Evaluation and Analysis

Some successful cases of implementing Administrative Licensing Law have been reported. Central government and Guangdong province declared the previous regulations on chemical industries void and revoked subordinate departments’ licensing authority on chemical industries (Yu and Tan, 2005). Wuhan city declared 48 government documents that created licenses ineffective. Ningxia province annulled 170 items of administrative licensing. Liaoning province annulled almost half of its licensing items (Xingzhen, 2004). Gulou district of Nanjing city reduced its licensing items from 278 to 53 (Mao and Ming, 2005). Chongqing city planned to reduce the processing time of license applications for construction projects involving land acquisition from 350 days to between 110 and 150 days. If the downsizing was successfully implemented, the city government predicted that license fees worth hundreds of thousands yuan could be saved (Lan, 2006). Guangdong province annulled the Regulations on Pesticide Management, implying that no licenses were necessary for trading pesticides. The province also permitted foreign investors to trade pesticides by the end of 2004 and fertilizers by the end 2006 respectively. Domestic private entrepreneurs were granted equal footing with foreign investors, and may enter all the markets open to foreign investors (Yu, 2005).

Caution is necessary for interpreting the success. The data about annulling licensing items and the government activities in implementing the Law were supplied by local governments and seldom checked by their supervisory governments. Besides that, attribution problems should also be considered. An objective of downsizing administrative licenses is to improve business environment through increasing government efficiency and resolving regional protectionism. Most business managers interviewed in a survey felt that government efficiency had been improved and regional protectionism had been alleviated after the Law came into effect. However, there is no knowing whether the improvement is due to license downsizing or other measures. Furthermore, managers’ perception change was reported before the Law was effective, as suggested by an earlier longitudinal survey (Table 5 [ PDF 99.5KB | 1 pages ]). The most chosen option "unchanged" reflects that the change in government efficiency is not really significant.

Examples of unsuccessful implementation of the Law are numerous. Private entrepreneurs in Guangzhou city were denied licenses to run businesses of agricultural factor inputs because the agriculture bureau ran the same business (Yang, 2005). A survey of 1,500 citizens in seven cities suggested that the Law failed to live up with the public expectation on its ability to improve administrative efficiency. The survey, conducted by Social Survey Institute of China at the end of 2004, revealed that 73% of the respondents did not feel the Law had improved administrative efficiency; 76% of the respondents thought that local government had watered down the effect of the Law; and 49% believed that individual bureaucrats had circumvent the Law (Jin, 2004). In creating a pro-competition business environment, policy has achieved only limited success. A survey of business managers in 2005 revealed that 34%, 58.1%, and 7.9% of the respondents thought the problems associated with barriers to market entry have been alleviated, unchanged, and worsened, respectively. Discriminatory administrative licensing procedures remained the most cited factor impeding business expansion, with 42.9% of the respondents thinking so, followed by discriminatory quality inspection standards (38.2%), exorbitant fees and unpredictable taxation policies (27.8%), restrictions on import and sale (23.5%), and discriminatory price restrictions (17.3%) (Centre of Human Resources Research and Training, Development and Research, the State Council, 2005). It has to be noted that about 17% of the respondents in the survey are affiliated to state-owned enterprises. State-owned enterprises are better protected by governments at various levels and find it easier to bypass administrative barriers. If respondents from state-owned enterprises had been excluded and only private entrepreneurs had been counted, the percentage of respondents expressing negative opinions about licensing issues would have been even higher.

