Institutional innovations, asymmetric decentralization ...

Environment and Planning C: Government and Policy 2007, volume 25, pages 269 ^ 290

DOI:10.1068/c0558

Institutional innovations, asymmetric decentralization, and local economic development: a case study of Kunshan, in post-Mao China Shiuh-Shen Chien

East Asian Institute, National University of Singapore, 469A Towel Block #06-01 Bukit Timah Road, Singapore, 259770; e-mail: [email protected] Received 8 September 2005; in revised form 8 May 2006

Abstract. The author provides an understanding of the concept of institutional innovations for local economic development in post-Mao China. With Kunshan, one of the most dramatically developed regions in Yangtze Delta, used as a case study, the aim is to understand how, under what circumstances, and by whom, locally initiated projects can be institutionalized and evolved in the context of China's transition. `Projects' here refer to those reforms implemented by local governments initially without any permission from the centre. It is argued that the development of those projects can be understood as an evolutionary process, consisting of three mechanisms of local ^ central interactions: state's intention to connive; ex-post state endorsement, and ex-ante state adoption. Moreover, the innovations would be successful not only because of general contexts such as marketization, liberalization, and globalization, but also because of a particular process of economic decentralization to the local and political centralization under the party, or, as is proposed, asymmetric decentralization. Careerist local officials would like to utilize their decentralized resources to strive for more development opportunities, which could in turn become their `political capital', enabling them to attract the attentions of upper level governments and hence gain promotion.

`Èvery locality is encouraged to learn from Kunshan to self-develop its own zone. After the zone has grown to some extent, the state will evaluate and then grant `the hat [of national title]' to become a national development zone.'' Li Peng, Prime Minister of China, comment in July 1992 (1) 1 Introduction: locally initiated projects in post-Mao China The tremendous success of China's reform in recent years has undeniably attracted worldwide attention. In many perspectives, post-Mao China can be regarded as having relatively superior economic growth and as having made rapid improvements in living standards at the national scale (World Bank, 1997; 2001). However, as many studies have shown, this transition in China also has been propelled by active and flexible roles played by local agents who have managed to bring about policy and institutional innovations in order to promote economic development (Oi, 1995; Walder, 1995; F Wu, 2000; Yeung, 2000; Zhu, 1999). For example, Shekou Industrial District, the prototype of four, pioneering, Special Economic Zones, was originally proposed by Guangdong Provincial Government (Zhu, 2005). The decollectivization programme began with an experiment in Anhui and Sichuan Provinces in the late 1970s ö without any official approval from the centre (Chung, 2000); similarly, the rapid development of township and village enterprises started in Jiangzu in the 1980s. The privatization of small state-owned enterprises (SOEs) was initiated in some areas (such as Shandong Province), and mass layoffs of SOEs began in other regions (for example, Shanghai (1) Chronology

of KETZ [cited from KETZ Administration Office and Party History Research Office of Kunshan CCP, 2000, page 443; also news source: ren min wang (based in Beijing) 2 September 2004].

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and Heilongjiang Provinces) in the 1990s (Cao et al, 1999; Qian and Roland, 1998). These reforms attained great success without any of the programmes being initiated by the centre; thus, locally initiated projects in China's transition phase could be generated at the local level rather than at the centre. This phenomenon of local institutional innovations is the focus of this paper. Of course, this is not to say that in China the centre played no role. But it is generally agreed that such local institutional innovations may be brought about in various ways, including: introduction of new reforms; legally ambiguous negotiations with investors; flexible shifting of resource allocations; arbitrary interpretation of legal documentation; and even the pushing of de facto implementation beyond de jure central regulations (Li, 1997b; Qian and Stiglitz, 1996; Wei, 2002; Yeung, 2000). It is doubtful that China's economic transition would have been so dynamic and rapid without such flexibility and innovation pursued by local officials. Most directly related to this is the importance of entrepreneurial local leadership, such as the personality, commitment, vision, and power of strong and charismatic local leaders (Qian and Weingast, 1996). Local leaders with the `guts' (dan liang) and courage (yong qi) to replace three fears (san pa) with three dares (san dan) are more likely to be able to create ambitious development projects (Chung, 1999a; Lam, 1999).(2) Underlying this, there are at least three different circumstances which can explain the local institutional innovations which happened in the context of post-Mao China. The first concerns the absence of constitutional rigidity. The Constitution of Communist China does declare that China is de jure a unitary state, but does not clearly regulate the central ^ local interactions. With the leeway left by the absence of constitutional regulations, local governments could deploy varied strategies to promote regional interests, even at the expense of the centre, without reference to the centre (Cheung, 1994; 1998a). The second approach focuses on the dimension of assessing localities' political capital in Beijing, including informal capital such as personal connections between local and central leaders (Cheung, 1998b), and formal capital due to the numbers of representatives from different provinces on the Central Committee of the Chinese Communist Party (Su and Yang, 2000). These researches imply that the greater the political capital in the centre, the more likely are local institutional innovations to happen. Third, this paper is about economic/material incentives, particularly in the model of `local state corporatism' in which local governments went into business with various agencies to raise revenues and to provide employment opportunities (Oi, 1995; 1998); or the phenomenon of `xia hai ', which refers to the many local bureaucrats quitting their public jobs and joining the business world (Li, 1998). These local incumbent or former bureaucrats were expected to act innovatively, because their personal income, bonuses, and fringe benefits apart from their salary, and perks were pegged to the performance of these local publicly owned or private companies. Although different analytic dimensions have been mentioned, I argue that at least two questions remain unanswered. First, apart from economic incentives, what else motivated local officials to make such policy and institutional innovations? The question is relevant to many of post-Mao China's economically globalized places (2) The

`fears' include: fear of risks, fear of input, and fear of blame for mistakes. The three dares cover daring: to take responsibility; to put in resources; and to overcome hindrances to productivity growth. The argument of `three fears and three dares' was put forward by Liang Weisu, Panyu Party Secretary of Guangdong Province in 1987, who tried to encourage local leaders to be more entrepreneurial in order to achieve the county's ambitious objectives (Lam, 1999).

