Chinas Reforms and Opening: Decentralization - Case Study Example

CHINA’S REFORMS AND OPENING: DECENTRALIZATION (Student Name) (Course No.) (Lecturer) (University) (Date) Over the past few decades, governments have been undergoing changes in the field of public management. The social, technological and economic reforms have seen a number of states change their public policies. In the wake of globalization, governments have found it necessary to modify their systems so as to meet the public demands and also to remain competent. Governments are moving from bureaucracies to democratic governance. Their traditional roles are continuously challenged facing external pressures for reforms. Stakeholders are demanding for open public management systems as a way of enhancing public performance. China is such nation that has embraced public reforms. This paper examines China’s move from centralization to decentralization and how the reform has impacted the public sector performance of China. Ancient China and centralization Historically, China has been known as the cradle land for humankind. Before the advent of civilization in China, the region had a centralized empire. The region had a centralized system of government where one state (Qin) unified other states (Lewis, 2007, pp.17). The first emperor of Qin established a centralized bureaucracy and a unified political system. Rules were set in one state, and all other states had to adhere to these rules. The central government controlled the entire economic resources, and this was detrimental to China’s economy since the financial resources were insufficient for local governments to carry out local responsibilities. The central bureaucracy resulted in serious corruption, uneven tax burdens heavy dependence on the central government to take local responsibilities among other economic difficulties (Coase & Wang, 2011). China faced lots of critics, and the Confucian argued that educated, ethical men should run the government. China’s move from bureaucracy In 1911, China faced a revolution that has been of great significance to the nation. China’s monarchical system was destroyed, and the provisional government of the Republic of China was found (Coase & Wang, 2011). The Northern Warlords dominated this era, and this was a new communist era of stability. The policies governing the nation were reformed, bringing about China’s phenomenal economic growth. As the years progressed, government leaders felt the need to defend the newly established socialist system and to overtake the Western industrial countries. It was, therefore, necessary for China to develop a strategy that will see it achieve these goals. Development strategy The year 1949 marked a transition period for China as government leaders designed a five-year plan focusing on massive industrial development. This included the 156 key projects that were designed with assistance from the former Soviet Union. Heavy industrial investment infrastructure accounted for 85%, and the rest was an agricultural investment. This move was paramount as it saw the national economy recover from the national wars. Implementation of this strategy was never easy interest rates were very high, and the supply of capital was short. The cost if developing capital intensive investments were therefore very high. As a result of this, the industries were not competitive in the open and free market economy. China’s reform under a planned economy China’s regulatory structure felt the need to maximize resource mobilization for capital-intensive industrialization and thus established a planned system. This system comprised of a macro-policy environment that distorted the prices of factors of production, a centralized planned resource allocation system and a dependent micro management system (Chan, Yue & Phillips, 2008). These economic reforms saw significant changes in China’s economy as the macro-policy environment depressed the prices of demanded industrial commodities, interest rates, and exchange rates, the planned resource allocation gave priority to the heavy industries and thus more resources were allocated to these industries and micro-management institutions ensured accountability and control. Move to decentralization China took a different move from the Soviet Union which concentrated all resources in the hands of the central authorities and denied them the right to independent action. The first step for China was delegating more powers to the local governments (Lieberthal & Yu, 2014). This move was guided by the desire to improve management in the industry, to improve trade and to strengthen the fiscal relationship between the central and local government. To attain these goals, the following reforms were put in place: • Delegating a significant number of state-owned enterprises to the local governments • The local governments were given authority over the taxes, making a share of government revenue decrease from 75% to 50% • A change in fixed investment decisions which were to be made by the local governments rather than the central government Consequences of the reforms The fiscal reforms took China a notch higher as the small local industries boomed. Several challenges arose following these changes as investment expanded too rapidly and the consequence of this was inefficient duplication. Coordination failures were evident and local governments suffered budget constraints. Redesign of the system Policy makers had to reform the entire system and felt that decentralization was the solution. All medium and large enterprises were once more subordinated to the central government (Lieberthal & Yu, 2014). Once again, the share of revenue for the central government increased. No changes were however made to the initial reforms as still had more authority over fixed investments and local revenue comprised