Understanding China's Transition to Capitalism: The Contributions of Victor Nee and Andrew

Walder
Author(s): Doug Guthrie
Source: Sociological Forum, Vol. 15, No. 4 (Dec., 2000), pp. 727-749
Published by: Springer
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Sociological Forlum, Vol. 15, No. 4, 2000

Understanding China's Transition to Capitalism:

The Contributions of Victor Nee and
Andrew Walder
Doug Guthrie

INTRODUCTION

Over the last 2 decades, the field of sociological research on the trans-
formation of Chinese society has changed dramatically. Where past scholar-
ship in the sociology of China was epitomized by the China-watcher area
specialist, the field today is more disciplinarily bounded and less tied to
area studies, more theoretical and less concerned with the microlevel details
and thick description of life in China.2 These changes have had positive
consequences for scholarship on Chinese society, and in this review essay
I consider the work of two scholars who have played central roles in this
transformation. Victor Nee and Andrew Walder have cast long shadows
over the field of the sociology of China.3They have, for better or for worse,
shaped the field in the image of their own ideas. I choose to focus this

Department of Sociology, New York University, 269 Mercer St., 4th Floor, New York, New
York 10003; e-mail: doug.guthrie@nyu.edu.
2Research on China was by necessity less systematic and more impressionistic, in part because
of access: before the economic reforms and the normalization of U.S.-China relations, both
of which came about in 1979, scholars of China simply could not get access to or clearance
for systematic research in China.
3ThatI choose in this review to reflect on the influence of these two scholars is not to discount
the outstanding and pathbreaking work of scholars who came before them-scholars like
William Parish and Martin Whyte (Whyte and Parish 1984), whose books on urban and rural
life in contemporary China brought a new kind of rigor to the study of Chinese society, or
Ezra Vogel (1989), whose books have consistently been ahead of their time in exploring
slices of Asian society and life, or Nan Lin (Lin and Xie, 1988) who organized the first
systematic survey research in China.

727
0884-8971/00/12()()-0727$18.(X/()? 2000 Plenum Publishing Corporation

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728 Guthrie

review on the work of Nee and Walder for a few reasons. First and foremost,
there is the issue of sheer impact: Nee and Walder's citation counts in the
social sciences are significantly larger than all other sociologists of China,
and they are several orders of magnitude larger than most.4 Through their
work, these two scholars have set the main agendas for the discussions that
occur among sociologists in the field of research on China, and accordingly,
they are cited far more than anyone else in this field of research. Second,
inasmuch as survey research (and more generally systematic research) is
fundamental to sociology, both of these scholars were among the first
to conduct systematic survey research on important aspects of Chinese
society-Nee in 1985 in rural Fujian Province and Walder in 1986 in the
city of Tianjin. Both of these surveys helped to show that large sample
systematic survey research could indeed be done in China, an important step
forward. Third, both of these scholars have taken on a more disciplinary-as
opposed to area studies-focus than their predecessors in the sociology of
China. From Walder's book and his research on the institutions that defined
China's planned economy to Nee's now famous (and widely tested) Market
Transition Theory, these two scholars have consistently asked big theoreti-
cal questions with ties to the central theories of the discipline. They have
published their research primarily in the mainstream journals of the field,
and have thus become central players not only in the sociology of China
but also in sociology as a whole. Whereas area studies in the past occupied
a marginal position in American sociology, Victor Nee and Andrew Walder
have played central roles in bringing the sociology of China into the main-
stream.

CHINA'S TRANSITION FROM PLAN TO MARKET

In China, the transition from plan to market has been gradual, though,
over time, no less dramatic than the events in Eastern Europe and the
former Soviet Union. Having embarked on the transition from socialism
to capitalism in 1979, the Chinese government spent a decade slowly whit-
tling away the institutions that defined the planned economy. The process

4According to the Institute for Scientific Information's citation databases, the following group
comprises the top five most-cited sociologists of China (in descending order): Andrew Walder,
Victor Nee, Martin Whyte, Thomas Gold, William Parish. To delimit the category of "sociolo-
gist of China," I defined this group such that a scholar had to have published multiple articles
on China, with at least one appearing in one of the following journals: American Sociological
Review, American Journal of Sociology, China Quarterly. Defining the group this way, as
opposed to, say, by whether an individual had written a book on China, eliminates scholars
such as Craig Calhoun, who is more widely cited than all on this list, but primarily for his
work outside of China. Citation counts are based on averages over the last 3 years.

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Understanding China's Transition to Capitalism 729

began with a gradual introduction of economic autonomy to enterprise

managers and local officials in industrial areas and decollectivization in the
countryside. As of the early 1980's, individuals increasingly had the freedom
to pursue their fortunes in the newly emerging markets of the Chinese
economy, and many individuals chose to do so. Enterprise autonomy for
managers and officials meant that the Party and industrial bureaus were
no longer standing over the shoulders of economic actors in the industrial
economy. Thus, the gradual reforms hit squarely at the heart of the central
institutions around which Communist China was organized.
But vestiges of the old system remained and these legacies would
potentially play fundamental roles in shaping the transition from one system
to the other. For example, while organizations were now increasingly free
to operate on their own economically, they were still embedded in the
hierarchy of the former command economy, and it would be important to
know whether a factory's position within this hierarchy would affect its
path through the transition. Similarly, basic institutions, such as the Party
and institutions of education, all of which took on particular forms with
particular consequences in the old system, still remained. It would be critical
to know how individuals connected to these institutions fared in the transi-
tion from socialism to capitalism. It is in this context, facing these and many
more unanswered questions, that Victor Nee and Andrew Walder rose to
prominence as scholars of China.

