Incentive Policies and China's Economic Development: Change and Challenge

By Liou, Kuotsai Tom | Journal of Public Budgeting, Accounting & Financial Management, Spring 2012 | Go to article overview

Incentive Policies and China's Economic Development: Change and Challenge


Liou, Kuotsai Tom, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. Incentive policies have been emphasized by many governments as one of the major policy tools to promote economic development in their societies. For this paper I have examined the application of incentive policies in China to improve economic performance during China's reform years. In the paper are theoretical reviews about various types of incentive policies and different arguments about their effects. The development of Chinese incentive policies is introduced and analysis of their achievements in improving economic growth and attracting foreign investment is presented. Challenging issues of incentive policies have been related to concerns about effectiveness and equity, accountability and transparency, as well as economic upgrade and balance. Implications of the Chinese development experience are provided for future study of incentive policies.

INTRODUCTION

Economic development has been one of the top public policies emphasized by the Chinese government since the late 1970s. For the past thirty years, China has successfully implemented various reform policies to increase economic growth and to improve the quality of public life. These policies have promoted private investments and business operations and have gradually changed the Chinese system from a totally government-controlled planning system to a market-oriented capitalist system (or a socialist system with Chinese characteristics). On the overall economic performance, China has achieved impressive records in almost all aspects of economic measurement and performance. For example, China's gross domestic product (GDP) has been increased from Rmb 362.4 billion in 1978 to over Rmb 30 trillion billion in 2008. Chinese people have also become richer, with annual GDP per capita rising from Rmb 379 in 1978 to Rmb 16,084 in 2006 ("GDP Growth 1952-2007," n.d.). The success of Chinese development has been well recognized by scholars of various disciplines who have studied policy lessons and implications of the Chinese development experience.

Among various reform policies, incentive policies provided by the Chinese government have played a major role in attracting foreign investments, promoting business development, and assisting economic transition. Researchers of Chinese economic development and public administration (e.g., De'Murger et al., 2002; Liou, 2009; Lu & Tang, 1997) have been interested in studies -not only types and industries of incentives provided, but also outcomes and implications of incentives policies. For example, incentive policies have been used in China's coastal region to attract foreign investment because of the lack of financial resources at the early stage of economic development. In recent years, incentive policies have been further emphasized by Chinese policymakers to address new economic problems, such as slowing growth rates, declining exports, and changing economic structures, which are related to the global financial crisis.

This paper is an examination of the implementation of incentive policies for China's economic reform and development. First I provide a review of theoretical findings about China's development model and concerns about the effectiveness of incentive policies. I then explain the development of Chinese incentive policies, especially their relationship with the strategy of special economic development zones (SEZs), during the reform years. Finally I identify major challenging issues associated with incentive policies and present important lessons from the Chinese development experience.

BACKGROUND OF INCENTIVE POLICIES

Financial incentive policies and programs have been emphasized in the literature of economic development at both the national and local levels. At the national level, the importance of financial incentive policies has been recognized by researchers of comparative development economy (e.g., Ho, 1981; Johnson, 1982; Lin, 1989; Wade, 1992). These researchers explained that the successful experience of newly industrialized countries (NICs) is related to not only provisions and operations of a free market system but also to an active role of government in directing public and private resources to change the structure of their economy. …

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