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where local development was significantly triggered neither by township ^ village enterprises nor by publicly owned companies, but by foreign direct investment (FDI). In the concept of the `local entrepreneurial state', Duckett (1998) argues that, even without becoming engaged in business for material interests, local officials could still improve the regulatory environments to make them more conducive to economic growth. However, this leaves the question of how these local leaders, with no material interests, could still be motivated to make institutional innovations. Second, how should we understand the formation and transformation of locally initiated projects? As argued earlier, many institutional innovations were initiated first by local agents and were then adopted by the centre and promoted across the country. In light of the fact that centre ^ local relations in post-Mao China were more a question of political dynamics (or so-called federalism, Chinese style) than of constitutional rigidity (Cao et al, 1999; Montinola, 1995; Qian and Weingast, 1996), there are mutual influences between central and local governments (Breslin 1996; Gore, 1999; Li, 1997a; Zhao, 1994). Bearing this in mind, how did local and central governments utilize their resources and interact with each other in order to bring about local nstitutional innovations? These two questions are the basic research enquiries of this paper. My aim in this paper is to understand how, under what circumstances, and by whom, locally initiated projects can be innovatively institutionalized and can evolve in the context of transitional Chinaöincluding marketization, globalization, and the one-party Communist regime. My main arguments are twofold. First, locally initiated projects can be viewed as an evolutionary process consisting of three kinds of local ^ central interactions: the state's intention to connive (Chung, 2000; Edin, 2000; Smart, 1999); ex-post state endorsement (Chung, 2000; Zhang, 1994); and ex-ante state adoption (Chung, 1997; Li, 1997b; Shirk, 1993). Second, such local institutional innovations could take place as a consequence of complicated mechanisms of economic decentralization to the local, along with political centralization under the Party. On the one hand, local government are granted more competencies and powers over certain economic activities (Fan, 1995; Ma and Wu, 2005; Montinola and Qian, 1995; Oi, 1995; 1998; Qian and Stiglitz, 1996; Su and Yang, 2000; Wong et al, 1995; Woo, 1999). On the other hand, local leaders are not elected locally by the people but are assigned by the upper level governments on the basis of their economic performance (Burns, 1987; Heilmann and Kirchberger, 2000; Huang, 1996; 2002; Ma and Wu, 2005). I argue that such mechanisms together trigger local institutional innovations: local officials would like to do their best to ultilize their decentralized resources to strive for more local development opportunities, which in turn could be their political capital to draw the attention of the upper level governments and hence obtain promotion. The case I examine in this paper is that of Kunshan, a county-level city under the Suzhou prefecture-level metropolitan of Jiangsu Province. Kunshan was ranked top in the `China Top Economically Strong 100 County-Level Administrations' ( jin ji bai qion xian) in 2005. However, historically, the primary sector constituted over 60% of the gross value of industrial and agricultural output in 1977, causing Kunshan to be nicknamed `the little sixth'. With the dramatic development from `the little sixth in Suzhou' to the foremost in China, there has been a series of institutional/policy innovations. The most important was the establishment of the Kunshan Economic and Technology Zone (KETZ). Locally initiated by the Kunshan local government in 1984, KETZ was granted its national title in 1992 and was permitted to operate as one of the first export-process zones (EPZs) in China in 2001, making it one of the most prosperous and competitive national development zones ö not only in

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Jiangsu Province but in China as a whole (Beijing Institute of International City Development, 2003).(3) In addition, a policy of a land-user fee charged to investors was launched in 1988 in Kunshan, which was the first county-level jurisdiction in China to practice this (land had been state-owned property since 1949). Moreover, KETZ offered basic standards of infrastructure for five utilities and land filling (wu tong yi ping) in the mid-1980s. These five utilities were: electricity, roads, communications, water, and sewage. Today, a total of nine utilities are provided (with the addition of steam, gas, optical fiber, and Internet) together with the land-filling service. In 1996 Kunshan established a foreign investor service centre, coordinating different departments to become a one-stop shop. In 1997 Kunshan launched the campaign ``Never Say `No' to Foreign Investors''.(4) In 2001 Kunshan established the first and only county-level Bureau of Information in China, in order to persuade the centre that they would be capable of managing an FDI programme for the production of CD ROMs.(5) In addition, Kunshan's dramatic development, from a planned and agricultural economy to a globalized and industrialized platform, had the following features. First, in terms of dramatic industrialization, the GDP share of the agriculture sector dropped dramatically from 50% in 1978 to 5.6% in 2000. Second, with regard to economic globalization, by 2003, Kunshan attracted US$ 1200 million of FDI and produced US$ 13.9 billion of trade. The ratio of trade to GDP in Kunshan was 260%, and the amount of FDI was 23.1% of GDP.(6) Third, concerning investment sources, by 2002, Taiwanese investment in Kunshan was US$ 4.5 billion öabout 70% of the total FDI in Kunshan, and 14% of all Taiwanese investment in China as a whole (Lee, 2003). In addition, dozens of restaurants serve Taiwanese-style cuisine and Taiwanese-style karaoke bars enliven Kunshan's nightlife, successfully generating the so-called `Taiwanese home atmosphere' in Kunshan and, in return, enabling Kunshan to attract more Taiwanese FDI.(7) Fourth, by 2004, the main industrial sectors in Kunshan by 2004 were electronic and information technology (IT) industry and precision engineering, which together generated over 50% of the industrial output.(8) In other words, the brilliant transformation of Kunshan shows that it can be regarded as one of the best cases by which to understand how local institutional innovations can dynamically be initiated, develop, and evolve in the context of the dramatic economic development in the post-Mao transition period. Certain researchers have argued that Kunshan's economic development, like that of most other prospering regions in post-Mao China, can be understood as outcomes (3) According to one survey on the top ten development zones in China, published in 2002 by Horizonkey (ling dian), a Beijing-based consultancy, Kunshan was the best among nine other zones, including Beijing, Tianjin, Pudong, Shenzhen, Dalian, Huangpo, Chendu, Wuhan, and Chongqin. (4) Kunshan Almanac (1994 ^ 1997, page 134). (5) In 2001 one worldwide producer of blank CD ROMS wanted to settle in Kunshan. However, blank CD ROMs are categorized as politically sensitive materials from the viewpoint of the Department of Information (DOI) at the State Council: [er shi yi shi ji jin ji bao dao (based in Guangdong), interview codes KO-03 and KC-03]. (6) In 2000 in China as a whole foreign capital was just 5.5% of GDP, and trade was only 43% of GDP. Kunshan's figures were much higher than the national averages. (7) The first Chinese-based schools with Taiwanese textbooks in the Yangtze Delta, and the first branch of a Taiwanese bank were established in Kunshan [Charlotte Observer (based in Carolina), 19 November 2003; er shi yi shi ji jin ji bao dao (based in Guangdong), 9 June 2004; interview codes KC-04 and KC-06 and Far Eastern Economic Review (based in Hong Kong) 5 July 2001; 6 December 2001]. (8) About 9 million laptop computers as well as 3.8 million digital cameras were produced in Kunshan. See 2004 Kunshan Statistical Report on National Economy and Social Development.


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of the complicated process of triangulation between globalization, marketization, and decentralization, such as: benefiting from the favourable macrocontexts for development provided by the centre; the locational advantage of being near Shanghai; the active role of the local leadership; and the expansion of global capitalizm seeking cheaper labour, and markets, and industrialization triggered by active local publicly owned enterprises (Marton, 1999; 2000; Saich, 2002; Wei, 2002; Wei and Fan, 2000). Other researchers highlight different dimensions, such as: the comparison in development costs between Kunshan and other development zones (Monash International Pty Ltd, 2003); technological-innovation capacity in relation to IT industrial clusters (Lai et al, 2005); and the international relationship covering economic security between Taiwan and China (Chen, 2004; Tung, 2002). With a focus on the issue of local institutional innovation in relation to what I call àsymmetric decentralization', in this paper I aim to investigate the policy process in relation to the formation and transformation of different development policies in KETZ in particular, and their roles in Kunshan development in general. The main empirical questions include those of how many different types of central ^ local interactions can be identified; under what kind of circumstances these types of interactions took place; and how mechanisms of economic decentralization and political centralization operated in the KETZ development process. Apart from economic contribution, what other kinds of roles did Taiwanese investors play in the Kunshan institutional innovation process? And what is the effectiveness of the consequences of institutional innovations? The remainder of the paper is divided into four sections. First, a theoretical discussion of asymmetric decentralization in the context of post-Mao China is offered, including marketization and globalization as general backgrounds, economic decentralization to the local along with political centralization under the party, as well as diverse types of central ^ local interactions. Second, different periods of Kunshan development are reviewed from the perspective of central ^ local interactions. Third, operations beyond the institutional innovations are discussed, including local innovative finance, the rescaling of administrative relationships, the compromise between local and central authorities, and the career paths of local leaders. Fourth, some theoretical and empirical implications are noted in the conclusion. 2 The concept of àsymmetric decentralization' 2.1 Marketization and globalization

