Eliot R. Cutler: The next power shift in China, from provinces to Beijing

Posted Aug. 07, 2008, at 12 a.m.

As the world’s attention turns to Beijing and the Olympic Games, the conventional wisdom abroad is that the government of the People’s Republic of China is an all-powerful, centralized state.

Wrong.

Indeed, China now needs to reverse a course set 30 years ago when the provincial governments were charged with overseeing rapid economic development and, in the course of doing so, accumulated vastly greater authority.

Over the period of impressive growth since the post-Mao reforms, China’ s economy has become a vigorous and competitive market economy — but also a much less directed one. It is now in desperate need of more order and regulation.

The national government has shrunk in proportion to China’ s burgeoning economy and is hard-pressed to improve environmental quality and provide the social goods and services that the citizenry wants and that President Hu Jintao and his colleagues want to deliver. The Beijing government’ s limited reach into the provinces threatens to stall an ambitious national agenda.

Because he realizes that the relationship between growth and sustainability has spun badly out of whack, President Hu’ s policies probably will accelerate two significant changes that we will see in China’ s next decade — more government and fewer companies.

Moregovernment? In China?

Yes. Recent reports suggest that 9,000 chemical plants alone discharge effluent into the Yangtze River. There may be more than 10,000 manufacturers of toys in China. Chonqing, nominally a city, is nearly as populous as the entire state of California, the world’ s eighth-largest economy.

China is not America, and the environmental challenges the Chinese face are more difficult — as well as more urgent — than any we have confronted in the U.S. The industrialization of America that took generations has happened in China in just a few years. Where the environmental damage wreaked by America’ s growth happened slowly, with no one watching, today’ s global climate challenge unfortunately doesn’ t give China as much time as America took to get it right.

Measures that were taken three and four decades ago in America ago to correct imbalances similar to those that now confound China might be usefully examined by a Chinese leadership looking for ways to solve their own problems.

For example, the U.S. Environmental Protection Agency, created in 1970, ultimately was given Cabinet status and the authority to regulate all nonmilitary programs and activities of other federal, state and local government agencies. China might well benefit from giving similar authority to its national environmental agency, just upgraded to a ministry this year.

The Ministry of Environmental Protection also needs to get bigger. Today, the head office of China’ s national environmental protection agency is staffed by only a few hundred people, making it difficult at best for the agency to set uniform nationwide standards, monitor performance across hundreds of manufacturing sectors and gain reliable compliance in 31 provinces.

Under the National Environmental Policy Act, every major federal government action, program or activity in the U.S. must be preceded by an environmental impact statement that discloses the environmental harm that might flow from the project and that examines alternatives to it. Most important — and of potential significance for China — the ultimate arbiter of the adequacy of the impact statement is someone other than the project proponent.

Finally, the U.S. federal Clean Air Act established air quality control regions based not on political boundaries but on air sheds. The law required that states and local governments cooperate on plans to control emissions within these regions. The point of greatest relevance to China today is that those plans had to promise results by a particular deadline, had to be approved by EPA, and then had to be implemented by the states and localities. If they weren’ t, the states would lose precious federal highway grants and the authority to make their own cleanup plans.

What will happen in China? We can expect that the national government will become more of a regulator and less of a promoter and that a stronger group of regulators with more employees and fewer overlapping jurisdictions will impose rules and standards that will be clearer and more uniformly enforced. The government’ s regulatory reach into the provinces will become much greater, and it will use economic incentives and financial mechanisms to gain more cooperation from provincial and local officials.

At the same time as the national government gets bigger, the manufacturing sector in China should begin to consolidate dramatically. There are a legion of forces lining up to spur consolidation. Chinese entrepreneurs are attracted by the substantial profit margins that brands and distributors reap compared with the paltry margins generated by thousands of sourcing factories competing with each other.

Not incidentally, fewer and better capitalized companies will be better able to comply with tougher environmental, health and safety regulations, to increase efficiency and productivity in order to compete with lower-wage competition from Southeast Asia and eventually Africa, and to compete globally for the best and the brightest design and managerial talent.

Eliot R. Cutler, a Bangor native, is the managing partner of the Beijing office of Akin Gump Strauss Hauer & Feld LLP , an international law firm. He is a former associate director of the White House Office of Management and Budget.

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