Transition and Development:
China, East Europe and North Korea
2009 Seoul National University WCU – Hong Kong University Conference
October 30- October 31, 2009
A Tale of Two Decentralizations:
Devolution of Government in Russia
and China
Leonid Polishchuk
Reflection on:
Chenggang Xu
The Institutional Foundations of China’s Reform and
Development
To appear in the Journal of Economic Literature
Leonid Polishchuk
Legal Initiatives in Russian Regions: Determinants and
Effects
In: P. Murrell (ed.) Assessing the Value of Law in
Transition Economies, University of Michigan Press,
2001
Difference in differences approach in
institutional studies
A good way to assess potential and limitations of institutions
is through comparative analysis when similar institutional
setups produce strikingly different outcomes.
Such comparisons reveal complementarities and
contingencies that could decide the fate of a policy reform.
Case in point: decentralization in Russia and China
In both countries decentralization was implemented almost
simultaneously to advance modernization and reform of a
formerly command economy in a large and diverse country.
Outcomes
China
Decentralization is
sustained and
institutionalized as a
signature feature of the
Chinese economic
development model
and powerful engine of
economic growth.
Russia
Decentralization was a
fiasco economically and
politically and was
curtailed and reversed
in the early 2000s.
Russia and China on decentralization map
Explaining the difference
Such multiplicity of outcomes begs explanations and
should be related to differences in conditions,
endowments, and path dependencies, as well as to
choices of different decentralization modes.
Rationales and precedents
China
Decentralization was a
deliberate choice of the
central government, an
innovative “made in
China” approach to
reform and itself a source
of numerous institutional
innovations.
It had precedents in the
country’s old and recent
history, from the imperial
times to the “Great Leap
Forward”.
Russia
Decentralization was a
spontaneous reaction to
earlier failures of hypercentralization, an ad hoc
elite pact based on
power-loyalty swaps, a
pragmatic choice of the
central government
offloading risks and
responsibilities of reforms
to regions, and an
attempt to grow market
institutions “organically”,
from bottom up.
Legal and political accommodations
China
Decentralization was implemented
by an authoritarian regime (the RDA
model) without a de jure federal
basis that includes inter alia
elections of regional governments.
“Federalism, Chinese style”
(Montinola, Quian, Weingast, 1995)
combines far-reaching economic
decentralization with unwavering
political centralization. Instead of
standard “best practice institutions”,
including private ownership and the
rule of law, “transitional”
institutions” were put in place,
which are gradually evolving to a
more conventional institutional
setup.
Russia
Decentralization was attempted
in the format of a rule-of-lawbased federal state with political
checks and balances and
constitutionally stipulated
divisions of power.
Decentralization was concurrent
with an economic reform which
emphasized private property and
free market.
Quality of institutions: ex ante and ex
post
The Russian foundations appeared more solid and credible than
China’s, and scored higher on conventional institutional
measurement scales. Performance outcomes were exactly
opposite.
Do Institutions Cause Growth? (Glaeser et al., 2004)
Checks and balances on executives could be less important than
good policies pursued under authoritarian regimes.
Imprecision of the Russian federal law and lax enforcement
practices narrowed the gap between the two systems. What
mattered were self-enforcing incentive-compatible equilibrium
institutions (Weingast 1997; Aoki 2001) emerging in China and
Russia.
Economic benefits of decentralization
Earlier view: decentralized system of government customizes
economic policies and provision of public goods to local needs
and regulates inter-jurisdictional spillovers .
Modern view: decentralization strengthens performance
incentives for subnational politicians and public servants, and
opens up a competitive market for regional and local policies.
Incentive multipliers of decentralization:
• competition for mobile factors of production
• availability of comparative benchmarks (yardstick, or
tournament, competition)
Solutions of subnational government
agency problem
China
Russia
Top-down (accountability
to the central
government through
appointments and
subordination)
1990s – bottom-up
(accountability to voters
through direct elections)
2000s – top-down
(accountability to the
central government
through appointments
and subordination)
Factors affecting performance and
outcomes of decentralization
•
•
•
•
Economic structure
Economic trends
Objectives and capacity of the central government
Civic culture
Impact of economic structure
• Concentration of production and high degree of
specialization of local economies require unimpeded
interregional exchanges which could be obstructed by local
trade barriers.
