Trickle down

The lot of the small-business owner in China can be hard. Beijing’s privatization policy, originally promulgated during the Deng Xiaoping era, called for the government to "grasp the large and release the small." But this was not to be confused with affection for the small. Given the preferential policy treatment afforded to state-owned firms, it seemed to some that if the Chinese government was willing to tolerate the galaxy of small and medium-sized enterprises (SMEs) that have contributed so much to the country’s economic turnaround, the tolerance was grudging, and perhaps temporary.

For these SMEs, the Expo is a hand that giveth and taketh away. On the one hand, shop-fronts on major thoroughfares have gotten new coats of paint and signage. But those who want to open new businesses complain that the municipal government is not interested in granting permits for reasons of "hygiene," among others.

No matter how much entertainment the local vibrant street economy provides foreign tourists, the government regards Shanghai’s micro-retail operations much in the same way it regards underwear drying on bamboo poles outside apartment windows: They make Shanghai seem like what it is, a city still very much part of a developing country. 

The discrimination shown SMEs during large public events is not specific to China. Cities want to put on their best face for such occasions, and corporations like to stick their logo on that face. In exchange for sponsorship, corporations frequently demand, and receive, preferential policies. For example, Expo organizers have implemented a single-entry ticket policy similar to those at amusement parks and concerts in the US, which coerces visitors to buy from designated vendors within the Expo area so as not to cut their visit short.

Crowded out

Some are concerned that these efforts will deprive Shanghai’s small businesses the opportunity to cash in on the Expo. It is a valid concern.

The assumption that giant public-private events like the Expo automatically produce benefits for the city at large is a weak one. Expos and Olympics in other countries have spectacularly failed to deliver much benefit to the wider masses, instead funneling what tourism profits there were to a select group of well-connected corporations. This history may explain a recent survey, which found that only 10% of London’s SMEs believe that they will benefit from the 2012 Olympics. A further 15% believe it will hurt business.

Still, Shanghai is not London, and it is doubtful that pro-corporate policies will succeed in blocking the majority of the city’s existing small businesses from cashing in. The enforcement task is too great, and the resistance too strong to make much of an impact. Repeated crackdowns on street-side vendors have failed to produce any real reduction in activity; the vendors’ carts are on wheels and can be easily relocated (one recent raid witnessed by CHINA ECONOMIC REVIEW featured a grilled-meat vendor charging his cart down a narrow alley as flaming coals bounced out of his stove), and the vendors themselves are too highly motivated to be forced out for such a long period of time. While lumpenproletariat enterprises like brothels are difficult to roll away, Chinese entrepreneurs will remain intransigent and nimble.

The fundamental fact is that goods and services produced by SMEs, down to the mobile grilled meat carts, will remain in high demand during the Expo. China predicts some 70 million tourists will pass through the turnstiles – and Expo organizers report that 12 million tickets have already been sold (by comparison, the Beijing Olympics sold 6.8 million tickets).

Most of these tourists will be Chinese (90% of the pre-purchasers hail from the Yangtze River Delta region, for example). Most of them will not be staying at the top-shelf hotels or eating at the glamorous restaurants dotting the Bund or Lujiazui. When they get done wandering around the pavilions, they will be returning to three-to-no star hotels and looking for the food they are used to and can afford. 

But will there be enough food to go around? The Expo grounds cannot serve the entire population of tourists every night, and the population of Shanghai does not look like it plans to evacuate during the event (a phenomena that occurred during the Atlanta Olympics, which drove many small restaurants bankrupt), so there will be no displacement effect.

The risk that the government runs, therefore, is that by trying to prevent a net increase in small tourist services like restaurants, it will effectively create an imbalance of supply and demand that cannot be alleviated by large corporate offerings. There must be few more frightening prospects for city managers than explaining to hundreds of thousands of hungry Chinese tourists why they can’t find a place to eat.