J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 24 (1), 114-135
SPRING 2012
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT:
CHANGE AND CHALLENGE
Kuotsai Tom Liou*
ABSTRACT. Incentive policies have been emphasized by many governments
as one of the major policy tools to promote economic development in their
societies. For this paper I have examined the application of incentive
policies in China to improve economic performance during China’s reform
years. In the paper are theoretical reviews about various types of incentive
policies and different arguments about their effects. The development of
Chinese incentive policies is introduced and analysis of their achievements
in improving economic growth and attracting foreign investment is
presented. Challenging issues of incentive policies have been related to
concerns about effectiveness and equity, accountability and transparency,
as well as economic upgrade and balance. Implications of the Chinese
development experience are provided for future study of incentive policies.
INTRODUCTION
Economic development has been one of the top public policies
emphasized by the Chinese government since the late 1970s. For
the past thirty years, China has successfully implemented various
reform policies to increase economic growth and to improve the
quality of public life.
These policies have promoted private
investments and business operations and have gradually changed
the Chinese system from a totally government-controlled planning
system to a market-oriented capitalist system (or a socialist system
with Chinese characteristics). On the overall economic performance,
China has achieved impressive records in almost all aspects of
--------------------------------* Kuotsai Tom Liou, Ph.D., is a Professor, School of Public Administration,
University of Central Florida. His teaching and research interests include
public management, local economic development, public budgeting and
finance, and program evaluation.
Copyright © 2012 by PrAcademics Press
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
115
economic measurement and performance. For example, China’s
gross domestic product (GDP) has been increased from Rmb 362.4
billion in 1978 to over Rmb 30 trillion billion in 2008. Chinese people
have also become richer, with annual GDP per capita rising from Rmb
379 in 1978 to Rmb 16,084 in 2006 (“GDP Growth 1952-2007,”
n.d.). The success of Chinese development has been well recognized
by scholars of various disciplines who have studied policy lessons and
implications of the Chinese development experience.
Among various reform policies, incentive policies provided by the
Chinese government have played a major role in attracting foreign
investments, promoting business development, and assisting
economic transition. Researchers of Chinese economic development
and public administration (e.g., De’Murger et al., 2002; Liou, 2009;
Lu & Tang, 1997) have been interested in studies --not only types and
industries of incentives provided, but also outcomes and implications
of incentives policies. For example, incentive policies have been used
in China’s coastal region to attract foreign investment because of the
lack of financial resources at the early stage of economic
development. In recent years, incentive policies have been further
emphasized by Chinese policymakers to address new economic
problems, such as slowing growth rates, declining exports, and
changing economic structures, which are related to the global
financial crisis.
This paper is an examination of the implementation of incentive
policies for China’s economic reform and development. First I provide
a review of theoretical findings about China’s development model and
concerns about the effectiveness of incentive policies. I then explain
the development of Chinese incentive policies, especially their
relationship with the strategy of special economic development zones
(SEZs), during the reform years. Finally I identify major challenging
issues associated with incentive policies and present important
lessons from the Chinese development experience.
BACKGROUND OF INCENTIVE POLICIES
Financial incentive policies and programs have been emphasized
in the literature of economic development at both the national and
local levels. At the national level, the importance of financial
incentive policies has been recognized by researchers of comparative
development economy (e.g., Ho, 1981; Johnson, 1982; Lin, 1989;
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LIOU Wade, 1992). These researchers explained that the successful
experience of newly industrialized countries (NICs) is related to not
only provisions and operations of a free market system but also to an
active role of government in directing public and private resources to
change the structure of their economy. The researchers indicated
that many of the successful NICs have emphasized a general
incentive policy to encourage the accumulation of production factors
(such as tax measures, R&D) and some specific industrial
development policies to offer incentives to promote the growth of
targeted industries (e.g., subsidizing credit or import protection).