It may take several years before the real impact of the license downsizing measures become obvious. At this stage, it can be concluded that the success is mixed. Many measures of the central government cannot be realized. Lu characterized policy executors’ distortion of national policies in communist countries as communist neotraditionalism, a concept first used by Walder (1986) in analyzing the bureaucratic behavior in Chinese communist regime. Lu argued that very often bureaucrats in communist regimes refused to adapt themselves to the “modern” (such as rational, empirical, impersonal) bureaucratic structures imposed by political elites. Instead they reshaped the processes behind the structures to reinforce and elaborate traditional (or patrimonial) modes of operation (Lu, 1999). The case of downsizing administrative licensing helps to illustrate the argument. Many parts of the Administrative Licensing Law have been reshaped to adapt to old licensing practices. According to the State Council Directive No. 412, provincial governments are permitted to keep 144 licensing items (Zhonghua, 2005). However, Sichuan province keeps 383 items in the end (Gao, 2005). Fujian province keeps 445 items (Fujian, 2006). Selective implementation may appear in the form of substantial delays. Private businesspeople are allowed in the trade of agricultural factor inputs – such as seeds, fertilizers, and pesticides – according to the Article 12 of the Law. By the end of 2005, Guangdong provincial bureau of industry and commerce neither put an end to the state monopoly of the trade nor permitted private sector to enter the trade (Yu and Tan, 2005; Yu, 2005). Certain localities violated Article 58 of the Law prohibiting license fees. A license for selling chemical products in Guangzhou city was worth more than 20,000 yuan in early 2006, one and a half years after the Law came into effect (Yu and Tan, 2005). Foreign-invested enterprises in Lianyungan city of Jiangsu province with a registered capitalization of US$3 million or above have to obtain at least 11 licenses and pay a license fee of 15,000 yuan before starting any businesses. The city also violated Article 26 and failed to designate one department to handle license applications involving more than one department. Among its 50 departments with licensing authority, only the urban management department followed this Article. Also the city government did not annul all licensing items according to laws: 109 out of its 428 licensing items remained in force illegally (Yan, 2005: p.44; Chen, 2005: p.75). The efforts at alleviating legislative inconsistency and creating a uniform trade regime have been compromised. Some departments of Guangzhou city have broken Article 5 of the Law and referred to internal documents or even department head’s personal opinions in considering licensing issues. The city’s industry and commerce bureau justified some of its licensing authority by quoting the internal hongtou wenjian "State Council Directive No. 68" issued in 1988 (Yu and Tan, 2005; Yang, 2004).

PRC’s WTO commitments of increasing regulatory transparency, setting up a uniform trade regime, and reforming licensing systems may be considered deep economic integration – a country’s convergence of its economic policies with international rules. Haggard argued that while the agenda of trade liberalization in deep integration has the potential for augmenting overall welfare benefits, it remains unclear whether deep integration can augment welfare benefits to particular countries, regions of a country, and/or and industries. Infant industries in developing countries may lose out if developing countries harmonize their regulatory policies around the norms of developed countries (Haggard, 1995: pp.2-4). The notion is particularly true to the countries like PRC which have no effective mechanism to redistribute the gains of free trade from beneficiaries to losers. In view of the damage to the losers, the WTO permits developing and the least developed member countries to maintain certain protectionist measures for safeguarding their infant industries. Following this line of reasoning, PRC should not have committed to uniform administration of trade regime given that its regional development varies greatly (Table 6 [ PDF 100.1KB | 1 pages ]), and the benefits to different localities could have been maximized by liberalizing trade at various degrees. Since the policy design of downsizing measures has not considered the reality, the downsizing measures cannot serve the needs of many localities and are opposed by local governments.

Conflict with local needs and opposition of local governments does not suffice to explain selective implementation of the WTO commitments and license downsizing. The CCP has several leverages over sub-national governments to ensure their subservience. First, the CCP controls the appointment of the leadership of provincial-level and prefectural-level governments (the level of governments immediately below provincial level). Political credentials and loyalty are more important considerations than workrelated knowledge and abilities in making appointment decisions, especially to the positions of party secretaries whose main duties are to operationalize central policies and supervise governors and mayors in executing the Party line. In principle, only those loyal to the CCP center and willing to vigorously pursue central policies can be appointed (Bo, 2002; Burns, 1989). Second, the leaderships of the CCP and state apparatus at different levels of governments are interlocked. Only reliable party members are appointed to head the state apparatus. Third, leading party members’ groups (dangzu) are set up in state apparatus for making major decisions. These danzu are manned by reliable party members. Fourth, the CCP uses a position rotation policy and avoidance schemes to make local leaders more responsive to central directives. Under the schemes, local leaders change their postings regularly and are posted away from their birthplaces. Since they cannot stay in office for a long time and have to work in a region where they have few friends and kin, building their own patronage is difficult. Therefore in principle they have little incentive to be responsive to local interests and defend local interests against central directives. Last but not the least, the CCP communicates with the bureaucrats in central bureaucracies and localities about its policies through political education in workplaces and propaganda xitong (a grouping of bureaucracies responsible for disseminating “correct” political thoughts through mass media, school education, and cultural activities). With similar outlook, consensus within bureaucracies over national policies can be more easily reached (Lieberthal, 1995: pp.183-215).

