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Industrial excess

(China Daily)
Updated: 2009-09-29 13:40

Local governments blindly launching the same type of industrial projects is a cause of overcapacity in production. When a number of cities are rolling up their sleeves to launch aeronautical projects, an overall plan by the central government for capping capacity at its optimum is necessary to check the short-term impulses of local governments.

There are lessons to learn from the past. In the early 1950s, massive plans were laid to turn almost all cities into industrial hubs. The larger and more comprehensive production capacity a city had, the better. As a result, excess production capacity had pushed many factories to bankruptcy in the early 1980s when market competition emerged.

We still remember the price war among many color television set producers in the early 1990s. A number of factories collapsed because of market saturation, caused by overcapacity brought about by blind investment in the sector.

Now, overcapacity in sectors such as iron and steel, cement and power generation has become a stumbling block to economic growth. And this is also the result of blind investment in such projects by local governments.

The investment by different regions in the same boom industry has been a big problem in the industrial development of this country. The overcapacity has caused massive waste of natural, financial and human resources, which could have been avoided from the beginning by the central government had it opted for an overall plan.

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The fact that China aims to develop an aeronautical industry of its own has prompted many local governments to consider upgrading their industries by getting involved in this technology-intensive sector.

When many localities are striving for the same project, foreign investors or technology providers are quite likely to become the biggest beneficiaries by seeking the most preferential policy from among local negotiators. This is undoubtedly detrimental to overall national interest.

Lack of a system of accountability for local government leaders is one of the major causes of this. Some local governments do not have long-term strategies for the development of local economies. They do not take into consideration the prospects of an industrial project when they approve investment in it. As long as the project can be launched, it serves the purpose of being recorded as an achievement during their term. If the project turns out to be a failure and the resources a waste, they know that in a few years, they may be out of office and, therefore, not penalized in any way. And if they are still in office, they just have to take some nominal responsibility for the fiasco.

Overall planning by the central government on the geographical distribution of some industries is important to avoid replication. Making local leaders accountable is the only way to force them to think twice before endorsing plans for huge investments in an industrial project.

There has to be concerted efforts on both fronts - central planning and local accountability - to avoid squandering resources on projects that are certain to result in excess capacity.