This paper examines the process of public policy making in China, with a focus on how economic factors influence policy decisions. A review of the literature shows that China’s policy making process has become more institutionalized and technocratic over time, though the Communist Party still exerts significant control. The paper puts forth an economic public policy model to explain how economic considerations shape China’s policy agenda and outcomes. The model has four main components: (1) identifying economic issues and demands, (2) economic policy analysis and forecasting, (3) consensus building among elites, and (4) policy implementation and outcomes. Economic data, trends and interests influence how issues reach the government agenda. Technocratic economic analysis informs policy design, though politics also plays a key role. Consensus among party-state elites over policy is essential for adoption and implementation. Finally, local conditions shape policy impacts. The model is applied to analyze major economic policy reforms in China over the past four decades, including agricultural reform, opening up and reform, fiscal and tax reform, financial sector reform, and responses to the global financial crisis. The analysis shows how China’s economic policy making has become increasingly professionalized and data-driven, while still operating within the party-state’s political imperatives. The economic public policy model provides insights into the political logic underlying China’s major economic policy choices and how these choices were implemented. The paper concludes with implications for future research on Chinese economic policy making.
Public policy making encompasses the processes by which governments make decisions to address economic, social and political issues. The policy process involves identifying issues that require government attention, formulating options for addressing them, adopting policy solutions, implementing these solutions, and evaluating their impacts (Birkland, 2011). Policy making occurs within a complex environment shaped by political institutions, interests, ideas, and socioeconomic contexts. Models of the policy process provide frameworks for understanding key actors, steps and factors that influence policy decisions.
China’s policy process has undergone major changes as the country transitioned from a planned to market-based economy over recent decades. Policy making power has gradually shifted from charismatic leaders like Mao to a more institutionalized and technocratic system. However, the Communist Party still exerts tight control over the policy agenda and outcomes (Li, 2016). Economic policy making in particular has become more professionalized and data-driven, with expert analysis playing a key role. But factional politics within the Party continues to affect high-level economic decisions.
This paper puts forth an economic public policy model tailored to analyzing and explaining policy making processes and outcomes in China’s unique party-state context. The model has four main components: (1) identifying economic issues and demands, (2) economic policy analysis and forecasting, (3) building consensus among party-state elites, and (4) policy implementation and outcomes. This framework elucidates how economic factors and technocratic analysis interact with political imperatives and institutions to shape policy choices. It builds on existing literature on Chinese policy making that highlights the institutionalization of more evidence-based policy research along with continued Communist Party control.
The model is applied to trace China’s major economic policy reforms over the past forty years. The analysis sheds light on how China’s leadership has pushed reform while managing trade-offs between economic imperatives and political control. It demonstrates an incremental, iterative policy process responding to changing economic realities. The economic policy model provides insights into the logic underlying major policy choices and how these choices have been shaped by China’s unique party-state institutional context.
Literature Review: Policy Making Models and China
Public policy making encompasses the processes by which governments identify issues that require attention, formulate options for addressing them, then adopt, implement and evaluate the chosen solutions (Birkland, 2011). The policy process unfolds in a complex social, political and economic environment. Actors including elected officials, civil servants, experts, interest groups and the public advocate policy ideas and seek to shape decisions. Institutions like legislatures, the judiciary and the bureaucracy create structures for policy deliberation and implementation. Problems rise and fall on the government agenda based on socioeconomic conditions, focusing events like crises, and interest group campaigns.
Models of the policy process provide frameworks for understanding the key steps, actors and factors that influence policy making. A classic stages model sees policy making proceeding through a rational sequence of stages, including agenda setting, policy formulation, adoption, implementation and evaluation (Jones et al, 2016). Agenda setting involves certain issues rising to gain the attention of policy makers. In policy formulation, alternatives are crafted to address the issue, informed by analysis of potential impacts. Adoption occurs when authorities select a policy solution. That solution is then implemented by bureaucracies. Finally, the policy is evaluated and potentially revised.
