• Size & economic might: California is the 6th largest economic entity in the world by GDP & accounts for 15% of America's total. By same measure, Guangdong and Jiangsu would be the world's 13th & 14th largest, exceeding Spain and Australia. Shandong, Zhejiang & Henan are individually a top 20 economy. Henan is just behind the Netherlands.
• However, various disparities exist:
  • By Area; Xinjiang is 47x Hainan
  • By Population: Guangdong is 33x Tibet
  • By GDP: Guangdong is 62x the GDP of Tibet, Beijing's average is 5x Gansu's
    • By comparison, the richest per capita GDP state New York is just 2.3x that of poorest Mississippi's
  • Conclusion: Large area, population, economic activity disparities makes it very hard to govern

1. Characteristics of Government Governance

• China has a 5 level governing system: Central 中央 > Province 省 > City 市 > County / District 县区> Village 乡镇, which evolved from historical 3 level organization

  • Beginning in 50s, started piloting having cities oversee counties (officially in 1983)

    • Number of cities went from less than 200 in 50s to over 600. Many "regions" were converted into official cities. Some regions exist but are generally sparsely populated areas, ie in Inner Mongolia

    

• Of course in reality, cities get very different treatment, political resources, etc. Same goes for counties.
• The balance between central and local government is really difficult — 1) maintaining unity is necessary, but 2) the size of the country necessitates that local government must be in charge for daily operations. First line of Romance of Three Kingdoms tells us that "The empire, long divided, must unite; long united, must divide. Thus it has ever been" and we can see in the last 2000 years of Chinese history, the relative "peaceful & unified" time is only 950 or 45%, with conflict / broken accounting for 55%. Which shows us how difficult it is to manage this balance. Thus the Chinese constitution notes that while the central government leads, the local government is expected to take initiative.
• On the CCP and the government. There is high overlap between the two organizations and difficult to separate, and since this book is about economic development, there is no need to differentiate.
• Duplication at each level: everything that exists at the central level are largely duplicated at the provincial, city and county levels, and is called the "4 sets of teams" 四套班子。eg. the central government has a finance department, and so does the provincial level, etc. Each department has a vertical reporting line, and also a horizontal one — that is, a city education dept will have to report to the provincial education dept (vertically) which is a "business" 业务 relationship but also to other city administrative depts (horizontally) which is a "leadership" 领导 relationship.
• Because the system is so complex, the tendency is for folks to "kick the ball" and throw everything to the level above them, leading to a natural concentration of power above. The key is to simplify internal decisionmaking and to make things happen at the lowest level where consensus can be reached. If there are often cross-departmental operations that need to occur, then a designated senior leader should be appointed, ie, there's usually someone in charge of the economy at each city because there's involvement from finance, commerce, tax, reform, etc.
• China was the first to come up with a complete professional bureaucracy. Roles cannot be inherited, must test into it. Not just political leaders but moral representatives, and responsible for maintaining the country & society's culture & ideology. Bureaucrats are assigned and usually must rotate throughout various regions.

1. Externalities and Economies of Scale

• Whether or not something should be taken care of by the local government is dependent on what are the effects. If no one external (to the administrative region) is effected, then the local bureaucracy should take care of it, if not, then the level up should coordinate. eg. cross-provincial pollution will require central government involvement.
• Economies of scale also explain what is taken care of by the local vs central government. For example, defense is borne by central, but compulsory education is largely borne by the local government since it largely involves local students and teachers. But educational materials are by the central government because the population having a different education and not understanding each other (including cultural references) would be a negative externality.
• Factors explaining the disparity across the country:
  • Population density is hugely uneven. The eastern half of China has 43% of the area but 94% of the population. The 4 largest provinces (Tibet, Xinjiang, Inner Mongolia and Qinghai) are about 50% of China's area. (BTW, centuries ago China used to be more dense in the north than the south, but it is now denser in the south.)
  • Provinces are also largely split by geographic landmarks — rivers or mountain ranges — as well as language (dialects). All this explains a lot of the divisions in administrative regions.

2a. Economic Development Transition Areas of Administrative Regions

• Where administrative regions meet, poverty tends to be highest. If we count 15km to each side of borders, we see that of the 592 most impoverished counties in 2012, over half are in this area (which itself accounts for 1/6 of the nation). Partly it's because these are often mountainous, often with minorities speaking different dialects, and neglected by local governments. But it's also precisely here where the Communist Revolution started, ie JinggangShan 井冈山.
  • Until 1992 even, roads tended to break down near boundaries, even 2012 this persisted.
  • Negative externalities continue to pile up though in cross-province situations, especially pollution. eg the Huai River, Tai Lake, Yellow River all have this problem.
• The solution is more market oriented reforms. In the short to mid-term, regional integration is needed. But the difficulty is: how do you serve agriculture-reliant counties and industry-reliant cities at the same time? 2 schools of thought which will be covered later:
  • 1. Increase independence and autonomy of counties, weaken their relationship with cities.
  • 2. Make cities bigger, remove counties and make them into districts. From 1983-2015: 92 cities removed 134 counties. For example Beijing used to have 8 districts but now has 16, the new ones are old counties turned into districts, same with Shanghai. This has accelerated economic development for many of the counties, but also created problems due to differences in land use.

1. Complex Information