Discussion about the Governance in the Economic Development

The 1st International Conference on China Development Theory held on October 19-20, 2019 in Renmin University of China. As a key part of the conference, a round-table discussion about the governance in the economic development held on Oct 20th,2019`s morning in Room 622 of Mingde building.Please see the below to know more details.

Song Lifang:

Good morning, everyone! It is our great pleasure to have the opportunity to invite Professor Pranab Bardhan to have a talk and discussion with us.  Prof. Bardhan is a very famous economist, he had ever acted as the chief editor of the Journal of Development Economics, and now he is working with UC Berkley. Let`s express our welcome and thanks to Prof. Bardhan.

Then I will make an introduction about our participants.. They are Prof. Nie Huihua,Prof. Sun Wenkai, Prof. Jiang Shaoming, Prof. Guan Quan,and Prof. Lv Bingyang, Prof. Lv is from the School of Finance. Our participants also include the postgraduates. And I am Song Lifang. Yesterday, Prof. Bardhan made an important and very interesting keynote speech about the governance issues in the economic development. His speech focused on many important issues including the roles of the government in the economic development, the relationship between the central government and the local government, and how to play the roles of the government in the innovation, technology improvement and many other aspects. So I think our discussion may focus on these issues related to Prof. Bardhan’s speech.

Well, let Prof. Bardhan make a brief introduction about his recent research and  make some points on our discussion.

Pranab Bardhan:

I have done research on different aspects of economics and not just development economics. I am teaching in Berkley now, and I used to teach international trade and globalization. So also, my Ph.D. is actually in international trade, essentially mathematical models of economic growth in international trade. That`s what I did for my Ph.D. from Cambridge University in England, and then I went to Cambridge, Massachusetts, where I was hired as a young assistant professor in MIT. So even at that time I was mainly studying economic growth theory and international trade.

And then after two years and a half of teaching at MIT, I thought that I wanted to do empirical work. I told MIT I wanted to go back to India. They were surprised that somebody wanted to leave MIT. I said I just want to do empirical work in my country. So I went back to India to work in the India statistical institute. Because there are lots of statisticians and lots of data, and I had research products and empirical data on India.

At that time, I started with the research on agricultural economics and institutional economics, and then I was invited by Berkley to be a visiting professor for one year. Then they said, would I like to stay on at Berkley? I like Berkley very much. And in fact, if any of you have not been to Berkley, I would like you to visit there today. It`s a beautiful place that is also very lively place.

So I stayed at Berkley, but at that time I was primarily working on institutional economics and agricultural economics . In fact, I edited and wrote a couple of works on agriculture and institutions in India. I have a whole book called economic theory of agrarian institutions that I edited when I was at Berkley.

So I became interested in issues of governance for a long time, and first I did some theoretical work on decentralization.

My data collection included two stages. When I originally went to India from MIT, I collected data on agriculture from the government statistics, but then I found that government statistics is not enough because they don`t sometimes answer the questions that I am interested in.

So along with another person, we carried out random sample of 110 villages, we looked at a lot of different relations in agriculture, the land market, the labor market and credit market, and collected a lot of data.

Then in the later stage in order to collect data on decentralization, I organized a service of about 19 villages in India. I can talk to the people in that language. So there I collected a lot of data on decentralization, local government, and how they are run. In India, because it`s a democratic country, the local elections are very important, so we also collected political data. For example, when you go to a household and 19 villages, we had a random sample of about 2400 houses. How do they vote? What makes them decide what to vote for? What are they dissatisfied in the local government and so on? On the basis of that data, we have published now about almost 25 papers.So that was from institutional economics to governance, to decentralization. But meanwhile, I also have been working on the effects of globalization including good effects and bad effects.


How do you think about the role of the industrial policy, I heard that before Prof Justin there is nobody talking about industrial policy.

——Nie Huihua


As you know, Justin is a very good friend of mine. I have known him from 1983 or 84. When I first knew Justin, he was not doing industrial policy, but it is not true that Justin is the first one. Industrial policy has been debated for quite some time. In fact, the first people who worked on industrial policy are some of the early development economists. One of the persons who used to work on industrial policy was Prof. Rosenstein, at MIT. I worked a lot with him in those early days at MIT on industrial policy.