Rational choice models focus on goal-oriented decisions by self-interested policy actors. They assume policy makers have clear objectives, gather information, assess alternative options and choose optimal solutions. Rational choice models highlight how institutional rules create incentives shaping stakeholder behaviors (Ostrom, 2007). Punctuated equilibrium theory posits that policy making goes through long periods of stasis and incremental changes, disrupted by sudden paradigm shifts during crisis periods. This model highlights the agenda setting power of focusing events versus inherent resistance to major policy changes (Baumgartner, Jones & Mortensen, 2018). Advocacy coalition frameworks analyze how coalitions of actors with shared beliefs and interests coalesce around and compete to influence policy within a policy subsystem (Jenkins-Smith et al, 2014). This highlights the role of ideas and learning over time.
Scholars have applied policy process theories to analyze institutional evolution and policy changes in China. Early studies saw Chinese policy making as reactive, personalistic and ideologically driven under Mao, though a bureaucratic system existed (Lieberthal & Lampton, 1992). Reform era analyses reveal China’s policy making has become more proactive, institutionalized and technocratic. Factors driving this bureaucratization include leadership incentives to boost government effectiveness, increasing demands on the state, and shifts in elite ideas favoring technical knowledge (Lu, 2000; Zhu, 2008).
Policy formulation relies more on expert research and consulting firms like the Development Research Center (Fewsmith, 2001). Think tanks feed ideas to top leaders with potential demonstration projects tried locally first. Policy implementation follows a “fragmented authoritarianism” model where national laws set goals, while local officials have latitude in experimenting with implementation methods (Lieberthal, 2004). Local demonstration projects that prove successful can scale up to national models. Through this incremental experimentation, policies adapt flexibly as conditions change.
However, the Communist Party still sets the overall policy agenda and parameters for debate within the bureaucracy. Party bodies like the Central Committee and Politburo remain the highest decision making authorities. Factional patron-client networks within the Party overlap with and influence government ministries (Shih et al, 2012). Major initiatives require building consensus among top party-state elites. Xi Jinping has recentralized some decision making under his leadership (Johnson, 2018). So China’s policy process involves technocratic policy research and local experimentation operating within constrained pluralism. The party-state balances responsiveness to changing socioeconomic conditions with maintaining political control.
Existing models provide limited insight into China’s economic policy making given its unique institutional context of party-state capitalism. China lacks electoral cycles, partisan changes, or checks on executive power that drive policy processes in democracies. But norms of technocratic governance require more responsiveness to economic imperatives versus early Mao-era policies. This paper puts forth an economic public policy model tailored to China’s system. It sheds light on institutionalized processes for transmitting economic data and analysis into policy decisions that are implemented through local experimentation and adaptation. But party-state control mechanisms persist, requiring consensus among top party elites over reforms. The model has four main components:
- Identifying economic issues and demands
- Economic policy analysis and forecasting
- Building consensus among party elites
- Policy implementation and outcomes
The first two components focus on how economic information, data, and technocratic analysis influence agenda setting and policy formulation. The third highlights the role of political imperatives like maintaining party-state control that constrain and shape decision making. The fourth allows for local variation in implementation and policy learning over time. This policy process produces economic policies and outcomes reflecting both technocratic and political logics. The model elucidates mechanisms for balancing responsiveness and control in China’s party-state system.
Identifying Economic Issues and Demands
The first part of the model involves processes for identifying economic problems that require government attention. Birkland (2011) describes agenda setting as the process by which conditions or categories of problems rise and fall on the government’s agenda. In China’s economic policy process, data gathering and monitoring mechanisms embedded in the bureaucratic system flagged emerging economic issues. These mechanisms included the communist planning process, household surveys, and performance metrics for officials (Chen et al, 2020). Economic data flows up the bureaucratic chain, with reports sent to statistical bureaus at each administrative level.
The planning system set output targets for enterprises and allocated inputs. By tracking plan fulfillment, cadres detected shortfalls, bottlenecks and other emerging economic problems (Xu, 2011). Cadres and work units also monitored public sentiment by analyzing letters to authorities complaining of economic difficulties. Household surveys tracked living standards, while routine performance evaluations of local officials generated data on socioeconomic conditions. Information flowed up to higher authorities, helping identify regions lagging behind.
After reforms began, more market-based indicators supplemented old monitoring metrics. Data like inflation, investment and trade flows shaped understanding of emerging issues. Think tanks and researchers generated reform recommendations, with prominent economists like Wu Jinglian gaining influence (Fewsmith, 2001). Media coverage also began influencing perceptions of economic problems, though still operating within propaganda system constraints.
