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Lessons in public sector reform from China

Abstract

China is a good case study for adoption of “best fit” options for progressive transition to State

functioning on “good governance” principles. It‟s spectacular record in sustained economic

growth, social and human development and poverty reduction are the outcomes of (a) Nation

building around a core commitment to inclusive, pro poor development with a progressive

shift towards citizen centric development; (b) providing fiscal and managerial space for

strategic decision making to local governments, while simultaneously enhancing fiscal

leverage for central oversight over policies and goals; (c) graduated change in the behavior,

mind set and skills of its Party and government cadres aligned with the human capital needs

of its policies and (d) a comprehensive merit based performance management system for

government structures and cadres. Without replicating the institutional structures commonly

associated with “good governance” China has embedded aspects of the core principles of

accountability and participation within its institutional envelop of single party domination,

inner Party democratization, state led, but Nation and increasingly citizen centric, market

oriented development and fiscal and administrative decentralization.

Keywords

Accountability, capacity development, decentralization, nation building, participation,

performance management.

Authors

Xiaoyun Li, China Agricultural University; Sanjeev Ahluwalia, World Bank; Dong Qiang,

China Agricultural University

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Introduction

1. The emergence of China, as a dominant economic power, with concurrent

improvements in access to and the quality of basic public services and sharp reductions in the

level and scale of poverty, pose the question, whether there are any lessons in public sector

management, which can be drawn, from its experience. Reforms commenced in China in

1978 but 1992 was an inflection point. Early in that year, chief reform architect Deng

Xiaoping delivered his Southern Tour Speeches, proposing to accelerate the reform process.

Later that year, the Fourteenth National Congress of the Communist Party of China confirmed

the establishment of a socialist market economy as the country‟s economic system reform

objective setting China on the path of a becoming a transitioning market economy.

2. China has had thirty years of continuous, rapid economic growth, unprecedented in

world history, at an average annual rate of approximately 10%1. In 2010, China‟s GDP

accounted for 9.3% of total global output, surpassing Japan to become the world‟s second

largest economy. At the same time, China transformed from an agriculture-based, centrally-

planned economy to an industrialized, market-oriented one. In 2011, the country‟s level of

urbanization exceeded 50%, with the urban population overtaking its rural counterpart for the

first time. Rapid economic growth enabled large-scale poverty reduction. The proportion of

the poor population (those earning less than $1.00 a day) declined from 73.5% in 1981 to 8.1%

in 2005. The population of the poor reduced by 624 million people during this period. Over

the same period, the global incidence of poverty fell from 41.7 to 16.1% or from 1.53 billion

to 879 million (Shaohua Chen and Martin Ravallion, 2008). China accounted for 96% of the

1 World Bank data.

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651 million lifted out of poverty globally during this period. The Government of China reset

the national poverty line from 865 to 1,274 RMB, at the end of 2010. Even by this revised

classification there were only 26.88 million poor in rural areas. (PRC State Council News

Office, 2011). This sets an enviable record of poverty reduction and provides important

lessons for the developing world.

3. China has similar significant achievements in public service delivery. In 1978, the

central government began to transfer the responsibility of public service delivery to local

government. By 1990 public service delivery was positioned as a key component of national

development, reflecting the collaborative roles of government, market and civil society.

According to assessments by the Ministry of Foreign Affairs and UN China (2008), the

country has fully met the second millennium development goal (MDG) of primary education

provision and is already moving forward to formulate a national development plan calling for

universal nine-year compulsory education. By the end of 2007, the rate of primary school

attendance for males and females reached 99.5%. From 2000 to 2006, the completion rate of

primary school (five years) rose from 95% to 99%, while the rate of middle school attendance

increased to 98% and universal nine-year compulsory education coverage, to 99.3%. During

the period 1991 to 2007, the infant mortality rate dropped from 50.2% to 15.3%, and the

under-five mortality rate, from 61% to 18.1%, accomplishing another MDG ahead of

schedule. The maternal mortality rate is likely to be 75% lower by 2015. In 1990, the number

of maternal deaths was 94.7 per 100,000 people. By 2007, this rate had already fallen to 36.6

per 100,000 people, representing a 61.4% decrease. Throughout this period, China

endeavoured to restructure its public service system. In 2003, it piloted nationwide the New

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Rural Cooperative Medical Scheme. By the end of 2009, the number of participating counties

