The political economy of China's robust performance

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  • This article was downloaded by: [University of Stellenbosch]On: 08 October 2014, At: 03:16Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,UK

    Journal of the Asia PacificEconomyPublication details, including instructions for authorsand subscription information:http://www.tandfonline.com/loi/rjap20

    The political economy of China'srobust performanceJun Zhang a & Guanghua Wan b ca China Centre for Economic Studies , FudanUniversity , Shanghai, Chinab Yunnan University of Finance and Economics ,Kunming, Chinac UNU-WIDER , Helsinki, FinlandPublished online: 20 Jun 2008.

    To cite this article: Jun Zhang & Guanghua Wan (2008) The political economy ofChina's robust performance, Journal of the Asia Pacific Economy, 13:3, 255-259, DOI:10.1080/13547860802131268

    To link to this article: http://dx.doi.org/10.1080/13547860802131268

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    http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditions

  • Journal of the Asia Pacific EconomyVol. 13, No. 3, August 2008, 255259

    GUEST EDITORS INTRODUCTION

    The political economy of Chinas robust performance

    Jun Zhanga, and Guanghua Wanb

    aChina Centre for Economic Studies, Fudan University, Shanghai, China; bYunnanUniversity of Finance and Economics, Kunming, China, and

    UNU-WIDER, Helsinki, Finland

    Introduction

    This year, 2008, marks the 30th anniversary of Chinas economic reforms andopening up, which began in late 1978. By any standard, Chinas economic trans-formation can be regarded as a large-scale social-economic experiment. Over thepast 30 years, China has seen dramatic changes in all sectors of the economy and allaspects of life. At an average growth rate of 9% per annum, per capita income hasrisen dramatically and the purchasing power of Chinese people has grown greatly.Several hundreds of millions of Chinese have been lifted out of poverty within ashort period of time. Chinas success has prompted some fundamental questions,for example, with its initial institutions and policies having departed from theestablished doctrine of economics so far, how could China possibly perform sowell? What factors have driven the near double digit growth rate for 30 years?

    It can be argued that Chinas achievement has to do with her high savingsrates and investment rates. All successful Asian economies save around 30% ofGDP, which in turn permits or promotes a high investment rate of 30%, doublingwhat the West saves and invests. It can also be argued that Chinas achievementhas to do with her huge population and cheap labor, a large community ofbusiness-oriented Chinese from all over the world, the irreplaceable role of twocapitalist open economies of Hong Kong and Taiwan, her state-owned financialsystem, and finally just good timing and pure luck.

    However, such arguments mistake the outcomes for conditions. An importantpoint missing from these arguments is that one needs a transformation functionor institutional setting under which a powerful incentive system is in place toconsistently bring all the factors together onto the right track for faster andsustainable economic growth.

    Although Chinas political or institutional reform has been slow, the factthat governments at all levels are involved in the transformation process has itsperks, particularly through their multiple levels of incentives, both positive

    Corresponding author. Email: junzh 2000@fudan.edu.cn

    ISSN: 1354-7860 print / 1469-9648 onlineC 2008 Taylor & Francis

    DOI: 10.1080/13547860802131268http://www.tandf.co.uk/journals

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  • 256 J. Zhang and G. Wan

    and negative, in encouraging and punishing certain economic activities. Themerit of Chinas evolving political institution is that both the central and some3000 local governments work together to promote decentralization and regionalcompetition, and to create market-based business for domestic non-state sector,and overseas Chinese and foreign companies. From this perspective, if therewere any China model underlying its economic success, it should be a businessmodel that combines Chinas political pragmatism and emerging market forces tofacilitate and induce the creation of business without just putting in place all thenew elements of a market system.

    Regarding lessons that China may offer, Gary Jefferson (2007, pp. 56) notesthat

    Chinas government has played a central and on-going role in the economystransition. A key difference between the transition of the Eastern Europe andthe FSU countries (EEFSU) and that of China is that whereas the functioningand authority of the former political systems collapsed in these regions, Chinasruling party and central government have remained intact with the legitimacy andadministrative capacity to steer Chinas economic transition and development.Chinas government has played a central role in reassigning property rights fromthe state to individuals and thereby incentivizing Chinas economic growth.

    That helps explain why expectations shaped by the theory of doctrine eco-nomics, or the Post-Washington Consensus, cannot successfully predict the ob-served outcomes of China. In fact, the Post-Washington Consensus sees a depoliti-cizing economic system as a precondition for post-transition growth.

    Understanding Chinas evolving institutions and eventually its concurrent eco-nomic system is a new topic. It will entail enormous inputs of both economistsand political scientists. In our view, China has evolved into a combination of ahighly decentralized fiscal system and an authoritarian political system. Within itseconomic system, the government has the objective function or mental model thatembraces market forces, marketization of the economy and opening up; withinthe economic system, China has introduced an efficient internal labor marketinto its bureaucratic hierarchy, and got incentives right for its bureaucrats andofficials. China has been advancing technologies through learning by doing, andadopting new knowledge in the business sector, etc. In short, Chinas success ofeconomic growth is essentially driven by pragmatic economic reforms character-ized by opening-up, and by allowing its political and economic institutions for anenormous expansion of investment and output, and by committing to maintainingits political and social stability.

    Against the above background, an international conference entitled Transitionand Economic Development: Markets, Governments, and Growth in China washeld on 1516 September 2007 at Fudan University in Shanghai. This conferencewas initiated and partially sponsored by the China Centre for Economic Studiesat Fudan University, jointly with the Chinese Economists Association in England(CEA-UK). The conference brought together economists from all over the world

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  • Journal of the Asia Pacific Economy 257

    to explore Chinas economic experiment and to provide in-depth discussions onthe political economy of transition and growth in China. A total of 50 papers werepresented at the conference, among which six were selected for consideration ofpublication in this Special Issue. The six papers all examine the fundamentals inChinas political economy from different angles.

