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Zhu Rongji Might Be Right: Understanding the Mechanism of Fast Economic Development in China

Authors


  • This paper was prepared for the lecture that I presented at The World Economy China Annual Lecture on 3 November 2011 at University of Nottingham Ningbo Campus. I am grateful to Professor David Greenaway, the vice chancellor of the University of Nottingham, and the editor of The World Economy, for his kind invitation, and to Professor Shujie Yao for his encouragement. Thanks also go to my students, Ziying Fan, Shiyi Chen, Changyuan Luo, Xiaofeng Liu and Dongbo Tang for their excellent research assistance. Participants of the lecture are gratefully acknowledged for their patience and comments.

Abstract

Understanding the facilitating role of regional governments and the source of regional competition is the key to demystifying the success of China’s fast economic development since the 1990s. This paper, as the product of the lecture the author delivered at The World Economy China Annual Lecture on 3 November 2011 at University of Nottingham, provides a framework that better illustrates the mechanism that motivates China’s economic growth over the past 20 years. It shows that the current growth mechanism in China is largely the result of institutional reforms and fiscal recentralisation that occurred in 1994 under the leadership of Premier Zhu Rongji. Being allowed to have their own source of tax revenue under the new fiscal reform, Chinese regional governments are motivated to pursue the goal of economic growth through fast capital formation and industrialisation. The newly designed intergovernmental fiscal relationship, as the most important reform programme in China, has also helped create a growth incentive that is compatible between central and local governments, and resulted in a Tibout-type regional competition in the sense that inefficient use of resources, including public land, would be substantially eliminated by the strategic behaviour of regional governments being more attractive to external direct investment. Such regional competition makes the regional governments preserve and use the markets rather than replace them, and has generated consistent and powerful development momentum for the post-1994 economy of China.

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