The 2020 Project: Policy Support in the People's Republic of China

Author: Asian Development Bank

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The 2020 Project POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

© 2002 Asian Development Bank All rights reserved The findings, interpretations, and conclusions expressed in this publication do not necessarily represent the views of the Asian Development Bank or those of its member governments. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences of their use. Asian Development Bank P.O. Box 789 0980 Manila, Philippines Tel: (63-2) 632-4444 Fax: (63-2) 636-2444 Website: http://www.adb.org

ISBN: 971-561-456-6 Publication Stock No.: 050602

TABLE OF CONTENTS vii xvii xix

List of Tables and Figures Preface Abbreviations

Final Report xxiii

Summary

PART I: STRATEGIC DIRECTIONS Chapter 1: The macroeconomy The Western Development Strategy History of efforts to promote the development of the Western Region The economy of the Western Region today Implications for macroeconomic growth in the Western Region Strategic considerations in the development of the Western Region

3 4 6 9 15 20

Chapter 2: The fiscal system Fiscal system Major challenges facing the public finance system Policy implications for the fiscal system

25 26 30 37

Chapter 3: The financial system Financial system Financial system in the Western Region Implications for financial policies

45 46 48 58

Chapter 4: Agriculture and natural resources Role of Government in developing and managing natural resources Natural resources and environmental issues Problems in agriculture and forestry Implications for policies for agriculture and natural resources

69 70 73 81 87

Chapter 5: Social conditions Demographic context Incidence of poverty Burden of disease Government health and welfare programs Implications for government policies

95 96 98 106 110 118

iii

PART II: STRENGTHENING THE COMPETITIVENESS OF THE WESTERN REGION Chapter 6: Transport policies Transport in the Western Region Demand for transport services in the Western Region Cross-border and subregional transport issues Implications for transport policies

123 124 129 131 137

Chapter 7: Energy policies and strategies National energy profile Energy consumption in the Western Region Energy balance analysis for the PRC and the Western Region Energy policies and related issues Case studies in regional development and energy sector finance Implications for energy policies

147 148 152 155 155 164 164

Chapter 8: Technology policy Role of technology in regional economic development Recent institutional reforms and their applicability to the Western Region Biotechnology Information and communication technology Implications for policies to promote technological innovation

171 172 174 177 179 182

Chapter 9: Competition policy Role of government in promoting competition Obstacles to competition Subregional issues Implications for competition policy

187 188 190 191 192

PART III: CREATING EMPLOYMENT OPPORTUNITIES

iv

Chapter 10: Industrial policy History of industrial policy Industrial structure of the Western Region Constraints on adjusting the industrial structure Role of industrial policy in economic development International experiences in industrial policy Competitive advantages in the Western Region Implications for industrial policies

197 198 198 200 200 203 205 209

Chapter 11: Human resources policies Size, skills, and knowledge of the labor force Employment

215 216 224

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

The labor market Implications for labor and social security policies

226 235

Chapter 12: Women Background of government policy Economic and social position of women Implications for policies

245 246 251 260

Chapter 13: Minorities Regional autonomy for minorities Social and economic conditions of minorities Participation of minorities in decision making Language policies as inhibitors of upward mobility Implications for policies on minorities

267 268 268 274 275 277

PART IV: ENHANCING LOCAL CAPABILITIES Chapter 14: Cross-border cooperation Russia and Mongolia The Central Asian Union The Association of Southeast Asian Nations Afghanistan and the South Asian Association for Regional Cooperation Implications for cross-border economic cooperation policies

285 286 289 292 295 296

Chapter 15: Local government Structure of local government Critical governance issues for the Western Region Future role of local government

305 306 308 312

Chapter 16: Water resources management Water resources Use of water resources Future water requirements Water resource planning and management options Implications for policy directions

315 316 319 322 325 333

Chapter 17: Environmental conservation and pollution control Institutional arrangements Information, monitoring, and reporting Environmental planning Pollution control Nature reserve management Ecological remediation Ecological research and development Implications for environmental protection and pollution control

337 338 340 340 342 345 348 349 352

v

Chapter 18: Urban development Urban land management Urban infrastructure Housing Financing urban development Implications for policies for urban development

355 356 358 360 361 364

Chapter 19: Rural development Rural infrastructure Food for Work programs Microcredit Assessment of priorities and implications for policies

367 368 372 372 375

Appendixes A. Comments from Meghnad Desai B. Comments from Carl Riskin C. Comments from Keijiro Otsuka

379 379 384 389

Policy Directions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

The macroeconomy The fiscal system The financial system Agriculture and natural resources Social conditions Transport policies Energy policies Technology policy Competition policy Industry policy Human resources Women Minorities Cross-border cooperation Local government Water resources management Environmental conservation and pollution control Urban development Rural development

Glossary References Contributors

vi

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

401 402 405 407 410 412 414 416 418 419 420 421 422 423 424 425 427 428 429 431 436 451

LIST OF TABLES AND FIGURES TABLES Table 1-1 Table 1-2 Table 1-3 Table 1-4 Table 1-5 Table 1-6 Table 1-7 Table 1-8 Table 1-9 Table 1-10 Table 1-11 Table 1-12 Table 1-13 Table 1-14 Table 1-15 Table 1-16 Table 1-17 Table 1-18 Table 1-19 Table 1-20 Table 2-1 Table 2-2 Table 2-3 Table 2-4 Table 2-5 Table 2-6 Table 2-7 Table 2-8 Table 2-9

Regional Shares of Government Capital Construction Investment (Within Budget), 1953–2000 “Pillar” Industries in the Western Region During the Ninth FYP Factor Endowment of the Western Region, 1999 Some Economic Indicators of the Various Regions, 2000 Urban and Rural Consumption Relationship between Poverty Counties, Poverty Populations, and Fragile Ecological Systems in the Western Region, 1988 Imports and Exports of the Western Region, 2000 Evolution of Industrial Structure in the PRC, 1978–2000 Industrial Outputs in the Western Region, as Percentage of National Total, 1985–2000 Percentage of Firms in Industries with Different Growth Patterns Heavy/Light Industry Structure of the PRC, 2000 Percentage of Industry Output Produced by Various Ownership, 2000 Economic Performance of the Western Region, 2000 Sector Contributions to Industry Growth, 1995–1997 GNP Growth Rate (Using Comparable Prices), 1997–2001 Scenarios of Annual GDP Growth (Constant Prices), 2000–2020 Government Investment, 1999–2000 (Current Prices) Population Size and Migration Between Regions Economic Growth Projections, 2000-2010 Cost-Benefit Analysis of Public-Private Mixed Policies Tax Revenue Assignment in the PRC after 1994 Transitional Transfer Payments from the Central Government to the Western Region, 1995–1998 Scale of TTP and Vertical Transfer Payments, 1995–1998 Government Budget Deficit, 1990–2000 Government Debt Issuance and Payment, 1990–2000 Foreign Debt and Risk Factors, 1994–2000 Government Extrabudgetary Revenue and Expenditure, 1996–2000 Budgetary and Extrabudgetary Revenue in the Western Region, 1996–1998 Budgetary and Extrabudgetary Expenditure in the Western Region, 1996–1998

6 8 9 10 11 11 12 13 13 13 13 14 15 15 17 17 17 19 20 22 27 30 30 31 31 32 32 33 33

vii

Table 2-10 Table 2-11 Table 2-12 Table 2-13 Table 2-14 Table 2-15 Table 2-16 Table 3-1 Table 3-2 Table 3-3 Table 3-4 Table 3-5 Table 3-6 Table 3-7 Table 3-8 Table 3-9 Table 3-10 Table 3-11 Table 3-12 Table 3-13 Table 3-14 Table 3-15 Table 3-16 Table 4-1 Table 4-2 Table 4-3 Table 4-4 Table 4-5 Table 4-6 Table 4-7 Table 4-8 Table 4-9 Table 4-10 Table 4-11 Table 4-12 Table 4-13 Table 4-14 Table 4-15 Table 4-16 Table 4-17 Table 5-1

viii

Total Investment in Fixed Assets, by Source, 1980–2000 Investment in Capital Construction, by Source, 1999 Tax Burden on the Regions, 1993–1998 Taxes on Urban Households, 2000 Per Capita Taxes and Levies on Rural Households,a 1999 Growth of Fiscal Resources in the Regions, at Current Prices Policy Recommendations for Tax Reform Regulation of Financial Institutions in the PRC Loans Granted by the PRC’s Financial Institutions, 1999 Deposits and Loans of State-Owned Commercial Banks, 1999 ADBC Loans, 1999 and 2000 RCCs’ Contributions to the Financial System, 2000 Deposits and Loans of Rural Credit Cooperatives, 1999 and 2000 Regional Distribution of RCC Loans, 2000 Nonperforming Lans of RCCs, 1999 RCC Balance Sheet, Fourth Quarter, 2000 Postal Savings Deposits, 2000 Comparison of Listed Companies in the Western Region, 1999 Financial Activities in the Western Region, 1999 Foreign Direct Investment in the PRC, 1999 Summary of External Assistance to the PRC Per Capita Fiscal Revenues and Expenditures, 1999 Summary of Policy Options for the Financial Systema Land Resources of the Western Region, 1999 Legislation and Government Functions: Agriculture, Forestry, and Natural Resources Management Number and Size of Nature Reserves in the Western Region, by Level of Government Administrative Bodies for Nature Reserves Species Biodiversity of the PRC Gross Output Value of Agriculture, Forestry, and Fisheries, 1999 Per Capita Consumption of Major Food Categories, 1999 Growth in Food Output, 1994–1999 Growth in Animal Populations, 1994–1999 Rural Population and Employment, 1999 Crop Yields, 1999 Animal Production, 1999 Forest Production in the Southwest, 1993 and 1999 Area of Forest Planting, 1997 Agricultural inputs, 1999 Output of Processing Industries, 1999 Average Landholdings Per Capita, 1999 Population Growth in the Western Region, 1990–2000

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

34 35 36 36 37 37 39 47 48 48 50 50 50 51 51 51 52 52 54 55 56 57 58 70 72 78 78 79 81 81 82 82 83 83 83 84 84 85 86 87 96

Table 5-2 Table 5-3 Table 5-4 Table 5-5 Table 5-6 Table 5-7 Table 5-8 Table 5-9 Table 5-10 Table 5-11 Table 5-12 Table 5-13 Table 5-14 Table 5-15 Table 5-16 Table 5-17 Table 5-18 Table 5-19 Table 5-20 Table 5-21 Table 5-22 Table 5-23 Table 5-24 Table 5-25 Table 5-26 Table 5-27 Table 5-28 Table 5-29 Table 5-30 Table 5-31 Table 5-32 Table 5-33 Table 5-34 Table 5-35

Distribution of Population Between Cities, Towns, and Counties, 1999 Comparison of Average Per Capita Urban and Rural Incomes, 1999 Estimates of Poverty in the PRC, Gini Coefficients to 1995 Expenditure of Poorest 5 Percent of Urban Households in the PRC, 1994–2000 Food Consumption of Poorest 5 Percent of Urban Households, 1994 and 2000 Consumer Durables Owned by Poorest 5 Percent of Urban Households Food Consumption of Poorest Sections of PRC Rural Population, 1990–1999 Poverty Population, by Region and County Status, 1999 Characteristics of Poverty County Population, by County Location, 1999 Characteristics of Poverty County Population, by Terrain, 1999 Characteristics of Poverty County Population, by County Status, 1999 Counties by Poverty Status and Average Rural Incomes, 1999 Schooling Expenses per Child in Poverty Counties, 1999 Herdsmen and Peasants in Inner Mongolia, 1995–1999 Analysis of Death Rates, 1999 Morbidity in the Western and Eastern Regions, 1998 Disability in the Western Region, 1998 Disability-Adjusted Life Years (DALYs) in the PRC, by Sex and Cause, 2000 Contribution of Risk Factors to the Burden of Disease, 1990 Incidence of Health Risks, 1999 Per Capita Household Expenditure on Medicines and Medical Services, 1990–2000 Funds Allocated for Poverty Alleviation, 1986–1999 Welfare Programs of the Ministry of Civil Affairs, 2000 Employment in Welfare Enterprises for the Disabled, 2000 WHO Ranking of the PRC’s Health System, 1997 Health Expenditures Per Capita, 2000 Government Health Services Expenditure Per Capita, 2000 Number of Medical Personnel, Xinjiang, 1999 Number of Health Facilities per Million Population, 1999 Central Government Subsidies for Health Facilities, 1998–2000 Village Health Facilities in Poverty Villages, 1999 Place of Birth and Qualifications of Midwife , 1998 Primary Means of Meeting Medical Expenses, 1998 Attitudes Toward Cooperative Medical Schemes, 1998

98 99 99 101 101 101 102 102 103 103 103 104 105 107 107 108 108 108 109 109 110 111 113 113 115 115 115 115 116 116 116 117 117 118

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Table 6-1 Table 6-2 Table 6-3 Table 6-4 Table 6-5 Table 6-6 Table 6-7 Table 6-8 Table 6-9 Table 6-10 Table 6-11 Table 6-12 Table 7-1 Table 7-2 Table 7-3 Table 7-4 Table 7-5 Table 7-6 Table 7-7 Table 7-8 Table 7-9 Table 7-10 Table 7-11 Table 7-12 Table 7-13 Table 7-14 Table 7-15 Table 7-16 Table 7-17 Table 7-18 Table 7-19 Table 7-20 Table 7-21 Table 7-22 Table 8-1 Table 8-2 Table 8-3 Table 8-4

x

Density of Transport Infrastructure, 2000 Key Transport Indicators of the PRC, by Region, 1999 Freight traffic, by Region and Mode of Transport, 2000 Transport Facilities in the Western Region, by Mode, 1999 Growth of GDP, Travel, and Freight, 1990–1999 Railway Shipments Between Xinjiang and Other Regions, 2000 Outward and Inward Railway Shipments in the Western Region, by Province, 2000 Central Asian Road Projects Special Funds for the Transport Sector Highway Funds During the Ninth FYP, 1996–2000 Sources of Road Finance Role of Foreign Investment in the PRC’s Transport Sector Coal Resources in the Western Region, 1999 Energy Production in the Western Region, 1999 Oil and Natural Gas Resources in the Western Region, 1999 Hydropower Resources in the Western Region, 1999 Installed Wind Power Capacity in the Western Region, December 1998 Solar Energy in the Western Region, 1999 Projected Supply of Primary Energy in the PRC, 2000–2020 Share of National Primary Energy Supply, 2000–2020 Projected Supply of Primary Energy in the Western Region, 2000–2020 Shares of Primary Energy Supply in the Western Region, 2000–2020 Projected Electricity Supply, 1999–2020 Natural Gas Consumption in the PRC, 1997 Biomass Energy Consumption in the Western Region, 1997 Comparison of Capital Investment in Biomass Gasification Plants Consumption of Primary Commercial Energy and New and Renewable Energy in the PRC, 1999 Projected Energy Demand, 2000–2020 Shares of Primary Energy Demand, 2000–2020 Projected Electricity Demand, 1999–2020 National Primary Energy Balance, 2005–2020 Primary Energy Balance of the Western Region, 2005–2020 Government Lifeline Subsidy Standards, 2000 Market Prices for Datong Mixed Coal Proxy Measures of R&D inputs in the Western Region, 1999 Proxy Measures of R&D Outputs in the Western Region, 1999 Economic Indicators of High-Tech Zones in the PRC, 1997–1999 Main Economic Indicators of High-Tech Enterprises in Development Areas, 1999

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

124 125 126 126 129 130 130 132 141 141 142 143 148 148 149 150 150 151 151 151 151 152 152 152 153 153 154 154 154 155 155 155 159 163 172 173 174 175

Table 8-5 Table 8-6 Table 8-7 Table 8-8 Table 8-9 Table 8-10 Table 8-11 Table 10-1 Table 10-2 Table 10-3 Table 10-4 Table 10-5 Table 10-6 Table 10-7 Table 10-8 Table 11-1 Table 11-2 Table 11-3 Table 11-4 Table 11-5 Table 11-6 Table 11-7 Table 11-8 Table 11-9 Table 11-10 Table 11-11 Table 11-12 Table 11-13a Table 11-13b Table 11-14 Table 11-15 Table 11-16 Table 11-17 Table 11-18 Table 11-19 Table 11-20

Some Venture Capital Enterprises Institutional Shortcomings of Government-Controlled Venture Capital Growth of Cable Networks and ICT Users, 1991–1999 Internet Usage in the Western Region, 2000 Sample Country Practices in Promoting the IT Industry Selected IPR-Related Legislation of the PRC IPR-Related International Treaties Signed by the PRC Industrial Composition of GDP in 2000 Industrial Enterprises, by Size, 2000 Industrial Enterprises,a by Ownership, 2000 Classification of Industrial Policies Competitive Advantages Index in the Western Region, 1998 Competitive Advantages in Industrial Products in the Western Region, 2000 PRC Attractions Included in the World Heritage List Tourism in the Western Region, 1998 Population, by Age Group, 1999 Net Population Gains Through Migration, 1990–1995 Net Migration Flows to Xinjiang, 1990–1995 Place of Work Outside Poverty County, 1999 Illiterate and Semilliterate Population Aged 15 and Over, by Sex, 1999 Level of Education Reached (% of Total Population Aged 6 and Over), 1999 School Net Enrollment Ratios, 1980 and 1997 Secondary School Attendance, 1999 Job Preferences among Different Urban Education Groups, 1999 Higher Education Facilities in the Western Region, 1999 Basic Statistics on Enrollment in Adult Education Technical Personnel in the Labor Force, 1999 Industry Distribution of Employment in the Western Region, 2000—Share of Total Employment Industry Distribution of Employment in the Western Region— Average Annual % Increase, 1993–2000 Urban Employment, by Ownership Sector Rural Labor Force, by Sector, 1999 Rural Employment in the Western Region, by Type of Enterprise, 1999 Average Earnings, by Ownership of Enterprise, 1999 Employee Wage Levels in Western and Eastern Region Cities, 1998–1999 Employee Wage Levels in 30 Cities, by Level of Education, 1998–1999 Per Capita Net Income of Rural Households, by Source and Region, 1999

176 176 180 180 183 184 185 199 199 199 201 205 206 207 207 216 217 217 218 218 219 220 220 221 222 222 223 224 225 225 225 226 226 227 227 227

xi

Table 11-21 Table 11-22 Table 11-23 Table 11-24 Table 11-25 Table 11-26 Table 11-27 Table 11-28 Table 11-29 Table 11-30 Table 11-31 Table 12-1 Table 12-2 Table 12-3 Table 12-4 Table 12-5 Table 12-6 Table 12-7 Table 12-8 Table 12-9 Table 12-10 Table 12-11 Table 12-12 Table 12-13 Table 12-14 Table 13-1 Table 13-2 Table 13-3 Table 13-4 Table 13-5 Table 13-6 Table 13-7 Table 13-8

xii

Income and Expenditure of Labor Working Outside Home County, 1999 Method of Finding Job Outside Own Poverty County, 1999 Official Urban Unemployment and New Entrants to Labor Force, 1999 Unemployment Insurance Cover, by Region, 1999 Income and Expenditure of Unemployment Funds, by Region, 1999 Payment of Unemployment Benefits, by Region, 1999 Expenditure on Reemployment Service Centers and Source of Funds, 1999 Government Subsidies to Insurance Funds, 1999 Contract Engineering and Labor Supply, 1999 Market Failures in Vocational Training Main Types of Vocational Training Systems Female Economic Participation, by Province, 1998 Time Trends in the Ratio of Urban Female Wages to Urban Male Wages, by Major Region, 1988–1994 Female Employment as a Percentage of Total Employment in Different Types of Enterprise, 1999 Female Employees as Percentage of Total Employees in Different Workforce Categories, 1999 Longevity of Women in the PRC, 1999 Morbidity Rates, by Sex and Locality, 1998 Immunization Coverage, 1993 Infant Mortality, by Province, 1998 Percentage of Illiterates and Semiliterates Aged 15 and Up, by Sex and Province, 1998 Human Development Index, by Province, 1997 Women Political Leaders, at the End of 2000 Women Asian Political Leaders, 1995–1996 Dependency Ratios a of the Aged, 1999 Activities of Provincial ACWF Branches among Minority Women, 1998 Minorities in the Autonomous Regions, 1999 Demographic Characteristics of the Three Main Minority Groups, 1990 Crude Birth Rates and Death Rates for Minorities in Xinjiang, 1999 Xinjiang Population, by Minority, 1978–1999 Full-Time Employees of Minority Nationalities in Xinjiang, 1990 and 1999 GDP Growth in Honghe Autonomous Prefecture, Yunnan Representation of Minorities on the Minorities Commission, 2001 Representation of Minorities in the Army, 1990

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

228 228 228 229 230 231 231 231 234 240 240 247 249 250 251 251 253 255 256 257 258 259 259 260 262 269 269 270 271 273 273 274 275

Table 13-9 Table 13-10 Table 13-11 Table 14-1 Table 14-2 Table 14-3 Table 14-4 Table 14-5 Table 14-6 Table 14-7 Table 14-8 Table 14-9 Table 14-10 Table 14-11 Table 14-12 Table 14-13 Table 14-14 Table 14-15 Table 14-16 Table 15-1 Table 15-2 Table 15-3 Table 15-4 Table 15-5 Table 15-6 Table 16-1 Table 16-2 Table 16-3 Table 16-4 Table 16-5 Table 16-6 Table 16-7 Table 16-8 Table 16-9 Table 16-10

Minorities Deputies in National People’s Congresses and People’s Political Consultative Conferences, 1954 and 1998 Educational Qualifications of the Xinjiang Labor Force, by Ethnic Group and Sex, 1982 and 1990 XPCC Agricultural Output, 1999 Trade Potential with Russia and Mongolia, 1999 Trade Potential with CAU Countries, 1999 Exports and Imports of Xinjiang and Inner Mongolia, by Country, 1999 Trading among Central Asian Countries and Xinjiang Movements Across the Kyrgyz Republic and Kazakhstan Borders, 1998 Trade Potential with ASEAN, 1999 Exports and Imports of Yunnan Province, by Country, 1999 GDP Per Capita of Yunnan’s Border Counties, 1999 Imports and Exports of Guangxi, by Country, 1999 Trade Potential with South Asia, 1999 Exports and GDP Per Capita in the PRC’s regions, 1999 Exports, by Category of Commodity, 1999 “Rejuvenate the Frontier, Enrich the People” Project Preferential Policies for Special Development Zones ETDZs in the Western Region Border Economic Cooperation Zones Average Areas, Populations, and GDPs of Level 3 and Level 4 Governments Number of Cities, by Size and Region, 1999 Number of Level 4 and Level 5 Governments, 1999 Concentration of Economic Activity in Provincial Capitals, 1999 Tax Collection Staff in Altay Prefecture Expenditure on Urban Maintenance Compared with Share of Nonagricultural GDP, 1999 Summary of Surface Runoff and Its Variability Groundwater Water Quality in the Northwest, 1999 Summary of Water Resources in the Western Region Consumptive Use of Water and Withdrawals for Consumptive Use, 1980–1997 Consumptive Use of Water and Sources of Withdrawals, by Region, 1999 Development of Irrigation Infrastructure, 1993–1999 Agricultural Areas in Gansu, 2000 Western Region Agriculture and Hydropower Profile, 1999 Domestic Water Consumption Gansu Water Supply Statistics, 1996–1997

275 277 279 287 289 290 291 292 293 293 294 295 296 297 298 299 300 301 301 307 307 308 309 310 312 317 318 319 320 320 321 321 321 322 323

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Table 16-11 Table 16-12 Table 16-13 Table 16-14 Table 16-15 Table 16-16 Table 17-1 Table 17-2 Table 17-3 Table 17-4 Table 17-5 Table 17-6 Table 18-1 Table 18-2 Table 18-3 Table 18-4 Table 18-5 Table 18-6 Table 18-7 Table 18-8 Table 18-9 Table 18-10 Table 18-11 Table 18-12 Table 18-13 Table 19-1 Table 19-2 Table 19-3 Table 19-4 Table 19-5

Potential Water Use in the Yellow River Basin in Gansu, 2000–2020 Future Irrigation Demand from the Yellow River Basin in Gansu Future Industrial Water Demand from the Yellow River Basin in Gansu Growth in Water Use in Gansu, 1995–1999 Summary of Water Headworks in Gansu, 1995–1999 Flood-Affected Areas, 1993 and 1999 Activities of Land Administration Bureaus in Xinjiang, 1998 Industrial Water Pollution Indicators, 1999 Industrial Wastewater Discharge and Treatment, 1999 Industrial Air Emission and Treatment, 2000 Sulfur Dioxide (SO2) Emissions, 1999 Some Tax Sources for Funding the Administration of Nature Reserves Number of Notarial Documents Relating to Property Transactions, 1996–2000 Population Per Hectare in Cities, 1999 Urban Water Supply, by Region, 1999 Per Capita Consumption of Potable Water in Cities, 1996 and 2000 Consumption of Water in Cities, by Use, 1996 and 2000 Households with Piped Water Supply and WCs, 1998 (%) Levels of Urban Sanitation Service, 1999 Urban Roads, by Region,a 1999 Home Ownership in Cities, 1999 Fiscal Revenue Per Capita in Cities, 1999 Average Annual Expenditures of Urban Households, 1999 Real Estate Investment, by Ownership of Enterprise, 2000 Real Estate Investment, by Source of Funds, 2000 Proportion of Villages with Infrastructure, 1999 Average Borrowings per Person, by Region, 1996 Use of Loans by Rural Households in Poverty Counties Returns of Public Investment to Production, per Year, 1997 Returns of Public Investment to Poverty Reduction, per Year, 1997

323 323 324 324 324 328 338 343 344 344 344 347 357 357 358 358 359 359 359 360 361 361 362 363 364 368 373 373 375 376

FIGURES Figure 1-1 Figure 1-2 Figure 1-3 Figure 2-1

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Western Region of the PRC 4 Organization of the Leading Group for Western Region Development of the State Council 5 Exports of the Western Region, Compared with Other Export Categories 11 Central and Local Government Budget Scheme 28

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 4-1 Figure 4-2 Figure 4-3 Figure 4-4 Figure 4-5 Figure 5-1 Figure 5-2 Figure 5-3 Figure 5-4 Figure 5-5 Figure 5-6 Figure 5-7 Figure 5-8 Figure 5-9 Figure 5-10 Figure 5-11 Figure 6-1 Figure 6-2 Figure 6-3 Figure 7-1 Figure 11-1 Figure 11-2 Figure 11-3 Figure 11-4 Figure 12-1 Figure 13-1 Figure 13-2 Figure 13-3 Figure 14-1 Figure 14-2 Figure 15-1 Figure 16-1 Figure 16-2 Figure 16-3 Figure 16-4 Figure 17-1

Steep Slopes Cleared for Agriculture Trees Recovering after Government Ban on Herdsmen Cutting Foliage for Grazing Stock Areas Subject to Desertification (Simplified) PRC Forests Commercial Chestnut Plantation in Luquan County, Yunnan Population Density in the PRC Urban Population Distribution, 1999 Cities in the Western Region with Populations of Over 1 Million Urban and Rural Household Incomes in the PRC, 1990–1999 Lorenz Curves for Rural Incomes, 1995 and 1999 Urban Net Incomes, 1999 Rural Household Incomes, 1994 to 1999 GDP Per Capita and Nonagricultural Population in Sichuan Counties, 1999 TVE Employees and GDP Per Capita in Sichuan Counties, 1999 Comparison of Incomes of Herdsmen and Peasants in Inner Mongolia, 1999 Goals of the Health System Main Railways in the PRC Proposed Railways in Central Asia Potential Rail and Sea Routes to South Asia Gas Pipelines Age Structure of Xinijang’s Population and the PRC’s population, 1999 Grape Cuttings Raised for Local Planting, Awati County (Xinjiang) Number of Tertiary Students and GNP in Various Asian Countries Human capital and industrial development patterns Female Mortality, by Age Group and Residence Growth of GDP Per Capita in Autonomous Areas of Sichuan Province, 1990–2000 Rural Income Distribution in Minority Autonomous Regions of the PRC, 1999 GDP Per Capita Correlated with Percentage of Han Population, Xinjiang Counties, 1999 Trade Regions Adjoining the Western Region Border Crossings in the Western Region Structure of Local Government in the Western Region Average Rainfall in Northwest PRC Annual Rainfall Distribution River Basins of the Western Region Routes for Water Transfer from the South to the North Decision-Making Process for Projects

74 75 76 77 85 97 97 98 99 100 100 104 105 105 106 114 127 133 136 157 216 217 221 238 254 271 272 272 286 287 306 316 317 318 332 341

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Figure 17-2

Regional Development Plans and Strategic Environmental Assessment Figure 17-3 Cement Factory Burning Coal as Fuel, Aksu Prefecture (Xinjiang) Figure 17-4 Logs Confiscated by Forestry Bureau Officers, Lancang County (Yunnan) Figure 17-5 Firewood Cut from Steep Hillsides in Upper Catchment of Yangtze River, Luquan County (Yunnan) Figure 17-6 Taomur Peak Reserve, Tianshan Mountains, Xinjiang Figure 17-7 Biogas Generation, Near Dong Hui, Lancang County (Yunnan) Figure 17-8 Ecological Rehabilitation in Lancang County, Yunnan Province Figure 17-9 Shelterbelt Project in Xinjiang Figure 17-10 Successful Kekeya Desert Rainbow Poplar Shelterbelt, Age 12 Years, Aksu Prefecture (Xinjiang) Figure 17-11 Degraded Landscape, Aksu Prefecture (Xinjiang) Figure 18-1 Urban Household Expenditure, 1999 Figure 18-2 Agreements for the Chengdu No. 6 B Water Treatment Plant

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

343 345 348 348 349 349 349 350 350 351 362 363

PREFACE The People’s Republic of China (PRC) has been the fastest growing economy in the world during the past two decades. This rapid economic growth, and targeted poverty reduction programs, has resulted in the incidence of poverty being halved from the 1990 level. Per capita income has almost doubled during the last 15 years. Life expectancy and adult literacy are up significantly and infant and maternal mortality have been reduced. These are remarkable achievements by any standards. However, not all regions have benefited equally from these developments. Substantial disparities in regional living standards have developed. The coastal region benefited more from economic liberalization and the opening up process and captured most of the foreign direct investment made. During the 1990s, GDP per capita grew more slowly in the western region than elsewhere in PRC. Per capita GDP in the western region is about two thirds of the national average and only 40% of that in the eastern coastal region. Regional disparities are also reflected in other socio-economic indicators. Poverty is more widespread in the western region than elsewhere and is particularly pronounced among minorities living in border areas. Many of the poor live on degraded land. Ecological issues such as land degradation, desertification, erosion and water resource management problems are more severe in western PRC than in the eastern region. People living in the western region, particularly the poor, have less access to health and education facilities and the educational attainments of the labor force in the western region are lower than elsewhere in PRC. There is also a wide gap in the development of physical infrastructure including roads, railway, power, telecommunications and water supply between the poor interior provinces and the eastern region. A recent survey found that 40% of the foreign companies operating in PRC would not consider expanding their operations in the interior provinces. Infrastructure constraints and the lack of a consumer markets were the most commonly cited reasons for not expanding into the poorer interior provinces. The Government is aware of the need to accelerate development in the poorer interior provinces. In 2000, the National People’s Congress endorsed the “go west” policy, a proactive strategy to promote growth and development in western PRC. The Tenth Five-Year Plan (2001 – 2005) also reflects this strategy. The Asian Development Bank (ADB) provided a technical assistance grant to help the Government formulate a strategy for the long-term development of the western region. Monash International Pty Ltd, an Australian company owned by Monash University, associated with a team of domestic consultants to conduct the study under the supervision of the State Development Planning Commission (SDPC) and ADB. Masaaki Nagata, Principal Programs Officer supervised this study on behalf of ADB. The guidance and support at various stages of the study provided by the SDPC

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was essential for the successful completion of the study. Special thanks are given to Mr. Cao Yushu, Director General of Department of Policy, Law and Regulations of SDPC for his guidance and support provided throughout the study. The contributions of Wang Fei, Division Chief, Wu Yuetao, Division Chief, Qu Yongguan of SDPC are also appreciated. International Consultant Team Leader, who provided the overall direction for the study was John Freeman of Monash International Pty Ltd. Other members of the international team were Heling Shi, Marika Vicziany, Philip Chang, Keith Trace, David Mitchell, Warwick Forrest and Ming Yang. Mr. Dong Furen, a Professor of Beijing University was the team leader of the domestic experts. The other domestic experts, each of who prepared independent research papers, were Gui Shiyong, Wei Ligun, Fang Weizhong, Shang Yong, Xie Ping, Liu Jun, Pan Shengzhou, Sun Jian, Wang Jian, Ju Songdong, Tang Renwu, Wu Xinmu, Liu Jianming, Wang Lusheng and Huang Shunjiang. The report also benefited from the comments of three external reviewers: (i) Lord Meghnad Desai of the London School of Economics: (ii) Dr. Carl Riskin of Queens College and Columbia University; and (iii) Dr. Kenijiro Otsuka of the Foundation of Advanced Studies on International Development in Japan. Work began on the Study in January 2001 and the findings of the study are presented in this book. Part I summarizes the strategic directions, covering macroeconomic issues, the fiscal and financial systems, agriculture and natural resources and social conditions. Part II identifies ways of strengthening the competitiveness of the western region by examining transport policies, energy policies and strategies, technology policies and competition policy. Part III examines opportunities to create employment and covers industrial policies, human resource policies, women and minorities. Part IV discusses ways to enhance local capabilities by addressing issues related to cross-border cooperation, local government, water resources management, environmental conservation and pollution control, urban development and rural development. The report concludes with a summary of the major policy directions and recommendations.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

ABBREVIATIONS ABC ACWF ADB ADBC ASEAN BOOT BOT B2B CASS CAU CCB CCP CDB CIF CMS CNOOC CNPC COE DALYs DPR ETDZ FDI FFW FIE FOB FYP GDP GIS GL GMS GNP GW GWD ha HDI ICBC ICT IFC IFPRI ILO

Agricultural Bank of China All-China Women’s Federation Asian Development Bank Agricultural Development Bank of China Association of Southeast Asian Nations build-own-operate-transfer build-operate-transfer business to business Chinese Academy of Social Sciences Central Asian Union China Construction Bank Chinese Communist Party China Development Bank cost, insurance, and freight cooperative medical scheme China National Offshore Oil Corporation China National Petroleum Corporation collective-owned enterprise disability-adjusted life years Department of Policy Research, State Development Planning Commission Economic and Technological Development Zone foreign direct investment Food for Work foreign investment enterprise free on board Five-Year Plan gross domestic product government insurance scheme gigaliter Greater Mekong Subregion gross national product gigawatt Great Western Development hectare Human Development Indicators Industrial and Commercial Bank of China information and communication technology International Finance Corporation International Food Policy Research Institute International Labor Organization

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IPO IWHR kJ km kV kWh LGPR LIS MoFTEC Mt Mw n.a. NPC OECD PADO PBC PPCC PPP PRC PSP R&D RRC SAARC SDPC SEAC SEPA SHE Sinopec SMEs SOE t TA TEU TFP TOR TTP TVEs TWh UNDP VAT WFOE WHO WTO XPCC YLDs YLLs

initial public offering Institute of Hydropower and Water Resources kilojoule kilometer kilovolt kilowatt-hour Leading Group for Poverty Reduction labor insurance scheme Ministry of Foreign Trade and Economic Cooperation metric ton megawatt not available National People’s Congress Organization for Economic Cooperation and Development Poverty Area Development Office People’s Bank of China People’s Political Consultative Conference purchasing power parity People’s Republic of China private sector participation research and development rural credit cooperative South Asian Association for Regional Cooperation State Development Planning Commission State Ethnic Affairs Commission State Environmental Protection Agency shareholding enterprise China Petrochemical Corporation small and medium enterprises state-owned enterprise ton technical assistance twenty-foot equivalent unit total factor productivity terms of reference transitional transfer payment township and village enterprises terawatt-hour United Nations Development Program value-added tax wholly foreign-owned enterprise World Health Organization World Trade Organization Xinjiang Production and Construction Corps years lived with disability years of life lost

Final Report

SUMMARY In February 2000, the Government of the People’s Republic of China (PRC) adopted a long-term strategy for the development of the Western Region, which it defined as comprising five autonomous regions, six provinces, and one municipality with the status of a province. In 1999, this region contained 28.8 percent of the PRC’s population but accounted for only 15.8 percent of its gross domestic product. This report examines specific policies in the context of the State Council’s long-term strategy. The policy areas fall into four main groups: • Strategic or macro-level policies (Part I of the report) • Policies to strengthen the competitiveness of the Western Region (Part II) • Policies to increase employment (Part III) • Policies to strengthen the capability of local governments (Part IV) To reflect the social, economic, and environmental diversity of the region, it is divided in the report into two: the northwest (Xinjiang, Gansu, Inner Mongolia, Qinghai, Ningxia, and Shaanxi) and the southwest (Tibet, Sichuan, Yunnan, Guizhou, Guangxi, and Chongqing). PART I: STRATEGIC DIRECTIONS The macroeconomy (Chapter 1) The Western Region cannot achieve the economic growth rates of the Eastern Region, even over a long period. The northwest is especially disadvantaged in factor endowment. But even if such economic growth could be achieved, its desirability has been deemed doubtful, in view of the likely effects on the natural environment. Hence, the economic planning objective for the Western Region should be to reduce the income differential with the Eastern Region. A combination of outward labor migration, investment, and increased total factor productivity can achieve this outcome. The Government also needs to progressively allow market forces to allocate resources in the best possible way. The fiscal system (Chapter 2) Reforms in the fiscal system benefit the whole country. Fiscal and government finance policies should support the basic objectives of good public finance, and cover tax assignment, government transfer payments, and government bond financing. The tax system needs to be made more transparent and equitable in its application across firms and individuals, with fewer arbitrary interpretations of tax laws and regulations. A direct lump-sum subsidy, proportionate to the total investment volume, would be more effective in attracting investment than the preferential tax system.

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A transparent and accountable lump-sum subsidy system for local government is desirable. To design an optimal system of intergovernment transfers, the roles and structures of national health and social assistance programs must first be defined. Instead of the present five channels of government transfer, there should be a regular transfer payment and a special subsidy. The regular transfer payment would balance regional fiscal capabilities, while the special subsidy would be for unusual items such as industry-specific measures to correct market failure and measures to alleviate the effects of major natural disasters. To improve the efficiency and effectiveness of its bond financing, the Government should strengthen control over the quality of each project and the management of funds. The financial system (Chapter 3) The financial system has developed more slowly than the economy, particularly in the Western Region. The Government should continue to encourage commercial financial institutions, develop financial markets, and allow the entry of foreign financial institutions. Financial reforms will benefit the national economy as a whole, but measures that would be particularly helpful to the Western Region include establishing a comprehensive legal framework for banks and nonbank financial institutions, providing lending incentives to commercial banks, using the resources of the policy banks, reviving rural credit cooperatives, setting up a postal savings bank, promoting and regulating informal financial markets, optimizing international development assistance, and opening up markets to attract foreign direct investment. Agriculture and natural resources (Chapter 4) The natural environment across the Western Region has undergone serious degradation because of inappropriate practices in agriculture, forestry, and industry. Productivity in agriculture is significantly lower than in the rest of the country. Such problems are commonly solved by radically improving techniques and reducing the economic dependence on the primary sector. The role of the State in agriculture and forestry must be redefined. The Government should invest less in commercial agriculture and forestry and give more emphasis to scientific research, extension, regulation, and environmental protection. Social conditions and welfare policies (Chapter 5) Government health and welfare programs are not adequately targeted to the poorest sections of the community. Although most of the need is in the Western Region the allocation of funds does not reflect this. Health expenditures per capita in the southwest are now below the level in some African countries. Central Government funds for health welfare programs should work within strict criteria to ensure that they benefit the neediest sections of the community. The incidence of rural poverty (using the standard of $1.08 a day in purchasing power parity) has fallen to 7.8 percent. Accordingly, the Government should now progressively move from targeting poor areas (poverty counties), a policy appropriate for dealing with mass poverty, to targeting poor households.

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PART II: STRENGTHENING THE COMPETITIVENESS OF THE WESTERN REGION Transport policies (Chapter 6) An effective transport system is crucial to economic development. It provides access to resources and markets, facilitates trade, allows economies of scale, lowers costs and prices, and widens production choices. Above all, it enables regions to reap the gains from trade by specializing according to comparative advantage. Nowhere is transport more important than in the Western Region. Vast distances isolate it from major markets. Most exports and imports must reach overseas markets through the coastal provinces or through other countries. This dependence on other countries and provinces means that regional transport cooperation is an important determinant of future growth and development. Transport policies must pay more attention to opening up international trade routes. Energy policies (Chapter 7) The PRC is the second-largest energy consumer after the United States. Production and consumption of coal, its dominant fuel, is the highest in the world. Rising demand for energy is a very significant factor in the economic development of the PRC, especially the Western Region with its very substantial energy resources. Any policy reforms in the energy sector will automatically benefit the region. Reforms are highly desirable in the areas of renewable energy, reduction of polluting energy practices, energy conservation, energy imports, and energy distribution. Technology policy (Chapter 8) Adopting modern technology helped the Eastern Region outpace the Western Region in economic growth. Government efforts to support technological innovation that began in the Eastern Region will extend to the Western Region. The Government should increase its inputs into research and development and the spread of new technology. It should establish markets to facilitate the transfer of new technology into the Western Region, and set up a project-oriented research fund to support research that is most relevant to the region. Information and communications technology and biotechnology are of particular importance to the Western Region. Competition policy (Chapter 9) In the European Union and the United States, competition policy is intended to limit the monopoly powers and collusive conduct of large firms. In the PRC, the central issue of competition policy is not how the Government should regulate the private sector but how it should progressively give up its own monopoly powers. The Government should use the Western Region as a kind of special economic zone in which it pilots various forms of withdrawal from exercising monopoly powers. A comprehensive competition law that provides for the phasing out of state monopolies should be a high priority in microeconomic reform. The breakup of regional protectionism should also receive special attention.

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PART III: CREATING EMPLOYMENT OPPORTUNITIES Industry policy (Chapter 10) Especially in the medium and long term, the Government should avoid high-intensity industry policies. The intent to optimize industrial structure is misleading and inefficient. A “light touch” approach is the most appropriate for creating markets, spreading information, and correcting market failures. Emerging markets in the Western Region include tourism and special agricultural products, particularly those relating to traditional medicine. Industrial policy in the Western Region should be aimed at creating employment by making it easier for enterprises to enter and exit from regional markets. In particular, local governments should promote the formation and growth of small and medium enterprises. Human resources policies (Chapter 11) The Government is progressively expanding the coverage of unemployment insurance. There is a need for a national unemployment insurance scheme to replace the present system of separate provincial funds. Separate provincial funds are not consistent with the objectives of a national labor market and the pooling of insurance risks; achieving these objectives will probably require the introduction of a social security tax. Distinctions according to residential status remain important in discouraging rural– urban migration. Recent reforms have facilitated urban registration in towns at the prefecture level and below, but not in provincial cities. Insofar as migration has social costs, these would accrue mainly to the rich Eastern Region cities, while the Western Region would gain through higher remittances from migrant laborers and higher agricultural productivity. Moreover, determining social benefits according to residential status discriminates against the Western Region. The receiving cities get the benefit of low-cost labor while the areas of origin bear the social costs (when sickness or redundancy forces migrant workers to return home). Local regulations on residence registration that give advantages to migrants with educational, professional, or business qualifications over migrants without these advantages threaten to widen the urban-rural social divide. Rural-urban migration could greatly reduce the social and economic gaps between the urban and rural populations. For the Government, the simplest path of reform would be to separate the registration system from the systems of entitlement to social security and other benefits. The Government should discourage discriminatory practices by the local governments of large cities toward rural migrants that violate their constitutional rights as citizens. A long-term strategy should be to progressively eliminate the separate status of rural and urban residents under various laws. Women (Chapter 12) As market forces grow and the role of government in the economy shrinks, women could become more vulnerable in the labor market and within the family. The diversification of types of enterprise and increasing social mobility are making it much harder for the AllChina Women’s Federation to tackle the full range of women’s issues effectively. The Federation has tried to cope with the challenges by establishing new associations such as

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the China Socialist Women’s Entrepreneurs’ Association, and by offering new services such as the Re-employment Guidance Centers. The Government should continue to promote the formation of women’s groups so that there can be a better and faster response to the emerging needs of women. In the field of employment, women’s rights under the Labor Law of 1994 must be better enforced. Minorities (Chapter 13) In spite of the government’s preferential policies for ethnic minorities, the minorities in the Western Region remain relatively poor and disadvantaged compared to their Han counterparts. It should be an integral part of development planning to reflect the needs and address the vulnerabilities of the ethnic minorities. A critical ingredient of the minority policies is measures to promote participation by minority leaders in the decision-making and planning process of the Government at all levels to enhance their ownership and support for the policies and priorities that evolve. Special attention also needs to be paid to the active evolution of minority culture as part of the rich and multicultural modern PRC. Improving the participation of minorities in the urban labour market required a combination of education, affirmative action, and participating interventions. PART IV: ENHANCING LOCAL CAPABILITIES Cross-border cooperation (Chapter 14) To reduce the economic isolation of the Western Region, cross-border cooperation is vital. However, economic deregulation, especially in relation to transport, and industrial policy initiatives are more important to achieving this than agreements on tariff reductions or regional cooperation agreements with neighboring countries. Local government participation in external regional cooperation, while important, benefits only the local government in question. Opening up the entire Western Region to the benefits of trade requires a focus on the transport industry and economic deregulation. As the cross-border cooperation groups (in which Yunnan and Xinjiang participate) progress toward formal agreements, the Government should consider setting up formal World Trade Organization (WTO) working groups. The WTO views regional integration initiatives (which it defines very broadly) as complements rather than alternatives in the pursuit of more open trade. For the Western Region, the pursuit of more open trade, not local economic integration, is the main objective. Local government (Chapter 15) Functions must be distributed across the various levels of local governments and local governments must be given appropriate specific independent powers. In a market economy, local government can be effective only when there is a comprehensive legal framework setting out obligations and discretionary powers. In distributing functions to different levels of local government, the Government should seek to devolve powers to local decision makers, and move the implementation of development programs and projects closer to the beneficiaries.

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Water resources management (Chapter 16) The southwest has abundant water resources but the northwest does not. In the northwest, urban development can proceed only at the expense of agricultural uses of water. In purely engineering terms, there is some potential for developing water resources to expand supply, especially in the southwest. However, the construction of reservoirs, pumping structures, and diversions should be subjected to more stringent economic, financial, social, and environmental analysis. Otherwise, it may not be possible to achieve efficient allocation of local government resources and matching of development targets with sustainable water resource development. There is plenty of scope for improving the management of demand through appropriate crop selection, water-saving techniques, efficient water delivery, increased consumer awareness, and higher tariffs. In the northwest, the migration of surplus rural labor to cities in the southeast of the PRC would also reduce the pressure on water resources. Environmental conservation and pollution control (Chapter 17) Throughout the Western Region, land resources, forestry, and environmental protection bureaus are taking on new responsibilities and activities. In each case, local government bureau officials are taking on unfamiliar tasks. In all three fields significant technological changes are occurring, including changes in environmental monitoring and assessment, in the use of satellite imagery, and in the management of data and information. The training of staff at all levels must therefore improve. Urban development (Chapter 18) The Western Region cities lack the revenue base to upgrade their infrastructure systems to match those of cities in the Eastern Region. They should invest in infrastructure (financed with higher user charges) rather than buildings, and ensure a steady supply of serviced sites for the real estate industry. The Government should continue reforming urban land markets, to create more vibrant property markets that will attract domestic and foreign investment. Reform of the City Planning Law is overdue, and should include measures to better control changes in land use, improve public participation, and better separate regulatory functions of local government from management and development functions. Rural development (Chapter 19) Compared with their counterparts in the Eastern Region, Western Region villages have very inferior infrastructure. The infrastructure is worst in villages in remote or mountainous areas. The cost of serving some villages would be prohibitive. Local governments will have to assess which villages have a long-term future and which do not. It makes no sense to invest in villages inside nature reserves or in areas where economic activities can never be sufficiently developed to support the population. There is a need for resettlement programs that are carefully planned with significant beneficiary consultation to avoid adverse social impacts and to ensure that those resettled are better off after the resettlement than before. Apart from village infrastructure, rural development programs should give priority to agricultural research and extension, education, and health services. A much lower priority should be given to infrastructure investments in irrigation and transport (other than village connections).

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I P A R T

Strategic Directions

CHAPTER

1

THE MACROECONOMY This chapter provides an overview of recent economic growth and social development in the Western Region. It lays the foundation for sector-specific studies in the following chapters, and explains the strategic considerations that should influence policy directions. Fiscal policy is discussed in Chapter 2 and the financial system is discussed in Chapter 3.

developed Eastern Region. Ecological degradation has gradually become a major constraint on longterm sustainable economic growth and social development. Accordingly, in February 2000, the State Council adopted a long-term strategy (the Western Development Strategy) to support the development of the Western Region, which consists of the municipality of Chongqing (Chongqing), Sichuan province, Guizhou province, Yunnan province, the Tibet Autonomous Region, Shaanxi province, Gansu province, Ningxia Hui Autonomous Region (Ningxia), Qinghai province, and the Xinjiang Uygur Autonomous Region (Xinjiang). The Inner Mongolia Autonomous Region and the Guangxi Zhuang Autonomous Region will enjoy the same policy treatment as the Western Region for their relatively

The Western Development Strategy Since embarking on an economic reform and liberalization program in 1979, the People’s Republic of China (PRC) has made impressive progress in all areas of economic growth and social development. An annual average economic growth rate of 9.6 percent (1979–2000) makes the PRC the fastestgrowing economy in the world. The country has also achieved a significant reduction in poverty—in the last 15 years 250 million people have come out of poverty. The Government recognizes, however, that the PRC still faces serious development challenges. Income disparities are growing between the poorer Western and Central regions and the more Figure 1-1 Western Region of the PRC

HEILONGJIANG Harbin Changchun

Urumqi

INNER MONGOLIA

JINING Shenyang

LIAONING

Beijing

XINJIANG

Hothot

GANSU

Taiyuan Xining

Jinan

NINGXIA SHANXI

SHANGDONG

Zhengzhou Xian

SHAANXI SICHUAN Lhasa

HEBEI

Lanzhou

QINGHAI

TIBET

Tianjin

Shijiazhuang

Yinchuan

JIANGSU

HENAN

Nanjing Hefei

HUNBEI

ANHUI

Wuhan

Chengdu

Nanchang

Chongqing

Changsha

JIANGXI Guiyang Kungming

HUNAN

ZHEJIANG

FUJIAN Fuzhou

GUIZHOU

YUNNAN Eastern

Taibei

GUANGXI

Guangzhou

Nanning

GUANGDONG Marco

Western Center Previously Center

4

Shanghai Hangzhou

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

HAINAN

Hongkong

Figure 1-2 Organization of the Leading Group for Western Region Development of the State Council

Leading Group for Western Region Development of the State Council Leader: Premier Zhu Rongji Deputy Leader: Vice Premier Wen Jiabao

Zeng Peiyan Li Rongrong Chen Zhili Xu Guanhua Liu Jibin Li Dezhu Xiang Huaicheng Tian Fengshan Fu Zhihuan Huang Zhendong Wu Jichuan Wang Shucheng Chen Yaobang Sun Jiazheng Dai Xianglong Liu Yunshan Xu Guangchun Zhou Shengxian Zhang Xuezhong Wan Xueyuan Yu Zhengsheng Shi Guangsheng Xie Zhenhua

Minister of the State Development Planning Commission Minister of the State Economic and Trade Commission Minister of Education Minister of Science and Technology Minister of the State Commission of Science, Technology, and Industry for National Defense Minister of the State Ethnic Affairs Commission Minister of Finance Minister of Land and Resources Minister of Railways Minister of Communications Minister of Information Technology Industry Minister of Water Resources Minister of Agriculture Minister of Culture , Governor of the People s Bank of China Executive Vice Minister of Propaganda Director of the State Administration of Radio, Film, and TV Director of the State Forestry Administration Minister of Personnel Director of the State Administration of Foreign Experts Affairs Minister of Construction Minister of Foreign Trade and Economic Cooperation Director of the State Environment Protection Agency

Office of the Leading Group for Western Region Development of the State Council Director: Zeng Peiyan Deputy Directors: Wang Chunzheng, Li Zibin, Duan Yingbi, Wang Zhibao

Comprehensive Planning Department

Agriculture, Forestry, and Biology Department

Development Offices within Governments of Provinces, Autonomous Regions, and Municipalities in the Western Region

poor economic development, although they belong geographically to the Central Region.1 The PRC Government recognizes the importance of geographical targetting and transportation systems in the development of the Western Region. The development of the Western Region will rely on three major transport routes: the Asia-Europe continental bridge, the Yangtze River waterway, and the routes to the sea in southwestern PRC. These three major transport routes will serve the Western Region by linking up major cities into a network of

Economic and Social Department

Human Resources Development Coordination Department

Coordination Offices within Governments of Provinces, Autonomous Regions, and Municipalities in the Eastern and Central Regions

three interprovincial economic zones: the area spreading along the Western Longhai Railway and the Lanzhou-Xinjiang Railway, the Nanning-GuiyangKunming areas, and the upper reaches of the Yangtze River. The Leading Group for Western Region Development, chaired by Premier Zhu Rongji and with Vice-Premier Wei Jiabao as the Deputy Leader, is developing the strategies and coordinating the implementation of the Western Development Strategy. Besides the Premier and the Vice-Premier,

CHAPTER 1: THE MACROECONOMY

5

23 Ministers or equivalent-level leaders are members of the Leading Group. The Office for Western Region Development, chaired by the Minister of the State Development Planning Commission (SDPC), Zheng Peiyuan, is responsible for the program (Figure 1-2). Premier Zhu Rongji explained the importance and the position of the Western Development Strategy in the PRC’s long-term development strategy toward 2020 in his Report on the Outline of the New FiveYear Plan at the fourth session of the ninth National People’s Congress on 5 March 2001.2

History of efforts to promote the development of the Western Region3 In the pre-reform era, the Government supported the Western Region through public investment in infrastructure, State-owned enterprises (SOEs), and fiscal transfer payments. Other measures included Table 1-1 Regional Shares of Government Capital Construction Investment (Within Budget), 1953–2000

Period 1953–1957 (1st FYP) 1958–1962 (2nd FYP) 1963–1965 1966–1970 (3rd FYP) 1971–1975 (4th FYP) 1976–1980 (5th FYP) 1981–1985 (6th FYP) 1986–1990 (7th FYP) 1991–1995 (8th FYP) 1996 1997 1998 1999 2000

Eastern Inland Central Western Region (%) Regions (%) Region (%) Region (%) 36.9 38.4 34.9 26.9 35.5 42.2 47.7 51.7 54.2 53.8 53.3 47.8 41.3 36.8

46.8 56.0 58.2 64.7 54.4 50.0 46.5 40.2 38.2 38.2 39.3 39.9 58.7 63.2

28.8 34.0 32.7 29.8 29.9 30.1 29.3 24.4 23.5 23.4

18.0 22.0 25.6 34.9 24.5 19.9 17.2 15.8 14.7 14.7

30.6 30.6

28.1 32.6

Source: Various issues of the China Statistical Yearbook. Note: Because of unspecified cross-regional investments, especially in the earlier years, the ratios may not add up to 100%.

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the relocation of human resources, e.g., universities and colleges, scientists and technicians, schoolteachers, and other specialists. There was no significant private sector investment until well after the national economic reforms program was begun in 1977–1978. The economic reforms also brought in institutional innovations that accelerated economic development in the Western Region. GOVERNMENT INVESTMENT From the inception of the PRC in 1949 to the end of the 1970s, the Government followed a “balanced regional and industrial development” policy. The first project was from the “economic recovery period” to the end of the 1950s, and the second was the “three frontiers construction” period in the 1960s and 1970s. During these periods, the Government invested heavily in the Western Region out of a consideration for balancing regional and industrial structures, national security, and other noneconomic concerns. From the first five-year-plan (FYP) of 1953–1957, the Western Region and the Central Region consistently received more government capital construction investment (within budget)4 than the Eastern Region (Table 1-1). The Western Region’s share peaked in 1966– 1970, when it accounted for 64.7 percent of total government capital construction investment (within budget). Only after 1981, the first year of the Sixth FYP, did the Eastern Region start to catch up. After that, the Eastern Region gradually received more privileges in terms of the share of government capital construction investment (within budget). The effectiveness and efficiency of the government investment in the Western and Central regions under the planned economy are summarized as follows:5 • Government investment during the 1950s, especially investment in infrastructure, was an effective way to establish industrial bases in the Western and Central regions to exploit comparative advantages; it reduced the income disparity by 12.6 percent between 1952 and

•

•

•

•

1965. The resource industries later contributed significantly to the rapid economic growth of the Eastern Region. However, this achievement came at a high cost. For example, in 1955, the government investment in Shanghai and Tianjin, two traditionally industrialized municipalities, accounted for only 76 percent and 108 percent of capital depreciation for that year, respectively. This non-market-oriented investment mechanism resulted in the slowdown of national economic growth and inefficient use of capital. The “three frontier construction” in the 1960s represented another boost for economic development in the Western Region. Unlike the government investment policy in the 1950s, “three frontier construction” started to emphasize “complementarity” of government investment: the Government relocated universities and colleges, skilled workers and managers, as well as capital to the Western Region. As a result, thousands of firms with fixed assets valued in the hundreds of billions were established rapidly in the Western Region. The resource misallocation was even more severe than in the 1950s: – Each industry base was independent and selfsustained, ignoring the complementary network effect, the production chain, and the comparative advantages of each region. – The Government emphasized rationales for the defense industries, but ignored the production of consumption goods. – The choice of location and technology was not purely economic, but included consideration of national security, balanced (meaning similar) industrial structures, etc. Paradoxically, government investment in the 1960s, initially intended to reduce regional imbalance, has actually been enlarging the income disparities from the end of the 1960s.

GOVERNMENT INDUSTRY POLICY The Western Region has been traditionally regarded as having comparative advantages in resource and raw material industries. In the selection of “pillar” industries during the Ninth FYP, the economic plans of the local governments and the policy recommendations of Central Government experts both reflected this tradition and understanding, and were highly consistent (Table 1-2). The plans all list the following industries as having comparative advantages: energy (coal or hydroelectricity), mineral resources, petrochemicals, building materials, and agriculture and livestock products. A notable exception is the tourism industry, which only appears twice. The Outline of the Ninth FYP of Economic Growth and Social Development related four out of the five strategies to the resource industry in the Western Region: • Strengthen resource exploration in the Western and Central regions. • Adjust industry structure and induce resourceintensive and labor-intensive industries to relocate in the Western and Central regions. • Reform the price structure of resource-intensive products and enhance the self-development capability of these regions. • Improve investment in the environment in the Western and Central regions and attract more foreign direct investment (FDI). PRIVATE INVESTMENT Only after economic reform started in 1977–1978 was large-scale private sector investment legally permissible and attracted into the massive market of the PRC. However, because of better infrastructure and higher rates of return, the Eastern Region attracted the majority of private investment, especially FDI. From 1978 to 1998, 16,243 FDI projects commenced in the Western Region with a total contract value of $21,690 million and actual value of $8,770 million, accounting for 5.0 percent, 3.8 percent, and 3.3 percent of national totals in the

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7

Table 1-2 “Pillar” Industries in the Western Region During the Ninth FYP Province, Autonomous Region

Based on Local Government Plans

Southwest Chongqing

Automobiles, metallurgy, chemicals, and food processing

Sichuan

Metallurgy, chemicals, food, machinery, electronics, automobiles, and building materials

Guizhou

Food (tobacco and spirits), aluminum, electricity, automobiles, coal and coal chemistry, phosphor, and building materials

Yunnan

Tobacco, biological food, phosphor, and tourism

Tibet

Agricultural products, mineral resources, forest products, tourism, and building materials

Guangxi

Sugar cane, metallurgy, automobiles, and building materials

Northwest Shaanxi

Machinery, electronics, medicine, food, and building materials

Gansu

Petrochemicals, building materials, machinery, textiles, food, and medicine

Qinghai

Electricity, salt products, crude oil and gas, chemicals, and metallurgy

Ningxia

Aluminum and coal

Xinjiang

Oil and gas, petrochemicals, textiles, food, and building materials

Inner Mongolia

Agriculture and livestock products, energy (coal), metallurgy, and automobiles (truck)

Source: Hu (2001).

Sixth, Seventh, and Eighth FYPs. In 1998, the Western Region attracted only $1,370 million, or 2.9 percent of total FDI in that year.6 LABOR MARKET AND HUMAN RESOURCES DEVELOPMENT During the early FYPs, the Government relocated several universities and vocational training colleges to the Western Region to accompany its investments in heavy industries. Some western cities, such as Xi’an, Chengdu, and Lanzhou, thereby gained some of the best scientists and engineers in the country. By the end of 1998, the Western Region had 1,178 State-owned, above-county-level research and development (R&D) institutes, accounting for 20.4 percent of the national total. The Western Region also hosted 20 percent of universities and colleges, 23.3

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

percent of polytechnics, and 18.1 percent of vocational education institutes.The Academy of Science has 26 research branches and employs about 6,000 scientists in the Western Region. INSTITUTIONAL INNOVATIONS During the last two decades, the Government has experimented with various institutional innovations, including special economic zones, the opening up of port and border cities, stock exchanges and other capital market developments, commercial and policy banks, free-tariff development zones, and tourist recreation parks, among others. Most of these institutional innovations took place in the Eastern Region, and only a few were in the Western Region. For example, out of the 422 newly established statelevel development zones, 360 are in the Eastern

Region, 36 are in the Central Region, and only 26 are in the Western Region. The Government also granted local governments more flexibility in the approval of FDI, foreign currency retention ratios, credit/capital ratios, and others. The willingness to accept and implement these innovations has been keenest in the Eastern Region.

