The Policy-Making Process: Management By Exception

Under the revised delegation relationship between the Chinese Communist Party and the government, the locus of bargaining over economic policy has shifted to the government arena. The Communist Party sets the general line for the economic reforms, but it delegates to government the formulation and implementation of specific policies. The Standing Committee of the State Council has become the main policy-making arena, while the Standing Committee of the Communist Party Politburo is much less active.^[14] The State Council is advised by a network of recently established policy research centers, described by Nina Halpern in chapter 5.

The Chinese government bureaucracy makes policy according to the decision rules characteristic of "management by exception" (Lawler 1976). At each level of the organizational hierarchy, agency representatives make decisions by a rule of consensus. If they all agree, the decision is automatically ratified by the higher level. If the bureaucrats cannot reach consensus, then the decision is referred to the higher levels, and if the higher levels cannot agree, then either nothing happens or the ultimate principal, the Communist Party, intervenes to impose a solution.

The advantages of management-by-exception, from the standpoint of the principals (the leaders of the government and the Communist Party) are that (1) it exploits the superior information of subordinates; (2) it

[13] Ironically, it was China's proto-legislature, the National People's Congress, under the leadership of Party conservative Peng Zhen, that was responsible for sabotaging some of the government's reform proposals, such as the bankruptcy law.

[14] According to Barnett (1985), the same shift from Party to government can be observed in the making of foreign policy.

relieves the principals of the costs of constant intervention in the policy process; (3) it gives all the agents who will implement a policy a voice in the formulation of that policy; and (4) it gives agents an incentive to resolve their differences and come to agreement.

Most corporations and many political systems delegate policy-making to subordinate agencies and use management-by-exception as the most efficient way to manage this delegation relationship. Parliamentary systems like Japan or France may appear to be dominated by their bureaucracies, but they are actually ruled by parliamentary party majorities who have effectively used management-by-exception to allow their bureaucratic agents to work out policy packages. If the politician principals seem invisible and rarely intervene to overrule a bureaucratic decision, it is because they have structured the bargaining game to produce outcomes satisfactory to them (and to their most influential constituencies).^[15]

The structure of the government bureaucracy reflects the Communist Party's notion of which groups should be represented in policy deliberations. Establishing a particular set of bureaucratic agencies, and organizing collective choice so that individuals represent the preferences of their agencies, enfranchises certain groups but not others (it is striking, for example, that the national labor organization is represented in key economic meetings in Hungary but not in China [Comisso, personal communication, 1984]). Just as a ruling party in a democracy structures decision-making processes so that its most important constituents are satisfied, the leaders of the Chinese Communist Party structure decision-making processes so that their most important constituents are satisfied.

The Chinese bureaucracy is organized by function (education, culture, public security) and by economic sector (agriculture, coal, machinery). Ministries are expected to articulate the interests of their particular sector. When ministers or vice-ministers are called together to discuss a policy proposal, they are expected to represent the perspective of their

[15] Management-by-exception is not the prevailing mode of decision making in the American political system. Bureaucratic agencies make their recommendations directly to the president or Congress, and the locus of bargaining is the congressional committee, not the bureaucracy. One possible reason for this difference between presidential and parliamentary systems is the separation of powers characteristic of presidential systems. Congress and the president, as dual principals, share authority over the bureaucracy; Congress is reluctant to shift the decision-making process to the bureaucracy for fear that the president might strengthen its influence over that process. In parliamentary systems, and in the Chinese communist system at the present time, the ruling party has no rivals for control of the bureaucracy and therefore can delegate to it decision making using management-by-exception. We may speculate that if the National People's Congress becomes a genuine legislature and exercises its authority over the bureaucracy, the Party might retract its generous grant of decision-making authority from the bureaucracy (unless the Party is able to completely dominate the NPC like a ruling parliamentary party in a democracy). These speculations are based on my conversations with Mathew McCubbins.

particular ministries. Press articles criticizing "selfish departmentalism" (e.g., Renmin Ribao , 21 January 1983) seem futile and naive when we recognize that Chinese government institutions are structured to encourage expressions of departmental points of view.^[16]

At higher levels, the commissions (State Planning Commission, State Economic Commission, State Science and Technology Commission) and the State Council promote the aggregation of departmental interests, but they also reinforce the articulation of sectorial interests. Within the State Economic Commission and the State Planning Commission bureaus are divided by economic sector, so that the head of the energy bureau, for example, argues for resource allocations to the coal, petroleum, electricity, and nuclear power industries. Within the State Council the degree of aggregation is greater. Each vice-premier and state councillor is assigned responsibility for a sector or a function, such as agriculture, industry, or finance. While such divisions of responsibility encourage specialized expertise in policy-making, they also guarantee that sector-based bargaining continues right up to the top of the government hierarchy (Chen 1987).^[17] The comprehensive agencies have their own organizational viewpoints as well: The State Planning Commission represents the macroeconomy, the State Economic Commission represents the enterprises, and the Ministry of Finance represents the central state (author's interviews).

