Regional Variation in Business-Government Relations in Russia and China

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Regional Variation in Business-Government Relations in Russia and China1
Explanations for the sharp difference in economic growth performance of Russia and China under economic reform vary widely. Some emphasize macro-level strategic choices, others the administrative environment in which business-government relations operate. Yet there has been little systematic empirical comparison of the two cases. This paper uses data from surveys of firms conducted by the World Bank in 2012 to analyze differences in the local business environments of Russia and China. The findings support theories emphasizing the difference in inherited levels of centralization of economic policy-making as a factor shaping incentives for firms and local governments to pursue growth.
1. Introduction
The dramatic difference in the record of economic performance since market reforms began in Russia and China has attracted broad attention from scholars and policymakers. World Development Indicators figures imply that the average annual compound growth rate for GDP per capita (in PPP terms and constant 2005 dollars) was 1.1% for Russia from 1991 to 2013 and 8.8% for China from 1980 to 2013.2 Explanations for the difference abound. For many, the explanation lies in the radical market-oriented policies adopted by Russian leaders under Western influence (Cohen 2001; Stiglitz 2005; Kotz 2005). They contrast this with the gradualism and etatism pursued by China. Some have gone so far as to treat China’s path as an alternative model of development--the “Beijing consensus” (Ramo 2004). Closer studies of the politics of reform in China tend to attribute China’s performance less to strategic vision than to skillful and pragmatic bureaucratic maneuvering. Many observers, and certainly China’s leaders, hold that by retaining the communist party’s political monopoly, China preserved a steering capacity that Russia relinquished when the CPSU dissolved.

Often writers counterpose a stylized version of one country’s trajectory to a detailed analysis of the other’s. For example, among China specialists it is axiomatic that the Soviet and post-Soviet Russian record reflects disastrous policy choices. Most would agree with Susan Shirk that "the Soviet strategy of political reform before economic reform produced political chaos and disintegration and a decline in living standards and growth rates" or Dali Yang's assessment that "Russia's shock therapy did not produce a sound market economy but instead a sort of anarchic capitalism riddled with corruption" or Minxin Pei's judgment that "of course, the big-bang approach has failed miserably in Russia" (Shirk 1993, p. 5; Yang 2004, p. 297; Pei 2008, p. 207). For the Chinese leadership, the Soviet/ Russian case remains a potent source of "negative teaching material," a lesson in how not to carry out reform (Bernstein and Li, 2010, pp. 1-23).

Nevertheless, there are surprisingly few systematic comparisons of the two countries’ paths of reform. Yet such comparison is called for: no other two postcommunist countries are so large and heterogeneous. China adopted most of the features of the Stalinist model of economic, political and social organization as it was building its communist economy in the 1950s. Soviet advisors oversaw the First Five-Year plan and Soviet assistance helped lay the foundation of China’s industrialization in the 1950s. In the 1960s and 1970s, scholars routinely treated the Soviet Union and Maoist China as alternative models of communism (Schurmann 1966; Leonhard 1977; Johnson 1970). The paucity of theoretically motivated, empirically based comparisons of the two countries today is therefore surprising (Rozman 1992 is a rare exception).

In contrast to the debate over strategies of reform-- Russia’s shock therapy vs. China’s incrementalism--a number of studies have focused attention on the consequences of the inherited administrative structure of the two states. Such theories call attention to the way administrative centralization or decentralization of economic control shape incentives faced by local party and government officials with regard to economic growth. Such theories vary in their treatment of the source of incentives for subnational government officials. Some stress local autonomy and cross-regional competition as the drivers of growth; others underscore the point that the central government sets the overall policy targets and manages the system for appointing and dismissing officials. Central capacity, for the centralizers, enables the regime to restrain local rent-seeking and to reward effective governance, whereas local autonomy, according to the decentralizers, allows local governments to compete for the center’s favor by creating hospitable environments for productive investment. Finally, cross-cutting the centralization/ decentralization debate is a theory emphasizing the character of administrative decentralization, not its degree.

