Chinese Cities Vary Widely in Local Government Effectiveness, Investment Climate

This from a World Bank press release:

Cities vary widely in local governance, investment climate, and progress toward achieving a harmonious society, according to a new World Bank survey of 12,400 firms and 120 cities in China.

The World Bank report Governance, Investment Climate, and Harmonious Society:Competitiveness Enhancements for 120 Cities in China...notes that since business law and regulation are similar throughout China, city-level differences in investment climate reflect significant differences in local government effectiveness. For instance:

• Taxes and fees average 3.1% of firms' sales revenue among the top 10% of cities compared to 6.9% among the bottom 10%.
• Firms' interactions with major local bureaucracies average 36 days per year among the top 10% of cities compared to 87 days per year for those in the bottom 10%.
• Firms' expenditures on entertainment and travel, which can be a vehicle for corruption, average 0.7% of revenues among the top 10% of cities compared to 1.9% of revenues for the bottom 10%.
  Combined times for customs clearance of exports and imports averages 5.4 days for the top 10% compared to 20.4 days for the bottom 10%.
• The survey found that losses due to power or transport problems have increased, especially in southern China; that firms' expenditures on entertainment and travel have declined as a proportion of sales revenue; and that taxes and administrative fees have increased in many cities since 2002.

It also highlighted notable differences in the importance of state-owned enterprises (SOEs) in local industry; over-staffing; access by small and medium enterprises (SMEs) to bank loans; confidence in legal protections for property and contract rights; and adequacy of local power and transport.

Local government effectiveness is generally highest among cities in coastal areas (Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong, Shandong, Beijing, Tianjin, and Hebei) and lowest among cities in western China.

More efficient local government, flexible labor markets and ease of access to finance could boost firm productivity by up to 35 per cent for cities ranked in the bottom 20 per cent.

"Lagging cities could promote faster economic development simply by making their local governments more efficient, transparent, and investor-friendly," notes Jim Adams, the World Bank's new vice president for East Asia and the Pacific region.

The survey highlights the following reforms as key to improving firm productivity and/or foreign investment:

• Further simplification of licensing and other procedures to start a business;
• Greater transparency and simplification of approvals for use of urban land;
• Elimination of special tax preferences;
• Elimination of some city-specific administrative fees and adoption of objective standards for remaining fees;
• Adoption of best-practice customs clearance procedures at inland customs posts;
• Greater consistency in labor practices, from tightening enforcement where necessary to protect workers and loosening labor rules where possible to increase business flexibility;
• The ownership transformation of remaining small/medium SOEs, liquidation of non-viable SOEs, and improved corporate governance at large SOEs;
• Additional foreign investment in local banks, such as city commercial banks;
• More widespread credit reporting, and greater opportunities for SMEs to use assets other than real estate as collateral; and
• Wider use, by local banks, of international best practices in SME lending.

The survey also uses nine measures of health, education, environment, and prosperity to rank each city's progress toward achieving a harmonious society. Performance on these measures also varies widely among the 120 cities. For instance:

• Per capita expenditures on education are RMB1244 for the top 10% of cities compared to RMB185 for those in the bottom 10%.
• 99% of industrial waste disposals meet environmental protection standards in the top 10% compared to just 79% of industrial waste disposals in the bottom 10%.
• Air quality is good or excellent 361 days a year for the top 10% of cities compared to just 218 days a year for those in the bottom 10%.
• Per capita green space measures 14.6 square meters for top 10% cities compared to just 4.4 square meters for the bottom 10%.
• Infant mortality rates are 4.8 per 1000 for top 10% cities compared to 16.3 per 1000 for the worst 10%.
• 94% of permanent workers have health insurance in top 10-percent cities, versus just 50% for the bottom 10%.

The survey shows that local government effectiveness, investment climate, and progress toward achieving a harmonious society appear to be correlated. For cities ranked in the bottom fifth, improving the investment climate, education and technical training, health care, and environmental quality so that they attain the levels of China's leading coastal cities could boost firm productivity by around 25% and increase foreign ownership by up to 10%.

Six cities offer outstanding performance in overall investment climate, local government effectiveness, and progress toward a harmonious society. These "golden cities" are Hangzhou, Qingdao, Shaoxing, Suzhou, Xiamen, and Yantai.

Another 13 "silver medal finalist" cities rank highly, but have room for improvement in local government effectiveness in the areas of business or progress toward a harmonious society: Beijing, Dalian, Dongguan, Foshan, Fuzhou, Guangzhou, Jiangmen, Ningbo, Shanghai, Shenzhen, Tianjin, Weihai, and Zhuhai fit this category.

The report's main author, William Mako, notes that it would be useful for the government or some other entity to replicate this survey periodically. "Two-year updates would give mayors, the business community, and central government officials the chance to see which cities are improving and where problems still remain."

In other findings, about one-third of observed differences in firm productivity and one-fifth of differences in the proportion of foreign ownership, reflect differences in "city characteristics" – such as population size, local GDP and economic growth, and transport costs.

Firms in more-populated cities tend to be more productive, probably due to competition and agglomeration benefits. This offers support for continued migration, especially to south-east cities where water scarcity is less of an issue. To absorb migrants without worsening urban poverty and unemployment, destination cities will need to invest more in urban infrastructure, housing and public services – while creating an investment climate that stimulates private sector investment and business development.

Transport costs for accessing seaports is a significant factor, especially for foreign investors. Survey data indicate that a 50% reduction in transport costs could lead to a 5 percentage point increase in foreign ownership (worth perhaps $1.5-2.0 billion) in such deep-interior cities as Lanzhou and Wulumuqi. Key measures to reduce transport costs include improvements in China Rail's governance, management, and service orientation; development of real nationwide trucking companies; increased air cargo service for interior cities; and additional regulatory reforms to encourage international integrated logistical service providers to expand into China's interior regions.

You can read the full text of the report here.