In This Review

Forging Reform in China: The Fate of State-Owned Industry
Forging Reform in China: The Fate of State-Owned Industry
By Edward S. Steinfeld
Cambridge University Press, 1998, 300 pp.

Much has been written from a macroeconomic perspective about China's huge, inefficient, state-owned enterprises (SOEs), which drain banking resources and threaten to bring down the Chinese economy. In contrast, this is the first detailed microeconomic examination of the firms' management. Benefiting from remarkable access to three mammoth steel corporations, Steinfeld illustrates how the managers, confronted with an array of irrational constraints, make decisions that are logical from their perspective but disastrous for the economy. They may, for example, expand production of unneeded steel because they can use the numbers to borrow more from the state bank. Accountability is also missing: the enterprises are technically "state owned" but actually lack a clear "owner" because decentralization has meant that managers are not held liable to anyone. Efforts at privatization further confuse the ownership issue, while the general solutions for the SOEs proposed by both reform-minded Chinese officials and foreign observers will not work without far more fundamental changes. As no foreigner has ever had such access to the SOEs before, Steinfeld's report is ground-breaking for all who have an interest in the Chinese economy. The study also provides a solid basis for theorizing about more general issues in transition economics.