In this paper I seek to adjudicate between the strategic and institutional perspectives on the development of the two countries under reform on the basis of data from a survey of firms conducted by the World Bank in the two countries in 2012. Before turning to the analysis, however, let us examine the competing theoretical perspectives more closely.

For many observers, Russia and China illustrate opposing strategies of transition from a planned economy. Russia’s represents radical stabilization and privatization. A policy of comprehensive fiscal and monetary stabilization is intended to impose hard budget constraints on the state and enterprises and achieve an equilibrium between aggregate demand and supply (Sachs 1993). Harsh budget austerity forces enterprises to restructure production to meet market demand. Large-scale privatization of state assets is intended to eliminate market-distorting political interests from the management of economic assets and to create incentives for private owners to improve the productivity of their holdings (Boycko, Shleifer, Vishny, 1995).

Those who believe that China represents an alternative model emphasize that China retained a strong guiding role for the state in economic development and moved incrementally to open its economy, giving priority to economic liberalization over political liberalization. In Joshua Cooper Ramo’s version, the Beijing Consensus entailed a strategy of innovation-based development, a concern to ensure sustainability and social equity, not just GDP growth, and a commitment to preserving national sovereignty (Ramo 2004).

However, as many scholars have pointed out, to treat China’s path as a strategy is to impose a retrospective logic on a process that was marked by caution, trial and error, advances and retreats, and enormous uncertainty. Only in hindsight can we promote China’s path to the status of a model; at each point along the way, China’s choices have been strongly shaped by the confluence of political and bureaucratic interests and economic conditions (Qian 2000; Qian and Xu 2006; Shirk 1993). Only if the absence of a grand strategy can be considered a grand strategy can we term China’s reform policies a model. China also adopted many more features of the “Washington Consensus” than is conventionally recognized, as Scott Kennedy has pointed out (Kennedy 2010).

Similarly, there are strong reasons to doubt how much Russia’s economic record reflects the impact of Moscow’s strategic choices. For one thing, the Soviet/ Russian transition severely undermined state capacity. As a result, Russia’s policymakers had very little room for maneuver (Gaidar 1999; Shleifer and Treisman 2000). Their policy reach was extremely limited: they had little control over the Central Bank, and regional official routinely found ways to circumvent central government policy. This explains why the rapid economic recovery after 1998 took policymakers in Moscow and the West by surprise (Gilman 2010 ).

More fundamentally, theories focusing on choice of reform strategy ignore the strong element of endogeneity in the policy choices made by reformers in the two countries. Anders Aslund points out that the starting points for reform in the two countries could scarcely have been more different: China was a largely agrarian society, Russia a largely urban, industrial society; China's bureaucrats had just undergone the trauma of the Cultural Revolution, whereas Soviet bureaucrats were adept at resisting any loosening of control; Chinese peasants were eager to respond to the opportunity to produce for market profit, Russian peasants, workers, and maangers were fearful of liberalization and unsure of the leaders' commitment to it; Russia's economy was dominated by giant loss-making industrial firms, China's was still heavily oriented to manual labor; the share of defense production in the Soviet economy was far greater than that of China (Aslund 2007). The architect of Russia's reform of the early 1990s, Egor Gaidar, himself pointed out that it is usually forgotten that, influenced by Chinese experience, Gorbachev had legalized individual private farming and individual entrepreneurship in 1986 and 1987 but that Russian economic agents had failed to respond in the way that the Chinese had responded (Gaidar 2007, p. 157). As is often the case in studying institutional effects, therefore, it is impossible to distinguish the effects of institutions from the effects of the conditions under which they were adopted on both the institutions and the outcomes (Przeworski 2004).

