Investment from outside of a locality promotes the development of its economy and industry. But some local governments are over-stretching their pro-investment policies to provide "extraordinary preferential treatments" that they cannot afford in the long run to investors, in a bid to win out in the competition for investment.
The practice not only increases the burden on local governments, but also encourages the speculation of some investors, prompting them to focus on quick returns.
With the competition for investment becoming increasingly fierce, the aforementioned practice must be rectified, otherwise it will turn regional development into a zero-sum game between neighboring towns, damaging the overall economic development environment.
For example, in order to compete for a big project, some places tend to offer "extraordinary concessions" in land use and tax reductions, and provide generous subsidies of various kinds. That makes the process a de facto auction of the projects.
Before the project proves its profitability, the bidders are doing nothing but upping the ante on transforming investment promotion into a gamble with taxpayers' money at the costs of fairness in market competition. That increases the risks for the winners in the "auction", as many local governments are running on debt already, and shakes the foundation for the rule-of-law business environment the government vows to form.
Therefore, the central authorities should take concrete actions to address the issue which cannot be tackled by the local governments themselves. In a guideline policy the central authorities issued in June last year, it was stipulated that grassroots governments should gradually clear up the subsidies and abolish policies that interfere with the market and are linked to tax revenue. It also calls for the elimination of policies that impede the unification of the market and fair competition, addressing local protectionism, market segmentation and insider trading, in order to prevent vicious competition for investment.
It should be borne in mind that some projects of the so-called emerging industries and high technology have proved to be a disguise for speculators to swindle local governments' subsidies, a source of kickback for some insiders in the government as some cases indicate.
There should be assessments and supervision of investment projects by means of an effective project and investment evaluation system. That will help local governments to see how the local economy will benefit from any investment project, whether the local economy can afford the loss to be caused by the possible failure of the project in the future, as well as an accountability system for the officials responsible for granting subsidies to projects that turn out to be not worth it.