Policy diffusion in incomplete decentralized system the case of diffusions of housing provident fund (HPF) policy in urban china

Policy Diffusion in Incomplete Decentralized System: The Case of Diffusions of Housing Provident Fund HPF Policy in Urban China CHEN TINGJIA B.Law, Nankai University A THESIS SUBMITTE

Policy Diffusion in Incomplete Decentralized System:

The Case of Diffusions of Housing Provident Fund (HPF) Policy in Urban China

CHEN TINGJIA

(B.Law, Nankai University)

A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SOCIAL SCIENCES

DEPARTMENT OF POLITICAL SCIENCE NATIONAL UNIVERSITY OF SINGAPORE

2013

To my parents,

who gave me the best of their love during the past 24 years

ACKNOWLEDGEMENTS

The topic of policy diffusion has interested me since my undergraduate It is excited that this research gives me an opportunity to make some contributions on the existing knowledge of this topic During my candidature, especially the period of thesis writing, I have received numerous help from others

First and foremost, I would like to express my deepest gratitude to my supervisor, Professor Wang Cheng-Lung, without whom I could not even finish this paper His tremendous support, guidance, and encouragement stimulate me to concentrate on the study and keep improving myself The original idea of this thesis was conceived when I did independent study on public policy with him Also because of his guidance and inspiration, I improved my argument more reasonable and much stronger His encouragement and intelligence have greatly prompted me to go further in academic study Luckily enough, I was just admitted by the University of Arizona to pursue my Ph.D in Public Policy Besides the academic study, Professor Wang also gave me great help on my life As an international student without scholarship, I would have had a much tougher time if he had not offered me the opportunity to be his research assistant But now I am so annoyed that my words are too thin compared with his vast support

I also owe a debt of gratitude to Professor Naomi Aoki Her course, decentralization and local governance, has inspired me a lot in this thesis Moreover, her comments on the early draft of this thesis are greatly appreciated I would also like to thank Professor Soo Yoen Kim Her training on research design allows this research to follow the scientific method rigorously

As the early version of this thesis has been presented in Mid-West Political Science Association 2013 Conference, I also wish to thank Professor Jale Tosun, the discussant of

my paper Her sharp questions have pushed me to have a further improvement on this thesis

I thank my fellow graduate students at National University of Singapore, who have enriched my life The discussions with them always spark the ideas for my current and future research Among these individuals, I would like to mention two persons specially

Li Xiang has introduced me several brilliant works on methodology which have contributed a lot to this study And the discussions with Zha Wen on the latest changes in the judiciary system in China have stimulated both our interests Thus, we would collaborate on relative research in the near future

Last but not the least, I am also grateful to my parents who give me the best of their love all the time I also want to thank my fiancé, Xu Chen, who is my dearest friend and faithful companion Whenever I encountered any difficulties, their warmest hands and strongest support are always beside me Nothing could compete with their support and love

TABLES OF CONTENTS

SUMMURY vii

LIST OF TABLES viii

LIST OF FIGURES ix

Chapter 1 Introduction 1

Chapter 2 Literature Review 3

2.1 General Discussion on Policy Diffusion 3

2.2 The mechanisms of policy diffusion and its conditions 7

2.3 Policy innovation and diffusion in China 9

Chapter 3 Argument and Hypotheses 13

3.1 Incomplete decentralization and its accountability locus 13

3.2 Principal-agent theory and policy diffusion in incomplete decentralization 15

3.3 Central-local relations in China 16

3.4 Policy Diffusion of Housing Provident Fund in China 19

3.4.1 Urban housing reform in China 19

3.4.2 An explanation on the diffusion of the housing provident fund policy 22

Chapter 4 Empirical Analysis 27

4.1 Data and measurement: the dependent variables 27

4.2 Data and measurement: the independent variables 28

4.3 Data and measurement: the control variables 29

4.4 Methodology 33

4.4.1 Methodology for Binary Time-series Cross-Sectional Analysis 33

4.4.2 Methodology for Survival Analysis 34

4.5 Results 35

4.5.1 Results for Binary Time-series Cross-sectional Analysis 35

4.5.2 Results for Survival Analysis 42

4.6 Discussion on the Statistical Results 46

Chapter 5 Conclusion 49

Bibliography 52

Appendix 60

SUMMURY

Most existing studies of policy innovations focus on the cases in which policy-making process is decentralized However, in many developing countries, such as China, the extent of decentralization is limited Thus, the determinants and mechanisms of diffusions of policy innovations in such a less decentralized system could be different from what has been established in the literature

Since 1980s, China has launched a full aspect economic reform to transit its national economy from a centrally planned system to a more market-based economy Housing reform, which was deigned to transform the welfare-oriented housing policy to a market-oriented one, was an important part of this policy transformation This article specifically analyzes how the housing provident fund (HPF) policy has been diffused in urban China during 1990s

This study intends to answer the following questions: (1) what are the key factors that determine the adoption of policy innovation concerning HPF among Chinese local governments (cities)? (2) How do central and local governments influence diffusion of policy innovations in this process? (3) Why are some local governments more likely to be positively affected by the central government to adopt the policy innovations? Using a revised theoretical framework which integrates both local political economy factors and national policy priorities of the central government, this study contributes to explain more systematically what factors determine the adoptions of new policies in the less decentralized system of China In addition, this study applies binary time-series cross-sectional analysis and survival analysis to study the large data set concerning policy innovations and diffusions in China The findings suggest that local revenue and enterprises’ economic performance which represent the local level capacity have a significant positive influence on the adoption of HPF policy, and that the effects of the national promotion on HPF policy innovation is significantly affected by the condition of local revenue However, contradict to the expectation, the average wages of workers and staff that may reflect the interests of local residents have a negative impact on the diffusion of HPF policy among Chinese local governments

LIST OF TABLES

Table 1 Summary Statistics for the Binary Time-series Cross-sectional Analysis 32

