With the state bulldozer clearing new terrain, China has recently been shaken by man-made seismic shocks.
In the belief that nothing great can ever be achieved without enthusiasm, the government and media are fiercely beating the propaganda drum. To succeed, they adopt time-honored methods of mass agitation: television, newspapers, books, rallies, and even cyberspace - everything reverberates with slogans calling for the "great remake of the west".
After yet another parade, the bystander is left bewildered, perhaps remembering the "Great Leap Forward" in 1958 aimed at surpassing Britain's industrial capacity within a few years. Back then, fervent ideologists furiously melted cutlery, pots and pans into hundreds of thousands of backyard furnaces to produce "steel". Afterwards, sober industrialists had to discard the communist "steel", and the country, one-fifth of mankind, plunged into chaos. Should we expect an economic miracle in the magic "century of the Chinese west"? Or do we have to prepare for just another emergency landing? It would seem the fate of the new frontier venture will differ markedly from Mao's campaign: It will produce fewer short-term gains, but also fewer long-term disasters. Instead, the initiative will resemble one of Mao's true feats - a long march is ahead.
The success of China's economic reforms since 1978 solved one problem, but created a new one. The eastern coastal areas grew rapidly and left behind the resource-rich west, which is comprised of 10 provinces and autonomous regions and the western part of Inner Mongolia. Capital, labour, technology, ideas, and passion moved eastwards, producing a "success-to-the-successful" spiral that aggravated the dilemma and transformed China into an albatross with only one wing.
Even though the west accounts for 57% of China's land area, it generated only 15% of the country's GDP, 15% of textbooks, 12% of patents, and a mere 3% of exports in 1998.
To remove the regional disparities and re-ignite sluggish demand, the Central Government decided to throw money at the problem. The State Development Planning Commission has reportedly channelled 70% of fixed-asset investments and foreign loans into the west since the start of last year. It also tries to attract foreign investors to fund the expansion drive. Priority sectors include infrastructure, energy, agriculture, resource-intensive industries, tourism, and environmental protection. The government plans to build 20 airports alone, and Shaanxi province wants 52,000 kilometres of new roads. Although nobody in China dares to predict anything but total success, the expected quick wins will remain elusive for four reasons:
Missing priorities.
In the east, smart developers concentrated on high-leverage pilot projects with laser precision. Yet in the west, a golden horde of wild hunters is firing with shotguns, wanting everything and achieving (close to) nothing. Without early wins, comparable to the fairy tale success of Shenzhen Special Economic Zone, the former fishing village close to Hong Kong, the momentum will soon evaporate. Besides, the patchwork of ideas lacks a cohesive overarching vision and framework. Regions compete against each other on the basis of ruinous incentives and resort to local protectionism. With widespread "empire-building", showcase projects mushroom everywhere in an uncontrolled fashion - each blueprint more difficult and gigantic than the previous one. The greater the expense, the prouder the smile of the governor. In the heat of the battle, few cool heads plan for local needs. Overcapacity and duplications are the dire consequences.
Structural bottlenecks.
Many of China's fundamental problems surface most prominently in the west, and these unfavourable starting conditions will slow progress. Apart from physical infrastructure, the region lacks human resources, such as managers and technicians and knowledge workers. It also lacks intellectual and social capital, such as business ethics, laws, institutions, and social networks. It will take several generations and significant foreign guidance to accumulate these critical soft resources, which carry more weight than the hardware that Chinese leaders are so eager to install. Alas, few foreign talents or Chinese knowledge workers and students, who increasingly value life quality, will move to dusty wastelands. Neither does it augur well that investments into science, research, and education are negligible compared with funding for monumental infrastructure projects. The framework for investments into the west, especially the legal fabric, is unsatisfactory. And damage to the environment will outweigh improvements, pulverising dreams of balanced development. The painstakingly slow rebuilding of East Germany, with a significantly smaller territory, more propitious starting conditions and support from a big uncle, offers a glimpse of the long and windy road ahead.
Lack of investments.
The government tries to lure investors with huge markets, cheap labour, almost unlimited land, mineral and energy resources, and preferential treatment. Yet both foreign and domestic investors are unlikely to catch gold rush fever. A quick poll of German businessmen in Beijing, revealed a lack of spontaneous enthusiasm about the west. At best, foreigners are interested in a very limited range of projects, such as airport construction or oil exploration, but resent that nationalists reserve the "cherries" for Chinese enterprises. The official announcement that large projects will increasingly source domestic goods and services promises little improvement in these discriminatory practices. Small and medium-sized private Chinese firms, which in the wake of an "entrepreneurial revolution" have become the engine of economic growth and employment in the Middle Kingdom, will also be wary of playing Russian roulette, betting their vulnerable organisations in Chinese Central Asia. Without outside help from foreign masterminds and domestic wizards, people in the wild west will find it difficult to learn best practice management, obtain access to international markets, and thus close the gap with the rest of the world.