In contrast to the policy-oriented approaches, institutional theories focus on the differences in state administrative structure, stressing the incentives guiding subnational government officials in the two countries. One example of such an approach is the theory of “market-preserving federalism” (Montinola, Qian and Weingast 1995; Weingast 1995). In a series of papers, Barry Weingast and his co-authors argue that the decentralization of control over economic regulation and social welfare administration that China carried out in the 1980s and 1990s, together with liberalization and the establishment of property rights, enabled the country to induce competition among provincial and lower governments that has restrained state predation and encouraged productive investment.

However, Hongbin Cai and Daniel Treisman argue that not decentralization, but competition among leadership factions, is the key to China's economic growth (Cai and Treisman 2006, 2005). They point out that China’s nomenklatura system continues to ensure that central party personnel managers appoint, rotate, and dismiss regional party and government officials according to their assessments of performance, and that moreover, the center frequently acts to restrain local predation rather than the other way around. Encouragement for local experimentation, certainly an important feature of China’s policymaking process, requires central monitoring and dissemination of information. Similarly emphasizing the importance of central control over the incentives for regional officials, Olivier Blanchard and Andrei Shleifer argued in 2001 that a key to the success of China's system of incentives for regional officials to promote economic growth is the greater centralization of political control over officials' careers in China than Russia. They claimed, for example, that Russia's system of electing regional governors undermined the center's ability to hold them responsible for improving economic performance (Blanchard and Shleifer 2001). (This argument is considerably weakened by the fact that the replacement of gubernatorial elections by presidential appointments under Putin had no effect on the incentives of governors to pursue growth-enhancing policies [Reuter and Robertson 2012].)

Finally, as noted above, a related theory emphasizes the nature rather than the degree of decentralization. Yingyi Qian, Chenggang Xu, and others have observed that the Soviet and post-Soviet Russian economy embodies many of the characteristics of an organizational type built around vertically structured, functional divisions, a hierarchical structure known as the U-form (unitary) model. China's economic administration is argued to be closer to a form in which relatively autonomous divisions integrate multiple economic functions--the M-form (or multidivisional) organizational model. A major premise of the theory is that China's economic administration is principally based on regional divisions, each with a diverse array of economic branches. Russia's regional divisions, in contrast, are said to be more specialized by industry. The U-form/ M-form concept arose from studies of American industrial corporations, exemplified by the rise of General Motors in the 1920s. GM encouraged competition among its separate divisions producing different brands of cars for different markets. GM's new corporate organizational model contrasted with the unitary, functionally-organized model of corporate administration at Ford, General Electric and other companies (Chandler 1977; Qian and Xu 1993; Qian et al. 2006; Qian 2000; Xu 2011; Harrison and Ma 2013).

Economists argue that these organizational models yield different types of performance incentives for division managers. Yardstick competition among division managers in an M-form organization can produce more credible information about the relative quality of different managers: if two divisions with roughly similar production profiles achieve different performance records, the central leadership might be more confident in attributing the difference to the skill or effort of their managers. A U-form organization encourages economies of scale, but makes competition among division managers a poor measure of their competence, and even destructive to the overall goals of the organization. What the M-form organization loses in central control and efficiency from economies of scale, it more than makes up for by inducing initiative and innovation on the part of its competing division managers (Maskin, Qian and Xu 2000).

The U-form / M-form highlights some important features of the legacy of communist administrative structure. The level of centralization in bureaucratic control over economic activity did differ significantly between the two countries.

First, with respect to fiscal centralization, China remains less centralized than Russia, although both have witnessed substantial variation over time. As Figure 1 indicates, the share of total revenues going to the central government rose and fell sharply in China: rising after the Cultural Revolution, declining from the mid-1980s to mid-1990s, rising again after the tax reform of 1994, then declining modestly in the last several years. In Russia, the center's take rose significantly under Putin, fell after the mid-2000s, then rose again with the recession of 2009. Today, the two countries diverge only modestly in the center's share of total revenues (48% in China, 61% in Russia). (Figure 1 about here:)

