Rawski on the costs built in to China’s system

Loren Brandt and Thomas Rawski, two of the best economists and economic historians working on China, have a new edited volume out under the somewhat daunting title of Policy, Regulation and Innovation in China’s Electricity and Telecom Industries. It promises to be essential reading for anyone interested in how industrial policy works in China–a topic that, thanks to the massive scale of various subsidy programs like Made in China 2025 and the US trade war that has been launched in response, is now of far more than specialist interest.

I have not yet read the book, but I did watch a September 26 event at CSIS in which Brandt and Rawski discuss their work, under the catchier title “Can China’s industrial policy work?” Sadly, if not surprisingly, the book does not provide a simple answer to that question. Here is how Rawski put it:

We have no big theory. We cannot predict which policies will produce success and which policies don’t. We see the same policies affecting the semiconductor industry, which has done very poorly, the thermal power equipment industry, which has done well, and ultra-high-voltage power transmission, which is a world leader technologically. What is the key? Perhaps it is the difficulty of the technical obstacles that these firms confront. Perhaps it is quality of management. It’s hard to say. There’s no simple way of saying what works and what doesn’t work in China’s industrial policy.

If they do not have simple answers, they do provide a lot of important insights into how China’s system, with its hybrid of market mechanisms and top-down political direction, actually works. I particularly liked the concept of “system costs” which Rawksi brings up in his very interesting discussion of the electricity industry (these are my notes from the video, lightly edited):

Another feature that we see across the board is that they prioritize technical objectives over economic objectives. I think this partly reflects the Soviet legacy. One of the lessons of this book, for me at least, is that the legacy of Soviet influence in the Chinese economy is much larger than I thought it was when we started out on this project. The objectives of the Made in China 2025 program read like the first Five-Year Plan. There’s no discussion of markets, there’s no discussion of competition–it’s about physical targets.

Another important conclusion is that this is a system that has very high built-in costs. Electricity provides a vehicle for looking at this because it’s simple: there’s one product, five firms produce half the output, two firms distribute 90% of the output. So by looking at a very small number of firms we can see what’s going on in the whole industry. We can quantify some of the system costs people like Ken Lieberthal associate with China’s “highly negotiated” political system.

Negotiation means time and energy, and to us that means system costs. In the American electricity industry, the share of managers is 6.8%; in China it’s 17.8%. You need this extra manpower to work things out. We find that the cost of generating and delivering electricity is 30% higher in China than it is in the US, even though the ingredients are cheaper in China than they are in the US.

Our authors find many areas in which technical upgrades produce no economic benefit. As one engineer at a power plant said to us: we spent a large amount of money improving our equipment to lower our coal consumption, but of course if we had just increased the utilization of the existing plant, we could have gotten the same reduction in coal consumption at zero cost. Many episodes of this sort. We find low utilization in the telecom networks, in the electricity grid. In the US, engineers recommend 15% extra capacity compared to peak load in power systems. In China, the provincial average is 90%. In Inner Mongolia, which is the biggest power generating province, it’s over 200%.

And finally, quality issues. A deputy minister says that Chinese machinery is useful but not too reliable because of small defects. In high technology industries, this is very dangerous.

So what we’re looking at is a tug of war. We see huge resources being poured into innovation, we see the creativity and entrepreneurship of the Chinese people and Chinese firms. This is good. And we see also system costs and inefficiencies which are moving in the other direction.

The Q&A also covers China’s role in the global productivity slowdown, safety in nuclear power, the use of labor in coal mining, and other interesting topics. Worth watching.

Kindleberger on the loss of technological leadership

The following passage by the economic historian Charles P. Kindleberger, from his slim book Foreign Trade and the National Economy, was written in 1960-61 but feels remarkably relevant to the present moment:

Technology today spreads in some degree through illegal imitation, including the pirating of design and industrial espionage, but mainly through licensing, direct investment, a simple reading of technical literature, foreign education, and so on. There is little doubt that the speed of diffusion of technology has increased not only among developed nations but between developed and underdeveloped. There need be no direct communication. That one country can produce a particular article may be sufficient spur to others, as Russian, French, and Israeli work in atomic energy may demonstrate.

