[MUSIC] How has China been able to incentivize its local leaders and government officials? There are several key features of the governance system that we emphasized at the end of the last presentation. First, that leaders are incentivized to pursue growth. And perhaps most remarkably, this is true at the highest level of government, the Politburo, which is the group of seven to nine top leaders, have consistently promoted economic growth as a main objective of the government. But then with their intention, this incentive had then been passed down to local officials at every level of government. And if you talk to leaders in other countries, this is the thing that most amazes them about China. That local leaders really do really care about growth and not rent seeking, and distribution of resources to clients and friends etc. Now China has also been able to successfully recruit some of the most able people into the bureaucracy. Because government careers are viewed as very high social status, very solid career plan. And finally, accountability in terms of the ability of the regular citizens to influence leaders still remains limited in the Chinese government system. With the one exception of the village election system, which we will talk about later. Now how does selection and promotion of government officials work? Well China has an annual entrance examination for would-be government officials. And this is an extremely competitive exam. It really is similar to the imperial exams which date back hundreds and thousands of years in China. So in 2016, there were nearly 1 million people who took this test, and only 27,000 or so were able to enter the civil service. So this is a selection rate of 1 out of 36 test takers. This is much more competitive than the college entrance exam system, which now admits about half or more of test takers. Now the promotion system is also quite well developed in the Chinese government system. There is an extensive annual evaluation system which are based on very explicit criteria that workers and leaders understand. And when you get to the very top positions, there is additional scrutiny. So almost everyone you have ever worked with will be interviewed to try and understand various aspects of your performance, and your integrity, etc. There's a typical norm where an official starts at a relatively low level of government, and kind of has to work his way up the system level by level, until he reaches the top. And this leads to a very competitive and meritocratic system. You really have to prove yourself to reach the highest levels of government in China. Now, what is the empirical evidence on whether economic performance in fact does influence these promotion decisions? Well there is a well-known study in 2005 which showed pretty convincingly that annual provincial growth rates does increase the probability that the provincial governors or secretaries will be promoted to higher positions in the central government. So this is a quite significant relationship in terms of the magnitude. Research has also found, their study as well as others, that political connections also matter. So it's not just economic performance, but who you know also can improve your chances of being promoted to the next level. One question that's interesting, related to this evidence, is whether the promotion system is actually getting people to work harder to promote growth. Or it's basically acting as a screening mechanism to just select the higher ability people, who kind of innately are hard workers and care about achieving the government's objectives. Now, one might think that excessive focus on economic growth rates might actually not be good for achieving broader development objectives. And one may also in this respect think about the potential downfalls of having a system where there are these annual growth targets that are set at the national level. And then at lower levels of government where the local officials feel a lot of pressure to meet these short term growth objectives. And they may do things to try to boost output in the short run. Even though his investments or spending targets may not be the best for promoting long-term growth. Now, there has been some theory, which is shown, that when an agent is being charged to achieve multiple tasks or objectives. That incentive system has to be very careful because the agent will really spend most of his time on the things that are being emphasized by the principal in terms of the incentive formula. And also, focus on things that he thinks the principal or upper level government in this case will be able to measure accurately. But he might as a result neglect other outcomes that are also important, ones that are not explicitly in the formulas or ones which are more difficult to measure. So one example is that research has shown that in places where provincial officials feel a stronger incentive or a stronger opportunity for being promoted to the higher levels of government. We often see increased pollution in addition to higher growth. And so this can be a negative aspect of an excessive reliance on economic growth, or excessive focus on economic growth as the main government objective. Now one way, obviously, to address this is to diversify the performance objectives that the government evaluates. So tell local leaders that environmental protection or poverty reduction is now going to be part of the formula for evaluating their performance. And this has been done, to some extent, and will probably continue into the future. But of course, it's harder for the government to keep track of everything, so there still may be certain things that are important, which slipped through the cracks. If we consider the performance incentives for regular public employees, not the leaders of government at different levels. We also find that promotions are based on a very systematic evaluation system that looks at a variety of performance indicators. So for example, public school teachers are government workers. They're public employees in China. And every year, they're evaluated on the test scores of their students, observation of their teaching by the principal. Evaluations by peers and students, and this all feeds into a system which produces a score each year. And if they do well after several years, they can be promoted to a higher rank, which entitles them to considerably higher pay as well as much greater prestige in their occupation. Recently, land development has also become more important objective of local officials. Part of this is because in some places, local officials are no longer able to retain as much of the enterprise tax revenue as before because of tax reforms. And so they tend to focus instead on developing land where they can charge land fees that they can keep really 100% of. And it's also been the case that the land development itself seems to be now correlated with the probability of being promoted. So upper official seem to be influenced by whether local officials can develop real estate. And this might be the case because if you have more land revenues, you can invest in kind of very visible infrastructure projects that impress upper-level officials. Or you can steer those resources more indirectly to benefit upper-level government officials. It may be contributing to kind of the overdevelopment of land, the sprawling nature of urbanization in China. Where we've seen population density not really increase even as the size of cities has grown, which is not a very efficient form of urbanization. What about local accountability, and what about China's village elections? In 1987, China implemented a new law that mandated that local village leaders will be elected. And this became nationally implemented in 1998 and mandatory. So under this provision, village heads and other village committee members are elected, typically every three years by popular vote of all villagers. At the same time, the village party secretary, who's perhaps the most powerful person in a village, continues to be selected by the township party committee. So it's not 100% all officials are elected. Nonetheless, people have started to study how this election system has influenced economic outcomes at the village level. And they found very interestingly, if you compare village outcomes before elections started and after they began. That elections increases public goods provision by more than 15%, and also reduces inequality in the village. In addition, research has found that elections are less effective if the community is divided on religious ground. So there still is a dimension in which effective democracy depends on the decisiveness of the society. Now if we think about how village elections are being in some sense used by central officials to meet their own objectives. We can think of to start, a system where the central government tries to monitor local officials themselves to influence their decision and effort through the promotion system and other means of accountability. But if they feel like it's very hard to monitor what local officials are doing, especially at pretty remote levels or low levels like the village or township. Then one thing they can do is establish elections to have villagers help monitor officials' behavior from below. To make the local leaders not just accountable to the center, but really accountable to the villagers themselves. Of course whether this is a good idea from the standpoint of the central government, will depend on kind of how their goals relate to the goals of local leaders, if they are very different. For instance, if local leaders want to be corrupt, and central government officials don't want them to be corrupt. Then there might be an opportunity to improve performance of local officials, by allowing for elections. So this will depend somewhat on the monitoring ability of the center, and of course on the relationship between the goals of the center and the people. If both the center and the people both are against corruption, then allowing villagers to help monitor the officials through elections can help achieve the center's objective as well. Now, what are the implications of this discussion of China's governance system? Well, I think first it shows that the strength of the governance system has been really the high quality and motivation of government officials in the system. This is related to a system of decentralization where local officials have the ability to really influence outcomes. But also a rigorous evaluation and promotion system which incentivizes them. China, as a result, has exhibited a very strong capacity to implement new policies, and to develop infrastructure. Now, some of the limitations of China's government system is that if not properly designed, incentives can become imbalanced. So, there could be an excessive focus on growth of other objectives, and some important outcomes may be neglected. There still is relatively lack of accountability from below, with the exception of the village elections we discussed. And as we think forward, other institutions, for example, court systems that protect property rights. Universities that create innovative minds, and banks that provide adequate finance for new startups and the best, most innovative projects. All of these things may become very critical to sustaining growth rates. In that respect, just having motivated government officials may not be enough.
