As part of Egypt’s Network for Integrated Development (ENID/ElNidaa) 2019 annual conference.

1. Cluster Development in China:
Market Size, Binding Constraints, and Local Initiative
Xiaobo Zhang
Peking University
International Food Policy Research Institute (IFPRI)
ENID/EL Nidaa’s Six Annual Conference, February 14-15, 2019
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2. The Great Puzzle of China’s
Industrialization
• China has experienced the same degree of
industrialization in three decades as Europe did in two
centuries (Summers, 2007)
• China is the world’s largest exporter today and the
largest or second-largest economy (Wu, 2016).
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3. • Financial development is regarded as a key instrument
for industrial development because pooled resources
are necessary to build factories and purchase
machineries (Goldsmith, 1969; McKinnon 1973;
Banerjee and Newman 1993; King and Levine 1993;
Rajan and Zingales, 1998, Ayyagari et al. 2006).
• Building a sound legal system is also crucial for
ensuring the functioning of market economy (contract
enforcement) (North, 1990; Acemoglu and Robinson,
2012).
Conventional Thinking on Industrialization
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4. • State banks didn’t extend any credit to SMEs in the
early stage of reform (Lin and Li, 2001).
• One possible channel is informal financing (Allen, Qian,
and Qian 2006). However, considering that at the onset
of China’s reform, a large proportion of rural people
were poor, the amount of local savings available for
informal financing would have been rather limited.
• Private ownership was not formally recognized by
constitution until 2004.
China Seems to Defy the Conventional Wisdom
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5. Role of Clusters in Industrialization
• Most Chinese industrial productions are
cluster based.
• There are thousands of clusters in China.
For example, Datang Township produced
6 billion pairs of socks per year.
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6. Use strong social capital to overcome credit
constraints and weak institutions
• Fine division of labor lowers the capital requirements of
entry (Ruan and Zhang, 2009).
• Social trust, repeated transactions, and proximity make
it possible for producers to use trade credit and informal
contracts to fill the void of formal financial and legal
institutions.
• It is more cost effective to build necessary public
goods/infrastructure in a small area than at the national
level.
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7. The Existing Strengths
• Strong social trust embedded in rural
communities;
• Abundant labor and high population
density
• Enterprising spirit
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8. Three Major Lessons
• Cluster development is limited by the extent of
market.
• Binding constraints in clusters are often location
specific and evolving over time.
• Local collective actions are needed to overcome
the binding constraints facing firms.
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9. Market Size
• The success of rural reform (giving land user rights to
farmers) has released millions of farmers from their land,
providing abundant labor for non-farm jobs.
• Rising rural income has stimulated the domestic demand
for manufacturing goods.
• In 2001, China joined WTO. The external demand for
Chinese products has greatly expanded.
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10. Puyuan Cashmere Cluster
• Set up marketplaces
• Set up the logistics center
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11. Marketplaces
• In April 1988, the township government
and the local administration for industry
and commerce raised 580,000 yuan from
different sources and constructed a
cashmere sweater marketplace (4,300
square meters of building area and more
than 50 rooms).
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12. Marketplaces
• Between1992 and 1994, the local government further raised nearly
100 million yuan from the Puyuan Township government; the
Puyuan Administration for Industry and Commerce (Puyuan Zhen
Gongshangsuo); the Puyuan General Company of Agriculture,
Industry, and Commerce (Puyuan Nonggongshang Zong Gongsi);
the Tongxiang City Goods and Materials Company (Tongxiangshi
Wuzi Gongsi); the Tongxiang Supply and Sale Cooperative (Puyuan
Gongxiaoshe);various banks; and other sources.
• Using these resources, the local government built 11 more
marketplaces with more than 3,000 shops for cashmere sweaters
and their intermediate inputs.
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13. 13

14. Logistics Center (PPP)
• It was not economical for each transport company to build separate
loading docks and parking lots, meaning that trucks often blocked
the streets when loading goods. Some of the companies even hired
thugs to fight for the most lucrative routes.
• In 1995, to reduce chaos and improve efficiency, the local
government intervened and organized 27 private logistics and
transport companies into a shareholding company with the local
government as the largest shareholder. The company invested 40
million yuan to build a logistics business center, a loading dock, a
150,000-square-meter warehouse, and a parking lot.
• The company has auctioned off 109 routes to more than 140 major
Chinese cities to private investors.
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15. Binding Constraints
• Location specific
• They are evolving over time
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16. The Case of Anding Potato Cluster
Anding potato cluster
Zhang and Hu, 2015, World Development 16

17. Expand the Market
• Establish trader and producer associations.
• Update market information systems.
• Set up a new system of local wholesale markets.
• Apply for more freight car quotas.
• Subsidize farmers to build storages.
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18. Acquire and Spread Market Information
• The potato association sends informants to live in
major wholesale markets nationwide to collect
market information.
• The county broadcasts the information in local
media (radio, TV, and newspapers) and on large
monitors in major gathering places (central squares,
railway and bus stations).
• Greater market transparency makes it harder for
traders to cheat farmers.
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19. The Spatial Distribution of Markets Over Time
☆: Wholesale market
○: Village collection point
Blue: Built 1996-2000
Red: Built 2001-2005
Yellow: Built 2006-2010
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20. Overcome Transportation Bottleneck
• Lobby for more freight car quotas (up from 1507
in 2003, to 3605 in 2004, and 6145 in 2009).
Transportation cost to Shanghai:
By car: 450 yuan/ton
By train: 225 yuan/ton
Anding to Guangzhou:
Anding, China: potato train
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21. Build More Storages (55% of annual output)
Farmer’s storage: 0.36 million tons
More than 2 storages per
household
Small natural ventilation storages:
0.185 million tons
Centrally air conditioned: 10000 ton each Natural ventilation storages: Medium size
200 Yuan
Subsidy/storage
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22. Role of Local Government
• Developing cluster is a continuous process with
constantly involving in overcoming constraints.
• The one-size-fits-all type interventions may work
for once, but not all the time.
• After a policy helps remove one binding constraint,
another emerges, that in turn, requires a new set
of local policies.
• Continuous tinkering is often required.
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23. Role of Local Government
• Most clusters/industrial parks are at the local
level. Their development involves constantly
tinkering with various bottlenecks.
• It is important to put local governments on the
driver’s seat considering their informational
advantage.
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24. Role of Local Government
• In China, local governments have strong
embedded interests in promoting
cluster/industrial park development:
– Fiscal competition among local governments
– Career competition among local officials
• More research is needed to understand the
incentive structures of local governments in
other developing countries.
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25. Is the Cluster-based Model in China Unique?
Medicinal and aromatic plants
(MAPs) cluster in Egypt
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26. MAPs
• More than 5,000 years of history, accounting for
more than 10% of output. The production is
labor intensive, employing many female
workers.
• 问题： 水污染和质量检验（成本巨高）
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27. Three Challenges
• Water contamination
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28. Processing
• Don’t dare to invest in machinery because
it is illegal to run a processing plant in a
village near MAP production.
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29. Testing
• Traders have to send samples to Germany
or Netherland for testing. Extremely
expensive!
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30. Why Lack of Local Collective Actions?
• Local officials do not have embedded
incentives to develop local economy.
• Local elites are driven by the agenda of
donors. They care only about the interest
of donors, which are often not aligned with
the interest of local people and do not fit
local conditions.
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31. Thank you!
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