Federalism and the Impetus for Reform in China

May 02, 2002 | BY

clpstaff &clp articles

China's recent entry into the WTO raises the essential question of what has driven reforms.

By Sean M. Dougherty and Robert H. McGuckin, The Conference Board, New York

Most commentators on China emphasize that privatization has been a key component of the country's reforms. But in a recent study, The Conference Board shows that China's increasing reliance on market-enhancing federalism1 is a significant though less recognized factor in the success of the Chinese reform programme (McGuckin and Dougherty, 2002). In our opinion, in addition to its localization of economic decision-making, China's increasing integration into the global economy will help to accelerate economic restructuring and the liberalization programme.

Much of China's growth from the early 1980s to the early 1990s can be traced to the development of individual proprietorships and rural collective firms that were a product of the first waves of China's economic reforms.2 Local governments, especially at the township and village level, were instrumental in facilitating the growth of these small-scale entrepreneurs.3 Building on the experiences with small firms and collectives, China during the 1990s broadened its reform programme to large and medium-sized
firms.4

While the encouragement of private ownership boosted incentives for individuals and firms to set up new enterprises, decentralization

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