When the Chinese CCP leaders set up their national economic bureaucracy in 1953, they gave industry a stronger voice than agriculture. There was only one ministry representing agriculture, but over ten ministries representing various industries. Because the fiscal system was set up to obtain revenue almost entirely from the earnings of state factories, central-government officials had a financial interest in keeping agricultural prices low and industrial profits high. This bias toward industry reflected the policy of Soviet-style industrialization, which prevailed at the time. Once institutionalized in the government structure, the bias

[16] Ellen Comisso (1986) argues that in communist regimes, the control of the Communist Party over bureaucratic careers makes it impossible for managers and government bureaucrats to articulate the particularistic interests of their units. Comisso has identified the key principal-agent relationship in communist regimes, but fails to recognize the advantages to the principal of delegation and management-by-exception. The Communist Party expects officials from subordinate government agencies and enterprises to articulate particularistic interests, and benefits from the bargaining among these interests.

[17] Vice-heads of provinces, cities, and counties are also assigned sectorial jurisdictions and are expected to bargain to get more benefits for their sector. One country cited as an example in the press had one head and thirteen deputy heads: "At the official work meetings they attended the deputy county heads asked the county head for power, material resources, and manpower in the interest of the parts they represented, thus bothering the county head instead of helping him carry out his work. For this reason, it is not good to have too many deputies" (Xinhua , 5 July 1987).

was perpetuated, as the continuing underinvestment in agriculture illustrates (Lardy 1983).

The bureaucratic reorganizations that have been a frequent occurrence since the 1950s are efforts to change the structure of interest articulation and aggregation, as well as to improve efficiency. Whenever ministries are merged or divided, raised to commission level or demoted to bureau level, the voices of various sectors are strengthened or weakened. The elevation of education from ministry to commission status in 1987, for example, was designed to give education more clout in the contest for government resources, in addition to enhancing coordination of educational activities under different ministries. Lynn Paine, in chapter 7 in this volume, describes the disadvantages the education sector suffers because of its organizational weakness.

Management-by-exception requires a bureaucratic hierarchy with formal equality among the units at any one level. If one ministry could impose its preferences on the entire group, then the advantages of management-by-exception would be lost. The Chinese government, by putting all ministers (as well as all bureau heads, all vice-ministers, etc.) at equal rank, satisfies this requirement. (An important exception is the Ministry of Finance, which by virtue of its revenue function, which is critically important to the survival of the state, ranks at the commission level [Lieberthal and Oksenberg 1988]). Although each ministry's actual influence varies with the prestige of its minister (and State Council overseer), its function, its control over subordinate enterprises, its financial contribution, and so forth (Oksenberg 1982; Lieberthal and Oksenberg 1988), the formal status of each ministry is the same. It is also crucial that the ministries are subordinate to organizations at the next level of the hierarchy. The State Planning Commission and the State Economic Commission (and to a lesser extent the State Science and Technology Commission) have formal leadership relations (Lieberthal and Oksenberg 1988) over the ministries and can resolve issues that ministries have been unable to agree on. At the apex of the government sits the State Council, which has leadership authority over all its subordinate agencies and can impose a solution when neither the ministries nor the commissions can find one.

The obvious fact that bureaucracies are organized by sector and function, not by geographic region as legislatures are, is worth emphasizing. Regional concerns are brought into government policy-making in a number of ways. The State Economic Commission and the State Planning Commission have regional as well as sectorial bureaus that voice the demands of the Northeast, the Southwest, and so forth. And whenever economic policy proposals are being debated, the heads of the relevant provincial (and some municipal) bureaus are invited to participate; pro-

vincial governors or vice-governors attend the most important policy work conferences. Each province sends a delegation to the annual national planning and budgeting meetings to lobby in its own behalf. Provinces are equal in rank to ministries, and disputes between provinces and ministries often filter up to the commission or State Council level. Yet, provinces do not have permanent formal representation in the bureaucratic arena where most economic policy-making now occurs.

The lack of formal regional representation in government policy-making is an institutional anomaly if we consider that since 1957, and especially since 1980, the provinces have received an increasingly large share of resources and authority. Moreover, the two most important constituencies for top Communist Party leaders currently are the central-government bureaucracy and the provincial officials. The institutional "payoffs" to the first group are quite clear, that is, extending bureaucratic autonomy and expanding the size of the bureaucracy. Yet the resources and authority of the provinces have not been recognized by institutional changes. (Provincial demands for an institutionalized voice at the Center could result in a strengthening of the national legislature, the National People's Congress. Or provincial officials might advocate shifting economic policy-making from the State Council, where they are not represented, back to the Politburo, where they currently are the largest bloc of votes.)