STRONG THEORY AND ENGAGING THE BROADER SOCIAL

SCIENCES: THE WORK OF VICTOR NEE

In 1989, Victor Nee published an article in the American Sociological

Review, which marked the inauguration of Market Transition Theory (here-
after MTT) and set in motion a debate that would continue for more than
a decade. The timing of this article's publication was significant for a number
of reasons. First, in the case of China, in 1989 the country had undergone
a decade of reform and it was thus a good time to step back and assess
the impact of the economic reforms there. Second, 1989 was the year that
much of the world woke up to the changes that were occurring in communist
countries across the globe. Although the events of 1989 eventually turned
sour in China-allowing the world to see very clearly just how far the
political reforms in this country had to go-for 6 weeks, the world's atten-
tion was on Beijing, and we watched in anticipation as issues of democracy
and the social impact of economic reforms were debated openly there.
Third, Nee's article was one of the first articles examining the economic

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730 Guthrie

reforms in China to be published in the flagship journal of the discipline.5

Since that date, many articles have been published in the American Socio-
logical Review and the American Journal of Sociology on the economic
reforms in China engaging-either directly or peripherally-the issues and
hypotheses raised by MTT.
Simply put, Nee's original thesis in MTT was that the shift from plan
to market changes the stratification order of society, essentially eroding
the relative power of the administrative elite. According to Nee (1989a,
p. 663), "The transition from redistributive to market coordination shifts
sources of power and privilege to favor direct producers (i.e., entrepreneurs)
relative to redistributors (i.e., cadres)." From this general thesis, Nee went
on to identify three processes by which the mechanisms of stratification
might change with the emergence of markets in transforming socialist econ-
omies-the market power thesis, the market incentive thesis, and the mar-
ket opportunity thesis-and from these he derived 10 specific testable
hypotheses. These hypotheses included predictions about the advantages
of entrepreneurs ("direct producers"), the disadvantages of cadres ("redis-
tributors"), returns to human capital/education, and returns to social and
geographical location. Essentially, all of these hypotheses began with the
view that markets favor human capital (over political capital) and direct
production (over redistribution). And, given that China's economic reforms
involve the transition from planned to market economy, we should empiri-
cally observe advantages accruing to those predicted to have advantages
in the emerging market economy. Nee then went on to test these hypotheses
with data from a survey project he organized in Fujian Province in 1985.
Market Transition Theory, in its original incarnation, was both bold
and elegant. The theory staked a clear and unequivocal position on the
role of markets and individual-level incentives (i.e., the pursuit of profits)
in societal transformations and, implicitly, on the trajectory of China's
economic reforms: Markets would ultimately diminish the power of the
state, and individual freedom in market exchange was the key to change
in China. His position, as he stated it later, was that "the pursuit of power
and plenty by economic actors in society" (Nee, 1996: 945) is one of the
major forces driving the economic reforms in China forward. Over the
course of the reforms, Chinese society would converge with other advanced

'Although the American Sociological Review is the official journal of the American Sociological
Association, many sociologists also view the American Journal of Sociology with equal prestige
(see, e.g., Phelan, 1995; Clemens et al., 1995). In this context, Nee was not the first sociologist
to analyze China's economic reforms in a major sociological journal. That distinction goes
to Nan Lin and Wen Xie, who published "Occupational Prestige in Urban China" in the
American Journal of Sociology in 1988. Of course there have been other scholars who have
written on China in the mainstream journals, such as Xiaotong Fei (1946), but I am speaking
specifically here about the era of economic reforms in China, i.e., post 1978.

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Understanding China's Transition to Capitalism 731

capitalist nations of the West, where human capital, governmental position,

and geography all seemed to work in a straightforward fashion vis-'a-vis
markets.6 In addition, there is an implicit view that markets (and thus the
degree of marketization in China) could be measured by individual level
economic indicators, such as household income, and returns to education.
These positions were, in general, interesting and provocative ones to take,
and they distinguished Nee's MTT as a set of testable hypotheses about how
China's economic reforms would proceed. However, the clearest prediction,
and thus the one that has generated the most debate, is that cadre advan-
tages will decline to the extent that markets replace redistributive hierar-
chies.
Nee's thesis would become the most hotly contested theory in the field
of sociological research on China and on transforming socialist economies
more generally.7 Perhaps anticipating the swirl of debate over MTT's origi-
nal hypotheses that would emerge in the mid-1990's, as early as 1991, Nee
was already refining some of the issues at stake in MTT. In 1991 Nee
published a second article in the American Sociological Review amending
the central tenets of the theory; the article marked positive and negative
steps for MTT. On the positive side, this article provided a sophisticated
analysis of the fates of cadres and entrepreneurs in reform-era China by
expanding the analysis beyond simple indicators, such as household income.
Statisticians and stratification theorists have long known that income data
tend to cluster in socially and institutionally defined ways, such that issues
like avoiding poverty or being in the top quintile of earners are often
much more revealing than basic income data [also problematic are the
assumptions of linearity and normal distribution implicit in the Ordinary
Least Squares regression analysis of Nee (1989a)]. In his 1991 article, Nee
captured the effects of the refined analysis elegantly and thus tested the
limits of his theory. The analysis showed that, while cadres themselves were

'In response to Parish and Michelson (1996), Nee rejects the notion that MTT is a theory
that implies convergence with advanced capitalist countries in the West (Nee and Cao, 1999).
However, Nee's tendency to talk about markets and market mechanisms in the abstract
places him much more in the convergence camp than in the path dependence line of argument.
The main point here is that identifying institutions and figuring out how specifically they
influence the course and trajectory of the reforms is a project that Nee does not pursue in
his work. The idea that "markets" and "market mechanisms" will favor human capital (a
result that has been reproduced in many advanced capitalist countries of the West) and that
China will predictably move in this direction as well is about a close as you can get to the
convergence thesis without stating it as such.
'In the top disciplinary journals, no less than 14 articles (not including the six responses to
the Market transition debate published in the American Journal of Sociology in 1996) have
been written in direct dialog with MTT (see Nee, 1991 Peng, 1992; Rona-Tas, 1994; Domanski
and Heyns, 1995; Parish et al., 1995; Bian and Logan, 1996; Nee, 1996; Xie and Hannum,
1996; Gerber and Hout, 1998; Brainerd, 1998; Szelenyi, 1998; Nee and Cao, 1999; Zhou, 2000;
Gerber, 2000). See Cao and Nee (2000) for a review systematic discussion of these studies.

