Friday, April 25, 2014

Erdos City – 鄂尔多斯市 The “Horde” That Wasn’t

Usman W. Chohan (楚浩云) is an MBA candidate at Desautels with a Concentration in Strategy and Leadership.
He is currently on an MBA exchange in Beijing, at a joint program between Tsinghua School of Economics (SEM) and MIT. The following piece is based on his work on Economics and Urbanization Trends in China, for the China Roots Seminar II (Industry & Society) at the Tsinghua University School of Economics and Management.

An inquiry into the etymology of the poetic language known today as Urdu shows that the name originates from the Mongol word Ordo, meaning “crowd”, “camp”, or “palaces”, from which we also derive the English word Horde. The meaning of the word Urdu embodies a sense of collectiveness, an abundance of interlocutors, and even a certain universalism. So it would seem an almost foregone conclusion that any city with a name derivative of Ordo would contain teeming crowds and bustling “hordes”. However, the resounding irony is that Erdos, Inner Mongolia, China is a city that, despite the communal insinuations of its name, has virtually no inhabitants.

It is not that Erdos is a ghost town which once contained a thriving population that has migrated elsewhere; rather, Erdos is a city built from scratch in the hinterlands of Inner Mongolia and has never had any settled inhabitants. Although it was designed to host a sedentary population of more than one million people, its construction has been left unfinished, thereby relegating it to the status of a white elephant in the roster of Chinese urban projects. Even when few households were made to move there, 98% of its buildings were never tenanted by anybody.

Erdos does, however, contain vast palatial structures, futuristic projects, a modern airport, impeccable roads, stunning Mongol sculptures, a postmodern museum, and a host of avant-garde architectural landmarks. It has even hosted several world class events, including the Miss World Final in 2012 and the World GT1 Racing series in 2011. It also assures visitors of few problems with the local residents, given that there aren’t any. In fact, there are more street cleaners than pedestrians on its sidewalks.

What has heralded the creation of such a behemoth urban project with virtually no residents? The answer is comprised of two parts: (1) The economic dynamics of energy-abundant Inner Mongolia; and (2) The political dynamics underlying the allocation of Inner Mongolia’s wealth.

Economic Dynamics of Inner Mongolia

Inner Mongolia is the third-largest province in China by land area, measuring more than one million square kilometers; but is quite sparsely inhabited, with 20 people per square kilometer. The birthplace of Genghis Khan, the vast region has historically been an economic backwater specializing in a limited number of economic activities, most notably as the largest producer of livestock-related goods in China, including cashmere wool, milk and meat.

However, a major transformation over the past 10 years has swept the province, since discoveries of its coal reserves were made: Inner Mongolia holds one-fourth of the world’s known coal deposits, making its energy contribution one of the underlying drivers of China’s economic miracle. The growth came swiftly: whereas Inner Mongolia only accounted for 7% of China’s coal production in 2000 out of 0.8 billion tonnes; by 2011 Inner Mongolia was producing roughly 1 billion tonnes on its own, or 28% of the 3.5 billion tonnes produced by China overall.

From a vast and remote backwater, Inner Mongolia was now propelled into an enormous economic boom that changed the very nature of its role within the Chinese economy, and the revenues from its coal deposits helped to give the residents of Inner Mongolia a per capita income in of RMB67,000 (roughly USD$16,000 after adjusting for purchasing power party, PPP). This was the sixth highest per capita income in the country (out of 31 provinces), only three places behind Shanghai; and this was quite a jump from its historical place among the committee of provinces: in 1980, Inner Mongolia was the 20th richest (or 11th poorest) province; and as recently as 2000; it was wallowing in 15th place.

In fact, Inner Mongolia has been the fastest growing province (+17% annually on average between 2001 and 2011), far outpacing the Chinese overall rate which hovered in the +8-10% during the past decade. In 2011, its total economic output of $180 billion dollars approximated the entire output of countries such as the Czech Republic and the Philippines.