They differ still more with respect to the level of centralization of economic coordination during the period of central planning. The Soviet central government exercised far more extensive control over the Soviet economy than did its Chinese counterpart. Relative to the size of the country, China's provinces and cities had much more planning authority than did Russia's. Moreover, China's economy had a far larger proportion of small and medium-sized industrial enterprises than did the Soviet economy. This is important because the small and medium-sized enterprises--and even some of the largest enterprises-- were subordinated to the provincial and municipal governments. As of 1984, China's central plan accounted for only about 30-40% of industrial output (Wong 1987, 389). Production in the Soviet economy was far more concentrated. Formally, 55% of Soviet industrial output in 1984 was produced by enterprises subordinate to the central (union) government (Narodnoe khoziastvo SSSR v 1984 g., p. 131). In 1983, there were fewer than 46,000 industrial enterprises and associations in the Soviet Union. Of those, a set of giant enterprises numbering fewer than 1500 produced nearly half of all industrial output and employed one third of industrial labor (Hewett 1988, p. 115). Fewer than half of Soviet industrial enterprises employed fewer than 200 workers (Aslund 1995, p. 152). At the point of the transition, over 90% of Russian cities and towns had nine or fewer civilian firms, and almost half had only a single firm. This left many cities highly vulnerable to economic shocks as supply chains and markets were disrupted when planning broke down (Brown, Ickes and Ryterman 1989, p. 35).

China decentralized administrative control over economic production as it broke away from the Soviet model of planned industrial development starting in the late 1950s. Campaigns such as the Great Leap Forward and the Cultural Revolution only accelerated the tendency toward the self-sufficiency of province, city and county-level economies, the tendency Donnithorne (1972) termed the "cellularization" of Chinese economic development. The Cultural Revolution carried this process to an extreme (even control over the giant Anhui Iron and Steel works devolved from the central to the provincial government), but the years after the Cultural Revolution saw only a modest restoration of centralized control before Deng undertook the program of "reform and opening up" after 1978.

The U-form/ M-form model therefore applies well to the difference in the way the two countries' economies were structured administratively at the point market reform began. The Soviet economy relied far more heavily on central coordination of production because of the much smaller number of potential suppliers and customers for giant industrial producers. The Chinese economy could allow a much greater share of coordination of production decisions at lower administrative levels because of the much larger number of smaller producing units that were subordinate to provincial and urban governments. This suggests that producers in the Chinese economy were much less vulnerable to disruptions caused by the loss of suppliers and customers and therefore better-positioned to respond to the opening of the market.

The strongly contextual nature of the reform choices made in each country makes it difficult to test the "shock therapy" vs. "incrementalism" theory. As far as firms are concerned, however, such theories imply that, post-reform, Russian firms would confront a less uniform but also less intrusive environment and Chinese firms to be more subject to more centralized state guidance and control. Theories of market-preserving federalism, market-corroding federalism, and M-form vs. U-form organization, for their part, converge on two arguments about the local institutional environment for business: first, that due to the incentive structure built into the performance evaluation system of the country for officials, local government in China is more conducive to productive investment than in Russia, and second, that local governments will exhibit greater diversity in institutional arrangements as leaders innovate and experiment with policy. Depending on local conditions, some may take on the features of a “developmental state” or “local state corporatism,” while others might take a more hands-off approach to business (Liu 2008; Doner, Ritchie and Slater 2005; Oi 1992, 1995).

We can test one element of these competing arguments by examining enterprise behavior and business-government relations at the local level in the two countries. The differing strength of incentives to induce growth posited by the institutional theories should be evident at three levels of analysis: aggregate differences between the two countries in the institutional environment for business; regional and local institutional environments in the two countries; and firm-level behavior. I use data from World Bank enterprise surveys conducted in Russia and China in 2012 to do so. Corresponding to these three levels of analysis, I derive three specific predictions about ways in which the patterns of business-government relations are expected to differ between Russia and China.

