Center And Locality: Federalism In A Unitary State

The People's Republic of China is a unitary state, with formal authority constitutionally held by the central government. Yet in reality, China, even before the introduction of economic reforms, was much more decentralized than the Soviet Union (Schurmann 1968). Beginning in 1957, the Center shared with the provinces the authority to approve projects, control industrial enterprises, plan production, allocate materials, and collect fiscal revenues. Despite periodic attempts at recentralization, the trend since 1957 has been progressive decentralization to the provincial level (Naughton 1985, 1987; Wong 1985, 1986).

Why China took the path of administrative decentralization is a highly significant but as yet unanswered question. Schurmann suggests that decentralization was made possible by the strength of the Communist Party at the provincial level; in contrast, the Stalinist purges decimated the Soviet party at the regional level (Schurmann 1968). Building on Schurmann's point, we might speculate that because of the strong Party base in the provinces, the CCP leaders created a Central Committee in which provincial representatives played a major role. The leadership enfranchised three major blocs within the Central Committee, officials from the (government and Party) Center, officials from the provinces, and People's Liberation Army officers.^[27] Leaders competed for power by building support among these key constituencies. Whenever a Party leader perceived that rival leaders were blocking his policy initiatives by their control over the central bureaucracy, he attempted to build support for his initiatives by "playing to the provinces." According to this analysis, Mao Zedong stressed administrative decentralization to win provincial support for policies promoting revolutionary transformation in 1957, 1964, and 1967-70, and Deng Xiaoping used the same strategy to win provincial support for economic reform policies in 1980.

Administrative decentralization offers economic as well as political advantages to the central leadership. Provincial officials are the agents of the central Party and government. Delegation of authority, whether to government ministries or to provincial departments, improves efficiency by exploiting the superior information of agents. And in a state-run economy, a profit-sharing rule, like the one included in the fiscal decentralization policies promulgated in 1980, improves the incentives for agents to be more efficient.

The prior decentralization of the Chinese system has had profound consequences for the course of the post–1978 economic reforms. The

cumulative effect of the progressive devolution of authority and resources from 1957 through the Cultural Revolution was to create a political system in which a substantial share of the planning decisions, management of factories, control of raw materials, and receipt of fiscal revenues was in the hands of local officials. Provincial Party secretaries also had an important voice within the CCP Central Committee. When Deng Xiaoping looked around for a group that could become the core of a reform coalition and that could counter the vested interests of the central economic bureaucracy in the command economy, he soon identified provincial officials. These local officials would play a key role in the implementation of reform policies because they controlled most of the enterprises in the country. And as the largest bloc within the Central Committee (36.8 percent in the twelfth and 39.4 percent in the thirteenth [South China Morning Post 1987]) they could provide critical political support within the Party if and when conservative leaders tried to challenge the reforms.

To win the support of provincial officials for the reform drive, Deng Xiaoping introduced a radical fiscal decentralization in 1980. This policy, officially called "apportioning revenues and expenditures between the central and local authorities, while holding the latter responsible for their own profit and loss" (Caizheng 1980) allowed provinces to fix for five years the amount of revenues they must remit to the Center and keep a proportion or all of the revenues over that amount. Provinces were assigned to five different categories of treatment, ranging from Guangdong and Fujian, who retained 100 percent of their above-quota revenues, to the three municipalities of Beijing, Shanghai, and Tianjin, who retained none of their above-quota revenues. In addition, provinces and the lower levels were permitted to keep all the profits from the enterprises controlled by them (Donnithorne 1981; Fujimoto 1980; Han 1982). The main advantage of this policy, colloquially called "eating from separate kitchens" (fen zhao chifan ), was the strong incentive for local authorities to expand their revenue base by developing their local economies. True, the growth motivated by new fiscal incentives produced some undesirable consequences: uncontrollable local investment, most of it going into profitable but reduplicative and wasteful processing plants, leading to supply shortages, inflation, and budget deficits; local protectionism; and excessive local imports, causing national imbalances in foreign exchange.^[28] The results of fiscal decentralization were dis-

torted by the irrational price structure and the lack of hard budget constraints, rather than by the fiscal policies themselves. The entrepreneurial energy sparked by fiscal decentralization was impressive nonetheless. And as a political strategy to win provincial support for economic reform, it was extremely successful.

