The Mandarin Model of Growth

In China’s hybrid economy, the central government employs economic performance evaluations to guide career advancements of local officials. When local governments face stringent debt constraints, these career incentives can spur growth. However, when debt constraints are relaxed, such incentives may lead to short-termism, over-leveraging, and crowding out of private investment. We examine the impact of these career incentives and, through counterfactual analysis, find that they contributed to half of China’s extraordinary pre-2008 growth. Post-2008, however, tighter control of local government debt would have been more critical to sustaining growth. The overall welfare implications of the Mandarin system remain ambiguous.