tion can have costs—for instance,increased inequality, policy externalities, and the creation of local “dukedom” economies—but argue that
in China’s case these were outweighed by the benefits (Qian and Weingast 1996, p.3). Blanchard andShleifer (2001) make the more nuanced claim that fiscal decentralization helped in China, but only because
it was combined with political centralization.
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incentives to stimulate economic growth. Fifth, some contend decentralization helped hardenbudget constraints on enterprises, forcing them to restructure.In this paper, we challenge the claim that decentralization had much to do with thesuccess of China’s reforms and its subsequent economic miracle . Grass roots initiatives did, of
course, occur, and considerable administrative decentralization took place from the mid-1980s.But the key reforms that reshaped China’s economy began in the late 1970s and early 1980s,when China was still one of the most politically centralized countries in the world. In fact,
centralization helped speed the spread of beneficial discoveries. Provincial governors were not
then—and still are not—a reliable check on central abuses, and certainly do not guarantee
property rights. The most commonly cited example of a governor who resisted Beijing actually
ended in victory for the central authorities: the governor was removed and his successor forced to
accept Beijing’s preferred policy. Fiscal decentralization cannot explain improved performance
because any beneficial effect of a higher local marginal share of tax revenues was offset by the
sharp decline in the proportion of GDP collected as taxes and available for sharing. Nor can fiscal
decentralization have hardened state enterprises’ budget constraints because these did not harden.
In fact, loss-making enterprises multiplied during the years of decentralization and rapid growth,
and the state banks virtually bankrupted themselves bailing them out. Budget constraints onlyhardened after central fiscal and monetary policy was tightened. To be clear, day-to-day controlover various economic activities did pass to subnational officials during the 1980s , subject toultimate review from above. However, increased local discretion had both positive and negativeeffects, and the evidence does not clearly indicate which on balance dominated.If decentralization was not a major ingredient in China’s reform success, the explanation
must lie elsewhere. We suggest another view of politics in post-Mao China. The driving forcebehind reform was not initiatives of autonomous local officials but competition at the centerbetween rival factions, with different ideological predispositions and local connections. Factionssought supremacy within the party by demonstrating theeffectiveness of their chosen policies
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across the chess board of China’s territorial administration. Local officia ls were linked into thesefactions, and sought to impress higher-ups with suggestions and sometimes spontaneous—evenillegal—initiatives. This view, which actually coincides with many traditional understandings ofChinese politics,3 can explain the temporal pattern of reform, which waxed and waned with shifts
in the factional balance of power rather than with changes in decentralization. It also explains
why economic performance has not deteriorated recently despite considerable recentralization.
Today, all major factions in Beijing accept the goal of marketiz
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