Lesson 4: Encourage local government entrepreneurship

The provision and maintenance of infrastructure, and the supply of regulatory and legal services depend on the capacity of local governments. Experience from East Asia, Western Europe, and the United States indicates that the local government entrepreneurship can spur or reinforce private entrepreneurship. In industrial countries local government initiatives include providing fiscal and, possibly, financial incentives in addition to providing essential services. But in East Asia, particularly China, experience suggests local governments have directly initiated new industrial activities in the early stages of development, supplying seed capital and managerial expertise (Oi 1990; Walder 1994, 1995; Nee 1989, 1990). Local governments have shouldered the initial risks associated with entering new fields and helping the community acquire the learning needed to successfully diversify into nonfarm activities. Local authorities in China have taken a leading role in setting up rural industry. Having established these beachheads they have opened the way for private and cooperatively owned enterprises which can take advantage 23 of the pioneering efforts of the government-initiated collectives.

Competitiveness, entrepreneurship, a sound financial strategy, and accountability are the keys to the success of local governments in this endeavor. Competition induces local governments to strive for efficiency, plan for the future, and harness local talent. Entrepreneurship, in sponsoring new start-ups, attracting investment from outside the locality, and persuading provincial or central governments to enlarge their financial stake in the community is crucial for enlarging the resource base.

An effective financing strategy aims at balancing the requirements for infrastructure and services against the revenue from fees, taxes, rates and central government grants handled by local authorities. It calls for economizing on administrative costs and nondevelopmental expenses and for choosing the best possible fiscal arrangement with the nexthigher level of government. Accountability is a function of built-in legal and administrative safeguards, the participatory vigilance of the local community, and the degree to which national politics creates a milieu in which local governments can be fairly elected, have the autonomy to pursue certain developmental objectives, and, as a consequence of competition or demonstration effects, have the incentive to take responsible initiatives.