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Eating in Separate Kitchens

Permanent Link: http://ncf.sobek.ufl.edu/NCFE004224/00001

Material Information

Title: Eating in Separate Kitchens Economic Decentralization and Local Authority in China
Physical Description: Book
Language: English
Creator: Brown, Sarah
Publisher: New College of Florida
Place of Publication: Sarasota, Fla.
Creation Date: 2010
Publication Date: 2010

Subjects

Subjects / Keywords: China
Economics
Decentralization
Politics
Xiamen
Fuzhou
Fujiah
Genre: bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: The hallmarks of China�s economic reform have been decentralization and marketization. Since the Mao era the Chinese government has decentralized fiscal and administrative authority, gradually granting local governments greater authority over an expanding range of economic decisions. Theories of decentralization and market liberalization suggest that these processes can lead to more economic efficiency and innovation at the local levels, sparking growth and development of a country as a whole. Examining how Chinese cities have gained and expanded economic authority within the unitary structure of the Chinese government offers an opportunity to understand how the Chinese economy has achieved such a tremendous turnaround since the late 1970s, as well as how decentralization and market liberalization affect local authority and policy innovation. As designated cities have successfully experimented with economic policy, economic authority has been further decentralized to lower levels across the country. The study of Chinese city types and their economic authority informs our understanding of decentralization and market liberalization under a unitary government.
Statement of Responsibility: by Sarah Brown
Thesis: Thesis (B.A.) -- New College of Florida, 2010
Electronic Access: RESTRICTED TO NCF STUDENTS, STAFF, FACULTY, AND ON-CAMPUS USE
Bibliography: Includes bibliographical references.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Local: Faculty Sponsor: Hicks, Barbara

Record Information

Source Institution: New College of Florida
Holding Location: New College of Florida
Rights Management: Applicable rights reserved.
Classification: local - S.T. 2010 B88
System ID: NCFE004224:00001

Permanent Link: http://ncf.sobek.ufl.edu/NCFE004224/00001

Material Information

Title: Eating in Separate Kitchens Economic Decentralization and Local Authority in China
Physical Description: Book
Language: English
Creator: Brown, Sarah
Publisher: New College of Florida
Place of Publication: Sarasota, Fla.
Creation Date: 2010
Publication Date: 2010

Subjects

Subjects / Keywords: China
Economics
Decentralization
Politics
Xiamen
Fuzhou
Fujiah
Genre: bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: The hallmarks of China�s economic reform have been decentralization and marketization. Since the Mao era the Chinese government has decentralized fiscal and administrative authority, gradually granting local governments greater authority over an expanding range of economic decisions. Theories of decentralization and market liberalization suggest that these processes can lead to more economic efficiency and innovation at the local levels, sparking growth and development of a country as a whole. Examining how Chinese cities have gained and expanded economic authority within the unitary structure of the Chinese government offers an opportunity to understand how the Chinese economy has achieved such a tremendous turnaround since the late 1970s, as well as how decentralization and market liberalization affect local authority and policy innovation. As designated cities have successfully experimented with economic policy, economic authority has been further decentralized to lower levels across the country. The study of Chinese city types and their economic authority informs our understanding of decentralization and market liberalization under a unitary government.
Statement of Responsibility: by Sarah Brown
Thesis: Thesis (B.A.) -- New College of Florida, 2010
Electronic Access: RESTRICTED TO NCF STUDENTS, STAFF, FACULTY, AND ON-CAMPUS USE
Bibliography: Includes bibliographical references.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Local: Faculty Sponsor: Hicks, Barbara

Record Information

Source Institution: New College of Florida
Holding Location: New College of Florida
Rights Management: Applicable rights reserved.
Classification: local - S.T. 2010 B88
System ID: NCFE004224:00001


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EATING IN SEPARATE KITCHENS: ECONOMIC DECENTRALIZATION AND LOCAL AUTHORITY IN CHINA BY SARAH BROWN A Thesis Submitted to the Division of Social Sciences New College of Florida In partial fulfillment of the requirements for the degree Bachelor of Arts Under the sponsorship of Dr. Barbara Hicks Sarasota, Florida April 2010

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ii Dedication This work is dedicated to my mother, Rosalyn Ruby your love and encouragement has inspired me to live my life to the fullest and create my own happiness. Thank you, always. To my father, Richard Brown, who has supported me every step of the way. And to my brother, Benjamin Brown, the best and most honest person I know. And finally to my Prime Six: Mary Barnes, Hannah Woerner, Shanna Turne r, Mitchell Hearn, and Sarah Thompson. We built something truly amazing in our years here and I am grateful for every moment. I could not have done this without you.

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iii Acknowledgements I would like to express my utmost gratitude to Dr. Barbara Hicks for her invaluable guidance and support throughout my years at New College. Her patience and encouragement have inspired me to expand my opportunities and push my own limits. I would also like to extend my most sincere gratitude to my committee members, Dr. Jing Zhang and Dr. Frank Alcock, for all of their time and effort.

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iv Table of Contents Acknowledgements ................................ ................................ ................................ ......................... iii Table of Contents ................................ ................................ ................................ ............................ iv List of Illustrations and Tables ................................ ................................ ................................ ....... vi Abbreviations ................................ ................................ ................................ ................................ vii Abstract ................................ ................................ ................................ ................................ ......... viii Introduction ................................ ................................ ................................ ................................ ... 1 Chapter I ................................ ................... 6 The Effects of Decentralization on Local Authority ................................ ................................ .... 6 Types of Decentralization ................................ ................................ ................................ ........ 7 Benefits of Decentralization ................................ ................................ ................................ .. 10 Limits of Decentralization ................................ ................................ ................................ ..... 13 Market Liberalization ................................ ................................ ................................ ................. 16 Costs of Economic Liberalization ................................ ................................ .......................... 19 Economic Liberalization in China ................................ ................................ ......................... 19 ................................ ............................ 20 The Great Leap Forward ................................ ................................ ................................ ........ 23 The Cultural Revolution ................................ ................................ ................................ ........ 26 The Death of Mao and Recovery ................................ ................................ ........................... 28 The Deng Reforms of 1978 ................................ ................................ ................................ ........ 28 Special Forms of Administrative Decentralization ................................ ................................ 33 Special Economic Zones ................................ ................................ ...................... 33 Open Coastal Cities ................................ ................................ ............................. 35 Line item Cities ................................ ................................ ................................ ... 36 Price Reforms ................................ ................................ ................................ ........................ 37 Retrenchment and the Tiananmen Square Incident ................................ ............................... 38 Revival of Reforms ................................ ................................ ................................ ................ 40 The Tax Assignment System of 1994 ................................ ................................ .................... 41 The Importance of Extra budgetary Revenue ................................ ................................ ........ 44 The New Millennium, the World Trade Organization and Beyond ................................ ....... 45

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v Conclusions ................................ ................................ ................................ ............................ 47 Chapter II Administrative Hierarchy: Three City Types ................................ ..................... 48 Fujian Province ................................ ................................ ................................ ...................... 50 Xiamen Special Economic Zone ................................ ................................ ............................ 52 Facing Outward ................................ ................................ ................................ ................. 52 Official Autonomy ................................ ................................ ................................ ............ 54 FDI Approval ................................ ................................ ................................ ....... 57 Local Budget ................................ ................................ ................................ ........ 57 Line item City ................................ ................................ ................................ ...... 58 Preferential Policies ................................ ................................ ............................. 59 Land Reform ................................ ................................ ................................ ........ 60 Pushing Limits ................................ ................................ ................................ .................. 61 Broad Interpretations ................................ ................................ ........................... 61 Local Development Plan ................................ ................................ ...................... 62 Extra budgetary Funds ................................ ................................ ......................... 63 The Taiwan Facto r ................................ ................................ ............................... 65 Legislative Ability ................................ ................................ ............................... 66 Experimental Reform ................................ ................................ ........................... 68 Conclusions ................................ ................................ ................................ ....................... 71 Fuzhou Open Coastal City ................................ ................................ ................................ ......... 72 Official Authority ................................ ................................ ................................ ............. 73 FDI Approval ................................ ................................ ................................ ....... 74 Preferential Policies ................................ ................................ ............................. 76 Limitations ................................ ................................ ................................ ........... 77 Pushing Limits ................................ ................................ ................................ .................. 78 Changing the Economic Plan ................................ ................................ .............. 79 Experimental Reform ................................ ................................ ........................... 80 Development Zones ................................ ................................ ............................. 81 Acceleration of Reforms ................................ ................................ ...................... 82 Conclusions ................................ ................................ ................................ ....................... 84 General Cities ................................ ................................ ................................ ............................. 84 Official Authority ................................ ................................ ................................ ............. 85 Party Personnel Control ................................ ................................ ....................... 86 Expansion of Special Policies ................................ ................................ .............. 86

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vi Administrative Ability ................................ ................................ ......................... 88 FDI Approval ................................ ................................ ................................ ....... 89 Land use Rights ................................ ................................ ................................ ... 90 Pushing Limits ................................ ................................ ................................ .................. 90 Illegal Development Zone s ................................ ................................ .................. 91 Importance of Extra budgetary Funds ................................ ................................ 92 Sale of State owned Assets ................................ ................................ .................. 94 Fiscal Concessions to FIEs ................................ ................................ .................. 95 FDI Project Miniaturization ................................ ................................ ................. 95 Conclusions ................................ ................................ ................................ ....................... 96 Chapter III Economic Authority at the City Level ................................ ............................ 97 Comparison of City Authority ................................ ................................ ............... 98 Conclusions ................................ ................................ ................................ .......... 107 Bibliography ................................ ................................ ................................ ........................... 110

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vii List of Illustrations and Tables Figure 2.1 Chinese City Hierarchy ................................ ................................ ............................... 49 Figure 2.2 Map of China ................................ ................................ ................................ ................ 51 Figure 2.3 Administrative Divisions of Xiamen ................................ ................................ ............ 55 Figure 2.4 Administrative Divisions of Fuzhou ................................ ................................ ............. 75 Figure 3.1 City Authority Chart ................................ ................................ ................................ .. 100

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viii Abbreviations COE County Owned Enterprise ETDZ Economic and Technology Development Zone FDI Foreign Direct Investment FIE Foreign Invested Enterprise FTZ Free Trade Zone HEA Horizontal Economic Association OCC Open Coastal City OUD Old Urban Districts PRC SEZ Special Economic Zone SOE State Owned Industry TVE Township Village Enterprise WTO World Trade Organization

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ix EATING IN SEPARATE KITCHENS: ECONOMIC DECENTRALIZATION AND LOCAL AUTHORITY IN CHINA Sarah Brown New College of Florida, 2010 Abstract Since the Mao era the Chinese government has decentralized fiscal and administrative authority, gradually granting local governments greater authority over an expanding range of economic decisions. Theories of decentralization and market liberalization suggest that these processes can lead to more economic efficiency and innovation at the local levels, sparking growth and development of a country as a whole. Examining how Chinese cities have gained and expanded economic authority within the unitary structure of the Chinese government o ffers an opportunity to understand how the Chinese economy has achieved such a tremendous turnaround since the late 1970s, as well as how decentralization and market liberalization affect local authority and policy innovation. As designated cities have suc cessfully experimented with economic policy, economic authority has been further decentralized to lower levels across the country. The study of Chinese city types and their economic authority informs our understanding of decentralization and market liberal ization under a unitary government. Dr. Barbara Hicks Division of Social Sciences

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1 Introduction experimental and a gradual process that has been heavily controlled by the central government. China emerged from the 1960s with a battered and weak economy. Following over twenty years of economic and social isolation, and the economically devastating policies of both the Great Leap Forward and the Cultural Revolution of the Mao Zedong era, the central government began the process of Economic Reform and Openness 1 in the late 1970s. In the post championed a series of nation wide economic reforms and was a strong proponent of the creation and development of Special Economic Zones (SEZs). The zones were strategically designed to attract foreign direct investment through their unique economic governance authority as city and municipal governments in the SEZs were ceded the ability to regulate taxes, investment, labor, and land use. 1 gaige kaifang

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2 The SEZ strategy was utilized to isolate the liberalization of the economy to very specific regions most particularly along the southern and eastern coasts where the government was able to experiment with more liberal economic policy while still protecting the rest of the country from unchecked reform. As the policy w as instituted and the SEZs began wielding their new authority, the economy began to see marked 2 Specific policies deemed successful in the SEZs were then expanded and applied to a broader selection of areas such as the Open Coastal Cities in the same regions. The economy in these areas began to expand rapidly as did the rate of foreign direct investment, which led to both further expansion o f economic authority within SEZs and the spread of many of these policies nationwide. At the same time a general decentralization of economic governance authority was occurring throughout the country. As the pace of reform increased, the central govern ment was, still carefully and gradually, granting economic governance authority to the provincial and local levels across the nation. The central government decentralized administrative, fiscal, and even some political authority to the local levels in orde r to promote higher levels of economic efficiency and growth. Cities and municipalities all over the country not only took advantage of their new authority, but also pushed the boundaries of their official authority in order to compete both internally and internationally for economic opportunities. There have, of course, been periods of retrenchment to old policies, including after the Tiananmen Square incident; however these periods were followed by even stronger pushes toward reform. While the testing of 2 Deng was supported in much of his Open Door policy campaign. However, he was also heavily criticized by those within the Communist Party who believed that policies such as the creation and maintenance of special economic zones allowed for the spread of ev ils within society.

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3 official limits to economic governing authority has been most studied in SEZs, the competition among cities to attract and encourage investment or develop other economic benefits ensures that local governments of all types use every opportunity to maximize their economic gain. Special Economic Zones are generally considered to hold higher levels of economic governance authority than the rest of the country. However, given the widespread decentralization of recent decades and the ambitions of local govern ments to push the limits of their officially sanctioned governance authority, the real world abilities of local governments to enact economic legislation may be greater than generally thought. This project seeks to determine whether Special Economic Zones still enjoy a higher level of governance authority or whether cities outside of Special Economic Zones exercise similar level of actual governance authority. By examining the evolution of governance authority at the local level I hope to discern whether p atterns in the expansion of that authority are creating similarities in the actual abilities of different types of Chinese cities to govern their economies. How have local governments pushed the limits of their official economic governing authority? Does t he successful use of governing authority in SEZs lead to the evolution of similar abilities in normal Chinese cities? What areas of economic governing ability have expanded and what areas have not? The loosening of central government control in China is no t just a domestic issue; it also affects the international community. Understanding how economic governing authority has developed and how it continues to evolve is important to understanding dents begin to have more of a voice in economic decision making, the landscape of investment and business also

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4 changes. Identifying the source of Chinese economic policy, whether from the central or the local government or some combination of the two, is e ssential to interacting effectively with the Chinese economy. Chapter I of this study considers the form and merits of decentralization and Forward and the Cultural Revol ution, as well as the reforms and decentralization of authority since the late 1970s. Particular emphasis is placed upon the creation and structure of SEZs and Open Coastal Cities. The chapter outlines the prevailing perspectives and theories on political decentralization and economic reform in China. By the end of this chapter, I develop the hypothesis that there are similar levels of economic governing authority in Special Economic Zones and cities outside of these zones. Chapter II examines two speciall y designated cities and one average city in Fujian province, which is located on the southeastern coast of China, directly across from Taiwan, in order to evaluate my hypothesis. Each city is of a different classification and together they present a range of formal status economic governance. First I will examine Xiamen, a sub provincial, coastal city and Special Economic Zone located in the south of the province. The analysis then turns to Fuzhou, the capital of Fujian and a designated Open Coastal City in the north. Finally, the third section examines economic authority in general cities that have no special designations. Each case study begins with a short history of the city and then examines three different levels of governance authority to determine th e extent to which the local government has developed economic governing abilities. These levels are: 1) officially designated authority ceded from the central government to the local government in

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5 official laws, statutes, policies and documents, 2) unoffic ial authority assumed by local government that was not specifically ceded by the center (pushing the boundaries of local authority), and, 3) the actual capacity of each city to initiate and enforce the policies it creates. In examining each case I attempt to draw general conclusions about the actual level of economic governance authority in that type of city that actually occurs whether within or outside of the formal powers granted to local government by the central government. Chapter III compares the conclusions from the three case studies and attempts to draw general conclusions about the level of economic governing authority in Special Economic Zones compared to the level of economic governing authority in Open Costal Cities and regular Chinese cities. I conclude that, while SEZs do generally have greater authority over economic matters than other city types, a complicated network of special city designations in China determines the overall economic governing authority of a city. Moreover when it comes to actual decisions about local economic matters and implementation of central policies, all cities push or often surpass the limits of their legal authority. Decentralization of economic authority to the city level and liberalization of th e economy have been gradual processes dependent on previous policy successes. As the decisions has expanded at the local level.

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6 Chapter I Economic Reform Decentralization is one of the principle elements of Chinese economic reform. many developing and transition economies (Bardhan 2002, 185). Heralded speeds. The Effects of Decentralization on Local Authority Decentra lization has been implemented in different forms, through different programs and with different results in countries all over the world. Therefore the evaluations of its benefits and limitations have been based on very different cases. Much of the literatu re available is based upon the Western experiences of decentralization,

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7 namely those of North America and Western Europe, which have very different institutional frameworks from those of Asia or Latin America. However, the experience is not standardized an d cannot be generalized into an easily defined practice or outcome. administrative and managem ent problems in the developing world (Rondinelli 1983, 12). Types of Decentralization The literature on decentralization is like its implementation broad and varied, which often leads to a confusion of terms and definitions. The various components and the different forms of decentralization are often described and used interchangeably, caus ing muddled conclusions about the empirical results of these processes. When discussing decentralization, we are referring to one of four different types of decentralization: deconcentration, delegation, devolution, and privatization (Rondinelli 1983, 18). Deconcentration involves the shifting of decision making from the central offices of government ministries and agencies to offices and staff outside of the capital or at lower levels. Provincial, municipal or local units are given greater autonomous disc retion to implement central decisions and policies and create their own policies at the local level, while still contending with the oversight of central ministry officials. The key aspect of deconcentration is that administrative authority or responsibili ty for certain functions is shifted out to local bodies, but those bodies are still part of the central government structure (Fesler 1949, 80; Collins 1974, 15).

