Full privatization is no panacea

By way of further illustration, let us consider some specifics. According to our research, a year after being fully privatized a Chinese SOE employs an average of 10 percent less people than equivalent firms that remain State-owned. Potentially, minority privatization leads to an average 12 percent job increase in the first year and majority privatization to an average 22 percent increase within two years.

In addition, although full privatization does not appear to benefit workers in terms of wages, partial privatization potentially leads to pay rises - 14 percent for minority privatization and 16 percent for majority privatization. Finally, both full and partial privatization tend to bring about additional labor productivity and slight improvements in workforce training.

The most striking aspect of these results, of course, is that in the case of partial privatization there are no obvious losers. Market discipline and incentives drive labor productivity improvements, while a government "helping hand" protects labor welfare via job creation and higher wages.

It should therefore be reasonable to expect that government would gain wider endorsement for a program of partial privatization than for a program of full privatization. Indeed, China's leaders have learned that hasty privatization measures can arouse often violent unrest among workers.

In 2009 the general manager of SOE giant Tonghua Steel was murdered by angry workers in reaction to a planned takeover that could have slashed the workforce from 30,000 to 5,000. Some weeks later the government was forced to cancel the privatization of State-owned Linzhou Steel in Henan province after militant workers held an official hostage for four days.

Social stability is paramount for China, and there are already clear signs that the leadership, attuned to the risks that full-scale privatization carries, is adopting a more tentative approach to reforms. The state sector is thriving at present, with the Ministry of Finance announcing in January that profits were up 38 percent on the previous year at 1.99 trillion yuan (209.5 billion euros). Profits and business revenue were double those of five years earlier, it said.

The official line is one of caution and was set out in March this year in a parliamentary address by China's top legislator Wu Bangguo. He announced the leadership had made a "solemn declaration" not to carry out privatization - although state media reports the number of private registered enterprises topped 8.4 million last year, accounting for 74 percent of the country's total.

Considering all of the above, policymakers and business leaders alike would do well to consider a wide-ranging program of partial privatization if China is truly to sustain its remarkable economic development and safely navigate the various obstacles in its path. After all, ensuring a "win-win" situation - which, among other positives, should help assuage worker resistance to the privatization phenomenon - is important for any government wanting to create vested interests that support an agenda of reform.

Kevin Amess is an associate professor of industrial economics at Nottingham University Business School, which has campuses in the United Kingdom, China (Ningbo) and Malaysia. Jun Du is a senior lecturer at Aston Business School. Sourafel Girma is professor of industrial economics at Nottingham University Business School.

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