Table 2 Summary Statistics for the Survival Analysis 33

Table 3 Maximum-Likelihood Estimation for HPF Policy Innovation 36

Table 4 Changes in the Predicted Probabilities of HPF Policy Innovation 37

Table 5 Estimated Hazard Rate of HPF Policy Innovation 43

LIST OF FIGURES

Figure 1 China's experimentation-based policy cycle 10

Figure 2 Local Revenue Increases HPF Policy Innovation 38

Figure 3 Economic Performance Increases HPF Policy Innovation 39

Figure 4 Average Wage Decreases HPF Policy Innovation 40

Figure 5 National Promotion Decreases HPF Policy Innovation 41

Figure 6 Effect of Interaction on Probability of HPF Policy Innovation 42

Figure 7 Effects of Local Revenue on the Hazard rate of Innovation 44

Figure 8 Effects of Economic Performance on the Hazard rate of Innovation 44

Figure 9 Effects of Average Wage on the Hazard Rate of Innovation 45

Figure 10 Effects of National Promotion on the Hazard Rate of Innovation 46

Figure 11 Effects of Interaction Term on the Hazard Rate of Innovation 46

Chapter 1 Introduction

Since 1980s, China has launched a full aspect economic reform to transit its national economy from a centrally planned system to a more market-based economy, among which housing reform was regarded as one of the three main reforms However, the Chinese government did experienced a difficult time to pull out the housing system from the old institutions Fortunately, the policy innovation of Housing Provident Fund (HPF), which was borrowed from Singapore, initiated by Shanghai municipal government, and quickly diffused after the first adoption, broke the impasse and promoted the housing reform in China It is a form of long time compulsory housing saving under the employees’ personal account, through which both employees and employers should contribute an equal percentage of the employees’ salary to the funds by month More importantly, the character of local initiation rather than central pilot selection of this policy, presents the uniqueness of this policy

Actually, not only in the case of HPF policy in this study, the diffusion of innovation has been widely and deeply influencing the policy making process of the governments.The political arrangement, social development, and policy practice in one region could easily be observed, understood, and learned by another place For decades, the practice of the policy innovation and diffusion largely facilitated the relative researches in academia Most of these studies on policy diffusion among local governments are embedded in the context of the U.S (Baybeck, Berry, & Siegel, 2011; Berry & Berry, 1990, 1992; Boehmke & Witmer, 2004; Cohen-Vogel & Ingle, 2007; Gilardi, 2010; Gray, 1973; Grossback, Nicholson-Crotty, & Peterson, 2004; McLendon, Heller, & Young, 2005; Shipan & Volden, 2008; Walker, 1969), where the decision making powers are usually fully decentralized and suits the Tiebout model well However, as Bardhan (2002) argued, the assumptions for Tiebout model are too stringent for most developing countries According to this, the existing theories on policy innovation and diffusion should be further revised and improved

Thus, China, as the largest developing country in the world, should be a prefect country for the study of policy diffusion in an “incomplete decentralization” system Also,

since the reforms in China, especially the political reform, will still carry on, and local policy innovation could be a breakthrough of further changing, it is important to deeply understand how the reform carried forward in the past Given the uniqueness and importance of the HPF policy which have been briefly described at the beginning of this chapter, it would be worth to explore the diffusion process, which could further inspire other reform of China in the future Therefore, this research applies binary time-series cross-sectional analysis and survival analysis to study the large data of HPF diffusion in China by answering the following questions: (1) what are the key factors that determine the adoption of policy innovation concerning HPF among Chinese local governments (cities)? (2) How do central and local governments influence the diffusion of policy innovations in this process? (3) Why are some local governments more likely to be positively affected by the central government to adopt the policy innovations? The findings suggest that the local revenue and enterprises’ economic performance that represent the local level capacity has a significant positive influence on the HPF policy innovation, and that the effects of national promotion on HPF policy innovation is significantly affected by local revenue However, contradict to the expectation, the average wage of local workers and staff that reflects the local interests has a significantly negative impact on the HPF policy innovation Detailed analysis and discussion will be provided in the following chapters

The organization of this paper is as follows Chapter two reviews the literatures on policy diffusion and positions the current research studies in the existing literatures In Chapter three, several hypotheses and related causal mechanisms are constructed by analyzing the case of HPF policy innovation Chapter four empirically tests the hypotheses that have been raised Chapter five concludes

Chapter 2 Literature Review

This chapter reviews the main body of literature related to the current research I first focus on the general discussions on the topic of policy diffusion, especially the horizontal and vertical diffusion Then, I turn my attention to the mechanisms and conditions of the diffusion of innovations With a careful scrutiny, this research shows the necessity to further explore the determinants and process of policy diffusion in an incomplete decentralized system Finally, as China, the largest developing country in the world, is the main focus of this research, I present the existing studies which analyze the policy innovation and diffusion in China The previous literature has drawn a general picture on the process of policy diffusion in China and emphasized the importance of the central government; however, they ignore the active role of the local governments and the interaction between the central and local governments during the diffusion process This research will contribute to the existing literature by studying the policy diffusion process

in a developing country and by examining the interaction between central and local governments in the diffusion of innovations

2.1 General Discussion on Policy Diffusion

The study of policy diffusion has emerged for decades long Rogers (1962) gave a comprehensive and systematic analysis on the general diffusion of innovations In his book, he presented the definition, elements, and process of diffusion “Diffusion is the process in which an innovation is communicated through certain channels over time among the members of a social system.” (Rogers, 1962, p 5) In terms of the diffusion in the field of the political science and public policy, Walker defined the policy innovation

as “a program or policy which is new to the states adopting it” (Walker, 1969, p 881), meaning that it is still an innovation for the states who do not have such a policy before

no matter whether or not some other states have already adopted it So it is different from

“policy invention”, which means the formation of original policy ideas (Berry & Berry, 2007) The spread of the innovative policy from the earlier adopters to the later ones is called policy diffusion

