36215 Public Disclosure Authorized

36215 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Countries and Countries Regions DIRECTIONS IN DEVELOPMENT China’s Development Priorities China’s Shahid Yusuf and KaoruYusuf Shahid Nabeshima China’s Development Priorities China’s Development Priorities Shahid Yusuf Kaoru Nabeshima ©2006 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 5 09 08 07 06 This volume is a product of the staff of the International Bank for Reconstruction and De- velopment / The World Bank.The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank 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 judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Dan- vers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN-10: 0-8213-6509-6 ISBN-13: 978-0-8213-6509-0 eISBN-10: 0-8213-6510-X eISBN-13: 978-0-8213-6510-6 DOI: 10.1596/978-0-8213-6509-0 Cover photo: Shanghai, China: ©2006 Getty Images Library of Congress Cataloging-in-Publication Data Yusuf, Shahid, 1949- China’s Development Priorities / Shahid Yusuf, Kaoru Nabeshima. P cm. – (Directions in development) Includes bibliographical references and index. ISBN-13: 978-0-8213-6509-0 ISBN-10: 0-8213-6609-6 1. China—Economic policy. 2. China—Economic conditions. I. Nabeshima, Kaoru. II. Title. III. Directions in development (Washington, D.C.) HC427.95.Y87 2006 338.951—dc22 2006041016 Contents Acknowledgments ix About the Author xi Acronyms and Abbreviations xiii PART 1 On the Eve of the Eleventh Five-Year Plan 1 Chapter 1 Introduction 3 Chapter 2 Rising Incomes, Declining Poverty, Growing 7 Inequality Geographic Concentration of Development and 13 the Sources of Growth Containing the Resource Intensity of Development 21 Environmental Diseconomies 25 Global Integration and Resource Dependence 31 PART 2 Policies for Rapid, Balanced, and Sustainable 33 Growth Chapter 3 Sustaining Growth 35 Supply-Side Developments 36 v vi Contents Demand-Led Growth 37 Sectoral Sources of Growth 43 Pattern of Urban Development and Agglomeration 47 Effects Moving to Cities 54 Migration Policy and Reform of the Hukou System 56 National Innovation System, Information Technology, 61 and FDI FDI in China 66 Promoting FDI 69 State-Owned Enterprise and Banking Sector Reforms 71 Impact of WTO Accession on the Domestic 75 Economy and Trade Partners Chapter 4 Reducing Poverty and Achieving Interregional 81 Balance Human Development Outcomes 86 Avenues to Balanced Development 89 Inequality and Development 96 Chapter 5 Conserving Energy and Water Resources 99 Energy Intensity 99 Energy Policy 102 Distribution of Water Resources 108 Water Policy 109 PART 3 Summing Up 115 Chapter 6 Connecting the Issues 117 Equitable Growth That Is Sustainable 117 Closing the Rural-Urban Welfare Gap 119 Implications of a Bigger Global Footprint 121 The Next Decade for China and the World 124 References 125 Index 149 Contents vii Figures 2.1 Wheat Production and Primary Output in China, 11 1990–2004 2.2 Population Distribution in China, by Region, 1985–2004 15 3.1 Household Saving Rates in China, Japan, and Korea, 42 1953–2003 4.1 Average Years of Schooling in China’s Provinces, 85 by Rural or Urban Location, 2000 4.2 Average Years of Schooling in China, by Region, 87 1982, 1990, and 2000 4.3 Literacy Rate in China, by Region, 1982, 1990, and 2000 88 4.4 Life Expectancy in China, by Region, 1990 and 2000 88 4.5 Road Length per Square Kilometer in China, 90 by Region, 1990–2004 Tables 2.1 China’s Poverty Headcount, 1990–2004 8 2.2 Inequality Indexes in China, 1981–2004 9 2.3 Employment in Township and Village Enterprises and 12 Private Enterprises in Rural Areas of China, 1985–2004 2.4 Urban Population in China, 1995–2004 13 2.5 Industrial Concentration (Gini) and Regions with the 16 Highest and the Second Highest Industrial Shares, 1980, 1985, and 1995 2.6 Key Industries in China, by Region, Five-Year Averages, 17 1999–2003 2.7 Shares of Guangdong, Jiangsu, and Shanghai in GDP, 17 Exports, and FDI, 2004 2.8 Output and Consumption of Oil and Gas in China, 23 1992–2004 2.9 Water Use, by Sector, in China, 1980–2000 26 2.10 Concentration of