China 2030 Conference Edition China 2030 Building a Modern, Harmonious, and Creative High-Income Society The World Bank Development Research Center of the State Council, the People’s Republic of China The World Bank Conference Edition © 2012 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This volume is a product of the staff of The World Bank and the Development Research Center of the State Council of the People’s Republic of China. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judg- ment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This conference edition presents a work in progress to encourage the exchange of ideas about development issues. The text is not final and is not for citation. Part II of this conference edition, comprised of five supporting reports, has not been edited. Contents Foreword vii Acknowledgments ix Background to This Research xiii Executive Summary xv Abbreviations . xix Part I Overview China 2030: Building a Modern, Harmonious, and Creative High-Income Society 3 1 China’s Path: 1978–2030 4 2 A New Development Strategy for 2030 15 3 Structural Reforms for a Market-Based Economy with Sound Foundations 25 4 Increasing the Pace of Innovation 34 5 Seizing the Opportunity of Green Development 39 6 Equal Opportunity and Basic Security for All 46 7 Strengthening the Fiscal System and Aligning It with the Evolving Role of Government 55 8 Achieving Mutually Beneficial Relations with the Rest of World 60 9 Overcoming Obstacles to Implementing Reforms 65 china 2030 v Part II Supporting Reports 1 China: Structural Reforms for a Modern, Harmonius, Creative High-Income Society 77 2 China’s Growth through Technological Convergence and Innovation 161 3 Seizing the Opportunity of Green Development in China 229 4 Equality of Opportunity and Basic Security for All 293 5 Reaching “Win-Win” Solutions with the Rest of the World 391 Foreword china 2030 vii C hina’s economic performance over the past 30 years has been remark- able. It is a unique development success story, providing valuable lessons for other countries seeking to emulate this success—lessons about the importance of adapting to local initiative and inter- regional competition; integrating with the world; adjusting to new technologies; build- ing world-class infrastructure; and investing heavily in its people. In the next 15 to 20 years, China is well- positioned to join the ranks of the world’s high-income countries. China’s policy mak- ers are already focused on how to change the country’s growth strategy to respond to the new challenges that will come, and avoid the “middle income trap.” That is clearly reflected in both the 11th and 12th Five Year Plans, with their focus on quality of growth, structural reforms to harness innovation and economic efficiency, and social inclusion to overcome the rural-urban divide and the income equality gap. The idea behind this study was developed in 2010, at the celebrations for the 30th anniversary of the China–World Bank part- nership. To commemorate that milestone, President Zoellick proposed to Chinese leaders to work jointly on identifying and analyzing China’s medium-term develop- ment challenges looking forward to 2030. Together, China and the World Bank would conduct research drawing on lessons from international experience as well as China’s own successful development record, and prepare a strategic framework for reforms that could assist China’s policy making as well as guide future China–World Bank relations. China’s state leaders welcomed and supported the proposal. This report, China 2030: Building a Modern, Harmonious, and Creative High- Income Society, represents the results of that work. The research was organized jointly by China’s Ministry of Finance (MOF), the Development Research Center of the State Council (DRC), and the World Bank. The report was written and produced by a joint team from DRC and the World Bank who worked together as equal part- ners. The team held numerous workshops, prepared several studies and background papers, and forged common ideas as well as bonds of friendship and mutual respect. A preliminary report was discussed at a high- level international conference held on Sep- tember 3, 2011, at which many Chinese and international experts provided helpful com- ments and guidance. This volume builds on these comments and further work commis- sioned by the team. The report is based on the