The Role of Local Government and Economic Development in - - PowerPoint PPT Presentation

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The Role of Local Government and Economic Development in Decentralization in China

Gangming Yuan Professor, Institute of Economics, Chinese Academy of Social Sciences

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The evolution of decentralization in China

• Fiscal decentralization (1980-1993)
• Recentralization (1994-2002)
• Investment decentralization (2003-now)

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Fiscal decentralization (1980-1993)

• Economic reform in China since 1978 has

been characterized by decentralization

• The decision-making power of the central

government shifted and dispersed to local governments.

• Local governments have vigorously

expanded their regional economies in response to this decentralization.

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Criticism of decentralization

• Fiscal decentralization gave excessive

stimulation to local governments, resulting in misallocation of resources

• Local investments repetitive and excessive.
• Local governments’ administrative protection,

market segmentation

• Unconstrained expansion of local economies
• Resulted in investment overheating and

macroeconomic fluctuation

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Criticism from two sides

• Planned economy view:

Decentralization weakened the central government’s competence for centralizing fiscal resources and control of the macroeconomy

• Market economy view:

The decentralization was administrative, not market competitive, deviating from the direction of market reform.

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Recentralization (1994-2002)

• In 1994, fiscal decentralization was

cancelled.

• Central government share of revenue

increased, local government share reduced

• Central government share increased

greatly from 22% in 1993 to 56%

• Local decision power taken back by the

central government

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The increased share of central revennue since 1994

10 20 30 40 50 60 1 1 9 9 7 7 8 8 1 1 9 9 8 8 1 1 9 9 8 8 2 2 1 1 9 9 8 8 4 4 1 1 9 9 8 8 6 6 1 1 9 9 8 8 8 8 1 1 9 9 9 9 1 1 9 9 9 9 2 2 1 1 9 9 9 9 4 4 1 1 9 9 9 9 6 6 1 1 9 9 9 9 8 8 2 2 2 2 2 2 2 2 4 4 2 2 6 6 2 2 8 8

% %

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The decision-making power concentrated in the central government

• In 1998, the decision-making power of

local branches of state-owned banks for loans was returned back to the banks headquarters.

• Decision-making powers for the key

investments in the locals were concentrated in the central government.

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The worst macroeconomic performance in recentralization

• The expanding enthusiasm of local investments

disappeared

• During 1998-2002, all indexes, including growth

rate, investment, consumption, income, price, employment, worsen:

– The rate of GDP increase was 8.2%, 2 percentage points lower than the past period 1978-1997. – The increase rate of investment below 10%. – The price index drop to negative. – The rate of unemployment rises to more than 4% from lower than 3%.

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Local investments expansion during the conflict (2003-now)

• Since 2003, local investments have been

vigorously reviving.

• Local investments boom in steel, cement,

aluminium, electricity, coal, etc.

• Scale and speed of local investments

exceed central investment

• Macro-management department opposes

strongly local investments expanding

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Macroeconomic performance

• 20
• 10

10 20 30 40 50 60 70 %

GDP price investment

fiscal decentralization recentralization investment decentralization

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The criticism from macroeconomic management department

• Local investments are expanding

excessively, causing economic

• verheating and bottleneck tension
• Local investments expanding at a low level,

causing industrial structure degradation.

• Local investments expanding blindly,

causing a surplus of production capacity

• Local investments have been supported

and protected by local governments, violating rules

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Arguments for local investments

• Not causing economic overheating
• Not expanding only at low levels
• Not blind
• Not violating rules
• Governance improved
• Self-restrained

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Local investments not causing economic overheating

• Macroeconomic performance has been good
• China's economy has been growing at more

than 10% for 5 years continuously

• Bottleneck restrictions such as energy,

transportation, steel, cement, etc. have eased

• No inflation
• Indicators such as residents income,

consumption, employment have been the best since 1997.

• Efficient management of local governments, has

undoubtedly played an important role.

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Local investments not expanding only at low levels

• Local investments have increased

production capacity, for example, in steel: industrial, advanced, and high-quality technology

• High-standard product technology,

conserving energy, using better material, environmental protection

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Local governments and local investments not blind

• Local governments support local investments,

gauging market dynamics, and swiftly seizing development opportunities.