FACTOR ENDOWMENT The Western Region does not have comparative advantage in factor endowment.The common assumption that it is very rich in natural resources relative to the rest of the country is not really correct; it is very hard to put high mountains and deserts to productive use. The vast area is not an asset; the distances that separate population centers are a liability. The knowledge and skills of its workforce are comparatively backward, and its stock of capital assets is relatively small (Table 1-3). The drawbacks of the Western Region are its geographical isolation and harsh living conditions. With regard to the low capital stock, even if total factor productivity (TFP) improves, it may not be practicable to increase industrial production in capital-intensive industries, such as resource processing. It makes more sense to concentrate on labor-intensive industries. The Western Region does have vast deposits of minerals, such as crude oil, gas, coal, gold,

The economy of the Western Region today A fundamental precept of the Western Development Strategy is the reduction of disparities between the PRC’s regions and the prevention of further degradation of the ecological environment. Despite impressive economic growth in the last two decades and the Government’s consistent efforts to promote balanced regional development, the Western Region still lags behind in almost all aspects of social and economic development.

Table 1-3 Factor Endowment of the Western Region, 1999 Western Region Item Natural resources Cultivated land (km2) Forest land (km2) Grassland (km2) Nature reserves (km2) Water (109 m3) Mineral resources Oil (Mt) Coal (Mt) Natural gas (GL) Gold (t) Chromium (Mt) Human resources Higher education graduates High school graduates Primary school graduates Preschool population Capital stock Roads (km) Railways (km) Gross capital formation (106 yuan) Enterprise total assets (106 yuan)

Northwest

Southwest

PRC

Western Region as % of PRC

140,155 357,603 208,127 297,000 234.4

166,134 487,945 99,097 392,900 1,335.4

949,709 2,633,000 314,797 770,800 1,569.8

32.3 32.1 97.6 83.0 21.2

28,100 529,700 21,010 742.4 5,408

– 89,000 7,360 611.7 3,796

101,800 999,500 65,220 4,157.5 10,270

27.6 61.9 43.5 32.6 89.7

3,973 12,580 37,174 8,733

3,649 15,578 101,000 21,035

34,747 120,424 432,928 87,462

21.9 23.4 31.9 34.1

327,635 8,419 250,861 865,782

205,015 12,927 392,395 1,160,389

1,351,691 57,922 3,796,541 11,696,889

39.4 36.9 16.9 17.3

Remarks See Chapter 4 See Chapter 4

See Chapter 16 See Chapter 7 See Chapter 7

See Chapter 11

See Chapter 6 See Chapter 6

Source: Various statistical yearbooks; Lu (2000).

CHAPTER 1: THE MACROECONOMY

9

37.9 percent of the total population, contributed 57.3 percent of gross domestic product (GDP), while the Central and Western regions, with 75.0 percent of total cultivated land and 59.5 percent of the total population, contributed only 42.7 percent of GDP (Table 1-4). Since the mid-1980s, per capita GDP has exhibited significant disparity and the income disparity is widening. In 1980, per capita GDP in the Eastern, Central and Western regions was 488 yuan, 337 yuan, and 274 yuan, respectively.The absolute disparity was 0, –151.4 yuan, and –214 yuan, and the relative disparity was 1:0.69:0.56. In 2000, per capita GDP in the Eastern, Central, and Western regions became 11,335 yuan, 5,982 yuan, and 4,687 yuan, respectively. The absolute disparity became 0, –5,353 yuan, and –6,648 yuan, respectively; and the relative disparity became 1:0.47:0.41. As an extreme example, Shanghai, a municipality in the east, had a per capita GDP of 25,739 yuan in 1999 while the western province of Guizhou had only 2,207 yuan. In other words, Guizhou’s per capita GDP in 1999 was only 9 percent of Shanghai’s. In terms of average GDP growth rate, there was no significant difference between regions in the 1980s. In 1991–2000, however, the relative disparity between the Eastern, Central, and Western regions increased. Income disparity between the urban and rural populations is more severe. This is so even when we

chromium, and other precious metals. The exploration and processing of mineral products, however, need capital-intensive production facilities, water, and transportation links. Water is necessary for processing coal and all mineral products, and is therefore an additional constraint. Rail transport cost and rolling-stock capacity are major impediments to developing mineral industries even if the track infrastructure exists. Exploration may also result in environmental and social costs that need to be mitigated. In the development of resource processing industries, the Government in cooperation with the private sector, needs to assess, both in the short term and in the long term, the availability of substitutes, the international market, the cost of exploitation and the establishment of transportation network, and the possible negative effects on the environment and minority peoples. INCOME DISPARITIES Despite the dramatic fall in the incidence of poverty in the PRC during the last two decades, poverty remains a major concern in the Western Region. The persistent poverty has various causes and reflects the widening development gap between the rural and urban areas in the economically disadvantaged provinces and counties. The 11 provinces and municipalities in the Eastern Region, with 29.2 percent of total cultivated land and

Table 1-4 Some Economic Indicators of the Various Regions, 2000

Region Eastern Central Western Southwest Northwest

Population (%)

GDP (%)

Primary Industry GDP (%)

Secondary Industry GDP (%)

Tertiary Industry GDP (%)

Per Capita GDP (yuan)

37.9 32.1 27.4 18.5 8.9

57.3 25.6 17.1 11.0 6.1

43.0 32.1 25.0 16.9 8.1

59.8 25.1 15.1 9.5 5.6

60.0 23.5 16.5 10.5 6.0

11,335 5,982 4,687 4,468 5,143

Source: China Statistical Yearbook 2001.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

use per capita consumption figures that have taken into account government transfer payments and therefore are a more accurate proxy for measuring consumers’ actual purchasing ability.Table 1-5 shows that rural consumption is 30 percent of urban consumption in the Western Region, below the national average of 31 percent, and well below the Eastern Region figure of 42 percent. POVERTY AND FRAGILE ECOLOGY About 70 percent of officially designated poverty counties are in the Western Region. The Western Development Strategy recognizes the interrelationship between poverty and environmental constraints. According to a recent study by the Chinese Academy of Social Sciences (CASS), there is a close relationship between the locations of poor populations and fragile ecological systems. In all western provinces except Yunnan, the overwhelming majority of the people who live in poverty in the poverty counties reside in ecologically fragile areas (Table 1-6). These estimates for 1988 have probably worsened in the intervening period, owing to population growth. COMPARATIVE ADVANTAGES AND INTERNATIONAL TRADE The PRC’s exports have grown rapidly and now account for 3.6 percent of world exports. The growth rate has exceeded that of GDP (Figure 1-3). The Western Region accounts for less than 4 percent of the PRC’s exports, and its share has been falling.

Table 1-5 Urban and Rural Consumption

Region

Rural Population (yuan per capita)

Urban Population (yuan per capita)

Absolute Disparity (yuan per capita)

Relative Disparity (yuan per capita)

1,502 1,306 1,308 1,304 2,414 2,414

6,117 4,167 4,619 5,049 4,190 4,998

–3,703 –2,665 –3,313 –3,741 –2,886 –3,328

0.39 0.36 0.28 0.26 0.31 0.33

Eastern Central Western Southwest Northwest PRC average

Source: China Statistical Yearbook 2001.

Figure 1-3 Exports of the Western Region, Compared with Other Export Categories 1994 = 100 180

160

140

120

100 1994

1995

1996

1997

World PRC PRC manufactures

1998

1999

PRC primary PRC services Western Region

Source: Calculated from Almanac of China’s Foreign Economic Relations and Trade 2000.

Table 1-6 Relationship between Poverty Counties, Poverty Populations, and Fragile Ecological Systems in the Western Region, 1988 (1) Province

Poverty Counties (no.)

(2) Population in Poverty Counties (millions)

Sichuan Guizhou Yunnan Shaanxi Gansu Qinghai Ningxia

51 31 42 34 30 12 8

28.0 12.0 10.7 7.9 8.7 2.4 1.9

(3) Poverty Counties in Fragile Areas (no.)

(4) Poverty Population in Fragile Areas (millions)

(5)

(6)

(3)/(1) (%)

(4)/(2) (%)

39 11 21 26 22 10 6

26.0 7.1 4.5 5.7 6.0 2.2 1.7

76 35 50 76 73 83 75

93 60 42 72 69 92 86

Source: Chinese Academy of Social Sciences (1999).

CHAPTER 1: THE MACROECONOMY

11

The following categories of goods dominate the PRC’s commodity exports: • Manufactures, most (89.8 percent) of which the Eastern Region produces • Products of “processing trade” industries7 (56.9 percent of commodity exports), which usually cannot locate in the Western Region • Products of foreign investment enterprises8 (FIEs) (45.5 percent of commodity exports), which are rare in the Western Region The Eastern Region has a comparative advantage by reason of its easy access to markets and to suppliers. The Western and Central regions are in a similar disadvantageous position relative to the Eastern Region. In per capita trade volume, the Western and Central regions achieved 14 percent of the national average and about 5.7 percent of the volume achieved by the Eastern Region (Table 1-7). The Western Region is also a less attractive place for FDI. Two best performers, Guangxi (a coastal province and close to Guangdong) and Chongqing, achieved only roughly 50 percent of the national average in per capita FDI, and less than a quarter of the level in the Eastern Region.

Government measures to promote exports or attract FDI have tended to help the Eastern Region and have served to divert fiscal resources that the Government might otherwise have applied to the Western Region. For example, equipment imported for import processing (for export) projects is taxexempt. PRICES There used to be a “dual track” pricing policy in the PRC. The Government controlled the price of resources and raw materials at below-market rates, while the price for consumption goods was more flexible in the domestic market and reflected prevailing market rates. One consequence was that the Western Region subsidized the costs of production in the Eastern Region. Although the PRC has officially abandoned the “dual track” pricing policy and leaves the price determination to market mechanisms, various forms of implicit price control and price fixing still prevail, especially for products in the upstream production chains, like resources and mineral products.Through SOEs, the Government has monopoly powers in some “pillar” industries, such as telecommunications, airlines, banking and insurance,

Table 1-7 Imports and Exports of the Western Region, 2000

Region PRC Eastern Central Western Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Total Trade ($ million)

Export ($ million)

Import ($ million)

Per Capita Trade ($)

FDI ($ million)

Per Capita FDI ($)

FDI/GDP (%)

474,296 436,820 20,310 17,166 8,968 1,786 2,545 660 18,128 130 2,034 8,198 2,140 570 160 443 2,264 2,622

249,203 226,878 12,398 9,927 5,588 996 1,394 421 1,175 113 1,489 4,339 1,310 415 112 327 1,204 970

225,094 209,942 7,912 7,240 3,380 790 1,151 239 638 17 545 3,860 830 155 48 116 1,060 1,652

366 889 49 48 37 58 31 19 42 50 45 71 59 22 31 79 118 110

40,715 34,886 3,594 1,852 1,359 244 437 25 128 0 525 493 288 62 0 17 19 106

31 71 9 5 6 8 5 1 3 0 12 4 8 2 0 3 1 4

2.59 5.86 0.71 0.43 0.47 0.65 0.43 0.06 0.25 0.00 0.96 0.35 0.66 0.20 0.00 0.26 0.08 0.37

Source: China Statistical Yearbook 2001.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 1-8 Evolution of Industrial Structure in the PRC, 1978–2000 1978 Region PRC Western

Primary Secondary Industry (%) Industry (%) 28.4 35.2

48.6 45.6

2000 Tertiary Total Industry (%) GDP (%) 23.0 19.2

Primary Secondary Tertiary Total Industry (%) Industry (%) Industry (%) GDP (%)

100.0 100.0

15.3 22.3

47.1 41.5

37.6 36.2

100.0 100.0

Source: China Statistical Yearbook 2001.

electricity, gas, and water. Consumers are paying higher and distorted prices for the use of these facilities and services. This price fixing will have the same effect as “dual track” pricing, as the consumers cross-subsidize producers who are mostly located in the Eastern Region. INDUSTRIAL STRUCTURE In the last 20 years, primary industry in the PRC has declined relatively by 13 percent from 28.4 percent to 15.4 percent, secondary industry has been roughly constant, and tertiary industry has picked up the most gains, from 23 percent to 37.6 percent. The Western Region has followed the same trend, but in different magnitudes. Most significantly, secondary industry declined by 4.1 percent and tertiary industry gained 17 percent (Table 1-8). Table 1-9 lists the relative weights of industrial outputs in the Western Region in the last 15 years. While GDP declined by 2.3 percent in total, primary industry increased its weight by 0.3 percent, and tertiary industry decreased slightly, by 0.4 percent. Secondary industry is the major victim of the economic development in the last 15 years; its weight decreased by 3.5 percent. The numbers combined with those in Table 1-8 imply that secondary industry in the Western Region has become less important for the region and the national economy. Another picture comes from looking at the industrial structure and comparing the percentages of industries exhibiting different growth patterns (Table 1-10). In 1997, 34.7 percent of firms in the Eastern Region were in industries with a constantly higherthan-average growth rate, while in the Central and Western regions less than 21 percent of firms were in these industries. Moreover, the growth rates in western PRC were declining. The northwest and the southwest have different industrial structures. Heavy industry dominates the northwest, and accounts for 75.1 percent of industrial

Table 1-9 Industrial Outputs in the Western Region, as Percentage of National Total, 1985–2000

Primary industry Secondary industry Tertiary industry GDP

1985

1990

1995

2000

24.7 17.5 16.9 19.4

25.6 16.8 20.1 20.2

24.5 15.1 18.7 18.9

25.0 15.1 16.5 17.1

Source: Various issues of China Statistical Yearbook.

Table 1-10 Percentage of Firms in Industries with Different Growth Patterns

Region

Constantly Above-Average Growth

Rising

Eastern Central Western

34.7 20.7 20.4

7.4 9.5 6.9

Declining

Constantly Below-Average Growth

Other

15.9 21.3 29.3

40.1 46.9 42.5

2.1 1.7 0.9

Source: Feng Chen (2000).

Table 1-11 Heavy/Light Industry Structure of the PRC, 2000 Region

Output of Heavy Industry (%)

Eastern Central Western Southwest Northwest PRC

Output of Light Industry (%)

54.5 66.9 64.4 57.6 75.1 58.0

45.5 33.2 35.6 42.4 24.9 42.0

Source: China Statistical Yearbook 2001.

output; among the heavy industries, mining and raw material industries account for over 70 percent of output. The southwest has a roughly equal share of heavy and light industry (Table 1-11). This reflects differences in natural endowment and government investment policy.The northwest is rich in mineral resources (such as aluminum, crude oil and gas, and other metals), and the southwest is rich

CHAPTER 1: THE MACROECONOMY

13

Table 1-12 Percentage of Industry Output Produced by Various Ownership, 2000

Region PRC Eastern Central Western Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

SOEs

COEsa

SHEs b

FIEsc

Funded by Hong Kong, China, Macau, and Taipei,China

47.3 37.5 67.9 73.4 68.4 67.9 60.2 79.3 80.4 76.8 66.2 80.5 78.3 76.4 89.1 73.0 88.2 79.9

13.9 14.8 14.5 7.6 8.4 6.0 7.4 8.0 8.1 20.4 13.2 6.5 6.4 15.3 2.8 3.2 3.2 2.7

11.8 8.7 19.8 17.1 13.2 19.1 15.4 6.9 9.1 11.6 11.6 22.6 18.3 11.6 5.7 6.5 50.4 19.9

15.0 19.2 5.9 4.6 5.7 9.1 5.4 2.2 3.1 0.4 8.4 3.0 6.4 0.7 0.0 6.3 0.8 2.5

12.3 16.3 3.5 3.0 2.8 4.3 2.7 0.8 2.6 0.0 3.0 3.2 4.8 2.8 2.5 1.2 0.8 4.7

Source: China Statistical Year Book 2001. a Collective-owned enterprises. b Shareholding enterprises. c Foreign investment enterprises.

in agricultural products, such as tobacco, tropical fruits, forest products, and building materials. Heavy industry has been under state control because of the huge initial investment and its perceived importance to the national economy. Accordingly, SOEs still dominate the northwest, producing 78.4 percent of GDP. Table 1-12 documents the ownership structure in various regions of the PRC. While over half of industry output in the country is produced by the nonstate sector, the Central and Western regions are still dominated by SOEs (67.9 percent and 73.4 percent, respectively). In particular, foreign-funded economic units, and economics units funded by Hong Kong, China, Macau, and Taipei,China are all concentrated in the Eastern Region. The Central and Western regions have only attracted less than a quarter of these investments. INDUSTRIAL PERFORMANCE AND UNEMPLOYMENT With the exception of Yunnan, where the tobacco industry dominates, all provinces and autonomous regions in the Western Region have a lower ratio of profits to industry costs than the national average (Table 1-13).This implies that profitability is rather weak. In terms of labor productivity, the situation is

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the same. With the exception of Yunnan province, labor productivity is lower in the Western Region than the national average. The poor performance of firms in the Western Region reduced the competitivenes of products in the market. When SOE reforms started, unemployment soared. Up to July 1999, Shaanxi laid off 301,000 SOE employees (15.6 percent of the total), and 112,000 employees of collective-owned units (23.6 percent). In Xinjiang, about 80,000 people lost their jobs, and in Ningxia, 34,700.9 PRODUCTIVITY Inferior factor productivity in the Western Region is the principal reason for its lower economic growth rate, despite higher investment rates. In 1997, total factor productivity (TFP) was 93.9 in the Eastern Region, 82.8 in the Central Region, and 78.4 in the Western Region. Lower TFP reflects inefficiency in resource allocation or slower technological progress, or both. Market imperfection and institutional inertia contribute to inefficiency in resource allocation, and lack of investment in R&D and human resources and lack of competition in product markets contribute to slower technological progress. TFP is a comprehensive index to measure the efficiency and

effectiveness of the production process. Unless there is an improvement in factor productivity, policies to accelerate investment will not succeed. PRIVATE SECTOR CONTRIBUTION SOEs still dominate economic growth in the Western Region, accounting for over 40 percent of industrial growth during 1995–1997, and well above the national average of 16.8 percent. At the same time, foreign-funded economic units and economic units funded from Hong Kong, China, Macau, and Taipei,China contributed 12.9 percent and 8.7 percent, respectively, to industry growth in the

Western Region, well below the national average for these units of 29.4 percent and 17.1 percent, respectively (Table 1-14).

Implications for macroeconomic growth in the Western Region ECONOMIC GROWTH IN THE PRC Although the PRC achieved a remarkable 12 percent GDP growth rate during 1990–1995 and an

Table 1-13 Economic Performance of the Western Region, 2000

Region

Ratio of Total Assets to Industrial Output Value (%)

Ratio of Assets to Liabilities (%)

Ratio of Profits to Industrial Cost (%)

Productivity (yuan per person per year)

9.0

60.8

5.56

45,679

6.1 6.9 7.2 15.8 5.3 7.8

64.8 64.5 69.3 55.5 27.0 68.4

1.7 3.6 2.3 8.4 22.0 3.9

31,252 31,848 31,751 68,960 31,634 35,494

7.6 5.1 4.8 5.5 11.0 6.2

68.2 65.1 72.9 60.0 62.7 59.3

6.1 1.3 0.4 1.9 12.8 2.2

32,899 26,819 41,175 32,874 76,656 32,756

PRC Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Source: China Statistical Yearbook 2001.

Table 1-14 Sector Contributions to Industry Growth, 1995–1997 Sector SOEs Collective-owned units (COEs) Shareholding enterprises (SHEs) Foreign investment enterprises (FIEs) Enterprises funded by entrepreneurs from Hong Kong, China, Macau, and Taipei,China Others Total

PRC Average (%)

Eastern Region (%)

Central Region (%)

Western Region (%)

16.8 19.6 12.7 29.4

12.4 12.8 9.8 38.4

20.8 41.9 17.7 9.6

40.1 10.5 22.0 12.9

17.1 4.4 100.0

22.4 4.2 100.0

5.1 4.9 100.0

8.7 5.8 100.0

Source: Feng Chen (2000).

CHAPTER 1: THE MACROECONOMY

15

impressive 8.3 percent during 1995-2000, such a high GDP growth rate may not be sustainable. GDP growth rate declined to 7.9 percent in the first half of 2001, while a lower 6.9 percent was recorded in the third quarter (Table 1-15). This view reflects the following considerations: • The rate of return of capital investment will inevitably decline because of the diminishing marginal rate of productivity of capital investment. • Imperfections in the financial system prevent the effective utilization of domestic and foreign capital. • The household saving rate will decline because of the increasing propensity for consumption. • Inertia in the labor market will continue to prevent effective labor mobility. • The aging population will impose heavier burdens on public finance. • Investments in environmental protection will divert funds away from productive activities. • The world economy is currently in a downturn. However, GDP growth in the PRC will continue to be stronger than world average for the following reasons: (i) institutional innovations, especially SOE reform and the increasing competitiveness and integration of the domestic market, will continue to boost economic development; (ii) membership in the World Trade Organization (WTO) will open up monopoly markets in banking and finance, insurance, telecommunication, and domestic airlines, thus increasing market competitiveness and the efficiency of capital utilization; (iii) urbanization and industrialization in currently underdeveloped areas will increase the extent of the market and promote further specialization and division of labor and productivity; and (iv) the relatively stable economic and political environment will attract more foreign investment into the PRC market. A recent study by the Development Research Center of the State Council projected two scenarios, summarized in Table 1-16.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

It would be wise to take the lower growth rate as the more realistic one, given the closer integration of the PRC’s economy with the world economy after the accession to the WTO and the current downturn of the world economy. ECONOMIC GROWTH IN THE WESTERN REGION Although the Government has increased investment in the Central and Western regions to boost economic growth in these two areas, the effectiveness of the investment is still questionable. Government investment in 2000 accounted for only 6.4 percent of investment in fixed assets, 11.9 percent of investment in capital construction (13.8 percent in the Western Region), and 3 percent of investment in innovations (see Table 1-17), for a weighted average of 7.5 percent. According to the Development Research Center study, capital investment will account for 60 percent of GDP growth in 2000–2010. Even taking the rather optimistic view that the Government will continue to increase investment at the 2000 annual rate (weighted average) of 12.6 percent (thanks to the expansionary fiscal policy, increasing government bond financing, and higher tax revenues from tighter fiscal discipline) and that the Western Region will be favored with an extra 4.5 percent increase in investment per year, the GNP growth rate in the Western Region will still only gain an extra 0.2 percent (4.5 percent x 7.5 percent [weighted average of the contribution of government investment] x 60 percent [capital contribution to economic growth]), if all other factors are kept constant. This reflects the declining importance of government investment in the promotion of economic growth. Institutional innovations are hard to quantify but they will undoubtedly contribute to economic growth, especially as the Central and Western regions could enjoy the “backward advantage” of imitating institutional experiments in the Eastern Region if the Government were to adopt the policy recommendations of this report.

Table 1-15 GNP Growth Rate (Using Comparable Prices), 1997–2001 2001 Region PRC Eastern Central Western Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

1997

1998

1999

2000

1st Quarter

2nd Quarter

3rd Quarter

8.8 9.1 9.0 7.7 7.8 8.8 8.2 7.2 7.5 9.0 6.5 7.6 7.4 6.8 7.2 6.1 8.8 7.8

7.8 8.3 7.2 7.1 7.0 6.8 7.3 6.8 6.4 8.2 7.3 7.1 7.3 7.4 7.2 6.8 5.9 7.7

7.1 7.8 6.3 5.9 5.6 6.1 4.5 6.7 5.8 7.7 6.2 6.4 6.8 6.7 6.6 7.0 5.7 6.3

8.0 8.7 7.3 7.1 6.8 7.1 7.5 7.3 5.9 7.8 6.1 7.5 7.5 7.3 7.5 8.2 6.8 8.1

8.1

7.8

6.9

Source: China Statistical Yearbook 2000, 2001; figures for 2001 are from the People’s Daily (http://www.peopledaily.com.cn/GB/jinji/36/200011121/609881.html). Note: National-level gross national product (GNP) figures do not match the aggregate regional-level GNP figures. Best estimates were used to calculate the weighted average GNP growth rate at constant price level.

Table 1-16 Scenarios of Annual GDP Growth (Constant Prices), 2000–2020 Scenario

2000–2005 (%)

2005–2010 (%)

2010–2015 (%)

2015–2020 (%)

2000–2015 (%)

2000–2020 (%)

8.1 6.9

7.8 6.4

7.1 5.6

6.2 4.7

7.6 6.3

7.2 5.7

Base case Lower-growth case Source: Li, Ju, and Hou Yongzhi (2000).

Table 1-17 Government Investment, 1999–2000 (Current Prices) Type of Investment Investment in fixed assets PRC Government budgetary appropriation Investment in capital construction PRC Government budgetary appropriation Western Region Government budgetary appropriation Investment in innovations PRC Government budgetary appropriation

1999 (million yuan)

2000 (million yuan)

Growth Rate (%)

2,985,470 185,210 (6.2%)

3,291,770 210,950 (6.4%)

10.3 13.9

1,245,530 147,890 (11.9%) 261,300 34,700 (13.3%)

1,342,720 159,410 (11.9%) 298,400 41,300 (13.8%)

7.8 7.7

448,510 10,750 (2.4%)

510,760 15,530 (3.0%)

14.2 19.0

13.9 44.5

Source: China Statistical Yearbook 2001.

CHAPTER 1: THE MACROECONOMY

17

Opportunities The main opportunities for the development of the Western Region are as follows: • Globalization and accession to the WTO will push the PRC into irreversible economic reform and market openness. Institutional inertia and obstacles will face more competition in domestic and international markets. Competition will also exert pressure on local governments to adopt international best practices in administration and the provision of public goods. • The experience with institutional innovations in the Eastern Region could help the Western Region to leapfrog some stages of development and take short cuts in experimenting with and implementing new institutional arrangements. • Market competition would also reveal the real comparative advantages of the Western Region and adjust its industrial structure to fully utilize and explore its advantages in trade with other regions in the PRC and in international markets, such as its enormous potential in tourism and other labor-intensive service industries. • Modern information and telecommunication technology (ICT) allows easy flow of information into isolated areas and significantly reduces the cost of knowledge diffusion and education. It will also reduce transaction costs in the exchange of goods, services, and knowledge in the Western Region and thus deal with one of the major disadvantages of the region. • After two decades of economic reform, the PRC has become a demand-oriented economy in which there is excess supply of most goods and services.The budget constraints are less tight and shortages of goods are less severe.This provides a more feasible foundation for the implementation of the Western Development Strategy. • The market mechanism is functioning in the Eastern Region and most public servants have gained experience in modern macroeconomic management. The Central Government is therefore more capable of using both market

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

mechanisms and central planning techniques to support the implementation of the Strategy. Threats Globalization and the ICT revolution will also pose a significant challenge to the economic development of the Western Region for the following reasons: • For the Western Region, globalization is a reality rather than a choice. Accession to the WTO will require that the PRC in general, and the Western Region in particular, actively participate in global economic competition so as to utilize the gains from trade. It will also require the Western Region to speed up its economic restructuring to catch up with the industrialized Eastern Region. The information revolution goes far beyond the popularization of personal computers. It requires profound economic restructuring. • Many SOEs in the Western Region, which are still under the protection of the planned economy, now have to face worldwide competition. Restructuring is inevitable and this will increase unemployment and bring in other social problems. • Membership in the WTO will challenge the existing comparative advantages of the Western Region: – Primary industry will encounter competition in the international market, especially in food, cooking oil, sugar, and cotton—the so-called four “pillar” products of the Western Region. – Secondary industry will face competition from wholly foreign-owned enterprises (WFOEs) in the Eastern and Central regions. – Tertiary industry may gain comparative advantages, for example, in tourism and other labor-intensive services. • In the international market, the cost of resource exploration and extraction is increasing while the price of resource-intensive products is decreasing for the following reasons: – Primary industries are subject to decreasing returns to scale.

– The prices of mineral products in the international market are unstable and gradually declining. – R&D will uncover more substitutable goods and therefore reduce the demand for mineral goods. • Resource-oriented economic planning, as in the Ninth FYP, is inconsistent with sustainable economic growth for the following reasons: – Historically, resource-oriented industry policy failed to increase the wealth of the people in the Western Region. – Overexploitation of natural resources has resulted in ecological degradation, which will jeopardize sustainable economic growth. – Many basic industries are too capital-intensive to absorb the labor force. • In addition, local governments in the Western Region may not have sufficient capacity to take on the new responsibility of facilitating economic restructuring. The net effect of these factors could reduce the gap between regions, but the Central and Western regions may still lag behind the Eastern Region in GDP growth. A rough estimate is for the growth-rate gap to narrow from the current 0.7–0.9 percent to 0.2 percent. POPULATION The Development Research Center study expects that the natural growth rate will drop to 0.82 percent by 2010. Migration between regions will probably continue the current trend. Table 1-18 gives a rather conservative estimate, based on population census data for 1990 and 2000.

ECONOMIC GROWTH IN THE PRC, 2000–2010 Combining all previous forecasts, the projections for GDP, population size, and per capita GDP are summarized in Table 1-19. IMPLICATIONS OF ECONOMIC GROWTH PROJECTIONS Table 1-19 presents a realistic picture of the economic growth in the PRC in the next 10 years. Three points stand out and deserve further discussion: • In spite of the Government’s continuous effort to promote economic growth in the Western Region, its GDP growth rate will still be lower than that of the Eastern Region, although the gap is narrowing.This result indicates the importance of private sector participation (PSP) and calls for the repositioning of public administration in the process of development. • With a more flexible labor market, labor forces will continue to migrate from the Western and Central regions to the Eastern Region. Moving people out of harsh environments and relocating labor forces in line with economic principles may be the most effective way to increase per capita income, although labor movement may not by itself increase GDP in the Western Region.The social impact of migrating on both the originating and receiving communities merits further study. • Income disparities will continue to exist and so will the relative poor. To assist the poor, a suitable income distribution mechanism, either a nationwide social assistance program or a suitable manner of government transfer payment, must be put in place to achieve even income distribution.

Table 1-18 Population Size and Migration Between Regions Total Population Region Eastern Central Western Southwest Northwest PRC

2000 (million)

1990 (million)

Averate Annual Growth Rate (%)

Forecast Annual Net Migration Rate, 2000–2010 (%)

491.33 415.64

425.83 382.66

1.44 0.83

0.82 -0.36

239.83 115.48 1,262.28

221.03 100.99 1,130.51

0.82 1.35 1.11

-0.46 0.00 0.00

Source: Compiled by consultants.

CHAPTER 1: THE MACROECONOMY

19

Table 1-19 Economic Growth Projections, 2000-2010 Year

2000

GDP (109 yuan) PRC 8,940 Eastern 5,123 Central 2,289 Western Southwest 983 Northwest 545 Population (million) PRC 1,262 Eastern 491 Central 416 Western Southwest 240 Northwest 115 Per capita GDP (yuan per capita) PRC 7,084 Eastern 10,433 Central 5,502 Western Southwest 4,098 Northwest 4,742

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

9,557 6,066 2,442

10,216 6,491 2,606

10,921 6,946 2,780

11,675 7,434 2,966

12,480 7,955 3,165

13,279 8,473 3,361

14,129 9,025 3,570

15,033 9,613 3,791

15,995 10,239 4,026

17,019 10,906 4,276

1,049 582

1,120 621

1,195 662

1,275 707

1,360 754

1,444 801

1,534 851

1,629 903

1,730 959

1,837 1,019

1,272 499 418

1,283 507 420

1,293 516 422

1,304 524 424

1,315 533 426

1,325 541 428

1,336 550 430

1,347 559 432

1,358 568 434

1,369 578 436

241 116

242 117

243 118

243 119

244 120

245 121

246 122

247 123

248 124

249 125

7,511 12,154 5,843

7,964 12,797 6,206

8,444 13,474 6,592

8,954 14,186 7,001

9,494 14,936 7,436

10,019 15,652 7,861

10,574 16,403 8,310

11,159 17,189 8,785

11,776 18,013 9,287

12,428 18,877 9,817

4,356 5,019

4,632 5,311

4,924 5,621

5,235 5,949

5,566 6,296

5,890 6,632

6,233 6,986

6,595 7,359

6,979 7,751

7,385 8,165

Source: Compiled by consultants.

Strategic considerations in the development of the Western Region OBJECTIVES OF THE DEVELOPMENT STRATEGY In light of the discussions in the previous sections, the Government should target the social development, rather than the economic growth, of the Western Region. The ultimate objective of developing the Western Region is to make its people better off. This can be achieved by separating efficiency objectives from those of equality. A transparent and competitive market system is essential to achieve efficiency of resource allocation, and an appropriate social assistance program must be in place to achieve equality in income distribution. Overemphasizing the GDP growth rate of that region, or even worse, setting the GDP growth rate as a political objective, will worsen the efficiency of resource allocation and reduce productivity in the Western Region. Environmental protection is another constraint on economic growth. Ecological degradation has gradually become a major constraint on sustainable economic development in the PRC. As in many other developing countries, the PRC has run down its natural resource assets for the sake of rapid economic growth in the last two decades. Environmental quality in the Western Region is now poor. Owing to the fragility of

20

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

the environment, unchecked environmental degradation will inevitably reverse ecologically sustainable growth for the nation as a whole. In the short term there is a tradeoff between economic growth and environmental conservation. • Environmental protection is costly.This implies that more resources will need to be devoted to projects that are not tangibly productive in the short run. • The damage (or the benefits) to the ecological system is difficult to measure; therefore, increased political pressure is required to implement a sound environmental policy, especially in the poor areas. • Environmental protection exhibits positive externalities and therefore calls for proper Government intervention and coordination. REPOSITIONING PUBLIC ADMINISTRATION The history of government-oriented development programs in the PRC in the 1950s and 1960s indicates that the Government needs to reposition itself to improve the efficiency and effectiveness of public administration in the development of the Western Region. Essentially, the Government should take a supporting role to build a better economic environment and correct market failure. The Government should implement further institutional reforms to set the appropriate rules of the game for the development of the Western Region. Institutional

reform is a Central Government task, but such reform will have a significant impact on the provincial economies. The experience of other countries has shown that there are major benefits from reforming public institutions.10 While the Government has made great progress in reform, many rigidities and regulations still restrict the effective functioning of the price system, the financial system, the taxation system, SOEs, and public administration. Appropriate measures that the Government could adopt include, but are not limited to the following: • Establishing an appropriately defined decentralized public administration system to encourage the local governments in the Western Region to compete in providing better public services for the private sector • Creating a stable and transparent legal environment to improve private sector participation in the development of the Western Region • Committing to protect private property rights to improve the efficiency of market transactions • Phasing out preferential policies for SOEs and WFOEs so that firms can compete on an equal basis irrespective of ownership • Using its judicial power to level the competition field. Top priority should be given to removing barriers so that the private sector will have access to all industries and markets become competitive or contestable (Chapter 8), and extending the scope of the Anti–Unfair Competition Law of 1993 to include measures against state monopoly The Government should also step in to provide the necessary transportation, communication, education, and public utility infrastructure in the Western Region, either through public finance or with the support of the private sector. Because of the harsh environment in the Western Region, the financial rate of return on infrastructure investment is rather low. Government investment or government-assisted private investment will be necessary to initiate these projects. To enhance the efficiency, accountability,

and transparency of government investment, if feasible, the Government should invite private sector participation (PSP) through various contractual arrangements. The Government should abandon its control of resources that can be allocated by the market to achieve efficiency of resource allocation and therefore increase total factor productivity in the Western Region. It should take measures such as the following to establish competitive markets in the Western Region and integrate these with other domestic and international markets: • Strictly following WTO principles to remove barriers to entry and trade restrictions • Identifying the barriers to the integration of the urban and rural economies and regional economies The Government should take responsibility for correcting carefully assessed market failures in the areas of natural monopoly, ecological degradation, environmental protection, education, and adverse social impacts on minorities. The concept of education should be extended to include capacitybuilding programs to enhance local government officials’ understanding of modern economic principles. Similarly, the Government should also increase the Western Region’s share of national fiscal resources to assist disadvantaged groups, including women, the poor, and minorities. PROMOTING PRIVATE SECTOR PARTICIPATION The private sector, the major driving force behind the economic growth in the Eastern Region, does have incentives to invest in infrastructure in the Western Region.11 Fostering private investment requires reducing the risk for private investors—through stable fiscal and monetary policy, stable investment regimes, sound financial systems, well-performing local governments, and an open and transparent business environment. But to encourage private investment the rule of law must also be strengthened and measures must be undertaken to fight corruption.

CHAPTER 1: THE MACROECONOMY

21

The Government should take measures to ensure that small and medium enterprises (SMEs), which are often particularly vulnerable to bureaucratic harassment and the buying of privilege by the well connected, can participate effectively in markets. Such measures include ensuring access to credit by promoting financial deepening and reducing the sources of market failure; and lowering the transaction costs of reaching export markets by expanding access to IT infrastructure, providing training in modern business practices; and building feeder roads to reduce physical barriers. Creating a sound business environment for the private sector may also involve deregulation and complementary institutional reform, for example, reducing restrictions on the informal sector, especially those

affecting small business, and tackling land tenure or registry inadequacies that discourage small investments. The 2002 Law in Promoting Small and Medium Enterprises is a positive step in addressing some of the problems faced by these businesses. Private investment will have to be complemented with public investment to enhance competitiveness and create new market opportunities. Particularly important is complementary public investment in expanding infrastructure and communications and in upgrading the skills of the labor force. International best practice shows that this publicprivate mixture will be most efficient if there is a clear understanding of the costs and benefits of various property rights and contractual arrangements (Table 1-20).

Table 1-20 Cost-Benefit Analysis of Public-Private Mixed Policies

Policy

Degree of Government Involvement

Instruments That Could Be Implemented in the Western Region

Property Rights

Major Costs and Benefits

Public finance

Highest

Public ownership

Public investment in: • Infrastructure • Environmental protection • Education

Tight macro control Ease of project initiation Higher monitoring cost Lower incentives and efficiency

Private sector participation

High

Public-private mixture

Service contracts Management contracts Lease Concessions, BOT, BOOT, ROT, divestiture

Efficiency gains Management improvements Reduction in risks, revenues, benefits Private sector responsible for investment and operations

Fiscal incentives

Medium

Tax exemptions/credits Tax holiday

Monetary incentives

Medium

Regional/Industryspecific policy Plus: Bounded private ownership

Higher incentives and efficiency than public investment More flexible implementation May generate distortions Rent-seeking activities

Regulation

Lower

Private ownership

Capital mobility Market access Competition policy

Correction of market failure Less distortion than fiscal/monetary incentives May generate rent-seeking activities Regulatory authority may have incorrect information

Legal framework

Lowest

Private ownership

Private land usage Property rights Intellectual property rights Regional competition

No distortion and a level playing field Potentially high incentive and efficiency Loose macro control Sometimes hard to initiate a project

Direct credit Subsidized credit Interest-rate rebates

Source: Compiled by consultants.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Notes 1 There has been discussion of adding the Xiangxi prefecture of Hunan province and the Enshi prefecture of Hubei province to the definition of the Western Region. This would make the Western Region consist of 12 second-level governments (seven provinces, one municipality, and five autonomous regions) and two prefectures. In this report, the “Western Region” is taken to mean the area under the 13 secondlevel governments; “northwest,” the area under the six northernmost governments of the 13; and “southwest,” the area under the seven southernmost ones. 2 The following is an extract from the Premier’s speech:

5 6 7

8

“Carrying out the strategy for Western Region development to accelerate the development of the Central and Western regions is a major step taken to achieve the strategic goals of the third stage of the country’s modernization drive. During the Tenth Five-Year Plan period, we need to place emphasis on key projects for a good beginning of the program. Construction of infrastructure and protection of the ecological environment should take priority, and we should strive for major breakthroughs within five to ten years.” 3 See Dong and Ye (2001). 4 Officially called government budgetary capital construction investment, the government

9 10 11

investment in infrastructure that has received formal approval from the National People’s Congress. See Dong and Ye (2001). See Dong and Ye (2001). In a processing industry, foreign companies provide raw materials, parts, components, and equipment and a domestic entity processes or assembles them. For a more precise definition, see Lin (2000). FIEs comprise four categories: • Sino-foreign equity joint ventures • Sino-foreign cooperative joint ventures. These are formed jointly by at least one PRC investor and at least one foreign investor, on PRC territory, in accordance with PRC laws and regulations. • Wholly foreign owned enterprises (WFOEs) • Foreign investment companies limited by shares. These are enterprises established under the Tentative Provisions of MoFTEC on Several Issues Regarding the Establishment of Foreign Investment Companies Limited by Shares. See Dong and Ye (2001). World Bank (1996) and (1997). As was reported in the People’s Daily on 19 December 2000, the Ziyuan Group (in Yunnan) invested 400 million yuan to rebuild the old Xuanwei municipality; Pacific Construction Group (in Jiangsu) invested 1,000 million yuan to build a Wensha first-class road in Xinjiang; a private firm in Shenzhen invested 406 million yuan to build a highway in Guizhou; and Xiangying Company (in Harbin) invested 30 million yuan for desert abatement in Inner Mongolia.

CHAPTER 1: THE MACROECONOMY

23

CHAPTER

2

THE FISCAL SYSTEM This chapter examines the efficiency and effectiveness of the fiscal system of the PRC, identifying areas that need strengthening to provide better support for the economic development of the Western Region. This analysis provides a basis for new policy directions in terms of changes in the tax system, government expenditure, bond financing, and government transfer payments.

Fiscal system INSTITUTIONAL FEATURES After the adoption of the open-up and reform policy in 1978, the Government shifted the focus of its investment to the Eastern Region, leading to an imbalance of economic development between the regions. During the Fifth FYP (1976–1980), government investment (within budget) in capital construction in the Eastern Region accounted for 42.2 percent of the total for the whole country, compared with 54.2 percent during the Eighth FYP (1990–1995). Between 1990 and 1995, the investment share of the Central and Western regions dropped from 50.0 per5cent to 38.2 percent, the Western Region alone suffering a drop from 19.9 percent to 14.7 percent. Recently, the trend has reversed, with the Central and Western regions receiving a record 63.2 percent of inward investment; the Western Region alone received 32.6 percent in 2000, the year the Western Development Strategy was adopted (Table 1-1). Because of a lack of financial resources, the Western Region suffers from serious deficiencies in all public services: education, science and technology, social assistance, transport infrastructure, public utilities, soil and water conservation, biodiversity conservation, and environmental protection. The fiscal system dates from the reform of tax assignment in 1994, which clarified the duties and responsibilities of local governments and the Central Government in relation to the financial system, and introduced a level-to-level framework for the fiscal system.1 As far as the Western Region is concerned, the fiscal system is of greater significance than the financial system, as it provides large transfer payments and special subsidies. The following are some important features of the system: • The Finance departments of the Central Government and local governments receive revenues separately on the basis of tax

26

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

•

•

•

•

categories rather than the levels of administrative jurisdiction. All enterprises, large or small, higher or lower in the bureaucratic hierarchy, will be increasingly free from governmental interference, be able to compete on an equal footing, and remit their taxes to the Central or local governments according to the tax law. The Central Government and local governments will mainly employ measures such as taxes, bonds, and preferential tax treatment to adjust the business environment for enterprises. In terms of expenditure, the Central Government and local governments are responsible for determining the scope and magnitude of public services, subject to the approval of the People’s Congress at the relevant level. The Central Government pays for key construction items that are usually largescale, long-term, and interregional. Local governments finance infrastructure, public utilities, education, health services, and so on at the local level. The Central Government also takes responsibility for adjusting the differences between regions mainly by providing local governments with subsidies through transfer payments.The traditional “base number method” will be replaced by the “factor scoring” method, which is more transparent and objective in that it determines the subsidies according to scores. The finances of the Central Government and the local governments should be separate from each other. They should have separate budgets in the pursuit of independence and balance.

TAX REVENUE ASSIGNMENT Under the tax revenue sharing system, the scope of expenditures of governments at different levels should match their respective responsibilities.The Central Government is mainly responsible for expenditure relating to defense, foreign affairs, and the operation of Central Government agencies, as

Table 2-1 Tax Revenue Assignment in the PRC after 1994 Level

Tax

Central taxes

Domestic excises Customs duties VAT and excises on imports Personal income taxa City and township land use tax Farmland occupation tax Fixed assets investment orientation tax Land appreciation tax House property tax Urban real estate tax Vehicle and vessel use tax Vehicle and vessel license plate tax Deed tax Slaughter tax Banquet tax Agricultural and animal husbandry taxes Domestic VAT Business tax paid by railroads and headquarters of banks and insurance companies, and 3 resource tax Other business tax Enterprise income tax paid by railroads and headquarters of financial institutions and insurance companies under the Central Government Other enterprise income tax Income tax on foreign and foreign-funded banks Income tax on foreign and foreign funded non-bank financial institutions Resource tax paid by offshore oil companies Other resource tax City maintenance and construction tax paid by railroads and headquarters of banks and insurance companies Other city maintenance and construction tax Security tax collected on stock transactions Other security tax

Local taxes

Shared taxes

Central Share (%)

Local Share (%)

100 100 100 0 0 0 0 0 0 0 0 0 0 0 0 0 75

0 0 0 100 100 100 100 100 100 100 100 100 100 100 100 100 25

100 0

0 100

100 0 100 0 100 0

0 100 0 100 0 100

100 0 88 0

0 100 12 100

Source: Compiled from various laws and regulations on tax revenue assignment. a Interest payment from banks and other financial intermediates is assigned to central tax.

well as expenditure for economic restructuring, development coordination among regions, and macroeconomic adjustment. In contrast to other large countries, the PRC has few Central Government activities in the regions. Local governments are mainly responsible for running the government agencies under their respective jurisdictions, as well as spending for economic and social development in their regions. In accordance with the principle of matching responsibilities with revenues, taxes are divided into Central Government taxes (central taxes), local government taxes, and taxes shared between the Central and local governments. Central taxes relate

to national interests and macroeconomic regulation, and shared taxes to economic development, while local taxes are those that are most suitable for collection by local governments. State tax agencies and local tax agencies are established separately. State taxes and shared taxes are collected by the State tax agencies. Local taxes are collected by the local tax agencies. The Central Government returns part of its tax revenues to local governments on the basis of the growth of local government valueadded tax (VAT) and consumption tax. The Central Government provides assistance in the form of fiscal transfers to the least developed regions and ethnic regions (Table 2-1).

CHAPTER 2: THE FISCAL SYSTEM

27

GOVERNMENT EXPENDITURE ASSIGNMENT PROCEDURE Under the Budget Law of 1994, five levels of government prepare budgets: the Central Government, local governments directly under the Central Government, cities divided into districts and autonomous prefectures, counties and cities not divided into districts, and, at the lowest level, municipal districts, townships, and towns (Figure 2-1). The central budget consists of the budgets of the different departments of the Government, and the local budget consists of the general budgets of the local governments directly under the Central Government.The budget year corresponds with the calendar year, starting on 1 January and closing on 31 December. As stipulated in the Budget Law: Article 12 The National People’s Congress examines the central and local draft budgets and the reports on the implementation of the Figure 2-1 Central and Local Government Budget Scheme

Central budget

Budgets of provinces and autonomous regions

Budgets of municipalities under the direct governorship of the Central Government

Budgets of municipalities and autonomous regions with subordinate districts

Budgets of counties, autonomous regions, municipalities without subordinate districts, and districts under municipalities

Budgets of villages, ethnic residential villages, and townships

Source: Ministry of Finance website.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

central and local budget, approves the central budget and the report on the implementation of the central budget and alters or annuls inappropriate resolutions made by the Standing Committee of the National People’s Congress on budget and final accounts…. Article 13 A local people’s congress at or above the county level examines the draft general budget at the corresponding level and the report on the implementation of the general budget, approves the budget and the report on its implementation at the corresponding level, alters or annuls inappropriate resolutions made by the standing committee of the people’s congress at the corresponding level on budget or final accounts and annuls inappropriate decisions and orders made by the government at the corresponding level on budget or final accounts…. The people’s congress of a township, nationality township or town which has an established budget examines and approves the budget at the corresponding level and the report on the implementation of the budget at the corresponding level and the report on the implementation of the budget at the corresponding level, supervises the implementation of the budget at the corresponding level, examines and approves the adjustment plan for the budget at the corresponding level, examines and approves the final accounts at the corresponding level, and annuls inappropriate decisions and orders made by the government at the corresponding level on budget or final accounts.

The Ministry of Finance and local government finance bureaus prepare the central budget and local budgets, respectively, as well as the final accounts. They are also responsible for the implementation and preparation of budget adjustment plans. Central and local budgets follow the double-entry format.

TRANSFER PAYMENT There are three types of intergovernment transfer payment: • Vertical transfer payments from the Central Government to provincial governments • Horizontal transfer payments from developed regions to underdeveloped regions • Poverty-reduction transfer payments from the Central Government to poverty counties Vertical transfer payment, the major component, includes five channels: tax returns, institutional subsidy (price subsidy), transitional transfer payment, special project subsidy, and end-of-balance subsidy. Tax returns Tax returns have the highest volume.The rule is as follows: using 1993 as the base year, for every 1 percent increase in the VAT and excise tax generated by business entities in a particular province or autonomous region, the Central Government increases the tax returns to those provincial governments by 0.3 percent. Although this incentive-based transfer payment does provide an incentive mechanism for provincial governments to attract investment into their respective regions, it places the Western Region, with its slower economic growth and therefore also slower VAT growth rate, at a substantial disadvantage and thus worsens the imbalance between regions. Institutional subsidy (price subsidy) Institutional subsidy (price subsidy) refers to the expenditure appropriations from the government budget for price subsidies. These subsidies include those making up the difference between the government sale and purchase prices of grains, cotton, and edible oils, as well as subsidies on the prices of meat, meat products, vegetables, textbooks, newsprint, and periodicals. In 2000, the total subsidy amounted to 104,228 million yuan. Transitional transfer payment Transitional transfer payment (TTP) is designed to balance regional disparities. The rule is as follows:

TTP = ([standard expenditure – standard revenue] x objective TP parameter + policy TP amount) (1 + incentive factor parameter)2 The formula has three parts: an objective factor, which attempts to measure the gap between standard expenditures and local fiscal capacity; a factor for subsidies to regions with large ethnic minority populations and other political considerations; and a factor to reward the provinces for good tax effort. Tax effort is measured as provincial tax collection relative to the national average. Generally, the transfers that a province can expect to receive in a year would be based on its fiscal gap and tax efforts in the previous year. In principle, this formula is well designed.The problem lies in the measure of “standard” expenditure and revenue.The normal practice is to use the previous year’s figure as the proxy for measuring the standard figure.This actually provides an incentive for local governments to overspend any revenue so as to qualify for a larger transfer payment in future years. Accordingly, the Western Region received the largest proportion of TTPs owing to its lower capability in collecting revenue. Guizhou, Qinghai, Xinjiang, and Inner Mongolia obtained the most TTP in 1995–1998 (Table 2-2). However, TTP accounted for only less than 2 percent of total subsidies from the Central Government to local governments (Table 2-3); thus, its redistribution function is limited. Special project subsidy Special subsidy is mainly applied to special projects, or is extended to rectify industry-specific policies and correct market failure (Chapter 10). Examples are financial and in-kind subsidies for natural disasters, and policy adjustment compensation. End-of-balance subsidy The end-of-balance subsidy is a subsidy from the Central Government to local governments to balance deficits at the end of the financial year.

CHAPTER 2: THE FISCAL SYSTEM

29

Table 2-2 Transitional Transfer Payments from the Central Government to the Western Region, 1995–1998 1995 Amount (million yuan) PRC Western Region Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

2,071 1,212 181 12 12 55 71 71 104 104 246 247 109

%

1996 Amount (million yuan) 3,465 2,364

58.5 0.0 14.9 1.0 1.0 4.5 5.9 5.9 8.6 8.6 20.3 20.4 9.0

% 68.2 0.0 12.5 15.6 0.9 4.2 6.9 5.6 8.1 6.7 16.1 15.7 7.8

295 369 20 100 162 132 191 159 381 371 184

1997 Amount (million yuan) 5,021 2,678 363 426 20 177 245 206 294 193 5 497 252

% 53.3 0.0 13.6 15.9 0.8 6.6 9.2 7.7 11.0 7.2 0.2 18.6 9.4

1998 Amount (million yuan) 6,064 3,839 76 381 558 24 210 272 229 397 221 597 576 298

% 63.3 2.0 9.9 14.5 0.6 5.5 7.1 6.0 10.3 5.8 15.6 15.0 7.8

Source: Lou (2000).

Table 2-3 Scale of TTP and Vertical Transfer Payments, 1995–1998 Year Transitional transfer payments (million yuan) Total subsidies from the Central Government to local government (million yuan) Ratio of TTP to total vertical transfer payments (%)

1995

1996

1997

1998

2,071

3,465

5,021

6,064

253,406 272,252 285,667 332,154 0.8

1.3

1.8

1.8

Source: Lou (2000); China Fiscal Yearbook 2000.

GOVERNMENT BOND FINANCING Article 27 of the Budget Law of 1994 permits the Central Government to raise the sums needed for construction investment through domestic and foreign debt. However, Article 28 prescribes that no local government should issue bonds on its own unless there is legal permission or permission is granted by the State Commission. In other words, under usual circumstances, only the Central Government has the right to issue bonds. To overcome the negative effects of the Asian financial crisis of 1997 on the PRC’s exports, the Government adopted an expansionary fiscal policy by issuing more government bonds.The total construction government bonds issued amounted to 100,000 million yuan in 1998, 110,000 million yuan in 1999, and 150,000 million yuan in 2000, and 32 percent of the proceeds were invested in the Western Region.The Government arranged complementary finance of 750,000 million yuan

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

from local governments, SOEs, and bank loans for investments in several mega projects in infrastructure construction and environmental protection. The Western Region enjoyed favorable treatment. In the first 11 months of 2000, infrastructure investment grew by 18.5 percent in the Western Region, 14.6 percent in the Central Region, and 5.7 percent in the Eastern Region. The Government plans to issue 150,000 million yuan worth of long-term construction bonds to commercial banks in 2001. Except for several new projects in the Western Region, most of the additional public debt will be applied to projects already under construction. The Government also plans to issue public debt of 50,000 million yuan for the implementation of the Western Region Development Strategy. Projects include, among others, the transfer of gas and electricity from west to east, the transfer of water from south to north, the building of the QinghaiTibet railway, and the conservation of ecosystems. While it seems technically and financially feasible to use government bonds to finance these projects, the means of assessing the costs, benefits, social impacts, particularly in minorities, environmental impacts, and risks are unclear and therefore cause for concern.

Major challenges facing the public finance system The major challenges facing the public finance system are:

• Insufficiency of public finance to meet all the infrastructure, education, health, and ecological protection needs; private sector participation (Chapter 1) is called for • Effective division of responsibility between the Central Government and the local governments in the provision of public goods • Prevention of regional protectionism • Fair and effective rules in guiding government transfer payments to achieve social objectives like poverty alleviation and pollution abatement • Cautious government bond financing to complement government budgetary financing and implement macroeconomic management

Table 2-4 Government Budget Deficit, 1990–2000

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Total Total Revenue Expenditure Balance GDP (million yuan) (million yuan) (million yuan) (million yuan) 293,710 314,948 348,337 434,895 521,810 624,220 740,799 865,114 987,595 1,144,408 1,339,523

308,359 338,662 374,220 464,230 579,262 682,372 793,755 923,356 1,079,818 1,318,767 1,588,650

-14,649 -23,714 -25,883 -29,335 -57,452 -58,152 -52,956 -58,242 -92,223 -174,359 -249,127

1,859,840 2,166,250 2,665,190 3,456,050 4,667,000 5,749,490 6,685,050 7,314,270 7,696,710 8,057,940 8,818,960

Budget Deficit/ GDP (%) -0.79 -1.09 -0.97 -0.85 -1.23 -1.01 -0.79 -0.80 -1.20 -2.16 -2.82

Source: China Statistical Yearbook 2001.

BUDGET DEFICIT AND FISCAL VULNERABILITY The debt burden of the Government is likely to grow in the short to medium term. The government deficit is 2.82 percent of GDP, which is well below internationally accepted levels (Table 2-4). However, if deficit spending of SOEs (the governmentmandated bank loans that partially substitute for a loss in subsidies disbursed through the budget) were taken into account (a debatable approach), what would be the effective budget deficit as a proportion of GDP? For 1990–1991, Wong et al. (1995) estimate a consolidated budget deficit of about 8 percent of GDP including subsidies.3 There was a sharp increase in debt ratio from 12.8 percent in 1990 to 32.5 percent in 1999. Accordingly, the principal and interest payment ratio has also increased from 6.5 percent in 1990 to around 20 percent in recent years (Table 2-5). The Government could find it difficult to meet its debt obligations if revenue growth were to decline sharply. Therefore, the Government may not be able to transfer as much to provincial governments. In contrast, the PRC is rather cautious in issuing foreign debt. In most years from 1994 to 2000, the debt service ratio stayed below 10 percent, liability ratio was around 15 percent, and foreign debt ratio was below 70 percent (Table 2-6). This may be one reason why the PRC was insulated from the Asian

Table 2-5 Government Debt Issuance and Payment, 1990–2000

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

(1) (2) Total Total Payment of Debt Principal and Issues Interest on Debts (million yuan) (million yuan) 37,545 46,140 66,968 73,922 117,525 154,976 196,728 247,682 331,093 371,503 418,010

19,007 24,680 43,857 33,622 49,936 88,296 135,503 191,837 235,292 191,053 157,982

(3) (4) Total Fiscal (1)/(3) Revenues (million yuan) (%) 293,710 314,948 348,337 434,895 521,810 624,220 740,799 865,114 987,595 1,144,408 1,339,523

12.8 14.7 19.2 17.0 22.5 24.8 26.6 28.6 33.5 32.5 31.2

(5) (2)/(3) (%) 6.5 7.8 12.6 7.7 9.6 14.2 18.3 22.2 23.8 16.7 11.8

Source: China Statistical Yearbook 2001.

financial crisis of 1997 and the global economic slowdown in 2000/2001. The risk of default on the Government’s debts depends on many subjective and objective factors, but the risk is generally perceived to be low. However, recent trial tax reforms to reduce agricultural taxes and fees by 26 percent to 30 percent will have a significant adverse impact on government revenue if they are implemented nationwide. Since expenditure is not likely to be reduced in the short to

CHAPTER 2: THE FISCAL SYSTEM

31

Table 2-6 Foreign Debt and Risk Factors, 1994–2000

Year

Total Payment of Principal and Interest on Debtsa ($ million)

Accumulated Foreign Debt ($ million)

Debt Service Ratiob (%)

Liability Ratioc (%)

Foreign Debt Ratiod (%)

1994 1995 1996 1997 1998 1999 2000

1,299.0 869.0 736.5 857.7 928.5 1,102.9 n.a.

92,806 106,590 116,275 130,960 146,043 151,830 145,730

9.1 7.6 6.0 7.3 10.9 11.3 9.3

17.1 15.2 14.2 14.5 15.2 15.3 13.5

78.0 72.4 67.7 63.2 70.4 69.5 52.1

Source: China Statistical Yearbook 2000 and 2001; China Fiscal Yearbook 2000. a Estimated using the exchange rate of $1= 8.25 yuan. b Ratio of the payment of principal and interest on foreign debt to the foreign exchange receipts from foreign trade and nontrade services for the current year. c Ratio of the balance of foreign debt to the gross national product for the current year. d Ratio of the balance of foreign debt to the foreign exchange receipts from foreign trade and nontrade services for the current year.

medium term, the fiscal outlook for the PRC is a concern. A significant increase in tax revenues in 1999 indicated that there may be loopholes in tax collection, especially in the collection of VAT, customs taxes, and personal income tax. There are potential factors, such as worker layoffs due to SOE reforms, vocational education and training for the unemployed, an aging population, that will

place additional upward pressure on government expenditure. For example, as the population ages there will be higher expenditure on pensions and health. This would put pressure on the Government’s fiscal position if there were a sharp decline in the growth of revenues or a slowdown in economic growth. EXTRABUDGETARY REVENUES AND EXPENDITURES Extrabudgetary revenue in the form of fees and charges and other miscellaneous items, and extrabudgetary expenditure in the form of special subsidies to local governments, are significantly higher than in advanced countries. In 1996–1998, extrabudgetary revenue accounted for 50 percent of budgetary revenues and extrabudgetary expenditure accounted for 45 percent of budgetary expenditure (Table 2-7), significantly higher than the corresponding figures of 7.0 percent in Australia, 6.9 percent in the US, and 5.5 percent in the UK.4 Most provinces and autonomous regions in the Western Region have even higher extrabudgetary revenue (Table 2-8). In 1998, Guangxi and Sichuan had the highest ratio of extrabudgetary to budgetary revenue of about 80 percent. Extrabudgetary expenditure in the Western

Table 2-7 Government Extrabudgetary Revenue and Expenditure, 1996–2000

Year 1996 1997 1998 1999 2000

Revenue Budgetary Extrabudgetary Ratio of Extrabudgetary (million yuan) (million yuan) to Budgetary (%) 740,800 865,110 (758,740)* 987,600 (873,250)* 1144,410 (n.a.) 1,339,520 (n.a.)

389,330 282,600 (388,900)* 308,230 (422,580)* 338,520 (n.a.) n.a.

52.6% 32.7% (51.3%) 31.2% (48.4%) 31.2%

Expenditure Budgetary Extrabudgetary Ratio of Extrabudgetary (million yuan) (million yuan) to Budgetary (%) 793,760 923,360 (818,760)* 1,079,810 (966,120)* 1,318,770 (n.a.) 1,588,650 (n.a.)

383,830 268,550 (373,150)* 291,830 (405,590)* 313,94 (n.a.) n.a

48.4% 29.1% (45.6%) 27.0% (42.0%) 23.8%

Source: China Statistical Year Book 2001; Lou (2000). * From 1997 onward, the extrabudgetary expenditures do not include the intrabudgetary government fund (fee). To maintain the comparability of figures for 1997 and 1998, the government fund figures were deducted from budgetary revenue and expenditure and added to extrabudgetary revenue and expenditure. The results are shown in parentheses.

