Date: Thu, 17 Oct 1996 15:26:09 -0400 (EDT) From: louisgodena-AT-ids.net (Louis R Godena) Subject: Re: Hyperinflation & Investment Controls in China Professor Rosser, obviously, is continuing to insist on that old totalitarian model to explain the evolutionary changes occuring in Chinese political society. Perhaps a lifetime spent among cows has inured him to the possibilities of change in unfamiliar cultures. It is clear that China now has a de facto federalist system in which the central government specializes in political responsibilities and the local governments specialize in economic responsibilities. This has a number of important normative implications. Under the condition of political authroritarianism, this combination of economic and fiscal decentralization with political centralization may be an optimal governance structure. Economically, a degree of political centralization is useful to alleviate coordination problems when economic agents lack financial self-discipline and when indirect macroeconomic policies are ineffective. Premature political decentralization in the presence of soft-budget constraints may have contributed to runaway inflation in other reforming centrally planned economies. Politically, the Chinese style of federalism can also be optimal because fiscal decentralization helps check the enormous political discretion in the hands of the central government, on which the Chinese political system itself places no formal constraints. We have already seen that the origins of inflation arise from the incentives for over-investment that arise at the local level and the difficulties faced by the center in monitoring and sanctioning profligate local behavior. Indeed, I would argue that the present configuration of Communist Party relations at virtually every level is more or less predicated upon the salient economic fact of the reforming economy; namely, the all important need to control a robust economy (meaning, primarily, the need to keep inflation under control) while maintaining both robust economic growth and the political supremacy of the Party. This of course has to be done within the context of the culture and traditions of Chines Communist society. That the Chinese have thus far done so (and rather successfully) is a continuing source of bafflement, envy and perplexity to the rest of Asia and the US. Louis Godena
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