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Should Mumbai Learn from Shanghai?

Indian policymakers are fascinated by Shanghai and they seek to develop Mumbai into another Shanghai. This vision is based entirely on the fascination with the Shanghai/Pudong skyline, without any substantive understanding of or facts about the growth in the Chinese city. True, there has been rapid growth in Shanghai, but most of this growth has been to the benefit of corporations (public sector and foreign controlled), little has gone to the city's households. Since the late 1990s, the poor of Shanghai have in fact seen a relative decline in incomes vis-à-vis the richer groups. Shanghai has a strong government (which has put up the towering skyline), but entrepreneurship and private initiative are limited compared to that in most other provinces of China. The city's record in innovation too has been poor. Is this the path for Mumbai to follow?

SPECIAL ARTICLEjuly 19, 2008 EPW Economic & Political Weekly44Should Mumbai Learn from Shanghai?Yasheng HuangIndian policymakers are fascinated by Shanghai and they seek to develop Mumbai into another Shanghai. This vision is based entirely on the fascination with the Shanghai/Pudong skyline, without any substantive understanding of or facts about the growth in the Chinese city. True, there has been rapid growth in Shanghai, but most of this growth has been to the benefit of corporations (public sector and foreign controlled), little has gone to the city’s households. Since the late 1990s, the poor of Shanghai have in fact seen a relative decline in incomes vis-à-vis the richer groups. Shanghai has a strong government (which has put up the towering skyline), but entrepreneurship and private initiative are limited compared to that in most other provinces of China. The city’s record in innovation too has been poor. Is this the path for Mumbai to follow?Yasheng Huang (yshuang@mit.edu) teaches at the MIT Sloan School of Management, Massachusetts, US. Some of the research in this article draws from his book Capitalism with Chinese Characteristics as well as his current book project on how politics has shaped business, entrepreneurship, education and daily life in China and India. Why can’t India plan bullet trains when China can smoothly roll hi-speed trains between Shanghai and Pudong covering a stretch of over 450 km in one hour? –Jayant Patil, finance minister, Maharashtra.Nowhere else in the world has Shanghai inspired more imagination – and despair – than in the Indian city of Mumbai (particularly during its monsoon season). Indian intellectuals and business people ask, often in great exaspera-tion, “Why cannot Mumbai be more like Shanghai?”. Prime min-isterManmohan Singh, an Oxford-trained economist and a man steeped in humanistic values, nevertheless sees the heavy-handed Shanghai as a model. In an excerpt from a speech he gave in March 2006 he said:When I spoke of turning Mumbai into a Shanghai, many wondered what I had in mind. It is not my intention to draw a road map for Mumbai’s future. But I do believe that Mumbai can learn from Shanghai’s experience in reinventing itself; in rebuilding itself; in rediscovering itself.1This paper begins with a quote by Jayant Patil, the finance minister of Maharashtra. His observation of Shanghai is fascinat-ing. It shows the depth of admiration Indians have for Shanghai as an economic model. His comment, however, also shows that he knew next to nothing about the city he so admired. The high-speed train, known as the Maglev, referred to by Patil, travels not from Shanghai to Pudong but between two locations within Pudong. It does not cover 450 km but only 30 km and it completes its journey 52 minutes ahead of Patil’s schedule – in less than eight minutes.The story of Shanghai is one of two extremes. At one extreme, Shanghai is viewed as a model of economic development and as a symbol of a rising and prosperous China, as the quotes from the Indian politicians show. At the other extreme, there is virtually no real knowledge about this city. It is unlikely that prime minis-ter Manmohan Singh has any detailed information about how Shanghai actually generates economic growth and creates wealth. He simply presumes the existence of these mechanisms firmly in place in Shanghai. Much of the admiration for Shanghai is based on visual evi-dence. Just look at Shanghai’s impressive and imposing skyline and the conclusion is obvious. A survey article on China and India in The Economist in March 2005 opined that India has been “lapped” in its race with China. Why? The proof is in the contrast between the writer’s experiences travelling in Shanghai and Mumbai. Returning to Shanghai was “a bewildering experience” as “[o]ccasionally, through the new skyscrapers, a familiar build-ing appears, lost in the concrete jungle”. Returning to Mumbai was infinitely more assuring. There was no new airport and the only innovation was an improved queuing system in the