First, at the aggregate national level, we should expect the quality of government interaction with business firms to differ. Theories focusing on the effects of inherited administrative structure posit that local governments in China have greater motivation to promote economic growth than in Russia. We would expect to find, therefore, that firms would consider local government more favorable to business in China than in Russia. Second, business firms in China would be predicted to be engage more in productivity-enhancing investment. Finally, because local governments have more discretion over their institutional environments in China, we would expect greater diversity in business-government relations across localities in China than in Russia; the opposite is implied by theories focusing on choice of reform strategy.

2. Research Design

The data for this paper are drawn from the World Bank's business enterprise surveys ( The 2012 Russian survey interviewed business owners and top managers in 4,220 firms from August 2011 through June 2012. The 2012 China survey interviewed business owners and top managers in 2,700 firms from November 2011 through March 2013. The purpose of the surveys is to obtain a picture of the business environment at the national level. The World Bank takes care to draw up a nationally representative sample of firms stratified by region, sector, size and ownership type. A battery of similar questions is asked in each survey concerning the firm's operations and the relations between the firm and the local government. Although there are minor differences between the Russian and Chinese 2012 surveys, there is a great deal of overlap between them, facilitating direct comparison.

I take advantage of a feature of these enterprise surveys that permits cross-regional comparison, although this was not the intent of the survey's designers. The survey took care to draw up national samples stratified not only by firm size and sector, but also by primary sampling unit. In both the Chinese and Russian surveys, there were enough firms in each geographic sampling unit to warrant treating the units as samples in themselves. Doing so allows us to compare business environments across different territorial units, as well as across countries. Below I justify this use of the data in more detail.

The Chinese 2012 survey covered firms in 25 cities. At least 100 firms in each city were selected. For most cities, more than 100 firms were interviewed. All were privately owned. A third of the cities are coastal trading cities. All of them are higher than the national average in gross output per capita.

The Russian 2012 survey interviewed firms in 37 regions.3 In most Russian regions sampled, around 120 firms were interviewed and in none were fewer than 79 firms represented. In contrast to the Chinese cities chosen for inclusion, the Russian regions were for the most part lower in gross per capita output than the national average. Again, the overwhelming majority of the firms in the Russian survey were 100% owned by domestic private owners. Consequently, in neither survey is variation in ownership type used as an explanatory variable for firm behavior and outlook.

As noted, I chose to treat the territorial units as samples in themselves. This was motivated by the theoretical question about cross-regional variation in institutional characteristics, and justified by the fact that the surveyers took pains to construct pools of firms in each sampling unit that were homogeneous in composition by size and sector of the firms.4

In many cases, respondents failed to provide answers to some questions. As a result, I excluded some items from analysis on the grounds that too few firms provided responses. In the case of Shanghai, so few firms in the city provided any answers at all (only 36) that I dropped all the Shanghai firms from analysis. I have also dropped observations from the analysis in cases where firms did not provide an answer or chose the "don't know" response.

By treating the individual territorial units as samples in their own right we can add an intermediate level of analysis between the firm and the country. This is particularly important for analysis of large, territorially heterogeneous countries such as Russia and China, where regional differences in economic profile, wealth, society and political environment are associated with institutional differences affecting firms. It is all the more important to take advantage of cross-territorial variation when attempting empirical tests of propositions about administrative decentralization. The 2012 surveys of enterprises in Russia and China each have adequate numbers of territorial units and firms in each territorial unit to permit an examination of both cross-national and cross-regional differences in the business environment.

3. Results

The first hypothesis concerned the overall difference in business conditions between Russia and China. Institutional theories predict that China's local governments will be more conducive to business than Russia's. Four sets of items from the surveys allow us to evaluate this proposition. The first concerns the firms' views of the greatest problem they face in their business environment. (Table 1)

For China, access to finance, worker educational levels, and the competitive environment were the problems most likely to be considered the severest obstacles to doing business. For Russia, tax rates (presumably including social insurance contributions) were far and away the greatest problems, followed distantly by access to finance. No other problem was cited by more than 8% of the firms. The fact that for China, access to finance was the most commonly cited problem, followed by the workforce's educational levels, suggests that problems that are only indirectly the result of government policies are far more likely to be obstacles to business in China than those directly stemming from government's actions, such as tax rates, corruption, and licensing. Although tax rates were named by 16% of respondents in China, in Russia more than twice as many firms did so.

