Re-Governing China

In order to achieve genuine stability, China’s leaders must strike a delicate balance between tiao tiao control and kuai kuai autonomy. But this has proved difficult, with relaxation of tiao tiao often leading not just to rapid regional growth and improvements in local public services, but also to widening imbalances and a heightened risk of overheating, owing to pro-cyclical herding behavior, such as excessive fixed-asset investment. The government is then forced to re-impose central control abruptly, bringing about a sudden stop. If China’s economy were a car, the country’s leaders would always be either flooring the accelerator or slamming on the brakes.

With its latest set of reforms, China’s government is attempting finally to fine-tune its approach. The package centralizes some responsibilities, such as managing resistance from vested interests, while expanding local-government autonomy in other areas, including procedures for licensing and planning approval. With the creation of free-trade zones – which entail lower tariffs, reduced customs barriers, and less administrative intervention – the government is attempting to give market forces a decisive role in resource allocation.

This effort to ease unnecessary constraints on regional entities will lead to market and institutional innovations. These innovations, together with increased transparency and the implementation of cutting-edge technologies, are likely to reduce rent-seeking and corruption, while boosting productivity and employment significantly.

The government’s recent decision to phase out the household registration (hukou) system will augment these gains further, as it gives workers and private business-owners alike the opportunity to choose where to live, work, and invest. As China’s leaders explicitly recognized at the Third Plenum, the removal of arbitrary tiao tiao controls can enable cities and local communities to evolve according to their own comparative advantages.

But China’s gradual opening up will increasingly allow companies and individuals to cross national borders in search of more lucrative opportunities, complicating the country’s governance matrix further. Indeed, coping with global competition for markets, resources, talent, and respect will require a two-way interaction between Chinese and global governance systems.

China’s leaders have already demonstrated that they understand the need to implement modern management techniques, and that doing so requires them to update and recalibrate the tools of central control on which they have long relied. With the right adjustments, China’s governance system can effectively address market failures like air and water pollution, food safety, energy efficiency, and social inequality, while ensuring the country’s long-term prosperity.

This process is only beginning, but it is off to a strong start.

Andrew Sheng is Distinguished Fellow of the Fung Global Institute and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng is Director of Research at the Fung Global Institute.

Copyright: Project Syndicate, 2014.