Working Paper: NBER ID: w7616
Authors: Olivier Blanchard; Andrei Shleifer
Abstract: In China, local governments have actively contributed to the growth of new firms. In Russia, local governments have typically stood in the way, be it through taxation, regulation, or corruption. There appears to be two main reasons behind the behavior of local governments in Russia. First, capture by old firms, leading local governments to protect them from competition by new entrants. Second, competition for rents by local officials, eliminating incentives for new firms to enter. The question then is why this has not happened in China. We argue that the answer lies in the degree of political centralization present in China, but not in Russia. Transition in China has taken place under the tight control of the communist party. As a result, the central government has been in a strong position both to reward and to punish local administrations, reducing both the risk of local capture and the scope of competition for rents. By contrast, transition in Russia has come with the emergence of a partly dysfunctional democracy. The central government has been neither strong enough to impose its views, nor strong enough to set clear rules about the sharing of the proceeds of growth. As a result, local governments have had few incentives either to resist capture or to rein in competition for rents. Based on the experience of China, a number of researchers have argued that federalism could play a central role in development. We agree, but with an important caveat. We believe the experience of Russia indicates that another ingredient is crucial, namely political centralization.
Keywords: No keywords provided
JEL Codes: P2; P3; H7; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political centralization in China (D73) | local governments fostering growth (H70) |
| local governments fostering growth (H70) | economic growth (O49) |
| political centralization in China (D73) | reducing risk of local capture (Y50) |
| political centralization in China (D73) | limiting competition for rents (D43) |
| weak central government in Russia (H77) | local governments captured by old firms (H70) |
| local governments captured by old firms (H70) | stifling growth of new firms (M13) |
| central government's control in China (H10) | rewarding or punishing local officials (H73) |
| rewarding or punishing local officials (H73) | encouraging pro-growth policies (O25) |
| dysfunctional democracy in Russia (D72) | local governments have little incentive to resist capture (H70) |
| initial conditions of economic development in China (O11) | limited potential for capture (Y50) |
| central government's ability to influence local governance (H10) | crucial for sustaining growth (O40) |
| elected governors in Russia (D79) | less accountability to central government (H77) |