Huihua Nie Collusion, Local Governments and Development in China A Reflection on the China Model Translated by Haifeng Li and Ping Chen Collusion, Local Governments and Development in China Huihua Nie Collusion, Local Governments and Development in China A Reflection on the China Model Huihua Nie Renmin University of China Beijing, China Translated by Haifeng Li and Ping Chen ISBN 978-981-10-5058-9 ISBN 978-981-10-5059-6 (eBook) DOI 10.1007/978-981-10-5059-6 Library of Congress Control Number: 2017945790 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: TAO Images Limited/Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore To Those Concerned About Destiny of China and Promoting China’s Progress A cknowledgements I avail myself of this opportunity to express my heartfelt gratitude for the invaluable support that I have received over the past 3 years (2009–2012), during which I spent every day scrambling up the moun- tains of my academic research. I must first mention the China Scholarship Council (CSC) which gave me financial support for my one-year postdoc- toral research at Harvard University with Oliver Hart, who, as an inter- nationally luminary economist in contract theory and the theory of the firm, benefited me a lot both in my academic research and teaching. A number of people have been wonderfully helpful in providing mate- rial and research approach for the book. I would very much like to thank Ruixue Jia, Minjie Jiang, Ting Jiang, Jinbo Li, Xianghong Wang, Rudai Yang, Yu Zhang, Yuxiao Zhang, and Zhaoyun Zou, with whom I collab- orated well and successively published a series of papers on the topic of collusion and the China model in Economic and Political Studies, Journal of Comparative Economics, Economic Research Journal, The Journal of World Economy, Review of Economics and Statistics, etc. Many of the papers inspired and enlightened me throughout the journey of complet- ing this book. I also give my thanks to my students Li Dang, Zhibo Tang and Hua Guo for their arduous and down-to-earth assistant research for me. My thanks would also go to Center for Firm and Organization Studies (CFOS) of Renmin University of China, which gave me a lot of help vii viii ACkNOWLEDGEMENTS through Young’s Workshop and CFOS’s seminars. I would also like to thank my doctoral tutor Prof. Ruilong Yang, who has given me many constructive suggestions for my research on this project and due concern to my academic career development. I would also be indebted to aca- demic colleagues, Prof. Naiwu Hu, Prof. Ye’an Zhou and Prof. Qijing Yang for their support and guidance. Finally, I would like to thank my friends and colleagues who work in the political community and enterprises for their first-hand materials and my family for their patience, encouragement and constant support. c ontents Part I An Anatomy of the China Model from the Perspective of Collusion 1 Introduction 3 1.1 The China Model 3 1.2 Cost of Economic Growth 8 1.3 Main Arguments 10 1.4 key Concepts 16 1.5 The Structure of This Book 19 Notes 20 References 22 2 Government–Firm Collusion: A New Analytical Framework 23 2.1 Three PX Projects 23 2.1.1 Dalian XP Project: Relocation and Expansion 24 2.1.2 Xiamen’s PX Project: Relocation 25 2.1.3 Ningbo’s PX Project: Abortion 26 2.2 The China Model Driven by Government–Firm Collusion 26 ix x CONTENTS 2.3 Government–Firm Collusion Model 30 2.3.1 Game Players 30 2.3.2 Information Structure 31 2.3.3 Utility Function 32 2.3.4 Time Line 33 2.4 The Optimal Equilibrium Collusion and Collusion-Proof Contract 34 2.4.1 Equilibrium Collusion 34 2.4.2 Collusion-Proof Contract 35 2.4.3 Allowing Collusion Versus Deterring Collusion 39 2.4.4 The Role of Compensation 40 2.5 A Case Study 42 2.6 Extended Discussions 44 2.6.1 The Local Government’s Lack of Long-Term Expectation 44 2.6.2 Imposition of Exorbitant Taxation on the Firm 44 2.6.3 Ineffectiveness of Supervision of the Mass Media 45 2.6.4 Lack of Credibility of Punishment 45 2.7 Summary 46 Notes 47 References 50 3 Collusion and Coalmine Accidents 55 3.1 High Frequency of Coalmine Accidents 55 3.2 The Evolution of China’s Coalmine Safety Supervision System 59 3.3 Testing Approaches to Government-Firm Collusion 60 3.4 Results of Econometric Analysis 63 3.4.1 Sources of Data 63 3.4.2 Data Description 64 3.4.3 Main Results 65 3.5 Robustness Test 69 3.5.1 More Control Variables 69 3.5.2 A More Rigorous Test 71 CONTENTS xi 3.6 Summary 72 Notes 72 References 74 4 Collusion and House Prices 77 4.1 An Overview of Exorbitant House Prices in China 77 4.2 Three Different Views About Exorbitant HousePrices 81 4.3 The Institutional Background of Housing Market Control 84 4.3.1 Fiscal Decentralization Between the Central Government and Local Governments 84 4.3.2 Housing and Land Reform 85 4.4 High House Prices Driven up by Collusion 87 4.5 Results of Econometric Tests 94 4.5.1 Model Specification 94 4.5.2 Data Description 96 4.5.3 An Analysis of Regression Results of Housing Variables 96 4.5.4 Robustness Test 99 4.6 Summary 101 Notes 101 References 103 5 Pollution, Illegal Land Use, and Other Major Social Problems 107 5.1 Environment Pollution 107 5.1.1 An Overview of Pollution in China 107 5.1.2 Collusion and Pollution 109 5.2 Illegal Use of Land 110 5.3 Local Negative Externalities 113 5.4 Smuggling 115 5.5 Food Safety 117 5.6 Other Major Problems 118 5.7 Summary 119 Notes 120 References 121