Many of the other reform policies introduced in the 1980s also reflect the strategy of "playing to the provinces." Under the leadership of Zhao Ziyang, whose entire career was based in the provinces, administrative decentralization became a key element in the political strategy of economic reform. Central ministries were told to send down (xiafang ) control of their enterprises to provincial or municipal authorities. Local authorities were authorized to retain enterprise depreciation funds and expand other sources of extrabudgetary revenues. The financial freedom of provincial officials was further enhanced by transforming capital-construction funds into bank loans and by granting more autonomy to provincial bank branches. In the realm of foreign trade, provinces were permitted to set up their own trade corporations and delegated authority to approve imports and joint ventures. And after the implementation of the 1988 foreign trade responsibility system, provinces contracted with the Center to share the foreign exchange revenues from trade (as well as the local currency profits and losses from trade), much as they do local fiscal revenues (Yao 1988). The one reform policy that harmed the interests of provincial authorities, the 1983 li gai shui tax system, which took the financial profits of local enterprises away from provinces, was scrapped after four years; in 1987 it was replaced with profit-sharing contracts (chengbao ), which restored the provinces' claim to local-enterprise profits (author's interview). Policies granting special financial and planning authority (called jihua danlie ) to eleven cities (fourteen, as of February 1989), special foreign trade and investment authority to four special economic zones and fourteen coastal cities, and full provincial status to one region (Hainan Island) enhanced the economic power of China's most flourishing cities and brought these cities into the reform coalition along with the provinces.

The result of all these reform policies has been to shift the center of gravity in economic administration from central agencies (tiao ) to local government (kuai ).^[29] This shift is more valuable for provincial and munici-

pal authorities than previous decentralizations because it occurs in the context of an increasingly marketized economy. With the market offering everyone new opportunities for making money, whoever controls access to the market has the opportunity to collect "rents" (Krueger 1974). Reform policies have both expanded market exchange and decentralized from Center to locality the rents collected by administrative regulation of the market. Having been delegated the authority to approve construction projects and imports, and to set license fees and other local commercial taxes, provincial and municipal authorities can, in effect, sell tickets to the market (Xinhua , 5 May 1988). If they charge money and use it to develop local infrastructure, as the Tianjin mayor, Li Ruihuan, was famous for doing (author's interviews), they are called statesmen. If they charge money and put it in their own pockets, they are called corrupt criminals. And if they take their payment in the currency of political support, they are called political bosses. The rent-decentralizing implications of many reform policies explain why provincial and municipal authorities are such enthusiastic supporters of economic reform.

At least some of these local rents were spent on expanding the size of local government. Top Party leaders, eager to win the support of local officials (and appease central ones), have tolerated a dramatic buildup of the national administrative apparatus. The average annual increase in the number of government cadres reached 330,000 per year; before 1980 the average increase was 110,000 per year. By the end of 1986 the total staff of government offices and organizations was 7.34 million, 78.2 percent higher than 1978 (Tang 1987). The increase in administrative expenditures that accompanied this growth in the size of government (a 250 percent increase over 1978) can be seen as a side-payment to keep local-and central-government officials satisfied during the period of reform.

The prior dispersal of resources and authority not only laid the foundation for Chinese leaders to make local officials the core of its reform coalition, it also had the surprising effect of motivating central economic bodies like the State Planning Commission and the Ministry of Finance to support important reform policies. These central organs were frustrated after years of trying to sustain central management of the economy in an environment characterized by dispersed material inputs and revenues. Planning and financial officials saw their actual control over the economy slipping away over the years. From their perspective, a formal sharing rule, dividing the functions, resources, and revenues between Center and province, was preferable to a continuing erosion of de facto control. At least the sharing rule would prevent further deterioration of their position and permit them to retain their current degree of economic control. This perspective of central comprehensive agencies explains why the Ministry of Finance proposed the 1980 fiscal decentralization, the State Planning Commission proposed the 1984 planning reform, and the Ministry of Foreign Economic Relations and Trade proposed the 1988 reform in foreign trade contracting (author's interviews).

China's form of decentralized communism has helped the Party leadership build political support for economic reform. Not only did it make provincial and municipal officials a natural constituency for reform, it also gave central economic officials a reason to support reforms that would preserve the sharing of control between Center and locality. One hypothesis that stems from this analysis is that the Soviet Union, which begins reform as a much more centralized system, will find the political challenge of economic reform even more difficult than China's.