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Surprising elements of a Chinese city’s success

by Andrew Sheng and Xiao Geng

Few people outside of China know Foshan, a city of 7 million located at the heart of the Pearl River Delta in southern China.

This vibrant and economically progressive city — which Foreign Policy and the McKinsey Global Institute ranked last year as the world’s 13th most dynamic city, based on its projected GDP increase from 2010 to 2025 — embodies China’s quest for a high-value-added, high-income economy.

With this in mind, about 18 months ago, a team of researchers (including us) launched a case study on Foshan. The city stood out, because its experience exemplifies China’s progress over the last 35 years — as well as the structural challenges that the country now faces.

One of the first Chinese cities to implement experimental economic reforms, Foshan first built itself up as a low-cost manufacturing center and is now working to become a knowledge-based, innovation-driven economic powerhouse.

The case study’s success depended on partnerships. A team of 24 researchers from the National Development and Reform Commission shared their extensive knowledge of China’s policies. Local experts facilitated the examination of 14 aspects of Foshan’s growth over the last 35 years: industry, land, transport, electricity, water, finance, employment, governance, planning, public finance, education, housing, health care and pensions.

This micro-institutional study of macro outcomes produced four surprises:

The first was Foshan’s economic performance. The city’s per capita GDP reached $14,828 in 2012 — higher than Shanghai or Beijing, and well within the World Bank’s “high income” category. Real-estate value per capita reached almost $50,000 in 2010 — more than four times per capita GDP that year — owing largely to soaring property prices. And Foshan’s urbanization rate, supported by high-quality infrastructure and an advanced industrial sector, reached 94 percent.

Foshan is not the only such success story in China. Of 287 Chinese cities, 17 have populations of more than 3 million, with per capita GDP exceeding $12,000. Together, these cities account for 11 percent of China’s total population and 30 percent of its GDP. While all of them hold important lessons for China as it attempts to avoid the middle-income trap, Foshan’s experience offers useful insights.

This is because of the second surprise.Beyond slightly easier access to international markets — a result of its proximity to Hong Kong and history of municipal-level reform — Foshan does not owe its success to some unique advantage.

Thus the main components of Foshan’s escape from poverty can be replicated in other Chinese cities, including:

Private-sector-led growth. The private sector contributed 62.5 percent of Foshan’s GDP in 2012, with one private enterprise for every 20 residents.

Production for domestic markets. Foshan’s net exports declined from 30 percent of GDP in 2006 to 18 percent in 2012, reflecting a much earlier shift to domestic markets than occurred in other Chinese manufacturing cities like Wenzhou (25 percent of GDP), Dongguan (32 percent), and Shenzhen (37 percent).

Globally connected, specialized markets. Foshan has more than 30 specialized market towns with sophisticated industrial clusters and local supply chains linked to international markets.

High-quality migrant labor. More than half of Foshan’s population and two-thirds of its workforce are migrants, who have access to the same social services as locals, owing to reforms in vocational training, health care, housing, and social security.

Greater local autonomy. By delegating significant fiscal and management responsibility to county, township, and village officials, Foshan’s government was able to stop acting as a substitute for the market, and begin facilitating and supporting market growth.

Decentralization of social services. The delegation of social services to more than 1,000 industry associations and non-government entities improved delivery and reduced the burden on public finances.

The third surprise was why only Foshan took these six steps, even though other cities could have done so easily. The city’s mayor, Liu Yuelun, explained that Foshan “had to rely on the market to get the people, capital, resources, infrastructure, technology and sales for its growth.”

Foshan is not a special economic zone; it is not under the direct control of the central or a provincial government; and it is not rich in natural resources. In other words, the market — not the state — was the key player in resource allocation.

The final surprise was that the key economic challenges facing Foshan today — such as local-government debt, credit access for small and medium-size enterprises (SMEs) and pollution — are identical to those facing China as a whole.

Andrew Sheng, president of the Fung Global Institute, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. Xiao Geng is director of research at the Fung Global Institute. © 2013 Project Syndicate (www.project-syndicate.org)