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Economic Decentralisation


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An overview of China's economic decentralisation

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Economic Decentralisation

  1. 1. China’s Decentralization Problem<br />Decentralization fueled China’s economic boom. Could it now be the main source of its domestic problems?<br />As its period of reform and opening enters its fourth decade, China’s peculiar blend of market economics and political authoritarianism has emerged as an attractive template for countries wary of US-led development efforts. China’s nimble recovery from the global economic slowdown, powered by a timely government-forged stimulus package, has only promoted the sense that the so-called “Chinese model” poses a serious challenge to the once-undisputed ideological victory of American-style capitalism.<br />New skyscrapers, top-notch airports, and glistening shopping malls attract the most attention, but behind this ritzy façade China remains beset by social problems. Take corruption, for instance. Prior to a well-publicized government crackdown launched in July, corruption in the central Chinese city of Chongqing had become so endemic that 1,500 public servants, several influential judges, 70 gang leaders, three billionaires, and 250 police officers were placed on trial. <br />Income inequality has also become a serious problem. While many of China’s poorest have been lifted out of poverty by economic reforms, the gaps between urban and rural populations as well as between those living in the coastal provinces and those in the interior have deepened. Vast differences in education, health, and living standards throughout the country have changed what was once one of the world’s most egalitarian societies. <br />The central government has identified both income inequality and corruption as problems that threaten its legitimacy and must be tackled. Yet its ability to do so raises uncomfortable questions for the ruling Communist Party, whose very structure may ultimately prove to be the biggest obstacle for reform. In an important sense, the policies that enabled China to forge its remarkable economic growth are the same as ones that may impede its ability to correct serious problems.<br />Throughout China’s long history central government power has vacillated between greater and lesser control over the country’s hinterland. Typically, greater central control coincided with periods of isolation while looser control correlated with greater engagement with the outside world. During the latter periods, regional governments within China maintained their own trade links with the world, leading to a sharp divide between the prosperous, more cosmopolitan coastal provinces and the more impoverished interior.<br />China’s experience in the twentieth century epitomizes this central-local vacillation. Following the decline of the Qing Dynasty in 1911, China’s Republican era was characterized by weak central control over the country as well as the rise of a well-connected business elite on the coast. After its victory in the Chinese Civil War, the Communist Party simultaneously unified the country and largely closed it to outside trade, a trend that would persist until the end of Mao Zedong’s rule.<br />The economic reform era launched by Deng Xiaoping in 1978 attempted to reverse years of economic mismanagement by re-engaging China with the outside world. Deng called for the establishment of Special Economic Zones that would focus on producing finished Chinese goods for export, a strategy that eventually led China to become the “factory of the world”. Local government officials took control of state-owned enterprises from the central government and forged links with the outside world, leading to the vast growth of China’s export economy.<br />Likewise, fiscal decentralization dramatically tilted the balance of economic activity from the central to local governments. Whereas during the Maoist era local governments were forced to turn over all output to Beijing in exchange for allocated labor and capital, the reform era brought two key reforms: enterprises came under a taxation system in which they could keep part of their operating profit, and local governments were able to keep both taxes and local revenue.<br />These changes granted a great deal more autonomy to local officials, whose status within the Communist Party became substantially dependent on their ability to foment economic growth. In addition, local officials saw personal financial gain in promoting economic activity, creating a powerful incentive to maximize growth figures. For those from the coastal area, powering growth became reliant on the engine of international trade.<br />As a consequence, the Chinese economy transitioned from a unified—if sclerotic—planned economy to an agglomeration of several different regional economies, most of which had little to do with one another and even acted as competitors. Provinces in the southeast coast forged stronger links with foreign countries than they did with provinces in the interior of China while erecting trade barriers and practicing import substitution policies in the manner of independent countries. Provincial leaders acted in their own self-interest and failed to capitalize on comparative advantage, preventing the country as a whole from maximizing the productivity of each individual province. In a sense, the value of the Chinese economy was lesser than the sum of its parts.<br />To be certain, China’s push to decentralize control of its economy allowed for its spectacular growth to occur and for hundreds of millions of people to be lifted out of poverty. In contrast to the experience of post-Soviet Russia, in which economic “shock therapy” led to the rise of a powerful oligarchy and economic decline, the Chinese model of development has succeeded more than even the most optimistic observers could have predicted. Even Russia, once China’s great adversary, has turned to Beijing as a model for its own development.<br />Yet just as decentralization has powered China’s economic success, it has also opened a veritable Pandora’s Box of problems that have greatly damaged the popularity and legitimacy of the ruling Communist Party. Of these problems, two of the gravest are income inequality and corruption. <br />During the Maoist era China had one of the world’s most egalitarian economic systems, in line with other centrally planned economies. Nowadays, the situation is far different. China’s Gini coefficient, a statistic that measures income inequality, has rapidly outpaced that of most developed economies and even that of India, a country with whom China’s economy is often compared favorably. <br />In transitioning to a market economy, a certain degree of economic inequality is expected as the new system produces winners and losers. Yet decentralization has amplified differences between both rural and urban Chinese and those living on the coast versus those living further inland. <br />As the central government granted more fiscal autonomy to its individual provinces, those provinces in position to capitalize on China’s new export-oriented economy were endowed with a drastically higher budget to invest in infrastructure, education, and other social services. Many of these provinces, acting in the manner of independent countries, established barriers to trade with others, thus preventing their newfound wealth from spreading to the poorer parts of the country. Combined with an ineffective central government mechanism for inter-provincial income redistribution, these protectionist measures deepened the development differences between coastal and inland provinces.