Can Federalism Curb Corruption in China?

Many commentators have credited China’s political decentralization, and the inter-jurisdictional competition it fosters, with suppressing local corruption and promoting economic growth. Other commentators have been similarly enthusiastic about the prospects for Chinese “federalism” to improve both economic and government performance, and urge China to go even further in embracing a federalist model.  For instance, an op-ed in the New York Times a few months back suggests that “[I]f China’s leaders want to ensure their country’s peace and prosperity over the long run, they would do well to chart a course toward a federal future.”

The main argument for why political decentralization, and the associated inter-jurisdictional competition, can improve governance and growth is straightforward: Local officials compete for mobile capital and labor, and this competition disciplines government officials because bad behavior (such as corruption) can cause voters and firms to move to another jurisdiction. The greater the mobility of firms and citizens, the stronger the disciplining effect. And there’s some rigorous recent academic research substantiating the hypothesis that political competition can improve governance, including an excellent recent paper that examines recent data from Vietnam and finds that economic growth, coupled with political decentralization and competition, has indeed reduced local government corruption.

So does this mean that China’s best hope for improving its governance performance is to decentralize even further, granting provinces and municipalities greater autonomy in setting policy within their jurisdictions?

The short answer is likely to be no.

The main reason is that, as Olivier Blanchard and Andrei Shleifer observed 14 years ago in an influential paper comparing China and Russia, fiscal decentralization in China has been effective only because it has been coupled with a particular form of political centralization, through the promotional system of the Chinese Communist Party (CCP). In China, although local officials have a great deal of discretion to set fiscal policy at the local level, the central government controls both the reward and punishment of local administrations through the Cadre Management system. The promotional structure acts as an incentive mechanism, and it seems to work: There is evidence that officials from faster-growing and richer provinces tend to be promoted more quickly, as well as evidence that the ability to raise tax revenue is material to CCP promotion decisions. So what does this all mean? It is well known that the central party is obsessed with economic growth. By tying regional officials’ future with economic performance, these officials are forced to take into account the adverse impact that collecting excessive (legal) tax revenue or excessive (illegal) bribe revenue would have.

Without this political centralization, uncoordinated regional bureaucrats might over-extract revenue (taxes or bribes), without adequately considering the impact of their behavior on national-level economic performance. In light of this, granting provinces and municipalities greater autonomy in setting policy within their jurisdictions—regardless of other benefits—is unlikely to lead to further reduction in corruption, and may make this worse. In China, the central party, with its focus on economic growth and tax revenue, is arguably the better anti-corruption gatekeeper.

From this perspective China is on the right, albeit long, road to less corruption. Publicly President Xi Jinping touts a message of zero tolerance when it comes to corruption. Privately I suspect the government isn’t as strict. Nonetheless, the message to bright young officials is clear—if they want a future within the party, do not be so corrupt as to hamper economic growth or tax revenue. This message is not perfect and may not be sufficient, but it serves as an encouraging starting point.

2 thoughts on “Can Federalism Curb Corruption in China?

  1. I see two approaches are taking place when it comes to fighting corruption in Asia. In China you this top-down approach – from meat eating tigers to low level sinking flies. In India, there is this Ana Hazare led bottom-up mass movement against corruption. It is worth watching how these two giants outperform each other in fighting corruption. Interestingly, the level of corruption in these countries is almost at similar level – if you use CPI yardstick.

  2. Pingback: Corruption Currents: From Qatar Hits Back to Obiang Settlement Talks | Coffee Talk Shop…

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