Greater reliance on private investment, less government intervention beneficial to Northeast Revitalization, Says World Bank

March 6, 2006

Beijing, March 6, 2006 - Northeast revitalization would benefit from greater reliance on private investment, less government intervention in the economy, and continued government support for infrastructure investments, education, and social protection and services, according to two World Bank studies released today.

Revitalizing the Northeast: Towards a Development Strategy recommends shifting attitudes away from the Northeast's role as a historical supply base in favor of focusing on the Northeast's ability to respond to future market demands. The three Northeast provinces also need to work together an economic bloc to support, and participate in, the rapid and sustained growth of China as a whole. Facilitating Investment and Innovation: A Market-Oriented Approach to Northeast Revitalization attributes lags in Northeast growth, foreign investment, and productivity to lack of a vibrant private sector and continued state dominance of the region's industry.

Key investment climate improvements to spur foreign and domestic private investment would include simpler procedures to start a new business; greater transparency in land use, taxes, and administrative fees; fewer restrictions or regulations on foreign investment into specific industries and into transport and logistics service; improved access to finance for small and medium enterprises (SMEs); and continued efforts to modernize urban infrastructure and improve urban quality of life.

While improving the investment climate to encourage new private investment, the World Bank studies conclude that it is also important to accelerate "transformation" of the Northeast's state-owned enterprises (SOEs). One concern is that continued SOE dominance of the Northeast's economy could "crowd out" more dynamic private businesses. SOE transformation should follow commercial best practices. This would involve, for instance, effective corporate governance and greater ownership diversification for large SOEs; the prompt sale or liquidation of small or medium SOEs, through open and competitive processes to avoid the "loss of state assets"; and the operational restructuring of distressed-but-viable large SOEs through specialized agencies. Similar perhaps to approaches taken in some Chinese cities, locally-owned specialized agencies could manage enterprise restructuring (including the settlement of worker claims) and the sale or management of enterprise assets, including real estate.

Wider and faster transformation of Northeast SOEs would place greater demands on social safety nets. Substantial progress has already been made. But the World Bank study sees a need for additional reforms to improve the sustainability and efficiency of key programs, including unemployment insurance, minimum subsistence payments in urban areas (di bao), and pensions.

Investments in urban infrastructure and quality of life, SOE reform, and social protection will require the mobilization of substantial financial resources. The World Bank studies suggest, however, that the Northeast could mobilize significant financial resources on its own, for instance by ending subsidies to loss-making locally-administered SOEs and following commercial best-practices for the sale or management of SOE shares and assets. The prospect of near-term improvements in the Northeast's investment climate, business activity, and local business taxes should also make it possible to finance measures to improve the investment climate.

Citing problems with central-local government transfers, the World Bank's report on Northeast development strategy also recommends a comprehensive review and additional rationalization of the inter-governmental fiscal system. A more balanced approach toward expenditure assignments and transfers, greater opportunities tax revenue mobilization (e.g., property taxes) by the local governments, and more authority to borrow (with appropriate controls) at the local level would make it easier for the Northeast to finance a variety of public programs.

The government continues to have an important role in Northeast development. But direct interventions, such as the designation of "pillar" industries and government-financed investments, are increasingly inappropriate. As China moves toward becoming an innovation-driven economy, the government's role should shift toward facilitating private investment and innovation and providing broad support for education and urban quality of life.

These studies were undertaken with encouragement and assistance from the Ministry of Finance; the State Council Office for Revitalization of the Northeast and Other Old Industrial Bases; and local counterparts in Heilongjiang, Jilin, and Liaoning provinces.

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