Chapter

V Decentralization and Regional Development

Author(s):
Michael Bell, Kalpana Kochhar, and Hoe Khor
Published Date:
June 1993
Share
  • ShareShare
Show Summary Details

China’s regional policy has been crucial in stimulating reform and, by the same token, high regional growth rates have contributed to the macro-economic imbalances that have periodically developed. Analysis of the role of the central policies toward certain regions and of the policies pursued by regional governments is complicated not only because of the size and complexity of the economy but also because of the speed with which policy changes have occurred, particularly in 1992 and 1993.

Although there were several phases of decentralization and recentralization in the period before 1979, the regional pattern of development and hence the growth performance of the regions were largely determined by central direction and were subject to nationwide priorities. Since the late 1970s, decentralization—under which local authorities and enterprises acquired increasingly greater autonomy in fiscal resource allocation, investment, production, and trade—has linked each province’s development more directly with its own resource endowment and priorities.

This section examines the major factors that influenced the performance of the provinces as decentralization proceeded in the context of the reforms since 1978. These include changes in the orientation of central government policy, ownership structure, and financial relations between the center and the provinces. Appendix II contains some empirical analysis of the major determinants of provincial and regional differences in growth. Considerable attention is paid to financial relations—which include fiscal and credit policies as well as issues of foreign trade and investment—because of their importance for the conduct of macroeconomic policy. China’s progress toward a more market-oriented economy has heightened the need to rely on indirect methods of macroeconomic management. At the same time, decentralization has involved institutional changes that have impaired the capacity of the Government to implement these methods.

Policy Orientation: Industrial or Regional?

Considerable debate has taken place over the orientation of policy in the period since 1978. A certain ambivalence by the authorities arose from their conflicting goals of opening the economy while attempting to ensure an equitable distribution of the benefits of economic growth, and of developing an “appropriate” industrial structure. Prior to the late 1980s, the focus on export-led growth in specific localities gave rise to strong cross-regional policy differentials, widely referred to as the “regional tilt” policy. However, policy during this period was not completely free of an “industrial tilt,” although the term “industrial policy” was not officially used until 1989.

In the late 1970s, two strands of central government policy combined to create conditions that were favorable for the development of new industries in certain coastal provinces, thereby setting a pattern of development that would help these provinces. First, priority was accorded to light industry and agriculture to redress the previous imbalance toward heavy industry. Second, as the open-door policy was initiated, the export-oriented and technologically advanced industries were given precedence in various regulations, notably those issued in October 1986 by the State Council, designed to provide additional incentives to foreign investors.

Debate over the orientation of policy intensified during 1988–90 as the perception grew that cross-regional differences in absolute income and growth rates were widening. Moreover, increasing interregional trade barriers and other monopolistic practices also increased concerns about the distorting effects of regional policy.

Against this background, an industrial policy containing a detailed list of favored and restricted sectors was for the first time formally promulgated by the State Council in 1989. Initially, the most frequently used measures to implement industrial policy were administrative restrictions through investment approval procedures and the credit plan, although there was some indirect use of the market mechanism, through interest and tax rate differentials. In 1991, the State Council converted the construction tax into an investment direction adjustment tax. Previously, investments in basic construction were subject to a unified construction tax rate, whereas after the revision differential rates were applied to projects with different ranks of priority. Although most of these policies differentiated among industries, in at least one important respect the move away from a regional tilt resulted in a more level “playing field”: the considerable simplification that took place in the foreign exchange retention scheme (see Section IV), which largely eliminated any regional or industrial bias in the retention of export earnings. The opening of inland provinces since early 1992 has represented a further move away from the regional tilt policy.

Despite the shift toward an industrial policy, there has been little impact on industrial structure and regional resource allocation. The central government has not only shifted its priorities—toward infrastructure rather than heavy industry—but has fundamentally altered its role in resource allocation; in particular, mandatory planning is being rapidly phased out in favor of more indirect methods. As a result, central government priorities have been overridden by those of the provincial authorities—especially in the coastal regions as they have progressively acquired more autonomy. Moreover, there have been a number of new regionally oriented policy initiatives since 1988, including those in Hainan, Pudong, and the opening of the inland and border areas.

