| In the period of the 30 years of Reform and Opening, China's unique progressive reform has not been met the failure as some western economists expected, on the contrary, it achieved remarkable success in the area of economic, social transoformation. China's economic and comprehensive power has much increased and its global influence increased considerably as well. In the economic achivements, the total GDP increased from 364.5 billion yuan in 1978 to 33.5353 trillion yuan in 2009, with the average annual growth of over 9.80%. Meanwhile, China has also made remarkable achievements in many other fields, such as poverty elimination, education, health care, average life expectancy, research and social security. China's economic and social achievements, which is known as " a growth miracle", are not understood by many people and regarded as a "mystery". The reason is that China's economic growth shows four unprecedented uniques:first of all, China's GDP growth maitained a high rate and sustained in a long period of time. From the growth rate, there has never been one big country which can maitain an annual growth rate of 10% in 30 years on the history. Moreover, it might continue for a longer period in the foreseeable future. It cann't be not a "miracle". Secondly, the mystery of this miracle shows "unconventional" characteristics from point of view of the economic theory:comparing to other countries, China has no advantages in many conditions stressed by the growth theory such as natural resource endowment, physical and human capital accumulation, and technological innovation capability and so on. In spite of that, China is at a comparatively low level in per capita resource endowment and technological innovation. In other words, China's economic miracle should not have happened according to these theoretical predictions. Thirdly, China's economic growth is obtained in the course of its transformation with imperfect system. That is, instead of on the basis of the logic of western mainstream economic theory or following the blueprint described by "Washington Consensus", China's reform is carried under a series of unsatisfying and even distorted system conditions such as not entirely clear poverty rights, not entirely free price, inadequate democratic, incomplete social equality, incomplete opening to the outside and lagged political reform, and has achieved greater accomplishment than the countries of former Soviet Union and Eastern Europe which carried out their reform in accordance with the mainstream of Western economic logic and the "Washington Consensus". Fourthly, accompany with the great economic ahcievements, China is in many difficulties:the prevalence of local protectionism, the low efficiency of state-owned enterprises, discrimination to the private economy, grave injustice of income distribution, the extremely high external dependence, the imperfection of financial system and the prevalence of corruption.... This even more highlights the meaning of China's economic growth as a miracle. Thus, since the late 1990s, many economists and scholars in the world who studies China regarded China's extraordinary economic performance as a "myth" --- that is, China's "Mystery" (such as:Zhang Weiying,1998; Peter Nolan (Nolan),1993; J. Buchanan, and Wang Dingding,1998).How to explain the "mystery" of China's economic growth? Is it possible to find a perspective with internal logic consistency which can be used to explain both China's economic success and the confusion during the economic and social development? The explaination of the "mystery" emerged in the big countries in transition like China contributes to increasing our knowledge of transition and economic growth. It is also helpful for China to adhere to the good system that has generated already, to improve the drawbacks of the existing system, to reform the bad systems impedeing economic and social development. Besides, it can promote China's experience and the Chinese model in the world, which is helpful for other developing countries to explore the road of economic take-off. Therefore, this paper will focus on explaining a few prominent "mysteries" shown in China's economic and social development. Specifically, this paper's main research work and innovations are as follows:First, a logical framework based on the competition among local government to explaining the China "mystery".In the existing literature, many economists emphasized the importance of the competition among local governments for China's economic growth, for example:Zhang Jun(2005,2007), Zhou Ye'an (2003,2005), Steven Cheung (2005,2008,2009), Lu Ming and Chen Zhao et al(2005,2006), Zhou Li'an(2005,2007,2008), Xu Xianxiang (2006), etc.; there are also many scholars explored the effects of local governments competition, such as:the effects on privatization (Zhanget al,1998), on FDI inflow (Pang Mingli,2007), on infrastructure construction (Zhang Jun, et al,2007), and on the local protectionism and market-oriented process (Zhou Nathan,2007; Lu Ming and Chen Zhao,2006), and so on; furthermore, there are some scholar discussed the incentive sources of the competition among local governments, for example:Zhou Li'an believes that the promotion tournament mechanism in political area is the root of local government competition, Steven Chueng thinks that China's share system of land is the main institutional arrangement that generates the local government competition...However, there isn't any framework with internal logic consistency in the existing literature, which can be used to analyze the constrains of China's Reform and opening up, point out the incentives and constrains that cause the local government competition, and analyze China's great achievements and difficulties of economic growth under the competition among local governments as well. So in Chapter 2, a logical framwork is constructed based on local government competition. In this framwork, the above questions are answered and the competition among local government is consisdered to be the most important driving force to create China's "mystery". Meanwhile, the reasons and effects of China's local government competition are also explained in this framework, as well as the role of knowledge played in the local government competition and economic growth in China.Secondly, the necessary conditions for the local government competition:the institutional arrangements that encourage and bind local government officials.Incentive is very important. It is only to incent properly that would the economy of one country take off and develop. For one country, governance is necessary not only for enterprises which means effective incentive to the managers and employees, but also for government given the importance of government in the economic development. By means of government, I mean the one composed by officials from all levels, not the abstract one. The decisions of local government are made by officials. The overall behavior of local government is "an aggregation" of the officials'individual behavior. So we must have a deep understanding of the incentive and restraint mechanisms on local officials in order to find out the determinant of local government competiton.This paper proposed that the incentive and restraint to the local officials are affected not by a single factor, but by various of factors working together, which will encourage these officials to contribute to the economic growth and working hard back and forth for their jurisdiction, and on the other hand, it will also promote corruption, neglection of citizens'livelihood and other behaviors for