A supply chainlinks producers and consumers through a complex web of outsourcing contracts,with market leaders in any product category orchestrating activities to producecomponents profitably along its entire length. For example, an iPad is designedin California – with chips from Japan and parts from South Korea, Taiwan, andelsewhere – and finally assembled in China for global distribution. But theecology of supply chains is not as straightforward as this depiction suggests.

Most studies of supply chains examine their operations, but take forgranted governments’ critical enabling role. Because the non-delivery ofgovernment services would inhibit the proper functioning of business supplychains, understanding how the government-services supply chain works is vital.

For example, the Chinese economy’s transformation was enabled by thesynchronized delivery of government services to support the logistics, finance,and manufacturing supply chains. This was a complex task that involveddifferent levels of the Chinese government and many state agencies andministries.

A supply chain is not only a network for production, but also a livefeedback mechanism, continually adjusting itself to ensure that production iscoordinated and aligned efficiently to meet changes in global consumers’demand, tastes, and preferences. Technology has enabled faster, more efficient“just-in-time” delivery, taking full advantage of specialization and knowledge-sharingon a global scale. As Apple has discovered, the winner in orchestrating asupply chain emerges with the lowest global costs and the largest market share.

The iPad could not be produced at such high speed and low cost without the“made-in-the-world” supply chain based in China. In addition to the macro andmicro aspects of economics, understanding supply chains in private and publicgoods and services in China requires mezo (institutional) and meta (system-wide) analysis.

When China initiated its economic reforms in 1979, it inherited acentrally planned economy that lacked the institutional infrastructure formarkets. Recognizing the need for systemic change, China allowed localgovernments in special economic zones and cities to experiment with modernlegal, administrative, and logistical practices for export industries,including investments in utilities and transport.

Intense competition among local governments for foreign investment led todramatic improvements in the business environment, featuring economicincentives in areas like land, labor, and taxation, as well as speedy issuanceof permits and approvals. City leaders were given responsibility for mobilizinglocal resources to generate GDP and employment, and they were (and continue tobe) rewarded with promotion for good performance.

The result was considerable innovation and institutionalization of localgovernment services to support market activities, including outsourcing ofexpertise in infrastructure project design, administration, and operations toprivate and foreign consulting and design companies. To support China’sparticipation in global manufacturing supply chains, many local governmentssold and dismantled their state-owned enterprises (SOEs), enabling many newprivate firms to provide the services needed for an export-oriented,market-based economy.

At the national level, the consolidation of SOEs and banks, and themodernization of their corporate governance via public listing on stockexchanges, enabled improved efficiency in regulated utilities, hardinfrastructure, and resource sectors, complementing liberalization and marketgrowth.

The Chinese government-services supply chain also benefited substantiallyfrom a meritocratic human-resources tradition. Officials with substantial and successfulexperience in local governments, ministries, or SOEs were deliberately promotedand cross-posted to less-developed regions to spread know-how, technology, andbest practices and processes. Indeed, China’s economic success reflects thedepth of administrative and market experience embedded in the Chinesebureaucracy. Chinese mayors are CEOs of their local economy, responsible notonly for market development, but also for social stability.

The critical mechanism for orchestrating and implementing the complex webof contracts embodied in China’s government-services supply chain is theFive-Year Plan, which foresees vertical and horizontal integration of almostall Party and administrative agencies. The FYP uses broad objectives andtargets for social and economic development, formed after extensive internaland public consultations. These mandates are translated by sub-nationalofficials into projects and work plans, such as targets for reducing energy useper unit of GDP in order to address resource constraints and concern aboutclimate change.

China’s success in developing from scratcha modern government-services delivery system explains why many foreigninvestors find it much easier to deal with Chinese governments than those inother developing countries.

The 12th FYP aims to shift China from an export-driven growth model towarda balanced economy that relies on domestic demand, while simultaneouslyaddressing industrial transformation, social inequities,and environmental degradation. This implies more complex contracts that gobeyond promoting markets, GDP growth, and employment to ensure inclusive,equitable, and high-quality government-services delivery. Implementation ofthese evolving social goals through local government agencies by specificofficials is a daunting task that requires profound changes in roles andperformance metrics.

No one doubts that Chinese local governments play a much more active and intrusive role than their counterparts in the West,which implies an additional complicating factor. Local governments now face notonly growing demands from the emerging middle class for greater transparency,competition, fairness, and access to opportunities, but also deepeningconflicts between local interests and global rules.

Orchestrating a complex government-services supply chain in asubstantially open continental economy with 1.3 billion people and five levelsof government is difficult enough using a simple GDP growth objective. Adaptingthe governance metric in a country of China’s size to an economy that is green,inclusive, and equitable presents a novel challenge in human history. The onlyprecedent for such an achievement is China itself.