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8 Delegation occurs when the central government transfers the management of specific responsibil ities to organizations that are outside the normal bureaucratic structure. The external organization is generally still indirectly controlled by the central government. When a government delegates authority to other bodies it is often attempting to avoid t he inefficiency of government bureaucracies or maintain public control over valuable resources. It is important to differentiate between delegation and privatization, the center delegates specific abilities to organizations such as public corporations, reg ional development agencies, and parastatal organizations, but the ultimate authority still remains in the hands of the government (Boodhoo 1976, 221). When a government privatizes an industry or action, authority is ceded to private companies or voluntary organizations, which is discussed later in this chapter. Devolution of authority allows for the creation or strengthening of sub national units of government. These sub units are autonomous in specified policy domains and are empowered with various levels of administrative, political, and fiscal authority within their designated jurisdictions. The central government tends to be only indirectly involved in the decision making at these levels, and the sub units are free to perform their explicitly granted fun ctions relatively independently. This sort of decentralization is accompanied by the spatial or geographical transfer of authority away from the central government in the capital to local units around the country, as well as the actual transfer of authorit 61; Rondinelli 1983, 25). Devolution is one of the most comprehensive forms of decentralization in that it both moves authority away from the central government and

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9 places it in t he hands of lower level officials with less central oversight, creating higher levels of actual autonomy. Privatization occurs when the central government transfers certain responsibilities to non governmental actors, such as voluntary organizations or pri vate corporations. Privatization is most often associated with the distribution of public goods and services, such as water, energy, and health care. Responsibility over former public goods or services is often transferred to organizations that represent s pecific interests in civil society with decisions being made by people closer to the actual point of implementation rather than government decree (Ralston, Colson, and Anderson 1981, 106). The assumption is that by allowing a private company or organizati on to carry out these functions, incentive of a profit would lead to greater efficiency. Generally speaking, when scholars discuss the benefits and disadvantages of decentralization they are referring to devolution. Within devolution itself there are actua lly three more precise forms of decentralization: administrative, fiscal, and political. Administrative devolution transpires as the central government transfers the authority to make certain policy decisions to sub national units or agents. Fiscal devolu tion allows sub national units to collect taxes, administer fees and fines, and spend a percentage of that revenue. Political devolution allows sub national units to have officials who are selected at lower levels, rather than the center (Bardhan 2002, 186 ). However, decentralization in the political sphere does not necessarily always imply the democratic election of officials by the local residents. Political devolution could just as easily be defined by personnel decisions being made at a lower level of g overnment instead of directly appointed from above (Bardhan 2002, 187).

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10 As we can see, the term decentralization is used to describe a broad and expanding body of policies. Understanding the precise forms of decentralization is not only important to under standing the relevant arguments in any given discussion, but also necessary to framing any study of the economic reforms of China. In many cases the terms decentralization and devolution are used interchangeably, and, for the purposes of this study, the te rm decentralization will also be used to mean the devolved type of decentralization. It is important to differentiate between decentralization and the mere anarchic disintegration of state power. In this study we are concerned only with the clear transfer of authority to other units, not the general dissipation of control away from government. According to these definitions, China in 1978 was highly politically and administratively centralized. In the years since 1978 it has become a great deal more admi nistratively decentralized while political decentralization has lagged behind. A great many decisions particularly economic decisions are made at the lower levels, but the majority of officials are still appointed by higher levels, despite the democratic e lection of village officials. Fiscally China has decentralized quite a bit, moving much of the collection of taxes and revenue spending out to lower levels in an effort to create more efficiency (Cai and Treisman 2006, 508). Benefits of Decentralizat ion The failures of the centralized state in the developing world have driven a wide range of scholars to advocate a decentralized approach to governance. For the purposes of this study we are most interested in those that could lead to positive economic benefits.

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11 Advocates of decentralization stress increased economic growth, better accountability structures, improved dispersal of public goods and services, and increased democratic participation at the local level. Efficiency is one of the most commonly c ited benefits to decentralization. In transferring fiscal authority the authority to collect and retain some percentage of taxes, as well as the ability to then spend that revenue to local governments the central state is giving local units a stake in the efficient allocation of those resources. When governments are responsible for their own budgets, and thus have the ability to go bankrupt, they have more of an impetus to use their resources efficiently (Davoodi and Zou 1998, 245). Local officials also hav e insights into the most effective use of resources at their level; when money is spent on things that actually benefit the local residents, waste is lessened. In order to avoid waste, local governments are likely to subsidize or invest in only activities that will be profitable and avoid those that lose money (Oates 1997, 83). The hardening of the budget in turn leads to the expectation for enterprises under the purview of local governments to also become more efficient in their practices, saving money and hopefully increasing profits. By the same incentive, decentralization motivates local governments to promote economic development the greater the development, the higher the taxes and revenues. Promotion of economic development could manifest in many di fferent ways, such as the creation of regionally competitive tax incentives for investment, stronger provisions of public goods, more precisely targeted local investment of government revenue all in an effort to attract higher levels of capital to their ju risdictions and promote the development of key areas of the local economy.

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12 Many studies have shown that fiscal decentralization is significantly linked with lower levels of corruption (Breton 1996, 87; Shleifer and Vishny 1993, 612). With greater and more varied oversight, rent seeking behaviors can be kept in check. Officials are considered to be more downwardly and horizontally accountable and are thus at a higher risk of discovery should they participate in bribery, patronage, or kickbacks (Fisman and G atti 2000). However, other studies assert the opposite, and find that local that decentralization can lead to corruption at lower levels where there are fewer mechanisms for oversight (Tanzi 2001, 7; Bardhan and Mookherjee 1998, 32). Placing decision making authority in the hands of the local officials is also assumed to create a system of checks and balances on the local government and protect local authorities a nd their policies from the predatory economic intervention of the central government. Decentralization reduces the strength and direct control of the central government over the economies at the local level. Not only can the decisions of local officials be shielded somewhat from the manipulation of the central government, but the economy is protected from the ambitions of the central government, which may or may not be in the interest of the region. The delineation of new local authority would, according to many, put the decisions outside the direct control of the central government and make reforms much harder to reverse. 3 Attempts to recentralize or return to earlier 3 The assignment of authority beyond the control of the central government is a large component of the vertical separation of political p owers characterized by five conditions: 1)a hierarchy of governments with a delineated scopes of authority, 2) sub national governments retain primary authority over the economy within their jurisdictions, 3) national government retains authority over the common market and to guarantee the mobility of factors across sub national jurisdictions, 4) revenue sharing between governments is limited and all governments face hard budget constraints, and 5) allocation of authority is institutionalized in order to pr otect sub national governments from alteration by the national government (Qian and Wiengast 1996, 6). See the next section for an argument against the use of this concept.

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13 policies are often met with so much regional resistance that they are extremely hard to im plement and often fail (Qian and Weingast 1996, 32). Decentralization is also credited with prompting an increase in regional economic policy experiments. Competition among cities and regions leads to a desire on the part of local government to create t he most appealing environment for investment capital, industry, and, according to many, labor (Tiebout 1956). As power is decentralized and local officials have more administrative and fiscal autonomy, they will begin to experiment with policies designed t o ensure greater development in their jurisdiction and sometimes even push beyond the limits of their official authority. Local ingenuity is particularly pronounced in Special Economic Zones in China, which were created specifically to isolate certain expe rimental policies before they could be introduced to the rest of the country (Holz and Zhu 2003, 183). Following a successful policy experiment in one region, the proven policy was often adopted by other cities and provinces in an effort to remain competit ive and continue development. Much of this competition and local policy experimentation are thought to lead to even higher levels of liberalization in local areas. SEZs have shown particular aptitude for local initiatives and policy experimentation and hav e been eager to expand local autonomy. Limits of Decentralization as they might seem. Problems with resource distribution, population differences, and interference from the central government are only a few of the issues that challenge the presumed benefits of decentralization. The assumption that decentralization actually

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14 places immoveable authority in the hands of the local officials to enact economic reform is also not necessarily valid. One of the largest issues in considering decentrali zation in China is that, despite the center does have ultimate control over spheres of autonomy of lower level governance. One of the benefits of decentralization mention ed above is the protection from the influence and abuses of the central government. Some scholars dispute the man 2006, 519). In many cases, the strength behind provincial and local leaders actually comes from the center through the strong relationships maintained among officials at varying levels. Lower level leaders appeal to their networks in the capital in ord er to gain the protection of more powerful officials at the center, and even these networks do not guarantee that the lower official is not removed from power, as has happened often in the past thirty years. 4 The continued use of network connections sugges ts that authority is still not fully seated or protected in local governments, but that authority at the local level is greatly scrutinized and influenced at the center. The assertion that regional or local governments become responsible for the majority o f policy experimentation also merits closer examination with respect to China. Cai and Treisman reject such an assumption, stressing the importance of central government involvement in initiating or maintaining local reform initiatives. Indeed, they 4 In one of the major cases provided by advocates of decentralization, Ye Xuanpin g, the governor of Guangdong managed for a short while to hold off a retrenchment attempt to recentralize budget revenues by Premier Li Peng after the Tiananmen Square Incident. However, a year later he was replaced and the recentralization occurred anyway There is even speculation that the entire spectacle was managed from the center as a play for power between Deng Xiaoping and Li Ping themselves (Cai and Treisman 2006, 520).

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15 point out that in many cases members of the central government, including Deng Xiaoping himself, removed officials at the provincial level because of their reluctance to begin or push along liberalized economic policies in their regions. Leaders in both Guangdon g province and Fujian the province that houses Xiamen, one of the first Special Economic Zones were removed from power because they lacked enthusiasm for the reforms expected by the center (Cai and Treisman 2006, 517). Cai and Treisman also stress the impo policies to other regions. The assumption that the promotion of development by local leaders wo uld lead to Despite the fact that studies show a significant link between decentralization and a decrease in local corruption, many things are not taken into account in these analyses (Breton 1996, 87;Shleifer and Vishny 1993, 612). First, at local levels corruption may not only encompass bribes. Local governments, for instance, might institute protectionist policies that favor local enterprises or companies, which det ers both foreign and domestic investment and development (Breslin 2006, 10). Protectionism is not limited to only policies that protect local enterprises from competition, but also policies that shield these enterprises from central government taxes and r egulations. In addition, if authority is decentralized to local levels, business interests may not need to utilize bribes in order to capture local government. The preponderance of networks and relationships at the local level make it much easier for relat ives and friends of local officials to gain preferential treatment in economic policies, which could have a large effect on local economic

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16 development and the expansion of more liberal policies as well as local authority (Luo 2000, 27). The effects of dece ntralization on local authority and governing ability are discussed and debated at length in countries around the world. While its positive and negative effects are weighed against each other, some assert that decentralization creates actual autonomy for l ocal governments, giving them the authority to craft more effective economic policies; others insist that decentralization is merely an instrument of the rule of the central government. As decentralization is one of the central elements to the nature of Ch inese economic reforms, understanding the balance between decentralized powers and the power of the central government is extremely important to the study of economic fol low the Western pattern is clear, but how the current authority of local governments Market Liberalization The debate over economic liberalization is an important part of contemporary development plans all over the world and is a closely watched facet of China's rise as an economic power. The benefits and disadvantages are deliberated in every country as nation al development paths are considered. For many developing countries that originally maintained relatively closed economies in an effort to protect domestic industries and enterprises, the liberalization of their economy is a highly controversial decision an d faces staunch opposition from conservative forces within the government and the elite, as

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17 well as employees in that industry. It was no different in China; economic liberalization has been a slow and contested process. Economic liberalization is tig htly associated with neoliberalism. Neoliberalism supports the creation of an open market economy in which economic power is transferred from the public sector to the private sector. Proponents of liberalization advocate several policies to create incentiv es for individuals and firms to improve output and increase profits in both industry and agriculture: privatization of state owned industries; the deregulation of price controls, factor markets and profit retention; encouraging foreign direct investment, r emoval of barriers to trade; and the establishment and enhancement of individual property rights (Qi 2001, 7). Market oriented reform, including trade liberalization, is a key element of the policy prescriptions proffered by neoliberal scholars. Essential ly they argue that when citizens and workers are given a real stake in the success of the enterprise higher rations or pay for higher output and profit they are more likely to improve their own efficiency and thus the overall efficiency of the enterprise ( Williamson 1989). Liberalization of economic policies can also contribute to higher levels of competition among firms, both domestic and foreign. While greater efficiency occurs within individual firms across the country, regional competition springs up a s the firms attempt to gain a greater share of the domestic market; and, as foreign firms are allowed into the market, even greater competition is expected. The increased competition encourages even greater innovation and efficiency, leading to even higher output levels and profits (Berggren 2003, 196).

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18 The Washington Consensus, first outlined by John Williamson in 1989, has come to be seen as the clearest embodiment of the principles of neo liberalism. 5 While it was at first an attempt to vo ice Williamson's own observations of generally accepted policy prescriptions within Washington's political, economic and technocratic circles concerning the debt crisis in Latin America, it soon became a doctrine associated with the spread of democracy. Pr 256). The idea of separating economic power from the coercive power of the state has been expresse d since the 18 th century, beginning with Montesquieu, and entrenched in the liberal democratic systems over the past three centuries (Montesquieu 1989, 340). Robert the resources available to the government for suppression decline relative to the resources more economically free they begin to insist on greater social and political freedom as well; with the economic power to support their own causes, they are capable of keeping their government in check. According to some, political oppositions, along with other forms of factioning that can occur as a result of economic liberalizatio ns including the rise of organizations based on class and occupational identities, which give people groups to belong to 6 necessary for the development of democracy (Fish and Choudhry 2007, 258). 5 The Washington Consensus has since taken on a negative connotation in many c ircles. Some critics see it as the embodiment of the United States' exploitative policies toward the developing world, encouraging the opening of foreign developing economies in order to better the US's own prospects for overseas investment and manufacturi ng. Others see the Washington Consensus as an overly ideological policy that offered often ineffective advice. 6 Along with the organizations that represent them, such as unions and professional associations

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19 Costs of Economic Liberalization Not all believe in the positive attributes ascribed to rapid economic liberalization. 258). Many believe t hat, instead of improving the lives of citizens, rapid economic liberalization can have extremely negative effects upon the majority of the population while only enriching a small few business elites who are in the right positions to take advantage of refo rms. In consideration of the negative effects of such policies, the public resists neo liberal rapid liberalization of the economy; therefore, policy makers insisting upon market reforms ignore popular opinion, thus undermining the development of democracy (Przeworski 1991, 183). Scholars assert that such sudden changes in policy can lower overall welfare, increase the already problematic inequality across regional and class lines, and encourage those who do gain from the new policies to restrict popular pa rticipation in government. The policies are seen as imposed from outside of the country and benefit only segments of the elite within the country and the foreign companies and investors who gain markets for their own goods and low cost labor and property f or manufacturing. Economic Liberalization in China China's economic liberalization has been a decidedly gradual process, going through periods of accelerated reform and periods of retrenchment and economic austerity. Choosing an export led growth plan, the central government has encouraged economic liberalization in specific regions first concentrating on the coastal regions of

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20 the East and South in order to experiment with policy changes before committing to them fully throughout the country. To encour age exports and capital accumulation, there has been a concerted effort to open up the country to foreign investment and trade while maintaining a good level of control over domestic actors. This unbalanced liberalization has served to limit the amount of change throughout the country and was hoped to diminish the overall effect of economic changes on political life. However, as China has attained higher standing in the international world, and as it strives for even faster growth, the central government ha s ceded even greater economic freedom to the private sector. China's accession to the WTO in 2001, which included negotiations to allow more access to the Chinese market and to place Chinese and foreign companies on a level playing field, the PRC has agree d to even greater liberalization of its economy as well as opened itself to greater foreign influence in the domestic economy (Breslin 2006, 8). The Early Economy of the Peoples Republic of China During the Mao era many economic decisions were made based on socialist ideology, rather than economic knowledge. Mao was a particular proponent of using the workers and peasants would lead to development and economic improv ement. 7 His insistence that China maintain a state of perpetual revolution and class struggle informed all of his political and economic policy decisions and led directly to the most tumultuous y rose and fell as his 7 was a tool through which Party officials are to gauge the will of the people. The mass li ne is used to motivate and mobilize the country quickly to follow central policy (Steiner 1951, 422).

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21 policies succeeded or failed, allowing space for more moderate leaders to make changes in policy while Mao re built his support. were defined by the comma nd economy, which was imported from the Soviet Union. After nationalization the economy was managed and planned by the bureaucratic center with an emphasis on building a heavy industrial base and high growth rates. Central planners set output and supply qu otas, prices, and wages with state revenues consisting almost entirely of the profits of the state owned industrial enterprises. The service sector remained underdeveloped and private business ventures were highly discouraged, while foreign trade and inves tment were kept to low levels. Agricultural plans and quotas were tightly mandated by the center. The intention of the system was to make the factors of production easily mobilized in order to facilitate rapid economic development. All private enterprise s were nationalized, landlords were forced to surrender their land to their tenants and the government, and farmers were forced to sell the majority of their crops to the government at heavily discounted prices. Control over consumption through rationing a nd allocation left the government with a high level of national output for reinvestment, hopefully with thought toward long term development. However, in China the reinvestment of that output was generally funneled into short term growth plans, particularl y in heavy industry, while light industry and agriculture tended to suffer (Shirk 1993, 25). China successfully reached a high rate of growth during this period, but at great cost to many sectors of the economy. Infrastructure projects in energy and transp ort were sorely lacking and thus added to the efficiency problems experienced around the country.

