Local Governments as Industrial Firms, Part I
By Doug Guthrie, Dashiell Chien, Chris Gao, and Diane Long
This article was originally published on January 30, 2020, at https://ongloballeadership.com. This is the first in a series of posts on how economic development on a local level drives the phenomenon of China development. Through these posts, we want to give a boots-on-the-ground flavor of the ways in which local governments in China are the drivers of economic development. This particular post is about how the Central Government pushes and develops rising stars in the political industrial complex. We’ve borrowed the title of this series from the great China scholar, Andy Walder, who first wrote about the concept of “local governments as industrial firms” in 1995, explaining how China succeeded in transforming its state-owned enterprises without following the model of rapid privatization.
Key Insights:
1. In a democratic society like the United States, we typically (somewhat haughtily) think we have the perfect understanding of how to run a society and economy. But there are advantages that authoritarian central planning brings to the economic development processes.
2. The Chinese Government in Beijing thinks very carefully about five-year plans but also about how to empower, encourage, and incentivize localities to develop with Key Performance Indicators (KPIs), which are typically tied to economic development, poverty alleviation, and responses to social crises.
3. The Central Government carries out its program of leadership development not just through incentives but also through experiments with moving successful leaders around to different struggling localities. We might think of this process as a sophisticated human resource (HR) plan for developing elite governmental leaders.
Economic and Social Experiments with Successful Leaders
Late in the fall of 2019, Zhang Anjiang (张安疆), who was the Mayor of Jiuquan, Gansu Province at the time, received word that he was being transferred to a new post. Starting in January 2020, Mayor Zhang would be moving to Chongqing to assume the posts of Deputy Secretary of Tongnan District Party Committee and Governor of Tongnan District. Tongnan is one of the nine districts that make up the city of Chongqing, China’s most populous city, with a population of 30 million. (In China, district governments are uniquely powerful, with their own tax bureaus and economic systems and are tied to the overall city numbers and are expected to pull their weight independently.)
The Mayor of the City of Jilin, Liu Fei (刘非), received a similar call reassigning him from his mayoral position to the position of Secretary of Loudi Municipal Party Committee in Hunan Province. In all, 31 political leaders received such reassignment calls. Political reassignments such as these are part of an annual ritual organized by the Central Government in Beijing. Part promotion and part economic experiment, they are meant to test successful local politicians with challenging new jobs in different local governments. If you are a rising politician in China’s political economy (the average age of this year’s cohort of re-assignees is 52), your main job is economic development and you go where the Central Government tells you to go.
Economic development in China is fundamentally shaped by government guidance and centralized control. This has been true since the beginning of the economic reforms, and during the pre-reform era as well. However, while we often think of the Chinese government as the authoritarian, protectionist, centralized party in Beijing, churning out five-year plans and enacting major initiatives such as the Belt and Road Initiative, that is only one side of the government.
In reality, local governments at provincial, city, district and county levels are the engines driving China’s powerful system of economic growth. Indeed, the Chinese government is an extremely decentralized and entrepreneurial system of district and township governments. Beyond China’s Central Government, the country is made up of 31 provincial level units – generally large bodies of land (like states in the U.S.), though there are also four provincial-level municipalities included in this group (Beijing, Chongqing, Shanghai, and Tianjin). Below these provincial units are about 800 municipalities, which are segmented into district governments. The mayors of China’s districts and townships behave like corporate CEOs, focusing on KPIs, pursuing foreign investment, and advancing their own careers through the financial and economic achievements in their jurisdictions. It is crucial that their actions and goals line up with the municipalities and provinces under which they reside (and ultimately with the national plans), but they are given discretion and incentives to make they own localities achieve those goals.
In this sense, to carry forward the firm metaphor, district heads are probably most like VPs of business units – they must deliver against the strategic plans of the holding company (the Central Government) and the corporation (the provincial or municipal government), but they also have a significant amount of autonomy to run their business units (their district governments) as they see fit. (NOTE: “Autonomy” is a sensitive word in this context. In this conversation, we are thinking of the concept of zizhuquan [自主权] as opposed to zizhiquan[自治权]. Both are translated in Chinese-English dictionaries as “autonomy” but there is a subtle difference. The former has a feeling of using authorized (delegated) power; the latter has more of a self-governing meaning, which is not what we are talking about.)
