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Local Developmental States: Who Can Promote What Kind of Industry?

 

The municipal authorities of Beijing and Shanghai have each sought to promote a range of industrial activities, including information technology (IT) and automobile manufacturing. Beijing has been successful in IT and not in automobiles; and Shanghai in automobiles and not IT. What explains the difference?

Adam Segal and Eric Thun argue that the answer lies in the interaction of two factors: the technical and economic characteristics of the different industrial sectors; and the political and bureaucratic characteristics of the respective local governments.

In a nutshell, Shanghai was successful with auto manufacture because of its institutional inheritance from the period of central planning. It had strong local planning institutions and was under pressure to continue to provide a high proportion of the revenue reaped by the government in Beijing. Shanghai had both the capacity and the incentive to coordinate the activities of industrial units involved in the car manufacturing. Each enterprise had the confidence to invest because the municipal government shared information on plans, could influence investments by deploying the considerable revenue it obtained from local industry, and enjoyed general credibility in the eyes of key actors. Once car manufacturing was successful, it too was taxed, heavily and directly.

This approach to industrial development worked because the key task was to coordinate the activities of a relatively limited number of enterprises, and successfully implant into Shanghai a set of known technologies. "A Shanghai tyre factory was not trying to reinvent the wheel; it sought simply to manufacture a reliable wheel." However, the success of this approach in Shanghai reinforced strong local institutional preferences for centralised action and dirigiste methods that were incompatible with the development of the IT sector.

The IT sector required a much less direct approach, greater flexibility, and a willingness to accept that public agencies could not keep pace with rapid changes in technology.

Beijing municipality had never been expected to supply large revenues to the central government. Authority was dispersed among a wide range of public agencies. The municipality was unable to play a powerful coordinating role to promote car production, and was in consequence not biased toward a heavily interventionist mode of relating to the local economy. By contrast, local agencies were able to discern the needs of the IT industry and, using their understanding of Silicon Valley as a model, to encourage entrepreneurship, provide information, link firms to one another, and generally nurture the sector.

Significance?

  1. In the late 1980s and 1990s, there was an extensive debate about the causes of successful industrialisation in East Asia, especially in South Korea and Taiwan. Discussion remained largely polarised around two competing formulae for economic success: active state intervention and industrial promotion versus 'following the market'. As demonstrated in Peter Evans' book, that divide can to some degree be bridged by focusing empirically on differences among industries and circumstances. What is sensible and feasible in one context may not be desirable or possible in another. Segal and Thun provide solid empirical support for this line of thinking.
  2. Segal and Thun warn that economic circumstances and opportunities tend to change faster than the bureaucratic and political characteristics of local government institutions. This implies that it is generally better to choose industries to suit local institutions than to do the opposite. Given a choice, it makes little sense radically to reform local institutions to attract a particular industry if there is a good chance that the industry will be uneconomic within a few years.

Sources:
Adam Segal, and Eric Thun, 2001, 'Thinking Globally, Acting Locally: Local Governments, Industrial Sectors, and Development in China', Politics and Society, Vol.29, No.4: 557-88.
Politics and Society is published quarterly by Sage (www.sagepub.com).

Peter Evans, 1995, Embedded Autonomy. States and Industrial Transformation, Princeton: Princeton University Press.

Keywords: developmental states, industrial policy, China.

Commentator: Mick Moore, IDS (January 2002).

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