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China’s Critical Disconnect

By Stanley Lubman, The Wall Street Journal, China Real Time Report

Last month, a businessman set off three explosions in a town in Jiangxi, killing himself and two others, after trying unsuccessfully for years to obtain reasonable compensation for the destruction of his home for a highway that was never built. In the course of his travails he had been thrown into jail and confined to a psychiatric ward. The suicide bombing dramatized the distress that arbitrary land seizures by local governments continue to cause many farmers.

Such extreme protest reflects a serious systemic problem in China’s governance: Underfunded local governments frequently dilute and undercut implementation of national laws and policies in their effort to sustain growth and increase local revenues. Some examples of the consequences of this practice include not only illegal expropriation of land, but also tolerance of violations of laws on product safety, intellectual property rights (IPR) and protection of the environment. There is a frequent disconnect between local governments and Beijing that is aggravated by the center’s underfunding of local governments.

This gap in Chinese governance could be partially addressed if the central government increased financial transfers to lower levels of government that might serve to reduce the incentives to pursue growth at any costs. In addition, however, local governments must be more closely supervised, both in their use of funds received from Beijing for use in social programs as well as more generally in their enforcement of national laws.

A major area of concern has been the arbitrary expropriation of farmland, often in collusion with private developers, without adequate notice and/or payment of fair compensation. The extent of the problem is illustrated by a nationwide illegal boom in the development of golf courses. In 2004, there were about 170 golf courses in China, and today there are nearly 600—despite the fact that development of new courses has been illegal since 2004. According to a recent report, golf course development was supposed to have been halted in order to preserve farmland and “reduce the huge numbers of villagers thrown off their land as luxury real estate is developed.” An architect of several illegal golf courses said that local governments “were almost always involved” and “were often the main client” for his services.

Local governments have been lax in enforcing food safety laws for similar reasons. Violations are widespread, according to frequent reports in the Chinese media. One recent article told of pork bought in Changsha stores so loaded with bacteria that it glowed in the dark. Another report told of acres of watermelons exploding in Jiangsu province because farmers were over-spraying melons with a growth-promoting chemical, hoping to put them on the market ahead of the peak season and increase their profits. The China Daily recently quoted a lawyer who said that local food safety watchdogs were unwilling to punish violators heavily or close them down because they did not want to be deprived of the income that supervisory bureaus earn from fines and charges on illegal behavior.

In response to inadequate supervision by food monitoring agencies, Beijing has announced that the efforts of local governments to ensure food safety will be more closely scrutinized by the central government, and officials will be rewarded for their efforts or sanctioned for their failures; Beijing, Shanghai and several provinces have already adopted such a responsibility system. A professor of administrative law was quoted as saying “local governments should follow the central government’s orders.” It is a measure of the extent of the problem that this truism was uttered seriously.

The failure by local governments to enforce central government laws on IPR has been a long-standing cause of friction between the U.S. and China, and it remains a serious problem. One cogent review of central-local relations, “Center-Local Relations: Hu’s in Charge Here?” (pdf) , by C. Fred Bergsten et al., states a major cause: “[L]ocal officials, with much at stake in preserving IPR-infringing enterprises, have proved a significant obstacle…” A guide issued by the U.S. State Department for U.S. companies on protecting intellectual property in China states that among the factors that undermine enforcement measures by the central government are “corruption and local protectionism at the provincial levels.”

The muddle illustrated by these examples stemmed from a 1978 decision to decentralize government in order to promote economic development. The “Hu’s in Charge Here?” review tells the story: At that time, local governments were given a separate revenue base and made responsible for their own expenditures. They developed local sources of income, and as a result they were less dependent on Beijing— and, at the same time, less accountable to the center. For example, with leeway to vary from central policies, local governments encouraged development of enterprises in order to promote the growth of local enterprises and to generate revenue, even when they caused serious environmental degradation.

A policy change in 1994 resulted in recentralization of tax collection without transferring significant new funding to local governments to make up for considerable losses of tax revenues. Because the central government hesitated to transfer needed revenue, and because and the local governments remained responsible for social welfare expenditures, local governments were even more motivated than before to promote growth at any cost. To make up for the loss in local tax revenue, in recent years the central government has increased fiscal transfers to the provinces. According to another scholarly study, however, even when the central government has made additional transfers and increased regulation of transferred funds, the pursuit of economic growth has not waned (see, for example, “The Political Economy of Earmarked Transfers in a State-Designated Poor County in Western China,” by Mingxing Liu et al.) Local enforcement of significant national laws continues to suffer.

The implications of local governments’ failure to enforce environmental and food safety laws reach well beyond Chinese borders. Indeed, the U.S. government, aware of the extensive responsibilities of local governments for food inspections and their frequently low level of attention to these matters, responded to the deficiencies in Chinese food safety regulation by opening the first overseas office of the FDA in 2008; it is currently giving compliance training in China that is intended to raise the level of enforcement at the local level. But the level of foreign assistance on product safety generally does not appear to be high enough to make a substantial contribution to solving a nationwide problem.

As helpful as foreign assistance might be, only China’s central government can initiate steps to address the problems discussed here. Some observers have urged that Beijing must transfer additional revenue to local governments to alleviate what one American scholar has called their “fiscal starvation.” The study of fiscal transfers cited above (Liu, et al.), however, suggests that they do not prevent diversion away from their intended purpose and that “more fundamental institutional reforms” are needed. The Chinese government continues to face the enormous task of strengthening local government adherence to national policies that are designed to benefit China’s citizens – but that can affect the rest of the world as well. 6/21/2011