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Guo, Gang
Department of Political Science
University of Rochester
February 1999
The evolution of the central-local relationship is one of the most prominent issues during the post-Mao reform era, especially in the 1990's. More than twenty years of sweeping economic reform has seen not only the decentralization of a Stalinist fiscal system and command economy, but also the shifting of preferential treatment from the Maoist regional development strategy. The latter widened economic disparity between the coastal and interior regions, which necessitated a series of adjustment and reorientation, with mixed results.
For centuries the center of the Chinese economy had been gradually moving toward the coastal regions. After the Communist takeover, the establishment of a highly centralized command economy after the Soviet model enabled the state to effectively implement investment policy toward target regions. Partly influenced by the Soviet development theory and partly out of national security concerns, the Chinese leaders emphasized regional industrial balance and directed a large portion of industrial investment into the hinterland. Under this strategy, the central government's regional investment policy was evidently highly redistributive. The coastal provinces contributed a much larger share to the central government revenue than they received in central government investments.
According to Shirk (1994:160), the decentralization of the Chinese fiscal system started long before the post-Mao economic reform. In the Great Leap Forward and Cultural Revolution, Mao played to the provinces to overcome the resistance of central planners and ministry officials to his program for accelerating social transformation and to defeat his party rivals. As a result, financial authority and resources were highly dispersed at the time of Mao's death in 1976.
In the post-Mao period, a key feature of the reforms has been the ongoing realignment of central-local relations, especially in terms of fiscal arrangement. The initiative to further expand fiscal autonomy came from both the coastal provinces and the central government, which resulted in the "eating in separate kitchens" reform in 1980. The center's continuing solicitousness toward the provinces reflected China's institutional context of delegation by consensus and of succession politics. Fiscal contracting served the collective interests of party leaders in building support for reform and their individual interests in building support for themselves. However, as Yang pointed out, the nature of the fiscal reforms, coupled with other dramatic changes in the economic system, caused the share of resources directly controlled by the central government to decline over time (Yang 1994:63). This has decreased the central government's control over investment, the most important macro-economic mechanism they can employ, and consequently their capacity to promote the development of particular regions or industries, as will be discussed below.
Again, the significant swing in the regional aspect of China's development strategy toward the coastal provinces did not coincide with the launch of the post-Mao reforms. A shift in the regional development strategy was already under way after China's strategic reorientation in the early 1970's, marked by the defection of Mao's designated heir, LIN Biao and the thaw of Sino-American relations. The inefficient third-front program was scaled back and the central government imported projects and build export production bases in coastal provinces (Yang 1997:26).
Deng Xiaoping's regional development strategy opted to favor growth at the expense of some equity and emphasized an imbalanced development program, at least in the short run. If China is to modernize and catch up with its neighbors in economic development, only after the coastal region has become sufficiently developed will attention be turned to the interior region. Eventually after the coastal regions have attained relative prosperity, economic growth will diffuse or trickle down to the interior. Evidences of this strategy include the reversal of the Maoist central government investment bias toward the interior, the establishment of special economic zones, the designation of coastal open cities and of free-trade zones and other development zones (Yang 1997:29). Besides these preferential policies for the coastal regions, the central government's policy of distorted price structure was also in favor of the coastal region. This system tended to underprice energy and raw materials, of which the interior regions were net exporters, and overprice manufactured goods, in which the coastal region specializes (Yang 1997:67).
However, the effects of the central government's preferential treatments toward coastal regions should not be overestimated. Given the superior geographical location and reservoir of human resources, the coastal region would still have developed at a faster pace than the interior regions, even without the inequitable institutional structure favorable to it (Yang 1997:38). Besides, the decline in the proportion of centrally-controlled fixed investment, "the single most striking, consistent change in the Chinese economy since 1978"(Naughton 1987:51), and the lack of a set of economic institutions for macro-economic control suitable for a market economy greatly constrained central government's ability to effect the preferential treatment.
Under the above-mentioned condition of decentralization, the "trickle-down" of economic growth to interior did happen, but in a very different way than what the early reformers had envisioned. The transfer of both resources and obligations to lower levels of governments has created powerful fiscal incentives for these governments to promote local economic growth in order to raise revenue and create employment. Yang used a game theoretic model of competitive liberalization to show that as the political and ideological concerns about the spread of liberal policies in the early 1980's were gradually eased, the dynamics of competitive liberalization produced a rush to establish special investment zones and programs throughout the country in the 1990's (Yang 1997:45). Also the partial price reform since the 1980's brought about a rush by interior governments to build processing plants. The central government's repeated efforts to crack down on the localist behavior had little effect.
By the late 1980's, as the coast-interior disparities have widened, the unbalanced strategy has become increasingly difficult to justify. Most important, the Chinese leaders were concerned about the potential political cost of these disparities, in light of the various protests and rebellions in the interior regions. Fiscally constrained as a consequence of the ongoing decentralization process, the deficit-plagued central government has lacked the fiscal strength to bring about a major shift in the pattern of regional development. It has resorted to various low-cost measures, such as calls for more overseas investment in the interior, and for rural enterprise development and inter-regional cooperation to at least partially fulfill its promise of more balanced regional development. It also decided that the tax and tariff privileges of the special economic zones be phased out in 2000.
Another effort by the center to address these regional disparities was the sweeping fiscal and tax reforms in 1993. Drawing on its organizational advantages of the Party discipline and on the collective action problems of the local governments, the center was able to obtain formal agreement for a fiscal rationalization (Yang 1994:87). In time, this would not only allow the center to reduce its soaring budget deficits and strengthen macroeconomic control but would also provide more resources for transfer payments in order to "support the development of economically underdeveloped regions and the transformation of the old industrial bases"(Yang 1997:105). However, China's fiscal system will never be as centralized as it was before.