Evolution of Ownership Structure

Since decentralization has proceeded along with the change in ownership structure, the latter is a significant indicator of a region’s progress toward reform. During the early years of decentralization, many centrally owned SOEs—and more importantly areas of economic activity—were transferred to the jurisdiction of the provinces.81 Given this more decentralized system, each province acquired greater potential to determine its own priorities and policies and thereby to influence its own performance, including the extent to which it promoted collectives (especially the dynamic TVEs) and private enterprises.

Nevertheless, the central government still influences ownership structure in the provinces in at least two ways. First, many SOEs are still directly under central control, and thus reform can proceed only at the pace permitted by the center. Second, some provinces continue to have a high concentration of SOEs either because of their endowments of raw materials or because they have traditionally been centers of heavy industry.

Although there has clearly been a reduction in state ownership during the reform era, the pace at which the ownership structure has changed has differed across provinces (Chart 2). For instance, between 1981 and 1991, the share of state-owned industry in total industrial output fell in the coastal province of Zhejiang from 58 percent to 29 percent, while in the interior province of Qinghai, it had stayed virtually unchanged at 83 percent. This growing diversity is reflected in a statistical measure of the share of SOEs in total industrial output: the coefficient of variation82 rose from only 0.097—reflecting a highly uniform ownership structure—to 0.24 in 1991.

Chart 2.Provincial Ownership Structure1

Source: Data provided by the Chinese authorities.

1Share of state-owned industry in percent. See list of abbreviations on p. ix for full names of provinces. Provinces ranked by per capita national income in 1990.

The fastest growing provinces—including Zhejiang, Jiangsu, Guangdong, Fujian, and Shandong-are those in which the share of state-owned industry has fallen most sharply. By 1991, the share of the SOEs in each of these five provinces had fallen by almost half, to about 30–40 percent, creating a structure dominated by the nonstate sector. By contrast, the remote (mainly western) provinces experienced a much lower pace of change. For instance, Qinghai, Guizhou, Ningxia, Inner Mongolia, and Heilongjiang all saw a decline of less than 10 percentage points, with the share of SOEs in industrial output staying at over 75 percent.

The growth of the nonstate sector took on slightly different forms in various provinces: TVEs (Jiangsu and Zhejiang), foreign-funded enterprises (Guangdong), and private enterprises (Zhejiang). Among these, the most significant development was the growth of the TVEs mainly in the coastal provinces. From 1978 to 1991, the nationwide output by TVEs grew at an annual average rate of 22 percent, 14 percentage points higher than that of the state-owned industrial enterprises.83 In 1991, 70 percent of the total sales revenue of TVEs came from the 12 coastal provinces and municipalities, with only 8 percent from the 9 western provinces and autonomous regions. Not only did the output growth of the TVEs exceed that of the SOEs, but their higher rate of productivity growth shows the stronger potential for growth of the TVEs.84

Center-Local Financial Relations85

Fiscal Relations

The fiscal relationship between the central and local governments has been a major source of tension as decentralization has proceeded. Before 1980, all revenues were remitted to the central government and then transferred back to the provinces according to expenditure needs approved by the center. Since the early 1980s, this relationship has gone through three major changes.86

In 1980, a revenue-sharing arrangement was established under which there were three basic types of taxes: those accruing to the center, those accruing to the localities, and revenue that was shared between the center and localities according to agreed formulas. During 1980–84, about 80 percent of the shared revenue was remitted to the central government and 20 percent remained with the local governments. This arrangement resulted in surpluses in wealthy provinces and deficits in poor provinces.

In 1985, a new arrangement—intended to create incentives for revenue collection by each province-set varying schedules based on each locality’s budget balance in the previous year. However, the central government continued to maintain a tight grip over the highest revenue-yielding regions, including Shanghai, Beijing, Tianjin, Liaoning, Jiangsu, and Zhejiang.

