Perils of decentralisation with Chinese characteristics
Context:
The article- “Perils of decentralisation with Chinese characteristics”, brings the contrasting approaches of India and China in terms of subnational economic competition. It throws light on the two nations economic models.
- India’s model of promoting healthy competition among its states to attract investments.
- China’s model of extreme decentralization.
Relevance:
GS-02 GS-03 (Polity and Governance, Economy)
Dimensions of the Article
- Background: China’s Decentralization and Economic Growth
- The Problem of Overcapacity
- Shift Under Xi Jinping’s Leadership
- Comparison: China vs. India
Background: China’s Decentralization and Economic Growth
- In China, a significant portion of government spending of nearly 51%, is handled by the local governments at the sub-provincial levels, as compared to just 3% in India.
- Having a much broader qualitative mandate, the local governments in China, take responsibilities on unemployment insurance and pensions. Which typically is managed by the national government in India.
- In the 1980s and 1990s, China’s decentralization, combined with the economic reforms initiated by Deng Xiaoping, allowed local governments to experiment with various economic policies to drive growth.
- Local leaders were incentivized to prioritize rapid economic growth as it determined their political success.
- This carved out a model where local governments heavily invested in industrial land at discounted rates, hoping to boost industrial output and generate future tax revenues.
- The strategy ultimate strategy was to attract industries by providing cheaper land, lower costs, and other benefits. And this resulted in a significant increase in exports due to low production costs and a competitive edge in global markets.
The Problem of Overcapacity
- Overcapacity is a situation when there is more supply and less demand. It leads to wastage of resources and results in loss-making enterprises.
- China also faced a similar situation of Overcapacity due to its aggressive investment-led growth model.
- This unregulated expansion had its benefits too. Foreign markets absorbed China’s excess production and sectors like steel expanded rapidly.
- China went from being a net importer of steel to the world’s largest producer and exporter in just a few years.
- However, as the global demand became stagnant, managing overcapacity became a significant policy challenge.
Shift Under Xi Jinping’s Leadership
- Under Xi Jinping, a study by National Development and Reform Commission (NDRC) in 2014, indicated that half of all investments from 2009 to 2013 were ineffective and resulted in a massive waste of about $6.9 trillion.
- The economic model that worked well during the 1990s and early 2000s began to lose steam under Xi Jinping and to overcome this, Xi Jinping moved towards recentralizing economic control by tightening oversight on both state and private capital.
- Central policies started becoming more specific, focusing on particular sectors and product lines.
- For instance: The push for self-sufficiency in semiconductors.
- Local governments invested heavily in chip-making firms, encouraged by the central government’s push.
- However, even after a decade, China still struggles with advanced chip production, and many firms have survived by relying on government subsidies without becoming competitive.
Comparison: China vs. India
- India’s federal structure maintains a healthy balance between central authority and state autonomy.
- In India, the central government controls the critical areas like defense, foreign policy, and macroeconomic management. And, it also encourages the states to compete with each other to attract investments which allows for healthy competition without the risk of excessive decentralization like that of China.
- India’s push for competition among states is aimed at enhancing governance, improving business environments, and attracting foreign direct investment (FDI).
- China’s extreme subnational competition, which initially created economic growth, has now turned problematic.
- The model led to a race where local governments prioritized rapid industrial growth over sustainable development.
- This lack of a “brake” mechanism resulted in resource misallocation and significant financial waste.
Way Forward
- China should focus on transforming from an investment-driven model to one that fosters innovation, consumer demand and sustainable development. Moreover, it must try to improve its global image by repairing its international relations with other super nations.
- For India, it’s a great lesson to learn from China’s missteps. Rather than focusing more on decentralising, the country should focus on skill development, employment generation and sustainable industrial growth. This balanced approach will help India to invite investments while ensuring inclusive growth across the nation.