In addition, World Bank researchers offered similar observations
and indicated that the high performing Asian economies (HPAEs)
were successful in getting the basics right to assure superior
accumulation of physical and human capital investment, develop
effective and secure financial systems, limit price distortions, and
open to foreign technologies (World Bank, 1993). Specifically, the
governments of the HPAEs have emphasized important financial
incentives and measures in their development programs. These
incentive policies and measures include, for example, targeting and
subsidizing credit to selected industries, establishing and financially
supporting government banks, establishing firm- and industry-specific
export targets, and developing export marketing institutions.
At the local level, researchers have emphasized the importance of
development finance in their studies of local economic development
in the United States (e.g., Blakely, 1994; Clarke, 1986; Eisinger,
1988; Luke, Ventriss, Reed & Reed, 1988). These researchers
recognized that policymakers are interested in using financial
assistance or tax incentive programs to attract the relocation of major
firms and plans as well as to promote the development of specific
industries or specific local districts. For example, Clark and Montjoy
(1998) explained that policymakers like to provide various financial
arrangements or activities in their local development policies to lower
political costs that are related to business development (e.g.,
limitations on the regulatory environment), in addition to subsidizing
traditional business costs for capitals (e.g., direct loans and loan
guarantees), lands (e.g., land banking), and labor (e.g., low cost/mass
production).
Researchers of development financing (e.g., Bingham, Hill &
White, 1990; Seidman, 2005; White, Bingham & Hill, 2003)
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
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emphasized not only different types of incentive policies but also
outcomes or effectiveness of these policies. Of the incentive types,
they indicated such financial incentive programs as direct financial
services and loan guarantees, targeted and selective tax incentives
(e.g., tax increment financing districts, tax abatement to some
desired businesses), and improved managerial services to the
business community (e.g., consolidated/one-stop permit issuance)
(Hy & Waugh, 1995; Liou, 1999). The purpose of these financial
incentive programs is to reduce business operational costs to help
the recruitment of domestic or international enterprises that are in
the process of relocation or local firms that are critical to home-town
development.
On the effectiveness of incentive policies, most
evaluations of economic development programs concluded that state
and local financial incentive programs have little influence on either
the level or the distribution of economic growth, especially when
compared with the impact of market factors (e.g., Bartik, 1991;
Peters & Fisher, 2004). The topic of effectiveness of incentive
policies has been one of the major concerns for studies of economic
development in general and development financing in particular.
The previous reviews of studies about national and local
economic development have provided important background
information for our study of Chinese incentive policies.
The
importance of a government-supported development model is well
documented in the study of successful economic development in East
Asian countries and regions. Many local governments have used
incentive policies, in terms of direct financial and taxation assistance
and indirect managerial operation improvement, to promote national
and local economic development. These findings are useful to this
study because Chinese policymakers have adopted similar
government-oriented reform measures and local-based incentive
policies to support their economic development.
DEVELOPMENT OF CHINESE INCENTIVE POLICIES
At the beginning of the economic reform, major challenges for the
Chinese government were to develop policies to address past
inefficient problems in China’s old economic system (Lu & Tang,
1997). For example, early in the reform, Chinese leaders developed
several incentive policies to encourage productivity in their planningbased economic system.
One of the major incentive policies
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LIOU implemented in both rural and urban areas was the contract
responsibility system (CRS). In 1981, the CRS was first implemented
in the rural area to reform the old system. The system provided work
points for completing specific tasks and allocated a small portion of
land to an individual family for meeting obligations to the state. After
1984, the CRS was introduced to urban industries to provide
incentives for enterprise management. The contract specified such
issues as minimum amounts of enterprise profits remitting to the
state; a mechanism to share additional profits above the base level
among the enterprise and workers; and commitment by the
enterprises to make up any shortfall in income (Gao, 1996). The
implementation of the CRS offered important policy incentives to
decentralize economic decision-making power and eliminate political
interference in the economic management of state enterprises (Koo,
1990).
