This document discusses governance and systematic transformation in China over two stages from 1978 to the present. It summarizes that China implemented economic reforms without political reforms by decentralizing power to lower levels of government, creating competition and incentives for growth. This "federalism, Chinese-style" allowed for gradual experimentation and learning which supported sustainable market-oriented reforms and rapid economic development, especially through township and village enterprises. The Chinese experience shows that pragmatic, politically feasible reforms can succeed without immediate democratic changes or privatization.

1. Governance and Systematic
Transformation: China
Sharkhuu Munkhbat
05.Nov.2011
Governance and Development

2. Contents
• Economic and social development in China,
• Governance and systematic transformation
• - Design of the political-economy,
• - Ineffective/weak Governance,
• - Political reforms,
• - Two stages of systematic transformation,
• - Decentralization in details - fiscal and financial
decentralization, another examples,
• - Crucial Benefits of Federalism, Chinese style,
• Conclusions.
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3. Economic and social development
• Annual economic growth over past 30 years: around 10%
• Nominal GDP $5.93 trillion, PPP $10.12 trillion, the 2nd
largest economy after the USA (2010),
• Per capita nominal GDP $4,382, PPP $7,544 (2010), 1978
$153,
• Between 2011-2015 China’s annual growth will be around
9.5 %,
• The largest exporter ($1.58 trillion), 2nd largest importer
($1.23 trillion) 2010,
• Social indicators such as absolute poverty, life expectancy
and infant mortality substantially improved,
• But regional variation: The highest economic growth has
occurred in the coastal provinces, while geographically
isolated north western have experienced much lower growth.
Source: IMF, World Economic Outlook (WEO) 2010, 2011
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4. Design of the political-economy
1. Market-oriented reforms have been effectively
conducted without any major political reforms;
2. The national government has been perceived to
exert substantial political discretion and to have the
power suddenly to reverse the policy reforms;
3. Only a few attempts have been made to establish
secure private property rights, commercial law and
independent judiciary;
4. Reforms, so far, have succeeded without large scale
privatization and complete liberalization of
markets.
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5. Ineffective/weak Governance
• Given political monopoly of Chinese Communist Party
(CCP);
• Economic returns are threatened by political arbitrariness
and predation;
• There are no institutional safeguards that can hinder the
government from reversing the reforms;
• This means that a potential turnover in leadership could
allow a new government to confiscate private wealth and
to impose penalties on those whose businesses succeeded
under the economic reforms;
• Quality of institutional matrix is far from the meeting the
standard of advanced economies.
• = Contradiction between weak governance and fast
economic growth
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6. Political reforms
• In fact, political reforms have
- neither opened the door for the emergence of a democratic
order
- nor have they sought to separate the Chinese Communist Party
(CCP) and state.
• Nevertheless, several critical political changes have
occurred since 1978:
1. Political decentralization has shifted considerable
powers to lower governments;
2. With the Chinese Communist Party (CCP) having
increasingly favored a pragmatic, market based policy
approach, a significant ideological shift in political
thinking has taken place which has fostered economic
reforms;
3. The government has significantly increased the degree of
openness its economy.
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7. Two stages of systematic reforms
First phase: 1978-1993
Both the economic and political system were reformed
through a combination of conventional and
unconventional measures. It included:
• political decentralization, entry as well as expansion
of private but particularly of local government
enterprises;
• a subtle dual-track (plan and market) strategy for
market liberalization;
• enhancement of financial stability.
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8. Two stages of systematic reforms
Second phase: since 1994
Increased efforts have been undertaken to replace the
old socialist economic system with rule based,
market-oriented economy. It included:
• Exchange rate unification,
• Current account convertibility,
• Tax and Fiscal reform,
• Reorganizing the central bank,
• Downsizing public administration,
• Restructuring and privatization of state-owned
enterprises.
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9. Decentralization
• The most important step towards more effective
governance was the regional decentralization of
government.
• The previous centralized system of police making was
incompatible with new market-oriented reforms.
• The devolution of government authority to lower levels
not only provinces but also prefectures, counties as well
as townships and villages.
• Lower level governments:
- assumed major responsibility over public fixed investments,
- were authorized to decide upon local expenditure, to provide
local public goods and to establish their own foreign trade
corporation.
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10. Fiscal decentralization
• Fiscal reforms: In 1980, the old unified revenue
collection and spending system was replaced by the fiscal
contracting system based on medium-term contracts
between adjacent governmental levels.
• Lower governments had strong interest in increasing
revenues and hence promoting economic growth in their
jurisdictions.
• In the mid 1980s, these incentives were even
strengthened by the expansion of extra- budgetary funds:
- no share with the central government,
- could be used more flexibly than regular funds.
= Fostering the development of local economies.
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11. Financial decentralization
• Decentralization of the state banking system in the mid-
1980s,
• Provincial, municipal and county governments gained
considerable control over credit allocation,
• This softened budget constraints eventually fed inflation -
adverse macroeconomic effects,
• However, the lowest level (township, village)
governments had very limited access to credit and did
not have the means continually to bail out loss making
town and village enterprises (TVEs) or shield them from
competition by protectionist measures,
• As a consequence of this mixture of incentives and
constraints TVEs have become a driving role of economic
growth and their output accounted 30% of total industrial
production in 1993.
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12. Decentralization-another examples
• The regional experimentation and imitation reduced
adjustment cost for economic and political agents by
allowing for gradual and structured learning,
• Special economic zones have been established:
• - foreign investment and business practices played primary role,
• - private ownership dominated,
• - market mechanisms were allowed to coordinate the allocation
of resources.
• In general, the intense inter-jurisdictional competition and
substantial political freedom over local economies have
encouraged learning, experimentation as well as adaptation
and eventually have promoted economic growth.
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13. Crucial Benefits of Chinese style
The political changes mentioned above have brought about a new
quality of the political system, which was called Federalism,
Chinese style.
1. A feasible means of overcoming political opposition to
economic reforms that exited within the national government,
2. Decentralization and the growing pressures for reform by
lower level governments have helped to make market-
oriented reforms more durable and sustainable,
3. It created inter-jurisdictional competition and allowed for a
great variety of experiments at the regional levels,
4. Dual-track approach for price liberalization allowed the
government to pursue the principle of conducting economic
reforms without creating losers,
These four set of arguments suggest that political and economic
decentralization has been single most important factor in
initiating market-oriented economic reforms.
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14. Conclusions
• It demonstrates that effective reforms don’t require
theoretically optimal but rather a pragmatic and politically
feasible sequencing of reform steps;
• The maintenance of some old institutions during the first
stage of transition may be more effective than the rapid
import of new formal institutions according to
international best practice;
• ‘Economic laws’ which focus on the beneficial effects of
performance-related incentive structures, competition and
hard budget constraints, not only apply to enterprises but
also to governmental organization;
• Systematic economic reforms can actually be implemented
without creating big or numerous losers;
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15. Conclusions
• The Chinese experience clearly supports on hypothesis
that a politico-institutional foundation is condition sine
qua non for economic reforms and development and an
adequate, even if imperfect, market-enhancing
governance structures can be politically crafted.
• The focus on China is obvious because the remarkable
success of its economic reforms has been mainly and
convincingly attributed to its decentralization policies.
• Hence, the Chinese experience may yield some
valuable lessons for other large countries.
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16. THANK YOU FOR YOUR
ATTENTION!
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