What role does the government play in China's urbanization process?
Since the reform and opening up, especially since the beginning of this century, China has experienced unprecedented rapid urbanization. In a horizontal comparison of the “BRIC countries” (Brazil, Russia, India, China, abbreviated as “BRIC”), China's urbanization path is unique, and is especially clearly different from the urbanization paths of Brazil, India, and other large developing countries with big populations. What draws the world's attention even more is that the outstanding performance of this urbanization path with Chinese characteristics can be called unprecedented. Take expressways as an example. In 1989, only 271 km of expressways were open to traffic in China. By 1998, 1,741 km were added that year alone, bringing the total mileage open to traffic to 8,733 km, ranking sixth in the world. By the end of 2001, the mileage open to traffic reached 19,000 km, leaping to second in the world. Ten years later, by the end of 2011, the total mileage open to traffic reached 85,000 km, leaping to first in the world. By the end of 2012, the total mileage open to traffic reached 95,600 km. By the end of 2013, there was no longer any suspense that it would exceed 100,000 km.
The same phenomenon also occurred in infrastructure such as railways, urban roads and bridges, airports, water, electricity and coal, telecommunications, and warehousing, and was even more reflected in avant-garde designed, massive urban buildings, such as supertall towers, star-rated hotels, urban complexes, and newly built housing. In addition, facilities and services related to residents' clothing, food, housing, and transportation, such as air routes, automobiles, and home appliances, also grew very rapidly. These infrastructure, commercial, and living-support facilities supported the rapid industrialization of China's economy.
Entering this century, China's becoming the world's factory has also become an indisputable fact. Made in China can be found in every corner of the world. China not only became the world's largest trading entity, but its total import and export volume once reached more than 70% of GDP. This is unprecedented in the history of great powers and even in world economic history. The mutual enhancement of urbanization and industrialization successfully created employment opportunities. Hundreds of millions of rural people migrated to cities for employment and settlement, causing China's urbanization rate, measured by the urban permanent resident population, to rise rapidly, reaching 52.6% by 2012. Rapid urbanization not only changed the face of cities with each passing day, but also profoundly changed China's social structure, and thereby affected people's values and consumption preferences. In the course of urbanization, China's enormous population size gradually revealed the tremendous power of its consumption. What British merchants expected more than 150 years ago, that “if only every Chinese person used one cotton sleep cap each year, the existing factories in England would already be unable to meet demand,” has come true, and the fantasy is turning into reality.
It is precisely because of this vision that the international academic community is deeply fascinated by China's urbanization path and the corresponding experience of rapid economic growth, and has thus constructed the concept of the “China model.” In this model, the developmentalist government, especially local government, is crucial and is the cornerstone of the “China model.” Because the government takes economic development as its sole purpose, it tests all kinds of political and social affairs by GDP, without other preferences. This kind of “neutral government” is the key to advancing urbanization and thereby promoting economic growth.
At least from a superficial perspective, the above observations are true. International experience shows that urbanization does not come out of thin air. If it relies on spontaneous evolution, not only does it take too long, but because of the lack of planning, it will hinder the city's further development. More seriously, laissez-faire development can easily trigger urban diseases such as insufficient employment opportunities, slums, and social disorder, and then lead to “urban drifting.” Thus, in urban development, how to give play to the government's role has become a field of study. The fact that urban planning programs are commonly offered in universities in various countries is one example. China's urbanization experience precisely reflects from one angle that a strong government can prevent the above urban diseases from arising.
⟦NL> However, if investigated at a deeper level, some questions also arise. First, what causes the government to have such enormous enthusiasm to promote urbanization and remain unaffected by other preferences? Second, what mechanism ensures the sustained supply of resources, especially an abundant source of funds, for the government to promote urbanization? Third, is this government-led urbanization model sustainable? Obviously, without clarifying these questions, it is impossible to objectively and comprehensively grasp the full picture of China's urbanization, and further impossible to build the theory of the “China model” on a reliable theoretical foundation. In this sense, the essence of this research project is institutional economics, hoping to explore institutional evolution and its significance through empirical analysis.
