A tale of two Chinese provinces: “Indians” in China

China is known to have adopted a “Federalism, Chinese style” decentralization approach, by which local governments are given substantial discretion in economic decision making. An interesting consequence of this is that some provinces are adopting polices that are very “Indian”, according to the study “A tale of two provinces” done by professors Yasheng Huang and Wenhua Di (MIT).

Jiangsu and Zhejiang are two neighboring Chinese provinces, one to the north of Shanghai, the other to the south. They started with similar conditions at the beginning of economic reform in 1980s, but ended up with different institutional environment and economic structure.

Jiangsu is very “Chinese”. In Jiangsu, “government plays a heavy sponsorship role in enterprise management and supported collectively-owned town-and-village enterprises (TVEs) rather than, or even to the detriment of, genuinely private firms.”  The Jiangsu economy now is heavily dependent on foreign investment in its numerous industrial parks, very representative of the typical “Chinese model”.

Zhejiang, in contrast, is the “India” in China, where local economy “heavily relies on private initiatives, a non-interventionist style by the government in the management of firms, and as supportive credit policy stance toward private firms.”  Both starting from scratch, in 1995, domestic private firms generated 38.7% of Zhejiang’s industrial output value, compared to 10.5% in Jiangsu. By 2001, the ratio was 69.3% and 44.7%, respectively. The two professors also  find that the more liberal institutional environment for domestic private firms in Zhejiang is associated with less foreign ownership of the joint ventures operating there.

I don’t want to conclude whether the “Chinese model” or the “Indian model” is superior. They both have strength and weakness. But the advantage of the Chinese decentralization approach is that, she never keeps all eggs in one same basket. Some provinces rely more on foreign investment, while the others rely more on private initiative. No matter which approach turns out to work better, the losers can learn from the winners and quickly adjust, which was exactly what happened in mid-1990s in Jiangsu when they realized the importance of private sector development. “Heads, I win. Tails, I still win.”, such is the wonderful “Federalism, Chinese style”

When India will have a “Chinese province” within its border? I am expecting. Indians spend so much time debating whether and how “Indian model” is better than “Chinese model”. The right way forward however is to start experimenting. Talking will take you nowhere.

References (Hat tip: PSD World Bank blog)
What can China learn from India, by Yasheng Huang (a Chinese) (PDF file)
What can India learn from China, by Sridhar Ramasubbu (an Indian) (PDF file)

Also, the research paper by Yasheng Huang:

A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China    (PDF presentation file in the World Bank)
Abstract:   In this paper, we use a unique dataset covering joint ventures in two provinces of China, Jiangsu and Zhejiang, to test the effect of the institutional environment for domestic private firms on ownership structures of FDI projects. Unlike many studies on this subject, we approach the issue from the perspective of local firms seeking FDI rather than from the perspective of foreign firms seeking to invest in China. Applying the prevailing bargaining framework in studies on ownership structures of FDI projects, we find that a more liberal institutional environment for domestic private firms is associated with less foreign ownership of the joint ventures operating there. Several mechanisms can contribute to this outcome. One is that a more liberal institutional environment may enhance the bargaining power of those domestic firms negotiating with foreign firms to form alliances (the capability effect). The other mechanism is that a more liberal institutional environment may reduce some of the auxiliary benefits associated with FDI - such as greater property rights granted to foreign investors - and thereby attenuate incentive to form alliances with foreign firms (the incentive effect).