Why can local governments defy central policies in downsizing administrative licenses even under strict political control? An analysis of the institutional features of the local political landscape can provide an answer. Institutional features here refers to both the formal rules and informal practices that regularize individuals’ behavior and structure the relationships among individuals in polities and economies (Hall, 1992: p.96). The relationship between central and local leaders can be construed as a principal-agent relationship. From a principal-agent perspective, agents have strong incentives to hide information or falsify reports to their principals because the information may provide clues for their fault-finding principals and expose their wrongdoings. The consequential informational asymmetry undermines the effect of command control. The problem is especially serious when the implementation of principals’ tasks entails many actors, and each actor monopolizes certain kinds of information that affects monitoring. The more actors are involved, the more information will be hidden, and the higher supervision and coordination cost will be involved in soliciting agents’ compliance. Agents’ roles of being gatekeepers of information also turn them into veto points in policy implementation (Lam, 2005: p.641).⁸

The institutional feature of “fragmented authoritarianism” – a term borrowed from Lieberthal for depicting PRC’s bureaucracy – makes it even more difficult for principals to collect adequate information for monitoring and coordinating agents. “Authoritarianism” indicates the concentration of political and economic authority in the state, a common strategy adopted by authoritarian states in governance. “Fragmented” refers to the wide dispersion of state authority among different functional bureaucracies horizontally, and different levels of governments vertically, and the lack of coordination among these authority holders in taking concerted actions. Since PRC’s bureaucracy is constructed by a command-and-control approach, structural processes in the bureaucracy place high emphasis on vertical reporting but low priority on lateral communication at both governmental and departmental levels. Under this system, bureaucrats are encouraged to follow orders from above but not coordinate with other bureaus. Effective lateral communications among functional bureaucracies are limited. When disputes take place among different authority holders during policy implementation process, they have little incentive to settle the disputes by themselves. Nor do they have authority to dictate if they are at the same administrative ranks. Thus they are inclined to refer their disputes to their supervisory organs. If they have different supervisory organs and these supervisory organs are at the same administrative rank, the disputes may be referred to even-higher ranking organs. The process may be repeated up along the administrative ladder until the disputes reach the Standing Committee of Politburo, the highest decision-making body holding absolute arbitration power. Since the Standing Committee of Politburo lacks the time, expertise, and information to involve itself in these disputes, resolving disputes are difficult. Key information about the issues in dispute flows upward and downward through the administration, and may be missing or distorted through the several rounds of reinterpretation by various information gatekeepers (Lieberthal, 1992: pp.1-32).

The institutional features have affected license downsizing as well. Various levels of government and their departments have some sorts of licensing authority and are involved in license downsizing. The implementation of downsizing is contingent on the concerted actions of numerous local actors with diverse interests. Consensus towards the action plans and schedule of downsizing is hardly reached. To address the problem of authority fragmentation and difficulty in coordination and supervision, the central government has started partial centralization of authority from sub-provincial to provincial-level governments since the late 1990s. The 31 provincial-level governments have been given more authority in monitoring sub-provincial governments and aligning local practices with national and provincial legislations. Central government can then focus its attention on provincial-level governments and monitoring of policy execution can be made easier. A recent evaluative study suggests that central bureaucracies cannot tap much more information from the policy of partial centralization. Heilmann pointed out that the securities regulators in Shanghai city, previously under the Shanghai Municipal Government, were incorporated into a central government regulatory commission. Due to geographical distance, communications between central and Shanghai regulators were not based on regular exchanges but on ad hoc meetings and unsystematic data transfers. Consultations and coordination remained inadequate (Heilmann, 2005: p.646). Moreover, many local bureaucrats reportedly resisted the partial centralization policy. They believed that if their departments remained accountable to local governments at corresponding levels rather than to the departments at next higher-level governments, they had greater chance of being appointed to people’s congresses or people’s political consultative conferences and retaining political influence after their retirement (Yang, 2004).

