Bridging the gap

Every now and then, the Chinese government feels it needs high-sounding principles and large-scale projects to boost the spirit of its people. Last year, it came in the form of an ambitious programme to develop the country's poor hinterlands in the west.

With the grandiose title of the Great Development of the Western Region, the plan is to initiate hundreds of public projects in nine poor inland provinces and one municipality, all in western China. In recent months, the government has started pouring public money and subsidised bank loans into infrastructure, environmental conservation and other costly projects in Gansu, Ningxia, Guizhou, Shaanxi, Qinghai, Xinjiang, Sichuan, Yunnan, Tibet and the city of Chongqing. These places account for half of the country's area and 23 percent of its 1.3bn population.

The scale of the investment drive is impressive but economists doubt the efficiency of such top-down investment, which is not subject to public scrutiny or market competition. China, they say, is already littered with half-complete buildings, hastily built bridges and thousands of state-of-the-art machines mothballed in warehouses.

However, the plan has succeeded in focusing the gaze of the population on one big issue, while distracting their attention temporarily from other problems.

Local officials wait for the billions of yuan the central government has promised to invest in their provinces. Businessmen discuss the tax exemptions and other preferential policies that the central government is drafting for the region. Academics debate the merits of such a development drive, while the media report endlessly about the economic potential of these underdeveloped regions. There are books, documentaries, films and special websites on the subject. Party secretary Jiang Zemin went so far as to call the campaign an effort "to revitalise the Chinese people."

Premier Zhu Rongji kicked off the 'go-west' campaign at the National People's Congress in early 1999, beckoning domestic and foreign investors to head west. The government led the way by allocating to the western regions a big part of Yn100bn in bond proceeds into building dams, airports, highways, environmental-protection schemes and other public projects. The central bank threw in its support, asking state banks to provide low-interest loans.

Financial support aside, the state is also providing tax holidays and other preferential treatment to investors in the west. In August, it made another big concession, opening up previously closed sectors, such as energy and telecoms, to foreign companies willing to invest in inland provinces.

In early September, the State Development Planning Commission ordered price administrators in the west to lower excessive administrative charges and abolish unreason-able and illegal fees. It highlighted the agriculture, tourism, real estate and high-technology sectors where charges should be cut to a reasonable level. Charges on the movement of personnel could be eliminated or slashed dramatically to encourage a free flow of talent, reported Economic Daily.

Moreover, the commission announced that price controls on transportation, education, environmental protection and power construction should be relaxed so as to encourage investment in the west.

Some crucial details about the investment drive, however, are still missing. It is not clear where the boundary has been drawn – some provinces like Henan in central China, wanting a piece of the action, argue that they, too, form part of the west. It is also not known how many projects in total are qualified to share the largesse. Many big-ticket projects already included in earlier five-year plans are being promoted as 'new' projects, such as the natural gas pipeline that will run from Qinghai in the west to Shanghai.

The go-west campaign is a work in progress, with new policies and projects announced every month. The general thrust, though, is straightforward: to beef up infra-structure of the region, rather than the old development strategy of pouring money into state enterprises to generate more output.

Developing transportation links is now a priority. Over the next 10 years, the transport ministry plans to build in the west 150,000km of roads, mostly expressways.

The railway authorities, too, will invest Yn400m in building railways linking the west to the rest of the country. These include the Yn23.2bn, 955km line from Xian to Hefei in the east and the Yn18.2bn, 640km Chongqing-Huaihua line.

Some economists criticise the approach used to speed up growth in the west as wasteful and inappropriate. "The government is imposing on the west the same formula it has used to develop the coastal regions, but the conditions of these two regions are so different," says Dr. Thomas Chan, director of the China Business Centre at the Polytechnic University of Hong Kong.

The coastal areas have invested heavily in infrastructure to attract investors to set up processing and other labour-intensive industries there to produce light-industrial products for export or local consumption. Inland provinces, though, are remote from ports and other transport hubs, and the local markets are too small to make such investment profitable for investors.

At first glance, the rich resources of the western provinces should be an attraction to investors. The west is said to have 84 percent of' the country's natural gas reserves, 39 percent of coal reserves and 24 percent of iron ore.

However, Mr. He Deqiang, a researcher at the economics department of the Beijing University of Aeronautics and Aviation, warns against any large-scale exploration of the resources, noting that the world already has excess supply. If the western regions join the fray, global commodity prices will fall and in the long run this will hurt China, a major commodity producer, he argues.

Chan believes inland provinces should concentrate on developing niche businesses, such as floriculture in Yunnan and ecotourism in Guangxi.

I can argues that what inland provinces lack most now are not roads and airports but human capital and competitive companies. There has been a continuing outflow of labour, including highly educated and skilled workers, from the west to the east. There are also few local companies that can compete without government subsidies and market protection.

The western region may be well advised to improve its 'soft' infrastructure, but local officials are preoccupied with improving the physical infrastructure. The nine provinces and Chongqing have come up with a long list of projects they wish to be funded with money from the central government. Favourite projects include airports, a status symbol for localities and a potential opportunity to receive kickbacks for local officials. In small towns close to Chengdu, the provincial capital of Sichuan, half a dozen airports are being planned.

Qinghai and Xinjiang have even suggested setting up a casino locally, an idea quickly rejected by Beijing. Gansu hopes to be the third place in China, after Shanghai and Shenzhen, where foreign banks will be allowed to do yuan business. "The central bank said it is considering the proposal but has not given us the go-ahead yet," says Mr. Guo Kuo, deputy governor of the province.

Chongqing has asked to set up 'an experimental zone' in which foreign firms can freely conduct insurance, banking, telecoms and other businesses that China has promised to liberalise after its accession to the World Trade Organisation.

