Whiting poses an important question: Why did the Chinese communist system endorse the expansion of private ownership of rural industries, rather than emphasizing collectively owned enterprises? What were the administrative links and feedback mechanisms among central policymakers, local administrators, and China's entrepreneurs and rural workers that led to privatization? For decades, a primary presumption in the scholarship of socialist systems was that communist bureaucrats had such deep vested interests in state ownership of economic enterprises that they would never convert. But Whiting reaches the startling conclusion that it was easier for local officials to tax and control private enterprises than socialist enterprises that were embedded in the state structure.

The tax system is crucial to her analysis. Most tax revenue came from the turnover and income taxes on rural industry. Taxes went up to the central government, but a share was retained locally, so local officials had an interest in expanding local industry. At the same time, local officials were given extensive local obligations, including education, health, etc., so they needed more revenue. Thus, they needed to increase rural industry and other sources of discretionary local income. They would be rewarded with promotions and higher salaries if they succeeded. Whiting's key point is that local officials were eager to increase their revenue, and higher levels agreed on this (Chapter 3).

In regions where the central government had earlier encouraged rural industry in the collective sector (rural Shanghai and Wuxi provide case studies for Whiting for this pattern of development), further development of collective industry was the easiest solution. Local leaders already had much influence over the collective sector and could easily get information to obtain tax revenues from them. However, and this is one of Whiting's key discoveries, local collective industry deliberately kept profits low by inflating expenses. They overstated the number of employees and expanded entertainment costs to shift expenses to tax deductions. As enterprises avoided taxes, local officials benefited indirectly from better economic and social conditions, but, at the same time, their tax revenue for themselves and higher levels was limited. (This subterfuge may also have resulted in Chinese and foreign analysts overstating the inefficiencies of the collective system.)

In areas where the central government had not helped to develop collective rural industry, private rural industry got a head start. (Whiting's case study work on this pattern is in Yueqing, near Wenzhou in southern Chejiang.) Rural officials had essentially no way of knowing the financial accounts of private industry for tax purposes, so they developed a far simpler institutional environment. A new form of enterprise, the “share-holding cooperative enterprise,” was created. It was a private firm, with the restriction that it had to reinvest 50% of profits and contribute at least 25% of profits to public accumulation funds (p. 160). Moreover, a simplified sales tax of about 9–10% of gross production replaced a complex set of taxes that required far more intrusive information to compute. Both private entrepreneurs and local officials gauged this a reasonable deal. The government got reasonably high tax revenues fairly easily. Moreover, if competition and overproduction started to push prices down and banks refused to loan money to failing firms, the local officials had no financial obligation to private firms if they went into debt and possible eventual bankruptcy. At the same time, private entrepreneurs got their private investment protected with a new, safe legal status (p. 177).

Thus Whiting arrives at an important and counter-intuitive insight, that local officials could do their jobs and please their superiors more easily by dealing with private enterprises than with collective ones. By the late 1990s, private ownership was becoming better accepted and protected and was expanding as a part of China's economic system.

At a macro-political level, her insights show that Chinese citizens do make inputs into the development of state policy. The modality is not through an institutionalized formal democratic process of elections between competing parties; rather it is by withholding resources from the state by locally sanctioned tax minimization and forcing the central government to adopt new policies that encounter less resistance.

From a methodological perspective, Whiting's book is a wonderful model. Her use of public documents is superb. She has found a wide range of yearbooks, government directives, and collections of articles on both local and national levels that provide a very full image of rural industrial development. She has supplemented this with 252 interviews, so that she can convert cold laws and statistics into living social, economic, and political processes. Quantitative analyses of economic and financial data further confirm some of her hypotheses. She proves that one does not need to take the risks of internal (nei pu) documents or secret materials to do in-depth research in China.

While Whiting's argument is persuasive, it is not necessarily complete. I wish that she had explored more systematically whether officials encourage private economic development because it gives them more opportunities to help their children, other relatives and friends, and maybe even themselves to become successful businessmen and leap above the financial constraints imposed on public servants. She tantalizes us with hints, “[L]ocal party secretaries and township executives … translat[ed] their political power into ownership of a relatively large number of individual shares in the most valuable firms, often at highly favorable prices” (p. 156), but does not treat this issue with the same rigor that she does her other hypotheses.

All in all, this is a fine contribution to our understanding of the internal dynamics of China's policy process as it continues to reform the economic system. It reminds us of the central importance of public finance institutions and policies to sustain a state. It is clear that the Chinese Communist Party understands this requirement.