Government-Industry Relations After Decentralization: From the Five-Year Plan to the World Trade Organization

Abstract

A decentralisation of autonomy to firms in the urban sector of China was carried out from the late 1970s in a gradualist or experimental manner to ensure a ?reform without losers?. Both line ministries and local governments were ?early winners? who became in favour of the status quo. A meaningful economic reform stopped by the end of the 1980s. The 1990s was spent fixing the political, economic and social damages caused by the reform. A series of efforts have been implemented by the central government to ?get the economy back to plan? since the mid-1990s. The relationship between government and industry was dancing at the tune of two-step forward and one-step backward.

China?s entry into the World Trade Organisation (WTO) was an opportune move to reap the fruits of the reforms. On the threshold of opening up its foreign trade regime, the central state reclaimed its authority as final decision makers, although the local authorities had been the ?driving forces in the process?. A comparative analysis of sector-specific governmentindustry relations since the Five Year Plan (FYP) reveals a tendency on the part of the industry to ?drag its feet? throughout China?s WTO negotiations.

This dissertation has developed a ?ministry-sector horse trading? model to understand China?s trade concession for entering the WTO. The three independent variables are government-industry relations, sectoral competitiveness and market structure. The negotiators refused to give concessions on ?high stake? sectors where the economic bureaucracies have high incentives to develop the industries; on uncompetitive sectors due to their loss-aversion tendency to minimise domestic political, economic and social damages; and on concentrated sectors for the presence of unified pressure from the enterprises. To maximise gains, negotiators tend to fight hard for ?high stake?, uncompetitive and high concentration sectors, but easily back down on "low stake?, competitive and low concentration sectors. A horsetrading strategy was adopted by negotiators after weighing the three indicators. That explains the dependent variables of huge concession on the agricultural and textile industries, but little concession on the banking, telecommunications and automobile sectors.

As a consequence, the WTO negotiation outcome was ?efficiency-reducing?. It allowed the economic bureaucracies some time to decide if they were willing to give up their control of ?high stake? sectors, impose great adjustment costs on sectors that were internationally competitive, and protect monopolistic profits of concentrated sectors. The ?efficiencyreducing trade concession? challenges the common belief that China?s WTO accession would have a huge positive impact on the country?s marketisation reform.