Reform Delay And Its Breakthrough After Crisis

There are two obvious characteristics in China’s transition process: First, thereform is usually delayed，it is said that the economic policies which have not beenconducive to the improvement of economic efficiency and social welfare are difficultto be alternated; Second, Delayed-reform can often be a breakthrough after the crisis.The existing literatures are not entirely satisfactory to explain both features. There issome weakness in those theories about China’s reform delay. Those theories whichthink that the reform delay is a game equilibrium among interest groups clearlyunderestimated the independence of the Chinese governments (either the centralauthority or local governments). The Communist leading political system and therelative concentration of the right structure make the government not a tool that maybe easily subject to interest groups. Another theory which attributes the reform delayto the lack of knowledge of the reform fails to analyze the reason why thepolicymaker has to face to limited reform knowledge. What’s more, since themechanism of crisis effecting on the delayed reform is linked to the reason whyreform is delayed, it is difficult to explain precisely how the crisis promotes reformbefore the reason of reform delay is put out. Therefore, regardless of the need forfurther development and improvement of the transition economics theory, or the needto provide both operational and targeted policy measures for speeding up the reform,it is necessary to issues more in-depth discussion about the reform delay and itsbreakthrough in the latest decade in China.In view of this, the paper proposes a hypothesis on the mechanism of China’sgradual reform to explain the reform may be delayed on some conditions. In thismechanism, the China’s transition is the result of the game between the centralauthority and local governments after the impetus of the crisis. Specific, the socialcrisis caused by "Cultural Revolution” made the central authority feel the regimesfirmly under threat, so it opens the reform and opening up. However, due to thecentral government’s less knowledge about reform, the reform has a higher risk offailure and reversal. Then the central authority successfully established a set ofpolitical incentive system which considered economic growth as the core to shift therisk of the reform to local governments. Local governments preferred to accept the risk of reform because they all wanted to be promoted but there was fiercecompetition among them. Local governments’ reform tests afford amount of reformknowledge to the authority. After comparing and choosing these reform models, theauthority will copy successful reform model to other local places or all the country.But the gradual reform mechanism may not be valid in two cases: one, the centralauthority is subject to ideology so that it won’t encourage or even suppress theinnovation with the market-oriented nature induced by the local governments; two,local governments may find a lower-cost method of non-market-oriented reforms topromote economic growth, resulting in either the central authority or localgovernments are reluctant to reform attempts.Reform delay will further exacerbate the distortion of resource allocationmechanism, and trigger a series of social problems. This situation may lead to a crisis,or the impact of the abroad crisis aggravates these problems so that a native crisisbreaks. Both cause economic growth to slowdown, the unemployment rate to increaseand so on. As a result, the regime suffered threat. The central authority has to take theinitiative action to assume the cost of reform, promote reform across the country orwider regions. So China’s reform was accelerated during the crisis.We will take land finance as an example to illustrate the second reason ofChina’s reform delay mentioned above and the possible mechanism of crisis’simpacting on reform in this case. Only using land, local governments can affordenough financial income and economic growth rate to meet the requirements of thecentral authority，so they won’t risk to make reform. Land finance was pro-gazed bylocal governments because the cost of this policy was much less than other reformcost. Thus, after local governments are no longer willing to make reform test, onehand the central authority can’t receive the feedback from the experience ofsuccessful reform, in other word, the central authority is limited to little reformknowledge. On the other hand, the local governments have provided sufficienteconomic growth to ensure that the regime is solid, so the central government is notwilling to reform, either. In this case, except directly prompting reform by enforcing impact onthe central authority, the crisis may also indirectly weaken the land finance’s delayimpact on reform so that the reform can be promoted more quickly.Above theoretical hypothesis has been proved correct by the Chinese provincialpanel data during1998to2010. Firstly, in the test on the relation between landfinance and market-oriented reforms, the land finance variable’s coefficient is significantly negative. Secondly, after adding the crisis variable to the model, thecrisis variable’s coefficient is significantly positive. Thirdly, after adding theinteraction term of land finance and crisis to the model and doing econometric testagain, the interaction term’s coefficient is significantly negative, indicating that thecrisis will weaken the land finance delayed impact on the market-oriented reform. Theabove results are also confirmed by various robustness tests.Finally, based on the results of this study, we propose three policyrecommendations. First of all, the central authority should utilize the crisis to putreform forward more quickly. Secondly, the key to prompt reform is to get rid of thedependence of local government’s dependence on land finance. Finally, change thesystem of land acquisition is the most urgent and feasible measure for breaking downlocal government’s dependence on land finance.