(cities and districts) reached 2,716, while the program‟s coverage included 833 million people,

or a participation rate of 94.19%2. In 1999, the government established the Minimum Living

Standards Guarantee Scheme, eventually extending this program into rural areas in 2007. By

2010, the scheme covered 23,105,000 urban residents and 52,140,000 rural residents3

3. This remarkable story of social and economic transformation with striking results in

poverty reduction begs the question; Are there lessons in economic growth and poverty

reduction for the rest of the developing world? The prevailing view is that China‟s success is

due to circumstances which are not replicable elsewhere, as evidenced by the following: the

extended political stability, due to the Communist Party of China (Party) being continuously

in power since 1949 and enabling thereby, long term strategic planning and uninterrupted

implementation; the relative cultural homogeneity of China, diluting the political imperative

for multiparty politics, so important in more fractured societies; and the strategic convenience

of Hong Kong and Taiwan, as off shore conduits for foreign investment and the harmonious

assimilation of private sector led, market oriented policies, into the socialist political fabric of

the country. Barry Naughton, identifies three features of China‟s experience which are unique:

the scale of China and the possibilities offered by a large internal market; the emergence of

new industry based on labor intensive development after a period of state socialism based on

capital intensive development; and the maintenance and restructuring of China‟s hierarchical

authoritarian system (Minglu Chen and David S. G. Goodman, 2012).

4. It is striking, however, that many developing countries have enjoyed similar

2 Ministry of Health, PRC, 2010

3 Ministry of Civil Affairs, PRC, 2011

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advantages but without comparable results from episodic attempts at public sector reform,

most often funded by foreign aid. Tanzania has had the same political party in power since

independence in1962. It has an abundance of natural resources and direct access to the sea. It

enjoys tribal and religious harmony unlike much of Africa. It also went through thirty years of

socialist political rule before starting to liberalize its economy in 1992. However, the results

in poverty reduction, social and human development do not elicit widespread acclaim. India is

another continental sized country with a comparable population, a large domestic market, the

potential for export led growth, an extended period of state investments in industrial and

infrastructure development since the early 1950‟s and significant social transformation

through democratization, including political plurality at all levels of government over the last

twenty five years. Yet results in poverty reduction, social and human development remain

unexceptional.

The hypothesis

5. This paper hypothesizes that the key difference between China and other developing

countries, is the selective but committed embedding of core good governance principles, as

the norm for government functioning. It is important here to distinguish between the core

good governance principles of “transparency, accountability and participation” and the

institutional forms of good governance which have become commonplace but rigid symbols

of good governance. The principle of transparency, which is intended to enable informed over

sight, has come to mean formal access to public information for citizens and an expansion in

the scope and range of public information preferably through a Right to Information law.

What is stressed in assessments of transparency is the legal right to information or the

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existence of formal mechanisms for getting access to public information rather than

measuring the availability of information demanded by an average citizen. The principle of

horizontal accountability is measured on the basis of the existence and functioning of an

elected and capable legislature; an independent and capable judiciary and other oversight

entities, like an Audit Agency and Anti Corruption Agency, as essential institutions for

horizontal accountability. However attribution of a specific form of institutional development

to results with respect to services for citizens is uncertain. Vertical accountability is equated

to functional rules of service for public servants, clear identification of roles, responsibilities

and delegated powers with sanctions and rewards based on measurable criteria of individual

performance. Similarly the benchmarks for downward accountability to citizens are the use of

direct citizen feedback systems on the performance of government like service delivery

surveys and citizen score cards including, more recently, the use of social media for this

purpose. Increasing levels of participation of citizens from managing schools to street lighting

to local level planning and monitoring of budget execution are viewed under the “demand for

good governance framework” as positive outcomes of open government.

6. China clearly does not fit into this model of “good governance”. It does not score

high on transparency indicators. Its leaders are not “democratically” elected by the people but

are selected through an inner party process which is not “transparent” in that a leader is

chosen by the Party. The line between what is permitted in the media and what is not is

unclear and needs to be negotiated with care and access to public information is not legally

enforceable by citizens. Citizens cannot march into a government engineer‟s office and

demand to see his accounts as they can in India. In China the Communist Party of China (The