Another example about management improvement of the old
economic system is the reform of China’s administrative examination
and approval system (AEAS). Based on principles of the old planned
economic system, China’s AEAS has been criticized as irrational and
inefficient in its operation, with such problems as overlapping
functions, black-box operations, and neglect of responsibilities after
the examination and approval. The reform calls for the development
of an open and transparent system based on scientific principles to
make decisions on the items to be examined, clarify concerned
standards, specify conditions for the approval, and enhance the
capacity of supervision. After China’s entry to the World Trade
Organization in 2001, a high level Leading Group for Administrative
and Examination Approval System Reform was formed in 2001 to
comprehensively analyse projects that are subject to administrative
examination and approval. By the end of 2004, the number of
projects that needed review and approval by State Council
departments had been cut by half (OECD, 2005). The reform of the
AEAS is similar to regulatory reform strategies emphasized in recent
public management reforms for the purpose of economic and social
development (Keating, 1998).
Besides incentives to improve the managerial operation of the
economic system, China also had problems attracting needed foreign
financial resources and managerial skills to support its new
development projects.
In its early open-door policy, China
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
119
emphasized such activities as increasing foreign trade, returning to
the World Bank and the International Monetary Fund and borrowing
from these institutions, and encouraging foreign investment from
joint ventures to wholly owned foreign-invested firms. But, a major
component of the open-door policy is the development of
economically opened coastal areas, especially the promotion of
special economic zones (SEZs) strategy.
The development of the SEZs is critical to China’s reforms
because the SEZs provide opportunities for attracting foreign capital,
advanced technology and equipment, as well as establishing market
value and rules (Stoltenberg, 1984; Kung, Iizaka, and Tong, 2002).
In 1980, China set up four SEZs in Shenzhen, Zhuhai, Shantou, and
Xiamen. In 1983, China adopted the related Law on Joint Ventures
using Chinese and foreign investments to attract the investment of
foreign joint ventures. In 1984, the concepts of SEZ were extended
to another fourteen coastal cities and Hainan Island (which became a
province and the fifth largest SEZ in 1988). Later, China expanded
these open cities to the coastal development triangles, including the
Yangtze River delta, the Pearl River delta in Guangdong, and the Min
Nan region in Fujian, Liaodong and Shandong Peninsulas, and the
Bohai Sea Coastal Region. For example, in 1990, the Pudong District
of Shanghai was designated as a new development zone to lead
development along the Yangtze River. Again, in 2006, the Binhai
district of Tianjin was assigned to promote the Bohai Sea Coastal
region’s development. Similar economic zones have been opened in
boarder cities, capital cities of inland provinces and autonomous
regions, as well as in large and medium-sized cities, in terms of free
trade zones, state-level economic and technological development
zones, and high-tech industrial development zones.1 (Figure 1).
The understanding of SEZs development is important in our study
of China’s incentive policies because, unlike other areas in China,
local governments in the SEZs have the authority to make various
investment decisions that are outside the state plan. They are
allowed to provide preferential tax and financial policies to attract
foreign investors, to adjust their administrative decision process to
provide flexible labor laws and simplified (one-stop) approvals, and to
undertake their own infrastructure development (e.g., power,
transport, and communication), as long as they can raise the funds.
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LIOU Specifically, preferential tax policies have focused on and given
priority to three types of investment activities: (a) foreign direct
investment to provide China with advanced management skills,
production technology, external markets and foreign exchange
earnings; (b) infrastructure investment to alleviate a key bottleneck of
economic growth; and (c) new/high technology investment to
stimulate efficient production and provide strong externalities for the
economy as a whole (Shih-Hsin University, SHU, n.d.).
