#3060 - Week 17 Reading Political Turnover And Economic Performance - Chinese Economic History Since 1850

The strong pro-business role of Chinese local officials stands in stark contrast with the rent-seeking behavior (“the grabbing hand”) of local officials in other transitional and developing countries (Krueger, 1974; Frye and Shleifer, 1997)

“market-preserving federalism”, argues that the pro-business incentives given to Chinese local officials are a result of a policy of fiscal decentralization and high-powered intergovernmental fiscal revenue-sharing contracts (Oi, 1992)

Employing provincial-level data Jin et al., (2000) finds empirical evidence, which supports the fiscal decentralization view

The role of political incentives or career concerns on the part of local officials in China is another explanation of why Chinese officials acted so differently

• Readiness of the Chinese central government to reward and punish local officials on the basis of their economic performance motivates them to promote the local economy (Blanchard and Shleifer, 2001)

• The multi-divisional form structure of the Chinese economic system allows a yardstick competition among local officials (Qian and Xu, 1993)

Maskin et al. (2000) find that the political status of a Chinese province (measured by the number of Central Committee members) is correlated with the provincial economic ranking

Besley and Case (1996) show that economic performance of a state relative to neighbouring states has a positive impact on the re-election prospects of US governors

Groves et al. (1995):

• In the 1980s, the Chinese industrial bureaus selected managers of state-owned enterprises (SOEs) on the basis of firm performance

• Since Chinese SOE managers are semi-officials situated in the bureaucratic hierarchy, this manager selection rule reflects a general shift in personnel control since the late 1970s from the political criterion to the performance criterion

Five layers of the state administration: the centre, provinces, prefectures, counties and townships

• The CCP acts as the HQ of this “multidivisional” system

• Dual presence of the CCP and government organs at each level of China’s political hierarchy

There is strategic importance of provincial leaders (Qian and Xu,, 1993)

China’s reform of its personnel control system coincided with the beginning of its economic reforms

Political conformity, which was the only important pre-reform criterion for promotion, gave way to economic performance and other competence-related indicators

“Obsession” with economic ranking among peers -> i.e. provincial yearbooks

In 1980, the CCP officially proposed the abolition of the lifetime appointment of party and government officials and installed a mandatory retirement system

• Required to retire at the age of 65 if they are not promoted to higher positions in the central government

• Implemented in 1982

• Led to two large waves of retirement in 1983 and 1985

• But was not strictly enforced

Loss of power is what marks the end of an official’s political career

Publicly announced demotions were very rare and a seemingly routine retirement may well disguise a dismissal

There were few options outside the internal political labour market

• Lock-in effect

  • Reinforces the incentives for Chinese officials to hold onto their power

The M-form structure of the Chinese economy makes each provincial leader’s performance individually distinguishable and comparable thereby allows for a sensible link between performance and turnover

Hypothesis: The probability of promotion (termination) for provincial leaders increases (decreases) with the provincial economic performance

Besides the GDP growth rate, the characteristics of provincial leaders may affect their likelihood of promotion and termination

Age has become a critical variable determining turnover, especially terminations after the age-based retirement rule was implemented in 1982

Provincial leaders’ connections with the central government could also affect the likelihood of turnover

• A provincial leader’s experience in the central government may allow her/him to maintain stronger connections with the center and better knowledge of the workings of central appointment procedures

The provincial location could also matter in a leader’s likelihood of promotion

• E.g. starting from 1979, the central government introduced a varierty of preferential economic policies that...