<br />In response to this growing disparity hundreds of millions of Chinese residents have migrated internally to the coastal cities in search of greater economic opportunity. There they often have found themselves unqualified for China’s urban social safety network because their registration, or hukou identification, tied them to their hometown. As a result, these migrant workers have lacked access to the education and health benefits accorded to legally registered urban residents.<br />The successive governments of Jiang Zemin and Hu Jintao have both sought to rectify China’s income inequality problem. Jiang established the ‘Go West’ program which provided economic incentives for businesses to relocate to the poorer, inland parts of the country. Hu has accelerated central infrastructure initiatives such as the high-speed train network in an effort to lower the cost of business in more remote parts of the country. Signs of progress have appeared—the microchip manufacturer Intel opened a production facility in Chengdu, for example—yet the disparity between the east and west in China remains striking.<br />Decentralization has also contributed to the spread of corruption; a problem that Beijing in September 2009 acknowledged severely harmed and weakened central rule and that some have argued poses the single greatest threat to Communist Party rule. While media reports and government statements pin the blame for corruption on the malfeasance of certain individual officials, it is instructive to consider the role of the system itself in contributing to the problem.<br />The Communist Party rules through a vast bureaucracy that has nominal control over all aspects of Chinese political life down to the village level. Members of the bureaucracy advance through approval from above; they are for the most part completely unaccountable to the people whom they govern. When Deng Xiaoping instituted economic reforms in the late 1970s, the performance of individual leaders became based on their ability to engineer economic growth in their jurisdiction more than any other metric. <br />This “growth at all costs” model has led to perverse consequences such as roads, bridges, and buildings built without any consideration of public use. Political and business interests within provinces, prefectures, and cities have fused to a degree that in many cases it is difficult to distinguish between the two. The recent crackdown on corruption in Chongqing, China’s largest metropolitan area, revealed a wide network of influential public officials deeply enmeshed in organized crime. Two of the more culpable suspects are the police commissioner and a respected judge.<br />Chongqing is merely the most high-profile example of a trend endemic to the entire country. After the abrupt reversal of Maoist-era policies, unclear and unenforceable laws and regulations governed China’s network of provinces and municipalities. Rather than a “rule of law” system as exists in many of the world’s democracies, China instead has a system better described as the rule by law; public officials simply are not accountable to the population they are meant to serve. <br />The crackdown in Chongqing reveals that Beijing can, when sufficiently pressed, fight corruption in its provinces. Yet within the bureaucratic structure that governs China the central government cannot possibly monitor all instances of corruption it sees. Even the spectacle of high-ranking officials incarcerated or executed has not made a serious dent in the country’s corruption problem. In essence, Beijing’s anti-corruption efforts thus far have resembled a game of whack-a-mole. Just as one corrupt network is squashed, others appear.<br />To its credit Beijing has not shied from tackling the problems of income inequality and corruption. Recent legislative initiatives like the Fuel Tax Law have sought to remove various fees established by individual provinces in favor of nationally enforced laws and standards. A national set of policies regulating the trucking industry would also reduce the cost of domestic transportation by removing inter-provincial barriers to trade. China’s economic fragmentation—epitomized by its relative lack of major firms for an economy of its size—is a weakness that the government has rhetorically pledged to correct.<br />Other matters remain. The parlous state of rural health and education infrastructure remains a serious impediment to rural economic development, while the plight of migrant workers living without proper documentation in the nation’s largest cities has only recently begun to elicit much government attention. The establishment of some sort of national social safety net would help promote some degree of equal opportunity in the country. While years away from effective implementation, Beijing at least has paid lip service to achieving this goal.<br />Yet the question remains; does the decentralized nature of China’s political structure allow for this sort of change? Even well-intentioned Beijing-launched initiatives peter out when passed to the provinces, mainly a consequence of local leaders acting in regard to their own interests rather than those of the country as a whole. Would Communist Party officials risk dampening economic growth in their district in order to establish a better social safety net? Would officials jeopardize their own business ties in order to champion initiatives for the public good? These questions, as central to the issue of Chinese corruption, have not been answered. <br />The logic of centralized versus decentralized control has long held sway in China due to the vast size of the country. But in many ways China has become smaller. There are now flights linking cities throughout the country as well as with many international destinations. The high-speed train network will ultimately, upon its completion in 2020, enable same-day rail travel between virtually any two major cities in the country.<br />Furthermore the rise of the internet alongside ubiquitous mobile phone service has brought the billion-plus strong Chinese nation closer together than ever before. To the well-connected netizen in Shanghai, the lives of migrant workers two thousand miles away in Sichuan Province no longer seem as remote. There have been recent examples in which public outrage stemming from corruption have prodded the usually recalcitrant government into action. <br />In its post-Mao incarnation the Chinese Communist Party has largely staked its popularity on preserving national unity and promoting economic growth. Its efforts to forge a single domestic market and nationwide standards with everything from trucking licenses to education may yet prove successful; the Party has always shown impressive resilience in response to internal crises. <br />However, Beijing’s persistent unwillingness to engage in meaningful political reforms and its inability to curb corruption could well render these efforts ultimately meaningless. Countries seeking to emulate China’s path to development would be wise to heed this caveat.<br />