After 1978, in order to sort out the crisis in the socialist regime, China introduced liberalization and marketizationöprice reform, land-use reform, and international trade öand supported export-oriented growth by the establishment of development zones and FDI (Wu, 2003; Wu and Ma, 2005). Special economic development zones were experimented with first in a few places and then promoted nationwide, in order to attract investors, focusing on routinization of production and giving rise to a prevalence of cheap `made-in-China' products engaging globalization. 2.2 Economic decentralization to the local

Apart from the (re)linkage between China and the world and the introduction of marketization, the post-Mao transition signified the changing central ^ local relationship ^ in particular opening-up economic spaces for local governments. At each level, local governments were awarded more competencies in administrative affairs in general and in fiscal revenues in particular. Administrative decentralization covered many dimensions of economic activities, including investment, land use, banking, and management of publicly owned companies. For example, from 1983 provincial governments were allowed to deal with joint-venture applications for projects where the

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investment was less than US$ 3 million. This upper limit was raised to US$ 10 million in 1985, and then to US$ 30 million for certain coastal provinces in 1988 (Zhang, 1994). Power over land use was also decentralized: defining the purpose of land use and assigning land-use rights became primarily local government decisions. As a consequence, local governments exerted the main influence on the pricing and transfer of land-use rights. Industrial and commercial land use were subject to various, newly imposed, levies which constituted a major source of local government revenue (Lin, 2001; Yeh and Wu, 1999). Moreover, fiscal decentralization took place widely in post-Mao China (Oi, 1995; 1998; Solnick, 1996). In terms of budgetary revenue, the central state's capacities were significantly weakened; and there was substantial fiscal decentralization, with central government's share of public expenditure falling from around 53% to 30% between 1982 and 1998 (Rodr|¨ guez-Pose and Gill, 2003). Moreover, there were extrabudgetary and extra-extrabudgetary revenues (Bahl, 1999; Fan, 1998; Ma, 2000; Wong, 1998; Wong and Bhattasali, 2003; Zhang, 1999). The èxtrabudgetary revenue' referred to funds that were not arranged and managed by government budgets, but were selfraised and used by various localities, governmental sectors, SOEs, and so on. The èxtra-extrabudgetary revenue' constituted funds that were self-raised by various local governments and their departments without approval from the centre. For example, local government in Shanghai was successfully financed via various channels of capital, including: budgetary revenue, land leasing, capital from the Shanghai Stock Market, state-directed credit allocation, and FDI (Zhang, 2003). With infrastructure finance in Gujiao of Shanxi as a case study, Herrmann-Pillath and Feng (2004) argue that local governments could not only bargain with higher level governments to get a larger share of revenue, but could also make certain policy innovations such as: `reverse build ^ operate ^ transfer', privatizing public services, ènterprising government', cashing in on public lands, and public ^ private cooperation. To sum up, the size, growth, and increasing complexity of local revenue had eroded Beijing's taxation powers (Brean, 1998). 2.3 Political centralization under the party

However, alongside economic decentralization, a very strong Communist Party state exists at central and local levels in China in economic production, capital accumulation, and urban development (Ma and Wu, 2005). As a Chinese saying goes `party overrides law' (dan da yu fa)öparty still overrides the administrative, legislative, and judicial systems. In addition, there is the nomenklatura (bian zhi ): `party controls the cadres' (Burns, 1987; Chan, 2004; Heilmann and Kirchberger, 2000). Under the nomenklatura system, the upper level governments exercised authority over the appointments of party cadres and government officials, including promotion, dismissal, and transfer. Many researchers point out that this kind of personnel management stresses the importance of job performance. In an attempt to encompass a wide range of functions at the local level, the indicators for evaluating performances were wide, including the gross value of industrial output, tax remittances, realized infrastructure investments, and so on (Edin, 2000; 2003; Whiting, 2001). Saich (2002) and Edin (2003) also note that `performance' can be divided into a mixture of priorities, including `hard' and `soft' targets. `Soft' targets refer to the maintenance of social order, such, as the eradication of the influence of Falun gong or meeting family-planning quota targets. But more important are `hard' targets, which primarily concerned economic indicators such as tax revenues and the growth of FDI and GDP and so on. The system works such that the greater the economic development, the better are the chances for the local leaders to get promotionöwith increased power and many


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tangible and intangible perks. Quantatively, with a regression model between mobility of provincial leaders and economic performances during their tenures, two statistical studies affirm careerism as a political incentive for local leaders to promote local economic development. Bo (2000a) identifies that elite factionalism and localism of natives were not statistically linked with the political mobility of provincial leaders, but economic performances were. He further argues that provincial leaders with good records of contributing to the central coffers were more likely to be promoted than to be demoted. In addition, Li and Zhou (2005) also conclude that Chinese central government tended to terminate provincial officials who performed badly in local economic development: the higher the economic growth rates relative to those under the immediate predecessor, the less likely the provincial official was to be terminated. In addition, qualitatively, in a comparison of development in Jiangxi and Fujian during the 1990s, Tan's (2002) research further addresses the importance of creating economic performance records for local leaders rather than of obedience to central policies. The history of Fujian development and records of the leaders' career paths together show that influencing the steering of local economic growth around 1990, which by then played an important role in Fujian's taking off, was a set of policies which were in sharp contrast to central austerity programmes in the same period. Although the local discretion obviously did not follow central government's policies, these leaders, who were, as expected, technically and administratively competent in dealing with economic matters, easily drew the attention of upper level governments and hence finally got promotions (Tan, 2002). What counts most in careerism to local officials is how to promote local economic development öeven if this includes disobedience to the central policies or regulations. In other words, political conformity, which was an extremely important criterion for promotion in Mao's time, has given way to economic and other competence-related indicators. I call this combination of economic decentralization to the local, along with political centralization under the party, àsymmetric decentralization'. Here, the term àsymmetric' also refers to the concept that the centre actually still had the upper hand. Although there was a kind of reciprocal accountability between local and central market-oriented reformers (Shirk, 1993), in reality the centre had more powers and resources (such as promotion, rotating, or cross-posting) to exert their influence over the local (Huang, 1996). The removal of Ye Xuanping is a case in point. Ye, Guangdong Governor in the 1990s, was a famous leading provincial figure who used to go against the central policies; in the end he was forced to quit the post of Guangdong Governor in the early 1990s (Gao, 1999). A similar thing also happened in the case of a former leader of Beijing, Chen Xitong (Bo, 2000b). 2.4 Typology of central ^ local interactions in locally initiated projects

In the absence of constitutional regulation, I argue that the political dynamics of the central ^ local relationship allows locally initiated projects to happen. Theoretically, four mechanisms can be identified: `secret forever', `state intention to connive', èx-post state endorsement', and èx-ante state adoption' (figure 1). The `state' I refer to here is the central government in Beijing. These four mechanisms can be grouped into two parts along the dimension of whether or not there was any permission granted by the central government. The first two mechanisms can be categorized as ùnauthorized', whereas the second two belong to the àuthorized' group. However, the first mechanism ö`secret forever'ömay need to be ruled out because although the scenario is theoretically possible it is in practise most unlikely. This mechanism refers to the situation in which local governments intentionally did not report to the centre when making innovations in new policies, and such innovations

