Regional Government Competition

Front matter

Regional Government Competition

This monograph provides a coherent and systematic explanation of China’s regional economic development from the perspective of regional government competition. It gives an almost unknown exposition of the mechanisms of China’s regional economic development, with numerous supporting cases drawn from China and elsewhere. This book is an invaluable resource for anyone interested in learning more about the development and transformation of China’s regional economy from both the Chinese and global perspectives.

Chen Yunxian is Professor, Economist and Deputy Governor of Guangdong Province, China.

Contents

List of figures vi List of tables vii Foreword viii Preface xix Translators xxii l Regional government 1 2 Three categories of resources 32 3 Resource allocation in “the four phases” 57

4 The representations and effects of regional government competition 82 5 Effective government and efficient market 128 Bibliography 213

Figures

Foreword

Region is a relative concept. Globally speaking, a country is a region; for a country, an area is a region. Regions share commonalities, similarities and generalities, but are also characterized by their individuality, particularity and diversity. Regional government is a government organization which administers affairs within its own jurisdiction, with a relatively fixed area, a relatively concentrated population and institutional governance. Regional government has the attributes of publicity and coerciveness.

The external possibility of regional government competition

The publicity of regional management is mainly reflected in ensuring regional public spending and maintaining regional markets and social stability by means of taxation, industry and commerce, public security and monitoring and supervision, and in ensuring its openness, fairness and impartiality through administrative legislation and justice. The coercive power of regional administration is embodied not only in the three super-economy coercive forces of legislation, justice and administration, but also in the economic coercion derived from its financial rights and rights to administer its affairs. Superficially, regional government manages economic development, urban construction and social livelihood, but in essence, its administration is reflected in its effective allocation of tangible and intangible resources of various categories, existing and potential, within its jurisdiction.

Social welfare resources correspond to people’s livelihood and are categorized into “non-operational resources” in market economy. The guideline policies for the management and allocation of such resources can be generalized as “social guarantee, general underpinning, fair play, and effective promotion”. Industrial resources correspond to economic development and are referred to as “operational resources” in market economy. The guideline policies for the management and allocation of such resources can generalized as “planning, guidance; support and regulation; supervision and administration”.

City resources correspond to urban construction and fall into “quasi-operational resources” in a market economy, covering public services systems that ensure smooth regional economic and social activities as well as the “hard” and “soft”

Foreword ix infrastructure that provides public services for regional production and people’s lives, for example, public facilities, transportation, telecommunications, power and water supply, landscaping, environmental protection, project development, education, science, culture, health, sports, journalism, publishing, radio and television. They are so called because their development and management can be implemented either by government, in which case they are public and non-operational in nature, or through market channels, in which case they become a commodity and operational. The choice of whether they are conducted by government or through market mechanisms depends on a range of factors, such as regional revenues and expenditure, market demand and public acceptability.

The practices of regional administration in the world and the successful experience of China’s reform and opening up show that regional government will, partly or wholly, resort to market mechanisms in its allocation, development and management of quasi-operational resources under the fundamental principles of “general underpinning, fair play, effective promotion” of social welfare services and public product provision. This aims to prevent the idleness and waste of urban resources and eliminate problems of urban resource depletion, low-quality operations and disorderly urban management owing to investment without earnings, construction without operation and focusing on public welfare while overlooking effectiveness. In the transformation from “quasi-operational resources” to “operational resources”, the determination of the nature of the entities of resource allocation — that is, the nature of the ownership and its governance structure, whether solely foreign-owned enterprises, joint ventures, cooperatives, joint-stock companies or private or state-owned businesses — must be in line with market rules, and its resource allocation and capital operations must be conducted through market competition, whether BOT, PPP, bonds or stocks. From the onset, the mode of “government promotion, social participation and market operation” opens up external possibilities of inter-regional government competition.

The intrinsic necessity of regional government competition

Two serious drawbacks reside in western market economics. On the one hand, government, market and society are considered independent, and government has been excluded from the market; on the other hand, government is deemed to have a single function of public administration and is deprived of a competitive function in economic development and urban construction.

