MAO ZEDONG called China’s three north-eastern provinces—Heilongjiang, Jilin and Liaoning—the country’s “eldest son”. In the Chinese tradition the family’s future rests on that child’s shoulders. But this one is failing in his duties. Debate rages over what has gone wrong and what to do. Many experts conclude that the regional economy needs to be run a different way. Their analysis has lessons for the national economy, too.

Mao made the north-east the centre of heavy industry. It still contains many of China’s largest makers of cars, aircraft and machine tools. In 1978, on the eve of Deng Xiaoping’s economic opening, Liaoning, the most populous of the trio, had the third-largest economy among mainland China’s 31 provinces. Its GDP was 20% bigger than that of Guangdong, the southern province with the biggest population. But 40 years of rapid national growth have left the north-east lagging behind. By 2016 Liaoning had fallen to 14th among provinces by income and had only one third of Guangdong’s GDP. In 1978-2016 its share of China’s output fell by more than half.

As long ago as 2003 a worried national government drew up a plan “to revitalise the old north-east industrial bases”. It did so by vastly increasing state investment, which jumped from 30% of regional GDP in 2000 to 60% five years later. Even this was not enough. In 2016 the government ladled out another vast dollop of money.

Three unusual features account for some of the region’s problems. First, Maoist planning left it more dependent on state-owned enterprises (SOEs) than other areas. In China as a whole 17% of industrial jobs are in SOEs. In Liaoning the share is 40%; in Heilongjiang 55%. These firms are inefficient and many are unprofitable. Houze Song of the Paulson Institute, a think-tank, calculates that the return on assets of Liaoning’s SOEs fell from 3% in the mid 2000s to minus 1% in 2015—ie, they were losing money (see chart).

Second, the region, which has 109m people, is ageing fast, even by Chinese standards. At 39.2 years, Liaoning’s median age (the point at which half the population is older, half younger) is the oldest in the country. The north-eastern provinces have a fertility rate—a measure of how many children women are likely to have—below one. The only other provincial-level areas that have such ultra-low fertility are the cities of Beijing, Shanghai and Tianjin.

The north-east is losing its best and brightest. Jiang Ping graduated in 2015 from the prestigious Number 3 High School in Harbin, the capital of Heilongjiang. She, along with 19 of her 47 classmates, left for universities in Beijing. All of them expect to stay in the capital when they graduate. In contrast, all but one of her father’s high-school classmates live and work in Harbin. The Harbin Institute of Technology is one of China’s top engineering universities. Only 3% of its alumni stay in the province.

Third, the north-east has an unusually strong collectivist tradition. Song Changtie manages a textile firm in the coastal province of Jiangsu, having lived in the north-east for 30 years. He wrote last year that Chinese people from other regions “cannot imagine how accustomed” north-easterners are to government control. History, he says, explains the difference. The north-east was a puppet state of Japan in 1932-45 and endured autocratic planning for a generation longer than elsewhere.

Still, it is possible to exaggerate the region’s peculiarities. Other provinces have failing SOEs. Half a dozen have declining populations. The region is not, on average, poor (see map). And although it is near the bottom of China’s league table of growth, the north-east is growing fast by the standards of rust belts globally. According to official figures, its GDP expanded by almost 7% a year in 2011-16, though the Liaoning provincial government admitted to falsifying its accounts for 2011-14, so the official statistics are suspect.

The national interest

All of which makes the question of how to revive the region more than a parochial one. It is, says Andrew Batson of Gavekal Dragonomics, a research firm, “a proxy debate about the future of China: should there be more interventionist industrial policy or more free-market solutions?”

Controversy flared last August with the publication of a 500-page report on Jilin, commissioned by the province from a well-known Chinese economist, Justin Yifu Lin, who was the World Bank’s chief economist in 2008-12. Mr Lin argued that Jilin is a bit like a poor developing country, and that it should take the path followed by successful emerging economies elsewhere. He said that would require investment in agriculture, pharmaceuticals and industries such as textiles, home appliances and electronics. Mr Lin noted that this is what China’s southern provinces had done, and such industries there were now being displaced by high-tech firms. He said this was giving Jilin (and the north-east generally) a chance to grab them.