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732 Guthrie

not more likely to avoid poverty or find themselves in truly advantaged

positions, entrepreneurs and "former team cadres" were significantly differ-
ent from the rest of the population on these outcomes. The latter outcome
is significant for the theory, because it means that former cadres are able
to position themselves to gain advantages in the reform era, a position that
seems to contradict MTT in its original form.
Nee addressed this divergence of the theory and the empirical findings
with the partial reform thesis: "officials . . . retain their power and privilege
under partial reform to the extent that markets remain bounded by redis-
tributive hierarchies" (Nee 1991: 280 n16). In a much later summary article,
Cao and Nee (2000) work very hard to "incorporate" many of the findings
of other theories. Of some findings that appear to contradict the theory,
they argue that they have been "incorporated into the market transition
framework" (Cao and Nee, 2000: 1179); of others they have conceded their
possible significance but question their "overall importance" (Cao and Nee,
2000: 1180). Other scholars have criticized the partial reform thesis on
exactly this point: "The unfortunate implications of this new position for
the testing of 'market transition theory' . . . [are that] the theory now has
no empirical implications until an undefined point in the transition. If the
advantages of cadres or former cadres are declining, this supports the
theory; if they do not, this simply means that 'redistributive power' has not
yet disappeared" (Walder, 1996: 1067; see also Zhou, 2000b). "Partial
reform" and lacking in "overall importance" are far too nebulous of con-
cepts to suffice as arguments for why former cadres do maintain advantages
in the reform era and why this is not in conflict with the predictions of
MTT. Thus, while the 1991 article marked an important and necessary shift
in reconsidering some of the central predictions of MTT, it was a weak
move for a strong theory. One of the hallmarks of a strong theory has to
be that the predictions are falsifiable, allowing us to distinguish when the
theory is right and when it is wrong, when it applies and when it does not.
In this case, findings that do not support the original predictions of MTT
are explained away as being a product of partial reform or lacking in
overall importance.
Over the next decade, a number of important articles emerged taking
on MTT directly, and they were followed by a number of compelling
responses from Nee.8 In an analysis of the economic reforms in Hungary,
Rona-Tas (1994) put forth a theory to counter MTT called the power
conversion thesis, essentially arguing that those with political power in
prereform socialist societies, will be in the best position to gain advantages
in periods of economic reform. Following from this theory is a set of

'I do not discuss all of the studies here. For a complete review see Cao and Nee (2000).

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Understanding China's Transition to Capitalism 733

hypotheses about cadre advantage that basically oppose the hypotheses

emerging from MTT. Rona-Tas found support for his theory in an analysis
of Hungarian survey data collected in 1989 and 1991.1 Bian and Logan
(1996) offer a very compelling analysis that questions the applicability of
MTT in urban China."' Several other important studies have tested and
refuted the claims of MTT on various grounds including the way that
inequality is measured and (Xie and Hannum, 1996), the ways that political
capital and marketization are defined (Parish and Michelson, 1996), and the
extent to which the theory applies to other transforming socialist economies
(Gerber and Hout, 1998).
However, while the main debate over MTT has been over the extent
to which its predictions are empirically true for transforming socialist
economies, I think this debate (including Nee's responses to his critics)
has largely missed the main strengths and weaknesses of the original
theory. First of all, MTT, in its original formulation was a strong theory
because it took a specific position on the course of transitions from
planned to market economies; it began with clear statements about the
stratification order within these respective systems and made clear,
testable (and thus verifiable and refutable) predictions about the transition

9Nee has pointed out that, while Rona-Tas claims to be testing MTT directly, he is actually
examining the situation of former cadres not current government officials (Nee 1996: 915,
n3). There is some ambiguity about how much Rona-Tas's and Nee's studies are in conflict,
in part because of the lack of fit between Rona-Tas's and Nee's definitions of what constitutes
a cadre elite and in part because MTT has provided a bit of a moving target on this issue.
In 1989, Nee seemed to be predicting that political capital in general (current and former
cadres) would decline relative to the economic capital exercised by the "direct producers"
(i.e., entrepreneurs): "I expect that changes in the underlying processes of socioeconomic
attainment will reduce the value of political capital in a more generic sense. Not only are
the direct controllers of the redistributive mechanism likely to experience relative loss, blut
the vallueof their political capital accumlulatedthrough prior experience as a cadre is likely to
diminish as well . . . I can indirectly test this hypothesis by examining the returns on former
cadre status" (Nee, 1989a: 671, emphasis added). While the effects of current cadre status
were negative, predictions about former cadre status were not borne out in the statistical
models tested in the 1989 article, and by 1991, Nee had fully shifted his position on former
cadres, as the analysis presented then showed that former team cadres were more likely to
be in the top quintile of earners and they were also likely to avoid poverty (bottom quintile).
t"Threestriking findings emerge from Bian and Logan's study. First, they find that individuals
in jobs with "high redistributive power" have significantly higher incomes across the first
decade of reform (there are no apparent advantages for jobs with "high market connected-
ness"). Second, they find that jobs in the state sector yield higher salaries in the reform era.
Third, communist party members did better than nonparty members in the first decade of
reform. The first two findings are compelling, because they operationalize the arguments of
MTT by examining the effect of markets in a specific institutional context (derived from
Walder-see below). The third finding apparently cuts directly against the predictions of
MTT, though based on Nee's later distinctions about partial reform (1991) and the view
that MTT is specifically about the positional power of current government officials (1996),
he may play down the extent to which Bian and Logan's findings disprove the theory.