In 1988, a fiscal contract system was adopted, in which six types of revenue sharing were introduced (Table 12).87 This system further increased the revenue share retained by the localities, particularly the major contributors to the central government’s revenue. When the initial three-year contracts expired in 1990, it proved impossible to negotiate satisfactory replacements; as a result the first generation of contracts has been repeatedly extended pending the negotiation of alternative arrangements. In 1992, experiments with a system of separate taxation were begun in nine provinces/municipalities.

Table 12.Central-Local Resource-Sharing Contracts, 1988-921
Type A2Type CType D
Variable Retention by FormulaType BVariable Remittance by FormulaSemi-Fixed Amounts to StateType E
Contracted rate of increase (In percent)Local retention rate (In percent)Fixed Rate of Retention (In percent)Basic remittance to center (In percent)Marginal remittance (In percent)Initial amount to state (Y 100 million)Contracted annual rate of increase (In percent)Fixed Amount to State (Y 100 million)Contracted Transfers to Provinces (Y 10 million)
Beijing4.050.0
Hebei4.570.0
Liaoning3.558.3
Shenyang4.030.3
Harbin5.045.0
Jiangsu5.041.0
Zhejiang6.561.5
Ningbo5.327.9
Henan5.080.0
Chongqing34.033.5
Tianjin46.5
Shanxi87.6
Anhui77.5
Dalian27.727.3
Qingdao16.034.0
Wuhan317.025.0
Guangdong (including Guangzhou)14.19.0
Hunan8.07.0
Shanghai105.0
Shandong2.9
Heilongjiang3.0
Jilin1.1
Jiangxi0.5
Shaanxi (including Xian)1.2
Gansu1.3
Fujian (beginning 1989)0.5
Inner Mongolia18.4
Guangxi-Zhuang6.1
Tibet Autonomous Region of China9.0
Ningxia-hui5.3
Xinjiang-uygur15.3
Guizhou7.4
Yunnan6.7
Qinghai6.6
Hainan1.4
Source: Ministry of Finance.

These contracts were intended to cover three years but have been extended annually in subsequent years.

The locality retained a specified proportion (local retention rate) of any revenue that was less than or equal to the contracted rate of increase. Any revenue above this amount was retained locally.

After the cities of Wuhan and Chongqing were separated from Hubei and Sichuan provinces, the provinces changed from net providers to the state to net recipients of subsidies from the state. The difference between their expenditures and their income, which was made up from income that Wuhan and Chongqing sent to the provinces, served as central government subsidies to the local governments. The percentage that Wuhan and Chongqing gave to the provinces was 4.8 percent and 10.7 percent, respectively.

Source: Ministry of Finance.

These contracts were intended to cover three years but have been extended annually in subsequent years.

The locality retained a specified proportion (local retention rate) of any revenue that was less than or equal to the contracted rate of increase. Any revenue above this amount was retained locally.

After the cities of Wuhan and Chongqing were separated from Hubei and Sichuan provinces, the provinces changed from net providers to the state to net recipients of subsidies from the state. The difference between their expenditures and their income, which was made up from income that Wuhan and Chongqing sent to the provinces, served as central government subsidies to the local governments. The percentage that Wuhan and Chongqing gave to the provinces was 4.8 percent and 10.7 percent, respectively.

In practice, the fiscal contracts were subject to continuing renegotiation usually to the disadvantage of the central government. For instance, in 1990 only 6 provinces recorded a surplus (Chart 3), even though 16 were contractually obliged to do so.88 Thus, the central authorities have frequently expressed concerns as to the distribution or assignment of resources between the center and localities and the difficulty of maintaining sufficient control over total fiscal expenditure.

Chart 3.Provincial Budgetary Operations, 19901

Source: Data provided by the Chinese authorities.

1Provinces ranked by per capita national income in 1990; see list of abbreviations on p. ix for full names of provinces.

2Revenue less expenditure according to national authorities’ definitions.