Technological leadership is harder than ever to maintain, although historians may think it was never held long. The result is that trade based on technical leadership must keep changing, for any given technical gap is foredoomed to closure.

As a general principle, to me that seems probably right. China is busy trying to close many technological gaps between its own industries and the global leaders, and the forces of technological diffusion suggest that time is on its side. Does that mean that the US, by imposing export controls on Chinese makers of telecom equipment, semiconductors and supercomputers, the US is engaged in a hopeless strategy doomed to failure? Not exactly. Historical inevitability can take a long time to play out, and the difference between technological gaps closing in 5 years, 10 years or 20 years is very much a nontrivial one for companies and nations.

And using this general principle to make predictions about how leadership in specific technologies plays out is not always going to work. Kindleberger’s own observations about the threat to US technological leadership from Europe have held up less well:

It looked for a time as though the technical gap between the United States and other developed countries was an enduring feature of international trade. Isolation from the battlegrounds of two world wars, plus an economic history of great labor scarcity relative to land, and later to capital, gave the United States an interest in innovation which was more widespread among the populace and among economic sectors than in other countries.

This view can no longer be held with assurance. … Europe and Japan are innovating positively. Major developments in the particularly American field of innovation–the automobile–have mainly been of European origin: the disc brake, the two-stroke engine, independent springing, and so on.

Particularly interesting is the new spirit of innovation in France, which has produced in the 1950s the Caravelle and Mystere in airplanes, the Citroen DS 19 and “deux chevaux” (two horsepower) in automobiles, high-voltage long-distance electric transmission, and direct transmission at 25,000 volts to electric locomotives. These and other equally radical departures from simple imitation of leading technical performance suggest a surge of independent innovation in France…

The general principle that technological diffusion is going to happen does suggest that the best way to combat the loss of technological leadership in one area is to open up technological leadership in a new area. The US did this fairly successfully in the decades after Kindleberger’s book was written. It still seems that the best response to today’s technological challenge from China (and others) is not going to be a bunch of delaying actions, but a renewed push forward.

Housing and the Chinese middle class

I have thought for a while that China’s privatization of urban housing is one of the most important and least understood events in its modern economic history. The entry into the World Trade Organization in 2001 has been exhaustively studied and its effects are still being vigorously debated today. The downsizing of state-owned enterprises in the late 1990s has also been repeatedly dissected and analyzed.

Housing privatization, which like SOE reform had its high-water mark around 1998-2003, has received much less attention. Which is strange, because the launch of a private housing market not only created the Chinese business cycle as we know it–basically all of China’s booms and busts over the past two decades have been driven by housing–but created the major source of private household wealth. So it seems obvious to me that housing reform deserves a comprehensive economic and social history, which I have not yet seen.

I dug into Luigi Tomba’s 2014 book The Government Next Door: Neighborhood Politics in Urban China in hopes of getting closer to that. He seemed to immediately grasp the central role of housing in the transformation of urban Chinese from socialist functionaries to a prosperous bourgeoisie. In the introduction he recalls how his initial fieldwork in Beijing in the early 2000s looking for a “middle class,” he found that

Most of the young people I was talking to did not fit the image of the wealthy entrepreneurs that dominate the mainstream portrait of a glamorous Chinese middle class often presented by the international media. Rather, they seemed to be, in large part, professionals and public employees whose housing careers often owed much to their position “within the system” of public employment.

