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China’s new Five-Year Plan: what are the implications for global development?

Linda Yueh, Fellow in Economics and Director, China Growth Centre (CGC), St Edmund Hall, University of Oxford, and Economics Correspondent for Bloomberg TV

After 30 years of truly remarkable economic development, with 400 million people lifted out of abject poverty, China believes that it is in a position to fundamentally adjust the strategies with which it has generated such substantial economic achievements. Its growing middle class now has the ability to serve as consumers – at least in urban areas – allowing the country to rely more on domestic demand to drive what is now the world’s second largest economy.  To make this transition away from export-orientation, China has developed an ambitious five-year reform plan to propel the economy into the ranks of rich economies and escape the ’middle-income trap‘ that has afflicted many countries in the post-war period.

Yet however remarkable China's growth has been since the start of the reform period in 1979, the country faces further challenges in the next three decades – so this Five-Year Plan is in actual fact a 30-Year Plan. Around 8% of its 1.3 billion people still live in poverty. Levels of income inequality are high, with the Gini coefficient now around 0.4, making the country as unequal as the United States. These are not only social concerns, but also economic ones.  Whether China is a model for other developing countries will hinge on whether the current re-balancing of the economy delivers, however.

A key aim of the Plan is to re-balance the economy away from exports and drive the economy more by domestic demand – that is, increase consumption, which has fallen from around 50% of GDP in the early 1990s (about the level of most market economies) to less than 40% today. The reason for this decline is not only because households save, but because their incomes have lagged behind. So, urban households save because they are worried about an inadequate social safety net for pensions, health and unemployment, while rural households are prevented from entering the urban labour market where the better paid jobs are, which in turn depresses incomes and therefore overall consumption.

At its centre, the Plan aims to increase development in the services sector. This would include more government services, which, currently comprising 40% of GDP, is low by international standards. Comparatively speaking government spending is also low at only 22% of GDP, of which 4 percentage points is due to the fiscal stimulus of the past 2 years.

A complementary key tenet is increased urbanisation. The proposed relaxation of the restrictive migration controls manifest through the household registration system (hukou) would allow migrants to move and settle in cities. It would increase their employment prospects and raise the incomes of the majority of the population in China. Rural household incomes (5,153 RMB in 2009) are less than one-third of urban incomes (17,175 RMB in 2009) and have been growing at a slower rate for most of the reform period (urban incomes were 1,150 in 1990 while rural incomes were 686 RMB). Most importantly, these reforms would remove the second-class citizenship status of rural residents, which makes these reforms desirable, as well as economically sensible.

This type of reform - economically efficient while also socially equitable - makes the Chinese growth model a worthy one for other developing countries to study. China's successful growth over the past 30 years has certainly garnered interest in a so-called Beijing Consensus, viewed as an alternative to the Washington Consensus insofar as the precepts of reform are less centred on the rapid introduction of market forces and more with care for the institutional underpinnings of the market.

In a sense, it is a little ironic, in that China is often viewed as an outlier for not having an effective legal system which in other countries is thought to be important for rapid economic growth. But the focus on institutions is indeed key, as China has adopted numerous institutional innovations, such as incentivising output by introducing market-oriented motives that have driven the private sector, all the while maintaining the state-owned sector.

This is the core of what the Chinese term ’marketisation with Chinese characteristics’. But whether these characteristics increase equity in society may well determine if there are worthwhile lessons to glean from a country that has certainly been the successful growth story of the late 20th century, and likely the 21st century as well.