China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [76]
One of the most serious criticisms of China’s progress in economic reform concerns the persistent fragmentation and distortion of the country’s internal markets. Chinese and foreign observers alike attribute such fragmentation and distortion to so-called local protectionism—administrative barriers to trade and investment that are erected by local authorities. Among the various factors blamed for the emergence of local protectionism in the postreform period (some scholars argue that this phenomenon did not exist in the prereform cra), analysts have singled out administrative decentralization and China’s unique form of fiscal federalism, which allows local governments to profit directly from the earnings of the firms through taxation.135 In many ways, local protectionism has been further exacerbated by a weak and balkanized legal system that permits local political authorities to pressure courts in their jurisdictions to favor local firms. Consequently, judgments against firms located in other jurisdictions can rarely be enforced and collected because of obstruction by the local authorities. An investigation of Heilongjiang province courts conducted by the Chinese People’s Political Consultative Conference showed, for instance, that local authorities issued specific instructions to the courts to protect sixty-seven firms that appeared to be losing their cases. The authorities explicitly told the courts not to render or enforce unfavorable judgments against these firms.136
Empirical analysis by Alwyn Young also demonstrates that the devolution of economic power to local governments during China’s economic transition is responsible for both the fragmentation of markets and the rising output growth. To the extent that localities are better suited to control the local economy than the central government, aggregate output will increase because of decentralization and not because of the abandonment of control. The fragmentation of markets in China is evident in massive industrial duplication, inefficient allocation of factor inputs, local trade wars, and the emergence of regional autarky.137 Research by other economists provides additional evidence of inefficiencies attributable to the fragmentation of markets. One study shows that economic inefficiency caused by irrational allocation of resources on an interprovincial basis began to worsen in the mid- 1980s and saw no improvement in the 1990s, largely as a result of the fragmentation of markets.138
Specifically, the fragmentation of markets affects both the product and factor markets. In the product market, local governments erect barriers to entry of products made in other localities and exports of raw materials. They typically employ a variety of legal and illegal methods, such as quantitative restrictions, regulatory hurdles (health and trademark inspections), and imposition of fees (equivalent to local tariffs). For example, eighteen provinces have regulations that bar or limit the sale of alcohol produced in other provinces.139 Another striking example of the use of fees to protect local producers is in the automobile sector. Customers who purchase automobiles made in other areas are required to pay additional costs for vehicle registration and inspection. In 1998, the total amount of fees levied on vehicles was 160 billion yuan, about half of which was judged unauthorized or illegal. In the meantime, the automobile industry made only 4 billion yuan in profits in the same year.140 There is evidence that links market fragmentation with slow growth in interregional trade. From 1985 to 1992, China’s exports and imports grew, respectively, 17 and 10 percent annually, but interprovincial trade grew only 4.8 percent a year in the same period-despite annual retail sales growth of 9 percent per year in the same period. 141
Fragmentation also affects the factor markets. An IMF study suggests that China’s capital markets remain highly fragmented. Cross-regional capital mobility within China in the 1990s was comparable to the crossnational capital mobility in developed