Decentralization and Local Governance in China.docx

Decentralization and Local Governance in China.docx

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DecentralizationandLocalGovernanceinChina

DecentralizationandLocalGovernanceinChina'sEconomicTransition

　　JustinYifuLin

　　ChinaCenterforEconomicResearch，PekingUniversity

　　jlin@

　　RanTao

　　InstituteforChineseStudies，theUniversityofOxford

　　CenterforChineseAgriculturePolicy，ChinaAcademyofSciences

　　ran.tao@

　　MingxingLiu

　　SchoolofGovernment，PekingUniversity

　　mxliu@

　　Paperpreparedfortheconference：

TheRiseofLocalGovernmentsinDevelopingCountries，LondonSchoolofEconomics，May2003.

　　1.Introduction

　　InanydiscussionofChina‘sdecentralizationandlocalgovernance，therearethreeaspectsthatdeservespecialattention.First，Chinaisalargecountrywithfivelevelsofgovernment.Belowthecentralgovernmentare31provinciallevelunits（42millionpopulationonaverage），331prefecturelevelunits（3.7millionpeopleonaverage），2109counties（580，000peopleonaverage），and44，741townships（27，000peopleonaverage）。

Furthermore，thereareabout730，000moreorlessself-governedvillagesinruralareasbelowthetownshiplevel（WorldBank，2002）。

Themulti-levelnatureofChinesebureaucracyfrequentlycausesconfusionwhenpeopletalkaboutdecentralizationandlocalgovernanceinChina，sincethelevelcanrangefromprovincialtovillagelevel.

　　Second，thefactthatChinaisstillatransitionaleconomyinaprocessofmarketizationmakestheexistingliteratureonChina‘sdecentralizationsomewhatdifferentfromthegeneraldecentralizationliterature.SinceChinausedtobeaplannedeconomyandmostoftheeconomicactivitieswereundercenter’scontrolintheplanperiod，thereformsinitiatedsincethelate1970scanbeviewedasaprocessofdelegatingmoredecision-makingpowersininvestmentapproval，firmentry，revenuemobilizationandexpenditureresponsibilitiestolowerlevelsofgovernmentandgrantingmoreautonomyinproductionandmarketingtostateownedenterprises.Asaresult，muchoftheliteratureonChina‘sdecentralizationactuallydealtwithChina’seconomictransitionandliberalization（seeQianandWeingast1996asanexample），comparedtothegeneralliteratureofdecentralizationthatfocusesonthetransferofpublicfunctionstolowerlevelgovernments.

　　Third，ChinaisstillaPartyStatewithalllevelsofgovernmentofficialsappointedfromabovebytherulingCommunistParty.UnlikemanyindustrializingcountriesofAfricaorLatinAmericathatareoftenplaguedbybureaucracieslackingexperiencesororganizationalcapacity，theChinesebureaucracyisanelaboratenetworkthatextendstoalllevelsofsociety，downtotheneighborhoodandworkingunit，exhibitingahighdegreeofdisciplinebyinternationalperspective（ParishandWhite，1978，1984）。

Withineachlevelthereexistsanimpressiveorganizationalapparatusthatcouldeffectivelytransmitthestatepoliciesdowntolowerlevelgovernmentagenciesstep-by-stepthroughseverallayersofgovernmentbureaucracy（Oi，1995）。

Onlyinthe1990s，grass-rootelectionstookplaceextensivelyatvillagelevel，whichisnotformallyalevelofgovernment.Therefore，theconceptsof“constitutionaldecentralization”and“politicaldecentralization”donotquitefitinthecaseofChinasinceneitherarethereinstitutionalizedrightsoflocalgovernmentsinthecentraldecision-makingproceduresnoraretherewidelyacceptedgenuineelectionsatandabovethetownshiplevel.

　　ThispaperfocusesonalimitednumberoftopicsconsideredessentialtounderstandChina‘sdecentralizationandlocalgovernancebytheauthors.Consideringthemulti-levelnatureofChinesebureaucracy，wewillfocusonthedecentralizationandgovernanceissuesatlocallevel，i.e.county，townshipandvillagelevel，whileatthesametimestrivetoillustrateingthestructureandevolutionofinter-governmentalarrangementsathigherlevelsthatconstitutetheinstitutionalbackground.SinceChinaisstillatransitionaleconomy，theChinesestatewasdeeply，andstillis，thoughtoalesserandlesserextent，involvedinsomecompetitivesectorsandintervenesintothesocialandeconomiclivesonmanyfronts.ThedecentralizationprocessinChinahasbeenaccompaniedbyinstitutionalchangessuchasgrantingmorepowerofnon-publicfunctions（suchasinvestmentapproval，entryofnon-statefirms）tolocalgovernments.Givendecentralizationofnon-publicfunctionsconstitutesanimportantelementinChina’seconomictransitionandinmanycasestookplacesimultaneouslywithdecentralizationofpublicfunctions，bothdimensionswillbeexplored.Furthermore，thecentralizedpoliticalsystemnotonlyhavelargelyshapedtheadministrativeandfiscaldecentralizationprocess，butalsoconstitutethebasisforunderstandingmajorlocalgovernanceissuesinChinasuchasunfundedmandatesandfarmer‘staxburdens，ineffectivenessinanti-povertyprogramstobediscussedinthepaper.

