Introduction

Ideological suspicion against private sector development has been gradually dissipating in the People's Republic of China (PRC). Ideological change has resulted in the Chinese Communist Party (CCP)'s revision of its constitution to allow private entrepreneurs to qualify for Party membership and amendment of the state constitution to enshrine the private economy as an important pillar of national economy. Creating jobs for first-time job seekers and laid-off workers through developing the private sector is placed high on the CCP's agenda. Private enterprises are now permitted to enter many sectors once monopolized by state enterprises and to create new market sectors. Both foreign-invested and domestic companies face less restrictions on acquiring state assets. Further private sector development requires a reform of the regulatory regime to make it more business friendly and encourage investors to invest. Reforms of the regulatory regime include two parts: to downsize licensing systems and to enhance government's regulatory capacity in policing markets and coping with various forms of market failure. This paper focuses on the first part of regulatory reforms. The significance of this part lies in its relevance to the improvement of the business environment on the one hand and implementation of PRC's commitments to the World Trade Organization (WTO) on the other.

This paper is structured in the following way: It first introduces the background and impact of the administrative licensing system on private sector development. Then the paper outlines the contours of administrative license downsizing. Emphasis will be placed on a discussion about Administrative Licensing Law. In the end, the implementation of downsizing measures will be evaluated. This paper argues that administrative license downsizing has been selectively implemented. Many local governments have kept the licensing activities that should be either annulled or handed over to upper-level governments. Based on an institutional analysis, this paper argues that the institutional features of PRC's bureaucracy have shaped the incentive systems of local bureaucrats in a way unfavourable for successful implementation of license downsizing. For pursuing local economic growth, local bureaucrats have more incentives to keep burdensome licensing systems than to reduce the ranged business activities requiring licenses. The high costs of policy coordination and supervision enable local bureaucrats to hide their activities from the scrutiny of their political masters. The institutional weaknesses in the mechanisms for reining in local bureaucrats allow local bureaucrats high discretion in distorting many national policies going against their interests, administrative license downsizing included.

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