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734 Guthrie

between these systems. The current debate misses the strengths of this
original position because we are mired in the details of what would
constitute evidence of declining returns to political capital and what
would constitute evidence of "partial" reform. The theory, at this point,
has become so broad that it has lost the specific statements that made
it a bold and elegant theory in the first place. As Zhou (2000b: 1193-94),
who has written eloquently on the state of this debate, summarizes the
issues: "When a theoretical debate generates more controversies than
intellectual growth, it often signals that the conceptual issues and theoreti-
cal logics are poorly defined and they are not widely shared among
scholars. . . Large-scale institutional changes involve multiple causal
mechanisms, which require close observations and careful detective work
to identify, understand, and untangle the actual process of change....
The bottom line is that, without careful and systematic examinations of
these processes, we cannot even begin to describe these phenomena accu-
rately, let alone develop sound theoretical explanations about their roles
in institutional changes." Second, and perhaps more importantly, the theory
is extremely vague on what markets and the processes of marketization
are (Walder, 1996). At various times the theory gives agency to "markets,"
"market mechanisms," and "market institutions" without ever specifying
what these abstract concepts are or how we would recognize them. In this
sense, I would have liked to see the debate over the transition from plan
to market move in a direction of more institutional specificity. It could
have just as well been the case that the MTT would have moved beyond
its focus on the returns to political capital to generating an understanding
about the impact of specific institutional reforms or a greater understanding
of what markets are and how we should go about measuring them
(Walder 1996).11

"One final, though perhaps more mundane, weakness in this debate that is worth mentioning:
it is extremely odd in this debate that power and privilege are measured in income when
we have long known that individuals are often compensated in a variety of ways in socialist
and transforming socialist societies, be they nonwage benefits, access to opportunities, power.
A striking example (albeit an anecdotal one) of the problems with assessing cadre power
in terms of income in the reform era came very clear to me in the course of my field research
in China in 1995 (see Guthrie, 1999): as I sat with the general manager of a state-owned
factory in the foods sector, he spoke of his views of equality, bragging about the fact that
he was paid the same wage that a factory floor employee was paid. As the interview ended,
the GM asked if I needed a ride back to the city center; apparently he was going that way
in his "company" car, which happened to be a luxury Mercedes. This did not seem to strike
him as ironic, despite the content of our earlier conversation. The point here is that this
individual, who was a cadre (previously employed at the bureau of "light" industrial products
[qing gongye ju]), would have showed up as having no particular returns to political capital
in a typical MTT study, which focused on income. Yet, in a number of ways, this individual
was clearly reaping the rewards of the reform era. No study that I know of in MTT has
attempted to empirically address this issue.

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Understanding China's Transition to Capitalism 735

Selling Sociology Outside of the Discipline: Nee Steps Up to the Plate

Overall, MTT has been a very positive debate within the discipline, if
only because it has placed transition economies, such as China's, at center
stage; and it is certainly the work for which Nee has gained the most
recognition. However, it is Nee's other work on China-work that has
been more substantively driven and less locked into the defense of a specific
theoretical position-that I believe has been the most powerful and
the most interesting.'2 For example, Nee's (1992) paper "Organizational
Dynamics of Market Transition: Hybrid Forms, Property Rights, and Mixed
Economy in China," which appeared in the Administrative Science Quar-
terly, exhibits a level of institutional specificity that gives it a much more
powerful analytical edge than anything in the MTT debate. In this paper,
Nee analyzes the implications of multiple property forms, where property
rights are often poorly specified; of the advantages of private firms within
this context; of an emerging market economy in which institutional uncer-
tainty is the norm; of the role of transaction costs in this world of murky
institutions. In this paper, Nee essentially explicates a path dependence
approach to the reforms, where the institutional structure of state-economy
relations in China define the country's path through the economic reforms
and the organizational forms that are emerging there. "'Ratherthan conceiv-
ing of market transitions as a linear progression to capitalism, we may
analyze the departures from state socialism as likely to produce hybrid
market economies that reflect the persistence of the institutional centricity
of their parent organizational form. The deep structures of the reform
regime are likely to reproduce important features of the state socialist
redistributive economy" (Nee, 1992: 22). Making very clear that he sees
"strong government involvement" (p. 25) as a central feature of China's
emerging market economy, as well as of its path through the transition,
Nee then goes on to analyze the extent to which high transaction costs are
a central feature of the type of market economy that is emerging in China.
Further, new institutional economics (a la Williamson) is not the only
approach to specifying institutional mechanisms we see here: discussing the
extent to which the private economy has forced the "mixed economy" to
compete in the market [an issue that Naughton (1995) also viewed as a
very important feature of China's reform path], Nee argues that economic
practices diffuse across firms in the marketplace, as collective and mixed

'2While this work of Nee's is less well-known than MTT within sociology, it is indeed well-
known outside the field of sociology. It is also interesting to note regarding Nee, that he
has also been successful with a full other line of research that is completely unrelated to
economic development in China. This is his work with Jimy Sanders on immigrant entrepre-
neurship in American cities (e.g., Sanders and Nee, 1987).

