The Incentive Role of Creating "Cities" in China

Li, Lixing (2008): The Incentive Role of Creating "Cities" in China.

Abstract

This paper examines a distinctive mechanism of providing incentives to local governments – upgrading counties to "cities". In China, awarding city status to existing counties is the dominant way of creating new urban administrative units, during which the local government gets many benefits. Using a large panel data set covering all counties in China during 1993-2004, I investigate the determinants of upgrading. I find that the official minimum requirements for upgrading are not enforced in practice. Instead, economic growth rate plays a key role in obtaining city status. An empirical test is then conducted to distinguish between a principal-agent incentive mechanism and political bargaining. The findings are consistent with the hypothesis that the central government uses upgrading to reward local officials for high growth, as well as aligning local interests with those of the center. This paper highlights the importance of both fiscal and political incentives facing the local government. The comparison between incentive mechanism and bargaining sheds light on an important question about China’s politics of governance: where does power lie in China?

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth, incentive mechanism, bargaining, political centralization, fiscal decentralization, county-to-city upgrading, central-local relationship
• Subjects: H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P26 - Political Economy ; Property Rights

References

Au, Chun-Chung and Vernon Henderson, 2006. "Are Chinese Cities Too Small." Review of Economic Studies, 73(3), pp. 549-576. Bai, Chong-En; Zhigang Tao and Sarah Y. Tong, 2007. "Bureaucratic Integration and Regional Specialization in China." China Economic Review, forthcoming. Besley, Timothy and Anne Case, 1996. "Incumbent Behavior: Vote-Seeking, Tax-Setting and Yardstick Competition." American Economic Review, 85(1), pp. 25-45. Blanchard, Olivier and Andrei Shleifer, 2001. "Federalism with and without Political Centralization: China versus Russia." IMF Staff Paper, 48, special issue, pp. 171-179. Bo, Zhiyue, 2002. Chinese Provincial Leaders: Economic Performance and Political Mobility since 1949. Armonk, N.Y.: M.E. Sharpe. Cai, Hongbin and Daniel Treisman, 2004. “State Corroding Federalism.” Journal of Public Economics, 88(3-4), pp. 819-843. Chan, Kam Wing, 1997. "Urbanization and Urban Infrastructure Services in the PRC." in Christine P.W. Wong, Financing Local Government in the People’s Republic of China. Hong Kong: University of Oxford Press. Chen, Ye; Hongbin Li and Li-An Zhou, 2005b. "Relative Performance Evaluation and the Turnover of Provincial Leaders in China" Economics Letters, 88(3), pp. 421-425. China Youth Daily, 2007. "Strong County in Shandong Seeks Direct Administration by Provincial Government: City-govern-county System Gets Challenged." Nov 14th, 2007. Available at http://city.finance.sina.com.cn/city/2007-11-14/93122.html Chung, Jae Ho, 1999. Cities in China: Recipes for Economic Development in the Reform Era. London and New York: Routledge. Chung, Jae Ho and Tao-chiu Lam, 2004. "China's 'City System' In Flux: Explaining Post-Mao Administrative Changes." China Quarterly, 180, pp. 945-964. Du, Qiming, 1993. "City: Urban Designation vs. Administrative Division." Zhongguo Fangyu (Chinese Territory Administrative Divisions and Place Names), (5). Economist, 2007a. "Talking Dirty in China." May 19th, 2007. Available online at http://www.economist.com/world/international/displaystory.cfm?story_id=8874472. Economist, 2007b. "Whale and Spratlys." Dec 13th, 2007. Available online at http://www.economist.com/world/asia/displaystory.cfm?story_id=10286863 Fogel, Robert, 2007. "Capitalism and Democracy in 2040: Forecasts and Speculations." NBER working paper No. 13184. Gu, Jie, 1997. "County-to-City Upgrading and from County-Executive to City-Mayor." Zhongguo Xingzheng Guanli (China Administrative Management), (7). Heckman, James, 1979. "Sample Selection Bias as a Specification Error." Econometrica, 47(1), pp. 153-161. Henderson, Vernon and Randy Becker, 2000. "Political Economy of City Sizes and Formation." Journal of Urban Economics, 48(3), pp.453-484. Huang, Yasheng, 1996. Inflation and Investment Controls in China: The Political Economy of Central-Local Relations during the Reform Era. Cambridge England; New York, NY: Cambridge University Press. Huang, Yasheng, 2001. "Political Institutions and Fiscal Reforms in China, Problems of Post-Communism." Problems of Post-Communism, 48(1), pp. 16-26. Huang, Yasheng, 2002. "Managing Chinese Bureaucrats: An Institutional Economics Perspective." Political Studies, 50, pp. 61-79. Jin, Hehui; Yingyi Qian and Barry Weingast, 2005. