Is China on Second-path Reforms?“

Image credit: Washington Post on Dec 18, 2006. Photo by Yon Yik/ European Pressphoto Agency

I accessed from http://www.nytimes.com/2008/12/19/world/asia/19china.html

This article is just my summary of a World Bank's report China 2030: Building a Modern, Harmonious, and Creative Society”

The country, which French Emperor Napoleon acknowledged in 18th century as “a sleeping giant”, now has been waken up and been experiencing trajectories of growth and development contributed by Chinese leaders, one of whom is Deng Xiaoping. The results of Deng Xiaoping’s structural reforms since 1978 are impressive according to growth indicators such as annual average 10 % GDP growth. Additionally, over 500 million Chinese people have escaped from poverty while the country now stands at the second largest economy and the largest exporters in the world.

The speedy growth of China allows the world to estimate that the country has potentials to become the world’s largest economy by 2030, according to the World Bank and People’s Republic of China (PRC). Notwithstanding the GDP growth, there is the rub. Its per capita income remains lower than other advanced countries while China needs to address a number of challenges and risks including: aging society, rising inequality, a large and growing environmental deficit and stubborn external imbalances. These problems trigger two questions: Can China still become the highest economy in spite of its slow current pace? Can it maintain the rapid growth with little disruption to the world, the environment and the social fabric of its own country?, asked by the World Bank report China 2030.

In attempt to answer the two questions, China’s Ministry of Finance (MOF), the Development Research Center of the State Council (DRC) and the World Bank organized a report, China 2030: Building a Modern, Harmonious, and Creative Society. Upon basis of lessons from international experiences and China’s development record, the report prepares a strategic framework for reforms that could assist China’s journey toward 2030 goal in the ocean of development challenges and risks. The report focuses more on “how to reform” rather than “what to reform”.

The report China 2030 proposes 6 strategic directions: 1. Rethinking the role of the state and the private sector to encourage increased competition in the economy. 2. Encouraging innovation and adopting an open innovation system with links to global research and development networks. 3. Looking to green development as a significant new growth opportunity. 4. Promoting equality of opportunity and social protection for all. 5. Strengthening the fiscal system and improving fiscal sustainability. 6. Ensuring that China, as an international stakeholder, continues its integration with global markets. (See the World Bank, 2030).

The first direction is explained by structural reforms implemented to strengthen the foundations of a market economy. Technically, the structural reforms are to redefine the role of government, reform and restructure state enterprises and banks, develop the private sector, promote competition, and deepen reforms in the land, labor, and financial markets. In enterprise section, it calls for recalibrations of state enterprises by introducing measures and modern corporate government practices such as ownership-management differentiation. Financial sector is suggested to commercialize and internationalize the bank system. In labor market, by 2030 Chinese workers policy shall ensure high rate of labor participation and revise wage policy and social security instruments (i.e. pensions, health and unemployment insurance). In rural land markets, policies shall maintain and prevent potential land-related conflicts in the process of acquisition of rural land for urban use. Complaints from farmers shall be addressed efficiently.

The second direction lies in the policies which accelerate an open innovation system in which Chinese firms are encouraged to engage in not only their own research and development but also participate in larger scale of innovation within global research and development networks. To achieve the innovation by 2030, Chinese policy makers shall increase the technical and cognitive skills of university graduates who are high-quality talents needed by innovative industry.

The third direction suggests China to take a growth opportunity of “green development” throughout a diversity of incentives and regulations aimed to improve the level of industrial well-being and sustainable growth. A wide range of low-pollution incentives and energy and resource efficiency shall be introduced to investments. The fourth direction guides Chinese policy makers to expand opportunities and promote social security for all by means of equality in occupational access, finance and social services and social security. The main aim of this direction is to combat the rising social and economic mobility amongst Chinese people at all margins. The fifth direction sheds light on fiscal system reforms which involve three dimensions: (1) mobilizing additional fiscal resources to meet rising budgetary demands; (2) reallocating spending toward social and environmental objectives; and (3) ensuring that budgetary resources available at different levels of government (central, provincial, prefectural, county, township, village).

The final sixth direction ensures that China, for the sake of mutual benefits, shall intensify relationships with the world. By pushing itself deeper to be a proactive stakeholder in world economy, China is expected to have a central role in shaping global agenda and addressing global issues such as climate changes, global financial instability, and international aids in helping poorer nations.

Finally, out of my personal reflection, I have a concern on the expected transformation of China toward 2030 prosperity. The concern relates to potential paradox of China’s own structural reforms and their unintended consequences on poorer and weaker countries. Definitely, the jurisdiction of the reforms covers only China—not Chinese investments outside their countries. Agreed or not, I think that if any investments inside China do not comply with these reforms (i.e. less-pollution and greening regulations or labor wage regulation), they will relocate their investments to any weaker countries for benefit of less-demanding and less protective regulations. Therefore, from weaker states’ perspective, it is necessary to keep up with what has been changed in China and then create their well-protective frameworks in order to keep away opportunistic Chinese investments who do not desire to comply with the structural reforms in China.

Reference The World Bank and Development Research Center of the State Council, the P. R. China 2013 “China 2030: Building a Modern, Harmonious, and Creative Society” Washington: The World Bank