The consensus on centralization

Dylan Levi King has a nice essay out in Palladium on the history of decentralization in China, opening with the assertion that “the most significant reform carried out in China after 1978 was one of systematic decentralization.” It is difficult to disagree with this. As the best China scholarship of the last few decades has made clear, local initiative played a central role in the country’s growth miracle–see for instance Jean Oi’s book on local state corporatism, or Xu Chenggang’s classic article on “regionally decentralized authoritarianism”.

Decentralization was one of Deng Xiaoping’s most important policies, but King’s piece is good on its pre-1978 history. Deng justified his experiments with reference to a principle that Mao articulated in a famous 1956 speech: “Our territory is so vast, our population is so large and the conditions are so complex that it is far better to have the initiative come from both the central and the local authorities than from one source alone.” Mao distrusted bureaucrats and central planning, and in fact economic planning in China of the 1950s and 1960s was error-prone and often incompetent. Mao instead celebrated bottom-up initiative and self-reliance, which were important themes of the alternative economic model he tried to implement in the Cultural Revolution. As a result the organizational structure of China’s state-owned enterprises became significantly more decentralized than in the Soviet Union and its European satellites.

Yet while Maoist decentralization was good at tearing down rational bureaucratic structures, it was bad at actually encouraging autonomy and local initiative. Local factories and agricultural communes may have been told they had authority to make their own decisions, but in reality they lived in an oppressive environment of repeated political campaigns in which the only safe thing to do was to parrot the slogan of the moment. Mao’s China rhetorically celebrated local self-reliance while harshly punishing political deviance–an incoherent combination. As a result local initiative remained a rhetorical trope rather than a concrete reality: there was for instance hardly any local economic specialization during the 1970s. After 1978, Deng made decentralization real by officially calling a halt to the endless rounds of political purges and telling cadres instead to focus on economic development.

The reason to review all this history now, of course, is that Xi Jinping seems to be pushing to revise this pattern of decentralization and implement more effective top-down control by the central government. King’s piece points out that “local experimentation has slowed” under Xi as he has formalized the legal boundaries of local government authority. (One recent example of this trend is how the National People’s Congress recently issued an authorization for local authorities to conduct trials of a property tax, a legal nicety that was not thought necessary when such trials were first launched in 2011.) Xi is also using the Party’s Central Commission for Discipline Inspection to investigate and punish not just corrupt officials but those who fail to carry out central instructions sufficiently expeditiously.

These are extremely important changes in China’s political economy that deserve attention. But the drive to recentralize authority in Beijing did not start with Xi: the reaction to the excesses and problems of decentralization had already begun while Deng was still alive. In the roughly two decades between Deng’s retreat from active decision-making and Xi’s ascent to the top job, the top leadership consistently pursued a centralizing agenda that sought to increase the share of administrative power and financial resources controlled by the central government. This trend began around 1993, shortly after Deng’s revival of market reforms in his 1992 southern tour. According to an account by Pieter Bottelier, the idea of re-centralization crystallized at a conference held in Dalian in June 1993 with participation from World Bank and Chinese officials:

The conference marked a turning point in the national debate on two major issues: (a) the appropriate degree of economic centralization for China and (b) the management of aggregate demand in China’s semi-reformed economy. Many reports on China’s reforms since 1978 rightly emphasize the importance and benefits of economic decentralization. Few focused on the partial re-centralization of 1993/94 which followed the Dalian conference.

In the early 1990s some central government leaders began to think that China’s irregular, stop-go pattern economic performance of the 1980s – with spikes of high investment and high inflation – was due to excessive administrative decentralization. By delegating fiscal and financial powers to lower-level governments, while at the same time transferring ownership of most state-owned enterprises to those governments, Deng Xiaoping had been very successful in stimulating growth, as was his intention. But the system had also led to a loss of control by the central government over investment planning by lower level governments and local financing. …To correct this problem, a partial re-centralization of administrative controls was thought to be needed, but it was recognized that this would be politically very unpopular in the provinces.

The debates at the conference were followed by a package of fiscal reforms that reversed the sharp decline in the central government’s share of tax revenue and gave it more authority to redistribute resources around the country. The debate over fiscal decentralization in the mid-1990s tied into the increasing discussion of widening regional inequalities; influential scholars argued for more vigorous central government action to spread the benefits of prosperity more widely. That line of thinking ultimately resulted in the launch of the Great Western Development program under Jiang Zemin, which was only the first in a wide range of regional aid policies that have been successively rolled out by the central government.

Since then, the argument over centralization has moved onto different issues but the general drift often remains the same. In 2007, when I was working at The Wall Street Journal, I wrote a piece about the Hu Jintao administration’s attempts to reassert central authority over local governments, focusing mainly on regulatory issues and real estate rather than tax revenue. Re-reading that piece now, it’s striking how essentially all the talking heads I interviewed saw this as a good and necessary thing: re-centralization was endorsed as the correct technocratic move, just as it was in the 1990s.

This consistency over three different decades suggests a long-standing elite consensus on the need for the central government to re-centralize authority and manage the country in a consistent and considered fashion. Hu attempted to act on that consensus, but his attempts to claw back more authority for the central government did not get that far. The ultimate reason for this is probably that Hu was never able to consolidate his own political power and centralize authority in his person, in part because Jiang Zemin kept hanging around to prevent it. Xi, of course, has consolidated political power with extraordinary efficacy, which means that his efforts at re-centralization are likely to more effective. He has also been able to take advantage of the US-China trade war and Covid-19 pandemic to create an atmosphere of national emergency. As the economic historian Charles Kindleberger once observed, societies are more amenable to centralization of authority during times of crisis.

Nonetheless I suspect that, given the elite consensus on centralization, any other moderately competent Chinese politician would be trying to do something similar in Xi’s place (though perhaps using different methods). China’s real-estate boom has acted as a powerful centrifugal force in the economy over the years, increasing the resources under the control or influence of local governments. As a result, more than two decades after Zhu Rongji’s fiscal reforms, China remains a highly fiscally decentralized nation. It’s worth pointing out, as the chart above shows, that the central government’s share of total government revenues, once local land sales are included, is now as low as it was during the fiscal emergency of the early 1990s. Xi’s efforts to discipline property developers and stamp out housing speculation, which are currently causing great financial stress, can thus be seen as part of this long-running struggle against the fissiparous tendencies in the Chinese economy.

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