Xi Jinping himself rose through this system. In some ways, decades ago, one could have imagined that President Xi was long destined for greatness in reform-era China. His father was Xi Zhongxun, who, after decades of pain and persecution in Mao’s China, was rehabilitated and served as the first Governor of Guangdong Province in the era of China’s economic opening under Deng. After a trying time during the Cultural Revolution, Xi would follow in his father’s footsteps, serving the public in a number of roles from Heibei to Fujian to Shanghai, and then to Zhejiang before moving to Beijing.
The mayors of China’s districts, townships, and villages advance their own careers through economic achievement, but they don’t do it alone. It happens through close coordination with China’s private sector and with foreign investors from abroad. Domestic companies like Tencent, Alibaba, and Huawei – but also international giants Apple, GM, Boeing, Microsoft, and many others – work closely with these local governments to drive the phenomenon of local state competition.
What the Chinese experiment in capitalism has revealed is that private property is not the cornerstone of capitalism, as economists have long thought. Instead, local competition is. Thus, while rapid privatization programs were unleashed on the former Soviet Bloc, China carefully set in place a balance between central state control, local state control and incentives for economic development. It then mixed this balance with enough autonomy for local governments to go out and recruit partners from the private sector and abroad to make it possible.
So, China’s model for leadership is to methodically develop people. It puts high-potential politicians in positions of difficulty and distress, and then leaders above then see what they can do in these challenging situations. This approach is a smart and effective HR strategy. The goal of the Chinese Government is to put successful people in new situations and ask of them: “You made this work in one context, but can you make it work in another area with a different history and different local cultural and economic context?”
This is an interesting question and an interesting story about how political leadership is developed in China. In democratic societies like the United States, we elect leaders who are focused on many different aspects of societal development – ideological, societal, and personal. In China, ideology matters – aspiring leaders have to be aligned with the Party – but economic development reigns supreme. And moving leaders around in this “natural” economic experiment is key to how China’s economic development works over time.
How successful will Mr. Zhang be in his next job in Tongnan District? What successes did the rising star, Chen Minger (陈敏尔), have in his job as the Governor of Guizhou Province, which led him to his promotion to the Governorship of Chongqing? How will Xue Kan (薛侃) transition from his position as the Executive Deputy Director of Reform Office of Fujian Provincial Party Committee to Deputy Secretary of Yangpu District Committee and Acting Governor of Yangpu District in Shanghai? It is a promotion for sure, but the question is how he will perform? The Central Government is watching.
Beyond Economics: A Current Issue, the Chaos of the Coronavirus
Of course, leadership is not only about economics and KPIs. Chinese local leaders have a great deal of autonomy to carry out economic development plans but also to attend to social crises. And the differences in how they perform are noticed not only by the government, but also by the populace, especially in the world of social media.
Henan Province (河南省) has long been dogged by discriminatory epithets of backwardness and cheating in economic development. Yet, this province in Central China has recently received a good deal of positive attention for its handling of the coronavirus. Many people on social media have praised the province and its leadership for its foresight and tough measures on epidemic control and prevention.
The province was far ahead of the curve on the control of travel, cancelling long-distance passenger busses from Wuhan in December 2019 and banning the sale of live poultry in the entire province in January 2020. Most of the credit goes to Yin Hong, who was relocated in November 2019 to Henan from his position as vice mayor of Shanghai and a Deputy Party Secretary. He became Henan’s governor in January 2020. In the short weeks since his ascension, Yin has become a social media phenomenon based on his activities. “Henan Province Governor” (“河南省长”) and “Stealing Henan’s Governor” (“偷河南省长”) have become hot trending terms over the last week.
Sample post on Weibo about Henan:
In essence: “Praise for the quick reaction and wise leadership of Henan Province.”
Sample post on Weibo about Henan:
Concluding Thoughts
Today in the United States, political leaders randomly run for local government office, sometimes uninitiated by the reality of politics and economics, sometimes tested by deep prior experience. Democracy has always been that kind of a crapshoot because elections can be as much a beauty contest as a job interview. To no one’s surprise, in China, the Central Government has a more micro-managed approach to political leadership. It grooms local political leaders, gradually testing them over time through promotions, and most certainly demotions, until the most talented local executives rise to the top. While the process may offend our democratic sensibilities of independence and choice, it has been remarkably successful, both as an economic and human resources solution.