This data and analysis shaped reformers’ views on China’s evolving economic imperatives. For instance, research showed agricultural collectivization causing stagnant rural incomes by the 1970s. Urban living standards also lagged regional peers. Enterprise and household surveys demonstrated how market incentives boosted productivity more than administrative fiat (Qian & Wu, 2003). Such evidence convinced leaders of the need for market reforms while maintaining state industry dominance. Data thus drove perceptions of major economic policy challenges even before public discourse opened up.
Economic issues also reached the agenda through individuals conveying local information up the chain of command. Local officials had latitude to petition higher levels with policy ideas to address problems in their region (Heilmann, 2008). Demonstration projects tested solutions locally first before scaling up. Positive results provided proof of concept to central authorities. Enterprise managers could also request more autonomy or special zones for market-based experiments. This bottom-up channel for local data and demands to reach central decision makers facilitated responsive policy adjustments.
Groups directly impacted by economic conditions similarly shaped understanding of policy issues. For instance, the rural household responsibility system that jumpstarted reforms emerged from peasant innovations. Farmers altered property rights within their villages well before national policy changed (Qian & Wu, 2003). Enterprise managers pushed for performance incentives and autonomy in hiring and investment. Laid off workers from state-owned enterprises pressed for social relief policies in the 1990s. Protests occurred but were contained locally, though authorities still received the message about socioeconomic dislocations.
Thus China’s bureaucratic monitoring system, supplemented by research and managed local feedback channels, filtered economic information up to central authorities. This institutionalized flow of data and analysis drove elite perceptions of major economic policy problems and needs for reform. It provided evidence of gaps between existing policies and optimal arrangements for growth and stability. Top leaders set broad reform guidelines, but specific policy design relied on technocratic analysis.
Economic Policy Analysis and Forecasting
The second component of the model involves processes for economic policy analysis, formulation and forecasting. This includes technical assessment of current policies and empirical evaluation of reform options. In China, economic research bodies provide crucial technical support services informing policy design. Under Mao, bodies like the State Planning Commission and State Statistical Bureau supplied data to assess plan fulfillment. Reform era institutions like the Development Research Center conduct more market-oriented policy analysis (Fewsmith, 2001).
Think tanks and expert commissions affiliated with the State Council, National People’s Congress, and ministries provide policy research and ideas. The National Development and Reform Commission formulates long-term development strategies. The Ministry of Finance and People’s Bank craft fiscal and monetary policies. Research consultancies employ many top economists, publishing reports read by officials. Chinese researchers partner with international agencies like the World Bank and IMF to absorb economic expertise (Naughton, 2017).
Policy analysis involves assessing the likely impacts of reform options using theory, empirical data, and predictive modeling. Cost-benefit analyses weigh tradeoffs between economic efficiency and social equity or stability. For instance, studying village enterprises in the 1980s showed their superior performance compared to state firms (Qian & Wu, 2003). This demonstrated potential gains from market liberalization, providing intellectual support for further reform. Data showed export promotion and FDI generating positive spillovers in coastal provinces, justifying expansion nationwide in the 1990s (Heilmann, 2008).
Forecasting uses macroeconomic modeling to predict reform options’ impacts on growth, employment, inflation, trade, investment, and fiscal conditions. Policy analysis departments within government and think tanks build econometric models for short and long-run forecasting (Chen et al, 2020). China’s State Information Center developed a macro model capturing interactions between sectors that became an important forecasting tool for reforms. Policy makers rely on such projections to assess reform timing, sequencing, and appropriate scales.
Reform policies often undergo local demonstration trials before nationwide adoption. Demonstration zones provide controlled experiments allowing technocratic analysis of various arrangements (Heilmann, 2008; Xu, 2011). Special Economic Zones pioneered export-oriented reforms in the 1980s. Trials were expanded based on positive economic outcomes. Free trade zones experimented with trade and investment rule changes. Financial reforms were phased in gradually with experiments in certain localities to test impacts. Successful demonstrations provided proof certain reforms could achieve intended benefits with manageable risks.
