How is China so welcoming of businesses? (REODB 2)

Representational Image by OpenClipart-Vectors from Pixabay

Local government incentives

In my first post on Real Ease of Doing Business (REODB), I had detailed how local politicians and bureaucrats in India torment businesses. Of the many insightful comments that I got, this one from Yogesh Karnik is very relevant here.

Does the rank-and-file bureaucracy benefit from being business friendly?

One of the most remarkable learnings I had about China is that a government department is allowed to distribute a part of its revenues to its employees. Here is Ang

Does the political leadership in China benefit from being business friendly?

In one of my most read posts, I had argued that a Member of Parliament (MP) in India has very little incentive to work on job creation. First, most of the work of a MP is invisible to his voters. For example, if the MP works with the central government to increase tourism in his constituency, most of his voters will not be aware of what he did. Secondly, the best place for jobs may be outside the constituency. For example, development of an industrial park in a port may attract more businesses and create many more jobs than similar park in a hinterland district. But the MP of the hinterland district will not get any praise from his voters, if he helped create the park at the port. Thirdly, many of the jobs created may go to immigrants from other districts or even other states. This may be because the immigrants are ready to work for less or because many locals consider a large subset of jobs beneath them. There is also the widespread practice of businesses not employing ‘locals’ because they ‘create trouble.’ Many industries in many states have the majority of labor force from out of state. Take construction in most states for example. Contractors in Kerala speak fluent Hindi because most of their labor force is from UP and Bihar.

Discussion

The incentives for the local governments in China — at the level of political leadership, rank and file and the organization itself — are very different from those in India. I believe that this is a major reason for why China is much more welcoming of business than India. However, China’s approach is not without dangers.

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Yogesh Upadhyaya

Yogesh Upadhyaya

Entrepreneur. Economist. Investor. Actor. Technophile. Policy wonk. Comedian. I love to explore places where these worlds intersect.