Editor's note: Shi Zhengfu is director of Center for New Political Economy, Fudan University and chairman of Comway Capital Group. He is also the author of the newly published book Supernormal growth: China's economy between 1979 and 2049. In a recent interview with the Shanghai Economic Review, Shi talked about the unique relationship in China's economic framework between the central government and local governments and the relationship between the government and the market. He believes that China's path lies away from the normal market economy and that many local government practices defy classic economic interpretations. The following is the 1st excerpt from this interview in which he discusses how central and local governments could work together under a legal framework and the possible economic implications.

Shanghai Economic Review: You employed the term "three-dimensional market structure" to explain China's extraordinary economic growth. Do you think China's economy is mature?

Shi: I didn't mean that China's economy is mature; what I actually mean is that China's three-dimensional market structure has just taken shape. The three pillars in the structure, the central government, local governments and enterprises, have been working well together for two decades. Despite the evident inefficiencies, this 3-D structure has tapped the potential of the central government's leadership, the motivations of the local governments and the innovative vitality of enterprises. However, the structure is not stable and it is now vital that we work out how to balance power distribution within a legal framework. We have to maintain a balance between the central government and local governments. In other words, if power is reasonably distributed between the central government and local governments and their relationship is legalized, we will see a vastly improved 3-D structure.

SER: If their relationship is legalized, does that mean the power of the central government will diminish and the power of local governments will expand?

Shi: If we look back over the experiences of the past decades, we can see that it's best not to give a definitive answer to this question. China is a huge country with unbalanced economic development and uneven population density; as a result the central government has to play a bigger role in specific areas, such as natural disaster prevention and land and resources management.

Early in the 1950s, Mao Zedong proposed to loosen the hold of centralized control, but he eventually failed because there was a lack of sound approaches for the division of administrative power. We did, however, see improvements later under Deng Xiaoping's reform strategy. On the one hand, local governments gave enterprises more freedom to create a more efficient market; on the other hand, the central government loosened its grasp on power to motivate local governments to compete for development. When local governments have their own motivations, they make their own decisions and try different policies. That's why our reform has yielded benefits.

SER: Do you think we should attribute the benefits of reform to the tax sharing system, which was introduced in 1994?

Shi: The introduction of the tax sharing system in 1994 was a breakthrough. Since then, the central and local governments collect taxes and manage public affairs with the money as agreed. The system has brought about changes in local governments' motivations as well as in the personnel system. As a result, the ability of individuals is becoming more important than political connections. In addition, in the past three decades, we have witnessed local governments focusing on their economic development and thereby tapping the full potential of their local advantages.

The article was translated by Liu Qiang. Its original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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