That initial insight led Tomba to start to piece together the complicated story of just who got housing and how. Still, this book is not a complete account of housing reform, nor does it claim to be. Only one chapter of his book is really about housing reform, and most of the rest is too heavy on political-science jargon and too light on detailed history for my taste. But it does contain some important insights on how housing works in China, particularly its political implications:

Housing privatization, which began with a massive transfer of housing stock from public to private hands in the 1980s and 1990s, has provided an opportunity to engineer a middle class systematically, through selective incentives and subsidization. It also built on the converging interests of local governments and developers in selling and developing their land, which remains the main source of income for urban governments to balance their budgets and finance infrastructural projects. These policies have inevitably favored those who had already been privileged by the unequal redistribution of housing in the socialist period because of their employment in the public sector. The resulting boost for a property-holding middle class went therefore mostly toward employees and families actively employed in the public sector, who became the first large cohort of Chinese homeowners during the housing reform of the late 1990s.

The key point here is that housing privatization replicated and amplified, rather than overturning, the pattern of inequality inherited from the planned economy. In that system, there was little inequality in wages or money income, but there was greater inequality in living standards, because housing and consumer goods were preferentially allocated to those with higher political status. The combination of SOE downsizing and housing privatization did remove some socialist foundations, particularly the ironclad guarantee of a job and housing for urban residents. But reform replaced them with something that would prove much more valuable over the longer term: privileged access to assets that were rapidly appreciating in value. So rather than weakening political support for the Chinese government, housing reform bolstered and broadened it:

China’s long-term processes of privatization and reform have, in fact, worked to reinforce, rather than reduce, the legitimacy of the authoritarian rulers, as the state and its policies are perceived by the weakest groups as the last line of defense against the deregulation of the market and by the middle classes as the guarantors of newly acquired “rights.” …

It is increasingly becoming clear that the political apparatus of the socialist hierarchical state is still in place; after more than three decades of marketization, there is little sign of the system that would successfully supplant it. Its role in defining the practices of power is still overwhelming, although perhaps more fragmented and not felt as directly by some of its citizens as in the years of mass campaigns and class struggle.

So China’s housing privatization, in addition to being one of the largest transfers of wealth in history, may also have been one of the most successful political strategies.

What triggered the China backlash?

Richard McGregor’s new short book Xi Jinping: The Backlash is a useful summary of how much of the world’s view of China has changed over the last few years, and not for the better. The catalog of the things that have upset foreigners dealing with China is now quite a long one:

The construction, and then militarisation, of islands in the South China Sea from 2013 galvanised hawks in Washington and allies in the region, not least because of its sheer audacity and scale. Foreign businesses, once advocates of engagement with Beijing to open the Chinese market, became disillusioned when they saw their access truncated. The seemingly ceaseless theft of trade secrets and technology hardened cynicism in governments and companies alike. The detention of up to a million Uighurs in re-education camps in Xinjiang in the name of anti-terror from 2017 highlighted human rights abuses in a way the jailing of individual dissidents never could.

And that is even without going into the somewhat different dynamics of the developing world’s backlash against China’s Belt and Road Initiative. Given all this, it may be a fool’s errand to try to identify any single trigger for the world’s reaction to a more assertive China. It is overdetermined, in the social science jargon, with many causes all pushing in the same direction. Nonetheless I very much agree with McGregor’s assertion that:

If there is a period that crystallised perceptions of Xi, and his world view and ambitions, that moment was in late 2017 and early 2018 when foreigners, and many Chinese as well, finally started to take him at his word. Xi was reconfirmed as leader of the Chinese Communist Party in October 2017 and then abolished term limits on his presidency in March 2018, removing any obstacles to his remaining in power in perpetuity. … In one decision, Xi confirmed his critics’ view that he was an unrepentant autocrat willing to take China backwards in the service of his agenda.

