China’s Development Modeli:the Costs and Benefits of the Decentralization Approach to Transition

This article provides a coherent framework within which to understand China’s development model,as well as the successes and the failures of China’s decentralization approach to reform.The combination of political centralization and economic decentralization provide local government with enough incentives to develop local economies,in particular incentives to promote market privatisation locally.However,the relative evaluation-based incentive schemes lead to inter- regional market segmentation,increasing inter-regional development gaps and the unequal provision of certain public goods.The success of early-stage reform can be attributed to the benefits of the decentralization approach.The next stage reform should however focus on minimizing the associated costs.China’s gradualist reform can be seen as a mechanism design issue under the control of central government.Therefore,it is essential to take both the costs and benefits of the decentralization approach into account in the design of the next-stage reform package.