What motivated the two towns to engage in the wall competition in "The Golden Kite, the Silver Wind"?   What are the negative effects of the competition on the townspeople?

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One might argue that local pride is the main motivation here. The two Chinese towns are fiercely proud of their respective identities and feel that they are under serious threat from the other. Superstition also plays an important part in the seemingly endless wall-building contest. The locals of both towns clearly set great store by the shape of the walls, seeing them as representing superior military strength and prosperity. In this battle of one-upmanship, it's important to have a wall shaped in such a way as to exude outward strength and resolve.

However, once it becomes clear that this petty squabble is causing widespread hardship to the people of both towns, then traditional values and belief systems are put to good use. From now on, such values, along with their local identities, will manifest themselves in towns resembling a golden kite and a silver wind, sustaining each other in a spirit of mutual support instead of being locked in a perpetual death spiral of destructive competition.

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We're not really told why Kwan-Si first changes their walls into the shape of a pig, but the messenger bringing the news seems to think that by doing so, they have made themselves the more powerful town. A pig will eat an orange, and so it looks like they are the town of strength. So, the Mandarin immediately orders the shape of the walls changed to look like a club, to beat the pig away. The towns prolong this competition because the town with the "strongest" wall shape would be the winner, and therefore the more prosperous and successful town. Think of it as a giant game of "Rock, Paper, Scissors".

Because of this competition, the townspeople have no time to tend crops or run businesses; instead they are constantly building and rebuilding the walls. So, they fall ill, lose money, and begin dying. Even the Mandarins are sick and weak at the end of the battle. Because of their greed, and refusal to work in cooperation rather than competition, their towns have suffered greatly.

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