China’s refocusing on social goals requires more than new metrics

This year’s government work report delivered by Premier Li Qiang marks a shift from the perennial fixation with growth towards a greater emphasis on effective strategic development, especially social and people-centred outcomes. The “two sessions” have convened against the backdrop of Washington’s military adventure overseas. In contrast to that overextended empire, China will prevail in the competition with the United States by putting its own house in order. Some of the most consequential reforms are not found in the work report’s section headings but are sometimes buried in the text. Both China’s rapid economic growth and the ills plaguing its economy can largely be attributed to how regional and local cadres are evaluated and promoted. The historical ethos has been growth at all costs. Barring corruption, cadres have long been incentivised to focus on delivering results for today rather than fostering long-term sustainable growth. Real estate development has powered immediate economic growth even as industrial investment has been squeezed out. Residential land can be sold for instant revenue and with expectations of swift projects, while industrial land is priced lower in exchange for industrial development and future tax revenues. Beyond the land-based model of municipal finance in China, cadres’ incentives have played a key role in creating China’s property glut. China’s landscape is dotted with vanity projects. Their construction may have provided a short-term gross domestic product boost, even if often leaving the local area debt-laden. Economic growth becomes a mirage arising from wastage instead of authentic development. In a recent collection of President Xi Jinping’s thoughts on the subject, cadres are exhorted towards a correct understanding of governance. But would a major education campaign, launched as work resumed after the Spring Festival holiday, be enough to change the behaviour of cadres? No system, however powerful, can command virtue. A reset of minds must come with a realignment of incentives. With all its limitations, GDP growth serves as a useful yardstick. The blunt instrument can serve as a starting point to be enhanced rather than eliminated. First, the central government can set up a process for regularly auditing the quality of GDP growth at regional and local levels. These audits will probe beneath the headlines to ask how sustainable growth is, whether it’s driven by one-off investment or real industrial expansion, whether such investment causes externalities and what social and environmental costs need to be addressed. The assessment of cadres using such metrics should be adjusted either upwards or downwards based on growth quality. Cadres who forego expedient growth today in favour of long-term results should be recognised. Those who mortgage the future for vanity projects should see their grades adjusted downwards when economic performance is only good on paper. Economic growth should still count, but cadres would be measured by quality-adjusted GDP growth. Beyond economic growth, other quantitative measures should be applied. An overemphasis on GDP growth has tilted cadres towards short-termism rather than long-term development. Sustainable economic growth will be reaped in time by sowing the right seeds today. Leading indicators of GDP growth should include industrial investment and the number of industrial enterprises. Importantly, return on investment should be measured to ensure state funds are well spent. Cadres should be measured by their effectiveness in pursuing the underlying drivers of long-term economic performance rather than just aggregate GDP figures. Looking backwards is just as important as looking forward. Measurements should extend beyond leading indicators to include retroactive audits. Cadres should not get away with creating an immediate boost while burdening future generations. Cadres should be held accountable for historical mistakes made behind the facade of growth. Finally, cadres should be judged not just from the top down but also bottom up. The central government could assess cadres through periodic surveys of the satisfaction of the local populace. The net migration flow for the region would provide another indication. People vote with their feet. While broader economic and social forces are at work alongside local governance, people are attracted to well-managed places. A quality of life index could be applied to gauge the social development of a place. While a balanced scorecard incorporating broader metrics will better align cadres’ behaviour with the national interest, the growth-driven orientation of local cadres must be seen in the context of China’s fiscal architecture. Compared to their share of fiscal revenue, local governments often shoulder a disproportionate share of fiscal expenditure. To make ends meet, local governments must pursue a range of business activities, often leveraging land-based financing. To become institutions that primarily focus on delivering broad social services, local governments must be adequately funded. A revamped cadre appraisal system can only be fully effective in concert with rebalanced municipal finance. In this year’s government work report, greater transfer payments are promised to regional governments. China’s new growth model will not be tested in Beijing’s policy documents, but in the daily reasoning of county officials, many of whom have operated in a system of short-term incentives and fiscal constraints. To steer the country towards sustainable development, cadres must be properly motivated and adequately resourced. Aligning local cadre incentives is a critical frontier which cannot be crossed without reshaping the fiscal terrain to ensure it is financially viable to do the right thing over the long term. China can only shift away from a growth-at-all-costs mindset when cadres are rewarded for pursuing qualitative outcomes and local governments have the fiscal means to pursue them.

China’s refocusing on social goals requires more than new metrics

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}To shift the mindset of local policymakers away from growth at all costs, China must also reset incentives and fiscal priorities

To shift the mindset of local policymakers away from growth at all costs, China must also reset incentives and fiscal priorities