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unauthorized status authorized status

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(Mechanism of secret forever)

3

Mechanism of state intention to connive

3

3

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Mechanism of ex-post state endorsement

3

Mechanism of ex-ante state adoption

Figure 1. Typology of central and local interactions in locally initiated projects.

were kept secret forever. But local regions would most likely want to be recognized in order to attract greater resources and investments from elsewhere. Moreover, local economic development issues also involve a group of people whose interests might be intertwined among, or even conflict with, one another. In consequence, it would be quite difficult to keep all participants silent all the time. When local innovations have been discovered, one scenario is that the central government had the capacity to prevent local government from proceeding but did not exert their powers. The `decollectivization experimentation' in Anhui is an example of this. In 1978 a group of households began to try decollectivization in secretö without any official endorsement from the centre. The centre's market-oriented leaders intentionally turned a blind eye for many reasons. First, it was reported that Deng Xiaoping and other reformers in the centre had no concrete ideas concerning rural reforms, but adopted a wait-and-see attitude. Second, Wan Li, the then Provincial Governor of Anhui, also played an important role. Because of his close relationship with Deng and Hu Yaobang, then Prime Minister of China, the centre was persuaded not to act openly against the illegal practices (Chung, 2000; Edin, 2000). In the àuthorized' group, local innovations are made by local governments initially and in the end acquire authorized status from the centre. Here I make a distinction between ex-ante and ex-post official recognition. Regarding ex-post: local innovations received central recognition some time after they had been implemented. Auhiu's decollectivization is again an example: after two years, the centre offered their endorsement to Anhui officials and peasants who were involved in the agricultural reform innovation (Chung, 2000). In terms of the privatization of small or medium-sized SOEs, Shandong started privatizing in 1992; Sichiun, Guangdong, and Heilongjiang joined in privatizing SOEs from 1994. The centre sanctioned the privatization process in July 1997, which means that the central ex-post endorsement came only after the programmes had been extensively practiced in the provinces (Woo, 1999). Concerning the ex-ante category, local governments recommended fresh ideas to central government before taking any action, and executed the innovations only after the centre had adopted their ideas. One example is the conversion of the airport of Qingdao from a military to a purely civilian role in the late 1980s. In order to connect globally, Qingdao made the policy recommendation that the airport be converted. The recommendation was initially rejected by the centre, but Yu Zhengsheng, then Qingdao Mayor, was reported to have flown frequently to Beijing to persuade the central officials and finally attained the approval for the military airport to be turned into a civilian one (Chung, 1999b). 3 Case study of Kunshan There are three stages of development: self-development zone ö1984 ^ 92; national-level zoneö1988 ^ 2001; and export-process zoneö1997 to date (figure 2). 3.1 The process of unauthorized but state-intentional connivance

Kunshan was still a closed and rural county in 1983. In February 1985 the project New Industrial Area (guo ye xin qu, the original name of KETZ) was approved by


1980

1985 3

Self-development zone

1990

1995

2000

2004

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1978

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initiating (1984); found by Jiangsu official (1986); still operating

3

3

National-level zone

initiating (1988); upgrade to county-level city (1989); state endorsement (1992); still operating

3

3

Export-process zone

initiating (1997); state adoption (2001); still operating

Figure 2. The three stages of Kunshan's development.

the Kunshan local People's Congress without reporting to upper level government (Almanac Office of KETZ, 2000). Because of its secret status, KETZ had to be largely self-financed and was managed in ways which were economical and prudent. First, Kunshan did not expropriate lands and property immediately after the KETZ plan was publicized. With a strategy of rolling development (gun dong kai fa), Kunshan spent the appropriation fees and displacement compensation in the main before the industrial lands were ordered by investors (K Wu, 2000).(9) Moreover, the location of KETZ was just beside the downtown area of Kunshan according to the strategy of developing a new district by relying on the old town (yi kuo lao cheng kai fa xin qu) (Almanac Office of KETZ, 2000; Yang, 1991).(10) The proximity between KETZ and central downtown Kunshan offered at least two main advantages. First, it was easier and cheaper to expand the existing infrastructure and utilities to KETZ from nearby central downtown than to establish a new site. Second, because of the location of KETZ, just near the county government office, there was no need to build an administrative office just to serve KETZ (Almanac Office of KETZ, 2000; Wu, 2000). Taken together, up to 1989, Kunshan spent RMB 27.1 million öonly around 20% of the average cost of each national development zone (table 1). Table 1. Performance comparison between Kunshan Economy and Technology Zone (KETZ) and national zones in 1989 Accumulated infrastructure financing (million RMB) KETZ Average national zone

27.1 183

In addition, under a strategy of relying on Shanghai in the east and depending on the `Third Front' in the west (dong yi Shanghai, xi tuo san xian), KETZ took advantage of being close to Shanghai to please domestic enterprises which were seeking opportunities near Shanghai to expand or shift their production capacities (Fei, 2000). By 1985 there were more than sixty enterprises in Kunshan for seventy factories in the rest of China to coinvest in or merge with; of these seventy factories, thirty-eight (9) The

author of the citation was Wu Kequan, then Chief of Kunshan County and the key architect of Kunshan development in the 1980s. The article was published for the first time in 1989. (10) This strategy was different from the then locational decisions for most national zones, which were settled in the outskirts of cities. This was because most people believed that development zones, in order to favour market conditions and foreign investors, were supposed to be far away from òrdinary people' in the downtown area, who remained in planned and socialist society.

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were in Shanghai (11) (Almanac Office of KETZ, 2000; Marton, 2000; Wei, 2002, Yang, 1991). To sum up, by 1989 Kunshan had become relatively successful in developing the secret KETZ: the total industrial output in KETZ reached RMB 5 million, an amount higher than the average of national-level zones (table 2).(12) Table 2. Performance comparison between Kunshan Economy and Technology Zone (KETZ) and national zones in 1989.

KETZ Average national zone

Total industrial output

Foreign direct investment (US$ million)

505 407

1.73 24.92

In January 1986 Han Peixin, then Party Secretary of Jiangsu Province, made a business trip to Kunshan and was unexpectedly told of the construction of the Kunshan New Industrial Area. Instead of immediately expressing strong disagreement, he asked Kunshan leaders for details of the secret zone. After the trip, he discussed the story of Kunshan with other provincial leaders and encouraged them to visit (Yang, 1991). Thus, Kunshan came to the notice of more upper level officials. In November 1987 Zhao Zhiyang, then General Secretary of the Chinese Communist Party (CCP), visited Kunshan and expressed his approval of Kunshan behaviour in self-developing KETZ. Its great success in self-development also had attracted the attention of nationwide circulated state propagandas, like xin hua ri bao (based in Beijing), jie fang ri bao (based in Beijing), and ren ming ri bao (based in Beijing),(13) and academics like the economist Xue Muqiao and the sociologist Fei Xiaotung (Yang, 1991). From this perspective, KETZ was developed as unauthorized, but with connivance. 3.2 Process of seeking state ex-post endorsement

In the late 1980s KETZ and the Kunshan Government started to seek national recognition for two reasons. First, their confidence was based on public affirmations and appreciations. Second, in terms of attracting FDI, by 1989 KETZ had received less than US $2 million, in contrast to the US$ 25 million average for each national zone (table 2 above). Whether or not zones could be operated legally and officially under state regulations was one typical consideration for investors selecting investment locations. Foreigners had reasonably had doubts about Kunshan, as a county administration which might not be able to keep secret the KETZ operation (Fei, 2000). After many efforts, in 1988 and 1989 KETZ was invited to attend conferences organized by the centre focusing on national development zones. The other participants were fourteen national development zones: KETZ was the only locally initiated project.