Regional government’s basic policy of “general underpinning, fair play and effective promotion” of non-operational resources and the regulation, supervision and management policies for operational resources make it the centralized agent of both the region and the central government. These also enable it to promote social stability through basic social guarantees and public services and to regulate regional economy through pricing, taxation, interest rates, exchange rates and legal means. In practice, regional government achieves its publicity and x Foreword coercive power by utilizing public revenues and expenditure and increasing taxes and other sources of revenue to provide budget arrangements for government administration, national defense and security, culture and education, science, health and utilities, etc. This is accomplished by providing social consumption expenses in the industrial, transportation, commercial and agricultural sectors; by providing fiscal investment expenditure in government investments, which comprise infrastructure, scientific R&D and policy-oriented financial investment in industries that need urgent development; and by providing transfer expenditure, mainly composed of social security and various fiscal subsidies. By so doing, regional government plays the “quasi-state” and “quasi-macro” roles.

Regional government’s participation in the allocation of and competition for quasi-operational resources and its planning, guidance and support for operational resources make it the centralized agent of a non-government entity in the region, and enable it to compete with other regions through innovation in institution, management and technology. Under such circumstances, regional government possesses management rights as its jurisdictional power, which allows it to allocate resources so as to maximize regional benefits, mainly through investment attraction, development, investment and operation and management of regional projects. Although this role of regional government differs from enterprises in objectives, development modes, regulatory factors and evaluation criteria, the competitive mechanism becomes the driving force for regional governments as the same agent of resource allocation as of enterprises within certain areas; their rules of behavior must meet the requirements of market mechanisms. Regional government then plays the “quasi-enterprise” and “quasi-micro” roles.

Regional government’s “dual role” and the competitiveness stemming from it in practice remedy the drawbacks of traditional market economic theories. According to modern market economics, not only are enterprises the entity of market competition but regional governments as well. The operating mechanisms of regional government explain the inherent inevitability of regional competition.

The relations and differences between regional government competition and business competition

Enterprises generally compete for the allocation of industrial resources, and regional governments mainly compete for the allocation of city resources. Relative independence and complementarities exist between enterprises and regional governments, but they differ as follows:

First, differences in fields of competition. Enterprises are micro-economic entities. They mainly compete for commodity markets and focus on industrial resources allocation. Market equilibrium theory, which takes manufacturers as its main subject, occupies a dominant position in western classical economics. Enterprises regard the pursuit of profit maximization as a precondition and assume the competitive forms of supply, demand, market equilibrium prices, perfect market competition, monopolistic competition, oligopolistic market,

Foreword xi different market structures and competitive strategies, etc. Enterprise competition is the precondition and basis for regional government competition.

Regional government is the subject of mezzo-economics. Competition between regional governments focuses on factor markets and city resources allocation. Factor markets include land, capital, labor forces, property rights, and hardware and software markets such information engineering. Regional government improves its competitiveness through the quantity, quality, structure and layout of urban resources. Regional government can also make policies and initiatives to regulate the allocation of regional factors and to attract and influence the direction of factor flow outside the region, so as to optimize the allocation of resources and eventually enhance regional competitiveness. Factor market competition affects enterprise commodity market competition.

Second, differences in means of competition. Enterprises seek to maximize profits mainly by increasing labor productivity — to effectively influence costs, prices, supply and demand and scale — and by optimizing the allocation of corporate resources to promote their cost minimization. Regional government makes every effort to increase total factor productivity as its chief means of sustainable growth. After simple dilatation through competing for tangible factors, such as land, projects and capital, the bottleneck of diminishing capital profits makes extensive economic growth difficult to continue. When nothing more can be added to regional input of all tangible factors, regional government will have to depend on the investment, increase and improvement of intangible factors such as technological advancement (with innovation as the core), resource allocation optimization and structural adjustment as well as institution, organization, legislation, environment, etc. as the new driving forces of regional economy development and urban construction.

Third, differences in paths of competition. Enterprises are investment growth-oriented. The continuous improvement of business performance comes from the constant input of production factors, including capital, labor, land, technology, entrepreneurship and so on. The initial strategy for businesses investment is mainly extensive expansion of quantity, followed by the quality-enhancing stage and then the stage of business management. In all these stages, sustained and effective inputs become critical. Regional government is efficiency growthriented. In light of the experiences of regional economies in the world, their economic growth path starts from the factor-driven stage (also known as the resource allocation stage) to the investment-driven stage (also known as the efficiency improvement stage) and then to the innovation-driven stage (also called the sustainable growth stage). Regional government makes efforts to optimize the combination of tangible and intangible factors, with efficiency improvement as the focus of its growth.