Similar to financial incentives promoted in the U.S., major
provisions of China’s preferential policies are lower tax rates than
those of firms located outside the SEZs, tax holidays for several years,
liberal access to foreign exchange, state bank loans and trade
protection and subsidies, and exemptions of import licenses and
customs duties on imports of machinery and equipment as well as on
their exports (Bell et al., 1993; Kung, Iizaka, & Tong, 2002; Lu &
Tang, 1997). One example about SEZs’ preferential tax policies is the
case of differential corporate tax rates for foreign and domestics
firms (e.g., Guo & Feng, 2007). Under this policy, foreign investment
enterprises paid a nominal tax burden of 15% and an actual tax
burden of 11%. But, domestic enterprises had to pay tax rates
double those of foreign investors (i.e., 33% of the nominal tax burden
and 23% of the actual burden). The differential tax rates were
changed in 2008 when China introduced a unified income tax rate of
25% (i.e., removing the preferential rate of 15% for most enterprises).
But, specially reduced rates of 15 % and 20 % are still available for
high-technology enterprises and qualified small and thin-profit
enterprises, respectively. The preferential policies emphasized in the
SEZs and the successful experience of SEZs in the coastal cities have
been expanded to local governments in the central and western
regions to attract investment from both foreign international
enterprises and domestic business companies in the coastal region.
Similar incentive policies and SEZ arrangements have been
implemented in western cities and provinces such as Chongqing to
promote development in China’s west region.
In sum, the development of incentive policies in China consisted
of both managerial improvements and financial assistances. The
reform measures, such as the contract responsibility system and the
administrative examination and approval system, were designed to
overcome inefficient problems related to China’s economic system.
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
121
The reform measures, such as special economic zones and
preferential policies, are promoted to attract foreign investments and
are important for China’s economic development. While the former
reforms are unique to the Chinese system, the latter reforms are
common incentive policies emphasized and reviewed in the studies of
economic development.
OUTCOME OF INCENTIVE POLICIES
To understand general outcomes of China’s incentive policies, we
examined economic data that are related to the distribution of
China’s gross domestic product (GDP) among various regions and
provinces and the longitudinal data of China’s foreign direct
investment (FDI). The two economic data are important because the
purposes of incentive policies are to improve economic growth and to
attract foreign capitals.
As shown in Table 1, administration divisions in China’s East
region showed higher figures on both total GDP and per-capita GDP
than those of China’s Central and Western regions. For example,
coastal provinces, such as Guangdong, Shandong, Jiangsu, and
Zhejiang have been ranked as the top four in the category of total
GDP values, while metropolitan cities, such as Shanghai, Beijing, and
Tianjin received top three rankings in their per-capita GDP values.
The gaps between the richest and the poorest provinces are huge in
terms of both values of the total GDP and the per-capita GDP. For
example, the per-capita GDP in Shanghai was RMB 56,733 in 2006,
which is about ten times the per-capita GDP in Guizhou (i.e., RMB
5750). The total GDP of Guangdong was RMB 2,596,855 millions in
2006, which is about ninety times the total GDP of Tibet (RMB
29,005 millions in 2006). The GDP gap between China’s East region
and Central and Western regions provide general evidence of the
success of coastal regional development, which is closely related to
(and based on) incentive policies emphasized in various SEZs.