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22 Finally, increasingly more input capital was necessary in order to maintain the growth in industry. Efficiency in state owned industries was a major issue, as everything was decided and controlled outside of the firm itself inputs, outputs, prices, labor, etc. All enterprise managers were required to do was ensure that the correct level of output was produced, and they were thus promoted or fired based upon the meeting of these quotas. They faced no incentive to innovate or change prevailing practices, often under reported capabilities and capacities in order to keep output targets down, and faced no competition from either domestic or foreign firms. Perhaps on e of the clearest demonstrations of the handling of the economy during this time was that the standard of living of the average Chinese citizen did not match the growth in industry, living standards were basically stagnant in comparison to the growth exper ienced elsewhere in the economy. Between 1952 and 1980 the gross output of agriculture and industry increased by 810%, national income increased by 420%, but individual income only increased by 100% (Shirk 1993, 28). As the country stabilized after the civil war, Mao began the process of collectivizing agriculture, encouraging those in the rural areas to join in what were called ectivization process led to heavy recruitment in rural areas, and by 1958 fully 100% of rural farmers were part of a collective, which generally consisted of approximately 200 households each. on, Mao ordered the decentralization of decision making to lower level units of the bureaucracy in order to

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23 prevent the abuse of power within the state bureaucracy. Gradually, economic planning authority was ceded to local governments and eventually direct ly to the collectives. The policy based upon the wishes of the peasants and workers. They were allowed to experiment with local policy and adjust it as results varied (Ji 2003, 250). of private enterprises. In some cases the firms were converted to join t state private firms in which the private investors were allowed to retain increasingly smaller percentages of the profits until the practice was entirely scrapped during the Cultural Revolution. Mao also encouraged the gradual devolution of authority ov er minor, less important state owned enterprises to the provincial, prefectural and county levels, while larger, more essential industries and firms remained under the control of the central planners (Frazier 2002, 130). Local governments were given nomina l planning control over enterprises within their jurisdiction. The central government retained a great deal of control over the revenues and expenditures of the state. Revenues including taxes, grain procurement, and the profits of state owned enterprise then allocated to various the various ministries and provinces or local governments. The Great Leap Forward In 1957, in a bid to accelerate lagging agricultural and industrial growth and encourage self sufficiency, Mao and the Party began instituting a series of reforms that

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24 eventually became collectively known as the Great Leap Forward. These reforms were some of the earliest pushes for decentralization of authority in nearly all areas of governance, but particularly in economics. Mao envisioned a program of mass movement and rural mobilization using labor intensive methods, in which the entire country came together to rocket the country to higher yields and higher production. The politica l fervor that followed created an unorganized attempt by all levels of government and production to rapidly increase production in both agriculture and heavy and light industry. However, the leadership still did not allocate the appropriate level of inputs for the agricultural sector necessary to increase harvests instead anticipating that the use of the rural unemployed could be used to produce these inputs. The collectivization process was accelerated even more with the creation of ich each consisted of about 5,000 households plus the relevant economic, social and political aspects of rural life. They soon took over the economic and agricultural planning o f capital construction, farming activities, education, healthcare, and the small scale rural industry that was expected to be a substitute for the additional agricultural capital from the center. One of the best known examples of this rural industry was th e backyard steel furnaces prevalent across the country during the Great Leap Forward, another labor intensive process in which the underemployed rural citizens would attempt to produce additional steel to supplement the local income. Sadly, the quality of the materials that were produced in these steel furnaces was very low; manufactured at low temperatures it tended to buckle and crack when exposed to pressure or low temperatures

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25 combined forces in or der to complete massive irrigation and water routing projects in order to increase agricultural output. However, projects had very limited success due to the lack of professional engineers and organizers. Much of the process was unsuccessful and wasted a l arge amount of resources while making no headway in improving outputs. Much of the capital available was still pumped into the industrial sector, which did see high rates of growth for a short time, increasing from 14% in 1957 to 29% from 1958 to 1959; it fell drastically to 19% in 1961. Due to mismanagement and false reporting of capacity and yields at both the commune and central level, as well as the tendency to prefer industrial use of transportation infrastructure, agriculture was unable to keep up wi th the increased growth of industry. This imbalance combined with the pressures upon lower level cadres within the communes to report increasingly higher agricultural output levels and thus an increase in the required sales of grain to the state at artific ially depressed prices, led to an extreme famine in the countryside in which between 17 and 23 million people lost their lives (Hudson 1997, 8). After the 1959 collapse of agricultural production, much of the responsibility for production was handed to ind ividual households, while authority over industry was gradually recentralized, inefficient local enterprises were shut down, and productive enterprises were consolidated. Moderate factions in Beijing began to rein in more radical policies and abolished the extreme output goals. The retrenchment and recentralization that occurred during the 1961 of favor, reintroduced material incentives, placed greater emphasis upon building the agricultural sector, f ollowed by light industry and then heavy industry. While rural industry was scaled back it did not disappear completely; instead the rural enterprises

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26 were developed much more selectively and infrastructure projects were carefully designed and implemented with consideration of the overall regional and national plans. Rural farmers were again granted small garden plots of land on which they could grow crops, and though the communes still existed in a looser sense, the production team became the center of inc ome distribution with farmers receiving material incentives for the work they did. The Cultural Revolution As Mao was forced to take a lesser role within the Party during the recovery period he became frustrated with what he saw as revisionist forces wi thin the government dismantling the work of the Great Leap Forward. He believed that, though the economy national consciousness had yet to be successfully integrated and t hat there remained liberties, traditional culture and capitalist economic policies. With the Cultural he vanguard of the people and restructure Chinese society in such a way that, though still guided by Maoist thought and campaigns issued from the top level of the Party, the people were in control. Those in authority who abused their power were removed thr ough constant struggle and revolution. In reality, the process was used by the majority of people to inflict revenge upon people who once might have wronged them. Unsatisfied with his lessened role in the Party during this time and what he saw as a revisi onist tendency within government Mao began rallying support with the younger,

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27 more radical student groups, which eventually came to be known as the Red Guards. The entire country was encouraged to criticize authority, including the central government. Duri Chunqiao, Yao Wenyuan, and Wang Hongwen) came to the peak of their influence and power, driving the Red Guard and the student movement into even greater fervor, which led to even greater upheaval across the country. Students were encouraged to criticize their teachers, children to denounce their parents, workers to denounce their managers and all were encou raged to attack their political leaders within the Party. It was during the Cultural Revolution that Deng Xiaoping, the future leader and reformer of the PRC, was expelled from the Party twice (Saich 2004, 51). Intellectuals and scholars were first encoura ged to and then forced to spend months or years in the countryside in order to experience physical labor and study socialism. As the Cultural Revolution spread and became more fervent, much of the country came to a standstill. Officials were too paranoid to make any policy decisions that might subordinates were encouraged to confront and abuse their superiors. As universities were shut down and intellectuals, professors, and hig h countryside for re education, innovation and invention slowed and would continue to do so until after the recovery of the late 1970s. Foreign trade came to an almost complete standstill with xenophobia running ram pant throughout the country. Thus, while industry and agriculture retained good outputs and did continue to grow, the severe lack of innovation, experimentation, and new technological inputs led to a China that lagged behind (Hudson 1997, 10).

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28 Eventually Mao, realizing that the Cultural Revolution had moved beyond his help rebuild the party. It was during the period of party rebuilding in 1975, that Premier Zhou Enlai defense and science and technology. The Death of Mao and Recovery ath in September of 1976 that the more moderate leaders of the Party were able to take control. Despite a short period of struggle between Hua Guofeng, the Gang of Four, and Deng Xiaoping over leadership, Deng began to consolidate power within the party an resignation in 1981. Following the arrest of the Gang of Four in 1976, their sentencing in took charge of the PRC (Saich, 2004 55). He had essentially gained control over the Party and the country by 1978, but Hua held his positions until 1981. The Deng Reforms of 1978 The decisions made at the Third Plenum of the Eleventh Central Committee in December 1978 were the beginning of economic reform in the PRC. Three key resolutions of the Third Plenum had lasting impacts upon the future of economic reform in the PRC. First, economic modernization became central to all Party work, while

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29 years was also denounced and economic liberalization praised. Finally the Plenum set the foundation for futur e policy that gradually introduced greater influence of market mechanisms within the economy (Saich 2004, 59). The result of the Plenum was a general consensus that China must gradually, but fundamentally, reform the economy through marketization and liber alization of economic policies. After the Third Plenum, reform expanded rapidly in every area of the economy with the center gradually releasing control over prices, taxes, foreign investment, imports, exports, and other areas over the next ten years. Much of the reform came gradually, beginning in certain areas, or at a certain level and then expanding outwards to encompass the entire country. One of the largest changes made to the economic system was the fiscal decentralization of power to the provinces i n the form of revenue sharing contracts 8 In revenue sharing each province would negotiate with the center for preferential tax policies. They were allowed to keep a certain percentage of their revenues whil e remitting the rest to the center; each level of government thus had its own tax base and its own expenditures. Such a scheme made it beneficial for provincial and local governments to generate more overall revenue in order for their actual budget to be h igher. With increased revenue the provincial governments also inherited new expenditures. The central government stopped providing services such as education, public works, and food subsidies, and financing these services gave the provinces greater control over the implementation of policies in those areas (Shirk 1993, 151). They were no longer given mandatory spending targets from the center and thus had more control over how they spent money. Provinces were also given the authority to 8 fen zao chi fan

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30 delegate those tasks to even lower levels of government as they so chose. In turn, provinces were now required to balance their own budgets, matching their expenditures to their revenues with no possibility of bailouts from the center (Roland and Qian 1996, 11). The new polic y gave provincial governments a level of fiscal autonomy while giving provincial governments to develop their own local economies and to support the central push for greater li beralization of economic policies in the regions. government even during the Mao era to build support for central initiatives and to garner individual support among officials (Shi rk 1993, 149). In allowing provinces to gain more fiscal autonomy and inviting them to become part of the discussion at the center, central officials, including Deng Xiaoping who made great use of the tactic, were able to ease the way for reforms and polic ies that might otherwise encounter resistance such as further liberalization and decentralization to lower level governments which might have been opposed by provincial governments attempting to hold onto their power. The result was a tax system that var ied greatly across the country with some provinces negotiating extremely generous agreements and others extremely restrictive agreements with the center all of which changed periodically as agreements were negotiated every five years. The difference in pro vincial tax agreements led to a tension between the provinces and increasingly divisive regionalism (Shirk 1993, 170). So, while revenue sharing schemes did create more responsibility in lower levels of government, they also gave those governments leverage over the center and the ability to resist certain policy changes or attempts at retrenchment.

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31 There were, however, issues with the revenue sharing schemes at the center. Despite the assertion that the schemes would make provinces more self reliant and fi nancially independent, bailouts and subsidies did still occur (Shirk 1993, 171). In order to keep provincial level officials supportive of central policies and politicians, the center had to guarantee that provincial budgets were not worse off than the yea r before. Provincial governments, while they gained more autonomy, also continued to expect the requirements. So, although revenue sharing schemes were a very potent pol itical tool, at the end of the day the central government budget was often too small to complete all of the infrastructure projects and meet all of the expected subsidy agreements that it had promised. In order to supplement the central budget, state offi cials used a few creative methods of augmenting their resources. Although authority over the majority of state owned enterprises had been devolved to provincial and local governments, the center appropriated the revenue of some of the more profitable indus tries including automobiles, tobacco, petrochemicals and shipping and organized them into large state corporations in 1983. These enterprises, along with those under the Ministries of Petroleum, Coal and Electric power, came under the control of the center in order to guarantee higher revenue for the central government (Wong 1991, 701). At other times, the center instituted universal ad hoc extractions from the provinces to cover temporary shortfalls in the central budget. In essence the provinces were forc ed to bail out the center; sometimes it was called a loan, other times it came in the form of a tax on local

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32 local governments, enterprises and individuals (Shirk 1993, 1 73). One final form of building the central budget came with the further delegation of responsibilities to the provinces including all responsibility for price subsidies, education, housing, public health costs and other public goods provisions. Such re venue sharing schemes were at the same time extended to state owned enterprises as well. By 1981, 80% of state owned enterprises (SOEs) were participating in revenue sharing experiments which gave them greater autonomy, though it was not until 1987 that po licies were fully expanded to all state owned enterprises. In the early 1980s, SOEs were allowed to retain some of their profits beyond the required remittance to the government in much the same ways as the provinces and local governments. They were also a llowed to sell at market price any extra output above the quota of goods that they were required to sell to the state at artificially depressed prices. The retained profit could then be invested with relative autonomy. Gradually SOEs gained more autonomy i involvement in enterprises was slowly eroded (Chow 2002, 49). In agriculture, the contract responsibility system also grew out of the decisions made at the Third Ple num. Under this scheme farmers were required to meet certain quotas and were compensated the accordingly for meeting it.. The system greatly decreased agricultural quotas and allowed farmers within communes who produced over those quotas to sell the excess product at market prices. The process actually began as a grassroots movement that was later picked up by the central leadership, only officially entering into policy in late 1979 with the Fourth Plenum. Officially the communes still existed, but much of the control was relegated to the individual households. This policy

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33 led to one of the largest increases in living standards for rural peasants and farmers up until that point. Special Forms of Administrative Decentralization As reforms continued many Party leaders began to see the need for greater interaction with foreign countries and the importance of foreign capital in developing the ushered in many reforms that allowed for greater international trade and foreign direct investment to enter China. One of the most well known policy decisions to come out of 9 was the creation of Special Economic Zones (SEZs). This policy was followed by the designation of other forms of special status with respect to investment and trade. Special Economic Zones In July of 1979 the Central Committee gave Fujian and Guangdong provinces enormous pow ers over economic and foreign trade decisions with the approval of document 79.50. The document also created two SEZs in Shenzhen and Zhuhai in Guangdong. In May of 1980 the Central Committee created two more SEZs, Xiamen in Fujian and Shantou in Guangdong Fujian and Guangdong were the recipients of a high level of economic autonomy due to their strategic positions near Taiwan and Hong Kong, respectively. Both regions were critically underdeveloped prior to the reform era in order 9 ga i ge kai fang

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34 10 In 1988 Hainan Island was designated as the fifth SEZ. overall economy, which allowed for greater experimentation without the concern that poli cy failures might have a negative impact upon the national economy. This insulation in regions and rural areas that would have the least effect on important sectors of the economy, and only after a successful run in the more remote regions were they allowed to expand to other regions with a greater impact on the national economy. policies and flex experimental economic policies and development strategies within their jurisdictions (Reardon 2002, 205). The provinces were given the task of reopening and increasing trade with Macao, Hong Kong, Taiwan, and other foreign markets with an emphasis on exporting goods that would bring high levels of foreign capital and increase employment. A strong emphasis was placed upon attracting foreign capital, particularly from the millions of Chinese loc ated in Hong Kong, Taiwan and Macao. Guangdong has very close ties with Hong Kong and Macao as millions of Cantonese migrated to those areas and still kept in contact with their relatives on the mainland. Fujian was an important link to Taiwan and millions of Fukienese Chinese, who migrated to Taiwan with the defeat of 10 The policies during that time caused an even greater disparity among urban, rural and coastal areas, since the central government was concentrating on key urban areas while neglecting infrastructure in areas considered at high risk for invasion, both in t erms of capitalism and military. The coastal regions were also dependent on their proximity to Taiwan and Hong Kong before the reform period. Since the central government expended very little on local infrastructure, local residents depended on their relat ionships with traders and residents of Taiwan to procure food and products to survive (Hsiao 2003, 137).