strong convic- tion that China has the potential to become viii china 2030 a modern, harmonious, and creative high- income society by 2030. In order to reach that objective, however, China must change its policy and institu- tional framework. China’s next phase of development will need to build on its con- siderable strengths—high savings, plentiful and increasingly skilled labor, and the poten- tial for further urbanization—and capital- ize on external opportunities that include continued globalization, the rapid growth of other emerging economies, and promising new technologies. At the same time, China will need to address a number of significant challenges and risks, such as an aging soci- ety, rising inequality, a large and growing environmental deficit, and stubborn external imbalances. The report proposes six strategic direc- tions for China’s new development strategy. First, rethinking the role of the state and the private sector to encourage increased compe- tition in the economy. Second, encouraging innovation and adopting an open innova- tion system with links to global research and development networks. Third, looking to green development as a significant new growth opportunity. Fourth, promoting equality of opportunity and social protec- tion for all. Fifth, strengthening the fiscal system and improving fiscal sustainability. Sixth, ensuring that China, as an interna- tional stakeholder, continues its integration with global markets. Using the 12th Five Year Plan as a start- ing point, and the six strategic directions as a policy framework, this report lays out a time frame for and sequencing of reforms that can take China toward its vision for 2030. We hope that it can provide a practi- cal guide to help China’s policy makers suc- cessfully navigate this next phase of China’s development journey. We also hope that it will mark the beginning of another period of fruitful partnership between China and the World Bank. LI Wei President Development Research Center of the State Council, P.R.C. Robert B. Zoellick President The World Bank Group Acknowledgments T his research was organized jointly by China’s Ministry of Finance (MOF), the Development Research Center of the State Council (DRC), and the World Bank. The report was prepared by a World Bank and DRC joint team, led by DRC Vice Minister Shijin Liu, World Bank Country Director for China and Mongolia Klaus Rohland, and World Bank Chief Economist for East Asia and the Pacific Region Vikram Nehru. President Robert B. Zoellick of the World Bank, Minister Xuren Xie of MOF, and Minsters Wei Li and He Liu of DRC pro- vided valuable guidance and strong sup- port throughout. A Chinese internal steer- ing committee comprising former Minister of DRC Yutai Zhang, Vice Minister of the Ministry of Finance (MOF) Yong Li, Vice Minister of DRC Shijin Liu, Director- General of DRC’s General Office Junkuo Zhang, Director-General of the Interna- tional Department of MOF Xiaosong Zheng, and Deputy Director-General of the Inter- national Department of MOF Shixin Chen, and a World Bank internal steering commit- tee comprising Sri Mulyani Indrawati, Lars Thunell, Justin Yifu Lin, Otaviano Canuto, Joachim von Amsberg, James Adams, and Klaus Rohland, guided this research. The overview report was prepared by a joint team led by Shijin Liu, Klaus Rohland and Vikram Nehru, and comprising Junkuo Zhang, Yongzhi Hou, Guoqiang Long, Shiji Gao, Yongsheng Zhang, Sen Gong, Wen- kui Zhang, Pei-Lin Liu, and Changsheng Chen from DRC, and Ardo Hansson, Sha- hid Yusuf, Carter Brandon, Philip O’Keefe, and Hans Timmer from the World Bank. The joint team is grateful to David Bul- man, Aart Kraay, and Antonio Ollero for analytical support and background papers. Yukon Huang, advisor to the World Bank team, as well as members of the Chinese Advisory Board comprising Jinglian Wu, Bin Xia, Fei Feng, Wei Lv, and Yanfeng Ge provided helpful advice and suggestions. The team benefited greatly from comments by peer reviewers Pieter Bottelier, Bert Hof- man, and Barry Naughton. The team is also grateful for comments from Fang Cai, Yuanzheng Cao, Yoon Je Cho, Evan Feigen- baum, Shuqing Guo, Motoshige Ito, David Lampton, Lawrence Lau, Jiange Li, Peilin Li, Dwight Perkins, Il SaKong, Pingping Wang, Yiming Wang, Fuzhan Xie, Shanda Xu, Lan Xue, Weimin Yang, Linda Yueh, and Yuyan Zhang. Most of those comments were received at an international