SPECIAL ARTICLEEconomic & Political Weekly EPW july 19, 200845immigration hall. The article thus concludes, “Whereas its neigh-bour has been transformed out of all recognition, India has, in most visible essentials, stayed the same”. In this paper, let me go beyond Shanghai’s skylines and present some real economic and social data on Shanghai. Economist Alwyn Young (1995) once memorably argued that the “tyranny of numbers” showed that east Asian growth was driven by capital investments rather than productivity improvements. His paper was published on the eve of the east Asian financial crisis. In this paper, let me describe what the “tyranny of numbers” tells us about Shanghai. The main sources of data in this paper come from regular household surveys conducted by the National Bureau of Statistics (NBS) as well as economic statistics such as the gross domestic product or GDP from a number of surveys [Urban Social and Economic Survey Team 1991; 1997; 2003; 2005]. Here is a brief summary of the findings based on these data: * First, although it is true that Shanghai has had excellent GDP performance, much of this growth seems to have done little to improve the living standards of the average Shanghainese. A huge portion of Shanghai’sGDP accrues not to Shanghai’s house-holds as personal income but to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign companies. The exalted GDP numbers translate into only modest levels of household income gains in Shanghai. Relative to the country as a whole, Shanghai’s households are not nearly as rich as the city’sGDP level suggests. * Second, in the 1990s, Shanghai’sGDP growth was not pro-poor and since the late 1990s its growth has been sharply anti-poor. The poorest segments of the Shanghai population have lost absolutely – i e, relative to their income position in the past – since 2000. As recently as 2005, rural Shanghainese, who still accounted for a sizeable share of the workforce,2 had about the same income level as they did in 1989 relative to the rural income level of the country as a whole. The income position of the urban Shanghainese, compared to the urban income of China as a whole, improved only marginally since the early 1980s. Whereas Shanghai households historically have had the highest wage level in the country, the growth of their wage has lagged the rest of the country. In addition, Shanghai households earn very little money from their asset ownership, not just compared with households living in rich provinces but also compared with households living in some of China’s poorest provinces. The huge construc-tion and real estate booms that outside analysts associate with Shanghai appear to have done very little to benefit the average Shanghaihouseholds. Their rental income is among the lowest in the country. * Third, despite its reputation of being a hi-tech hub of China, there is no hard evidence that Shanghai is innovative. Measured in terms of patent grants per year, Shanghai consistently under-performed two of China’s most entrepreneurial provinces, Zhejiang and Guangdong. * Fourth, a mechanism that is widely associated with efficiency and wealth creation is conspicuously missing in Shanghai – entrepreneurship and private sector development. Shanghai has an extraordinarily strong government and the strength of this government was the reason why Shanghai’s skylines went up so quickly. But this achievement in the urban skylines was achieved at the expense of what actually truly matters for economic growth in the long run – private sector and entrepreneurship. This paper will be a factual presentation of some of these key facts about Shanghai. I leave the readers to judge whether Mumbai should emulate Shanghai. Maybe it should, but Mumbai will be better off by making that decision after it has all the facts right. GDP and Its ComponentsShanghai has some exalted GDP numbers. For example, in 2004 Shanghai’s GDP per capita was 55,037 yuan (about $ 6,880). This was 5.2 times China’s GDP per capita. By this measure, Shanghai unquestionably deserves the title as the head of the dragon. GDP data, however, are extraordinarily tricky.3 They tell us about the level of economic activities but they do not tell us anything about how the income is shared. There are two distributional issues related to GDP. One is how GDP is shared among three actors of the economy – households, government and corporations. The other distributional issue has to do with how income is shared between the rich and the poor people. Let us take a look at these two distributional issues as related to Shanghai. In the following analysis, I benchmark Shanghai against two other provinces in China – Guangdong and Zhejiang. These two provinces – by Chinese standard at least – have a bottom-up, entrepreneurial approach toward economic development. The contrast of the statist Shanghai with these entrepreneurial provinces is substantial. GDP per capita is often loosely referred to as income per capita. That phrase leaves the impression that an average Shanghai resi-dent earns an income close to its GDP per capita, i e, 55,037 yuan. Many foreign firms, for example, use GDP per capita data to design sales strategies in their regional marketing plans. But this assumption is deeply flawed.There are two ways to disaggregate GDP data. One