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Table 2-8 Budgetary and Extrabudgetary Revenue in the Western Region, 1996–1998 1996

Region

1997

Budgetary ExtraRatio of Revenue budgetary Extra(million Revenue budgetary to yuan) (million yuan) Budgetary (%)

1998

Budgetary ExtraRatio of Budgetary ExtraRatio of Revenue budgetary ExtraRevenue budgetary Extra(million Revenue budgetary to (million Revenue budgetary to yuan) (million yuan) Budgetary (%) yuan) (million yuan) Budgetary (%)

Southwest

Chongqing Sichuan Guizhou Yunnan Tibet Guangxi

20,901 4,946 13,001 244 9,051

20,790 3,837 5,831 178 9,304

99.5 77.6 44.9 73.0 102.8

5,930 17,290 5,588 15,042 300 9,915

6,946 18,279 4,587 8,689 280 10,213

117.1 105.7 82.1 57.8 93.3 103.0

7,113 19,729 6,534 16,823 364 11,967

5,422 15,910 3,486 6,568 156 9,829

76.2 80.6 53.4 39.0 42.9 82.1

6,760 4,337 958 1,268 4,831 5,726

4,033 3,174 636 853 4,622 3,753

59.7 73.2 66.4 67.3 95.7 65.5

7,655 4,691 1,092 1,407 5,452 6,608

6,186 3,739 760 1,103 4,801 5,053

80.8 79.7 69.6 78.4 88.1 76.5

9,333 5,403 1,277 1,775 6,539 7,767

4,518 2,718 480 844 4,344 2,880

48.4 50.3 37.6 47.6 66.4 37.1

Northwest

Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Source: Lou (2000); Finance Yearbook of China 2000

Table 2-9 Budgetary and Extrabudgetary Expenditure in the Western Region, 1996–1998 1996

Region

Southwest Chongqing Sichuan Guizhou Yunnan Tibet Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

1997

1998

Budgetary ExtraRatio of Budgetary ExtraRatio of Budgetary ExtraRatio of Expenditure budgetary ExtraExpenditure budgetary ExtraExpenditure budgetary Extra(million Expenditure budgetary to (million Expenditure budgetary to (million Expenditure budgetary to yuan) (million yuan) Budgetary (%) yuan) (million yuan) Budgetary (%) yuan) (million yuan) Budgetary (%)

326,730 99,580 270,390 36,850

192,390 35,900 60,850 1,590

58.9 36.1 22.5 4.3

101,010 275,100 111,830 313,200 38,210

67,420 164,500 43,260 87,480 2,440

66.8 59.8 38.7 27.9 6.4

125,760 320,930 133,090 328,000 45,320

51,470 151,920 33,700 60,680 980

40.9 47.3 25.3 18.5 2.2

121,790 90,950 32,710 29,520 114,890 126,380 157,010

38,940 30,550 6,350 8,680 47,470 36,300 87,430

32.0 33.6 19.4 29.4 41.3 28.7 55.7

137,720 104,300 36,470 33,630 123,350 142,910 170,840

58,640 36,130 8,280 11,040 42,240 49,120 99,250

42.6 34.6 22.7 32.8 34.2 34.4 58.1

166,200 125,340 44,000 45,120 145,990 170,310 198,360

42,530 27,410 4,300 7,380 41,380 26,950 92,730

25.6 21.9 9.8 16.4 28.3 15.8 46.8

Source: Lou (2000); Finance Yearbook of China 2000

Region is on a par with the national average (Table 2-9). The high ratio of extrabudgetary to budgetary revenue and expenditure indicates a lack of discipline and therefore increases the vulnerability of the fiscal system in several ways. • Since the local governments have discretionary power to collect fees and charges from

economic entities with weaker bargaining power, SMEs and agriculture will suffer the most from the excess burden. This will increase the production cost and therefore the competitive disadvantage of the private sector, which is dominated by SMEs and agriculture farmers. • The discretionary nature of fees and charges will also increase the uncertainty in doing business

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and therefore reduce the incentive for long-term investment. • Extrabudgetary revenue and expenditure reduce the capability of the Central Government to implement macroeconomic fiscal policy. • This loophole will also leave room for corruption and other rent-seeking behavior. • Because of lack of discipline and transparency, extrabudgetary expenditure is lower in efficiency than normal budgetary fiscal expenditure. DECLINING SHARE OF INVESTMENT OF THE CENTRAL GOVERNMENT In the last decade, the Central Government’s share of investment in fixed assets and capital construction was much lower than the average in the 1980s. Even in 1999 and 2000, when the Government implemented an expansionary fiscal policy, the percentage of state budgetary appropriations in fixed assets was only 6.2 percent and 6.4 percent, respectively, well below the 13.6 percent figure in the 1980s (Table 2-10). The Central Government contributed more in capital construction.The Western Region as a whole enjoyed favorable treatment in 2000. State budgetary appropriations for investment in capital construction were 1.9 percent higher than the national average, at 14.5 percent of total budgetary appropriations. However, there were wide variations within the Western Region, with appropriations for capital

investment in Tibet accounting for over 63.5 percent of total budgetary appropriations while those in Sichuan were the lowest at 6.7 percent (Table 2-11). Therefore, government finance has become less important in investment in the last decade, but the Western Region still relies more on public finance than other regions in the PRC. That said, in 1999 and 2000 the absolute volume of public-financed investment was increasing and the growth rate was even higher than the GDP growth rate. This was mainly due to the improved fiscal discipline that increased tax revenues and the expansionary fiscal policy that aimed to increase domestic aggregate demand in recent years. The decline in the ratio of public-financed investment is largely attributable to the increase in private investment. This trend is likely to continue in the Tenth FYP. PUBLIC FINANCE GAPS IN THE DEVELOPMENT OF THE WESTERN REGION State budgetary financing and government bond financing are unlikely to be sufficient to support the proposed infrastructure investment and environmental protection projects in the Western Region. In the Tenth FYP, the proposed railway projects amount to 100,000 million yuan. Building State-level expressways to link various hubs in the Western Region requires an annual investment of about 700,000 million yuan to 800,000 million yuan. The

Table 2-10 Total Investment in Fixed Assets, by Source, 1980–2000 State Budgetary Appropriations (million yuan)

Domestic Loans (million yuan)

Foreign Investments (million yuan)

386,083 38,043 34,746 48,367 52,957 62,105 62,588 69,674 119,739 185,214 210,945

539,907 131,473 221,403 307,199 399,764 419,873 457,369 478,255 554,289 572,593 672,727

149,584 31,889 46,866 95,428 176,895 229,589 274,660 268,389 261,703 200,678 169,624

1980s in total 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: China Statistical Yearbook 2001.

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Fundraising and Other Sources Total (million yuan) (million yuan) 1,773,576 358,044 504,995 856,236 1,153,096 1,340,919 1,541,240 1,709,649 1,935,961 2,016,980 2,257,714

2,849,150 559,449 808,010 1,307,230 1,782,712 2,052,486 2,335,857 2,525,967 2,871,692 2,975,465 3,311,019

Percentage of State Budgetary Appropriations (%) 13.6 6.8 4.3 3.7 3.0 3.0 2.7 2.8 4.2 6.2 6.4

Table 2-11 Investment in Capital Construction, by Source, 1999 State Budgetary Domestic Appropriations Loans (million yuan) (million yuan) PRC Western Region Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

159,407 41,330 5,000 4,031 2,682 3,380 3,717 4,348 2,989 2,114 1,517 4,278 3,579 3,697

Foreign Investments (million yuan)

Fundraising (million yuan)

Others (million yuan)

Total (million yuan)

85,218 10,198 221 3,558 696 239 2 1,243 485 150 197 852 1,289 1,267

523,310 112,030 7,125 26,139 4,871 14,851 1,323 10,375 5,798 2,310 2,279 18,576 8,090 10,296

139,678 41,521 3,077 8,473 1542 3,632 601 5,583 3,815 2,139 839 4,281 3,845 3,695

1,266,248 284,986 20,748 60,260 15,428 30,494 5,854 28,740 20,298 9,343 8,384 37,470 21,623 26,341

358,635 79,906 5,327 18,060 5,638 8,392 212 7,192 7,211 2,631 3,552 9,484 4,821 7,386

Percentage of State Budgetary Appropriations (%) 12.6 14.5 24.1 6.7 17.4 11.1 63.5 15.1 14.7 22.6 18.1 11.4 16.6 14.0

Source: China Statistical Yearbook 2001.

4,200-km gas pipeline from Xinjiang to Shanghai will cost 300,000 million yuan. The Bureau of Civil Aviation plans to build or upgrade 20 airports and the total investment will reach 5,000 million yuan. The disposable government income in 1999 was made up of 1,144,400 million yuan in tax revenues and 110,000 million yuan in government construction bonds, which was much lower than the required investment. INDIRECT TAXATION The major component of the tax reforms of 1994 was the introduction of VAT to replace turnover taxes. Three features of the VAT system are of particular significance for the Western Region: • It does not apply to the services sector, particularly retail and wholesale trade. • It does not give allowances for taxes paid on capital goods. In other words, it is productionbased, not consumption-based.This distortion favors the Eastern Region, which has less heavy industry than the Central and Western regions. • The Bureau of State Taxation issues VAT invoices and receipts only to companies whose annual turnover exceeds 1 million yuan for retailers, and 1.8 million yuan for wholesalers. “Small taxpayers,” defined in the Tax Law as business entities with a turnover of less than 1 million yuan for retailers and less than 1.8 million yuan for wholesalers, find it difficult to trade with “normal taxpayers.” Some small taxpayers also illegally use

normal taxpayers’ official VAT invoices and receipts to do business. In introducing a production-based VAT rather than a consumption-based one the Government probably thought that by not allowing for the deduction of capital inputs, it could maintain steady tax revenues. Also, in the context of soft budget constraints, it could abate overheating in the capital investment sector, that is, reduce companies’ (especially SOEs’) incentive to invest in capital goods more than necessary. These constraints on introducing a consumption-based VAT still exist, although to a lesser extent, thanks to the microeconomic reforms that have hardened the soft budget constraints at the firm level. ENTERPRISE TAXES The current tax assignment is biased against secondary industry and SOEs. In 1999, SOEs contributed 65 percent of total enterprise tax revenues in 1997 even though, as a whole, they made losses. From 1993 to 1995, the percentage of tertiary industry output in GDP decreased slightly from 32.7 percent to 31.3 percent, while the tax burden on enterprises decreased from 8.5 percent to 3.1 percent. SOEs dominate the Western Region. As a result, the tax burden on enterprises in Ningxia is 1.6 percent higher than the national average, higher than in Guangdong, Zhejiang, and Jiangsu by 3 to 5 percent in 1998.Yunnan’s industry tax burden is 23.7 percent, 14.8 percent higher than the national average of 8.9 in 1994.5

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A recent study extended the conclusion to the whole Western Region.6 Table 2-12 illustrates the major findings. In 1998, all provinces in the Eastern Region, except Beijing, Tianjin, Shanghai, Guangdong, and Liaoning, had tax burdens 7 percent to 8.8 percent below the national average. The Central Region had tax burdens of around 6 percent to 8 percent while the Western Region’s was above 10 percent. The regressive tax burden is mainly due to the tax on agriculture, which dominates the Western Region. The elimination of tax differentiation in sectors should correct this regression. TAX ON HOUSEHOLD INCOME The Individual Income Tax Law of 1999 updated the law originally passed in 1980. The law prescribes a range of tax rates ranging up to 45 percent. It also provides many exemptions. The law is ineffective, despite the efforts of the National People’s Congress to strengthen the control of tax evasion. Table 2-13 Table 2-12 Tax Burden on the Regions, 1993–1998

Region

1993 (%)

1994 (%)

1995 (%)

1996 (%)

1997 (%)

1998 (%)

Eastern BTSa East without BTS Central Western PRC

10.35 19.47 8.69 9.02 11.06 10.15

10.15 21.17 8.22 8.09 10.70 9.93

9.69 20.31 7.82 7.53 9.79 9.14

9.51 20.11 7.66 7.14 9.39 9.01

11.16 23.25 9.02 7.47 9.85 9.94

11.44 23.11 9.35 7.81 10.40 10.3

Source: Zhang and Liu (2001). a Beijing, Tianjin, and Shanghai.

Table 2-13 Taxes on Urban Households, 2000

Region Eastern Central Western Southwest Northwest PRC

Per Capita Per Capita Per Capita Disposable Income/ Disposable Total Income Per Capita Total Income Income (yuan) (yuan) (%) 7,849.88 5,169.21

7,901.15 5,196.10

99.35 99.48

6,146.31 5,149.46 6,279.98

6,181.37 5,179.29 6,316.81

99.43 99.42 99.42

Source: China Statistical Yearbook 2001.

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lists total income and disposable income for a typical urban resident in each region and the ratio of disposable income to total income. The ratio is essentially the same and very close to 100 percent; this implies the tax is flat (essentially zero) and income tax has not yet had the function of redistributing incomes. Even for the richest 10 percent of urban residents, per capita disposable income was over 99 percent of per capita total income in 2000. TAXES ON FARMERS The tax burden on farmers comprises a combination of state taxes and levies by townships and villages (Table 2-14). While the total average percentage of the taxes is under 10 percent of gross income, and less in the poorer provinces, they nevertheless impose a severe burden on poor households. In addition to the taxes and levies, local governments levy other charges on peasants, including fines, 5 to 10 days’ corvee labor a year, and a variety of special fees. The Government has announced that it intends to abolish the township and village levies, phase out corvee labor, and raise state agricultural taxes.7 The taxes on farmers comprise the agricultural tax and surcharge, the special products tax, the slaughter tax, the farmland utilization tax, and the education surcharge. A problem with special fees is that, like the township and village levies, they are regressive. The proposal is that the only tax would be the tax and surcharge on crop production and the special products tax. UNEVEN FISCAL EXPENDITURES IN THE WESTERN REGION Table 2-15 shows the growth of fiscal resources in the Eastern, Central, and Western regions from 1978 to 1998. Although the growth rates are similar, the absolute (relative) disparity in fiscal expenditures per person has expanded from 22 yuan (69.9 percent) to 292 yuan (64.4 percent), mainly because of the current tax revenue returns rule implemented in the PRC.

Table 2-14 Per Capita Taxes and Levies on Rural Households,a 1999

Province/Autonomous Region

(1) Gross Income (yuan)

(2) State Taxes (yuan)

5,000 4,551 2,697 2,375 1,589 1,516 1,445

376 107 39 35 21 8 26

Inner Mongolia Xinjiang Sichuan Ningxia Guizhou Yunnan Gansu

(3) Township Levies (yuan) 3 106 9 5 2 3 12

(4) Village Levies (yuan)

Taxes/Gross income [(2)+(3)+(4)]/(1) (%)

46 164 43 50 14 12 19

9.4 9.6 4.7 5.7 3.1 2.1 4.4

Source: Statistical yearbooks of local governments. a Excluding herdsmen households.

Table 2-15 Growth of Fiscal Resources in the Regions, at Current Prices 1978 Item Eastern Region GDP per capita Fiscal revenue per Fiscal expenditure Central Region GDP per capita Fiscal revenue per Fiscal expenditure Western Region GDP per capita Fiscal revenue per Fiscal expenditure

1998

Amount (yuan) % of Eastern Region

Amount (yuan) % of Eastern Region

Average Annual Growth Rate (%)

capita per capita

464 485 73

100.0 100.0 100.0

8,914 602 823

100.0 100.0 100.0

15.9 1.1 12.9

capita per capita

310 67 52

66.8 13.8 71.2

4,958 280 476

51.4 46.5 57.8

14.9 7.4 11.7

capita per capita

251 45 51

54.1 9.3 69.9

3,859 269 531

43.1 4.3 64.4

14.6 9.3 12.4

Sources: Local Fiscal Statistics of 1998.

Policy implications for the fiscal system A good public finance strategy for regional development should have the following objectives: • Provide a level playing field for the Central Government and local governments to supply local goods • Operate an effective and fair tax system that creates minimal undesirable distortions in the economy • Clarify responsibility for infrastructure investment between levels of government and the rationale for selecting major infrastructure investments • Operate a system of transfer payments between local governments that equalizes services and fiscal capabilities

• Operate an effective and efficient system of government bond financing (and other forms of financing) to complement the fiscal system The fiscal policies should support the basic objectives of good public finance and cover institutional arrangements, tax assignment, government transfer payments, and government bond financing. Other sources of financing will be discussed in Chapter 3. INSTITUTIONAL ARRANGEMENTS TO PROVIDE A LEVEL PLAYING FIELD The following progressive institutional reforms are desirable: • Governments’ ability to collect taxes should be enhanced through the following measures: – Encouraging bank transfer, instead of cash exchange, for business-to-business transactions and even business-to-customer transactions

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– Implementing a computer-based tax registration system linked to bank accounts to discourage tax evasion – Introducing tax substantiation and a severe punishment system – Establishing a nationwide credit approval system to discourage wrongdoing • The tax system should be made more transparent and equitable in its application across firms, with fewer arbitrary interpretations of tax laws and regulations to prevent rent-seeking behavior. The key ingredients of reform here are clear rules, capable of simple enforcement, and specialized education and training. One important step would be to clarify or eliminate vague provisions in various laws that provide opportunities for government interference in private economic activities. Under this principle, the long-term benefits of preferential company income tax treatment in the Western Region are doubtful. • The Government should begin a systematic effort to simplify the system of fees and taxes levied on the private sector. Converting the large extrabudgetary revenue and expenditure items to in-budget items could make the whole system more transparent and accountable. From the firms’ point of view, taxes are more predictable and manageable than discretionary fees and other charges. The fact that local governments are not allowed to adjust the rate of local taxes or create new taxes to meet their needs has in many cases encouraged them to impose arbitrary and nontransparent fees. As a result, the burden on firms is uneven, in terms of both size and location. To rationalize and simplify this system, it will be necessary to decentralize some taxation powers and rights to revenue, where appropriate, and to make policies more consistent across locations in the long term. • In the absence of an appropriate public administration system that maintains the regional competition and free mobility of

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resources among regions, decentralizing taxation power may actually deteriorate the uneven tax burdens on firms in different regions. Therefore, in the short term, the Central Government could maintain its monopoly power in the design of both central, local, and shared tax, but use a more fair and efficient transfer payment system to balance the disparities in local tax revenues. A FAIR TAXATION SYSTEM WITH LESS DISTORTION Public finance economics show that a “good” public finance system should satisfy the following conditions: (i) horizontal and vertical equality in tax burdens; (ii) broad tax base and moderately progressive marginal tax rate; (iii) liabilities matched with public expenditure; and (iv) simplicity. Preferential tax To leverage the development of the Western Region, the Government has introduced a preferential tax policy summarized in the Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region.8 However, streamlining the taxation system to reflect the aforementioned principles is a higher priority than offering preferential tax treatment in the promotion of economic development in the Western Region. This is so for the following reasons: • Preferential tax introduces a distortion to the market. It will encourage multibranch firms to transfer their reported profits to their branch in the Western Region while still having most investment and production capacities in other regions. • Preferential tax is short-run in nature and uncertain in the future. This will encourage firms to invest in projects with short time horizons or to reestablish firms when the preferential period expires so as to continue to take advantage of preferential tax. This will leave room for rentseeking activities and corruption. • It makes the collection of tax revenues complex and less transparent.

Table 2-16 Policy Recommendations for Tax Reform Areas Needing Improvement

Negative Effects on the Development of the Western Region

Value-added tax Production-based VAT disallows offset of VAT for the purchase of fixed assets and foreignimported capital goods

Discourages capital-intensive enterprises from investing in fixed assets and import of high-tech capital goods

Introduce a consumption-based VAT, consistent with the depreciation of fixed assets, to allow the offset of VAT on the purchase of fixed assets

Small enterprises (defined as enterprises with annual turnover of less than 1 million yuan in the production sectors or 1.8 million yuan in the wholesale sector) are not eligible to use the designated VAT invoice

Makes it hard for SMEs to deal with enterprises eligible to use the designated VAT invoice, and therefore discourages the development of the private sector

Enterprises can claim 10% offset only on the purchase of transport services

Increases the tax burden of enterprises that rely more on transport services

Introduce a VAT number system to replace the eligibility test of using the designated VAT invoice Encourage the development of an ecommerce-based recording and processing system Streamline the VAT rate to make it neutral to goods and services transactions

Resources tax Tax rate is too low to reflect the negative externality of using natural resources

For the resource-rich areas concentrated in the Western Region, too low and too narrow resources tax encourages the waste of resources and lowers the tax revenues of local governments

Consumption tax (excise) Tax base is too narrow and tax rate is too low for some goods, like cigarettes, wine, and petrol Company income tax Tax evasion and tax avoidance are prevalent

Personal income tax Tax evasion and tax avoidance are prevalent

Agriculture taxes and fees Agriculture taxes and fees are too high; discretionary fees are prevalent

Increase the resources tax rate to (i) reflect opportunity costs (including negative externalities) of using resources; and (ii) increase local governments’ tax revenues Widen the tax base to include the use of forest, grassland, and water resources

Tax base is too narrow Business tax on tertiary industries Business tax is inconsistent with level of taxation of the primary and secondary industries

Policy Recommendations

Encourages local governments to be involved in the operations of tertiary industry, and distorts the industrial structure Due to the under-development of tertiary industry, local governments collect less tax than in the Eastern region.

Merge business tax into VAT and company income tax to reduce its distorting effects

Reduces the tax revenues of the Government and its ability to make transfer payments

Widen the tax base to include more luxury goods and increase the tax rate for goods with significant externality and having “demonstration effects”

Reduces local governments’ capability to provide local public goods

Encourage bank transfer–based transactions

Reduces local governments’ capability to provide local public goods Fails to reduce income disparities between regions

Enhance the withholding system and encourage the bank transfer–based transactions

Impose heavy tax burden on farmers in the Western Region

Reduce agriculture taxes and fees and impose strict rules on the charging of fees on farmers

Source: Compiled by the consultants.

• It reduces the tax revenues of local governments as well as their capacity to provide local public services. A direct lump-sum subsidy, proportionate with the total investment volume, is an alternative to preferential tax without the shortcomings identified above.

Reform of the tax system The decentralized tax assignment is quite modern and consistent with international best practice.However, some areas still need strengthening. While all these reforms would apply to the whole country, the Western Region would benefit the most from tax reform. The suggested reforms are as follows (Table 2-16):

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• Introduce a consumption-based VAT to allow the deduction of capital inputs and high-tech equipment. Most countries allow the deduction of capital inputs,9 and this will make VAT neutral to various inputs. A production-based VAT will undoubtedly distort firms’ decision on the appropriate combination of capital and labor, unless the Government is deliberately promoting laborintensive technology and industry. Even then, there are policies more suitable than a distorted VAT system, such as a direct subsidy for labor inputs. The expected reduction in the tax revenues following the introduction of a consumption-based VAT could be compensated by (i) introducing institutional improvements that reduce tax avoidance and evasion, as suggested in the previous section; (ii) widening the VAT base to apply the same tax rate to the service sector; (iii) widening the tax base of resource tax and consumption tax, and (iv) increasing the tax rate as the last resort. • Introduce a VAT registration number for each business entity, as implemented recently in Australia as part of its new goods and services tax (GST) system, which imposes 10 percent tax on all goods and services trading (except for basic foods, education, and health). The measure would complement or replace the official VAT invoice and receipt system, which issues official VAT invoices and receipts only to companies with annual turnover of more than 1 million yuan for retailers and 1.8 million yuan for wholesalers. Abolishing this discriminatory VAT treatment would facilitate market exchange. The use of computers could minimize the increase in administrative work. • Streamline the VAT rate to make it neutral to goods and services (especially for transport services). • Increase the resources tax to reflect the environmental costs of the extraction of

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resources, and use the collected tax to finance ecological protection projects. • Abandon the business tax on tertiary industry and merge it with VAT to reduce the distortion between industries. • Widen the base of the consumption tax to charge a higher rate for selected luxury goods with “demonstration” nature. • Introduce a tax-withholding system and encourage bank transfers to reduce income tax evasion. Reduction of the tax burden on farmers There is a need to reduce the tax burden on poor farmers, many of whom live in the Western Region. The current income tax is rather regressive in that higher income urban households pay no tax while lower-income farmers pay 2–10 percent in taxes and levies. A progressive income tax scheme, as implemented in all developed countries, is needed to achieve horizontal and vertical equity in the fiscal system. GOVERNMENT INFRASTRUCTURE INVESTMENT Although government investment in infrastructure is widely regarded as pivotal in promoting economic development in the Western Region, international practices illustrate that the Government should pay particular attention to, and correctly address, the following concerns: • In the PRC, it is difficult to reconcile the allocation and control of public funds with development objectives. Budgetary allocations largely reflect historical allocations and the bargaining powers of local governments, and do not allow for new emphases on particular activities or for the phasing out of others. • Governments must choose between new construction and maintenance, and between rural and urban sectors among regions. Allocating expenditures to different activities on the basis of social rates of return is an important method of establishing priorities. Political

achievement should give way to economic analysis. Analysis of such returns in most developing countries reveals the critical importance of maintenance over new construction. Other activities that deserve priority over new investment include the completion of unfinished projects. • Increase spending on basic, lower-cost rural infrastructure, and cut back high-cost mega projects. This should be an economic priority that will contribute significantly to poverty reduction. Moreover, integrating agricultural development with industrial development by building up rural industrial infrastructure would allow rural industries to prosper and rural populations to become employed in industry without major dislocation. • Strengthen the work of the National Audit Administration under the Audit Law of 1994 in auditing the benefits of budgetary expenditures on infrastructure projects. GOVERNMENT TRANSFER PAYMENT AS A MEANS OF POVERTY ALLEVIATION The tax system may not be the ideal means of remedying regional imbalance, owing to the potential distortions in the market and the ineffectiveness of the personal income tax system. Therefore, government lump-sum transfer payments should play the leading role in poverty alleviation in the Western Region. International experience illustrates that a transparent and accountable lump-sum subsidy system is desirable and provides a feasible means to achieve this objective. Regular transfer payment The five channels of government transfer payment could be merged into regular transfer payment (tax returns, institutional subsidy, and transitional transfer payment) and special subsidy (special project subsidy and end-of-balance subsidy). In addition, a social security safety net

should be established to provide assistance for the poor. There are different views on the relative merits of rules-based government transfer payment versus government discretionary transfer payment. Rulesbased transfer payment is more transparent and accountable, but less flexible in dealing with widely differing conditions such as those that exist in the Western Region. Discretionary transfer payment, on the other hand, is more flexible and thus able to take special circumstances into account. However, discretionary transfer payment leaves great scope for abuse and corruption. The optimum mix depends on the institutional capability of the governments, especially the accountability of the local governments. In principle, regular transfer payment is used to balance regional fiscal capabilities. It could be justified on the grounds that: (i) it should meet the minimum funds requirement with which local governments are able to perform their normal functions; and (ii) it should help people of different regions to have equal access to public services, avoiding excessive differentials in the provision of public services. Further studies are needed to design a fair and effective regular transfer payment system. One option is to adopt the “factor scoring” principle, that is, find a set of proxies to measure the potential capability (not the actual revenue, as in the current system) of local finance, the potential need of public services in each province and autonomous region (not the actual expenditure), and the level of economic development. The regular transfer payment should function by filling the disparity gaps between local government revenues and the funds required to supply minimum public services. The transfer payment from the Federal Government to state governments in Australia is widely regarded as “good” practice in economic literature. Box 2-1 documents the details of the practice.

CHAPTER 2: THE FISCAL SYSTEM

41

Box 2-1 Fostering Interregional Equity Through Fiscal Equalization in Australia

A

lthough Australia is a federal country comprising eight states and territories, most taxation power is assigned to the Federal (Commonwealth) Government, which accounts for almost three-fourths of general government revenue. The federal nature of the system is preserved through large-scale intergovernmental fiscal transfers: in 1998–1999, these totaled about US$20,000 million equivalent, about half of which came in the form of unconditional block grants. The fiscal transfer mechanism is designed to address both vertical and horizontal fiscal imbalances. The vertical imbalance is addressed by transferring enough resources to permit states and local governments to spend almost 50 percent of general government expenditure (while raising about one-fourth of revenue). The Australian system also has a mechanism to partly remedy the horizontal fiscal imbalance— differences in revenue capacity among the states— by focusing on equal access for all citizens to certain basic social services. Until World War II, the annual negotiation between the states and the Federal Government concerned both the total amount of grants to be allocated and their distribution among the states. This generated a great deal of contention and the zero-sum nature of the allocation system made a national consensus very difficult. In the system introduced since then, the annual negotiation has centered only on the

total amount. As soon as that figure is agreed, the allocation among the states follows a formula designed to equalize access to basic social services (thus providing a greater per capita amount to poorer states). According to the allocation principle, each state is given “the capacity to provide the average standard of state-type public services, assuming it does so at an average level of operational efficiency and makes an average effort to raise revenue from its own sources.” This simple and powerful principle sets all the incentives in the right direction. Because these averages are assumptions used in the allocation formula, each state has a positive incentive to raise its revenue effort and its service efficiency above the national average. If it succeeds, it retains the increase in revenue and all the cost savings, and the national averages for the following years are automatically raised, adding a dynamic dimension to the fiscal and efficiency incentives. In 1997, one of the authors asked the Chairman of the Australian Grants Commission whether the efficiency of the system depended on the relative interregional equality of income evident in Australia. He replied, rightly, “And how do you think it got that way?” Assuring that each citizen has access to quality basic education and health is probably the best single route to remedying both interpersonal and interregional income inequalities in the long term.

Source: Schiavo-Campo and Sundaram (2001).

Nationwide social security safety net10 As an alternative or supplement, a social security network should be able to supply most functions of government transfer payment to the poor without the shortcomings of lump-sum transfer. This is especially true in the transfer payment to individuals. It has an additional merit that could guarantee that the fund actually reaches the poor. In fact, a wellfunctioning social assistance and social security system should be in place before any other transfer payment schemes are introduced. The specific objectives of social security include insurance, protecting people against risks such as unemployment; income smoothing, allowing people to protect their living standards in old age by redistributing income from their younger years; and poverty relief, ensuring at least a minimum standard of living. The changes in labor markets that economic reform brings require a fundamental reform in the old system of income transfers: a widening wage and income distribution means that transfers must be targeted in ways that take more account of differences in circumstances; the loss of job security after SOE reform makes developing unemployment benefits urgent and means that transfers can no

42

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

longer be administered by enterprises. Both these changes call for strengthening the administration of social security. Broadly, social safety nets can take two forms: transfers, whether in cash or in kind; and programs that give people earning opportunities. There is a strong presumption that, where transfers are paid, they should be in cash wherever possible: cash payments leave buying decisions to the recipient, they are more transparent in budgeting, and they do not interfere with market prices. In some circumstances, however, benefits in kind have advantages: they usually maintain their value during inflation, and in specific cases, they may be well targeted and could avoid “hijacking” by local governments. For those in absolute poverty in the Western Region, additional ways to relieve poverty will be necessary, but before such measures can be implemented, the absolute poor must first be identified. There are three broad ways to identify the absolute poor: • Income-tested social assistance. Assistance to individuals or families with incomes below a specified level is appropriate for the lifetime

poor and in cases where contributions cannot be calculated or enforced. But broadly based, income-tested social assistance presents several problems: it creates important disincentives against work; the necessary tax rates are unsustainable for poor countries; determining eligibility is administratively demanding and costly; and income testing can be stigmatizing and intrusive and thus politically contentious. These problems are serious for the Western Region, especially where poverty is transient and often shallow, so that many people move into and out of poverty. • Targeted relief using poverty indicators. It is sometimes possible to identify the poor through an indicator of poverty that is easier to measure than income. For example, an income test for all families with children is administratively costly, but family allowances—a fixed amount per child per month—are paid without income in Australia. Other uses of indicator targeting include help for pregnant women and infants through nutrition programs and medical checkups, and help for schoolchildren through free meals and health checks. Old age, particularly in single-person households, is another good indicator of poverty and is relatively undemanding administratively. • Self-targeted poverty relief. The Government could try to subsidize goods consumed mainly by the poor. Another approach is to offer subsistence cash payments in return for work. Such “workfare” has advantages: the only people who participate are those who are genuinely poor, and recipients may be allowed to preserve their dignity by working. Broader benefits may accrue where the work creates useful infrastructure such as roads. GOVERNMENT BOND FINANCING AND OTHER SOURCES OF PUBLIC FINANCE To improve the efficiency and effectiveness of bond financing, the Government should:

• Improve the regulation system for investment in public debt projects, and strengthen control over the quality of each project and the management of funds. • Ascertain that sufficient complementary funds are in place on time and that the speed of project construction is assured. All the regulations concerning constructors of a project, bidding procedure, monitoring mechanism, quality standards, and default punishment must be well contracted and the relevant authority must have the legal power to carry out and arbitrate the contract. • Obey the budget and the final settlement of accounts strictly to avoid opportunistic behavior. An alternative capital resource would be to issue a construction lottery in the Western Region. Nowadays, the purchase ratio of lotteries in the PRC is rather small, leaving much room to be exploited. Only 6 percent of the population has bought lottery tickets, and there seems to be no market in the rural areas. However, with 6,000,000 million yuan of savings in their accounts, people can afford to purchase the tickets.

Notes 1 This was not the first time since 1949 that the Government had made major changes in the tax system. The Central Government initially assumed financial power, then decentralized it, then assumed it again. The frequent transfer of fiscal power is closely related to the national economic regulation system and changes in economic and political conditions. 2 The formula had two parts: an objective factor that attempted to measure the gap between standard expenditures and local fiscal capacity, and a factor for subsidies to regions with large ethnic minority populations. The latter was in line with the PRC policy for improving the welfare of its minorities.

CHAPTER 2: THE FISCAL SYSTEM

43

3 4 5 6 7

The fiscal shortfall was determined by standard expenses on wages of civil servants, standard administrative expenses, agriculture and other productive expenditures, and other expenditures such as price subsidies. On the other hand, special transfers to provinces with minority regions were determined by the fiscal gap between the minority regions and the national average. In 1996, another factor was added to the formula to reward the provinces for good tax effort. Tax effort is now measured by provincial tax collection relative to the national average. Generally, the transfers that a province was expected to receive in 1999 would be based on its fiscal gap and tax efforts in 1998. Wong, Heady, and Woo (1995). World Bank (2001b). Lunjun Zhang (1999). Zhang and Liu (2001). Report on the Outline of the Tenth Five-Year Plan for National and Economic and Social Development. Delivered at the Fourth Session of the Ninth National People’s Congress on 5 March 2001 by Zhu Rongji, Premier of the State Council:

investment in the Western Region should be collected as a reduced rate of 15% for a certain period of time. Upon approval by the provincial government, enterprises based in autonomous regions, prefectures or counties may also be granted reduction or exemption of corporate income tax for a certain period of time. New enterprises engaged in transport, power, water conservancy postal services, broadcasting and etc. in the Western Region are eligible for a twoyear tax holiday and a 50% reduction for the next three years following the tax holiday. No agriculture tax should be levied for ten years on income from cultivate land for the purpose of ecological protection. By analogy with tax exemption in railway and commercial airport construction, no occupation tax will be collected for taking cultivated land to build state-level highways and province-level highways. Provincial governments in the Western Region should decide on any reduction or exemption of taxes for taking cultivate land to build other types of highways. If domestic or foreign

The system of administrative fees and taxes in

investors invest in the Western Region in sectors

rural areas needs to be reformed by abolishing

where investment is encouraged by the

all administrative fees imposed exclusively on

government or sectors with a competitive edge

farmers, such as contributions to township and

and need to import advanced technology and

village public accumulation funds and at the

equipment to facilitate their invested projects,

same time by raising the current rates of

these imports, except for those not exemptible

agricultural tax and special agricultural product

by government regulations, should be exempted

tax where it is appropriate. This is a sound policy

from tariffs and import value added tax, provided

for safeguarding the legitimate rights and

that the imports are purchased within the total

interests of farmers and reducing their burden.

8 The Circular states: The corporate income tax of enterprises in government-encouraged sectors that are

44

financed with either domestic or foreign

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

amount of investment.

9 Cnossen (1998). 10 The policy recommendations are consistent with the views expressed in World Bank (1997).

CHAPTER

3

THE FINANCIAL SYSTEM The PRC’s financial system has developed more slowly than the economy. It is particularly underdeveloped in the Western Region. This chapter identifies the reforms that will be of particular importance to the development of the Western Region.

Financial system The PRC’s financial system has progressed far from the situation of about 15 years ago when under central planning a single bank performed the functions of both the central bank and commercial banks. The financial system now has three regulatory institutions: • The People’s Bank of China, which supervises banks, credit cooperatives, and other financial institutions outside the insurance and securities sectors • The China Securities Regulatory Commission, which supervises the securities market • The China Insurance Regulatory Commission, which supervises the insurance sector In each of these subsystems, financial reform and deregulation have generally lagged behind developments in the real economy. FINANCIAL INSTITUTIONS SUPERVISED BY THE PEOPLE’S BANK OF CHINA Four state-owned commercial banks are dominant. Each bank has a nationwide network of branches and together they account for more than 60 percent of the financial sector’s assets (Tables 3-1 and 3-2). National and regional commercial banks, credit cooperatives, postal savings banks, and trust and investment companies complement them (Table 3-2). The institutional structure of the financial sector remains weak, especially its risk management and credit analysis functions, and the quality of the banks’ portfolios. Despite efforts to establish commercial criteria in lending, banks continue to act as an extension of the treasury, recycling savings to designated SOEs rather than to the most creditworthy customers. At the same time, the Government expects banks to turn in more profits to offset its shortfalls. Subject to conflicting constraints of this sort, most domestic banks still act like state agencies, and so have little incentive to improve efficiency. This is becoming an urgent problem in view of the fact that WTO accession portends increased

46

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

competition. The People’s Bank of China (PBC) has set the following timetable for allowing foreign banks to conduct renminbi (RMB, PRC currency) business in the domestic market:1 • On accession: Shengzhen, Shanghai, Dalian, and Tianjin • First year: Guangzhou, Qingdao, Nanjing, and Wuhan • Second year: Jinan, Fuzhou, Chengdu, and Chongqing • Third year: Kunming, Zhuhai, Beijing, and Xiamen • Fourth year: Shantou, Ningbo, Shenyang, and Xi’an • Fifth year: All other cities and areas This timetable will exert tremendous pressures on the operation of domestic banks. Since 1993, the PRC financial system has undergone considerable regulatory reform, reflected in more than 25 new laws and regulations, including the Central Banking Law of 1995 and the Commercial Banks Law of 1995. However, the statutory framework is incomplete; there are no statutes for policy banks, rural credit cooperatives (RCCs), postal office savings, and other nonbank financial institutions. SECURITIES MARKET Under the Securities Law of 1998, the China Securities Regulatory Commission has wide-ranging powers to supervise the activities of all organizations participating in the securities markets. The securities markets are still undeveloped. There are two stock exchanges, in Shanghai and Shenzen in the Eastern Region, with 1,088 listed domestic companies and 114 foreign-funded companies. In addition, PRC companies can issue shares denominated in HK dollars on the stock exchange of Hong Kong, China, which offers opportunities for tapping foreign funds. INSURANCE INSTITUTIONS Four laws and bylaws regulate the insurance market: the Insurance Law of 1995, the Probationary Regulations of Insurance Management of 1996, the

Table 3-1 Regulation of Financial Institutions in the PRC Regulatory Institution

Regulatory Responsibilities

Financial Institutions Regulated State-owned commercial banks • Bank of China • Agricultural Bank of China • Industrial and Commercial Bank of China • China Construction Bank

10,400

3

1,524

177

180

City commercial banks

90

555

Incorporated banks • Bank of Communications • Investment Bank of China • CITIC Industry Bank • Others

10

1,450

41,755

1,430

836

120

31,477

458

238

268 24 5 4 n.a.

Finance companies

70

n.a.

Leasing companies

15

n.a.

Securities companies

• Shenyin Wanguo Incorporated Co. • China Nanfan Securities Commission Co. Ltd. • China Huaxia Securities Co. Ltd. • Others

8

23 21 17 n.a.

Stock exchanges

• Shanghai Stock Exchange • Shenzhen Stock Exchange

2

265b

State-owned insurance companies

• China Life Insurance Co. • Zhongbao Property Insurance Co. Ltd. • China Pacific Insurance • Xingjiang Bingtuan Insurance • Others

5

132 47 24 1 n.a.

• Ping’an Insurance Co.

1

45

• Tian’an Insurance Co. • Dazhong Insurance Co. • Xinhua life Insurance Co. • Huatai property Insurance Co. • Yong’an property Insurance Co.

5

9

• Others

6

Banks

Policy banks • China Development Bank • Agricultural Development Bank of China • Export and Import Bank of China Foreign-funded financial institutions

Bank Supervision Department II

People’s Bank of China Cooperative financial institutions

Cooperative Rural credit cooperatives Financial Institutions Department Urban credit cooperatives Postal saving units

Nonbank financial institutions

Trust and investment corporations • CITIC Nonbank • Shanghai International Trust and Investment Co. Financial Institutions • Zhongmei Trust and Investment Co. Department • China National International Trust and Investment Co. • Others

State council

China Insurance Regulatory Commission

Assetsa (109 yuan)

4

Bank Supervision Department I

China Securities Regulatory commission

No.

Incorporated insurance companies

n.a.

Branches of foreign insurance companies

• Youbang Insurance Co. (USA) • Others

13

n.a.

Joint-venture insurance companies

• Zhonghong Life Insurance Co. • Others

13

n.a.

Source: People’s Bank of China (2000); various other sources. a Total asset value. b Total market value.

Table 3-2 Loans Granted by the PRC’s Financial Institutions, 1999 (1) (2) (3) State Banksa Othersb Total (109 yuan) (109 yuan) (109 yuan)

Form of Lending Short-term loans Industry Commerce Construction Agriculture TVEs FIEs Private Others Long- and medium-term loans Trust loans Other loans Total

5,011.3 1,678.6 1,898.9 132.3 174.5 190.5 267.6 30.1 638.8 2,279.2 79.1 7,369.6

1,377.4 116.3 90.2 15.4 304.7 425.6 31 27.8 366.4 117.6 250.5 258.3 2,003.8

(1)/(3) (%)

6,388.7 1,794.9 1,989.1 147.7 479.2 616.1 298.6 57.9 1,005.2 2,396.8 250.5 337.4 9,373.4

78.4 93.5 95.5 89.6 36.4 30.9 89.6 52.0 63.5 95.1 0.0 23.4 78.6

Source: People’s Bank of China (2000). a See Table 3-1. b Other financial institutions include joint-stock banks, regional commercial banks, rural credit cooperatives, trust and investment corporations, and finance companies.

Table 3-3 Deposits and Loans of State-Owned Commercial Banks, 1999

Regions Personal Deposits Eastern Central Southwest Northwest PRC Enterprise Deposits Eastern Central Southwest Northwest PRC Loans Eastern Central Southwest Northwest PRC

Bank of China ABCa ICBC b CCB c Total (109 yuan) (109 yuan) (109 yuan) (109 yuan) (109 yuan) 286 111 44 28 468

484 237 126 73 920

720 376 154 130 1,380

373 184 86 69 713

1,862 907 411 301 3,481

156 53 24 18 251

13 5 5 7 30

466 192 123 76 858

408 143 104 69 725

1,044 393 257 170 1,864

365 139 58 37 598

648 414 226 131 1,419

994 562 259 187 2,002

477 220 119 98 914

2,484 1,335 661 453 4,933

Source: China Financial Yearbook 2000. a Agricultural Bank of China. b Industrial and Commercial Bank of China. c China Construction Bank.

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Probationary Regulations of Insurance Agencies of 1997, and the Probationary Regulations of Insurance Brokers of 1998.The China Insurance Regulatory Commission, established in 1998, supervises the activities of 43 insurance companies with four different types of ownership (Table 3-1).

Financial system in the Western Region There is a great gap between the financial industry in the Eastern Region and that in the Western Region. The economy of the Western Region now accounts for only 15 percent of GDP, and GDP per capita is only 63 percent of the national average. Inevitably the financial industry is underdeveloped, has insufficient funds, and has little capability to support economic growth.This is evident from the following characteristics: • Small scale of lending • Lack of incentives for lending • Lack of direction in the activities of the policy banks • Slow development of local financial institutions • Lack of equity finance • High concentration of financial markets • Primitive insurance industry • Absence of foreign banks • Difficulty of obtaining loans SMALL SCALE OF FINANCE In the Western Region, the scale of finance is small, and most loans are from the state-owned banks. At the end of 2000, financial institutions had savings balances of 2,031,100 million yuan, or 16.4 percent of the national total, and loan balances of 1,728,000 million yuan, or 17.4 percent of the national total. The savings balance per capita is only about 65 percent of the national average.The added value of banking and insurance industries accounts for 15 percent of the added value of the two industries throughout the PRC (1999). By the end of 2000, the savings balance of the state-owned banks in the Western Region was

79.5 percent of that of all the financial institutions in the PRC and 6.1 percent higher than the national average, while their loan balance was 82.4 percent of that of all the financial institutions and 5.5 percent higher than the national average. The state-owned banks’ loans in the Western Region are of poor quality and profitability.The high ratio of bad loans is due to historical reasons, such as the reform of poorly performing SOEs prevailing in the Western Region. Other than Sichuan,Yunnan, Gansu, and Xinjiang, the state-owned banks have a higher ratio of bad loans than the national average, adversely affecting profitability and the ability to make further loans. After corporatization, the commercial banks have been more interested in shifting savings from the Western Region to the more profitable Eastern Region.This has contributed to the shortage of loan finance in the Western Region. LACK OF INCENTIVES FOR LENDING Banks have less incentive for lending to the Western Region because they perceive the risks to be high. The inflexible interest rate system also prevents banks from charging a higher interest rate or transaction fee to compensate for the risks. Reforms that focus on slowing the accumulation of nonperforming loans make banks averse to risk. Indeed, the central bank requires all banks to implement a policy called Responsibility to Individuals, which makes each credit officer personally responsible for loans. Most banks in the Western Region are state-owned and face limited competition, so the profit incentive is weak. Therefore, they show little interest in riskier projects that have higher net present value. Adding to their reluctance are controls on interest rates and restrictions on transaction and monitoring fees. Inability to flexibly adjust interest rates discourages banks from providing loans to risky projects. Projects must be rationed to obtain finance, encouraging rent seeking and corruption. Progress has been made to relax restrictions; for example,

interest rates on loans to SMEs may vary within 30 percent of the prescribed rates, and RCCs can charge interest up to 50 percent higher than the basic interest rate.2 Further liberalization is necessary to encourage lending to the Western Region. Collateral and guarantees could overcome the risk barrier. In the Western Region, the lack of suitable guarantees and collateral is the most frequent reason for an enterprise not being able to obtain a bank loan. Although local governments and other firms are allowed to provide guarantees, recently such guarantees have contributed in large part to the soft budget constraints for firms, especially in rural areas. Because the central bank discourages both government and firm-to-firm guarantees, providing collateral has become the only way for most firms to obtain a bank loan. Yet many firms are unable to provide adequate collateral. A recent study by the International Finance Corporation (IFC)3 revealed that about 75 percent of private firms in the Western Region regard collateral as a moderate or major obstacle to obtaining bank loans. PROBLEMS OF POLICY BANKS In 1994, the PRC set up three policy banks: the Agricultural Development Bank of China (ADBC), the China Development Bank (CDB), and the Export and Import Bank of China. At the end of 1999 their combined assets were equivalent to 15 percent of the combined assets of the big four state commercial banks. After several years’ operation, they have demonstrated awareness of their social obligations, but they also have some problems. They compete against commercial banks in the use of funds and lend to profit-making operations, a diversion from the pursuit of social objectives. In the case of ADBC, which is perhaps the most relevant to the Western Region, around 50 percent of loans were lent to the Central Region, 15 percent to the Western Region, and 28 percent to the Eastern Region (Table 3-4). In 1998, the State Council intervened in ADBC operations to curb the diversion of funds to loss-making enterprises, leading to big

CHAPTER 3: THE FINANCIAL SYSTEM

49

Table 3-4 ADBC Loans, 1999 and 2000 1999 Region

2000

Amount (million yuan)

Eastern Central Western Southwest Northwest Unclassified PRC

ADBC has a defined scope of operation, there is scope for expanding the ADBC policy role in new directions.

%

Amount (million yuan)

%

201,000 349,300

28 48

199,500 373,900

27 51

59,200 75,500 42,500 727,500

8 10 6 100

60,900 74,600 31,300 740,100

8 10 4 100

Source: Almanac of China’s Finance and Banking 2001.

Table 3-5 RCCs’ Contributions to the Financial System, 2000

All deposits Savings deposits All loans Agriculture loans

RCCs (%)

Other Financial Institutions (%)

All Financial Institutions (%)

12.2 19.2 10.6 73.4

87.8 80.8 89.4 26.6

100.0 100.0 100.0 100.0

Source: People’s Bank of China (2001).

Table 3-6 Deposits and Loans of Rural Credit Cooperatives, 1999 and 2000

Region Eastern Central Western Southwest Northwest PRC

County Population (million)

1999

2000

1999

2000

Per Capita Loans in Counties 2000 (million yuan)

279,000 286,900

832.3 289.9

945.7 577.6 330.5 192.7

659.7 218.1

2,364.5 760.2

147.7 162.0 107.9 118.4 66 74.6 44.4 52.6 1,335.8 1,512.9 922.6 1,048.9

696.1 699.5 1,292.9

170,100 75,200 811,300

Deposits (million yuan)

Loans (million yuan)

Source: Almanac of China’s Finance and Banking 2001.

improvements in the bank’s grain purchasing closedfund operation.4 With the State Council’s adjustment in Grain Reform Policies and implementation of the Reforestation of Arable Land Project and the Planting Grass and Trees Project, ADBC’s grain purchasing operation will continue to shrink. However, because

50

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

SLOW DEVELOPMENT OF LOCAL FINANCIAL INSTITUTIONS Local financial institutions—which include national and regional commercial banks, trust and investment companies, RCCs, urban cooperative banks, and urban credit cooperatives—are growing slowly. They have a high ratio of bad loans and the number of branches has begun to shrink. The state-owned commercial banks have a monopoly position in the Western Region, while the local financial institutions are less developed. From 1997 to 2000, the loans granted by legal local financial institutions contributed only 7 percent to GDP. Rural credit cooperatives Under Article 8 of the Constitution, RCCs are collectively owned by the working people. During their life of 50 years, RCCs have gained momentum in developing the rural economy and have now become an important tie connecting farmers to the financial system. By the end of April 2001,5 savings in RCCs throughout the country had reached 1,580,000 million yuan, making up 12 percent of the total savings in the financial sector. Loans by RCCs totaled 1,050,000 million yuan, or 10 percent of all financial sector loans. RCCs are even more important in lending to the agriculture sector. Although RCCs contributed only 10.6 percent of total loans in 2000, they accounted for 73.4 percent of loans to the agriculture sector (Table 3-5). RCCs also had a slightly higher profit rate in the 1990s than the ABC.6 Their average profitability was 1.2 percent, which compares favorably with the profitability reported by the ABC (0.4 percent). Their profit rate declined recently because of the low recovery rate of TVE financing and the accumulated bad loans. However, the Western Region is falling behind in the development of RCCs:

• Per capita RCC loans in the Western Region in 2000 amounted to only around 700 yuan per county person, less than one-third of the level in the Eastern Region (Table 3-6). • RCCs have less incentive than the state-owned commercial banks to provide loans to the Western Region. In 2000, the Western Region received 23 percent of the loans of state-owned commercial banks but only 16 percent of RCC loans (Table 3-7). • RCCs have a high percentage of nonperforming loans in the southwest (Table 3-8). A snapshot of a balance sheet of RCCs also reveals that RCCs may not be using their liabilities effectively (Table 3-9). In the last quarter of 2000, RCCs had excess reserves (cash in vault) of 32,700 million yuan, accounting for 14.5 percent of total reserves and 2.3 percent of total assets. As identified by the State Council,7 RCCs had less incentive to supply loans for higher-risk projects. In the case of defaults, RCCs receive either less or no government guarantee than other state-owned commercial banks. Postal savings banks Postal savings banks are another unexplored source of loans to the Western Region. In 2000, such banks had total saving deposits of 80,900 million yuan in the Western Region. Under the current management arrangements, all postal savings have to be kept in the PBC in the form of cash reserves (Table 3-10).

Postal savings banks and RCCs are competing in the savings deposit market; postal savings enjoy the advantage of being a safer form of deposit, with PBC as the guarantor. On the other hand, postal savings banks and RCCs do not compete in the loans market because postal savings banks are not allowed to lend to clients. Table 3-7 Regional Distribution of RCC Loans, 2000 State-owned Commercial Banks 9

Region

Amount (10 yuan)

Eastern Central Western Southwest Northwest PRC

RCCs Amount (109 yuan)

%

%

2,484 1,335

50.4 27.1

659.7 218.1

62.8 20.7

661 453 4,933

13.4 9.2 100

118.4 52.6 1,048.9

11.2 5.0 100

Source: Almanac of China’s Finance and Banking 2001.

Table 3-8 Nonperforming Lans of RCCs, 1999 Accumulated Loans Receivable at the End of 1999 Nonperforming (million yuan) Loans (million yuan)

Region Eastern Central Western Southwest Northwest PRC

Percentage of Nonperforming Loans (%)

637,400 124,800

53,800 13,400

8.4 10.7

73,300 36,600 872,100

16,500 4,800 88,500

22.6 13.1 10.2

Source: Almanac of China’s Finance and Banking 2000 .

Table 3-9 RCC Balance Sheet, Fourth Quarter, 2000 Assets Type Reserve assets Required reserves Deposits with the PBC Cash in vault Central bank bonds Claims on Central Government Claims on other sectors Claims on nonmonetary financial institutions

Total

Liabilities Amount (million yuan) 223,250 190,540 32,710 50,070 1,116,190 3,550

1,393,060

Type

Amount (million yuan)

Liabilities to nonfinancial sector Demand deposits Time deposits Household deposits Other deposits Liabilities to central bank Liabilities to nonmonetary financial institutions Bonds Paid-in capital Other items (net) Total

1,512,890 228,830 38,810 1,235,530 9,720 39,970 290 71,600 –231,690 1,393,060

Source: Almanac of China’s Finance and Banking 2000 .

CHAPTER 3: THE FINANCIAL SYSTEM

51

Table 3-10 Postal Savings Deposits, 2000 Region

market has so far served primarily to finance SOEs and help them take the first steps to diversifying their ownership. Private firms have had limited access. Although no explicit rules in the Securities Law of 1998 or in administrative regulations prevent nonstate firms from making it to the stock market, either by making an initial public offering (IPO) or by buying into listed companies, of the 976 companies listed on the Shanghai and Shenzhen stock exchanges, only 11 are nonstate firms. In 1998 and 1999, only four nonstate-firm IPOs took place. Table 3-11 illustrates the discrepancy between listed companies in the Western Region and other regions of the PRC. From the perspective of the sources of funds, the percentage of liabilities is too high, while the percentage of equity is far too low. In 1999, there

Amount (million yuan)

Eastern Central Western Southwest Northwest PRC

231,300 145,700 43,600 37,300 457,900

Source: Almanac of China’s Finance and Banking 2001.

LACK OF EQUITY FINANCE Stock markets Equity finance has been small in percentage terms and narrow in range of application, and the capital markets are expanding slowly. Economic growth has depended mainly on loans. The stock

Table 3-11 Comparison of Listed Companies in the Western Region, 1999

Region Southwest Chongqing Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Western Region PRC

Listed Companies % of Listed Companies In the Outstanding In the Western Shares No. PRC Region (millions)

22 20 10 7 8 14 14

2.4 2.2 1.1 0.8 0.9 1.5 1.5

20 10 7 8 14 14 164 923

2.2 1.1 0.8 0.9 1.5 1.5 17.8 100.0

Total IPOs Average IPO % of Listed Companies % of Listed Companies In the Outstanding In the In the Western Shares In the Western PRC Region (millions) PRC Region

12.2 6.1 4.3 4.9 8.5 7.4

745 403 192 295 524 754

1.9 1.1 0.5 0.8 1.4 2.0

12.1 6.6 3.1 4.8 8.5 10.2

3,702 4,028 2,742 3,681 3,717 5,383

89.4 97.3 66.2 88.9 89.8 130.0

98.8 107.5 73.2 98.3 99.2 140.0

12.2 6.1 4.3 4.9 8.5 7.4 100.0

745 403 192 295 524 754 6,143 38,217

1.9 1.1 0.5 0.8 1.4 2.0 16.1 100.0

12.1 6.6 3.1 4.8 8.5 10.2 100.0

3,702 4,028 2,742 3,681 3,717 5,383 3,746 4,140

89.4 97.3 66.2 88.9 89.8 130.0 90.5 100.0

98.8 107.5 73.2 98.3 99.2 140.0 100.0 110.5

Source: China Securities Yearbook 2000. Note: Employees’ shares are not included.

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were 164 listed companies in the Western Region, accounting for 17.8 percent of all the listed companies in the PRC. Together, they pooled 61,428 million yuan, accounting for 16.1 percent of the national total.8 Difficulties in listing Listing difficulties are among several obstacles to the development of equity markets in the Western Region. Until recently, the region had several regional stock markets for SMEs. These markets were under the control of local governments; some ran quite well and helped finance the growth of local firms. During its reform of financial markets, however, the Government closed these regional markets. Nonstate firms are now trying to gain access to the market by buying a controlling (often relative rather than absolute) interest in an SOE. In March 2000, the China Securities Regulatory Commission announced that the system of quotas for listings would end, and underwriters would determine the timing and pricing of new issues. Private firms should then have greater opportunity to attain long-term funding from the equity market. During the current transitional period, however, many SOEs approved for listing under the quota system have yet to come to market. Therefore, a bottleneck in offerings still prevents nonstate firms from coming to market.9 Restrictive listing requirements Listing requirements are rather restrictive, such that many private firms in the Western Region are too small or have not operated long enough to qualify for listing. Also, they may not qualify because of poor profitability, although many high-technology companies are attractive investments despite low profitability in their initial years. Under proposed listing rules for the Second Trading Board, companies would not have to demonstrate a history of profitability to be listed. Furthermore, their proportion of intangible assets could be as high as 70 percent, but they would have to disclose their corporate information every three months. The capital required

to obtain a listing is expected to drop from the main boards’ 30 million yuan to 20 million yuan. This is progress, although the need for such a high minimum level of capital can still be questioned. Difficulties in share buybacks An investor must be able to sell his shares if an IPO is not possible. One alternative as part of the investment arrangements would require that a company or its major shareholder buy back the investor’s shares at some point in the future. A company buyback would result in the cancellation of the shares, and the law does not permit a company to repurchase its own shares, except when canceling shares in order to reduce the company’s capital or when merging with another company or companies that hold its shares. Otherwise, cancellation of shares must be subordinated to the consent of the investor, the other shareholders, and the company’s creditors, either through a stipulation of the possibility of cancellation in the company’s articles of association or through a subsequent amendment approved by the stockholders. These rules were instituted to protect the rights of the investor, creditors, and shareholders. In the case of a company buyback negotiated by the investor, there is no question of any infringement of the investor’s rights. Creditors have other means at their disposal—such as covenants to prevent management actions detrimental to their position—that are far more meaningful than any detriment arising from the erosion of capital through share cancellation. These means seem sufficient to protect shareholders. A simple solution would be to amend company law to permit share buybacks from investors unless expressly forbidden by a company’s articles of incorporation (which themselves could be amended by shareholders). CONCENTRATION OF FINANCIAL MARKET Table 3-12 lists the concentration of financial activities in the Western Region. Xi’an and Chengdu dominate financial loans of rural credit cooperatives,

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Table 3-12 Financial Activities in the Western Region, 1999 Loans

Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Western Region

Bonds Issued by Companies (%)

Rural Credit Cooperatives (%)

Urban Credit Cooperatives (%)

Commercial Banks (%)

Representative Agencies of Foreign Banks (no.)

Branches of Foreign Banks (no.)

12.4 23.0 0.5 1.3 0.0 15.2

11.2 34.7 3.7 10.7 0.0 10.5

0.0 57.8 0.0 0.0 0.0 0.0

9.6 20.7 6.5 12.6 0.6 8.3

4 7 0 1 0 2

1 1 0 1 0 0

15.4 2.5 5.3 6.3 4.8 13.2 100.0

15.0 5.3 0.5 1.1 0.0 8.6 100.0

42.2 0.0 0.0 0.0 0.0 0.0 100.0

13.0 7.2 2.6 2.6 8.6 7.7 100.0

0 0 0 0 0 0 14

0 0 0 0 0 0 3

Source: Almanac of China’s Finance and Banking 2000

urban credit cooperatives, and commercial banks in the region. Foreign banks are also more likely to choose Chengdu as the place to set up branches or representative agencies. INSURANCE INDUSTRY The insurance industry in the Western Region is backward, and there is relatively low demand for and supply of insurance. By the end of 2000, only two insurance companies had registered in the region. Seven nationwide insurance companies had 226 branches, and there were 28,000 insurance practitioners.These are far less than the standards in the Eastern Region. By the end of 1998, the premium income in the Western Region was 18,300 million yuan, or 14.7 percent of national premium income. Property insurance premiums amounted to 8,370 million yuan, 45.7 percent of total premium income in the Western Region, while life insurance premiums totaled 9,930 million yuan, or 54.3 percent. The ratio of premium income to GDP (insurance depth) in the Western Region is 1.55 percent, compared with Shanghai’s 2.79 percent; premium income per capita (insurance density) is 64.2 yuan, compared with the PRC’s 99.9 yuan, Shanghai’s 788 yuan, and Guangdong’s 181 yuan. Compared with the Eastern Region, the insurance industry is yet to develop. The insurance companies are slow in developing new products, and are more labor-intensive. Their

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management is relatively weak and the practitioners are relatively poor-quality. ABSENCE OF FOREIGN BANKS The financial industry in the Western Region is less open to the outside world. By the end of 1999, there were 162 branches and subbranches of foreign banks in the PRC; of these, 93 (57.4 percent) were in Shanghai, Shenzhen, Beijing, and other eastern cities, but only three (1.85 percent) were in the Western Region. Five provinces in the northwest, as well as Guizhou and Tibet, have none. Foreign financial institutions have not yet stepped into the securities and insurance market of the Western Region. FOREIGN DIRECT INVESTMENT International financial flows have underpinned the growth of the PRC’s economy. The flows fall into two main categories: external loans ($10,212 million in 1999) and FDI ($40,319 million in 1999).10 External loans alone, the smaller category, amounted to 0.3 percent of the PRC’s GDP in 1999. There was a surge of FDI in the 1990s. In 1998 the PRC was the third largest recipient after the US and the UK. The $43,751 million in FDI that year was 74 percent of the peak achieved in 1995, inflows having dropped with the Asian financial crisis. Most of the FDI goes to the Eastern Region (Table 3-13).