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736 Guthrie

economy firms mimic the practices of private firms in the marketplace (a

la DiMaggio and Powell, 1983). Not the types of arguments that sociologists
of China typically associate with Victor Nee and MTT, but we should note
here that Nee was well ahead of the curve in analyzing Chinese society
from the theoretical perspectives of the new institutionalism(s).
In another series of papers that appeared in core economics journals,
we see a similar agenda-the strong sociological arguments made on the
economists' own turf, emphasizing the importance of institutions, norms,
networks and the state in the process of economic reform in China. In one
paper (Nee, 1998), which appeared in the American Economic Review,
Nee argues that the new institutional economic literature has failed to
understand the ways that formal (contracts, property rights, laws, etc.) and
informal (norms, networks) constraints combine to shape the performance
of organizations and economies more generally. This paper [the ideas of
which are examined at greater length in Nee and Ingram (1998)] is a
succinct, powerful analysis of the intersection of organizations and the
formal rules that define them with social networks and the norms that guide
them. And, here again, we find references not only to the new institutional
economics but also to sociology's version of the new institutionalism:
"When the formal rules are at variance with the preferences and interests
of subgroups in an organization, a decoupling of the informal norms and
practical activities, on the one hand, and the formal rules, on the other
hand, will occur. As John Meyer and Brian Rowan (1977) observe, decou-
pling 'enables organizations to maintain standardized, legitimating, formal
structures, while their activities vary in response to practical considerations.'
. . .Independent of this ceremonial formal structure, informal norms arise
to guide the day-to-day business of the organization" (Nee, 1998a: 88).
Again, not the type of argument typically associated with Nee and MTT,
but there it is, and he is making the economists listen to these arguments
in their own forum. In another article, which appeared recently in the
Journal of Institutional and Theoretical Economics, "The Role of the State
in Making a Market Economy," Nee (2000) instructs economists about the
role of the state, making arguments that fit well with recent theoretical
treatises in Economic Sociology, such as Neil Fligstein's (1996) "Markets
as Politics" model. It is more than interesting that the scholar who sits
opposite the "state-centered" theorists in sociological debates is the same
person forcing the field of economics to acknowledge the importance of
the state in the construction of markets and the role of networks and
informal norms in the organization of economies.13

'3Nee has taken this line in a number of other papers, which are much closer to institutionalism
and the core of economic sociology. I have chosen here to focus on those which are published
in economics journals, however, there are many more. See, for example, Nee and Su (1990,
1996, 1998) and Nee (1989b).

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Understanding China's Transition to Capitalism 737

A final body of Nee's work on the new institutionalism can be found

in The New Institutionalism in Sociology, which he coedited with Mary
Brinton. Bringing together an impressive set of scholars from the fields of
sociology and economics, including such scholars as Douglass North and
Robert Frank, this volume actually accomplishes what many in economic
sociology often hope for but fail to achieve: it is truly an interdisciplinary
conversation between sociologists and economists on the organization of
economies and societies. This volume is, to my mind, simply the best edited
volume on the social and economic study of institutions, with the possible
exception of Powell and DiMaggio's (1991) edited volume on The New
Institutionalism in Organizational Sociology. 4 For readers who grow queasy
at rational choice assumptions (and I am one of them), Nee makes a
compelling case for an alliance between economics and sociology, in effect
exhorting sociology to step up to the plate and participate in this debate
rather than hiding behind the walls of our own discipline. As Nee (1998b:
2) puts it, "Far from being threatened by the paradigm shift taking place
in economics, sociology has much to gain from the new interest in producing
a theory of institutions and institutional change. Sociology also has much
to lose by not participating in this cross-disciplinary paradigm." And lest
we see Nee as operating from the one-dimensional perspective of rational
choice assumptions, for which his critics have criticized him, we need only
to look to what he says to the economists about institutions: "Institutional
design requires a combination of poetry and science. The cold rationalist
view based on the extension of standard economic theory to analyze the
working of institutions is effective so far as the formal organizational rules
are concerned. However, in the domain of informal norms and networks
of ongoing social relationships, a poet's insight into the human condition
may prove to be as useful in institutional design as science" (Nee, 1998b:
88). This volume, and Nee's work in this area more generally, may play a
central role in the interdisciplinary conversation that is so needed.

BALANCING SUBSTANCE AND THEORY: THE

INSTITUTIONAL ANALYSIS OF ANDREW WALDER

If Nee's influence on the study of China is eclectic, Walder's influence

might be described as more focused. Throughout his career, Walder has
been exceptional at identifying institutions that shape Chinese society in
fundamental ways and revealing how these institutions are linked to social

"This is not to set up a comparison between these two volumes-each has strengths in different
areas. Rather, it is to say that the quality of the Brinton and Nee volume is, in my view,
equal to that of the Powell and DiMaggio, which has, in effect, become canon in economic
and organizational sociology.

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738 Guthrie

processes and social change. His work has also always extended beyond
these institutions to develop larger theoretical arguments that extend to
analyses of socialist and transforming socialist societies. To begin a discus-
sion of Walder's work, we must go back to his original work on the planned
economy, which became widely known through his book Communist Neo-
Traditionalism: Work and Authority in Chinese Industry (1986). This book
is remarkable in its analytical marksmanship for understanding the funda-
mental institutions around which communist societies were organized, and
in many ways it still stands as perhaps the most important book written
on the institutional structure of prereform Communist China. This work
begins with an analysis of the work unit, the basic system that organized
Chinese society (especially urban industrial China) for 30 years of Commu-
nist Party rule before the economic reforms began. When the Communists
came to power, one of first things they did was eliminate private ownership
of economic organizations and establish the work unit system, the social
security (and monitoring) system through which Chinese society was orga-
nized. This system stood at the center of Walder's analysis.
Two obvious aspects of the work unit system were the establishment
of a social security system and the establishment of a system of direct
monitoring of individuals in urban industrial China. However, a much more
subtle aspect of the work unit system was the institutionalization of patron-
client relations between managers and workers and the extent to which
this pattern of authority became the primary way that state power and
personal power were exercised in Communist China. In short, this study
was fundamentally about the structure of power in China's planned econ-
omy, and it explicated the basic institution through which power was orga-
nized. In a shortage economy, incentives work much differently than they
do in an open market, as income is essentially set in what Walder calls
a "frozen wage structure." Managers and workers engage in a complex
bargaining dance, which pits the incentives available in a planned econ-
omy-nonwage benefits, political favoritism, political and social capital-
doled out by managers and team leaders against the cooperation of workers
within the established economic system. This "organized dependence" and
the "clientilistic" relations this system bore were fundamental to the organi-
zation of power relations in the planned economy and understanding these
aspects of workplace authority was fundamental to understanding exactly
what the work unit was in Communist China. In a sense, Walder embarked
on a study of one of the most important institutions in Chinese society and
chartered an analytical course that was completely original.
While his analysis of workplace authority in Communist China was
fundamentally about China's prereform era, Walder (1994a, 1995c) later
extended this institutional argument to a brilliant analysis of the breakdown