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35 the Guomingdang and their subsequent flight across the Strait. The two provinces were encouraged to utilize their connections with overseas Chinese to develop the regional economy. Fujian cre ated ten different Taiwanese investment zones that offered preferential policies to only Taiwanese investors (Hsiao 2003, 140). The local governments of the SEZs were given unprecedented authority to entice foreign investment; officials were granted the ability to offer preferential tax treatments, discounted land use fees, and favorable labor policies. Joint ventures between Chinese companies with foreign stock holders were particularly encouraged and were greatly helped along by the Joint Ventures l aw of 1979, 11 which officially opened China up to foreign direct investment (Yabuki 1995, 246). In early 1984, Deng Xiaoping visited Shenzhen, Zhuhai, and Xiamen Special Economic Zones in a bid gain support from the provinces and local governments and to re inforce his own support for the economic liberalization that was occurring throughout the country. He wrote that the development (Yabuki 1995, 244). His support emboldened local officials and signaled to those in favor of retrenchment of decentralization that he intended to continue reform at an even stronger pace. Open Coastal Cities Fol subsequent speeches including one to the leading cadres of the Party in which he mentioned the opening of certain port cities the State Council began the process of 11

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36 opening fourteen coast al cities to foreign investment and trade (Yabuki 1995, 245). These cities were: Dalian, Qinghuangdao, Tianjin, Yantai, Qingdao, Lianynggang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. Open Coastal Cities were granted ab ilities similar to those of Special Economic Zones, but with less authority. They were encouraged to entice foreign capital and trade, build infrastructure and create a more hospitable environment for foreign investment but were expected to place more emph asis on drawing foreign technology to China and to undertake technological reform in order to expand the existing enterprises. They were to be first and foremost the window through which China filtered and absorbed foreign technology and to concentrate on encouraging joint venture and entirely foreign enterprises (Shirk 1993, 48). This status would eventually evolve, after the proper period of infrastructure building and the development of existing enterprises; however, the emphasis within Open Coastal Citi es was placed squarely on technological procurement and enhancement. Line item Cities placed economic authority in the hands of lower levels of government. 12 It essent ially gave some cities provincial level economic power over industrial enterprises. The city governments had long complained of their subordinate position to the provincial government, while enterprises were often caught between the expectations of the cen ter, in affairs (Zhan 2009, 397). It began with an experiment in Chongqing, Sichuan, the home 12 Jihua danlie

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37 province of key economic planner Zhao Ziyang, in a bid to soothe the egos of pr ovincial government leaders who did not want to give up control, and spread during the period of 1983 to 1987 to eight other cities: Wuhan, Shenyang, Dalian, Guangzhou, Xian, Harbin, Qingdao, and Ningbo. By 1991 there were 14 central cities with provincia l level designations, adding Xiamen, Shenzhen, Nanjing, Chengdu, and Changchun to the list. Central cities were not granted the entire range of provincial authority for example their personnel decisions were still made at the provincial Party level but the y did gain greater financial control and were accorded official status under the national plan and budget. Pressure from other cities, jealous of the authority gained by central cities, led to an even greater push of decentralization to the city level in t he early 1990s. Price Reforms A large part of the economic reform process in 1984 was price reform and deregulation. The overall consensus was that it was necessary to deregulate the national prices and allow them to be influenced by market mechanisms; however, it was also agreed that price reform must, like most economic reform in the PRC, be a gradual process that was carefully planned and executed. A compromise was reached, called the two tier price system, in which one set of prices remained set by the government and another was se t by the market. State enterprises were still able to purchase the allotted amount of inputs and had to sell the allotted amount of outputs at the price administered by the government, but they could also buy extra materials and sell the excess products at their market prices. This policy was already somewhat in place on agricultural products in village marketplaces, but became national policy in 1984. The policy gradually

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38 evolved throughout the 1980s and 1990s. While the overall policy was outlined at the center, much of the actual implementation fell to the provinces, which had been given responsibility for the subsidies that kept many of the products at artificially low price levels. Their continued control over the subsidies and thus regional prices regi onally gave provinces some freedom to protect local economic prosperity during the retrenchment in the late 1980s and early 1990s. The price of staples was slowly increased over time, and by the mid 1990s the majority of products in China were sold at mark et price. Retrenchment and the Tiananmen Square Incident The negative effects of decentralization were felt across the country, and a conservative backlash against the liberalization had been brewing throughout the late 1980s. Reform and liberalization particularly in 1987 and 1988. Urban youth, especially university students, also began to notice the higher instance of corruption among local officials and were increasingly place as the moral authority in China. Calls for greater liberalization and reform were joined by calls for democracy and individual rights. Agitation continued to build as the students garnered increasing support from urban residents. Student demonstrati ons were widespread, with Tiananmen Square in Beijing as a focal point. As tensions mounted the central government was slow to react, though a hard line was taken officially and in the news. The return of Zhao Ziyang in 1989 from a trip abroad brought some moderation, but with his dismissal on May 19 th the door was left open for the more conservative factions to implement a tough response. On May 20 th the PRC declared martial law and on the night of June 3 rd PLA troops were ordered to

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39 enter Tiananmen Square in order to remove all protesters from the square. They did so using tanks and guns, which resulted in hundreds of deaths and injuries. 13 partners and led to a sudden drop in for eign direct investment. Many OECD countries immediately condemned the repressive actions of the PRC. Several countries completely froze relations with China during this time, and many Western countries called for economic sanctions to be brought against th e PRC. The incident completely changed the international image China had been carefully cultivating since the end of the Mao era. For economic policy, the result of the Tiananmen Square incident was a sudden freeze in decentralization and liberalization and a period of austerity in which the central government attempted to recentralize control over the country. Party conservatives be gan to take over economic control as Zhao Ziyang and many other key reformers were purged the Communist Party, and Marxism) with his economic policies and his conciliatory stance toward the student movements. Economic hardliners such as Premier Li Peng took the initiative to bring about an even deeper period of austerity and recentralization. They attempted to strengthen the role of economic planning and gave preference to state enterprises in material procurement and access to credit (Lieberthal 2004, 143). While some of the conservative policies were relatively successful, the overall effec which did take care of the high inflation created by the overheated economy. Conservative attempts to recentralize fiscal authority were politically unfeasible and were immediately and 13 There is still conjecture from all directions as to the actual number of casualties

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40 intensely fought by the provincial and local governments, who pointed to their high expenditure responsibilities, many of which were required by the central government. Lower level governments also defended enterprises under their authority from the discriminatory c redit practices that were to favor centrally controlled industries and enterprises. Resistance was particularly strong in the coastal provinces, and many observers placed the governor of Guangdong at the center of the resistance movement. While the conserv atives did successfully divert credit and lending to their own enterprises periodically in 1989, by 1990 lending had returned to more normal distributions (Qian and Weingast 1996, 21). Conservatives were also unsuccessful in reining in reform at and below the provincial level. For example, while conservatives at the center were attempting to maintain the dual price system, Guangdong went through with marketization of prices on some products and materials and was quickly followed by the majority of other pro vinces. 14 It was at this point that many conservatives, including Li Peng, began to distance themselves from the conservative position, endorsing the coastal development plan and reform. 15 Revival of Reforms f South China to endorse reform 1995, 274). The state planning system was heavily scaled back. By 1993 only 18 crucial 14 Some of the materials and products that had their prices liberalized were even technically considered under the pu rview of the center, such as grain, but Guangdong continued with the reforms despite central objections. 15 The costal development plan was most strongly propagated by Zhao Ziyang and Deng Xiaoping, who had both come under direct and indirect criticism for it during the height of conservative power.

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41 producer goods were still considered to be included under state allocation or compulsory to the market (Naughton 1995, 290). At the same time the center made decisive strides to remove restrictions on private ownership and even the playing field for such ventures. In 1993 the State Administration of Industry and Commerce decreed that private b usinesses were allowed to participate in very nearly all types of industry and commerce, save for a few specific tasks. The overall reform strategy resulted in an increasingly streamlined and standardized approach to the economy, which was most exemplified by the new tax system that was instituted in 1994. The Tax Assignment System of 1994 The tax assignment system, which replaced the revenue contracting system, has been one of the most comprehensive attempts to standardize government revenue and expendit ure to date. The goals of the reform were to simplify and rationalize the current tax structure, raise the revenue to GDP ratio, raise the central to total revenue ratio, and make the structure of revenue sharing between the central and local levels more t ransparent and objective (Su and Zhao 2000, 2) The system essentially assigns certain types of taxes to each level of government and delineates expenditure to the corresponding level of government. For example, the central government is responsible for e xpenditures in national defense and diplomacy and thus collects taxes in the form of tariffs and income taxes of centrally controlled SOEs. Sub national units (which include provinces, counties, municipalities, cities and villages) on the other hand, are r esponsible for local capital construction and price subsidies and thus collect taxes in the form of

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42 business taxes, personal income taxes, and home property taxes. In addition to the separate collections of taxes, a category of taxes including value added taxes, stamp taxes on security exchange, and natural resource taxes are considered shared taxes and are distributed among the different levels of government at ratios depending upon the individual tax characteristics. The tax system would no longer result from an individualistic patchwork system of negotiated arrangements between center and local governments, but a standardized program would be the same for everyone. This new system changed the relationship between the center and the localities; the origina l plan had the center in control of 60 % of the budget, as opposed to only 40 percent under the contracting system. Of course, local interests became stronger politically and achieved greater control over the creation and implementation of economic polic y. As a result, the central government had greater trouble gaining the support of local governments for national policy. Coastal provinces, which benefited from the revenue sharing system by negotiating significantly better agreements with the center than the interior and central provinces, were particularly vehement in their opposition to the new budget system and took an ideologically critical stance against Li Peng, who first introduced the plan in 1989. They painted Li, Vice Premier Zhu Rongji and Presi dent Jiang Zemin as conservative anti reformers intent upon reversing economic decentralization, which was dest voices against the reform, and for a time he was successful in completely blocking the change, but he was eventually removed from his position and replaced with a more accepting official.

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43 Central and inland provinces, however, were more easily swayed by the central upon subsidies from the central government. On the whole, inland provinces would not see much change in their remittance of taxes to the center, and would most likely see an increase in subsidies from the center. In order to appease the local governments, the center included a tax revenue rebate system that allowed f or transfers of funds back to the local governments in order to maintain local budgets. The center even guaranteed that for the first three years of the plan it would reimburse any shortfall that might occur in local expenditures due to the new reforms. Th budgets, while still locating control of those funds within the central bureaucracy (Zhao and Zhang 1999, 254). Tax bureaus in the provinces were separated to differentiate among ce ntral, provincial, and local tax collection, creating further delineation and transparency among the levels. In order to gain support from the SOEs, the central government implemented an overall tax cut from 55 percent to 33 percent for all enterprise type s including foreign invested, domestic, and state owned. Despite fears that the reform would pull power away from the local governments, it actually added concrete independence to their finances. The tax assignment system added items to local taxes and gu aranteed local governments the ability to spend those taxes on locally decided purposes while retaining at least the same level of revenue as they had in 1993. In reality, local governments as a whole became more self sufficient, and the reform encouraged them to expand their own tax collection. Between 1995 and

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44 1997, central revenue grew by 13.3% while provincial revenue expanded by 24.1% (Kim 2004, 199). From the initial introduction of the scheme in 1989 to its full implementation in 1994, there was a c onstant dialogue between the center and the localities; negotiation and consensus building became a large part of the process in an effort to ensure that the reform did not make anyone considerably worse off. The center did gain a larger budget, but the lo calities gained the legal foundation for their revenue sources. The Importance of Extra budgetary Revenue One of the tools used by local governments to ensure that they are able to meet their expenditure liabilities is extra budgetary revenue. This reven ue is outside the national budgetary system and generally outside of the purview of fiscal monitoring by central institutions, making such ventures extremely helpful for lower level governments seeking the independence to shape economic development. Since most local governments do not have the authority to raise or impose new taxes, they levy non tax charges on residents in order to generate revenue outside of the national fiscal system. Those fees are usually implemented by i nformal bodies or agencies. The practice was first seen in the early 1980s but became far more widely used after the implementation of the tax assignment system in 1994. Currently, extra budgetary revenue makes up almost one fifth of the revenue of the PRC (Zhan 2009, 2). Extra budgetary revenue not only expands the overall budget of local governments, but also gives them greater discretion in their spending. While they might use all funds in the official budget to complete projects and services required b y the center, they are able to use extra budgetary funds collected through these informal

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45 practices to expand upon local initiatives. It is a much less transparent system that can certainly lead to abuse and corruption, but is a tool used widely to give lo cal governments more room to develop their economies. For example, in 1996 township village enterprises (TVEs) were responsible for 204 types of fees paid to 60 government entities (Lin 2005, 93). Some regulation has been put in place, such as the efforts by Zhu Rongji at the 1998 practice, it still continues. The New Millennium, the World Trade Organization and Beyond After the late 1990s, reform slowed, more radical policies were dampened by interests in the central and local governments, and ministries and localities continued to act in their own economic interests. The political power of the center is not as clear cut as it once was; the support networks and relationships built by politicians at the center had begun pushing back in the early 1990s, forcing central leaders to consider their obligations to interests and officials at the lower levels. Local government fear of unemployment especially after to the Asian financial crisis in 1997 held back much of the reform of SOEs, and was exacerbated by accession to World Trade Organization (WTO) in 2001. 16 Jiang Zemin, knowing the volatility of the issue, sidestepped the normal decision making process, and most of the reforms required for compliance with WTO guidelines were decided in closed door sessions of top leaders in order to avoid widespread debate and upheaval. The planned and gradual opening of China to foreign 16 The assumption was that once China joined the WTO it would be forced to accept more competitive and efficient foreign companies into the local markets, which could put local enterprises out of business and th us increase unemployment.

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46 companies with the gradual elimination of tar iffs and removal of discriminatory practices across the country made China more appealing to foreign companies, which the leadership hoped would promote greater competition between their own firms and foreign owned enterprises and thus a higher rate of gro As Hu Jintao assumed the positions of General Secretary and president in 2003 Hu and Wen were marketed as men concerned with the plight of the poor, w hile former elites. The administration has, however, been proactive in meeting the conditions negotiated in 1999 with the Sino US Trade Accord, which outlined a plan of action for necessary to meet its timeline of requirements for membership in the WTO. 17 The key ize trade with the other members of the WTO. Gradually central leaders have given domestic and foreign firms equal standing in domestic markets. The average tariff level was reduced from 15.3% to 9.8% between 2001 and 2006; and non tariff barriers to trade were abolished by 2005. In many cases, China has gone beyond its responsibilities to the WTO in liberalizing its domestic markets, particularly in terms of service markets such as banking and finance. The banking sector has been opened up to foreign compa nies as Chinese (RMB) currency services were opened to all foreign banks, and foreign entities are allowed to buy up to 25% of shares in both private and state owned Chinese commercial banks (Zhao and Wang 2009, 186). 17 While China joined the WTO in 2001, it is still required to make adjustments to its laws and policies in order to fully meet its obligations.

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47 Conclusions cycle has periodically decentralized and recentralized varying degrees of economic authority from the center to the local governments. The not just because of offici al policies. As evidence has suggested, local governments utilize every opportunity and tool to pursue their own economic goals. The Guangdong provincial government, which is well known within China for pushing the limits of its official authority, has a s (Hsing 1988, 125). Through such things as extra budgetary revenues, lobbying at the central level, and flat out ignoring central policies, local governments have gained greater autonomy over time. But how much autonomy they actually have is not always clear from just reading the laws and statutes. It is important to look beyond city designations and positio ns within the national budget as a Special Economic Zone or Open Coastal City, or just a normal city, or a province with a special economic mandate. The actual ability of a local government to make economic decisions is not entirely contained by central go vernment decisions. Examining the policies in put in place by local governments and the implementation of those policies is just as important in determining the full extent of local economic authority.

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48 Chapter II Administrative Hierarchy : Three City Types A city in China is not the same as a city in the Western world. Cities consist of an urban center and the suburban and rural areas that surround it these include smaller cities, townships and villages. The urban city government has juri sdiction over all of the lower level governments in its jurisdiction (Chung 2004, 952). There are four different city types: province level, sub provincial level, prefecture level, and county level. Province level cities of which there are only four: Beiji ng Tianjin, Chongqing and Shanghai have the same abilities as a provincial government and are directly administered by the central government. 18 Sub provincial cities which are also c alle d line item cities, are administered by the province, but their munic ipal governments have the same independent power as the province in economic planning and administration. There are fifteen sub provincial cities, one of which is Xiamen. All sub provincial cities are prefecture level cities that have been granted a higher status than their peers (Shen 18 Province level cities are also called direct controlled municipalities.

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49 2007, 310). Prefecture level cities are much more common and make up the majority of large cities in China. They control smaller cities and counties under their jurisdiction, as well as any townships or villages that fall wit hin their territory. County level cities fall under the control of their respective prefecture level cities, but do maintain some autonomy in respect to their economic decisions and help administer villages and townships (see Figure 2.1 for a diagram of ci ty levels). 19 In addition to these levels, several dozen cities were given other designations such as special economic zones, coastal open cities, riverine open cities, open border cities, and line item cities (Chung 2004, 947). All of these designations ha ve different effects on the economic authority of city governments. Figure 2.1: Chinese City Hierarchy 19 There are also county level governments that are not designated as cities, because they are below population and revenue requirements set by the center to delineate different levels of government. Most of these county level governments are gradually disappearing as the territory either incorporates itself into a county level city or is annexed by a prefecture level city. Central Government Provincal level City County level City County level Government Provincial Government Subprovincial (line item) City County level City County level Government Prefecture Level City County level City County level Government

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50 Fujian Province Located on the southeastern coast of the People's Republic of China, directly across the strait from Taiwan, Fujian Province has maintained its status as an important link between China and the rest of the world (see Figure 2.2 for a map of China and the l ocation of Fujian). The province has historically been isolated from the rest of the mainland by extensive mountain ranges, has little arable land, and has a coastline second in length only to Guangdong, which forced the province to face outwards in order to survive. Indeed the city of Quanzhou's port was one of the first ports in China to open to foreign trade, and Fuzhou and Xiamen became two of China's five treaty ports in the 1842 signing of the Treaty of Nanjing (Shieh 1998, 304). Fujian's proximity to Taiwan has made the province a key location in the tense political and economic relations between China and Taiwan. However, Fujian's connection to Taiwan is more than just proximity; until 1887 Taiwan was a prefecture under the control of the Fujian pr ovincial government and thus migration from Fujian to Taiwan was common. After the defeat of the Guomindang in this area by the Communists in 1950, hundreds of thousands of refugees fled for Taiwan (Long 1994, 204). 20 Fujian's proximity to Taiwan was not, h owever, necessarily a positive attribute during Mao's rule of China. The province became a defensive front against the exiled government of Republic of China and its Western allies, receiving only 1.5 percent of the country's total capital investment betwe en 1949 and 1978 (Shieh 1998, 305). As a result, 20

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51 Figure 2.2: Map of China Source: Clemson University East Asian Studies. http://www.clemson.edu/EAS/china_map.htm (Accessed April 6, 2009) Xiamen an d Fuzhou city labels added by the author. Fujian province remained impoverished and backwards until the national reform efforts of the 1980s. In 1979 the Central Committee and the State Council of the People's Republic of China, through C provinces greater autonomy in economic decision making and explicitly authorized the creation of four Spe cial Economic Zones, including one in Xiamen, Fujian. The special policies granted the provinces the economic authority to exploit their traditional strengths

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52 in foreign trade and investment, encouraged the reunification of the mainland with Taiwan, Hong K ong, and Macau, and allowed the center and the province to experiment with more radical policies without a high risk of upsetting the national economy should they fail (Sheih 2000, 93). In this case Fujian's isolation and backwardness was an advantage; bei ng a coastal province with few ties to the national economy it was the ideal place to begin experimenting with more liberal economic policies. Xiamen Special Economic Zone The island city of Xiamen, located on the southwest coast of Fujian Province, has a long history of utilizing its coastal location to its economic and political advantage. Much like the rest of Fujian, Xiamen has been greatly dependent upon international t rading and overseas relations for most of its livelihood, using its access to the ocean as an outlet for trade and cultural exchange both regionally and internationally for centuries before China became the economic powerhouse it is today (Qi 2001, 43). Facing Outward With the signing of the Treaty of Nanjing in 1842, Xiamen became one of continued to develop its infrastructure and manufacturing capabilities as gre ater foreign investment flowed in and foreign companies took advantage of lower labor and production costs. The island of Xiamen was finally connected to the mainland by a long

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53 causeway in 1955, 21 and by 1957 it was linked into the national railroad system with the completion of the Ying Xia railroad, creating even more opportunities for infrastructural improvements (Howell 1999, 144). In the early 1960s, Mao, fearing the proximity of Taiwan and an American invasion, began the process of securing the coastal areas and the capital while moving industrial capacity away from the coasts literally ordering the transfer of entire factories to the inner provinces. The lack of central funding left the coastal regions to serve as a first line of defense against foreig n threats and in the process removed vital investment It was not until 1979 that Xiamen received positive attention from the central government. When the Fujian provincial government was granted its special policies and flexible measures, officials immediately began looking for ways to encourage reform and development throughout the province. In 1981 Xiamen became the fourth Special Economic Zone (SEZ), joining the ranks of Shekou, Shenzhen and Zhuhai, and followed Langqi, an island near the provincial capital of Fuzhou. Not only would establishment of the SEZ in Langqi give the area greater domestic prestige and international exposure, but it would also allow the provincial government to exert more control over the actions of the local government. However, the central government saw the extensive infrastructural development necessary in Lang qi a rural underdeveloped village as counter productive. Instead officials saw Xiamen which already had a developed, if neglected, city center with the capability to expand its industrial areas as a more viable option. The 21 Ying Xia railroad is a line between Xiamen and Yingtan, Jiangxi Province, which branches out into the rest of the national system.