Fourth, differences in orientations of competition. Enterprises regard demand-side expansion as their orientation. Business competition starts from market demand, demand quantities, demand structure, corporate strategies and tactics. The ability to adapt to market requirements becomes essential to their survival and success. Regional government regards supply-side optimization xii Foreword as its orientation. Regional government’s determined direction for economic development, urban construction and facilitation of people’s livelihood is to promote supply-side structural reforms by effectively allocating the supply of land, capital, projects, technology, work forces and other tangible resources; by effectively regulating the supply of prices, taxation, interest rates, exchange rates, law and other intangible resources; and through innovation in institution, organization and technology.

And, finally, differences in modes of competition. Enterprises adopt the ERP (enterprise resources planning) mode to exercise effective and integrated management of materials, finance, information and customer resources and to achieve inter-regional, inter-sector and inter-industrial coordination and effective allocation in terms of logistics and personnel, financial and information flow. Guided by market demands, enterprises will strive for effective integration of resources, adjustment of functions, improvement of production efficiency and eventual enhancement of competitiveness. Regional government, however, may establish the DRP (district resources planning) mode to effectively allocate resources such as land, population, finance, environment, technology and policies, design layouts and make appropriate arrangements according to regional planning and strategies. Equipped with systematic management notions and approaches, regional government employs layout design and planning as the basis to make judgment upon market changes, deploy regional resources, enhance regional competitiveness, realize the best regional TFP and achieve sustainable economic and social development in the region.

The representation of regional government competition

The relations and differences in competition between regional governments and enterprises reveal that competition between regional governments and that between enterprises are two systems of competition on different levels of the modern market economy. They are mutually independent but related, constituting the double entities of competition of the modern market economy. Competition between enterprises is the basis of competition in the market economy and leads to competition between regional governments. Regional governments compete for the optimization of resources allocation via systems, policies, projects and environment. It is a different kind of competition, above the level of enterprise competition, which in turn influences, supports and promotes enterprise competitiveness. Enterprise competition takes place only across enterprises. Regional government can only act as a planner and guide of industrial development; an assistant and regulator of commodity production; and a supervisor and manager of market order. It has no right to exercise direct intervention in micro-level enterprise operations. Regional government competition takes place only across regional governments. It follows the rules of market economy and competes in terms of projects, policies and public affairs in relation to regional resource allocation, economic development, urban construction and people’s livelihoods.

Foreword xiii Project competition

There are three main categories of projects: national key projects, social investment projects and foreign investment projects. The first category includes special national key projects; major projects for national science and technology programs; major infrastructure projects for national science and technology programs; and major state-financed construction and industrial projects. The second category includes projects in high-tech industries, newly emerging industries, equipment manufacturing, raw materials, finance, logistics and other services. The third category includes projects concerning intelligent manufacturing, cloud computing and big data, networking, intelligent urban construction and so on.

Regional governments compete for projects in order to directly acquire capital, talents and industry; effectively solve regional financing, land acquisition and other issues through legitimate project policies and rational public services; guide, through project implementation, regional land development and urban infrastructure construction; increase investment; promote industrial development; optimize the allocation of resources; enhance policy capabilities; and facilitate the sustainable development of regional economy and community. Consequently, project competition becomes one of the key issues for regional government work that leads the direction of regional development. Awareness of the importance of projects, development, efficiency, advantages, conditions, policies and risks becomes an essential requirement for regional government in market competition.

Competition of industrial chain development

Generally speaking, each region has its own industrial foundation with its own characteristics, which are in most cases contingent upon natural resource endowments in the region. The crux of the matter lies in how to maintain and optimize regional internal resources endowments and how to synergize and obtain high-end resources from outside the region. The key is optimization of industrial structure and effective development of industrial chains, and the breaking point is developing towards high-end industries, forming industrial agglomeration and leading industrial clustering.

Regional government competition for industrial chain development unfolds mainly in two aspects. The first is concerned with factors of production. Low-end or primary factors of production cannot form a stable and long-lasting competitive edge. Only by introducing, investing in and developing high-end and high-level factors of production — such as industrial technology, modern information technology, network resources, transport facilities and professional personnel, research and development think tanks, etc. — can powerful and competitive industries be built up. The second is concerned with industrial clustering and industrial underpinnings. Regional competitiveness reveals that effective industrial clustering, employing the existing regional industrial base as the leading force, can reduce business transaction costs and improve enterprise xiv Foreword profitability. The industrial smile curve makes manifest that the most valuable areas are located at both ends of the value chain — R&D and market. As a result, an important route for regional government to follow in achieving sustainable development is to cultivate competitive industries, develop industrial chains and introduce “targeted” investment according to the structural requirements of the industry.