• Concentration of production and interregional division of
labour raises importance of centrally supplied institutions,
policies and infrastructure.
• Concentration of production reduces short-run significance
of competitive markets and private sector development.
• Concentration of production increases the danger of
capture of subnational governments by dominant economic
and political interests (Bardhan, Mookherjee, 2000).
• Dissimilarity of regional economic profiles and socioeconomic conditions complicates interregional
comparisons of government performance and devalues
tournament competition.
Economic structure comparisons
China
Russia
Relatively even allocation of
industries across the
country and “completeness”
of regional economic
profiles.
High concentration of
production and profound
disparities in income and
welfare.
Importance of national
markets and infrastructure.
Susceptibility to capture of
subnational governments
by narrow interests.
Difficulties in assessment of
regional and local
governments’ performance.
Similarity and comparability
of economic conditions in
various regions facilitates
tournament competition.
Impact of economic trends:
strategic complementarity between
decentralization and growth
Economic growth and massive inflow of investments
nation-wide strengthen performance incentives of regional
and local governments: efforts to improve investment
climate and supply market-enhancing institutions bring
high rewards. Economic growth makes government
reputation a valuable long-term capital asset and thus
substitutes for the rule of law as a commitment device.
Recession and a lack of investments devalue local promarket efforts and reduce economic costs of reneging on
policy announcements and expropriating private
investments.
Costs and benefits of expropriation of
external investments
Political economy of scale and
endogenous rule of law
High inflow of investments maintains “supply” of good
institutions and lends credibility to government’s
commitment to honour investors’ rights. In a rational
expectations equilibrium good institutions and policies
and private investments feed upon each other.
When investments trickle in, violation of investors’ rights
is a distinct possibility, making investors’ scepticism
rational and self-fulfilled (Rodrik, 1991; Polishchuk, 2003)
Economic trends comparison
China
Fierce regional competition
for massive inflow of foreign
investments has been a
powerful force for promarket policies, which
contributed to the nation’s
reputation of an investorfriendly economic
powerhouse.
Russia
Throughout the recession of
1990, capped by the 1998
financial crisis, foreign and
domestic investments
remained suppressed. Local
efforts to attract
investments were devalued
by the overall negative
investment profile of the
country at large, which in its
turn was sustained by
predatory policies of
regional governments.
Somewhere in Russia: a 1999 dialog
between regional governor and
investor
Investor: “What are you doing?! No one will ever
invest here again!”
Governor: “Big deal! No one is investing here
anyways.”
Objectives and capacity of the central
government
China
The central government was
consolidated and committed to
economic growth and
modernization. National interests
were properly protected against
regional attempts to e.g. raise
local trade barriers. Proper
enforcement incentives for
regional officials were set and
consistently applied and
enforced.
Russia
Throughout 1990s the
government remained weak,
divided and unstable. It did not
have, let alone being able to
implement, a clear vision for the
country, and surrendered much
of its policy prerogatives to
regions. The ability of the
government to enact and enforce
laws required to maintain
“market-preserving federalism”
was low throughout 1990s, and
multiple regional transgressions
into the federal domain
(“sovereignties parade”) went
unopposed.
Role of civic culture
Economic benefits of decentralization hinge upon
accountability of subnational governments. If economic
decentralization is coupled with political one, civic culture, i.e.
political awareness, participation and capacity for
mobilization and collective action, is of paramount
importance “to make democracy work” (Putnam, 1993). Civic
culture keeps narrow interests in check.
Russian mode of decentralization was highly sensitive to the
capacity of the society to uphold democratic institutions
Social capital endowments
China
Economic decentralization
was decoupled from
political one, and the
impact of civic culture was
insignificant.
Russia
Past experience of political
participation and selfgovernment is nearly
absent, and the stock of
social capital, eroded by
centuries of despotic rule, is
low. Regional politics was
easily manipulated and
controlled by vested
interests. Non-transparency
of government and wide
variations of local
conditions further
weakened accountability of
regional administrations to
voters.