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Understanding China's Transition to Capitalism 739

of authority relations in transforming socialist societies. In many ways,

academics along with the rest of the world were caught off guard by the
dramatic events of 1989. In the late 1980's and early 1990's, a debate
emerged among China scholars over whether a nascent civil society was
emerging in China (see, e.g., Strand, 1990; Rowe, 1993; Madsen 1993; Saich
1994; White et al., 1996). Proponents of the civil society view essentially
argued that, indeed, a civil society was percolating beneath the surface in
China's gradually transforming economy and society. In a post hoc way,
the events of 1989 were then taken as evidence that civil society was alive
and thriving in China. Recognizing the analytical weakness of this debate,
Walder shed much light on the transformation of Chinese society-and
thereby helped explain the factors that led to the eruption of 1989-with
an analysis focused not on whether civil society existed in China in the mid
1980's but on the causal processes that had allowed this transformation to
take place. As Walder (1994: 298, emphasis in original) put it, "[A] theory
of political order is a necessary starting point for any theory of change.
There must have been institutional mechanisms that served to maintain
order in the old regime in spite of longstanding and obvious economic
problems and political liabilities; and these institutions must have been
eroded in ways we do no yet understand. The current emphasis upon the
triumph of 'society' over 'the state' tends to obscure the logically prior
question of how such a triumph, if it is that, could occur . . . [W]hat changed
in these regimes in the last decade was not their economic difficulties,
widespread cynicism, or corruption, but that the institutional mechanisms
that served to promote order in the past-despite these longstanding prob-
lems-lost their capacity to do so."
The analysis goes on to specify the mechanisms that were crucial for
maintaining order in communist societies as (1) hierarchically organized
and grassroots mobility of the Communist Party and (2) the organized
dependence of individuals within social institutions, particularly work-
places. With the beginning of the economic reforms in China, both of these
institutional bases of power began to erode. Walder has aptly termed these
eroding mechanisms "the quiet revolution from within" (Walder, 1995c).
Thus, through this line of research, Walder presented an institutional picture
of the forces shaping power relations in Chinese society in the prereform and
postreform eras, contributing in fundamental ways to our understanding of
social structure and social change in China and other transforming social-
ist societies.
A second line of institutional analysis conducted by Walder examines
the structure of the former command economy and its impact on organiza-
tional budgetary processes in the prereform industrial economy (Walder,
1992). As revolutionary as was Walder's earlier work on the institutional

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740 Guthrie

pattern of authority relations in the Chinese economy, this second line of

research was, in my view, equally if not more important. Through earlier
work [carried out by Walder (1986), Whyte and Parish (1984), Szelenyi
(1978, 1983), and others], it was well-understood that, despite a rhetoric
of equality under state socialism, various political and social advantages
played into the distribution of resources under this system. Among those
interested in the uneven distribution of resources in these societies, virtually
everyone conceived of this resource distribution at the individual level,
arguing that Cadres ("redistributors" in the language of Market Transition
Theory) took advantage of their positions to reward themselves with the
perquisites of the command economy. Until Walder wrote about the issue
in 1992, no one had even considered the fundamental role that work organi-
zations and the administrative hierarchies in which they are embedded
played in the distribution of resources. In other words, Walder took a
process that was fundamentally viewed as an individual-level process and
conducted an organizational and institutional analysis on the issue. This
was a brilliant step forward because it linked the distribution of re-
sources-at both individual and organizational levels-to the budgetary
processes of the planned economy in state socialism.
The basic argument of Walder's analysis is the following: Workplace
organizations in planned economies are stratified according to their access
to state resources. Those closer to the central government are, for a variety
of reasons, better able to extract resources from the state. Thus, variation
in organizational resources is a reflection of variation in organizational
abilities to extract resources from the state, and, by extension, variation in
the extent to which organizations can secure resources for their employees.
As Walder (1992: 528-29) explained it, "China's national budget is a nested
hierarchy of independent budgets-each government unit exercises prop-
erty rights over firms under their financialjurisdiction . . . This bureaucratic
economy, far from being a monolith, is composed of thousands of govern-
ment jurisdictions of varying sizes, each of which seeks to expand its reve-
nues by capturing investment, subsidies, and grants . . . The ability of
organizations to win privileged treatment in these budgetary and fiscal
processes has direct consequences for its employees." This argument was
demonstrated empirically in an extremely innovative fashion: based on an
individual-level survey, Walder weighted the cases such that the workplace
data gathered from individual respondents were analogous to a representa-
tive sample of organizations.15 He then operationalized a variable to approx-

'5For methodological discussions of this approach to organizational analysis, see Marsden

(1994) and Kalleberg et al. (1996).