His proposal was received politely in official circles, and by a storm of criticism everywhere else. Zhao Gang of the government’s main planning agency said Mr Lin had shown that “it’s not a problem to develop textiles or technology in Jilin.” But Guo Qiang of the Central Party School in Beijing replied that scholars who advise governments are “most unreliable” when they suggest which industries to develop. Sun Jianbo, the founder of China Vision Capital, a fund-management company, was even more to the point. “The north-east’s problem,” he wrote, “is not industrial structure but institutions and culture.”

Mr Sun argues that it is wrong to regard the north-east as a poor developing area. He says it is a moderately rich stagnant one. Lacking cheap labour, it cannot compete with, say, Bangladesh in attracting low-cost industries. More important, he argues, the north-east has a lethal combination of corruption and political meddling which makes it hard to attract investment of any kind. Investors shy away, he says, “because business scams, government interference and constantly changing policies are universal in the north-east.”

Corruption is indeed rife. It can cost 300,000-500,000 yuan ($47,500-79,000) to buy a job as a nurse at a state hospital in Harbin. That is roughly eight years’ salary, but the bribe is judged worthwhile because a state pension is secure and the job comes with opportunities for kickbacks. In 2016, 45 deputies from Liaoning to the National People’s Congress (China’s parliament) and 523 members of the province’s own assembly were thrown out for bribery. The prime minister, Li Keqiang, complains that entrepreneurs need 200 stamps or licences to start a business in the north-east, a huge number. Xu Long, a trader in Harbin, sums it up: “Elsewhere the crooks steal baby chicks but fatten them up before killing them. In the north-east they kill the chicks right away and then wonder why no one has enough to eat.”

Political interference produces arbitrary, even disastrous decisions. Take Dandong, on the border with North Korea. The town is best known as a place to watch for sanctions-busting by the regime in Pyongyang. But it enjoys another distinction, as China’s largest private port. In 2005 the municipal government sold most of its stake in the facility. The new owners began cautiously expanding it. The city fathers, however, soon threw caution to the wind. Ignoring the fact that they no longer owned the port, they announced in 2011 that “the whole city” would support its development. They showered the owners with tax breaks and cheap land.

There followed a period of breakneck growth in spending on the project, financed by easy money from government-owned banks. Investment by the private firm quadrupled in 2011-15 compared with the previous four years. But the debt ballooned as the port’s main business (shipments of coal and steel) collapsed. With new loans drying up, the company ran out of cash and defaulted on two repayments. Some staff have not received wages for more than a year. “Private”, in this case, did not mean efficient, or even independent.

The massive increase in the central government’s investment in the region has given local officials more economic influence. A car company in Liaoning, called Brilliance Auto, shows what can happen. In 2002 the provincial government took over what was then a thriving concern. It pushed out the founder, cancelled plans to open a new plant near Shanghai and forced the company to buy steel from a steelmaker it itself owns. Three-quarters of Brilliance’s revenue comes from domestic sales of sedan cars. But its models have lost money since 2002. The sedan division is mired in debt, a remarkable feat in China’s booming car market.

Local governments in the north-east mollycoddle their industrial champions by giving them preference in procurement contracts. But their protectionism has not helped. The Paulson Institute’s Mr Song has looked at sales within China of 36 types of industrial products from Liaoning. He finds that their market share has fallen in 30 of them since 2000, most by between a third and two-thirds. In the late 1990s exports from the province were growing at roughly the national rate. Since then, they have been growing only two-thirds as fast. There has been a decisive shift away from openness and trade towards local autarky.

There are a few bright spots., one of China’s largest delivery companies, is investing 20bn yuan in Harbin, and has put its data-analytics division there. But the broader lessons of the north-east are sobering. It is a place where political connections are more important than efficiency, where local governments have wasted vast quantities of money, and investment-led growth has encouraged local protectionism. At the national level, Mr Xi is making politics paramount, protecting SOEs and keeping government investment high. The moral of the north-east’s woes is that these policies do not help to sustain economic prowess.