Policy analysis and forecasting capacities expanded significantly from the planning era (Chen et al, 2020). But politics still constrain technocratic autonomy. Leadership priorities bound the scope of issues considered legitimate for study. Think tank personnel rotate through government posts socializing them into acceptable orthodoxies (Naughton, 2017). Conclusions must fit within the parameters of party-approved development visions. During the reform era, measures to expand market incentives aligned with leaders’ economic growth priority, so received support. But liberal political reforms are off limits. There are close party-state feedback loops between economic policy analysis and agenda setting.
Within constrained technocratic space, economic data, forecasting tools and policy analysis play key roles informing reform designs. This was evidenced by practices like demonstration projects to test options and gradual scaling up based on local results. It explains the incremental, iterative nature of many reforms as policies were adjusted based on empirical monitoring. The economic policy analysis component translates agenda setting into evidence-based policy alternatives within approved ideological bounds. This impersonal, technocratic approach provides legitimacy and guards against instability risks.
Building Consensus Among Party-State Elites
The third component of the model highlights how building consensus among Communist Party leaders and elites shapes economic policy choices. In China’s one party political system, top party committees and organs remain the ultimate arbiters of major policy decisions, bounding the scope of debate (Li, 2016). Within these parameters, achieving alignment among top party-state officials across government, military, and state-owned enterprise sectors is essential for new policies to be approved and successfully implemented.
Several factors drive the imperative of consensus building on economic reforms. First, no single leader has independent authority to set major policies like Mao once did. Power is now more distributed and collective. The Politburo Standing Committee consists of seven to nine leaders representing diverse factions and patronage networks (Shih et al, 2012). Getting initiatives through collective leadership bodies requires extensive consultation and consensus building. Second, differing ideological convictions and institutional interests across factions constrain leaders’ room for unilateral action. Conservative leaders less convinced of market reforms often resist changes, slowing the pace.
A third factor is China’s bureaucratic structure fragments authority across ministries and multiple levels of government. Central leaders lack coercive power to impose policies without local cooperation. Major reforms require bureaucratic coordination to align priorities across state organs (Lieberthal, 2004). Otherwise implementation suffers from resistance or shirking. Coordination is achieved through iterative policy drafting involving input across ministries and provincial officials. This consensus process takes time but enhances compliance.
A final consideration is maintaining social and political stability. Dramatic reforms risk destabilizing side effects leaders wish to avoid, as occurred under Mao (Fewsmith, 2001). Gradual reforms are seen as more manageable. Leaders spend significant effort smoothing out policy conflicts to preserve harmony. Even at the height of reform fervor under Deng Xiaoping, reforms avoided undermining party-state authority or the socialist ideal, which was seen as tied to stability and legitimacy. Reforms were framed as means to accelerate socialist modernization versus Westernization.
These imperatives produce an economic policy process centered on building agreement over reforms among party elites. Several mechanisms facilitate consensus building. First, new leaders appoint reform-minded technocrats to key offices, creating an aligned team (Fewsmith, 2001). Likeminded officials control the State Council ministries driving reforms. Second, behind the scenes consultation establishes informal consensus before formal policy drafting. This occurs through informal leaders’ meetings, expert policy conferences, and meetings among heads of powerful ministries (Li, 2016). Through these channels, potential objections get addressed.
High level meetings of the Central Committee and annual National Party Congress provide occasions for leaders to signal support for policy directions (Shih, 2008). Speeches endorse broad reforms in principle, allowing more specific policy design later. Consensus emerges through this iterative, consultative process. Finally, personnel rotation through different regions and ministries socializes officials into the prevailing policy line (Bo, 2002). Dissenters are isolated while team players rise through patronage networks. Conformity to the party line thus becomes embedded in officials’ interests.
These consensus building mechanisms produced unified party elite support for major economic policy reforms like opening up, enterprise privatization, and WTO entry, despite adjustment costs (Fewsmith, 2001). Reform policies represented pragmatic adaptations to changing economic realities rather than shifts in core socialist ideals or party dominance. Technocratic arguments helped convince cautious leaders of market reforms’ benefits and manageable risks due to deliberate sequencing. However, reforms avoiding political impacts like competitive elections remained off the table, bounded by imperatives to maintain party power. The need for party unity and stability thus placed limits on economic reforms despite technocratic consensus over certain options.