Conclusions
(i) Chinese economic structure was more conducive to
“localization” of economic policy-making than the Russian one.
(ii) Central government in China was able to clearly articulate its
policy priorities and align incentives of regional governments in
accordance with these priorities; it was also able to effectively
police its relatively few areas of direct economic responsibility, such
as unimpeded trade between regions and macroeconomic stability.
(iii) Central government in Russia was unable to properly implement
its role in the “market-preserving federalism” compact, and
tolerated massive regional transgressions into the federal policy
domain.
(iv) Democratic processes in Russian regions failed to ensure
accountability of regional governments to voters.
(v) Economic structures of Russian regions and protracted recession
distorted incentives of regional policy-makers away from improving
market institutions and investment climate.
Regional policy innovations
Economic decentralization allows – end encourages! –
regional and local policy initiatives. Market-preserving
federalism generates such initiatives, puts them to test
through competitive selection, and facilitates dissemination
and emulation of successful ideas throughout the country.
Both countries counted on regional innovations. China relied
on regions in navigating through unchartered waters of
“transitional institutions”, where the main appeals were lower
risks and local creativity in search of indigenous reform
strategies. In Russia regional lead in reform was considered as
an opportunity to sidestep policy gridlocks in Moscow and to
demonstrate merits and potential of market reforms to other
regions and nation-wide.
Regional initiatives in Russia and China
Both countries had indeed produced a number of regional policy
innovations that were massively emulated by other regions. However
the impact of such initiatives was markedly different. In China the
innovations that survived reality checks and competitive selection
were usually conducive to economic growth. In Russia they were often
detrimental to economic efficiency.
China
Land reform
Privatization
Special economic zones
Township and village enterprises (TVEs)
Bankruptcy procedures
Russia
Trade, investment and migration barriers
Local price controls
Takeover of federal economic
prerogatives
Floating of “junk” regional bonds
Multiple local taxes and off-budgetary
funds
Issuance of monetary surrogates
Bilateral “treaties” with the central
government
Collusions with firms to avoid remittance
of federal taxes
Advantages of reform through local
experimentation: the case of bankruptcy
(M-form vs. U-form; Quian, Roland, Xu, 2006)
The institution of bankruptcy was introduced in China through
local trials and errors within loose centrally set guidelines.
Regional experimentation gradually relieved political tension
over bankruptcy and provided vital input into the final version
of the national law.
In Russia the trial and error process was nation-wide, leading
to a costly legal roller-coaster: the first version of the national
bankruptcy law set excessively high requirements to initiate a
bankruptcy procedure, which rendered the institution
defunct; the second version radically reduced those
requirements, opening a floodgate of “contracted
bankruptcies against sound businesses; the third version,
presently in effect, raised the barriers back again.
Subnational governments’ direct involvement
in private sector
Both in Russia and China local public officials become entrepreneurs
not only metaphorically (when they introduce policy innovations), but
also directly. In China local governments are involved in the economy
e.g. through TVEs, whereas in Russia such involvement takes various
forms of “public-private partnership”.
In China the TVE model served as transitional institution that secured
property rights in lieu of their unavailable conventional legal
protection, and strengthened incentives to provide local public goods
(Che, Qian, 1998). The latter effect is of more general nature: it is
argued that if an otherwise unaccountable government official
acquires a stake in the private sector, his public policy decisions
become better aligned with social needs (McGuire, Olson, 1996).
However this is no longer the case if market interests of a politicianturned-entrepreneur value rent extraction over value creation
(Polishchuk, 2008). In such case, common in regional “public-private
partnerships” in Russia, the wedge between government priorities and
social welfare does not get narrower, but grows wider.
Lessons learned
Egregious failures of the Russian federal model prompted the
newly consolidated central government to re-establish
political control and directly subordinate regional governors
to Moscow by turning them from elected politicians into
presidentially appointed administrators.
Liberal critics considered such measures as overreaction,
especially since the resumption of economic growth and
increased sophistication of voters improved chances for
success of the Russian federalism. Still, “de-federalizaton”
brought the Russian system of government closer to China’s,
and was expected to improve performance of regional
officials (Blanchard, Shleifer, 2001).
