What Happened To The Growth Of China?

In January, China’s government forecast that the country’s economy – which, at the time, was experiencing a strong rebound after the pandemic slowdown – would grow 5.5% in 2022. But by the second quarter, the spread of the Omicron variant had forced the government to implement emergency lockdown measures in its most economically dynamic cities, including Beijing, Guangzhou, Shanghai and Shenzhen.

The two-month lockdown in Shanghai, in particular, dealt a devastating blow to growth , as the entire Yangtze River Delta was cut off from the global economy. It also rattled businesses and sapped investor confidence. Many entrepreneurs and investors – both foreign and Chinese – have become more cautious than ever about doing business, at least in the short term. The effects of this change will persist, even after economic activities – which have not recovered after more than three months since the lockdown was lifted – return to their previous level.

It seems that what has happened to the economy since March was avoidable. The fact is that, despite being implemented only to a limited extent, policy innovation at the local level helped Shanghai minimize the economic impact of the pandemic in the two years prior to the March 2022 lockdown. Account, it is reasonable to consider the role that such innovation could play in mitigating the damage to businesses and the investment environment caused by lockdown measures linked to the pandemic.

Innovation at the local level is not incompatible with the implementation of the national policy framework against Covid ; conversely, failure to adapt policies to local conditions can weaken their impact. However, to date, most local governments have not adopted innovative strategies to implement policies related to the pandemic and, in many cases, have implemented those policies much more aggressively than required. This is because local authorities fear failure, which could include losing their jobs.

There are good reasons to hold government authorities accountable for their decisions, and China has long had mechanisms in place to do so . But the focus of responsibility in China has recently shifted to punishing wrongdoing rather than incentivizing doing the right thing. And such a change has obviously been strengthened by expanding the mandate of local governments to include critical imperatives like managing financial risk and reducing pollution. When it comes to Covid, this has helped ensure that responses everywhere are similar.

However, the lack of will on the part of local governments to innovate carries severe economic costs.

Since April, after acknowledging the huge economic cost imposed by its pandemic control policy, the central government has introduced a series of policies aimed at easing financial restrictions on micro, small and medium-sized enterprises that have been affected by the measures. of containment of the Covid, and this has served to restore supply in specific sectors, including automobiles, electronics and transport. But local governments are still implementing strict mobility control policies, which affect cross-border economic activities – crucial to the recovery – despite repeated instructions from the central government not to do so.

This represents a remarkable turn from the past . Since Deng Xiaoping launched his “reform and opening up” agenda in 1978, China has generally managed to strike a dynamic balance between local government responsibility and local political innovation, thus maximizing the benefits and minimizing the costs of both. Local governments have long been an important source of innovation in China. While the central government drew the main policy roadmap, local governments were always encouraged and motivated to initiate innovation.

As local governments were empowered to adapt policies and programs to their context, policy shocks became less likely. This offset the shortcomings of China’s formal institutions and allayed private sector concerns about protecting property rights, access to markets, and infrastructure, thus helping to foster dynamism at all levels of the economy. Political innovation at the local level thus played a key role in China’s “economic miracle.”

In recent years such local innovation has become less frequent. This is partly because local authorities fear political fallout, and tougher anti-corruption measures from the central government. But the different behavior of local authorities may also reflect changes in their incentives, caused by China’s apparent efforts to move away from the past decentralized system.

This change will have far-reaching implications for China’s economic development. Unless China commits to implementing comprehensive structural reforms and building a more comprehensive market system, a move away from the regionally decentralized system of the past will expose the flaws in its economic system. These errors – which were mitigated at least in part by local government competition under a regionally decentralized system – will become obstacles to economic dynamism and sustained growth.