(11) Examples include Jinxin television factory of Shanghai, Fonghua refrigerator factory of Guizhou, Hongyeng motor factory of Sichiun, Jianghua electronic factory of Jiangxi, Huangshi textile machine factory of Hubei, Hongshan bearing factory of Guizhou, Hanjiang tool-mechanism factory of Shannxi [ren min wang (based in Beijing), 2 September 2004]. (12) Fourteen national zones together created RMB 5699 million in total, equal to about 4 million each. (13) Chronology of KETZ, cited from KETZ Administration Office and Party History Research Office of Kunshan CCP (2000, pages 422 ^ 423).


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Ji Congwei, a representative of the State Council, made a final remark in 1988 encouraging these national zones to learn from Kunshan how to spend smaller budgets and gain from good economic performance.(14) After that, the phrase `fourteen (national zones) + one (Kunshan)' was used to describe KETZ's singular performance. In 1989 Kunshan was upgraded administratively from a county to a county-level city.(15) In June 1992 Zou Jiahua, then Vice Prime Minister, offered Kunshan the title Kunshan Economic and Technical Zoneöthe same as the national zones. In July 1992 Lee Peng, then Prime Minister, further openly encouraged other localities to learn from Kunshan. These designations and appreciations to some extent represented unofficial state endorsement. Finally, in August 1992, the State Council granted KETZ national status. Total FDI injections grew exponentially after Kunshan was awarded a national title (figure 3).(16) And the scale of investment projects was also becoming bigger: from 1985 to August 1992, there were only six investment projects over US $10 million per item; 600

FDI ($ million)

500 400 300 200 100 0

1987

1989

1991

1993

1995

1997

1999

2001

2003

7000

30

6000

25

Export

5000

20

4000

15

3000 10

2000

5

1000 0

(b)

1987

1989

1991

1993

1995 1997

1999

2001

2003

GDP (RMB 100 million)

Exports (US $100 million)

(a)

GDP

0

Figure 3. (a) Utilized foreign direct investment (FDI), and (b) export and GDP in Kushan Economy and Technology Zone. (14) Chronology of KETZ (KETZ Administration Office and Party History Research Office of Kunshan CCP, 2000, pages 425 ^ 427). (15) `Ànswer to Jiangsu province regarding establishment of Kunshan county-level city'' (kun yu Jiangsu sheng she li Kinshan shi di pi fu), Documentation Code: min pi (1989) No.8, 1989/07/27. Kunshan Almanac (1988 ^ 1993, pages 1 ^ 2). (16) Of course, I do not want to argue that FDI was injected into KETZ only because of its being granted national status: the macrocontext in China also changed to be in favour of FDI after Deng's Southern Tour in 1992.

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only sixteen months after listing as a national zone, there were twenty-two additional projects over the same ceilingömost of these were from Taiwan.(17) 3.3 Process of persuading the state to adopt ex-ante

In the late 1990s Kunshan was keen to promote itself as an export-process zone (EPZ). In contrast to the traditional zone, mainly focused on tax exemption, the concept of an EPZ is a special enclosed area with one-stop service supervised directly by the General Customs of the State Council, with substantial coordination between police, tax office, container port and airport authorities, commodity inspection, Department of Financial Affairs, banks, and foreign trade customs declaration companies, and so on.(18) The foreign companies established in EPZ enjoy the 24-hour clearance service with only a single application for documentation examination and commodity inspection. More interestingly, the concept of an EPZ was not initially proposed by the centre but was actually first proposed by Kunshan. The establishment of the EPZ aided with two development bottlenecks. First, the customs service did not satisfy the demands of fast delivery for import and export (kuai jin kuai chu) of high-tech manufacturing in general and IT products in particular. For example, Customs could not meet the requirement of the so-called `955 principle', namely, 95% of high-tech goods have to be produced and then transported within five days of the orders being placed.(19) Second, Kunshan was still at the lowest jurisdiction of county-level administration, despite its highly industrialized and economically globalized performance. This low status constrained Kunshan's capacity to sort out problems. Prior to the establishment of the Kunshan EPZ, the Kunshan Customs representative office was under the Customs Offices of Suzhou, Nanjing Customs Office of Jiangsu, and the General Customs in Beijing. Much time was required for documentation to be passed level by level, or to wait for the General Customs to coordinate the four administrations to work out the problems.(20) Many face-to-face complaints and communications about slow Customs service were made by Taiwanese investors in Kunshan. With further help from the Taiwanese, Kunshan officials were able to arrange a `learning-cum-visiting' tour to Taiwan, where there is a very competitive Customs service for the IT industry.(21) For example, starting in 1995, a veteran Kunshan official, Xuan Binglung, together with other officials arranged to visit the Nantze EPZ and Hsinchu Science Park six times to learn about the operation of the IT-manufacture environment, including the legal system and related regulations, tax policy, and the structure of the administrative

(17) Kunshan

Almanac (1988 ^ 1993, pages 271 ^ 272). must be noted that actually the first development zone in China named as an èxport process zone' was in Jinqiao, Pudong in the early 1990s. However, then the basic function was only tax exemption [Shanghai tong ji (based in Shanghai), June 2001]. (19) Interview code: KO-03; KC-02; KC-03. (20) I was told a story about the advantage of Shanghai administrative level. The interviewee complained to the Shanghai Mayor about the slower service of Customs in Pudong Airport after Shanghai moved its international airport from Hongqiao to Pudong. The Shanghai Mayor then negotiated directly with General Customs in Beijing. Three days later, the problems had significantly improved [zhong guo shi bao (based in Taipei), 9 February 2003; also interview code: YC-03]. (21) Taiwan's Customs service meeting international IT manufacture standards also can be evidenced by the fact that Taiwan won global rankings in producing 70% of international market in chip foundry services; 72% in computer laptops, 68% in LCD monitors, 66% in cable modems; and 36% in semiconductor packing services [Business Week (based in New York), 16 May 2005]. (18) It


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organizations.(22) Having made these educational trips, Kunshan started to lobby the centre to adopt the idea on an EPZ. In March, 1997, Chen Shunhuan, then Vice Director of the Office for Special Economic Zones, paid a visit to Kunshan and listened to a report by Kunshan leaders. Unfortunately, the centre did not make any affirmative decision at that time (Kunshan EPZ Administrative Committee, 2000). However, Kunshan did not give up the idea, nor did it operate an EPZ illegally; rather, it continued efforts to persuade the centre.(23) In March 1999, Kunshan gave a presentation on EPZs to Wu Yi, then a senior central official. Wu ordered central officials to become involved and to help. Later, the General Customs organized visits to Kunshan for six groups. In late 1999, the General Customs went to Kunshan to open the first Hearing Committee. In April 2000 the General Customs approved fifteen experimental EPZs as pioneer trials, including the Kunshan EPZ in KETZ. In September 2000, the Kunshan EPZ was inspected and approved by the centre and was fully in operation in October 2000. By then, Kunshan had attained five `number one' records by virtue of being well prepared: Kunshan was the first place in the whole of China to propose the idea of EPZs; the first zone to prepare site planning and construction for an EPZ; the first zone to pass the state's examination; the first zone to place investment; and the first zone to generate trade.(24) Table 3. Export in Kunshan Economy and Technology Zone (KETZ) and the export-process zone (EPZ), in US$ millions.

