In China, all reform is local

The recent ratification by the National People's Congress of a constitutional amendment protecting private property rights marks a major milestone in China's transition to a free-market economy. Whether this economic transformation will provide merely a veneer for continued authoritarian rule, or will help pave the way for genuine political reform, remains to be seen. Either way, continued economic liberalization is a welcome change.

But how did this come about? In one respect, the market economy is being embraced because the national government is no longer the only voice being heard in China. Nongovernmental organizations and private advocacy groups have begun to influence both the course and speed of China's transition and are persuading political leaders that economic and political transformation are needed to keep the wheels of economic progress moving forward.

While China's economic growth has been remarkable, those of us closest to the action realize that it has also been uneven. That's why researchers at the nonprofit National Economic Research Institute in Beijing have been conducting a long-term comparative study of economic policy in China's 30 provinces and autonomous regions. The results of this effort - partially funded by the US Chamber of Commerce's Center for International Private Enterprise in Washington - are tracked in an annual publication called the "Marketization Index for China's Provinces."

Like the Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal each year, which compares economic freedom in more than 150 countries, and a similar index analyzing the comparative advantages of the 50 US states, our study compares the policies of China's provinces.

We measure some key variables: the degree to which the local government interferes in market transactions; the level of legal support for the free market; and the degree to which the private sector, the commodity market, and the financial market have developed.

The Index already has become a valuable reference tool for both policymakers and researchers seeking to understand why certain regions are developing faster than others, or seeking to promote further reform.

From afar it may seem as if there is just one China. A closer examination, however, reveals wide disparities among provinces and regions, just as there are significant differences in the business climates of Arkansas, California, and Texas.

Guangdong, Zhejiang, and Fujian, for example, rank first, second, and third, respectively, in our latest Index; Inner Mongolia, on the other hand, ranks 24th, Shaanxi Province ranks 27th, and Xinjiang finished dead last in our latest analysis.

Guangdong, which is home to the well-known Pearl River Delta where many US and multinational companies have located their outsourcing operations, scored near the top in patent applications, the number of patents approved, and - significantly - in protecting intellectual property rights. Xinjiang -where the size of local government remains large and where less has been done to relax its control - ranked near the bottom.

The Index findings confirm the clear and unmistakable relationship between relaxation of government controls and economic growth. The provinces that have done the most to liberalize their economies have been rewarded with the greatest amount of foreign investment and private sector development. Provinces that have been slow to liberalize have been left behind.

Just as the Index of Economic Freedom has demonstrated from a global perspective, hopefully the Marketization Index will eventually help show a strong correlation between economic and political freedom in China's provinces, thus prompting the Chinese government to increasingly move toward a free and open society.

For now, on the economic front, our findings already have prompted provincial officials in Fujian, Shanghai, Gansu, Qinghai, Guangxi, Hunan, Jiangxi, Zhejiang, Jiangsu, and Hubei to make key policy changes.

By ranking fourth in the Index, officials in Jiangsu Province realized they had few available lawyers, accounting firms, and independent auditing agencies - all of which represent an indicator for the early stages of regional economic development. So they established an institution to act as a clearinghouse for developing these intermediaries.

Although much more needs to be done to implement our findings, on the local level the provincial policymakers have become the real catalysts of change. They are the ones putting the findings into practice. The success of their changes has sent an important message to the rest of China and to others around the world.

Zhu Saini is director of international programs at the National Economic Research Institute, the winner of the Atlas Economic Research Foundation's Templeton Freedom Prize for Free Market Solutions to Poverty.

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