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Party) rules and is supreme. There is no concept of an independent judiciary or legislature so

horizontal accountability, beyond and outside of what the Party considers appropriate, does

not exist. Citizens were not invited, till recently, to participate in service delivery surveys or

to review the budget of their city or village or monitor government expenditure. However,

vertical accountability within the Party/government is rigidly enforced. Vertical accountability

is based on clearly developed work programs and responsibilities with quantified targets,

which feed into national programs. Performance is monitored and less than adequate

performance is sanctioned, sometimes harshly. While China does not fit into the conventional

model of good governance, this paper hypothesizes that it enforces the core good governance

principles of accountability and participation. It enforces downward accountability by making

the Party responsible for ensuring the well being of citizens. Participation is similarly ensured

through inner party democratization. Consensual adherence to these principles explains its

exemplary performance in poverty reduction, social development and economic growth. More

significantly in the thirty years since 1992 when the reform commenced China has shown its

capacity for adaptive behavior to align the Party with the aspirations of the people without

losing its dominance. This strategy has given it the political space for sustained reforms.

Building a Nation

7. If “good governance” is equated with “development effectiveness” China is a star

performer based on sustained economic growth, social and human development and poverty

reduction. It does this by ensuring that all levels of the Party and the government, commit to

and work towards, implementing the shared objective of national development, but with

considerable freedom, for lower levels, to develop localized operational strategies. This sense

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of personal commitment to a national goal is weak elsewhere and “nation-building” is no

longer considered necessary in a globalised world, except in the context of fragile states

where it is seen as“glue” which could bind fractured societies. However, as the recent Euro

zone crisis illustrates, even in the developed world, building and maintaining a citizen‟s sense

of belonging to a nation is based on a functional, credible and legitimate state. This is the

approach that China has taken since 1947.

State building in China

The Party and the State

8. China does not distinguish between the State and the Party. This is not unique. There

are any number of countries where this distinction does not exist de facto, though the façade

of “democratic” elections is played out. China views democratization as a progressive goal

which must be preceded by developing a capable State and Party. It has consequently worked

to build the State over the last sixty years. The centrality of the Party provides the ground for

national consensus. China‟s political system has always been one of centralized state power.

In 1949, following the establishment of the Communist Party of China, the Party and the State

became indistinguishable. The relationship between Party and the State is principally reflected

in the notion of “Party represents and is indistinguishable from government” (以党代政，党

政不分) (Ding Xueliang 2011: 44). While this relationship has undergone changes post 1978,

the Party continues to lead the government through direct or indirect means.

9. Beginning in 1982, and then again in 1988, 1993, 1998, 2003, and 2008, the Chinese

government implemented six institutional reforms, attempting to simplify and restructure its

structures and systems. In the early years the government studied and implemented the

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Soviet model of a planned economy, with planning administration as its primary means of

economic regulation. Prior to the reform and opening up, the Party designed national

development plans according to the guiding principle of continuous revolution, committing,

what would later be considered, a number of errors. In 1978, the Third Plenary Session of the

Eleventh Central Committee of the CPC decided to shift the focus of the Party and the State

toward the modernization of socialism. Since then, the Party not only produces a long-term

plan for socio-economic development, it also details specific objectives, focal points and

measures which the government and its various departments implement (Zhou Tianyong,

2008: 92).

Nation building

10. Nation-building began at the turn of the 20th century, during the late Qing, early

Republican era, when Sun Yat-sen proposed the “Three Principles of the People,” attempting

to resolve the crisis in state authority and establish a modern State. In Sun Yat-sen‟s view,

following the expulsion of the Manchus from power, the Chinese people had been able to

recover their own nation and its political system (Sun Yat-sen 1956: 68-70). With the support

of nationalist sentiment, Sun Yat-sen achieved national integration and produced a cohesive

State. The Kuomintang, or Nationalist government, however, could not complete Sun Yat-

sen‟s nation-building project. Subsequent to the Party gaining power, China transformed into

a totalist state system, exercising absolute control over society. National development became

the common objective of the Party, government and the people and the interest of the State

superseded all other considerations. In 1953, the Party initiated the expropriation of all private

business rights. In 1958, the central Party-State called on the masses to construct backyard

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furnaces as part of a large-scale, all-encompassing steel-smelting campaign. That same year, it

began the construction of the people‟s communes, collectivizing ownership of the means of

production and allocating labour based on work-points. The people‟s commune directly

eliminated the private ownership of land and squeezed out peasant household industries. In

1955, urban youth began to arrive in rural areas to engage in the reclamation of land. In

December 1968, Mao Zedong transmitted his instructions for “young intellectuals to be sent-

down to countryside to receive the indispensible re-education of Chinese rural poverty,”

launching the “go up the mountain and go down to the village” (上山下乡) movement. In

those years, all middle and high school students (i.e., students who would have been attending

school between 1966 and 1968) were sent-down. An exceptionally high proportion of these

students were forced to participate as a result of political pressure.