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54 rivalry between the provincial go vernment in Fuzhou and the Xiamen municipal government would continue to be a problem for the new SEZ as it began the process of reforming and opening up the city to greater development opportunities (Shieh 2000, 98). Official Autonomy As an SEZ, Xiamen is able to take advantage of relatively liberal economic policies as well as a higher level of official economic autonomy. The authority conferred upon SEZs has expanded and contracted over time depending upon the political currents at th e central and provincial level. However, despite periods of austerity in the past, Xiamen has gained a great deal of economic autonomy since the beginning of the national reform process in 1979. Xiamen Municipality consists of many different districts and towns, Xiamen Island was chosen as the first location for the SEZ and special policies. The policies and an SEZ. New types of zones were opened throughout Xiamen Mun icipality (see Figure only consisted of the 2.5 square kilometers of the Huli district, but in 1985, following a proposal by Deng Xiaoping, the State Council approved a plan to allow the zone to be expanded to the entire Xiamen island, a total of 131 square kilometers. At the same time, Xiamen was given specific rights to introduce free port policies on the island, but it was not until 1988 that the municipal government was a ble to establish its own free port area in Xinglin district (now Jimei District). The hope was that the new policies, which loosened restrictions and removed taxes on the movement of goods, people, and currency

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55 Figure 2.3: Administrative Divisions of Xiam en Source: China Maps. < http://www.chinamaps.info/images/City/Map%20of%20Xiamen%20City.jpg > (Accessed April 6, 2009). English district labels added by author. in the SEZ, would improve the climate for greater economic integration with Taiwan (Brogan 1988, 91). In 1996 Xiamen was extended an even greater special ability as direct shipping was opened between Xiamen and Kaohsiung, Taiwan, allowing Xiamen to

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56 monitor one of only two points of direct entry of Taiwanese goods and investment on the mainland. 22 econom Xiamen and Taiwan, giving local officials tacit approval for greater opening of the SEZ to Taiwanese investment and development of Taiwan Investment Zones. 23 Within the Taiwan ese Investment Zones, the Xiamen Municipal Government not only is able to take advantage of existing preferential treatments in the SEZ, but also has the authority to extend certain additional investment incentives to prospective Taiwanese investors. These which essentially means giving Taiwanese investors approximately the same benefits as mainland Chinese citizens such as accommodation, commercial housing, and me dical services. None of this policy authority is available to normal cities in China. This change in policy toward Taiwanese investors and the importance the center places upon the reunification of the mainland and Taiwan have become important spurs for Xi relative economic autonomy. Xiamen has been committed by the central, provincial, and 94). The authority granted to Xiamen, as well as its many different forms of special zones, not only creates an enticing area in which to invest, but also presents a positive environment for encounters between Taiwan and mainland China. 22 Before this decision most Taiwanese goods were shipped through Hong Kong in order to circumvent policies on both sides of the Strait discouraging direct freight and investment on the mainland. The Taiwanese government was particularly concerned with the wholesale transplantation of industry to the mainland. The second location that was allowed to accept direct freight from Taiwan was Fuzhou, which will be examined in the next case study. 23 Between 1989 and 1992 Xiamen received approval for three different Taiwanese Investment Zones Xinglin, Haicang, and Jimei. Xinglin was recently absorbed into Jimei district.

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57 FDI Approval Special Economic Zones have much greater control over administration of interna tional economic activities. Xiamen was originally given the ability to approve light industry projects with investment under RMB 30 million, and heavy industry projects with investment under RMB 50 million (Shen and Yeung 2002, 4). In 2009 the central gove rnment further relaxed the limitations on FDI approval at the provincial and sub provincial city levels, and granted the SEZs the authority to approve any foreign investment projects valued under US $100 million (Jiang 2009). 24 The ability to approve projec ts at the municipal level removed a great deal of the red tape and bureaucracy that stood between foreign investors and investment projects in Xiamen. Investors were no longer required to go through provincial or central government application processes in order to begin a project. In dealing directly with investors, the municipal government was able to speed up infrastructure and development projects within the city and retain more control over the types of projects instituted in the Zone. Local Budget X iamen not only has the authority to raise funds independently of the central and provincial governments, but is essentially required to be self financing (Yeung and Chu 1995, 11). The provincial government provided only RMB 50 million to the Xiamen SEZ in 1981 for infrastructure development and investment, leaving the municipal government to finance the SEZ through special abilities ceded to it by the central government, including borrowing money from abroad, issuing bonds overseas, and making spot transact ions without the approval of the central and provincial governments. 24 The central government also ceded similar authority to some other sub provincial cities that were not SEZs.

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58 Line Item City In 1988, after a great deal of lobbying on the part of municipal officials, Xiamen the State Council, which placed the Xiamen municipal government at the same level as the provincial government in economic decision making authority. Despite the agreement that Xiamen would become financially independent of the province, Xiamen was forced to continue a previous revenue sharing scheme that required the SEZ to remit a fixed sum of RMB 100 million per year to the province (Shieh 200, 106). In 1995 that amount was increased to RMB 490 million upon insistence that the province depended upon the income generated by the agreement, though shortly thereafter it was decreased to 10% of that rate, or RMB 49 million. It was only in 1994 that negotiations between the provincial and local governments yielded an agreement to end the remittance entirely wit h a one time lump sum payment. Although Xiamen had been given the authority to create separate economic laws for the SEZ during its creation in 1981, local deputies insisted that the local government was still unable to assist foreign investors to solve pr oblems with labor management, contractual protections of investment, and real estate. The issue arose at both the 1988 granted expanded legislative powers, becoming only the s econd city in the nation to receive these powers. The new powers gave Xiamen a significant policy advantage compared to the rest of the SEZs and the open coastal cities, and further loosened provincial control over local economic matters (Howell 1999, 159) Following this decision, the municipal government also gained the ability to approve investment projects over RMB 100 million, giving the city even greater economic autonomy and control over

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59 the economic direction of the city without having to get State Council (the national government cabinet) approval. Preferential Policies or waive some taxes for foreign associated enterprises and investors depending upon the type of enterprise or investment. In SEZs all joint ventures and wholly foreign owned enterprises are assessed an enterprise income tax of only 15%, but the municipal government has the authority to set municipal taxes at rates that encourage foreign investment pr ojects and manufacturing in such areas as export, high technology, construction, and sectors related to local harbor and port construction and rejuvenation. The municipal government generally has the authority to control tax rates within their various spec ial zones, including the Taiwanese Investment Zones, Free Port Zone, and Technology Zones. However, the central government does have the ability to revoke some tax exemptions and rebates, such as in 1995 96 when Beijing, in a move toward 25 began to phase out export tax rebates and the tax exemptions granted on capital and intermediate goods imported by foreign invested enterprises. The change in tax policy affected Xiamen particularly hard as so much of its foreign investment is depende nt upon enterprises with export processing projects importing raw or intermediate materials at a low price, assembling the final product on the mainland, and exporting elsewhere. With the new national restrictions, investors no longer saw their Xiamen manu facturing plants as cost effi cient (Luo 2001, 115). 25 With accession to the WTO the central government came under pressure to place foreign and domestic companies on the same playing field. In some c ases that meant giving domestic enterprises greater freedom and better rates and fee structures; in other cases it meant removing preferential policies for foreign enterprises.

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60 Land Reform Land reform in Xiamen became an important issue in the mid 1980s as FDI began to rise and more enterprises searched for industrial space. After the national government began issuing general regulations for land use in 1988, the Fujian provincial government began promulgating its own policies, such as Rules of the Xiamen Special Economic Zone on Land Management, which outlined the conditions under which enterprises can lease land from the gov ernment. Following each national and provincial policies, Xiamen municipal government was able to form its own, more specific regulations. Xiamen expropriation, development, tr ansfer, and management of land and its resources, and all land transfers go through the Land Management Department at the municipal level ( China Business Law Guide 2005, 89.454). The municipal government can only lease residential land for 70 years and industrial land for 50 years, but does retain the authority to determine the land use fees and adjust them as it sees fit. Control over land use has gradually been co nferred to the municipal level in Xiamen with the city itself administering the entire process and managing the land use throughout the agreed time frame ( China Business Law Guide 2005, 88.101). While labor management issues do fall under the purview of t he Municipal important to the SEZ is the minimum wage, which is controlled by the Municipal Provisions Governing Enterprises in Xiamen Special Economic Zone on Min imum Wages These provisions state that the Municipal Government retains the right to adjust the minimum wage and must publish it in the Xiamen Daily newspaper on July

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61 1 st of every year. The city is able to attract higher quality labor for FIEs, while guar anteeing that residents are compensated appropriately. Pushing Limits and Assuming Authority While China is a unitary government and laws and regulations often require re and the special policies in place give it a rare opportunity to push beyond the limits of its maintained a careful and calculated strategy with the center; while it follow s central guidelines, it also takes broad interpretations of its official authority (Luo 2001, 71). Broad Interpretations The Municipal Government of Xiamen has authority over not only the city surrounding the SEZ but also the internal workings of the Zo ne. While the Zone currently encompasses the 131 square kilometers of Xiamen Island, 26 the Municipal Government actually has jurisdiction over a total of 1,565 square kilometers and has the authority to delegate responsibilities to each area as it so choose s, but maintains exclusive control over the SEZ ( China Business Law Guide 2005, 89.404). Although the original SEZ only consisted of 2.5 square kilometers within Huli district both municipal and provincial officials were persistent in finding ways to expan d the preferential policies of the SEZ. In 1981 local officials preemptively announced that foreign investors would be able to enjoy the preferential policies throughout all of Xiamen Island, not just in Huli district. Later 26 Xiamen Island consists of Huli district (the original boundaries of the SEZ) and Siming District. The rest three were converted into Taiwan Investment Zones between 1989 and 1992).

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62 that same year the First Party Secretary of Xiamen, Lu Zifen, announced that foreign investors could rent land outside of Xiamen Island and still take part in the 15% income tax incentive. Many of the attempts by municipal officials to extend preferential policies outside of the area of the Zone made reference to having better incentives than the neighboring province of Guangdong. Throughout the reform period Xiamen developed a rivalry with Shenzhen SEZ, which became a strong impetus in the expansion of economic decision making powers (H owell 2001, 130). Local Development Plan A large part of the autonomy enjoyed by the Xiamen Municipal Government comes from its ability to design and implement its own economic development plans and infrastructure development. The only requirement is that the local government must be with economic decision making abilities on par with a province, Xiamen has become increasingly independent of the central and provincial g overnment in its investment decisions. While the central and provincial governments both initially intended Xiamen to be a regional center for light industry, the Municipal Government has taken charge of its own initiatives and changed the direction of its development. Officials in Xiamen, noting the complaints of its foreign investors, have, in addition to their investment in the basic infrastructure necessary for industrial growth, such as the harbor, airports, power grid, transport and machinery, made a concerted effort to invest in chemical processing plants. Despite the fact that higher levels of government had no intention of Xiamen becoming a center for chemical processing, the Municipal Government has nonetheless

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63 made it possible using its own invest ment strategies ( China Business Law Guide 2005, 89.152). Extra budgetary Funds The Municipal Government is able to utilize several different means to raise the funds necessary to complete investment projects under their purview: local taxes, profits fro m city owned enterprises or loans from local banks and bank branches. Xiamen was the first city to be allowed to borrow funds from overseas, and it took advantage of that fact in garnering a loan from the World Bank to improve its harbor in the late 1980s. The city also has the ability to independently certify foreign banks within the SEZ and takes pride in the fact that the Xiamen International Bank, the first Chinese foreign joint bank, was established on their territory (Luo 2001, 61). A large part of the infrastructure investment within Xiamen came from the Municipal Government, while only a small part came from the central and provincial governments. The importance of extra budgetary funds in Xiamen Municipality has become even more pronounced since t he new tax system was instituted in 1994, as more of official budgetary revenue has been returned to the control of the central government. The actual amount of extra budgetary funds collected by the Municipal Government is hard to determine, because it is not reported to the center and is entirely under the control of local governments. However, since Xiamen is implicitly expected to use these funds to complete its investment and development plans, there is great incentive in the Municipality to utilize th at source of revenue. Extra budgetary funds tend to be designated specifically for a certain purpose such as harbor or transportation development and upon collection are immediately used in the planned manner.

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64 There are three categories of extra budgetary funds in China: 1) maintenance fees and taxes on public utilities and the income of extra budgetary enterprises owned by local governments, 2) administrative fees and charges on such things as agriculture, rental income on public housing, and market manage ment fees, 3) funds from SOEs (including, after tax profit remittances, depreciation and funds for major repairs). Despite the fact that SOE profits were supposed to remain in the hands of the enterprise to encourage autonomy and maximized efficiency, much of the burden of extra budgetary revenues falls upon the SOEs owned or managed by the local government. One of the largest cases is the corporate taxes placed upon firms in Xiamen until the early 1990s. While foreign firms were only required to pay 15% to the Municipal Government, County Owned Enterprises (COEs) and Township Village Enterprises (TVEs) were required to pay 40% and SOEs an even more exorbitant 55%, plus any applicable regulatory fees. Unsurprisingly extra budgetary revenues often surpass bud getary revenues (Luo 2001, 71). development allows it a great deal of space to control its own finances, there has been somewhat of a backlash from firms over periods of exorbitan t and out of control fees, charges, and local taxes. By 1988 the municipal government and its departments devoted to encouraging local investment and foreign investment had received complaints of excessive fees in various areas of business in the Zone. Loc al authorities began the process of rectifying fee collection and proceeded to cancel six types of fees and reduce rates so that all types of enterprises now pay the same rate. Extra budgetary funds are an extremely useful tool in the arsenal of the local government and Xiamen has been careful

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65 to use extra budgetary funds to its advantage in its investment and development plan, but also maintain a comfortable environment for foreign and domestic investment (Brogan 1988, 77). The Taiwan Factor Xiamen has u sed its historical connection to Taiwan to its advantage in expanding its own economic authority. Between 1989 and 1992 Xiamen received permission to create and manage three Taiwanese Investment Zones within the Municipality one each in Haicang, Jimei, and to Xiamen officials, who opted to delegate some aspects of the day to day running of the Zones to lower level officials in those districts but maintained a high level of involvement with inves tment decisions and attracting Taiwanese investment (Howell 1999, 170). China, a policy that esse ntially levels the playing field for all firms regardless of whether they are foreign or domestic. Although the central government has managed to remove including the 1995 1996 phasing out of export tax rebates and the ta x exemption on imported capital and intermediate goods by foreign invested companies 27 Xiamen has been able to offset some of those losses by extending greater incentives to Taiwanese firms that invest in Xiamen. Following indications and new regulations on Taiwanese investment from the center, Xiamen began issuing its own 27 tors took advantage of low labor and import/export costs to manufacture goods using imported inputs which were then exported for sale in foreign markets. They were thus hit hard by the rise in import/export cost. The higher taxes also lessen the number of new companies willing to set up manufacturing factories in the SEZs.