Policy Implementation and Outcomes
The final component of the model addresses processes of policy implementation and resulting economic outcomes. Adopted policies must be translated into concrete programs, rules and actions by officials and economic actors. Implementation involves bureaucratic administration guided by leadership priorities (Saich, 2011). But local conditions and actors shape how reforms play out in practice. This allows for policy learning and adaptation over time, but also produces regional variation. Central directives provide flexibility for local experimentation within the party’s developmental vision (Heilmann, 2008).
Implementation processes exhibit both centralized and decentralized elements (Montinola et al, 1995). The central state issues broad reform guidelines through legislation and party directives. More specific regulations and policies are left to ministries and provincial governments. Central leaders appoint provincial officials to ensure compliance with the party line. But they allow flexibility in local implementation methods (Xu, 2011). This decentralized approach encourages policy learning and diffusion of successes across localities. Reform policies are adjusted based on feedback on what works.
For instance, Special Economic Zones allowed exceptional rules to attract foreign investment. Their success led to expanding these zones and emulating the policies elsewhere (Qian & Wu, 2003). Agricultural reforms begun in collective villages were adopted more widely as higher crop yields demonstrated their efficacy. Local fit shapes implementation forms, enabling adaptation and selective policy borrowing across regions. This provides feedback for incremental policy adjustment towards more optimal arrangements.
Decentralized implementation produces regional variation in economic outcomes (Montinola et al, 1995). Development levels diverged between coastal and interior provinces after reforms began. Local economic and fiscal conditions determine how vigorously officials implement pro-growth reforms. Better developed regions pull further ahead under market competition, exacerbating inequality. But central subsidies and investment in poorer regions help spread gains more widely over time. More capable local leaders also influence development disparities (Xu, 2011). Delayed reforms in provinces with less capable officials inhibit local growth.
While allowing flexibility, the party center employs oversight and incentives to keep local implementation aligned with national reform priorities (Saich, 2011). Merit-based promotions and fiscal rewards motivate local officials to pursue mandated goals. Provinces compete on metrics like growth, unemployment, and social stability in a “yardstick competition”. Center-local bargains negotiate suitable policies given local conditions under national principles. For instance, leaders made concessions enabling poor interior provinces to move slower on state enterprise reforms. But all must ultimately adhere to the party line.
This “fragmented authoritarianism” implementation model enabled locally-tailored translation of national economic policies into practice (Lieberthal, 2004). It explains regional divergence within the overall national policy framework and emergence of new reform models from successful local experiments. Central oversight and incentives induce local cooperation with national developmental directives. Implementation feeds back into agenda setting and policy formulation through performance data and demonstrated local successes. Through this iterative process, policy making incorporates adaptive learning.
Literature on policy implementation in China reveals the importance of local bureaucratic discretion, factional politics, and center-local bargaining in shaping how reforms play out (Montinola et al, 1995; Sheng, 2010). Implementation outcomes reflect relative influence of pro-reform versus conservative officials. More capable and pro-reform provincial leaders pilot local demonstration projects providing evidence convincing national leaders to enact deeper reforms. But factional patronage networks also affect which localities and sectors gain most from preferential policies in areas like access to credit.
Initial reform gains disproportionately accrued in coastal provinces where leaders aligned with Deng enacted liberalization. But later policy swings showed central leaders steering resources towards interior regions to balance development (Sheng, 2010). Provincial interactions with the center exhibit “reducing the negative” tactics to minimize adverse reforms alongside “increasing the positive” to expand favored policies (Shih, 2008). Officials delay, compromise and bargain around reforms not matching local interests. This tug of war between national reformers and reluctant localities ultimately produces partial policy adaptation and heterogeneous outcomes as compromises emerge.
The implementation component of the model incorporates local discretion and center-local bargaining into the national economic policy process. It elucidates how developmental outcomes like growth, inequality, and stability manifest through decentralized implementation under party oversight. Local conditions influence where new reforms emerge. But center incentives and oversight induce adherence to the national policy line, bounding variation. Implementation analysis reveals micro-level processes translating centralized reform initiatives into economic outcomes.