11. From 1949 to 1978, China‟s development plans failed to focus on citizens as partners

in the process of national building. Citizens were viewed as a source for labour for centrally

planned development. In 1978, the Eleventh Plenary Session of the Third Central Committee

of the CPC recognized that given the lagging economy, disordered political system, Socialism

faced a crisis of legitimacy. The Party resolved to initiate reform with the objective of

implementing citizen centric development, which was expected to reinforce the political

legitimacy of the Party. This trend was reinforced in the 1990s, following the momentous

changes in Eastern Europe.

Decentralisation

12. Decentralisation, a key component of “good governance”, has been a key feature of

China‟s strategy for inclusive development. However, decentralisation has not followed the

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traditional model of synergistic and parallel devolution of political, administrative and

financial powers and functions. China‟s model of decentralisation is a hybrid of centralised

revenue raising powers, policy development and government cadre management coupled with

high levels of fiscal and administrative decentralisation enabling tactical decision making at

the local level for implementing national policies. Political power remains tightly vested in

the Party. The Party in turn intervenes closely in the appointment of all government

functionaries. Fiscal powers for raising revenues have been centralised over the period 1978

to 2009. The share of local revenue in national revenue fell from a level of 84.5% in 1978 to

47.6% in 2009. However expenditure at the local level increased from 52.6% to 80% over the

same period4. This was aligned to the strategy to increasingly decentralizing power. With the

freedom to innovate on how to implement centrally planned development, local governments

have continuously expanded the scale of local economic activity, enhancing their local

economic potential. While the 1994 tax sharing reform, weakened local government‟s ability

to raise fiscal resources, it did not constrain the availability of fiscal resources for locally led

development, although all development is within the broad parameters of central policy. The

key innovation in China has been the centralisation of revenue raising powers, with the

objective of acquiring leverage to enforce central goals and policies and yet encourage

decentralized decision-making and strategies for achieving these goals, including the

decentralization of expenditure powers. Annex 1 gives a more detailed account of the

evolution of fiscal management in China.

Capacity development of Party and government cadres

4 China Statistical Yearbook-2010

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13. China gives great importance to shaping the mind set and skills of its cadres, to align

with the requirements of its development strategy. Elsewhere, capacity development is

primarily funded by foreign aid, loosely regulated, inadequately “owned” by governments and

usually delivered by international consultancy organizations, which thrive on “cookie cutter”

approaches. It is no wonder then, that it is often unrelated to the underlying incentives,

organizational structure and development strategy, leading to uncertain results in learning,

behavioral change or effectiveness in work. To construct a system conducive to economic

development, the objectives, priorities, sense of responsibility and expectation of shared

benefit of the process‟s core participants must be reshaped, thereby fundamentally cultivating

a common rationality (Dietrich Rueschemeyer, 1977). China adopted a three pronged strategy

for capacity development. The first component of this strategy was to disseminate the national

vision of the government. The second was to reinforce training. The third was to strengthen

the review and approval process of cadre appointments and promotions at all levels of the

party organization (Shen Dawei, 2011: 201). In 1995, the Party initiated the “Three Stresses

Campaign” announcing that cadre education would focus on three areas, namely, learning,

politics and righteousness. In 2004, it initiated an advanced education program and in 2008, it

developed a study program for development practioners. The Party attaches great importance

to cadre education and training. Since the beginning of the new century, the central

government has formulated two five-year plans for cadre education and training, the “2001-

2005 National Cadre Education and Training Plan” and “2006-2010 National Cadre

Education and Training Plan,” in addition to the “2010-2020 Cadre Education and Training

Work Reform Outline.” In 2006, it also drew up a preliminary version of “Cadre Education

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and Training Work Regulations.” Under the leadership of the central party committee, the

Central Organization Department oversees the division of work and responsibility within the

state apparatus and the management of cadre education and training at each level of

government. It is responsible for the overall regulation of nationwide cadre education as well

as for the education and training of centrally-supervised cadres of specialists and technical

experts of key state-owned enterprises and financial institutions. Each region must follow the

requirements of the cadre education and training management system, delegating

responsibility for relevant tasks.