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66 preferential poli cies for Taiwanese investors. Passed in 1997, Regulations on the Exemption of Land Use Fees for Projects Invested in by Taiwan Compatriots grants Taiwanese firms that lease land in any part of the Xiamen Municipality an exemption from land use fees for fiv e years following the beginning of the project. Investment projects were required to fall into certain categories export oriented, advanced technology, high and new technology but the regulations included a clause at the end the municipal authorities. This clause gives local officials the opportunity to include any type of project that might improve FDI in the municipality ( China Business Law Guide 2005, 89.454). Legislative Ability province and its ability to approve higher levels of investment in the municipality have emboldened local officials in their quest to attract foreign in vestment. In 1997 Xiamen municipal officials began courting Taiwanese investment more directly and taking on an increasingly more international position. They established the annual Cross Strait Export Commodity Fair and the Exhibition Center for Products of Taiwan Invested Enterprises, and started inviting and meeting directly with representatives from Taiwanese firms in order to build closer ties with their counterparts across the Strait (Luo 2001, 117). The central government, particularly the State Coun supportive of municipal leaders taking on this new responsibility, and has encouraged the

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67 process with yet more provisions for Taiwanese investment nationwide. 28 Courting of foreign investment was not limited to only T aiwan; each year the head of the municipal government and a group of local officials went to Hong Kong to introduce new incentives in each Zone, meeting with departments of the Hong Kong government and with large multinationals. They also invite rich, infl uential overseas Chinese who originated from their Zones to join a consultant group that meets once every two months in Hong Kong (Gupta 1996, 59). Xiamen has even gone so far as to grant Taiwanese businesspeople the right to not only vote, but also be ele 155). The Tax Assignment System reform of 1994 caused some concern for the SEZs in that it removed preferential treatment for foreign firms in terms of the enterprise tax; foreign invested enterprises ( FIEs) were put on equal ground with domestic and state owned enterprises with all types of enterprises subject to a 33% income tax nationally. This new change in policy limited the range of rates the local government could charge enterprises. While before the reform they were charging SOEs 55%, after the reforms they could only charge them 33%, which limited the revenue they could extract. Xiamen, however, still retained the ability to offer foreign companies preferential tax rates under the 33% and apply c ertain tax holidays and rebates depending upon the sector in which the investment project fell (Hameed 1996, 43). Xiamen also began offering more preferential policies in terms of its own local taxes and fees to attract investment with the municipal govern ment promulgating new provisions waiving the local business tax and 28 Interestingly enough, at the same time the central government had begun missile tests and military exercises across the Strait in reaction to the upcoming democratic elections in Taiwan warning independence groups of the consequences of electing a separatist President, and in the process deeply affecting cross Strait trade and investment with Xiamen.

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68 relaxing some aspects of local investment policies for Taiwanese funded corporations ( China Business Law Guide 2005 89.501). As China has moved closer to fulfilling its WTO responsibiliti es to give foreign and domestic companies equal standing by removing discriminatory taxes and fees, the SEZs have become more dependent upon local initiatives and local tax and fee rebates to attract foreign investment. The movement making Xiamen a competitive environment to attract investment (Howell 1999, 138). Experimental Reform of industrial reform in order to move itself away from its dependency on SOEs and stand as an example to the rest of the country (Luo 2001, 84). Xiamen, like the other SEZs, decentralized a great deal of authority to enterprises in order to reduce the burden on government departments and give enterprises more autonomy in their actions. Specifically, Xiamen removed the constraint of some government overview, and allowed firms to make individual decisions on such things as production and hiring. Xiamen was one o f the first cities to move away from the guaranteed job in SOEs and institute a system of contract based employment through the creation of labor markets and allowing SOEs to recruit workers and managers abroad or at home, as well as allowing them to dismi ss workers as needed. Xiamen, along with Shenzhen in Guangdong Province, embarked upon a path of pricing reform in the late 1980s that was much more rapid and wide reaching than the rest of the country was considering. The central government issued provi sions for the price reform, cautioning the coastal provinces to restrain current reforms due to nation

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69 wide overheating of the economy. Xiamen, going directly against the central decree, continued with the reform anyway and removed price subsidies through 1988, diverting those funds into wage subsidies instead. The plan was intended to restructure the price system for goods and services while reducing government burden and strengthening financial discipline and hardening budget constraints in SOEs. Municipa l officials expected that the sudden rise in prices would be absorbed by the higher wages and increased efficiency within the enterprises themselves. Instead, as living costs rose, overall standard of living declined; wages were not enough to make up the d ifference in prices. Enterprises began reporting greater losses and demanding a reduction in their profit tax, but the municipal government was dependent on the revenue from SOEs and would not oblige. Nevertheless, its tax revenues during that period decli ned greatly until the market was able to balance out. The municipal government did not, however, experience any negative political effects from its refusal to follow central policy and maintained their own economic decisions (Luo 2001, 69). While the rest of the country concentrated on the contract responsibility system in 1988, Xiamen, with the permission of the State Council, began implementing a new budget. Authorities c ut the profit tax rate from 55 percent to 15 percent and abolished the regulatory tax, which gave all enterprises the same profit tax rate, regardless of ownership. After tax profit remittance was regularized as well. Each enterprise, depending upon their profit level in 1987, remitted a certain amount (between 1 and 35 percent) to the government. Enterprises were also required to repay bank loans from after tax profits and could determine the schedule and amount of each payment. The

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70 measures were expected to, respectively, regularize relationship between the government and enterprises, regulate the after tax profits of SOEs operating in the zone, and harden budgetary constraints on enterprises in the zone. The reforms were also supposed to encourage the SOE s in completing their own capital construction and research and development (Luo 2001, 72). The results of the reform, however, are contentious. While the SEZ authorities claim that the new scheme improved enterprise efficiency and growth, hardened budget constraints, and brought in greater revenue for the government, others dispute that claim. They point to the increase in capital construction expenditures in the government budget during the time following reform and the continued use of government revenue s to supplement research and development the two of which, financial expenditures in 1989 (Luo 2001, 74). making SOEs has also g iven it a unique position in reforming the SOEs under its command. It has made extensive use of the Horizontal Economic Associations (HEAs) that have been employed across the country. HEAs are a tool that link the coastal regions with interior territories : firms from interior provinces are allowed to invest in, co operate, or fuse with local enterprises and FIEs working within SEZs to both secure materials for production in the SEZ and connect interior firms with foreign investment and technology. The loc al government has made it possible for interior provinces and companies to locate official offices within the SEZ and municipality in order to aid the creation of HEAs (Luo 2001, 81). With the rise of HEAs came the concept of the Xiamen Merger of SOEs. Me rgers in Xiamen are most often used by local authorities to get rid of loss making SOEs and

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71 write off the bad debts associated with them. One of the largest benefits of such mergers is the retention of most if not all of the employees of each firm, an enti rely positive attribute in the eyes of Xiamen officials. The enterprises are then combined to create a new legal entity, often called an enterprise group, which is run by a sort of board of directors conveniently making the firm harder to manipulate for lo cal authorities. Xiamen municipal authorities have assumed the role of both facilitating and sometimes strongly recommending mergers between loss making enterprises and successful enterprises without consulting the central government and of expanding their authority over local enterprise decisions (Luo 2001, 83). Conclusions over other cities of similar size. Its ability to approve foreign direct investment independently, off er large concessions to foreign investors, and create several different types of investment zones all with their own preferential policies have all been huge terms of economic plan, which places it on even footing with the provinces in economic laws and decision making. Finally becoming financially independent from the provincial govern economic plan. An important aspect of SEZ status is the ability to experiment with new economic policies within the municipal area in order to gauge whether or not they are approp riate

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72 or will be successful in China as a whole. Xiamen has been rather hesitant in its experimentation; local policies have not been quite as radical as one might expect from a city with so much economic freedom. Instead the local experiments have tended to follow the trends in other open regions, and remained dependent upon political indications of greater reform from the center. As an SEZ and a city that has become deeply important to the attraction of FDI particularly from overseas Chinese in Taiwan and Hong Kong Xiamen has been able to maintain and expand its economic decision making authority since its creation. It remains an area of high economic authority in which the local government has a surprising amount of discretion and power. Fuzhou Open Coastal City relationship with the rest of the world for centuries serving as a military, administrative and political center for the entire region. The city was a key trading port, developed a thriving shipbuilding industry, which led to even greater interaction with foreign countries, and became a key point of contact with the Ryukyu Islands and Taiwan. In 1842 Fuzhou, along with Xiamen, was designated as a treaty port followi ng the signing of the Treaty of Nanjing, which forced even greater integration with the international community and began a period of industrial and infrastructural development. While the period of central austerity under Mao Zedong dealt a heavy blow to l ocal infrastructure, by the time nationwide economic reform began in 1979 Fuzhou was the center for heavy industry in the province, producing one third of the total industrial output value in Fujian (Howell 1999, 144).

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73 As the provincial capital, Fuzhou ma de many overtures toward the central government for special policy treatment, including a proposal to establish a Special Economic Zone in Langqi, an area under the control of the Fuzhou Municipal e provincial government and relationship between Fuzhou and Xiamen has been one of a strong rivalry; the two cities have competed regularly for open policy treatments loans, central favor, and foreign investment. The rivalry between the two cities was exacerbated by differences in dialects, 29 regional interest, and enthusiasm to develop (Yeung and Chu 1995, 12). Official Authority The Provincial Government in Fuzho u has spent a great deal of time lobbying the central government for greater special policies, applying for the right to establish development zones and the right to expand policies in existing zones to the rest of the province. Many of their proposed area s tend to be in close proximity to Fuzhou itself, including the original site recommended for the Fujian SEZ at Langqi, with the intention of maintaining tighter provincial oversight over the any new development zone (Shieh 2000, 98). In 1983 provincial of ficials proposed expansion of the open policies of the SEZ through the development of the regions surrounding Xiamen and Fuzhou, reflecting the pressure from local governments to extend the open policy regarding investment to more cities. However, the rece ntralization of investment control briefly in mid 1983 29 Natives of Fuzhou speak Foochow while natives of Xiamen speak Fujianese which is cal led Taiwanese in Taiwan -thus giving Xiamen an advantage when dealing with Taiwanese businesses and expanding the divide between Xiamen and Fuzhou.

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74 forced Fujian to cut its investment in capital construction drastically. Priority for remaining investment went to Xiamen, putting Fuzhou at a policy disadvantage (Howell 1999, 153). Despite this perio d of austerity, Fuzhou still gained control over a share of 294 province administered enterprises in late 1983, which increased local autonomy and control over planning and production within the city (Howell 1999, 155). In 1984 the State Council approved t he creation of fourteen Open Coastal Cities (OCCs), that were expected to be centered around the creation of Economic and Technology Development Zones (ETDZ). The ETDZs were extended better policies for an districts (OUD). 30 ETDZ was established at Mawei District and was intended to develop knowledge and technology intensive enterprises, particularly concentrating on light industry, scientific and technology research, trade, and tourism. Mawei di greater openness to international business (see Figure 2.4 for a map of the administrative divisions of Fuzhou). Four categories were created for OCCs: those that concentrate on comprehensive opening, those that focus on trad e, those that develop their existing resource base, and those that serve as transportation nodes between the rest of the country and the rest of the world. Fuzhou was tasked with developing its existing resource base. FDI Approval After being designate d an Open Coastal City in 1984 Fuzhou gained greater control over the approval of investment projects involving foreign investors. The Municipal Government has the authority to approve non manufacturing projects under 30 cons iderably less control over economic decision making (Howell 1999, 154). Old Urban Districts are the areas in where there is more developed but older infrastructure conducive to manufacturing and production.

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75 Figure 2.4: Administrative Divisions of Fuzhou RMB 30 million, presuming the project falls within certain parameters. The parameters of FDI approval at the OCC level are the following: the state cannot be responsible for the sale of products, the project must require no export quota and the enterprise must be able to repay any foreign capital itself (Shen and Yeung 2002, 6). 31 In 1996 Fuzhou, in addition to Xiamen, was granted the ability to participate in direct shipping with Fuzhou to build 31 The limit was originally placed at RMB 5 millio n, in 1988 the limit was expanded for OCCs in million.

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76 connections with foreign companies and attract higher levels of investment (Luo 2001, 117). Preferential Policies While the general tax rate for foreign investment in the OUDs is 24%, Fuzhou, as an OCC, also has the ability to extend a r educed profit tax of 15% to select foreign invested enterprises outside of the ETDZ that meet a specific set of conditions. In order to receive the reduced rate foreign invested projects must invest in the old urban district of the city, production must be technology or knowledge intensive, and the project must be a long term investment under RMB 30 million. 32 The reduced tax rate was also offered to FIEs investing in energy, transportation, and port construction in key parts of the city. Manufacturing proj ects within the old urban areas are taxed at 80% of the prevailing rate. The municipal government also has the authority to grant concessions on local profit taxes to some enterprises in old urban areas. Local officials are also empowered to offer a 10% f lat tax rate applied to income from stock dividends, interest, and rentals by investors with no formal establishment in China (Shen and Yeung 2002, 6). Fuzhou, like all OCCs, has no provision for local control over import and export taxes on products and t heir inputs produced within the city and exported elsewhere except for imports of certain equipment that are exempt from tariff, import and value added taxes (Shen and Yeung 2002, 7). s in establishing several different forms of development zones within its borders, including its 32 o riginal ETDZ.

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77 ETDZ in Mawei district, which actually contains four other varieties of development zone. Fuzhou ETDZ has a Taiwan Investment Zone, a Free Trade Zone (FTZ), a Hi tech Industrial Development Zone and an Export Processing Zone, making Fuzhou unique among OCCs with a total of five distinct Zones integrated into one development area. ile retaining the authority to direct the development zones and decide the preferential policies offered to foreign companies, as well as to create and implement regulations on the formation and operation of local FIEs (Bahl 1996, 84). In 1987 Fuzhou and X iamen were both ceded the authority to lease tracts of land to foreign real estate and development companies and retain control over land use rights within the city and its various zones (Shieh 2000, 105). Limitations As an Open Coastal City, Fuzhou faced more obstacles to its development than it might seem. In 1985, only one year after its designation as an OCC, Fuzhou was one of ten OCCs to be stripped of its special status. In response to the expanding foreign trade deficit China was facing at the time, the central government attempted to recentralize foreign trade and foreign exchange management by capping the decision making power of the development areas in the coastal regions. With the suspension of their special policies went the extra central funding, not only slowing local infrastructure development but also causing a great deal of trepidation in local officials about the path of development to be taken in Fuzhou. While its status as an OCC was returned to it in 1986, the uncertainty and doubt within local government about central government reactions caused local officials to be more cautious in their initiatives to develop and open up the

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78 ss (Howell 1999, 165). Pushing Limits authority of the city and instituting more open policies closer to the capital, Fuzhou als o faced greater oversight from the levels of government above it (Shieh 2000, 98). Fuzhou is able to reap the benefits of the advocacy of provincial officials but is also more directly designation as an SEZ, provincial authorities in Fuzhou were slow to enact the necessary changes required for the city to become more independent, instead delaying the approval of local I and mitigated 1990s Chen Guangyi, a provincial leader native to the Fuzhou area, was accused of withholding the fiscal autonomy Xiamen should enjoy as a line item city and redirecting in 1985 resulted in a severe lack of central and provincial funding on which it was dependent to develop its own infrastructure, making it harder for local offi cials to follow their own development path (Howell 1999, 165). government began drawing up preferential policies for foreign investment and built customs bonded warehouses, taking advanta ge of the early enthusiasm of central and

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79 provincial leadership for decentralization to construct its own regulatory environment in order to begin attracting FDI and promoting local development. Local officials began forming the preferential policies withi n the ETDZ, putting special emphasis on high tech and knowledge between the power of SEZs and OCCs, ETZDs have the same ability to approve investment projects as the SEZs and maintain the same preferential profit tax of 15% on all foreign to waive or reduce import and export tariffs beyond the central decisions (Shan and Yeung 2002, 9). After establishing a goo d administrative structure within the Zone, the Municipal Government, like those of the other OCCs, took the initiative to decentralize economic decision making to the local government officials and bodies within the Zone itself, not only expanding local g overnment authority at lower levels but also removing strain upon the municipal administration (Bahl 1996, 82). Changing the Economic Plan Originally provincial officials had planned for Fuzhou to be the center of heavy industry, machinery, and chemicals in the province. However, since the municipal government has the authority to make its own investment plan, local leaders ignored provincial guidelines and began developing infrastructure and manufacturing facilities for electronics. This put Fuzhou in di rect competition with Xiamen, but the municipal policy decision essentially forced the provincial government to change its plan to accommodate the development of electronics industries in both cities (Howell 1999, 155).

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80 Experimental Reform Following the c entral decision to allow the transfer of land use rights in 1990, Fuzhou began reforming local policies the ability to rent or lease land at discounted rates or completely waive the fees became a large part of local strategy within OCCs. Competition among the OCCs, particularly using the special policies ceded to their respective ETZDs, grew rapidly as the Open Coastal Cities began selling land at cheaper rates than their neighbors. The municipal government now allows the authorities within the ETDZ to coll ect revenue on the leasing or renting of land use rights to foreign investors under the understanding that all profits must be reinvested in the development of land or infrastructure facilities within the Zone (Bahl 1996, 109). Fuzhou has also been creat ive in using its authority over the land within the municipality to reform its local housing system, which has led to both higher revenues at the municipal level and greater involvement of local companies in the process. In 1985 Fuzhou held the first publi c housing sale in the province; the city began building public housing and selling or renting the units at cost level. 33 The first exhibition sold 168 units, 66 of which were purchased by individuals. During this time local officials began experimenting wit h different types of housing regulations, allowing local firms greater decision making abilities in the entire process 76 different development companies were engaged in the entire process, from planning, land appropriation, design and building. Houses wer e even allowed to be sold in different stages of completion, which let buyers finish the homes according to their own preferences and financial ability and gave developers more control over the sale of their products. While the experimental 33 Such policies were also implemented elsewhere in the province including in Xiamen and Nanping, but at significantly lower numbers

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81 reforms in Fuzh ou were not as radical as those in some of the more experimental zones, decentralized decision making on housing controls (Chiu 2000, 443). Development Zones Fuzhou has made exten sive use of various types of development zones, establishing dozens of different zones which cater primarily to Taiwanese investors. Some of these zones were approved by the central government and others operate illegally to this day (Hsiao 2003, 153). In 1987 Fuzhou turned over a 4 square kilometer industrial estate in Fuqing district to overseas Chinese investors and gave them the right to develop it as they saw fit, with very little government involvement. The zone was so successful that the process was repeated several times with different companies taking the lead throughout Fuqing, which many believe led to the emergence of an industrial center in Fuqing that thrives today. Fuzhou was also the first to grant plots of land to the rural village collecti ves to develop an industrial estate and attract foreign manufacturers. The first of these zones was called Gushan Fuxing Investment District, a 2.6 square kilometer zone set up independently by local farmers with self raised funding for infrastructure impr ovements and collective land. By the end of 1992 the Gushan zone had approved 97 FIEs with an investment of about RMB 280 million, which has all been a result of the hard work of local farmers turned officials who maintain a direct stake in the success of the zone (Studwell 1993, 89). In 1989 Fuzhou was finally able to bring open door policy to Langqi Island the original recommendation for SEZ placement in Fujian. A Science Park was created in

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82 Langqi, and shortly thereafter the Island wa s designated as a Taiwan Investment Zone. By 1993 however, the central government had become concerned by the rapid development in the coastal provinces fearing the overheating of the economy, and Fujian came under the criticism of central leaders for its unauthorized development zones. A broad campaign to shut down illegal zones throughout the country was launched during to slow its plans for development. They claimed that growth in their city was led by increases in exports and foreign investment, and therefore should be allowed to continue without central government interference, essentially disregarding central demands (Hsiao 2003, 154). Acceleration of Reform 1980s, and its enthusiasm for taking advantage of its preferential position increased. After a 1988 visit from Zhao Ziyang in which commitment to open policy in the region, Fuzhou pushed beyond the limits on its authority and generated new regulations to attract FDI. The Municipal Government exempted export oriented enterprises built bef ore 1990 from land use fees for ten years and allowed them to retain 90 percent of their foreign exchange value earned before 1990. The city also removed import and product duties on imported machinery, raw materials, fuel, and parts for exported goods. Th ey also directly invited foreign businesses to buy state owned enterprises or purchase shares in them in order to update existing state factories (Howell 1999, 157).