conference orga- nized by MOF, DRC, and the World Bank in Beijing on September 3, 2011. The five supporting reports were prepared under the overall guidance of Shijin Liu, Klaus Rohland, and Vikram Nehru. china 2030 ix x china 2030 The supporting report on structural reforms was prepared by a joint team led by Wenkui Zhang (DRC) and Ardo Hans- son (World Bank) and included Jianwu He, Louis Kuijs, Ulrich Schmitt, Jun Wang, Anbo Xiang, and Min Zhao. Critical guid- ance, inputs, and advice were provided by Daofu Chen, Jianwu He, Shouying Liu, Hongri Ni, Jianing Wei, and Chenghui Zhang (all DRC), and by Robert Cull, Asli Demirguc-Kunt, Juan Feng, Yukon Huang, Guo Li, Haocong Ren, Tunc Uyanik, Xiaoli Wan, Ying Wang, and Luan Zhao (all World Bank). The report builds on new background papers or notes prepared by Ehtisham Ahmad (consultant, fiscal pol- icy), David Bulman (consultant) and Aart Kraay (World Bank, economic growth), Yoon Je Cho (consultant, financial sector), Andrew Hilton and Paul Munro-Faure (Food and Agriculture Organization, land), Hironori Kawauchi (World Bank, Japan), Chul Ju Kim (World Bank, Korea), Ping Li (Landesa, land), and Wenkui Zhang and Anbo Xiang (DRC, enterprise sector). The team benefited from useful discussions and comments from (in alphabetic order by surnames) Carter Brandon, Loren Brandt, Nigel Chalk (IMF), Shixin Chen (MOF), Klaus Deininger, Peiyong Gao (CASS), Sudarshan Gooptu, James Hanson (consul- tant), Ede Ijjasz-Vasquez, Kang Jia (Institute for Fiscal Sciences), Il Houng Lee, Lili Liu, Shangxi Liu, Xiaofan Liu, Millard Long, Philip O’Keefe, Thomas Rawski, Elaine Sun, Eric Thun, Rogier van den Brink, Dimitri Vittas, Yan Wang, Li Xu, Shanda Xu, Chunlin Zhang, and Zhuoyuan Zhang. In preparing the report, the team was ably supported by Jianqing Chen, Yan Wang, and Shanshan Ye. The supporting report on social develop- ment was prepared by a joint team led by Sen Gong (DRC) and Philip O’Keefe (World Bank) and comprising Dewen Wang (World Bank) and Liejun Wang (DRC). The team also included Jin Song (World Bank), and Changsheng Chen, Yang Su, and Dong Yu (DRC). Director-General of DRC’s social development research department, Yanfeng Ge, provided constructive comments for the report. It benefited from background papers by Carl Mason and Quilin Chen (social spending modelling); Toomas Palu (pri- mary health care); Sen Gong and Dong Yu (citizen participation); Liejun Wang and Sen Gong (doctor and teacher pay), Scott Rozelle (human capital); Kin Bing Wu, Christine Boscardin, and Peter Goldschmidt (educa- tion); Fang Cai, Yang Du, and Meiyan Wang (labor market overview, and labor mar- ket institutions); John Giles, Dewen Wang, and Wei Cai (labor supply and retirement); Dewen Wang and Philip O’Keefe (hukou); Sen Gong and Liejun Wang (hukou) John Giles and Dewen Wang (social security); and Laurie Joshua (aged care). The team also benefited from comments from Tamar Manuelyan-Atinc, Arup Banerji, Eduardo Velez Bustillo, Fang Cai, Gong Chen, Ariel Fiszbein, Gerard La Forgia, Emmanuel Jimenez, John Langenbrunner, Peilin Li, Xiaoyan Liang, Albert Park, Hainan Su, Adam Wagstaff, Liping Xiao, Xiaoqing Yu, Li Zhang, and Bingwen Zheng. The team is grateful to the Korea Development Institute and Japan-China Economic Association for making arrangements for DRC study tours in Korea and Japan respectively, and to local Development Research Centers of Chengdu and Nanjing, and the Hangzhou Govern- ment for joint field visits and meetings. Finally, the team is grateful for assistance in preparing the document from Limei Sun and Tao Su. The supporting report on innovation was prepared by a joint team led by Shiji Gao of DRC, and Shahid Yusuf of the World Bank and comprising Zhiyan Sun, Jietang Tian, Xiaowei Xuan and Yongwei Zhang from DRC, and Luan Zhao, Lopamudra Chakraborti, and Rory Birmingham from the World Bank. We thank Hamid Alavi, Cong Cao, Mark Dutz, Xin Fang, Zhijian Hu, Gary Jefferson, Jamil Salmi, Changlin Wang, Chunfa Wang, Jun Wang, Lan Xue, and Chunlin Zhang for their most help- ful comments and suggestions. In addition, Jingyue Huang and Bo Lv prepared some of the background company case studies. [...]