26 China The EconomistFebruary 24th 2018
2 lin is a bit like a poor developing country,
and that it should take the path followed
by successful emerging economies else-
where. He said that would require invest-
ment in agriculture, pharmaceuticals and
industries such astextiles, home appli-
ances and electronics. Mr Lin noted that
this is what China’s southern provinces
had done, and such industries there were
now being displaced by high-tech firms.
He said this was giving Jilin (and the north-
east generally) a chance to grab them.
His proposal was received politely in of-
ficial circles, and by a storm of criticism
everywhere else. Zhao Gang of the govern-
ment’s main planning agency said Mr Lin
had shown that “it’s not a problem to de-
velop textiles or technology in Jilin.” But
Guo Qiang of the Central Party School in
Beijing replied that scholars who advise
governments are “mostunreliable” when
they suggest which industries to develop.
Sun Jianbo, the founder of China Vision
Capital, a fund-management company,
was even more to the point. “The north-
east’s problem,” he wrote, “is not industrial
structure but institutions and culture.”
Mr Sun argues that it is wrong to regard
the north-east as a poor developing area.
He says it is a moderately rich stagnant
one. Lacking cheap labour, it cannot com-
pete with, say, Bangladesh in attracting
low-cost industries. More important, he ar-
gues, the north-east has a lethal combina-
tion of corruption and political meddling
which makes it hard to attract investment
of any kind. Investors shy away, he says,
“because business scams, government in-
terference and constantly changing poli-
cies are universal in the north-east.”
Corruption is indeed rife. It can cost
300,000-500,000 yuan ($47,500-79,000)
to buy a job as a nurse at a state hospital in
Harbin. That is roughly eight years’ salary,
but the bribe is judged worthwhile be-
cause a state pension is secure and the job
comes with opportunities for kickbacks. In
2016, 45 deputies from Liaoning to the Na-
tional People’s Congress (China’s parlia-
ment) and 523 members of the province’s
own assembly were thrown out for brib-
ery. The prime minister, Li Keqiang, com-
plains that entrepreneurs need 200 stamps
or licences to start a business in the north-
east, a huge number. Xu Long, a trader in
Harbin, sums it up: “Elsewhere the crooks
steal baby chicks but fatten them up before
killing them. In the north-east they kill the
chicks right away and then wonder why
no one has enough to eat.”
Political interference produces arbi-
trary, even disastrous decisions. Take Dan-
dong, on the border with North Korea. The
town is best known as a place to watch for
sanctions-busting by the regime in Pyong-
yang. But it enjoys another distinction, as
China’s largest private port. In 2005 the
municipal government sold most of its
stake in the facility. The new owners begancautiously expanding it. The city fathers,
however, soon threw caution to the wind.
Ignoring the fact that they no longer
owned the port, they announced in 2011
that “the whole city” would support its de-
velopment. They showered the owners
with tax breaks and cheap land.
There followed a period of breakneck
growth in spending on the project, fi-
nanced by easy money from government-
owned banks. Investment by the private
firm quadrupled in 2011-15 compared with
the previous four years. But the debt bal-
looned as the port’s main business (ship-
ments of coal and steel) collapsed. With
new loans drying up, the company ran out
of cash and defaulted on two repayments.
Some staff have not received wages for
more than a year. “Private”, in this case, did
not mean efficient, or even independent.
The massive increase in the central gov-
ernment’s investment in the region has giv-
en local officials more economic influence.
A car company in Liaoning, called Bril-
liance Auto, shows what can happen. In2002 the provincial government took over
what was then a thriving concern. It
pushed out the founder, cancelled plans to
open a new plant near Shanghai and
forced the company to buy steel from a
steelmaker it itself owns. Three-quarters of
Brilliance’s revenue comes from domestic
sales of sedan cars. But its models have lost
money since 2002. The sedan division is
mired in debt, a remarkable feat in China’s
booming car market.
Local governments in the north-east
mollycoddle theirindustrial champions
by giving them preference in procurement
contracts. But their protectionism has not
helped. The Paulson Institute’s Mr Song
has looked at sales within China of 36
types of industrial products from Liaoning.
He finds that their market share has fallen
in 30 of them since 2000, most by between
a third and two-thirds. In the late 1990s ex-
ports from the province were growing at
roughly the national rate. Since then, they
have been growing only two-thirds as fast.
There has been a decisive shift away from
openness and trade towards local autarky.
There are a few bright spots. JD.com,
one of China’s largest delivery companies,
is investing 20bn yuan in Harbin, and has
put its data-analytics division there. But the
broader lessons of the north-east are so-
bering. It is a place where political connec-
tions are more important than efficiency,
where local governments have wasted
vast quantities of money, and investment-
led growth has encouraged local protec-
tionism. At the national level, Mr Xi is mak-
ing politics paramount, protectingSOEs
and keeping government investment high.
The moral of the north-east’s woes is that
these policies do not help to sustain eco-
nomic prowess. 7GREAT WALLBeijing Pyongyang
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