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83 In 1992 municipal leaders in Fuzhou announced plans to develop a Minjiang Golden Triangle Economic Circle over the next five years. Despite the odd language, the term refers to the greater area around Fuzhou, a similar development triangle is centered upon Xiamen in Southern Fujian. It is essentially an expansion of more open policies to the a reas surrounding special zones. Later that year a Free Trade Zone was approved by municipal and provincial leaders. The new FTZ claimed to have the most preferential poli government had produced a total of 22 new reform and open policy measures, finally taking the initiatives offered by the central government (Howell 1999, 159). Along with enthusiasm in creating local regulations came more bold expressions economic relations, the delegation from Fuzhou announced that officials intended to make Fuzhou the fin ancial and commercial center of the province, as well as a hub for information technology and Min Taiwanese foreign trade exchange. 34 By the end of that meeting municipal officials distributed fifteen intentions, including one to extend the limits of their authority to approve joint ventures to the districts and counties under municipal control, and improve local government procedures and attitudes concerning FIEs. These intentions were followed that May by fourteen municipal regulations, including one that decentralized the approval of production projects under RMB 20 million to the planning commissions of districts and counties (Howell 1999, 166). 35 34 Min refers to the natives of northern Fujian, centered around Fuzhou. 35 The regulations also included a cla use urging provincial and central governments to set up a Fuzhou Development Bank

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84 Conclusions the inconsistent policy decisions of the c enter made the Municipal Government uncertain in its plans to develop and open up. Therefore local leaders have been more restrained than many others in their reform practices. Unable to take advantage of the opportunities presented by their special status relative to the rest of the country, local leaders have lagged behind other OCCs and SEZs in expanding local economic authority. There has, however, been an upsurge in co ncrete standing for themselves in the overall system. Policy changes have primarily depended first on cues from the center indicating a more open and relaxed policy nationwide, which is then capitalized upon by municipal officials to expand upon existing p olicy. 2001 and the central government continues to remove special policies across the country, it has so far faced little threat to its autonomy and special policies. Instead, Fuzhou has taken the opportunity to deepen its own economic authority and further decentralize economic decision making to the sub city levels. General Cities lobbying for similar economic freedoms. Gradually the central government began empowering cities throughout the country, often raising their administrative status with

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85 power gravit ating toward the major urban centers (Cham 1997, 86). After the 1990s the central government made a concerted effort to balance growth throughout the country by expanding the decision making abilities of local governments across the board and opening the i nterior and border regions to foreign direct investment. Official Authority 36 Congresses above the county level are empowered to establish Standing Committees, which are the au thoritative organs in their areas. At the provincial level these Committees can create and implement their own legislation providing that it does not contradict central policies; this policy was later expanded to certain metropolitan cities (Ting and Fen 1 994, 77). The central government has taken many steps to put more control over local decisions in the hands of local governments, decentralizing jurisdiction over a large number of administrative functions. The 1982 Constitution provides a clear outline of the functions that have been granted to local governments: within the limits of their authority as prescribed by law, [local governments] conduct the administrative work concerning the economy, education, science, culture, public health, physical cultu re urban and rural development finance, civil affairs, public security, nationalities affairs, judicial administration, supervision, and family planning (Ting and Feng 1994, 78). Local officials were slowly gaining more responsibility for administ ering the areas under their authority, deciding how to institute new policies and taking charge of local decisions in a whole new range of public concerns. As discretion over local affairs has been delegated to lower level governments, there has also been a general movement toward 36 The Organic Law was passed first in 1954, renewed in 1979 and amended by the Standing Committee of the

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86 the consolidation of lower level governments into larger cities that control more counties, townships, and villages (Kam 1997, 92). Party Personnel Control A large factor in the recent rise in local autonomy is the decision to l imit the personnel selection ability of the central organs of the Communist Party. In 1984 purview over personnel decisions within the Party was limited to two levels below each level of administration. Regional and local Party hierarchy became much more l ocalized, and since the Party oversees appointments to the government in China, the change in policy allowed more of an opportunity to place community members in official positions. Local officials were also able to make more informed decisions without the interference of officials native to other regions (Ting and Feng 1994, 79). Expansion of Special Policies The Horizontal Economic Associations created between FIEs operating in SEZs and the interior regions of China have become a vital part of connecting the local governments and enterprises of interior and border provinces 37 with foreign invested companies. The network of horizontally linked and market oriented enterprises developed through the HEAs has gone a long way toward breaking down the compartment alization of the country along regional blocks and sectoral lines, giving municipal governments in the interior of China the opportunity to benefit from the open policies and attract some forms of investment even if it is through an intermediary (Luo 2001, 131). 37

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87 Rising inequality between the coastal region and the interior and border regions caused cities all over the country to lobby the central government for their own open and special policies to attract FDI. The center responded with a concerted effort to bridge the gap between regions by opening up the interior and border regions. In 1991 the center delegated authority over foreign trade to all localities and abolished all export subsidies. This move was the beginning of a more nationwide reform approa ch oriented toward opening the entire country to the outside world and giving local governments greater control over their economic decisions (Jiao and Lin 1994, 46). results of local reform and opening up, 38 the Communist Party Politburo released the its Document Number 4. 39 gov ernment was done with its incremental approach to reform. 40 The Document called for strengthening relations between coastal and inland areas, accelerating the opening up of the inland areas, and implementing the relevant policies related to foreign investme nt in inland areas (Fu 2000, 62). The geographical opening of the interior to foreign trade and investment as well as decentralization of all of the economic decision making authority that comes along with managing foreign trade and investment was a large part of the new reform plan. In the early 1990s the center approved an additional 21 open cities along the Yangzi river and in the Northeast and authorized those city governments to set up their own ETDZs. By 1996, 14 border cities were opened to foreign t rade and 38 Reform and opening require bold moves and courageous experiments must not proceed like a woman with bound feet 39 ing Reform, Opening Wider 40

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88 investment and allowed to take advantage of the preferential policies enjoyed by FIEs; they also enjoyed similar abilities to approve FDI. The number of nationally recognized ETDZs expanded to 34 which were applied for by both provinces and munici pal governments across the country and approved by the central government (Fu 2000, 58). In 1992 all provincial capitals were opened to FDI and were given SEZ like preferential policies and FDI approval authority ( China Business Law Guide 2005, 89.004). In 1996 the number of cities and counties that had been officially declared open investment areas, in one form or another, was 354 (Fu 2000, 58). Administrative Abilities Prefecture level cities are empowered to establish and maintain between 60 and 70 different departments and bureaus under their command, as well as the ability to form ad hoc units. They are also given the authority to form districts within their jurisdict ion, enabling them to annex neighboring counties into their territory, which allows them to expand their urban areas along with their tax bases (Li, Dong and Cao 2009, 997). The city governments are allowed to set their own local development plans for the areas under their jurisdiction and to promulgate local laws and regulations on economic and some right to promulgate local decrees and implement laws (Chung 2007, 796) They also make decisions regarding local economic development issues such as local urban planning, the regional division of labor, and the allocation of capital and raw materials, as well as exercise control over an increasing number of SOEs (Chung 200 7, 798, 801; Airriess 2008, 140).

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89 FDI Approval The ability of average cities in China to approve investment projects is still lagging behind the open regions, but as the center has decentralized control over foreign investment, more authority has made its way to the city level. It is estimated that the urban government of a prefecture level city holds 5000 6000 kinds of power to approve various economic projects, and as the country continues to adjust to its membership in the WTO many government regulation s and administrative rules will be eliminated (Shen collect and spend revenues within its territory and the more likely it is to attract FDI (Hong 2008, 140). Therefore it is not surprising that local governments have an incentive to upgrade their status to that of a city in order to enjoy higher levels of economic autonomy. The central government has encouraged this trend by relaxing the criteria for city designation ov er time with revisions of central laws in 1983, 1986 and 1993. By 2003 there were 660 cities of various kinds in China, with many cities in the process of upgrading to a higher level (Chung 2007, 793). Urban governments have, in keeping with the central go (Airriess 2008, 138). City governments at the prefecture level and below are not allowed to con trol where FDI goes in their jurisdictions (Shen 2007, 310). The central decision in 2009 to expand the FDI project approval limit of provincial governments to US $100 million did contain a provision that allowed the provincial and some sub provincial le vel cities to enjoy the same authority, but did not cede the same ability to prefecture or county level cities (Jiang 2009). Prefecture level cities can attract FIEs with tax

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90 concessions and land agreements, but the final decision to approve a project lie s in the hands of provincial officials. Land use Rights Following amendments to the 1982 Constitution and the Foreign Business Land Development Measures in 1990, cities all over China gained the ability to control the leasing of land under their ju risdictions 41 and were therefore able to reap the financial benefits of rental payments, fees, auctions, and duties (Fu 2000, 55). Both policy changes removed the absolute ban on the transfer and re transfer of land usage rights and on large scale land deve lopment schemes by foreign investors. In so doing, they allowed city governments to lease and allocate land as they saw fit, as long as they followed the guidelines set down by the central government. In November 1999, with the signing of the Sino US agre for Accession to the WTO, the central government also agreed to relaxed geographic restrictions for foreign banks (Fu 2000, 53). At the same time the center granted foreign banks the same rights as Chinese banks in all locations, whi ch allowed all city governments to attract and facilitate the establishment of foreign bank branches in their jurisdictions (Fu 2000, 87, Luo 2001, 124). Pushing Limits As the interior and border regions have been opened to foreign direct investment and more economic power has been decentralized to lower levels of government, cities have taken advantage of their authority in order to pursue their own local interests, even 41 Previously only Joint Ventures were allowed t o develop land under special land use legislation; all other land was owned by the central State and allocated according to central decisions.

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91 if their initiatives go against central policies. Local governments have become kno wn for monitoring to assert their own position and goals (Zhang and Zou 1994, 169; Yun 2009, 208). Illegal Development Zones Different types of development zones became a huge part of local development strategies in the coastal areas and, seeing the success of the zones and eager to see their own areas develop, provinces and cities in the interior and border regions began opening their own development zones with o r without central approval. Despite the fact that there is only one official New Open Economic Development Zone 42 located in Pudong, Shanghai cities and provinces around the country opened their own illegal New Open Economic Development Zones without centr al approval ( China Business Law Guide 2005, 89.053). 43 All types of zones were opened independently of central government approval and the problem grew so extreme that in 1993 the center had to reinstate more strict requirements for central approval; Party General Secretary Jiang Zemin even became directly involved in shutting down unauthorized zones. Local governments below the provincial levels were stripped of the authority to approve development zones while provincial approvals had to be authorized by th e State Council (Fu 2000, 182). A second development zone boom in 1998 saw the creation of between 1000 and 2000 new development zones; in Jiangsu nearly all towns and villages began constructing development zones. Despite the limits placed upon local gov ernments concerning the 42 This zone enjoys even greater preferential policies and economic authority than SEZs and is given even greater ability to enact radical policy experiments within its borders. 43 Cities in Jiangsu, Zhejiang, Shandong, Anhui, Xinjiang and Inner Mongolia, working in conjunction with their provincial governments, created illegal zones with similar abilities as Pudong.

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92 creation of new development zones, there has been a continued battle between the center and localities over illegal zones. By 1999 6,866 development zones existed across China, in that same year 70% of them were closed by the center and 70% of the remaining zonal area was condensed. However, inspections between October 2004 and May 2005 revealed that 61% of zones operating within China were still illegal, and 50% of the land used by those zones was illegally appropriated (Yun 2009, 1 76). Importance of Extra budgetary Funds As the local share of tax revenues has declined with the 1994 Tax Sharing Reform and the central government has encouraged local governments to generate their own revenue in order to complete local development plans, extra budgetary funds have become increasingly more important for city governments. Often the central government will promulgate laws and policies referencing the responsibilities of lower level governments, but not allocate the financial or materia l resources necessary to complete the process. Such disjunctures leave the city governments at a disadvantage. Recently items in the budget that used to be solely local tax items are being converted to shared tax items in 1994 only three items fell under t he shared tax categorization, as of 2006 that category consists of 12 items (Yun 2009, 185). 44 In response to this budgetary shift away from lower levels, city governments have taken to imposing ad hoc fees (called tanpai ) on enterprises in their jurisdict ions to make up the difference between their budgetary revenues and the expenditures for which they 44 The allocation of the shared taxes has also gradually become uneven between the center and the localities after the reform in 1994 it was split 50/50, later it shifted to 4/1 (center to local government), since 2003 it has been 98/2.

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93 are responsible. 45 Extra budgetary funds are generally earmarked for certain uses and are immediately applied to those uses. For example, the profit on sales of state owned housing at the city level often falls under the extra budgetary accounts and is then used to fund the building of new housing (Chan 1997, 81). Cities across China are slowly taking control of local housing price reform and housing developme nt, selling off public housing at different prices and rates (Chan 1997, 115). Prefecture level cities also keep tight control over county level cities within their jurisdiction by converting them to municipal districts as soon as possible in order to retain control over the tax revenue and land use fees at those levels (Chung 2007, 14). 46 jurisdiction over as much land as possible has become a key strategy of prefecture level cities, however the acquisition and transfer of land has not necessarily been handled within central regulations. Instead they have been largely ignored by urban governments in order to maximize the city budget (Chung 2007, 803). Extra budgetary fees are completely removed from central control and monitoring. They can increase the loca l funding at prefecture and city levels by up to 57% and are mechanisms by which city governments keep as much enterprise profit as possible at the local level instead of allowing it to move to the center. These strong incentives thus gave rise to many dif 45 Tanpai was origina lly seen in the rural areas after de collectivization as a new source of funding to replace taxes paid by the collective, it only spread to the urban areas after the 1980s decentralization for cities to supplement their finances to complete the new public services, roads, schools and sanitation, which were now part of their expenditure responsibilities (Fu 2000, 179) Anywhere between 5% and 50% of funds retained by enterprises ended up in the hands of the local government. 46 Such refusal to relinquish cont rol over the lower levels can also lead to abuses by the city government. Rural localities, which had a tendency across China to have a higher burden of production and taxes, took the brunt of city fees in some cases: a 2003 study found that out of 400 lev y items on residents of rural areas between 1996 and 1997 only 40 were legal according to central government regulations (Chung 2007, 803).

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94 by local officials (Wong 1997, 59). City governments were known to ignore local owned assets at a severely undervalued rate. Bank loans are also reported separately from the main local government account and not reported to higher levels of government. They are therefore very important to local development plans. City governments have a great deal of influence over local bank officials not receive the loans they request. Therefore officials are able to put pressure on managers to provide loans to preferred comp anies (Wang 1994, 100). Loans made directly to local governments are often earmarked to finance road and bridge building projects and are generally repaid by tolls or vehicle licensing fees (Chan 1997, 79, 80). Sale of State owned Assets Given the prefere ntial tax and land use policies still afforded to foreign invested enterprises, there is a high motivation for local governments to encourage local SOEs to convert to FIEs in order to keep more of the SOE profits available to the local government and decre ase the bureaucratic interference from higher levels of government. undervalued and sold to foreign investors, with SOE managers and local governments receiving the windfal l profits (Fu 2000, 180, 183). The central government has tried to combat the problem of undervalued state owned assets by requiring independent appraisals, but local governments have still managed to avoid the process. The problem has been exacerbated by the spread of the experimental practice of merging loss making SOEs and successful Joint Ventures, which is even more attractive to local governments

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95 trying to increase their revenue. Between 1998 and 2000 cities utilizing this scheme doubled (Luo 2000, 3 4). Fiscal Concessions to FIEs Cities also face a strong inclination to offer fiscal concessions such as reduced taxes, lower land use fees and, new infrastructure to FIEs beyond their official authority to do so, not only to compete with other cities f or FDI, but also to grant fiscal advantages to the local enterprises partnered with the joint ventures and keep more profits within the reach of local government fees and taxes (Wong 1997, 44). A survey of 60 localities in 1991 and 1992 found that 33 local ities, or 55%, explicitly offered concessions beyond the limits placed upon them by the central government. Indeed, Hai preferential treatment for Joint Ventures in th e mid 1990s (Fu 2000, 182). FDI Project Miniaturization While most city governments have no ability to approve FDI projects within their jurisdiction, they do manage to circumvent some of their limits. To avoid the bureaucracy of escalating FDI proposal s beyond the provincial government, local governments will projects in order to stay below the US $100 million limit for provincial approval. Staying below that limit circumvents having to send the proposal through higher levels of bureaucracy to the central government and often saves precious time (Fu 2000, 181). Local governments also have a tendency to ignore those central policies that limit their ability to attrac t FDI, including those explicitly against pollution intensive FDI projects.