In addition to the GDP data, China has also increased its FDI
measurements such as the number of projects, contractual value and
realized values, since economic reforms in the early 1980s. As
revealed in Table 2, for example, between 1983 and 2006, the
number of FDI projects increased from 638 projects to 41,485
projects. The FDI contractual values increased from US$19.17
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LIOU TABLE 1
Gross Domestic Product among China’s Administrative Divisions,
2006
Region
Eastern
Guangdong
Shandong
Jiangsu
Zhejiang
Hebei
Shanghai
Liaoning
Beijing
Tianjin
Fujian
Guangxi
Hainan
Central
Hubei
Hunan
Heilongjiang
Anhui
Inner Mongolia
Shanxi
Jiangxi
Jilin
Henan
Western
Shaanxi
Yunnan
Chongqing
Xinjiang
Gansu
Guizhou
Ningxia
Qinghai
Tibet
Sichuan
GDP (in million
RMB)
National
Rank Order
GDP per
capita
2,596,855
2,184,670
2,154,836
1,564,893
1,161,370
1,029,697
925,705
772,030
433,773
750,163
480,198
105,243
1
2
3
4
6
7
8
10
21
11
16
28
28,077
23,546
28,685
31,684
16,894
56,733
21,802
49,505
40,961
21,152
10,240
12,650
6
7
5
4
11
1
8
2
3
9
27
18
749,317
749,317
621,680
614,190
479,000
474,650
461,877
424,923
1,246,409
12
13
14
15
17
18
19
22
5
13,169
11,830
16,268
10,044
20,047
14,106
10,679
15,625
13,279
17
20
12
28
10
15
24
13
16
438,391
400,187
348,620
301,898
227,500
226,743
70,698
64,105
29,005
863,780
20
23
24
25
26
27
29
30
31
9
11,762
8,961
12,437
14,871
8,749
5,750
11,784
11,753
10,369
10,574
22
29
19
14
30
31
21
23
26
25
Source: National Bureau of Statistics of China (2007).
National
Rank Order
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
123
TABLE 2
Foreign Direct Investment in China, 2009 (USD 100 million)
Year
1979-82
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
No. of Projects Contractual Value
920
49.58
638
19.17
2,166
28.75
3,073
63.33
1,498
33.30
2,233
37.09
5,945
52.97
5,779
56.00
7,273
65.96
12,978
119.77
48,746
581.24
83,437
1,114.36
47,594
826.80
37,011
912.82
24,556
732.76
21,001
510.03
19,799
521.02
16,918
412.23
22,347
623.80
26,140
691.95
34,171
827.68
41,081
1,150.70
43,664
1,534.79
44,001
1,890.65
41,485
2,001.74
37,871
27,154
23,435
Realized Value
17.69
9.16
14.19
19.56
22.44
23.14
31.94
33.93
34.87
43.66
110.08
275.15
337.67
375.21
417.26
452.57
454.63
403.19
407.15
468.78
527.43
535.05
606.30
603.25
694.68
-
-
Source: National Bureau of Statistics of China (Various Years). See
also Fung et al. (2002), US-China Business Council (n.d).
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LIOU millions to US $200,174 million and the realized values increased
from US $916 million to US $69,468 million. The government FDI
data further showed that China’s East region received about 83% of
the total project numbers and about 83% of the FDI realized values.
China’s Central region received about 11% of the total project
numbers and about 9% of the realized values and China’s West
region received only about 6% of the project numbers and about 4%
of the realized values (Dang, 2008, p. 20). Again, the success of
China’s FDI achievement has been in the Eastern coastal region with
the development SEZs and the provisions of preferential policies.
Finally, besides the data about China’s GDP and FDI, one recent
study of comprehensive competitiveness of China’s major cities
provided additional evidence about changes in China’s Eastern
coastal cities (Beijing International Institute for Urban Development,
2008). The study reported the top ten most competitive cities in
China by examining ten factors such as globalization, industrial
structure of post-industrialization cities, economic flows, openness of
the market, entrepreneurship, innovative atmosphere, human
resources, urban governance structure, urban brand, and city
clustering and city alliance. Based on these factors, the top ten
competitive cities are Shenzhen, Shanghai, Beijing, Dongguan,
Guangzhou, Hangzhou, Wuxi, Suzhou, Nanjing, and Changsha.
Again, the most competitive cities reported are in China’s Eastern
region. The selection of Shenzhen as the top competitiveness city is
a special recognition for the successful development of SEZs because
Shenzhen is a new city and the city’s development is based on the
provision of various incentive policies emphasized in the reform years
(Guo & Feng, 2007).
