Significance of Downsizing Administrative Licensing Systems

In Western countries, regulatory reforms are responses to the challenges posed by perceived failure of public ownership and Keynesianism in sustaining economic growth, the pressure of globalization for policy convergence, and the demand on governments for cutting business costs and saving public resources at the time when raising tax rates to satisfy public demands has become difficult (Janow, 1998: p.216). Downsizing administrative licensing systems is one of the regulatory reform measures. It involves cutting the number of licenses required in business activities, simplifying the procedures in obtaining licenses, and curtailing government's licensing authority. Through downsizing, the PRC government hopes to improve administrative efficiency, economize the use of state resources, combat corruption, and above all, bolster its performance legitimacy. The downsizing merits scholarly attention for several reasons. The first is the implications of administrative license downsizing on promoting private sector activity which has the potential of significantly contributing to PRC's economic growth and social stability. An increase in business is conducive to job creation. A study of 80 countries concluded that from 1984 to 1998, private firms created 4 – 80 times as many jobs as public sector firms. In PRC, almost all the 27 million new jobs created between 1996 and 2001 were in the private sector (Asian Development Bank, 2003: p.97). Huang and Di (2004) traced the economic development of Zhejiang and Jiangsu, the two eastern PRC provinces almost identical in broad economic and social fundamentals back to the late 1970s. They argued that Zhejiang's economy outperformed Jiangsu's in the end because of the former's thriving private sector, a consequence of a more friendly business environment. A function of business environment is the regulatory burden. Measured by the World Bank's regulatory quality indicator – an indicator measuring the incidence of market-unfriendly policies and businesspeople's perceptions of regulatory burdens, PRC's regulatory quality has deteriorated relative to other countries. In 1996, the regulatory quality of approximately 47% of the surveyed countries was rated lower than PRC's. In 2004, the percentage dropped to 35% (The World Bank, 2004). ¹ A survey of the business managers of 138 domestic firms in six cities revealed that the burdensome licensing process was the top challenge to doing business among the five most widely cited barriers of market entry (Table 1 [ PDF 99.7KB | 1 pages ]). The other four challenges (policy restrictions, local protection, industrial monopolies, and limited market size) were to different extents caused by the regulatory framework. The American Chamber of Commerce in Shanghai reported that the businesses of 92% of its 238 surveyed member companies were affected by unclear regulations, 91% by bureaucracy, and 87% by inconsistent interpretation of regulations. Corruption, a pervasive social problem that has caught much scholarly attention, was quoted by "only" 70% of the respondents as a major challenge to business (American Chamber of Commerce in Shanghai, 2004).

Second, downsizing administrative licenses is a strategy for harmonizing PRC's investment policies with its WTO commitments. The WTO commitments oblige PRC to increase its regulatory transparency, ensure consistency among different levels of legislation, and administer its trade regime uniformly across the country. During the reform era, governments at various levels have retreated from directing economic production and resource distribution on the one hand. On the other hand, they have acquired new regulatory power based on secretive official documents known as hongtou wenjian (red-heading documents). Though they carry the same or sometimes even greater weight than laws and regulations, they are inaccessible to the public. Until recently, local governments of all levels can issue these official documents arbitrarily regardless of national laws and administrative decrees issued by upper-level governments. In 2001, 14% of these documents, once creating over 80% of administrative licenses, reportedly conflicted with various laws and regulations (Lai, 2003: pp.171-172; Yu and Tan, 2005). The inherent inconsistency and secrecy in the administrative licensing system have not only resulted in an unpredictable investment environment but also gone against the above WTO commitments. An investigation into license downsizing is conducive to evaluating how far the PRC government is able to implement its WTO commitments, and to what extent these commitments have been implemented.

The third reason is a methodological one. As an evaluative study, examining license downsizing has several advantages over much of the existing literature examining PRC's regulatory reform. A common approach of existing literature is to select particular sectors of an economy as case studies. Energy, telecommunication, financial services, and civil aviation are much researched areas in the literature. A weakness of this approach is that in PRC, all the above four sectors are still largely under state control. The impact of the regulatory reform in these sectors on private sector development is not significant. On the contrary, administrative licenses exist in a wide spectrum of economy, including both public and private sectors. Moreover, an important output indicator of downsizing is the number of administrative licenses slashed. The number of licenses before and after downsizing provides a convenient benchmark for evaluation.

This paper explains the implementation outcome of license downsizing by focusing on local institutional features that shape local bureaucrats' behavior. "Local bureaucrats" refers to the government officials working in sub-national governments. Their role in license downsizing merits scholarly attention due to their impact on the outcome of most national policies. Local bureaucrats account for 93.1% of all bureaucrats in PRC. The figure ranks it the fourth highest, after the 96.74% of Uzbekistan and Russia, and 94.87% of Kazakhstan, among the 205 countries and regions surveyed by World Bank. ² In the meantime, the PRC government hires the largest number of bureaucrats (19.91 million) in the world and the bureaucracy is far bigger than the second-placed Indian (8.21 million). However, its central bureaucracies (a staff of 1.33 million) are slimmer than their counterparts in India (2.74 million), US (2.64 million), UK (1.80 million), Colombia (2.00 million), and Egypt (1.35 million) even though the geographical size and population of the latter three are much smaller than PRC's. Furthermore, central government's responsibility for sub-national governments' payroll and other expenditure has shrunk considerably since the 1980s when administrative and financial authority was gradually decentralized. Central government has to rely heavily on sub-national governments to provide both manpower and money for implementing most of its policies, including downsizing administrative licenses. PRC has 31 provincial-level governments (excluding the two Special Administrative Regions of Hong Kong and Macao), 333 prefectural-level governments, 2,861 county-level governments, and 44,067 township-level governments, all of which have had some sorts of authority over creation of business licenses until recently. Given the huge number of sub-national governments, monitoring of these bureaucrats is extremely difficult. The huge number of local governments, the relatively small central bureaucracies, and consequent difficulties in monitoring have given local bureaucrats high discretionary power and enabled them to shape national policies according to local institutional features and locally-defined state objectives.

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