Monday, January 16, 2012

The competition dynamics beneath China's economic success

Enlightened public policy, intended or otherwise, has surely played a major part in China's economic success for the past nearly quarter century. However, there remain serious debates about what specific policies contributed to this success.

In this context, a NYT article points to the positive role played by public policy in unleashing fierce economic competition among its city states and the central role of urban development in driving economic growth. Though these city states - semi-autonomous regions within large provinces - are built around a huge urban metropolis, a major portion of its population lives in the rural areas surrounding the city. It writes,

"When it comes to economics, China is more a thin political union composed of semiautonomous cities... than an all-powerful centralized government that uniformly imposes its will on the whole country. And competition among these huge cities is an important reason for China’s economic dynamism. The similar look of China’s megacities masks a rivalry as fierce as that among European countries.

China’s urban economic boom began in the late 1970s as an experiment with market reforms in China’s coastal cities. Shenzhen, the first "special economic zone", has grown from a small fishing village in 1979 into a booming metropolis of 10 million today. Many other cities, from Guangzhou to Tianjin, soon followed the path of market reforms.

Today, cities vie ruthlessly for competitive advantage using tax breaks and other incentives that draw foreign and domestic investors. Smaller cities specialize in particular products, while larger ones flaunt their educational capacity and cultural appeal. It has led to the most rapid urban "economic miracle" in history."

Each of these city states has a municipal government, which administers both the urban and rural parts. A very tightly enforced hukou (household registration) system limits migration into cities. Those living in the countryside are also registered as farmers and receive various welfare benefits. Though the focus of the city governments have hitherto been confined to the urban center, it is now shifting to the countryside, partly in an effort to retain people in the suburbs and villages so that the city does not get too congested and its growth gets choked. Some municipal governments have set up development zones composed of small firms (mainly export-oriented) in the rural areas.

China's experiment has important lessons for India's federal system. Drawing a parallel with Beijing's policy towards city governments, is it possible for the central government to align policy incentives in a manner that helps create an environment that promotes competition among states? What should be the elements of such a policy framework that does not conflict with India's federal system? What should be the support that the central government should provide for each of these elements?

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