The analysis of China’s GDP and FDI data clearly revealed the
success of China’s economic development. Additional distribution
data and competitive city findings further indicated that the better
and faster developed were in China’s Eastern region rather than in
the Central and Western regions. These findings provided some
general and indirect evidences to support the outcome of incentive
policies in promoting China’s economic development.
CHALLENGES OF INCENTIVE POLICIES
Previous review findings about theoretical issues of incentive
policies, development of China’s incentive policies, and outcomes of
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125
China’s GDP, FDI and city competitiveness offered good background
information for our examination of the Chinese experience with
incentive policies. Three critical lessons and challenges are identified
and analyzed here: incentive effectiveness and equity, managerial
accountability and transparency, and economic upgrade and balance.
Effectiveness and Equity of Incentives
The first challenging issue of incentive policies concerns their
effectiveness and equity (e.g., Liou, 2009; Robinson-Barnes &
Waugh, 1998). On the effectiveness side, researchers wanted to
know if the provision of incentive policies has resulted in an increase
of economic growth, such as jobs and tax revenues. Researchers of
local economic development in the United States argued that local
incentive programs have little influence on either the level or the
distribution of economic growth, especially when compared with the
impact of market factors (e.g., Bartik, 1992; Peters & Fisher, 2004).
From the equity perspective, researchers indicated that many of the
traditional incentives simply transfer money from the public sector to
successful firms (moving these firms from place to place) and do little
to help those in need (Rubin, 1998).
Robinson-Barnes and Waugh (1998) further indicated that the
provision of tax incentives has been counterproductive as they have
caused intergovernmental competition and may be ineffective and
unfair due to the overlooked opportunities in localities not typically
targeted. Researchers agreed that the use of financial incentives is
based on political considerations because tax and incentives are easy
to control and manipulate when comparing them with other
determinative factors such as the quality of the local labor force
(Wolman & Spitzley, 1996). They noticed that policymakers enact tax
incentives not on the basis of rational economic analysis of cost and
benefits, but as a defensive measure against regional competition
(Grady, 1987).
For the Chinese experience, incentive policies have produced
both positive and negative effects (e.g., Tseng & Zebregs, 2002). On
the positive side, the incentives have been successful in promoting
economic growth and improving citizen’s cost of living. As shown in
Table 1, both GDP and GDP per capita showed high figures in
provinces and cities of the Eastern coastal region. From FDI data
reported in Table 2, it is also clear that China has successfully
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LIOU recruited foreign companies and investments to support China’s
economic development. These foreign investments have provided
the needed financial capital to support local governments and the
important technical and managerial knowledge and skills to support
business communities.
The negative consequences of China’s incentive policies include
unfair treatment between domestic firms and foreign companies,
unequal development between regions with and those without such
incentives, and negative side effects and costs (e.g., environmental
pollution) associated with economic growth (Liou, 2009). The
unequal regional development is especially evidenced in the
increasing gap between China’s Eastern region and Central and
Western regions. As reported in the previous section, there are major
disparities between China’s coastal provinces and inland provinces,
in terms of both GDP estimates (i.e., Guangdong’s GDP of 2596885
millions of RMB vs. Tibet’s GDP of 29005 millions of RMB) and GDP
per capita (i.e., Shanghai’s per capita of 56733 RMB vs. Guizhou’s
per capita of 5750 RMB). Despite traditional development factors
such as market and location, these increasing income gaps and
regional disparities are closely related to differences between their
development policies, especially the opportunity of providing
incentives (preferential policies) and the development of SEZs.
Managerial Accountability and Corruption Concerns
Another challenging issue for the study of incentive policies has to
do with the importance of managerial accountability and
transparency to avoid potential corruption and waste cases. As Liou
(2007) indicated, accountability is important in the process of
economic development because governments have to make special
arrangements, such as tax incentives, to support the recruitment of
new businesses and the retention of old businesses in their
communities. In many cases, these special arrangements have been
offered to selected industries and special companies and individuals,
based on consideration of many factors. The accountability concern
for incentive policies is to make sure that public interests have been
protected and no private gains or corruption cases have been
reported. The challenges are in the process of making incentive
decisions and the criteria used in making such decisions. In many
cases, incentive policies and decisions have been criticized for
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
127
different considerations, such as short term interest vs. long term
interest, and economic benefits vs. social and environmental
welfares.
