China's Golden Cities

The common assumption about China's boom is that its impact, good and bad, is concentrated in the coastal cities where economic reforms first began 25 years ago. One thinks of Shenzhen's blossoming from a fishing village into an industrial metropolis of 7 million people with a business climate that builds great wealth, but also may foster corruption and degradation of the environment. That's what many of us at the World Bank would have assumed, too, until we began surveying 12,400 firms in 120 Chinese cities. While we are only beginning to analyze the data, a number of patterns quickly emerge. Among the most striking is the fact that there is no link between fast growth and the breeding of corruption or pollution.

In general, China's transition to a market economy appears to be both more advanced and somewhat less damaging than we thought. Only 8 percent of the firms in this random sample of manufacturing are majority state-owned. Though they control one third of the assets in the sample, this still suggests a larger private sector than previous estimates. The extent of the transition varies dramatically:, from 99 percent private firms in Wenzhou or Jiaxing on the southeast coast to 60 percent in Anshan in the old northeastern rust belt. But in the cities where the private sector flourishes, firms reported far less red tape--from faster times through Customs to fewer days dealing with bureaucracy and less frequent demands for bribes.

While corruption is inherently hard to measure, we get pretty good response rates on the question of whether firms have to pay bribes to get loans from commercial banks, which are still largely state-owned. In southeast cities such as Hangzhou or Xiamen, 1 to 2 percent of firms report paying bribes to gain loans; the figure is above 10 percent in more than 20 cities of the center and west.

What explains these differences? Being near the coast is a help in China, because of access to external ideas and because coastal areas were permitted to experiment with reform first. An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou--all were industrial backwaters in 1978, and responded to China's opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.

A good investment climate for firms also goes hand in hand with a good environment for people. As expected, cities with better investment climates tend to have higher wages (averaging $3,000 to $4,000 a year in coastal cities, versus $1,000 in the interior), less unemployment, lower infant mortality and higher education spending. But surprisingly, they also score higher on environmental measures such as green space per capita, clean-air days per year and percent of water discharge that is treated. For example, cities like Weihai, Qingdao, Suzhou, Hangzhou and Fuzhou all score very highly in terms of business climate, and all treat 97 percent or more of their industrial waste water, with Weihai treating a perfect 100 percent.

The opposite is also true. The average waste water treatment rate for cities with poor investment environments was about 78 percent. Why is this so? Cities with poor investment climates tend to have industry dominated by state firms, which often are the worst polluters.

Let's be crystal clear: all the major cities of China face serious environmental challenges. Still, many of the coastal cities now realize that having a good environment and being a nice place to live are critical to attracting talented people in an increasingly competitive world. So a number of "golden cities"--such as Suzhou, Hangzhou, Dongguan, Jiangmen, Qingdao and Weihai--are finally becoming both relatively nice places to live and good places in which to do business.