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Reviving the Rust Belt

A proposal to bolster the flagging economy of Jilin Province by shifting focus to the development of light industry has generated heavy debate among economists

By NewsChina Updated Oct.1

China’s northeast region, referred to as the “eldest son of the Republic” for being the first region to industrialize, has nowadays become a rust belt thanks to an economic slowdown, over-reliance on State-owned enterprises (SOEs) and the continuous outflow of skilled workers.  

In late August 2017, a policy proposal drafted by Peking University’s Center for New Structural Economics (CNSE) to accelerate the economy of Jilin Province, located in China’s northeast, has divided China’s economists. The landmark Jilin Report, led by economist Justin Yifu Lin, stated that Jilin should develop labor-intensive industries as the first step to revitalizing its economy, but ignored the reform of institutional problems, sparking debate among economists and policymakers. 

Industrial Policy  

The three provinces that make up China’s northeast – Heilongjiang, Jilin and Liaoning provinces – were among the first regions in the country to be industrialized, relying largely on heavy and chemical industries, energy resources, raw materials and SOEs. Over the past decade, however, the region has suffered a more drastic economic plight than the rest of the country. 

Over the years, the central government has introduced a package of stimulus measures trying to keep the region afloat. In October 2003, the State Council, China’s cabinet, made it a national strategy to revive the northeast by unveiling a series of subsidy measures. In 2007, the National Guidelines on Rejuvenating the Northeast were proposed to revive the region’s economy in a comprehensive way. In 2016 alone, at least three national documents were released to boost the northeast economy. The region’s flagging economy has to date not taken a turn for the better. 

Since 2014, the economic growth rate of the region has ranked lowest across the country. From January to June 2017, the growth rate in Liaoning was 2.1 percent, in Heilongjiang 6.3 percent and in Jilin 6.5 percent, ranking as the bottom three provinces and regions nationwide. 

The previous strategy to rejuvenate the northeast, particularly Jilin Province, mainly focused on promoting heavy industry including the automobile and chemical sectors, the pillar industries of the province, while largely ignoring light industry. The Jilin Report, however, offered a different prescription, arguing that the province has great potential and a comparative advantage in developing light industry, and urging the province to improve related infrastructure. 

Justin Yifu Lin’s team suggested that the crucial way to address Jilin’s economic plight was to shift from a catch-up strategy that defies comparative advantages to one that plays to the region’s strengths. Jilin’s comparative advantage, according to Lin, is to “develop light industry before vigorously promoting heavy industry.” 

Official statistics showed that Jilin’s light industry accounted for 32 percent of its industrial structure in 2015, up from nearly 20 percent in 2003. Lin’s team recommended that Jilin could benefit from its solid heavy-industry infrastructure to accelerate the development of labor-intensive manufacturing of goods, including household appliances, garments and textiles, as an initial step to reviving the economy. 

The industrial added value of Jilin’s textile enterprises reached 14.7 billion yuan (US$2.27 billion) in 2016, an increase of 16.1 percent year on year, exceeding that of the energy sector which stood at 12.2 billion yuan (US$1.9 billion). The textile industry has been added to the list of Jilin Province’s top eight key industries. 

“Those who still believe that the northeast should adhere to the development of heavy industry, and that coastal areas should stick to light industry, are still living under the planned economy,” said Fu Caihui, one of the report’s authors.  

According to the report, the labor cost of labor-intensive sectors based in Jilin is only 30 to 50 percent of that of coastal Jiangsu and Zhejiang provinces and so industries with comparative advantages in Jilin should be labor-intensive. It stated that the province should develop five great industrial clusters such as agriculture, health, textiles, equipment and information technology by receiving industries relocated from provinces of Zhejiang, Jiangsu and Guangdong where light industry is already highly developed. 

To date, Jilin’s manufacturing sector has employed only 5.7 percent of the workforce. In Zhejiang Province and the city of Tianjin, the proportion is respectively 40.3 percent and 28.2 percent. The Jilin Report stated that it was very unlikely the heavy industry sector would create jobs in the province, adding that Jilin urgently needed labor-intensive light industry to increase employment. 