Industrial policy doesn`t mean to leave things just to the market. The state should provide a leadership role in pushing some particular sectors. B If you take some of the nearby countries, before China, South Korea and Japan has followed industrial policy. So the industrial policy has been talked about earlier and also, some countries, more or less successfully followed industrial policy but not all industrial policies have been successful.

For example, in India, when we started economic development, they also talked about industrial policy and I`m talking in the 1950s and 1960s. China also followed industrial policy in the 1950s and 1960s, but both China and India at that time were inspired by the policy. So the emphasis was more on heavy industries as in China, not and same in India.

But one of the problems of that kind of industrial policy are Soviet inspired industrial policy that they did not give much emphasis on markets, particularly open markets. Looking at the Japanese and South Korea policy, they were giving emphasis on exports while the Soviet Union was not market oriented. So that`s a big difference in industrial policy.

Now, the industrial policy keeps the export markets open. Earlier China and India were not open markets. One big difference is that when you are producing only for the domestic market, you are not conscious of the problems of high cost, quality, and things like that. If you have to keep that in mind, you have to export and then you have to pay very much attention to your efficiency, low cost, high quality. Otherwise, you will not be able to sell in the export market. So I would say this is a big difference between earlier China, earlier India and Brazil. Brazil also followed the same kind of industrial policy. But later industrial policy in Japan, Korea, south Korea, and China since 1990 onward and particularly after the entry of WTO and the beginning of this century. It is much more exported oriented.

So if you read the industrial policy theoretical literature, there is an article which has both theory and Chinese data.  Industrial policy in China succeeded in sectors with the competition. What competition does is to make you cost conscious, quality conscious, otherwise you lose the competition. This competition primarily is important for exports. And I think Justin is very much aware of that.

Two years ago Justin with his new institute of structural economics invited me to give a keynote lecture there, and we discussed these issues and he`s very much aware of these issues. So Justin is, I think, now one of the leading writers on the industrial policy that is referenced to China. But he has also suggested that this policy should be followed in attribute.

I have an article on decentralization in the journal of economic perspectives in December 2002. After that I wrote a book. There are some chapters on corruption and some chapters on decentralization. Now, I discussed this issue. Are we going to trade off between autonomy and accountability? Checks and balances have to depend on accountability. Mainly, if those collusion happen between local business and local officials, there are many ways to check it.

One way China checks it is that if local official wants to be promoted, they have to keep in mind not too much collusion and not too much corruption.

That`s not the only way. So in India, for example, some of the check on the collusion in the local area is through elections. First of all, India has democratic elections and the media is very active. So if you support collusion, then stories will come out. There will be journalists who investigate and publicize and there are a lot of accusations against the local official.

So that`s a political check and balances. The other checks and balances are administered like auditing. I think auditing of the accounts is very important. Let me give you another example from another country, Brazil.

In fact, some of you may be interested in the work by one of my colleagues, his last name is FINAN. He`s a Brazil economist. He has worked in local municipal governments in Brazil for partly political check and partly this auditing check. He did a kind of random sample, and he found that before the election of the mayor, in certain areas the audit reports were made public. He was transparent. He did it in a randomized control.

In some other municipalities, they checked what affect it had on the main election of the mayor. As you expect, if the audit says that the mayor did something wrong and that it`s public, the mayor could not get elected next time. So it is a check from the political check plus the auditing check. So by the way, this is published in the quarterly journal of economics published by FINAN. It has now become a famous article because nobody before has done a randomized control on the level of decentralization.

So there are many ways of checking, but nothing is perfect. Different things work differently in different countries. The key is to try out what is better.


Japan made the successful transformation from the authoritarian to democracy, another model is the African countries, for example, Zimbabwe, the democracy did not make the economy succeed. Another example like the Soviet Union and China, before China’s reform, the economic system is planned economy, in a completely planned economy, we cannot see that corruption. However, in the transition from planned to market economy, the corruption appeared. So what’s your viewpoint about the reasons for this.

——Guan Quan


Okay, let me suggest two of my own articles where I have tried to answer these questions. I have an article in the journal of economic literature in 1997, called economics of corruption in view of issues where there`s a whole section on these questions about corruption in planned economies, versus corruption in market economies and also corruption in autocracy countries, corruption in democratic countries. There are different kinds of corruptions.