Competition for talents, science and technology

The primary issue in competition for talents and science and technology is the recognition of the doctrines that human resources are primary resources and that science and technology are primary productive forces. The most fundamental task is to improve local personnel training systems and increase regional investment in personnel training and technological innovation, and the greatest essence resides in creating conditions for talent attraction, introduction, training and employment. The competitiveness of science and technology talents is measured by regional science and technology human resources indexes; the number of people engaged in scientific and technological activities per ten thousand people; the number of scientists and engineers per ten thousand people; the total number of scientific and technological activities per ten thousand people; the number of students in colleges and universities per ten thousand people; annual investment in science and technology talent training index per ten thousand people; total operating expenses of science and technology activities; the percentage of GDP for science and technology expenditure; per capita research funding; the percentage of local fiscal expenditure for financial allocations to local science and technology; per capita government expenditure on education; total local fiscal expenditure on education; number of full-time college teachers; and other indicators. Regional government makes efforts to improve and enhance related indicators so as to reinforce the overall competitiveness of talent in science and technology.

Fiscal and financial competition

Regional fiscal competition covers fiscal revenue and expenditure competition. Fiscal revenue is mainly achieved through the pursuit of economic growth and the accrual of taxes. Apart from social consumption and transfer expenditure, competition is chiefly realized through government investment, such as investment in infrastructure, science and technology R&D, investment of fiscal policy funds in industries that need urgent development and other fiscal investment expenditure. Fiscal investment expenditure is an important force for driving economic growth. The overall size of fiscal revenues and expenditure is limited; regional government must actively build various platforms for investment and financing — as well as mobilize and attract regional, national and international financial institutions, funds, personnel, information and other financial resources to the greatest possible extent — in order to benefit regional economic

Foreword xv development, urban construction, social and livelihood services. Preferential policies and measures adopted by regional governments drive each other into competition for fiscal spending and monetary absorption.

Infrastructure competition

Infrastructure competition takes place in the construction of both infrastructure hardware and smart city software. The former includes transportation platforms of highways, ports and aviation; energy supply platforms of electricity, gas and others; information platforms of cable and networks; and science and technology, industrial, entrepreneurial and creative parks. The latter includes intelligent city-building platforms of big data, cloud computing and the Internet of things. Infrastructure systems, which can be rated as advanced, adaptive and backward, underpin economic and social development in the region. The moderately advanced infrastructure supply in a region will provide optimal services for urban structure, facility size and spatial layout in market competition so that enterprise costs are reduced, production efficiency enhanced and industrial development facilitated. Whether regional infrastructure is complete directly brings forth differences in regional economy and affects its future.

Competition in environmental systems

In addition to infrastructure, environmental systems here mainly cover the construction of ecological environment, humanistic environment, policy environment, social credit systems and the like. Regional government competition entails environments for development, including the harmony between investment development and ecological protection; the matching between investment attraction and policy services; the agreement between pursuit of wealth and social returns; and the mutual support between legal supervision and social credit. Favorable environment systems are the recipe for success in investment solicitation, project construction and sustainable development; this has been proven by successful experience in China and overseas.

Competition in policy systems

This involves policies implemented by regional government on both foreign and regional levels and is also true between countries. Policies are public products that are non-exclusive and imitative. Therefore, good competitive policy systems must be (1) realistic, i.e. in line with reality and the requirements for socio-economic development; (2) advanced, in the sense that they are foresighted and innovative; (3) workable, in the sense that they are clear, targeted and enforceable; (4) organized, in the sense that specialized agencies and people perform duties and put them into operation; and (5) effective, which means that there are inspection, monitoring, assessment and evaluation mechanisms, including the involvement of third parties playing their role so as to achieve xvi Foreword policy objectives effectively. Whether policy systems are sound or not has great impact upon regional competition.

Competition in management efficiency

Regional government management efficiency is an overall indication of administrative activities, speed, quality and efficiency; this covers macro-efficiency, micro-efficiency, organizational efficiency and individual efficiency. In terms of administrative compliance, regional government bodies should follow the norms of legality, interest and quality, and in terms of administrative efficiency, they should follow the norms of quantity, time, speed and budgeting. Competition in management efficiency is in nature competition of organizational systems, government obligations, service awareness, work skills and technological platforms. Developed regions have been practicing, without precedent, the paralleled and integrated service modes.