In view of the difficulty in monitoring and soliciting compliance through a topdown approach, O’Toole argued that policy makers should use a bottom-up model to achieve implementation success. Policy makers should either modify the incentive systems in the administration or adjust policy content by involving policy executors in the policymaking process to induce appropriate behavior on the part of policy executors, and to align policy executors’ interests with broader collective benefits (O’Toole, Jr. 1989: pp.312-339). License downsizing remains a top-down implementation model. The inputs from local actors in policymaking processes are not actively solicited. The incentive systems marked by a linkage of extra-budgetary revenue with the level of subsidy and bonus remains unreformed. Some local governments have tried to sever the link to reduce the incentive for individual departments and bureaucrats to defend their licensing authority and the associated extra-budgetary revenue. In 2003, Beijing city decreed to level out the subsidies to the city’s bureaucrats. Individual bureaucrats at the same rank were entitled to the same amount of subsidies, regardless of the level of extra-budgetary revenue individual departments generated (Chou, forthcoming). Nevertheless, not many local governments can follow the Beijing model as their tax bases are much narrower. Some of them are so short of funds that they can neither fully cover the expenditure on fundamental education and health care, nor pay their employees on time. Licensing authority can help to create a source of revenue. As a consequence, local governments may annul only the items with limited potential for revenue generation and keep others illegally (Yan, 2005: p.44; Chen, 2005: p.75).

Furthermore, licensing authority can help to create locally owned conglomerates with certain monopoly power and form a stable source of revenue. Downsizing administrative licenses works against the industrial growth of the regions where the industries are not competitive enough to survive and grow without protectionist measures. Without monetary compensation, it is difficult for them to relinquish their licensing authority. Besides that, the performance appraisal system still places heavy emphasis on local leaders’ abilities to develop the local economy and links the appraisal result with career advancement and punishment. This system compels local leaders to narrow their focus on local economic growth and downplays collective interests. Undoubtedly license downsizing can help to improve the local business environment, attract more investment, enlarge tax bases, and fuel economic growth in the long run. But regular job rotation discourages local leaders from committing to policies that can hardly achieve immediate results.

Several institutional features entrench local leaders’ incentives to promote shortterm local economic growth. The first is a lack of pro-reform interest groups or a strong functional bureaucracy representing the societal actors who benefit from the downsizing of the licensing regime. After investigating 50 countries’ regulatory reforms in the telecommunication industry, Li, Qiang, and Xu (2005) argued that successful regulatory reforms are more likely in countries with strong pro-reform interest groups such as financial sector and urban consumers who are frequent users of telecommunication services and beneficiaries of a reformed telecommunication industry. The major opponents are the incumbent telecommunication operators who have vested interests in the old regulatory systems. The countries whose regulatory reforms are less successful are those without institutionally significant beneficiaries from the reforms. In regards to license downsizing, the major beneficiaries are private entrepreneurs whilst the bureaucracies issuing licenses have vested interests in the old licensing regime. The institutional position of PRC private entrepreneurs is very weak. The PRC denies autonomous interest groups with institutional positions participation in the policy process. The strict control of the formation of civic associations makes it difficult for private entrepreneurs to organize collective actions. All-PRC Federation of Industry and Commerce, the state-sanctioned national association representing private enterprises, is like a government’s executive arm more than its Anglo-American counterparts which proactively advocate the interests of their members, join alliance with legislators and functional bureaucracy, and lobby on behalf of their members. Without beneficiaries having strong institutionalized positions, license downsizing easily loses momentum in the face of bureaucratic resistance.⁹

