BEIJING – The slowdown of China’s economy has captured the headlines in recent weeks. Whether it is a permanent or temporary adjustment, the Chinese authorities have much work to do in laying the groundwork for strong economic performance in the medium and long term.
Despite extraordinary growth since the start of its transition to a market economy in 1979, China is facing serious challenges simultaneously: rising inequality, large and growing levels of environmental degradation, stubborn external imbalances, and an aging society.
Fortunately, China’s 12th Five-Year Plan (2011-2015) recognizes the need to deepen market-oriented reform, change the country’s development model, and focus on the quality of growth, structural reforms, and social inclusion to overcome the rural-urban divide and stem the rise in income inequality. In line with this bold, long-term approach, a new report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, proposes reforms that my country needs to develop a mature, well-functioning market economy by 2030.
The report is the result of a longstanding China-World Bank partnership. Commemorating the 30th anniversary of China’s membership, World Bank President Robert B. Zoellick proposed to the country’s leaders a joint effort to identify and analyze China’s medium-term development challenges. China 2030 calls for structural reforms that would redefine the role of government, overhaul state-owned enterprises and banks, develop the private sector, promote competition, and deepen liberalization of the land, labor, and financial markets.
While providing relatively fewer tangible public goods and services directly, the Chinese government will need to provide more intangible public goods and services like rules, standards, and policies. Such policies and institutional improvements increase productivity, promote competition, facilitate specialization, enhance the efficiency of resource allocation, protect the environment, and reduce risks and uncertainties.
In the enterprise sector, the focus will need to be on increasing competition in all sectors, reducing barriers to entry and exit for private companies, and strengthening state-owned enterprises’ competitiveness.
In the financial sector, the banking system must be commercialized, thereby gradually allowing interest rates to be set by market forces, while capital markets must be deepened in tandem with the development of the legal and supervisory infrastructure needed to ensure financial stability.
In the labor market, China needs to accelerate reforms of the hukou (household registration) system to ensure that, by 2030, workers can move more freely in response to market signals. Currently, anyone who moves to another part of the country without a hukou risks losing access to education, social services, and the housing market. China’s policymakers also need to introduce measures to increase labor-force participation rates, rethink wage policy, and make social-insurance programs portable nationwide.
Finally, farmers’ rights need to be protected, the efficiency of land use must be increased, and policies for acquisition of rural land for urban use should be overhauled.
China’s medium-term success will also require creating an open system in which competitive pressures encourage Chinesecompanies to engage in product and processinnovation, not only through their ownresearch-and-development efforts, but also through participationin global Rampamp;Dnetworks. The priority is to increase the quality of Rampamp;D, rather than just its quantity. Policymakers will need to focus on increasing the technical and cognitive skills of university graduates, and on building a few world-class research universities with strong links to industry.
An enlightened strategy must encourage China to “grow green,” as opposed to growing rapidly now and facing massive environmental costs later. Encouraging new investments in low-pollution, energy- and resource-efficient industries would lead to greener development, spur investments in related upstream and downstream manufacturing and services, and build an international competitive advantage in a global sunrise industry.
China 2030 also calls for expanding opportunities, promoting social security, and reducing the country’s relatively high social and economic inequality by addressing the rural-urban disparities in access to jobs, finance, and high-quality public services. Doing so will require greater sustained attention to underserved rural areas and migrant populations, and to restructuring social policies in order to ensure secure safety nets.
Moreover, it is vital to strengthen China’s fiscal positionby mobilizing additional revenues and ensuring that local governments have adequate financing to meet their rising expenditure responsibilities. Such reforms can help to ensure that budgetary resources are available at different levels of government (central, provincial, prefectural, county, township, and village), and are commensurate with expenditure responsibilities.
Last but not least, China should become a proactive stakeholder in the global economy. By continuing to intensify its global trade, investment, and financial links, which have served it well over the past three decades, China would benefit from further specialization, increased investment opportunities, and higher returns to capital, as well as mutually beneficial flows of ideas and knowledge.
China must remain committed to resuscitating the stalled Doha Round of multilateral trade negotiations, and support a global agreement on investment flows. Global integration of China’s financial sector will require opening the capital account, which will have to be carried out steadily and with considerable care; but it will be a key step toward internationalizing the renminbi as a global reserve currency.
