Reshaping China’s government-services supply chain

Andrew Sheng (left), President of the Fung Global Institute, is a former chairman of the Hong Kong Securities and Futures Commission and is currently an adjunct professor at Tsinghua University, Beijing. Xiao Geng (right) is Director of Research at the Fung Global Institute.

HONG KONG – A supply chain links producers and consumers through a complex web of outsourcing contracts, with market leaders in any product category orchestrating activities to produce components profitably along its entire length. For example, an iPad is designed in California – with chips from Japan and parts from South Korea, Taiwan, and elsewhere – and finally assembled in China for global distribution. But the ecology of supply chains is not as straightforward as this depiction suggests.

Most studies of supply chains examine their operations, but take for granted governments’ critical enabling role. Because the non-delivery of government services would inhibit the proper functioning of business supply chains, understanding how the government-services supply chain works is vital.

For example, the Chinese economy’s transformation was enabled by the synchronized delivery of government services to support the logistics, finance, and manufacturing supply chains. This was a complex task that involved different levels of the Chinese government and many state agencies and ministries.

A supply chain is not only a network for production, but also a live feedback mechanism, continually adjusting itself to ensure that production is coordinated and aligned efficiently to meet changes in global consumers’ demand, tastes, and preferences. Technology has enabled faster, more efficient “just-in-time” delivery, taking full advantage of specialization and knowledge-sharing on a global scale. As Apple has discovered, the winner in orchestrating a supply chain emerges with the lowest global costs and the largest market share.

The iPad could not be produced at such high speed and low cost without the “made-in-the-world” supply chain based in China. In addition to the macro and micro aspects of economics, understanding supply chains in private and public goods and services in China requires mezo (institutional) and meta (system-wide) analysis.

When China initiated its economic reforms in 1979, it inherited a centrally planned economy that lacked the institutional infrastructure for markets. Recognizing the need for systemic change, China allowed local governments in special economic zones and cities to experiment with modern legal, administrative, and logistical practices for export industries, including investments in utilities and transport.

Intense competition among local governments for foreign investment led to dramatic improvements in the business environment, featuring economic incentives in areas like land, labor, and taxation, as well as speedy issuance of permits and approvals. City leaders were given responsibility for mobilizing local resources to generate GDP and employment, and they were (and continue to be) rewarded with promotion for good performance.

The result was considerable innovation and institutionalization of local government services to support market activities, including outsourcing of expertise in infrastructure project design, administration, and operations to private and foreign consulting and design companies. To support China’s participation in global manufacturing supply chains, many local governments sold and dismantled their state-owned enterprises (SOEs), enabling many new private firms to provide the services needed for an export-oriented, market-based economy.

At the national level, the consolidation of SOEs and banks, and the modernization of their corporate governance via public listing on stock exchanges, enabled improved efficiency in regulated utilities, hard infrastructure, and resource sectors, complementing liberalization and market growth.

The Chinese government-services supply chain also benefited substantially from a meritocratic human-resources tradition. Officials with substantial and successful experience in local governments, ministries, or SOEs were deliberately promoted and cross-posted to less-developed regions to spread know-how, technology, and best practices and processes. Indeed, China’s economic success reflects the depth of administrative and market experience embedded in the Chinese bureaucracy. Chinese mayors are CEOs of their local economy, responsible not only for market development, but also for social stability.

The critical mechanism for orchestrating and implementing the complex web of contracts embodied in China’s government-services supply chain is the Five-Year Plan, which foresees vertical and horizontal integration of almost all Party and administrative agencies. The FYP uses broad objectives and targets for social and economic development, formed after extensive internal and public consultations. These mandates are translated by sub-national officials into projects and work plans, such as targets for reducing energy use per unit of GDP in order to address resource constraints and concern about climate change.

China’s success in developing from scratch a modern government-services delivery system explains why many foreign investors find it much easier to deal with Chinese governments than those in other developing countries.

The 12th FYP aims to shift China from an export-driven growth model toward a balanced economy that relies on domestic demand, while simultaneously addressing industrial transformation, social inequities, and environmental degradation. This implies more complex contracts that go beyond promoting markets, GDP growth, and employment to ensure inclusive, equitable, and high-quality government-services delivery. Implementation of these evolving social goals through local government agencies by specific officials is a daunting task that requires profound changes in roles and performance metrics.

No one doubts that Chinese local governments play a much more active and intrusive role than their counterparts in the West, which implies an additional complicating factor. Local governments now face not only growing demands from the emerging middle class for greater transparency, competition, fairness, and access to opportunities, but also deepening conflicts between local interests and global rules.

Orchestrating a complex government-services supply chain in a substantially open continental economy with 1.3 billion people and five levels of government is difficult enough using a simple GDP growth objective. Adapting the governance metric in a country of China’s size to an economy that is green, inclusive, and equitable presents a novel challenge in human history. The only precedent for such an achievement is China itself.

The opinions expressed here are those of the author, not necessarily those of the World Economic Forum. Published in collaboration with Project Syndicate.

 Image: People walk past a large chinese flag REUTERS/Stringer China