If the political and economic fundamentals were favourable, the government would not need to unleash grand campaigns and offer generous incentives - price-cutting always signals an inherently bad product. In the west, the expected low returns on investments, which will not improve dramatically at least in the medium term, are incommensurate with the downside risks and the costs of foregone projects with higher profitability elsewhere. The cost side in particular will depress earnings and reduce cash flows. Low labour productivity results in high unit labour costs. The accompanying increase in the cost of goods sold erodes gross margins. Large distances to the eastern markets and the insufficient transport and distribution infrastructure inflate selling expenses. The problem is compounded by the large premiums for attracting managers and other skilled personnel, which raise the general and administrative expenses and further reduce operating income. If one adds the high-weighted average cost of capital that managers, rightly or wrongly, will use as discount rate in their capital budgeting to compensate for perceived risks, economic value destruction is almost guaranteed.
Excessive state intervention.
With market forces remaining largely impotent, the campaign will become an expensive centrally-directed state enterprise, "China West Inc". Even though the government prides itself on issuing bonds instead of money, and uses innovative financial engineering schemes to fund the effort - such as seductive lottery schemes for mostly uneducated people - long-term debt will grow further. Debt service now already consumes roughly two-fifths of revenues, which in China include proceeds from new debt issues.
As in the Three Gorges construction project, widespread corruption and entangled bureaucratic webs will absorb significant resources. In the past, substantial state support has not developed a capacity for self-help, but cultivated a "free rider" attitude, which will be reinforced in the future.
After the officially sponsored jumpstart, the west will not only remain on the drip of the central government, but become increasingly dependent. As elsewhere in China, state-owned enterprises will obtain the lion's share of credits, even though they are not renowned for fine management and shrewd investment appraisal. In fact, 62% of the nationwide 600 companies earmarked for debt-equity swaps, the last rescue from bankruptcy, originate from the west.
Prospects would brighten if private entrepreneurs took the lead and financed the expansion spree, since they usually handle their hard-earned money with great care, unlike the state, which freely spends income from taxes and fees without personal accountability. When China has to lower its guards after WTO accession, savvy international investors will swarm out, swiftly open the cupboards, and count all the dead bodies. Then, the "capitalist empire" will strike back and punish red megalomania.
In contrast to such governmental encroachment, Deng Xiaoping, the engineer of China's economic miracle, did not draft an expensive and grand master plan based on perfect foresight. Instead, he skilfully exploited the talents and energies of the grassroots, and moved ahead incrementally towards the final destination: prosperity.
The failed experiment of the planned economy had taught him that Herculean undertakings cannot be centrally decreed and co-ordinated - unless there is a reversion to simple and violent Stalinist industrialisation, as in Siberia, which was mainly developed by German prisoners of war. Politically motivated mega-projects with negative net present values, surviving only on subsidies that decrease costs artificially, cause financial blowout and state bankruptcy - Southeast Asia was the latest victim to pay the price for hubris.
How different was America's westward expansion and development, which proceeded slowly, driven by a huge trek of idealistic (and materialistic) pioneers, without much central control. China, though not expanding its military boundaries, still has to move the economic frontier, which separates rich and poor, westward, and would be well advised to capitalise on the remembrance of things past - the lessons from its own development and the experiences of other nations.
DESPITE THESE SOBERING FACTS, IT IS encouraging that, by throwing a challenge, a central flame can light many small candles. The campaign of westward expansion will improve certain vital factors such as physical infrastructure and resource industries. It will calm the people ("something is happening"), if only leaders correct their current mistake of creating unrealistic expectations and nurturing the belief that "all problems will be solved", which will later cause disappointment and loss of faith.
The authorities in Beijing should recall the last hours of the Ming dynasty. Officials told the emperor that there was no danger, even as the Manchu troops stood menacingly at the gates. The climate at the court simply did not tolerate negative remarks.
Dr Kai-Alexander Schlevogt, a leading expert in strategic studies, is the first permanent foreign professor in the People's Republic of China (at Beijing University). He also is a senior faculty member at the Australian Graduate School of Management at the University of New South Wales. He is based in Sydney and travels frequently to China. Before, he served at McKinsey & Co and Harvard University. Website: www.schlevogt.com; email: schlevogt@schlevogt.com.