In December 1999 the Government announced tax concessions for FIEs to apply to the Central and Western regions. The main attractions of the PRC for FDI are the size of the domestic market (mainly a medium- and long-term attraction) and the low manufacturing wages for the assembly of goods for the export market (the immediate attraction). The tax concessions are unlikely to have much impact on FDI, and the tax concession approach is unsatisfactory for the reasons stated in Chapter 2. The Government’s other approach is to guide foreign investment to the Central and Western regions through a catalog of projects11 —a list of projects in primary, secondary, and lower-level demand in a given industry. In reality, this represents hope rather than expectation. From December 1997, the Guiding Catalogue of Foreign Investment Industries extended tax concessions to certain industries in the Western Region. In June 2000, the Advantageous Industry Catalogue of the Foreign Investment in Central and Western China12 introduced further concessions. If the policy objective is to promote FDI for the assembly of goods for the export market, the Eastern Region is bound to attract most of the FDI. However, the more the Government accepts FDI for sales to the domestic market, then the more attractive the Western Region’s position will become. The Government measure most likely to encourage FDI in the Western Region would be to further open up opportunities for FDI in the process of SOE reform and corporate restructuring, that is, through mergers and acquisitions.The SOEs that restructure most quickly would gain a competitive edge, thus raising the potential return to foreign investors. Another point is that Western Region SOEs account for a much larger share of local industrial output than do SOEs in the Eastern Region. LOANS AND ASSISTANCE FROM INTERNATIONAL FINANCIAL ORGANIZATIONS The Ministry of Finance is responsible for the management of overseas borrowing by the Central

Table 3-13 Foreign Direct Investment in the PRC, 1999 Contracted Region Eastern Central Western PRC

Projects No. % 13,953 2,100 865 13,953

82.5 12.4 5.1 100.0

Amount (US$ million) 35,065 4,118 2,040 41.223

Actual Amount % (US$ million)

85.1 10.0 4.9 100.0

35,434 3,747 1,139 40,319

% 87.9 9.3 2.8 100.0

Source: Almanac of China’s Foreign Economic Relations and Trade 2000.

Government and local governments. The major lenders are the World Bank, the Asian Development Bank (ADB), the Japan Bank for International Cooperation, and various foreign governments (Table 3-14). CONCESSIONAL EXTERNAL ASSISTANCE There has been a decline in concessional financial assistance to developing countries from bilateral and multilateral organizations.Total concessional assistance to developing countries in 1998 was $32,700 million, 2.1 percent below the 1997 level and 27 percent below the 1990 level. As developed countries tighten their fiscal spending, concessional financial assistance will continue to decrease. Therefore, there could be intensive competition for these funds in the future. Empirical studies have shown that under a stable environment with sound economic policy, financial assistance from bilateral and multilateral organizations could induce private investment and reduce investors’ perception of risk.13 This will create an environment conducive to attracting private investment to the Western Region. The PRC has established bilateral credit relations with 19 countries and regions. Japan accounts for two-thirds of loans from foreign countries. In 1998– 1999, the PRC contracted $4.82 million in loans with Japan for 44 projects, including many related to Western Region development. The PRC has

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Table 3-14 Summary of External Assistance to the PRC

External Source

Period

Multilateral Assistance ADB UNDP World Bank Bilateral assistance Australia Canada France Germany Italy Japan Spain United Kingdom United States

1999 1996–2000 2000 2000 1998 1997 1998 1996–1998 1998 1997 2000–2001 1997

Ordinary Loan (US$ million)

Soft Loan (US$ million)

Mixed Credit/Export Credit (US$ million)

1,258.5

Grant Assistance (US$ million) 19.9 194.1

2,127.0

25.0 32.9 47.4

791.5 c

50.8 601.8a 235.8 b 3,714.3d 600.0e 16.0

12.8

n. a. 700.0

76.2 14.0 140.0 n. a. 30.0

Source: Asian Development Bank (2000a) a Includes $304 million in market funds. b Includes export credits. c Untied loans from Japan Export-Import Bank. d Financial year 1999–2000. e Includes some mixed credits and export credit.

established a stable and cooperative relationship on a long-term basis with international organizations. ADVANTAGES OF FOREIGN LOANS FOR THE WESTERN REGION There are many benefits from loans from bilateral and multilateral agencies. International links With the PRC’s accession to the WTO, the Western Region will open further to the outside world. Thus, developing relationships with bilateral and multilateral agencies are important to help the world understand the PRC and its influence on world economic development. The use of loans from international agencies will give the outside world confidence in the economic prospects of the Western Region, and thereby create a favorable environment for FDI. Technical advantages The World Bank and ADB play important roles in institutional innovation, sustainable growth, support for the private sector, environmental protection, and poverty alleviation. The projects are carefully planned and controlled by the Government to the benefit of

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key strategic government policies. By its very nature, the process of economic reform takes government agencies into areas in which they lack technical expertise. Financial advantages The funding source is relatively stable as there is a minimum of influence from fluctuations in the international market. Even if incidents in the international capital market were to reduce capital inflows, loans from the World Bank and ADB could still serve as a guaranteed inflow. Loans from international organizations are mainly for infrastructure, environmental protection, social development, and poverty reduction, in line with the government’s strategy for the Western Region.These loans could alleviate shortages in public finance. Under the PRC’s public finance framework, loans from international organizations have a special role that FDI cannot provide. Large scale Foreign loans normally come in larger lumps than FDI, the typical size being $100 million, suitable for major projects. Loans from international organizations and foreign governments are also long-term and at

low interest rates, and bring the benefits of competitive procurement to international standards. Experience has shown that with loans from international organizations and less administrative intervention, the cost of large and medium-sized projects in the PRC drops by 20–30 percent.14 DISADVANTAGES OF FOREIGN LOANS FOR THE WESTERN REGION Repayments In the absence of a standard system for paying off foreign debts, the local governments exhibit moral hazard and competition in seeking projects. Since the Ministry of Finance guarantees loan repayments, it is ultimately responsible for them. According to national regulations, local governments and the specific agencies are responsible for the debts, even if they are sovereign foreign debts under the charge of the Ministry of Finance. However, the experience of the Ministry of Finance in recovering debts from local governments indicates that there are some problems. Although some methods such as budgetary deduction have been adopted to solve the problem, they are just temporary solutions. As the local governments in the Western Region are financially weaker than those in the Eastern Region, the strategy of relying on loans from international agencies may prove difficult to implement. Counterpart funds The limit of counterpart funds is likely to become one of the main restrictions on the use of foreign loans in the Western Region. ADB loans, on average, have accounted for about one-third of the total project cost requirements.15 The local governments in the Western Region, because of their limited fiscal revenues, are incapable of meeting the repayment conditions and of providing counterpart funds. Seven provinces and autonomous regions are in the bottom ten in the ranking of per capita fiscal revenues. Four are in the bottom five (Table 3-15). All these provinces and autonomous regions rely on government transfer

payments to provide basic public services, and can hardly be expected to provide sufficient counterpart funds to complement foreign loans. Interest rates The phenomenon of crowding out the use of foreign loans has recently arisen. For the last three years, the PRC has followed an expansionary fiscal policy. Interest rates have fallen to a low level. Domestic commercial banks are willing to provide loans to infrastructure projects that promise good returns. The procedure of applying for foreign loans is complex and the management requirements are restrictive. These considerations have induced a shift from foreign loans to domestic loans. Procedures and project implementation The procedures for applying for domestic loans and foreign loans are different and hard to coordinate. There are several explanations: the special

Table 3-15 Per Capita Fiscal Revenues and Expenditures, 1999

Region Eastern Central Western Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Per Capita Fiscal Revenues (yuan) Rank a 995.5 315.9 263.1 250.1 248.2 201.6 414.3 179.9 284.5 320.9 295.0 230.6 279.8 348.6 403.9 367.8

Per Capita Fiscal Expenditures (yuan) Rank(a) 1,340.3 597.6

25 27 30 12 31 21 20 29 23 16 13 15

810.4 489.8 426.6 463.4 907.0 2,096.5 479.3 827.7 572.6 583.9 1,100.1 916.4 944.5 849.0

25 30 29 10 3 27 21 19 6 9 8 13

Source: China Fiscal Yearbook 2000. a Ranking is out of 31 provinces, autonomous regions, and municipalities governed directly by the Central Government.

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requirements of international financial organizations, the inflexible procedures of central and local agencies that approve and evaluate loans, or the peculiarities of the various project proponents. Without adequate preproject preparations, arbitrary changes may take place in the later stages of project implementation, with adverse consequences for the completion date and procurement efficiency. Nonprofessional attitudes can damage the international reputation of the PRC. Exchange rate risks The exchange rate and interest rate risks are significant. The lack of financial instruments for hedging in the PRC heightens these risks. There are strict controls on the capital account, while the

current account is flexible, and the renminbi cannot be converted freely. The relaxation of controls on interest rates is progressing, but the interest rates for deposits and loans have not yet been marketized. While the long-term, large-value foreign loans cannot keep up with volatile changes in the international financial market, fixed rate and currency type are liable to cause great risks.

Implications for financial policies A summary of policy options for the financial system is contained in Table 3-16). More discussions are in the following subsections.

Table 3-16 Summary of Policy Options for the Financial Systema Strengthen the Informal Financial Market

Encourage Overseas Financing

Establish a regional financial center to facilitate direct financing

Launch a public awareness program to encourage formal contracting in the informal market

Follow WTO principles and establish an integrated financial market

Facilitate effective use of RCCs’ excess reserves

Encourage more new listings and relax listing requirements

Empower the courts to guide policy and arbitrage disputes

Effectively implement policies opening up the renminbi business to foreign banks and insurance companies

Allow the establishment of credit guarantee companies

Fully utilize the infrastructure and expand the functions of postal savings

Broaden and strengthen the range of exit mechanisms available to investors; simplify share buybacks

Initiate governmentfunded demonstrations of institutional innovation by the Eastern Region in the Western Region

Establish credit agencies and allow banks to access external information and credit records

Establish a postal savings bank to lend to the rural poor

Establish a legal framework to develop private equity markets such as a venture capital market

Promote Nonbank Financial Intermediaries

Use Capital Market and Direct Financing

Liberalize the interest rate scheme

Encourage RCCs to lend to the Western Region by providing interest rate subsidy

Institute a transparent and accountable financial system with less preferential policies to establish a level playing field

Allow banks to charge monitoring fees

Promote a diversified and overlapping banking system to enhance specialization and competition

Strengthen Institutions

Strengthen Bank Incentives

Establish a complete legal framework for the policy banks, RCCs, and the proposed postal savings bank

Strengthen land use rights of farmers to facilitate financing a

Excludes international and bilateral assistance.

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Box 3-1 A Diversified Banking System in Australia

I

n addition to banks, financial institutions such as building societies, credit unions, and merchant banks play an important part in the Australian financial system. In the Australian Financial Accounts, “Other Depository Institutions” are defined as those with liabilities included in the Reserve Bank’s definition of broad money. Nonbank institutions included in broad money are other authorized depository institutions (building societies and credit cooperatives), corporations registered under the Financial Corporations Act of 1974 in categories D (money market corporations), E (pastoral finance companies), F (finance companies), and G (general financiers), and cash management trusts. The following table shows the total assets of each category of nonbank deposit-taking institution.

Total Assets of Other Depository Corporations, 1998–2000 Amounts Outstanding at 30 June (A$ million)

Permanent building societies Credit cooperatives Money market corporations Pastoral finance companies Finance companies General financiers Cash management trusts Total

1998

1999

2000

11,801 18,205 67,636 3,545 43,729 16,704 18,676 180,296

12,697 19,881 60,860 4,039 47,173 18,289 21,531 184,470

12,395 19,172 63,703 5,922 44,272 20,632 23,804 189,900

There are seven categories of other depository corporations. Permanent building societies are usually organized as financial cooperatives. They are authorized to accept money on deposit. They provide finance principally in the form of housing loans to their members. Credit cooperatives, also known as credit unions, are similar to building societies. As their name implies, they are organized as financial

STRENGTHEN INSTITUTIONS The banking system in the PRC needs institutional strengthening to provide better services to the Western Region.The Government should consider these policy options: • Establishing a complete legal framework to grant statutory provisions to all financial institutions. Particular attention should be paid to the statutory provisions of the three policy banks, numerous RCCs, and the proposed postal savings bank. • Promoting a diversified banking system to deepen financial market penetration and promote competition. A diversified banking system helps to serve various clients with different needs and requirements. In Australia, there are seven types of quasi banks

•

•

•

•

cooperatives that borrow from and provide finance to their members. Credit cooperatives mainly lend for purposes other than housing. Supervision of building societies and credit cooperatives was transferred to the Australian Prudential Regulatory Authority on 1 July 1999, and from 1 July 2000 these institutions are no longer subject to the Financial Corporations Act of 1974. Money market corporations are similar to wholesale banks and for this reason they are often referred to as merchant or investment banks. They have substantial short-term borrowings which they use to fund business loans and investments in debt securities. They are registered as category D financial corporations under the Financial Corporations Act of 1974. Pastoral finance companies incur liabilities to lend to rural producers. They are category E financial corporations. Finance companies (category F financial corporations) borrow mainly on financial markets, for example, by issuing debentures. They lend these funds to both businesses and persons. Their lending to businesses is sometimes called commercial lending and covers, for example, financial leasing of vehicle fleets. Their lending to persons is often in the form of installment credit to finance retail sales by others. In contrast with finance companies, general financiers (category G financial corporations) are funded by their parent company or another member of their company group. Typically they lend to corporate customers which buy products produced by member companies of their group. For example, a general financier within a motor vehicle manufacturing group will lend to the group’s dealers to finance their inventory of vehicles. Cash management trusts are investment funds that are open to the public. They invest the pooled monies of their unit holders mainly in money market securities such as bills of exchange. As with other public unit trusts their operations are governed by a trust deed and their units are redeemable by the trustee on demand or within a short time. They are not subject to supervision by the Australian Prudential Regulatory Authority or registered under the Financial Corporations Act of 1974.

complementing the operations of four commercial banks (see Box 3-1). Establishing a level playing field for SOEs and the private sector so that firms gain equal access to bank finance irrespective of ownership. Requiring state commercial banks to pay attention to the financial risks, and to determine loan applications and interest rates according to the financial risks involved. Paying attention to the ratio of loan financing and equity financing.To increase enterprises’ capital through equity financing, there is a need to develop equity markets. Coordinating policy-oriented and commercial financing.The policy banks should stick to their core functions while the commercial banks expand commercial lending.

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• Coordinating domestic and foreign funds, and attracting foreign funds to the Western Region in order to expand the total investment. • Introducing incentives for system innovation, more activity by financial institutions, and better performance of financial services. Direct the central bank to support commercial financing The central bank should direct and support the development of commercial financing in the Western Region. It should not stipulate the legal reserves requirement of financial institutions only on the basis of differences between regions.16 Rather, the central bank could implement differentiated legal reserve requirements for the small and medium cooperatives or joint-stock financial institutions in the Western Region. In doing so, it would facilitate central bank operations and increase the funds to be used in the Western Region.17 Encourage lending by policy banks In the short term, the policy banks should take the lead in increasing investment in the Western Region. However, in the long run the major source of funds should be commercial funds. Commercial financing will generate the momentum for the sustainable development of the Western Region. The construction of major infrastructure needs medium- and long-term loans. Hence, the State Council has decided to appropriate more funds from treasury bonds, fiscal revenues, and favorable loans from international financial institutions toward the development of the Western Region. However, the amount of treasury bonds and fiscal appropriation is limited. Policy banks should therefore be encouraged to participate.18 In the process of developing the Western Region, policy banks should not be profitdriven and should concentrate on their core functions.The key reason that policy-oriented banks tend to diversify is shortage of funds. There is a need for effective measures to tackle this problem. The following suggestions are just a few possibilities:

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• Policy banks could issue a rolling 20- or 30-yearterm Western Region Development Bond with the guarantee of fiscal revenue. The bonds could be sold to commercial banks, individuals, and corporate entities. They could be listed on the stock exchange and should have the status of treasury bonds. • Some part of postal savings funds and pension funds can form the fixed source of funds of policy banks. • The central bank can re-lend to policy banks and extend the loan term according to their use of funds. • Policy banks could be allowed to get funds from foreign financial institutions and financial syndicate with the guarantee of the State. Given the shrinkage in ADBC’s operation, its scope of operation in the Western Region can be adjusted or expanded. ADBC should do more in respect of the following to replace its activities in purchasing, reserving, and appropriating grain: • Sharing the burden of developing the Western Region with CDB. While CDB supports largescale infrastructure projects, ADBC could support small- and medium-scale infrastructure projects, environmental protection projects, and industries characterized by strong competitive advantages as a result of special geographical location, climate, or culture. • Taking over the management of the Beautiful Mountains and Rivers Projects to improve environmental conditions in the Western Region. • Taking over agriculture development loans from commercial banks, and special loans and antipoverty loans from the central bank. • Managing an Area Planting Fund to utilize the proceeds of a carbon tax (Chapter 4). In order to contribute more to the development of the Western Region, CDB should set up branches and provide long-term credit to support the construction of infrastructure. Policy banks should learn from the World Bank and ADB and provide technical assistance funds to the

Western Region for use in preparing and analyzing the projects to which they will be making loans. This will increase the possibility of loan success and reduce the financial risks. Use state-owned commercial banks to finance large-scale projects The state-owned commercial banks have the advantages of larger scale and assets. They are more suited for the financing of large-scale projects, based purely on commercial principles. Government subsidies to projects should preferably come from policy banks.The policy banks should increase medium- and long-term loans to the Western Region to improve infrastructure. This in turn can foster a favorable environment attracting large amounts of commercial funds into the Western Region. STRENGTHEN BANKS’ INCENTIVES An important step would be to strengthen profit incentives through private ownership and competition. At present, the ownership structures of the real sectors do not balance with those of the financial sectors. Private ownership in the financial sector is practically nonexistent. The Government should allow the entry of private financial institutions, especially as WTO membership will open up opportunities for foreign financial institutions. To ease regulatory concerns, particularly in the light of recent financial crises, there could be strict prudential requirements for private financial institutions. Private financial institutions are likely to be more independent of political considerations and more profit-oriented. They are not likely to compete directly with state-owned banks, although the new competition will have an invigorating effect on the state-owned financial sector. New banks tend naturally to focus on underserved market niches, especially younger and smaller firms, which constitute the bulk of the private sector today. They do not tend to discriminate among customers on the basis of existing relationships, and in their struggle to

establish themselves in the market, they are more prone to trying innovative ways of doing business. The big state-owned banks are likely to dominate the domestic financial landscape in the Western Region for the foreseeable future. Strengthening profit incentives would therefore have a major impact on improving private firms’ access to bank loans. Corporatization, listing, and strategic partnering with foreign financial institutions are some of the ways to reach this objective. Monitor the impact of financial sector consolidation on incentives for SME lending With consolidation taking place in urban and rural credit cooperatives, rural credit funds, and investment and trust company sectors, financial institutions are likely to become larger and credit decisions more centralized. Given the important role these financial institutions play in SME financing, any gains made in terms of financial stability should not have an adverse effect on information and relationship capital, which would tend to reduce SMEs’ access to financing. Further liberalize interest rates Evidence suggests that further liberalization of interest rates is needed to improve private firms’ access to bank loans. Such a measure is not likely to have a significant impact on the borrowing costs of these firms. Most private enterprises able to borrow already pay effective interest rates that are significantly higher than the ones prescribed by the PBC. Entrepreneurs also indicate that access to financing is more important than the costs of funds. Allow banks to charge transaction (and monitoring) fees Banks find that loans to private companies, the bulk of which are smaller and less transparent, carry higher unit transaction costs. Therefore, if they use uniform procedures that do not differentiate between different types of borrowers, they are likely to discriminate against small firms.

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Transaction fees would, to some extent, unbundle the decision to look at a project proposal from a credit standpoint.They would also prompt banks to consider the proposals of a larger number of smaller firms and, hence, to develop a more service-oriented culture and to actively promote greater transparency and better accounting standards. Banks would need to adopt new procedures and develop skills in areas such as cash flow analysis, project finance, and risk management. The introduction of transaction fees would also be an important aspect of the realignment to international practices in banking, which seems inevitable with WTO membership. Improve incentives in credit guarantee schemes and management of risks In the first half of 1999, the State Economic and Trade Commission issued guidelines entitled Establishing Credit Guarantee System Pilot Projects for Small and Medium-Size Enterprises Guidance Opinion to stimulate bank lending to SMEs. By November 1999, 70 cities had established credit guarantee agencies with a total capitalization of 4,000 million yuan. Credit guarantee agencies are treated as nonfinancial institutions and are outside the regulatory scope of the PBC. International experience suggests that credit guarantee schemes can sometimes play a useful transitional role in improving SMEs’ access to loans. With proper supervision, such schemes can reduce transaction costs for banks, improve risk management through more flexible guarantee schemes (if guarantee funds and borrowers are free to negotiate them), and alleviate the collateral difficulties of small, mostly private, firms. However, credit guarantee schemes also entail risks, which are potentially high in the PRC. Local governments could use credit guarantee schemes as a means of continuing to interfere in credit allocation and as a substitute for policy lending. Also, at present there is no risk sharing between guarantee agencies and banks; this creates non-ideal incentives in lending decisions. The 2002 Law in Promoting Small and Medium Enterprises provides a legal basis for such guarantee mechanisms.

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Furthermore, guarantee schemes should not divert attention from reforms of risk management in bank lending. There is a need for a system for registering assets used as collateral (especially movable assets), a better system for auctioning machinery and equipment (and for creating secondary markets in such assets in general), and a better system for enforcing collateral. Conditions in the Western Region suggest that the Government could consider revising the Land Administration Law of 1998 to allow the use of land as collateral. Such a reform could also facilitate adjustment of landholdings. However, the Government would want to avoid the phenomenon of rural landless labor (which so bedevils other countries) by limiting the application of this reform. In the long term, national social security rather than landholdings should ensure basic living standards. Allow financial institutions access to external information A financial institution must efficiently access information about a potential client’s credit history and the nature of any claims outstanding against property offered as collateral. The PRC needs to create institutions such as real estate registries or credit bureaus to allow financial institutions access to the credit records of their clients. PROMOTE NONBANK FINANCIAL INSTITUTIONS Encourage the operations of rural credit cooperatives The Government should consider the following measures to promote RCCs: • Putting RCCs’ excess reserves to better use • Providing interest subsidy for loans made by RCCs to the Western Region to overcome the risk factor and weaker repayment ability of farmers in the region and therefore provide an incentive for RCCs to invest in the local market • Using RCCs as a vehicle for developing microfinance in the Western Region • Introducing a law to govern the operations of RCCs

Fully utilize the postal savings infrastructure Postal savings points are more extensive than RCCs and for farmers in remote areas are the only banking facility.They provide an excellent infrastructure for expanding financial services in remote areas where most of the poor now live. The network is underutilized and only takes deposits, issues postal checks, and helps to sell insurance policies and government bonds. At the end of 2000, the accumulated postal savings deposits amounted to 458,000 million yuan, of which 31,477 million had been deposited during the year. To fully utilize this infrastructure in an overall strategy of diversifying the banking system, the Government should consider establishing a postal savings bank to take deposits and make loans to a wide range of communities, especially in remote areas. The bank should be under the regulation of the PC and provide normal banking services as well as some microfinance services (along with RCCs). The Ministry of Information Technology Industry, which is responsible for post offices, may have some concerns. Postal savings points cross-subsidize other post and parcel businesses that are making losses. Pricing reforms or institutional reforms should therefore precede postal savings bank initiatives. USE CAPITAL MARKET AND DIRECT FINANCING Using various investment funds available through the bond and stock markets, the Western Region could issue securities to fund the construction of infrastructure. FOSTER THE GROWTH OF A FINANCIAL CENTER IN THE WESTERN REGION The Government should foster the growth of a financial center in the Western Region. Xi’an and Chengdu are the strongest candidates in terms of manufacturing base, commercial facilities, financial institutions, technology base, universities and colleges, tourism resources, and international reputation. They are the centers of finance,

commerce, technology, manufacturing industry, and tourism in the northwest and the southwest, respectively. Xi’an, the capital of Shaanxi province, is in the eastern portion of the Western Region. It is the gateway to the northwest. Although it is situated inland, it can be regarded as a coastal city like Shenzhen. It links the western and eastern regions through communications and cooperation in economic activities, technology, information, and funding. Chengdu is a large city in the southwest and has the strongest links with foreign markets of any city in the Western Region. Promote access to domestic capital and equity markets In developed countries and an increasing number of developing countries, there has been a shift in intermediated finance to disintermediated finance (e.g., bonds and equities). Raising funds on the capital and equity markets is a very important source of finance to fund long-term development in the Western Region. This is the major source of capital in developed economies (e.g., the recent injection of private funds into the equity markets in developed economies to develop the information technology sector). As the people of the PRC become richer, they will look for sources of investment other than banks for private savings. The focus needs to be on how to mobilize private domestic capital to fund long-term development projects in western PRC. The PRC Government should facilitate access to public equity markets by taking the following measures:19 • Facilitating more new listings. The decision to abolish the quota system and allow underwriters to determine the timing and pricing of new issues should be well implemented. • Relaxing listing requirements. Listing requirements regarding the size of firms, operating histories, and minimum years of

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profitability could be relaxed to lower the barriers for the listing of small, new, and hightech firms on the stock exchanges. • Broadening and strengthening the range of exit mechanisms available to investors. The establishment of a second trading board would provide a mechanism for investors to exit from the market and therefore give them more incentives to invest in risky projects. • Simplifying share buybacks. Regulations and rules should be revised to simplify the buyback of outstanding shares to improve the mobility of capital. Improve the efficiency of private equity funds Legal and taxation instruments are necessary for private equity funds to develop. The main issues relate to the legal organization of funds (whether joint-stock company or contractual), the need for trustees to protect investors from the adverse actions of the fund manager, and the use of a fund manager and tax treatment to avoid double taxation. Previously the law did not clearly define the rights and obligations of the investor, the fund manager, and the custodian; the relationships between them was uncertain, and the role of a trustee who can represent the fund in legal proceedings was ill defined. The 2001 Trust Law provided a much clearer definition of the obligations and rights of the parties. The investment industry in general would benefit considerably if the State acted less as a patron of the companies in which it invests and more as a protector of efficient competitive markets. As a transitional step, the State could use indirect mechanisms to ensure that venture capital flows are strong, stable, and accessible to a wide range of companies, including private ones. The experience of the Small Business Investment Corporation program in the US exemplifies one transitional mechanism to ensure that small companies with an attractive future but not the high returns that private venture capital

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demands also have access to prelisting equity capital.20 ENCOURAGE THE ESTABLISHMENT OF THE INSURANCE INDUSTRY People in the Western Region lack awareness of insurance. This restricts the development of the insurance industry. Property insurance should take the lead, providing insurance service to important infrastructure projects such as highway, railway, airport, telecommunication, and water conservation projects. Insurance companies can also provide risk management services for medium- and large-scale and high-tech projects.They should devise insurance packages to exploit the tourist market. The State should encourage the operation of joint-stock insurance companies in the Western Region and develop the insurance intermediary market.The State may show preference in approving the setting up of insurance agency companies and insurance brokers. There is a particular need for research on the insurance needs of farmers in conditions of unreliable rainfall in the northwest, and on the new risks arising from the switch to cash crops and exposure to fluctuations in international prices. One of the best ways of meeting many of these policy objectives is simply to open up the insurance market in the Western Region, and to encourage foreign insurance companies to set up branches in the region. STRENGTHEN THE INFORMAL MARKET About half of the sample firms in the recent IFC survey21 have at some point resorted to the informal market to finance their activities. While the informal market provides more flexibility in financing smallscale loans,22 it will encounter serious problems when its scope extends beyond friends and family members. The most prominent of these problems are defaulting and cheating, which are difficult to control because the parties cannot turn to the law for protection, especially in the absence of written contracts, as is typically the case.23

Some promising institutional innovations in the area of informal financial markets are happening in the Eastern Region of the PRC. A hui is a collection of households that are willing to contribute a fixed amount of money to a common pool with either implicit or explicit contract. The collected money is then used to finance projects undertaken by each household in an agreed order. A hui could be as small as a couple of households, or as large as a thousand households. Most hui use houses or other fixed assets as collateral. The cost of default includes the confiscation of collateral, loss of face (reputation), permanent exile from the hui, and other financial punishments. A public awareness program is needed to bring the hui contract in line with the Contract Law and empower the courts to police and arbitrage the disputes. With its lower level of urbanization and strong family ties, the Western Region could find that the informal system becomes an important complement to the formal financial system. Residents in the Western Region will be willing to adopt the institutional innovations in the Eastern Region if some government-funded information demonstrations could be arranged. ENCOURAGE OVERSEAS FINANCING Though overseas financing remains limited, its role appears to be increasing. In the same IFC survey, 23 percent of the sampled firms wanted to form joint ventures with foreign firms in order to get capital in the future while 11 percent said they were willing to borrow from foreign banks. Following WTO principles, the Government should remove all those barriers that prevent foreign banks from having access to renminbi business in the PRC. An integrated financial market could then evolve. As stated earlier, the Government could encourage FDI in the Western Region by opening up more opportunities for such investment in SOE reform and corporate restructuring.

The Government should take precautions in implementing the industry catalog for foreign investment. As discussed in Chapters 2 and 10, such government-guided preferential industrial policies could further distort the market. Preferential policies are also inconsistent with the “light touch industrial policy” approach analyzed and recommended in Chapter 10. IMPROVE THE USE OF BILATERAL AND MULTILATERAL FINANCE IN THE WESTERN REGION There is room for improving the use of loans and technical assistance from international financial organizations and foreign governments.The Government should strive to improve the use of existing loans while preparing for expanded international assistance to the Western Region. The Government should consider implementing the following measures: • Assessing alternative financing more carefully. Consideration should be given not to interest rates alone but to the broader terms of the loans, such as duration, repayment conditions, grace period, and punishment for default. • Intensifying the supervision of loans to local governments and improving repayment performance.Taking precautions against financial risks is a paramount objective, as is the protection of the good reputation of the Government as an international borrower. • Considering international lending (ADB, IFC, or World Bank) to the financial sector (RCCs, financial intermediaries, etc.) rather than to local government to reduce the risk of default. • Identifying feasible projects, to improve the structure and quality of loans.The Government wishes to utilize 70 percent of the preferential foreign loans in the Western and Central regions. Implementing this policy will require a great deal of work by local governments and Central Government departments to identify sufficient suitable projects.

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• Investigating policies and terms for on-lending to local governments. • Considering the need for government subsidies for social projects. • Reviewing regulations and procedures relating to official development assistance. The PRC must strengthen its anticorruption measures, improve transparency of information, promote the participation of project beneficiaries in project design and implementation, and upgrade the functions of inspection and auditing.

Notes 1 PBC press conference, published at http://www.china.com.cn/. 2 International Finance Corporation (2000). The survey shows that in 2000 state banks were charging the firms an average interest rate of 7.9 percent, and credit unions 11.5 percent. These rates, with transaction costs factored in, were comparable to the informal market rate (the difference is not statistically significant). At the same time, most ways of circumventing restrictions on interest rates discriminate against smaller firms, and are too blunt to reflect differences in the risk profile of projects. 3 IFC (2000). 4 Almanac of China’s Finance and Banking 1999. 5 People’s Daily, at: http://english.peopledaily.com.cn/ 200105/29/eng20010529_71271.html. 6 See Meyer and Nagarajan (2001). 7 People’s Bank of China (1988). 8 This is mainly due to the following: (i) There is no big regional capital market in the Western Region; the channel of financing through securities issuance is almost blocked and the volume of issue of stocks and securities is low. The first and secondary markets of treasury bonds are small in scale. (ii) The profitability of listed companies in the Western Region is poor. As analyzed in the Annual Report of Listed Companies 1999, the total gross profit and net profit of 160 listed companies in the

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9

10

11

12

13 14 15 16

Western Region amounted to 6.4 percent and 3.5 percent, respectively, of the corresponding indicators of all the listed companies’ A shares. Of the 101 certified securities dealers in the PRC, only 21 are in the Western Region, and they are less developed. Their ability to sell is also low, their brokerage is facing tough competition, their human resources are insufficient, and their research and development ability is limited. (iii) The market’s ability to attract funds is weak, the profit per share is 0.05 yuan less than the national average. Because of the high proportion of state-owned shares (30.4 percent) and juridical person’s shares (69.57 percent) (1998), stock liquidity is low. The stock market has so far played a minor role in financing the development of firms in the Western Region. However, a recent IFC report found that firms in the Western Region would be strongly motivated to list on the stock exchange if the incentives for managers and employees were to be improved, primarily through stock options. This is particularly the case in high-tech firms, where human capital plays a critical role in operations. Almanac of China’s Foreign Economic Relations and Trade 2000. The numbers in this chapter vary slightly depending on the source document. Hu Jingyuan, Deputy Director, Department of Foreign Investment, Ministry of Foreign Trade and Economic Cooperation, “Review of Foreign Investment in China in 1999 and Prospects in 2000,” in Almanac of China’s Foreign Economic Relations and Trade 2000. Order No. 18 of 16 June 2000, issued jointly by the State Development Planning Commission, the Economic Trade Commission, and the Economic Cooperation Bureau of the Foreign Trade Committee. Carbaugh (2000). Xie Ping and Xueling Wu (2001). Asian Development Bank (2000a). Actually, the legal reserves requirement for the branch-system state-owned commercial banks, differentiated according to the regions, is difficult

to implement. A state-owned commercial bank is registered as a single juridical entry but has many branches throughout the country. If the differentiated legal reserve requirement were implemented according to the regions, multiple ratios would exist in one bank, complicating supervision by the central bank. Moreover, these banks have more funds in the Western Region because of the low legal reserve requirement; the funds could be transferred to other branches of the banks, rendering the legal reserve requirement ineffective. 17 What should be pointed out is that it would not weaken the central bank’s ability to indirectly macro-adjust these financial institutions when implementing the differentiated legal reserve requirement for small and medium cooperatives or joint-stock financial institutions. According to the statistics, from 1993, the four state-owned commercial banks have relied less on re-lending from the central bank and their re-loans have progressively become smaller. The balance of the central bank’s re-loans to the four banks went from 1,200,000 million yuan at the end of 1995 to 490,000 million yuan at the end of 1999. Re-loans accounted for 6.3 percent of the central bank’s total liabilities at the end of 1999. Besides, as the experience of many other countries has shown, avoidance of the legal reserve requirement is not likely and can be minimized as long as strict supervision is ensured. 18 In fact, it compensates somewhat for the outflow of funds from the Western Region by ensuring the primacy of policy-oriented financing. Over years, the national strategy favored the Eastern Region, widening the gap between the Western and Eastern regions. In the market-oriented economy, the resources in the Western Region such as funds, skills, and technology are flowing to the Eastern Regions because of its comparative advantages. Commercial financial institutions have become the main channel of outflow of funds. This trend is hard to reverse in the short run. Therefore, the

19

20

21 22

policy-oriented financial institutions can make up for some of the outflow. For a more comprehensive discussion on the policy recommendation to improve access to public and private equity in China, see Xie Ping and Xueling Wu (2001). While venture capital plays an important role in financing the growth of small, technology-oriented companies, it also has its limitations. Venture funds typically back only a tiny fraction of the technologyoriented businesses begun each year. Furthermore, the structure of venture investments is inappropriate for many young firms: venture capital groups are unwilling to invest in very young firms that require only small infusions. Public programs to provide early-stage financing to firms, particularly to hightechnology companies, have become commonplace in many countries. As the Small Business Innovation Research program in the US has shown, successful initiatives tend to complement venture capital rather than substitute for it. If carefully implemented, such programs could play a useful role in promoting the development and commercialization of intellectual products and the associated protection of intellectual property rights. International Finance Corporation (2000). Lending in the informal market has several distinct characteristics: (i) It usually takes place among a closely knit network of friends or family members, among whom reputation is very important. These factors greatly reduce information asymmetry. Indeed, reputation and relationship often substitute for the use of collateral. (ii) Informal lending is usually short-term. The main reason is that individuals face tight liquidity constraints, but high interest rates are also relevant. The short maturities also reduce the risk of default. Thus, it is not uncommon for firms to buy materials for an order through an informal loan and to repay the loan when the order is settled. (iii) Informal lending has more flexible terms. Private firms often need money to complete a production cycle, which can be as short as several days in some industries.

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Formal loans are usually issued for at least six months or a year and do not allow a grace period, and this is an important deterrent to private firms. (iv) Applying for an informal loan does not require much time, maybe only a day. 23 Not long ago, some semiformal financial institutions such as credit associations organized by county and township governments emerged in rural areas. They attracted savings by offering high interest rates and making loans to local firms. Many of them ran into serious problems, however, often because of the involvement of local governments. A large portion of the lending went to local TVEs and

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contributed to the soft-budget problem of these entities. To avert a crisis, the Government decided to shut down all credit associations. Almost all are now closed, their debts in the hands of local governments. Wenzhou is one place where they still seem to be operating. Wenzhou has a long history of informal financial markets and had private banks in the 1980s. Its credit associations were under less government influence, and they issued loans to private firms with hard budget constraints. Their good record of management explains in large part why they still exist and shows that semiformal financial institutions are viable in such conditions.

CHAPTER

4

AGRICULTURE AND NATURAL RESOURCES This chapter discusses the condition of agriculture, the natural resources, and the environment in the Western Region, identifies some critical issues, and proposes policies and strategies.

Role of Government in developing and managing natural resources Economic growth during the 1980s relied heavily on natural resources, and was achieved at the cost of serious deterioration in environmental conditions. During the late 1980s and 1990s, the Government passed comprehensive legislation to conserve natural resources and to ensure a more sustainable balance between economic growth, social development, and environmental protection. MANAGEMENT OF LAND RESOURCES The State Council has assigned to the Ministry of Land Resources responsibility for developing policies relating to the management, protection, and rational utilization of land and mineral resources. Extent and distribution of natural resources Although the Western Region accounts for 62 percent of the PRC’s area, it has a much smaller share of the productive land (Table 4-1). Table 4-1 Land Resources of the Western Region, 1999 (km2) Region

Total Area

Southwest Sichuan 485,000 Guangxi 236,661 Yunnan 394,000 Guizhou 176,100 Tibet 380,000 Subtotal 1,671,761 Northwest Ningxia 51,800 Gansu 454,430 Inner Mongolia 1,183,000 Xinjiang 1,660,400 Qinghai 720,000 Shaanxi 205,800 Subtotal 4,275,430 PRC 9,600,000

Cultivated Land Forest Landa

Grassland

44,500 26,552 28,547 18,483 2,236 120,318

232,300 81,666 128,732 45,187 60,000 487,945

10,100 12,000 71,800 22,000 40,000 135,900

17,589 34,861 75,240 33,839 5,814 50,440 217,783 1,300,400

3,629 42,569 186,670 70,000 5,000 49,735 357,603 2,633,000

26,002 45,000 866,670 95,000 35,000 31,810 1,099,482 4,000,000

Source: Statistical yearbooks. a Not necessarily with forest cover. Figures for Tibet and Qinghai are estimates.

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It is thus misleading to describe the Western Region as having vast natural resources relative to the rest of the PRC. It has extensive deserts and high mountains. Within the Western Region, most of the forest land is in the southwest, while most of the cultivated land and grassland is in the northwest. However, the northwest is more than twice the area of the southwest, and the productive land has a scattered distribution. Responsibilities of the Ministry of Land Resources The specific responsibilities of the Ministry of Land Resources are as follows: • Administering land titles, land grading, and registration • Supervising and inspecting law enforcement by the departments responsible for land and resources management at various levels, and the implementation of plans for land and mineral resources • Developing policies and regulations concerning arable land especially those that protect and encourage the development of cultivated land, enforcing control over the different purposes of land used for agriculture, organizing the protection of farmland, and administering and supervising the development of unused land and reclamation of land Legislation A revised Land Administration Law of 1998 took effect on 1 January 1999. With respect to rural areas, the most important reform was the strengthening of the security of tenure and the rights of the individual vis-à-vis the farm collective. The land use contract would have a 30-year duration.The peasant or work unit, which acquired the contract, would bear the obligation to protect and use the land rationally, in accordance with the uses specified in the contract.The law would protect the contract right. Any subsequent changes in the boundaries or size of the parcel, subject to the

contract, would have to be agreed upon by two-thirds of the management board of the collective and submitted to the township administrators for approval. Security of tenure for land rights is critical for providing incentives for long-term investment, and for using land as collateral (Chapter 3) and as a form of social security. The Land Administration Law distinguishes between three classes of land use: • Agricultural land, including arable land, forest land, grassland, land for water irrigation and water conservancy, and water bodies in use for aquaculture • Construction land, including land for housing in urban and rural areas, public utilities, industry, mines, communications, water conservancy, and defense facilities • Unused land Among other important provisions, the Grassland Law of 1985 and the Forestry Law of 1998 define land use rights for grassland and forest land (Table 4-2). Regional differences While the legislation applies nationwide, land tenure patterns vary from region to region. For example, in Inner Mongolia and Qinghai grassland is mostly in the hands of households, whereas in Xinjiang it is mostly managed by SOEs. Forest land may be directly under household management, collectively managed by groups of households, managed by a township or village collective or enterprise, or part of a state farm. State forests supply most commercial timber and tend to be in areas with lower population density, while collective forests supply timber, fuel, and other products to local communities and are smaller in size. Forest in Xinjiang is almost entirely state forest, while Yunnan and Sichuan have a mixture of collective and state forest. Taking the Western Region as a whole, a lower proportion of productive land is under household management than in the rest of the country.

WATER AND SOIL CONSERVATION The Minister of Water Resources is responsible for water and soil conservation. Legislation The Government adopted the Water and Soil Conservation Law of 1991 to prevent and control soil erosion, protect and ensure the rational use of water and soil resources, mitigate floods, droughts, and sandstorms, improve ecology, and develop production. The law includes several specific measures to combat erosion. It prohibits the reclamation of hillsides with a slope over 25 degrees for the cultivation of crops, and it empowers local governments to enforce the rehabilitation of slopes over 25 degrees that are under cultivation. ENVIRONMENTAL MANAGEMENT AND PROTECTION The Government now gives a high priority to the environment. High-level official statements, notably the Premier’s report1 on the Tenth FYP to the National People’s Congress, 5 March 2000, make frequent reference to environmental issues. Environmental management and protection covers a broad range of policies and programs, including at the “brown” end, pollution control and waste management and, at the “green” end, conservation of ecological conditions and biodiversity. Institutional arrangements In 1971 the PRC began to respond to concerns on environmental issues by forming a small group under the State Council to assist in preparations for the 1972 United Nations Conference on the Human Environment.2 Environmental legislation and policy developed under the State Commission on Environmental Protection until 1998, when the State Environmental Protection Agency (SEPA) was formed at the ministerial level. SEPA and the corresponding agencies at the various levels of local government have policy formulation, coordination, and regulatory functions.

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Table 4-2 Legislation and Government Functions: Agriculture, Forestry, and Natural Resources Management Subject/Legislation

National Agencies Responsible

Key Statutory Functions

Land administration Land Administration Law of 1998

Ministry of Land Resources, Department of Land Use Management

Administration of land titles and rights Rural land use planning Protection of agricultural land

Soil and water conservation Water and Soil Conservation Law of 1991

Ministry of Water Resources Soil Conservation Bureaus

Prevention and control of soil erosion Protection and rational utilization of water and soil resources Coordination of efforts to combat desertification Preparation of plans to combat desertification

Combating Desertification Law of 2001 Environmental protection Environment Protection Law of 1989 Air Pollution Prevention and Control Law of 1995 Prevention and Control of Water Pollution Law of 1996

Agriculture and animal husbandry Grassland Law of 1985

Popularization of Agricultural Technology Law of 1993 Agriculture Law of 1993

Animal Epidemic Prevention Law of 1997

State Forestry Administration, National Bureau to Combat Desertification

Protection and improvement of the human and ecological environment Prevention and control of pollution

State Environmental Protection Agency State Environmental Protection Agency State Environmental Protection Agency

Formulation of national standards for environmental quality and the discharge of pollutants Formulation of regulations and standards relating to biodiversity conservation Environmental monitoring

Ministry of Agriculture, Animal Husbandry Bureau

Protection, management, and development of grasslands Provision of guidance in the protection, research, and use of grassland ecosystems Modernization of animal husbandry Agricultural extension Agricultural development planning Plant disease prevention Extension services Agricultural environmental protection, rehabilitation of agricultural ecological environment Agricultural marketing Prevention of animal epidemics

Animal Husbandry Bureau, Agriculture Bureau, State Forestry AdministrationAgriculture Bureau

Grain Bureaus Animal Husbandry Bureau

Forestry Forestry Law of 1998

State Forestry Administration

Forest management and administration Forest protection Tree planting and administration

Mineral resources Mineral Resources Law of 1997

Mineral Resources Administrative Bureau

Sustainable exploitation of resources

Nature reserves Protection of Wildlife Law of 1988

State Forestry Administration, State Department of Wildlife Administration

Protection of terrestrial wildlife Establishment of nature reserves Control of the import and export of endangered species under CITES

Source: Compiled by the consultants from statutes and other government documents.

Other agencies, however, particularly the resource management agencies (forestry, water resources, and agriculture) have operational responsibilities and functions for environmental protection. As with most other countries, the administration of environmental protection has evolved rapidly as the economic costs of environmental and natural resource degradation became apparent. In 1998,

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the Ninth National People’s Congress upgraded environmental protection administration to ministerial status.3 This change, at a time of cutbacks in the size of government, was a strong and clear statement of state policy, confirming the Government’s commitment to balance economic and social development with the conservation and rehabilitation of the environment.

The structure and institutional policies for environmental protection and related functions are still evolving. The allocation of functions for environmental management and protection is necessarily dispersed and, consequently, can be complex. The clearest example of this transitional state is in relation to policies and works for erosion control and water resource management. Operations for these urgent purposes are environment conservation–related but necessarily also involve, at least, the agencies responsible for forestry, agriculture, and water resources. Some uncertainty remains in the field, particularly at county level, about the respective functions and relationships between the Environmental Protection Bureau and the resource management agencies. Internationally, governments seek the most optimally effective administration models for the particular local circumstances. In relation to protection of water resources, most countries have determined that: • Environmental management should be holistic, and not partitioned artificially for separate protection of air, water, and land • Environmental regulation should be independent of resource management and use functions That is, the environmental agency should be responsible for all aspects of environmental quality; the water resource management agency should not also be the environmental regulator. Just as an industrial enterprise is responsible for its environmental performance, so forestry, water resources, and other resource management agencies are responsible for the environmental outcomes of their operations.The establishment of an environmental agency does not reduce those functions, but rather provides criteria, transparency, and accountability against which those environmental outcomes can be assessed. In the Western Region, because of the nature of the issues, the Environmental Protection Bureaus, the Forestry Bureaus, and the Water Resources and Soil

Conservation Bureaus all undertake environmental protection and conservation functions. Legislation The environmental legislation has developed progressively since 1984 and now covers a very wide range of matters. More so than in most other areas of public administration, administrative authority and coordination among agencies for environmental management are critically important.The 1998 reforms, particularly the elevation of the national environmental agency to ministerial level, directly responsible to the State Council, consolidate environmental protection as a key platform of the Government. Only in this way can the desired balance between growth and environment (economically and ecologically sustainable development) be achieved. However, institutional coordination remains a challenge.

Natural resources and environmental issues There has been serious degradation of the environment in the Western Region over recent decades.The most conspicuous environmental issues have been: • Soil erosion from storm-water runoff and sedimentation of streams and rivers • Salinization • Desertification through wind erosion and other processes • Degradation of natural ecosystems • Loss of biodiversity, or, more accurately, loss of species diversity • Air and water pollution Agriculture, husbandry, and forestry have been unable to escape a vicious circle of environmental degradation, leading to loss of output, leading to more use of marginal land. Restrictions on logging and farming on steep slopes and animal grazing, and the restoration of degraded lands, have begun to

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reverse the decline. Substantial environmental issues remain from the ravages of past decades, and there are institutional issues concerning the implementation of legislation and administrative

Figure 4-1 Steep Slopes Cleared for Agriculture

Luquan County (Yunnan), Pudu River catchment, headwaters of the Yangtze River clearance continues as a source of soil erosion and sedimentation of the river.—Photo Dr. W. Forrest

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policies. The Government’s strategy for the Western Region has important components relating to environmental protection, including erosion control, ecological improvement, and grassland improvement.4 SOIL EROSION Water erosion has affected some 1,530,000 km2 in the PRC,5 of which 204,600 km2 is potential desert. The general distribution of this is as follows: • 430,000 km2 on the northwest loess plateau, most of which stretches over Shanxi and, in the Western Region, Shaanxi, Ningxia, Gansu, and Qinghai • 460,000 km2 in the south mountainous and hilly areas, mainly in the Central Region in the basins of the Yangtze River and the Pearl River • 540,000 km2 in the North Earth and Rocky Mountainous areas, mainly in the upstream areas of the Huaihe and Haihe river basins in the Central Region • 100,000 km2 in the Songhua River basin and the Daxing’anling mountains (separating the Western and Central regions) and Xiaoxing’anling mountains (Central Region) Therefore, while the Western Region has only about 25 percent of the PRC’s areas of major water erosion, the erosion problem is very severe. The loess plateau is becoming the most seriously soil-eroded area in the world. On steep slopes, removal of vegetation cover accelerates storm-water runoff, erosion, and sedimentation of streams and rivers. Erosion degrades the land, reduces its biological productivity, and exacerbates downstream flooding and silting up of reservoirs. In drier areas, wind erosion leads to frequent regional duststorms and continuing desertification. The economic, social, and ecological cost of soil erosion, followed by in-stream sedimentation and flooding, has been recognized as a serious national issue, particularly following the devastating floods in 1998 along the Yangtze River (Figure 4-1).

Figure 4-2 Trees Recovering after Government Ban on Herdsmen Cutting Foliage for Grazing Stock

Freezing and melting processes on the cold plateau Freezing and melting processes adversely affect large areas of the Qinghai-Tibet Plateau, which is 3,000 m to 4,000 m above sea level. Sandy land occurs mainly around the Qaidam and Gonghe basins in Qinghai and in the middle reaches of the Yarlung Zangbo River in Tibet.These are among the few alpine arid sandy lands in the world, with a fragile ecological environment that is prone to damage and hard to restore.There are population concentrations in the Yarlung Zangbo middle reaches, and population growth, overgrazing, strong winds, firewood collection, and the sandy soil are threatening livelihoods. Only a comprehensive rehabilitation strategy can reverse the adverse trends.6 Other desertification factors Desertification processes are often complex and attributable to many causes. Climatic variations in precipitation and temperature are a factor. Mining activities and the collection of medicinal herbs and native fungus are significant contributory factors. SALINIZATION Salinization and alkalization have affected arable land in many parts of the northwest. Salinity has affected 50 percent of the area under irrigation in the inland drainage basins and 15–30 percent of other areas under irrigation in the northwest.7 The inland drainage basins that cover much of the northwest (Figure 16-3) have soils with high salt levels. Irrigation can easily cause salt levels in the topsoil to increase; the expansion of irrigation over the last 30 years has led to salinization to an extent that reduces yields and forces the abandonment of vast areas of cropland. There is a need for wider application of both rectification measures and more appropriate irrigation techniques. DESERTIFICATION The Convention to Combat Desertification (of which the PRC is a signatory) defines desertification as land

Awati County, Xinjiang Province. Native poplar trees near Tarim River, at edge of Taklamakan Desert.— Photo Dr. W. Forrest

degradation in arid, semiarid, and dry subhumid areas resulting from various factors. Approximately 2,662,300 km2, or 27.3 percent of the PRC’s area8 is subject to desertification. Almost all of this area is in the Western Region, and, with the exception of the alpine arid areas of Tibet, almost all in the northwest (Figure 4-3). There are five main groups of factors behind desertification: • Wind erosion, affecting 1,670,400 km2, much of which is grassland • Water and soil erosion, affecting 204,600 km2 • Freezing and melting processes on the cold plateau, affecting 363,300 km2 • Salinization and alkalization processes affecting 233,200 km2 • Other factors affecting 213,800 km2 This section discusses each of these groups of factors in turn. Wind erosion and grassland degradation The PRC’s grasslands cover 4,000,000 km2, or 42 percent of the total land area.9 The usable grasslands cover 3,100,000 km2 comprising four main areas:10 • The Inner Mongolia–Ningxia–Gansu steppes • The Qinghai-Tibet plateau pastoral area • The Xinjiang steppes • The south PRC pastoral area Thus, almost all of the PRC’s grasslands are in the Western Region.

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Figure 4-3 Areas Subject to Desertification (Simplified)

Water Wind Freezing/Melting Other

Note: Areas shown as subject to wind erosion include many areas where sanitization or alkalization is the main cause of desertification.

About 866,700 km2 of grassland is degraded, with degradation continuing at the rate of about 13,300 km2 annually.11 The Grassland Law of 1985 stipulates that indiscriminate reclamation and excessive grazing should be punishable by criticism, warning, fines, or compensation for economic loss.The law has not been effective. In fact, some studies12 attribute the increases in livestock numbers directly to economic reforms. Government rehabilitation programs have, however, been successful in the areas that they cover. DEGRADATION OF NATURAL ECOSYSTEMS Overexploitation of forests for logging, stock grazing, and clearance for crops has severely degraded ecological conditions over much of the (original) forested land. In mountain and semimountainous areas, there is widespread soil erosion, extreme in some parts, and reduced water retention within the

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catchment, resulting in downstream sedimentation of rivers and flooding. In the drier plains, wind erosion of soil results in duststorms and sand encroachment into oases, villages, and towns, damaging infrastructure and reducing the quality of community life. Over centuries, much of the native vegetation and habitat has been lost. As recently as the 1960s and 1970s, campaigns for local self-sufficiency in grain led to large-scale deforestation of sloping lands with the result that more plants and animals have become extinct and others are threatened. The major remaining forest areas are shown in Figure 4-4. Serious restriction on removal of timber from forests began in the 1980s and has intensified, particularly in the Western Region, in the watersheds of major rivers. The number, area, and scope of nature reserves have also increased, particularly from the late 1970s. From fewer than 50 reserves in 1978, the

Figure 4-4 PRC Forests

Forest Type

Region

Main Species

Daxing’anling forest regions

Inner Mongolia

Larix gmelini, Pinus sylvestris var. mongolica, Quercus mongolica, Populus davidiana, Betula platyphylla, Salix koraiensis

Qinling-Xiaoling mountainous forests

Qinling in Shaanxi south and north slopes of Longshan

Pinus armandii, Larix chinensis, Pinus tabulaeformis, Picea, Abies, Quercus, Fagus longipetiolata, Betula, Acer, Tilia

Bailongjiang forests

Northwest of Sichuan, Baijiang valley

Picea, Abies, Pinus tabulaefornis, Pinus armandii, Betula, Populus davidiana, Quercus

Qilianshan forests

Gansu, Qinghai

Abies Sibirica, Picea crassifolia, Betula albo-sinensis

Tianshan-Alatai forests

North slope of Tianshan-Alatai region

Picea obovate, Abies siberica, Picea schrenkiana, Larix siberica, Betula albo-sinensis

Transverse ranges forests

West of Sichuan, north of Yunnan, and southeast of Tibet

Picea, Abies, Larix, Pinus Yunnanensis, Pinus armandii, Cedrus deodara, Pinus densata, Pinus szenaoensis, Pinus griffithii, Tsuga chinensis, Quercus, Castanopsis, Tilia, Betula

Southern forests

Yunnan

Pinus szemaoensis, Taiwania Cryptomerioides, Melia, Lauraceae, Euphorbiaceae, Rubiaceae, Myrtaceae, Proteaceae, Caesalpiniaceae, Paimaceae, Burseraceae, Annonaceae, Dipterocarpaceae, Magnoliaceae, Theaceae, Bombacaceae

Source: Fu Ma Li and Yang Shonyi (1996).

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Table 4-3 Number and Size of Nature Reserves in the Western Region, by Level of Government No. of Nature Reserves Province

1*

Chongqing Shaanxi Guizhou Ningxia Inner Mongolia Yunnan Sichuan Xinjiang Guangxi Qinghai Gansu Tibet Western Region PRC Western Region, as % of PRC Western Region excluding Tibet Western Region excluding Tibet, as % of PRC

5 5 3 8 6 10 3 5 3 4 2 54 124 44 52 42

2

3

4

1 1 1 4 3 48 30 16 57 1 25 11 198 392 51 187 48

3 1 4 27 7 1 43 84 51 43 51

2 5 19 1 24 27 3 5 4 90 326 28 90 28

Total 6 12 29 8 35 108 50 19 67 4 34 13 385 926 42 372 40

Area of Nature Reserves (1,000 km2) 1

2

3

4

Total

1.9 1.4 1.0 28.0 6.9 8.8 51.0 0.8 50.1 37.0 34.5 221.4 265 84 187 71

0.2 0.1 Neg. 0.2 0.4 10.8 17.8 51.5 14.4 0.2 10.2 291.4 397.1 460 86 106 23

0.3 0.4 0.7 0.8 1.4 0.1 3.6 6.5 56 3.6 56

0.1 0.8 0.7 Neg. 12.1 1.0 0.3 0.5 2.5 18.0 38 47 18.0 47

0.6 3.1 2.9 1.2 40.5 19.5 28.3 102.5 15.7 50.2 49.8 325.9 640.1 770 83 314 41

Reserve, % of Total 0.6 1.5 1.7 2.4 3.4 5.0 5.8 6.3 6.6 7.0 11.1 26.7 9.4 8.0 4.7

Source: Sun Jian (2001). * 1 State; 2 Province/autonomous region; 3 City; 4 County. Note: The figures include reserves for various purposes, the most common being for species and resource protection, and for land and ocean scenery protection.

Table 4-4 Administrative Bodies for Nature Reserves No. of Known Nature Reserves Administrative Body Environmental Protection Agencies Forestry Ministry/Bureaus Nature Reserve Administrative Office Other Provincial Bureausa Government Offices Other b

National

Provincial

1 2

13 176 8 27 3 3

Other/ Local Total 49 155 5 20 8

63 333 8 32 23 11

Source: Edmonds (1994). a Includes Agriculture, Animal Husbandry, Fishery, Aquatic Products, Geological, Cultural, Public Security, Mining bureaus. b Includes universities, research academies, Academy of Sciences.

number increased to 100 by 1982, and to 500 by 1990; currently, more than 900 reserves have been established, covering about 8 percent of the PRC’s land area (Table 4-3). Although it has 71 percent of the PRC’s total land area, the Western Region has only 40 percent of all

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nature reserves. These amount to 83 percent of the total area of the PRC’s reserves, but the figures include several very large reserves in Tibet. The reserves of the Western Region amount to only 41 percent of the national total reserve area when Tibet reserves are excluded. Conserving the residual native vegetation and repairing the damage from previous times should be a priority in the Western Region. Establishing more nature reserves is an important contribution to achieving this principle. However, the program has several weaknesses. Various agencies with diverse interests administer reserves (Table 4-4), often giving attention to a single aspect and without the knowledge or experience needed for integrated reserve management. Of 926 reserves established by the end of 1997, 360 had no assigned administrative agencies, and of these 308 had no effective management

arrangement.13 The agencies managing nature reserves discharge their functions with a lack of resources and with other priorities. In many cases, however, reserve management is a secondary function (to forestry) for which the agency has little or no particular regulatory or enforcement expertise. Importantly, with such dispersed administrative arrangements, there is no opportunity for the accumulation of a single body of “corporate” knowledge, skill, and authority, with benefits flowing to guide the management of all reserves, or in-house specialist expertise widely available. There are options for improvement in two aspects: increasing the scope of reserves and improving their administration. There are clear indications of deficiencies in nature reserve coverage. Significant ecosystems and species are inadequately represented, particularly in the Western Region (Table 4-3). BIODIVERSITY Despite the effects of centuries of habitation and loss of natural ecosystems, the PRC remains one of the world’s main centers of biological diversity. This biodiversity comprises both species diversity and genetic diversity. Species diversity The PRC’s rich biodiversity derives from its vast land area, its ancient geological history, and its great variety of topographical and climatic conditions (Table 4-5). Forests are the most important ecosystems in the PRC, in terms of the sheer diversity of species that they harbor.14 Loss or degradation of habitat poses the main threat to loss of species, but other factors are also significant, including weak ex situ measures to protect biodiversity.15 Genetic diversity The PRC has a very long history of agricultural activities. Accordingly, it now has a very rich resource of germ plasma. The country has more than 20,000

Table 4-5 Species Biodiversity of the PRC Category Mammals Birds Reptiles Amphibians Fish Freshwater algae Lichen Moss Pteridophyta Gymnosperm Angiosperm

Species in PRC 581 1,244 376 284 3,864 9,000 2,000 2,200 2,600 250 30,000

World Total

% in PRC

4,170 9,198 6,300 4,148 19,056 26,900 20,000 23,000 12,000 850 260,000

13.9 13.5 6.0 6.8 20.3 33.5 10.0 9.6 21.7 29.4 11.5

Source: National Environmental Protection Agency (1998).

varieties of rice, 55,000 of beans, 31,000 of cotton, sugar, tobacco, and vegetable oil, over 18,000 of vegetables, and over 15,000 of grass. The PRC is also one of the richest countries in domestic animals, with 2,222 varieties and breeds. Biodiversity policy The PRC ratified the Convention on Biological Diversity in 1993, becoming one of the first countries to do so. In accordance with the Convention, it has prepared a National Strategy and Action Plan for Biodiversity Conservation.16 However, progress in implementing it has been disappointing.17 In particular, the following weaknesses are apparent: • A lack of clarity in defining the responsibilities of the various agencies having responsibilities for biodiversity conservation • A lack of understanding of the economic benefits of biodiversity • A lack of progress in updating and enforcing legislation • Inadequate databases on the country’s biodiversity • A lack of public awareness of the importance of biodiversity • Unsustainable exploitation of wildlife • A lack of biodiversity conservation work at the local government level

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While SEPA is responsible for formulating national policy for biodiversity conservation, other Central Government and local government agencies control the management and allocation of resources. ENVIRONMENTAL POLLUTION Air pollution Urban air quality is a national issue, with serious effects on public health and buildings (see Chapter 17 for further discussion of urban air pollution). However, air pollution also affects vegetation. Acid rain does substantial damage to agricultural production and forest growth in the southwest. The areas suffering the most are in Sichuan (acid rain frequency of 70 to 90 percent, with pH of 4.5), Guangxi (frequency 85 to 90 percent, pH 4.2), and Guizhou.18 The acid problems in the northwest are not as severe because the soil is more alkaline and the coal contains less sulfur. Industrial, urban, and agricultural pollution of rivers Despite having less industry and fewer cities, the Western Region has some severely polluted rivers that are unsuitable for irrigation, with the worst pollution often occurring when the need to use the water is greatest. Water pollution occurs mainly because of inadequate (or no) treatment of domestic and industrial wastewater (see Chapter 17 for details). In the winters of the northwest, the cold temperature of water and low flows slow down the dilution of wastes. In summer the quality of irrigation return flows can be poor in comparison with river flows, adding to the problem of water quality. The quantities of domestic and industrial wastewater could grow rapidly with urbanization and the development of industry, while an increase in the use of fertilizers (from the currently quite low level) could add to the problem. Governments have paid less attention to water pollution in the Western Region than in the Central and Eastern regions. In the case of the Yellow River, which is in heavy use for irrigation throughout its

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length, only 25 out of 69 pollution control projects in the Ninth FYP were in the Western Region. This was despite the fact that 80 percent of the river’s length is in the Western Region, and that the Baotou section (Inner Mongolia) is one of most seriously polluted. Pollution is as severe in the upper (Western Region) and middle (Central Region) sections as it is in the Eastern Region. Pollution standards Official pollution standards are the main instrument for the control of pollution. As is so often the case in other countries, the pollution standards have inherent problems: • They stipulate the concentration of each pollutant, rather than the load. Concentration is easier to measure, and is relevant for the control of acute effects, but most environmental effects occur as a consequence of the total load. • They imply a clear boundary, between hazardous and safe levels. • They are designed to achieve an ambient environment goal.This approach does not provide adequately for increases in discharges as economic output grows (and hence load increases). Moreover, new information may require lower ambient goals.The alternative approach of achievable standards using available technology is preferable but leads to debate about economic feasibility. • They encourage industry to pollute at just below the standard, and inhibit the pursuit of “cleaner production” goals, including continuing improvement. • They are irrelevant to some pollutants, such as complex hydrocarbons, that are toxic or carcinogenic at levels below the capability of routine monitoring. Most pollution standards in the PRC date from 1982 and in many cases are now less stringent than international best practice. The level of pollution remains greater than acceptable, even when all enterprises are complying with the standards.19

Table 4-6 Gross Output Value of Agriculture, Forestry, and Fisheries, 1999

The 2002 Clean Production Law provides a legal framework to encourage the adoption of clean production technologies.

