Conclusion

On top of improving the business environment, license downsizing has the potential for changing bureaucrats’ behavior towards private businesses through institutionalizing the operational mode of the administration on the basis of PRC’s WTO commitments. The downsizing centers on removing the licensing authority of local bureaucrats and changing the practice of creating market barriers and rent seeking by the use of an overly complicated licensing system. The PRC government has slashed most licensing items and issued laws and regulations to prevent annulled licensing items from being re-established. Sub-provincial governments have to refer to national laws and regulations before making decisions on licensing issues, and gain the approval from provincial-level governments in order to establish new licenses. Provincial people’s congresses have taken some of the licensing authority from provincial-level governments and weakened the latter’s ability in licensing issues.

The selective implementation of the downsizing illustrates that the masterminds behind the policy have failed to adequately consider the structural features of local institutions through which the downsizing policy is carried out. Since the policy entails numerous implementers whose interests are diverse and activities are poorly coordinated, a command-and-control approach in implementing the policy neither solicits voluntary compliance from implementers nor generates adequate information for policymakers to monitor policy implementation and exercise sanctions. Besides that, the incentive systems in local governance go against the policy in the implementation process: The performance appraisal systems of local leaders and job rotation system encourage local leaders to narrowly focus on the short-term economic growth of small localities but ignore the welfare of wider regions and the long-term policy of improving investment environment. Licensing authority conducive to achieving the immediate result of economic growth by fending off competition against local enterprises and their products is therefore much sought after. Since local governments are required - at least to a large extent – to be financially self-sufficient, the potential of the licensing authority to form local governments’ major source of revenue provides strong incentive for the local government without a broad tax base to thwart license downsizing. Other institutional features such as weak institutional positions of private businesses, ineffective legislation review mechanism, and deficient legal system make it possible for local leaders to bypass the formal rules.

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