I actually don`t think there`s no corruption in planned markets. There`s a great deal of corruption in Soviet Union, the only thing is that we did not know about it. The Soviet and  the Russian economies had told me that if you don`t belong to the party outside, you have to pay money to get anything. Because sometimes corruption persists if the person who is giving you something has monopoly power.

So like a monopolist who can charge any price, so let me give you an example. In order to drive a car, you need a driver`s license, okay? In Soviet Union, and in  India until recently, the person who issues the driver`s license has a monopoly power because he`s the only person who gives you driver`s license.

Guan Quan:

But maybe I can get it from the other region?


No, you see, there`s authority. So suppose even in a general office, since you are resident is in that region, it`s only that region office that you can get it from. This is essentially the monopoly power. So in Soviet Union, in India until very recently, you have to pay bribe to get the driver`s license, okay?

What is much worse is that you don`t have to pass a driving test. You got the driver`s license because you paid quite well. Okay? So is the same with passport. If you have a residence, the regional passport office has a monopoly power in order to get passport, you have to pay great.

So I think the reason is, just as a monopolist has the power to fix the price, in monopoly, these is a public service, which fix the price and how much you have to pay.

So in the United States, it`s a contrast. if the U.S. citizen wants a passport, supposedly you can get a passport at a post office. Say you go to apply and the postal officer asks for a bribe, you say no, go to the next post office. Anybody can issue it. Here, it`s a competition wherever there is monopoly power, there is corruption. I have seen Chinese corruption in which they`re trying to control. Much of Chinese corruption is because of the monopoly power of the officer or the official. So they get to do with the monopoly power of the public service provider. Whether it`s a democracy or with a country, this ultimate reason will remain. Since China is a relatively authoritarian country, I think there is a basic social corruption that will remain because of the main economic reasons of monopoly power and no competition.

The second issue is the effectiveness of the state. One of the problems of many African states is the state capacity is very low. I think there are many reasons for it. I would say historically countries where there is a long history of a democratic state, an example would be Japan. Japan has a long history of it. China has a long history of a bureaucratic state. There are certain rules of effectiveness of the state. For example, in China, for many centuries, the democrats were hired in a service of elimination. Recruitment and promotion depends on that kind of sudden rules.

In Africa, the African government gives you a job without any examination, without any checking or qualifications. India also has a system of examinations. I must say just examination isn`t the solution but at least it gives you certain effectiveness to the state. It gives you a sudden capacity to the state. I think one major problem of Africa is state capacity is low. Now, apart from the history that I mentioned, the history of a bureaucratic state is a problem.

Even in Asia, I will give you an example of a country that does not have a long history of state. Guess which country? Philippines. In fact, Philippines was not a state until the Spanish conquest in the 15th century. So you will see in the Philippine state, the capacity is much less than even nearby other states, because there`s a long history of bureaucratic capacity in either Korea or China.

The other issue is education. I think bureaucrats need certain kind of training. It`s not just examination. You need certain training. And any countries where education levels have been low, would have low quality. It`s not just corruption. The quality level is low with education.

In India, for example, even though they have civil service examination, the education quality is not as developed as in China. I`m not talking about people like me. I`m talking about poor people. Poor people have much less education.

However, China, say around 1976, has a better education level than India. That makes a difference to the quality of the bureaucrats.

One is corruption and one is education. One of the good things about Japan, China, Korea, is education, I`m talking the formal education, it has been high. And therefore, the quality of bureaucrats in this country is better.


This question is, from the perspective of 150 years ago, we may compare China with Japan, and Japan was driven by Meiji innovation and China was under Sun Yet San’s new revolution. 70 years ago, New China was founded in 1949, India became independent in 1947, so in the last 7 decades, from the economic perspective China developed better than India, but India is a democracy country. Then, the question is, what kinds of economic, political and institutional reasons for the development differences between China and India.

——Guan Quan


Okay, that is what I discussed a little bit yesterday in my lecture about the comparative study of India and China. I also have a book called Awakening Giants, feet of clay, assisting the economic rise of China and India, it was published by the Princeton press. There is a Chinese version available. It was actually first published in 2011 but then there`s a later edition, 2013, the later edition is paper back.