• Pay more attention to the long-term investment

project and strategic meaning.

• Expect to get steady, continuously, high-

efficiency development, occupying the forefront in categories such as scale, technology, quality, benefit, etc..

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Local investments not causing production surpluses

• The total amount of steel production countrywide

break yearly targets set by the management department, from 150 million tons to 450 million tons.

• Electric, coal, cement, aluminium etc. similar.
• The output of products increased in a large

amount has covered the shortage. Local investments have made the contribution.

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Amount of steel production

50 100 150 200 250 300 350 400 450 500

N

• v
• 2

J a n

• 3

M a r

• 3

M a y

• 3

J u l

• 3

S e p

• 3

N

• v
• 3

J a n

• 4

M a r

• 4

M a y

• 4

J u l

• 4

S e p

• 4

N

• v
• 4

J a n

• 5

M a r

• 5

M a y

• 5

J u l

• 5

S e p

• 5

N

• v
• 5

J a n

• 6

M a r

• 6

M a y

• 6

J u l

• 6

S e p

• 6

N

• v
• 6

million tons

Limited line

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• Local investment enterprises and local

governments pay attention to market trends and the overall situation of industries more than the department of central government.

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Opinion differences on local investments in hot industries

• Central department: producing or

aggravating production surplus and vicious competition.

• Local governments: efficient exceed the

inefficient in competition, favorable to development of the industries.

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Local enterprises regulated by central department, from limited to accepted

• Local enterprises expanding, growing into

leading enterprises

• Central department warning and limiting at first,

accepting finally

• TV: Changhong (长虹）

Car: Cherry（奇瑞）, Jili（吉利） Mobile phone: Bird（波导） Steel：Sha steel（沙钢）, Jian Long（建龙）, Laigang（莱钢）, Hualing（华凌）

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Local investments not violating rules

• In the interest of local development and

environment

• Local governments supervise and control

illegal and low quality investment strictly, initiatives exceed the capability of the central government.

• Local governments do not provide the

protection for investments with low efficiency and high pollution.

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Investment in rules compliance

• Local governments ask local investments to

comply with the rules

• A tragic case: Central government punished

severely Tieben Steel Plant (铁本）for violating rules in 2004.

• Local governments have understood, do not

grossly violate the rules.

• The costs of violating the rules for large-scale

investments are enormous.

• Local investor consciousness for following the

norm is very strong

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Rationality and efficiency of local government’s decision

• Local governments support local investments

warmly, is rational.

• Wishing eagerly to improve public service ability

through local industries' development.

• As sharp as entrepreneurs, courageous and

resolute, swift, efficient

• Rationality and efficiency of local government’s

decision in supporting investments are far higher than central departments

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Local governance improved

• Local governments obtain abundantly

more information than the central government .

• Local investments approved by local

governments have obvious stimulation and market mechanism constraints.

• Local investors assume sole responsibility

for returns and losses of investments.

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Local governments self- restrained

• Local governments have enthusiasm in

supporting local investment expansion, also have self- restrained response to economic fluctuations to evade risk

• Reduced investment, which is the effect of

the central government’s regulation for preventing overheating, but more a function of self-restrained behavior of local investments.

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Steel investment growth

• 20

20 40 60 80 100 120 140 160 180 200

Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06

%

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Dilemma of decentralization

Decentralization strongly stimulates the vigor of local economies but may bring macroeconomic overheating and fluctuation

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The conflict intensifies and eases

• In 1994, the problem was resolved by

cancelling decentralization and recentralization.

• In 2004, the conflict between

decentralization and recentralization have

• ccurred and intensified.
• Since 2005, the conflict easing, investment

decentralization has been maintained

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Tieben Steel Plant in Jiangsu province was closed in 2004

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Shagang(沙钢）in Jiangsu province, the largest nonstate-owned steel plant, is expanding

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The tragedy of recentralization not replayed

• Local governments and local investments

self- restrained behavior, relieving the conflict

• Local governments and enterprises are

vigorous, while also self -restrained.

• The tragedy that excessive local

expansion resulted a returning of concentrated powers has not been replayed