Thursday, June 7, 2018

Once in Harbin: The debate raging over China’s Northeast rust belt

From Andrew Batson's blog, September 1, 2017:
Over the past week or so, an impassioned debate has broken out over what should be done to help China’s struggling rust belt in the Northeast. Justin Yifu Lin, perhaps China’s most famous living economist, sparked the debate when his think tank released a long (400+ pages!) report proposing an industrial policy strategy for Jilin, one of the three Northeastern provinces. The report’s recommendations were seemingly innocuous–develop more light industry, tourism, and agriculture-related businesses–but they nonetheless attracted vociferous online criticism.

Why? The summaries in the English-language press (see the SCMP and Caixin) give the impression that it’s a debate over whether government policies should promote light industry, or something else. If that were the case, this would be a typical academic tempest in a teacup. In fact, a lot more is at stake: the debate over what to do about the Northeast (aka Dongbei, aka Manchuria) involves fundamental differences over how to understand Chinese economic history and the development trajectory of countries and regions really develop. The debate over how to help such struggling regions is also one where conventional Western economic wisdom has little to offer, so the field is wide open. After doing some reading on both sides, here’s my guide to the debate (warning: this is a long post).

Let’s start with the “Jilin Report” itself (the full Chinese-language text is available at the Center for New Structural Economics, Lin’s think tank at Peking University). I’ve only read the executive summary, which is not particularly short either, but the main points are pretty clear. The background for the report is the long-term economic decline of the Northeast, once the most industrialized part of China, despite more than a decade of national plans and programs aimed at “revitalizing” the region. The core argument of the report is that the government needs to learn from the mistakes of previous policies (this quote and all subsequent ones are my translation):
Before the reform era [began in 1978], the old industrial base in the Northeast benefited from the nation’s promotion of a heavy-industry-focused catch-up development strategy. But in the reform era, the Northeast has suffered from the legacy of this strategy, and its industry, products and technological structure lack market competitiveness. The “revitalize the Northeast strategy” therefore must be a development strategy that is in line with the Northeast’s own comparative advantage, and must not result in the launch of a new round of the old strategy. …
To speak frankly, the first round of the “revitalize the Northeast strategy” from 2003 to 2016 still relied on trying to strengthen this old-style catch-up strategy that went against comparative advantage rather than following it. A research project based on industrial enterprise microdata from 1999-2007 shows that the strategy helped enterprises expand output value, but did not increase profits. A strategy that expands the output of enterprises that are not viable is a strategy that goes against comparative advantage.
The importance of this statement has I think gotten lost in the some of the ensuing debate over the report. It matters a lot that China’s most famous economist has come out and said, in so many words, that the decade-long government policy for revitalizing the Northeast has been a complete failure and is fundamentally flawed. This judgment is in my view absolutely correct, and in fact none of Lin’s critics are arguing against it (if anything, they would likely be even more harshly critical than he is). If the debate over the Jilin Report does nothing else, it should make very clear that more aid to state-owned heavy industry is not the answer to the Northeast’s problems.

What strategy should replace the old, failed strategy is less obvious, and this is where opinions really diverge. Essentially, Lin’s report argues that Jilin is an underdeveloped, low-income province, whose industrial structure is excessively weighted toward heavy industry. Therefore Jilin should do what underdeveloped, low-income countries and regions that have successfully developed have all done, which is focus on light industry. Jilin can do some of this by attracting textile and electronics manufacturing facilities that are being relocated out of high-income coastal provinces, but it can also develop industries that take advantage of its particular natural endowments, such tourism in its many wilderness areas. (Side note: Changbaishan, an extinct volcano that straddles the border with North Korea, is in Jilin province, and in fact it is one of the most spectacular natural wonders I’ve ever seen, easily on par with national parks in the U.S. The site is also extremely well maintained and managed despite the huge volume of tourists.)
The article that helped spark the online storm of commentary focused on this idea that light industry will relocate from coastal provinces from Jilin. Written by Sun Jianbo, an economist at China Galaxy Securities, it pulls few punches in going after the much more famous Lin:...MORE