14. The content of cadre education and training is designed according to responsibilities

and administrative levels and primarily encompasses political theory, policy legislation,

professional knowledge, cultural education and skills training. While political theory

education remains the principal focus, the training also offers elective study, full and part-time

programs and learning opportunities both at home and abroad, promoting the all-around

enhancement of cadres‟ quality and capacity. In addition, the training targets particular party-

state officials (i.e., leading cadres, reserve cadres, grassroots cadres, female cadres, ethnic

minority cadres, non-party cadres and other public functionaries) and, according to their level

and classification, provides party-state officials, enterprise managers and technical experts

with educational training. The cadre education and training mechanism primarily consists of

party schools and institutes / academies of governance, socialism and cadre management as

well as the Central Organization Department‟s directly-controlled Yan‟an Cadre Academy,

Jinggangshan Cadre Academy, Pudong Cadre Academy and China Business Executives

Academy (Dalian). There are about 2,700 party schools, more than 2,000 local academies of

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governance and over 1,000 institutes of socialism nationwide. The party schools focus more

on politics and ideology, the academies of governance emphasize economic and practical

skills, and the institutes of socialism primarily train ethnic minority cadres and other United

Front representatives (David Shambaugh, 2008). In addition, members from business training

organizations, institutions of higher education and scientific research institutes also participate

in cadre education and training.

15. By September 2000, the Central Party School had trained four million cadres of

which 2.3 million were from mid-to-high level ranks, 4,500 “young reserve cadres,” 3,000

ethnic minority cadres and 7,300 Propaganda Department cadres and Central Party School

instructors (Wan Fuyi, 2001: 292). By the end of 2001, half of the country‟s 6,932,000 cadres

had been trained; 989,000 at a party school; 195,000 at an academy of governance; 225,000 at

a cadre management college and 1,669,000 through other forms of professional training

programs (General Office of the Central Organization Department, 2002).

Performance management

16. China has an effective system for performance management, which focuses on results

and not process. Even the Party subjects itself to performance review, with derived

performance measures for lower cadres and levels of government. Following the 1978

decision to concentrate on economic reform, China established an effective system for

evaluating the performance of local government officials based on economic growth rates.

The lack of “clutter”, or inclusion of multiple objectives for performance evaluation, enabled

quantitative evaluation though attribution of results to effort may have become uncertain.

Performance assessment is the determining factor in career progression of local officials. The

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Chinese government uses a top-down approach to the formulation and articulation of

objectives, requiring lower levels of government to handle implementation. Performance

evaluation is based on quantitative measures derived from the “list of duties” of each

employee. At the beginning of each year, the State Council draws up a government work

report, summarising the past year‟s work and putting forth the current year‟s objectives. All

ministries and commissions use the relevant content of the government work report to craft

more specific departmental targets, subsequently transmitting them down the ranks. Every

level of local government must summarize and report on those targets passed down to them

from their superiors before transmitting them once again to even lower-level ranks. National

medium-to-long term strategic plans, likewise, follow the aforementioned process of target

formulation, dissemination and assessment.

20. In China‟s model of collaborative leadership of party and government, the Party is

responsible for the evaluation and promotion of local officials while the central government

articulates development objectives. (Zhou Li‟an, 2007). Party-State officials of equal rank

from across all the Regions of China compete on the basis of economic growth rates as the

measure of their relative performance. This mechanism ensures that officials both articulate

and disseminate these growth objectives among their subordinates. In practice, the

performance evaluation system results in healthy but intense competition among local

officials of equal rank since it is closely linked to rewards and sanctions. This system aligns

individual incentives with national objectives. On the basis of panel data from 28 provinces

and directly controlled municipalities, between 1979 and 2002, Zhou Li‟an, Li Hong bin and

Chen Ye (2005) established that economic performance significantly influenced the

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promotions of provincial officials. Secondly, they found that performance trends over several

years had a higher impact on career prospects than single year‟s performance signalling

appropriate attribution of results to effort.

21. The shift in 1992 from single minded pursuit of economic growth to comprehensive

development presented a major challenge for performance evaluation since the performance

matrix has expanded. Due to information asymmetries and unquantifiable objectives the

previously “closed” system of performance evaluation has become insufficient. The Party and

government has responded to this new challenge by beginning to associate citizens with

performance assessments of government using surveys of the level of citizen satisfaction with

public services. The 2006 “Scientific Outlook on Development‟s Pilot Methods for the

Comprehensive Evaluation of Local Party and State Leading Groups and Cadres” lists the use

of statistical data to rate performance. Some of the principal performance indicators included:

local per capita GDP and its rate of increase, per capita fiscal revenue and its rate of increase,

urban and rural incomes and their rates of increase, resource consumption and production

safety, elementary education, urban employment, social security, urban and rural cultural life,

population and family planning, arable land conservation, environmental protection and

investment and innovation in science and technology. More specific targets are formulated

related to local conditions.