… a Tale of Two Centralizations
Such expectations however did not materialize,
which can be seen from continued deterioration
of economic institutions, neglect of
infrastructure, multiple complaints about public
service provision, widespread red tape,
corruption and government mismanagement and
predation.
Comparisons between the Russia and China still
remain relevant – this time to shed light on
uneven outcomes of political centralization.
“It’s economy, stupid!”
Sweeping re-centralization in Russia was not confined
to the political domain – it was extended into the
economy by re-allocating tax revenues away from the
regions to the federal government, and by radically
reducing regional policy-making autonomy.
The economic part of centralization was a clear
departure from the Chinese approach. However, the
centrally imposed constraints are not always
sufficiently rigid and binding, and regional executives
still exercise de facto considerable discretion over
economic and social policies.
Corporate social responsibility as an alternative
to taxes and regulation
The new policy-making environment generated another wave
of regional innovations, prominent among them – informal
taxation and regulation of the private sector under the guise
of “corporate social responsibility” (CSR).
The conventional role of CSR is to serve as a private
alternative to government regulation by allowing civil society
groups to settle directly their relations with companies. In
Russia CSR is largely dictated by regional governments or
accommodates informal bargains between regional
governments and firms (Polishchuk, 2009). This practice
illustrates the “see-saw” effect whereby unforeseen and often
informal reaction finds ways around an economic policy
reform and thus diminishes its effect (Acemoglu, Robinson,
2008).
How effective is political control?
Economic disparity between Russian regions did not get
narrower, which ceteris paribus makes the task of
performance assessment of government officials in Russia
more difficult than in China.
The main difference however is in policy priorities of the
central government – in China the priority is given to
economic growth, in Russia – to political stability. The
second objective often contradicts with modernization and
reform (Acemoglu, Robinson, 2006) and does not allow
clearly identified and measurable performance targets.
The importance of staying focused
Assessment of performance of regional officials – a critically important element of
a politically centralized system of government – is based in China on economic
growth indicators. While the Chinese assessment system is somewhat complicated
and includes “hard”, “soft”, and “priority” targets, economic performance is the
key concern which sets in motion competition between regions and thus
performance incentives.
In Russia a presidential decree has established in 2007 43 “primary” performance
measures for regional officials, and a specially assembled government commission
added to the list another 39 “auxiliary” indicators. Such incomprehensible and
unwieldy system of tasks does not provide a clear focus for regional executives
which are now supposed to be officially guided in their actions by the central
government. Multitasking is also at odds with “yardstick competition” (Holmstrom,
Milgrom, 1991). In reality practical indicators include social stability in the region,
balanced relations with local elites, and expected election results in support of the
ruling party. However controlled media and stifled political competition often
suppress early warning signals, and elections are widely believed to be rigged to
produce the “right outcome”.
Self-defeating purpose
Stability as the main objective of the central government
could be hard to maintain through credible sanctions
against non-performing regional officials. When rule of law
and formal institutions are weak, chief executives in
Russian regions maintain stability through mostly informal
and personalized networks built around them. Removing
the key linchpin from such system could jeopardize the
fragile socio-political equilibrium, which explains the
longevity of some of Russia’s regional political players.
While the task of sustaining economic growth is
implementable through compatible with effective political
centralization when the strong central government
monitors performance and rewards leaders and punishes
laggards, the task of maintaining stability is inherently at
odds with such model.
Limits of the two models
Institutional imperfections and flaws of the Russian and
Chinese models of subnational governance are likely to
become more pronounced and contentious than
before.
China
Profound structural distortions prior
to the reform and enormous growth
potential of the country allowed to
sustain rapid growth as a Paretoimproving process without major
re-distributional conflict. As reform
deepens and development
challenges become more complex,
tasks of regional governments
acquire multi-dimensional nature
which make the top-down agency
problem less adequate.
Russia
The crisis has exposed
weaknesses of the Russian
institutions and threatens the allimportant stability, especially in
single-factory cities
(monogoroda). Suppressed
private sector cannot generate
adequate income and
employment, and reduced fiscal
resources of regional
governments are insufficient to
cushion off the recession.