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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital (www.chinafirstcapital.com) , a China-based international investment bank and advisory firm for capital markets and M&A transactions. China First Capital was established in 2007 and has its headquarters in Shenzhen, China.... More
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China Private Equity, by China First Capital
  • How Local Government Primes the Pump of Economic Growth in China 0 comments
    Aug 22, 2010 8:11 PM
     Two factors are paramount in explaining the phenomenal economic success of China over the last thirty years: smart government policies and the abundant ingenuity, hard work, talent and entrepreneurial drive of the Chinese people.

    A day doesn’t go by without me seeing at first hand that entrepreneurial genius at work in China. The inner workings of government, however, are generally invisible to me as an outsider.

    During a recent trip to Shandong, however, I had the privilege of seeing part of China’s government up close, doing what it often does best – constructing and carrying out policies that allow businesses to thrive in China.

    In all countries, governments makes the rules and sets the conditions under which business succeed and fail. China is no different. One obvious difference: China’s government clearly must be doing a lot right for the country to deliver the greatest sustained period of economic growth ever recorded.  How was this achieved? The simple answer is that China’s government began 30 years ago to scrap a rigid socialist system for a free market economy.

    “Socialism with Chinese characteristics” is the official phrase. It’s no set doctrine, but mainly a pragmatic pursuit of policies to foster global competitiveness, employment and rising living standards in China. China government invites its citizens to evaluate it on this basis, using statistics, to judge how well it manages the economy.

    Most would agree, including me,  the government is doing an outstanding job. How it does so,  however, is very much of a mystery.

    Over the course of four days, I met with the mayors and Communist Party Secretaries of three of Shandong’s larger and more prosperous cities: WeifangLaiwu and Linyi. These were working meetings, not diplomatic meet-and-greets. I was the only non-Chinese in these meetings. I was traveling at the invitation of the chairman of one of our clients. This client already has extensive and highly-successful operations in Shandong, with revenues there in the last two years of over Rmb 1 billion.

    “We are here to serve you”. This is the statement I heard repeated in each city by the Party Secretary and the Mayor.  This is neither an idle boast nor an empty promise. In every instance where I’ve been in meetings with senior figures in the Chinese government, I’ve been deeply impressed by their competence, directness and sense of purpose in offering to do whatever it takes to help improve the conditions for investment and so raise local living standards.

    The meetings with Shandong political leadership had an overlapping two-way purpose: to facilitate my client’s expansion plans in Shandong, and to allow the Party Secretary and Mayor of each city to lay out in plain language the economic development agenda for the next few years. They did this confidently, effectively, forcefully.

    I’ve never before heard political leaders speak with such a single-minded focus, as well as evident sincerity,  on their priorities to improve the life, work and leisure of their citizens. There was no self-aggrandizement, no insincere black-slapping, no empty platitudes, indeed nothing that could be construed as expressions of naked self-interest, or the exclusive interest of the party they represent.

    There is a good reason for this: political careers in China are made and lost in part on how well the local economy performs, as measured by objective statistics. The metrics include not just local gdp growth, but also the growth in living and recreation space per person, the completion of large local infrastructure projects on time and on budget, urban beautification programs like planting trees and cleaning up local waterways.

    Political success in China must be tangible, measureable. And the improvements must come quickly enough – generally within 2-3 years – to boost an official’s chance to continue to climb the rungs.

    Arguably, most political careers, including in the US, are determined by how well political leaders deliver for their citizens.  The clear difference in China, from what I can see,  is that it’s a much more data-driven process, more like how management are rewarded or penalized inside a big company. As Peter Drucker, perhaps the wisest thinker about management famously said, “You can only manage what you can measure.”

    China is often run by the Communist Party  like one large centralized corporation. The command-and-control methods of management appear similar. While a vastly oversimplifies things, the meetings I attended with political leaders in Shandong were very familiar in many respects to business meetings I’ve attended. The local leaders articulated the goal, which in each case is to keep local gdp growing at well above China’s national average. All three cities are now doing so.

    The infrastructure would need to be continuously upgraded to achieve this. As each city gets richer, of course, it gets correspondingly harder to generate such large annual leaps in output. So, projects grow in scale to the truly monumental. In Weifang, for example, the Party Secretary outlines plans to build a new greenfield port and industrial center outside the city that would one day house over one million people in spacious new apartment buildings.

    In each city, the planning goals were uniformly ambitious. The political leaders left no doubt that private business should and must play a big part in the process.  They pledged not just help removing any administrative obstacles, but also to make land available at concessionary prices for private sector projects that would create large number of jobs.

    The three cities I visited – Weifang, Laiwu and Linyi – are all thriving, not just economically, but also in these more human terms. The cities are for the most part clean, pretty, with newly-built urban infrastructure of roads, housing, parks.

    Many outside China have likely never heard of these places. But, Linyi and Weifang, with populations of 11 million and 8 million respectively,  are both larger than any city in the US and Europe.

    Laiwu, is smaller, with a population of just over 1 million. However, it does like to do things in a big way. At lunch with the Party Secretary and Mayor, I sat at the largest round dining table I’ve ever seen. Sixteen of us ate at a table that was over four meters in diameter – so large that each person was served lunch individually, one small helping at a time, by a large team of waiters. 

    Corruption and political chicanery exist in China, of course, as they do in US, Europe, Japan and everywhere else political officials with control over valuable resources interact with businessmen. But, in my experience during my three days meeting officials in Shandong, the local government is far more intent on lending a helping hand, rather than looking for back-handers.

    China’s one-party political system is not to the taste of many Americans or Europeans.  But, if judged by standards of effectiveness, rather than electoral accountability, local governments in China routinely outperform their counterparts in the US.  For all the pretentions to public service, accountability and incorruptibility, US politics, especially at the local level, is infested by influence-peddling and political bribery in form of campaign contributions.

    As I saw living for many years in Los Angeles, the second biggest city in the US, local officials act mainly in ways that favor a select few, and deliver only scant benefits to the society as a whole. LA is now teetering on the edge of bankruptcy, with degraded infrastructure, failing schools, punishingly high taxes. LA, like China, is also run as a one-party system, with a Democratic machine that pushed through election rules that make it all but impossible for the opposition Republic Party to gain control, no matter how badly the Democratic Party politicians mess up.

    Given a choice, I’d take Shandong’s local bosses anytime. They are held to a higher, more transparent standard. Over the course of a four-to-five year term in office, they will often preside over real material improvements in citizens’ lives that few American politicians will deliver over the course of a career.




    Disclosure: None
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