is the expenditure approach, under which GDP is disaggregated into consumption, investment, government spending, and net exports. The expenditure approach is the most common method by whichGDP data are reported for China and for other countries. The alternative approach is the income approach, under which GDP is divided into the following components: (1) labour income (wages and benefits), (2) capital income (i e, business profits, interest and rent), (3) depreciation, and (4) taxes (i e, income to the government). Depreciation is otherwise known as consump-tion of fixed capital and it refers to the amount that businesses set aside to replace worn-out structures and equipment. Calculations of the income components of GDP often require removing the depreciation amount from the GDP amount.GDP minus deprecia-tion becomes the net national product (NNP). The other three components of GDP represent income accruals to the three main players in an economy – labour, owners of
Net rural income
SPECIAL ARTICLEEconomic & Political Weekly EPW july 19, 200847the 24 years between 1980 and 2004, Shanghai seemingly went through a full cycle: In the 1980s the city lost relative to the rest of the country, but in the 1990s it regained its previous dominant position. This would be the conventional wisdom interpretation of the economic history of Shanghai based on the GDP data. Let us look at the other two lines in Figure 2 representing rural net income per capita and urban disposable income, respectively. The indicators based on the household-income surveys, a more accurate measure of the economic well-being of the average Shanghainese than theGDP data, would cast doubt on this interpretation. The line representing rural net income is shaped like an inverted V or a pyramid, almost a flipped image of theGDP per capita ratio. After an initial decline between 1980 and 1983, the ratio steadily rose, peaking in 1993, and then it declined or stayed flat for the rest of the period. At its peak, the ratio was 2.96 in 1993 and in 2004 it was 2.5, exactly the same ratio as in 1989. An apt description of the line representing the urban disposable income ratio is a staircase with elongated but low stairs, i e, the ratio rose by very small steps but with many flat years in between. The ratio rose in 1985 to 1.46 (from 1.28 in 1984) and stayed flat until 1993 when it rose from 1.49 to 1.66. It then remained flat for another six years and rose only in 1999 to 1.87 and then resumed the flattening pattern until 2002 when the ratio declined to 1.72. What do these numbers mean? The first striking pattern is a systematic inverse relationship between theGDP measure and the income measure. In the 1980s, when Shanghai’s GDP per capita declined against the rest of the country, the income of its average residents was actually gaining and this was especially true for its rural residents. In the 1990s, the relationship between per capitaGDP and per capita rural income was still negative but the movements of these two variables reversed their directions. Shanghai’s per capitaGDP grew substantially faster than the rest of the country beginning in 1990. In 1990, the ratio was 3.62. It was 3.98 in 1993, 4.25 in 1997, 4.88 in 2000 and 5.24 in 2004. At 5.24, Shanghai was roughly where it was in 1983 (5.11) in terms of its position vis-à-vis the rest of the country. After peaking in 1993, the rural Shanghainese steadily lost ground relative to the rural Chinese elsewhere in the country. The rural Shanghainese were still the richest in the country but in 2004 their margins relative to the rest of the country had decreased. In 1993, the ratio was 2.96; in 2004, it was 2.49. This is exactly where Shanghai was in 1989. Urban Shanghainese fared only slightly better. They managed to increase their income margins relative to the rest of urban China but at an extraordi-narily modest pace. Their margins rose every seven years or so, in 1985 (1.45), in 1993 (1.66), and then in 1999 (1.87). In 2004, the ratio was 1.77, a decline from the 1999 level. Let me more formally demonstrate the negative relationship between Shanghai’sGDP and its income levels – both relative to the rest of the country. The Pearson correlation coefficient for Shanghai’sGDP per capita and urban income per capita is -0.12; the Pearson coefficient for Shanghai’sGDP per capita and rural income per capita is -0.62. In other words, there is a syste-matic negative relationship between Shanghai’sGDP and the income levels of its population, although the strength of the relationship is much greater for the rural data than it is for the urban data. The next question is why Shanghai exhibits such a pattern. One hypothesis is that a state-controlled economy can grow with-out improving the economic well-being of its average residents. For example, government-controlled corporations can invest heavily and reap huge gains through profit distributions. The government can finance heavy investments through taxes which reduce the income share of households. In contrast, an entrepre-neurially-driven economy can only grow by improving the per-sonal incomes of the average households. We