II
The Chinese government's important role in urbanization can be traced back to 1949. Before that, like other developing countries, China's urbanization did not involve strong government intervention and showed a natural process. After 1949, China implemented a highly centralized planned economic system similar to that of the former Soviet Union. At the macro level, this was reflected in the use of mandatory plans instead of a competitive price mechanism to allocate resources. At the micro level, it was reflected in the use of administrative production units instead of a free enterprise system based on survival of the fittest. Observed from the perspective of institutional economics, in this system information was aggregated from the bottom up, while decisions, that is, directives, were implemented from the top down. The central planning agency was the highest, even the only, decision-maker, and local governments were merely, even solely, executors. As a result, the entire economic activity, whether in terms of people, finances, and materials or production and supply and marketing, was controlled by plans. It should be pointed out that this system was a strict system. To ensure the smooth progress of economic planning, corresponding arrangements needed to be made in the social system and political system. In addition to maintaining various “units” subordinate to administrative power in cities, in rural areas this was manifested in the use of administrative power to artificially maintain the urban-rural divide.
It is very obvious that the operational results of the above highly centralized planned economic system presented fiscally dominant characteristics in financial arrangements, and all economic activities were state economic activities. The so-called public finance is half finance and half politics. It is the foundation and pillar of state governance and is highly subordinate to the state's strategic goals. After 1949, constrained by the historical conditions of the time, developing industry, especially heavy industry related to national defense and security, was the urgent task. In order to develop industry, investment had to be expanded, which required suppressing consumption, mobilizing savings, and controlling costs. The highly centralized planned economic system and its corresponding social and political institutional arrangements could precisely satisfy this requirement.
Specifically, the mechanism for realizing the above demands was as follows: in rural areas, through the state monopoly for purchase and marketing of agricultural products, agricultural product prices were artificially lowered and industrial product prices were raised, using the scissors differential to mobilize rural savings into industry, and correspondingly lowering wage costs. Through the people's commune system, the rural population was bound to the land, artificially reducing the opportunity cost of population mobility. On this basis, not only could low wage costs be maintained for a long time, but industrial capital accumulation could also be continuously maintained. In cities, by establishing administratively subordinate state-owned factories, capital was ensured to be concentrated in the industrial sectors most needed by the state. Through ration coupons and supporting systems, consumption was artificially suppressed, and through the monopolistic arrangements of state-owned banks subordinate to public finance, consumption surpluses were continuously mobilized into industrial investment. Under these circumstances, fiscal arrangements subordinate to the state's strategic goals naturally determined the order of their financial arrangements: first construction, then livelihood. Efforts were concentrated on developing industry, while cities were regarded as a necessary cost of developing industry and thus became subordinate. Hence the scene of Chinese cities at that time appeared: on one side of the road were tall factory buildings, and on the other side were “rammed-earth” staff dormitories, with poor living conditions, insufficient living-support facilities, and severe shortages in urban infrastructure and public utilities. The typical representative of this scene in a newly emerging industrial base was Daqing, and the typical representative in an old industrial base was the Tiexi District of Shenyang.
While the highly centralized planned economic system brought economic development, it also brought serious drawbacks. On the one hand, by the late 1970s, China's industrial system had taken initial shape, and gross industrial output value already accounted for more than 70% of total social output value. On the other hand, urbanization lagged seriously, and more than 70% of China's population were still peasants. The tendency toward dual economic segmentation was not only solidifying and deepening, but also sharply antagonistic and at risk of rupture. In the language of the time, the proportions of agriculture, light industry, and heavy industry were seriously imbalanced, the urban-rural gap was continuously widening, and the national economy had reached the brink of collapse. The root of the problem lay in the “Stalin model,” namely the decision-making errors, serious waste, and low efficiency of the highly centralized planned economic system. It was precisely for this reason that reform became historically inevitable, and the orientation of reform was naturally toward a market economic system.