The second feature is the ineffectiveness of the legislation review mechanism. To assure consistency among different levels of laws and regulations, several OECD countries have established central regulatory registers and enforced only the rules that are included in the registers (OECD, 2002, p.373). PRC has its own legislation review system under which the NPC wields the review authority. The NPC promulgated the Law of Legislation in 2000 to operationalize the review process. This Law identifies a hierarchy of Chinese laws with the Constitution as supreme. The laws enacted by the NPC should prevail over the State Council’s administrative decrees which, in turn, prevail over local laws. Local administrative decrees are placed at the bottom of the hierarchy (Articles 78–80). The Standing Committee of the NPC is responsible for reviewing and striking down lower-level legislation contradictory with Constitution and laws (Article 88). ¹⁰ Beneath its Law Committee, the Standing Committee of the NPC set up a Judicial Review Office (Fagui shencha bi an bangongshi) to provide the Law Committee with expert advice on legislation review. Review of consistency among administrative regulations and local people’s congress regulations was left to the State Council, its Ministries, or local-level administrative agencies (Article 86). Since the promulgation of the Law of Legislation, the Standing Committee of the NPC has received some 20 requests for legislation review. But the Standing Committee of the NPC could not take any action in response because it had not worked out a review procedure. The Judicial Review Office had only a staff of less than thirty officers. This was far from enough to reviewing all legislations and decrees (Wen and Hua, 2004: p.31).¹¹

The third institutional feature is high ambiguity in the laws aimed at delineating administrative authority. For example, administrative punishment law obliges local governments to hold public hearings when they plan to introduce a “relatively large amount of penalty” or a provision about “revoking” (diaoshao) licenses. To evade the constraints, some departments do not introduce penalties but collect “guarantee money”. They do not revoke licenses but “recall” licenses (Ma, 2006). The ambiguity in the Regulations of Management of Dangerous Chemical Products is another example. The regulations, issued by the State Council in March 2003 states that manufacturers of dangerous chemical products, including “mildly poisonous agricultural-used pesticides” have to obtain licenses first before they can start their businesses. But the definition of “mildly poisonous pesticides” is unclear. Some agricultural bureaus classified fertilizers and pesticides into dangerous chemical products and justify their insistence on keeping the licensing authority over the trade of fertilizers and pesticides. By this means, the bureaus may keep their authority to deny private entrepreneurs necessary licenses to run businesses of fertilizers and pesticides, and fend off competition against similar businesses affiliated to the bureaus (Yang, 2005). Some local governments circumvent the Administrative Licensing Law by transferring their licensing authority to subordinate industrial associations or other government-sponsored intermediary entities. These associations and entities are known as service units (shiye danwei). Though they are charged with administrative functions, they are not counted as administrative entities: Administrative entities usually refer to government departments. The licensing items that service units take charge of are not counted as administrative licenses and therefore not bound by the Law (Han and Yang, 2005).

Courts have the potential for curbing power abuse. Unfortunately, that the PRC’s courts lack prowess to rein in the administration is the fourth institutional feature entrenching local leaders’ incentive to safeguard their licensing authority. The power of interpreting laws and administrative decrees does not rest on courts but people’s congresses. The deputies of people’s congresses, however, work for the congresses on a part-time basis. Most of them have received no legal training. No subsidies are given to them to hire legal consultants or supporting staff. It is difficult for them to accumulate expertise and to spare time for law interpretation. Unlike the judges in Western democratic countries which guarantee judiciary stability and impartiality through life employment, PRC judges’ terms of office are decided by Party branches. Courts are dependent on Party branches and local governments and vulnerable to intimidation from Party and government officials. Thus PRC judges are reluctant to challenge government decisions. More importantly, PRC political leaders reject the liberal notion of a neutral state. Courts have to decide cases according to a normative agenda determined by the regime (Peerenboom, 2001). Even though occasionally courts may exert their prowess and rule against local governments, local governments’ resistance can easily foul the rule enforcement. In early 2006, the city court of Tolufan, Xinjian Autonomous Region reportedly ruled that a township government violated an entrepreneur’s property rights and had to compensate him. The township government ignored the ruling and the ruling could not be carried out (Lu, 2006). The limitation of existing laws and judiciary makes it difficult for businesspeople to challenge administrative decisions and safeguard their rights. Without powerful constraints, many local leaders have incentives to ignore the laws and policies going against their interests, Administrative Licensing Law and other measures of license downsizing included.

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