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Understanding China's Transition to Capitalism 741

imate the effect of this "nested hierarchy." As it turns out, controlling for
several other factors, this variable had the strongest independent effect on
the organizational decision to offer a variety of nonwage benefits to its
employees. As his empirical results show that organizations closer to the
central government were, in fact, more likely to offer extensive nonwage
benefit packages to their employees, Walder concluded that these organiza-
tions had greater access to excess resources (and are therefore more fa-
vored) in the planned economy. Thus, Walder's analysis of the distribution
of resources under state socialism told us something fundamental about
the institutional structure of China's planned economy, a feat that no one
conducting research on stratification under state socialism had accom-
plished.
Four innovative steps taken by Walder in this analysis reoriented
thinking on the study of China's planned economy (and its transition to
capitalism). First, understanding the importance of hidden budgetary pro-
cesses in command economies was a necessary step forward specifically
in research on stratification but more generally for our understanding of
command economy (and its transformation in the era of economic reform),
yet no one, with the exception of Christine Wong (1986) and David Granick
(1990), was analyzing the fundamental institutions of this system in China.
Second, adopting a strategy for how to analyze organizational position in
the command economy was also a fundamental step forward. Identifying
institutions is often the easy part; operationalizing variables and showing
empirical effects that reflect the theoretical (or stated) workings of these
institutions is a much more difficult task. Walder's study not only presented
an empirical way of operationalizing the institutional structure of China's
command economy, but it yielded strong empirical results in support of
this analytical approach. Further, the operationalization of this variable
would prove decisive when Walder extended analysis to the reform era.
Third, in this analysis, Walder stepped beyond a narrow focus on economic
indicators focusing instead on the distribution of resources in terms of
nonwage benefits. We have long known that nonwage benefits were an
important part of remuneration in socialist societies, but strangely few
have incorporated these important perquisites into research as dependent
variables. Finally, implicitly in this work (and this point becomes more
explicit in the continuation of this line of inquiry as it applies to the reform
era) Walder has given us an empirically grounded conception of a multiorga-
nizational state. The notion that there is some basic structure that is "the
state" becomes so one-dimensional analytically that it is impossible to see
the forces at work here in any detail. In other words, to talk simply of the
state as if it were one coherent political entity is to ignore the extent to

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742 Guthrie

which states can often be decentralized sets of organizations that pursue

their own interests (Fligstein, 1990). Walder has shown us empirically ex-
actly how this is so in Chinese society.
As in his earlier research on institutionalized power relations in the
work unit, which he later extended to an analysis of China's reform era,
Walder also extended his analysis of the fiscal structure of the command
economy to an analysis of the economic transition. This study, was, like
his earlier work, an incisive analysis of the critical institutions of China's
industrial reform. Walder sought to answer a question that has long puzzled
scholars and observers of China's economic reforms: given the longstanding
assumption of the need for privatization in order to spur on "efficient"
economic development among state-owned organizations, how do we ex-
plain the dramatic double-digit growth of China's industrial economy (par-
ticularly in rural areas), an event that occurred without privatization? The
basic debate in economics, to that point, had taken one of two approaches
to the question, one arguing over the extent to which Chinese firms had
actually become more productive, the other arguing over the extent to
which Chinese firms had silently become private.16Again beginning with
the fundamental institutions that define the context in which China's re-
forms are occurring-first and foremost, the institutional hierarchy of the
former command economy, second the issue of property rights-Walder
cut to the heart of this puzzle by clarifying a couple of key issues that shape
the trajectory of China's reforms. Walder argued that what varies in China's
era of economic reform is not the extent of privatization that has occurred
in Chinese firms (or the distinction between "state" versus "collective"
ownership), but rather, the variation is in the extent to which the rights of
revenue extraction had been pushed down the ladder of the former com-
mand economy. The further down the ladder of the former command
economy we travel (i.e., the further from the central government a firm
lies), the more revenue extraction and firm management have been left to
local governmental jurisdictions. Thus property rights (defined here as
the ability to extract revenue) are "attenuated" at lower levels of the
governmental hierarchy. As a result, local officials have had much greater
capacity and much greater incentive to push the factories in their jurisdic-
tions toward aggressive reform in last two decades. Thus, local officials
have, over time, come to run their jurisdictions much like they would
run an industrial firm-local officials as industrial managers, governmental
jurisdictions as industrial firms. This perspective was not only incisive and

'60n the latter issue, a flashpoint of this debate was over whether collective enterprises, which
are the predominant organizational type in the productive rural area, are in fact, a type of
hybrid or even semi-private organizational form.

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Understanding China's Transition to Capitalism 743

creative in its analysis, but it also left in its wake a number of hypotheses
about how the institution of the former command economy is shaping
China's economic reforms in fundamental ways."7
A third line of research to which Walder (1995b; Walder et al., 2000)
has contributed has to do with the institutions that define the advantages
of elites in China's transition from socialism to a market economic system.
This line of research has been the area in which Walder's work has been
most closely tied to established debates within the field of Sociology (and
China studies) on career mobility (e.g., Moore, 1944; Inkeles, 1950; Oksen-
berg, 1968; Shirk, 1982; Lin and Xie, 1988; Lin and Bian, 1991; Bian, 1994;
Zhou et al., 1996, 1997; Gerber, 2000) and is therefore, on some level, the
least path-breaking. Nevertheless, true to form, Walder's work in this area
has revealed important things about fundamental institutions in Chinese
society-the Party and higher education-and has done so in innovative
ways. Based on a 1986 urban household survey in Tianjin, Walder (1995b)
engaged the debate over social stratification and mobility in socialist and
transforming socialist societies, arguing that, in the case of China, there
were two paths to elite status within the Communist Party order: one
emphasizing educational credentials and one emphasizing a combination
of Party and educational credentials.18 The former led to high prestige
professional positions, while the latter led to administrative posts within
the government. This study thus tied to fundamental questions within the
field of sociology about credentialing and social stratification, linking these
issues to the fundamental institutions governing occupational mobility in
Chinese society. The study was also important for its innovative research
design; similar to earlier studies (e.g., Walder, 1992) in which Walder looked
beyond standard economic indicators (i.e., income), in this study he also
analyzed dependent variables that demarcate power that is not necessarily
reflected in income, namely the number of subordinates an individual has