KETZ Kunshan EPZ Kunshan EPZ as a percentage of KETZ

2001

2002

2003

1 940 180

3 652 1 157

6 310 3 257

9.3

31.7

51.6

Under the EPZ policy, Kunshan was able to offer a speedy Customs service. Moreover, Kunshan also built direct links with the General Customs, which helped Kunshan to sort out any new business complaints more efficiently.(25) Statistically, in terms of export, Kunshan EPZ contributed 30% of KETZ's export in 2002, rising to more than 50% in 2003 (table 3). It is understandable why export and GDP increased more sharply after 2001 in KETZ (figure 3). 4 Operations beyond the local innovation process in KETZ and Kunshan 4.1 Economic decentralization and local innovative finance

As argued above, economic decentralization involves local governments being empowered with more competencies concerning economic affairs. With a focus on Kunshan, (22) The importance of these trips can be seen in the naming of two roads in Kunshan EPZ which were named Nantze Road and Hsichu Road [er shi yi shi ji jin jing bao dao (based in Guangdong), 6 September 2004);Yuan Jian za zhi (based inTaipei), December 2005; interview codes: KO-03; KO-02]. (23) During this period, Kunshan officials reportedly visited Beijing eighty-four times to communicate and negotiate with different ministries [er shi yi shi ji jin ji bao dao (based in Guangdong), 6 September 2004; also interview code: KO-03]. (24) Kunshan Almanac (2001, page 172). (25) One company which invested in Kunshan EPZ wanted to import new machines that can operate in nonlead production procedures in order to comply with the latest European regulations. In order to do so, it needed to dispose of old machines that could not be discarded because of the old Customs regulations. The company explained the problems to Kunshan officials who sorted out the problems in just one week. This would not have been possible before the establishment of the Kunshan EPZ [yuan jian za zhi (based in Taipei), December 2005].

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scholars have noted that Kunshan actually gained more power to promote economic affairs than before, triggering better economic development (Marton, 1999; 2000; Wei, 2002). This can be shown in two dimensions: administrative and fiscal. For example, in March 1992 Kunshan was entitled to permit FDI projects up to US $30 million. Prior to that, many offers of FDI to Kunshan could not be dealt with directly but depended on Jiangsu for approval. Moreover, fiscally, in 1988 Kunshan proposed adopting the land-lease policy before it was implemented nationwide by the centre, not only because of the need to innovate local finance but also to create incentives to attract more FDI. In terms of innovating local finance, Kunshan established the KETZ without any substantial fiscal help from upper level governments; alternative sources of finance were, hence, necessary. In terms of FDI, as is shown in table 2, by 1989 KETZ was good at generating industrial output but poor at attracting FDI; then, the land-lease policy would be a unique selling point with which to attract FDI.(26) The first sale was made in 1988 and the contract assigned in April 1989 for fifty years. By 1992 the land-user fee policy applied to more townships and villages in Kunshan. By 1998 all lands in Kunshan were subject to the land-lease policy; Kunshan was the first county-level administration to have this policy.(27) Land lease became one of the most important sources of local finance. The infrastructure cost was only exceeded by local fiscal revenue after 1996, clearly showing that there were financial shortages even when KETZ used all the fiscal revenues for infrastructure construction (table 4). During the whole of the 1980s, the main solution to infrastructure-financing shortages relied on the income from land lease (Li, 2000).(28) Moreover, land lease was a successful marketing strategy. During the period of preparation for the first purchase, Kunshan advertised the scheme in many domestic and international newspapers. There were more than 2000 requests for application forms, and eleven companies visited Kunshan. The name Kunshan was thus widely publicized, both domestically Table 4. Comparison of infrastructure cost and fiscal revenue in Kunshan Economy and Technology Zone (KETZ) in million RMB (source: Annual Report on the Development of KETZ, 2003).

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Infrastructure cost

Local budgetary revenue

1 1 3 6 8 9 12 15 80 200 200 210 101 111

na na na na 5 7 8 7 60 61 121 118 227 293

(26) Miyoshu Haruo, the first foreign investor in Kunshan, was from Japan. He proposed the idea of land lease to Kunshan officials when he wanted to expand his investments in Kunshan because he felt apprehensive that his factories were on land which was not legally leased to or owned by him. (27) Kunshan Almanac (1999, page 139). (28) The author of the citation, Li Quanlin, served as Mayor and Party Secretary of Kunshan from 1991 ^ 96 (see also Kunshan, 1988 ^ 1993, page 152); interview codes KO-02; KO-06; KO-09).


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and internationally (Yang, 1991). By 1995 of 576 land-lease projects, more than 400 were either joint ventures between China and foreign investors, or involved foreign companies (Hsu, 1998). 4.2 Rescaling central ^ local relationships

I also argue that economic decentralization can be analyzed from the view of rescaling the administrative relationship. This means that county administrations were able, officially or unofficially, to contact upper level governments öand even the centre in Beijingömore easily than before. For example, Kunshan was allowed to contact Jiangsu directly to apply for permission for officials' business trips abroad. Before, Kunshan officers needed to send their application forms to Suzhou which forwarded the documents to Jiangsu. The new policy made it easy and convenient for Kunshan officials to go abroad for international marketing. Moreover, direct contact was established between Kunshan and Beijing. In 1992 Kunshan sent a representative to Beijing for the national title. Zheng Huizhen, one of the Vice Mayors of Kunshan, stayed in Beijing for two months to find out first hand what information the centre required. For example, one day Zheng knew that Beijing needed an official document authorized by Jiangsu, to show the provincial solidarity with their application for the national title; she phoned her colleagues in Kunshan the same day, and Kunshan officials prepared a draft for the top leaders of Suzhou and Jiangsu to signöshe then faxed the document back to Zheng just the following day (Yang, 1996). In addition, in 1999, at the request of the centre, Kunshan drafted the first version of management regulations for the EPZ (Almanac Office of KETZ, 2000). Furthermore, the 2003 Handbook of Practicing Export Process Zone ( jia gong chu kou qu cao zuo shi wu) was published by the General Customs as the only textbook or operation manual in China for EPZ policy. But the Handbook was actually edited by Kunshan officials on behalf of the General Customs, based on experiences in the Kunshan EPZ in 2003.(29) 4.3 Compromises beyond central and local interactions