There are mainly two types of policy diffusion One is horizontal; while the other is vertical The horizontal policy diffusion usually means the diffusion across nations or among the local governments in a country For this group of study, the existing literature focuses on either the internal or external factors that lead to the policy diffusion Traditionally, the domestic conditions could strongly dominate the policy adoption within its jurisdiction, so when people analyze the adoption of a policy innovation in a jurisdiction, the internal factors are usually considered In numerous empirical studies, these internal factors, such as ideological position and prior beliefs (Gilardi, 2010; Grossback et al., 2004), socioeconomic conditions (Walker, 1969) , election period (Berry & Berry, 1990, 1992), the character or capacity of the leaders (Teodoro, 2009), have been demonstrated their significant roles in the adoption of policy innovation However, the domestic determinants alone could not explain the story of policy diffusion

as a whole

Walker opened a window to explore the diffusion of innovations from the external factors, namely, the “regional reference groups” In his pioneering study, Walker found that in each of the regional clusters, the states usually followed the comparable leading state to adopt a new program Followed this study, Gray (1973) analyzed the adoption of

a new policy from the interaction between the adopters and the potential adopters By analyzing the cumulative frequencies of states adopting the law in the areas of civil rights, welfare, and education, she pointed out that various issues could have different diffusion patterns which had not revealed significant variations in Walker’s study, and a state may adopt policies in various arenas with distinctive speeds Even though Walker (1973) criticized this article as its “completely intermixed population” did not take the regional barriers (namely, whether there is an effective communication channel between two states from different broader regions) into consideration and may not provide stable feature of states’ innovative capacity, these two studies did pioneer the policy innovation analysis from the perspective of the regional factor, namely, how the policy adoption of a state is influenced by the regional leader or previous adopters Influenced by their valuable explorations, many following studies have emphasized the importance of the neighbor’s policy adoption, either the neighboring state or local governments within a country or the neighboring country (Baybeck et al., 2011; Berry & Berry, 1990, 1992;

Boehmke & Witmer, 2004; Chien & Ho, 2011; Clark, 2009; Cohen-Vogel & Ingle, 2007; Linos, 2011; McLendon et al., 2005)

It is worth mentioning that Berry and Berry’s study (1990, 1992) on the diffusion of state lottery and tax collection unified the internal determinants model and regional diffusion model and combined the internal characters (i.e the political, economic, and social factors) and the regional influence together, by using the event history analysis (EHA) Based on Mohr’s analysis of organizational innovation, they proposed that an organization’s motivation to adopt an innovation is affected by its internal characters as well as the information of other organizations, since the obstacle, namely, uncertainty, that it may face can be overcome by the resources such as the information of relative innovation practice by other organizations

However, what should be noticed is that the influence of the neighbors may not always

be autonomous, the catalysis by the third party as a facilitator or a communication channel is thus necessary for the diffusion In terms of the cross national policy diffusion, overwhelming studies have highlighted the function of international organizations in policy diffusion because the international organizations convey valuable information (Cao, 2009, 2012), and also the less-developed countries are more likely to rely on the financial aid from the international organizations, such as the World Health Organization (Clark, 2009) In additional to the international organizations, some transnational corporations can also promote such diffusion by coercing the host country to adopt a certain policy (Dolowitz & Marsh, 1996) These outside promoters have largely accelerated the spread of innovative policies

Surely, such outside promotions by the third parties not only exist in the cross-national policy diffusion, but also exist in the domestic policy diffusion, which is the focal point

of this study, as well Policy entrepreneurs play a significant role in the process of the diffusion of innovation, since they are the people “who are willing to invest their resources in pushing their pet proposals, are responsible for prompting important people

to pay attention and coupling solutions to problems” (Kingdon, 1984, p 21) For instance, Mintrom (1997) stated that the presence and action of policy entrepreneurs can significantly increase the probability of the state legislative approval of school choice,

even consider the potential determinants, such as state politics, the choice in neighbor states As a brunch of policy entrepreneur, the behaviors of the bureaucrats have drawn some scholars’ attention Some empirical research shows that the governments which tend to hire the chiefs from other organizations and the diagonal promoted bureaucrats are more likely to make the policy innovations (Teodoro, 2009)

Another important type of policy diffusion is vertical diffusion, which emphasize the influence of the federal or superior governments on the state/local governments Berry and Berry (2007) maintained that national government plays the analogous role to the

“widely respected leader state”, while the former one has more instruments to intervene the local policies These instruments include administrative mandates and creating financial incentives Daley and Garand (2005) made a contribution on exploring the determinants of variation in the strength of state hazardous waste programs They examined how the action of the federal government (i.e financial support) as long as the spillover effect between state governments and the internal determinants, such as problem severity, the state political and economic conditions, and the interest group pressure, can affect the policymaking in one state Besides the financial incentive, Karch (2006) examined how the national legislations affect the state-level enactment of policy innovations under no coercive pressure or financial stimulation, which is called catalytic control by him He maintained that the influences of national intervention on the state innovation are determined by whether the national intervention lowers, or raises, or has

no impact on the obstacle And he continued to study whether the national activities, such

as the president’s national televised address and national wide debate, can significantly increase the probability that states would introduce a relative agenda-setting (Karch, 2012) Interestingly, Shipan and Volden found that the release of the state law on antismoking will decrease the probability that a city in that state to adopt a same law (Shipan & Volden, 2008), which implies that centralization may become an obstacle for the local policy innovation (Shipan & Volden, 2012)

Besides the research above, some other scholars pay attention to the bottom-up policy diffusion (Clavier, 2010; Shipan & Volden, 2006) For example, Shipan and Volden (2006) tested the city-to-state diffusion as well as the state-to-state and national-to-state

diffusion by examining the diffusion of antismoking laws passed between 1975 and 2000 They maintained that the legislative professionalism of a state and policy advocates at the state level would affect the probability of the statewide adoption of a local law These multilevel diffusion studies open up our minds in studying policy diffusion analysis However, when analyzing the influence of federal government, these limited studies overlook the interaction between the national intervention and the internal factors of the states government

2.2 The mechanisms of policy diffusion and its conditions

The popular determinants discussed above provide a space to further detect the driving force of policy diffusion The scholars also endeavor to detect the mechanisms of policy diffusion They either use these mechanisms as independent variables to explain the features of policy diffusion, such as the temporal or conditional diffusion (Shipan & Volden, 2008), policy adoption and expansion (Boehmke & Witmer, 2004), or detect the factors determining the diffusion or adoption of an innovation under a certain mechanism (Baybeck et al., 2011; Berry & Berry, 1990; Gilardi, 2010) In general, as Shipan and Volden (2008) presented, the mechanisms of policy diffusion include social learning, competition, coercion, and imitation Social learning always refers to that a policy in one region or organization is adopted by another region or organization, since they meet similar problems and difficulties, or the adopters admire to the success policy outcome of others Because of the limited time, intelligence, and information, just as Lindblom said, the existing knowledge of the regarding issue is important for the decision makers (Lindblom, 1959), so they tend to adopt the policy solving the similar issues as theirs In terms of the competition mechanism, it usually happens under the situation when two regions or organizations compete for scarce resources In this situation, the adoption of policy innovation is tried to overcome the negative externalities (Shipan & Volden, 2008) Boehmke and Witmer (2004) distinguished the mechanisms of social learning and economic competition in the process of diffusion They argued that the social learning theory is usually suitable to those states which are searching for the solutions to the problems that they encountered, while economic competition mechanism is always

related to the policies which are pushed by other states' pressure, such as lost business, tax revenue Moreover, the coercion mechanism states that a region or organization adopts a policy coerced by another region or organization in exchange of acquiring relative aid or avoiding the penalties Finally, the pioneering members are likely to be imitated and followed by other membership in a stable group That is, the followers just want to “copy the actions of another in order to look like other” (Shipan & Volden, 2008)