'7Walderhas also extended this analysis to a general inquiry into institutional transformation
of property rights in reform era China. Note that Walder's first essays (1986a, 1992a, 1992b)
that dealt with the issue of fiscal reform and the institutional hierarchy of the former command
economy were explicitly grounded in a discussion of property rights, conceived of in these
early articles as the ability to extract revenues. In an essay that serves as the introduction
to a volume on the transformation of property rights in reform-era China (Oi and Walder,
1999), Walder and Oi (1999) shed light on the institutional arrangements that comprise the
complicated notion of property rights in China today. Borrowing from Demsetz (1988),
Walder and Oi argue that the institution of property should be conceived of as a "bundle
of rights," where questions of managerial control, the ability to extract revenue, and the
ability to transfer ownership must all be addressed in a full understanding of property rights.
The central point here is that, while firms in China may call themselves state-owned or
private, the reality of these organizations' property rights depends upon the multifaceted
issues within this "bundle" of rights. The institutional analysis presented in this volume brings
much clarity to the discussion of the transformation of property rights in the Chinese economy.
"The survey employed for this study was the same one employed in Walder (1992).

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744 Guthrie

control over and the size of housing space an individual is allotted. Based
on a new, nationally representative life-history survey conducted in 1996,
Walder and colleagues found that his earlier model held but that the pat-
terns changed in significant ways when viewed over time. Essentially, this
more recent study finds that, when time periods are disaggregated, college
education did not become a criterion for administrative positions until the
post-Mao period. As Walder (2000: 206-07) puts it, "Party membership
has never been a criterion for the attainment of professional positions, and
a college education did not become a criterion for administrative positions
until the post-Mao period (for those who had not already followed the
professional path)." In other words, the earlier finding of the requirement
of both college education and Party membership only became a fact in the
post-Mao period.

CONTRIBUTIONS TO METHODOLOGY AND THEORY:

LESSONS LEARNED FROM NEE AND WALDER

Victor Nee and Andrew Walder have played fundamental roles in

shaping our understanding of China and transforming socialist societies
more generally. Methodologically, both scholars have had a significant
impact on the systematic research of Chinese society. Both scholars were
part of an early group of social scientists to be conducting systematic
research in China. In the years before the opening of China, the data upon
which we were forced to rely were highly impressionistic and often drawn
from Hong Kong emigres, who were, by definition, a self-selected group
and no longer lived in or experienced directly the country about which
they were being interviewed. In this context, it was an absolutely crucial
step forward in understanding Chinese soceity that social scientists entered
the field and conducted large-scale systematic surveys of the changes taking
place in China, as Nee did in 1985 in rural Fujian Province and as Walder
did in the City of Tianjin in 1986.'9
Theoretically, however, they have shaped knowledge of the economic
reforms in China in very different ways. From a theoretical perspective,
the impact of Nee's work should be viewed on two levels. First, in obvious
ways he has shaped sociological research on the study of economic transition
in China. Market Transition Theory has set the terms of a major debate

'9The sample for Walder's Tianjin survey was originally drawn in 1983 and the first survey
conducted in 1985 by a team of scholars led by Nan Lin (see Lin and Xie, 1988; Lin and
Bian, 1991). A team of scholars led by Walder and Peter Blau conducted the second survey
on this sample of respondents in 1986. Both scholars have been involved in subsequent
large-scale, national survey research projects.

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Understanding China's Transition to Capitalism 745

within the field of sociology. While some (including myself) would like to
see the discussion move beyond the long-running controversies regarding
the effects of political capital, there is no question that this theory has
served as a major contribution to the field of China research and to the
discipline more broadly. But Nee's corpus of work must be viewed as so
much more than the transition debate in sociology. Nee is one of only a
handful of sociologists who have published articles in lead journals from
multiple core disciplines-in this case the American Sociological Review
and the American Economic Review-and this says a great deal for his
ability to speak across disciplines. Where many of the interactions among
our disciplines have been reduced to shouting matches, Nee is actually
having a conversation. If economists start taking notions like informal
norms, the importance of the state, and concepts like institutional isomor-
phism seriously it is, in part, because the work of scholars like Victor
Nee. And while his writing within sociological venues often seems more
economistic than sociological, the opposite is true for his writing in eco-
nomic venues. Interestingly, it is in the venues outside of sociology that
Nee has done some of his most exciting work on the institutional changes
in China's transition economy.
Walder's work has, in certain respects, been more consistent in its goal
and message. He has written broadly about the specific substantive issues
defining economic and social life in socialist and transforming socialist
economies. But the analyses always begin and end with an understanding
of the fundamental institutions that shape the lives of individuals and
organizations in these societies. Perhaps the greatest lesson that can be
taken from Walder's work, however, lies in his ability to marry deep substan-
tive understanding with incisive theoretical analysis. In general, each of
the institutional projects Walder has taken on aspires to combine a rich
substantive understanding of the specific institution in question with an
analysis at a theoretical level of the operation and function of critical
institutions organizing socialist societies. In other words, if we abstract away
from the substance of each of his lines of research, we find at their core
fundamental theoretical ideas about what certain institutions tell us about
the organization of power relations in socialist and transforming socialist
societies, about the path dependent nature of transitions from plan to
market, and of the institutions that shape patterns of stratification in Chi-
nese society. Thus, while his work is deeply theoretical, the theory does
not obscure substance and detailed description-one always comes away
from his studies with a clear understanding of some fundamental aspect of
Chinese society. This is a difficult balance to strike, and it is one that Walder
strikes consistently well.
Perhaps the greatest contribution of all, however, comes with the fact

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746 Guthrie

that these two scholars have played a central role in bringing the study of
China into the mainstream of the discipline. With the restructuring of area
studies and the strengthening of the core disciplines over the last two
decades, sociology could have easily turned inward, focusing purely on the
study of American society and social structure. This has not happened-if
anything, the discipline has become much more international over the last
two decades-and it is largely because of the methodologically rigorous
and theoretically deep work of scholars like Victor Nee and Andrew
Walder. For their work in this area, we own them a great debt.

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