Although most fiscal revenue is collected by local agencies, it is—at least in principle—designated as central, local, or shared. Through much of the reform era, this distribution of revenue has derived from the ownership of the enterprises that generate the revenue. As Wong (1991) points out, through the 1980s the central government actually increased the proportion of its claims on total resources by various means including the appropriation of some of the most profitable enterprises (in industries such as automobiles, tobacco, petrochemicals, and shipping); the introduction of taxes on extrabudgetary funds of enterprises; and the recentralization in 1985 of four key sectors—coal, nonferrous metals, petroleum, and power. However, this development has been offset by another effect of decentralization: the localities now “own” many of the more recently established enterprises and derive substantial income directly from this source.

In summary, these developments have been reflected in the various trends illustrated in Table 13, which include (1) a gradual decline in the total revenue/GNP ratio that reflected a parallel fall in the central revenue/GDP ratio; (2) an increase in the local revenue/GNP ratio through the mid-1980s and a decline thereafter; and (3) a marked decline in the share of revenue collected through local taxes (before tax-sharing), accompanied by an increase in the share retained by the localities. It is this last characteristic, which has led to a sharp reduction in the relative size of transfers from the localities to the center, that is at the heart of the central government’s concerns.

Table 13.Central and Local Revenues1
1979198019811982198319841985198619871988198919901991
(In percent of GNP)
Revenue before tax sharing26.723.321.320.020.120.620.721.919.516.816.716.615.8
Central3.12.93.23.45.06.57.28.06.55.55.25.64.6
Local23.620.418.116.715.114.113.513.912.911.311.611.011.1
Revenue after tax sharing26.723.321.320.020.120.620.721.919.516.816.716.615.8
Central12.510.310.110.910.210.49.47.47.17.5
Local8.89.710.09.710.511.510.19.49.79.1
Net payment shared from
local to central level9.36.35.13.23.03.53.61.91.91.9
(In percent of total revenue)
Revenue before tax sharing100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Central11.412.615.016.825.031.434.836.733.532.930.933.829.3
Local88.687.585.083.275.068.665.263.366.567.169.166.270.7
Revenue after tax sharing100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Central58.651.450.252.949.247.548.344.342.345.1
Local41.548.749.747.150.752.551.755.757.754.9
Memorandum items:(In percent of GNP)
Total extra budgetary receipts11.312.512.615.516.717.217.917.918.016.816.715.3
Central5.26.26.87.47.47.36.56.76.1
Local10.210.510.410.410.510.610.410.09.2
Budgetary plus extra
budgetary238.035.833.935.536.837.838.639.837.533.633.431.9
Central15.516.317.718.617.816.713.913.813.6
Local19.920.520.120.922.020.719.819.718.3
Source: World Bank (1993a).

Excluding the proceeds of debt issue.

After revenue sharing.

Source: World Bank (1993a).

Excluding the proceeds of debt issue.

After revenue sharing.

Although the resources available to the localities have indeed grown, the demands for expenditure placed upon them have also increased, arguably disproportionately—leading to attempts by localities to mobilize other sources of revenue to meet all their obligations. The proportion of total expenditure financed by the center declined through much of the 1980s as the provinces were expected to assume greater responsibility for social, health, and education expenditures and for the financing of some elements of subsidies. The center no longer explicitly stipulates the specific expenditures, but the policies of the central government determine the nature of the expenditure commitments of the local authorities.

Credit Policy

In the first phase of financial reform through the mid-1980s, the People’s Bank of China—until then a monobank—was broken into a number of specialized banks, with the People’s Bank retaining the function of the central bank.89 Each major bank, including the People’s Bank, shares an organizational structure that parallels the Government’s administrative structure, with the national headquarters at the top, provincial and municipal branches in the middle, and the city/county branches at the bottom.

At present, the influence of the People’s Bank is circumscribed by a system of “dual leadership.”90 At the national level, its power is limited, since it is answerable to the State Council in a capacity similar to other line ministries. At the provincial level, its branches are administratively linked to local governments; the authority of the center was strengthened in 1988 through a decision to allow the headquarters of the People’s Bank to appoint provincial bank presidents.

