Zhu Rongji Might Be Right: Understanding the Mechanism of Fast Economic Development in China

21 Pages Posted: 23 Dec 2012

See all articles by Jun Zhang

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Date Written: December 2012

Abstract

Understanding the facilitating role of regional governments and the source of regional competition is the key to demystifying the success of China’s fast economic development since the 1990s. This paper, as the product of the lecture the author delivered at The World Economy China Annual Lecture on 3 November 2011 at University of Nottingham, provides a framework that better illustrates the mechanism that motivates China’s economic growth over the past 20 years. It shows that the current growth mechanism in China is largely the result of institutional reforms and fiscal recentralisation that occurred in 1994 under the leadership of Premier Zhu Rongji. Being allowed to have their own source of tax revenue under the new fiscal reform, Chinese regional governments are motivated to pursue the goal of economic growth through fast capital formation and industrialisation. The newly designed intergovernmental fiscal relationship, as the most important reform programme in China, has also helped create a growth incentive that is compatible between central and local governments, and resulted in a Tibout‐type regional competition in the sense that inefficient use of resources, including public land, would be substantially eliminated by the strategic behaviour of regional governments being more attractive to external direct investment. Such regional competition makes the regional governments preserve and use the markets rather than replace them, and has generated consistent and powerful development momentum for the post‐1994 economy of China.

Suggested Citation

Zhang, Jun, Zhu Rongji Might Be Right: Understanding the Mechanism of Fast Economic Development in China (December 2012). The World Economy, Vol. 35, Issue 12, pp. 1712-1732, 2012, Available at SSRN: https://ssrn.com/abstract=2193222 or http://dx.doi.org/10.1111/twec.12036

Jun Zhang (Contact Author)

Fudan University - China Center for Economic Studies (CCES) ( email )

China

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