Zhou Li’an
[Summary of the previous issue]
The last issue discussed the paradox of China's economic development: China has had a long period of high growth despite many unfavorable adversities. Mainstream Western theories focus on property rights, the interaction between political and economic systems, state capacity, and institutional transformation, but none of them can clarify China's development experience. I propose a "Bureaucracy + Market" framework, in which local officials engage in "political tournaments" around economic development, while firms in different regions compete in the market. Local officials compete politically for their interests, and help the businesses in their jurisdictions to the greatest extent possible. Such a system has many advantages: first, it provides local officials with sufficient incentives to promote regional economic development; second, it helps limit official predation; and third, it provides feedback and trial-and-error opportunities for government-enterprise cooperation.
In this issue, we will continue the previous discussion on the relationship between government and enterprises, explain the logic of government and market competition, and explain how governance in China varies across regions, time, and issues, and then analyze the institutional support behind China's economic growth.
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Government-Enterprise Relations under "Bureaucracy + Market"
The government's "helping hand" and "predatory hand" may vary from region to region, and the combination of bureaucratic competition and market competition may be very different. In terms of bureaucratic competition, are officials selected on the basis of their performance, connections, or money? In practice, all three of these aspects may affect promotions. The combination of all three may vary from region to region, and thus have a significant impact on the strength and direction of officer incentives. Similarly, there may be regional differences in the intensity of market competition. State-owned enterprises or enterprises in resource monopolies are naturally less sensitive to the pressure of market competition, while private and foreign-invested enterprises are more responsive to the market.
By dividing the differences between bureaucratic competition and market competition into strengths and weaknesses, we can obtain four combinations, as shown in Table 1. A strong bureaucratic competition means that promotion of officials relies more on economic development performance and vice versa; a strong market competition means that jurisdictional firms are more sensitive to external competition and vice versa.
By following the four combinations, we can draw a "political and economic map" of China with systematic differences between regions that can significantly affect the economic potential of a locality. In an institutional environment like China's, the most successful regions in terms of economic development are not necessarily those with the richest natural resources, the most favorable development base and location, but rather those with the best combination of bureaucratic and market competition. The regions that have failed the most in economic development are not necessarily those with the worst natural resources and the worst conditions for economic development, but rather those with the weakest incentives and constraints brought about by bureaucratic and market competition. For example, the Northeast region has an excellent basis including industrial base, infrastructure, education resources, and agricultural base, but the economy has been in decline for years and the population has been drained out because of the abnormal bureaucratic ecology, the dominance of SOEs and resource-based industries, in other words, the result of the failure of both bureaucratic competition and market competition. In other words, it is the result of the simultaneous failure of bureaucratic competition and market competition mechanisms. In short, the economic growth of a region depends, in a considerable sense, on the matching effect between "political entrepreneurs" and "market entrepreneurs". At the same time, I would like to emphasize that this model of dual market competition is not perfect. We must go back to the respective mechanisms of bureaucratic and market competition to find out the boundaries of this model.