There is a close relationship between People’s Bank lending to specialized banks and the allocation of credit among provinces, reflecting national priorities for the regional distribution of resources. Indeed, the demarcation between the credit and fiscal policies is often blurred by decisions—proposed largely by the State Planning Commission—as to the proportions of investment that should be financed by the budget and the credit plan. Chan 4 illustrates that through the allocation of credit, the authorities had sought to secure sizable resource transfers from a relatively few surplus provinces (predominantly higher-income provinces) to the larger number of provinces in which growth of deposits was insufficient to finance the expansion of credit.91 By this means a relatively even distribution of credit growth could be achieved, at least during periods such as 1990 when domestic demand was restrained.

Credit policy in a province may offset the stance of the fiscal contract. For instance, in 1991 Shanghai, which makes large fiscal transfers to the center, was allowed to expand credit by more than the increase in its deposits (Chart 4). In contrast, much tighter credit policy was imposed on Guangdong—which faces a relatively light fiscal obligation to the center—despite the strong demand for credit from this dynamic economy. Thus, even though investment in Guangdong was 80 percent higher than that in Shanghai, credit expansion was only 26 percent higher. This is striking, given that investment is clearly an important component of credit expansion.

Chart 4.Provincial Monetary and Credit Operations, 19901

Source: Data provided by the Chinese authorities.

1See list of abbreviations on p. ix for full names of provinces. Provinces ranked by per capita national income in 1990.

2Defined as the difference between the absolute increase in deposits and credit expansion during the year.

3Left scale.

4Right scale.

External Policies

Of the three broad macroeconomic sectors, regional disparities are the most pronounced in the external sector. Analysis of the external financial position of the provinces is complicated by the nature of data available; a substantial proportion of external trade (particularly imports) is not recorded against the province of final use. Nevertheless, available data (Chart 5) reveal that the resources generated by external trade are concentrated in a handful of coastal provinces: the highest export/GNP ratios are recorded in Shanghai, Tianjin, Liaoning, Guangdong, Jiangsu, and Shandong. However, imports in the first two provinces are substantial and leave the balance of resources created by external trade concentrated in the other four provinces. The inflow of foreign direct investment is even more heavily concentrated in one province, Guangdong, which in 1990 accounted for one-third of foreign investment inflows. By comparison, exports from Guangdong accounted for one-fifth of total exports. The large volume of external resources available to Guangdong may be one reason why the central authorities have imposed a relatively tight domestic credit policy on it, to secure the transfer of resources to other provinces.

Chart 5.Regional External Developments, 19901

Source: Data provided by the Chinese authorities.

1See list of abbreviations on p. ix for full names of provinces-Provinces ranked by per capita national income in 1990.

As with other aspects of economic policies there is a hierarchical structure to the institutions involved in implementing China’s external policies, all of which have undergone substantial decentralization during the reform era.92 First, the responsibility for formulating trade policy and plans falls to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and its commissions in each of the provinces (provincial COFTECs). Second, actual trade is conducted only by the foreign trade corporations (FTCs). incorporated at both the central and local levels, and by a growing number of producing companies that are permitted to trade on their own account (including the foreign-funded enterprises). An indication of how extensive decentralization has been is that in 1978 foreign trade was conducted by 12 FTCs, all centrally owned; by 1991 there were some 4,000 FTCs most of which were owned at the provincial level.

Third, exchange control and external debt management are handled by the State Administration for Exchange Control (SAEC)—an agency operating under the supervision of the People’s Bank of China—with branches in most localities. The SAEC controls access to the approximately 100 foreign exchange adjustment centers (or swap centers) at which the market-oriented exchange rates are set. Fourth, the bulk of foreign exchange transactions and reserve management are handled by the Bank of China (BOC) with its own extensive domestic and foreign branch network.

Until 1991, external resources were allocated between the center and localities through contractual arrangements under which remittances of foreign exchange by the latter were specified with different ratios for below- and above-plan quota amounts. Retention at the enterprise level was also differentiated according to product, and the open economic zones were permitted more favorable retention than other areas (for instance, up to 100 percent in the SEZs). The retention system was considerably simplified in 1991 when a more uniform system was adopted that established formulas for the distribution of foreign exchange earnings among the center, the localities, and the enterprises.