The concern of accountability is especially important in an
examination of China’s incentive policies because of the many official
corruption cases reported in recent years.2 For example, in Shanghai
(the city with the highest per capita GDP), former party chief Chen
Liangyu was dismissed in September 2006 for alleged corruption
charges related to a social security fund scandal and later was
sentenced in April 2008 to 18 years in prison on charges of financial
fraud, abuse of power, and accepting bribery (“Chen Liangyu Gets,”
2008). At the same time, Yin Guoyuan, former vice-director of the
city's housing, land and resources administration bureau, was
charged with taking bribes and illegally possessing various properties.
Yin received a sentence from a Shanghai intermediate court for death
with two years' reprieve (i.e., the two-year reprieve most likely means
the death penalty will be cut to life in prison (“Former Shanghai Land
Official,” 2008). In Shenzhen, China’s first and successful reform
city, Mayor Xu Zongheng was dismissed in June 2009 for alleged
corruption charges related to bribery for government positions and
bids for construction projects (Cui, 2009).
To promote accountability and to reduce corruption, we want to
emphasize the importance of performance evaluation in the
application of incentive policies (Liou, 2007; Liu, 2009). Evaluation
of incentive policies can be addressed in the planning and financing
stages of the economic development process (Liou, 2007). During
the planning stage, evaluation activities include clear measurement
of development goals, selection of evaluation criteria, and
assessment of the overall effect. At the financing stage, performance
evaluation methods have been required and implemented for
periodically monitoring the costs and benefits of each tax incentive.
Researchers (e.g., Ihlanfeldt, 1995) further suggested principles and
guidelines for policymakers in the use of tax incentives to promote
economic development. Some of the guidelines are (1) tax incentives
should be accompanied by specific programs that seek to mitigate
the unwanted side effects of economic growth; (2) tax incentive
programs should contain provisions to reduce potential revenue
losses; and (3) performance evaluation methods should be adopted
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LIOU for periodically monitoring the costs and benefits of each tax
incentive.
Economic Upgrade and Regional Balance
Considering both positive and negative effects of incentive
policies, Chinese policymakers have adjusted incentive policies to
upgrade their economic structure and address many challenging
problems resulting from economic development. As mentioned,
China emphasized the gradual ending of their preferential tax policies
for foreign invested enterprises (FIE) over domestic enterprise (DE) in
the 2008 China Enterprise Income Tax. A unified income tax rate of
25% has been established for both FIE and DE and most tax
incentives currently available only to FIE will be phased out over 5
years, including the tax holiday for manufacturing FIE, rate reduction
for export oriented FIE, preferential tax rates of 15% and 24% in
certain regions, and tax refund on dividend reinvestment (Deloitte,
2009; Sharkey, 2007).
Incentive policies, however, will be continually applied to the
development of technology-led sectors and high-value capabilities. A
series of tax breaks have been introduced to promote hightechnology, environmental protection and energy-saving industries.
The new Enterprise Income Tax Law offers a reduced 15% tax rate
(compared to the regular rate of 25%) for high and new technology
enterprises. These enterprises must be engaged in at least one of
the eight fields that receive key support from the national
government, including electronic information technology; biology and
medical technology; aerospace technology; new materials technology;
high-tech services; new energy and energy conservation technology;
resources and environment technology; and technology
transformation of traditional industries.