According to the China Labor Statistical Yearbook 2016, laid-off workers numbered 7.5 million in the three northeastern provinces, accounting for 25 percent of the total nationwide. Because of unemployment and the under-developed light industry and service industry sectors, it stated that many people have to leave the region for southern China to pursue a living, leading to a heavy outflow of people. 

According to data from the Sixth National Population Census in 2010, nearly 2.2 million people had left the region in the decade leading up to 2010. In 2016, Jilin, with a population of over 27 million, registered an outflow of over 200,000 people, including a large number of high-tech staff and skilled workers. As a more specific example, only 18.9 percent of graduates from Jilin University, one of China’s top universities, chose to stay and work in the province. 

Academic Backlash 

When the report was published, it generated heated debate in academic circles and criticisms were poured on to its deliberate avoidance of the northeast’s systemic problems. The controversy focused on whether Jilin should develop its textile industry, whether it would be a cure-all to develop light industry, and whether the industrial policies should be dominated by the government. 

Sun Jianbo, a former analyst at China Galaxy Securities, argued that China’s northeast is unfit to become a new labor-intensive hub of light industry because of its weak infrastructure. Moreover, highly-efficient light-industrial production bases have already been constructed and are performing well in several provinces in southern and eastern China. 

“A fatal mistake Lin made is to treat Jilin Province and the rest of the northeast as a country. Even as an ‘independent economy,’ there is no logic for Jilin to develop textiles, household appliances and electronics at a time when the world has entered the eve of artificial intelligence and China has ushered in the era of bullet trains,” he said. 

Tian Guoqiang, director of the School of Economics at Shanghai University of Finance and Economics, said the essence of the debate is whether scholars and government policies should determine the development of specific industries, particularly for emerging industries, or whether the market should take the lead role. 

“The Jilin Report led by Lin has almost ignored reform and systemic problems. It is hard to achieve sustainable economic growth if we only talk about development and policy, disregarding reform and governance,” he told the Economic Observer. “To embrace the market economy, the local government of Jilin has to first redefine their role as an all-powerful economic planner. The imbalance in the economy is only the result, and the undoing lies in the imbalance of the governance system.” 

Investment has been playing a crucial role in bolstering the northeast’s economy, but in recent years the region has seen investment steadily decreasing. What’s more, the deep-rooted concept of the northeast being dominated by heavy industry and SOEs continues to be pervasive, meaning the region is failing to effectively attract private and foreign investment. Official statistics showed that the value of foreign direct investment reached US$2.27 billion in Jilin in 2016, accounting for only 1.8 percent of the national total. 

Zhang Shuyu, an economic researcher at the University of International Business and Economics in Beijing, agreed with Professor Tian. He told NewsChina that Jilin’s problem is not the structure of its industries but institutions and culture, and in order to survive the dilemma, eschewing the fatal flaws of unresolved institutional mechanisms is highly urgent. He added that it is difficult to say whether Jilin Province had a comparative advantage in developing certain types of light industry before it actually develops them. 

“Rather than a poor province that has never been developed, Jilin is an industrialized and developed region that has lagged behind over the past decade,” he said. “Its flagging economy largely stems from the dominance of the planned economy, coupled with the over-reliance on SOEs. If the province is unable to cut production and transaction costs to make a better business environment, it will be struggle to develop light industry.”  

There is a common saying in Chinese business circles: “Do not invest beyond Shanhaiguan” (a pass between the northeast and Hebei Province to its south). The saying suggests that powerful SOEs, business scams, corruption, constant government interference and policy changes are prevalent in the region, making it difficult for private enterprises to survive and profit. 

In the face of such a barrage of criticism, Hui Li, a post-doctoral researcher at CNSE, responded by writing in NewsChina’s Chinese edition that the report’s findings were proposed based on the natural advantages of Jilin, including its labor force, natural resources and infrastructure, rather than from the perspective of institutional problems, which need to be solved by “continuous reform, but it is unrealistic for industries to be upgraded automatically simply by reforming the system.”  

Hui said that economic growth lies in increased productivity, which is attained in two ways. The first is technological innovation in the existing industries, and the second is the emergence of more high value-added industries. 

“It is natural for different people to have different views on reviving the northeast’s economy. We recommend scholars not only point out the problems, but also provide ways to solve these problems,” she said. “If there are only scenario analyses and economic forecasts but no policy proposals, solving any concrete problems will remain impossible.”