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96 A study found that out of approximately 11,000 FDI projects in 1991, 29% were in pollution intensive industries (Feng 1997, 25). Conclusions As the central government has decentra lized economic decision making power to lower levels of governments in a bid to distribute public responsibility and encourage innovation and efficiency at the local level, cities have been major beneficiaries of the new reforms. Emphasis has been placed u pon the rapid development of urban areas in order to attract increasingly higher levels of foreign investment, which has allowed city governments to assert their economic authority through direct interaction with foreign investors, administration of local governments under their jurisdiction, and expansion of that jurisdiction into neighboring counties and smaller cities. Recent reform and development patterns have also emboldened city governments to push the upper limits of their authority. As shown above, cities throughout China have taken initiatives in their jurisdictions that are beyond their official powers, but nonetheless continue despite market system and its accession to the WTO have accelerated the expansion of local government power and influence, cities still remain un equal in both their official economic powers and the measures they take to strengthen their economic authority.

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97 Chapter III Economic Authority at the City Level The decentralization of economic authority in China has been a gradual process of reforms and experimentation that has left a patchwork of different classifications of cities, all with varying degrees of d ecision making ability. As the country has continued to reform policies to meet the requirements of its accession to the WTO specifically through removing preferential policies for FIEs and moving toward national treatment for all enterprises there has bee n an impetus to develop the economic authority of city governments. In addition to their official authority, which is granted explicitly by the central government, local governments are eager to expand their economic abilities through pushing their limits and using creative interpretations in the local implementation of central policies. The central government has had a hard time monitoring the implementation of all of its decrees and laws at the local level, leaving local governments with a surprising amou nt of space to interpret and manipulate policy to their advantage (Jia 1994, 48).

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98 Comparison of City Authority As China has become increasingly concerned both economically and politically with the outside world, the central government has encouraged greater acceptance of responsibility over both finances and distribution of public goods at lower levels of government. Different types of cities have received different levels of authority, and several cities have many different designations. Xiamen, for example, is both an SEZ and item city, 47 but not all SEZs enjoy that status. In fact, Shenzhen is the only other SEZ that has the line item title, which several prefecture level cities (the same designati on as Fuzhou though Fuzhou does not have line item status) also enjoy. 48 While Xiamen does gain several abilities due to the fact that it is an SEZ, many of those abilities are amplified by its status as a line item and those augmented abilities are not nec essarily present in all SEZs. Such differentiations among SEZs makes it difficult to draw any concrete conclusions about the economic authority bestowed upon all SEZs compared to that in other forms of cities in China, however, there is certainly evidence of increased economic authority in SEZs relative to the rest of the country. As the center has placed greater emphasis on developing efficiency at lower levels and given local governments a greater stake in their own development, allowing cities greate r freedom in creating and following their own economic plans has become a large part of central policy. Since all cities in China are expected to both create their own plan and generate the revenue necessary to meet the goals of that plan, it would seem th at 47 This designation makes it a sub provincial city, which is still administered by the province but it is given econ omic independence. 48 Dalian, an OCC, also has jihua danlie status.

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99 cities are on equal footing when it comes to that plan; however, that is not necessarily true. For a summary of key differences found in the case studies, see Figure 3.1. item status contributes to even greater freedom in maintaining its own plan. While the majority of materials and sectors are no longer centrally planned and controlled, there are certain materials and sectors such as those related to national defense, steel, coal and cement that remain under the purview of the central gov ernment and for which there are still required quotas. As a separate listing in the national plan Xiamen, in addition to being financially independent from the province, receives its required quotas directly from the central government instead of working t hrough the levels of bureaucracy at the provincial level. Open Coastal Cities and general cities, on the other hand, are required to take their quotas through the provincial government. In addition to the added bureaucracy, provincial governments often ten d to attach additional requirements for certain materials, which the city is required to meet. Cities not holding the line item status also face a financial responsibility to the province that Xiamen is not subject to they are not financially independent a nd still depend on the province to receive their part of shared taxes and to distribute transferred funds from the center. Xiamen and Fuzhou were both given their special designations (SEZ and OCC) with the intention of opening to the world and incre economy. Thus, they have specific abilities in attracting foreign trade beyond those of general cities in China. While authority over foreign trade was only delegated to all cities in 1991, Xiamen has been expected to directly engage foreign investors and counterparts,

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100 Figure 3.1: City Authority Chart Xiamen Fuzhou General Economic and Development Plans As separate listing in the plan, plan items and quotas come directly from the center, con control own development plans and expenditures, as long funds are self raised Receives plan items and quotas through the provincial government, also required to meet additional quotas from the province, makes own development and expenditure plans Gets plan items and quotas through provincial government from the center, make own development and expenditure plans Foreign trade Direct contact, interacts with foreign business interests Responsible for attracting and managing foreign trade Responsible for attracting and managing foreign trade Preferential tax/ land use fee policies Broad control over tax related concessions to FIEs : land use fees, housing costs, Taiwanese national treatment, import/export duties for FIEs, Has similar preferential p olicies to SEZs but only over production projects no control over import export duties/taxes Controls local preferential tax policies, no control over import or export taxes/duties, required to abide by lowest central rates widespread off ers beyond central limits FDI Approval $100 Million $30 Million None Experimentation Broad ability to experiment, enthusiastically encouraged by the center Expected to experiment as part of L imited to the expansion of experiments elsewhere, of central laws and regulations does occur Placement Development Zone Special Economic Zone Hi Tech Industrial Development Zone Free Trade Zone, Export Processing Zone, Aviation Industrial Park Industrial Zone, Open Investment Zone, applies directly to the central government Economic and Technological Development Zone Taiwan Investment Zone Free Trade Zone, High tech Industrial Development Zone, Export Processing Zone, must apply through Pr ovincial government Dependent upon designations, applies through the Provincial government, wide spread construction of illegal zones Administrative/law ability legislative authority promulgate own laws Implements provincial and central laws, monitoring and managing local implementation Implements provincial and central laws, monitoring and managing local implementation

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101 particularly in Taiwan, since its inception as an SEZ. As time has passed, officials in Xiamen have taken charge of relations across the strait by holding and attending conferences in Hong Kong and Taiwan, and acting with Fuzhou as the only two ports for d irect shipping with Taiwan. Both cities have been charged with managing the movement of ships and containers between the Mainland and Taiwan, which necessitates an even closer relationship between the municipal governments and their Taiwanese counterparts. expected to manage their own foreign trade, which includes the administration of direct shipping from Taiwan and the internal management of the investment environme nt. Preferential tax allowances are also higher in Special Economic Zones than in Open Coastal Cities and general cities in China. 49 In addition to the ability to exempt FIEs from local taxes and fees, Xiamen is able to offer a reduced national enterpri se profit tax of 15% for any foreign invested project, reduced or waived import and export tariffs, and exemption from the remittance tax. Fuzhou and other OCCs are more limited in their preferential policies for FIEs, having to differentiate between their Economic and Technology Development Zones and their old urban districts. Within its ETDZ, Fuzhou can offer a 15% national profit tax only on production or manufacturing projects, exemption from the remittance tax, and reduced or waived local taxes and fee s. Within the OUDs, they can offer a 24% profit tax for most FIEs; only if the project involves certain types of infrastructure development can the 15% rate be extended to them; other enterprises involved in certain sectors are offered a 20% rebate on the taxes they pay. OCCs also cannot offer remittance tax exemption in their OUDs. Fuzhou has found a 49 These exemptions or rebates extend beyond the simple ability to offer exemptions or waivers for local taxes and fees, which is within the discretion of all cities.

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102 clever way of improving its ability to offer preferential tax rates to FIEs by placing four different kinds of development zones inside of the original ETDZ, therefore allowing interested FIEs to reap the tax benefits of more than one type of zone. General cities in China must abide by the unified tax rate set by the central government of 33%. While there are some exemptions and reductions, they are primarily d ependent upon sectors and involvement in infrastructure and are applicable across the country. Despite the limits placed upon them, cities at all levels around China continue to offer tax concessions beyond their official capacity in Inner Mongolia offered concessions beyond those of even the SEZs. Once the cities have attracted FDI through their interaction with foreign investors and offering their preferential policies, the project must be approved. In this aspect of authority Xiamen has a definite advantage over the other cities. As an SEZ, the city has been granted full approval authority over the establishment of new FIEs as well as the management of existing FIEs in its jurisdiction, but also the ability to approve investme nt projects worth US$100 million dollars and under. This power is on par with the provincial carrying out their economic plans for the city, both by removing of another level of bureau cracy which greatly reduces the amount of time spent approving a project and giving them a superior ability to guide local sectoral and infrastructural development. In these area SEZs far exceed other cities in their ability to approve foreign investment. Open Coastal Cities, such as Fuzhou, are only able to approve projects valued at US $30 million and under and have no ability to establish or manage the FIEs under their jurisdiction. Although the change in policy does remove the need to apply to the centr al

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103 government for a great number of projects, Open Coastal Cities depend much more on the provincial government to approve investment projects within their jurisdictions. General cities, on the other hand, depend entirely on the province and the center to approve their foreign investment projects, which puts their economic and development plans somewhat at the mercy of officials at higher levels. Considering the importance of raising revenue at the city level with an increasingly higher amount of taxes be ing retained by the central government and the need to supplement FDI, it is not surprising that city governments of all types have found ways to generate and keep a greater percentage of profits within the reach of local governments. The most profitable t actic is to expand their tax base while encouraging FIEs in both legal and illegal ways. In order to expand their tax bases, the cities annex smaller cities and counties, extending their jurisdiction over their inhabitants, land and any enterprises. Local government attempts to keep enterprise profits at local levels are just as widespread. Strategies include encouraging the establishment of new FIEs in order to take advantage of the remaining preferential policies, 50 facilitating the merger of loss making S OEs with successful Joint Ventures, and the more covert and illicit tactic of ignoring of national tax evasion. These protected profits are then appropriated through local taxes and fees, and placed into the extra budgetary accounts of the local government The extra budgetary revenues of some local governments are sometimes larger than their official budgets, and since they are not reported or controlled by the central or provincial governments, city officials are able to use them to meet the local economi c plan. Such 50 Obviously, taking a dvantage of preferential policies is much easier to accomplish in Xiamen, with its authority to establish and approve FIEs and with foreign investment decentralized to the SEZ level.

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104 revenues are more important at lower levels; even the most developed cities utilize extra budgetary funds to ensure that their jurisdictions run smoothly and meet their goals. The importance of land use rights to the development of local econ omic authority has become much clearer since the 1990s. As control over land has finally been decentralized to lower levels even to counties and villages below the city local governments have taken charge of their own infrastructure development and have be en able to benefit from the increased revenues that accompany rental and lease agreements. Those revenues also fall into accounts separate from the main budget, allowing city governments at all levels to decide their own prices on housing, industrial space and public infrastructure spaces. Housing and land reforms are now largely under the purview of local governments and dependent on the initiatives of city officials. While we have seen greater innovation within the SEZs and OCCs, new policy innovations a re spreading rapidly into the rest of the country as cities around the nation take advantage of their ability to set their own prices, administer the development and building process independently, and allocate land as needed. In addition to their greater openness to the outside world and better preferential policies, SEZs and OCCs have the added benefit of being some of the only designated areas for experimental economic policy. They are relatively unique in their ability to form and implement their own ex perimental policies independently of any oversight by the central government. Their locations on the coast and within the general open economic areas, for a long time isolated from the rest of the country, have put them in a position to act as a testing gr ound for new, market oriented policies. Liberalization of the economy really began to take off in the SEZs and was expanded following successful local

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105 implementation. As the rest of the country was opened to the outside world, policy experimentation also c ame to be expected in all localities. Experimentation and adjustment of economic policy at the city level in management and distribution of public goods, enterprise reform, labor management, and a host of other issues became a key part of city responsibili ty throughout the country. The establishment of development zones is also a much simpler process for an SEZ than for other types of cities. As centers for economic growth the SEZs and OCCs already have the existing infrastructure necessary to facilit ate the majority of zone types: better transportation, energy, and port facilities to support more intensive industry and item city removes yet another area of provincial bureaucracy; the city applies dire ctly to the central government to approve the establishment of a new development zone. Fuzhou, on the other hand, still has to apply through the provincial government but has the added benefit of being the capital city of Fujian province. The desire to mai ntain control over more areas with preferential policies gives the province an incentive to advocate for the city. 51 Fuzhou has also been very creative in the creation and management of zones, delegating control over the zones to both foreign investors and local farmers. Recent plans for a development triangle General cities have a harder time lobbying for permission to establish new zones within their jurisdiction and are requi red to apply through the provincial government for the right to create a new zone. The added bureaucracy is not always a drawback, however. Since the 1990s, there have been periodic booms in zone creation throughout the country 51 The province also has an interest in the profit tax revenue it might gain from any new FIEs that invest within the OOC due to the creation of a new zone. Having a zone with even more preferential policies toward FIEs keeps their profits within reach of th e province should they need them.

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106 and the majority of these ne w zones have not been approved by the central government. Collusion between provincial and city officials has brought about the establishment of hundreds of illegal development zones that the central government has not been able to close. In fact, much of the evidence suggests that zones previously shut down by the center continue to operate to this day as unrecognized development zones sanctioned by the provincial and city governments. The extent to which a city can form its own local economic policies, de crees and laws helps determine its overall economic authority and varies greatly across the different city types and levels of government. All SEZs have wider discretion in the promulgation and implementation of national laws and decrees, as well as the ab ility to form local allowed to create its own laws on issues not directly related to the economy as long as they do not contradict existing central laws and decisions. This law making ability gives the city much more discretion over both economic and non economic decisions. For instance, the ability of Taiwanese businesspeople to vote in loca l elections stemmed from these extra law making abilities. Line item cities are even issued different social policy quotas, such as birth rate, and allowed to form their own policies surrounding them. Cities without the line item designation, including mos t OCCs, do not have the same abilities to create laws. Most cities are instead given the ability to promulgate and implement provincial and central laws as they apply to the locality while managing the local economy. While cities do not have the ability to form their own legislation, they are able to use their own flexible interpretation of the legislation that is passed down from the

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107 central and provincial government. Central monitoring of local implementation is usually rather weak, which can allow a city to apply its own interpretation to central and provincial laws with surprising discretion despite the official limitations. Conclusions As the SEZs have gained more authority over economic matters, their experiences have informed the pattern of decen tralization throughout the rest of China. The gradual expansion of local economic governance authority has allowed the central government to assess the benefits of decentralization and liberalization. The center has the opportunity to ascertain the effects of reforms before exposing the entire country to new policies. Knowing the extent of efficiency improvements, the importance of local knowledge and incentives in innovation and decision making, and the effect of opening markets to greater competition and freedom allows China to tailor its national reforms in a more controlled manner. When a policy is found to be successful it spreads, both legally and illegally, to other regions of the country. The initial success of the SEZs led to the creation of various other special zones, including Open Coastal Cities, and their continued prosperity has prompted cities all over the country to construct zones and implement policy with increasing autonomy. The devolution of economic authority and the liberalization of th e economy have radiated inward from the coast, and the SEZs have general cities, push beyond their official authority, leading to even greater reforms as successful policie s are rapidly adopted across the country.

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108 Comparing the economic governing authority of Special Economic Zones, Open Coastal Cities and general cities in China is not as simple as it might seem. While there is a distinct hierarchy in city types with SEZs granted greater economic decision making abilities, there are also other administrative concerns in determining the authority of each specific city. One city can have many different designations and within each designation only be afforded some of the abil ities associated with that status. Xiamen is an SEZ and also holds the status of a line item city and the ability to create and implement its own laws. However, line item status is not limited to SEZs or to coastal areas in general; indeed, there are some Open Coastal Cities and even some general prefecture level cities that have been designated as line item cities. The Fuzhou OCC does not hold line items status, but it is the capital of Fujian province and is thus afforded greater discretion and advocacy a t higher levels. General prefecture level cities have gradually been allowed greater economic decision making authority as China has opened wider to the outside world through both its own initiatives and the requirements of its accession to the WTO, but th ey remain at a policy disadvantage to cities with special designations such as SEZs, OCCs, and line item cities. The effects of decentralization in China can give us insights into the real world benefits and limitations of the process. While China has s een amazing economic growth since the reforms began, it has also seen new instances of local corruption. The increase in extra budgetary funds and the use of sometimes exorbitant fees to supplement local budgets has often put undue stress on rural resident s and enterprises. Decentralization can lead to greater efficiency gains, increase production, and improve the overall economy, but at the sam e time it risk s certain

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109 experience also leaves us with questions abo ut the true extent of local economic power. While economic authority has been granted to lower level governments, all city levels have remained cautious, taking their cues from the central government in reforming local economies. In such a unitary system i t is hard to determine whether economic decentralization and liberalization has truly placed control in the hands of local governments. That cities still depend on the center to indicate policy direction implies that decentralization does not entirely prot ect local officials and their decisions from national interference and that local innovation may not necessarily be the primary source of economic reform and liberalization. The implementation and effects of decentralization and liberaliza tion are not uni form across countr ies Experiences can vary dependent upon government type, economic health and local conditions. W experience, the results of its reforms remind us that it is important to remain aware of the possi ble limitations and negative effects of the process in order to understand all of its potential results. As a country in the process of great economic, political and cultural change China s experience can be of great value to the study of decentralization and local authority and could help influence the economic and political paths of other developing nations.

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