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.
Justin Yifu Lin is Chief Economist and Senior Vice President for
Development Economics at the World Bank. He is the founder and first director of the China Center for
Economic Research, and was previously a professor of economics at Peking University and
at the Hong Kong University of
Science and Technology.