The World Bank and the Development Research Center of the State Council, the People’s Republic of China has a 468 study called China 2030 – Building a Modern, Harmonious, and Creative High-Income Society The lengthy report addresses all aspects of reform and policy. (financial reform, enterprise reform, urbanization /hukou reform, research and development, etc…)
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 makers 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.
China’s economic performance over the last three decades has been impressive. GDP growth averaged 10 percent a year, and over 500 million people were lifted out of poverty. China is now the world’s largest exporter and manufacturer, and its second largest economy.
Even if growth moderates, China is likely to become a high-income economy and the world’s largest economy before 2030, notwithstanding the fact that its per capita income would still be a fraction of the average in advanced economies.
But two questions arise. Can China’s growth rate still be among the highest in the world even if it slows from its current pace? And can it maintain this rapid growth with little disruption to the world, the environment, and the fabric of its own society? This report answers both questions in the affirmative, without downplaying the risks.
Having the DRC’s name on the document gives China’s reformers cover. The World Bank is viewed with suspicion by hardliners, who see it as a meddler in the affairs of developing countries and a purveyor of ideas that could undermine party rule in China. With a semi-official stamp of approval on it, the report will be less easy for conservatives to dismiss as part of a Western plot. In turn, it’s believed, the DRC used the World Bank as cover in its discussions with foot-dragging bureaucrats (“Don’t blame us for these proposals, blame the bank”). At times, behind closed doors, the DRC argued for even bolder reforms than the bank itself was suggesting.
Six important messages emerge from the analysis:
1. Implement structural reforms to strengthen the foundations for a market based economy by redefining the role of government, reforming and restructuring state enterprises and banks, developing the private sector, promoting competition, and deepening reforms in the land, labor, and financial markets.
2. Accelerate the pace of innovation and create an open innovation system in which competitive pressures encourage Chinese firms to engage in product and process innovation not only through their own research and development but also by participating in global research and development networks.
3. Seize the opportunity to “go green” through a mix of market incentives, regulations, public investments, industrial policy, and institutional development.
4. Expand opportunities and promote social security for all by facilitating equal access to jobs, finance, quality social services, and portable social security. These policies will be critical in reversing rising inequality, helping households manage employment-, health-, and age-related risks, and increasing
5. Strengthen the fiscal system by mobilizing additional revenues and ensuring local governments have adequate financing to meet heavy and rising expenditure responsibilities.
6. Seek mutually beneficial relations with the world by becoming a pro-active stakeholder in the global economy, actively using multilateral institutions and frameworks, and shaping the global governance agenda.
Reforming the hukou system
Hukou reform needs a phased strategy implemented over an extended period, with the end goal of hukou being a simple population registration system, delinked from social entitlements. It needs national-level planning in close coordination with provincial authorities.
The key issue is not hukou reform per se, but what are the necessary pre-conditions of entitlement and welfare reform that will reduce the importance of hukou, turning it ultimately into a more typical population registration system such as exists in many other countries. These pre-conditions will require different types of collective action—across agencies and across levels of government—in order to ensure that reforms that are socially and economically optimal at the aggregate level do not continue to be delayed. It will also require consultation with the public to explain the rationale and strategy for reform.
The first step of the reform strategy could be to set a national framework for extension of the residence permit system, in order to begin the process of delinking social entitlements of nonlocal residents from their hukou status. While it would not be practical in the short to medium term to expect common levels of eligibility criteria (e.g., the number of prior years of residence or of social insurance contributions), it would be important to have common indicators that urban jurisdictions could adapt to local conditions (e.g., period of prior local residence). The criteria could be informed by the many local pilot programs and might take an approach such as Guangdong’s with its scoring system in order to avoid overly rigid rules. A second practical implementation challenge would be establishing national standards for information systems and data exchange of information on mobile populations. While a fully centralized national database seems overly ambitious for the present, a common platform would be essential tounderpin an effective reform.
A second dimension of the reform is the spatial expansion of more liberal residence permit and hukou conversion eligibility standards. A gradual expansion of the spatial scope of registration permit eligibility is also likely in such a framework—beginning with all rural residents of the prefecture, then extending to all people with hukou of that province, and ultimately opening up residence permits to those from beyond the province. This pattern is already visible in local reforms in places such as Chengdu, Chongqing, and Guangdong and provides a sequence for phased equalization of entitlements.
A third issue to address would be the extent of rights conferred once a migrant obtains a registration permit, as well as the possible sequencing of such rights. Again, current pilots may be informative on this issue. In the initial phases, it would be unlikely that the full social entitlements of local residents could accrue immediately upon obtaining a residence permit.
However, it would be important to create a pathway within the local permit system for gradual acquisition of the same social entitlements as local residents, prioritizing rights such as children’s education. The pace and scope of rights given to residence permit holders may also become a source of competition among cities in trying to attract non-local workers as the aggregate labor force shrinks and rural labor surplus is exhausted. An illustrative graduation strategy is shown in Figure 4.9.
Under such a common national framework, the residence permit could be rolled out nationally by the second half of this decade. Once universally established, the qualifying criteria and the pathway toward the same rights as local residents could be accelerated over time. In this way, a residence permit could by 2030 have the same social entitlements as those of local workers and could be obtained after a reasonably short period of residence in a city with modest qualifying criteria.
A key challenge in making such a transition effective would be agreement on the financing responsibilities for social services of those obtaining residence permits. This would be a complex negotiation between national and sub-national authorities but should be guided by a clearer understanding of migrant flows across space and of the externalities of labor mobility.
There could be fiscal burden sharing which could be more weighted toward national financing in cases where migrants came from beyond the jurisdiction of the province, and it could involve a role for the province in the case of intra-provincial migrants. Certain entitlements would have a significant degree of self-financing by the migrant household that would be built into the qualifying criteria, for example with social insurance contributions in the urban workers’ system.