In my book, I talk about one of the main issues which is exactly this question. So if you go historically, in the year of 1800 China and India together took half of the world economy, and Japan and the United States were very small at that time. Among the 50 percent of the world income, China took about 31 percent, and the rest by India.

And then the industrial revolution came in the west so they went up. Japan is a late comer in the industrial revolution in1868. Japan wanted to catch up with the west because the west had gone far ahead, and the Japanese state was very effective as I already mentioned.

Concerning China and India, in 1949 the People’s Republic of China was established, and then in 1947 India got independence. In the first few decades actually, per capital income difference is not so big, but education and health is better in China.

On the other hand, other aspects of the economy are somewhat better in India than in China. So up to the end of the 1970s, there were not much difference. Both were primarily agricultural countries. Some industries in India were advanced quite a bit. One difference was that India’s industries are both state owned and private. Some of the biggest Indian industries at that time expanded at that time, but there are quite a few successful private industries in India.

For example, steel industry was partly public sector but largely private sector in India. But after the reforms in agriculture and the reindustrialization came in China, China proceeded much faster than India. In fact, in the 1990s, per capital income in China and India are not very different. But from 1990 onwards, China went up sharply. So the reforms proceeded much faster in China. Even today, reforms are much more advanced in China than in India. For example, foreign investment is very important for joined ventures, and it has been very important to China. But foreign investment is not so important for India. Indian politics wanted to shut out the foreign investment because of lots of reasons.

I think it`s a culture reason. Because India was a colony for a long time, they`re always very suspicious of foreigners. They say if you open it up to the foreigners, they would control it. Because you know, in India, if you look at India’s history, the colonization by Britain started not by the British government but by a multi-national company called the East India Company. So to this day, many Indian are very suspicious of foreign national companies. What is their motivation? I think it`s irrational. I think the Chinese policies are the right one, allow them to come but we control. They should come on our terms. And I think the Chinese have taken a much better policy in that respect than India has. So I think that opening and reform has been much more advanced in China.

Second, the workers, education and health are very important. India has been backward compared to China in education and health.

Third, I think China gained at least in the first two or three decades, even today I would say, so does China. When they started working out in the rest of the world, much of Chinese exports went through Hong Kong, right?

Already Hong Kong had an established marketing structure with the world. Similarly, in Southeast Asia, many of the entrepreneurs were Chinese entrepreneurs. In Thailand, Vietnam, Indonesia, Malaysia, the most successful businessmen were Chinese, right? So when mainland China started opening, there`s already a whole network and marketing structure which China then used. But India did not have. I think once China opened, these networks and structures helped. Now, mainland China does not need much help but in the beginning, we needed the help of the structure and the network. So these are some of the reasons why I think China in the last few decades has done much better than India.

The other thing is the political factor. India is a democracy country, so any decision takes a long time. Suppose you decide to take a policy and then you have to go through various steps and you have to discuss at this level, then there will be public debate. Any policy, public debate in the media and then elections. I will give you one example. In west Ben Gel of India I`m from, the provincial government was run by the communist party. It`s a democratic communist party. They stand in elections. Sometimes they win, sometimes they get defeated. When they wanted to industrialize, they wanted to acquire land for industry. Something is very familiar to in China. Collusion within local business and local government in China is quite often over land. When the official thinks this land should be given to the local business, it`s very easy. You do it quite smooth, fast.

In 2005, the communist government wanted to acquire some land to start some private industries. The farmers said no, we are not going to give you the land because you`re not compensating us enough. There`s a lot of agitation, okay?

So this became a big issue in the election. The government lost. So they could not acquire the land. Even to this day, it`s not a communist government, even they could not acquire land. So in 2005, and now 2019, so far, they have not succeeded in acquiring that land. That takes you to the democratic process. I know that many farmers are very angry that land has been taken away. But they cannot defeat them in the election. So in this case, land acquisition for industrialization is very difficult in India.

Similarly, labor is highly organized in India. There are a lot of trade unions. So suppose you want to do something for labor, the trade unions will start education. You will lose the election because the unions might be against you. So I would say land and labor issues, and I could give you other examples to show that democracy makes things much slower.