This jibes with my own observation of the dramatic shift in the consensus of the US China-watching community (and here is a similar observation from someone with more foreign-policy expertise than me) . As a few people have pointed out, what has really changed over the last couple of years is not the views of the China hawks–it is the views of the China doves. People who had long felt that China, was moving, albeit imperfectly, in a more positive direction over the long term, began to concede that, in fact no, China was not really moving in the right direction anymore. Xi’s decision to abolish term limits helped convince the waverers and solidified this trend. It was a move that was almost perfectly indefensible. After all, abolishing term limits is something only tinpot dictators of third-world countries do.

China clearly did not anticipate the blanket foreign-media coverage and criticism of the move, but its explanations only highlighted how poorly officials understood the perceptions of their system abroad. Chinese official media justified the removal of term limits as being a minor administrative adjustment to bring the term limit for the presidency in line with the other two offices Xi holds (Party general secretary and Central Military Commission chairman), neither of which have term limits. The official argument is that it’s important for the leader in China’s system to hold all three offices (something Jiang Zemin, the first to do so, had also said). What this argument actually implies is that Xi had already decided to stay for a third term as general secretary, and that the rules had to accommodate this decision by not forcing him to give up the state presidency.

Given the consequences that have since flowed from it, Xi’s decision on term limits must go down as one of the greatest geopolitical own-goals of all time. So I was a little disappointed that McGregor, author of the classic and still-relevant The Party: The Secret World of China’s Communist Rulers, did not dig deeper into the background of this decision. Not that anyone in the Chinese system would have any incentive to talk to him about it. The full story of that fateful moment in early 2018 is likely to emerge only after Xi eventually passes from the scene.

Logistics and the demand for empire

Daniel Immerwahr’s How to Hide an Empire: A History of the Greater United States is one of the more surprising and interesting history books I have read in a while. One part of the book’s agenda is clear from its title: to bring to light the often-forgotten history of the margins of the US, places like the Philippines, Puerto Rico, Hawaii and Alaska, and various Pacific islands. And there is a wealth of fascinating stories here that I (and I suspect most Americans) had never heard.

But the second part of the book’s agenda is even more surprising and ambitious: Immerwahr presents a theory of how technological change has shaped the global political order. The puzzle he sets out to answer is why the US, after acting not so differently from other imperial powers in the 19th century, changed tack after its victory in World War II:

Today, the idea that the United States might have annexed France or claimed Europe’s Asian colonies in 1945 seems like an absurd counterfactual. But it wasn’t unthinkable. That was, in fact, precisely what Germany and Japan had just done. And it wasn’t too different from what the United States had itself done, repeatedly, to formerly Spanish lands throughout the preceding century…

At the war’s end, the United States possessed the world’s fourth-largest empire, accounted for more than half the world’s manufacturing production, and had atom bombs. Why not conquer the globe?

But of course, that’s not what happened. Not even close. Instead, the United States and its allies did something highly unusual: they won a war and gave up territory…

Partly this is because many places were no longer so willing to be colonized: political change reduced the supply of potential colonies. But Immerwahr argues that the US was happy to endorse independence for its colony of the Philippines, and not to seek out new colonies, because it had less demand for colonial territory:

It may help to look at the decline of colonialism from a different angle, focusing not just on supply but on demand as well. The worldwide anti-imperialist revolt drove the cost of colonies up. Yet at the same time, new technologies gave powerful countries ways to enjoy the benefits of empire without claiming populated territories. In doing so, they drove the demand for colonies down.

The “empire-killing technologies” ranged from skywave radio to screw threads, and they worked in different ways. But, collectively, they weaned the United States off colonies. In so doing, they also helped to create the world we know today, where powerful countries project their influence through globalization rather than colonization.

What follows is a fascinating short history of the technical change inspired by wartime pressures. The developed industrial economies had sought colonies for access to raw materials they could not produce at home. Fertilizer was imported from the guano islands of Peru, and rubber from the plantations of Southeast Asia–trade flows that were quickly disrupted by conflict. But developments in chemistry produced substitutes for both of those goods: synthetic ammonia and rubber. Industrial technology could therefore substitute for access to tropical colonies.