Looking back on 35 years of China's reform experience, it can be seen that it adopted a market-oriented gradual reform approach. This approach laid the genetic foundation of China's current urbanization model and became prominent because of path dependence. Reform started from the highly centralized planned economic system, and the logical and practical starting point of reform was first to reduce the degree of centralization, manifested as the delegation of administrative power, especially decision-making power. In central-local relations, this was reflected in streamlining administration and delegating power, with local governments having greater decision-making power. In government-enterprise relations, this was reflected in delegating power and yielding profits, not only giving enterprises operational autonomy but also allowing retained profits. In enterprise-worker relations, a bonus system was introduced, allowing differences between good and poor performance. In state-peasant relations, the state monopoly for purchase and marketing of grain was abolished, the people's commune system was eliminated, and the household contract responsibility system was implemented, encouraging peasants to earn more through more work on the basis of giving them operational freedom.
This series of institutional power-delegation arrangements enabled China's urbanization path to begin to break away from the traditional model, manifested in three aspects:
First, with the rural economic system reform based on the household contract responsibility system, peasants could invest and operate independently, so China's industrialization was no longer state-led industrialization and displayed typical Asian industrialization characteristics. That is, peasants with monetary income, governed by the laws of handicraft industrialization, invested in industry. Township and village enterprises flourished, and their clustered development changed the original urban layout, and small towns began to emerge. At the same time, urban construction funds also no longer relied on fiscal appropriations, but were mostly arranged through so-called self-raised funds such as fund pooling and shareholding. In a sense, this was the earliest form of public-private partnership (PPP) to appear in China.
Second, the original cities were gathering places for state-owned enterprises. Under fierce competition from non-state-owned enterprises represented by township and village enterprises, the performance of state-owned enterprises was generally poor, and some even suffered serious losses. This not only greatly affected local fiscal revenue, but also, because of worker layoffs, the severe employment situation forced local governments to attract investment. To attract investors, infrastructure with the “three connections and one leveling” became a basic condition. Because renovating old urban areas was more costly, the method of building new cities beside old urban areas was often adopted, and the development zone model thus became widely popular.
Third, streamlining administration and delegating power provided sufficient conditions for the above urbanization development. In the 1980s, with the extensive development of the rural household contract responsibility system, the channel for mobilizing economic surplus from rural areas had already been blocked. At the same time, with the delegation of power and yielding of profits to state-owned industrial enterprises, fiscal revenue based on profits showed a downward trend. Squeezed from both sides, the original fiscal foundation was shaken, and a change of course became necessary. After 1984, on the one hand, in fiscal revenue, “replacing appropriations with loans” and “replacing profit delivery with tax payments” began to be implemented. On the other hand, in fiscal expenditure, “eating from separate kitchens” began to be implemented, that is, the central and local governments each bore their own level's fiscal expenditure. This change in the fiscal system laid the precondition for local governments to organize fiscal revenue in order to meet their own level's fiscal expenditure. The long-term disconnect between industrialization and urbanization formed under the highly centralized planned economy created arrears in urbanization. In addition, the enormous pressure to transfer rural surplus labor into employment forced local governments to make great efforts to organize revenue to meet expenditure. Extra-budgetary revenue thus emerged, grew rapidly, and increasingly became the main source of funds for urban construction.
Research in institutional economics shows that institutional change has the characteristic of “path dependence.” Once initial conditions are given, institutional research will unfold along the space of development possibilities prescribed by the initial conditions, and in the process of this unfolding will continuously strengthen the tendency to depend on this path. In China's urbanization, the power-delegation arrangement in the 1980s from highly centralized decision-making power to dispersed decision-making changed the initial conditions and led to the above three changes, and all these changes implied a common path: urban development funding arrangements could be realized without formal fiscal resources (general fiscal revenue composed of taxes). Moreover, as time passed, under mutual competition and imitation among localities, this path became increasingly clear, namely the land leasehold system. That is, through converting “raw land into serviced land,” land value was increased, and funds were then raised by realizing it. In addition to being used for infrastructure construction, land could also be used to support land and enable rolling development. The genetic foundation of “land finance” was thus established.
Because various resources, including land, were mostly concentrated in local governments, local governments' capacity to raise fiscal revenue, especially extra-budgetary fiscal revenue, was far higher than that of the central government. From 1980 to 1993, local fiscal revenue as a proportion of national fiscal revenue averaged as high as 68%. In some provinces with rapid economic development and rapid increases in resource prices, especially land prices, fiscal revenue grew much faster than the national average. By contrast, local governments' expenditure responsibilities did not change greatly, and especially in some economically developed provinces, expenditure growth was smaller than revenue growth. From 1980 to 1993, local fiscal expenditure as a proportion of national fiscal expenditure averaged 49%, showing a pattern of large fiscal power and small expenditure responsibility.
