"Nobles" and "Princes" in government competition
On the 2005 audit report of budget execution

Nov. 14, 2006
from China Economic Times

Government competition includes linear competition and vertical competition among regional governments as well as linear competition and vertical competition between central government departments. If we call competition between regional governments an "economy of nobilities," then competition between central government departments should be called an "economy of princes." If regional competition includes a certain amount of production and profit-making, competition among departments is more of the nature of monopoly and interest-sharing.

As time goes by, this is exposed more and more clearly. One can see signs of this from problems exposed by the current audit report.

Economic notes by Zhang Shuguang

Sept. 11, the State Audit Bureau published an audit report for the execution of the 2005 budget. Problems in diverting or overspending of treasury funds, the creation of extra-budgetary funds, investing against the rules, and creating fake accounts are still very serious among the 42 central government departments, with no substantial changes from audit results for the previous year. Many culprits commit the same crimes; many come up with new ways of doing it. Though some departments have used timely measures to rectify problems, before the basic system and policies are changed, we cannot expect improved results.

There are two ways of interpreting this: one, we can look at the current fiscal budgetary system; or, we can go one step further and analyze the fundamental structure of our economy.

Looking at the fiscal budgetary system, fiscal reform did not go far enough; our budget audit system is incomplete; our budget spending classification is too vague, and there are no scientific expense standards or budget quotas; additionally, some departments never really have budgets; some departments do not carry over project funds from year to year according to regulations, so budgets at the beginning of the year cannot be pinned down to specific projects or people, giving great flexibility in creating budgets and executing budgets.

