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Should Shanghai Reindustrialize Itself?- the Sunday Column

“Attempts should be made to let Shanghai become the international metropolitan city with the most competitive manufacturing sector," said Mr. Han Zheng, mayor of Shanghai in a recent gathering of industrial officials all over Shanghai.

He emphasized that the consensus on the accurate positioning of industrial manufacturing in Shanghai is required and pointed out that strong and large manufacturing industry is quite supportive of the build-up of Shanghai as the economic, financial and shipment center. Shanghai should avoid the hollowing process of manufacturing industries and should choose different way of development from other international metropolitan cities, mayor Han said.

His public speech was the final answer to the positioning of Shanghai’s economic development targets after designing the industrial policies went back and forth in the last two decades. Policy debates began in the middle of 1980s. In the early of 1990s, a strategy called “three, two, one" surfaced in Shanghai, and like other international metropolitan cities in the world, Shanghai was expected to target firmly on the tertiary industry or service sector, hoping to enlarge its share in GDP by 70% by the end of 20th century (today, service sector provides about 40% of Shanghai’s GDP, about 10% higher than the national average).

Shanghai slowed down its investment and technological innovation in manufacturing industries and replaced it by huge investments in financial and trade infrastructure. In the light industry, her share in electronic and electrical appliance market dropped sharply. Shanghai’s big brands such as Feiyue, Kaige, Jinxing had all gradually erased from people’s memory, being taken over by the newly emerging trademarks like Chang Hong, TCL, etc.

Honestly speaking, it is ridiculous to see Shanghai government fight back to reverse its declining productivity in manufacturing. Why? Because Shanghai is a land and human capital intensified city. The living standard and thus the production costs have been relatively higher than the rest of Yangtzi River Delta. To hollow its industrial legacy of 40 years under the centrally planned system is nothing but fair and efficient. This is something inevitably occurring and is largely a result of marketization of Chinese regional economy. Shanghai’s drop in the production of consumer goods is nothing but an evidence of inefficiency of its manufacturing factories. But the stories we usually heard in Shanghai are quite different.

It is very impressive if you got a chance to talk to Shanghai officials. They learn a lot not from theory but from reality, for example the contrasting experiences in Hong Kong and Singapore during 1998 financial turmoil. Shanghai officials learnt from different version of “A Tale of Two Cities.

After the financial instability was over, Hong Kong was performing so badly because Hong Kong had hollowed its manufacturing industries and moved production up to south mainland China, the story says; In contrast, Singapore has successfully recovered from its financial crisis due to its firm manufacturing base. The tale of the Hong Kong and Singapore’s experiences taught Shanghai officials a lot and they began to realize that it is extremely important for Shanghai to keep its manufacturing afloat. The focus of the government development strategy has finally returned to the previously chosen pillar industries which include auto, steel, petrochemical, biological, and telecom, and so on.  

However, because the higher living standard and the accordingly growth of wage payment, productivity growth in the manufacturing sector in Shanghai slowed down, and is surpassed by its neighborhood provinces, Zhejiang and Jiangsu. Because of the declining growth of labor productivity, per capita real disposable income for manufacturing employment has almost stagnated and is lower than that of many cities in Zhejiang and Jiangsu provinces. If Shanghai still holds on the manufacturing industry, it has to contain its future wage growth and slows down its growth of income for majority of its blue collar population. This in turn disincentives the flow-in of talent and creative human resources from all over the country, standing lose to Beijing and/or Shenzhen, and finally, dooming its unique geographic advantage and colonial endowments.

The dilemma facing Shanghai is historically originated from the economic management system of Maoist regime. The whole economy was segmented administratively so that it was highly overlapped with the administrative fragmentation. The economic transactions and production had been artificially disintegrated, resulting in a difficulty of the upcoming of integrated market and industrial organization that is beyond this boundary. China’s political and personnel system has reinforced this fragmentation.

Under this system, albeit changing a bit, big cities have lost its extremely important rule in commercialization of the economy. Economic growth in the past two decades has been largely ignited by huge public investments at all levels of Chinese governments. That partially explains why the market institutions are lacking and lagged behind even though its economy has grown so fast. Again, Shanghai, as a London-alike city, its geography, its colonial history and openness would determine its role in Chinese economy. But another non-city Shanghai exists. Shanghai is treated as a provincial level economic entity by the central government. Its officials are therefore equivalently measured and rewarded by its GDP numbers, and all other economic growth indicators, just like the governmental economic departments of other provinces. That leads us to the famous “prisoners' dilemma" in John Nash' theory of game.

Boston (20/7/2003)

by Zhang Jun

Zhang Jun is director of the, China Centre for Economic Studies, Fudan University
 
 

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