The Chinese government has been making economic policies according to management-by-exception at least since the early 1980s.^[18] Research by Lieberthal and Oksenberg (1988) and by Lampton (1987) found that consensus was the rule governing economic decision making in the central government, and that any participant could veto proposals.^[19] In contrast to a legislative setting in which majorities rule, minorities have the power

[18] A serious deficiency in our understanding of Chinese politics is the lack of a "base line" with which to compare current political practices. The analysis here, as well as previous studies of Chinese policy-making based on documents (e.g., Teiwes 1979, 1984; MacFarquhar 1974, 1983; Oksenberg 1971), suggests that during Mao Zedong's reign the locus of economic policy-making was the Communist Party instead of the government. Little discretion was delegated to government institutions. It would be valuable to confirm this conclusion with information from retrospective interviewing in China.

[19] A consensus-decision rule does not necessarily require unanimity. A bureaucrat from a weak agency may not have an effective veto. If eveyone knows that an agency is weak and that its position will not be sustained by the higher level, it may be unable to block a measure or force a compromise, whereas a bureaucrat from a strong agency could succeed in doing so. The writings of Lampton (1987), Oksenberg (1982), Lieberthal and Oksenberg (1988), and Shirk (1989) have suggested that agencies that generate revenues, have control over a large number of enterprises, and have ties to top Party leaders have more clout than agencies without these resources, but more case studies of policy-making are needed before we can speak with any certainty about the differential ability of agencies to veto measures under management-by-exception in China.

to obstruct action in bureaucracies run by management-by-exception. Whenever an agency refuses to compromise and consensus cannot be reached, the issue is "tabled" or is referred to a higher level for resolution. As the secretary-general of the State Council complained, "many problems remain unsolved for a long time simply because of the objection from a minority. ... Too many people exercise veto in our public organs" (Chen 1987).

Much of the time of the government bodies above the ministries is taken up by what the Chinese call "coordination" (xietiao ) work, which means resolving conflicts among subordinate units. The State Economic Commission (SEC) and (to a lesser extent) the State Planning Commission are supposed to provide final resolution to interagency (as well as interregional and agency-region) disputes.^[20] But because the internal organization of these bodies reinforces sectorial and regional divisions, disputes often are passed up for resolution at an even higher level. The Standing Committee of the State Council spends much of its twice-weekly meetings resolving interministerial (or interprovincial or ministerial-provincial) differences over relatively minor issues (author's interviews). A temporary institution called the "Adjustment Office" (tiaojie bangongshi ) was established under the premier during the mid-1980s (Lieberthal and Oksenberg 1988) to settle conflicts that were obstructing the progress of reforms and take some of the load off the Standing Committee of the State Council.

Bargaining among bureaucratic agencies is structured by management-by-exception. Every agency representative must decide whether to sign on to a lower-level decision that does not entirely satisfy its preferences, or hold out and force the intervention of the higher levels. To make this decision the agency representative must seek information about the preferences of the higher-level bureaucrats to anticipate what their decision would be. Unless the agency representative has reason to believe that the higher levels would make a decision more favorable to their agency's interests than the lower-level decision, the representative will compromise to reach agreement at the lower level. After all, a bureaucrat or an agency that consistently refuses to compromise will certainly not be popular with upper-level leaders. Agency officials are the

[20] The Economic Reform Bureau of the SEC spent most of its time resolving disputes among subordinate units sparked by changes in the economic structure, such as disputes between ministries and Wuhan over control of factories after Wuhan became an independent planning entity (author's interview). After the SEC and the SPC were merged in June 1988, the State Council was so overloaded with disputes to resolve that in 1990 they set up a new commission responsible for xietiao work, the Production Commission, consisting of the former SEC Production dispatch Bureau (shengchan diaodu zu ) and Enterprise Management Bureau (qiye guanli zu ), to relieve their burden (author's interviews).

employees of the State Council and are appointed by the Communist Party. A reputation for rigidity may be punished by demotion or other measures.^[21] Therefore, in most circumstances an agency will settle for a less-than-optimal decision at the lower level instead of gambling on a better decision at a higher level. From the standpoint of the principal, management-by-exception works well when it allows key groups to articulate their interests but creates incentives for them to compromise their differences without forcing the principal to intervene.