everything except customs duties and enterprises that subordinated to the government. These reforms were not any better, and new reforms had to be put in place to change the aspects of the traditional economic system to achieve economic development. Framework change Framework guiding change Low efficiency was evident as micro-management institutions were rigid. As a result of this, the system resulted in inherent problems of the traditional economic system. Policy makers identified the relationship between production inefficiencies of the enterprises and a lack of stimulus for workers. They, therefore, resolved to new reforms to address the issues in place. Goals for the reforms • To improve workers’ incentives • To stimulate enterprises to increase output and turnover by increasing a share of retained profits • To stimulate economic growth Instruments used to attain the goals Expansion of decision-making powers Enterprises were given more power to make decisions on their internal welfare and rewarding systems. For this reason, they could reward or punish according to performance. The income of workers was therefore directly linked to their performance, and thus, the enterprises improved the incentives of the workers. Micro operational mechanisms in rural areas State-owned companies in rural areas underwent a partial deregulation and households were given decision-making powers in production (Chan, Yue & Phillips, 2008). Households could now make decisions on sharing of profit and surplus, which did not exist before. They, therefore, worked hard to increase production which in turn resulted in higher sales and thus a large proportion of the retained profits. Privatization In as much as China was dominated by central planning and public ownership, special economic zones were set aside to become market economies controlled by private ownership. The central government declared some coastal cities as special economic zones and authorized private developers to develop these regions. This stimulated the growth of the economy. Marketization The central government changed its legal requirements so as to expose the industry to the market forces. The government modified the fiscal arrangements following government’s deficit. Income tax replaced the profit remittances for the enterprises and enterprises were allowed to determine their prices. Further reforms Policymakers felt that economic reforms were not enough and advocated for education reforms as the education system was not adequate to contribute to further economic opportunities. The purpose of their educational reform was to align the educational system with the newly emerging marketization of the economy (Gregory & Stuart, 2014). Policymakers expressed concerns that management for schools was inefficient and that the control of the government for schools was too rigid. Education reforms were put in place, and the administrative power of the elementary schools was delegated to the local authorities (Chan, Yue & Phillips, 2008). The central authorities could, however, monitor and guide the local authorities in regards to the major policies and plans. This was the biggest step to decentralization as it increased the level of awareness in both political and economic realms. Impacts of the reforms The marketization process saw the size of the government change significantly. The change in the size of the government is attributed to a change in its size of revenue. Competition increased since firms were allocated resources depending on their level of competitiveness (Gregory & Stuart, 2014). As a result of this, China became a liberalized nation. Conflicting agenda and contradictions The purpose of China’s decentralization was to stimulate economic growth and attain economic stability. Even though China’s economy has become open and has experienced growth, several concerns have been raised concerning the inflation that has reached grave levels and fluctuating prices and exchange rates (Naughton, 2007, pp.203). Privatization was aimed at allocating more resources to private ventures with more comparative advantage than the state-owned enterprises, but this is so unfortunate since private enterprises are taking advantage of the situation to create monopolies. More power was given to the local governments to bail out inefficient firms and wasteful public consumption. The government’s purpose for this decision was to increase healthy competition and to attract foreign direct investment. Local governments have however expressed concerns over the threat to the survival of local industries if competition by foreign firm increases. Local governments are therefore imposing restrictive policies on non-local commodities to protect their industrial interests. Many economists have disagreed with the interregional barriers as they hinder the economic growth of China. Conclusion China’s successful decentralization is attributed to the redefined reforms unlike the initial reforms which did not promote economic growth but only resulted in economic overheating. It is evident that China’s decentralization involves the transfer of authority and decision-making from higher to lower level. Through fiscal decentralization, China’s governance became more open, and practices such as severe corruption were eradicated. Assigning revenue control to the local government was a big step towards eliminating bureaucracies in China. Assigning revenues to local governments also increased the efficiency of allocation of resources and thus if resources are well allocated to the most viable sectors of the economy, it is a guarantee that the economy will grow. In conclusion, China’s move from centralization to decentralization is the reason for China’s economic growth. References Chan, C. K., Yue, J., & Phillips, D. 2008. 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