Ideally, we would test the first hypothesis by examining responses to items about corruption. The surveys sought in various ways to obtain information about corruption. For example, a number of questions in both surveys asked about the prevalence of "informal payments" and "gifts" in various situations (for example, following a question about visits from tax inspectors, the survey asked "in any of these meetings or inspections was a gift or informal payment expected or requested?"). However, few firms in either country provided responses to these questions. Those that did overwhelmingly claimed that no informal payments or gifts were expected or requested. In China, for example, 2293 firms provided some response to a question about the total value of informal payments as a percentage of annual sales; of those only 73 firms named a figure greater than zero. In the Russian survey, of 2645 firms providing some response to the equivalent question, 1890 firms claimed that no payments had been given. We can interpret these results in either of two ways. We could take them at face value and conclude that there is very little corruption in either country in firm-government relations. Alternatively, we could infer that the issue of corruption is so sensitive that firm managers prefer to give no answer or an inaccurate answer rather than risk answering candidly. In view of official attention to the problem of corruption in both countries, it would be highly unwise to take the results to these questions at face value.

There are three other items, however, that yield more informative patterns of responses. The first concerns the total amount of time that senior management spends dealing with government regulations. We can take this as a rough measure of the degree to which administrative regulation is burdensome for firms. Table 2 gives the results. (Table 2)

It is striking that, in the Chinese survey, 55% of firms reported that no time was spent by senior management on regulations. The mean amount of time spent by firms was 1.3%. In Russia, by contrast, only 16% of firms reported spending no time. The mean amount of time was 18%, the median was 10%.

Another dimension of the institutional environment for firms has to do with the judicial system. Table 3 displays the results to a question about perceptions of its fairness. (Table 3 here)

About 60% of Chinese firms reported that the court system was fair whereas only one third of Russia firms agreed.

Finally, Table 4 reports the responses to an item about the degree to which unregistered, informal-sector firms pose difficulties for the given enterprise. This question may be taken as an indication of the degree to which law enforcement bodies are able to enforce regulations affecting licensing, labor safety, wages, taxes, pollution, and the like. If authorities turn a blind eye to the practices of firms that evade regulation, it would suggest that they are inept or corrupt or both.

In Russia, over 14% of firms reported that competition from the informal sector was a major or very severe obstacle, as opposed to only 4% of Chinese firms. Over 60% of Russian firms but almost 80% of Chinese firms reported that it was not an obstacle or only a minor one. Thus it appears that such competition is a somewhat greater problem for Russian firms than Chinese ones.

In each case, therefore, firms in China found government to be less of a hindrance to their operations than did Russian firms. These results are consistent with the expectations of the institutional theories.

The second hypothesis translated these aggregate cross-national differences into predictions about firm-level behavior. We hypothesized that cross-regional competition encourages regional officials to encourage firms to engage in growth-generating effort. This would imply that firms in China would tend to be more oriented to productive investment in physical and human capital, to be more innovative, and to do more to upgrade technology. Five items from the two surveys allow us to test this hypothesis directly. They concern the provision of training to employees; possession of an ISO or similar certification; introduction of new management practices; effort devoted to research and development; and introduction of new products and services. Each indicates the degree to which firms are oriented to improving their competitive position by upgrading skill and technology. Table 5 summarizes the results. (Table 5)

In all cases, Chinese firms are more competitively-oriented than Russian firms. 85% of firms in China, but fewer than half in Russia, reported offering training. Fewer than 11% of Russian firms have ISO or equivalent certification, whereas over 60% of the Chinese firms do. In China, 45% of firms had introduced new management practices or structures in the last three years, while in Russia, only 26% of firms had done so. In China, 40% expended resources on in-house R & D; in Russia, 86% did not. In China, just over half the firms had introduced a new product or service, in Russia, only slightly over a quarter had done so.