Inner Mongolia’s untapped coal resources have proven invaluable in satiating the rising energy demands of one billion people across China. However, there exists an additional resource unique to this region which provides a significant advantage to the Chinese economy: the possession of rare earth metals. For example, the bed of coal deposits in the environs of Xilinhot contains roughly 40% of the world’s reserves of Germanium, a rare earth metal used in building circuitry for advanced purposes such as photovoltaic cells and Aeolian turbines

Political Economic Dynamics of Inner Mongolia

With this budding promise of prosperity, the decisions on allocation of the resource revenues were left in large part to local authorities at the provincial and subprovincial levels in Inner Mongolia, rather than to the central government of China. This is because, as a general trend in Chinese policy, Fiscal Decentralization has been a major source of empowerment for provinces and autonomous regions relative to the central government.

As part of this decentralization movement, provinces have their own revenue streams and are responsible for much of the public expenditure under their jurisdiction in areas such as education, welfare, healthcare etc. Provinces can also pass their own laws and regulations, as long as these do not conflict with national laws. Additionally, the size of local governments in China is mainly determined by upper levels of the state, and has much less to do with local needs or local constituents. Furthermore, the central government gives the provinces a great deal of latitude in adopting policies to boost economic growth, and it encourages provinces to engage in “approved policy experiments”.

It is in this spirit of “approved policy experiments” that Erdos was founded. The provincial government of Inner Mongolia received significant cash inflows due to both coal and rare earth metal sales, filling its coffers to the brim and giving the province a surplus that could not adequately be invested in the limited number of available investment opportunities. However, as with other subnational entities around the world, the government could not leave the budget unspent, because this would incur the possible fallout that follows any governmental institution not fully utilizing its budget: a reduction in future budget size, an appropriation of funds by central government, a series of political demotions and transfers, an adverse reputational impact, among other potential outcomes.

Therefore: (1) encouraged to boost economic growth with experimental policies, (2) pressured to spend the entirety of the budget, (3) bereft of adequate investment opportunities, and (4) being more beholden to upper levels of government than to local needs; the local authorities decided to pour money into an artificial futuristic metropolis in the middle of nowhere. This was not an insignificant misallocation of capital: RMB1.1Trillion, ($161 Billion USD) has been apportioned since 2003 to the construction of this “vanity project” of building a fully functioning city to accommodate one million residents.

Erdos City

The Hordes never came to Erdos. How surprising may this have seemed to the Chinese authorities? After all, China urbanizes ten million people on an annual basis, or roughly one percent of its population and larger than the total populations of many countries such as Sweden and Switzerland. Accommodating such an enormous group of new arrivals every year is a truly colossal challenge which China must confront. The national government has strongly advocated urbanization as an integral part of its development strategy; and the almost insatiable demands for urban dwellings in China led many to believe that just “popping up” new cities would drag in the teeming masses.

Erdos, however, does not offer the natural demand pull that other cities in China do. Above all, it does not have an industrial base to employ migrant workers, which is the main reason why such large internal migration has taken place within China in the first place: for it is mainly the hunt for employment opportunities which has fomented migration patterns. Erdos also doesn’t it have the critical mass of public services that would invite newcomers. Its dry and frigid winters also diminish its allure. Ironically, the city has a per capita GDP of more than $25,000 USD, higher in fact than Beijing. This is because of both the small denominator of inhabitants, as well as the large numerator of resource revenues.

Nonetheless, the city does offer some remarkable attractions, at least in theory, ranging from: museums, a football stadium, palatial structures, a modern airport, modern roads, a Cubist-designed Mosque, and a central Genghis Khan square. It also assures visitors of few problems with the local residents, given that there aren’t any. It thus becomes evident that the peculiar economic and political circumstances subjacent to Inner Mongolia’s energy abundance led to the construction of a white elephant project in the form of the empty Erdos metropolis. Whereas the root of the word Ordo implies “crowds” and “hordes”, the categorical irony is that, unlike the vitality of the Urdu language, the Erdos conurbation is devoid of the vibrancy of urban life.

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