Perhaps even more interesting is the discussion of how the unprecedented scale and scope of conflict in World War II led to the development of a whole battery of new techniques and equipment for moving goods around the world:

It’s telling that before the war started, ‘logistics’ had been a specialist’s term, not much heard in general speech. The military academies exalted courage, leadership, and tactical acuity, not procurement and transportation. Yet, fairly soon into the Second World War, commanders grew accustomed to speaking of tonnage, inventory levels, and supply lines with the knowing reverence previously reserved for accounts of battlefield heroics.

What is more, they got good at it. During the war, the military devised a suite of logistical innovations, all designed to move people, things, and information cleanly and quickly around the planet. Planes were the most obvious—the United States came to dominate aviation—but others were no less important. Radio, cryptography, dehydrated food, penicillin, and DDT: these technologies laid the foundations of today’s globalization.

The logistical innovations did more than speed everything up. They also enabled the United States to move through places without carefully preparing the ground first, as it had in Panama. No longer would seizing large areas or zones be necessary to run a long-distance transportation network. Mere dots on the map, sometimes little more than airfields in jungle clearings, would suffice. And so, just like plastic and other synthetics, these new technologies helped to make colonies obsolete.

Empire did not vanish as a result, but its shape changed: Immerwahr calls the US, with its eight hundred military bases strewn around the globe, a “pointillist” empire, focused on occupying strategic points rather than governing large swathes of territory. This does indeed seems to be the contemporary model of empire, as evidenced by China’s effort to build up its own access to strategic points and ports.

Gu Mu, China’s champion of export discipline

The concept of “export discipline” is an important one in my understanding of the development of Asian economies, and the functioning of industrial policy more generally. The phrase, which I take from Joe Studwell’s 2013 book How Asia Works, describes a particular type of relationship between the government and business, one in which the government pushes business to make sure that its energy and investment are going into improving national productivity. Exporting does that by forcing companies to compete in global markets and meet global standards. Absent such discipline, businesses can easily turn into lazy monopolists, rent-seekers, or property speculators–activities that generate lots of profits for them but do not do much to raise the nation’s living standards (see my last post on the topic).

Of course, this is easy to say in the abstract, but how is export discipline actually applied in real-life politics and business? Studwell’s book has some good stories about this, for instance the one about how South Korean president Park Chung Hee in 1961 put the nation’s leading businessmen in jail until they agreed to do what he wanted: develop heavy industry and obtain foreign technology.

The official history of China’s economic reforms is rather more sanitized, but the memoirs of Gu Mu (谷牧), who was vice premier in the 1980s and in charge of foreign trade, do help show how export discipline was applied in the Communist bureaucratic system (see this post for some more interesting tidbits from Gu’s memoir).

China initially decided to open up to foreign trade through the famous Special Economic Zones: the coastal cities of Shenzhen, Zhuhai, Shantou, and Xiamen that were given dispensation from many of the stifling rules and procedures of the planned economy. And from the beginning there was some ambiguity about what the function of the SEZs would be, as Gu relates in his account of the March 1980 meeting that decided to create them (these and following quotes are from the official English translation of his memoir):

During the discussions, in light of the practice of starting the special zones, the comrades also considered that we should not only develop industry, but also commerce, tourism, real estate and other sectors. We should not only expand export trade, but also play multiple functions in the economic life of the whole country. So the term “special export zone” could hardly cover all of their functions and roles. Based on these discussions, I came up with the term “special economic zone,” which had a wider connotation and was endorsed by everyone.

In other words, the SEZs were originally general laboratories for economic reform, rather than solely being solely focused on exports (as an aside, it’s interesting that Gu takes credit for coining the term SEZ). And Gu relates how the deregulation in the SEZs allowed them to quickly become centers for smuggling, which attracted lots of criticism from conservative elements in the Party. While he is emphatic that Deng Xiaoping’s strategic justification for the SEZs was mainly to export and attract foreign technology, he also makes it clear that many people in the SEZs were reluctant to sign up to this vision.