Meritocratic based career progression

22. While adherence to Party principles is a primary requirement, recruitment and

promotion in China, is meritocratic and performance counts towards personal progress at all

levels. This is in sharp contrast to other developing countries where no more than lip service

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is paid to performance management and results orientation and recruitment is often non

meritocratic and personal progress is often unrelated to performance. The Party manages the

entire process of cadre recruitment, evaluation, promotion and supervision. At the time of

cadre selection, it pays close attention to both political and professional criteria along the lines

of being “both red and expert” (又红又专). After 1978, with economic growth as the primary

development objective, while being “red” continued to be a fundamental criterion increasing

emphasis is placed on professional ability. When politics itself demands specialization, cadres

must become experts if they want to be considered “red” (James R. Townsend and Brantly

Womack 2003), In August 1980, Deng Xiaoping5 stated that “In accordance with enterprise

development, it is necessary to formulate new requirements and new means for upgrading

each industry‟s cadres and talented employees. In the future, many professions and positions

will hire only on the basis of tested qualifications.”

23. Beginning in 1990, the Party laid out a series of new regulations to enhance the

overall quality of party-state cadres by consistently improving selection methods. In 1995, the

central government issued the “Provisional Regulations for the Selection and Appointment of

Party and State Leading Cadres.” Seven years later, in 2002, it again drew up the

“Regulations for the Selection and Appointment of Party and State Leading Cadres.” These

regulations stipulated that leading party-state cadres must possess the following basic

prerequisites: 1) They must possess knowledge about Marxism-Leninism, Maoist Thought

and Deng Xiaoping Theory necessary to fulfil their position‟s obligations and earnestly

practice the Three Represents‟ main ideas; 2) They must have a long term goal of communism

5 “Reform of the Party and State Leadership System,”

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and a firm belief in Socialism with Chinese Characteristics, resolutely implementing the

Party‟s guidelines and policies and be committed to the reform, opening up and

modernization, during which they must endure hardship to achieve significant change; 3) By

maintaining liberation ideals, seeking evidence based options, remaining professionally

competent, being innovative in solving real problems and conducting investigations and

research, they are to integrate Party policy with practical conditions at the local level to make

performance more effective; 4) They must be committed to the revolutionary cause, be

politically responsible and have the practical experience; organizational ability, educational

qualifications and specialized knowledge to be a competent leader. In 2004, the Central

Committee of the CPC formulated its “Provisional Regulations for the Public Selection of

Party and State Leading Cadres” and it‟s “Provisional Regulations for Competitive Posting in

Party and State Organizations.” These two provisions institutionalised the government‟s

inclusion of merit and qualifications. In April 2005, the Fifteenth Session of the Tenth

National People‟s Congress Standing Committee approved the “People‟s Republic of China

Civil Servant Law,” stipulating that for appointments at the level of section head and below as

well as for other non-leadership positions, the methods of public examination, equal

competition and merit based recruitment should be adopted. In 2006, the Central Organization

Department began implementing the “Scientific Outlook on Development‟s Pilot Methods for

the Comprehensive Evaluation of Local Party and State Leading Groups and Cadres.” Within

these methods, it required a commitment to integrity and talent, real accomplishment and

publically accepted principles. In order to evaluate ethics and ability, it suggested a variety of

methods, including democratic nomination, democratic assessment, opinion polls, and

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analyses of accomplishment and individual conversations.

Conclusion

24. China‟s spectacular record in pro poor economic growth is a significant testimonial to

its policy for inclusive development. Viewed top down, from the perspective of international

development, it is difficult to endorse how consultative this process has been or whether the

tight time frame in which economic growth has been achieved was indeed arrived at in a

consensual manner or whether the costs to individual freedom were justified using a cost

benefit approach. Against this is the fact that China has lifted more than 600 million citizens

out of poverty over the last thirty years and today enjoys international political and economic

status. These achievements are plausibly the result of explicit policy choices. These policy

choices have emphasized nation building over individual freedom. The Party processes

represent the democratic choices of the citizens. To the extent this remains true, citizens drive

State action. China explicitly recognizes and facilitates local initiatives in the management of

development, within a national policy framework. China has a State led market oriented

economy. Significant effort is expended to enhance the effectiveness of the State in

implementing national policy. Capacity development for aligning the behavior, mind set and

skills of the Party and State cadres with the evolving needs of the nation is a key input into

enhancing State effectiveness. Performance management is similarly a priority and is

universally applied through the prescription of quantitative targets for State entities and

individuals. The targets are based on aggregate results related to economic growth and

development rather than the provision of inputs or the achievement of intermediate processes.