Finally, despite the industry-based incentives to upgrade
economic structure in the coastal region, Chinese policymakers still
emphasize geographically-based incentive policies to promote the
development of China’s Western region. The development strategy
used is still based on the successful experience of SEZs over the
reform years. For example, the State Council recently approved a
plan to establish a new SEZ in Chongqing (Liangjiang Economic
Zones) in May 2010. The new SEZ is to receive the same favorable
policies as those given to the Pudong in Shanghai and the Binhai in
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
129
Tianjin. The new SEZ is designed to develop a new manufacturing
base, a western gate channeling investment, a logistic hub along the
upstream Yangtze River, and a financial center in West China.
Located in the less developed Western region, the new SEZ will bring
more growth potential and will serve as another new engine for
China’s commercial development in the next decades. The new SEZ
will also serve as one of the significant measures for the Chinese
government to counter difficulties in the global economic downturn
and carry out strategies for further economic development
(“Chongqing District to Be,” 2010; “West China Puts,” 2010).
CONCLUSION
This paper examined the development of China’s incentive
policies and their relationship with economic development. China
has implemented various managerial strategies to promote efficiency
in its economic system and special preferential tax policies to
promote economic development. The results of these reform
strategies and policies have been consistent high rates of economic
growth, successful accumulation of foreign investments, and rapid
development in the coastal provinces and cities. But these policies
have also resulted in major challenges, such as effectiveness and
equity concerns, managerial accountability and transparency, and
economic upgrade and balance.
The application of incentive policies during China’s economic
reforms has shown both similarities and differences from the findings
reviewed in previous studies. China has adopted similar governmentguided development policies and specific tax preferences and
financial assistance to attract foreign investment and business
development. But, unlike the development experience in NICs and
the local development in the US, China’s incentive policies have
addressed inefficiency problems from the old planning economic
system and have adopted a partial and gradual approach to selected
regions and industries.
Closely related to China’s regional
development, incentive policies have been emphasized in the
implementation of special economic zone development strategies,
first in the coastal region and then gradually expanded to the interior
regions. These government-guided SEZs and gradual-approached
incentive policies are major strategies of China’s economic
development.
130
LIOU The Chinese experience will be emphasized for policymakers to
consider the adoption and implementation of incentive policies to
promote economic development. Incentive policies, especially in the
form of preferential tax policies, will be popular policies for
policymakers because it is easier for them to use (or manipulate)
these public policy tools than to change other environmental factors
(e.g., quality of life indicators) to attract business development. But,
the Chinese experience should be interpreted with caution because
of China’s unique environment. Investments from overseas Chinese
and international firms are based on the consideration of not just
incentive policies, but also factors such as cheap and talented
human resources, large populations and related consumer power,
and huge domestic markets and regional influences.
Chinese governments at both the national and local levels have
almost total control over the distribution of resources in terms of
different treatments, schedules, and criteria between regions and
industries. While efficient from the administrative consideration,
these government authorities and privileges will not be able to be
applied with similar approaches and results in other societies of
Western democratic governments. These and other related issues
from the Chinese experience provide good arguments for future
studies of incentive policies. Future researchers may want to conduct
individual or comparative case studies with more direct data and
evidence in other economic transition countries to enhance our
understanding of the application of incentive policies in economic
development.
NOTES
1. There are some differences between China’s SEZs and other
similarly development arrangements (e.g., industrial and or high
tech parks). For example, SEZs are an administration division
such as a city or province, which have more authority in
preference policies and are larger geographic areas than those of
industrial and high tech parks (i.e., within a city with limited
authority). For more information, see for example, Guo and Feng
(2007).
2. Bureaucratic corruption has become one major managerial issue
in recent years. There are many system and policy factors
associated with the problem of corruption. While not explaining
INCENTIVE POLICIES AND CHINA’S ECONOMIC DEVELOPMENT: CHANGE AND CHALLENGE
131
causes and consequences of corruption, this paper indicates that
incentive policies have provided opportunities for corrupted
officials because of special application of the policies in selected
region and industries. For more information about corruption in
contemporary China, see for example Gong (1994) and Kinkley
(2006).
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