From 1979 to the end of 1984, five special documents were issued by the Party Central Committee and the State Council on SEZs or containing content relevant to SEZs. For the orientation of the economy of SEZs, these documents repeatedly pointed out: “Priority should be given to the utilization of foreign capital,” “Priority should be given to conducting industrial productive projects,” “Products should be mainly for export,” “Great efforts should be directed to introducing advanced technology.” The basic intention was clear.

But some comrades who worked in Shenzhen SEZ and several experts and scholars had long held different opinions. They thought that the conditions were bad for Shenzhen to develop industry. Products for export ran against the investment goal of foreign businessmen, which was for their products to enter the Chinese market. Their proposal was to build Shenzhen into a financial, commercial, foreign trade and tourist center, and their cries became louder and louder.

Here is the impulse that export discipline has to counter: local bureaucrats and businesspeople want to make money in ways that are convenient to them, but that don’t build national productivity. Gu worked consistently against these arguments, and tried to stop Shenzhen from focusing so much on property development:

I agreed the SEZs should develop tertiary industry like finance, commerce, foreign trade and tourism. But priority should be given to industry, and related industries should be developed correspondingly to make them comprehensive export-oriented SEZs centered around industry. Without industry on a certain scale and level, their economic foundation was not solid, with no source of goods for export, or vehicles for the introduction and digestion of advanced technology, and other industries would not develop. … So this argument, which went against the policy of the Party Central Committee and the State Council, was inadvisable and unrealistic.

Since I perceived these problems, I wanted to hold a meeting to unify the understanding and action. … I talked about the positive situation of opening up in the country, about the new progress of SEZs, and also pointed out some problems that needed careful attention, including the overextended scale of capital construction, too fast increase of funds for consumption, and the gaining of easy money by taking advantage of the preferential policies. … I emphasized that SEZs should not be content with erecting big buildings; they should not be average industrial cities. They should become export-oriented special economic zones based principally on industry earning foreign exchange through export, so that their products could enter international markets and earn foreign exchange for the state. …

At the meeting I focused on guidance rather than criticism. But this was no easy problem to solve. The meeting was over, but there was no agreement on how to develop an export-oriented economy. Some SEZs still acted according to their own beliefs. In 1985, the scale of construction in Shenzhen was even bigger, with the plan increased by 40 percent over the actual scale of 1984. My opinions were dismissed, and little attention was paid to similar criticisms from others. … I realized that general talk would not solve the problem and we needed systematic work.

The bureaucratic maneuvering that followed is too detailed to quote in full, but basically Gu commissioned some expert reports that would back up his goal of an export-oriented economy, and sent some of his trusted cadres to Guangdong to convince working-level officials of the rightness of his views. The leadership team of the Shenzhen SEZ was also reshuffled, which presumably (though Gu does not say this directly) helped lessen resistance. He then organized a nationwide meeting, running from late December 1985 to early January 1986, of almost all the central and local government officials involved in SEZs, where his speech advocating for export-oriented SEZs achieved the backing of the top leadership. That ensured that the local officials got the message:

This meeting was new starting point for the SEZs to advance in a pioneering spirit. The SEZs unified their understanding and carried it out properly. … they stressed industrial production and a better range and quality of products; they made great efforts to open international markets and increase exports; they cleaned and reorganized companies and overcame disorder in product circulation. These measures were carried out swiftly and resolutely. In that year, Shenzhen cut 51 buildings of more than 18 stories from its capital construction planning. Its scale of capital construction was reduced by 30% from that of the previous year. Hundreds of substandard companies were removed or merged. This was a major shift in focus.

Gu Mu (2nd from right) in Shenzhen in 1980

After reading this account, it hard not to feel that the importance of effective bureaucratic battlers like Gu is probably underrated in recent Chinese history (and probably all history) relative to charismatic leaders like Deng Xiaoping. I also have to wonder who in the current Chinese leadership is serving as the champion of export discipline?