Application of the Model to China’s Reform Era
This section applies the economic public policy model to analyze major reforms over the first four decades of China’s reform era. The model sheds light on the motivations, processes of negotiation and consensus building, and varied localized implementation that characterized China’s incremental yet transformative shift toward a more marketized economy. It reveals an iterative, adaptive policy process responding to changing economic realities while ensuring continued Communist Party control.
Rural reform policies began under commune system inefficiencies apparent by the 1970s. Statistical data showed declining crop yields and stagnant incomes under collective farming (Qian & Wu, 2003). Research linked incentives to productivity, with household farms outperforming communes (Sicular, 1988). Meanwhile, protests erupted in villages like Xiaogang where peasants illegally reallocated communal land (Zhao, 1987). These signals of agricultural crisis reached the top via bureaucratic and media channels, aided by sympathizers like Deng Xiaoping.
Think tanks like the Rural Development Research Center formulated alternatives like the household responsibility system based on field experiments (Sicular, 1988). Their analyses showed household farming with user rights over output would dramatically raise incentives and efficiency. They designed rules allocating plots based on family size and allowing limited free markets for surplus crops. Demonstration pilots saw households prosper (Qian & Wu, 2003). This evidence convinced leaders to scale reforms nationally, beginning the rural economic takeoff.
Conservative opposition to abandoning collectivization was overcome by framing reforms as improving socialism (Bernstein, 1984). Peasants still lacked private land ownership and remained under party control. Deng filled key posts with reformers to drive changes through bureaucracy (Bo, 2002). Rural reforms aligned with his agenda for rapid growth and modernization using market incentives under party oversight. Decentralized implementation allowed locally tailored contracts between villages and households (Sicular, 1988). Regional diversity in village politics and rural conditions produced variation in contract terms, fees, plot sizes, and market liberalization patterns. But the national household responsibility system framework spread rapidly.
Early agricultural reforms highlight the model’s key mechanisms. Statistical indicators and field experiments highlighted policy problems. Technocratic analysis formulated solutions. Deng built elite consensus by appealing to socialist modernization and appointing allies. Decentralized implementation adapted the household system to local contexts while conforming to national principles. This case shows an early example of the iterative process from data and research to policy design and implementation. It paved the way for further pro-market reforms.
Opening Up and Special Economic Zones
After rural reforms showed economic takeoff from liberalization, focus shifted to attracting foreign capital for industrialization. Data revealed large productivity gaps behind global export leaders (Naughton, 1996). Debate ensued over import substitution versus export promotion strategies. Think tanks analyzed economies like Taiwan and Singapore where export orientation catalyzed development. This convinced leaders of the need for foreign technology and investment to fuel manufacturing growth, spurring the “opening up” policy push (Fewsmith, 2001).
To court foreign investors wary of China’s political climate, special economic zones created localized enclaves exempted from socialist controls. Shenzhen and other coastal cities piloted zones with duty-free treatment, tax breaks, and business-friendly rules (Yu & Tian, 2017). Monitoring showed massive investment flowing in, technology diffusing, and rising trade. Officials flocked to absorb lessons from these demonstration experiments, pressing Beijing for wider adoption of their reforms (Xu, 2011). Data showed export-oriented zones prospering compared to lagging interior regions.
Top leaders saw results in coastal provinces as proof opening up could achieve rapid modernization under party oversight (Bo, 2002). They sanctioned spreading successful zone policies through more of the coastal region in the 1980s. Export promotion, foreign investment and business autonomy were extended incrementally based on local pilot demonstrations of favorable outcomes. However, some leaders worried too much foreign influence could undermine socialism and party authority (Fewsmith, 2001). Concerns over stability bounds for liberalization remained, slowing nation-wide implementation.
Local discretion over implementation enabled differential outcomes as coastal provinces pulled ahead (Montinola et al, 1995). Shanghai and other cities with capable, internationally-engaged leaders, educated workforces, and good infrastructure exploited zones most effectively. Interior regions lacking these advantages saw less investment and technology inflows. But policies later aimed to spread gains inland through subsidies and campaigns encouraging state firms to relocate up the Yangtze (Sheng, 2010). Export zones successfully catalyzed rapid industrialization and rising incomes, confirming to leaders the benefits of opening up. Implementation patterns highlight the dual logic of local experimentation within national party priorities.