Particulates in China’s Cities, by Grade, 27 1998, 2000, and 2002 2.11 Concentration of Sulfur Dioxide in China’s Cities, 27 by Grade, 1998, 2000, and 2002 2.12 Water Quality in China by Class, 1991–8 30 3.1 Contributions to Output Growth in China, 1971–2004 37 3.2 Contributions to TFP Growth in China, 1971–1998 38 3.3 Growth Rate of GDP in China, by Source, 1990–2003 38 viii Contents 3.4 Final Consumption as a Share of GDP, 1980–2004 39 3.5 Labor Elasticity in Manufacturing in China, 1989–2004 41 3.6 Employment Elasticity of Output in China, by Sector, 42 1981–2003 3.7 GDP Growth in China, by Sector, 1980–2004 44 3.8 Share of Employment in Three Sectors 44 3.9 Total Cultivated Land in China, 1980–2004 46 3.10 Yield per Hectare for Select Grains in Select Countries, 46 Various Years 3.11 Potential Gains from Optimizing City Size in China 50 3.12 R&D Expenditure in China, by Sector, 1999–2002 61 3.13 Patent Applications Submitted by Domestic and 63 Foreign Residents in China, by Type of Patent, 1996, 1998, and 2000 3.14 Basic Research Expenditure as a Share of Total R&D 63 Expenditure in China and Other Countries, Various Years 3.15 Geographic Origin of China’s Imports, Various Years 78 4.1 Availability of Health Care Services in China, 1980–8 83 4.2 Health Indicators in China, 1991–2000 84 4.3 Access to Sanitation in China, 1990 and 2000 90 4.4 Education Expenditure as a Share of GDP in Select 93 Countries, 2000 5.1 Agricultural Products Produced in the 3-H Basins as a 110 Share of Total Output in China, 2001 5.2 Projected Availability of Water in the 3-H Basins under 112 Three Scenarios of Growth in Demand, 2000–20 6.1 Carbon Dioxide Emissions in China, 1990–2003 123 Acknowledgments This study was prepared in close consultation with China’s National Development and Reform Commission (NDRC). We are deeply grateful to Yang Weimin and Xu Lin for their guidance. Throughout the preparation of this study, we cooperated with the U.K. Department for Interna- tional Development (DFID), which generously supported the research and other activities financially and intellectually.We are especially indebt- ed to Chris Athayde and Jillian Popkins. We thank David Dollar, Homi Kharas, Yukon Huang, Bert Hofman, Deepak Bhattasali, and Sudarshan Gooptu for their support, encourage- ment, and comments throughout the preparation of this report. The background notes commissioned for this report provided us with invaluable insights into China’s development, future challenges, and policy options. The richness of the report owes much to the authors of the notes: Richard Bird, Era Dabla-Norris, Cindy Fan, Daniel Gunaratnam, Vernon Henderson,Patrick Honohan,Albert Park,Anthony Saich, Zmarak Shalizi, Edward Steinfeld, Kong-Yam Tan, John Taylor, Dana Weist, and Shiqing Xie. We benefited from a number of written comments provided by exter- nal reviewers, participants of workshops held in Beijing, and colleagues at the World Bank. We thank the peer reviewers, Elizabeth Croll, Nicholas ix x Acknowledgments Lardy, Vikram Nehru, and Dwight Perkins. Written comments were provided by Charles Abelman, Noureddine Berrah, Dan Biller, Shantayanan Devarajan,Tarhan Feyzioglu, Santiago Herrera, Emmanuel Jimenez, Louis Kuijs, Douglas Olson, David Scott, Graham Smith, Geoffrey Spencer, Xi- aoqing Yu, Chunlin Zhang, and Jianping Zhao. We also thank representatives from the NDRC, DFID, and the World Bank’s China country team, who attended workshops held in Beijing and Washington, DC, and offered comments and suggestions. We deeply appreciate the cheerful and dedicated assistance of Maribel Flewitt and Tristan Suratos in producing this manuscript and thank Jian- qing Chen for her excellent support from the Beijing office, Tomoko Okano and Jue Sun for their valuable assistance with research, and Tian- shu Chen for a careful translation of the study into Chinese. About the Authors Shahid Yusuf is a research manager of the Development Economics Research Group at the World Bank. He holds a Ph.D. in economics from Harvard University in Cambridge, Massachusetts.

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