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Imbalance between Responsibility and Control Slows the Economy Down

Contemporary Russia’s political system is becoming more and more similar to the Chinese one, while the Chinese economy is demonstrating stable growth and the Russian one is stagnating. Andrey Yakovlev, Professor at the HSE Department of Theory and Practice of Public Administration, believes that the Chinese were able to effectively use the methods of governance they adopted from the USSR. His paper ‘Incentives in the System of Public Administration and the Economic Growth’ was presented at the conference ‘Challenges for Economic Policy in the New Environment’

Russia and China are the world’s two largest transitional economies, although, from the very beginning, they have implemented very different systems of reforms. But, according to Andrey Yakovlev, over the last decade (approximately since the mid-2000s) the models of social organization and administration have become noticeably more similar in the two countries. Both of them have formed a system of state capitalism with limitations in political competition, corruption, weak courts etc. The paradox, the scholar says, is that despite similar socio-political models, the economic indicators in Russia and China are markedly different. The Chinese economy, despite the 2008-2009 crisis, is maintaining high growth rates, and the Russian one demonstrates ‘stagnation trends’ in spite of the government’s attempts to stimulate innovation and fight corruption and other negative phenomena.

If you want growth, prepare for the war

Andrey Yakovlev mentioned several popular narratives about the reasons why China is able to sustain economic growth and Russia can’t. The first version focuses on differences between the countries’ regional policies: political decentralization in Russia in 1990s versus fiscal federalism and maintaining political centralization in China. Such a system, Professor Yakovlev says, creates incentives for regions to compete for capital attraction and investments ‘even given the lack of formal property rights, independent courts and everything else that is considered necessary for normal economic development’.

Such a view was correct for the 1990s, the expert notes. But in the 2000s, political control over regions in Russia was restored, including the transition to the appointment of governors and an increased state role in the economy. And in China incomes were seriously redistributed in favour of the central government after the 2004 taxation reform, which brought the regional policies of the two countries even closer. Therefore, this version of events can hardly explain the difference in the economic achievements of Russia and China.

The second popular explanation focuses on differences in models of plan-based economies of the USSR and China. The Soviet economy was built according to the pattern of ‘one factory’, and the Chinese one based on the principle of ten ‘main bases’, which were distributed in different parts of the country and were able to work independently of each other. This was made against the possibility of partial occupation of the country by an external aggressor. Beijing was seriously preparing for invasion by the USA or the USSR and built the country’s economy using its experience of guerilla war against Japan. ‘As a result, this lead to the creation of a more competitive structure for the economy and industry, which played an important role when economic reforms started’, Andrey Yakovlev explains. Critics of this theory emphasize the fact that at least up to 1960 the Soviet plan-based economy demonstrated higher growth rates and was capable of producing innovations.

The researcher notes another feature of the Soviet plan-based economy. The directive system of administration allowed quick concentration of resources in key areas, but contained an inherent contradiction: it’s impossible to foresee and plan everything. As a result, mismatches between the plan and the reality were regulated on micro-level through informal relations between agents. This system of informal institutions, such as clientelism and illicit dealers, in its turn, lead to systematic corruption.

‘Two keys’ to Beijing and Moscow

According to Prof. Yakovlev, a more important specific feature of the Chinese economic system is its orientation towards economic growth, ‘which is an indicator for evaluating the officials’ work’. If there is growth – you move up the career ladder. If there are no results – the official will be demoted or dismissed. Such a system of motivation is effectively complemented by a system introduced by Deng Xiaoping – ‘change of generations’, which means regular staff renewal.

In addition to that, China has managed to effectively implement the ‘system of two keys’ (as the researcher calls it), which was imported from the USSR. Its ideas is that on any level there is an administrator responsible for economic indicators (governor, mayor) and an official representing the ‘hierarchy line’, namely the Communist Party of China in this case. The party official not only has a large degree of authority, but together with the administrator is responsible for the result achieved. If it is good, the administrator and the controller move up the career ladder, and if not, both of them risk losing their position. This stimulates local officials to work for results more effectively.

Until the early 1980s such a system was used in the USSR as well. An important difference was that the Soviet economy was closed and oriented on implementing the plan, while the Chinese, as mentioned, was ‘tied’ to result evaluation (for example, indicators of economic growth and volume of exports).

According to Andrey Yakovlev, there is a certain ‘hierarchy line of control’, and it is not the party, but the Presidential Administration and the security agencies, which are ‘under the President’. ‘Over the last three or four years the fight with corruption has lead to the fact that representatives of our line of control instigated plans for the number of inspections, fines, launched criminal cases and imprisonments’, the scholar says. The problem is that the work of Russian controllers, unlike that of their Chinese colleagues, is in no way focused on the final result, namely economic growth. ‘As a result, there is a growing imbalance between responsibility for economic results on behalf of certain officials, particularly the governors and the government’s economic authorities, and control authorities, which belong to the presidential administration and security bodies’, Andrey Yakovlev argues.

So, according to the expert, ‘a key issue for economic and social development’ is the incentive for initiative in regions. The system of incentives that exists in Russia today works as a negative selection. ‘As we’ve found ourselves in a system, that, from the outside, is very similar to the Chinese one, it seems to me that it’s better to implement the mechanisms that work in China and used to work in the Soviet Union’, Andrey Yakovlev summarizes.

 

Author: Гринкевич Владислав Владимирович, October 30, 2014