Source: Setting the Agenda: Asia and Latin America in the 21st Century
Ariel Armony has described the relationship between China and Latin America as “an ‘encounter of informalities’” (2012: 104). Building on this idea, I will sketch out some preliminary ideas about what this encounter of informalities might mean in both a comparative and “actual” interactive sense. First, by way of comparison, I will discuss the meaning of the concept of informality and what governing informality means in the China context. At first glance, this may seem a simple exercise, but any effort to “travel” with a Latin America-based concept of informality very quickly runs into complications in the case of China. Second, with this comparative perspective in mind, I will discuss what a distinct form of Chinese informality might mean for growing economic and political interactions between China and Latin America.
Chinese Informality in Comparative Perspective
The concept of informality is rarely applied to the Chinese political economy by either Chinese or international observers. As a rare 2009 study noted, “In China… there has been relatively little attention to the subject of the informal economy” (Huang 2009: 419). This inattention is both intriguing and puzzling since the urban informal sector constitutes close to 60% of total urban Chinese employment (Huang 2009).1 Why the concept of informality has not been prominent in either academic or popular use in China has various explanations.Compared to Latin American informality, the Chinese state plays a different and, arguably, more active role in the “governing” of informal markets. It is this comparatively prominent role of the Chinese state in governing Chinese informality that has led to its neglect as a popular or academic analytical category. However, having more governance or “regulation” of informality in China does not necessarily equate with better governance or regulation. In fact, even though the overriding goal of the Chinese Communist Party (CCP) and the state is to maintain “stability” and “order” over markets in general, the result of efforts to govern informal markets is quite often the opposite of the desired stability and order.
Understanding informality in the Chinese context first requires some background about the concept itself. In a commonly cited definition, informality “is a process of income-generation… [that] is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated” (Castells and Portes 1989: 12). This definition, with its focus on “unregulated economic processes, is crucial but frequently frustrating. This is because definitions and studies of informality that focus on a regulated/unregulated, formal/informal dichotomy often fail to thoroughly investigate the state’s relationship to the informal economy.
The literature on informality, mostly adapted to settings outside of China, demonstrates a bifurcated use and understanding of the concept of “regulation.” It emphasizes the distinction between formal and informal types of employment in which “deregulation” implies the loss of employment stability and material and legal guarantees from employers or the state. In this sense, employment in the regulated or formal sector is associated with job stability, a certain set of state- backed welfare benefits, and legally mandated labor standards. In contrast, unregulated or informal sector employment is associated with job instability, no basic legal protections, and few guaranteed material benefits. Throughout the 1980s and 1990s, in both Latin America and China, we saw similar processes of “deregulation” and rising informality as states liberalized large swaths of their economies.
While this approach to the unregulated nature of informality stresses a definitive shift away from the state’s commitment to a certain form of production and labor arrangements, it says very little about how the state interacts with markets and workers once they become “informal.” Studies that take up the question of how the state interacts with those who no longer enjoy the protection and benefits of formal sector employment often emphasize ways in which the informal sector is unregulated by the state. One argument suggests that informal markets are simply hidden from the view of state officials. According to this view, officials know about and can “see” these markets but are not necessarily opposed to their existence. Instead, they “intentionally [do] not intervene in an explicit, active, or institutionalized way” (Roever 2005: 5). Ultimately, both arguments portray the state as lacking a regularized, institutional form of interaction with the informal sector. In other words, the state fails to govern the informal sector and, almost by definition, the informal economy is therefore “unregulated.”
The idea that the informal sector is unregulated or ungoverned makes little sense in the case of China. The Chinese state, and in particular its uniformed agents in the institutional form of the “urban management” unit, or chengguan, actively regulate a key segment of China’s urban informal economy. In other words, a dedicated unit of the Chinese government maintains close oversight over and has daily interactions with the “face” of China’s informal economy—its urban street vendors. In this sense, China seems to govern and regulate an informal sector that is not governed or regulated in other countries.
Nevertheless, the result of this interaction is often a confrontational cat and mouse game that has captured the attention of the larger Chinese public. It has also captured the attention of elements of the CCP who are concerned about the challenge it poses to the legitimacy of the Party’s rule. Therefore, the Chinese state actively seeks to regulate and control key parts of the country’s informal economy with the avowed intent of “maintaining order and stability.” The result is an uneasy standoff between state and society that often results in rising chaos, violence, and decreasing state legitimacy.