While the technical efficiency of a “performance for results” system is not well established

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the fact that performance against targets is linked to individual rewards and sanctions

provides powerful incentives and motivation for the Party and State cadres to compete,

enhancing thereby system effectiveness. This performance management system has served the

State well during the phase of rapid economic growth. It is unclear however, whether the

same system can be adapted to subsequent phases of slowing economic growth and enhanced

citizen demands for deeper consultations and participation in decision making. The

commitment to use merit as a criteria for initial appointment and subsequent career

progression, coupled with rising incomes and the benefits from enhanced levels of human

development, enabling larger numbers to enter the competition for Party and State jobs,

provides the basis for inclusive nation building. All developing countries face the dilemma of

State building in terms of striking the right balance between State power and individual rights.

The intrusiveness of State power is also closely linked to the alignment of individual interests

with national interests, as interpreted by the State. States which seek to emulate external

models of governance, without testing these first against the context in which they are to

operate, face the possibility of State objectives becoming increasingly divergent from

individual interests, resulting in increasingly negative, often violent, interfaces between the

State and citizens, sparking of a vicious cycle of State repression and citizen protest. This is a

challenge which the Party has addressed by showing remarkable capacity to adapt and change.

In many ways, the pervasive influence of the Party has enabled this change to be implemented,

even when the demand for enhanced democratization has arisen because of the incompetence

of corrupt local Party officials. With enhanced human development levels and incomes and

the technology revolution, has come the challenge of managing social expectations and

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adapting to the convening power of social media. It is not known how the Party will respond

to the increasing ability of citizens to mobilize virtually, including across borders and what

changes in Party structures and systems would be necessary to address the enhanced political

expectations of citizens. However the Party has three key strengths which are likely to enable

it to bridge the transition without losing its dominance. First, the system of merit based

selection of cadres and leaders provides equal opportunities to citizens, to share in political

power and participate in decision making, thereby diluting opposition. Second, the Party is

extremely conscious that its legitimacy rests on remaining responsive to citizen concerns,

within the framework of its dominance. Third, the growing non ideological orientation of the

Party will continue to focus its efforts on the delivery of results on the ground, with respect to

citizen satisfaction. These strengths are likely to enable the Party to transcend current

international trends in political pluralism.

25. The key lessons for developing economies are that inclusive, pro poor economic

growth is a useful tool for nation building and establishing the legitimacy of the State.

Investments in social and human development are key for sustained economic growth and for

sustaining the credibility of the State. Sustained single party dominance can only be ensured

by testing leaders through inner party democratization, intensive cadre management,

including capacity development and aligning the party objectives with the interests of citizens.

Accountability and contestability are key for performance management in party or

government structures. Results orientation is a key ingredient of development effectiveness

which grounds the complex systems and processes of the State, in the reality of the lives of

citizens. None of these conclusions are new. However, what this paper seeks to hypothesize is

22

that China has internalized all these aspects of political and administrative governance. It is

therefore fertile ground for further research on performance management, inclusive growth,

effective capacity development and the adoption of “best fit good governance” principles.

23

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Annex 1

Fiscal management in China since the 1980’s

1 Beginning in 1980, the central party-state switched from the past system of fiscal

administration, namely, unified collection and allocation, to that of “eating in separate

kitchens” (分灶吃饭). This reform emphasized that the central and local government “divide

revenue and expenditure and delegate responsibilities” (划分收支、分级包干). In 1985,

central and local government put into practice the fiscal administration system of “dividing

taxes, auditing revenue and expenditure, and delegating responsibilities” (划分税种、核定收

支、分级包干), improving upon the former system of “eating in separate kitchens.” Three

years later, due to the decline in the proportion of central revenue, the central party-state

initiated the fiscal responsibility system. And although this system raised the proportion of

central revenues, it failed to increase them at the same rate as the country‟s economic growth.