Most of these explanations on horizontal policy diffusion are under the conditions of Tiebout model1, while those vertical diffusions are analyzed under the federal system in which there is a clear scope between the power of the federal and state governments For example, state governments learn new policy from other states to win votes from their residents Also, the competition is possible since the local residents could “vote by feet”

by freely moving from one state to another This is a quite decentralized system which is supposed that the governments at the lower tiers have better information on local preference and conditions Hence, the local governments could provide the public goods reflecting the preferences of the local residents to achieve economic efficiency (Oates,

1972, pp 11-12; Tiebout, 1956) and have a quick action on local affairs (Rondinelli, Nellis, & Cheema, 1983) once they enjoy the decision-making and fiscal autonomy and take the responsibility within the regions This is based on the assumptions of high political accountability and consistently aggregated preferences in a locality However, as Bardhan (2002) argued, the assumptions for Tiebout model, such as population mobility, mechanisms of political accountability, similar administrative capacity across different government tiers, are too stringent for the developing countries Consequently, it is necessary to analyze the diffusion process in developing countries whose decentralizations are usually incomplete The practice in China, the largest developing country in the world, may provide us a further understanding on the diffusion process in

an incomplete decentralized system

1

Tiebout model is a model on local expenditure proposed by Tiebout in 1956 It argues that local expenditure could be more adequately reflected the local preference than the national level based on the following assumptions They are: full mobility of the voters, full knowledge of the local issues of the voters, large number of communities, no restrictions on employment opportunities, diseconomies between communities, having and keeping optimum size of the communities (Tiebout, 1956)

2.3 Policy innovation and diffusion in China

A sprawling literature on policy innovation in China has been published in Chinese journals since 2000, which probably resulted from the initiation of the prize for the innovation of the Chinese local governments Compared with the empirical studies on policy diffusion among the local governments in the U.S and other different countries, these researches lack the empirical analysis for the diffusion of a specific policy innovation However, they could provide some intuitionistic knowledge on the practice in China The motivations of the local governors, such as promotion (B Wang, 2009; Jiannan Wu, Ma, & Yang, 2007), the desire to innovate, and the pressure from the society (G Chen & Li, 2009; He, 2011; Jiannan Wu et al., 2007; X Yang, 2008) are usually mentioned Also, the innovations could vary subject to geographical areas Although the proportion of innovations in one region is related to its level of economic development (B Wang, 2009), it shows that the eastern area is the most active region in policy innovation followed by the western provinces, while the middle region is surprisingly the least active (He, 2011; Jiannan Wu et al., 2007) Besides, some scholars find that the governments in city and county levels are more likely to have innovative policies (He, 2011; Jiannan Wu

et al., 2007) Nevertheless, little attention was paid to the diffusion of these innovations Fortunately, several recent studies could help us to draw a big picture on the diffusion process in China

Policy experimentation is an important policy practice in China It defined as a policy process “in which experimenting units try out a variety of methods and processes to find imaginative solutions to predefined tasks or to new challenges that emerge during experimental activity” (Heilmann, 2008) It differs from the traditional policy diffusion or spontaneous policy diffusion that the scholars usually studied; Rather, just as Heilmann said, it is “a purposeful and coordinated activity geared to producing novel policy options”

in which the local experiences or innovation is the important resources for the national policy formulation (Heilmann, 2008) Even though with these discrepancies, however, the studies of policy experimentations do contain the same attributes to the diffusion of policy innovation In Rogers (1962)’s definition, there are four key elements for diffusion:

an innovation, communicated channels, time, and social system Since there is a sequence

of time for different jurisdiction to adopt a specific innovative policy in the social system,

and the propaganda of the central government is a strong communication channel, policy experimentation should be regarded as a special kind of policy diffusion

In his research, Heilmann argued that “experimentation under hierarchy”, the pattern

of experimental governance in China, did and do stimulate the socioeconomic and even some political changes in China (Heilmann, 2008) His works contribute to the explanation of how experimentation itself works in China Three types of China’s experimentation are given by him, which are experimental regulation, experimental points, and experimental zones And China’s experimentation-based policy cycle is as follows

Figure 1 China's experimentation-based policy cycle

Source: Heilmann, 2008

Heilmann’s finding in economic area has been verified by the research on policy diffusion in other areas, such as public service and social welfare, in China Foster (2004)

made a case study on the diffusion process of "Service Promise System" (fuwu chengnuo

zhi) Though it was initiated under the pressure of the masses, which is different from

Heilmann’s studies, it shows somewhat similar way of the spread of the policy Namely, local officials posit a new policy program through the way of policy learning; with a

good performance, such a policy program may further draw the attention of the provincial leaders and even relative central officials Hence, the higher levels of governments tended

to regard this policy innovation as a model, and promoted this policy to the governments

or agents in other areas or sectors, so that the policy diffusion could happen Recently, based on the interplay between central and local governments, Shi (2012) used three types of diffusion in China, which are coercion, competition, and pre-emption diffusions,

to explain the local activism and national unification in the process of social policies diffusion

All the studies above emphasize the importance of local pioneering practice or experiments and the general coordination and further promotion of the central governments, yet the intervention of the central government was discussed in a general way In a newest research, it identifies two different mechanisms of this central-local interaction, “mandatory policy diffusion” and “championship policy diffusion” (X Zhu, forthcoming) According to Zhu, these two mechanisms are determined by two intervention methods of the central or superior government, which are called intervention with administrative command, and the contest with performance evaluation For the former one, since under the unitary instruction of the central or superior government, all the local governments should adopt the same innovative policy; while for the latter one, the local governments tend to choose some different policy instrument with the same policy goal, so that they would not lose the champion as followers

