Central-Local Relations

in China
Central-Local Relations in a Unitary
System
Unitary system vs. federalism
Central-local relations in a unitary system
China’s dilemma in its central-local relations
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 Chinese Unitary System of Vertical Power Structure

Central Gov

34 Provincial-level

332 Municipal-level
Local
Governments
2,853 County-level

40,466 Township-level

680,000 Communities Self-governing Organizations

The public (peasants, workers, white collars, middle class, social organizations,
etc.)
The mountains are high and the emperor is far away.

山高皇帝远

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6
Central-Local Relations in China
The dilemma of central-local relations

◦ shou (tightening up): disincentive effect on local development

◦ fang (letting go): loss of central authority

Decentralization but to what extent? How to deal with the principal-agent problem?
The Center, the Local and the Public
Central

Local Public
Instruments of Central Control
Information gathering through on-site personal inspection trips, investigative instruments,
formal document system, etc.

Ideological training through the the party school system

Tools of suppression, incl. the public security and military organizations of the People’s
Liberation Army (PLA)

Preventive mechanisms
◦ The fiscal system
◦ Top-down accountability through personnel system
The Center, the Local and the Public
Central

l
tro
onC
cal
Fis

Local Public
Changing Central-Local Fiscal Relations
Decollectivization of agricultural production at the end of the Cultural Revolution
From central fiscal control to “eating in separate kitchens” (fenzao chifan)

◦ Before the 1980s: the central government collected revenue (through local governments) and returned
to local governments

◦ From the 1980s, central revenue and local revenue were separate based on negotiated deals

◦ The central and local expenditures were defined

Changing Central-Local Fiscal Relations
The pros of fiscal decentralization
◦ Local economic growth and the rise of township and village enterprises (TVEs)
◦ In 1987, the industrial revenue in rural areas surpassed agricultural revenue
◦ In 1991, industrial outputs in rural areas accounted for 50% of national industrial outputs

The cons of fiscal decentralization

◦ Regional inequality
◦ Local protectionism
◦ Central authority constrained
Central Fiscal Revenue as Percentage of GDP
Changing Central-Local Fiscal Relations
The fiscal reform in 1994
◦ Recentralizing the fiscal control by redefining “state tax” vs. “local tax”
◦ Recentralizing some administrative power (taxation, banks, land management, industry and commerce
management)

Results
Central and Local Revenue as Percentage of National Revenue
Changing Central-Local Fiscal Relations
The discrepancy between central-local distribution of revenue and expenditure
◦ In 1993-2003, the revenue of central and provincial governments as percentage of national revenue
increased from 35% to 66%, but their expenditures as percentage of national expenditure increased
from 45% to 49%
◦ 75% of national expenditure were at the provincial level and below; the statistics was 14% on average
among developing nations in 1990s, 32% in OECD countries
◦ Local taxes were able to finance 40-45% of their expenses
Central and Local Expenditure as Percentage of National Expenditure

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Changing Central-Local Fiscal Relations
What happened to local governments?
◦ They were in debt
◦ Local debts: RMB 13.5 trillion, including 3 trillion at the township level
◦ In total, government debts accounted for 40% of GDP
◦ They relied on extra-budget revenues (collecting taxes and fees) and on non-budgetary revenues (land
and other state property sale, highway toll, etc.) ---- they became predatory
◦ Quality of public services was at stake
◦ As a result, conflicts between local governments and the public arose
 Total Local Debt Outstanding and Growth Rate

Source: MIT Center for Finance and Policy, “China’s Local Government Debt Levels”, January
2016.
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 Size and Growth Rate of Land Sales

Source: MIT Center for Finance and Policy, “China’s Local Government Debt Levels”, January
2016.
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The Center, the Local and the Public
Central

ol nt
Co geme
ntr
a
Fis Man
cal
dre
Ca

Local Public
Cadres Management System: Top-down
Accountability
Principal-Agent Theory
◦ The control problems for large organizations and agency costs due to hierarchical management
◦ Preference divergence by agents
◦ Non-pecuniary consumption of perquisites out of firms’ resources
◦ Risk-averse behavior
◦ Informational asymmetry
◦ “Shirking” or “opportunistic” behavior
◦ How to avoid the control problems?
◦ Converge preferences
◦ Stock option
◦ Efficiency wage
◦ Promotion
◦ Direct supervision and performance evaluation
Cadres Management System
The top-down accountability system through personnel control

◦ Central officials appointed to local governments

◦ Transferring and promoting local officials

Cadres Management System
The institution of cadre evaluation: “Contract Responsibility System”

◦ Setting of quantitative goals

◦ Introducing competition among state bureaucrats, resulting in a “tournament model” of local
governance
◦ GDP-driven economic growth
◦ Local experiments and innovations
◦ Evaluation-driven behavior of local cadres
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Changing Incentives for Local
Governments
Much of China’s Post – Mao rapid rural industrialization has been due to the work of local
governments.

A corporate form of local economic growth

◦ Local government is a hierarchy with obligations
◦ Officials have a direct role in fostering the development of rural industry
◦ Salaries are directly affected by the performance and growth of their rural enterprises
◦ Each level is fiscally independent and is expected to maximize economic performance
From Top-Down to Bottom-Up
Accountability
Central

ol nt
Co geme
ntr
a
Fis Man
cal
dre
Ca

Local Public
Village Elections
Elections in China
Village elections and their limits
◦ Background
◦ 1987, Organic Law on Villager Committee Elections
◦ More standardized since the 1990s
◦ Meanings
◦ Elections and governance
◦ Upper-level elections?
◦ Democratic training

Elections of people’s deputies at different levels

◦ Direct elections at township- and county-level
◦ Indirect elections at higher levels
The Center, the Local and the Public
Central

ol nt
C o em e

Le
ag
ntr

g
Fis Man

itim
cal

acy
dre
Ca

Local Public
Village Elections
Political Trust and Regime Support
Hierarchical trust
◦ Political trust level decreases as government level moves down
◦ Hierarchical trust is a peculiar feature in China, in contrast with most other Asian countries

Sources of hierarchical trust

◦ Performance: economic performance, corruption, public services, etc.
◦ Individual characteristics: political values

Impacts of hierarchical trust

◦ Damaging regime support
◦ See Chen, D. (2017). Local Distrust and Regime Support. Political Research Quarterly, 1065912917691360
Source: Chen, D. (2017). Local Distrust and Regime Support. Political Research Quarterly,
1065912917691360.
Source: Wu, C., & Wilkes, R. (2017). Local–national political trust patterns: Why China is an exception. International Political
Science Review, 0192512116677587.
What Have We Learned?
Paradox of the central-level authority in China
◦ Centralization but inadequate power
◦ Economic decentralization without political decentralization

To enhance the resilience of the Chinese political system

◦ More institutionalized central-local relations
◦ More meaningful public participation