Enterprises’ retained foreign earnings can be traded in the swap centers. However, because of local protectionism, interprovincial flows of foreign exchange are restricted and the exchange rates in the swap centers tend to vary unduly. For instance, in August 1992, the premiums (the margin over the official exchange rate) in the swap centers across the country ranged from 24–36 percent. In 1992, the authorities announced their intention to establish a national exchange market and to unify the exchange rates, and they have issued regulations prohibiting local restrictions on the flow of foreign exchange. To facilitate the process, they are also planning to modernize the telecommunication facilities and payments and clearing systems.

Since direct controls have yet to be replaced by indirect instruments within an appropriate legal and regulatory framework, further risks for implementing national policies arise from growing provincial autonomy. For instance, without adequate monitoring arrangements, international trade agreements may be violated by Chinese enterprises that undertake direct negotiation with foreign counterparts. Similarly, the management of external reserves and debt is complicated by state-owned institutions under provincial authorities that undertake external borrowing or other foreign transactions (including offshore investment) without the sanction of the center while facing a soft budget constraint.

Nevertheless, the provinces remain subject to a considerable amount of central direction. First, the trade licensing and regulation system implemented by MOFTEC can be applied throughout the country on a relatively uniform basis through the network of COFTECs. Thus, in 1988/89 under the rectification program, although the number of commodities under licensing did not increase, there was an evident tightening of existing regulations in all regions, which contributed to the sharp decline in imports in 1990. Second, a much larger proportion of imports are handled by centrally owned FTCs than for exports (46 percent and 20 percent, respectively), allowing considerable scope for the implementation of import restrictions at the central level.

Third, in many cases, decentralization seems simply to have replaced direct intervention by the central government with lower levels of government—the provincial or municipal authorities. For instance, in Jiangsu province, although the center sets mandatory output targets or export quotas only for certain items, the province can set binding contracts between FTCs and the producing enterprises, which are effectively the same as mandatory targets.

The Experience of Guangdong

Guangdong covers an area of 180,000 square kilometers and has a population of 63 million (only 14 countries have a larger population). In 1978. Guangdong’s per capita income was Y 313, close to the national average of Y 315, and ranked tenth among the 29 provinces, autonomous regions, and municipalities. By 1991, its per capita national income had risen to Y 2,134, ranked fifth in the country.

The Fastest Growing Region?

Guangdong is often cited as the fastest growing region in China, in Asia, and perhaps in the world. Many, including Deng Xiaoping, have sought lessons for the rest of China from Guangdong’s experience. Available statistics show that while Guangdong does indeed rank consistently high in the various indices of economic growth, it is not always top, and does not outstrip other provinces by a large margin. Indeed, it has grown at a rate close to that of other coastal provinces such as Fujian, Jiangsu. Zhejiang, and Shandong in the past decade. This result arises from Guangdong’s size and diversity: in addition to its well-known export-oriented light industrial base, it has an extensive agricultural sector whose performance may well have been similar to that of the rest of China.

Thus, it is not the whole province, but Southern Guangdong, or the Pearl River Delta, that has been growing strikingly fast. Unofficial estimates put average growth in many counties and cities in the Pearl River Delta at 20 percent or more in the past decade, whereas the three SEZs in the delta grew at average rates of over 30 percent. Although it would be most instructive to examine the experience of Southern Guangdong, available data restrict the analysis to the whole province.

Selected Features in Guangdong’s Development

Role of Exports

Among all sectors in Guangdong, the fastest growth has come from exports. From 1978 to 1990, Guangdong’s exports grew at an annual average rate of 29 percent, more than twice the province’s rate of GDP growth (12.4 percent), and by 1990, total exports had reached $10.6 billion, 17 percent of the country’s total. The export/GDP ratio jumped from 13 percent in 1978 to 34 percent (double the national average) in 1990. The trade surplus has consistently been about 30 percent of the value of exports or about 10 percent of GDP; even excluding consignment processing by Hong Kong companies, trade remained in surplus.