The proposals contained in China 2030 could provide a framework for Chinese policymakers as they seek to achieve their goal of sustainable and harmonious growth. With the global economy entering a dangerous phase, China’s government will need to respond to new risks, shocks, and vulnerabilities as they arise. But, in doing so, it should adhere to the principle that policy responses to short-term problems must uphold, not undermine, long-term reform priorities.
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James Stedronsky
Everything Mr Lin states seems quite sensible but there are two tremendous social factors which shape the country and may dominate the economy which aren’t discussed.
1. Corruption. Corruption in China is massive and endemic throughout the country.
The source of most of the corruption is what is most troubling: The Communist Party.
Local party officials and their relatives are increasingly controlling large portions of local economies for their own private gain. This will create huge economic distortions and probable civil unrest. I understand that the higher levels of the Party are trying to control some of the corruption by instituting nascent democratic counsels and committee at the local levels. Who knows if enough will be done.
2. The Young. Approaching the not distant future is a tsunami of educated, aggressive, young adults, most of whom come from single child homes. They are starting their own businesses, producing their own movies and music and already taking over the cities. The country, too, will soon be theirs. There is little question, in my mind, but that they will transform Chinese society as did the boomers of the 60’s in the US. How? I have no idea but it will significant and the economy will be subservient to it.
Jonathan Lam
Gamesmith94134: The Future of China’s Growth
Andres Arellano Beaz,
This is the worst possible plan for China, if is because the same institution like Politburos do not have the control of the state-enterprising which are largely own by individuals who represent the state and the military. It is why China is facing serious challenges simultaneously: rising inequality, large and growing levels of environmental degradation, stubborn external imbalances, and an aging society. At present, there is about 50% of China’s population is still living in the 60s, which is the age of cultural evolution; and there is real case of inequality among the 1%, by the “gang of descendant” or the corrupted officials, and the 99% of those must work over hundred years to buy a house. It is just another case of banning cigarettes smoking while we are selling them. I realize that your criticism on the improvement the World Bank insisted, but how would you justify those in pursuit of prosperity by looting the poor and getting rich themselves and they also wear the same uniforms with a good motto.
Perhaps, I sympathize Chinese Politburo in fighting corruption among the powerful just like I quitting cigarettes; ‘ The proposals contained in China 2030 could provide a framework for Chinese policymakers as they seek to achieve their goal of sustainable and harmonious growth.’, may not be appropriate to meet World Bank President Robert B. Zoellick’s demand. However, I do believe the Chinese Politburo is working gingerly toward its goal.
Take the recent case of Wen verse Bo fought in Beijing now; Premier Wen Jiabao must circumvent a trillion debts, originated to “Chongqing Model” that Bo Xilai and the military are tied to all goods and services to the Chongqing, and most its people or government cannot afford. How can the Politburo undo privatized properties off the officials of a region where they rule? Or how does the Politburo define the opportunity for growth if they cannot resolve the corruption by its ‘new left’ that has the controls of all business and government?
In paraphrase of the era of glasnost and perestroika, it is similar to Putin verse Khodorkovsky, head of Yukos, in 2003, that Khodorkovsky was charged with embezzlement and money laundering, and jailed as dissenter to Russian authority; but, Wen Jiabao cannot charge Bo and his family for overdoing in development of his “Chongqing Model” if it runs on plutocracy that left Chongqing Model with great prosperity and a trillion debts without bankrupting itself in the first place. Besides, there are more cases of “Chongqing Model” to many regions in China that created a serious debt problem for China, and many local governments are at brink of bankruptcy.
At present, despite of the 7.5% growth, China had the first trade deficit. I am not sure of why it is happening, but the situation may continue if manufacturing sector is running on a hybrid course that would leave the local government with a great risk of uprising and discontent.
Sometimes, I wonder if I have seen the fact of negativity of smoking, but quit smoking is not going easier than just a conscious mind after smoking for forty years . So, as an American, the proposal for 2030 for China is longer than expected, however, the resolution to its problem demand a tougher choice and determination. I just think it is better off if China is not going back to its 60s for another Cultural Revolution.
Good try! Mr. Wen Jaibao.
May the Buddha bless you?
Andrés Arellano Báez
This is the worst possible plan for China. How do I know that? Because the exact same plan, propose by the same institution, was applied in Latin America in late 80 and early 90 and was the worst for the region. Of course, It was not the worst for international conglomerates, but was the worst for the people.