the role of local government and economic development in
TRANSCRIPT
![Page 1: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/1.jpg)
1
The Role of Local Government and Economic Developmentin Decentralization in China
Gangming YuanProfessor, Institute of Economics,
Chinese Academy of Social Sciences
![Page 2: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/2.jpg)
2
The evolution of decentralization in China
• Fiscal decentralization (1980-1993) • Recentralization (1994-2002)• Investment decentralization (2003-now)
![Page 3: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/3.jpg)
3
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.
![Page 4: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/4.jpg)
4
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
![Page 5: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/5.jpg)
5
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.
![Page 6: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/6.jpg)
6
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
![Page 7: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/7.jpg)
7
The increased share of central revennuesince 1994
0
10
20
30
40
50
60
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
%
![Page 8: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/8.jpg)
8
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.
![Page 9: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/9.jpg)
9
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%.
![Page 10: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/10.jpg)
10
Local investments expansionduring 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
![Page 11: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/11.jpg)
11
Macroeconomic performance
-20-10
010203040506070
%
GDP price investment
fiscal decentralization recentralizationinvestment
decentralization
![Page 12: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/12.jpg)
12
The criticism from macroeconomic management department
• Local investments are expanding excessively, causing economic overheating 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
![Page 13: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/13.jpg)
13
Arguments for local investments
• Not causing economic overheating• Not expanding only at low levels• Not blind• Not violating rules• Governance improved• Self-restrained
![Page 14: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/14.jpg)
14
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.
![Page 15: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/15.jpg)
15
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
![Page 16: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/16.jpg)
16
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..
![Page 17: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/17.jpg)
17
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.
![Page 18: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/18.jpg)
18
Amount of steel production
0
50
100
150
200
250
300
350
400
450
500
Nov-02
Jan-03M
ar-03M
ay-03Jul-03Sep-03N
ov-03Jan-04M
ar-04M
ay-04Jul-04Sep-04N
ov-04Jan-05M
ar-05M
ay-05Jul-05Sep-05N
ov-05Jan-06M
ar-06M
ay-06Jul-06Sep-06N
ov-06million tons
Limited line
![Page 19: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/19.jpg)
19
• Local investment enterprises and local governments pay attention to market trends and the overall situation of industries more than the department of central government.
![Page 20: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/20.jpg)
20
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.
![Page 21: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/21.jpg)
21
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)
![Page 22: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/22.jpg)
22
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.
![Page 23: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/23.jpg)
23
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
![Page 24: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/24.jpg)
24
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
![Page 25: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/25.jpg)
25
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.
![Page 26: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/26.jpg)
26
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.
![Page 27: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/27.jpg)
27
Steel investment growth
-20
0
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
%
![Page 28: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/28.jpg)
28
Dilemma of decentralization
Decentralization strongly stimulates the vigor of local economies
but may bring macroeconomic overheating and fluctuation
![Page 29: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/29.jpg)
29
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 occurred and intensified.
• Since 2005, the conflict easing, investment decentralization has been maintained
![Page 30: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/30.jpg)
30
Tieben Steel Plant in Jiangsu province was closed in 2004
![Page 31: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/31.jpg)
31
Shagang(沙钢)in Jiangsu province, the largest nonstate-owned steel plant, is expanding
![Page 32: The Role of Local Government and Economic Development in](https://reader030.vdocuments.us/reader030/viewer/2022011805/61d3caa72aca7945693a0fdc/html5/thumbnails/32.jpg)
32
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