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How to revive northeastern China’s economy

Most people would immediately think of the Pearl River Delta and Yangtze River Delta as China’s most prosperous regions. But five decades ago, the three provinces in northeastern China, namely Jilin, Liaoning and Heilongjiang, were the country’s growth engine.

The region once underpinned the nation’s economic growth with shipbuilding, automobile, steelmaking, coal, oil and other heavy industries.

However, the northeastern provinces have started to lose their competitive edge since 1970, as coastal regions began to take off. Beijing has recently asked famous economist Lin Yifu to devise measures to revive economic growth in the region.

Lin suggested that the region should start from light industries including textile, electronics, home appliances, etc. His remarks have drawn a lot of criticism.

Let’s take a brief look at the northwestern region’s rise and fall.

As early as the 1920s, the region was under the control of warlord Zhang Zuolin. Thanks to his vision, big investments were made in railway construction and heavy industries. Zhang also actively promoted science education and the import of foreign machinery and technology.

As a result, the northeastern region transformed itself into a leading industrial powerhouse.

Japan invaded the region in 1931 and established a puppet state called Manchukuo, and the occupation lasted more than 10 years. During this period, the industrial strength of the regions was further improved.

The northeastern region was little affected by the Chinese civil war and maintained a relatively sound economic structure.

The region was well positioned to support the nation’s growth after the establishment of People’s Republic of China. Moreover, China badly needed natural resources and heavy industries in the early years. The northeastern provinces functioned as the nation’s growth engine for almost 30 years.

However, China’s economic gravity has shifted to the Pearl River Delta and Yangtze River Delta since the opening-up in the 1980s.

The coastal regions took off thanks to their geographic advantage, flexible economic policy and proximity to Hong Kong and Taiwan.

Meanwhile, China started to import steel, oil and other resources from overseas. The northeastern provinces, still relying on outdated machinery, became less and less competitive and started to fall behind.

The central government is trying to figure out ways to turn around the region’s fortunes.

Lin, a former World Bank chief economist and a senior vice president, wrote a 300,000-word policy proposal after two years of research in the less-developed region. He suggested that Jilin province should encourage light and textile industries before expanding into heavy industry and manufacturing.

The core issue of the northeastern region is the lack of an industrial structure built on its relative advantages rather than poor business conditions, Lin said, adding that it leads to low investment return. The government should wield its visible hand in order to ensure smooth economic restructuring.

Lin argued that light industries are moving away from expensive Pearl River Delta and Yangtze River Delta to southeastern Asian and African nations for cheaper labor costs. Relocating these industries to the northeastern regions would create new jobs and fresh growth momentum.

However, his proposals have been greeted with a lot of criticism from both government officials and academics.

Some believe the two coastal regions owe much of their success to cheap labor, flexible policy and foreign investment over past 30 years. However, the northeastern provinces lack these factors.

Most unemployed in the region are old staff laid-off by local state firms. In terms of both quality labor and production costs, the region simply can’t compete with southeastern Asian and African regions.

Also, they pointed out that the biggest issue of the region is bureaucracy and local protectionism, which has held back investors from other regions.

In that case, local authorities should put priority on eliminating bureaucracy and restoring market rules in order to revive growth momentum in the region, rather than asking the government to play a bigger role.

This article appeared in the Hong Kong Economic Journal on Aug 29

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA


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