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Abstract
Between 1977 and 1989, the Chinese central government launched four rounds of economic retrenchment. A critical component in these retrenchment rounds was reduction of local investment volume. Despite similar pressures from the central government, provincial authorities formulated diverse policy responses. Some readily complied; others resisted to protect their economic interests.
This study explores the reasons for the cross-sectional variations in provincial responses to central investment policies. Three competing explanations are examined. The economic power explanation stresses the importance of an uneven distribution of economic resources among Chinese provinces; the political integration argument looks at different degrees of representation by provincial officials in the central government, and the time horizon argument seeks answers in tenure stability of provincial officials.
Using both qualitative and quantitative research methods, this study largely supports the political integration explanation. Chinese provincial officials with close ties to the Center, such as Politburo members or those with previous career trajectories largely in the central ministries, are found to be more compliant in their investment behavior. There is evidence to suggest that the central government consciously manipulates personnel mixes at the provincial level to achieve its policy objectives. Provinces of critical economic importance to the Center are typically staffed by officials with close organizational ties to the Center, and, when the need to retrench economy arises, the central government achieves overall macroeconomic stability by targeting and seeking full compliance from these provinces.
These research results raise some fundamental questions about the political requirements of making economic transitions. To the extent that economic reforms require macroeconomic stability, the success of an economic transition hinges on the political capacity of supplying such stability. When central bureaucracies have relinquished much of their economic control and before market discipline has been firmly established, retaining political and bureaucratic control over economic players can serve as a short-term, stop-gap and, at times, the only available instrument to effect macroeconomic stability. This study joins a number of recent works in political economy in supporting the thesis that the strength of the state is a critical variable in explaining diverse performances in economic and fiscal discipline among developing countries undergoing drastic economic change.