These scholars’ researches provide us valuable knowledge and a way to study policy diffusion in China However, there are two major weaknesses for these studies First, they discussed the diffusion process in a general and more descriptive way that pointed out the importance of local pioneering actions and national coordination Nevertheless, the general national factor cannot explain the variations of localities in adopting a new policy Therefore, with no analysis on the detailed conditions of the localities, we still cannot understand why and how some regions adopt certain policy faster than the others Second, these studies overemphasize the central intervention in the diffusion process The interaction between the central and local governments is ignored Despite a recent research analyzing the driving force of the diffusion of police departments’ microblogging in China from the perspective of organization innovation (Ma, 2013), it

discusses the predominance of the upper government in general without paying attention

to the possible variations in the effect of the upper government influence depending on the local conditions

To fill the existing gaps, the research intends to answer the following questions What are the key factors that determine the adoption of policy innovation concerning HPF among Chinese local governments (cities)? How do central and local governments influence diffusion of policy innovations in this process? Why are some local governments more likely to be positively affected by the central government to adopt the policy innovations? By answering these questions, this study tries to explore the specific factors that influence policy diffusion in China Shipan and Volden (2012) has hypothesized that decentralization may be more suitable for policy diffusion than centralization; however, the meticulous conditions should be scrutinized

Chapter 3 Argument and Hypotheses

In this chapter, I answer three questions First, what are the key factors that determine the adoption of policy innovation concerning HPF among Chinese local governments (cities)? Second, how do central and local governments influence diffusion of policy innovations in this process? Third, why are some local governments more likely to be positively affected by the central government to adopt the policy innovations? In the nutshell, my answers to the above questions are as follows Under the conditions of incomplete decentralization, both national intervention and local level capacity and interests determine the adoption of a policy innovation In present-day China, the local governments gain the autonomy to some extent that enable them to represent their interests in local decision making process, while they still have strong accountability to the central and upper level government which implies the national intervention is important As for the case of the Housing Provident Fund (HPF) policy, this chapter hypothesized that the central government promotion and local level capacity and interests, such as the local revenue, the performance of the enterprises, and the average income of the employees, could together determine the diffusion of HPF policy Furthermore, as the localities have different interests, national intervention may have various influences on these localities For those localities which have stronger incentive to initiate the HPF policy, they would be more likely to be affected by the promotion the central government Thus, national intervention could magnify the influence of the local level capacity and interests

3.1 Incomplete decentralization and its accountability locus

Last chapter has argued that the full aspects of decentralization, which is an important condition for the existing policy diffusion analysis, may not be suitable for most developing countries as the decentralization in the majority of them is incomplete Decentralization means “the transfer or delegation of legal and political authority to plan, make decisions and manage public functions from the central government and its

agencies to field organizations of those agencies, subordinate units of government, autonomous public corporations, areawide or regional development authorities; functional authorities, autonomous local governments, or nongovernmental organizations” (Rondinelli, 1980, p 137) Decentralization, which is a relative concept to centralization, was raised to solve the problems in the later system (Schneider, 2003) It is a continuous variable rather than a constant That is, any points between the two ends (extreme centralization and anarchy) of the continuum of decentralization could be regarded as

semi-“decentralization” On this continuum, there are mainly different degree of decentralization, including deconcentration, delegation, and devolution (Rondinelli, 1980) Among these, deconcentration is the minimal degree of decentralization, while devolution is the most substantial one The World Bank (2004) makes a detailed discrimination on these three degrees of decentralization In a deconcentration system, the officials at the local level are the employees of the central government rather than of the local government itself (World Bank, 2004) Therefore, these officials should have stronger upward accountability than the downward As for the officials in the delegation system, they could be the employees of central or local government; they have autonomy

to some extent, while they should also fully or partially be accountable to the center (World Bank, 2004) Compared with the first two forms, devolution endows the localities autonomy to the largest extent The localities in this system could be regarded as an independent or separate power with little or no direct control of the central government (Rondinelli, 1980) This research calls the first two forms of decentralization as

“incomplete decentralization”

As we can see, decentralization in the U.S belongs to the forms of devolution It has the separation power between the federal and state government, high downward accountability because of the political decentralization and local elections, and free movement among the states All these conditions are the foundation of the multitudinous studies on policy diffusion However, for most developing countries, local autonomy is limited Even with the process of decentralization, the local governments have to partly

or largely rely on their counterpart national government For many of them, the local officials are appointed by the central or upper level government, which may impair the downward accountability in decentralization Thus, for most of the developing countries,

the subnational governments “are not wholly controlled by the central government but are ultimately accountable to it”, which could be characterized as principal-agent relationship between the central and local government (Litvack, Ahmad, & Bird, 1998, p 9) This accountability locus, as an important premise, may significantly influence the diffusion process in most of the developing countries

3.2 Principal-agent theory and policy diffusion in incomplete decentralization

Principal-agent theory is an important branch of literature that focuses on organization control In his seminal article, Moe (1984) introduced the principal-agent theory in political science studies Since then, the principal-agent theory has been widely used to discuss the organization control from various perspective, such as bureaucracy (e.g Gailmard, 2010; K Yang, 2009), the relationship between politics and administrative system (e.g Worsham & Gatrell, 2005), and even the relationship between the states and international organizations (e.g Worsham & Gatrell, 2005) As what has just been talked about, it also provides us an angle to analyze the central-local relations under the

conditions of “incomplete decentralization”

According to this theory, principals and agents usually have distinct interests, since they need to make the rational choice for themselves; Also, the agents have incentives to hide the information from principals to maximize their own interests (Miller, 1992, p 2; Moe, 1984) Therefore, “information asymmetries” and “conflict of interest” are the two main reasons for the “agency problem” (Moe, 1984) To reduce the “agency problem”, the principals need to build monitoring devices and incentive structures to ensure the agents work in a proper way

In a decentralized system that locality has limited autonomy and high upward responsibility, the central or upper level government and the local governments together form a principal-agent relationship On the one hand, because of the endowment of autonomy through decentralization, the local governments would like to follow their own interests when they make a decision Also, the subordinates may not always behave as what their superior expected So whether adopting a new policy or not is highly likely to

be based on the local level capacity and interests However, different from the counterparts under the full decentralization that have strong downward political accountability, the local interests here are not necessary to be the preferences of the local resident It is more likely that the local political elites and strong interest groups dominate the local interests On the other hand, the central government as the principal could use the monitor system and incentive control to affect and adjust the local behaviors It means that the central government could promote the diffusion and adoption of a policy by various instruments It is interesting that the central government could also use the pre-emptive strategy to promote the adoption of a new policy among the localities Consequently, this research proposes that the local level capacity and interests and national behavior would together affect the diffusion of policy innovation in such as system

