Keynote Lecture Brief
Prof. Zhang firstly introduced how he got interested in rural industrialization. In 2004, the Ethiopian government approached him to help arrange a field trip to China. The delegation wanted to learn from China’s rural industrialization experiences considering that the two nations share many similarities. Since then, he has conducted more than 10 in-depth case studies, including: footwear cluster in Wenzhou (CER), cashmere sweater cluster in Puyuan (EDCC), children’s garment cluster in Zhili (CER), mechanization cluster in China (AJAE), suitcase and bag cluster in Baigou, China (related to e-commerce), potato cluster in Gansu (WD), handloom cluster in Ethiopia (JDS), aquaculture cluster in Bangladesh (Food Policy), mechanization cluster in Myanmar, medicinal and aromatic plants (MAPs) cluster in Egypt. Then Prof. Xiaobo Zhang referred to the lecture by Prof. Justin Yifu Lin, who believes that development strategies should hinge upon a country/region’s comparative advantage (what it has) and governments can play a role in facilitating economic development.
A few questions arise: how to turn the principles into actions? What constitute comparative advantage? And who are in the best position to identify and fulfil the latent comparative advantage? To answer these questions, Prof. Zhang began by discussing one puzzle and four stories.
China’s rural industrialization puzzle
In 2005, there were 15 million firms in China, and 2/3 of them were in rural areas. Conventional theories believe that financial development and a sound legal system are crucial to economy growth. But China seems to defy the conventional wisdom. State banks didn’t extend any credit to SMEs in the early stage of reform. Private ownership was not formally recognized by constitution until 2004. Despite these constraints, China had several existing strengths: strong social trust embedded in rural communities, abundant labor, high population density, and enterprising spirit. China has used these existing strengths overcome the limitation of formal institutional and financial systems. Social trust, repeated transactions, and proximity make it possible for producers to use trade credit and informal contracts to fill the void of formal financial and legal institutions.
Considering the severe competition among numerous similar workshops, why do they tend to co-locate their businesses? British economist Alfred Marshall highlighted the three advantage of cluster: market linkage, labor pooling, and technology spillover.. Prof. Zhang added a few more features of clusters: lower capital barriers to entry through fine division of labor, group anti-predation strategy, coping with demand uncertainty, and symbiosis.
Case I: Puyuan Cashmere Sweater Cluster
Prof. Zhang took Puyuan cashmere sweater for instance to show that cluster by division of labor can lower the capital entry barriers, which would offer opportunities to rural entrepreneurs. And then, people can overcome financial constraints by informal contacts and trade credit. Furthermore, it helps firms handle risks and lower tax rate.
Case II: Anding Potato Cluster
Based on the case of Anding Potato Cluster, Prof. Zhang answered the question that why local governments in China have such strong incentives to promote local economic development compared with many other developing countries. Prof. Zhang believes that is due to fiscal competition among local governments and career incentives among officials. Anding of Gansu Province used to be one of the poorest places in China (poverty rate 78% in 1980) and didn’t produce potato until 1960s. Now it has become one of the three largest potato production centers in China. Potato accounts for two-thirds of the cropping area and Anding provides every Chinese with one kg potato per year. Farmers generate about 60% of their income from potatoes.
Yiwu Small Commodity Trading City
Local governments have played an active role in overcoming successive bottlenecks and fostering the cluster’s emergence and growth. They introduced a series of measures to improve quality of lands, to adopt potato production, to breed better varieties, and to expand the market. They were also active in acquiring and spreading market information, overcoming transportation bottleneck, building more storages and developing the processing sector.
Prof. Zhang believes that economic development is a continuous process with constantly involving supply-side and demand-size constraints and a process for governments to remove binding constraints.
Yiwu is in the center of Zhejiang Province with very bad land quality and high population density. Right now there are five large marketplaces, more than 70,000 shops. Each day about a quarter million traders visit the city, of whom 10% are foreigners. One-stop shopping makes it easy to do business.
Prof. Zhang furtherly discussed the role of local government in this case. As early as in 1982, the county government decided to legalize informal trading, they started to offer registration service, provide temporary licenses, and build up marketplaces. Later on, governments built a reservoir, turned an air force base into a civic airport and set up a custom near the logistic center (the first inland custom in China).
Due to the fiscal competition among local governments and career competition among local officials, local governments in China have strong embedded interests in promoting cluster and industrial park development. As to local governments in other developing countries, more research is needed to understand their incentive structures.
Medicinal and aromatic plants cluster in Egypt
Medicinal and aromatic plants had more than 5000 years of history, accounting for more than 10% of output. The production is labor intensive, employing many female workers. Now they encounter three major challenges: water contamination, illegal to run a processing plant in a village and extremely expensive testing cost. Why didn’t government in Egypt try to overcome these bottlenecks? One key reason is that local officials do not have incentives to develop local economy.
In many developing countries, local elites are driven by the agenda of donors. They care only about the interest of donors, which are often not aligned with the interest of local people and do not fit local conditions. In other words, because elites earn more for donor projects, they pay less attention to the binding constraints facing local businesses.
Finally, Prof. Zhang emphasized that development is a continuous process, and there are no one-size-fits all strategies. It is hard for an outsider to prescribe development strategies tailored to changing local conditions. To foster a cluster’s emergence and growth, local governments and elites should make use of existing strengths to overcome binding constraints. To do this, they need adequate incentives.
Written by: Zhongchen Fan
Proofread by: Prof.Xiaobo Zhang