The continued decline in the central government's fiscal revenue as a proportion of national fiscal revenue, even to the point where central fiscal expenditure was difficult to maintain, finally triggered the 1994 fiscal system reform. Constrained by the conditions at the time, this reform did not make major adjustments to the expenditure responsibilities of governments at all levels. The main goal of the policy was to concentrate efforts on raising fiscal revenue, especially the central government's fiscal revenue. Looking back now, the goals at that time were limited, mainly to raise two proportions: that is, to raise the proportion of fiscal revenue in total national income and to raise the proportion of central fiscal revenue in total fiscal revenue, commonly known as the tax-sharing system reform.
⟦NL> With respect to the priority goals set at the beginning, the tax-sharing system reform achieved tremendous success. In addition to the increase in the proportion of fiscal revenue in total national income, the proportion of central fiscal revenue also continued to rise. By 2008, local fiscal revenue accounted for only 47% of national fiscal revenue, down 21 percentage points from 1994. But at the same time, the expenditure responsibilities of local governments did not decrease correspondingly, and expenditure continued to rise. By 2008, average local fiscal expenditure had reached 79% of national fiscal expenditure, up 20 percentage points from 1994. The fiscal revenue-expenditure gap of local governments grew larger and larger. To meet the demand for funds for urban construction, local governments had to further expand funding sources. As a result, an urbanization investment and financing model using land as an intermediary gradually emerged. This not only became the main model dominating urbanization investment and financing since the beginning of this century, but also became the complete form of today's Chinese local government “land finance.”
In 1998, China Development Bank and the Wuhu municipal government pioneered the “Wuhu model” in the field of urban infrastructure loans in China: several single urban construction projects were bundled together, a financing platform designated by the municipal government acted as the legal person for unified borrowing and repayment, and the municipal government established a “debt service reserve fund” as repayment guarantee. Subsequently in 2000, cooperation between China Development Bank and the Suzhou Industrial Park further developed this model and created a brand-new institutional arrangement: the government contributed funds to establish a commercial legal entity as the borrowing institution for infrastructure construction, enabling the borrower to obtain the project revenue rights from land transfer and cultivating the borrower's “internal cash flow.” At the same time, through the fiscal compensation mechanism, fiscal-type funds such as land transfer revenue were converted into the borrower's “external cash flow.” The two worked together to effectively transform government credit into repayment cash flow. This is the well-known “local financing platform” model.
After 2000, in addition to China Development Bank, more and more local governments and commercial banks participated in this model. In particular, in 2008, in order to resist the economic recession brought by the global financial crisis, China launched an unprecedented “four trillion” economic stimulus plan. The number of newly built and under-construction infrastructure projects increased substantially. In addition to fiscal investment, more local governments adopted the method of debt-financed investment, and the local financing platform model was highly favored. At the same time, the financial system's credit constraints on urban infrastructure investment were also greatly relaxed, which also provided convenient conditions for debt-financed investment. The balance sheets of thousands of government-owned companies expanded rapidly, and the scale of debt rose sharply.
According to the 2011 audit by the National Audit Office, 48.85% of the outstanding local government debt balance in 2010 occurred after 2008. At the same time, local debt was nationwide. By the end of 2010, among 2,779 counties nationwide, only 54 county-level governments had not borrowed government debt. All other provincial, municipal, and county governments had borrowed debt. At the same time, local government debt also showed a trend of accelerated development. In the National Audit Office's 2013 audit, all local government debt, including debt for which repayment responsibility was borne, debt for which guarantee responsibility was borne, and other corresponding debt, rose from 10.7 trillion yuan in 2010 to 17.99 trillion yuan in June 2013, with an average annual growth rate of nearly 20%. Among this, county-level government debt grew fastest, at 26.59%; municipal-level was next, at 17.36%; and provincial-level was 14.41%.