Arable Animal Farming Forestry Husbandry Fisheries (109 yuan) (109 yuan) (109 yuan) (109 yuan)

Region

Problems in agriculture and forestry There are many contradictions and problems in the development of the agriculture and husbandry of the Western Region. GROSS OUTPUT VALUE The Western Region accounts for only 23 percent of the PRC’s gross output from agriculture, forestry, and fisheries. Arable farming accounts for 62.2 percent of the Western Region’s output (Table 4-6). DEMAND FOR FOOD The structure of production and the structure of demand are not quite the same. The demand for food is rapidly changing with urbanization. In all of the PRC’s regions, urban populations have a much higher demand for all foodstuffs except grains (Table 4-7). As urbanization proceeds and household incomes rise, the domestic demand for all the main food categories except grain will rapidly increase. The demand for processed food will increase more rapidly than that for food as a whole. These changes will open up opportunities for agriculture and

Eastern Central Western Southwest Northwest PRC

Total Amount (109 yuan)

%

594.7 465.2

37.3 29.2

282.8 243.0

190.0 45.7

1,104.8 783.2

45.1 31.9

131.1 219.7 1,410.7

6.4 15.7 88.7

51.4 122.6 699.8

1.5 15.7 252.9

190.4 7.8 373.7 15.2 2,452.0 100.0

Source: Calculated from the China Statistical Yearbook 2000.

husbandry in the Western Region. There will be more scope for labor-intensive production of high-value fruits and vegetables, and for high-quality animal products. SUPPLY OF FOOD In recent years agricultural and livestock production in the PRC has been growing quite slowly (Table 4-8). Many analysts attribute this simply to a preference for investment in the urban and industrial sectors of the economy.20 However, agriculture has not performed well in the Western Region (Table 4-8). Many would argue that the Western Region has a comparative advantage in grain production. Certainly there is more scope for improving yields, yet production has grown less rapidly that in other regions. Rural incomes have stagnated in comparison with those in the Eastern Region.

Table 4-7 Per Capita Consumption of Major Food Categories, 1999 Region Urban population Eastern Central Western Southwest Northwest Rural population Eastern Central Western Southwest Northwest

Grain (kg)

Vegetables (kg)

Edible Oils (kg)

Meat (kg)

Eggs, Egg Products (kg)

Aquatic Products (kg)

Sugar (kg)

Liquor (kg)

221.2 217.3

223.5 176.3

74.3 78.1

487.3 320.4

72.4 65.1

242.2 77.6

27.0 19.0

115.4 85.4

197.3 214.9

206.6 150.7

76.8 72.1

510.6 269.9

61.5 50.8

75.4 40.2

28.0 19.4

81.2 89.0

243.8 260.9

109.1 124.0

6.2 6.7

16.6 13.4

6.5 4.9

7.3 3.2

1.9 1.3

9.8 6.2

238.4 238.1

131.7 56.0

5.3 5.4

24.0 11.5

2.2 1.7

1.5 0.4

1.5 1.0

5.7 3.2

Source: Calculated from the China Statistical Yearbook 2000.

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Table 4-8 Growth in Food Output, 1994–1999 Northwest

Grain Oil-bearing crops Sugar crops Tea Fruits Meat Milk

Southwest

Rest of PRC

1999 Output (Mt)

% Increase Over 1994

1999 Output (Mt)

% Increase Over 1994

1999 Output (Mt)

% Increase Over 1994

45.21 2.76 — 0.01 6.61 4.02 2.51

10.3 31.8 — 6.0 88.5 59.4 93.4

88.55 3.22 49.73 0.18 8.18 12.51 0.69

16.1 40.6 45.9 13.4 88.4 41.9 26.0

397.65 20.03 24.98 0.49 46.35 42.96 4.87

17.2 46.7 -29.4 12.5 108.3 58.7 55.0

Source: Calculated from the China Statistical Yearbook 1995 and the China Statistical Yearbook 2000.

Table 4-9 Growth in Animal Populations, 1994–1999 Eastern

Central

Southwest

1999 % Increase 1999 % Increase 1999 % Increase Population Over Population Over Population Over (million) 1994 (million) 1994 (million) 1994 Cattle Hogs Goats Sheep

27.1 129.7 44.9 20.3

20.1 5.8 14.0 33.1

40.2 148.2 45.2 14.2

16.0 21.5 96.0 32.0

54.4 126.8 28.0 16.4

44.7 2.7 43.0 -3.0

Northwest

PRC

1999 % Increase 1999 % Increase Population Over Population Over (million) 1994 (million) 1994 17.6 25.6 30.0 80.2

-3.9 1.9 27.0 16.7

139.3 430.2 148.2 131.1

23.1 9.5 40.2 17.4

Source: Calculated from the China Statistical Yearbook 1995 and the China Statistical Yearbook 2000.

GROWING ANIMAL POPULATIONS As with grain production, the way in which production of animal products is expanding is not sustainable. Animal populations cannot continue expanding forever in an environment where, at least in the northwest, water resources are scarce (Table 4-9). WATER RESOURCES Chapter 17 contains an assessment of the water resources of the Western Region and their management. The northwest is very short of water resources, receiving only 15 percent of the PRC’s precipitation and containing about 7 percent of its water resources. The southwest, on the other hand, is rich in water resources, receiving 40 percent of the precipitation and containing 47 percent of the water resources.

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RURAL POPULATION AND EMPLOYMENT In terms of population and employment, the rural areas of the Western Region are quite different from those of the rest of the PRC. Population In 1999, the population of the Western Region was 361.5 million, (or 24.7 percent of the PRC’s population), whereas the land area accounts for 61.9 percent of the whole country (Table 4-10). However, this is somewhat misleading as there are large areas with negligible population, and the population is concentrated in the most productive areas. The issue is remoteness rather than population density. Employment In contrast to the Eastern Region, there is far less nonagricultural employment in the rural areas. In the

Table 4-10 Rural Population and Employment, 1999 Population

Region Eastern Central Western Southwest Northwest PRC

Employment

Total Population (millions)

Rural Population (millions)

Rural/ Total (%)

Total Rural Employment (millions)

Employment in Agriculture, etc. (millions)

Agriculture/ Total Rural (%)

452.9 409.8

335.0 308.8

74.0 75.4

167.0 156.6

102.1 117.9

61.2 75.3

238.7 110.6 1,212.0

200.5 77.8 922.2

84.0 70.3 76.1

109.6 35.7 469.0

85.3 29.6 334.9

77.8 82.8 71.4

Source: Calculated from the China Statistical Yearbook 2000.

Table 4-11 Crop Yields, 1999

Region Eastern Central Western Southwest Northwest PRC

Rice (kg/ha)

Wheat (kg/ha)

Corn (kg/ha)

Soya Beans (kg/ha)

Tubers (kg/ha)

Peanuts (kg/ha)

Rapeseed (kg/ha)

Cotton (kg/ha)

6,548 6,154

4,887 3,988

5,041 5,268

1,818 1,926

5,046 3,775

3,063 3,189

2,048 1,372

916.0 902.4

6,444 6,328 6,345

2,533 3,080 3,947

4,124 4,871 4,945

1,433 1,174 1,693

3,056 2,142 3,556

1,940 2,080 2,961

1,421 1,327 1,469

789.0 1,344.8 1,028.0

Source: Calculated from the China Statistical Yearbook 2000.

northwest, nearly 92 percent of employment in the rural areas is in agriculture. Because of the low population density and the distance from urban centers, there is not much chance of introducing industries outside the primary sector. OUTPUT AND PRODUCTIVITY The production ability of the lands in the Western Region is low although there are large areas of arable land and grassland. Arable land At the time of the last agricultural census (31 October 1996) there were 49,573,400 ha of land under cultivation in the Western Region, or 38 percent of the total for the PRC. The productivity of the western lands is quite low (Table 4-11). Cotton is the only major crop with yields higher than those found in the Eastern Region. Grassland The ability to produce livestock products is also low. In 1999, the Western Region produced 18 percent of the beef in the country, 24 percent of the mutton, 20 percent of the wool, and 28 percent of the cashmere.This indicates that the productivity is low relative to the grassland resources in the Western Region.The production of animal products on a per

Table 4-12 Animal Production, 1999 (kg/head) Region

Beef

Milk

Pork

Eastern Central Western Southwest Northwest PRC

62.9 52.7

83.3 52.4

100.6 100.9

Goat Wool Sheep Wool 0.35 0.10

2.71 3.26

Mutton 35.6 43.3

11.3 34.8 36.3

11.6 123.6 51.5

78.1 84.0 93.1

0.07 0.32 0.21

0.85 2.10 2.16

19.7 10.7 19.2

Source: China Statistical Yearbook 2000.

head basis (Table 4-12) also indicates low productivity. The measures in Table 4-12 are crude, but they are nevertheless indicative of a lack of application of science and technology. Forests Forestry in the PRC is facing a crisis, with high demand for forest products, environmental protection needs, a rapid depletion of natural forests, and poor quality of forest plantations.21 Timber production is in decline at a time when demand is increasing (Table 4-13). With the fall in domestic production and rising demand, imports of logs grew by 192 percent between 1993 and 1999, while imports of paperpulp grew by 496 percent. To counter the

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Table 4-13 Forest Production in the Southwest, 1993 and 1999 Timber (103 m3) Province a

Sichuan Guizhou Guangxi Yunnan Tibet

Rubber (Mt)

Pine Resin (Mt)

Walnuts (Mt)

1993

1999

1993

1999

1993

1999

1993

1999

4,580 699 3,219 3,651 287

597 504 3,186 1,953 195

– – 2.2 95.6 –

– – 1.5 167.6 –

3.7 1.3 245.3 31.7 –

1.7 3.8 226.2 52.2 –

17.7 4.4 0.2 48.7 0.1

23.8 5.0 0.3 60.4 0.8

Source: China Statistical Yearbook 1994 and China Statistical Yearbook 2000. a Includes Chongqing.

degradation of resources, the Government has a program to return cultivated and degraded land to forest. Much of the land still having forest cover, or needing more substantial tree cover for ecological protection, is wholly or largely closed to logging, grazing, and cultivation.The Government has also banned logging and cropping on slopes above 25 degrees. However, the net conversion of arable land to forestry has so far been negligible. In Sichuan, for example, the cultivated area shrank from 456,040 km2 in 1990 to 445,470 km2 in 1999, but urbanization accounted for 96.4 percent of this reduction.22 In the northwest, there has been a longstanding preference for planting trees on the plains rather than on the hills. Hillsides closed to cultivation were to account for only 22.4 percent of tree planting under the Eighth FYP and only 20 percent under the Ninth FYP.23 Since the plains available for tree planting are almost entirely in the north, this also implies a geographical bias in policy, especially as the colder climate of the north is not as conducive to rapid tree growth. The economic benefits of planting trees on grassland are probably far less than planting them on hillsides. Firstly, unless totally denuded, grass plains would regenerate more cheaply if simply left alone, and grass would prevent erosion sooner than trees. Secondly, planting trees on hillsides protects against soil erosion by water, which is far more damaging

than wind erosion. Much of the planting on flat land in the northwest has been to reverse desertification and control wind erosion. Shelterbelts to protect fields are vital in the wind-prone northwest, but do not need to be wide to be effective. Some recognition of the importance of planting slopes is evident in the Gansu Tenth FYP, which splits planting equally between hills and plains, probably the most appropriate balance for that province. More generally, programs to deal specifically with environmental damage issues include the following: • Plantings to improve or restore ecological conditions, commonly with state or provincial funding and implemented at the local level, with villagers contributing labor; commonly under the general title of “fields to forests” • Commercial plantations, with similar objectives but using commercial species, often fruit or nuts • Replacement of wood as fuel in villages by other energy sources, including biogas and solar (cutting trees for firewood remains one of the main threats to forests of the Western Region) While tree plantings always have a primary purpose, they usually have multiple benefits. Plantings primarily for timber production account for about 30 percent of all plantings in the Western Region (Table 4-14), but they also contribute to soil stabilization (Figure 4-5), watershed protection, and other conservation objectives.

Table 4-14 Area of Forest Planting, 1997 Plantation Purpose Region Eastern Central Western Southwest Northwest Total PRC Western Region as % of Total PRC

Timber Fruit, Oil, Nuts, etc (10,000 ha) (10,000 ha) 188 578 691 470 221 1,457 47.4

296 384 691 422 269 1,371 50.4

Ecology, Protection (10,000 ha)

Charcoal (10,000 ha)

341 349 677 201 476 1,367 49.5

41 25 69 20 49 135 51.1

Source: China Environmental Statistics 1998.

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Special Purposes (10,000 ha) 3.4 9.3 4.1 2.7 1.4 16.8 24.4

Total (10,000 ha) 870 1,345 2,132 1,116 1,016 4,347 49.0

Figure 4-5 Commercial Chestnut Plantation in Luquan County, Yunnan

Throughout the PRC, similar areas are being planted for each of the three main purposes: timber, commercial production, and ecological protection, though planting for ecological protection is predominant in the northwest (mostly Inner Mongolia, 60 percent) and planting for timber production is predominant in the faster-growing conditions of the southwest. Ecological planting in the Western Region is barely 50 percent of the PRC’s total, despite the widespread environmental damage and the fact that the region has 70 percent of the PRC’s area. The “fields to forests” program comprises just below 10 percent of the total planting program for ecological conservation,24 consistent with the statistics indicating that there has so far been little or no net conversion of arable land to forestry. Reasons for low productivity The main reason for the slow growth of agricultural and forestry production is the ultimate constraint of natural resources. However, a lack of balance in the inputs has contributed to poor productivity.25 In particular, the use of machinery and the use of fertilizer are far below the average for the Eastern Region (Table 4-15). The low level of mechanization and fertilizers is indicative of a general lack of application of modern agricultural technologies.

Established by local community and county government on land previously used for agriculture. An area of 12,000 ha will produce 1,000 t of chestnut each year at maturity, and contribute to watershed management.—Photo Dr. W. Forrest

The measures in Table 4-15 are crude and not accurate. For example, there may be regional differences in the use of organic manure, but then again use of organic manure is likely to be easiest in the Eastern Region. Implications of the need to improve productivity Improvements in productivity will require the transfer of much of the rural population to nonagricultural employment. Such a transfer could be through the growth of TVEs or through migration to cities (whether in the Western Region or in the Eastern Region).The growth of either TVEs or cities in the Western Region would require a reduction in the

Table 4-15 Agricultural inputs, 1999 Regiona Eastern Central Western Southwest Northwest PRC

Cropping Ratiob

Area Under Irrigation (%)c

Application of Fertilizer (kg/ha)

Use of Machinery (kW/ha)d

Labor (no./ha)e

Output/Person (yuan)f

1.4 1.3

46.7 39.3

345 255

3 156 663

2.2 2.0

23,812 18,657

1.2 0.8 4.7

26.5 33.4 146.0

199 198 996

591 677 1,390

2.8 1.5 2.1

15,254 16,772 19,739

Source: Calculated from the China Statistical Yearbook 2000. a See note to Table 4-7. b Sown area/cultivated area; the cultivated area is as at 31 October 1996, and is taken from the agricultural census. Because of multiple cropping the sown area normally exceeds the cultivated area. c Area under irrigation as a percentage of area under cultivation. d Total power of agricultural machinery expressed in kW divided by area. e Number of persons employed in agriculture, husbandry, and fisheries divided by the sown area. f Gross output value divided by persons employed.

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water available for agriculture because of the finite limits to water resources. However, in the Western Region, access to the major urban centers is fundamental to the marketing of agricultural produce.26 At present, only 18.1 percent of the population in the southwest, and only 20.1 percent of the population of the northwest, lives in cities. ENTRY INTO WTO The PRC’s entry into the WTO will have a big impact on agriculture, but not immediately in the Western Region. Subsistence farmers who do not participate much in the market economy are common in the Western Region. With membership, grain prices will continue to trend downwards, and imports are likely to increase.27 Irrigation investments to increase grain production are unlikely to be economic. The main impact of WTO entry may be to narrow the range of agricultural products in which the region has a comparative advantage. These products are likely to be fruit, tree crops, some animal products, and processed food products. A recent study analyzed the impact of WTO accession on agriculture in the regions by using a computable general equilibrium model. The study concluded that the difficulties of switching to highvalue-added cash crop production and migrating to the nonfarm sector (whether in TVEs or in city enterprises) were the key factors constraining the ability of less-developed regions to cope with WTO accession.28 The risk of adverse impact in the Western Region, with farmers regressing to subsistence agriculture, appears to be high.

Improvements in techniques and selection of appropriate crops will be very important. MARKETS AND PRICE CONTROLS The state grain purchasing agencies have a monopoly over grain purchases at set prices. They are allowed to sell grain at a price that ensures cost recovery. The ADBC provides loans to cover the full cost of purchases until the completion of sales. This system has serious drawbacks:29 • Nonstate grain agencies are likely to continue to market grain, probably at a competitive price as they have lower overhead costs. • With fixed state purchase prices, farmers have incentives to sell lower-quality grain to the state grain agencies. • The state grain agencies may misuse their monopoly power. • The state grain agencies may be unable to sell their grain at cost-recovery prices, in which case the ADBC has to shoulder the financial losses. The Government is preparing to open up the purchase and sale of grain, beginning in the Eastern Region.30 Opening up the grain trade should encourage farmers to optimize crop mix and upgrade grain quality. PROCESSING INDUSTRIES There is scope for the further development of processing industries in the Western Region, but it is easy to exaggerate the potential. Firstly, there is already a processing industry in the Western Region (Table 4-16).

Table 4-16 Output of Processing Industries, 1999 Region Eastern Central Western Southwest Northwest PRC

Yarn (Mt)

Cloth (Mt)

Silk (Mt)

Sugar (Mt)

Vegetable Oil (Mt)

3.16 1.74

10,495 4,467

0.05 0.00

1.93 0.47

3.74 2.13

9.62 10.89

1.32 0.42

0.18 0.10

0.29 0.47 5.67

1,001 1,087 17,050

0.01 0.00 0.07

5.44 0.69 8.53

0.52 0.95 7.34

10.66 1.81 32.99

0.46 0.10 2.30

0.07 0.01 0.36

Source: China Yearbook of Statistics 2000.

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Cigarettes Canned Foods (million cartons) (Mt)

Chinese Medicine (Mt)

Secondly, water supply is critical for most agricultural processing industries, which suggests that only in the southwest is there major potential.Thirdly, and most importantly, most of the rural industry in the Eastern Region is not in fact processing industry. Agricultural processing industries do not account for much of the PRC’s industrial output: Food processing .......................... 1.3 percent of gross industrial output Food manufacturing .................. 3.2 percent Timber processing, etc. ............. 0.4 percent As the PRC’s economy matures and incomes rise, the likelihood is that agricultural processing industries will account for an increasingly percentage of the national economy. Agricultural processing industries, while locally important, can at best make a small contribution to the overall development of the Western Region economy. Land tenure Ownership of land remains “collective,” with villages controlling the allocation of land (generally on 30-year leases) to households in accordance with government policies. Actually, there are several forms of tenure. Private plots are only a small percentage of total landholdings (Table 4-17). There is no legal framework for regulating the transfer of land rights. This has the following adverse consequences: • Farmers who have other employment opportunities make little effort to look after their land. • Farmland is not put to its most efficient use.

The new Land Administration Law did not reform the transfer of rights, which the draft of the legislation preferred to leave for a future revision in the General Principles of the Civil Law of 198631 (articles 71 to 83 of the Civil Law deal with the basic principles of property ownership and inheritance). Investing in agricultural development The PRC’s economists have for some time been discussing the need to gradually change the longstanding tendency to support industry at the expense of agriculture.32 The contribution of agriculture to funding industrial investment has come from three sources: taxation of rural areas, low prices for agricultural products, and savings transfers.33 However, in all three cases the contributions are likely to have been greatest in the richest agricultural areas. The most critical issues for the Western Region are the fiscal one and the investment one.

Implications for policies for agriculture and natural resources The Tenth FYP proposes four broad strategies for agriculture and forestry:34 • Ecological protection • Application of better techniques and technologies • Institutional reforms • Improvements in rural infrastructure

Table 4-17 Average Landholdings Per Capita, 1999 Cultivated Land Region Eastern Central Western Southwest Northwest PRC

Hill Land

Lease (ha)

Family Plots (ha)

Other (ha)

Total (ha)

Lease (ha)

Family Plots (ha)

Other (ha)

Total (ha)

Forest (ha)

1.31 1.99

0.06 0.08

0.02 0.04

1.40 2.12

0.13 0.20

0.12 0.15

0.02 0.01

0.27 0.35

0.05 0.03

1.01 3.34 1.65

0.11 0.13 0.09

0.08 0.12 0.05

1.19 3.59 1.78

0.25 0.55 0.21

0.21 0.05 0.14

0.03 0.25 0.04

0.48 0.85 0.39

0.07 0.38 0.08

Source: Calculated from the China Statistical Yearbook 2000.

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The major issues that policies must resolve are manifold: how to provide better livelihoods for the (surplus) rural population, protect biodiversity, reinstate forests on slopes, rehabilitate grasslands, halt desertification, and reduce pollution loads. ECOLOGICAL PROTECTION Reduce pollution With the improvement in the national economy, it is now practicable to review pollution standards and make then more stringent, where necessary, consistent with international levels. Apart from the need to minimize health and environmental impacts, WTO members will expect the PRC not to have a commercial advantage because of lax environmental controls. In the late 1990s, SEPA began stringent regulatory activities to compel industrial plants to either comply with standards or close down. Despite the program’s successes, many industries continue to exceed the pollution standards (and pay an excess pollution levy) and there are cases where pollution levels remain excessive, even though there is compliance with standards. This has implications for the timing of revisions in standards. Presumably, many industrial enterprises have invested heavily to comply with the existing standards. Generally, it would be inappropriate to immediately make the standards more stringent and cause another round of investment. A pollution reduction program could improve ambient environment conditions to acceptable levels and hold them there. The following actions are necessary: • Reformulating pollution standards to match international technology best practice, along with timetables for implementation that take account of the levels of investment likely to be required • Developing a system of licences whereby industries pay fees based on the actual load and toxicity of each pollutant discharge, considering the sensitivity of the receiving environment

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• Authorizing local governments to enter into pollution reduction contracts with industry, subject to enforceable commitments to make the production and technological changes needed for compliance with pollution standards • Developing a cleaner production program in the context of the 2002 Clean Production Law, with incentives for industry to adopt voluntary environmental audit, seek certification of compliance with international performance standards (the State Technical Supervision Bureau announced the adoption of the ISO Standards 14001, 14004, 14010, and 14012 relating to environmental management in 1996), and undertake continuing improvement in environmental performance Improve grassland management Rehabilitation of grasslands is essential both for the sake of livelihoods and for reasons of environmental protection. Grassland management through administrative measures to enforce carrying capacities has either not worked well or been expensive. Necessary measures include the following: • Expanding the application of science and technology to the management of grasslands and herds, i.e., expanding R&D and extension work • Developing model husbandry practices appropriate to the resources, climate, and geography35 • Reviewing the Grassland Law of 1985 with a view to strengthening the role of herdsmen and village committees in grassland management and reducing the role of government • Adjusting the main function of animal husbandry from simply maximizing animal populations to incorporate the protection of ecological environments • Giving up the objective of grain self-sufficiency and focusing on the development of a competitive animal feed industry

Conserve biodiversity Consistent with the national strategy for biodiversity conservation,36 the Government should undertake the following reforms: • Developing and implementing comprehensive biodiversity legislation dealing with access to genetic resources, intellectual property rights, conservation of ecosystems, and species conservation • Upgrading the national network for biodiversity information and monitoring, and ensuring that it extends across all of the Western Region • Introducing a program for local governments to prepare biodiversity policies and action plans (especially for protected areas) within the framework of SEPA guidelines • Introducing a system of natural resource accounting and revising the resources tax • Incorporating biodiversity conservation in school curricula • Improving the network of national nature reserves in the Western Region There is wide recognition of the deficiencies in administrative arrangements. International practice, almost universally, is for a single authority to have full responsibility for nature reserves, as is the practice for the management of other natural resources (forestry, fisheries, minerals, water, etc.). That model allows full development of integrated reserve management and subject specialization, factors found to be essential for effective nature reserve management and protection. Fund an increase in the rate of forest planting The State Forestry Administration plans to increase the nation’s forest cover from about 14 percent (of 1,337,000 km2 of forest area) in 1993 to 17 percent by 2010.37 The basis of this plan is an annual net increase in forest area of 2,000,000 ha, the estimated achievement between the 1989 and 1993 inventories. In 1997, less than 250,000 ha were planted for all purposes (Table 4-2).38 Even at the higher planting rate, the restoration of degraded

lands would take more than 50 years. The rate of planting must be increased, particularly where erosion continues to cause costly damage. According to local Forestry Bureau officials, the rate of planting could be increased substantially, the constraint being lack of finance.39 Forest establishment could be a major component of the PRC’s Least-Cost Greenhouse Gas Abatement Strategy.40 A greenhouse gas abatement tax could fund tree planting. Benefits of forest development identified by the Strategy include: • Potential for mitigating carbon emissions, at least for a time frame of 50 to 100 years • Improvement of environment and ecological conditions • Generation of rural employment and incomes The Strategy recommends the consideration of forestry-based greenhouse gas abatement options and arrangements for international investments. It identifies cost-effective and carbon-accumulationeffective forest establishment options, including various options for the Western Region. The strategy also proposes using afforestation along with forest protection to make use of the “very significant functions of forests in addressing global climate change.” The framework for such a greenhouse tax could include the establishment of a Greenhouse Gas Abatement Fund, the fund being: • based on a tax levied on dominant sources of greenhouse gas emissions • administered by a bank assigned or established to administer all financial aspects, within a framework of government policy • used to provide low-interest loans for the purpose of reforestation By way of illustration, a tax on coal-fired power generation, at a rate equivalent to 100 yuan per year for each household with power supply, could fund forest establishment at an annual rate of about 4,000,000 ha, about ten times the recent rate.41 This would greatly accelerate the establishment of all

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three classes of forest—production, commercial, and ecological. Recognizing the social benefits of afforestation, and the principle that government should continue to meet the cost of social benefits, the fund might provide finance at different levels for different purposes. For example, it could meet 20 percent of total costs for plantings primarily for commercial production, and 80 percent for plantings primarily for ecological protection. A concurrent review of the taxation of forest products, which is very high, could minimize administrative costs overall.The emphasis should be on planting slopes rather than grasslands. There is a need to recognize, as does the Forestry Development in Poor Areas Project, the potential contribution of forestry projects in mountainous areas to poverty alleviation.42 IMPROVEMENT IN TECHNIQUES Apply technology There are ecological, economic, and social imperatives to improving agricultural techniques. The following measures would assist: • Increasing investment in science and technology in the major research centers (such as animal science in Urumqi, desert and grassland research in Lanzhou, Chinese traditional medicine in Chengdu, and biodiversity in Kunming) • Promoting green agriculture and the production of producing green food • Publicizing and enforcing intellectual property rights for agricultural technology • Building a network of adult education for peasants and herdsmen (see Chapter 11), and agricultural extension programs • Concentrating extension efforts on poor areas, leaving other areas to the private sector (such as through input marketing) • Promoting the industrialization model whereby a leading company cooperates with extension agencies and peasants; improving cooperation between the various parties involved in the industrialization of agriculture and husbandry

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• Fully opening up the agriculture sector to foreign investment • Allowing areas to specialize according to their comparative advantage by promoting the operation of markets and the proportion of production entering the market • Encouraging foreign investment in pesticides by progressively banning highly toxic products Any substantial improvement in agricultural productivity implies a large surplus rural population. The policies proposed in Chapter 11 for education, training, and the facilitation of migration are therefore important to the improvement of agricultural productivity. Enlarge the scale of agriculture operations Through regional specialization it should be possible to achieve economies of scale. The Western Region should link the building of production bases to growth in scale of production and to changes in industry structure; become market-oriented and develop characteristic, well-distributed industries and products; foster the growth of leading industries and the development of a regional economic pattern suited to the region’s resources; and build the specific and regional agricultural production bases, turn its resource advantages into industry advantages, and maximize production rate and economic benefits. Encourage rural industry In the main, distance from markets dictates that rural industry in the Western Region will consist of the processing of agricultural products and not, as in the Eastern Region, activities unrelated to agriculture, husbandry, or forestry. There are many examples of successful development of processing industries in the Western Region,43 yet overall there is much less of such industries than elsewhere. The industrialization of the Western Region needs the participation of leading companies, and local governments should therefore make more room for nonlocal companies. The development of the Western Region should break through the confines of

agriculture itself, and achieve the integration of agriculture, industry, and business.This is especially difficult in those parts of the Western Region where a minority population occupies the rural areas and the cities contain a predominantly Han population. Chapter 13 discusses measures for overcoming the problems. Building new proceeds allocation systems is one key factor that will ensure the healthy development of industrialization. Development of “order-form agriculture” (what the farmer plants depends on the orders from the enterprises) would help commercialize agriculture.The leading companies should build the risk fund, make the protective purchases, and give benefits according to the quantity of goods that the peasants sell, thus building stable alliances with the farmers. Farmer should be able to buy shares by using land ownership, products, technology, and money, thus integrating the enterprises and the farmers who share the risk and benefits. INSTITUTIONAL REFORMS There is a need to redefine the role of the State in agriculture and forestry. There should be less government investment in commercial agriculture and forestry and more emphasis on scientific research, extension, regulation, and environmental protection. The provision in Article 5 of the Combating Desertification Law of 2001 that makes the State Forest Administration responsible for the national effort to combat desertification is unfortunate. It leads to bias toward physical solutions, particularly planting trees, whereas institutional reforms are fundamental to tackling the human causes of desertification and to encouraging rehabilitation. It would be better to allocate responsibility to an agency under the Ministry of Land Resources. Most of the powers necessary to protect (and control the use of) land derive from the Land Administration Law of 1998 administered by agencies of the Ministry of Land Resources, which already have overall responsibility for the rational use of land.

The Land Administration Law of 1998 has left many matters for future determination, so there is still a lot of scope for progressive institutional and land tenure reform. Possible further measures include the following: • Improving the contract system for grassland, and raising animals according to the quantity of pasture; clarifying and certifying the ownership and usufruct of grassland, and handing out certificates for the use and ownership of grassland • Enforcing the prohibition on the destruction or improper use of grassland; adjusting the frequency and intensity of grassland use, and promoting better techniques for their use • Allowing peasants and herdsmen to buy shares by giving them land ownership and usufruct • Compensating for the increment of land in the ecological protection region • Improving and regularizing the operation of the land rental system • Introducing a legal system for the transfer of land rights • Building the financial systems to support the development of agriculture and husbandry; trying to find a way that is both convenient to peasants and safe for the financial institutions • Reforming the tax on agriculture and husbandry by introducing regulations on permissible taxes and fees, and by transferring township fiscal powers to the county • Standardizing the allocation of land proceeds among the state, the collectives, and the farmers IMPROVEMENT OF RURAL INFRASTRUCTURE When PRC officials speak of the need to improve rural infrastructure, they are usually thinking of investments to enlarge the effective irrigation area, improve irrigation channels, and construct drainage, or to use spray irrigation, drip irrigation, or declining irrigation and preserving method. More wells can be built in the water-scarce grassland to provide drinking water for humans and animals. However, the low

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agricultural productivity implies that agricultural research and extension services are a higher priority; deficiencies in techniques and the education statistics (Chapter 11), that education facilities are vital; and, finally, the changing pattern of food consumption, that there is a need to improve transport and distribution systems (Chapter 6). Chapter 19 examines the priorities for rural infrastructure in greater depth.

Notes 1 Premier’s Report to the National People’s Congress, 5 March 2000: Greater efforts [must] be exerted to complete projects to protect natural forests, such as those along the upper reaches of the Yangtze River and the upper and middle reaches of the Yellow River. We need to intensify work on the Northeast, North and Northwest China Shelter Forest Projects and similar projects on the middle and lower reaches of the Yangtze. We need to do more to protect natural grasslands. We need to step up our efforts to prevent the karst from becoming stony desert. No time can be lost in bringing under control the sources of sand storms affecting the area around Beijing and Tianjin. We need to continue our efforts to control and treat water pollution in important river valleys, regions and sea areas. We need to treat pollution and do more landscaping in large and medium cities with the aim of noticeably improving the quality of the environment there. We also need to pay due attention to prevention and control of environmental pollution in rural areas.

2 Ross (1998). 3 Jahiel (1998). 4 Circular of the State Council on policies and measures pertaining to the development of the Western Region.

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5 National Environmental Protection Agency and State Planning Commission (1994). 6 Wang Jiaji et al. (1999). 7 Pan Shengzhou (2000). 8 Secretariat of China National Committee for the Implementation of the United Nations Convention to Combat Desertification (2000). 9 China Statistical Yearbook 2000, p. 5. 10 National Environmental Protection Agency and State Planning Commission (1994). 11 National Environmental Protection Agency and State Planning Commission (1994). 12 For example, Hamann (2001). 13 Sun Jian (2001). 14 Harkness (1998). 15 National Environmental Protection Agency of China (1998). 16 National Environmental Protection Agency of China (1998). 17 United Nations Development Program–United Nations Environment Program (2000). 18 National Environmental Protection Agency, State Planning Commission, and State Economic and Trade Commission (1997). 19 For a recent comprehensive review of standards see Asian Development Bank (2000e). 20 Li Dasheng et al. (1998) 21 Runsheng Yin (1998). 22 Sichuan Statistical Yearbook 2000, p. 301. 23 National Environmental Protection Agency and State Planning Commission (1994). 24 Sun Jian (2001). 25 Verburg et al. (2000). 26 Liu Jun (2001). 27 Jikum Huang et al. (1999). 28 Xinshen Diao et al. (2001). 29 Yongzheng Yang (1999). 30 State Council Information Office (2001b). 31 Asian Development Bank (2000e). 32 Chen Jiyun (1999). 33 Li Dasheng et al. (1998). 34 Report on the Outline of the Tenth Five-Year Plan for National Economic and Social Development (2001).

35 After years of natural selection and human choice, there are various species of livestock, such as the white hair goat of Erduosi, muqin sheep of Wuzhu, nap sheep of Xinjiang, and yak of Tibet that are well adapted to local environments. 36 National Environmental Protection Agency of China (1998). 37 Ministry of Forestry (1995). 38 Forestry Bureau officers in Yunnan Province said that current plantation establishment rates were less than in the mid-1990s because of funding constraints. 39 Consultations by the international team in Yunnan and Xinjiang, April 2001. 40 Asian Development Bank, Global Environment Facility, and United Nations Development Program (1998). 41 Calculation based on (i) urban population of 400 million, that is, about 60 million households serviced from coal-fired power generation; and (ii) average cost of forest establishment, 1,500 yuan, current cost in Yunnan.

42 World Bank (1998). 43 For example, the Yili Group of Inner Mongolia started from a small milk-processing factory owned by a hui in 1983 and became a modern enterprise producing frozen foods. In 1995, the company extended its operations into ice cream making. Its annual output has grown to 100,000 t. In 1996, the Yili Group listed on the stock market, the first milk producer to do so. The Yili brand became well known, and the company became one of the leading companies in the processing of agriculture and husbandry produce. By the end of 1999, its total assets had grown to 990 million yuan, net assets to 732 million yuan, sales revenue to 1,150 million yuan, and profit to 110 million yuan. At the same time, the Yili Group cooperates with farmers and provides funds for raising cows, thus supporting the milk industry. The Xinfa Group of Inner Mongolia and the Delong Group are other leading groups driving the development of local SMEs.

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CHAPTER

5

SOCIAL CONDITIONS This chapter provides an overview of social conditions in the Western Region, with particular attention to demography, poverty, and health, and explains the policy implications of this analysis.

Demographic context The PRC’s demography has undergone remarkable changes. In 1950, life expectancy at birth was only 50.2 years for women and 53.9 for men. By 1996, it had reached 73.0 for women and 68.7 for men.1 POPULATION GROWTH During the 1990s, population growth slowed considerably as the birth rate fell while the death rate remained more or less the same. However, while population growth in the southwest was just below that for the PRC as a whole, it was substantially higher in the northwest (Table 5-1). Annual population growth rates in Guizhou, Tibet, Qinghai, Ningxia, and Xinjiang were higher than in the rest of the Western Region and the rest of the PRC. There is a strong association between high

fertility rates, low urbanization, and these minority populations.2 The highest fertility rates and the highest infant mortality rates are found in Xinjiang and Tibet. For the rest of western PRC, fertility rates are now below replacement rate. As socioeconomic changes are likely to be conducive to low fertility rates, the natural growth of the population will continue to slow and is likely to turn negative sometime in the 21st century.3 In 2000, the population of the Western Region was 355 million, or 28 percent of the PRC’s population of 1,266 million. According to low-medium projections, the PRC’s total population will peak in 2030 at either 1,515 million or 1,441 million.4 The first consequence of this growth will be that the 16–64 age group will peak at 70.9 percent of the total population in 2010. This will then cause the labor force to peak at an estimated 893 million in 2020.5

Table 5-1 Population Growth in the Western Region, 1990–2000 1990

Southwest Sichuan Chongqing Guizhou Yunnan Guangxi Tibet Subtotal Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Subtotal PRC

2000

Population (millions)

Natural Growth Rate (%)

78.9 29.1 32.7 37.3 42.2 2.2 222.4

1.14 n.a. 1.52 1.57 n.a. 1.71

33.2 22.6 4.5 4.7 15.3 21.6 101.9 1,143.3

1.70 1.45 1.69 1.88 1.86

1.44

Natural Growth Ratea (%)

Annual Average Growth, 1990–2000 (% )

83.3 30.9 35.3 42.9 44.9 2.6 239.8

0.68 0.50 1.42 1.17 0.80 1.58 0.89

0.54 0.60 0.75 1.40 0.62 1.76 0.76

36.1 25.6 5.2 5.6 19.3 23.8 115.5 1,265.8

0.61 0.92 1.39 1.32 1.18 0.72 0.86 0.88

0.83 1.26 1.42 1.80 2.32 0.96 1.26 1.02

Population (millions)

Source: Calculated from the China Statistical Yearbook 2000 and Land Population Census Office (2001). a 1999 data.

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Figure 5-1 Population Density in the PRC

More than 50 persons/km2 1_50 persons/km2 Less than 1 person/km2

Source: Fu Ma Li and Yang Shonyi (1996).

POPULATION DISTRIBUTION The population is heavily concentrated in the more hospitable parts of the Western Region. The population density in the extensive deserts and mountains is extremely low (Figure 5-1). The population densities in much of the southwest are broadly comparable to those in the Central Region and the Eastern Region.

Figure 5-2 Urban Population Distribution, 1999

Central 92 cities > 200,000

Harbin

LEVEL OF URBANIZATION Urbanization in the PRC has lagged behind that of other developing countries, mainly because of controls on rural-urban migration, the past bias against the tertiary sector of the economy and the emphasis on industrial and agricultural production. Most of the city population is in the Eastern and Central regions (Figure 5-2). Especially in the northwest, vast distances separate cities (Figure 5-3), and this will slow the development of an integrated labor market. The low level of urbanization and distance will together restrain the growth of employment outside agriculture and pastoral industries.

Wuhan

Eastern 75 cities > 200,000

Beijing

Shanghai

Northwest 19 cities > 200,000 Lanzhou

Xi an

Southwest 24 cities > 200,000 Chengdu

0

1

2

Chongqing

3 4 5 6 7 Nonfarm population (million)

8

9

10

Source: Urban Statistical Yearbook of China 2000

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Figure 5-3 Cities in the Western Region with Populations of Over 1 Million

Chifeng Urumqi Hothot Baotou

Datong

Taiyuan

Lanzhou Tianshui Xi’an

Mianyang Nanchong Chengdu Suining Leshan Neijiang Guang’an Chongqing Zigong Luzhou Guiyang Kunming Nanning Guigang Qinzhou

The level of urbanization of the Western Region is comparable to that of the Central Region but well below that of the Eastern Region (Table 5-2).

northwest grew at an annual rate of 2.9 percent, compared with 4.8 percent in the southwest and 5.2 percent in the Eastern Region.6

RATE OF URBANIZATION Between 1990 and 2000, the PRC’s urban population grew more than four times as fast as the total population, at an average annual rate of 4.8 percent, compared with 1.1 percent for the total population. Such has been the growth of the urban population that the rural population actually fell by 44 million between the census dates. However, the rate of urban population growth has been slower in the Western Region, especially in the northwest. Between 1990 and 2000, the urban population of the

Incidence of poverty

Table 5-2 Distribution of Population Between Cities, Towns, and Counties, 1999

Region Eastern Central Western Southwest Northwest PRC

Cities (%)

Towns (%)

Counties (%)

Total (%)

27.3 20.7

11.1 9.4

61.6 70.0

100 100

18.1 21.0 22.7

10.7 10.9 10.4

71.3 68.0 66.9

100 100 100

Source: China Population Statistical Yearbook 2000.

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To review the incidence of poverty it is first necessary to define it. In its World Development Report 1990: Poverty, the World Bank introduced a standard of $1 a day, measured in 1985 international prices and adjusted to local currency using PPP conversion factors. At the request of ADB, this study has used the $1-a-day standard, as the government standard is very low and not appropriate for longterm planning. AVERAGE INCOMES In both urban and rural areas, average incomes rose steadily through the 1990s. They are now well above the $1-a-day level (Figure 5-4). Urban incomes have risen faster than rural incomes and are now well above rural incomes. In

Figure 5-4 Urban and Rural Household Incomes in the PRC, 1990–1999 PRC rural 1990 = 100 500 PRC urban PRC rural

Western Region rural $1 a day

400 300

the Western Region, both urban and rural incomes, and especially the latter, are below the national averages (Table 5-3).

200 100

INCOME DISTRIBUTION The widening gap between rural and urban incomes points to rising inequality. Before 1995 inequality was increasing even within the rural population alone (Table 5-4).

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Source: Calculated from Rural Household Survey Yearbook 2000 and China Statistical Yearbook 2000.

Table 5-3 Comparison of Average Per Capita Urban and Rural Incomes, 1999 Urban Region PRC Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Rural

Rural/Urban

Income (yuan)

Net Income (yuan)

Income (yuan)

Net Income (yuan)

Income (%)

Net Income (%)

5,889

5,854

2,987

2,210

50.7

37.8

5,916 5,510 4,953 6,235 6,956 5,648

5,896 5,478 4,934 6,179 6,909 5,620

2,347 2,697 1,861 2,210 1,699 2,751

1,720 1,789 1,334 1,387 1,232 1,972

39.7 48.9 37.6 35.4 24.4 48.7

29.2 32.7 27.0 22.5 17.8 35.1

4,679 4,502 4,727 4,509 5,360 4,799

4,654 4,475 4,703 4,473 5,320 4,771

1,953 1,796 2,008 2,775 2,917 3,225

1,406 1,393 1,425 1,721 1,600 1,981

41.7 39.9 42.5 61.5 54.4 67.2

30.2 31.1 30.3 38.5 30.1 41.5

Source: Statistical Yearbook of China 2000 and Rural Household Survey Yearbook 2000.

Table 5-4 Estimates of Poverty in the PRC, Gini Coefficients to 1995 Source

Period Covered by Study

Gini Coefficients

CASS and foreign scholars

1988–1995

Rural increase from 0.338 to 0.416 Urban increase from 0.233 to 0.332 General increase from 0.382 to 0.452

World Bank

1981–1995

General increase from 0.288 to 0.388

State Council

1978–1995

Rural increase from 0.212 to 0.340 Urban increase from 0.160 to 0.280 General increase by mid-1990s from 0.375 to 0.390

Sundrum: Typical Gini ratios for • industrial economies • developing economies

0.30–0.40 Greater than 0.40

Source: Morgan (2000), note 13; Sundrum (1990).

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99

Figure 5-5 Lorenz Curves for Rural Incomes, 1995 and 1999 Cumulative income 100 1995

1999

Equal incomes

80

60

40

20

0 0

10

20

30

40 50 60 70 Cumulative population

80

90

100

Source: Calculated by consultants from the China Rural Household Statistical Yearbook 2000.

Figure 5-6 Urban Net Incomes, 1999 Yuan per capita 16,000

PRC Guangxi

Guizhou Sichuan

Yunnan Shaanxi

Xinjiang Shanghai

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0

10

20

30

40 50 60 % of households

70

80

90

100

Source: Provincial yearbooks and Statistical Yearbook of China 2000.

However, since 1995 this trend in rural incomes has been reversed. In particular, the incomes of the poorest half of the rural population have increased much faster than those of the richest half (Figure 5-5). Incidence of urban poverty The World Bank estimates that less than 1 percent of registered urban residents have incomes below $1 a day. However, differences in price levels between cities complicate the analysis. The urban household

100

surveys publish expenditure data for the poorest 5 percent of urban households. In the Western Region, the average incomes of the poorest 5 percent of the urban population are below those of the PRC’s urban population as a whole, but not much lower. The expenditure data show that the poorest 5 percent of urban populations on average have substantial nonfood expenditures and possess many consumer durables. Moreover, the position of the poorest 5 percent seems to be slowly improving (Table 5-5). In constant price terms, total living expenditure in 2000 was above the 1994 level but below the 1996 level. However, food prices have fallen substantially since 1996, and food as a proportion of total living expenditure by the poorest 5 percent of households has steadily declined and was close to 50 percent in 2000. Data on food consumption do not indicate any deterioration in nutrition standards (Table 5-6). Possession of consumer durables has increased (Table 5-7). It is fair to say that conditions for the poorest 5 percent are slowly improving, but they are not improving as fast as those for poor rural households, and not nearly as fast as average urban incomes. As the distinction between the urban and rural economies gradually breaks down, it may be that relative poverty in the cities will become more significant in the future. Incidence of rural poverty Despite the unsatisfactory income distribution, the Government has had considerable success in reducing poverty, especially rural poverty. Incidence of poverty according to official figures The government standard for defining poverty reflects the cost of meeting basic needs. It includes the cost of sufficient food to satisfy daily nutritional requirements of 2,100 calories, plus an allowance for nonfood needs such as housing, fuel, clothing, and transport. In 1999, this standard was 625 yuan.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 5-5 Expenditure of Poorest 5 Percent of Urban Households in the PRC, 1994–2000

Expenditure (yuan, constant 1999 prices) Total living Food Food/Total Price indices General Food

1994

1995

1996

1997

1998

1999

2000

1,971 1,215 61.7%

2,366 1,433 60.6%

2,601 1,535 59.0%

2,483 1,431 57.6%

2,421 1,318 54.5%

2,328 1,227 52.7%

2,181 1,102 50.5%

100.0 100.0

117.1 122.9

108.3 107.6

102.8 99.9

99.2 96.8

98.6 95.8

100.4 97.4

Source: Calculated by consultants from statistical yearbooks.

According to government statistics, the incidence of poverty declined from 70.0 million in 1994 (when the Government substantially revised poverty policies) to 34.1 million in 1999, or 3.7 percent of the population. Of the 34.1 million, 48.2 percent lived in the Western Region proper (excluding Inner Mongolia and Guangxi, which accounted for 7.1 percent of the population. Incidence of rural poverty according to World Bank standard The Government acknowledges that its poverty standard is a very austere one, and that policy formulation needs also to consider the plight of people who are close to the poverty line.The Government recognizes the value of using the higher World Bank standard of $1 PPP a day for some purposes. Using this standard, the World Bank estimated that the number of rural poor declined from 287 million in 1991 to 106 million in 1998 (no reliable data by region using this standard are available; differences in the cost of living complicate comparisons).7 In 2000, the World Bank updated the $1 PPP standard to $1.08, or 772 yuan a year in PPP terms.8 On this basis, the number of rural poor in 1999 would have been about 71.9 million (7.8 percent). The data on average rural incomes indicate that the majority of the rural poor now live in the Western Region. Average rural incomes per capita in the Western Region are only 71.5 percent of those in the rest of the PRC. Food expenditure as a proportion of total expenditure is higher in the Western Region. NATURE OF RURAL POVERTY The PRC’s achievement in reducing poverty is in strong contrast to a virtually stagnant problem of mass poverty in South Asia, and this raises questions about the nature of the remaining poverty. The World Bank (2001a) refers to “residual poverty.” Looking

Table 5-6 Food Consumption of Poorest 5 Percent of Urban Households, 1994 and 2000 Item Pork Beef Mutton Poultry Fresh eggs Fresh vegetables

1994 (kg)

2000 (kg)

12.8 1.3 0.7 2.5 6.9 100.5

12.6 1.3 0.7 3.5 8.8 96.4

Source: China Statistical Yearbook 1995 and China Statistical Yearbook 2001.

Table 5-7 Consumer Durables Owned by Poorest 5 Percent of Urban Households Item Sofa Desk Washing machine Shower Color TV Refrigerator

1994 (no.)

2000 (no.)

146.3 72.6 73.4 11.7 62.0 38.9

147.7 68.6 74.4 26.3 96.0 58.7

Source: China Statistical Yearbook 1995 and China Statistical Yearbook 2001.

toward 2020, it is indeed useful to think of the PRC’s poverty as residual in character. The concept has some advantages: • It recognizes the great achievement in poverty reduction in recent decades. • It distinguishes the nature of poverty in the PRC from the desperate poverty of South Asia. • It draws attention to people that remain on the margins of national economic growth, whom poverty or health or welfare programs should target. • It recognizes that in most countries some residual poverty is very intractable, and does not go away simply as a by-product of economic growth.

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101

There is already a vast difference between the nature of poverty in the PRC and India.9 The poorest families in the PRC, unlike their Indian counterparts, generally have: • More than one set of clothing • Some consumer durables, storage containers, and farming equipment and tools • Bicycles, thermos bottles, and sometimes even fashion goods such as high-heeled shoes • Houses of decent size, where necessary with winter heating with flues to remove fumes10 • Land attached to their homes and small farm animals such as pigs (Yunnan) or goats (Xinjiang)

Table 5-8 Food Consumption of Poorest Sections of PRC Rural Population, 1990–1999 Income Group Poorest 5%

Grain Vegetable Cooking oils Meat Poultry Eggs Sugar Alcohol

5–10%

10–20%

1990 (kg)

1999 (kg)

1990 (kg)

1999 (kg)

1990 (kg)

1999 (kg)

767 322 12.15 7.85 1.53 4.85 2.64 9.9

1397 438 30.6 58.5 4.11 14.6 5.33 37.6

1041 436 16.19 9.55 2.15 6.29 3.64 13.1

1839 584 40.4 80.3 5.67 18.4 7.31 48.4

1296 2300 553 773 20.43 50.5 11.62 105.4 2.84 8.43 7.91 24.1 4.66 7.98 16.7 59.5

Source: Statistical Yearbook of China 1991 and Statistical Yearbook of China 2000.

Table 5-9 Poverty Population, by Region and County Status, 1999

Region

All Poverty Poverty Counties/ Counties Counties All Counties/ (million) (million) (%)

Eastern (including Guangxi) Central (including Inner Mongolia) Western (excluding Guangxi and Inner Mongolia) PRC Source: China Rural Poverty Monitoring Report 2000.

102

5.0 12.7

1.9 6.0

37.9 47.0

16.4 34.1

10.1 18.0

61.7 52.7

Even among the poorest sections of rural society, food intake has greatly improved in recent years (Table 5-8). The major implication of this difference is that in the PRC there is a much greater potential for selfreliance in achieving better living standards. POVERTY COUNTIES In 1986, the Government stipulated criteria for designating counties as poverty counties.The basic criterion was average net income below 150 yuan, or 200 yuan in minority autonomous counties or 300 yuan in counties that had made a great contribution during the revolution. In 1994, the Government reviewed the list of counties, removed from the list those with average incomes above 700 yuan in 1992, and added counties with incomes below 400 yuan in 1992. The 1994 list of 592 poverty counties, based on 1992 data, was further revised in 2002. The poverty county concept still largely defines the scope of government poverty programs.11 Share of total poverty population The poverty counties contained 52.7 percent of the poverty population in 1999, down from 72 percent in 1992. However, in the Western Region, the percentage had risen to 61.7 percent (Table 5-9). Characteristics by location About 48 percent, or nearly half, of the population of the poverty counties is in the Western Region. Half of the Western Region has a much lower income than the other half (Table 5-10). Average household size in the Western Region poverty counties is higher, and the higher ratio of household members to workers partly contributes to the lower per capita incomes, but only partly. Characteristics by terrain Over 60 percent of the poverty county population lives in mountainous areas (Table 5-11). Average per capita incomes are lower in the poverty counties in mountainous areas.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 5-10 Characteristics of Poverty County Population, by County Location, 1999

Category Eastern Region, including Guangxi Central Region, including Inner Mongolia Western Region, excluding Guangxi and Inner Mongolia Total

% of Poverty County Population

Average Net Income (yuan)

Consumption Expenditure (yuan)

Expenditure on Food (yuan)

Average Household Size (no.)

Average No. of Workers (no.)

14.7 37.1 48.2 100.0

1,787 1,402 1,112 1,347

1,230 1,114 919 1,045

688 627 598 625

4.4 4.2 4.7 4.46

2.86 2.71 2.85 2.80

Source: China Rural Poverty Monitoring Report 2000.

Table 5-11 Characteristics of Poverty County Population, by Terrain, 1999

Category

% of Poverty County Population

Average Net Income (yuan)

Consumption Expenditure (yuan)

Expenditure on Food (yuan)

Average Household Size (no.)

Average No. of Workers (no.)

Plains Hills Mountains Total

17.9 21.2 60.8 100.0

1,527 1,497 1,248 1,347

1,046 1,043 1,011 1,045

577 639 634 625

4.38 4.62 4.38 4.46

2.77 3.01 2.91 2.80

Source: China Rural Poverty Monitoring Report 2000.

Table 5-12 Characteristics of Poverty County Population, by County Status, 1999

Category

% of Poverty County Population

Average Net Income (yuan)

Consumption Expenditure (yuan)

Expenditure on Food (yuan)

Average Household Size (no.)

Average No. of Workers (no.)

29.5a 13.4 a 34.1 a 16.8 a 100.0

1,420 1,109 1,235 n. a. 1,347

1,118 926 992 n. a. 1,045

632 600 641 n. a. 625

4.58 4.91 4.93 n. a. 4.46

2.91 2.94 3.04 n. a. 2.80

Revolutionary Border Minority Other locations All counties Source: China Rural Poverty Monitoring Report, 2000. a Consultants’ estimates; exact percentage not available from the source report.

Characteristics by county status Incomes are highest in the counties that contributed to the revolution, and lowest in the border counties (Table 5-12). Chapter 13, Minorities, examines poverty among minorities. Chapter 14, Cross-Border Cooperation, examines, among other topics, the possibilities for improving the economies of border counties, which, in principle, have an advantageous location. INCIDENCE OF RURAL POVERTY ACROSS THE WESTERN REGION Of 246 counties in the PRC with average rural incomes below 1,000 yuan, 194 are in the Western Region (Table 5-13).

However, in 1999 there were 121 counties with rural incomes below 1,000 yuan that were not poverty counties, almost as many as the 125 poverty counties with rural incomes below 1,000 yuan. Thus the designation of poverty counties is no longer consistent with the actual distribution of poverty. One reason is that, except in Xinjiang, incomes in the poverty counties have been steadily improving, more or less in line with the increase in rural incomes in the PRC in general (Figure 5-7). POVERTY AND NONFARM EMPLOYMENT Nearly four-fifths of rural employment in the Western Region is in agriculture, a far higher proportion than in other regions (Chapter 11). In the Western Region,

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103

Table 5-13 Counties by Poverty Status and Average Rural Incomes, 1999 Poverty Counties Region Southwestern Sichuan Tibet a Yunnan Guizhou Guangxi Subtotal Northwestern Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Subtotal Total PRC

Other Counties

Total Counties

Income <1000 Yuan

Income >1000 Yuan

Income <1000 Yuan

Income >1000 Yuan

Income <1000 Yuan

Income >1000 Yuan

15 n. a. 36 0 0 51

14 n. a. 37 48 28 127

20 n. a. 23 12 0 55

131 n. a. 30 26 76 263

35 n. a. 59 12 0 106

145 n. a. 67 74 104 390

17 17 3 3 12 0 52 125

33 23 11 5 13 31 116 462

9 9 10 0 8 0 36 121

48 38 16 12 52 68 234 1,914

26 26 13 3 20 0 88 246

81 61 27 17 65 99 350 2,376

Source: Agricultural Yearbook of China 2000. a The source document has no data for Tibet.

impact in keeping the gap between urban and rural incomes from widening further.

Figure 5-7 Rural Household Incomes, 1994 to 1999 Average household net income, 1999 prices (yuan) 2,500 PRC Western region Gansu poverty counties Yunnan poverty counties

Sichuan poverty counties Xinjiang poverty counties

2,000

1,500

1,000

500 1994

1995

1996

1997

1998

1999

Source: Calculated by consultants from China Rural Poverty Monitoring Report (poverty counties), China Rural Household Statistical Yearbook (Western Region), and China Statistical Yearbook 2000 (entire PRC).

counties that have little nonagricultural output tend to have low GDP per capita (Figures 5-8 and 5-9). TVEs have not developed in the Western Region to the same extent as they have in the Eastern Region for a variety of reasons (see Chapter 11, under “Rural Employment, by Sector”), and are especially few in remote areas. The geographical concentration partly explains why TVEs overall have not had much

104

POVERTY AND EDUCATION The lack of employment opportunities and low incomes lead to low school enrollment. It costs about 200–300 yuan each year to send a child to primary school. The amount covers a range of incidentals including clothing, pens, and paper (Table 5-14). Sending a child to secondary school costs about double that amount, and higher education costs about 1,500–2,000 yuan per student per year. Shaanxi, Xinjiang, Gansu, and Inner Mongolia all had completion rates in the 1990s that were close to the average for the entire PRC.This suggests that, on average, households in the northwest were under less economic pressure than those in the southwest, where Yunnan, Guizhou, and Qinghai all had completion rates significantly below the average for the country. POVERTY AND ANIMAL HUSBANDRY People whose livelihood depends on animal husbandry rather than arable farming live in fundamentally different economic and social conditions. They are much, much smaller in number than the arable farming population. In Inner Mongolia, which has the most extensive grasslands in the PRC, the herdsmen population is less than 20 percent of the peasant population. It seems that the livelihoods of

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 5-8 GDP Per Capita and Nonagricultural Population in Sichuan Counties, 1999a GDP per capita (yuan)

10,000

y = 281.34x - 15.534 R2 = 0.4152

8,000

herdsmen improved in the 1990s, mainly because they were able to increase incomes by increasing animal numbers. In Inner Mongolia, for example, incomes of the animal husbandry group are on average higher than those of the arable farmers (Figure 5-10). However, in Inner Mongolia there is little difference between the incomes of the poorest 20 percent of herdsmen and the poorest 20 percent of peasants. In both cases the poorest 20 percent had net incomes less than 1,000 yuan in 1999. The percentages under 625 yuan and $1.08 PPP were also similar (Table 5-15). Moreover, the cultivated area expanded. Despite (or perhaps because of ) their progress in the 1990s, many herdsmen populations are in danger of becoming victims of the “tragedy of the commons.”The following are two examples of recent studies that have documented this: • In the Jungarian Basin (Xinjiang), reduced mobility and overgrazing threatens the availability of fodder, further degradation of land resources, and the livelihoods of the Kazak herdsmen. The pressure on them is also due to the expansion of cultivation, the growing competition for water, the absence of a pricing policy for groundwater users (Chapter 16), and the lack of policies to encourage the growth of fodder crops (Chapter 4).12 • The pastoralists of Dari County in the southeast of the Qinghai-Tibetan Plateau suffer from land degradation due to overgrazing.13 In the harsh climate of Dari (with altitudes of 3500 m to 4000 m), a “tragedy of the commons” is taking place as herders overgraze the pastures. Herding families

6,000

4,000

2,000

0 0

5

10 15 20 25 30 Nonagricultural population as % of total

35

40

Source: Calculated by consultants from Statistical Yearbook of Sichuan 2000. a Excludes counties over with over 30% nonagricultural population on the grounds that these are mostly on the Sichuan plain and semiurban in character; however, the relation is similar even if these counties are included.

