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Beyond GDP Growth in China

At last year’s 19th National Congress of the Communist Party of China, leaders reminded local officials that, when it comes to economic growth, they should be focused on quality, not quantity. But if local governments are to succeed, China’s leaders will need to update and clarify the incentive system that fueled past success.

SHANGHAI – China owes its economic-growth miracle largely to local governments. But, as the country attempts to build a more modern and sustainable economy, in a context of lower overall growth, local governments need to adapt. What will happen when they do?

Despite the occasional inappropriate intervention, local governments have been very successful in preserving the market and fostering the spirit of entrepreneurship over the last three decades or so. They have promoted local infrastructure investment, reined in bureaucracy, created an attractive business environment, and enacted preferential short-term supportive policies. But it was always GDP growth that was their main – and, in a sense, only – objective.

This focus on GDP growth is a direct result of the incentives created by the Communist Party of China (CPC), which has long promoted local officials based exclusively on the GDP gains they oversaw. According to recent research by Li Xing and his colleagues, this political competition caused the central government’s growth objectives to be significantly amplified at the local level: the lower the level of government, the more ambitious the objectives have been.

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