A European inspiration for Chinese decentralization

A lot happened in China in 1978, the year conventionally used as the starting point for the reform era. One of the many fascinating events of that year was the five-week journey of a group of Chinese officials, led by Vice Premier Gu Mu, to France, Germany, Switzerland, Belgium, and Denmark. Today, when such visits are a regular occurrence, it is hard to comprehend the significance of this trip, and just how much it must have blown the minds of the Chinese officials. Gu and other officials saw first hand, and for the first time, just how advanced Western technology was and how high living standards were in these countries.

Ezra Vogel, in chapter 7 of his Deng Xiaoping and the Transformation of China, compares the overseas trips that Chinese leaders made in 1978 to the Iwakura Mission of 1871-73, which helped inspire Japan’s modernization. Gu Mu’s authorized memoirs also discuss this trip, and in the book he actually reproduces a large section of the subsequent report he wrote for the Party leadership (I picked up a copy of the English translation of his memoirs at the Foreign Languages Bookstore in Beijing).

His report made a big impression, and is usually credited with helping inspire the high-level decisions made soon after to open China up to foreign trade and develop science and technology. But Gu’s report also discusses several other issues, and I was particularly interested in the part where he argues for decentralizing authority on economic matters to local governments. This was inspired by what he saw in Europe: for instance, Gu remarks on his meeting with the governor of the German state of Bavaria, who offered him a handshake agreement for a $5 billion loan over dinner.

Decentralization would become one of the most distinctive features of China’s reform era, and local governments’ freedom to pursue economic growth is usually given a lot of credit for China’s subsequent success. So it’s worth reading Gu’s arguments in full:

On the improvement of the economic management system. The key to this question is how, under the uniform planning of the central authority, to allow local governments to accomplish more. Chairman Mao once said, one of the important reasons why the economy of European countries had developed so fast was that their countries were comparatively small. The central and local governments had division of power and could handle affairs flexibly. What we saw during our visit bears this out.

For example, in West Germany, the local governments at the state level enjoy relatively wide power. Many affairs can be handled once decided by a state government. This is beneficial to economic growth. Rhineland State only has a population of 3.6 million and it has a revenue of 10 billion DM (about 8 billion renminbi) for the state government to handle. Apart from administrative expenditure, this revenue is used in developing agriculture, local transport, education, urban construction, environmental protection and so on. Industrial construction is invested by capitalists and not included.

We have provinces and municipalities that are larger than some European countries, but their authority in managing the economy is very limited and hence they lack initiative. In planning, finance and managing materials, provinces and municipalities have not become real actors. The local governments do not have much power. For many affairs they have to come to Beijing. Often to address a single problem they have to go to several departments and wait several months without a result. This state of superstructure makes our socialist state machine seem inflexible and poorly adapted to the development of economic foundations.

If this problem is not solved and if we do not give full play to the initiative of local governments under the uniform planning of the central authority, our economy will lack vigor and there will be no high-speed economic development worth talking about.

This is a useful reminder that decentralization is not an immutable feature of the Chinese system, or something that happened automatically just because China is a very large country. Clearly Gu saw that in the 1970s the Chinese system was too centralized to be efficient, and that it needed to be more decentralized. (Jae-Ho Chung’s book Centrifugal Empire: Central-Local Relations in China also argues that the Maoist emphasis on local autonomy in the 1970s was largely rhetorical, with most localities compelled to follow the same political campaigns and economic priorities.)

It’s fascinating to learn that one of the most distinctive features of China’s economic model was, at least in part, inspired by the example of Europe. This history seems particularly relevant now, given that China’s current leadership is often focused on the problems decentralization has created, and looking for ways to push the pendulum back the other way (see this post from 2017 on the recent shift away from decentralization and its potential implications).