central planning had produced poor results, either through shortages or non-useful surpluses.
Comparable advantages The hybrid status of TVEs as neither state-owned nor privately owned provided significant advantages within the reforming economy of China. Because they were not state-owned, TVEs were not restrained by state planning policies or price control. And because they were not private, they were not politically controversial.
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. TVE profits, however, could be kept entirely at the local level. They were deemed non-tax revenues for village collectives and townships governments. TVEs could also contribute to local government revenues through value added tax (VAT), which had to be paid by regardless of whether a TVE was profitable.
TVEs were formally responsible for their own profits and losses. They needed to 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. However, many TVEs benefited from preferential access to local bank credit and informal government support during the early reform period.Naughton, Barry (2007). The Chinese Economy: Transitions and Growth. MIT Press.
Socioeconomic Background