Topic: An inquiry into the behavior of China's local government 
Lecturer:Prof. Cao Zhenghan 
Discussants:Prof. Han Chaohua, Prof. Nie Huihua, Prof. Liu Jianxiong, Prof Sheng Hong, Dr. Niu Fengrui 
 
 
At the 364th Unirule bi-weekly symposium, Prof. Cao Zhenghan from School of Economics, Zhejiang University delivered a speech entitled “An inquiry into the behavior of China’s local government”.
Ever since the reform and opening-up, China's transition has been associated with devolution of authority from the central to local levels of government (Qian and Weingast, 1996). Decentralization in China started as early as 1980 and has continued as a fundamental component of reform since then. As a result, local governments in China at all levels have acquired authority as well as responsibility over their own local economies.

Decentralization induces fiscal competition among local governments. Indeed, local governments in China compete vigorously in investing in infrastructure and establishing development zones in order to attract foreign capital and domestic business into their regions.

Existing literatures on China’s local government modeled the local government as an agent aimed to stimulating local economic growth under two constraints, namely budget constraint and the investment constraint, i.e. the local governments compete with each other to attract investment.
Prof. Cao spend six month in Xiaoshan county in Zhejiang province to study the root cause and pattern of Xiaoshan government’s behavior in the past decade. During his field trip, he has observed two distinct features. One is that from the 1970’s the local government has gradually transformed from one who take charge of all the economic activities to one who is in charge of the roadmap of local development. The second feature is that the local government privatized almost all of the state-owned enterprises under local supervision during the 1990’s. Prof. Cao thought the second feature is incompatible with the existing theoretical framework on local government behavior. Because he thought the existing theory could only predict the local government to induce gradual privatization not a radical one which happened in the 1990’s. So he developed a new theory to interpret local government behavior in China. According to him, China’s local government’s aim is to command the direction of local economic growth. Thus they have to focused on how to attract investment and shape the roadmap for local economy. While most of the state-owned enterprises were burden on the back of local governments and they were generally incompatible with the roadmap of local economy, so the local government had to privatize them.