Prosper or Perish: Credit and Fiscal Systems in Rural China

4. The Implications of Cadre Evaluation and Fiscal System for Local-Government Behavior

76 4 THE IMPLICATIONS OF CADRE EVALUATION AND FISCAL SYSTEM FOR LOCAL-GOVERNMENT BEHAVIOR Local-government interference in lending operations can be explained through an analysis of political institutional design. Specifically, the Chinese Communist Party (CCP)’s cadre evaluation system and the fiscal system combine to create overpowering individual and collective incentives for local government to pursue local industrialization and to maximize revenue at all costs. Rural credit cooperatives (RCCs), due to their weak corporate governance structure (as detailed in chapter 2), became easy targets for local officials ravenous for financial resources. The central government seeks to control lower-level officials by setting binding quantifiable performance targets for them. But this outcome-oriented oversight is undermined by the fact that the central government cannot control the process through which these hard targets are achieved. Local-government interference in credit operations thus becomes an unintended consequence of the systemic demands embedded in China’s political institutions. Cadre Evaluation and the Drive toward Local Industrialization and Revenue Maximization After the launch of market-oriented reforms in the early 1980s, institutional incentives replaced Maoist ideology as the central government’s key instrument for attaining compliance from local authorities.After embarking on liberal economic reforms, Deng Xiaoping could no longer rely on ideology to ensure the center’s orders were carried out by local governments in far-flung regions. Institutional THE IMPLICATIONS OF CADRE EVALUATION AND FISCAL SYSTEM 77 mechanisms and incentives were therefore needed. The nomenklatura system became the most significant of these mechanisms. The nomenklatura system is an essential feature of the CCP’s political institutional design. It allows the party to manage and control the appointment, promotion, transfer, and removal of all leading cadres (lingdao ganbu). Through the nomenklatura system, higher-level governments are able to create effective incentives for lower-level officials to align their interests with those of higher-level governments. Party organization departments maintain confidential dossiers (dang’an) on senior personnel at lower administrative levels.1 Leading cadres at the township level,which include the party secretary,the government head,and all those who are ranked second-section (fu keji) and above,2 are controlled and managed by a county party organization department. Ordinary cadres—officials who do not occupy leadership positions—are managed separately, by a county government personnel department (renshibu) under the civil service bianzhi system.3 Between 1980 and 1984, the party employed a “two-ranks-down” system of managing local officials. Under this system, the central organization department appointed leading cadres in the provinces (one rank down from the center) and prefectures (two ranks down from the center), the provinces appointed those in prefectures and counties, the prefectures appointed those at the county and township levels, and the counties appointed leading cadres in townships. This enabled central party officials to control leading officials in provinces and prefectures while leaving the prefectures to control the massive numbers of officials in rural counties and townships. The intention of this relative decentralization was to enable central party officials to retain control of party cadres while reducing the party’s enormous costs in monitoring all cadres. However, the system also created overlaps in responsibilities between two party committees that had power over officials who were one level below.4 It was also undercut by information asymmetries between party superiors and subordinates who are two ranks down. As a result, the “two ranks down” system encountered difficulties in implementation and high transaction costs and was therefore replaced with a “one rank down” system in 1984, which operates to this day. Under this system, township leading cadres are controlled and managed by the county party organization department (zuzhibu), county leading cadres by the prefecture, those of the prefecture by the province, and those of the province by the central party organizational department. Though the current system is more decentralized than its predecessor, it still allows the center to effectively acquire local compliance to its policies and priorities . In principal-agent terms, the current cadre management system constitutes a chain of principal-agent relationships. The central leadership is the principal and the provinces the agent in the first chain, with the provinces being the prin- 78 PROSPER OR PERISH cipal and the prefectures the agent in the second chain, and so forth. The Beijinglevel principal appoints the provincial-level agent who is most likely to follow through with Beijing’s goals and priorities, and the provincial-level principal in...