ChinaTech #8 The local government bureaucracy
.. and a comical study of political incentives
This new segment by Shobhankita Reddy is your go-to newsletter for updates and perspectives on China’s tech ecosystem. This edition explores China’s local government apparatus in the context of its national science and technology goals
In a recent tweet, Pranay Kotasthane had this to say about China's decentralised economy -
"China is not federal and yet more decentralised than India. While India's city-level governments account for less than three per cent of total government spending, a staggering 51 per cent of government spending in China happens at sub-provincial levels.
Local governments also have a much broader qualitative mandate. They are almost exclusively responsible for unemployment insurance and pensions.
This factor alone has enabled many experiments—good and bad—to happen rapidly.
While the industrial successes we often hear about are attributed to China's top leadership, they are often the result of local governments' fail-fast approach, investments, corruption, greed and commitment."
This edition seeks to expand on this with regard to China's science and tech (S&T) ecosystem.
In their study of China's local officials' promotion, Bochao Chen and others have a few important takeaways.
Given China's vast market size, multiple stakeholders and varying local conditions, they posit that investigating its journey from a middle-income, imitation-first and mass-manufacturing nation to a centre of rapid high-technology advancements is worth studying. While several reasons - industrial espionage, forced technology transfer from foreign firms, and state capitalism are all true, a more nuanced study is necessary to fully explain China's technological rise.
In their paper, the authors focus on unpacking the motivations of the local government officials in China's S&T progress.
China has a decentralised economy but a centralised political system, both party and cadre system. This means that while local governments are empowered with fiscal autonomy and support companies with subsidies, tax incentives, land offerings and tailored loans, the appointments and promotions of local government officials are decided by higher-level provincial leaders.
In fact, the two are interlinked. They find that -
"..prefecture-level (an administrative subdivision of provincial level government) mayors are more likely to be promoted in regions with a strong innovation performance, especially in prefectures with strict innovation evaluations."
The following case in point makes for a fascinating example -
"In 2006, the Chinese government issued the "Medium- and Long-Term Development Plan for Science and Technology (2006-2020)" (MLP), which set the goal of becoming a world‑leading innovative nation. As the planner of innovation, the central government links officials' promotion assessments to the locality's innovation performance to ensure the appropriate conditions for implementing this top-down policy.
Sun et al. (2021) found that after the national "Tenth Five-Year Plan" proposed patent targets, the number of patent applications in November and December of each year significantly exceeded those filed in other months, creating a "patent rush." This indicates that local officials may intervene in patent applications and approvals at the end of the year to meet their performance targets in the field of technological innovation."
Of course this is not the only metric for an official's promotion or rise in the cadre system. Officials are subject to a relative evaluation system designed to create competition between officials from different regions, and "ability, loyalty, network connections", as well as "economic performance" and "environmental governance" under the official's control all play a role, making this a "promotion tournament".
Government guidance funds in China, which are public-private investment vehicles initiated at the administrative level, play a crucial role.
"These funds pursue financial returns and align with state industrial policy objectives, channeling private capital into strategic technology sectors."
A more recent case study is when the State Council unveiled its "New Generation of Artificial Intelligence Development Plan" in 2017 with the aim of making China a globally leading innovation centre for AI by 2030. It's easy to imagine the flurry of bureaucratic activity this is likely to have spurred.
But the events that followed are almost comical -
With the overall framework set, China's industrial AI policy has entered the next crucial phase, trickling down from the national level to individual provinces, municipalities and cities. By mid-April, governments within 18 provinces and municipalities had released AI plans to promote their local AI industries.
In the pursuit to outbid each other, their local targets even exceed ambitious national goals. Eleven local governments published targets for their AI core industries for 2020. Accumulated, this would create an AI core industry of almost 400 billion CNY in 2020, exceeding the national target of 150 billion CNY more than twofold.
The municipal government of Shanghai drew up the most ambitious AI plan of all, aiming for an AI core industry size of more than 100 billion CNY by 2020. To achieve this, Shanghai is building AI industry zones in multiple locations across the city. Last December, Shanghai's Lingang Area Development Administration signed agreements with 15 leading Chinese AI firms, including Baidu Innovation Center, iFlyTek, Horizon Robotics, and Cambricon. Beijing thus sees its position as China's leading science and technology hub with its stronghold in Zhongguancun seriously challenged. In response to Shanghai's advances, Beijing's government announced a 14 billion CNY AI industrial park in Mentougou district in January 2018.
The provinces also compete to woo highly skilled workers in the sector, mainly foreign nationals of Chinese descent and Taiwanese nationals.
Changzhou in Jiangsu province, for example, plans to hand out between 200,000 and 300,000 CNY to companies and research institutions for each world-class or national-level AI talent who settles down in Changzhou Science and Education Town. In another example, Hangzhou tries to lure highly skilled workers with subsidies, e.g. for auctions of highly-contested car license plates.
The authors of this report conclude with -
"The current top-down approach in China's AI industry is thus in line with the country's overall industrial policy, in that it mobilises massive amounts of capital and labour towards a specific target even at the risk of creating inefficiencies and wasting resources."
The bureaucratic apparatus and studying the motivations of individuals making the choices that they make is key to understanding China's socio-economic status. But what happens when a declining economy squeezes the local governments and crunches their ability to incentivise overcapacity, as is the case with China now?
More on that in another edition.