By this standard, Chinese management-by-exception has not worked well during the late 1980s. From the perspective of the top leaders of the government (articulated by Chen Junsheng, then secretary-general of the State Council), the work of the government has been impeded by constant arguing and "the escalation of coordination." Problems that once were solved at lower levels are now being pushed up to the State Council (Chen 1987). There are several reasons why the management-by-exception system is working poorly. First, divisions within the Party leadership encourage intransigence among subordinates. Conflicts among principals increase uncertainty for agents and lead them to gamble on the higher-level resolution of the conflict. Even without specific information (usually acquired through factional relationships) that someone at the top will support their position, subordinates expect more favorable treatment when there is leadership conflict. Central and provincial officials currently are the two major constituencies within the CCP Central Committee.^[22] Top Party leaders compete for power by building up support among these two key groups. They welcome opportunities to appeal to particular officials by pressing their interests when policies are decided. Yet even while top leaders are glad to have opportunities to build support by helping ministers or provincial officials, they complain that incessant bureaucratic wrangling has overloaded the system.

A second reason for the growing burden of coordination work is that participation in policy deliberations has been expanded to include representatives of more groups. Each policy is debated in a series of meetings to which a large number of affected units, both local and central, as well

[21] There is no evidence that uncooperative behavior is punished by cutting an agency's budget, which often is the case in democracies run by management-by-exception.

[22] In this sense the relationship between Party and government in China is not a pure agency relationship. There is reciprocity between principal and agents in all agency relationships; the principal generally believes that the organization will run more smoothly if the agents are kept satisfied. But Party leaders in China are politically dependent on government officials to an even greater degree because these officials belong to the CCP and participate in choosing the leaders of the CCP. Top provincial and ministry officials are constituents as well as agents of the Party leaders. This fact may help explain why Communist parties, even when they use tight "police patrol" control of the government, seem to do such a poor job of oversight.

as technical experts, are invited. The composition of these meetings is not set by any rules (in contrast to policy deliberations in Congress or other democratic legislatures), allowing the top government leaders who are orchestrating the process a high degree of flexibility. The widening of consultation is designed to prevent overconcentration of power in the hands of a few individuals in the Party. Deng Xiaoping, in his important 1980 speech "On the Reform of the System of Party and State Leadership," argued that it was this overconcentration of power that had produced the Cultural Revolution and other excesses of Mao Zedong's rule (Deng 1980). By expanding participation in the policy process, Deng and other top Party leaders hope to improve the quality of decisions and build support for them among key constituent groups. But inviting more groups to sit at the bargaining table also complicates the process of building consensus. Instead of a small, stable group of participants who are willing to trade votes on one issue because they trust others to pay them back on the next issue, there is a larger, ad hoc group that finds agreement much more problematical.

Finally, economic reform, by creating new financial interests among bureaucratic and regional agencies, has made bargaining among them more intense. Policies designed to improve economic incentives by allowing ministries, provinces, local industrial bureaus, and so forth to retain a share of their renminbi (Chinese currency) and hard-currency earnings have made bureaucratic agencies more profit-conscious. They fight more fiercely to obtain preferred policies because the stakes are higher. For example, the dispute about which ministry would take charge of the production of refrigerators and washing machines, which took five years to resolve in the era of economic reform (Renmin Ribao , 17 July 1984), would have been settled more quickly and easily under the old system. The creation of new financial incentives sometimes makes it easier to work out a compromise by giving all affected parties a share in the deal. There are many examples, especially at the local level, of potentially profitable joint ventures and other projects that were approved only because every agency with approval authority was given a percentage of the profits (Lieberthal and Oksenberg 1988). But, on the other hand, this new mode of resolving differences by dividing the profits encourages agencies to press their demands in the bargaining process. They recognize that assertiveness can pay off in several percentage points of a profitable venture. As the secretary-general of the State Council notes, "A profitable undertaking invariably draws the intervention of many departments, with every department demanding a slice of the cake, and none will make any concession. Sometimes this ends in a confrontation" (Chen 1987).

Management-by-exception tends to bog down in the Chinese govern-

ment bureaucracy because the bureaucracy is so poorly institutionalized. There are few rules about who participates in which decisions. The sequence of decision gates is ambiguous in all policies except those related to the planning and budgeting cycles. Policy decisions are not permanent, because a leader who does not like the outcome of one work meeting can call for another with a different set of participants.^[23] When Chinese officials talk, they often differentiate between "hard" and "soft" decisions (author's interviews). Moreover, all the conflicts among agencies, among provinces, and between agencies and provinces, must be resolved by higher-level bureaucratic organs. There is no administrative law or independent judiciary to settle jurisdictional disputes among them. The absence of judicial institutions puts the entire load of conflict resolution on the central government and the Party.