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style." Journal of Public Economics, 89(9-10), pp. 1719-1742. Lampton, David, 1992. "A Plum for a Peach: Bargaining, Interest, and Bureaucratic Politics in China." K. Lieberthal and D. Lampton, Bureaucracy, Politics, and Decision Making in Post-Mao China. Berkeley: University of California Press, Landry, Pierre, 2003. "The Political Management of Mayors in Post-Deng China." The Copenhagen Journal of Asian Studies, 17, pp. 31-58. Li, Cheng and David Bachman, 1989. "Localism, Elitism and Immobism: Elite Formation and Social Change in Post-Mao China." World Politics, 42(1), pp. 64-94. Li, Hongbin and Li-An Zhou, 2005. "Political Turnover and Economic Performance: The Incentive Role of Personal Control in China." Journal of Public Economics, 89(9-10), pp. 1743-1762. Lin, Justin Yifu; Ran Tao and Mingxing Liu, 2005. "Decentralization and Local Governance in China' S Economic Transition." working paper No. FE20050095, Forum for Economic Development, CCER, Beijing University. Liu, Bangwei, 2005. "Urbanization: From "County-to-City Upgrading" Back to a Normal City System." Tianzhong Xuekan (Journal of Tianzhong School), 20(4). Liu, Junde; Yuming Wang, 2000. Zhidu yu Chuangxin - Zhongguo Chengshi Zhidu de Fazhan yu Gaige Xinlun (Institution and Innovation – New Theories of Development and Reform in China’s Urban System). Nanjing: Dongnan University Press. Maskin, Eric; Yingyi Qian and Chenggang Xu, 2000. "Incentives, Scale Economies, and Organization Forms." Review of Economic Studies, 67, pp. 359-378. Mei, Ciqi, 2006. "Get Promoted: Political Incentives and Policy Implementation of China's Local Officials in China." Manuscript, Department of Government and Politics, University of Maryland. Mei, Ciqi, 2007. "Rules of Political Game: Cadre Evaluation and Appointment System in China." Manuscript, Department of Government and Politics, University of Maryland. Montinola, Grabriella; Yingyi Qian and Barry Weingast, 1995. "Federalism, Chinese Style: The Political Basis for Economic Success in China." World Politics, 48(1), pp. 50-81. Naughton, Barry, 1992. "Hierarchy and the Bargaining Economy: Government and Enterprise in the Reform Process." K. Lieberthal and D. Lampton, Bureaucracy, Politics, and Decision Making in Post-Mao China. University of California Press. Park, Albert, Scott Rozelle, Christine Wong, and Changqing Ren. 1996. "Distributional consequences of reforming local public finance in China", China Quarterly, 147, pp. 751-778. Ping, Xinqiao, 2006. "The Performance Evaluation of Local Budget System and Index Design." CCER working paper No.C22006018, Beijing University. Qian, Yingyi and Barry Weingast, 1997. "Federalism as a Commitment to Preserving Market Incentives." Journal of Economic Perspectives, 11(4), pp. 83-92. Qian, Yingyi and Gerald Roland, 1998. “Federalism and the soft budget constraint.” American Economic Review, 88(5), 1143-1162. Qian, Yingyi, 2000. "The Process of China's Market Transition (1978-1998): The Historical, Evolutionary and Comparative Perspectives." Journal of Institutional and Theoretical Economics, 156(1), pp. 151-171. Ren, Mingda and Xiaomin Wang, 1999. "Why There Is a Passion on County-to-City Transformation?" Shehui (The Society), (7). Sheng, Yumin, 2005. "Central-provincial Relations at the Ccp Central Committees: Institutions, Measurement and Empirical Trends, 1978–2002." China Quarterly, 182, pp. 338-355. Shirk, Susan L., 1993. The Political Logic of Economic Reform in China. Berkeley: University of California Press. Su, Donghai, 2000. "West Development and Turning Guyuan Prefecture into a City." Shichang Jingji Yanjiu (Research on Market Economy), (2). Su, Fubing and Dali Yang, 2000. "Political Institutions, Provincial Interests, and Resource Allocation in Reformist China." Journal of Contemporary China, 9(24). Tsui, Kai-yuen, 2005. "Local Tax System, Intergovernmental Transfers and China' S Local Fiscal Disparities." Journal of Comparative Economics, 33, pp. 173-196. Van de Ven, Wynand P. M. M. and Bernard M. S. Van Praag, 1981. "The Demand for Deductibles in Private Health Insurance: A Probit Model with Sample Selection." Journal of Econometrics, 17(2), pp. 229-252. Wang, Yuxi; Lijia Ji and Yang Lin, 1998. "Some Investigation and Thoughts on Issues about County-to-City Upgrading in Liaoning Province." Zhongguo Fangyu (Chinese Territory Administrative Divisions and Place Names), (1). Wong, Christine P.W. and Richard Bird, 2005. "China's Fiscal System: A Work in Progress." Available at SSRN: http://ssrn.com/abstract=875416. Wooldridge, Jeffrey, 2002. Econometric Analysis of Cross Section and Panel Data, Cambridge, MA: MIT Press. Xin Changzheng (Journal of New March), 2000. "The Central Government Decides not to Accept Applications for County-to-City Upgrading." (5), pp. 44. Zhang, Li and Simon Zhao, 1998. "Re-Examining China's "Urban" Concept and the Level of Urbanization." China Quarterly, 154, pp. 330-381. Zhang, Tao and Heng-fu Zou, 1998. “Fiscal Decentralization, Public Spending and Economic Growth in China.” Journal of Public Economics, 67(2), pp. 221-240. Zhang, Xiaobo, 2006. "Fiscal Decentralization and Political Centralization in China: Implications for Growth and Inequality." Journal of Comparative Economics, 34(4), pp. 713-726. Zhuravskaya, Ekaterina, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style." Journal of Public Economics, 76(3), pp. 337-368 Zhuravskaya, Ekaterina, 2007. "Whither Russia? A Review of Andrei Shleifer’s A Normal Country." Journal of Economic Literature, 45(1), pp. 127-146.