Secondly, budget supervisory mechanisms are basically of no use. Never mind tax-payer supervision, it's not possible; even the NPC and the people's congress at every level cannot supervise budget execution. Although the financial department must make a budget report to the NPC, this report only provides very vague classification, with no details. The methods for creating a budget are not transparent, details are kept secret. Even financial experts can't make heads or tails of it, let alone NPC delegates. So this is just a formality. Thirdly there is no effective responsibility mechanism, no punishment for fiscal violation and mistakes are dealt with too leniently. Once the audit report is published, relevant departments will give a response, symbolically hand out a punishment, and it's finished. Thus, the cost of violating the rules is very small, while profits are great. So come the next year, people do the same. Thus, the audit storm is like loud thunder with little rain, turning to a gentle drizzle. Government departments don't care about this, relevant people also don't care about this, and average employees in these departments treat this with understanding and support.
Theoretically, these things happen because our officials have no sense of public financing, don't understand how to spend state budgetary money, and the current system will not make them understand this. Nobel economics prize winner Milton Friedman talked about four types of spending: spending one's own money on one's own affairs generates the most economy; spending one's own money on other people's affair generates the most efficiency; spending other's money on one's own affairs generates the most waste; spending other's money on other people's affairs generates the most irresponsibility. Currently departments spend state money to make gains for themselves, squandering and stealing the wealth of the country and damaging the interests of the public. The reason departmental leaders and actual culprits don't think this is serious is because the money does not go directly into their pockets, so they are not suspected of corruption. On the contrary, they are praised for "bringing benefits to their subordinates." This is just a different type of embezzlement. For these types of gains, everybody in the department shares in the profit, but leaders usually get a bigger share.
The audit report exposes defects in our fiscal budgetary system, but behind the problems in our entire structure. Although people have talked about these problems, discussions have not been thorough and no consensus has been reached. There has also been a somewhat one-sided understanding.
The essence of China's market report is obviously not the usual letting go of power and benefits, but government freeing up control of the non-state-owned sector and especially the private sector. However, needless to say, this reform began by giving power and profits to regional and state-owned enterprises. Compared with previous "explosive" reforms, this time, power-sharing is combined with marketization. As power is relegated to regional governments, especially as financial power is reduced, regions gain independent economic interests. This, together with the policy of turning government work towards an economic focus, gives regional governments full power to handle local economic work. Thus regional governments are no longer just an administrative organ, but an active market entity. Governments to a great extent become like an enterprise. As a result, on the one hand, the Chinese economy grows rapidly, but on the other hand, government competition grows viciously, demonstrating a trend toward domination and the replacement of market competition. Battling for interests between regions and between the central government and regional governments has become a driving force governing the direction of the Chinese economy. This fighting is embodied in every aspect of social and economic life. And the central government's macro-economic regulations and controls and regional governments' anti-regulations and anti-controls are a clear manifestation of this. Policy fighting over energy conservation and the prevention of pollution is another important manifestation. People have discussed this rather fully and basically reached a consensus. But the current system does not allow us to solve this problem. The balance that appears after each policy fight is a temporary break in an old government war and the beginning of a new battle.
As people are discussing the vicious development of chaotic competition among governments, they often point only at regional governments and regional protectionism and neglect competition between government departments. In reality, government competition includes linear competition and vertical competition among regional governments as well as linear competition and vertical competition between government departments. If we call the competition between regional governments the "economy of nobilities," then competition between government departments should be called the "economy of princes." If regional competition still includes a certain amount of production and profit-making, competition among departments is more along the lines of monopoly and interest-sharing. As time goes on, this is exposed more and more clearly. One can see some signs of this from problems exposed by the current audit report.
Currently, government departments not only hold huge administrative power and economic resources, but have their own departmental assets, and are doing all kinds of investments in disguise. Which department doesn't have its own hotel, its own so-called cadre training center, its own enterprise and nonprofit organizations? In name all these institutions and units are state-owned assets, but in reality, they are departmental assets. They not only provide special services internal to the department and for the departments leaders, but also create profits for the department. They have also become devices and set-up to transfer profits between departments and to turn public funds into private funds.
Illegal investments are revealed in the audit report and include the Ministry of Civil Affairs putting public funds into private accounts; the State Sports Administration Sports Funds Management Center using the welfare lottery fund to invest in the stock market; and the State Forestry Bureau Center for Managing World Bank loans diverting state afforestation project funds to investments in securities and to give loans. All these investments follow one basic rule, and that is: if they lose money, it's the state's loss; if they make money, it's their own. This is because of this special type of state-owned assets being placed outside budgetary management, which makes it "rational" for state-owned enterprises, especially those in monopolized sectors, to go outside of the national budget and not to turn their profits in to the state. It is apparent, therefore, in China at present, that there are not only large and small "nobility economies," but also powerful "princes' economies." The state ownership system to a certain extent has already become a departmental ownership system.
Since all the departments and ministries hold huge administrative power and economic resources and their actions are not effectively controlled, they have become the object of and the leverage worth fighting for in regional economic competition. This shows how regional competition and departmental competition are closely linked. It is estimated that there are over 5,000 regional rep offices in Beijing. Their main task is to handle relations with the ministries (or departments) which means running to the ministries and offering money (a Chinese homonym for "running foreword"), and obtain a greater share of the distribution of national resources. Recently, in the author's survey of a southern province, a petrochemical project that was cooperating with a foreign company became the object of a fight between a provincial capital city and a less developed mid-sized city. All the local conditions supported the choice of placing this project in a mid-sized city and the provincial government also supported this, but because the provincial capital had greater relationship power in Beijing and an extensive network, it got the big project in the end.
Apart from so-called public interests, all departments have their own special interests, thus competition between government departments is very fierce. The means of competition include mainly the following two.
One is that all departments want to increase and expand subordinate institutions and assets. All ministries have their own associated units and subordinate institutions. The subordinate institutions in turn have their own associated units and subordinate institutions, thus forming a long chain of association. As for temporary institutions like offices and centers, they are as numerous as hairs on a cow.
Subordinate institutions will do things, gather money, establish networks by using the power and reputation of the government. At the same time, they also offer tributes, bribes to government departments and senior officials, and do things the government cannot openly do. More senior government departments use this to expand their field of power, reaching to other departments and regions. Thus we have an interesting phenomenon: while our social changes basically wipe out the traditional "four generation" extended family model, it has been reborn in our government organizations. Like clans, there is also a distinction between direct lineage and side-branches, and the originally equal relations became hierarchical. The result not only cramps the necessary room for normal development of nongovernment institutions and the private sector, but creates an expansion and inflation of the government and state-owned sector.
Secondly all departments try their best to expand their own administrative power. In almost every incident and in every decision made, people can see fighting between departments. The incident in which Tieben was closed down the year before last demonstrated that the recent process of combining state tax and local tax has become more obvious. The fight is demonstrated even more fully in the power struggles among anti-trust institutions with regard to anti-trust law legislation. Currently, legislation is usually "departmental legislation," all departments try to give themselves more power by means of legislation. Although government control is necessary for the market economy, market reform includes both loosening government control over the non-state-owned sector, and establishing new government control over the market. But the kind of government control established now through government competition is a distortion. If we say loosening control of the non-state-owned sector promotes marketization in China, then government control that is enforced for the purpose of expanding departmental power is actually going in the opposite direction.

by reporter Zhang Shuguang