| How does a state renegotiate its duties and obligations to society? One of the key explanations for the disintegration of socialism in the Soviet Union and Eastern Europe is that these states failed to keep up their end of the “social contract.” As scholars of the regions point out, the fusion of economics and politics under socialism made the failure of the economy a moment of political opportunity, leading to the end of socialism.; In the Chinese context, however, the state has extricated itself out of the “social contract” with the urban working class without losing its grip on political power. This dissertation analyzes this significant Chinese exceptionalism. I argue that a key factor in China's ability to reform the economy without sacrificing political control is the timing and sequencing of its foreign direct investment (FDI) policy. Liberalization of FDI began China's retreat from state-owned industry and its endorsement of diverse forms of ownership and, by extension, diverse forms of labor relations. I argue that this process of ownership diversification, including foreign ownership, sets the Chinese experience apart from other socialist transitions that relied mainly on privatization of the state sector and/or the further liberalization of a nascent domestic private sector.; FDI played three roles in the process of China's reforms. First, the foreign sector served as a laboratory from where difficult and politically sensitive labor reforms were extended to other parts of the economy. Second, as FDI's economic importance grew, it placed competitive pressure on the state sector to produce more efficiently, thus necessitating new labor practices. Third, the existence of a foreign sector gave ideological justification for deeper reforms. It legitimated the rapid growth of a Chinese private sector and it legitimated state sector managers' demands for greater enterprise autonomy and less onerous welfare burdens. Openness to FDI, thus, led gradually to the expansion of capitalism labor practices, a contagion of capitalism that permeated ownership boundaries. |