Figure 5-9 TVE Employees and GDP Per Capita in Sichuan Counties, 1999 GDP per capita (yuan) 12,000 10,000 8,000 6,000 y = 37.603x + 1264.3 R2 = 0.4636

4,000 2,000 0 0

50

100

150

200

250

300

TVE employees per 1,000 population Source: Calculated by consultants from Statistical Yearbook of Sichuan 2000. Note: See note to Figure 5-8.

Table 5-14 Schooling Expenses per Child in Poverty Counties, 1999 Southwest (yuan per capita) Item Tuition Books Education fund Boarding expense Traffic expense Other expense

Northwest (yuan per capita)

Sichuan

Guizhou

Yunnan

Guangxi

Ningxia

Shaanxi

Gansu

Inner Mongolia

247 103 55 104 124 182

95 43 18 63 19 41

92 63 19 46 40 82

230 70 38 93 63 128

37 49

193 86 38 96 25 174

52 43 13 30 26 24

118 64 36 117 51 82

23 45 38

Source: National Bureau of Statistics and Leading Group for Poverty Alleviation and Development (2000).

CHAPTER 5: SOCIAL CONDITIONS

105

Figure 5-10 Comparison of Incomes of Herdsmen and Peasants in Inner Mongolia, 1999

are well aware of the causes of the environmental degradation, but lack the social organization to deal with them, and are now dependent on intermittent, emergency Government relief.

% of population 100

80

Burden of disease

60

40

20 Peasants

Herdsmen

0 0

1,000

2,000

3,000 4,000 5,000 Net income (yuan)

6,000

Source: Calculated from data in the Inner Mongolia Statistical Yearbook 2000.

7,000

MORTALITY Mortality rates are very high in the Western Region. For each age group, mortality rates in the rural areas are higher than in the cities. However, the higher mortality in rural areas is only part of the story. If one applies the PRC’s age-specific mortality rates for city, town, and county populations to the city, town, and county populations of the Western Region, one finds that actual mortality is higher than one would expect. This is true of every part of the Western Region except Inner Mongolia (Table 5-16).

Box 5-1 A Marginalized Miao Family in Luquan County, Yunnan

A

t the very entrance to the Miao village was a handsome school. Just 150 m away, separated only by a shed for pigs, an extended Miao family lived in considerable poverty. We talked to two sisters about their lives; the men were out in the fields. One sister was talkative and well informed, the other was less so and indeed did not know her age. The other sister volunteered the information that she was 36. Both women lived in mud-brick homes of decent size, with good thatching. One house lacked windows, was very dark inside, and was filled with smoke because the stove had no flue. It was possible to stand comfortably and indeed the house had a mezzanine level piled high with stored household goods. Hanging in the middle of the house was a bright light bulb. The family was not very poor by contemporary Indian standards in, say, Bihar state. They had cooking utensils, farming equipment, and

more than one set of clothes. They appeared to be partially selfsufficient in clothing because they were preparing a fiber called ma from which they wove cloth. The sister who could not remember her age also had a pig and five piglets. She was about to sell these because she could not afford to feed them. The more articulate sister had a nineyear-old son who was not at school. It was too expensive, she said. When the boy turned seven, the headmaster had come to fetch him but after the first day or so, he could not compel the boy to return. This young boy was very small for his age, and may have been stunted owing to poor nutrition. The school is a mere 150 m away—but the family’s poverty holds them back from allowing him to attend. The mother did not intend to allow the boy or indeed her two younger girls to study.

Source: Field visit by team members, April 2001.—Photo Dr. M. Vicziany

106

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 5-15 Herdsmen and Peasants in Inner Mongolia, 1995–1999

Herdsmen Total population Average household size (persons) Number of animals per herdsman Average per capita net income (1999 prices) Percentage of population with incomes below 625 yuan Percentage of population with incomes below $1 per day, PPP Peasants Total population Average household size (persons) Cultivated area (km2) Cultivated area per peasant (ha) Average per capita net income (1999 prices) Percentage of population with incomes below 625 yuan Percentage of population with incomes below $1 per day, PPP

1995

1999

Average Annual Increase

1,881,000 4.4 25 2,124 9.3 15.0

1,911,500 4.2 27 2,698 5.7 8.6

0.4%

12,330,000 4.0 5,491,000 0.46 1,372 18.5 28

11,871,900 4.0 7,524,000 0.61 1,903 6.4 10

(0.9%)

1.9% 6.2%

8.2% 8.5%

Source: Inner Mongolia Statistical Yearbook 2000.

The higher death rates mean about 165,800 more deaths than expected each year in the Western Region. MORBIDITY Morbidity rates are also higher in the Western Region than in the Eastern Region (Table 5-17). The rates are not age-specific: the Western Region has a younger population than the Eastern Region. The real difference in morbidity is therefore greater than Table 5-17 suggests. DISABILITY The Government estimates that there are 60 million people in the PRC with disabilities; of these, 80 percent live in the rural areas. The incidence of disability is higher in the Western Region, but not markedly so (Table 5-18). The Government estimates that among the disabled poor, 30 percent live in the 592 poverty counties. If correct, this figure is surprisingly low, since the poverty counties contain 52.7 percent of the rural poor (Table 5-9).

Table 5-16 Analysis of Death Rates, 1999

Region Northwest Gansu Qinghai Ningxia Shaanxi Inner Mongolia Xinjiang Southwest Yunnan Sichuan Guizhou Chongqing Tibet Guangxi PRC

Predicted Death Ratea (‰)

Actual Death Rate (‰)

Actual/ Predicted (%)

Excess b (no.)

5.36 5.16 4.79 5.97 6.58 4.62 5.58

6.14 6.46 5.39 6.08 5.80 6.63 6.13

114.5 125.2 112.4 101.9 88.1 143.8 110.0

19,295 6,431 3,129 3,923 –11,024 34,689 30,557

6.00 6.35 5.50 6.53 4.62 6.52 6.20 6.16

7.45 6.69 7.32 6.62 7.05 6.61 6.89 6.16

124.2 105.4 133.0 101.4 152.6 101.3 111.2 100.0

59,210 28,504 65,366 2,676 6,014 4,037 165,806 0

Source: Calculated by consultants from China Population Statistical Yearbook 2000. a Age-specific death rates for cities, towns, and counties in the PRC as a whole applied to the city, town, and county populations in each age group. b The difference between the predicted and actual death rates multiplied by the population.

CHAPTER 5: SOCIAL CONDITIONS

107

Table 5-17 Morbidity in the Western and Eastern Regions, 1998 From Chronic Illnessa Region/Type of Area Western Region Provincial cities Prefecture cities Southwest counties Northwest counties Eastern Region Provincial cities Prefecture cities County

From Other Illness

Male (%)

Female (%)

Male (%)

Female (%)

22.3 15.9 8.8 10.2

26.3 17.8 10.3 13.7

20.2 18.7 13.8 12.2

24.4 22.0 16.4 15.8

18.8 10.5 7.4

22.2 12.4 7.3

15.5 12.6 13.4

18.4 14.5 14.2

Source: Calculated from Ministry of Health (1999). a Diagnosed as such by a doctor six months before the survey. The illness could be: (i) communicable disease such as TB or noncommunicable disease such as coronary heart disease or high blood pressure; or (ii) other chronic illness for which the patient was taking treatment and/or medicine, or undergoing physical therapy. b Illness in two weeks before the survey, defined as an uncomfortable feeling that prompts the patient (i) to go to a medical unit for treatment; or (ii) to take medicine or follow some course of treatment, of the patient’s own initiative; or (iii) to leave work or school or stay in bed for a day or more.

Table 5-18 Disability in the Western Region, 1998

Region/Type of Area Western Region Provincial cities Prefecture cities Southwest counties Northwest counties Eastern Region Provincial cities Prefecture cities Counties

Walking Disability (‰)

Sight Disability (‰)

Using WC (‰)

Hearing Disability (‰)

1.78 1.98 1.17 0.99

2.56 1.87 1.31 1.04

1.49 1.65 0.87 0.82

1.77 1.79 1.45 0.99

1.74 1.38 1.05

1.97 1.40 1.04

1.56 1.14 0.92

1.74 1.27 1.17

Source: Calculated from Ministry of Health (1999)

ECONOMIC AND SOCIAL BURDEN OF DISEASE In the 1990s, the Global Burden of Disease project introduced a new measure—the Disability-Adjusted Life Year (DALY)—to quantify the burden of disease. The DALY is a health-gap measure, which combines information on the impact of premature death and of disability and other nonfatal health outcomes. One DALY can be thought of as one lost year of “healthy” life, and the burden of disease as a measurement of the gap between current health conditions and an ideal situation in which everyone lives until old age, free of disease and disability. The main causes of DALYs in the PRC are neuropsychiatric conditions, unintentional injuries, cardiovascular diseases, respiratory diseases, and malignant neoplasms (Table 5-19). Apart from respiratory diseases, all the main causes of DALYs in the PRC are more important than they are in the world as a whole. Respiratory diseases are of roughly equivalent importance. ANALYSIS OF RISK FACTORS Global-burden-of-disease studies in the 1990s found that the major risk factors for DALYs in the PRC were malnutrition, poor water supply, sanitation and

Table 5-19 Disability-Adjusted Life Years (DALYs) in the PRC, by Sex and Cause, 2000

Cause Category Neuropsychiatric conditions Unintentional injuries Cardiovascular diseases Respiratory diseases Malignant neoplasms Respiratory infections Perinatal conditions Nutritional deficiencies Digestive diseases Intentional injuries Musculo-skeletal diseases Congenital anomalies Others Total Total DALYs (millions)

Global (%) 12.34 9.27 10.25 6.63 5.33 6.23 3.14 3.32 3.13 2.03 2.23 2.34 36.08 100.00

Male (%)

Female (%)

13.21 15.45 11.49 9.87 9.75 5.08 4.55 4.26 4.24 3.21 2.55 2.39 13.95 100.00 112.2

16.36 9.90 10.87 9.60 7.44 6.60 5.24 4.46 2.94 4.06 3.63 2.50 16.40 100.00 93.5

PRC Two Most Important Causes Unipolar depressive disorders, alcohol-use disorders Road traffic accidents, falls Ischemic heart disease, cerebrovascular disease Chronic obstructive pulmonary disease, asthma Trachea, bronchus, and lung cancers, liver cancer Lower respiratory infections, upper respiratory infections Low birth weight, birth asphyxia and birth trauma Iron-deficiency anemia, protein-energy malnutrition Cirrhosis of the liver, peptic ulcer disease Self-inflicted injuries, violence Osteoarthritis, rheumatoid arthritis Congenital heart anomalies, Down syndrome

Source: Estimated by consultants from data in Murray, Lopez, et al. (2001) and from the World Health Organization website. The source data relate to the WHO subregion B of the West Pacific Region. Subregion B, which besides the PRC contains Cambodia, Laos, Malaysia, Mongolia, Philippines, Republic of Korea, and Viet Nam, has a population of 1,533 million, of which the PRC has 1,295 million, or 84.5 percent.

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personal and domestic hygiene, tobacco use, alcohol use, and occupational hazards (Table 5-20). Table 5-20 does not include bad housing, which is a significant factor behind respiratory diseases in the Western Region. Dark, humid, poorly ventilated houses, in combination with cooking with biomass, unsuitable stoves, and sleeping on kang (bed of brick or other solid construction), contribute to respiratory diseases and TB. Iodine deficiency is widespread in

the Western Region. Poverty leads to widespread poor nutrition among infants and lack of treatment. The WHO global-burden-of-disease study is in the process of calculating the contribution of various risk factors in 2000. Examination of the individual risk factors and their incidence in the Western Region strongly suggests that the higher mortality and morbidity in the Western Region is partly explainable by a higher incidence of the risk factors (Table 5-21).

Table 5-20 Contribution of Risk Factors to the Burden of Disease, 1990

Deaths (%)

YLLs a (%)

YLDs b (%)

DALYs c (%)

Developing Countries, DALYs (%)

3.1 0.9 0.5 9.2 1.3 2.8 3.2 2.6 0.2 0.8

7.9 1.7 0.6 4.9 1.8 4.2 1.6 1.2 0.4 0.5

2.0 2.5 0.2 2.6 3.0 3.6 0.2 0.3 0.2 0.4

5.3 2.0 0.4 3.9 2.3 3.9 1.0 0.8 0.3 0.4

18.0 7.6 3.7 1.4 2.7 2.7 0.9 0.6 0.4 0.4

PRC Risk Factor Malnutrition Poor water supply, sanitation, and personal and domestic hygiene Unsafe sex Tobacco use Alcohol use Occupational hazards Hypertension Physical inactivity Use of illicit drugs Air pollution

Developed Countries, DALYs (%) 0.0 0.1 2.1 12.1 9.6 9.6 4.7 4.0 1.9 1.5

Source: Murray and Lopez (1996). a YLLs = Years of Life Lost b YLDs = Years Lived with Disability, adjusted for the severity of the disability c DALYs = Disability-Adjusted Life Years

Table 5-21 Incidence of Health Risks, 1999

Risk Factor/Indicator Poor water supply, sanitation, and personal and domestic hygiene/No tap water (‰) Lack of fruit and vegetable intake/Vegetable intake (kg per capita below recommended) Lack of physical exercise/Population not taking exercise (%) Tobacco use/Smoking population (%) Poverty/Population in poverty (%) Alcohol use/Urban expenditure on alcohol (yuan per capita) Alcohol use/Rural consumption of liquor (kg per capita) Accidents/Traffic deaths (no. per million population) Respiratory system diseases (‰) Cardiovascular system diseases (‰)

Northwest

Southwest

Western Region

PRC

Western Region/PRC

65.2

66.1

60.8

53.5

1.14

77.2 87.8 29.0 5.0 80.1 3.2 279.2 44.2 10.1

15.3 87.4 29.6 10.8 80.1 5.7 168.2 53.6 6.7

35.4 87.6 29.2 7.8 80.1 4.9 204.3 48.9 8.4

28.0 85.9 28.8 5.7 95.3 6.9 66.1 46.4 11.5

1.26 1.02 1.01 1.37 0.84 0.71 3.09 1.05 0.73

Source: Calculated by the authors from Ministry of Health (1999) and Statistical Yearbook of China 2000 (traffic deaths, vegetable intake).

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However, inadequate access to health services remains an important explanation for higher morbidity and mortality. ACCESS TO HEALTH SERVICES In the Western Region, people who get sick are less likely to seek treatment. In the cities, the percentage of the sick that do not seek treatment is less than in the Eastern Region. In the counties, which contain most of the population, the percentage that does not seek treatment is higher than in the Eastern Region. The cost of medicines and medical services is rising steadily and is in particular affecting the poor (Table 5-22). Poor urban households (the poorest 5 percent of the population) spend 6.1 percent of their net income on health, compared with 5.1 percent for all urban households. Rural households in the southwest spend 5.3 percent of their net income on medicines and medical services, and rural households in the northwest 3.4 percent, compared with a rural average of 3.9 percent for the entire PRC. Although rural households in the northwest spend less, their expenditures have been increasing rapidly. A 1993 survey14 found that medical expenses were a significant contributor to poverty: 15.7 percent of households

in Western Region poverty counties paid for medical services by borrowing money, 8.5 percent by owing payment, 6.0 percent by selling household property, and only 3.1 percent by using Government assistance. FUTURE BURDEN OF DISEASE The incidence of chronic conditions that require treatment is much greater in middle age and above in the PRC than in developed economies. This is associated with the severe biomedical and nutritional deprivation that those who have survived to middle age suffered while in their mother’s womb or in infancy.15 As the population of the Western Region ages, there is likely to be a substantial increase in the incidence of chronic conditions. Unless there are improvements in mother and child welfare, there will continue to be adverse consequences for the health of the future adult population and for health expenditures.

Government health and welfare programs The dramatic decrease in poverty and disease in the last 30 years has been largely due to the combined

Table 5-22 Per Capita Household Expenditure on Medicines and Medical Services, 1990–2000 Item In yuan per capita (constant 1999 prices) All urban households Poor urban households (lowest 5 percent) Rural households Southwestern rural households Northwestern rural households As % of net income All urban households Poor urban households (lowest 5 percent) Rural households Southwestern rural households Northwestern rural households

1990

1995

1998

1999

2000

54.66 28.62 40.17 36.92 23.42

121.16 68.61 48.21 45.79 27.33

202.53 116.99 67.11 57.36 59.17

245.59 102.93 70.02 65.48 47.81

315.49 139.55 87.71 84.83 59.45

1.7 1.9 2.8 3.2 2.3

2.6 3.3 2.7 4.8 3.0

3.8 5.5 3.2 3.8 3.6

4.2 4.4 3.2 4.2 2.8

5.1 6.1 3.9 5.3 3.4

Source: Calculated by consultants from the China Statistical Yearbook, various years.

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impact of growth and special government programs. This section describes the government programs in three areas: • Poverty alleviation • Welfare programs • Health programs In the poor provinces, prefectures, and counties there are local offices of the Leading Group for Poverty Reduction (LGPR) and the Poverty Area Development Office (PADO, the local LGPR bureau), as well as county Civil Affairs bureaus. In addition to these, there is a range of community-based projects funded by public donations.The best example is Project Hope, which was set up ten years ago and has raised a total of 1,800 million yuan.16

Special education programs Since 1995 the State Education Commission and the Ministry of Finance have jointly implemented the National Project of Compulsory Education in Poor Areas, channeling over 10,000 million yuan to poverty counties and some other priority areas (province-designated counties, old revolutionary base areas, and ethnic minority areas). According to the Government, 392 of the 592 poverty counties have attained the twin objectives of eliminating illiteracy among the young and the middle-aged and establishing nine years’ compulsory education.17 The Education Development Strategy of the Tenth FYP 18 gives priority to the Western and Central regions in completing this program.

POVERTY ALLEVIATION PROGRAMS The government agencies mentioned above administer a range of poverty alleviation programs that are best understood by looking at the four major sources of funding. From 1986 to 1999, 130,780 million yuan, or $20,280 million, was spent on poverty alleviation. In 1999, 24,800 million was spent mainly through funds provided as State Poverty Alleviation Loans, Ministry of Finance Grant Funds, and Food for Work Funds (Table 5-23). About 40 percent of the funds for poverty alleviation take the form of Alleviation Loans from State Poverty Funds; 20 percent are funds from Food for Work (FFW) programs and about 13 percent are grants from the Ministry of Finance.

State Poverty Alleviation Loan Funds The Government’s subsidized loan funds are at the heart of its development-oriented approach to poverty alleviation.The loan program ran into difficulties when about half the loans went to TVEs. Apart from diverting funds intended for poor households, these TVEs often ran into financial difficulties: many were capital-intensive and generated few jobs for the poor; many became loss making, reducing the net revenue of some poor counties. Additional financial support to TVEs further reduced funds available for small enterprises run by poor families.19 Diversion of funds also occurred when loans were given to better-off farmers, who were in fact ineligible for assistance. These farmers liked the loans because of their low interest (2.88

Preferential fiscal and finance measures for poverty counties The Government extends a range of preferential fiscal and financial measures for poverty counties. These preferential policies include the following: • A three-year income tax holiday for new enterprises • Exemption of poor households from state grain procurement quotas • Reductions or exemptions from agricultural taxes

Table 5-23 Funds Allocated for Poverty Alleviation, 1986–1999

Source State Poverty Alleviation Loan Funds Ministry of Finance Grant Funds Food for Work Funds Ministry of Civil Affairs Total Funds, current prices

1999 (million yuan) 9,700 3,315 5,000 n.a. 24,800

Cumulative, 1986 to 1999 (million yuan) 68,450 21,645 33,900 n.a. 130,780

Source: World Bank (2001a), Table 3.3, p. 43.

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111

Box 5-2 Poverty and Resettlement in Kelpin County (Aksu Prefecture, Xinjiang)

A

bout 7,000 very poor people have been resettled from Kelpin (and other counties) to new villages located on the Taklimakan desert side of the Kashgar-Urumqi highway. Number of People below the Poverty Line in Aksu Prefecture, 1994 and 1999 Aksu Prefecture No. of families in poverty No. of people in poverty Kelpin County No. of families in poverty No. of people in poverty

1994

1999

25,179 113,910

4,300 16,200

1,802 10,169

34 194

Source: Interview with Abdul Rahman, Director, Poverty Alleviation Office, Aksu Prefecture, Xinjiang, 26 April 2001. Note: 97 percent of the population of Kelpin county is Uygur.

The village that we visited is on newly irrigated land along the Aksu river extension into the Taklimakan desert, and has the capacity for another 3,000 migrants. The village looked quite prosperous with farmers reporting successes in growing fruit trees and grapes. Vegetable growing, however, has failed. There are also doubts about the long-term sustainability of new villages of this kind which form part of Xinjiang’s Opening Up of the Desert campaign. Among the environmental issues that are visible to any visitor are problems of salinity and the extent to which the Aksu can continue to provide water for irrigation, given the great pressure on the river from cotton growing and mining upstream and also the high rates of evaporation during the hot summer months. In Xinjiang, another component of poverty alleviation work that often lacks formal public recognition is the voluntary contribution made by civil servants to helping the poor. We encountered an example of this when we visited Wushi County (Aksu prefecture). The poorest families had been moved to the outskirts of the town of Wushi in a small housing colony that ran parallel to the road. Each family received a two-room brick house built from commercially made bricks. As the families prosper, they can extend these houses by making mudbricks. The two-room houses had been constructed with the financial assistance of voluntary funds collected from the employees of Wushi County departments. Such public-spirited support for a poverty alleviation program would be hard to find in any other part of the world. It is impossible to quantify how much of the reduction in poverty in Wushi County was made possible by such voluntary contributions from county employees, but the record of poverty reduction during the 1990s has been impressive as the following table shows: Poverty Reduction in Wushi County, Aksu Prefecture, Xinjiang, 1994 and 2000 No. in Poverty

1994

2000

People Families

35,812 7,993

2,515 583

Decline in Poverty Numbers 33,297 7,410

Source: Interview with Tu Ling Ling, Head of Poverty Alleviation Office, Wushi County, Aksu Prefecture, 27 April 2001. Note: 96.5 percent of the population of Wushi county is Uygur. Source: Field visit by team members, April 2001.

112

percent) and local officials were eager to help because there was a preference for spending funds on projects likely to generate taxable incomes.20 The process of obtaining loans also disadvantaged the poor who did not understand the bureaucratic procedures and had no collateral to meet the needs of the executing agency, the Agricultural Bank of China. Research has shown that the loan program has been very ineffective in reducing poverty in comparison with other investments (Chapter 19). To tackle the problems of the loan program, the State Council issued the Measures on the Management of the State Poverty Relief Funds in 1997. The problems cited above are similar to those besetting programs in other countries that seek to provide poor families with cheap loans. The failures of the Integrated Rural Development Program in India are powerful examples of the misdirection of funds intended for the poor.21 In the PRC, the experiment with microcredit as an alternative means of providing the poor with loans has not escaped similar pitfalls. In 2000, government financial assistance by way of grants and loan funds amounted to 24,800 million yuan. The Government expects local governments to use the mainly for land reclamation, small-scale irrigation works, rural roads, rural water supply, and agricultural extension (Chapter 19 evaluates relative priorities between these rural development sectors). Food for Work Programs FFW is the second largest poverty alleviation program after the Loan Funds: it provided 5,000 million yuan in funding support in 1999, compared with 9,400 million yuan for the loan program. As it is a rural development program rather than a social welfare one, it is reviewed in Chapter 19 in the overall context of rural development. Resettlement programs Local governments resettled about 2.6 million rural poor in 2000. This work follows the principles of noncompulsion, financial assistance, nearby resettlement, and maintenance of family and social

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links.The local governments provide basic housing. Apart from the direct beneficiaries, these resettlement programs are extremely important for the protection of nature reserves, forests, and other areas with valuable ecosystems. MINISTRY OF CIVIL AFFAIRS PROGRAMS The Ministry of Civil Affairs is responsible for a wide range of welfare programs.The bulk of the money goes to programs for veterans, martyrs, and their families

provision of services for the disabled. While the State Council sets the criteria for classifying disabilities, local governments at various levels are responsible for the services. Therefore, the provision of services tends to reflect the financial resources of local governments. For example, disabled people in the Western Region are far less likely to have access to welfare enterprises (under Article 29 of the law) than disabled people in the Eastern Region (Table 5-25).

Table 5-24 Welfare Programs of the Ministry of Civil Affairs, 2000 Expenditure Program

Amount (million yuan) %

Programs for martyrs, veterans and their families Families of martyrs, veterans, etc. Rural programs Poor households with livelihood guaranteed in five aspectsa People who receive temporary relief People who receive lowest cost-of-living allowance People who receive relief Urban programs People who receive temporary relief People who receive lowest cost-of-living allowance Other urban programs Disaster relief People who receive relief in natural disasters People who receive funds in natural disasters Rescued victims of natural calamity Other benefits for the general public Administrative costs Total

Recipients (million)

Location of Recipients Eastern Central Northwest Southwest Total

8,813

38.4

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

152 244 365 113

0.7 1.1 1.6 0.5

0.5 4.6 2.9 0.3

30.8 36.1 55.0 45.5

33.2 35.2 21.5 17.3

27.0 17.3 7.0 22.2

9.0 11.4 16.5 15.0

100.0 100.0 100.0 100.0

135 2,193 241

0.6 9.5 1.0

1.1 3.8 n.a.

53.9 37.9 n.a.

29.2 28.5 n.a.

8.5 17.2 n.a.

8.4 16.4 n.a.

100.0 100.0 n.a.

2,748 369 306 4,198 3,095 22,970

12.0 1.6 1.3 19.3 13.5 100.0

49.9 3.3 3.3 n.a. n.a. n.a.

24.3 12.9 14.6 n.a. n.a. n.a.

32.0 19.0 19.7 n.a. n.a. n.a.

24.3 37.6 50.6 n.a. n.a. n.a.

19.4 30.5 15.2 n.a. n.a. n.a.

100.0 100.0 100.0 n.a. n.a. n.a.

Source: China Civil Affairs Statistical Yearbook 2001. a Eating, clothing, shelter, medicine, and burial; see Rules for Provision of Rural Five Aspects Assistance 1994.

(38.4 percent) and to disaster victims (12.0 percent). In the welfare programs for the poor, urban residents do best both in terms of number of recipients and amount of assistance received (Table 5-24). This urban bias reflects the concept of village selfgovernment in the countryside, under which a village committee takes responsibility for public welfare. The Protection of Disabled Persons Law of 1990 lays down the general principles guiding the

Table 5-25 Employment in Welfare Enterprises for the Disabled, 2000 % of National Total Region Eastern Central Western Southwest Northwest PRC

Total Population

Units for Disabled

Disabled Employees

38.9 32.9

64.6 21.7

74.3 15.9

19.0 9.1 100.0

7.6 6.0 100.0

5.6 4.2 100.0

Source: China Civil Affairs Statistical Yearbook 2001.

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113

Box 5-3 Resettlement in Xinjiang

I

n the resettlement village of Alsay we also encountered another component of residual poverty in the PRC—the separation of children from their parents. The families in this village are already poor, but their lives become much harder when families split up. In one case, the householders were aged and looking after their grandchild whose parents had divorced. This grade-8 boy said that his main problem at school was that neither his parents nor his grandparents could afford to buy him all the textbooks he needed. The house had the usual utensils, blankets, clothes but the grandparents said that they were too poor to buy “real wood.” There was a huge pile of sticks, twigs, and branches in the front yard. Like other families that had been resettled, they also had 2 mu of land but lacked the energy and money to grow fruit trees or vegetables or to keep animals. This household would also never qualify for a microcredit loan. Therefore, a considerable proportion of the residual poverty will require regular handouts to families unable to become self-reliant because of physical incapacities due to age, accident, or birth defects. Source: Consultant’s interviews, Alsay village, Aksu prefecture, Xinjiang, 27 April 2001.

INSTITUTIONAL LEADERSHIP The important decisions about what to implement, when, and how have been made by provincial and county officials rather than Central Government officials or the village poor. This has resulted in poor control over funds; inadequate coordination; the diversion of funds to other purposes; or the distribution of funds to projects and people who are not truly needy. According to one estimate, 26,017 million yuan was allocated by the Government for poverty alleviation in 1999, but only 22,382 million yuan was used.22 The shortfall of 13 percent could indicate inefficiencies in the capacity of local governments to apply the available funds appropriately. More central monitoring is needed together with more participation in decision making Figure 5-11 Goals of the Health System Level

Distribution

Efficiency

Health Responsiveness Fairness in financing Quality

114

Equity

by the poor themselves. Involving farmers’ associations and women’s groups (such as the AllChina Women’s Federation) will help to ensure that the poverty programs are not driven by top-down approaches. Provincial government officials seem to be ill informed about the nature of poverty in the poorest villages and townships; typically their knowledge is restricted to what they need to know in order to make the project assessments. Community participation at the provincial level would put some passion into poverty alleviation. HEALTH PROGRAMS Overall efficiency of the national health system A recent (2001) WHO study ranked the PRC’s national health system 132 out of 191 systems in WHO member countries in terms of overall achievement, behind India (121) and Indonesia (106), countries with lower GNP per capita.23 The assessment considered five factors: level of health, health inequality, responsiveness to legitimate demands, equity of response, and fairness of financial contributions (Figure 5-11). WHO studies rank the PRC 81 on the level-ofhealth goal, and 88 or 89 on the level-ofresponsiveness goal—much higher than the overall system efficiency ranking of 132. According to WHO, the deficiencies in the PRC’s system relate in particular to equity and financial issues (Table 5-26). The Government believes that the WHO studies do not accurately represent the true status of the PRC’s health system relative to other countries’ health systems, and that the WHO samples were too small and not representative of the whole of the PRC. Health expenditure The PRC ranks 139 among WHO members in terms of health expenditure per capita, ahead of Indonesia but behind India. In the Western Region, both government and private health expenditures per capita are below national levels, especially in the southwest (Table 5-27).

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Table 5-26 WHO Ranking of the PRC’s Health System, 1997 Country Rankings Criterion Health Level Distribution Responsiveness Level Distribution Fairness in financial contribution Overall goal attainment Health expenditure per capita Overall system performance

Weighting

PRC

India

Indonesia

25% 25%

81 101

134 153

103 156

12.5% 12.5% 25%

88–89 105–106 188

108–110 127 42–44

63–64 70 73

100%

132 139 144

121 133 112

106 154 92

Explanation Disability-adjusted life expectancy Inequality in life expectancy Ability to meet people’s expectations Inequality in responsiveness Equality in ratio of total health contribution to total nonfood expenditure

Source: World Health Organization (2001).

The levels of health expenditure per capita in the southwest are below the levels in several African countries, e.g. Kenya and Zambia. Table 5-28 looks at Government health services expenditure per capita in more detail. The numbers are not consistent with those in Table 5-27. However, they do again indicate much lower levels of health services expenditure in the Central and Western regions than in the Eastern Region. The ratio is nearly 2.45 to 1. The differential is greatest in the case of hospital expenditures.

Table 5-27 Health Expenditures Per Capita, 2000

Region

Private Expenditure

Government Expenditure (yuan)

Urban (yuan)

Rural (yuan)

53 25

375 259

117 72

33 36 38

263 310 320

59 85 85

Eastern Central Western Southwest Northwest PRC

Source: Calculated by consultants from the Statistical Yearbook of China 2001.

Medical personnel The number of doctors per thousand people in the PRC increased from 1.07 in 1978 to 1.67 in 1999. The number of nurses has increased even more than this. However, health services in the PRC have a

strong and increasing urban bias.This is evident from the statistics on medical personnel. For example, in 1999 Urumqi had 8.9 percent of Xinjiang’s population but 22.1 percent of its doctors.24 In Xinjiang as a whole, the level of service is more than twice as high in the cities as in the counties.

Table 5-28 Government Health Services Expenditure Per Capita, 2000

Region

Subsidies for Hospitals (yuan)

Subsidy for Rural Health Prevention Institutions (yuan)

Rural Health Prevention and Treatment (yuan)

Woman and Child Health Care (yuan)

Others (yuan)

Total Fees (yuan)

171 72

50 20

10 6

4 3

10 6

245 106

68 71 110

20 16 31

5 6 7

4 3 3

5 4 7

101 99 158

Eastern Central Western Southwest Northwest PRC

Source: Calculated by consultants from Ministry of Health (2001b) and preliminary population figures from 2000 census.

Table 5-29 Number of Medical Personnel, Xinjiang, 1999

Type of Area In cities per million population In counties per million population

Total Medical Personnel

Medical Technical Personnel

Other Technical Personnel

Managerial Personnel

Logistics Workers

75,300 11,639 46,878 4,214

58,771 9,084 38,743 3,483

1,515 234 377 34

6,900 1,067 3,923 353

8,114 1,254 3,835 345

Source: Calculated by consultants from Xinjiang Statistical Yearbook 2000.

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115

Health facilities In the Western Region as a whole, the level of provision of health infrastructure, in purely numerical terms, is comparable to that in the PRC as a whole (Table 5-30). However, buildings are old, facilities poor, and medical standards low. The Government’s strategy for improving health facilities in the Western Region is to continue with the “three constructions”—county hospitals, health centers (in some cases, hospitals) in the townships, and health stations in the villages—along with maternity and child care units.25 It proposes to increase its subsidies, of which the Western Region has been receiving a large proportion (Table 5-31).

Eastern Central Western Southwest Northwest PRC

The state shall develop the maternal and infant health care undertakings and provide necessary conditions and material aids so as to ensure that mothers and infants receive medical and health care services. The State shall support and assist the maternal and infant health care undertakings in outlying and povertystricken areas.

Table 5-33 indicates that local governments are still far from fulfilling this statutory undertaking.

Table 5-30 Number of Health Facilities per Million Population, 1999 Region

However, the delivery of health services in poverty villages is still far from complete (Table 5-32). Article 2 of the Maternal and Infant Health Care Law of 1994 provides as follows:

Clinics

Sanitation and Antiepidemic Units

Maternity and Child Care Units

Hospital Beds

179 125

2.2 2.8

1.5 2.2

0.2 0.2

235 224 176

2.9 5.7 2.9

2.1 3.7 2.0

0.2 0.3 0.2

Health insurance in urban areas In both urban and rural areas, medical subsidies strongly influence the use of medical services. In the major cities, the examination rate for people in the government insurance scheme (GIS) is more than double that for those who have to pay. Medical cover is significant only in the cities (Table 5-34).

Source: Calculated by consultants from China Statistical Yearbook 2000.

Table 5-31 Central Government Subsidies for Health Facilities, 1998–2000 Total Amount Item

Western Region Share

1998 (million yuan)

1999 (million yuan)

2000 (million yuan)

1998 (%)

1999 (%)

2000 (%)

36.3 40.4

44.9 43.4 37.9

40.9 59.3 90.3

47.7 50.5

43.4 54.3 63.2

51.5 59.3 61.6

Government special finance for illness prevention and treatment, health monitoring, and rural health programs “Three constructions” Construction of hospitals in poverty counties Source: Ministry of Health (2001a).

Table 5-32 Village Health Facilities in Poverty Villages, 1999 Southwest Facility/Service Villages with clinic Villages with doctor Villages with midwife

Sichuan (%)

Guizhou (%)

83.3 83.3 50.0

40.6 65.6 65.6

Yunnan (%) 96.2 100.0 92.3

Northwest Guangxi (%) 82.1 89.3 82.1

Source: National Bureau of Statistics and Leading Group for Poverty Reduction (2000).

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Ningxia (%) 62.5 100.0 87.5

Shaanxi (%)

Gansu (%)

Inner Mongolia (%)

95.0 100.0 60.0

66.7 88.1 57.1

60.0 90.0 53.3

Table 5-33 Place of Birth and Qualifications of Midwife , 1998 Place of Birth

Qualifications of Midwife

Hospital

Health

Home

Other

Doctor

Village Doctor

Midwife

Other

65.6 40.6 31.2

3.1 38.4 31.0

1.2 14.1 28.4

30.1 7.0 9.3

0.0 3.8 2.3

0.0 19.3 22.9

0.0 71.2 63.4

100.0 5.7 11.5

67.4 39.2 8.9 23.2

2.2 5.9 8.7 8.2

10.4 46.4 76.9 60.9

20.0 8.5 5.5 7.7

0.0 1.4 4.7 6.8

0.0 2.8 18.2 21.0

7.2 22.5 41.2 52.0

92.8 67.6 36.0 20.2

Eastern Region Provincial city Prefecture city Counties Western Region Provincial City Prefecture City Southwest Counties Northwest Counties

Source: Calculated by consultants from Ministry of Health (1999).

Table 5-34 Primary Means of Meeting Medical Expenses, 1998

PRC Eastern Region Provincial cities Prefecture cities Counties Western Region Provincial cities Prefecture cities Southwest counties Northwest counties

GISa (%)

LISb (%)

Half-LIS c (%)

Medical Insuranced (%)

Medical Care Planse (%)

CMSf (%)

Own Expense (%)

Others (%)

Total (%)

4.9

6.2

1.6

1.9

0.4

5.6

76.4

3.0

100.0

13.2 4.0 0.9

36.60 1.41 1.03

8.60 0.98 0.39

4.49 1.86 2.17

1.78 0.12 0.09

0.06 13.39 14.38

33.8 77.5 80.7

1.5 0.7 0.3

100.0 100.0 100.0

25.3 9.8 1.2 2.3

15.88 24.97 0.22 0.35

3.70 4.55 0.12 0.10

0.62 3.50 1.88 0.42

2.53 0.06 0.02 0.04

0.19 5.23 2.13 0.01

35.8 51.6 81.7 96.5

16.0 0.3 12.7 0.2

100.0 100.0 100.0 100.0

Source: Calculated by consultants from Ministry of Health (1999). a Government insurance scheme for staff of government and party organizations, and their retirees. b Labor insurance scheme for employees and retirees of SOEs. c Direct relatives of SOE employees get a 50 percent reduction on medical costs. d There are three types of medical insurance: (i) cooperative schemes whose members are residents of towns with agricultural hukou, (ii) town government schemes run in conjunction with insurance companies, and (iii) insurance company schemes to provide hospital cover for peasants and students. e Various medical care plans cover (i) TVE employees only, (ii) agriculture and industry employees only, or (iii) all rural employment categories. f Cooperative medical schemes managed by villages or townships.

The Second National Health Services Survey of 1998 (Table 5-34) revealed a significant decline in the population coverage of the GIS and labor insurance scheme (LIS), and an increase in the proportion of the population that had to pay for services. In 1998, among those in the lowest income group who reported illness but did not obtain treatment of any kind, nearly 70 percent (compared

with 38 percent in 1993) claimed financial difficulty as the major reason.26 Health insurance in rural areas From the early 1960s the Government promoted medical cooperatives in rural areas. The system was never financially sustainable. Economic reforms and the shift from communal to household production

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systems accelerated the decline in the medical cooperatives. There was little to prevent moral hazard in relation to the consumption of services, funding was inadequate, and there were inequalities between cadres and ordinary commune members.27 The Government intends to reform and reconstruct the cooperative medical system, improve healthcare facilities, and reestablish the rural medical cooperative system. However, the system cannot work in poverty areas, or indeed in much of the Western Region rural areas. Nearly half the rural population in the Western Region does not even want such a system (Table 5-35). Government programs for the Western Region In March 2001, the Ministry of Health issued the Advice from Ministry of Health about Strengthening Health Work in the Western Region. This exhorts local governments to improve all forms of healthcare services in the Western Region along with health education. COOPERATION BETWEEN LOCAL GOVERNMENTS According to government poverty policies, more highly developed local governments should help the less-developed ones.28 Thus, Beijing helps Inner Mongolia,Tianjin helps Gansu, and so on.The local governments cooperate in cadre exchange, personnel training, establishment of schools, improvement of farmland, provision of drinking water, and many other ways.

Implications for government policies The challenge facing the Government is to identify and implement policies that will improve social conditions in the Western Region. BALANCE BETWEEN PROGRAMS There is now a strong case for progressively moving toward targeting people in need of assistance instead of areas needing assistance.The reasons are as follows: • With the falling incidence of poverty it is becoming much harder to identify areas of mass poverty, and expenditure on area programs therefore benefits many people not in need of assistance. • The falling incidence of mass poverty is leading to a closer correlation between poverty and the onset of conditions such as old age, disability, natural disasters, and disease. • The fact that poverty county designations are lasting so long, that many poor counties are not designated as poverty counties, and that average incomes in Xinjiang poverty counties have not improved are all indictments of the poverty county system. • The combination of targeting areas and targeting people leads to “double dipping” by beneficiaries (for example, veterans’ families benefit both from the poverty county programs and from the social assistance programs for veterans’ families).

Table 5-35 Attitudes Toward Cooperative Medical Schemes, 1998 Type of Medical Cover Desired

Region PRC Eastern counties Northwest counties Southwest counties

No Cover (%)

Examination Cover Only (%)

46.2 40.9 49.6 46.4

12.4 9.0 18.5 20.4

Hospital Cover Only (%) 11.7 14.1 18.0 9.3

Source: Calculated by consultants from Ministry of Health (1999).

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Full Cover (%)

Total (%)

Willingness to Pay (yuan)

29.6 42.4 23.4 31.4

100.0 100.0 100.0 100.0

83.55 104.02 104.18 54.65

• Levels of health expenditure are comparatively low in much of the Western Region, while at the same time the burden of disease is comparatively high. • There are similarly inequities in social assistance expenditures, and levels of social assistance are also very low in the Western Region. The simple solution is to progressively shift expenditure or tax concessions from area programs to health and social assistance programs. BALANCE BETWEEN GOVERNMENT AND NONGOVERNMENT PROGRAMS Helping the victims of poverty, disease, and natural disaster is a fundamental responsibility of any government and essential to the maintenance of a government’s legitimacy. However, the complexities of modern societies mean that total reliance on government programs will result in gaps and inefficiencies, and, moreover, mean that there will be less innovation and missed opportunities to apply additional resources. Nongovernment organizations In many countries, nongovernment organizations play an important role in alleviating poverty and the burdens of ill-health, disability, and old age.There is, however, a belief among some that in PRC the notion of an NGO in the PRC is an oxymoron since all groups must register with the Ministry of Civil Affairs after first obtaining a government or party sponsor.However, the Government’s new poverty reduction strategy calls for a greater role of NGOs, and the 2001 Trust Law provides a legal basis for private charities working in such areas as poverty reduction, health and education. Private sector There is recognition that the private market can play a greater role and that an appropriate fiscal, administrative, and legal structure needs to evolve to enable the market to work effectively. International best practice shows that the private sector can play a major role in, for example, the construction of rural

infrastructure.29 The private sector’s involvement can be secured by establishing proper economic incentives to ensure that infrastructure is not only constructed but also maintained in proper working order.30 WELFARE AND SOCIAL ASSISTANCE PROGRAMS Now that the numbers of poor are so much lower, the Government should give more emphasis to social assistance programs that target poor households, irrespective of whether they live in poverty counties or not. In 1999, Ministry of Civil Affairs programs reached less than 10 percent of the rural poor (excluding temporary relief programs). An objective of near–100 percent coverage is now realistic in both administrative and financial terms. The challenge is to find targeting mechanisms that are administratively feasible in rural areas. Practicable mechanisms may include social assistance payments to the elderly, and nutrition programs. HEALTH Improving the health of the Western Region is important for humanitarian reasons but should also be an important component of the Government’s strategies for reducing regional imbalance.The Ministry of Health is not a member of the State Council’s Leading Group for Western Region Development; this indicates that health in the Western Region is not receiving sufficient attention. Disease is one of the causes of poverty and reduces labor productivity. Local governments must give close attention to implementing the Advice from Ministry of Health about Strengthening Health Work in the Western Region. Reduction of health risks The Western Region has a high incidence of health risk factors. Local governments could substantially reduce some of these risks by improving rural water supply and sanitation (see Chapter 19), education in health and hygiene, and education in house construction, ventilation, cooking, and heating. Promotion of more appropriate energy sources, such as solar energy and biogas, can also make a contribution.

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Equitable distribution of government expenditure The distribution of Government health expenditures between urban and rural areas and between the Eastern Region and the rest of the country is not equitable. Fairness in financial contributions According to WHO, households should not become impoverished or pay an excessive share of their income in obtaining necessary healthcare. Payment should be based on income and for the most part should not reflect use of services or risk.31 Payments should not be regressive, as they are in the PRC. Furthermore, until the Government is able to establish an effective system for redistribution of personal incomes, it should provide free or heavily subsidized health services to the poor through special programs. In all except the richer counties, local governments will have to establish medical funds to help the poor.

Notes 1 United Nations Development Program (1999a), p. 24. 2 Tu Ping (2000). 3 Zhai Zhenwu (2000). 4 Zhai Zhenwu (2000), p. 250. 5 Zhai Zhenwu (2000), p. 253. The labor force is defined as males aged 16–59 and females aged 16– 54. 6 According to preliminary results of the 2000 Census (National Bureau of Statistics [2001]). 7 World Bank (2001a), Table 1, p. xv. The official poverty standard of the PRC has been $0.66 per day, compared with the World Bank standard of $1 per day. 8 World Bank (2001b). 9 This statement is based on the observations of two international team members in India and in the PRC

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10

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

30

31

(including the poverty counties of Luquang and Lancang in Yunnan, and Kelpin and Wushi in Xinjiang). This was certainly the case with the poorest families in Aksu prefecture, Xinjiang province, although heating in winter is known to be regarded as a luxury by the poorest families in Gansu province. State Council Information Office (2001a). See Hamann (1999). Liu Yongong et al. (2001). Health Care Financing and Organization in Poor Rural Areas of China Project Group (1998). Fogel (2001). The money was used to build 7,812 schools for 2.3 million children (China Daily, 2–3 June 2001, p. 2). State Council Information Office (2001a). State Development Planning Commission (2001a). World Bank (2001a), pp. 46–48. World Bank (2001a), p.48. Mendelsohn (1998), pp. 162–165. Wangjian (2001), p. 8. Murray, Lauer, et al. (2001). Xinjiang Statistical Yearbook 2000. Ministry of Health (2001a). Gao et al. (2001). Zhu Ling (2001). State Council Information Office (2001a); Leading Group for Poverty Reduction (2001). For a review of the available, international literature on this, see Asian Development Bank (2000g), Chapter A13 (“International Rural Infrastructure: Approaches and Experiences”). In developing countries, private sector capital investment in infrastructure equals about 15 percent of total investment, having grown from $100 million in 1998 to over $20,000 million in 1996. For a summary of World Bank recommendations about private financing of rural telecommunications see World Bank (2001a), pp. 23–25. Murray and Frenk (2000).

I I P A R T

Strengthening the Competitiveness of the Western Region

CHAPTER

6

TRANSPORT POLICIES An effective transport system is of crucial importance to economic development, providing access to resources and markets, facilitating trade, allowing economies of scale, lowering costs and prices, and widening production choices. Above all, it enables regions to reap the gains from trade by specializing according to comparative advantage.

Transport in the Western Region Nowhere is transport more important than in the Western Region. Vast distances isolate it from major markets. Most exports and imports must reach overseas markets either via the coastal provinces or via other countries.This dependence on other countries and provinces means that regional transport cooperation is an important determinant of future growth and development. THE WESTERN REGION IN CONTEXT The lack of an efficient and effective transport system is an important constraint on the growth of the Western Region.The density of transport infrastructure, measured in terms of the number of kilometers of rail or road per hundred square kilometers of land area, is much lower than in other regions (Table 6-1). The transport system’s thinness does not tell us whether or not it is meeting the west’s needs; it may

be thin because of lower demand. On the other hand, densely populated areas in the Western Region tend to be close to major transport arteries and are relatively well served. Table 6-2 compares the transport systems of the PRC’s three regions. Whereas the vast size of the Western Region means that its road and rail networks are comparable in total length to those of the other regions, they are much less dense. The tonnage of freight traffic is also much lower, while the share of the task undertaken by each mode of transport is very different. In 1999, rail transport accounted for 12.7 percent of the total volume of freight shipments in the Western Region, while road transport accounted for 85.4 percent and water transport for 4.0 percent of shipments. In general, rail carries medium-distance freight, with an average haul of 862 km, while road transport, with an average haul of 62 km, is mainly used for shortdistance freight shipments. There is not much long-distance freight (the east-west distance of Xinjiang alone is 2000 km).

Table 6-1 Density of Transport Infrastructure, 2000 Railways (km/km2 x 102)

Road (km/km2 x 102)

Region/Province

National

Local

High Grade

First Class

Second Class

Third Class

Fourth Class

Eastern Central Western Shaanxi Gansu Ningxia Sichuan Yunnan Guizhou Qinghai Xinjiang Tibet National average

1.40 1.33 0.33 1.16 0.59 1.09 0.42 0.49 0.97 0.15 0.14 n.a. 0.61

0.13 0.15 0.02 n.a. n.a. 0.11 0.03 0.02 n.a. n.a. n.a. n.a. 0.05

0.86 0.22 0.05 0.18 n.a. 0.13 0.18 0.14 0.15 n.a. 0.03 n.a. 0.17

1.43 0.17 0.02 0.09 0.02 0.19 0.16 0.02 0.02 n.a. n.a. n.a. 0.21

6.50 2.98 0.35 1.80 0.84 2.32 1.33 0.45 0.42 0.25 0.34 0.05 1.59

7.96 5.25 1.44 6.69 2.88 5.92 1.98 2.32 1.41 0.75 0.79 0.11 2.88

22.26 12.77 3.48 10.95 3.79 6.06 8.80 24.06 8.03 1.10 0.86 0.73 7.82

Source: China Transportation and Communications Yearbook 2001.

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Table 6-2 Key Transport Indicators of the PRC, by Region, 1999 Indicator Length of transport routes (km) Length of railways in operation Length of highways Length of navigable waterway Density of transport routes (km/100km2) Railways Highways Waterways Total freight traffic (Mt)a % share Railways % share Highways % share Waterways % share Total freight task (Mt-km) % share Railways % share Highways % share Waterways % share Average transport distance: Freight (km) Railways Highways Waterways Facility index: Freightb Railways Highways Waterways

Western Region

Central Region

Eastern Region

575,919 21,347 532,650 21,922 8.42 0.31 7.79 0.32 2,930 100.0 371 12.7 2,503 85.4 57 1.9 494,180 100.0 319,530 64.7 154,920 31.3 19,730 4.0 169 862 62 348 0.50 0.0036 1.26 0.0092

444,378 21,686 391,161 31,531 26.46 1.29 23.29 1.88 3,745 100.0 722 19.3 2,862 76.4 161 4.3 724,500 100.0 497,590 68.7 167,810 23.2 59,100 8.2 193 689 59 367 1.37 0.019 3.97 0.051

497,957 14,890.0 427,880 55,187 45.92 1.37 39.46 5.09 5,981 100.0 549 9.2 4,539 75.9 893 14.9 2,315,890 100.0 444,450 19.2 249,730 10.8 1,621,710 70.0 387 810 55 1,815 1.19 0.017 7.17 0.028

PRC 1,518,253 57,922 1,351,691 108,640 15.82 0.60 14.08 1.13 12,657 100.0 1,642 13.0 9,904 78.3 1,111 8.8 3,534,570 100.0 1,261,570 35.7 572,460 16.2 1,700,540 48.1 279 768 58 1,531 0.57 0.0079 2.44 0.0074

Source: China Statistical Yearbook 1999. a The figures for freight traffic and freight ton-km include figures for transport not classified by region; hence regional totals do not add up to the national total. b Facility Index for Freight Traffic = (Density of Transport Routes x Freight Traffic/Freight tonkm) x 10.

Table 6-3 provides another snapshot of freight traffic by region, mode, and type of facility. While the Central Government is responsible for the major railway arteries, local governments may invest in railway links. However, the national rail system is dominant, accounting for 95.6 percent of total rail freight, and 96.1 percent of Western Region freight. In the case of roads, those of the Ministry of Communications carry only 4.8 percent of the

PRC’s road freight, and only 3.4 percent of Western Region freight. Nationally, waterways that are the responsibility of the Ministry of Communication carry 54 percent of traffic. However, in the Western Region, which is much less dependent on waterway transport, Ministry of Communications–controlled waterways account for only 20 percent of traffic. Table 6-4 provides an overview of the state of the Western Region transport system as of 1998.

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Table 6-3 Freight traffic, by Region and Mode of Transport, 2000

Traffic and Mode of Transport Total freight traffic Railway freight traffic National railways Local railways Road freight traffic Waterway freight traffic

Western Region (Mt)

Central Region (Mt)

3,066.3 417.0 378.9 17.8 2,587.8 61.4

3,876.7 761.6 741.0 19.5 2,947.7 167.4

Eastern Region (Mt)

expand greatly in the 1970s and 1980s, nor did the Eighth FYP investment lead to much growth. The rail network in the Western Region mainly comprises a series of lines running eastward to the coastal provinces and port cities, such as Shanghai and Lianyungang. In addition to these east-west lines, north-south lines link the Western Region cities (e.g., Lanzhou and Chengdu). Lanzhou, Guiyang, and Chengdu act as natural hubs for the Western Region rail system.2

PRC Total (Mt)

6,412.5 13,355.5 601.6 1,780.2 535.1 1,655.0 46.4 83.7 4,852.6 10,388.1 958.3 1,187.2

Source: China Transportation and Communications Yearbook 2001.

Table 6-4 Transport Facilities in the Western Region, by Mode, 1999 Railways Region/Province PRC Western Inner Mongolia Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

Highways

Main (km)

Extensions (km)

Total (km)

Expressway (km)

1st Class (km)

2nd Class (km)

Navigable Waterways (km)

57,923

86,511

1,351,691

11,605

17,716

139,957

116,504

5,012 2,013 591 2,290 1,654 1,873 0 1,941 2,323 1,092 712 1,849

6,203 2,432 591 2,614 1,713 1,931 0 2,316 3,279 1,097 802 2,605

6,3824 51,378 28,086 89,318 33,973 102,405 22,475 43,212 36,212 18,268 10,015 33,484

0 575 134 747 115 405 0 315 13 0 55 170

45 389 122 633 26 72 0 159 0 18 109 57

3,070 2,319 2328 6,580 627 1,435 568 3,034 3,164 1,394 1,367 5,086

1,083 5,582 12,324 6,199 2,132 1,530 0 998 1,305 372 397 0

Source: China Statistical Yearbook 2000.

RAIL SYSTEM Given the vast distances to markets, railways are the most economical means of transport in the Western Region. Development of the rail system The rail network (Figure 6-1) is mostly of recent construction.The Lanzhou-Urumqi line was completed only in 1964; the continuation west from Urumqi to Ala Pass, part of the EurAsia Land Bridge (see discussion in this chapter), was completed only in 1990. Similarly, the Korla-Kashgar railway was not completed until 1999.1 The railway system in the Western Region did not

126

Northwest system The major rail links passing through Lanzhou, the hub for the northwest, are: • Lanzhou-Lianyungang (the eastern portion of the EurAsia Land Bridge, also known as the Longhai line). The line links Gansu with the port of Lianyungang (Jiangsu). Traffic has increased rapidly and there is severe congestion. Duplication and electrification of the BaojiLanzhou section will ease congestion. Construction of the Hefei-Xi’an railway will also mitigate bottlenecks and, by interfacing with

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 6-1 Main Railways in the PRC

Harbin Ala Pass Changchun

Urumqi

Shenyang Hohhot

Xining

Chengdu Lhasa

Beijing

Tianjin Yinchuan Shijiazhuang Taiyuan Jinan Lanzhou Zhengzhou Xi’an

Wuhan Chongqing

Hefei Nanjing Shanghai Hangzhou Nanchang

Changsha Guiyang Kunming

•

•

•

•

other lines, offer greater flexibility and efficiency. Lanzhou-Wuwei-Jiaguyan-Urumqi-Ala Pass. Parts of the 1,600-km section in Gansu are being upgraded and electrified. Lanzhou-Baotou-Hohhot-Beijing, the normal route for Lanzhou–Beijing traffic (the alternative is via Xi’an and Zengzhou) Lanzhou-Chongqing railway. The 1,043-km line will run by way of Lintao-Minxian-DangchangWudu-Guangyuan-Nanchong-Wusheng.This second major line between the northwest and southwest PRC will shorten rail distances and alleviate the strain on the Baoji-Chengdu line and the Baoji-Lanzhou section of the Lianyungan-Lanzhou railway. It will also expand the traffic handling capacity in the northern parts of Sichuan and Chongqing. Lanzhou-Xining-Golmud (construction of a 1,118-km extension to Lhasa in Tibet has commenced)

Fuzhou

Taibei

Guangzhou Nanning Hongkong Macao Haikou

• Baoji-Zhongwei. This single-track rail line links the Lanzhou-Lianyungang line with the LanzhouBaotou-Beijing and Baotou-Wuwei-JiayuguanUrumqi lines, providing a relief route or avoiding line for trains from the coastal provinces to the Western Region. Southwestern system The major rail lines of the southwest are: • Baoji-Chengdu and Xianfan-Chongqing, the gateways from southwest to northwest PRC • Yingtan-Guiyang, linking southwest PRC to central-southern and eastern PRC • Guiyang-Guanxi and Guiyang-Kunming, linking the southwest to the Eastern Region The Western Region rail system has four main weaknesses: • Lack of capacity: lines east of a line between Lanzhou and Chengdu • Unutilized capacity west of Lanzhou • Circuitous routes, especially north-south between

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major Western Region centers, for example, between Lanzhou and Chengdu, adding to the cost and time taken for rail transport • Gaps in the rail network in the southwest and northwest Tenth FYP proposals During the Tenth FYP the PRC plans to invest 270,000 million yuan in its railways,3 of which about 100,000 million yuan would be for rail construction in the Western Region. The intention is to complete 2,600 km of new railways, including 1,300 km of double-track line and 500 km of electrified line. The focus will be on links to the coastal provinces, including the double-tracking of the Lanzhou-Baoji and Zhuzhou-Lipanshui lines and the construction of the Nanjing-Xi’an, Suining-Chongqing-Huaihua, and Neijiang-Kunming, Shenmu-Yan’an, and Qinghai-Tibet railways. ROAD SYSTEM The PRC’s road network is underdeveloped quantitatively and qualitatively. Expressways and class 1 highways account for less than 2 percent of the total road network, and class 2 highways for about 9 percent. The remaining 90 percent (class 3 highways and below) are paved and gravel roads of lower standard. With only 1,000 km of roads per million inhabitants, the density of the road network is low. The Western Region had over 575,000 km of highways in 1999 (37.9 percent of the national total), including 2,529 km of expressways (21.8 percent of the national total), 1630 km of class 1 highways (9.2 percent), and 30,972 km of class 2 highways (22.4 percent). Approximately 5 percent of towns and townships have no connection with the road system.4 The Government’s strategy is to develop a National Trunk Highway System, linking all cities with populations of over 500,000. The system consists of 12 interprovincial trunk highways (similar to the US interstate freeway system). However, most of the expressways and class 1 roads lie in the Eastern Region.5 Like the railways, the highway network may

128

be thought of as a series of roads running east to the coastal provinces and port cities, such as UrumqiLanzhou-Xi’an-Hefei-Shanghai. East-west routes • NH109/110 Beijing-Lanzhou, NH110 via Hohhot and Baotou in Inner Mongolia • NH312 Shanghai-Hefei-Xi’an-Lanzhou-UrumqiPRC border (Horgos).This road is currently being improved in Gansu Province; work on two-thirds of the road has already started, work on the other third has yet to be started. • NH315 Lanzhou-Xining-Kashgar In addition to these east-west highways, northsouth highways link major Western Region cities: • NH212 Lanzhou-Chongqing-Kunming, currently being upgraded • NH213 Lanzhou-Chengdu-Kunming, currently being upgraded However, to concentrate exclusively on the national highway system would be to miss the essential role of local roads. Most Western Region roads link villages and townships to provincial centers and to the major rail and road arteries. Roads are used overwhelmingly for short-distance transport. The condition and strength of local government roads are of crucial importance. Off the national highways, many roads are unsuitable for heavy vehicles. The Master Plan for Poor Areas (Eighth Seven-Year Plan for Poverty Alleviation, 1994–2000) set as its goal the provision of year-round access to every poor township and 90–95 percent of villages. The availability of access to all-weather rural roads ranks high among the priorities of western provinces. At the end of 1999, less than 80 percent of villages in the Western Region had road access (Chapter 19). AIR TRANSPORT Given the vast distances, air transport is essential for opening up the Western Region to the outside world and boosting development.The main airports are in the provincial capitals; smaller airports are generally

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

in prefecture cities. About a third of the region’s 39 airports are in remote areas that the rail system does not reach. The PRC’s aviation regulator, the Civil Aviation Administration of China, has announced plans to regroup the 10 airlines under its control.6 Under the plan, there will be three groups: • Beijing-based Air China, Chengdu-based China Southwest Airlines, and China National Aviation Corporation will form a new group with assets of $6,800 million, 118 planes, and 339 routes. • Shanghai-based China Eastern Airlines and China Northwest Airlines and Yunnan Airlines will form a new group with assets of $5,700 million, 118 planes, and 437 routes. • Guangzhou-based China Southern Airlines, China Northern Airlines, and Xinjiang Airlines will form a new group with assets of $6,000 million, 180 planes, and 606 routes. The significance of the reform lies in the possible strengthening of competition, since the groups have overlapping route structures.The consolidation has encouraged other airlines to cooperate and provide larger networks.7 WATER TRANSPORT While waterways are important in the southwest, they are relatively insignificant in the northwest. In the southwest, the Yangtze River and its tributaries are major arteries linking the southwest with central and eastern PRC. Similarly, the Xi River and its tributaries provide transportation from Guangxi and Guizhou to Hong Kong, China and Macau, while the Lancang River8 connects Yunnan with Thailand, Lao People’s Democratic Republic (Lao PDR), and Viet Nam. In the northwest provinces, river craft operate on the Yellow River upstream of Lanzhou, and on a section of the Ertix River in Xinjiang. PIPELINES Pipeline transport is still in its infancy in the Western Region.9 The crude oil pipelines in Xinjiang and

Gansu, including those between Karamay-Maytag, Karamay-Urumqi, Huoshaoshan-Beishanti-Urumqi, Huatugou-Golmud, and Tazhong-Lunnan-Korla, are isolated and do not form an interconnected regional network. The expansion of the oil pipeline network in Xinjiang is threatening the economic viability of the railways, since oil accounts for over half the rail freight to other provinces. Sichuan already has a natural gas pipeline network over 6,000 km long, with an annual transmission capacity of 7.3 GL. A natural gas pipeline from northern Shaanxi to Beijing has been opened, while the 870-km LanzhouChengdu oil product pipeline was completed in 2000.