However, even though these two factors could induce the adoption of innovation, it does not necessarily mean that the national promotion has an equal effect on all the localities Since the local governments have information advantages, as the principal-agent theory has argued, they could take advantage of the resources for their own interests Assuming that the central government uses similar instruments to control the subnational governments, the localities having stronger local level capacity and interests are more likely to be affected by the promotion of the central government

3.3 Central-local relations in China

The following of this study will use the case of China, the largest developing country in the world, to analyze how policies are diffused in such an incomplete decentralization system Therefore, this section will deploy a general picture of the central-local relations

in China from the political, fiscal, and administrative perspectives

First, little political autonomy has been given to the localities In Bland’s definition, political decentralization refers to that the local governments could get the autonomy through local election and pluralism party system (Bland, 2010, p 48) However, in

China, the Communist Party of China (CPC) has the “political leadership (zhengzhi

lingdao)” towards the People’s Congress at each level Most candidates of the important

officials, such as the mayors or the head of each department, need to be nominated and recommended by the Party Committee at each jurisdiction; based on the list of nomination provided by the Party Committee and discussion of the deputies of People’s Congress, the presidium of the corresponding People’s Congress determines the formal list of the candidates; at last, the deputies of the People’s Congress “elect” nearly every candidate within the list (G Zhu, 2008, pp 130-131) Hence, the “election” at each unit was under the control of the Party Committee, which is to say that there is little political autonomy at the localities in China As such, the local government has limited downward political accountability to their residents

Such an institution of “election” is directly influenced by the basic personnel principle

in China, namely “party controls the cadres” (G Zhu, 2008, p 127) It could further affect the administrative autonomy of the localities Human resources management is usually an important angle to analyze the division of administrative autonomy between the central and local governments Many scholars believe that China's centralized power

have been even strengthened through the nomenklatura system or the cadre management

system (Edin, 2003; Huang, 1996; Landry, 2008; Sheng, 2005) The implementation of

performance measurement, which uses political integrity (de), competence (neng), diligence (qin), and performance (ji) as four main criteria to judge a cadre's achievement,

is one of the most influential methods for the central government to control the actions of the local officials This judgment may influence the career path of the cadres further According to Edin, the key elements in these four criteria are political integrity and performance As for political integrity, it emphasizes the cadres' political loyalty to the CPC This criterion has the veto power on the cadres' achievement That is to say, if a cadre does not accomplish this criterion, which are usually related to the political issues,

he will not be promoted or could even be punished no matter how well he did to achieve the other three criteria (Edin, 2003) In contrast, a well performance, especially the economic performance, will earn bonus and political benefits for the cadres (Caulfield, 2006; Landry, 2008), while poor economic performance does not have a strong negative influence on a cadre though that will be hard for him to climb higher in the bureaucratic hierarchy (Landry, 2008) As a consequence, with strictly obeying the central instructions

on certain coercive policy arenas such as “birth control”, the cadres actively participate in the promotion tournament through the way of facilitating local economic development (Zhou, 2007) Besides the promotion system, cyclicality, administrative uniformity, tenure length and correlations, and governance types are also used to demonstrate the high degree of central control (Huang, 1996) Despite some scholar argued that the

provincial cooperation is important for the implementation of nomenklatura system2, it cannot be denied that the cadre management system is an effective central control over the local officials and improve the upward accountability of the local governments

However, the performance competition has to be based on the certain degree of local autonomy Also, the localities have to gain some discretion to fully develop their comparative advantages After 1979, the local governments began to acquire some fiscal and decision-making autonomy Many scholars regard this decentralization as an important driving force for China’s economy (Caulfield, 2006; Montinola, Qian, & Weingast, 1996; Oi, 1992), since this changing encourages the local governments to carry major functional responsibilities on economic affairs and to aim at promoting economic development Hence, it encourages the local governments not only to play an active role

on those local affairs without the coercion instruments from the central government (Zheng & Wu, 1995), but also to take more responsibility within its jurisdiction (Li, 1998) Even though there is a significant tendency of fiscal recentralization after the tax reform in 19943, the local governments still have the expenditure autonomy which can reflect the preference of the localities For example, in 2010, the ratio of the expenditure

of the central and local governments is 17.8% to 82.2% (National Bureau of Statistics of China, 2011) and the local governments and people’s congress play the main role in local budgeting

2

For this point, please see Zheng (2007, pp 98-105) By illustrating the procedure of cadre selection, he pointed out the importance of provincial leaders in the process of selecting leading cadres, as they play the role of providing information

3

The 1994 taxation reform in China was a strong recentralization on the fiscal autonomy of the provincial

governments It established the Tax Assignment System (fenshuizhi) (TAS) which specifies the way that

revenues are shared between the central and provincial governments As a result of the 1994 reforms, Beijing dramatically increased its share of tax revenue, and this ratio has kept increasing during the last two decades

In sum, the central-local relations in China just match the principal-agent relationship

in an incomplete decentralized system that has been analyzed in last session On the one hand, the local governments enjoy the decision-making and fiscal autonomy and take the responsibility within the regions Thus, the localities have opportunities to follow their own interest when they are making decisions However, because of the lack of effective local election, the downward accountability is low and the local interests are more likely

to be captured by the local political elites and relative interest groups On the other hand, strong political and cadre control may play as effective instruments to affect and adjust the behaviors of the local officials Therefore, local governments would follow the instructions of the central government

3.4 Policy Diffusion of Housing Provident Fund in China

Based on the discussion above, this research intends to provide an explanation of the diffusion of the Housing Provident Fund (HPF) policy among the municipalities in China However, before focusing on the case of HPF policy, we need to take a look at the large context of urban housing reform in China during the 1980s and early 1990s

3.4.1 Urban housing reform in China

Since 1980s, China launched a full aspect economic reform to transit from centrally planned economy to a market economy The arenas of agricultural operation system in rural area, state-owned enterprises system, banking system, and fiscal and taxation system all experienced such a transformation (Jinglian Wu, 2005) Housing reform was unfolded against this background

