Local Economic Protectionism in China’s Economic Reform

Abstract

A hallmark of China’s economic reforms since 1979 has been the decentralisation of the use of resources to lower levels of the administrative hierarchy. The central leaders have expected the subnational units, by making greater use of the market, to use the decentralised resources in economically productive areas. Provincial and local authorities are, however, very pragmatic. They miss no opportunity to maximise their control of resources, in order to minimise conflict in their units or localities. In a country with as unfavourable a resource-population ratio as China, local protectionism is not inconceivable, though it is neither inevitable nor desirable. Although it is widely accepted that China’s reforms have achieved notable success in moving towards a market economy, as evidenced in the remarkable reduction in the share of goods allocated through the plan and in the deregulation of price controls (World Bank, 1994: xiii–xiv), progress in the greater integration of the domestic market is less pronounced. Local protectionism or the ‘feudal economy’ principally takes the form of using a restrictive economic blockade by China’s provincial and local governments to prevent the outflow of scarce local raw materials and the sale of non-locally produced goods within their areas. This article addresses the issue of why local economic protectionism has arisen and been sustained in the course of the economic reforms. In the first section of the article, incidents of economic localism in the provinces are presented. The causes of the rise of local economic protectionism will be suggested in section two. It is argued that local protectionism occurs because of the fiscal squeeze experienced by subnational governments in the economic reform period and the use of ‘import’-substitution industrialisation to promote ‘infant’ industries in inland China. Section three examines the effectiveness of the tax-assignment reform, implemented nationwide in 1994, in containing the economic problem.