Fiscal Recentralization and Tax Reform
The 1980s reforms decentralized economic decision making but also federalized China’s fiscal system, causing rising deficits and inequality (World Bank, 2002). Local governments gained authority over taxing and spending while relying on remitting a share of revenue to the center. But officials facing soft budget constraints often overspent, forcing Beijing to bail them out. Remittance evasion exacerbated central revenue shortfalls (Ma & Norregaard, 1998). Deficits limited funding for national public goods, while poorer western provinces lagged without redistribution. GDP share of education, health and infrastructure spending declined.
Research showed locally captured revenues being wasted on duplication, non-viable projects and corruption under soft budget constraints (Ma & Norregaard, 1998). Think tank studies outlined reform options to recentralize revenue administration and harden budget constraints on local governments. Analysis indicated giving provinces and municipalities greater spending responsibilities to match their taxing powers could improve accountability and services. Research showed western provinces’ low fiscal capacity necessitated increased transfers to maintain national equity (World Bank, 2002).
Political debate ensued around recentralizing fiscal powers after earlier decentralization reforms (Wang, 1995). Local officials resisted revenue administration reforms. But Deng Xiaoping intervened to build elite consensus around urgent fiscal realignment and increased central control to support national development priorities (Fewsmith, 2001). Tax reforms implemented in 1994 recentralized revenue collection in a national bureaucracy while devolving expenditures to provinces and localities. This recentralization hardened local budget constraints while increasing central capacity for strategic investment and transfers.
New national tax codes eliminated preferential policies that allowed coastal provinces to retain more revenues (Sheng, 2010). This shifted resources towards poorer western areas. Central ministries designed infrastructure projects financed by national bonds to spread development. Fiscal reform implementation enabled a more equitable pattern of development through the 1990s as lagging regions received greater subsidies (Wang & Hu, 2001). Regional inequality narrowed. The 1994 reforms highlight renewed central control over the reform agenda to sustain national progress and stability after uneven local outcomes. Implementation aligned with redistribution priorities.
Financial Sector Reforms
By the 1990s China’s state banking system was saddled with non-performing loans from funding loss-making state enterprises (Lardy, 1998). Interest rate controls and directed lending distorted investment efficiency. Banks lacking autonomy made loans based on state mandates rather than commercial returns. Foreign competition was barred despite WTO accession commitments. Reform advocates saw modernizing the financial sector as essential for improving capital allocation to spur productivity gains.
Closed state-dominated banking had aligned with early development strategies (Walter & Howie, 2011). But research showed liberalizing interest rates, launching a bond market, allowing private banks and foreign competition, and restructuring state banks would improve efficiency and stability. Restructuring proposals aimed to remove banks from social welfare duties and impose hard budgets on state borrowers. Think tanks designed options for phasing reforms allowing learning over time about risks (Liew, 2005). Debate ensued given reforms risked job losses at state firms and social unrest.
Changes were implemented gradually through demonstration projects in sectors like rural finance and zones allowing inward foreign investment (Liew, 2005). Evidence that local trials generated positive results without instability provided reassurance, enabling incremental national roll-out. Interest rate liberalization was done in steps, maintaining some controls to limit risks. Entry barriers were lowered for private and foreign banks. Despite losses, big state banks were recapitalized rather than privatized to maintain stability (Walter & Howie, 2011). This incremental approach introduced more market incentives in finance while limiting disruption.
Provincial diversity in financial reform implementation mirrored capacity and risks (Herrala & Jia, 2015). Coastal and urban areas with more advanced banking systems and institutions proceeded faster in adopting new rules and market-based practices. Underdeveloped interior regions and provinces with larger state industrial sectors dragging down banks moved slower in financial modernization. But national principles set the reform direction despite uneven provincial progress. Sequencing enabled gradual adoption of more liberal finance with ongoing oversight of risks. The financial reform case shows cautious, experimental implementation providing evidence to drive change while hedging disruption.
Global Financial Crisis Response
The 2008 global financial crisis threatened to halt China’s rapid growth trajectory. Collapse in export demand, capital outflows, and falling property values posed risks (Li et al, 2012). Economic data turned negative, with GDP growth falling below 7%. Concern grew over mass unemployment from factory closures. Analysts warned of potential unrest from downturn impacts after decades of rising prosperity (Garnaut et al, 2009). Maintaining stability through continued growth and employment became imperative.
