Federalism, Chinese Style: The Political Basis for Economic Success in China

TLDR

China’s rapid economic growth is underpinned by political reforms that establish credible market commitments. The authors describe this reform as a unique form of institutionalized decentralization—“federalism, Chinese style”—which yields three key effects. The decentralization fosters intergovernmental competition for labor and capital, spurs local experimentation and learning, incentivizes prosperity, and shields local governments and enterprises from central political interference.

Abstract

China's remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets. This reform reflects a special type of institutionalized decentralization that the authors call “federalism, Chinese style.” This form of decentralization has three consequences. First, it fosters competition, not only in product markets, but also among local governments for labor and foreign capital. This competition, in turn, encourages local government experimentation and learning with new forms of enterprises, regulation, and economic relationships. Second, it provides incentives for local governments to promote local economic prosperity. Finally, it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government.