More damagingly, it triggered interregional fiscal competition and closed-off local markets.

2. In 1993, the State Council issued its “Decision on Implementing Fiscal Management

of the Tax-Sharing System,” and a year later, put it into effect. The principles and content of

the tax-sharing system reform include: in accordance with the division of authority between

central and local government, rationally determine the expenditure limit at level of the

financial administration; based on the principle of integrated authority and financial control,

designate each type of tax as either central, local or shared, and establish separate central and

local tax collection mechanisms; scientifically audit local revenues and expenditures,

progressively carrying out a relatively regulated central transfer system; and establish a strong

separated budgetary system, hardening budget constraints at every level. This tax system

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reform stipulated that central, local and shared taxes all had to be legislated at the central level,

ensuring unified national policy and equal competition within an integrated domestic market

and among enterprises. The 1994 Tax-Sharing System accomplished the central party-state‟s

objective of a unified tax authority and stripped local government‟s right to levy and/or

reduce taxes. Local government could only adopt adaptive measures (e.g., fees, funds and tax

returns) to raise or reduce taxes. Table 1 lists the distribution of taxes between the centre and

local governments.

Table 1: Types of Central and Local Taxes

Central Tax Local Tax

Domestic value-added tax √（75%） √（25%）

Domestic sales tax √

Import value-added and

sales taxes √

Export value-added and

sales taxes √ (92.5%) √ (2.5%)

Business tax √ √

Enterprise revenue tax √ (60%) √ (40%)

Personal income tax √ (60%) √ (40%)

Natural resource tax √

Urban maintenance and

construction tax √ √

Property tax √

Stamp tax √ (97%) √ (3%)

Urban land-use tax √

Land value-added tax √

Vehicle tax √

Shipping tax √

Vehicle purchase tax √

Customs tariff √

Arable land occupation tax √

Contract tax √

Tobacco tax √

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Other taxed income or

revenue √ √

Source：National Bureau of Statistics，China Statistical Yearbook-2010.

3. Under the current division of tax authority between central and local government, the

central fiscal administration is principally responsible for expenditures related to national

security, foreign affairs, ministerial operations, national economic restructuring, regional

development coordination, macro-level regulation and the development of centrally-run

public institutions. More specifically, this includes: expenditures for national defence, military

police, diplomatic affairs, foreign aid, central administration, centrally-owned enterprises

technical upgrading and prototype design, geological exploration, centrally-planned

agricultural support, repayment of domestic and international debts, central public security

authorities and programs related to culture, education, health and science. The local fiscal

administration is principally responsible for the expenditures of local authorities and the

development of the area‟s economy and public institutions. Specifically, this includes costs

related to local administration, public security, military police, the people‟s militia, project

planning and basic investment, local enterprise technical upgrading and prototype design,

agricultural supports, urban maintenance and construction, improvement of local culture,

education and health, price subsidies and other supports. Table 2 provides data on central and

local government revenues and expenditures‟

Table 2: Proportion of Central and Local Revenue and Expenditures, 1978-2009

Year

Proportion of Fiscal Revenue

(%)

Proportion of Fiscal

Expenditure (%)

Central Local Central Local

1978 15.5 84.5 47.4 52.6

1980 24.5 75.5 54.3 45.7

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1985 38.4 61.6 39.7 60.3

1990 33.8 66.2 32.6 67.4

1994 55.7 44.3 30.3 69.7

1995 52.2 47.8 29.2 70.8

2000 52.2 47.8 34.7 65.3

2005 52.3 47.7 25.9 74.1

2009 52.4 47.6 20.0 80.0

Source: National Bureau of Statistics, China Statistical Yearbook-2010.

4. In 1994, to prevent the tax-sharing system from causing a decline in local financial

resources, the central party-state created a system of fiscal transfers. Using this mechanism, it

managed to achieve uniform public service provision across different localities. The fiscal

transfer system primarily includes tax returns, transfer payments, organizational and

settlement grants and special project transfer payments. The transfer payments include those

for general purposes, minority regions, wage adjustments, rural tax reform, and county-village

award stipends, among others. Special transfer payments include social security, health and

sanitation, science and technology, education, waterworks, etc. As the central party-state has

not placed too many restrictions on fiscal transfer funds, local government can be relatively

flexible with spending. The special transfer payments, by contrast, can only be used for

particular projects as directed by the central party-state. At the same time, they also require

local government to provide matching funds.