A simple decomposition of Guangdong’s growth (see Appendix II) shows that during the decade through 1990, when Guangdong’s average GDP growth outstripped other provinces by 3.6 percentage points, export growth contributed almost two-fifths of its growth, double the national average. As for the other sectors, their contribution to overall GDP growth was 7.7 percentage points, compared with 7.0 points for the whole of China.

Foreign Investment and Proximity to Hong Kong and Macao

Guangdong’s geographic proximity and cultural and linguistic similarities have facilitated rapid economic integration with Hong Kong and Macao. Among the foreign investors in Guangdong, Hong Kong and Macao continued to be the largest source in the past decade. In most years, investment from Hong Kong and Macao has accounted for about two-thirds of the total actual foreign investment, whereas in 1991 new contracts from these territories accounted for about 90 percent of the total (Table 14). Moreover in 1991, Guangdong received 68 percent of all investment in China by Hong Kong and Macao. Guangdong is thus an extreme example of what is observed elsewhere in China—that individual provinces have concentrated on attracting investment from specific and distinct foreign countries or regions.

Table 14.Source of Foreign Investment in Guangdong, 1991(In millions of U.S. dollars)
Number of

Contracted

Investments
Pledged

Investment
Actual

Investment
Total8,5075,015.52,582.5
Hong Kong7,6234,229.61,622.8
Macao326248.3102.0
Taiwan Province of China276263.1115.2
Japan49315.1311.8
Source: Guangdong Statistical Yearbook, 1992, pp. 356–58.
Source: Guangdong Statistical Yearbook, 1992, pp. 356–58.

In addition, Hong Kong and Macao provide the primary channels that connect Guangdong’s enterprises with international markets. Besides foreign direct investment, other forms of economic integration have developed, including trade, leasing, and processing and assembling. Many domestic enterprises export products through corporations in Hong Kong, and a division of labor has emerged with production shifting to the Pearl River Delta region and marketing remaining in Hong Kong. It is estimated that over 3 million people in Guangdong are now working directly or indirectly for Hong Kong-based businesses with many workers crossing the border to work in Hong Kong and vice versa.

Fiscal Relationship with the Center

Many have argued that Guangdong’s rapid growth resulted from its favorable fiscal relations with the central government. Indeed, the center appears to have intentionally allowed Guangdong to remit less revenue than other provinces with comparable conditions during the past decade to give it more financial autonomy to facilitate the experiments with decentralization and reform. There was almost zero net transfer from Guangdong to the center during 1980–87, and under the 1988–91 fiscal contract Guangdong was required to submit a fixed initial amount of only Y 1.4 billion with an annual growth rate of 9 percent. By contrast, Shanghai was required to submit a fixed annual amount of Y 10.5 billion. Further analysis of this question (Appendix II) suggests that the favorable fiscal relationship with the center was only a minor factor in explaining Guangdong’s strong growth performance.

An Experimental Reform Zone and the Open-Door Policy

Guangdong has been used as a laboratory for various reforms and it has consistently been more aggressive in opening its economy than other provinces. Three of the four original SEZs are located in Guangdong; the Pearl River Delta Economic Development Zone was established during the mid-1980s; and eventually, in March 1988, Guangdong was designated a “comprehensive reform experiment zone” and proceeded with reforms in ten areas, including finance, fiscal matters, and trade, with the intention of further opening the region’s economy. The province led the rest of China in liberalizing retail prices and removing mandatory planning.

It has also pressed the autonomy granted to the limits, seeking further concessions from the center. One striking example is that Guangdong has, with the tacit consent of the center, proceeded with investment projects that exceeded the mandate of provincial governments without central authorization. Moreover, in contrast with some other provinces, rather than centralizing authority delegated from the state in their own hands, the Guangdong authorities devolved authority further to lower levels of government (counties and cities). This devolution has enabled many productive investment projects to proceed without undue bureaucratic delays.

Can Guangdong’s Experience Be Replicated?

Given that Guangdong’s success has stemmed from a mixture of policies (opening the economy and reform) and geographical circumstances (especially proximity to Hong Kong and Macao), the question arises as to whether its performance can be replicated. Evidently the prospects vary according to location and natural resource endowment as well as the policy orientation of the local authorities.

