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An institutional perspective on coordinated regional development

YE WEIPING | 2020-10-14
(Chinese Social Sciences Today)

The Hong Kong-Zhuhai-Macao Bridge symbolizes better coordination and integration in the Greater Bay Area. Photo: XINHUA 
Coordinated regional development is an inevitable requirement for the next stage of economic growth. This reacts to imbalanced economic growth and manifests the development goal of promoting the free flow of factors of production, saving transaction costs and achieving better and faster economic growth. 
 
In 2017, the report to the 19th CPC National Congress put forward definite requirements for the implementation of the coordinated regional development strategy. In 2018, the CPC Central Committee and the State Council issued the Opinions on Establishing More Effective New Coordinated Regional Development Mechanisms. In 2019, the Central Committee and the State Council issued the Outline Development Plan for Guangdong-Hong Kong-Macao Greater Bay Area (GBA). The above requirements and documents demonstrate that China has attached great importance to coordinated regional development. Legal professionals should analyse the progress made in coordinated regional development and reflect on the root causes of the weakness of laws and regulations from an institutional perspective, searching for corresponding paths to improve the systems. 
 
Current plan
Expanding on the GBA plan, China has paid detailed attention to its coordinated regional development. To promote growth in cargos and services between the Chinese Mainland and Hong Kong and facilitate investment, in 2003, the Central Government of China signed the Closer Economic Partnership Arrangement (CEPA) with the Government of the Special Administrative Region of Hong Kong and the Government of the Special Administrative Region of Macao respectively. In 2004, the provincial governors of Fujian, Jiangxi, Hunan, Guangdong, Guangxi, Hainan, Sichuan, Guizhou and Yunnan, and the chief executives of the Special Administrative Regions of Hong Kong and Macao, signed the Pan-Pearl River Delta Regional Cooperation Framework Agreement to strengthen cooperation in infrastructure, businesses and investment, commerce and trade in this region. The Outline Development Plan for the GBA launched in 2019 marked a new development phase for cooperation and coordination in the region. 
 
It is noteworthy that coordinated regional development has not reached the expected level compared with the massive economic and social progress made since reform and opening up in the GBA. According to the Outline Development Plan, some problems still exist in the GBA. The market’s interconnection level needs further improvement. The internal development gap is still large and coordination and inclusiveness should be strengthened. Moreover, homogenous competition and resource misallocation still exist in some areas and fields. In light of empirical economic research, some scholars believe that the CEPA neither increased exports to Hong Kong from the Chinese Mainland, nor reversed the downward trend in imports. Other scholars conclude that the boundary effect, as a composite index of the trade barriers between the two areas, is still rising and the market is gradually becoming de-integrated. 
 
Incentives and obstacles 
Coordinated regional development could be regarded as an incentive mechanism to promote market entities. China’s economic success since the reform and opening up relies not only on releasing market energy by altering behavior motives and behavior patterns of market entities, but also on the reform of early stage financial management systems, such as “the system of dividing revenue and expenditure between central and local governments,” which fully mobilized the enthusiasm of local governments to develop economy. 
 
Local government competition is an important perspective to observe and analyze the successful experience of China’s reform and opening up. 
 
The reasons why policies and measures for coordinated regional development have not achieved the expected results are worth exploring. Charles Tiebout set five preconditions for effective local government competition in his economic model. These conditions are: Publicly provided goods, services, and regulatory activities are provided at minimum average cost and the scale of population required to reach this minimum is a relatively small share of the national population; There is a perfectly elastic supply of these local political jurisdictions, each capable of replicating all attractive economic features of its competitors; Mobility of households and businesses among jurisdictions is (almost) costless; Households and businesses are fully informed about the fiscal and regulatory policies of each jurisdiction; There are no inter-jurisdictional externalities or spillovers. 
 
In terms of motives, local government competition brings significant positive drive to local governments. The regional GDP has long been an important indicator of whether administrative officials in local governments could successfully receive promotions. Then, the official championship competition centered around the regional GDP emerges. However, coordinated regional development does not necessarily produce positive incentives for the decision-making motives of local governments. On the one hand, the unbalanced economic development among regions could be attributed to that the Matthew effect and the polarization effect which emerge in the process of economic growth are an outgrowth of the market competition. The faster-growing regions with vested interests have no incentive to contain unbalanced development. On the other hand, to achieve better and faster economic growth, it is necessary to further analyze externalities and spillovers of local public goods. Obviously, local governments are willing to internalize positive externalities of the local public goods provided and take the initiative to obtain spillover effects of economic growth in advanced regions. This could explain why local governments are willing to participate in various types of regional cooperation. However, where there are negative externalities in the provision of local public goods, the willingness of local governments to correct those behaviors (which create negative externalities) needs to be strengthened. 
 
Institutional improvement 
Focus is needed to remove artificial restrictions hindering unified market construction and increase the provision of public goods so as to facilitate coordinated regional development. Considering the incentive of local government behaviors, decisions which do not involve behavioral externalities can be left to local governments to make decisions on their own within the scope of authority. When evaluating government behavior, it is important to consider the economic and social effects of government actions to make evaluations comprehensive. Local governments have sufficient motives to internalize the positive externalities of public goods. The Central Government should make the institutional design compatible with incentives to mobilize local governments. For decisions with obvious negative externalities, the Central Government should be the major force promoting the implementation of relevant laws and policies since local governments don’t have strong motives to correct their actions provisioning public goods. In order to improve coordinated regional development, we must clarify the problems that hinder growth and then find solutions that match the nature of problems, promoting institutional construction and improvement. 
 
As far as the regulation of regional blockades are concerned, at the beginning of the reform and opening up, the State Council enacted administrative regulations of the Interim Provisions for the Promotion and Protection of Competition in the Socialist Economy, and set prohibitive provisions to acts that hinder the construction of a unified market, such as regional blockades and the division of departments. Since then, the State Council has made more detailed regulations on the regional blockade in two statutory documents, namely, the Circular on Breaking Inter-Regional Market Blockades and Further Vitalizing Commodity Circulation released in 1990 and the Regulation on the Prohibition of Regional Blockades in Market Economy Activities issued in 2001. The 1993 Anti-Unfair Competition Law and the 2007 Anti-Monopoly Law (AML) included such acts into the scope of legal adjustments. The Opinions on Establishing a Fair Competition Review System in the Development of Market-oriented Systems enacted by the State Council in 2016 made specific requirements according to the government's regulations, regulatory documents and other policy measures for fair competition review, which to some extent compensated for the institutional weakness that the AML’s insufficient binding force had on abstract administrative actions. 
 
However, the implementation of laws and regulations needs to be further improved. Under such circumstances, it is necessary to focus on enhancing the authority and independence of the antitrust enforcement agency and the joint conference on fair competition review, increasing the allocation of resources for law enforcement to relevant public authorities. As such, competition enforcement and the fair competition review system could be implemented from top to bottom. In legal regulations, it is necessary to consider the complexity of the government’s behavioral incentives and their positive and negative effects on economy and society, and make a comprehensive and accurate evaluation of the rationality and legitimacy of the government’s behavior. 
 
Ye Weiping is director of the Research Center for Innovation and Development of the Rule of Law at Shenzhen University. 
Edited by NIU XIAOQIAN