Bureaucratic integration and regional specialization in China

Fiscal decentralization introduced as part of Chinaʹs economic reform since 1979 has unleashed strong incentives for Chinaʹs local governments to pursue economic development, but the same incentives have also led to local protectionist policies inhibiting the process of regional specialization. This paper focuses on the constraints or freedom with which local governments can implement their protectionist policies. Using a panel data of 29 Chinaʹs regions over the time period of 1985–1997, we find that Chinaʹs political system of bureaucratic integration (specifically, concurrent appointment of local government officials in the central government) imposes constraints on the local governments from practicing protectionism. We also find that the effectiveness of local protectionist policies is limited by market competition, specifically, competition from foreign-invested firms operating in China and foreign imports. Our results on the role of local protectionism remain robust to controls for the regional variations in the size of the economy and the stage of economic development.