New frontiers

Urban renewal (1)New frontiersThe fate of China’s economic reforms will be determined locally. Our first article looks at a wealthy city near the coast; our second, at a poorer one inland. Jan 11th 2014 | FOSHAN | From the print edition [image:] THE furniture market in Foshan claims to be the biggest in the world. It boasts a bewildering mix of things to sit on, sleep in and eat at. One shop, named the “Louvre”, offers a range of styles from neoclassical to postmodern, which an assistant defines as a cross between European and modern, suitable for “successful people”. The market, which sprawls over 3m square metres (32m square feet), showcases the manufacturing powers of Foshan, a city of 7m people in the southern province of Guangdong. The city is an archipelago of industrial clusters, dedicated to furniture, textiles, appliances, ceramics and the equipment required to make them. These clusters have produced some of China’s most successful private firms, such as Midea, a maker of household appliances, which began as a bottle-lid workshop, and now employs 135,000 people, generating over $16 billion in revenue in 2012. Many economists worry that China will succumb to a “middle-income trap”, failing to make the jump from an early stage of growth, based on cheap labour and brute capital accumulation, to a more sophisticated stage, based on educated workers and improvements in productivity. But no economy, let alone one the size of China’s, moves in lockstep from one growth model to another. Some regions always outpace others. Provinces like Gansu, in China’s north-west, are still struggling to wean themselves off state-owned mines and smokestacks (see article). Other parts of China’s economy are already comfortably high-income, according to the World Bank’s definition. For example, Foshan’s GDP per head was almost $15,000 in 2012, higher than in some member states of the European Union. Foshan best represents China’s “emerging economic frontier”, according to the Fung Global Institute (FGI), a think-tank in Hong Kong. With the help of researchers from the National Development and Reform Commission, China’s planning agency, the institute is studying Foshan for clues about the rest of the economy’s future. Foshan’s example is relevant to other parts of China, it argues. Unlike the nearby metropolis of Shenzhen, it was never a special economic zone. Unlike neighbouring Guangzhou, it is not a provincial capital. It also shares many of the country’s growing pains. Lacking oil and coal, it is prone to electricity shortages. It is heavily polluted and highly indebted: its government pays 47% of its tax revenues on servicing its liabilities. Wages are going up, land is running out, and growth is slowing down. To tackle such problems, China’s Communist Party endorsed a long list of bold reforms at its long-awaited “third plenum” in November. Economists welcomed the list even as they worried that officials would fail to implement it. But in China, implementation is often a process of gradual diffusion not abrupt transition. Some of the principles proposed by the plenum are already in practice in Foshan. Some may have been inspired by it. The third plenum resolved that the market should play a “decisive” role in the allocation of resources. In Foshan it already does. In the early 1990s Shunde, one of the city’s districts, pioneered the sale of government-backed enterprises to their managers, workers and outside investors. Foshan now has about one private enterprise for every 20 residents. In 2012 they grew twice as fast as the remaining state-owned firms. November’s party plenum also called for private capital to play a bigger role in public infrastructure. In Foshan over the past nine years the government has allowed private firms to bid for over 500 projects, including power generation, water plants, and rubbish-incineration plants, according to Liu Yuelun, the city’s mayor. Ahead of the party’s call to consolidate the state bureaucracy, Shunde district had already slashed the number of its departments from 41 to 16. [image:] Another national aim is to unify parts of China’s land market, allowing rural land to be leased on similar terms to state-owned urban plots. In the 1980s Foshan had already created a shadow market in communal land, which villagers leased to budding industrialists, contrary to national law that reserved such land for rural purposes. Because these land rights were technically illegal, many big firms eschewed them. But that made them all the cheaper for scrappy, small firms willing to live in the legal shadows. This grey market allowed Foshan’s industrial clusters to grow organically, according to economic logic rather than arbitrary land laws, argues the FGI. It also allowed villagers to reap some of the gains of Foshan’s industrial transformation. By 2010, the FGI calculates, the average Foshan resident owned property worth almost $50,000. Will Foshan’s experiments inspire nationwide reform? Its lessons sometimes get lost in translation. Shunde’s sales of government-backed firms is one example. It sold its most profitable firms before selling the lossmakers, a strategy it likened to “marrying off the prettiest daughter” first, according to Linda Chelan Li of the City University of Hong Kong. The national government, in contrast, let small, loss-making firms go but clung tight to big, profitable ones. These SOEs remain powerful and profitable and all the harder to reform as a consequence. Foshan’s penchant for experimentation also reflects its unusual administrative history. Until 2002 two of its districts, Shunde and Nanhai, were cities in their own right. Their governments still collect more revenues than the city itself. This allows decentralised—and more responsive—decision-making. “When the upper level of government gives more authority to subdistricts, they have a stronger sense of responsibility,” says Mayor Liu. In response to the demand of local industry, for example, Shunde district built an impressive polytechnic, which now teaches 11,000 students. Its qualifications are not recognised as degrees by the Ministry of Education but they are highly valued by local employers. A skilled graduate can earn up to 6,000 yuan ($990) a month, says Fu Qingju of Keda, an equipment-maker. The quantity of workers will grow more slowly as migration to Foshan slows, but the quality can always improve. Do you copy? Foshan’s success may prove hard to imitate or to sustain. Its prosperity rests on the benefit that firms derive from proximity to others. But these clusters are hard to replicate. Why would companies flock to a new cluster when one already exists? China is dotted with ambitious local governments keen to build hubs of high-tech firms and services. Not all of them can succeed. In addition, when industries cluster in one location, pollution also concentrates in the same spot. Foshan has experienced the stark trade-off between industrial growth and environmental protection. In the past the government would approve a new company before the sewerage system was ready to cope. Four of Foshan’s inland rivers are heavily polluted. In 2003 it tightened environmental regulations on its local ceramic firms, an industry with centuries-old roots in Foshan. Ten years later, fewer than 60 out of 600 firms remained. The rest did not pollute less. They just polluted elsewhere. Pollution is now a barrier to Foshan’s development, rather than a byproduct of it. “We understand that our poor environment does not attract talented people,” notes Mr Liu, the mayor. “We want to provide greener lands for them.” Mr Liu hopes that new, cleaner clusters will supersede its older, dirtier ones. The east of the city, which is connected to Guangzhou by underground, hosts a cluster of back-offices for Guangzhou’s finance industry. Foshan is also building a new cluster dubbed the Sino-German Industrial Services Zone, dedicated to the services that high-end manufacturing requires. The new zone straddles the Dongping river. One bank represents Foshan’s prosperous, tangible present—a busy port, loading and unloading containers full of manufactured goods. On the other bank is Foshan’s vision of its future: a pleasant ribbon of parkland, decorated with cherry trees, mudflats to attract birds and a skate-boarding rink. The park includes a man-made beach and pond, open to the public, where up to 2,000 people can bathe. In the past Foshan’s enterprises made great leaps by assimilating foreign technology. Its ceramics industry, for example, imported a German oven in 1983 that increased output tenfold. The Sino-German zone is an attempt to import something else: not German kit so much as German credibility. The international tie-in is a sign of Foshan’s ambition to become a “liveable” city, attractive to the kind of people that a sophisticated service industry needs. Like its furniture, Foshan’s new city aims to be somewhat European, modern and suitable for successful people. Source: The Economist