Demand for transport services in the Western Region IMPACT OF ECONOMIC GROWTH ON DEMAND FOR TRANSPORT Rapid economic growth has caused a surge in demand for some transport services (Table 6-5).

Table 6-5 Growth of GDP, Travel, and Freight, 1990–1999 Region PRC GDP at 1999 prices (109 yuan) Air travel (passenger-km) Road travel (passenger-km) Rail travel (passenger-km) Air freight (ton-km) Road freight (ton-km) Rail freight (ton-km) Xinjiang GDP at 1999 prices (109 yuan) Air travel (passenger-km) Road travel (passenger-km) Rail travel (passenger-km) Air freight (ton-km) Road freight (ton-km) Rail freight (ton-km)

Growth Rate (%/year)

1990

1999

3,375 23,048 262,032 261,263 820 335,810 1,062,238

8,191 85,730 619,920 413,593 4,230 572,430 1,283,840

10.4 15.7 10.0 5.2 20.0 6.1 2.1

41 1,073 5,511 3,796 20 10,809 14,116

96 3,179 15,705 8,190 88 27,046 30,360

9.9 12.8 12.3 8.9 17.6 10.7 8.9

Source: Calculated from statistical yearbooks.

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As the structure of the economy changes, freight transport grows at a slower rate than GDP.10 Rail transport, both passengers and freight, has grown at a slower rate than transport by other modes. The Ministry of Railways expects an even lower growth rate during the Tenth FYP period, 4.4 percent a year for passengers and 0.9 percent a year for freight.11 However, in places capacity limitations could be suppressing demand for rail transport.That is, given current charging practices, producers wish to ship more freight than the railways can handle. During the economic boom of the early 1990s demand for railway freight services was 10–20 percent above the capacity of the rail system,12 and shippers typically had to give between 18 and 48 days’

notice when they required a wagon, and had to load and unload the wagon within four hours. Robust economic development in the Western Region during the 1990s has boosted freight movement; the 1998 freight volume of 2,220 Mt was 51 percent above that of 1990.13 Taking Xinjiang as an example, Table 6-5 suggests that the total freight traffic handled by all modes rose from 139 Mt in 1990 to 304 Mt in 1998. Over the same period, the traffic task increased from 262 to 554 million tonkilometers. Road transport increased its share of freight haulage in Xinjiang from 83 percent to 84 percent between 1990 and 1998, while rail’s share declined from just over 15 percent to about 11 percent. The pipeline sector increased its share of freight slightly,

Table 6-6 Railway Shipments Between Xinjiang and Other Regions, 2000 Outward Shipments Region Eastern Central Western Southwest Northwest PRC

Inward Shipments

Total

(Mt)

(%)

(Mt)

(%)

(Mt)

(%)

Outward/Inward Shipments

5.4 4.6

22.0 18.5

3.8 1.2

51.8 15.8

9.2 5.7

28.8 17.9

1.4 3.9

2.6 12.1 24.7

10.3 49.1 100.0

0.8 1.6 7.3

10.9 21.5 100.0

3.4 13.7 32.0

10.5 42.8 100.0

3.2 7.7 3.4

Source: China Transportation and Communications Yearbook 2001.

Table 6-7 Outward and Inward Railway Shipments in the Western Region, by Province, 2000

Province Chongqing Sichuan Guizhou Yunnan Shaanxi Gansu Qinghai Ningxia Xinjiang

Outward Shipments (Mt)

Inward Shipments (Mt)

Outward/Inward Shipments

9.2 25.8 24.8 17.2 21.6 16.9 5.3 17.8 24.7

12.2 33.7 14.5 15.5 18.1 24.8 5.4 9.0 7.3

0.748 0.766 1.714 1.108 1.198 0.680 0.969 1.971 3.365

Source: China Transportation and Communications Yearbook 2001.

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while waterway transport was virtually nonexistent. The railway system is the major carrier of longdistance freight to and from Xinjiang, and Table 6-6 shows the pattern of rail shipments. Major destinations for outward cargo from Xinjiang include Gansu, Henan, and Sichuan.The sources of inward cargoes are more diverse, with the major suppliers being in Gansu,Tianjin, Jiangsu, and Sichuan. An imbalance between inward and outward shipments is important insofar as it adds to railway or road costs by forcing operators to reposition equipment. There is an imbalance in freight flows to and from most western provinces, although its extent and direction vary.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

The ratio of outward to inward rail shipments is highest in the case of Ningxia and Xinjiang. Ratios of outward to inward shipments of 3 and above suggest that the railways face a substantial backhaul problem. At the other extreme, Gansu has a ratio of outward to inward shipments of 0.68. Gansu imports sizable volumes of freight from the coastal provinces but does not have the volume of outward cargo characteristic of Xinjiang and Ningxia. IMPLICATIONS FOR FUTURE DEMAND FOR TRANSPORT With continuing GDP growth and likely changes in the macroeconomy of the Western Region (see Chapter 1), demand for transport will continue to grow. However, experience with market economies suggests that the demand will diversify and focus on quality. Shippers will want speed and reliability, shorter waiting times, minimal damage to goods, and the ability to move small loads efficiently. There will be much more demand for specialized services, such as refrigerated, containerized, and express parcel transport. Road transport better satisfies these types of demand, at least over short and intermediate distances, and is likely to account for much of the traffic growth, assuming that regulation does not constrain growth.The railways will continue to carry bulk cargoes over long distances; an efficient rail system could expand its role in long-distance container haulage. Air transport will be increasingly important and critical to the development of the Western Region. More specifically, the demand for transport services will vary with the following, among others: • Extent to which local processing of minerals and agricultural products takes place. Large quantities of coal, oil, metals, and agricultural produce move from the Western Region to the Eastern Region. Pricing and other market-oriented reforms would have a substantial impact on commodity movements. For example, the closure of small coalmines will alter the pattern of coal shipments. Moreover, there is scope for a

considerable growth of value-added or processing industries. Several proposals for locating coal-fired electricity generating power plants at or near large mines would have the effect of “transporting coal by wire.” Similarly, further development of oil refining in Gansu would lead to more demand for upstream crude oil pipelines from Kazakhstan and Xinjiang, as well as additional capacity in downstream pipelines connecting the refineries with the markets in the coastal and southern provinces. Large-scale development of value-adding industries would significantly alter the scale and nature of rail shipments. • Extent of a general shift from primary to secondary and tertiary industries. A gradual shift from primary to secondary and tertiary industries would reduce the volume of basic materials that the transport system handles, and increase the demand for higher-quality transport services, especially container services. In general, such a change is likely to favor road rather than rail transport. • Extent of integration into the world economy. A more open and competitive economy should generate a significantly larger volume of trade in goods and services. Such an increase in trade will call for improved and expanded transport services. If the Western Region is to take full advantage of the new opportunities, it must develop the necessary transport links to Central, Southeast, and South Asia. • Extent to which the Western Region is able to attract tourists. A major increase in tourist numbers has important implications for the domestic and international aviation sectors, as well as rail and road.

Cross-border and subregional transport issues The emphasis in Western Region economic development has been on the links to the coastal provinces. However, to expand international trade the emphasis should be on cross-border links.

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TRANSPORT LINKS WITH CENTRAL ASIA Like the Western Region, the Central Asian republics are landlocked: their exports and imports must be shipped through a third country. International cooperation is essential. The physical condition of the road and rail transport links to the major cities of Central Asia is poor and the routes are often indirect. Priority should be given to rehabilitating existing links while planning new rail and road links for construction in the medium term. More specifically, key regional arteries must meet modern standards so that they can carry the projected loads and the economic needs of growth in the area.14 Ala Pass (Druzhba)–Aktogay rail project (part of EurAsia Land Bridge) The 304-km rail line between the Ala Pass (Druzhba) and Aktogay15 is a section of the EurAsia Land Bridge (see below).This international transit route became important in 1991, when the PRC opened a new railway from Urumqi to Ala Pass on the Kazakhstan border.16 The Ala Pass line provides a circuitous route between Urumqi and Almaty

(Kazakhstan), running in a northwest direction from Urumqi to Ala Pass and Aktogay and then in a southwesterly direction to Almaty.17 The condition of the Druzhba-Aktogay section is poor, with many speed restrictions.Telecommunications along the line also requires renewal.18 As of August 2000, there was an average of just over four freight trains per day, a daily local train between Urumqi and the Kazakhstan border, and two international passenger trains weekly between Urumqi and Almaty.19 This is well below the trade potential of the route. At the 1999 ADB Workshop on Transport Cooperation in Central Asia, the PRC and Kazakhstan ranked improvements on the DruzhbaAktogay line as of “high: importance (Table 6-8). The PRC delegate noted that traffic volumes through the Ala Pass are increasing and are likely to continue to increase. Railway track upgrading in Kazakhstan This project relates to the upgrading of the EurAsia Land Bridge line between Almaty and Aktogay. Existing problems include the condition of the track

Table 6-8 Central Asian Transport Projects Ranking by Governments Proposed Project Rail projects Druzhba–Ala Pass Facilities Improvement Railway Track Upgrading in Kazakhstan Xinjiang N. Railroad to Almaty Andijan-Kashgar Rail Transport Corridor Trans–Kyrgyz Rep. North-South Rail Corridor Kemin-Almaty Railroad Link Torugart-Kashgar Railroad Link Road projects Highway Artery (M39/M32) improvements Kuitun-Selimu Lake Road Project Almaty to Issyk-Kul Road Construction Bishkek-Torugart Road Improvement Andijan- Osh-Irkeshtan Road Corridor Upgrade Kashgar-Hunshlap Road Corridor Upgrade

PRC

Kazakhstan

Kyrgyz Rep.

Uzbekistan

High Medium High High Medium Medium

High High Low Medium -

High High Medium High

High -

High High Medium High Low

High High Medium -

High Medium High High Low

Medium High -

Source: Haig-Prothero (1999)

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Cost ($ million) 60 150 300 1,326 1,440 261 na 35 229 230 55 45 100

Figure 6-2 Proposed Railways in Central Asia

ASTHNA

ABTOGAY

JEMINAY BAKETU

ALMATY TASHKENT

BISHKEK 1

SAMARKAND

5

ALA PASS HORGOS MUZAERTE

URUMQI

2 3

TO RUGART 4

DUSHANBE

KABUL ISLAMABAD

Existing railway Possible railway Border crossing

and communications system. It would appear sensible to upgrade both the Druzhba-Aktogay and Aktogay-Almaty sections if maximum use is to be made of this rail link. The project has been given a “high” priority ranking by Kazakhstan. Xinjiang North Railroad to Almaty These proposals involve the construction of a new Urumqi-Horgos-Almaty line (Figure 6-2). The proposed line would leave the Urumqi–Ala Pass line at Jinghe, cross the PRC-Kazakhstan border at Horgos, and run south of Lake Kaptschagaiske to Almaty.This line offers a direct route between Urumqi and Almaty, cutting the rail distance by approximately 350 km. Also, if constructed entirely on the PRC gauge, it would allow trade with Almaty without the present change of gauge at Ala Pass. It would undoubtedly facilitate trade between the PRC and Central Asia. However, the line would be expensive to construct. Preliminary estimates suggest that it would cost upward of $300 million. It is a lower priority than

1 2 3 4 5

Andijan Osh Irkeshtan Kashgar Kemin

improving existing road and rail routes, but as trade and traffic build up it is likely to become an attractive investment. Kashgar-Torugart-Andijan or KashgarIrkeshtan-Osh The PRC favors developing transport links across the main passes connecting Xinjiang to neighboring countries.20 Two options for constructing a new railway between Xinjiang and the southern region of the Kyrgyz Republic, including the Fergana Valley, are under consideration: • Kashgar-Torugart-Andijan or • Kashgar-Irkeshtan-Osh The alternatives run parallel to proposed road improvement schemes in Kashgar-Torugart-Balykcy (on Lake Issyk-Kul)-Bishkek (or Almaty) and in KashgarIrkeshtan-Osh. Both schemes cross terrain that is very difficult for railway construction.The cost of either the Kashgar–Torugart–Jalal Abad or Kashgar-IrkleshtanOsh railway lines would exceed $1,000 million.

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The scale of current freight and passenger traffic makes it difficult to justify the large investment required. Freight movements over the Torugart Pass amounted to 100,000 t in 1994, 125,000 t in 1995, 80,000 t in 1997, and 57,000 t in 1998. About 70 percent of this is from the Kyrgyz Republic to Xinjiang. Passenger traffic has been estimated at 22,000 in 1994 and 11,400 in 1998.21 Highway Improvements (Tashkent-BishkekAlmaty-Horgos-Urumqi) The Tashkent (Uzbekistan)–Bishkek (Kyrgyz Republic)–Almaty (Kazakhstan)–Horgos (Xinjiang)– Urumqi highway is the most important road corridor in Central Asia.22 It is already in heavy use, especially by trucks carrying international freight,23 so its rehabilitation, in conjunction with the reduction of nonphysical barriers to trade, offers substantial gains to several countries.The PRC, Kazakhstan, and the Kyrgyz Republic rate the project a “high” priority for the PRC, while Uzbekistan rates it a “medium” priority. Rehabilitation of the Almaty-Horgos road is economically viable and would improve regional transport links, help promote trade in Central Asia, and enhance economic development opportunities.24 Bishkek-Torugart road improvement (part of Kashgar-Torugart-Bishkek-Almaty route) The Bishkek-Torugart and Andijan-Osh-Irkestan proposals, providing for transit across the Kyrgyz Republic to and from the PRC, are alternative projects. Whereas the Bishtek-Torugart road would improve transport between Bishkek and Kashgar, the Andijan-Osh-Irkestan road would improve transport links between the PRC and Osh.25 The BishkekTorugart road crosses the Kyrgyz Republic in a northsouth direction and provides the shortest and most direct route between its capital and Xinjiang.26 These road corridor improvement proposals also compete with the proposed rail lines between KashgarTorugart-Andijan and Kashgar-Irkeshtan-Osh. The PRC considers the Bishtek-Torugart road of “medium” importance, whereas the Kyrgyz Republic

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sees the road as a very important artery.27 Investigations have confirmed that the project is economically viable and would improve transport links in the region, promote trade, and help alleviate poverty in its area of influence.28 Andijan-Osh-Irkeshtan road upgrade (part of Kashgar-Irkeshtan-Osh-Tashkent route) An ADB consultant29 noted that another potentially important cross-border link is that from Kashgar, through Andijan and Osh, in southern Kyrgystan, to the Fergana Valley and Tashkent. With the recent (October 1999) completion of the railway to Kashgar from Urumqi, and the improvement of the road between Kashgar and the Kyrgyz Republic border at Irkeshtan, this could become an important trade link, particularly for trade between Xinjiang China and Kyrgystan/ Uzbekistan, provided the section between Irkeshtan and Osh is improved. The Andijan-Osh-Irkeshtan Road Corridor upgrade project is ranked of “high” importance by the PRC, Kyrgyz Republic, and Uzbekistan. Investigations have indicated that the project would be economically viable, improve transport links, promote trade in Central Asia, enhance opportunities for economic development, and help alleviate poverty in its area of influence.30 TRANSPORT LINKS WITH SOUTHEAST ASIA The transport links between southwest PRC and Southeast Asia are so poor that they act as a barrier to trade. Road links Roads links with Viet Nam, Lao PDR, Thailand, and Myanmar are of low quality. Roads run from Kunming (Yunnan) to Lashio and Lollam in Myanmar, from Kunming via Myanmar and Lao PDR to Chiang Rai in Thailand, and from Kunming via Lao Cai to Hanoi, Viet Nam. ADB has recently contributed funding to a Southern Yunnan Road Development Project involving, among others, the upgrading of a section

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

of the Kunming–Chiang Rai road, linking Yunnan with Lao PDR, Myanmar, and Thailand. There are various proposals for improvements in transport links or new transport corridors between southwest PRC and Southeast Asia. Road proposals include the improvement of the roads between Kunming and Chiang Rai, between Kunming and Lashio (Myanmar), and between Kunming and Hanoi. Rail projects include the construction of new railways between Yunnan and Thailand and between Yunnan and Myanmar, and the reconstruction of the railway between Yunnan and Hanoi (Viet Nam). Water transport proposals include the upstream Lancang (Mekong) River navigation project and the Red River Navigation Improvement Project. Road improvement projects of interest to the PRC, which would be complemented by efforts to remove cross-border trade barriers, include: • Kunming–Chiang Rai (Thailand). The proposal is to improve the existing road running SSW from Kunming to Daluo on the PRC-Myanmar border, thence via Lao PDR to Chiang Rai in Thailand. The estimated cost of road improvements is $353.5 million. Preliminary economic evaluation of the improvements suggests that the project is economically viable. • Kunming-Lashio (Myanmar). The project aims to improve the existing road running approximately west from Kunming to the PRCMyanmar border, then south to Lashio and Lollam. The estimated cost of road improvements is $817.4 million. Preliminary economic evaluation of this road improvement scheme suggests that the project is economically viable. • Kunming-Hanoi (Viet Nam). The proposal is to improve the road that runs approximately southsouthwest from Kunming–Lao Cai (on the Vietnamese side of the PRC–Viet Nam border)– Hanoi. The estimated cost of road improvements is $49.6 million. • Guangxi-Viet Nam. Preliminary estimates suggest that it is economically viable to improve the roads in the Guangxi/Viet Nam transport corridor.

RAIL LINKS The only rail links with Southeast Asia are the metergauge Kunming–Hekou–Lao Cai– Hanoi line, and the (Beijing)–Nanning–Pingxiang–Dong Dang (Friendship Pass)–Hanoi line; however, the Vietnamese rail system does not connect with the main rail systems of Southeast Asia. Rail improvement projects of interest to the PRC include the following: • Yunnan-Thailand. The proposal is to build a railway, approximately 1,300 km long, between Kunming and northern Thailand, at a cost of about $1,300 million to $1,800 million, depending on the route. The railway should reduce transport costs, with additional benefits arising from resource development, especially in mining and timber.Yunnan has prepared a preliminary feasibility study and has indicated its wish to proceed with the project, even if external funding is unavailable. • Yunnan–Viet Nam. The proposal is to rehabilitate the meter-gauge Kunming–Hekou– Lao Cai–Hanoi (Haiphong) line and facilitate access from Yunnan to the new port at Cai Lan (Viet Nam). The improvements would cost at least $65 million. • Yunnan-Myanmar. The proposal envisages the construction of a new Kunming-Myanmar line at a cost of between $600 million and $700 million. If constructed, the line should yield savings in transport costs and additional benefits through resource development. TRANSPORT LINKS WITH SOUTH ASIA The Western Region lacks transport links with South Asia. It has only two border crossings: • Kunjirap (Xinjiang), where the Karakoram highway crosses from Pakistan (see Chapter 14) • Zhangmu, where the Friendship Highway crosses from Tibet into Nepal Cross-border trade between Yunnan and Southeast Asia and South Asia may take place either

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by road and rail links between the PRC and Myanmar, Thailand, or Lao PDR or by road and rail from the interior of Yunnan to a seaport in southern PRC and thence by ship to Southeast Asia or South Asia. The advantage of the PRC ports is that there are already major container ports at Shenzhen (the PRC’s second-largest container port) and Guangzhou (fifth-largest container port), and port facilities close to the border with Viet Nam are also planned. However, there are two much shorter routes between India and the PRC that may be practicable (Figure 6-3):

• Via Yangon in Myanmar • Via northern Myanmar and northeast India Neither route has been subject to recent investigation, so the descriptions in this section are necessarily very general. Route via Yangon One possible new trade route between the Western Region and South Asia is via a railway between Kunming (Yunnan) and Yangon (Myanmar), with seaborne freight between Yangon and various ports in South Asia. The advantages of this route are as follows:

Figure 6-3 Potential Rail and Sea Routes to South Asia

KARAKORAM KABUL RAWALPINDI KEJIA DELHI KATHMANDU

ZHANGMU YADO NG

C ALC UTTA C HITTAG ONG

MANDALAY

HA NDI

HAI PHONG

YANG ON MADRAS

C O LO MBO

Existing railway Possible railway Border crossing

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• It offers an alternative to the Malacca Strait, which is certain to become an increasingly congested sea lane. • It offers a much shorter sea route at the cost of a slightly longer land route between southwest PRC and the sea. The route would replicate the Southwest Silk Route, in use during the 4th century BC or earlier, and the PRC’s first inland route to the outside world.31 Following its occupation of Myanmar, Britain conducted surveys for the construction of a railroad from Yangon to Yunnan in 1874 and 1875, but was unable to complete the surveys. There appear to be three candidate routes between Kunming and Yangon32 with a preliminary cost estimate of $600 million to $700 million,33 which seems much too low. Until now,Yunnan has attached a higher importance to developing a rail link with Thailand,34 which would not benefit trade with South Asia and would be much more expensive because of a greater length of new track. The majority of the major urban centers in South Asia are within 300 km of ports, and seaborne freight is always likely to be far more competitive than road transport. Route via northern Myanmar and northeast India An alternative route to South Asia is via a railway or road from Dali (Yunnan) to Myithina, the northern terminus of the Myanmar rail network, to Tinsukia (northeast India).Tinsukia is on the Indian rail network, which could, subject to the removal of current border restrictions, also lead to the Bangladesh port of Chittagong. Prior to the partition of India in 1947, Chittagong was the port for northeast India (Assam); border restrictions and a range of inefficiencies in port operations handicap its operations,35 but these do not detract from its longterm potential. The major advantage of this route is that it could, in fact, encompass the first option since the Dali-Myithina route is one of the three possible rail routes to Yangon.

Implications for transport policies RAIL TRANSPORT On the supply side, upgrading of the rail system and the building of new lines linking the Western Region with the coastal and southern provinces will probably continue. This will overcome the shortage of capacity between the Western Region and the Eastern Region as well as that between the northwest and the southwest, especially Sichuan. The rail system will also expand as a result of the construction of developmental lines such as Urumqi-Kashgar and Qinghai-Tibet. On the demand side, the railways will continue to be the dominant transporters of bulk commodities over long distances. However, experience in both developed and developing countries tells us that in a deregulated market road and rail are likely to compete for medium-distance traffic (500–1,000 km), especially intermodal traffic. There will be growth in cross-border traffic, primarily as a result of closer links between the Western Region and the Central Asian republics rather than as a result of a significant expansion of through rail traffic between the PRC and Europe. EurAsia Land Bridge traffic will grow with CIS countries rather than the European Union. Rail transport is more costly than sea transport over long distances, and intense competition on container shipping routes between the PRC and Europe implies that the benefits of lower ship operating costs are passed on to shippers. ROAD TRANSPORT The road system is likely to expand rapidly as a result of the extensive highway construction now under way.Trucking companies will continue to handle intraprovince and short-distance freight.There will be a modal shift from rail to road, as the demands for a higher-quality transport system escalate and as the transport becomes more customer-oriented. Similarly, experience in forecasting transport demand in

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developed and developing market economies indicates a growth of relatively long-distance road haulage.36 In Australia, for example, there is strong competition between road and rail over the 860-km route between Melbourne and Sydney. ROAD-RAIL COMPETITION The progressive introduction of market mechanisms will offer transport users greater choice. In a more competitive transport market, always providing sufficient capacity exists (see below), service providers will have to be more responsive to the needs of their customers. In the past PRC shippers on occasion had to give the railways between 18 and 48 days’ notice to order a wagon.37 Similarly, PRC shippers have been allowed only four hours to load or unload a wagon and passengers have considerable difficulty in getting hard sleeper berths. A market system would allow prices to rise in the face of such suppressed demand. In turn, the price increases would send signals for investment to increase the system’s ability to handle the demands. Despite the fact that rail traffic is still growing, the PRC is experiencing a modal shift toward truck transport for freight and toward road and air transport for passenger travel.38 This has been caused by: • Heavy investment in roads compared with railways. While the road system expanded by 15,000 km a year, the rail system expanded by only 350 km a year. • Increases in rail fares. In 1985, short-distance (less than 100 km) passenger fares were increased by 36.7 percent to induce a shift in short-haul passenger business from rail to bus. In 1989, a 112 percent increase led to a 15.9 percent decrease in passenger trips, and in 1995, a 51.8 percent increase caused a 12 percent drop in passenger trips.39 • Shortage of route capacity AIR TRANSPORT With the rapidly growing demand for air travel and airfreight in the Western Region, there is a need to

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construct new airports and expand existing facilities. Local governments should pay particular attention to the airports in border areas, first because there is more demand growth here (deriving from crossborder trade and travel), and secondly because of past neglect of this need.40 In addition to airports for scheduled services, there is great scope for the development of a general aviation industry using local airstrips. NEED FOR AN EXPORT-ORIENTED (INTERMODAL) TRANSPORT SYSTEM The PRC’s foreign trade has grown rapidly. However, the Western Region has yet to experience the benefits of export-led growth. While the interior provinces account for over 60 percent of the PRC’s population, they account for less than 20 percent of foreign trade. This inequality in foreign trade has aggravated regional disparities. As the Gansu Draft Tenth FYP41 notes,“the trend of economic globalisation is inevitable.” If the Gansu vision is realized, growing exports and imports will require an appropriate transport system. Containers offer a fast, safe and cost-effective method for exporting and importing, and easy transfer from one mode of transport to another.They enable firms to offer door-to-door service, with predictable delivery times, and they reduce pilferage. For these reasons, over 80 percent of general cargo, measured by value, and over 50 percent, measured by weight, now moves by container. The PRC’s international container trade has grown dramatically. Its container ports had a throughput of approximately 20 million TEU in 2000, compared with 2.2 million in 1991. In developed countries, containers are common in the inland transport system; in the PRC they are common only in the coastal provinces. Only 24 percent of seaborne containers journey beyond the port city. Most containers are stuffed and unstuffed within the ports, their cargoes being carried break-bulk to and from inland destinations.42 There are a variety of impediments to efficient inland distribution of seaborne containers:

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

• Government agencies structured on modal, rather than intermodal, lines. The result is an array of overlapping jurisdictions. • Lack of competition in intermodal markets, with two SOEs dominating them • Lack of container handling facilities and equipment at inland locations, increasing costs • Shortage of railway capacity limiting shippers’ access to cost-effective inland container services • Failure to develop a customer-oriented focus There are not many container handling facilities in the Western Region. Lanzhou has a container handling facility, although the volume of containers using the facility is small. Gansu’s Tenth FYP provides for the expansion of the East Lanzhou International Container Port; if Gansu is successful in promoting an export-oriented economy, a rapid buildup of international container traffic is likely. Given Gansu’s geographic position, the development of Lanzhou as a major inland container hub offers real possibilities. EURASIA LAND BRIDGE The PRC is developing the EurAsia Land Bridge from the eastern port of Lianyungang (Jiangsu) to Europe, via the Western Region, Kazakhstan, and Russia. The route, intended primarily for container traffic, competes with container shipping on the Far East– Europe route, as well as with the Trans-Siberian Railway from Vladivostok or from the Western Region border port of Manzhouli (Inner Mongolia). Traffic on the route has never attained the volumes expected. Container traffic over Ala Pass, on the border between the PRC and Kazakhstan, amounted to 30,500 TEU in 1997 (of which 16,500 TEU moved westward from the PRC to Kazakhstan, while 14,000 TEU moved eastward). Many of the full containers carry auto parts from the Republic of Korea and are shipped to Uzbekistan via the PRC; return containers are either loaded with cotton for export or depart empty.The volume of through PRC–Europe Land Bridge cargo is said to be “relatively modest,” estimates suggesting that no more than 2,000–3,000 TEU was carried in 1995.43

The volume of freight carried is a measure of the directional imbalance in PRC-Kazakhstan trade. Of 2.3 Mt of cross-border cargo in 1998, imports accounted for 2.1 Mt. Some of this traffic moves in special wagons unsuitable for other traffics. The imbalance of cargo led to the repositioning of empty freight cars, at considerable cost to the railway. Container movements declined to 16,000 TEU in 1998, in part because of dissatisfaction with the service on the route. An ADB consultant44 has noted: Transit times between East Asia and Uzbekistan vary between 25 and 40 days. Transit times for competing routes is usually 25 days. Erratic transit times over the EurAsia Land Bridge route cause delays of approximately 15 days per shipment. The delays lead to additional stockholding costs as well as increasing the risks of shutting down assembly lines due to lack of critical components.

To put the EurAsia Land Bridge into context, the large container ships on the PRC-Europe route carry over 6,000 TEU and with more than ten sailings a week. Three of those sailings could handle all the containers shipped via the EurAsia Land Bridge in 1998. As of August 2000, there was an average of just over four freight trains per day, a daily local train between Urumqi and the Kazakhstan border, and two international passenger trains weekly between Urumqi and Almaty.45 The future role of the EurAsia Land Bridge should therefore be to serve inland markets in Russia, Belarus, and Kazakhstan rather than the European Union. The lack of traffic stems from several disadvantages: • High freight rates. One of the two companies providing rail shipping services charges $3,200 to transport a 20-foot container, and $4,700 to transport a 40-foot container from Urumqi to Berlin, rates that encourage shippers to route freight via eastern ports by sea to Europe.46

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• Long and unpredictable transit times, owing in part to the state of the track, particularly in Kazakhstan, and in part to organizational deficiencies, particularly at national borders • The change from the PRC standard 1.435-m gauge to the broad 1.520-m gauge at Ala Pass. This causes delay while wheel sets are changed or commodities and passengers are transhipped. • Poor telecommunications on Central Asian railways, and the lack of a reliable information system to tell customers where their freight is and when delivery will occur • Strong competition from alternative routes (e.g., container shipping on the Far East–Europe trade, trans-Siberian route across Russia, rail route from Central Asia to Bandar Abbas in Iran) CHANGING ROLE OF GOVERNMENT The transport sector is undergoing major restructuring. In the “old” sector, monopolistic SOEs provided services, with massive State intervention in pricing and investment decisions.The emerging sector will be market-driven and competitive (within and between modes), with private ownership of some transport entities. The role of government will change from that of providing transport services to that of creating a stable environment for private operators, and regulating where there is market failure (where there is evidence of anticompetitive behavior by service providers). Competition and freedom of entry to transport markets are necessary to ensure that shippers receive the types of service they require at the lowest possible price. NEW FUNDING CHANNELS FOR TRANSPORT INVESTMENT The gap between the supply of, and demand for, transport services has widened since 1980, placing physical stresses on the transport system. For example, heavy traffic flows and inadequate maintenance led to a deterioration of road transport in both rural (deterioration of road surfaces, etc.) and

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urban (longer commuting time, overcrowding of roads) areas. In turn, these deficiencies led to the recognition of the need for more resources for road construction and improvement. Government responsibilities Traditionally, road and rail construction has been mainly a public sector activity, with rail infrastructure the responsibility of Central Government and road infrastructure the responsibility of local governments. However, the ability of governments to fund necessary improvements in transport is limited. Transport must compete with high-priority areas, such as education, defense, and welfare, for government funding. Given constraints on government funding, there is a need to diversify the sources of both rail and road funding. Government support now takes the form of loans rather than grants. Increasingly, expressway financing has moved to local governments, which are able to access private funds and foreign capital markets.The key to improving the transport system lies in innovative funding. The PRC has already diversified its funding sources for transport investments. There are already special-purpose funds to raise money for specific types of transport investment (Table 6-9). Road sector Table 6-11 lists the sources of road funding in the PRC. In general, road funding comes from: • Central and provincial governments, for intercity road transport links • City councils, for roads within city boundaries • Private companies and foreign companies, for inter- and intracity highway construction • Households and business enterprises, which pay taxes to finance roads and make direct payments for road use in the form of fares and tolls Article 21 of the Highway Law of 1999 lays down the general principles for road funding. Chapter 3 of the Law provides for funding from the following sources (Table 6-10):

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 6-9 Special Funds for the Transport Sector Fund

Year Begun

Fundraising Method

Purpose

Special Foundation for Key Energy and Transportation Construction

1983

Collected from extrabudgetary funds of departments and units

Construction of key State energy and transportation projects

Special Foundation for Railway Construction

1998

Railway Department levy of 2.8 fen per ton-km on cargo

Capital construction of railways and purchase of rolling stock

Surcharge for Local Railway Construction

1991

Local governments levy (with approval of State Council)

Construction of local railways

Civil Aviation Construction Foundation

1993

Collected from airlines (10% for domestic airlines, 4–6% for international airlines)

Construction of civil airports, telecommunications, navigational equipment, and other capital projects

Airport Administrative and Construction Fee

1992

Departure fees paid by passengers

Airport construction

Vehicle Purchase Tax

2000

Levy of 10% on vehicles of domestic manufacture and 15% on imported vehicles

Special Foundation for Highway Construction

Highway Maintenance Fee

1985

Surcharge on fuel purchases

Mainly for maintenance, improvement and widening of highways

Harbor Construction Fee

1985

Levied on goods entering or exiting 26 ocean harbors

State Harbor Construction Foundation

Source: Mainly (with minor updates by the consultants) from Jin Bei and Wei Houkai (1999).

• Appropriation by local governments at various levels, including appropriation from special funds collected by taxation • Loans from financial institutions or foreign governments • Investment by business enterprises • Other sources that conform to laws or regulations of the State Council The Government has for a long time been considering whether or not to introduce a national fuel tax to replace provincial and local fees, including the road maintenance fee.47 This reform would not necessarily have any implications for the assignment of tax revenues between the levels of government. However, reforms that assigned a larger share of tax revenues to the Central Government would probably be beneficial to the Western Region as its revenue collection potential is low. A recent government study comprehensively reviewed highway funding.48 It provides various recommendations for strengthening highway finance: • Introducing a Highway Construction Bond • Improving the consistency of bank finance • Promoting provincial highway SHEs

Table 6-10 Highway Funds During the Ninth FYP, 1996–2000 Source Central Government vehicle taxes Local governments road maintenance fee Loans and credits domestic loans Local enterprises Total

Amount (million yuan)

Share of Total (%)

75,500 65,000 297,600 103,500 316,500 273,900 186,800 876,400

8.6 34.0 36.1 21.3 100.0

Source: Ministry of Communications (2000b).

• Facilitating the use of foreign capital and BOT • Standardizing the transfer of operating rights • Formulating preferential policies for the Central and Western regions The report recognized that the Central and Western regions would be dependent on government funds. It proposed that the Government apply the proceeds of the Highway Construction Bond to the Western and Central regions, and that policy loans from the State Development Bank go mainly to these regions.

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Table 6-11 Sources of Road Finance Measure

Date Begun

Road maintenance fee

1950 (revised 1980)

Characteristics

Rate

Remarks

Tax on transportation company revenue Tax on vehicle ownership

15% of gross revenue Based on tonnage

Revenue to provincial governments, used for intercity road maintenance

About $0.04/km

Mainly collected on the spot; road financed with loan, bonds, or foreign investment

Toll roads

1980

Direct beneficiary pays; toll belongs to constructor. Toll level set by provincial government

Road infrastructure development rights

1980

Foreign or private companies construct and manage toll road

Revenue to company

Local beneficiary pays

1980

Indirect beneficiary pays, e.g., where farmers donate labor and materials

Primarily in rural areas

Collecting Fund

1980

Levy on businesses and households in project vicinity

Usually depends on ability to pay

Revenue to local government; illegal under Highway Act of 1999

Land use fee

1981

Levied on foreigners for use of land

Fee varies

Revenue to city government

Public utilities fee

1984

Levied on business income of water supply, electricity, public transport, gas, and telephone companies

5–8% of income

Revenue to city government; earmarked fund, used for intracity road construction

Tax on city construction and maintenance

1984

Levy based on sum of “product tax,” “capital gains tax,” and “business tax”

City, 7% of sum; town, 5% of sum; other, 3% of sum

Revenue to city government; exclusively used for intracity road construction

Contribution by real estate enterprises

1984

Indirect beneficiary-pay

Obligation against land development right

Land use tax

1985

Land users (except FIEs) pay land charges

0.3–6 yuan/m2 (varies)

Vehicle purchase fee

1985

Sale of development rights

1987

Capital gains tax on land Integrated development Foreign loans, domestic loans, bonds

1990

10% of sale price of domestic vehicles; 15% of CIF price and customs tax for imported vehicles

Revenue to Central Government; exclusively used for intercity road construction

Land use rights can be traded to developers

Land price differs from city to city

Revenue to city government

Tax on capital gain on land

30% or 50% of gain

Shared by central, provincial and city government Intracity

Constructor develops land beside road to internalize development gains Mainly for subways and expressways

Caused boom in expressway and subway construction in Eastern Region

Source: Adapted from Yoshitsugu Hayashi et al. (1998), pp. 186–187.

Highways The following trends are observable in road sector funding: • The share of grants from Central and local governments has gradually decreased, while the importance of funding through the “user pays” system has increased.

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• The private sector and foreign investors are now able to invest in highway construction and management, formerly monopolized by the State. • Earmarked taxes and road maintenance fees are the main sources of highway funding. • Revenue from land sales is being used to finance road construction within cities.49

Foreign investment Over the past decade the PRC has opened up the transport sector to foreign investment.Table 6-12 notes the extent of foreign participation and provides a brief statement of the rules relating to foreign investment for each of the modes. The main constraint on foreign investment lies in government ownership of the main railway lines. FUNDING TRANSPORT IMPROVEMENTS IN THE WESTERN REGION Funding infrastructure improvements in the Western Region poses special problems. These arise from the following, among others: • Lower population densities. Whereas toll roads in the coastal provinces are often profitable, with low capital costs and high revenue streams as a result of substantial traffic diversion to the toll road, toll roads in the Western Region are unlikely to prove so attractive to private sector investors. • Lack of foreign investor knowledge. Whereas investors are familiar with the coastal provinces, there is less awareness of the costs and benefits of investing in the Western Region.

• Extensive borders. Central governments must normally finance international links because of the nature of the risks. • Harsh terrain.Topography and remoteness often make for high construction costs. As a result of these factors, it will be necessary for the Government to play a greater role in infrastructure construction in the Western Region than in the Eastern Region. However, there is scope for the Government and local governments to create SOEs to build, own, and operate transport networks.50 The following trends in Western Region transport funding are likely: • Central, provincial, and municipal governments will continue to mobilize a significant share of the investment resources required (including access to private investment and capital markets). • There will be growing foreign investment in the transport sector, including the spread of BOT and BOOT funding in line with the State Council policy on the Great Western Development Strategy.51 • The “user pays” philosophy will be more widely adopted.

Table 6-12 Role of Foreign Investment in the PRC’s Transport Sector Mode

Extent of Foreign Participation

Source of Income for Foreign Investors

Railways

Construction of lines under the jurisdiction of local governments only (and subject to SDPC approval), and construction and operation of railways through joint ventures with PRC partners

In the case of joint ventures and cooperative ventures, both partners are allowed to determine their own prices

Highways

Construction of highways, bridges, and tunnels via joint ventures, cooperative enterprises, or wholly owned enterprises. The BOT method can also be used.

Foreign investors operating a highway, bridge, or tunnel may set prices. Accounts can be settled with foreign exchange or compensatory payments of land.

Waterways

Construction of lease harbors and public berths via joint ventures and formation of wholly owned companies to invest in docks or shipping companies. Joint ventures may engage in stevedoring.

Foreign investors can set prices and/or charge fees in foreign exchange on special waterways. Collection of tolls for use of public docks comes under the jurisdiction of local governments. Prices for waterway transport have been decontrolled.

Aviation

Construction of facilities that are not part of the aviation control system. The share of foreign capital in an airport constructed and managed by a joint venture must not exceed 49%.

Development of land in the vicinity of airport or airport-related business

Source: Jin Bei and Wei Houkai (1999), p.57.

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• The ability of road and other infrastructure developers to finance construction by capturing part of the increase in land values will be enhanced. PRICING OF TRANSPORT SERVICES Until recently, the PRC has, for social reasons and as an inflation control measure, set freight rates and passenger fares below market clearing rates. Recent policy statements favor the determination of prices by market forces.52 Market-determined prices should send the correct signals about investment to potential public and private sector investors.

growth; they improve public sector management practices; they reduce resource costs; they expand service availability and accessibility; and they lower public service deficits. In facilitating economic growth, transport improvements normally contribute to poverty reduction. However, the most direct impact on poverty is the provision of road access to villages that do not have it (see Chapter 19 for further discussion of this subject).

SEPARATION OF “COMMERCIAL” AND “SOCIAL” RAILWAYS From a managerial perspective, it is preferable to separate commercially viable traffics (the “commercial” railway) from the “social” railway, that is, from those national development projects whose immediate return is social rather than economic. After a careful assessment of social and environmental impacts, such national development projects should be funded with direct Government grants or subsidies, rather than a cross-subsidy from freight shippers. Cross-subsidies risk making longdistance traffic uneconomic, further isolating the Western Region. IMPACT OF TRANSPORT IMPROVEMENTS ON POVERTY Economic growth contributes to poverty reduction in two major ways: by generating income-earning opportunities for the poor and by increasing Government capacity for income redistribution.53 In turn, improved transport is an essential component of economic growth, providing physical access to resources and markets; expanding trade, economies of scale, and specialization; lowering costs and prices; and widening production choices. Most transport improvements are undertaken because they fulfill one or more of the following criteria: they improve efficiency and economic

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Notes 1 2 3 4 5 6 7 8

9 10 11 12 13 14 15

16 17 18 19 20 21 22 23

Chen Yao (2000). Hu Yixun et al. (eds.) (1993). Xinhua, 16 June 2001. Jin Bei and Lu Tie (2000). Jin Bei and Wei Houkai (1999). China Daily, “Aviation Industry Set to Reorganize,” 28–29 April 2001. China Daily, 1 May 2001. The PRC’s 2,160-km section of the 4,661-km-long Mekong River is known as the Lancang River. In Yunnan there are river ports at Simao and Jinhong. Jin Bei and Lu Tie (2000). Lu Zheng and Lue Tie (1999). Xinhua, 14 June 2001. Wjian Hong Wu and Chris Nash (2000). Jin Bei and Lu Tie (2000). Asian Development Bank (1998a). The border station on the PRC side of the border is Alashankou, while the border station on the Kazakhstan side is Druzhba. The border crossing is referred to as Ala Pass. Asian Development Bank (2000c), p. 6-2. The proposed rail line between Urumqi and Almaty via Horgos offers a more direct route. Asian Development Bank (2000c), p. 6-3. Asian Development Bank (2000b). Asian Development Bank (1998a), p. 8. Asian Development Bank (2000c), p. 6-12. Asian Development Bank (2000c), p. 2-14. Asian Development Bank (2001).

24 25 26 27 28 29 30 31 32 33 34

35 36 37 38 39 40

41 42 43 44

Asian Development Bank (2000c), p. 4-10. Asian Development Bank (1998a). Asian Development Bank (2000c), p. 4-15. Asian Development Bank (1998a). Asian Development Bank (2000c), p. 4-19. Asian Development Bank (2000c), p. 2-14. Asian Development Bank (2000c), p. 4-15. Wang Dakun (1999). Asian Development Bank (2000d). Asian Development Bank (1994). Speech of Niu Shaoyao, Vice Governor of Yunnan Province, Proceedings of the Sixth Conference on Subregional Economic Cooperation, Asian Development Bank, March 1997, p. 91. Subramanian (2001). Heggie and Vickers (1998). Wjian Hong Wu and Chris Nash (2000). Wjian Hong Wu and Chris Nash (2000). Wjian Hong Wu and Chris Nash (2000). For example, the Xinjiang government proposes to build six feeder airports during the Tenth FYP, but none of the proposals are near border crossings. (Shanghai Daily, 15 June 2001). Gansu Province (2001). Boyes (1995). Containerisation International, September 1995. Asian Development Bank (2000b).

45 Asian Development Bank (2000c), p. 6-2. 46 Asian Development Bank (2000f ). 47 In a meeting with an international team member on 17 December 2001, Zhenyu Fan of the Highway Department, Ministry of Communication, said that there is still no timetable for this reform. 48 Ministry of Communications (2000a). 49 Hayashi et al. (1998). 50 Corporatization has in fact been a major policy reform agenda that ADB has been promoting with the Government since the early 1990s. Such corporatization has already been completed in seven out of 10 provinces and municipalities where ADB is involved in the road sector (Chongqing, Heilongjiang, Hunan, Jilin, Shanxi, Sichuan, and Yunnan), and is under preparation in the remaining three provinces (Hebei, Jiangxi, and Liaoning). Further assistance is being provided in this regard through an ongoing TA for Corporatization, Leasing, and Securitization in the Road Sector. 51 State Council, Policies of the State Council Concerning the Development of the Great Western Area, State Council 2000, No. 33, Library No. 0002195, 2000. 52 State Council, Policies of the State Council Concerning the Development of the Great Western Area, State Council 2000, No. 33, Library No. 0002195, 2000. 53 Zhi Liu and Colin A. Gannon (1999), p. 1.

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CHAPTER

7

ENERGY POLICIES AND STRATEGIES The PRC is the second largest energy consumer after the United States, and holds top rank in the production and consumption of coal, its dominant fuel. Rising demand for energy is a very significant factor in the economic development of the PRC, especially the Western Region.

National energy profile

Coal production in 1998 was 1,350 Mt, or roughly one-third of the world total. That same year, the PRC had net coal exports of 35 Mt, primarily to the Republic of Korea and Japan.1 However, the Western Region accounts for only about a quarter of the PRC’s coal production (Table 7-2). The coal industry is suffering from oversupply. Large State-owned coalmines have built up inventories, and many are operating at a financial loss. A large number of small, unlicensed mines add to the oversupply, and in 1998 the Government launched a major program to close them down. As of early 2000, more than 30,000 small coalmines had closed, and more are closing. Local coal prices have started to recover, but supply still outpaces demand.

The Western Region has substantial deposits of coal, oil, and gas. Over the past few decades, the Government has invested considerable capital in developing energy sources in the region. COAL The Western Region holds most of the PRC’s coal reserves of 1,000,000 Mt (Table 7-1). Table 7-1 Coal Resources in the Western Region, 1999 Province Inner Mongolia Guangxi Five provinces in southwest Gansu, Ningxia, Qinghai, and Xinjiang Shaanxi Western Region total

Coal Reserves (Mt)

Share of National Total (%)

225,600 2,100 89,000 139,900 162,100 618,700

22.6 0.2 8.9 14.0 16.2 61.9

Source: State Development Planning Commission (1999a); State Development Planning Commission, n.d., Report on Strategy Study of Tenth Five-Year Plan.

OIL The PRC’s total oil reserves are estimated at over 100,000 Mt. The economically exploitable oil deposits amount to 11,000 Mt, priced internationally at $18 a barrel. Of the total oil reserves, 27.6 percent are in the Western Region (Table 7-3).

Table 7-2 Energy Production in the Western Region, 1999 Province

Coal (Mt)

Oil (Mt)

Natural Gas (GL)

Total Power (TWh)

Hydropower (TWh)

PRC Inner Mongolia Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Western Region total Western Region as % of PRC Gansu as % of PRC Xinjiang as % of PRC

1,045.0 70.7 8.2 11.8 20.9 40.3 26.6

160.0

25.2

0.0

0.3 8.2 0.1 0.1

24.3 18.9 2.1 15.3 27.8 267.0 25.5% 1.8% 2.7%

6.4 0.4 1.9 1.3 17.4 27.7 17.3% 0.3% 10.9%

1.3 0.0 0.4 0.0 3.1 13.4 53.2% 0.0% 12.3%

1,239.3 38.0 25.3 15.8 44.4 33.5 29.8 0.6 25.5 26.2 11.4 11.2 16.7 278.6 22.5% 2.1% 1.3%

196.6 0.2 15.4 3.2 26.0 13.4 18.5 0.5 2.0 11.8 8.8 0.9 3.0 103.6 52.7% 6.0% 1.5%

0.0 0.2

Source: State Development Planning Commission (2001c).

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Table 7-3 Oil and Natural Gas Resources in the Western Region, 1999 Oil Reserves

Basin Sichuan Tarim (Xinjiang) Jungar (Xinjiang) Shaanxi, Gansu, Ningxia Qaidam (Qinghai) Western Region

Gas Reserves

Oil Reserves (Mt)

Share of National Total (%)

10,700 8,600 6,600 2,200 28,100

10.5 8.4 6.5 2.2 27.6

Theoretical Reserve (GL) 7,360 8,390 10,700 1,920 28,370

Discovered Exploitable Gas (GL)

Rate of Discovery (%)

687 515 750 147 2,099

9.3 6.1 7.0 7.7 7.4

Source: China Natural Gas and Petroleum Company (1994); State Development Planning Commission (1999a).

The PRC ranks fifth among the world’s oilproducing countries. Of its 160 Mt of oil production, 17.3 percent is from the Western Region, and 10.9 percent from Xinjiang. However, the country has been a net oil importer since 1993. Production and consumption are projected to be 160 Mt and 215 Mt respectively in 2000, leaving a gap for imports of 55 Mt. Domestic oil supplies will come mainly from Xinjiang, and imports mainly from the Middle East and Central Asia. Consequently, the oil industry is likely to be important in the Western Region. The PRC’s oil industry is undergoing major changes. In 1998, the Government reorganized most of its oil and gas assets into three vertically integrated firms: the China National Petroleum Corporation (CNPC, or PetroChina), the China Petrochemical Corporation (Sinopec), and the China National Offshore Oil Corporation (CNOOC). Originally, CNPC was engaged primarily in upstream production and exploration activities, while Sinopec focused on downstream refining and distribution and CNOOC developed oil and gas fields offshore. Sinopec is Asia’s largest oil refiner; the Government owns 80 percent of this listed company. The Government has also deregulated the price of gasoline, Sinopec’s main product. Making the industry competitive in the international market will require further reforms.

NATURAL GAS In contrast to its coal reserves, the PRC’s reserves of natural gas are very small.The low natural gas endowment places the PRC at a disadvantage for two main reasons: • Natural gas is the most convenient and cleanest fuel for a range of uses from space heating to electricity generation during demand peaks. • Natural gas is the best feedstock for numerous chemical syntheses, including nitrogenous fertilizers (of which the PRC is the world’s largest producer). The largest reserves of natural gas are in the Western Region, where discovered exploitable reserves total 2,090 GL (Table 7-3). More than half of the natural gas production is from the Western Region, and one-third comes from Sichuan. Xinjiang ranks second in gas production, with 12.3 percent of the PRC’s total. ELECTRICITY Like the coal industry, the electric power industry is experiencing oversupply because of slower economic growth, the effects of the Asian economic crisis, and excessive investment.The Government has responded by closing down small thermal plants and by imposing a moratorium on power plant construction (with a few exceptions). Most small plants are diesel or coal-fired plants that local governments constructed when

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demand grew in the 1980s. Generally, they are relatively inefficient and polluting. Oversupply and a lack of adherence to negotiated contracts discourage foreign investment. However, the State Development Planning Commission’s Energy Research Institute projects electricity consumption to grow at 5.54 percent per year. If a real competitive market for electric power develops, the PRC market may once again become attractive to foreign investors. New regulations will be necessary to attract foreign investment in power transmission, distribution, and retail.

1999, the country’s total installed generating capacity was about 73.0 GW, only a fifth of the potential generating capacity. Considering the parts of the Western Region with the greatest reserves, actual generation was an especially low percentage of potential generation in Tibet (Table 7-4). The Western Region accounts for 52.7 percent of the PRC’s hydropower generation, but 81.5 percent of the potential generation (Table 7-4). Gansu province alone generated 117.47 TWh of hydroelectric power in 1999, or 6 percent of the country’s total.

HYDROPOWER The PRC’s hydropower resources rank first in the world. There are 378.5 GW of exploitable reserves, nearly 80 percent of which are in the Western Region.2 However, the rates of exploitation and utilization are low, especially in the Western Region. By the end of

WIND POWER AND SOLAR ENERGY The Government has made an effort to promote renewable energy. However, further policy, regulatory pricing institutional reforms are needed to create an enabling environment to fully develop the potential for renewable energy development. By the end of 2000, the PRC had installed 268 MW of wind power, 15 MW of photovoltaic solar power, 35 MW of solar thermal power, and 76 MW of geothermal power. Across the Western Region, from Xinjiang through Gansu to Inner Mongolia, there are considerable wind power resources. The winds across the plateaus in these regions are generally steady, with little turbulence and few gales. Much of the land is grassland, and suitable for wind power development. The Ministry of Electrical Power has estimated the exploitable wind energy in the PRC at 253 GW.3 The Western Region ranks second in wind resources after the Eastern Region, but accounts for only half of the country’s installed capacity (Table 7-5). The PRC is rich in solar energy resources with total radiation of 3.3´106 kJ/m2 to 8.4´106 kJ/m2. Two-thirds of the country has more than 2,000 hours of sunshine a year. Western provinces enjoy the highest annual solar radiation and sunshine hours, which are very high by world standards (Table 7-6). In Tibet, by the end of 1999, seven solar photovoltaic stations had been set up in remote and isolated rural counties with unit capacities varying between 25 kW and 100 kW.

Table 7-4 Hydropower Resources in the Western Region, 1999 Yearly Power Generation Province Inner Mongolia Guangxi Chongqing/Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ninxia Xinjiang Western Region PRC

Exploitable Reserves (GW) 2.4 14.2 91.7 12.9 71.2 56.6 5.5 9.1 18.0 0.8 8.5 290.9 378.5

Potential (TWh

%

8.4 0.4 63.9 3.3 515.3 26.8 65.2 3.4 394.5 20.5 330.0 17.1 21.7 1.1 42.4 2.2 77.2 4.0 3.2 0.2 46.0 2.4 1,567.8 81.5 1,923.3 100.0

Actual TWh

%

0.1 0.1 5.7 7.8 10.8 14.9 5.0 6.8 6.9 9.4 0.2 0.3 0.7 1.0 4.4 6.0 3.3 4.5 0.3 0.5 1.1 1.5 38.4 52.7 73.0 100.0

Source: State Development Planning Commission (1999b).

Table 7-5 Installed Wind Power Capacity in the Western Region, December 1998 Wind Farm

Unit Capacity (kW)

Units

Total Capacity (MW)

Xinjiang Inner Mongolia Gansu Western Region PRC total

100, 150, 300, 450, 500, 600 55, 100, 120, 250, 300, 550, 600 300

144 110 4 258 529

67.1 45.2 1.2 113.4 223.6

Source: SDPC (2000a), p. 15.

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Table 7-6 Solar Energy in the Western Region, 1999 Type 1 2 3 4 5

Province West Tibet, Southeast Xinjiang, West Qinghai, and West Gansu Southeast Tibet, South Xinjiang, East Qinghai, Central Ningxia, Central Gansu, and Inner Mongolia North Xinjiang, Southeast Gansu, and North Shaanxi Guangxi and Southern Shaanxi Sichuan and Guizhou

Sunny Hours per Year

Annual Energy Radiation (kJ/m2)

2,800–3,300

670–840

3,000–3,200 2,200–3,000 1,400–2,200 1,000–1,400

590–670 500–670 420–500 330–420

Source: State Development Planning Commission (1999b).

PROJECTED ENERGY SUPPLY IN THE WESTERN REGION BY 2020 The PRC’s projected energy supply and sources for the next two decades, based on the Western Region’s energy supply in 2000 and the PRC’s development strategy for the region, are shown in Table 7-7 and Table 7-8. On average, the annual growth rates of energy supply in the PRC are between 2.6 percent and 3.1 percent. Coal will still be the dominant energy source in the PRC throughout the next two decades although its share is likely to decrease from 68.3 percent in 2000 to 57.4 percent in 2020. Oil supply is likely to increase but will account for a declining proportion of total supply. Gas, hydro, nuclear, new, and renewable energy sources are forecast to increase their shares very quickly. In the Western Region, projected annual energy supply growth rates are between 5.0 percent and 5.6 percent, much higher than those in eastern PRC. In the next 20 years, all kinds of energy supply are likely to increase dramatically. The output of coal and oil is likely to more than double, gas output to increase more than five times, hydro and nuclear energy output to more than quadruple, and renewable energy output to increase about 200 times. By 2020, renewable energy supply in the Western Region will amount to 7.12 percent of the total (Table 7-9 and Table 7-10). Table 7-11 shows the electricity supply trend in the PRC and in the Western Region. The available data suggest that, on average, the power supply will

Table 7-7 Projected Supply of Primary Energy in the PRC, 2000–2020 Fuel

2000

Coal (Mt of raw coal) Oil (Mt) Gas (billion cu m) Hydro and nuclear power (TWh) Renewable (Mt, coal equivalent) Total (Mt, coal equivalent) Average annual growth (%)

2005

2010

2015

2020

1,045.0 1,167.0 1,305.0 1,468.0 1,620.0 160.0 174.5 185.2 196.6 206.7 25.2 54.7 80.4 107.6 130.9 227.8 320.2 435.1 544.1 682.0 1.0 5.0 18.6 56.6 140.9 1,092.7 1,277.6 1,481.1 1,727.9 2,016.4 2.6 3.0 3.1 3.1

Source: Energy Research Institute, State Development Planning Commission.

Table 7-8 Share of National Primary Energy Supply, 2000–2020 Fuel

2000 (%)

2005 (%)

2010 (%)

2015 (%)

2020 (%)

Coal Oil Gas Hydro and nuclear power Renewable Total

68.3 20.9 3.1 7.6 0.1 100.0

65.3 19.5 5.7 9.2 0.4 100.0

62.9 17.9 7.2 10.7 1.3 100.0

60.7 16.3 8.3 11.5 3.3 100.0

57.4 14.6 8.6 12.4 7.0 100.0

Source: Energy Research Institute, State Development Planning Commission.

Table 7-9 Projected Supply of Primary Energy in the Western Region, 2000–2020 Fuel

2000

2005

2010

2015

2020

Coal (Mt of raw coal) Oil (Mt) Gas (billion cu m) Hydro and nuclear (TWh) Renewable (Mt, coal equivalent) Total (Mt, coal equivalent) Average annual growth (%)

267.0 27.7 13.4 104.0 0.4 286.4

326.8 34.9 35.6 165.0 1.9 392.7 5.4

417.6 44.5 56.3 260.0 7.4 539.0 6.6

513.8 58.0 73.2 342.0 24.0 696.0 5.2

615.6 77.5 85.1 446.0 63.3 889.7 5.0

Source: Energy Research Institute, State Development Planning Commission.

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Table 7-10 Shares of Primary Energy Supply in the Western Region, 2000– 2020 Fuel

2000 (%)

2005 (%)

2010 (%)

2015 (%)

2020 (%)

Coal Oil Gas Hydro and nuclear power Renewable Total

66.6 13.8 6.2 13.3 0.1 100.0

59.4 12.7 12.1 15.3 0.4 100.0

55.3 11.8 14.0 17.9 1.4 100.0

52.7 11.9 14.0 17.9 3.5 100.0

49.4 12.4 12.7 18.3 7.1 100.0

2015 (TWh)

2020 (TWh)

Source: Energy Research Institute, State Development Planning Commission.

Table 7-11 Projected Electricity Supply, 1999–2020 1999 (TWh)

Region PRC Average annual growth (%) Average growth (%) Western Region Average annual growth (%) Gansu Xinjiang Western Region as % of PRC Gansu as % of PRC Xinjiang as % of PRC

2005 (TWh)

2010 (TWh)

1,233.1 1,729.3 2,292.4 2,995.5 3,822.5 5.8 5.8 5.5 5.0 5.5 281.1 495.0 693.0 956.3 1,242.2 9.9 7.0 6.7 5.4 26.2 35.0 47.8 65.0 86.0 16.9 24.5 36.5 52.5 72.5 22.8 28.6 30.2 31.9 32.5 2.1 2.0 2.1 2.2 2.3 1.4 1.4 1.6 1.8 1.9

Source: Energy Research Institute, State Development Planning Commission.

ELECTRICITY CONSUMPTION Electricity consumption per capita per year is higher in parts of the northwest than the national average of 918 kWh. The need for space heating in winter pushes consumption per capita above the national average in Inner Mongolia, Gansu, Qinghai, and Ningxia. In contrast, electricity consumption per capita in the southwest is well below the national average. Reasons include high density of population and an underdeveloped power industry. OIL CONSUMPTION The dramatic growth of oil consumption has made the PRC a net oil importer. Between 1985 and 1998, oil consumption increased by 116 percent. In the same period, domestic oil production increased by only 29 percent. Oil imports increased from 0.9 Mt in 1985 to 57.4 Mt in 1998, for an annual growth rate of 37.7 percent.

Table 7-12 Natural Gas Consumption in the PRC, 1997 Quantity (GL) Industrial feedstock Power and heating Household Transport and commercial Total

14,500 2,190 2,120 120 18,930

% 76.6 11.6 11.2 0.6 100.0

Source: Han (1999).

increase by 5.5 percent each year over the next two decades PRC’s, and by 7.3 percent in the Western Region.

Energy consumption in the Western Region Energy consumption in the Western Region is much lower than elsewhere in the PRC. On average, a person in the Western Region consumes about 80 percent of the energy that a person in the Eastern Region does.