private interests which might lead to the consequences of market segmentation, bias public goods providing and low growth of employment, etc.It is studied in Chapter 3 that the institutional arrangements which encourage and bind China's local officials. There are six kinds of institutional arrangements as the following: the first one is fiscal decentralization system; the second one is the promotion tournament mechanism in political area; the third one is the level-by-level localization administrative contracting system of of routine powers; the fourth one is relationships of China's Party and Government; the fifth one is the hybrid regional organization structure of China; the sixth one is the informal systems of how to be an official in China's traditional culture and of the importance attached to the network of relationships. At the same time, this paper makes comparatively deep research on the role of these systems in incentiving and constrainting the local government officials.Thirdly, the impact on the corruptions of local government officials by the local government competitionGenerally speaking, corruption will inhibit economic growth and social equity doctrine. However, why could China be able to maintain rapid economic development with corruption of such a high level? If we think that competition among local governments be the most important driving force to promote China's "mystery", what impacts would the local competition impose on the corruptions of local government officials then?Chapter 4 builds a model for the attempt to explore the impact of the promotion tournament in China's political area on the corruption of local government officials. The results show that there are both positive and negative effects of promotion tournaments and local government competition on the corruptions of local government officials, that is, on one hand, local government officials will be encouraged to be uncorrupted in his post and to work hard in promoting the economic growth of his jurisdiction in order to obtain a promotion opportunities; on the other hand, the local government officials will be driven to be involved in corruption. The results also show that:In the local government competition, jobs pay play the role of eliminating corruption of local government officials only when it meet the conditions of the participation constraint. Once the local government officials decide to corrupt, the so-called "high-paying Honesty" play a weak role in reducing the corruption of local government officials while it is the the pay difference between high and low positions that plays the real role.Meanwhile, many other factors will have significant impacts on local government officials' corruption of uncorruption, such as differences in inter-regional growth conditions, differences in the political environment, differences of investment in anti-corruption, differences of fairness and transparency in the administration of justice through such mechanisms as "the effect of throwing the handle after the blade", "demonstration effect", "big dye vat effect", and so on.Fourthly, the conclusions of the effects of local government competition on the industry selection, employment and income distributionThere are three important phenomena in China's economic development:the first one is over high proportion of capital-intensive industries such as the heavy and chemical industries with the lagging-behind of labor-intensive industries such as services in the economy; the second one is the coexistence of the high growth of economy and low growth of employment; and third one is that the grave injustice in income distribution, the rising proportion of capital income and the declining propption of wage. Why there are so many paradox coexist together? Is there any theory with inner logic cosistence which can be used to explain these three phenomena.Chapter V of this article constructed two models based on competition among local governments. The first model describes that under the local competition, local governments will embark in the " War of Introducing Businesses & Investments" and the more fiercer of promotion competition among local government officials, the more intense will be the " War of Introducing Businesses & Investments" do.The second model analyzes under the competition of local government, local government's industry choice would do what impacts on employment and income distribution.The analysis shows that the following three effects will be brought out by the "competition for growth" among local government:The first one is the over development of capital-intensive and technology-intensive industries with the ignorance of labor-intensive industries. Compared to labor-intensive industries, capital- intensive and technology-intensive industries has stronger effects in growth. Therefore, local governments and government officials are more willing to introduce and support those large scale, capital-intensive or technology-intensive enterprises, while ignoring development of labor-intensive SMEs', which lead to the injustice in finance, policy, market access for a long time in many districts of China. Another important phenomenon emerges at the same time, that is the serious duplication and same structure of industries in different districts. And in addition, those industries which have obvious effect in boosting economic growth are highly same-structured.The second one is "the growth with low employment or no employment". Since China is of relative scarcity of capital and is abundant of labor, when every district prefers the strategy of developing capital-intensive and technology-intensive industries, the development diviated from the endowment of factors of production will lead to a phenomenon that capital and equipment replace labor and the demand for labor decline, namely, to "growth with non-employment or low employment."The third one is the declining of allocation according to work and the increasing of distribution according to capital in the initial distribution of national income. It is the preference to the capital-intensive and technology-intensive industries and neglecting of labor-intensive industries that will lead to the increasing demand for capital and technology which brings about the rise of capital and technology price, as well as the declining demand for labor which brings about slowing down the labor price. This will bring about a sustained decline in allocation share of labor.Fifthly, the impact of local government competition on macroeconomic fluctuationsIn the local government competition, local governments and their officials will have an impulse to invest in the pursuit of faster economic growth, which will lead to economic overheating in China. Once it happens, the the central government will take austerity measures and political punishment, which will cause economic contraction. In this way, China's macro-economy fluctuates periodically.Chapter 6 constructed a econometric model to isolate the various volatile items in GDP composition of items with the HP way, and then attempts to find their impact on the volatile items of GDP growth. We use the data from 1990 to 2004 including the total GDP each year, household consumption, government consumption, gross capital formation, net exports of goods and services, the total amount of credits, as well as data such as price index. The econometric analysis based on pana data shows that the investment fluctuations under the support of local government is the main reason that cause China's macro-economy influctuations.
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