The Kunshan case also shows that local policy innovation was a process which different agents would have to negotiate and compromise together. The outcome of the policy innovation behind central ^ local interaction, after negotiating, is an acceptable trade-off between both sides; the process of ex-post state endorsement in Kunshan is an example. By granting Kunshan the status of a national zone, the state still did not allow Kunshan the full benefits of a national zone. The State Council agreed that KETZ could practise the preferential investment policies of 15% tax rebate for FDI, but said that Kunshan could not enjoy the fiscal subsidy that the state had provided to other national zones.(30) Generally speaking, the national-zone policy covers two main areas: the FDI tax-rebate policy on the one hand, and financial subsidy on the other. Kunshan and the centre each judged the importance of each package. Kunshan set up the FDI tax-rebate policy as their first priority. In 1989 KETZ attracted very little FDI compared with other national development zones. Kunshan was able to view financial subsidy as less urgent because it had established KETZ economically much earlier than other zones, but also because the land-lease fee helped Kunshan's finances. The centre, however, judged the application differently although they came to the same decisions regarding priorities as had Kunshan. On the one hand, Kunshan's (29) Interview

code: KO-03; Kunshan Almanac (2004, page 87); Kunshan ri bao (based in Kunshan), 14 December 2004. (30) `Ànswer to an issue regarding establishment of Kunshan Economic and Technological Zone'' (kun yu she li Kunshan jin ji su kai fa qu di pi fu), Documentation Code: kuo han (1992), No 104, 22 August 1992, Kunshan Almanac (1988 ^ 1993, page 2).

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economic performance had been utilized by the centre as a show case and a role model to encourage other national-level development zones; the catch phrase `14 1' clearly shows that the centre recognized the achievements in KETZ. On the other hand, however, the centre was very cautious in respect of projects which had been initiated by local governments first and for which these governments then applied to the state for financial support. This was partly because the financial situation of the central government was, at the time, relatively weak (Wong, et al, 1995). And it was also partly because many local governments attempted to serve their regional interests by way of the so-called `reserve-fishing strategy' (Gore, 1999). For example, localities might persuade the central government to incorporate the locality's own projects into the state plan, perhaps by intentionally underestimating the cost of a project. Once the projects were under way, the locality might use various excuses not to foot its share of the bill. In order to balance the appreciation of KETZ's performance and to avoid localities employing the reverse-fishing strategy, a basic attitude of the central government was to allow FDI tax rebate but to offer no state fiscal subsidy. By then, the attitude of the centre matched the considerations of the local officials in Kunshan. To sum up, the tricky offer of ex-post state endorsement in 1992 shows that the outcome was an acceptable trade-off matching the priority concerns of each side. 4.4 Career paths of local leaders

In the context of one-party control, performance-based promotion in relation to careerism is the other key dimension in the mechanism of local institutional innovations. Of course, it is difficult to investigate whether the motivations of local officials making institutional innovations are, in fact, triggered by careerism: it is likely that they will give grandiose reasons in public such as `serving the people'. However, the careers paths of the leaders who served in the developed regions can be traced to help understand the relationship between careerism and local economic development. Kunshan was dramatically changed from being the `little sixth' to one of the most globally industrialized counties. Therefore, we should expect the career paths of the leaders to be quite brilliant. Until now, in 2006, there have been five former Party Secretaries since 1989 when Kunshan was upgraded from a county to a county-level city (table 5). Wu Kechun (1984 ^ 91) was one of the most important figures in development in the 1980s. He was promoted to be a Vice Director of Suzhou People's Congress. Originally, he was to be one of the Vice Mayors in Suzhou, but he declined due to age and health concerns.(31) Wu's successors were Li Quanlin (1991 ^ 96), and then Zhang Weiguo (1996 ^ 2000); both are currently Vice Governors of Jiangsu. Of more than fifty county-level administrations in Jiangsu, Kunshan is the only one to have produced two vice provincial leaders. After Zhang left, Ji Jianye (1997 ^ 2001) and Zhang Lei (2000 ^ 03) became Kunshan Mayor and Party Secretary, successively. Ji was promoted to become Mayor of Yangzhou directly after serving in Kunshan. Zhang is the serving Director of the Department of Trade and Foreign Economy of Jiangsu Province. Ji and Zhang received, exceptionally, promotions of two echelons.(32) Taken together, the career paths of leaders in Kunshan shows a high correlation between the leaders' economic performance and their political promotion. One investor commented that Kunshan's

(31) Interview

code KO-06; KO-07. were upgraded from division level to department level direct, without serving at the vice department level [nan fan zhou mo (based in Guangdong); 18 November 2004; also interview codes KO-06; KC-04; KC-07].

(32) They


285

Table 5. Party secretaries of Kunshan since 1989. Party secretary Period of tenure in Kunshan

Main positions after Kunshan office

Wu Kechun

June 1984 ± November 1989

Li Quanlin

November 1989 ± February 1991 February 1991 ± November 1996

Vice Director of Suzhou Retired People's Congress; because of Vice Director of CSSIP age ceiling Vice Mayor and Mayor of Yancheng, Mayor of Changzhou; Vice Governor of Jiangsu Vice Mayor and Mayor of Zhengjiang; Vice Governor of Jiangsu Mayor of Yangzhou Two-echelon promotion Director of the Department Two-echelon of Trade and Foreign promotion Economy, Jiangsu Province

Zhang Weiguo November 1996 ± August 2000 Ji Jianye Zhang Lei Cao Xinpin a Ji

December 1997 ± August 2000 a August 2000 ± August 2001 August 2000 ± August 2001b August 2001 ± May 2003 May 2003 ± present

Notes

served as Mayor of Kunshan from December 1997 to August 2000. served as Mayor from August 2000 to August 2001.

b Zhang

leaders worked as hard as they did in improving local economic development because they knew they would be promoted afterwards.(33) 5 Conclusion With the aid of the case study of Kunshan and the development of KETZ, my focus in this paper is on the detailed history and operation of local institutional innovation for local economic development. Statistically, Kunshan is one of the most dramatically developed regions in the Yangtze Delta. The history of the development of KETZ and Kunshan shows that three different central ^ local interactions occurred sequentially. The notion `state intention to connive' can be used to characterize the development of KETZ in the 1980s, because of the secret status of KETZ at the beginning. Then, `state ex-post endorsement' occurred as KETZ was finally granted the status of a national zone in the early 1990s. Third, the route by which Kunshan proposed the concept of the export-process zone to the centre can be understood as `state ex-ante adoption'. In addition, from the perspective of àsymmetric decentralization', local finance was found to be very innovative. Kunshan was able officially or unofficially to contact either the Jiangsu Provincial Government or the centre directly. And the brilliant career paths of local leaders in relation to the successful economic performances explains why careerism in local officials matters in local institutional innovation. Here, I offer more notes beyond the local institutional innovations in Kunshan, theoretical implications, and empirical observations. First, the research can be regarded as a supplement to the researches on local state development. Baum and Shevchenko (1999) and Duckett (1998) argue that, in some cases, post-Mao China's local officials (33) [Source: gong shan shi bao (based in Taipei), 1 November 2004; also interview codes KC-03; KC-06]. A similar situation also occurred in Suzhou, a prefecture city of Jiangsu Province but one rated as the second most economically globalized city in the Yangtze Delta, which attracted almost the same amount of FDI as Shanghai. Three successive former party leaders were promoted to become provincial leaders of Jiangsu, Jinlin, and Shannxi, respectively; this is also reported as the `Suzhou phenomenon'.