　　Thepaperisstructuredasfollows：

insection2，wereviewthecentralization-decentralizationcyclesintheplanperiodbefore1978andthelogicforsuchcycles.Insection3，adiscussionofadministrativeandfiscaldecentralizationinChina‘smarket-orientedreformssincethelate1970sandtheirimpactsoneconomicgrowth，spatialinequalityandpovertyreductionarepresented.Insection4，wedescribetherecentralizationsince1994andanalyzehowitaffectedlocalpublicfinanceandpublicgoodsprovision.BasedonanalysesofChina’sinter-governmentalfiscalandpoliticalarrangement，section5furtherexplorestwomajorlocalgovernanceissuesinChina，i.e.，un-fundedmandatesandineffectivenessinanti-poverty.PartVIconcludes.

　　2Centralization-DecentralizationCycleInthePlanPeriod

　　ThefoundingofthePeople‘sRepublicofChinain1949markedaneweraoftheChinesehistory.Theambitiousgovernmentleadersthenbelievedthattodefendthenewsocialistsystem，andtokeeppaceandevenovertakewesternindustrialcountries，rapidindustrialdevelopment，especiallytheestablishmentofacompletesetofheavyindustrieswasessential.LearningmainlyfromtheSovietexperiences，theChinesegovernmentbegantoformulateandimplementtheFirstFive-yearPlanthatgaveprioritytoheavyindustrialdevelopmentsince1953.

　　However，developmentofcapital-intensiveindustrieswouldhavebeenextremelycostlyiffreemarketwereallowedtooperateinacapital-scarceeconomy.Tomobilizeresourcesforsuchaheavyindustrialization，aplansystemwasestablished，whichwascharacterizedbyatrinityofamacro-policyenvironmentofdistortedpricesforproductsandessentialfactorsofproduction（e.g.trainedpersonnel，funds，technologies，resources，etc.），highlycentralizedplannedresourceallocationandamicro-managementmechanisminwhichfirmsandfarmershadnodecision-makingpower（Linetal，2003）。

[i]Forinstance，thePeople‘sCommunesystemwassetupintheruralareasinthelate1950stoguaranteestatemonopolyofgrainprocurement.Besidessupplyinggrainatdepressedprices，thecommunesandproductionbrigadeswerealsoresponsibleformobilizingfinancialandhumanresourcesforlocalpublicgoodsprovisions，suchaswaterconservancyconstructionbyorganizingcompulsorylaborservicesoffarmers.

　　Undertheplansystem，aheavilycentralizedfiscalsystemwasestablished.NotonlytheaccountingsystemsofSOEsweredirectlyincorporatedintogovernmentbudget，butalsomajorresourceswerecontrolledbythecenter.TheStatePlanningCommissioncommandedtheauthorityindetermininglocalrevenueandexpenditureplansonanannualbasis，knownas"unifiedrevenueandunifiedexpenditure"（tongshoutongzhi）。

Localgovernments（atprovince，prefecture，countylevelandcommunelevel）didnothaveindependentbudgets.[ii]Astoexpenditureassignment，thecentralgovernmentwasresponsiblefornationaldefense，economicdevelopment（capitalspending，R&D，universitiesandresearchinstitutes），industrialpolicy，andadministrationofnationalinstitutionssuchasthejudicialsystem.Responsibilitiesfordeliveringday-to-daypublicadministrationandsocialservicessuchaseducation（exceptuniversities），publicsafety，healthcare，socialsecurity，housing，andotherlocal/urbanserviceswasdelegatedtolocalgovernments.

　　However，inacountryofthesizelikeChina，theworkingloadstoformulate，administrate，coordinate，andmonitorthecentralplanswereextremelyheavyandbecamemoreandmoresoastheeconomicsystembecamelargerandmorecomplicated.Forexample，thenumberofstateownedenterprises（SOEs）subordinatedtothecentralgovernmentincreasedfrom2，800in1953to9，300in1957，andthenumberofitemsinmaterialallocationundercentralplanningincreasedfrom55in1952to231in1957（QianandWeingast1996）。

Theclassicalproblemofcontrolandmonitoringunderinformationasymmetryemergedsoonaftertheplannedsystemwassetup.Astheeconomygrewlargerwithmoreprojectsinitiatedandenterprisesstarted，theplansystembecameincreasinglyunmanageable.Tomakethingsworse，ahighlycentralizedplannedsysteminevitablyunderminedtheincentivesoflocalgovernmentswhenlocalcoordinationinindustrialdevelopmentwasessential.

　　Underthisbackground，Chinainitiateditsfirstdecentralizationwithintheplannedframeworkbydelegatingmorepowerstolocalgovernmentsin1957.Thepoliciesthenincluded：

（1）delegatingnearlyallSOEstolocalgovernments，suchthattheshareofindustrialoutputbytheenterprisessubordinatedtothecentralgovernmentshrankfrom40percentto14percentofthenationaltotal；

（2）centralplanningwastochangefromanationaltoaprovincialbasis，withdecisionsaboutfixedinvestmenttobemadebylocalgovernmentsratherthanthecentralgovernment；（3）revenuesharingschemeswerefixedforfiveyearsandlocalgovernmentsweregrantedsomeauthorityovertaxes.T