    Volume contents

    Speaking of the political economy in post-reform China, one must look at howand what Chinese local governments do in order to improve local investmentclimate. The first paper, by John Weiss, entitled Investment Climate in China:Province Estimates, focuses on how much the performance gap at the enterpriselevel can be explained by firm and sector specific factors and how much it is dueto the investment climate and operating environment. Weiss finds that provincialgrowth is determined by openness to foreign investment and trade, ownershipand by implication competition, geography and the investment climate interms of both hard and soft infrastructure. By controlling for as many firm andsector specific factors as possible, the author isolates the impact of the investmentclimate though province dummy variables. His conclusion is that the investmentclimate in each province plays a major part in explaining provincial differences inperformance.

    As mentioned earlier, the economic system in China has evolved into thestate where fiscal decentralization coincides with political centralization and localofficials are successfully motivated to foster economic growth. One of the moti-vations and control mechanisms established in Chinas political and bureaucratichierarchy is the use of term limits and the rotation system for high level govern-ment officials. In the second paper, entitled Term Limits and Rotation of ChineseBureaucrats: Do They Matter to Economic Growth?, Jun Zhang and Yuan Gaoinvestigate whether such an internal labor market works in favor of economicgrowth. Using 19782004 panel data covering detailed information on provincialgovernors (including the provincial party secretary, mayor for municipal cities,and chairman for autonomous regions), they find a positive impact of both termlimits and rotation of governors on local economic growth. They also find thatterm limits and economic growth exhibit an inverted U relationship, although therotation impact is more obvious in the coastal provinces than inland provinces.

    One of the reasons that the Chinese system has evolved rather than collapsed isattributable to the adoption of a mental model of the government to new reality andthe evolution of the political institutions induced by economic transformation. Asthe power of indigenous private business grows, the Communist Party and centralgovernment responsively changed its governing rules to embrace the participationof indigenous entrepreneurs in politics. Zhao Chen, Ming Lu and Junzhi Hespaper Power and Political Participation of Chinese Entrepreneurs: Evidence fromLiuzhou, Guangxi examines the determinants of political participation of privateenterprises. Their study demonstrates how business sector participation in politics

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  • 258 J. Zhang and G. Wan

    facilitates business expansion, and how political participation of entrepreneurshelps shape up the evolution of political institutions.

    Unveiling the success of Chinas robust economic performance requires a goodunderstanding of the role played by government-owned land. Land leasing, as acompetitive strategy and a source of fiscal revenue for local governments, is vitalfor business creation and for attracting FDI under a regionally decentralized fiscalsystem. In the paper entitled Instrumental land use and Investment-driven Growthin China, Mingxing Liu, Ran Tao, Fei Yuan and Guangzhong Cao explore theincentives local governments offer through land development strategies in orderto compete for commercial investments. Based on 19982005 province-level data,they find that, although leasing land at relatively low bid prices may sacrifice someof the extra-budget revenues, it contributes to local output growth and thereforesecures local government a future stream of value-added tax.

    Attracting foreign direct investment (FDI) is seen as an important performanceindicator to local officials. Therefore, the location decision of FDI can influence lo-cal policy making and induce institutional changes. Such a yardstick competitioncertainly helps promote economic liberalization. However, it may also producenegative spillovers. In the paper FDI and Environmental Regulations in China,Jing Zhang and Xiaolan Fu examine whether differences in the stringency of en-vironmental regulations affect the location choice of FDI in China, and whetheran intra-county pollution haven exists. Using three different measures of environ-mental regulations that vary across time and province, they find that environmentalstringency has a significant and negative effect on FDI, which suggests that, ce-teris paribus, FDI prefers to locate in regions with relatively weak environmentalregulations.

    Despite the importance of FDI, growth essentially depends on total investment,not FDI alone. From that perspective, it is useful to study firm leverage decisions.In the final paper of this special issue, entitled What Determines the LeverageDecisions of Chinese Firms? Harshana Kasseeah takes on this task. Due to datalimitations, his study focuses on leverage decisions of listed Chinese manufactur-ing firms over the period 19952004. It is found that (1) firm characteristics suchas profitability and size affect the leverage decisions, while collateral and growthopportunities do not; (2) there exist no important differences in the financing oflisted firms across eastern (coastal), central regions and western regions; (3) con-trary to other firms, the leverage of firms located in high FDI recipient provincesand firms who receive more subsidies from the state is not influenced by theirprofitability; and finally, (4) WTO accession does not seem to affect the leverageof firms.

    AcknowledgementsThe international conference on Transition and Economic Development: Markets, Govern-ments and Growth in China, on which this Special Issue is based, was co-sponsored by theSchool of Economics at Fudan University through a national grant named 985 project,

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  • Journal of the Asia Pacific Economy 259

    which contains a sub-project on regional economic growth and decentralization in China.We thank the Chinese Ministry of Education, Fudan University and its School of Economicsfor their supports and sponsorship. We also thank the Chinese Economists Association inEngland (CEA-UK), and its president, Professor Zhongmin Wang, for co-organizing thisconference. Last but not least, our sincere appreciation goes to the referees and editors ofthis Journal for their input, assistance and patience.

    ReferenceJefferson, G., 2007. How has Chinas economic transformation shaped the field of eco-

    nomics? Comparative Economic Studies, forthcoming.

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