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Friday, September 22, 2017

Credible Commitment and Chinese Municipal Debt: How Legal Omnipotence Makes Authoritarian (and Democratic) States Practically Powerless

Okay, "powerless" is a little strong. But this week's news that Standard & Poor's Global Ratings has down-graded China's sovereign debt is a reminder that the vaunted ability of authoritarian regimes briskly and efficiently to get things done is a tad exaggerated. The Chinese Communist Party has been struggling for years to get its ballooning debt under control but to no avail. As Shitong Qiao and I argue in a little essay, it turns out that Chinese local officials' vast legal powers actually weakens their capacity to control their local debt. The problem local officials face in China is just a specific instance of a familiar constitutional difficulty: Legal omnipotence impedes officials' capacity to make credible commitments necessary to secure cooperation necessary to accomplish long-term reforms. In the context of Chinese municipal debt, local officials' powers to undo their predecessors' policies impedes credibility of commitments to follow through on reforms needed to attract home-buyers and lenders (say, by reducing the cost or improving the quality of schools, policing, or pollution). Being unable to commit to such value-enhancing but intangible goods, mayors and party secretaries emphasize physical infrastructure that is relatively durable and can quickly generate GDP and jobs that enhance a local officials' chances for promotion. In theory, the central government could refuse to promote local officials who incur "excessive" debt. In reality, the central government has neither any easy metric for measuring when debt is excessive nor any easy way to gain information about local indebtedness without the cooperation of local officials. Moreover, the CCP's cadre promotion policy rapidly moves local leaders from one local jurisdiction to another after three years or so, giving each local official an incentive to rack up debt for impressive GDP and job results while handing off the debt time bomb to their successors.

Before one gets cocky about constitutional democracy's advantages in using law to make commitments credible, keep in mind that constitutions are mere parchment guarantees of stability. If actual political institutions do not enforce the promises of policy-makers, then merely paper guarantees will not enable a government to make its policies stick. The United States' debt was down-graded back in 2011 precisely because bpnd raters worried about how partisan polarization was impeding the Congress's willingness to honor past Congress's commitment to re-pay its debts on time. Evidence suggests more generally that low collective responsibility and high partisan polarization tend to undermine lenders' perception that the borrower's commitments to re-pay debt are credible.

In short, democracy and autocracy can both be unstable without institutions that practically lock in office-holders' promises across time. As an American teaching constitutional law in Shanghai this year, this basic common problem confronting both China and America has made my classes more exciting but my worries about instability gloomier. With the 19th Party less than a month away, President Xi Jinping may be making a bid for a third term and an extra-compliant Politburo. Meanwhile political conventions in Congress and the Presidency also seem to be unraveling -- perhaps "rotting" in Jack Balkin's term. In either case, one hears an impatience with the old rules that prevent an energetic executive from "getting things done." By undermining the conventional bases for credible commitment, however, both Xi and Trump might find that they have lost their capacity for effective action. As Carles Boix and Milan Svolik argue, authoritarian regimes actually are more resilient when there is a balance of power that makes inter-factional bargains more credible. Trump's supporters may likewise be discovering that those old fusty trans-partisan conventions governing the D.C. "swamp" are necessary for getting anything done. In either case, there could be a deep irony that, in the name of energetic government, stakeholders trashed limits on action that make long-term actions possible.

Posted by Rick Hills on September 22, 2017 at 10:57 PM | Permalink

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