Before 1978, China, like many other socialist countries, carried out the centrally planned socialist economies The national government had the overall power on resources allocation and economic development Under the slogan of “production first, living conditions second”, Chinese government carried out a development model of high saving and low consumptions to promote the industrialization (Cheng, 1999, p 4; Zang, 1994, p 2) In this process, the wages of the workers and staff was squeezed to an extremely low level To compensate the low wage system, the government has provided the state

employees with high social welfare, such as housing, medical care (Zang, 1994, p 3) In other words, the subsidy for housing that should be included in the salaries of the employees was used by the state to finance new house building and then freely distributed to the state employees (Y Wang & Murie, 1999, p 157) Therefore, under the old system, housing was primarily a social welfare and income subsidy rather than a commodity in China (Y Wang & Murie, 1999, p 6) The governments and work units

(danwei) were the main suppliers for the housing Usually, “the central government

appropriated funds, and local governments and state-owned enterprises constructed the housing units” (Huque, 2005, p 53) More specifically, the central government took in charge of the general housing plan and funds allocation; the city government took the responsibilities of providing housing and allocated house funding within its jurisdiction;

and the government-owned institutions (shiye danwei) and enterprises directly controlled

the distribution and management of housing within their public housing stocks (Y Wang

& Murie, 1999, p 7) As for the residents, they only needed to pay an extremely low rent

of 0.13 yuan/sq (Fong, 1989, p 34) The rents on average “accounted for some 1 percent

of a worker’s annual income” (Huque, 2005) However, the beneficiary of the public housing could only be “the officially registered urban residents and public sector employees”, while other “unofficial migrants, rural farmers and the young unemployed” were excluded from the system (Y Wang & Murie, 1999, p 8)

In the initial period of time, this system was geared to the economic system of China (Cheng, 1999, p 4) However, the problems became obvious and severe with its further development First, it brought a severe financial burden to the government and negatively influenced the efficiency of the state owned enterprises (SOE) Statistics show that before

1978 the government spent about RMB 35 billion on housing construction and maintenance while only received RMB 1 billion from rents (J Chen, Hao, & Stephens, 2010) The rent income was even not enough for the simple maintenance and repairs (Y Wang & Murie, 1999, p 120), let alone to establish a sustainable cycle for housing development Second, the boomed urban population intensified housing shortage By

1978, housing shortage had reached 1billion in all major cities (Y Wang & Murie, 1999,

p 101) According to the national housing survey conducted at the end of 1985, “25.6 percent of the urban households (105.4 million households) still had difficult housing

problems” (Zang, 1994, p 10) Moreover, there was a severe unequal distribution of housing among different work units The large and well-performed work units can usually provide relative sufficient housing for their employees than those smaller ones (Y Wang & Murie, 1999, pp 108-109, 118-119) And corruption often happened in the distribution process (Zang, 1994, p 6)

According to this, in 1978 and 1980, Deng Xiaoping subsequently made two speeches

on housing issues regarding house provision pluralism, especially the sale and rent increasing of housing, which is regarded as the preclude of housing reform (Jia & Liu, 2007) Based on the speech, in June of 1980, the CPC Central Committee and the State Council endorsed and relayed the “Report Outline of the National Working Meeting on

the Capital Construction” (quanguo jiben jianshe gongzuo huiyi huibao tigang) In this

document, housing commercialization has been firstly mentioned, which indicates the launching of the housing reform (Asia-Pacific Finance and Development Center, 2011)

It is worth to notice that the housing reform is more like an economic reform rather than solely welfare reform, as it concentrated on the distorted economic and distribution system It was one of the three major economic reform programs for 1980s China (Zang,

1994, p 1)

Unlike the radical changes of housing institution in socialist East Europe, China’s housing reform experienced an incremental process with repeated policy experiments, adjustments, and further promotions (Lee, 2000) The initial exploration of the affordability of households for commercialization was practiced in Xi’an, Nanning, Liuzhou and Wuzhou in 1979 (Huque, 2005) Later, four cities, Zhenzhou, Changzhou,

Shashi, and Siping, initialized a pilot program of sale of new housing units (shidian

shoufang) in 1982, which intended to sell a small number of new housing units to the

individuals (Fong, 1989) In this experimentation, individuals only needed to pay third of the total price, while the city government and the work units had to equally pay the other two-third of the price (Y Wang & Murie, 1999, p 144) In 1986, Yantai, Tangshan, Bengbu, Changzhou, and Jiangmen implemented a pilot project to increase the housing rent by issuing special housing coupon, which could be used as a subsidy of the increased rent (Huque, 2005) These programs have been further promoted to other cities

one-after the initial experiments However, even though a lot of endeavor has been put on housing reform, state work units continued to dominate urban housing provision in China until 1990s (Junhua Chen, Guo, & Wu, 2011) Also, because of the generally low wages, the experiments of rent increasing in 1980s were not entirely successful (Lee, 2000)

Based on the experience of the pilot points, in 1988, the State Council promulgated

“Implementation Plan for Gradual Reform of the Urban Housing System” (guanyu zai

quanguo chengzhen fenqi fenpi tuixing zhufang zhidu gaige de shishi fang’an) in the first

national working conference of housing reform The objective of this reform was to increase housing rent, to establish housing fund, to sell the public housing, and to establish housing finance More importantly, this document states that the following housing reform should be led by the provinces themselves, while the central government mainly takes responsibility to guide the general reform direction and promote the successful experiences rather than direct the specific pilot projects and cities Thus, the localities gained the autonomy to choose their own policy instruments The innovation and diffusion of housing provident fund policy was born against this background

3.4.2 An explanation on the diffusion of the housing provident fund policy

Because of the high pressure of inflation from 1988 and political unrest in 1989, the housing reform experienced a slower pace shortly (Cheng, 1999, p 9; Y Wang & Murie,

1999, p 150) In February of 1991, Shanghai produced its own implementation plan for housing reform which was soon approved by the General Office of State Council In this proposal, housing provident fund is raised as one of the core content4 It is a form of long time compulsory housing saving shared by employees and employers together: both parties should contribute an equal percentage of the employees’ salary to the funds by month, which are under the employees’ personal accounts; and the HPF only could be withdrawn when the employees purchase or build their own housing, or when they get retired (Shanghai Municiple Government, 1991) In October of the same year, the Steering Group of Housing System Reform promulgated the “Opinions on Comprehensive Reform of the Urban Housing System”, which updated the 1988 plan and