In response, senior leaders deployed economists to research stimulus options (Naughton, 2009). Policy studies recommended an aggressive stimulus targeting infrastructure to boost domestic demand. State think tanks designed investment projects across transportation, clean energy, housing and health sectors that could quickly employ surplus labor. Proposals emphasized strengthening social safety nets to maintain consumption and enhance workforce adaptability. Analysts showed stimulus needed to be large in scale given export shocks, recommending 4 trillion RMB (Naughton, 2009).
Leaders debated appropriate scale and content of stimulus spending versus risks of overheating the economy (Garnaut et al, 2009). Consensus emerged around securing social stability through maintaining high growth being paramount. But factions tussled over specific spending shares for different sectors. The State Council finalized a stimulus plan in November 2008 focused on construction and social welfare expansion while avoiding oversubsidizing inefficient state firms (Li et al, 2012). Various ministries implemented approved projects funded through state banks. Local governments borrowed heavily to finance infrastructure building their regions (Wang, 2013).
The stimulus enabled China to maintain GDP growth around 8% through the global recession, supporting employment (Li et al, 2012). Quick rollout of shovel-ready construction projects absorbed unemployed migrant workers. But dependence on debt-funded infrastructure exacerbated overcapacity problems and financial risks in following years. Many approved projects proved unviable, generating non-performing loans. Leaders thus faced another round of reforms to restrain credit, shrink excess capacity and impose discipline on local governments and state firms (Lo, 2015). The stimulus response and aftermath illustrates the policy process balancing short-term stability imperatives against longer-run adjustment needs.
In summary, applying the model to major economic reforms in China reveals some consistent patterns. Reform policies often emerged in response to statistical indicators or field experiments revealing policy limitations. Research and forecasting analyzed dynamics and simulated reform options. Adaptive implementation through demonstration zones enabled policy learning from local outcomes. Within constrained space, technocratic expertise informed pragmatic policy adjustments to changing economic realities. But reforms required building consensus among party elites without undermining their authority. This explains China’s incremental yet transformative economic transition under continued Communist Party control. The economic policy model elucidates the political logic underlying design and sequencing choices in reform initiatives over four decades.
This paper developed an economic public policy model tailored to analyzing China’s reform experience. The model elucidates the institutionalized processes transmitting economic information and analysis up to top leaders who set agenda parameters. It reveals how technocratic research and local experimentation interact with political imperatives to shape policy within an authoritarian regime. It incorporates decentralized implementation allowing local adaptation under central oversight. Analysis of major reforms using the framework reveals common patterns of incremental policy adjustment through demonstration effects and elite consensus building, balancing technocratic and political logics.
The model contributes several insights to scholarship on Chinese policy making. First, it reveals systematic channels for economic data and analysis to inform policy choices, explaining increased technocratic governance capacity over time. Second, it shows how political control imperatives bound the range of options considered but technocratic consensus can convince cautious elites of low-risk reforms. Third, it incorporates center-local implementation dynamics that translate national policies into diverse localized outcomes. Finally, it explains China’s iterative, adaptive policy process responding to changing economic realities within political constraints of one-party rule.
The model has limitations that suggest directions for future research. Differences between policy domains like economic versus social policy making could be explored more fully. The role of leaders’ ideological orientations and factional makeup in shaping policy agendas warrants further analysis. Implementation patterns across provinces could be analyzed more systematically using quantitative indicators. Interactions between local pilot projects and national policy formulation merit deeper investigation. Comparisons with other East Asian developmental states might reveal if the characteristics identified generalize beyond China. Extending and refining the model could enhance understanding of China’s evolving economic governance.
Overall, the model proposed here provides a useful framework for explaining the logic behind China’s major economic policy choices during the reform period. It reveals a pragmatic, responsive leadership that empowered technocratic analysis and local experimentation within constrained pluralism. This approach enabled major economic transformations and growth while maintaining party dominance through gradualism. The economic policy model distills the essence of how China “crossed the river by feeling the stones” on the path to market reforms within a party-state system. It offers insights to inform ongoing analysis of China’s unique policy processes and adaptations to changing internal and external conditions.
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