Chinese Informality Meets Latin American Informality
This somewhat formalized comparative approach to understanding the governance of informality in China is useful as background, but it fails to capture a more common sense understanding of the concept. A more intuitive understanding of informality would include two essential facts: (1) formal laws and rules can be, and are, negotiated, bent, or violated; and (2) who you know is crucial, because having the right connections makes these laws or rules even more malleable. As Armony writes, “people in China, as in most of Latin America, move in a deep sea of informality, in which unwritten rules, bribery and/or personal connections are the gatekeepers to resources controlled by individuals in positions of power” (Armony 2012: 104). Moreover, for those who live in informal environments, informal practices are “common knowledge in society,” and therefore people “understand that there are incentives to comply with the [informal] rules as well as sanctions for not following them” (Armony 2011: 38, 2012: 104).
In this more cultural understanding of informality, the implicit comparison is with more formal institutional environments, such as the United States or Germany, where it is understood that laws and regulations are followed and enforced. In contrast, in Latin America and China it is intuitively understood that rules, standards, and laws are potentially quite negotiable.2 What happens when Chinese and Latin Americans, both accustomed to informality, meet? One effect, Armony argues, is the heightened possibility for corruption as Chinese and Latin American government officials and businesspeople together undermine even the best-formulated labor, environmental, and other investment rules.
Armony may well be correct that the interaction of Chinese and Latin American state and business representatives—both steeped in informal practices—will lead to corruption. Ultimately, this is an empirical question. Here, I want to ask a few questions and posit several outcomes, some negative and some potentially positive. First, even though Chinese traders and investors may be used to an informal institutional setting in China itself, does that necessarily make them more prone to, or more adept at, negotiating the rules than their counterparts from more traditional recipients of FDI from the United States, Europe, or elsewhere in Latin America? Without the strong enforcement of trade and investment regulations on the part of Latin American governments or the oversight of laws such as the American Foreign Corrupt Practices Act, history has shown that firms from even the most “formal” countries may engage in bribery, corruption, or other legal and standards violations.
Another question that relates to the discussion of comparative informality in China and Latin America is the extent to which knowing how to be informal in China translates into knowing how to be informal in a foreign environment. A Chinese firm or individual adept at navigating the Chinese political and economic institutional environment may not necessarily be equally as adept in a Latin American setting.
Understanding levels and types of informality across countries would be a challenging but worthwhile effort. For example, as Indian firms increasingly invest abroad, including in Latin America, how should we understand their firms’ approach to negotiating investment rules and other government regulations?
When Chinese SOEs go abroad, they often come with an understanding that having resources and connections can help them get what they want. But just as the Chinese informal economy is unintelligible in comparative perspective, failing to take into account the all-important role of the state can lead us to overlook a crucial and possibly unique feature of China’s overseas trade and development behavior: a preference for state-to-state deals. Within China, having government connections is fundamental for the smallest to the largest of businesses. In Africa, but also in deals with Latin American countries, Chinese SOEs and development banks have shown a preference for engaging in state-to-state deals and, when possible, gaining “sovereign guarantees.”
I would suggest that this preference is in part based on the unique features of Chinese informal practices and also the nature of the Chinese political economy. Within China, knowing the right government officials is often a ticket to preferential market access, credit, protections, subsidies, etc. At the same time, it also implies a kind of guaranteed stability for a given business deal. The perception that stability is implied, or risk minimized, by having the right political connections is underpinned by the absence of popular election of government officials. Nor do labor, environmental, or other “civil society” groups openly participate in the system.
Undoubtedly, China is not the only place where having good official connections is seen as crucial to business success. But when Chinese firms, especially SOEs and policy banks, go abroad to Latin America or elsewhere, they come with a strong sense that knowing the right government officials implies a kind of guarantee. They assume that certain, often official, connections guarantee their interests. Another way of putting it is that Chinese businesspeople and government officials assume that the risk of any given trade or investment deal can be largely minimized if the deals are done with the right officials, or at least with their approval.3 Knowing specifically who to know is arguably less important than knowing an official’s rank in the hierarchy.