have already demonstrated that in entrepreneurial Zhejiang the employee com-pensation share of GDP is much higher than it is in Shanghai. A logical inference is that GDP performance in Zhejiang is positively correlated with the household income of the average Zhejiang residents. This is confirmed in Panel (2) of Figure 2 which graphs the ratios of Zhejiang’s per capitaGDP, urban household income, and rural household income relative to the values of the national averages. In sharp contrast to the pattern visible on the Shanghai graph, the three lines move closely together. The Pearson corre-lation coefficient for the GDP per capita and urban household income is 0.91; it is 0.90 for the GDP per capita and rural household income data series. The welfare implications of the state-centred, interventionist Shanghai model and of the entrepreneurial Zhejiang model cannot be more clear. Income DistributionIn 2004, the World Bank convened a large conference in Shang-hai on global poverty. David Dollar, who wrote extensively about the supposed connections between globalisation and poverty reduction in China, explained why the conference was held in Shanghai, “The World Bank looks around the world for success-ful stories, interprets it and then proselytises the interpretation – and that is often pretty good”.6 Shanghai, according to the Financial Times article covering the event, is “a fitting location”. It was one of the best students of glo-balisation. In the 1990s and since China joined the WTO, the city had received a massive amount of FDI. Much of China’s poverty re-duction occurred in the 1980s when the country was minimally globalised. In the 1990s, not only did the pace of poverty reduc-tion slow down dramatically, but also there were significant set-backs. (In the concluding chapter of this book, I will return to this issue and note that China in 1990s revised downward its poverty threshold several times so more people were lifted above poverty – in a statistical sense.) In this section, let us examine how poor people were faring in Shanghai, right under the noses of the World Bank delegates. Figure 3 (p 48) presents the annual growth of urban household income averaged over three periods, 1986-88, 1989-2003, and 2001-2003. The data were taken from the web site of the Shang-hai government and are based on the annual urban household surveys conducted by the NSB. The figure presents the real income growth rates. The nominal incomes were deflated to their 1978 prices. I used Shanghai’s consumer price index. The Shang-hai web site reports income levels by seven groups: (1) lowest, (2) second lowest, (3) lower-middle, (4) middle, (5) upper-middle,
Shanghai to Guangdong ratio Shanghai to Zhejiang ratio Shanghai to Guangdong ratio
SPECIAL ARTICLEEconomic & Political Weekly EPW july 19, 200851a single self-employer in that year. Things improved a bit in sub-sequent years. In 1996, there were 2.3 self-employed per 100 ur-ban households and in 2004 there were 5. But in terms of its rela-tive rankings in the country, Shanghai was always in the bottom tier. It was ninth from the bottom in 1996 and third from the bottom in 2004. Panels (1) and (2) of Figure 5 provide more details. Not only is entrepreneurial incidence low in Shanghai, those who choose to go into self-employment businesses in Shanghai earn very little money compared with self-employers in other provinces. We already saw that Shanghai has a very low share of employee compensation in itsGDP. In the Chinese data, employee compensation comprises two sources. One is the wage and bene-fits received by workers at paid establishments. The other source is what is known as proprietor income – the income derived from owning and operating a business. (This is one major difference with theUS data where income accruals, paid income and propri-etor income are reported separately. In the Chinese GDP data, they are combined.)Fortunately, theNBS urban household surveys provide a detailed breakdown of household incomes and we can thus com-pare Shanghai’s proprietor income with that of other regions in China. In 2004, urban self-employers in Shanghai reported their per capita business income to be 500 yuan. In contrast, urban self-employers in rich – and entrepreneurially-oriented – pro-vinces earned far more. In Zhejiang, the per capita business income in 2004 was about 1,400 yuan; in Guangdong, it was about 800 yuan. Guangdong and Zhejiang, however, are among the richest regions in China. A more surprising finding is that Shanghai also compares poorly with what are often viewed as laggard provinces. At 500 yuan, Shanghai was squarely in the same earnings neighbourhood as Hunan, Ningxia, Anhui and Yunnan. The GDP per capita of these four provinces is a fraction of that of Shanghai. In terms of their GDP per capita ratios to that of Shanghai (based on 2003 data), Hunan is 0.162 of Shanghai; Ningxia is 0.143; Anhui is 0.138; and Yunnan is 0.121. That urban entrepreneurs in Shanghai and Yunnan earned about the same amount of per capita business income is fascinat-ing. Yunnan is located in China’s south-west and is one of the poorest