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REMAKING THE CHINESE LEVIATHAN

STANFORD UNIVERSITY PRESS

Contents

A Note on Translation, Transliteration, Names, and Currency Exchange Rates......................................................xiiiAbbreviations...................................................................................................................xvMap of the People's Republic of China...........................................................................................xvi1 Economic Transition and the Problem of Governance in China....................................................................12 Market Transition and the Remaking of the Administrative State................................................................253 Institutional Development and the Quest for Fiscal Prowess and Market Order...................................................654 The Smuggling Crisis and the Leveling of the Economic Playing Field...........................................................1105 Administrative Rationalization and the Reorientation of Government Behavior...................................................1506 Market Incentives and the Disciplining of Government Discretion...............................................................1867 Institutional Reforms and the Struggle against Corruption.....................................................................2178 Institutions of Horizontal Accountability and Good Governance: Legislative Oversight and Government Audit.....................2599 Conclusions...................................................................................................................290Appendix: The Composition of the State Council, 1992 and 2003...................................................................315Abbreviations Used in Notes and Bibliography....................................................................................319Notes...........................................................................................................................323Selected Bibliography...........................................................................................................371Index...........................................................................................................................395

Chapter One

[F]ree markets could never have come into being merely by allowing things to take their course.... laissez-faire itself was enforced by the state. —Karl Polanyi

Since 1989, China's leaders have lived in the age of trial. Confronted with one crisis after another, including the Tiananmen incident of 1989, the fall of communism in Eastern Europe and the former Soviet Union in the early 1990s, the domestic economic turmoil of 1993–1994, the Asian financial and economic crisis of the late 1990s, and the SARS (Severe Acute Respiratory Syndrome) crisis of 2003, China has nonetheless persevered on the path of liberal economic reforms and enjoyed rapid economic growth. Yet the official commitment to economic liberalization has been accompanied by major uncertainties in governance. Simultaneously having to deal with the strains and disruptions of industrialization, marketization, urbanization, and globalization, the Chinese leadership has been in a marathon quest for institutional development, rationalizing existing institutions and building new ones to cope with the unruliness of markets and bring about a regulative economic order.

Contrary to prevailing predictions, China has made substantial progress in improving the institutional framework for economic governance. To anyone concerned about the welfare of the Chinese people or about the rise of China for regional and world affairs, the significance of such institutional development is obvious. A sound institutional infrastructure is vitally important for sustained economic development. Moreover, a small number of political scientists have also emphasized the importance of a well-functioning administrative state for the consolidation of democracy. As Joseph Schumpeter noted in his classic Capitalism, Socialism, and Democracy, a competent bureaucracy "is not an obstacle to democracy but an inevitable complement to it." Therefore, though they are concentrated in the area of economic governance, China's governance reforms not only bear on economic growth but will also have major implications for political development.

In this study, my first task is to document the changes in Chinese governance, including the rationalization of the administrative state, the strengthening of the fiscal sinews for the central state, the enhancement of the regulatory apparatuses, the divestiture of businesses operated by the armed forces and other state institutions, the reforms of the administrative approval system and the improvement of transparency and governmental service, the ascendance of institutions for horizontal accountability, and the introduction of myriad institutional mechanisms to cut down on waste, improve financial supervision, and curb corrupt practices. To be sure, as the Chinese leadership's initial mishandling of the SARS crisis highlighted, in many respects China still falls far short of the standards of good governance demanded of democratic polities. Yet I submit that, in light of the circumstances and of the conventional wisdom, the magnitude and scope of China's multifaceted governance reforms, particularly in economic governance, are quite significant and worthy of serious intellectual attention.

Second, although the Chinese leadership articulated the general goal of building a market economy as national policy in the early 1990s, many of the specific institutional reform measures for achieving that goal did not get implemented until the late 1990s and beyond. How and why did the reformist ideas get converted into policies for implementation with such a time lag? In the analytical framework adopted in this volume, I submit that the interplay of three major factors, namely changing economic conditions, internal politics/political leadership, and crises (real or perceived), have been the most important elements catalyzing the stream of policy choices to be described and analyzed.

Third, this study suggests that the significance of the governance reforms as a whole may be larger than the sum of the parts. The individual reforms are generally designed to achieve certain specific goals, such as to attract more investment, to save the government money, to close loopholes in government financial management, or to cut down on smuggling. Yet together they also alter the landscape for the struggle against corruption and the exercise of governmental authority in general.

In the rest of the introductory chapter, I first present the historical setting for the study, namely the immediate efforts by the post-Tiananmen Chinese leadership to strengthen the political machinery while renewing the commitment to economic reforms. Then I note that China's partial reforms undertaken until then had forged a strong nexus between state and enterprise and survey the contrasting scholarly perspectives on that nexus. Next I draw on the general literature on the politics of reforms to see how that literature would assess the difficulties China would face to move beyond the partial reforms and build a modern market economy. Much of this...