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intervene indirectly in the economy by helping with business plans, finance, coordinating local projects, investing in local infrastructure, and promoting cooperative economic relations with external agencies. However, they do not offer proper explanations as to why and how local cadres are able to interact with the centre and to create environments conducive to growth while not themselves engaging in business for profit (Baum and Shevchenko, 1999). With Kunshan as an example case of local development, this research provides more understanding concerning the operations and mechanisms of institutional innovation behind local state development, at least in terms of dynamic interactions of central ^ local governments, as well as in terms of local officials' careerism as political incentives. Second, this paper also complements researches emphasizing that post-Mao local development has been strongly affected by the Chinese diasporaömainly from Hong Kong, Macao, and Taiwan. For example, Smart and Hsu (2004) examine the impact on local development of the mobilization of resources from these diaspora. Yang (2002) focuses on the role of Chinese guanxi in terms of business transactions and other new social forms and expression. Hsing's (1998) research also shows how cultural affinities between Taiwanese owners of local branch plants and local Chinese officials lubricate further investment and growth through traditional guanxi of gift exchange. What is not well documented in these researches is the dimension of the relationship between FDI and local institutional innovations. By focusing the process of establishing an EPZ in Kunshan, I argue that FDI could play an important role in local institutional innovation by helping the local officials of relatively underdeveloped host areas to understand and to learn sophisticated development strategies from the FDI home country. Third, based on field interviews and participatory observation, I also found that there are three Taiwan-connected agents who have contributed to Kunshan's rapid institutional learning and innovation. As well as KATI, as an institutional actor, the other two are development companies invested in by expoliticians and retired topranking bureaucrats in Taiwan and experienced planning professionals from Taiwan. Both of these companies have experience in industrial policymaking and industrial land development. How the diversified operations and effectiveness of these three different agents should be understood in relation to local institutional innovations and economic development remains an interesting, but unanswered, question awaiting further research. Finally, I do not want to imply that such local institutional innovation was problem free. Performance-based personnel management with a heavy focus on economic indicators, along with limited check and balance and civil society involvement, could, in fact, produce many problems of unsustainable development (Unger and Chan, 1995). Despite its impressive performance in terms of economic globalization, Kunshan itself has not developed equally well (Po and Pun, 2003; Wei, 2002). In terms of comprehensive indicators of a `moderately better-off society' (xiao kang she hui), Kunshan does not qualify in certain areas, such as: disposable income of city as well as rural inhabitants; research and development as a proportion of GDP, green coverage versus concrete areas (Zhang, 2004). In the 1980s and 1990s peasants did not benefit sufficiently from the compensation programmes and expropriation processes compared with their counterparts in industrial, developed countries.(34) Under the system of àsymmetric decentralization', with a focus mainly on economic development, Kunshan in particular and China in general face the enormous challenge of how to balance growth and the interests of minority and environmental development. (34) Interview code: KO-10; KC-07; YP-07; YP-04; zhong quo jing yin Bao (based in Beijing) (18 December 2004).


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Acknowledgements. The author would like to thank Ian Gordon of the London School of Economics and Sueching Jou of National Taiwan University for their insightful discussions, the Urban China Research Network for financial support, and the referees from Environment and Planning C: Government and Policy for their constructive opinions. Different draft versions of this paper were also presented in 2004 at the American Association of Geographers, in 2005 at ``Chinese Cities in Transition: The Next Generation of Urban Research, Part 4'', and in 2006 at the American Association of Asian Studies. References Almanac Office of KETZ, 2000 Kunshan kai fa qu de xin cheng yu fa zhan [Formation and transformation of Kunshan Development Zone], in Kunshan kai fa qu shi wu nian [Fifteen Years of Kunshan Development Zone], Eds KETZ Administration Office, Party History Research Office of Kunshan CCP (Ting Lin, Kunshan) pp 15 ^ 57 Bahl R W, 1999 Fiscal Policy in China: Taxation and Intergovernmental Fiscal Relations (1990 Institute, South San Francisco, CA) Baum R, Shevchenko A, 1999, ``State of the state'', in The Paradox of China's Post-Mao Reform Eds R Macfarquhar (Harvard University Press, Cambridge, MA) pp 333 ^ 360 Beijing Institute of International City Development (Ed.), 2003 zhong kuo shu zi huang pi shu [Yellow Book of Numbers in China] (Zhong Kuo Shi Dai Jin Ji, Beijing) Bo Z, 2000a, Chinese Provincial Leaders: Economic Performance and Political Mobility Since 1949 (East Gate, London) Bo Z, 2000b, `Èconomic development and corruption: Beijing beyond `Beijing' '' Journal of Contemporary China 9 (25) 467 ^ 487 Brean D J S, 1998, ``Fiscal reform in modern China: an overview'', in Taxation in Modern China Ed. D J S Brean (Routledge, New York) pp 1 ^ 30 Breslin S G, 1996 China in the 1980s: Centre ^ Province Relations in a Reforming Socialist State (Macmillan, London) Burns J P, 1987, ``China's nomenklatura system'' Problems of Communism 36 (September ^ October) pages 36 ^ 51 Cao Y, Qian Y, Weingast B, 1999, ``From federalism, Chinese style, to privatization, Chinese style'' Economics of Transition 7 (1) 103 ^ 131 Chan H S, 2004, ``Cadre personnel management in China: the nomenklatura system, 1990 ^ 1998'' The China Quarterly issue 179, 703 ^ 734 Chen T-J, 2004, ``Living under the roof of WTO: cross-Strait economic relations since WTO accession'', in Rising China and the East Asian Economy (Korea Institute for International Economic Policy, Seoul) Cheung P T Y, 1994, ``Relations between the central government and Guangdong'', in Guangdong: Survey of a Province Undergoing Rapid Change Eds Y-m Yeung, D K Y Chu (The Chinese University of Hong Kong, Hong Kong) pp 19 ^ 51 Cheung P T Y, 1998a, `Ìntroduction: provincial leadership and economic reform in post-Mao China'', in Provincial Strategies of Economic Reforms in Post-Mao Chinaö Leadership, Politics and Implementation Eds P T Y Cheung, J H Chug, Z Lin (East Gate, New York) pp 3 ^ 46 Cheung P T Y, 1998b, ``The Guangdong advantage: provincial leadership and strategy toward resource allocation since 1979'', in Provincial Strategies of Economic Reform in Post-Mao China ö Leadership, Politics, and Implementation Eds P T Y Cheung, J H Chung, Z Lin (East Gate, New York) pp 89 ^ 144 Chung J H, 1997, ``Shangdong: the political economy of development and inequality'', in China's Provinces in Reform ö Class, Community and Political Culture Ed D Goodman (Routledge, London) pp 127 ^ 157 Chung J H, 1999a, ``Recipes for development in post-Mao Chinese cities'', in Cities in China ö Recipes For Economic Development in the Reform Era Ed. J H Chung (Hong Kong University Press, Hong Kong) pp 1 ^ 17 Chung J H, 1999b, ``Preferential policies, municipal leadership and development strategy öa comparative analysis of Qingdao and Dalian'', in Cities in China ö Recipes for Economic Development in the Reform Era Ed. J H Chung (Routledge, London), pp 105 ^ 140 Chung J H, 2000 Central Control and Local Discretion in China-Leadership and Implementation During Post-Mao Decollectivization (Oxford University Press, New York) Duckett J, 1998 The Entrepreneurial State in China: Real Estate and Commerce Departments in Reform Era Tianjin (Routledge, London)

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