China can achieve sustained and equitable growth if it builds on
recent successes and takes energetic policy action focused on
domestic market integration and flexibility and on improving
conditions for growth in the less developed regions and localities,
according to a new World
Bank report released in Beijing Tuesday.
The report China: Country Economic Memorandum-Promoting Growth
with Equity, takes stock of China's performance and presents a set
of policy options that could help accomplish China's objective of
growth with equity. The report recommends policy actions centered
on three themes: domestic market integration and flexibility,
improving conditions for growth in the less developed regions and
localities, and addressing the risks to future growth and
distributional performance in China.
Yukon Huang, Director of the World Bank China Program said:
"China's growth and poverty reduction performance have been
excellent. Although some increase in income inequality is
inevitable during rapid growth, China is now focusing more sharply
on narrowing such inequalities and enhancing the quality of its
economic growth. This is taking place in the context of
globalization and rapid structural reforms. A movement to greater
domestic market integration-to match the rapid global integration
that is taking place-and to providing better social protection,
human capital development and risk mitigation is needed to support
the next stage of China's development process."
Large-scale poverty reduction has been one of China's greatest
accomplishments during the post-1979 reform period. About 400
million people have been lifted out of poverty at the $1 a day
expenditure level. Inequalities, however, have deepened as the
distribution of income and opportunities has shifted in favor of
urban areas and coastal regions, leaving rural areas and less
developed regions farther behind. Distortions and rigidities
remaining in the domestic market are partly the cause. The report
suggests that, if recent trends in widening rural-urban inequality
and the disparate growth of per capita incomes across provinces
continue, income inequality would rise sharply, with essentially
equal contributions to national inequality from the rural-urban and
inter-provincial disparities.
Hana Brixi, leading author of the report said: "The Chinese
Government has a unique opportunity and capacity to make China's
expanding economic opportunities accessible to a larger share of
China's population. For inhabitants of China's rural areas and less
developed regions, migration and skills are the main route to
better incomes. Productive jobs across China would be created more
easily with effective market regulation and competition. The
prospects of those who remain in agriculture will mainly benefit
from better enforcement of land use rights and environmental law at
the local level."
The report suggests that China needs domestic market integration
and flexibility for both growth and equity reasons. It notes the
following reasons: Although exports are likely to continue grow
rapidly, more than 70 percent of China's output will still be
intended for the domestic market by 2007. Obstacles to efficient
allocation of labor and capital and to competition reduce the speed
of technological upgrading and China's competitiveness in the
global economy. Market integration and flexibility can ease the
pain of restructuring and promote the flying geese pattern of
industrialization. The results of domestic structural adjustment
are more likely to be viable in the long term if they occur in
harmony with broader market forces, both national and
international. With respect to equity, migration is particularly
important to narrow the farm/non-farm wage gap.
In this context, the report identifies the main problems in the
form of: a) local government protectionism, which arises from local
government dependence on own enterprises and local government
control of market regulations, enterprise management and courts,
and which fragments China's domestic market for goods and services;
b) shortage of low-income housing in urban areas, weak execution of
land use rights in rural areas, and the direct and indirect
discrimination of migrants, which all inhibit migration; and c)
government control over resource allocation and inadequate
information on enterprise performance which inhibit efficient
allocation of capital.
The report points out that achieving a better distribution of
incomes and opportunities - the essence of a xiaokang society -
depends on the creation of productive jobs, especially for people
in the lagging regions and mainly within such regions, and on
returns to farm labor. In this context, the report presents the
government with a policy package focusing on five areas: investing
in people, promoting the diffusion of technology, facilitating
urban agglomeration, expanding services, and enhancing farmers'
prospects.
As for financing this policy package, the report admits that the
government's current fiscal position offers limited room for
continuing fiscal expansion. Therefore, the role of the government
in the economy needs re-examination to give greater play for other
economic players, which would allow the aggregate amounts of public
sector spending to remain unchanged while affecting its composition
in a substantial way. The effort to promote high growth with equity
in China is likely to be effective if the government focuses on the
delivery of core public services, while being only indirectly, if
at all, involved in commercial activity in the economy.
Finally, the report addresses the main risks to China's future
growth and distributional performance. Gaps in social
security may erode risk-taking in an increasingly market-oriented
society and could undermine social cohesion and public support for
further reforms. Inadequate delivery of public services in
poor localities could constrain future economic growth.
Macroeconomic risks - particularly financial sector vulnerability
and government contingent liabilities - could escalate, raising
uncertainty and exacerbating fiscal pressures.
To reduce the risks, the report suggests to expand the coverage
of social security for the urban non-state sector and to offer some
basic insurance schemes, such as protection against catastrophic
illness and injury, for rural areas. With respect to overall public
services delivery, the report points out that a comprehensive
inter-government finance system reform is needed, along with some
centralization in financing of core public services, such as
education and social security, and with greater autonomy and
accountability. To preserve macroeconomic stability, the report
reinforces its case for reforms in the banking sector, which are
needed before bank recapitalization is attempted. It indicates that
such reforms, along with pension reform and adequate government
attention to fiscal risk monitoring and management, can reverse the
trend of rising government contingent liabilities and ensure future
macroeconomic stability.
Homi Kharas, Chief Economist for the East Asia Region,
reiterated that the purpose of the Country Economic Memorandum is
to make an assessment of China's recent developments, and some of
the major economic challenges for the medium-term. Periodic
stock-taking exercises of this kind build on more detailed
analytical and advisory work that the World Bank is conducting on
China, in collaboration with the government and Chinese technical
experts. They help in the design of future work, and also help to
maintain a policy dialogue on China's development challenges.
(China.org.cn September 9, 2003)