Going Dutch

"Come visit Shanxi, it's lovely": the province is desperate to diversify

As if swine flu weren’t bad enough: Dutch disease is breaking out in China and the province of Shanxi is suffering from a particularly bad case.

Nothing to do with clogs, canals or cannabis, however.

The diagnosis is more mundane. The term, first introduced by the Economist magazine in the late 1970s, refers to the Dutch discovery of a natural gas field 10 years earlier. In the subsequent natural resource boom, other investment was “crowded out”, leading to a decline in local manufacturing i.e. what seemed like a boon in fact cost the economy elsewhere. Now the disease is reappearing in central China, says the Southern Weekly. The newspaper offers a “resource curse” explanation of Shanxi’s woeful economic performance this year.

The People’s Daily picked up on a similar issue this week. Many of the country’s mineral-rich regions are falling behind the national average in growth terms, it says. But Shanxi, with a decline in GDP of more than 8% in the first quarter, is the country’s worst performer.

Besides the “crowding out” phenomenon (and Shanxi’s light manufacturing sector has shrunk in recent years relative to its heavier cousin), resource-cursed economies usually suffer from overexposure to commodities too.

Think Nigeria, Angola and Iraq. But at a provincial level, Shanxi fits the bill – and its commodity is coal. Until recently it was China’s leading producer. But competition from other provinces (see next article) and overseas has eroded its pricing power, especially as the economic slowdown dampens overall demand.

Of course, there have been good times too, and the Weekly notes that previous attempts at industrial restructuring have usually petered out when the coal price has risen. The temptation to cash-in has been too strong, especially when government planners are tasked with boosting growth and employment.

But this raises questions of leadership, a third area in which the resource curse can cast its shadow.

In part, coal’s dominance is self-perpetuating. Most of the province’s officials come from within the coal industry, so they struggle with blue-sky thinking when it comes to radical change.

Perhaps more significant are murkier issues in governance and accountability, as the resource elites skim off disproportionate wealth and power.

Hence Shanxi’s coal barons are famous across China for their financial and political clout, even as their birthplace struggles with pollution and industrial safety. Local city Linfen regularly tops the polls as the most contaminated city on earth (see WiC10 for more on this infamous city). The region’s poor safety record is also well known; the Weekly says that the industry death count tracks movements in the coal price. The curse strikes again.

Can the afflicted escape? The locals grumble that central China (Shanxi included) is missing out on some of China’s march towards greater prosperity. It lacks the export industries and foreign direct investment of the wealthier coastal provinces to the south and east. And it has less access to the state largesse being lavished on provinces to the west.

So Shanxi would like to be shown a little more love. After all, it started out as a key contributor to Mao’s early Five Year Plans, and is now paying something of a price. But the national media is unsympathetic, and the increasingly open criticism of mining safety is further denting the province’s reputation.

One response has been to acknowledge the curse but try to make the best of it. So there is talk of a coal futures exchange being built in the provincial capital, Taiyuan –which might then grow by adding other commodies. Chicago Mercantile Exchange of the east, perhaps?

But many locals seem more fatalistic and a number of Shanxi cities are having problems filling government positions. Few want to risk being held responsible for future misfortune. “Mining brings bad luck” is the common refrain.

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