... Holly Krambeck, Axel Baeumler, Meskerem Brhane, and Andrew Saltzberg (urban development); Lee Travers, Sudipto Sarkar, and Paul Kriss (water); Sina Johannes (pollution and waste); Luc Christiaensen (agriculture); Katrina Brandon (natural resource management); Urvashi Narain and Gordon Hughes (adapting to a changing climate); Kirk Hamilton and Maryla Maliszewska (simulating a carbon price for China) ; and. .. climate change, international financial stability, international migration, health pandemics, water management, and other global challenges will require new approaches to transnational and global governance arrangements The U.S dollar will likely remain the world’s major international reserve currency, especially given weaknesses in the Euro Area and Japan But expansionary monetary policies in the advanced... policy reaped large dividends for China, bringing investments, advanced technologies, and managerial expertise; opening the international market for China s goods and services; and giving a boost to China s internal economic reforms The proximity of Hong Kong SAR, China, and Taiwan, China, helped, as did a large Chinese diaspora dispersed across the globe Trends and characteristics at home and abroad in... Sall (China s future green export markets, and using urban quality of life indices to evaluate government performance) Additional comments and guidance from World Bank colleagues were provided by Andrew Steer, Ken Chomitz, and Michael Toman (peer reviewers), and Gailius Draugelis, Marianne Fay, Kathryn Funk, Marea Hatziolos, Dan Hoornweg, Vijay Jagannathan, Abed Khalil, Paul Kriss, Xiaokai Li, Magda... State-owned enterprise TFP Total factor productivity WTO World Trade Organization c h i n a 2 0 3 0 xix Part I Overview China 2030: Building a Modern, Harmonious, and Creative High-Income Society China 2030: Building a Modern, Harmonious, and Creative High-Income Society Introduction From the early 1500s until the early 1800s, China s economy was the world’s largest By 1820, it was one-fifth again as... china 2030 As a high-income society, China s aspiration is to enjoy a per capita income on par with advanced economies; have a large middle class that acts as a force for stability, good governance, and economic progress; eliminate poverty as it is known today; and promote social harmony by increasing equality of opportunity and lowering inequality in all its economic and social dimensions If China. .. growth, China has reached another turning point in its development path, one that calls for a second strategic, and no less fundamental, shift China s ultimate objective is to become a modern, harmonious, creative, and highincome society by 2030 Each element of the phrase modern, harmonious, creative, and high income” has specific significance in China that guides the analysis and recommendations in... coordinated the translation work The World Bank’s Elaine Sun, Kathryn Funk, and Li Li managed coordination and production of the English edition The team is grateful to Patricia Katayama and Susan Graham of the World Bank’s Office of the Publisher for the editing and layout of the English conference edition The xii CHINA 2030 International Department of MOF, the General Office and International Department... We thank Jiyao Bi, Qisheng Lai, Hong Song, Youfu Xia, Xiangchen Zhang, and Xiaoji Zhang for their helpful comments and suggestions Excellent data work and other inputs were provided by Yueqing Jia, Sergio Andres Kurlat, Jose Alejandro Quijada, and Sachin Shahria The team also benefited from excellent support provided by Maria Hazel Macadangdang and Rosalie Marie Lourdes Singson Pei-Lin Liu, Changsheng... considerable care, but it will be a key step toward internationalizing the renminbi as a global reserve currency Finally, China must play a central role in engaging with its partners in multilateral settings to shape the global governance agenda and address pressing global economic issues such as climate change, global financial stability, and a more effective international aid architecture that serves . Paul Munro-Faure (Food and Agriculture Organization, land), Hironori Kawauchi (World Bank, Japan), Chul Ju Kim (World Bank, Korea), Ping Li (Landesa, land), and Wenkui Zhang and Anbo Xiang. Lee Travers, Sudipto Sarkar, and Paul Kriss (water); Sina Johannes (pollution and waste); Luc Christiaensen (agriculture); Katrina Brandon (natural resource manage- ment); Urvashi Narain and. Hughes (adapting to a changing climate); Kirk Ham- ilton and Maryla Maliszewska (simulating a carbon price for China) ; and Chris Sall (China s future green export markets, and using urban quality