4

The contents of the reform proposal in Shanghai include establishing the housing provident fund, raising housing rent while giving the subsidies, selling the housing at discount prices, etc

formally extended the housing reform to the entire country (Huque, 2005) Interestingly, the HPF policy then frequently appeared on the reform proposal of many other cities, such as Beijing, Tianjin, Qingdao, after it was initiated by Shanghai In 1994, State Council promulgated the “Decision on Deepening the Urban Housing System Reform”

(guowuyuan guanyu shenhua chengzhen zhufang zhidu gaige de jueding) The central

government first formally promoted the Housing Provident Fund policy and required all the governments, public organizations, and enterprises to establish this institution Thus,

a new wave of the adoption of HPF policy was coming Later, State Council released the

“Suggestions on Enhancing the Management of Housing Provident Fund” (guanyu

jiaqiang zhufang gongjijin guanli de yijian) in 1996 And in 1998, State Council required

each provinces and departments of central government to make a full implementation and improvement of the Housing Provident Fund institutions in its official documents (State Council, 1998) Later, State Council released the Regulation on Management of Housing

Provident Fund (zhufang gongjijin guanli tiaoli) in 1999 and revised it in 2002, which indicates the institutionalization of the HPF policy We can see a clear expansion and

development trace of the HPF policy

One thing should be noticed here is that the policy goals of HPF kept changing since it was born (Taffin, Friedemann, & Kim, 2011, p 6) The original goal of the HPF was to

“enhance housing affordability for urban residents” through compulsory saving (Taffin et al., 2011, p 6) and to solve the problem of the shortage of housing development fund (Y Wang & Murie, 1999, p 160) In the early 1990s, welfare housing still played the dominated role At that time, the loan of HPF was a kind of construction loan, which mainly opened to the work units for housing investment or large housing projects for low income families (Cong, 2008, p 84) Thus, the capital from the HPF helped to reduce the financial burden and supported them to construct more housing for their employees However, the function of HPF had a drastic change in 1999, since welfare housing system was totally abandoned in that year The Regulation on Management of Housing Provident Fund in 1999 clearly defined that the housing provident fund could only be loaned to the individuals since then (State Council, 1999) Therefore, the HPF became an important strategy to create a market-oriented housing finance system through which the contributors could purchase a home by loaning at a low interest rate (Taffin et al., 2011, p

6) Today, the HPF Scheme plays three functions, housing finance (i.e releasing mortgage lending to individuals), pension funds and housing policy instrument (Taffin et al., 2011, p 3) Nevertheless, as the generation and diffusion of the HPF policy is important to this study, its initial goal and what happened during time period from 1991

to 1999 are the main focuses of this research

As what has been talked in the sessions before, national intervention and local level capacity are the two main factors that affect the adoption of innovation of a locality As for the factor of local capacity, it is a little bit complicated in this case Since the decentralization in China is incomplete and there is no free and fair election in the locality, the local government has little downward accountability to the local residents Thus, the interests of ordinary urban local residents or employees could hardly directly influence the decision of the government, especially at the time with the underdeveloped internet On the contrary, the local political elite and interest groups may have a more important influence on the adoption of HPF policy For this case, relative municipal government and state enterprises are the two main bodies that should be analyzed

First, the local government was the main provider of public housing and took the responsibility for decision making on housing reform within its jurisdiction What should

be noticed is that the government played two roles in this process On the one hand, the government itself is a work unit and has its own employees that it also need to and usually first to consider their benefits and interests On the other hand, it is also the governor of the territory that should consider the overall conditions of the locality as a whole As a work unit, the municipal government, especially the officials of the government themselves, should welcome this new HPF policy Since the welfare system was not abandoned at that time and the officers in government usually had better housing conditions, to adopt this new policy may mean that the government could win their employees with extra benefits However, to government and government-owned institutions5, their contributions to the housing provident fund should be appropriated

5

Government-owned institutions refer to those organizations that provide public services under government direction Their running is either fully or partly supported by the government budget revenue For most cases, the salaries of their employees are appropriated by the budget revenue Public schools and hospitals in China belong to this kind of institutions

from the local revenue Thus, the local revenue could positively influence the decision of the government on the adoption of the HPF policy Moreover, as a local governor, the local government also needs to consider the affordability of the citizens, more specifically, the ordinary employees So here come the two hypotheses

Hypothesis 1: The higher the local revenue of a city is, the more likely it is to adopt

the HPF policy

Hypothesis 2: The higher the average income of the employees of a city is, the more

likely it is to adopt the HPF policy

Furthermore, the situation and attitudes of the interest groups are also important in the government’s consideration After 1978, the government encouraged the work units and individuals to play more roles on housing investment with the work units gaining more financial and management power (Y Wang & Murie, 1999, p 156) Even though the housing provident fund provided the enterprises broader sources of housing investment that they can loan money from, the premise of the implementation of this policy is that the enterprises have the capability to afford this compulsory payment first Thus, the performances of the enterprises are important factors to affect their behaviors So the enterprises’ economic performance of a region could also positively influence the adoption of the HPF policy

Hypothesis 3: The better the enterprises’ economic performance of a city is, the more

likely that it will adopt the HPF policy

The factor of national promotion has already been quite obvious in the process of HPF diffusion This study hypothesizes that the national promotion will have a positive effect

on the adoption of the HPF policy Thus, the hypothesis is as follows

Hypothesis 4: The stronger the national promotion is, the more likely that a locality

will adopt this policy

In sum, a synthesized hypothesis is as follows: The higher the local revenue, the higher the average income of the employees, the better the enterprises’ economic performance, and stronger the national promotion, the more likely a city is to adopt the HPF policy

Another thing needs to further detect is the various effects of national influence on the policy innovation of different regions Despite that the central-local relations in China is more like the principal-agent relationship, it does not mean that the local government as the agents has little autonomy other than follow the national instruction Therefore, the national behavior could hardly have equal influence on every locality Those localities have more incentive to initiate a reform could be more likely to be affected by the national intervention Therefore, the hypothesis is as follows

Hypothesis 5: The effect of national promotion on HPF policy innovation could be

positively affected by the conditions of local revenue

The hypotheses above give various determinants of the diffusion of HPF policy in China Next chapter will put them into operationalization, will talk about the measurement and methodology of this study, and will show the statistic results of the analysis