In China, the leaders can decide and implement very fast, but if they make a mistake, the correction of the mistake is more difficult in China. In some period, they made some of the biggest mistakes. If the leader makes a mistake, it takes a lot of time. In India, if they make a mistake, media will flash it and the elections will lose and finish. So I think there`s a positive side, there`s a negative side. Positive side for the Chinese case, you can take decisions very soon. You can implement much faster. However, India is much slower, but the positive side for India is that the decision are more legitimate. Indian system is accountable downward. I this system, we`re all accountable to the top leadership. Now, that is fine but if the leaders make a mistake, it takes time. Because nobody tells the leader you have made a mistake. And then there`s a lot of suppression of information.

So I think different systems have different advantages and disadvantages. All right, thank you so much.


We have long been confused about the conception of centralization and decentralization. Once we introduced a very famous theory by a person from in Ming dynasty, and he thinks that because the local government is not at the same level, they have different levels, we can be decentralization at the low level, and at the high level, it should be centralization.

So we can make the whole country achieve a good social order. You know, the Chinese story, the social order is very important for China. If the whole country keep united, the economy can grow quickly. Not only it happened in the past 50 years, it also happened in the whole history. So the centralization is good.

——Lv Bingyang


I think I agree with you. I see, China has a unique combination, a centralization of the party. It can only administer the decentralization below. Very few countries have this combination. This is the Chinese system.


She said that we have the same government model, the whole 100 case. After Qin Dynasty.


So in fact, there is an article in the journal of economic literature, the author is XU, a well known Chinese economist who teaches in the University of Hong Kong, I think.

I know him, he`s a friend of mine. He wrote an article in journal of economic literature probably in 2011. He said that Chinese system is generally centralized. If you look at India, it`s the opposite. There`s very little political centralization because the central government depends on the regional powers. So it is a politically decentralized system but the local economy is highly centralized, even if you get elected in the local government, you don`t have any money. You depend on the money from that. So the center exercises its power through the transfers to the local government.

Which is now coming in China also to some extent, fiscal transfers is an issue but in general, Chinese fiscal system is much more decentralized. I gave some data yesterday in my lecture saying that in China, province expenditure takes about 60 percent of the total expenditure. While the corresponding percentage in India is about 10 percent. So that`s why many things in local India including education, health, roads, are not as good as in China.


How keep the balance between the central and local government?

——Sun Wenkai


In terms of balance, the balance is to be maintained continuously because if you reach a system and then after some time, one will be more dominant than the other. You have to keep the balance, so you need checks and balances at each stage.

In terms of governance structure, so far in my judgment the best governance structure with that kind of balance is the Scandinavian countries. It is not an accident that in most economic indicators in the world, the best system is not American. Not China, not Japan. If you look at most of the indicators, the best performance is in Scandinavian countries. These are small countries, not like China and India.

I used to joke with my Scandinavian friend when they say, we have done this and that. I remember talking to a friend in Norway. What is the population? The city I come from is Calcutta. In terms of the conceptual issues, they have achieved this kind of balance, politically and the workers are very powerful. The worker unions are very strong in Scandinavian countries, so the politicians have to play a very important role. So the corporate sector and the labor has equal power, so they keep it in balance and the democracy is very strong over there.


How about the small countries?

——Jiang Shaomin


The problem is, we don`t know if we can really do it in large countries. There`s no example. Evening along developing countries, I can give you an example of any good well running country. Costa Rica is a very small country, and it is one of the best records not just in development but in environment. Costa Rica is a democratic country, the democracy has worked in such a way that they maintain all of this balance.

•The performance, the economic growth may be a reason for the target and India`s officials are based on. I don`t agree quite much.

•I see in general there are many criteria, even in China. The one that I did not mention is stability, political stability. There`s unrest in the local area, then the promotion may be asked.

But let me say, seniority in India plays much more important role.

•Oh, really? So can they define it?

•I think they should combine. One rational of seniority is the senior person has more experience. That is the argument but the experience is not good enough. So I agree with you. That is a balance.

•Ok, let’s finish our discussion. Thank you!