How differently has this proposition worked for Chinese firms and banks in Africa than in Latin America, given the different institutional and political settings in each region? Many Chinese firms and major policy banks have cut their teeth in Africa, where there is a clear preference for state- to-state deals and sovereign guarantees.4 There is, however, reason to believe that the Chinese confidence in the guaranteed risk-reducing nature of state-to-state deals may be misplaced in many Latin American settings. This could be, in large part, because of the more institutionalized and vibrantly participatory Latin American setting, which contrasts with the environment in many of the African countries in which Chinese firms and banks have been operating. The idea that Latin American officials can be voted out of office and that civil society groups representing labor, environmental, or indigenous interests might criticize or help overturn government decisions is anathema to a Chinese sense of “informality.” It is, however, part and parcel of Latin American democracy. In this sense, Latin America may be less informal but its political and legal systems more institutionalized than China’s.
Chinese SOEs and development banks, as the quintessential “state capitalists,” are used to having the upper hand when it comes to navigating the informal Chinese institutional environment. However, it is not clear that knowing how to be informal or negotiate the rules in China will translate into the ability to effectively or consistently do so in Latin America or elsewhere. In fact, it is quite likely that the more sure Chinese firms or government officials are that knowing the right (i.e., highest-placed) Latin American politician means a guaranteed outcome, the more disappointed and surprised they will be if and when that politician leaves office or changes his or her mind.5
As China’s investment activities in Latin America continue to increase, more non-state Chinese firms will pursue deals in Latin America. What kinds of deals and how they make them will likely differ from their SOE and policy bank counterparts. It will be interesting to see how firms with fewer, or at least different, kinds of state connections in China navigate Latin American institutional environments. Will they be more or less likely to engage in corruption? One possibility is that they will be more willing to seek out and do deals with non-official partners in Latin America. They too may be willing to negotiate and bend the rules as much as their hosts allow, but they may want to bend different rules differently. The institutional variation in any given Latin American country will be a key variable in how much or how effectively Chinese firms, state or private, can bend the rules.
One last consideration, and one that points to a less pessimistic outcome as Chinese and Latin American informalities meet, is whether rule bending might not be a potentially healthy thing. Sometimes, bending or ignoring the rules is necessary or healthy when the rules themselves are poorly designed or fail to reflect a social consensus. In China, two clear examples of the informal economy are street vendors and informal finance. Both arguably fulfill an important role in providing employment, income, and popular products and services. This, in part, also explains the state’s on-again, off-again approach to enforcing prohibitions against these activities. If Chinese firms or individuals prove adept at getting around ill-conceived or burdensome bureaucratic barriers in Latin America, this may not necessarily be such a bad thing. The devil will be in the details.
1 Naughton (2007) puts the number at close to 40%.
2 Armony (2012) notes that informality is “high” in China and Latin America.
3 This applies most dramatically to China-Venezuela ties. China’s largest loan exposure in Latin America, just under US$40 billion, is in sovereign loans to Venezuela.
4 For a recent example that explores the effects of different institutional settings on Chinese investments in Africa and Latin America, see Alves (2012).
5 Here the case of Hugo Chávez and Venezuela again comes to mind.
References
Alves, Ana. 2012. “China’s Oil Diplomacy: Comparing China’s Economic Statecraft in Angola and Brazil.” Ph.D. Dissertation, London School of Economics and Political Science.
Armony, Ariel C. 2011. “The China-Latin America Relationship: Convergences and Divergences,” in Adrian H. Hearn and José Luis León-Manríquez (eds.), China Engages Latin America: Tracing the Trajectory. Boulder: Lynne Rienner.
Armony, Ariel C. 2012. “Exporting Corruption,” Americas Quarterly, Winter: 104-107.
Castells, Manuel and Alejandro Portes. 1989. “World Underneath: The Origins, Dynamics, and Effects of the Informal Economy,” in Alejandro Portes, Manuel Castells and Lauren A. Benton (eds.), The Informal Economy: Studies in Advanced and Less Developed Countries. Baltimore: Johns Hopkins University Press.
Hart, Keith. 1973. “Informal Income Opportunities and Urban Employment in Ghana,” Journal of Modern African Studies, 11(1): 61-89.
Huang, Philip C. 2009. “China’s Neglected Informal Economy: Reality and Theory,” Modern China, 35(4): 405.
Naughton, Barry. 2007. The Chinese Economy: Transitions and Growth. Cambridge: MIT Press. Roever, Sally. 2005.
“Negotiating Formality: Informal Sector, Market, and State in Peru.” Ph.D. Dissertation, Department of Political Science, University of California, Berkeley.