The third hypothesis concerns the relative degree of variation among territorial units in institutional characteristics. Institutional theories predict that, compared with Russia, China’s local governments will feature greater diversity across territorial units, and, greater homogeneity within them, reflecting the local differences in the institutional choices made by local governments.

Table 6 displays the results of an analysis testing this proposition. The items are those already discussed but now incorporated into a multi-variate model predicting the likelihood of a positive response. To facilitate comparison, I have made all the response variables dichotomous. I conducted the analysis using STATA's xtlogit procedure for multi-level logistic regression. Here firms are the basic unit of observation. Firms are nested inside territorial units (again, cities for China, regions for Russia) which in turn are nested in the national samples. Firm responses to each question are regressed on three co-variates: the logged size of the firm; the employees' overall level of education (measured as the share of the workforce with a higher education in Russia, and a secondary education in China), and the gross regional/ city product per capita. (Russia's figure is for 2010, the latest figure available; China's is for 2011). The territorial units are the panels. The estimation yields a predicted mean value for each firm's response conditional on its being located in the given panel. The predicted firm responses are then aggregated to yield a mean value for each question for each territorial unit. That is, the value is the average expected likelihood for a particular city or region that a firm in that city or region will give a positive response to a given question, holding firm size and educational level and city or region GDP per capita constant. The point of the exercise is to test the thesis that in China's more regionally heterogeneous structure of economic administration, conditions for firm behavior and firm-government relations will vary more across regions than in Russia. By implication, the territorial units within China will also show more internal homogeneity relative to total variation. Two statistics are used to test these expectations: the intra-class correlation statistic, or rho, and the coefficient of variation.

The rho statistic in a multi-level model indicates the amount of variation across observations that is explained by correlations within the units in which the observations are nested (intra-class correlation) relative to the amount of variation observed across the panels. In this case, that means the degree to which firms in a given city or region offer similar responses after holding constant firm-level characteristics, such as the size of the firm, the educational level of the firm's workforce, and the gross output of the city or region per capita. How much of the pattern of variation, in other words, is accounted for by common features of territorial units as opposed to characteristics of the firms or the level of wealth of the territorial unit? In every case, the rho values for China are higher, often by several times, than those for Russia. Thus in predicting the patterns of responses of individual firms, we can explain 20, 30 and even 50% of the variation by the characteristics of the cities where they are located. For Russia, in most cases only 5- 10% of cross-firm variation is associated with regional characteristics.

The second measure is the degree to which the mean values vary across the spatial units. The coefficient of variation is used for this test. The cv is a dimensionless statistic calculated as the standard deviation of a distribution divided by the mean. For the distribution of a given random value (such as mean income per province of a country), a higher coefficient of variation would represent a greater dispersion of values around the country's mean. Note that in a multi-level model such as this, where both rho and the cv statistics are calculated, as rho increases, the cv will decrease. This is because the cv calculates the dispersion of mean values of a variable across different nesting units without taking account of clustering within the units. Consequently, to the extent that intra-unit variation declines relative to cross-unit variation, the cv is likely to decline as well. (Table 6)

The results again show that in every case, the cv's for China are considerably greater than those for Russia. Both rho and the cv therefore tell the same story. Spatial variation in firm behavior and government institutions is substantially greater in China than in Russia.
4. Discussion