Regional government competition is embodied in the above-mentioned eight types and is in essence reflected in their policies regarding the allocation of regional resources towards operational resources, so as to enhance enterprise vitalities, and towards non-operational resources, so as to create favorable environments; these are, in their ways, rules and supporting policies to be employed to manage quasi-operational resources, so as to achieve sustainable growth in the region. In a nutshell, regional government competition is basically reflected in competition in the optimization of resource allocation.

Government Foresighted Leading (GFL) as the core of regional competition

Competition entails innovation, and innovation is competitiveness. Continuous innovation is sustained competitiveness. Regional innovation is the core of regional government competition. Innovation in notion, institution, organization, administration and technology is indispensable in regional government competition. GFL becomes essential to regional competition and development.

First, notional foresighted leading is the actual competitiveness in the factor-driven stage of economic growth, which has been amply demonstrated throughout the world. In this very stage, economic growth is chiefly achieved through the expansion of production input, like land, labor and other natural resources; there is a focus on competition for resources and in prices, which are prone to such problems as excessive exploitation of production factors, lower production efficiency, technological backwardness, resource depletion, brain drain and social conflicts. Consequently, development notions, direction and modes in this stage become decisive. Advanced notions tend to determine the modes and trends of regional development. Regional government’s innovative notions — e.g. the overall command of regional factors, strategic positioning, development paths, modes and layout and a driving force for development — become the focus of regional competition. Therefore, for the facilitation of stable, coordinated

Foreword xvii regional development, it is of primary significance to follow foresighted leading notions of “coordination”, “green” and “openness” in the factor-driven stage.

Second, organizational foresighted leading plays a key role in competition in the investment-driven stage, in which period expanding investment, and intensifying its stimulation to economic growth, is the primary means of regional competition. Driven by investment multiplier effects, investment can enormously expedite economic growth; this has been demonstrated in the Keynesian theory of effective demand. Investment is of great significance for increasing effective demand and boosting GDP. Especially during economic downturns, government can increase investment to reverse the trend of economic downturn and drag economy out. However, problems like quick ups and downs in economy and the lagging-behind of technology and innovation may ensue after single short-term stimulus of investment as a result of “investment hunger” and “investment dependence”. Under such circumstances, innovation in organizational administration becomes crucial. That requires the intensification of investment management standards; rapid organizational responsive capabilities; closer relations to market and enterprise services; network and matrix structuring; and streamlined administration so as to achieve greater efficiency and flexibility and improve investment effectiveness. Organizational foresighted leading is crucial to stable and orderly economic development and inter-regional competition in the investment-driven stage.

Third, technological and institutional foresighted leading is the key to scoring success in regional competition in the innovation-driven stage. Innovation has the most explosive driving force for economic development and pushes the socio-economy to transform from quantity- to quality-type, reflecting overall breakthroughs in socio-economic performance and in optimized social allocation. At this stage, technological innovation is the core of all driving forces, and institutional innovation is the fundamental guarantee for continuous technological innovation. Technological innovation gives birth to new formats, new products, new industries and new models. Institutional innovation protects and promotes the integrated innovative development of science and technology, finance and industry, which combine to stimulate innovation-driven sustainability. Technological and institutional foresighted leading become an important means of regional competition at this stage.

Finally, overall foresighted leading is the inevitable choice for competition in the wealth-driven stage. Under the assumption that regional economic development in the world follows the sequence of factor-driven, investment-driven, innovation-driven and wealth-driven stages, then the wealth-driven stage of economic growth requires not only innovation in notions, technology, organizations and institutions but also overall foresighted leading, so as to achieve and guarantee the sustained advantages of regional competition. This stage is characterized by the full play of individual creativity; comprehensive balance between work and life; rapid development of tertiary industries; growing awareness of the importance of resources environments; and continuously emerging models of economic and individual development. Therefore, the flexible, quick xviii Foreword and diverse development of regional economy in the wealth-driven stage requires the coordination of institutions, policies and measures to match the pulse of the wealth-driven times, orient the values of the wealth-driven stage and maintain the sustainability and vitality of the economy. Overall continuous innovation and foresighted leading — in the whole process and over the full range of factors — are the inevitable options for regional competition at this stage.

The dual nature of regional government as “quasi-state” (“quasi-macro”) and “quasi-enterprise” (“quasi-micro” ) constitutes a pattern of competition of “double entities” between regional governments and between enterprises by means of the mechanisms of market economy and an optimal combination of “effective government” and “effective market” in modern market economy. The organic integration of “effective government” and “effective market” is the mature market economy in the real sense.