But Han says that projects are proposed without much consideration about their commercial viability. Will investors be attracted to the many industrial zones now being built in the west, he asks? Will there be enough users to pay for the state-of-the-art toll roads to recoup the investment?

Limited foreign interest
Foreign investors have so far expressed little interest in the under-developed western regions. Some conveniently cite their existing investments in inland provinces as evidence of support for Beijing's initiative, although such investments were made long before the current drive began. IBM, for example, already has a USS20m software development project in Xian in Shaanxi province, while Hewlett Packard has a Yn68m project, also in Xian, to develop e-commerce technology. BP has an acetic acid project in Chongqing and reported a profit of USS3m in its first year of operation.

One concern over investing in the western regions is how increased industrial activity will harm the already degraded environment. Han fears that if polluting industries start to relocate their factories to the west, it will be an environmental crisis for the region. The west has already suffered a drastic deterioration of' its environment in recent decades, thanks to excessive logging and fanning, the pressure of feeding a fast-growing population and climatic change.

Consequences of the deteriorating environment are being felt across the whole country. Beijing experienced several major sandstorms this year, partly because the arid, treeless west can no longer act as the capital's natural shield against extreme changes in weather.

Another consequence is the drying up of the middle reaches of the Yellow River in recent years. This has caused serious water shortages around the river's lower reaches. Blame is attributed to the excessive cultivation of the land in the west, which has led to serious soil erosion and turned this cross-country river into a torrent of mud. Gansu alone accounts for one-third of the sand found in the river. If the west starts to build factories and houses at the same frantic speed as the east did a few years ago, the ecological imbalance will get worse, environmentalists fear.

Aware of the problem, the government has made environmental protection a theme in the current development drive. It has ordered local governments to turn arable land into grasslands, as a way to reduce soil erosion. Farmers are to be given cash compensation in return for giving up their land. In Gansu, under a `rebuild mountains and rivers' programme, Yn49bn will be spent to convert 5.3m hectares of crop fields into grasslands within a decade.

Finally, there is the problem of corruption. Poor, inland provinces are known to be among the most corrupt in the country, as witnessed by the large number of top officials recently found guilty of taking massive bribes. The most shocking case was the conviction of a top leader in Guangxi, the south-west region ranked among the poorest in

China. Cheng Kejie, who was chairman of Guangxi in the early 1990s, was found to have accepted bribes of Yn4lm.

Another corruption case, also in Guangxi, shows how easy it is for local officials to receive kickbacks from public projects. Li Zhenlong, a party boss in a small city, amassed a fortune of Ynl6m by fanning out public projects to his friends, in return for luxury gifts and cash rebates. "This is the Guangxi phenomenon: the poorer a province, the more corrupt are the local officials," wrote the Beijing-based China Newsweek magazine.

Plugging the loopholes
The Communist party has executed a few big tigers like Cheng, to scare off the millions of bureaucrats from dipping into the pot of public funds dedicated to development in the west. However, without a free press and an independent judiciary, analysts doubt if such a crackdown will ever work.

Some counter by arguing that Beijing has no choice but to press ahead with the investment initiative, even if there is a high risk of officials diverting funds for their own use. Says Mr. Daryl Ho, economist at Jardine Fleming in Hong Kong: "There is little debate about the merits of providing public goods, such as infrastructure, to poor areas. As for corruption, it is typical of many developing countries where the rule of law is still being established. What the government can do, though, is to plug the administrative and legal loopholes as it goes along."

A history of action
The idea of heavy state spending in the poor regions is not new. Since 1949, there have been successive waves of large-scale industrial investment in these land-locked and largely rural areas. In the 1950s and 1960s, Beijing relocated hundreds of manufacturing plants from the prosperous east to the west, parachuting thousands of machines and even more technicians to some of the country's most destitute areas.

The aim was two-fold: to achieve a balanced geographical growth nationwide and to protect China's important industries from military attack by the Soviet Union or the US. Such an 'industrial transplant' helped the impoverished west to produce impressive output figures overnight, but the trickle-down effect on the rest of the economy has been limited. A typical sight in many inland cities is that of an automobile or chemical plant was abandoned when market reforms began in 1978. Paramount leader Deng Xiaoping did the economically sensible thing – channelling resources to the naturally advantaged east and south and promising to help the west later. The coastal areas took off, sucking talented labour, capital and raw materials from the west. Investors set up shop in industrial zones along the coast, but avoided the inland provinces because of their poor distribution and transportation links.

The east-west gap widened, overriding earlier efforts to redress the imbalance. Take Gansu as an example. In 1978, this western province known for its droughts and poor Yellow River loess was an industrial heavy-weight under the old planned economy. Yet, despite having twice as many people, Gansu's GDP figure was one-quarter of that of Shanghai in 1999.

Gansu, with many state-supported heavy industries, is still one of the better-performing-inland provinces. In Xinjiang, Inner the mountains where few people live. Mongolia and Tibet, where ethnic minorities Such distorted economic development dominate, a major part of the local population is illiterate and live in abject poverty. Overall, the average annual income of Chinese living in the western regions was Yn4,300 last year, 40 percent of that in the east.

The Communist party is getting nervous about the widening gap. The west is home to 55 non-Han nationalities, where `minorities' still account for more than half of the local population in regions such as Tibet and Xinjiang. These areas suffer from ethnic unrest, which the government hopes to defuse through economic development. Its reasoning is that if people's lives get better, nationalistic yearnings will recede.

Another reason for the investment initiative is to help the national economy grow faster in the long run. The government realises that if a big part of the 1.3bn population remains poor, the country cannot enjoy a healthy and sustainable growth. This became clear in the last few years, when Chinese firms failed to sell their surplus production of television sets, cars, clothing and other consumer goods to inland citizens who did not even have enough to eat.