The survey results are consistent with the argument that differences in inherited levels of administrative centralization in Russia and China affect business-government relations in such a way as to encourage at least some city governments in China to induce productive investment, innovation, and competition among firms. The evidence therefore adds support to the argument that the differences in economic performance between Russia and China in the reform era can be explained in part by decentralization of control and competition to achieve economic results. Aggregate differences in the obstacles that firms face in the two countries, differences in perceptions of the fairness of courts, intrusiveness of bureaucracy, and enforcement of the rules of competition all reveal an institutional environment less difficult for firms in China than in Russia. Chinese firms are far likelier to complain about the lack of access to finance and the low level of education of the workforce than are their Russian counterparts. Russian firms are likelier to cite onerous tax rates as their greatest burden and to spend more time dealing with government regulations than Chinese firms. These findings are also consistent with the results of surveys of entrepreneurs in Russia and China conducted by Djankov, Qian, Roland and Zhuravskaya, who report that 82% of Chinese entrepreneurs, and only 49% of Russian ones, regard local government as favorably disposed toward entrepreneurship. Attitudes toward regional government broke down almost identically (78% vs. 51%) (Djankov et al. 2006).

We also considered the implications of the institutional perspective for firm-level behavior. Studies of business-government relations in the two countries suggest that Chinese local governments reward successful firms but require them to compete in international markets. For example, Shandong province provides an extra 1% in subsidies to firms for every additional dollar they earn in exports. The provincial government actively targets firms for membership in business groups that will serve as provincial champions, but allows loss-making firms to go bankrupt (Liu 2008). In Russia, by contrast, a charateristic pattern of local business-government relations is the particularistic, often personalized, exchange of favors--tax breaks and subsidies to favored firms in return for support for government’s political interests (Frye 2002; Yakovlev 2006; Aidis et al. 2008). In any case, we do see substantial differences in the degree to which firms in Russia and China seek to adapt to domestic and global competition. Almost no firms in Russia have gone to the trouble of acquiring international quality certification for their products; a majority of the Chinese firms have done so. About twice as many of the Chinese firms have introduced new products or services in the previous three years as have Russian firms. The overwhelming majority of Chinese firms offer training to their employees; fewer than half of Russian firms do so. These findings suggest an environment in Russia in which firms complain of government interference but depend on government to protect them against competition and provide services such as training, whereas Chinese firms are less likely to solicit government assistance or complain of excessive government interference.

We also took advantage of the structure of the data set to explore cross-regional differences and found that Chinese localities vary more in the environments they create for business. For example, as Table 6 showed, the amount of total variation in the predicted probability that firms regard tax rates as their worst problem explained by intra-city correlations is .37, while that for Russia is.04. Yet tax rates are by far the most commonly cited problem for Russian firms. This suggests that it is the national tax regime in Russia that creates problems for Russian firms, whereas in China there is more local variation in tax regimes.

Does the fact that the spatial units used for this analysis are Chinese cities and Russian provinces skew these results? In Russia, it is clear that the regions (the 83 subnational subjects of the federation) are the units where most administrative responsibility is concentrated. The Soviet pattern under which the regions were given general responsibility for managing their economic and social development whereas cities were extremely constrained, continues today. In China, no one subnational level of government possesses such a predominant share of administrative responsibility. The pressure to generate growth operates at all levels of administration in China, not just the province level (Xu 2011). They face strong incentives therefore to find new, creative ways of generating revenues. Therefore, it is reasonable to compare Russian regions with Chinese cities as panels.

As a final point, note that we should avoid placing undue emphasis on high GDP growth alone in evaluating the economic performance of Russia and China. As many analysts of China's economic development have observed, the system of incentives for local officials in China tends to reward short-term output growth at the expense of other targets, such as environmental protection. For example, central officials are often unable to force local officials to shut down local enterprises that violate national environmental safety standards (Economy 2007; Fewsmith 2013). Even if we accept that China’s policymakers encourage local officials to generate growth, it does not help explain why the center often fails to induce local officials to meet other goals--such as environmental protection-- when that may imposes losses on them. The Russia-China comparison confirms that the system of incentives for officials and enterprises that the central government in China has put in place have had the effect of inducing much higher rates of economic growth during the reform era than have their equivalents in Russia. It is less clear that they are also effective in producing sustainable growth.


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