Inland Provinces93

Many inland regions, except for some border provinces, suffer from a lack of natural trade and investment partners, poor infrastructure, inadequate managerial skill, and an inadequately trained labor force. These factors may offset any incentives that can be offered. Nonetheless, in 1992 the authorities initiated the opening of many inland areas along the Yangtze River valley, and many more localities seized the initiative to offer similar incentives without central authorization.

Priorities for these and other inland regions include drawing on the reform experience of Guangdong by allowing market forces to determine resource allocation and identify comparative advantages, encouraging nonstate enterprises, reducing government intervention, and removing interprovincial barriers to promote integration among the regions.

Border Provinces

China has seven provinces located along its inland borders,94 many of which have some advantages similar to the coastal provinces in terms of international trade and economic cooperation with neighboring countries. For instance, the border prefectures and counties in Yunnan province (bordering Myanmar and Viet Nam) and whose international trade has risen sharply in recent years are reportedly among the fastest growing regions in China’s border area. Northern Chinese provinces stand to benefit from trade with the former Soviet Union with its severe shortage of consumer goods. Although China’s border provinces exhibit significant comparative advantages in technology and productivity relative to the inland provinces, other external factors are likely to be less favorable than in Guangdong: the neighboring countries are less developed and have smaller markets than the economies of east and southeast Asia that are providing both trade outlets and sources of capital for the coastal provinces.

Coastal Provinces

Guangdong’s export boom and massive use of foreign capital were mainly supported by its economic integration with Hong Kong and Macao. For most coastal provinces, the existence of natural partners with both geographic proximity and mutual comparative advantages would also strongly affect their growth performance.

The Fujian Delta area has already developed strong links with Taiwan Province of China. With the latter’s industry now facing skyrocketing labor and land costs, Fujian, whose unit cost of labor is still less than half that in the Pearl River Delta area, represents a highly attractive location for capital from Taiwan Province of China.95 Trade is less dynamic than that between Guangdong and Hong Kong because of political considerations, but the potential is clearly very high.

Northeast China also has great potential, given its substantial petroleum, metallurgical, coal, chemical, and building materials industries and proximity to Japan and Korea, as well as the potential markets of Russia and the Democratic People’s Republic of Korea.

The Yangtze River Delta is the home of China’s most advanced industrial city, Shanghai, and two provinces with highly market-oriented economies, Jiangsu and Zhejiang. These provinces have grown about as quickly as Guangdong even without an external partner such as Hong Kong, Foreign investment and trade associated with the opening of the Pudong New Area is likely to lead to accelerated growth in the whole delta.

There is potential in many regions of China for developing along patterns similar to, though not identical with, Guangdong’s experience. It should, however, be recalled that the growth of Guangdong and other coastal provinces received a strong stimulus from investment from other parts of China that sought the benefits of a less restrictive economic environment. As economic liberalization spreads through the country, the growth should become more evenly distributed.

Conclusions

China’s size has led its leadership to turn to the provinces for experiments that have stimulated reform for the past 15 years. The center has tolerated and even encouraged provincial initiatives and the widespread application of market-related reforms. These regional policies have been highly successful in generating the strong growth of some of the coastal provinces (Chart 6). Statistical analysis has identified some of the factors that have contributed to the rapid growth of the most successful of the coastal provinces as the extent of openness of the province; the low degree of state ownership; little government intervention in microeconomic policies; the higher amount of fiscal resources retained in the province; and the availability of foreign direct investment (see Appendix II).

Chart 6.Regional Income and Consumption Disparities1

Source: Data provided by the Chinese authorities.

1See list of abbreviations on p. ix for full names of provinces. Provinces ranked by per capita national income in 1990.

However, one of the negative effects of the decentralized decision making, in the context of an underdeveloped system of indirect instruments of macroeconomic management, has been a severe weakening in macroeconomic control with adverse implications for the maintenance of macrostability. This topic is covered in more detail in the following section.

    Other Resources Citing This Publication