provinces. In the 1980s and 1990s, the central govern-ment teamed the coastal and prosperous provinces with China’s poorer provinces in the interior and western regions of the coun-try. Shanghai was teamed with Yunnan.13 To illustrate how strange it is that urban entrepreneurs in the two provinces earned about the same amount, suppose there was a finding that self-employment incomes in the US and Turkey were about the same. Turkey’s per capitaGDP in 2000 at $3,000 was about 10 per cent that of theUS, similar to the per capitaGDP gap between Yunnan and Shanghai. The most plausible explanation is that Shanghai restricts its household businesses to the lowest value added activities. It is not economics; it is policy. ConclusionsA detailed examination of data will at least raise some questions about the foundation of Shanghai’s seeming economic miracle. Shanghai’s impressive skylines are built with the resources of the public sector rather than with the vitality of a private sector. But here is a puzzle: How can the public sector be so rich when the private sector is lagging? I do not have direct evidence yet but let me offer a conjecture – Shanghai may have been massively subsidised by the rest of the country. Keep in mind that Shanghai is a city rather than a coun-try. To understand why skyscrapers went up so quickly in Shang-hai (and in other major cities such as Beijing) one has to know what did not go up elsewhere in the country. It turns out that it was education, especially rural education. Even as China’s urban boom dazzled many Indian observers, China was raising tuition charges in rural areas and under-investing in health and educa-tion. (Contrary to the wide perception in India, China no longer has free basic education for its citizens.) China made a costly trade-off in favour of physical infrastruc-tures and urban white elephants at the expense of human capital. On April 2, 2007, China Daily published an article with an unusu-ally frank title, ‘The Ghost of Illiteracy Returns to Haunt the Country’. It reported that the number of the illiterate adult Chinese increased by 30 million between 2000 and 2005 [Wang 2007]. In 2005, there were 115.7 million illiterate adult Chinese, compared with 85 million in 2000. The official source of data, China Statistical Yearbook 2006has since confirmed these figures [NBS 2006].Should Mumbai then learn from Shanghai? Notes 1 The speech is printed on the web site of the Indian embassy to the United States. See http://www.in-dianembassy.org/newsite/press_release/2006/Mar/35.asp, accessed on August 23, 2006. 2 In 2004, according to the NBS (2005, p 369), the number of employed people in Shanghai was 8.37 million people and 2.48 million of them were classified as “rural”. This suggests 29.6 per cent of the workforce to be rural. There is a sharp dis-crepancy between the residency and employment data. According to the same source, in 2004, only 80,000 people resided in the rural areas. How-ever, Shanghai’s residency data are highly unsta-ble. In 1992, there were 4.1 million rural residents, but in 1994 this number declined to 1.8 million. In 1995, this number fell to 3,90,000. This pattern suggests the likelihood that the number of rural residents is highly sensitive to administrative re-classifications rather than to the long-run economic and social dynamics, which tend to bring about changes more gradually. 3 For one thing, because GDP data are the explicit benchmarks used by the Chinese political system to promote or demote officials, they can be easily manipulated. During the 1990s, Shanghai was a showcase of Chinese economic progress and it is not altogether implausible to assume that Shanghai’s GDP data might have been assembled in such a way as to match its outwardly impressive skyline. Chinese data are often sus-pected of statistical falsification, but this is not a problem for which a ready solution exists. In the analysis below, I will proceed on the basis that the Chinese data are accurate, but I will analyse the components of Shanghai’s GDP to illustrate some of the particular dynamics of its economy.4 In 1997, for example, the net national product of the US was $ 7,231 billion. Of this amount, $ 4,687 billion was employee compensation and $ 551 billion was proprietors’ income. In the Chinese data, employee compensation and pro-prietors’ income are reported together. So in order to compare the two countries, I added the two items in the US data, which comes to 72.4 per cent. 5 The main problem is that we do not know whether foreign firms also fall into the category of govern-ment-controlled firms. So double counting may be involved. 6 Quoted in Balls (2004). 7 The data are from Urban Social and Economic Survey Team 1991; 1997; 2003; 2005. 8 It should be noted that official publications report a very high savings rate. There are two possibili-ties. One is that the government and businesses rather than households in Shanghai account for much of the savings. This is merely the asset side of the income approach of GDP. Because much of the income accrues to firms and the government,

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