152

GAS CONSUMPTION Gas accounts for a very small share of total energy consumption in the PRC, about 2.2 percent, whereas the world average is 23.2 percent. In addition, natural gas in the PRC is mainly used in industry (Table 7-12). Because of an underdeveloped gas network, natural gas is consumed locally. In 1997, gas consumption in Sichuan, Xinjiang, Heilongjiang, and Liaoning amounted to 81 percent of the PRC’s total. ENERGY CONSUMPTION OF RURAL HOUSEHOLDS Biomass energy consists of wood and forest industry residue, agricultural residue, animal manure, hydrophytes, municipal and industrial organic wastes, and oil crops. In this report, biomass energy is taken to include the first three types, and refers to rural energy consumption in the Western Region. Optimal use of biomass energy is of great significance in poverty reduction and environmental protection. In 2000, 64 percent of the population lived in rural areas; the rural population derived 57 percent of its domestic energy supply from biomass.4

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Table 7-13 Biomass Energy Consumption in the Western Region, 1997

Rural Population (million)

Region

In 1997, the rural population consumed about 365 Mt (coal equivalent) of biomass; the Western Region accounted for 25.3 percent of this consumption (Table 7-13). Energy efficiency is only about 5 percent, and the use of wood has huge environmental impact. Over the past 20 years, local governments, with the assistance of the private sector and international organizations, have developed many small hydropower plants, coalmines, solar energy systems, and wind power plants.These projects have brought electricity to many rural households, but many others still cannot afford commercial energy. A new strategy is necessary to cater to the rural poor. Since 1999, the Government has required local governments to protect forests and grasslands along the upper reaches of the Yangtze River and the Yellow River. Cutting trees and bushes in those areas is now prohibited. This policy makes it difficult for households to access biomass energy. There is a need to find alternatives; one possible solution may be to provide rural households with a minimum amount of coal, free of charge. Biomass energy consumption by rural households leaves plenty of room to improve energy efficiency and environment. To collect biomass for cooking, a typical rural household in Sichuan needs to spend 100 to 150 person-days a year.5 Using biomass gas instead of collecting biomass will save time. As well as the collection time, a household needs to spend about 3 personhours cooking if using biomass directly. Moreover, the energy efficiency of direct-burning biomass is only 5–8 percent.6

PRC Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Western Region Western Region as % of PRC

880.0 39.2 15.3 70.3 31.0 25.0 n/a 26.9 19.8 3.4 3.7 8.7 243.4 27.7%

Consumption per Capita (t, coal equivalent)

Biomass Energy (Mt, coal equivalent)

0.76 0.63 0.74 0.53 0.51 0.58 n/a 0.82 0.56 0.44 0.45 0.79 0.60 79.00%

364.56 12.93 8.13 20.71 12.91 10.08 n/a 10.55 7.32 1.40 1.39 6.69 92.11 25.30%

Source: China Rural Energy Statistical Yearbook 1998–1999.

Biomass gasification is technically and economically viable. By 1997, the PRC had built 164 biomass gasification plants. Gas production amounted to 45 ML, and about 27,600 rural households were using biomass gas for cooking. Unfortunately, all the gas plants are in the Eastern Region. Three kinds of gasification technologies are available (Table 7-14). The individual household plants require only a small capital investment and are therefore well suited to the Western Region, where population density is low. TOTAL SHARE OF NEW AND RENEWABLE ENERGY New and renewable (biomass) energy is the main energy source for rural households. In 1999, the PRC consumed 1,220 Mt (coal equivalent) of commercial energy, and 2.73 Mt (coal equivalent) of renewable energy (biomass). Table 7-15 shows the PRC’s commercial and renewable energy consumption in 1999. In 1999, new and renewable energy accounted for over 18 percent of total energy consumption in the

Table 7-14 Comparison of Capital Investment in Biomass Gasification Plants Technology

Type of Machine

Output

Gas for power generation Centralized gasification Individual household

Demo model XFF-2000 FUDE-50

1,200 kW Supply 200 households Supply 1–2 households

Capital Investment 3.8 million yuan 384,500 yuan 1,300 yuan

Investment per Household 3,167 yuan per kW 1,945 yuan 1,300 yuan

Source: Qin (2000).

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Table 7-15 Consumption of Primary Commercial Energy and New and Renewable Energy in the PRC, 1999 Consumption (Mt, coal equivalent)

Type of Energy Total primary energy Commercial energy Total new and renewables Traditional biomass New energy

1,492.7 1,220 272.4 242.4 30.3

Share (%) 100 82 18

100 89 11

Source: Li and Han (2000).

PROJECTED ENERGY DEMAND OF THE WESTERN REGION UP TO 2020 The Energy Research Institute of the State Development Planning Commission has projected energy demand from a base year of 2000 using various assumptions about GDP growth and the elasticity of energy demand with respect to GDP (Tables 7-16 and 7-17). The GDP growth assumptions for regions are consistent with the discussion in Chapter 1. Coal will continue to dominate energy demand over the next

Table 7-16 Projected Energy Demand, 2000–2020 PRC

Western Region

Fuel

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Coal (Mt) Oil (Mt) Gas (GL) Hydro and nuclear power (TWh) Renewable (Mt, coal equivalent) Total (Mt, oil equivalent) Average annual growth, %

1,020 215 29 228 1 1,159

1,127 245 65 320 5 1,363 2.7

1,245 296 116 435 19 1,644 3.8

1,408 335 174 544 57 1,971 3.7

1,554 380 220 682 141 2,335 3.5

254 26 14 104 0 275

282 31 18 165 2 332 3.8

311 38 25 260 7 411 4.4

352 45 33 342 24 509 4.4

389 53 45 446 63 639 4.7

Source: Energy Research Institute, State Development Planning Commission.

Table 7-17 Shares of Primary Energy Demand, 2000–2020 PRC

Western Region

Fuel

2000

2005

2010

2015

2020

2000

2005

2010

2015

2020

Coal Oil Gas Hydro and nuclear power Renewables Total

62.9 26.5 3.4 7.2 0.1 100.0

59.1 25.7 6.3 8.6 0.4 100.0

54.1 25.7 9.4 9.7 1.1 100.0

51.0 24.3 11.7 10.1 2.9 100.0

47.5 23.3 12.5 10.7 6.0 100.0

66.1 13.4 6.5 13.8 0.1 100.0

60.6 13.4 7.3 18.1 0.6 100.0

54.1 13.1 8.0 23.1 1.8 100.0

49.4 12.7 8.7 24.5 4.7 100.0

43.4 11.9 9.3 25.5 9.9 100.0

Source: Energy Research Institute, State Development Planning Commission.

Western Region. Small hydropower plants, coalmines, and biomass energy, solar, and wind power systems are the main sources of energy supply for small towns and villages. New and renewable energy sources could meet 30 percent of the Western Region’s needs and 50 percent of rural needs by 2020.

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20 years, increasing by more than 50 percent over the period. However, its share of total energy demand will decrease from 62.9 percent in 2000 to 47.5 percent in 2020. Similarly, oil demand will increase, but its share will decrease. The demand for natural gas, hydropower, nuclear power, and renewable energy will increase both in absolute terms and as a

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 7-18 Projected Electricity Demand, 1999–2020 Region

share of total energy demand. For instance, the demand for gas is likely to expand more than seven times in volume and four times in share. Energy demand in the Western Region will exhibit the same pattern of change as that of the PRC as a whole, except that the growth rate is likely to be higher. Coal will be the main energy source with a volume of 388.5 Mt and 43.4 percent share. Oil demand will double but its share will decrease slightly from 13.4 percent in 2000 to 11.9 percent in 2020. Gas, hydropower, nuclear power, and renewable energy will increase in both volume and share. For more details, see Table 7-18 and Table 7-1.

Energy balance analysis for the PRC and the Western Region The PRC will remain a net importer of energy. In 2020, total energy imports will probably amount to 319 Mt (coal equivalent). The country will mainly import oil and gas and export a small amount of coal. Table 7-19 shows the balance of total energy, coal, gas, and oil for the PRC up to 2020. The Western Region will become the PRC’s domestic energy supplier. Although both energy demand and supply will increase, supply is forecast to grow more rapidly than demand.Total energy exports from the Western Region to the Eastern Region will reach 250 Mt (coal equivalent) in 2020, more than four times the 2000 level. Coal will account for 91 percent of energy exports.The balance of exportable energy will include oil, gas, and electricity (Table 7-20).

Energy policies and related issues Since the 1980s, the Government has adopted a range of policies to guide the development of the energy industry.

1999

PRC Average annual growth (%) Western Region Average annual growth (%) Gansu Xinjiang Western Region as % of PRC Gansu as % of PRC Xinjiang as % of PRC

2005

2010

2015

2020

1,233.1 1,729.3 2,292.4 2,995.5 3,822.5 5.8 5.8 5.5 5.0 281.1 393.5 523.4 685.6 877.6 5.8 5.8 5.6 5.0 26.2 36.7 48.9 64.0 81.9 16.9 23.7 31.5 41.3 52.9 22.8 22.8 22.8 22.9 23.0 2.1 2.1 2.1 2.1 2.1 1.4 1.4 1.4 1.4 1.4

Source: Based on data from the Energy Research Institute, State Development Planning Commission.

Table 7-19 National Primary Energy Balance, 2005–2020 2005 Primary energy balance (Mt, coal equivalent) Energy supply Energy demand Import Coal balance (Mt, coal equivalent) Coal supply Coal demand Export Oil balance (Mt, coal equivalent) Oil supply Oil demand Net imports Import dependence (%) Natural gas balance (GL) Gas supply Gas demand Net imports Import dependence (%)

2010

2015

2020

1,278 1,481 1,728 2,016 1,362 1,644 1,971 2,335 85 162 243 319 1,167 1,305 1,468 1,620 1,127 1,245 1,408 1,554 43 60 60 66 175 245 70 29

185 296 111 37

197 335 138 41

207 380 173 46

55 65 10 15

80 116 36 31

108 174 66 38

131 220 89 40

Source: Energy Research Institute, State Development Planning Commission.

Table 7-20 Primary Energy Balance of the Western Region, 2005–2020

Primary energy balance (Mt, coal equivalent) Energy supply Energy demand Export Coal balance (Mt, coal equivalent) Coal supply Coal demand Exportable Oil balance (Mt, coal equivalent) Oil supply Oil demand Exportable Natural gas balance (GL) Gas supply Gas demand Exportable Electricity balance (TWh) Electricity supply Electricity demand Exportable

2005

2010

2015

2020

393 332 60

539 411 128

696 509 187

890 639 251

327 282 45

418 311 106

514 352 162

616 389 227

35 31 4

44 38 7

58 45 13

77 53 24

36 18 17

56 25 32

73 33 40

85 45 40

495 394 102

693 523 170

956 1,242 686 878 271 365

Source: Energy Research Institute, State Development Planning Commission. Note: Primary energy sources include hydropower, nuclear energy, and geothermal electricity. Energy conversion factors to 1 ton (coal equivalent): crude oil, 1 t; oil products, 1 t; bituminous coal, 0.6945 t; natural gas, 1074 m3; primary energy, 3.67 MWh). The conversion factors are based on the average efficiency of converting fuel oil to electricity in various countries.

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COAL DEVELOPMENT In the 1970s, the Government set a production target for coal of 1,400 Mt of coal by 2000. Given the shortage of capital and primary energy, small-scale production was encouraged. By 1985, local governments and the private sector had developed about 80,000 small coalmines, many of them in the Western Region.This overcame the energy shortage, but it also led to frequent accidents, negative effects on the environment, and inefficient use of natural resources. Small coalmines face numerous problems. Because of energy substitution and conservation, national coal stocks are increasing. In 1999, the PRC produced 1,390 Mt of coal but consumed only about 900 Mt. The Government decided7 in 1998 to close inefficient and dangerous coalmines. In addition, it has announced a range of policies relating to environmental conservation, including the Environmental Protection Law, the Environment Protection Management Regulations for New Project Development, the Utilization and Management Regulations for Coal Ash of 1989, and the Utilization and Management Regulations for Stone Coal. These policies have had considerable impact on the small and private-funded coalmines in the Western Region. The Government has introduced various policies relating to coal conversion and consumption. Among these are China’s Clean Coal Technology in the Ninth FYP and 2010 Development Outlines (June 1997) and a series of energy conservation policies (Energy Conservation Development Outlines, China’s Energy Conservation Technology Outlines, Management and Evaluation Methods for Energy Conservation Equipment). Under these policies, clean coal and energy conservation technologies have developed quickly. For example, the share of washed coal in the PRC’s total coal consumption increased from 24 percent in 1998 to 28 percent in 2000.

Mt in 2005 and 370–395 Mt in 2020.8 Given the supply-demand imbalance, the PRC’s strategy is to promote energy conservation, find alternative fuels, use renewable energy, explore foreign oil reserves, and diversify sources. The Government is trying to stabilize oil output in the Eastern Region and further develop fields in the Western Region. The use of advanced technology may make it possible to maintain the output of the Eastern Region oilfields, but the resources of the Western Region may attract all available domestic capital and technologies. The oil companies may have to cut down capital investment in the Eastern oilfields, close unproductive wells, and transfer personnel and equipment to the Western Region. Other policies include diversifying sources of supply and enlarging storage capacity. In addition to imports by sea, the Government is negotiating longterm import-export agreements with Russia and Central Asian countries. The PRC’s oil stocks are equivalent to only 20 days’ consumption. Now that imports have increased, some argue that the PRC must increase its storage capacity. In relation to oil supply, the Government should promote energy substitution policies. For example, promoting and using natural gas to substitute for oil and oil products will benefit environmental conservation, reduce oil imports, and spur the development of natural gas in the Western Region. Oil imports from Kazakhstan and Russia via Xinjiang would stimulate the development of the energy sector in the Western Region, but would be expensive. If the PRC imports oil and gas from Russia via the northeast (Daqing), it may affect the economic and energy development in the Western Region in the short term. However, in the long run (20 to 50 years), the PRC will require imports of oil and gas not only from Xinjiang but also from Russia.

OIL DEVELOPMENT The PRC’s oil production is likely to continue to be less than demand. It could reach 160–170 Mt in 2005 and 180–190 Mt in 2015, as against demand of 269

GAS DEVELOPMENT The development of gas resources requires major investment in pipeline networks and distillation networks. The extension of the gas distribution

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

system will allow gas to replace coal for power and heat generation. These projects are designed to form a nationwide network of natural gas supplies based on three major natural gas producing areas in the west: Sichuan, Shaanxi, and Xinjiang. The network will also cover most developed areas in the east. Gas transport from Xinjiang to the Eastern Region Recent statistics show that the Western Region has natural gas reserves of 1,500 GL. Natural gas has a

huge market potential, and is likely to become a major form of clean energy in the 21st century. The Xinjiang gas pipeline will start from Lunnan and finish in Shanghai (Figure 7-1). The total length of the pipeline will be about 4,200 km. The capital cost is estimated at 38,400 million yuan. The planned diameter of the pipeline is 1,118 mm and the annual gas transmission capability is 12 GL. The Super Gas Transport Project aims to transport natural gas from Central Asia via Xinjiang to Shanghai. It is a key component of the Government strategy to

Figure 7-1 Gas Pipelines

R

U

S

S

I

A

Irkutsk Manzhouli

KAZAKHSTAN Tashkent

Bishkek

MONGOLIA

Karamay

Almaty Lunnan

Hami Datong

Xian

PEOPLES REPUBLIC OF CHINA Chengdu

Shenyang

Beijing Tianjin

Jingbian Lanzhou

Jilin

Changchun

Urumqi

Xining

Daqing

Ulaanbaatar

Zhengzhou Nanjing Shanghai

Chongqing

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157

develop the west. The Government has mobilized foreign investment in the project, which at a cost of 120,000 million yuan is second only to the Three Gorges Project in investment size. A careful analysis of the social and environmental impacts of this project is required. The eastern provinces have also shown interest in the project since it would help ease their energy shortages. Gas pipeline projects could make areas along their routes magnets for capital, technology, and skills, facilitating economic development in the route regions. Another proposed gas project would link the Russian gas grid in Siberia to the PRC and possibly the Republic of Korea via a pipeline from Irkutsk. The estimated cost of the project is $10,000 million, and a feasibility study is under way. The PRC would like the pipeline to go directly to northeast PRC. However, Russia is suggesting that the line should enter the PRC via Mongolia because this route is shorter. About $12,500 million is required to extend the 4,000-km pipeline from the Irkutsk basin gas fields in Eastern Siberia to northern PRC. The PRC expects the pipeline to transport 20,000–25,000 GL of gas a year to the PRC, while the Republic of Korea expects to receive 10,000 GL a year. Gas transport from Inner Mongolia to Beijing There are plans for a pipeline to carry natural gas to major markets in northern PRC and the coastal areas including Beijing,Tianjin, Hebei, and Shandong provinces. PetroChina has signed contracts with the Royal Dutch Shell Group for the construction of the gas pipeline.9 Gas transport from Sichuan to Hubei The governments of Sichuan and Chongqing prefer not to export their natural gas.The results of gas reserve surveys are not encouraging as they suggest that there is no certainty that available reserves will be adequate to meet future local demand from a population of 115 million (1999). Additionally, gas

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prices are so high (1.09 yuan/m3 per household) that customers in central PRC may not be able to afford the gas. After transport to Wuhan (Hubei province), the price may increase by 0.1 yuan/m3 (given the cost of gas transport from Ningxia to Gansu).10 Customers may not be able to afford the gas since purchasing power in Hubei is not much better than in Sichuan and Chongqing. Consequently, gas transport from Sichuan and Chongqing may not be feasible. POWER DEVELOPMENT The Government has introduced many reforms in the power industry. Among others, the reforms involve restructuring institutions, converting provincial electricity bureaus into companies, reforming tariffs, encouraging private sector investment, and splitting the vertically integrated power system into individual generation, transmission, distribution, and retail companies. The Electric Power Law of 1996 requires reform toward the creation of vertically separated power producers and retailers in a competitive market. Thermal power In 1997, when power was in surplus, the policy of optimizing elements of thermal power plants attempted to restrain further development of small thermal units. Power supply still exceeds demand, the surplus being equivalent to about 10 percent of installed capacity. Consequently, a new policy, the substitution of large and highly efficient power technologies for small and inefficient power technologies, requires either 300 MW or 600 MW power units. In addition, the Government has approved the development of cogeneration. Hydropower The Government has made efforts to develop hydropower in the Western Region, particularly the large hydropower projects on the Yellow and Yangtze rivers. It aims to increase hydropower output to 30 percent of total power production by 2010. To promote hydropower, the Government has introduced various incentives for development: a

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

poverty reduction policy for remote rural hydropower development, low interest rates for hydropower investment, tax exemptions and preferential tariff policies, and special policies for resettling displaced people. Power transmission SDPC proposes to transmit power from Guizhou, Yunnan, and Guangxi to Guangdong. Guizhou, for example, would send Guangdong 4 GW of power by 2005. Hydropower transmission is seen as having multiple benefits. It will have a positive impact on rural electrification, poverty reduction, and tourism. The hydropower will meet increasing power demand in Guangdong, where consumption increased by 11 percent in 1999 and 20 percent in 2000. In the past, Guangdong installed many small, inefficient, expensive, and dirty coal and diesel power plants.Transmitting power to Guangdong will mitigate pollution, reduce electricity tariffs, and ease power shortages.11 Yunnan has also initiated power projects in line with the national plan of sending power from the west to the east. These projects include the Xiaowan hydropower plant on the middle reaches of the Lancang River, the 600 MW Qujing power plant, the technology upgrade for Kaiyuan power plant designed to generate 600 MW, and the enlargement production project for Xuanwei power plant.The projects will enable the province to supply a total of 8 GW to Guangdong by 2015. Development of dams in the Lancang River should reflect the downstream impacts of such dams. In addition, the Government welcomes foreign investment in hydropower plants and power transmission. Hong Kong China Electric Power Ltd. is negotiating with the Guizhou government and power company for an investment in hydropower plants. Hong Kong, China needs strategic power supplies.12 There is also a proposal for further thermal power development in Inner Mongolia and Shanxi and the transmission of power to Beijing,Tianjin, and Tangshan.

Renewable power In 1996, the Government introduced a Brightness Program, which called for the use of solar and wind energy to power remote and rural households. The Program combines poverty reduction, environment conservation, and development of renewable power sources. In March 1996, SDPC promulgated its Developing Program with the Wind policy, which aims to develop wind power technology in two steps: (i) entering into joint ventures with foreign firms in 1996–2000; and (ii) developing the PRC’s wind power technology after 2000 on the basis of the experience in joint-venture production. However, further policy reforms are needed to provide incentives to develop wind power. Domestic power tariffs The Government has implemented several policies to help poor households reach a minimum level of energy consumption. Firstly, it has a detailed subsidy policy for the poor in cities. Table 7-21 shows the subsidy standards of the PRC Government for poor households in the 10 capital cities of the Western Region and Beijing. In urban areas, electricity tariffs are less than 0.4 yuan/kWh. Household tariffs in Guangzhou, Beijing; and Lanzhou, for example, are 0.38 yuan/kWh, 0.39 yuan/ kWh and 0.32 yuan/kWh, respectively. Hence, a poor household in Lanzhou would pay 12.8 yuan per month for 40 kWh of electricity. That is about 2.8 percent of the 458 yuan minimum monthly income of a threemember household in Lanzhou—an acceptable rate. Table 7-21 Government Lifeline Subsidy Standards, 2000 City

Subsidy (yuan per capita per month)

Beijing Lhasa Chongqing Yenchuan Chengdu Kunming Lanzhou Urumqi Xining Hohhot Nanning

280 170 169 160 156 182 156 156 155 143 183

Source: China Youth Daily, 10 April 2001.

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There is a potential conflict between pricing reforms and poverty reduction policies. Economic pricing requires electricity tariffs to be set on the basis of marginal production costs.That will tend to raise electricity prices. However, the adoption of economic pricing will ensure sufficient capital return to attract sustainable investment. On the other hand, the poverty reduction policies of the Government require power tariffs that are not too high for the poor to afford. The conflict can be resolved by increasing the efficiency of power distribution. In rural areas, the average electricity tariff is about 1 yuan/kWh, discouraging households from using electricity. High electricity prices are largely attributable to poor management, electricity theft, and outdated and inefficient distribution technologies. Wires and transformers are frequently lost. Studies indicate that rural electricity tariffs could fall below 0.5 yuan/kWh once improvements are made in rural power distribution and system management.13 Rural households would then be able to afford electricity for lighting, refrigeration, farming, and rural industry development. Power consumption would increase, enlarging the market and thus attracting investment in larger and more efficient power facilities. In the meantime, the Government should regulate the wholesale price at busbars of power plants on the basis of long-run marginal production costs. Australian power generators prepare their electricity sale bids on the basis of short-run marginal costs of production in order to lower the prices and expand their market shares. Consequently, the electricity prices at the busbars are cheaper than necessary. This situation benefits neither the power companies nor the customers. Using the short-run marginal cost of production to set electricity prices would discourage investment in power generation. The average net income of rural households in the Western Region ranges from 1,232 yuan (Tibet) to 1,981 yuan (Inner Mongolia). At a tariff rate of 0.5 yan/kWh (based on government policy), an annual consumption of 600 kWh of electricity would cost 300 yuan—9.1 percent of net household income in

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Tibet and 3.7 percent in Inner Mongolia. To help poor households reach a minimum level of energy consumption the Government is subsidizing the consumption of electricity and diesel for irrigation and other agricultural purposes. Unfortunately, this policy may adversely affect the natural resources and the environment. In India, governments subsidize the use of electricity and diesel in agriculture production. As a result, rural people use more energy than necessary to pump water for irrigation. Not only is there waste of electricity, but water resources are also misused. A better way for the PRC would be to avoid electricity and diesel subsidies but to reduce the taxes on peasants. ATTRACTING FOREIGN AND PRIVATE INVESTMENT IN THE ENERGY SECTOR The Government welcomes foreign and private investments in the energy sector of the Western Region. Foreign firms may invest in power plants through such investment mechanisms as BOT arrangements, joint ventures, direct investment, or technology transfer. Speaking at the launching of a major gas pipeline project in March 2000, Premier Zhu Rongji said that foreign investors were allowed take a majority stake in the pipeline and that foreign companies could control its management.14 According to a typical policy document from the State Council15 on attracting foreign and private investment:

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Implementing preference tax policies. The corporate income tax of enterprises in government-encouraged sectors that are financed with either domestic or foreign investment in the Western Region should be collected at a reduced rate of 15 percent for a certain period of time. Upon approval by the provincial government, enterprises based in autonomous regions, prefectures or counties may also be granted reduction or exemption of corporate income tax for a certain period of time. New enterprises engaged in transport, power, water

conservancy, postal service, broadcasting, TV, etc., in the Western Region are eligible for a two-year tax holiday and a 50 percent reduction for the next three years following the tax holiday.… If domestic or foreign investors invest in the Western Region in sectors where investment is encouraged by the government or sectors with a competitive edge and need to import advanced technology and equipment to facilitate their invested projects, these imports, except for those not exemptible by the government regulations, should be exempted from tariffs and import value added tax, provided that the imports are purchased within the total amount of investment.

More detailed policies are also available for the different sectors. In power, the Government issued the New Electricity, New Prices policy in the early 1990s. The policy stated that the purchase price of electricity should be such as to allow an independent power producer to pay back capital and interest and attain profit. Although this policy has brought foreign investment funds into the power sector, many foreign investors have been forced to renegotiate their contracts after completion of construction and accept a lower than anticipated return on equity. The price of electricity from the JinYuan Power Plant (Gansu) sold to the grid was 0.36 yuan/kWh in 2000, but the average price of electricity in the province was 0.27 yuan/kWh. The Government is planning to reduce the VAT rate for hydropower development. The objective is to attract foreign funds and make hydropower generation competitive with power generation using nonrenewable resources. Similarly, Governmentowned banks are following policies to facilitate hydropower development in the Western Region, such as extending the capital return period, which has considerable impact on keeping down electricity prices.16

There has been considerable foreign investment in the energy sector. In 1999, the largest foreign participant in the PRC’s onshore gas sector was Royal Dutch/Shell. Shell signed a $3,000-million contract with CNPC to jointly explore and develop gas resources in the Ordos Basin of north Xinjiang.17 The contract allows Shell to tap gas reserves on the Changbei block, which covers 1,600 km2, build a gas pipeline, and establish a sales network. The pipeline will extend through Inner Mongolia, Beijing, Tianjin, Hebei, and Shandong.The project will supply 3 GL/ year of natural gas to the Eastern Region for 20 years. It is expected to start in 2004. At present, foreign direct investment (FDI) is allowed only in power generation; power transmission is a Government monopoly.The Electric Power Law of 1996 does not forbid foreign and private investment in power transmission, but the vertical integration of power generation, transmission, and distribution effectively prevents private investment. However, a split of power generation assets from other assets is now under way. After this split and the formation of a national transmission company, the power generation companies and the national power transmission company will be able to sell their shares on the stock market. In the Western Region, however, backward power technologies and management may delay institutional reforms. Policies introduced by the PRC to encourage private investment have done little to facilitate such investments in the Western Region. For example, it is difficult to find a bank or a finance institution that is willing to take risks for private investors. A more detailed study is required to solve these problems. Over the past decade, some local governments in the Western Region have participated in energy investments, all limited in scope and scale. Local government projects are subject to auditing and approval by the Central Government.The audit process often takes time and projects are sometimes rejected. Abolishing the planning and approval of projects by the Central Government would stimulate

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local government investment in the energy sector in the Western Region. In Australia, the national Government has very little to do with energy project development, which it leaves to second-level governments and the private sector. IMPACT OF ENERGY DEVELOPMENT ON THE ENVIRONMENT Pollution control The Government is paying increasing attention to environmental protection. Environmental protection laws and regulations have had significant impact on the energy industry. The Environment Protection Law of 1989 and the Air Pollution Prevention and Control Law 1987, for example, provide for specific controls on air emissions. These laws and policies have pushed the energy industry to improve energy efficiency and have mitigated air pollution to some extent. Renewable energy development In June 1992, in response to the Rio Conference, the PRC prepared a white paper entitled China’s Population, Environment, and Development Agenda in the 21st Century (Agenda 21 Plan), which detailed a strategic plan for sustainable development in all economic and energy sectors. Following State Council approval of the plan in 1994, a joint committee of the three key commissions for renewable energy developed the China Sunlight Program, a renewable energy strategy up to 2010. The strategy represents an implementation plan for the goals of Agenda 21. It highlights photovoltaic, wind, biomass, fuel cell, ocean, and hydrogen technologies and contains specific goals and funding recommendations for the Tenth FYP period and beyond. Policies for developing clean and renewable energy range from those designed to encourage R&D to policies for the promotion of commercialization and mass production.These policies include the following:

162

• Subsidy.The Government supports whole funding for demonstration or model projects, and partial funding for renewable energy R&D. • Tax. The Government imposes 6 percent VAT on hydropower business, but 17 percent on other industries. • Pricing. The Government requires grid firms to purchase wind energy even if the price is above the grid average. Similarly, the power grid firms must buy electricity from small hydropower plants at production cost plus reasonable profits. The grid firms are allowed to raise tariffs to cover the loss. This pricing policy has been applied in other renewable energy production. Gas distribution firms, for example, are required to buy biogas in Shanghai at 1.2 yuan/m3, higher than the price of town gas. • Low-interest loans. The Government has set up a special loan fund with low interest for rural renewable projects. Over the past 10 years, loans from this fund have amounted to about 100 million yuan a year.The Government plans to lend more. The interest rate is about 2–3 percent below normal commercial terms. One of the PRC’s important energy policies is improving the structure of primary energy consumption. In particular, the Government has decided to develop clean and renewable energy on a large scale. Energy development in the Western Region fits the policy well. Energy programs in the Western Region include the transmission of natural gas and hydropower to the Eastern Region. However, many policy issues have not been resolved, in particular, pricing. Conflicts in electricity and gas prices between energy producers in the Western Region and energy users in the Eastern Region have not yet been solved. The Central Government has made policies for new and renewable energy development. Now local governments in the Western Region should make their own policies in line with the Central Government’s policies, providing incentives in project

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

finance and income tax to promote the development of new and renewable energy. In particular, there should be incentives to encourage investment from local energy service companies and the private sector in new and renewable energy. Further effort is required to improve regulations and policies for environmental protection. In Australia power generation companies expect to increase their production of renewable power (not including hydropower) by 2 percent between 2000 and 2010. The effects of energy development on the environment are well known. The Government has environmental protection policies, but these policies need strengthening. Feasibility studies on coal-fired power plants, for example, do not require analyses of the impact of emissions (SO2, NO2, and dust) on human health, animals, forests, rivers, and land. Also, power companies applying for new power generation projects are not required to submit strategies for energy conservation and demand-side management. In developed countries, such as Australia, a power company must use arguments from these impact analyses or studies to demonstrate that its planned project is environmentally sound and has provisions for energy conservation and demand-side management. ENERGY PRICING POLICY Coal pricing policy The market has set coal prices since 1993, when the Government allowed free trading in the market (except for supply to power plants) to overcome a coal shortage. Production progressively grew but by 1997 the PRC had surplus coal, and prices fell dramatically. SOEs accumulated most of the surplus because their coal costs (prices) were higher than those of small private enterprises, which were spending much less on safety, environmental protection, and equipment.The SOEs could not compete. The Government therefore decided to close the small and unsafe coalmines and keep coal prices at a reasonable level.

Table 7-22 Market Prices for Datong Mixed Coal

Shanghai Guangzhou

November 1992 (yuan/t)

July 1993 (yuan/t)

June 1994 (yuan/t)

December 1994 (yuan/t)

190 228

230 308

230 280

267 315

Source: China Energy Development Report, 1997.

Coal prices vary with transportation cost.Table 7-22 shows the prices of Datong coal in Shanghai and Guangzhou. Another example is Huating coalmine in Gansu. At the coalmine the price of coal is 60 yuan/t, at Lanzhou it reaches 200 yuan/t, and at Longnan, 400 km away, 380 yuan/t. Oil and oil product pricing policy The Government does not yet have policies to limit the consumption of oil and oil products. Instead, it uses pricing to promote energy conservation. Over the past few years, it has raised gasoline prices by six times; prices now approach the international level. There is scope for further action. The Government could set standards of efficiency for cars, with a labeling program for car production and sales. Before 1993, the Government subsidized the petrochemical industry by lowering oil prices.The petrochemical industry grew quickly, but the oil industry went into deficit.The oil and petrochemical industries were reformed and restructured starting in 1994. By 1996, oil prices had been raised three times. In 1998, the Government proclaimed the Pricing Reform for Oil and Oil Products policy to establish an open and competitive market based on the international market for oil production, processing, and consumption. Power pricing policy In regard to pricing, the Electric Power Law of 1996 stipulates that power tariffs should include

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power production costs, reasonable profit, and tax. Moreover, the tariffs should take into account reasonable cost recovery of the power transmission network and cross-subsidy.They should be attractive to investors in power plants, transmission and distribution network, and retail business.

Case studies in regional development and energy sector finance This section presents some international experience in regional energy system development and energy sector finance. ELECTRICITY TRADE IN ASEAN COUNTRIES Energy trade among the Association of Southeast Asian (ASEAN) countries is becoming important. In 1998, ASEAN put forward a plan for an interconnecting power grid and asked the Australian Agency for International Development (AusAID) and the European Union to undertake feasibility studies. The European Union is expected to finance the project. Several Southeast Asian countries are already interconnected, enabling electricity trade among them. The planned regional power grid will connect all ASEAN countries soon. ELECTRICITY SECTOR FINANCE IN PAKISTAN Between the late 1980s and the early 1990s, Pakistan was suffering from a power shortage. To attract foreign investment, the Government set the average price of electricity from private power plants at about $0.065/kWh (1998 prices). This policy drew large investments from American companies. The investments, plus the downturn in the national economy during the Asian financial crisis, contributed to solving the power shortage. Unfortunately, since the Government did not allow electricity prices to rise much and electricity theft was common, Pakistani power utilities could not

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recover their operational costs and had to sell off assets. ENERGY CONSERVATION FINANCE IN THAILAND In the early 1990s, to save energy and protect the environment, the Thai Government introduced a tax on the consumption of dirty energy, mainly fuel for vehicles. Gasoline stations collected the tax and transferred it to Government energy and environment conservation funds.The National Energy Policy Office has collected millions of dollars in taxes from fossil fuel consumption, and has plowed the money into energy and environment conservation.This policy had a big impact and it financed many pilot energy conservation projects.The Energy Star Office Equipment Promotion Program, for example, saves considerable electricity in the use of office equipment.

Implications for energy policies During the next 20 years, coal will continue to dominate the PRC’s energy sector. However, its share will decline. Natural gas, hydropower, and new and renewable energy production and the shares of those forms of energy will increase dramatically. The Western Region will therefore become one of the PRC’s most important energy bases. In particular, Xinjiang will serve both as base for energy production and port of entry for energy imports. By 2020, the PRC will be importing 319 Mt (coal equivalent) of energy, including 173 Mt of oil and 90 GL of natural gas. Energy transported from the Western Region to the Eastern Region in 2020 would amount to 250 Mt (coal equivalent), including 227 Mt of coal, 24.3 Mt of oil, 45,000 GL of natural gas, and 364.7 TWh of electricity. IMPOSING ENVIRONMENTAL PROTECTION TAXES ON DIRTY FUELS To enhance environmental protection policy, the State Environmental Protection Agency (SEPA) should

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work with the National Pricing Bureau to calculate and set taxes on sources of dirty energy. The dirtier the fuel, the higher the tax should be. These taxes should be imposed on the trading of energy, to encourage consumers to consider the use of clean and efficient energy sources, and facilitate energy conservation. The income from duties levied on the consumption of dirty energy should be invested in energy and environment conservation. For households or industrial sectors that use coal as primary energy source and have access to natural gas and town gas, the Government or an independent regulatory organization should levy taxes for environmental protection. The taxes should be high enough to drive coal users to switch to natural gas or coal gas. PROMOTING ELECTRICITY TIME-OF-USE TARIFFS Time-of-use tariffs are good for economic operation of the power system, promotion of demand-side management, and hydropower development. As yet, however, time-of-use tariffs are in use in only a few industrial and commercial sectors in some cities. The Government should extend the use of time-of-use tariffs with the development of power sector reform. REFORMING PRICES OF NATURAL GAS In 2001, the PRC still has two pricing systems for natural gas: planned gas price and market price. The former is cheaper than the latter. Natural gas prices should be based on the market equilibrium point. REGULATING INEFFICIENT POWER PLANTS AND COALMINES The Government should encourage the replacement of small and inefficient coal-fired power plants and coalmines. To facilitate the substitution, the Government needs to set up independent agencies to monitor and regulate efficiency and safety issues. Power plants or coalmines that do not meet the regulation standards should be shut down.

PROMOTING CLEAN COAL TECHNOLOGY Coal liquefaction and gasification technologies may help revive the coal industry, especially when international oil prices stay high.The Government should make special policies, such as a tax-free policy, to promote coal liquefaction and gasification technologies. USING ADVANCED TECHNOLOGY IN POWER GENERATION Combined-cycle technology with gas turbines for power generation has been widely recognized as state-of-the-art power production technology.This technology has the following advantages: • Much smaller land area requirement per megawatt than coal power • Ease of installation in load centers • Little negative environmental impact • Very high efficiency (up to over 50 percent) • Short installation period Most new power plants in the US use this technology. In the Western Region, natural gas will be one of the most important primary resources.The combinedcycle technology with natural gas turbines for power generation should be chosen as first priority for power development in the region. PROMOTING COGENERATION In the northwest, it is very cold in winter and space heating requirements are substantial. A combinedcycle gas turbine integrated with cogeneration technology should be the best thermal power technology to adopt. DIVERSIFYING OIL IMPORT CHANNELS It is important to diversify oil import sources and bring the PRC’s oil companies up to international standards. The Government should abolish the oil import quota management system, and allow the national oil companies to decide sources, time, types, and quantities of oil imports. PRC oil companies should produce and trade oil in both domestic and international markets.

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PROMOTING OIL AND GAS EXPLOITATION IN CENTRAL ASIA None of the three PRC oil and gas companies has the capability to make large-scale investments in Central Asia. Special policies are needed to encourage these firms to develop overseas. These policies include: • Establishing an insurance policy for overseas oil business investment • Allowing sunk and ineffective capital offset taxes • Avoiding the imposition of double taxes on overseas profits of oil firms • Considering oil exploitation equipment to be transported and used overseas as equipment export and therefore tax-exempt • Freeing oil firms from finance and guarantee limitations.The Government should allow oil firms to be financed and guaranteed by multiple institutions, foreign or domestic. • Lifting, or in some cases increasing, the foreign exchange limits on oil firms • Implementing various measures to increase oil stocks, including extending loans from the Import-Export Bank of China to purchase oil or from the Development Bank of China to purchase equipment; providing grants from the Ministry of Finance to reduce loan interest; deferring oil import taxes until the oil is actually used; establishing commercial oil storage companies PROMOTING RENEWABLE ENERGY The following policies would promote the development of the Western Region’s wealth of renewable energy resources: • Setting a target for renewable energy consumption (excluding hydropower and biomass) as a proportion of fossil energy consumption, say, 10–15 percent. • Setting up a national renewable energy development agency, such as a State Renewable Energy Development Commission, to make policy and lead the development of renewable energy.

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• Introducing national renewable energy quotas, and encouraging trading in them. Power generators in the east and south, lacking sources of renewable energy, could invest in renewable energy in the Western Region or buy their renewable energy quotas. All the customers of the national power network would therefore contribute to the costs of renewable development (mainly in the Western Region). • Introducing rebates for the cost of installing wind-powered or solar hot water devices. The Government may raise the funds by imposing tax on dirty fuel consumption. • Drafting regulations to define the renewable energy technologies eligible for government support, the levels of renewable energy capacity in each grid, the requirements for power grids to provide convenient grid connections for renewable energy power plants and buy all the electricity at fixed prices, and the economic and technical goals of supported renewable energy technologies. • Rationalizing prices. In 1994, the Ministry of Electric Power issued an executive order establishing the pricing principle for wind power to include production cost, financing costs, taxes, and reasonable profits. The order also required power grids to purchase all the electricity that wind plants generate,and all the customers of the power grid, not just those closest to the wind supply, to bear the additional cost. However, the order did not define the extent of a power grid. Confusion arises as to which customers must bear the price difference. Revisions in the order should clarify the confusion and also cover all renewable energy technologies. • Strengthening training and communication efforts to increase the awareness of the public, local government officials, and entrepreneurs on the protection of the environment and the benefits of renewable energy technologies.

• Introducing revolving funds for household-scale renewable energy development. In the Western Region, rural households lack access to commercial finance. A revolving fund can fill the gap by marshaling public and multilateral funds to capitalize the account and using household repayments to expand the size of the fund. The fund would help establish and stabilize the market by increasing the number of households that can purchase renewable energy systems. • Establishing new financing mechanisms. Flexible loan rates and repayment plans can also serve the goal of market development. Many herdsmen in Inner Mongolia, for example, purchase small energy systems for household needs, water pumping, electric shearing, and other uses. If herdsmen pay less in the beginning and more later when business activity expands, the twin purposes of rural economic development and electrification can be served. • Building an advisory service to provide customers with information on renewable energy • Introducing new technologies in renewable energy development through international cooperation PROMOTING ENERGY CONSERVATION The Government should establish standards for all energy consumption devices, and develop energy labeling programs for them. For example, by 2010, a standard should have been set for gasoline consumption and it should be understood by all car drivers. In addition, a label on the car should indicate its energy efficiency rank, to make it easy for customers to compare each car’s efficiency, as indicated on the label, with the standard. The Government should also promote wall and ceiling insulation in buildings. The Government should build sound systems for energy conservation and demand-side management auditing. Any firm that applies to develop a new energy facility, say, a new power

substation, should provide a comprehensive study on energy conservation and demand-side management. Experts from an independent regulatory agency will audit the report to see if the power expansion plan can be delayed by using energy conservation and demand-side management strategies. Only if the answer is no will the firm be allowed to build new power facilities. ATTRACTING MORE FOREIGN CAPITAL TO THE WESTERN REGION The Government or the local governments in the Western Region need to make more detailed policies to develop an energy market and attract foreign investment in the energy sector. Power transmission, for one, is under the control of the Government and constitutes a monopolistic marketplace.The Electric Power Law of 1996 does not forbid foreign and private sectors from investing in power transmission. The Government should develop policies that encourage foreign investment in power transmission. REDUCING THE POVERTY OF MINORITY GROUPS Providing commercial and renewable energy to rural households plays an important role in poverty reduction for minority groups, which make up most of the rural households in the Western Region. These minority households usually live in remote areas with a very low population density. They are covered by national and international poverty reduction policy, national minority policy, and environment protection policy. Reducing poverty for these groups needs capital from the Government and international grants or special loans. Local governments should use various fund sources to reduce poverty. Ningxia, for example, has a Donate Coal to the Poor policy. The local government purchases, transports, and distributes coal to poor households free of charge, such that the households no longer see the need to cut trees for firewood. Thus, through the coal donation, taxpayers’ money and poverty reduction funds are used to protect the environment.

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ATTRACTING DOMESTIC PRIVATE SECTOR PARTICIPATION IN ENERGY DEVELOPMENT Developing the Western Region needs private investment; government funds alone are not enough. To attract and manage domestic private investment policies and regulations are needed. In the energy sector private investment has focused mainly on small coalmines and small hydropower plants in the Western Region. The small coalmines use simple technology and are quick to develop and profitable, but they also operate dangerously and are wasteful in resource exploitation. The Government needs to establish regulations to enforce the use of modern technology and safety measures. Private investors could join together to invest in large coalmines. The Government could also allow the domestic private sector to invest in small oil and gas fields that are not economic for the public sector. Since this is a new business, the Government needs to make policies and regulations to guide it. Safety and the rational exploitation of natural resources should be key points of the regulations. Another policy that would attract domestic private sector investment is nondiscrimination against investors, private or public, in such matters as loan applications, insurance, and interest rates.18 IMPLEMENTING INSTITUTIONAL REFORMS AND ENHANCING COMPETITION Institutional reform is a key issue in the development of the energy sector. As of now, the institutions still operate on the basis of the planning economy. Centralized planning of the energy sector does not fit in with the market economy. The Government should encourage SMEs to participate in oil and gas development by instituting an open bidding system. In the meantime, the Government should reform its institutions to make them suitable for market competition. To continue power industry reform, the Government should split power generation from transmission, distribution, and retail. For a start, it plans to separate power generation assets and set

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up power generation companies. Splitting transmission from generation and distribution, and even selling some generation and distribution assets to the private sector, would complete this reform and bring full generation and retail competition to the power industry. To succeed in power sector reform and restructuring, the Government needs to study similar reforms in Australia, Chile, the UK, and the US. Simplifying the audit and approval process for energy development projects in the Western Region would encourage investment. For example, provincial governments should be given authority to decide which energy facilities to develop with little audit and approval, as long as these projects are environmentally friendly and economically sound. For private sector investment, there is a need for the Government to improve regulations on safety, minimum size of capital investment, and technologies. These regulations would prevent the development of small coalmines but encourage small hydropower energy. INSTITUTING POLICIES TO ENCOURAGE R&D IN THE ENERGY INDUSTRY The Government should make policies to help stimulate R&D in the energy industry. In order to reduce the costs or prices of renewable technologies, the Western Region needs to develop its own new mass production technologies. Government can use tax policy to encourage R&D in energy technologies. For example, it could treat R&D expenditure as a cost of production. SETTING UP SPECIAL FUNDS TO SUBSIDIZE SPECIAL SECTORS The Electric Power Law of 1996 requires preferential treatment for rural areas, minority areas, remote areas, and poverty areas. Tariffs in the Western Region have provided cross-subsidies. The average rural electricity tariff in Gansu, for example, is about 0.05 yuan/kWh, or one-sixth of the provincial average. With the development of a free trading market for

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power, it will be difficult to continue these subsidies. Rather than providing hidden subsidies, the Government should provide direct assistance through other programs.

Notes 1 State Development Planning Commission (1999b). 2 China Energy Strategy Study, 2000–2005. Beijing: China Electrical Power Press, 1997. 3 H. Dai et al. (1992). 4 State Development Planning Commission (1999b). 5 Inquiries by international team member in Sichuan, April 2001. 6 S. P. Qin (2000). 7 State Council 1998, No. 43. 8 State Development Planning Commission (2000c). 9 Huo Yongzhe (2001).

10 Gas transported from Ningxia to Gansu is about 0.1 yuan/m3, according to the Gansu Provincial Planning Commission. The pipelines are almost the same in length. 11 People’s Daily, 13 April 2000. 12 People’s Daily, 13 April 2000. 13 See State Development Planning Commission (2001b) and W. K. Han (2001). 14 PennWell (2000). 15 State Council, Circular on Policies and Measures Pertaining to the Development of the Western Region. Beijing: China Planning Press, 2000. 16 Interview with Jiang Shao Jun, Director, Long-term Strategy and Planning Department, State Power Corporation, 2001. 17 PennWell (2000). 18 The private sector, thought to be high-risk and unsecure, has generally found it more difficult to apply for loans.

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CHAPTER

8

TECHNOLOGY POLICY The Government attaches great importance to the role of science and technology in the development of the Western Region.1

1998, per capita GDP in Guangdong and Fujian was 2.5 times higher than the average in the northwest. Among the factors that contributed to the turnaround, the accumulation of physical capital accounted for only 19 percent; the remaining 81 percent was due to the accumulation of human capital, institutional innovation, and technological progress.3 Following standard international practice, it is possible to quantify the lag in technological progress in the Western Region in terms of R&D inputs and R&D output.

Role of technology in regional economic development A recent study by S. Fan et al.2 showed that among the various public investment sectors in rural PRC (R&D, irrigation, roads, education, electricity, and telephone), R&D has been the major contributor to economic growth and poverty reduction (see Chapter 19). The rate of return of public R&D inputs is the highest for total rural GDP, agricultural GDP, nonfarm GDP, and poverty reduction. Even more significantly, the rate of return of public R&D investment is higher in the Western Region than in the Eastern and Central regions. These results imply that R&D should be regarded as the primary target for public investment to increase rural GDP and reduce poverty in the Western Region. This is consistent with the technological policy outlined in the Circular 2000. Technology helped the Eastern Region outpace the Western Region in economic growth. In 1978, per capita GDP in the northwest was higher than that in Fujian (Eastern Region); per capita GDP in Qinghai was higher than in Guangdong. After 20 years, in

R&D INPUTS All proxy measures of R&D inputs indicate that the Western Region lags far behind the Eastern Region (Table 8-1). The key points are as follows: • The first proxy, the number of higher-education graduates, is a measure of the potential for technological innovation. By this measure, the Western Region is 27 percent behind the Eastern Region and 9 percent behind the Central Region. • The second proxy, funds invested in natural sciences and technology projects, is a measure of the actual monetary (capital) inputs in R&D

Table 8-1 Proxy Measures of R&D inputs in the Western Region, 1999 Graduates in Institutes of Higher Education Region PRC Eastern Central Western Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

(no.) 847,617 409,725 257,259 180,633 20,442 35,465 10,568 15,757 1,066 36,328 14,007 2,490 2,680 11,657 10,911 19,262

(%) 100.0 48.3 30.4 21.3 11.3 19.6 5.9 8.7 0.6 20.1 7.8 1.4 1.5 6.5 6.0 10.7

Investment in Natural Sciences and Technology Total Funds (million yuan) 51,432 32,569 8,621 10,242 543 4,031 271 702 24 2,887 696 102 92 283 264 348

Government Funds (%)

100.0 63.3 16.8 19.9 5.3 39.4 2.6 6.9 0.2 28.2 6.8 1.0 0.9 2.8 2.6 3.4

Source: China Statistical Yearbook 2000. a Number of scientific and technical personnel in state-owned enterprises and institutions at the year-end.

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(million yuan)

(%)

32,159 19,715 4,923 7,521 331 2,905 169 468 23 2,453 483 69 51 183 205 184

100.0 61.3 15.3 23.4 4.4 38.6 2.2 6.2 0.3 32.6 6.4 0.9 0.7 2.4 2.7 2.4

Personnela (no.)

(%)

21,430,140 100.0 10,633,235 49.6 5,915,934 27.6 4,880,971 22.8 360,515 7.4 1,024,524 21.0 444,907 9.1 585,409 12.0 29,868 0.6 491,367 10.1 334,964 6.9 86,281 1.8 108,656 2.2 369,296 7.6 408,240 8.4 636,944 13.0

Table 8-2 Proxy Measures of R&D Outputs in the Western Region, 1999 Transaction Value in Technical Markets by Region Regions PRC Eastern Central Western Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

(million yuan) 52,341 33,520 10,430 8,392 3,253 1,259 8 1,723 0 825 258 43 47 428 294 253

(%) 100.0 64.0 19.9 16.0 38.8 15.0 0.1 20.5 0.0 9.8 3.1 0.5 0.6 5.1 3.5 3.0

Gross Output Value of High-tech Products (million yuan) 594,357 410,143 110,315 73,899 9,894 27,326 2,685 4,340 0 17,658 1,856 0 0 727 2,661 2,824

(%) 100.0 69.0 18.6 12.4 13.4 37.0 3.6 5.9 0.0 23.9 2.5 0.0 0.0 1.0 3.6 3.8

Export of High-tech Products ($ million) 11,908.2 10,693.4 749.4 465.3 19.8 84.7 9.2 95.4 0.0 139.9 5.3 0.0 0.0 18.9 43.1 20.1

(%) 100.0 89.8 6.3 3.9 4.3 18.2 2.0 20.5 0.0 30.1 1.1 0.0 0.0 4.1 9.3 4.3

Source: China Statistical Yearbook 2000.

activities. The Western Region received less than 20 percent of the national total, about 43 percent less than the Eastern Region. Among various sources of research funds, 73.4 percent came from governments, indicating the Western Region’s weaker ability to attract funds from other sources, especially research funds from the private sector. • The third proxy, the number of scientific and technical personnel in SOEs and government institutions, is a measure of human resource inputs into R&D activities.The Western Region attracted only a bit above 20 percent of the PRC’s total, 27 percent less than the Eastern Region. • R&D inputs in the Western Region are also highly concentrated in the capital cities of four provinces and municipalities. Xi’an (Shaanxi) and Chengdu (Sichuan) each contributed 20 percent of higher-education graduates, attracted 28 percent and 39 percent of research funds, and employed 10 percent and 20 percent of science and technology personnel. R&D OUTPUT The Western Region contributed even less in terms of R&D output (Table 8-2): • The first proxy of transaction value in the technical market is a measure of the value of successful projects accepted by the market. The

Western Region contributed 16 percent, proportionally lower than the capital and human resource inputs of 20 percent (Table 8-1). • The second proxy of gross output value of hightech products measures total output of final product with imbedded new technological innovations. The Western Region contributed 12 percent, 4 percentage points less than the transaction value of its successful projects; that might indicate weaker ability to commercialize technological innovations. • The third proxy of export of high-tech products is a measure of the competitiveness of high-tech products in the international market.The Western Region was weak in producing internationally competitive high-tech products. • As in R&D inputs, R&D output was also concentrated in Xi’an and Chengdu. In summary, the Western Region lags behind because of less inputs, geographical concentration of inputs, limited sources of funding, and lower productivity and little commercialization of outputs: • Less inputs and high concentration. The Western Region lags behind the Eastern and Central regions in the actual capital and human resource inputs of R&D and potential capability of R&D. The limited resources were highly concentrated in the two cities of Xi’an and Chengdu.

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• Limited sources of funding. The Western Region relies more on the Government to support R&D activities, and has attracted less funding than the Eastern Region from the private sector. • Lower productivity and lack of ability to commercialize output. R&D output in the Western Region is proportionally lower than R&D input. This indicates there is lower productivity in transferring input to output and a lack of a ability to market technological innovations. MAJOR CONSTRAINTS ON TECHNOLOGICAL INNOVATION A successful technological innovation needs the following four factors: (i) high-quality R&D personnel, (ii) incentive mechanism, (iii) information, and (iv) research funds. The Western Region does not have comparative advantage in any of these four areas: • With the exception of four cities, the Western Region is short of high-quality R&D personnel. Even in the four cities that had sufficient R&D personnel, many of these migrated to the Eastern Region, drawn by its rapid economic reforms and the prospect of a better working environment, creative freedom, higher salaries, and flexible working time. • Most R&D personnel in the Western Region work for SOEs in which the reward mechanism is rather inflexible. Worse, most SOEs lack incentives to enhance their competitiveness by investing in risky R&D activities; their demand for high-quality R&D personnel is quite low. • R&D needs information channels to determine the demand for and supply of innovations. R&D personnel also need professional exchanges to stimulate new ideas. The Western Region is isolated by its geographical location and an unwillingness on the part of its institutions to facilitate exchange of information and ideas. • Most R&D activities are either directly funded by governments or conducted within SOEs.The Western Region does not have a suitable

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environment to attract R&D investment from the private sector or venture capital. It lacks both the right“hard environment”(good-quality labor force, communication and transportation facilities, and other living facilities) and the right“soft environment” (regional preferential policies, freedom, appropriate laws and regulations, private property rights, efficient local governments).

Recent institutional reforms and their applicability to the Western Region The PRC has recently introduced several institutional reforms to stimulate R&D. Although most reforms commenced in the Eastern Region, it is reasonable to expect that all these reforms will extend to the Western Region in due course. The best known of these reforms are the establishment of high-technology industry zones and the promotion of venture capital. NEW AND HIGH TECHNOLOGY INDUSTRY ZONE As an institutional innovation, high-tech zones in the PRC have developed rapidly in recent years, with mixed results. Essentially, high-tech zones have the following advantages: • High-tech zones are institutional enclaves insulated from the surrounding areas. • Within these enclaves, governments can efficiently and effectively provide support in the areas of infrastructure provision, laws and regulations, and other zone-specific preferential policies. • High-tech zones shorten the physical distance between R&D enterprises and thereby facilitate information exchange. • R&D enterprises within the zones have less constraint in designing reward mechanisms to attract high-quality R&D personnel. • Because these institutional reforms are applicable only to a small enclave, they will encounter less political constraints.

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As a result, high-tech zones have attracted significant amounts of investment and R&D personnel in a short time. However, their efficiency indicators are mixed. The sales/profits ratio is higher in the high-tech zones than the national average; that is, in the hi-tech zones, firms appear to need more sales to generate the same amount of profits. This is contradictory to the nature of R&D and international experience (Table 8-3). Regional analysis further shows that the high-tech zones in the Western Region have lower labor productivity and poorer export performance than the national average (Table 8-4). As with any other government-supported industry policies, this result is predictable and reflects an inappropriate division of responsibility between the Government and the private sector. More specific explanations for these effects are as follows: • Initial investment responds to government preferential policies, which are uncertain and short-lived.This increases the risk and uncertainty of investment.Therefore, most investments are short-term and will last only for as long as preferential policies are in effect. • Local governments control access to the hightech zones. This provides another rent-seeking opportunity and room for corruption.

Table 8-3 Economic Indicators of High-Tech Zones in the PRC, 1997–1999 Indicator Number of enterprises (thousands) Number of employees (thousands) Total output value (million yuan) Sales income (million yuan) Profits and taxes (million yuan) Sales/profits-and-taxes ratio in high-tech zones Sales/profits-and-taxes ratio in PRC industry Export earnings in foreign exchange ($ million)

1997

1998

1999

136,810 141 310,950 275,200 34,990 12.7 8.9 6,480

160,790 178 433,360 379,310 47,700 12.6 9.0 8,530

174,980 220 594,360 559,270 73,730 13.2 6.7 11,910

Sources: Gao, Zhiqian (2000)

• There is a shortage of subsequent research funds, especially private venture capital. • Access to information is deficient. Enterprises in the zones are supported by the Government and therefore lack a full understanding of the domestic and international market. • The enterprises are not competitive enough in the market despite their technical advantages. A questionnaire survey of some export-oriented enterprises in the zones showed that only 18 percent of their products have a domestic market share above 30 percent, and that half of the enterprises do not know the market share of their products.4

Table 8-4 Main Economic Indicators of High-Tech Enterprises in Development Areas, 1999

Area PRC Baotou (Inner Mongolia) Nanning (Guangxi) Guilin (Guangxi) Chongqing Chengdu (Sichuan) Mianyang (Sichuan) Guiyang (Guizhou) Kunming (Yunnan) Xi’an (Shaanxi) Baoji (Shaanxi) Yangling (Shaanxi) Lanzhou (Gansu) Urumqi (Xinjiang)

No. of Enterprises

No. of Staff and Workers

Total Income (million yuan)

Exports ($ million)

Labour Productivity (yuan per person)

Export per Person ($ per person)

17,498 158 120 155 195 223 64 57 80 1,275 88 32 322 106

2,210,487 19,793 15,727 22,670 43,598 76,270 42,703 24,310 18,955 80,474 28,169 1,980 18,548 7,781

677,479 2,873 3,758 4,001 9,854 13,657 13,167 2,524 4,940 20,167 3,124 377 2,826 1,268

11,908.2 43.1 20.1 28.9 19.8 66.7 17.9 9.2 95.4 122.8 14.7 2.4 5.2 18.9

268,880 134,460 179,580 173,230 226,950 138,830 391,960 110,430 228,980 177,030 112,930 116,230 100,050 93,480

5,390 2,180 1,280 1,270 450 870 420 380 5,030 1,530 520 1,210 290 2,430

Source: China Statistical Yearbook 2000.

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Table 8-5 Some Venture Capital Enterprises Year Established

Total Capital (million yuan)

Shengzhen High Technology Venture Capital Investment Co.

1998

Guangdong Technology Venture Capital Investment Co.

Enterprise

Investors and Share

Department in Charge

1,000

Shengzhen municipality: 500 million yuan Others: 500 million yuan

Department of Science, Shengzhen municipality

1997

200

Guangdong municipality: 100 million yuan Guangdong Huaqiao Trust: 50 million yuan Guangdong Yuechai Trust: 50 million yuan

Department of Science, Guangdong municipality

Shengzhen New and High Technology Industry Investment and Services Co.

1995

100

Shengzhen municipal government

Department of Science, Shengzhen municipality

Shanghai Science and Technology Investment Limited Co.

1993

305

Bureau of Science and Technology, Shanghai municipal government

Zhejiang Science and Technology Venture Capital Investment Co.

1993

60

Department of Science: 52% Department of Finance: 48%

Department of Science and Department of Finance, Zhejiang municipality

Shanghai Innovation Technology Group Co.

1993

48

Shanghai municipality

Department of Science, Shanghai municipality

Jiangsu New and High Technology Investment Co.

1992

150

Jiangsu municipality

Department of Finance, Jiangsu municipality

Department of Science, Shanghai municipality

Source: Jiangnan Huang and Jing Wang (eds.) (2001).

Table 8-6 Institutional Shortcomings of Government-Controlled Venture Capital Activity

Current Institutional Arrangement

International Best Practices

Comments

Selection and evolution of projects

Government

One or some investors with unlimited liabilities (venture capital manager) Independent consulting company

Government does not have sufficient incentives and information

Financing

Out of financial department of governments

Self-financing Partnership Managed trust funds

Single-source funding limits scale and lowers efficiency

Monitoring of the use of venture capital

Government

Venture capitalist Contract between venture capitalist and enterprise manager

Government does not have sufficient incentives and information Without independent consultants, contract is flawed

Exit of venture capital

Government

One or some investors with unlimited liabilities (venture capital manager) Independent consultants

Government does not have sufficient incentives and information to determine the right time to exit

Source: Compiled by consultants.

VENTURE CAPITAL MARKET The driving force behind the high-tech industry is venture capital, which is characterized by high risk, high return, and high flexibility. Once again,

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government controls and involvement dominate. Table 8-5 lists seven major venture capital enterprises and their ownership structure; and Table 8-6 identifies the problems.

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Biotechnology IMPORTANCE OF BIOTECHNOLOGY Biotechnology provides another opportunity to enhance the competitive advantages and reshape the entire arable and husbandry systems in the Western Region. Because of significant economies of scale and the possible threat to human health and ethics, most biotechnology research in developed countries is done by state-owned scientific laboratories or private laboratories with government subsidy and strict monitoring.5 Since the PRC is one of few countries that have achieved significant advances in gene cloning and reproduction, the Government should follow the lead of the Organization for Economic Cooperation and Development (OECD) and set up a high-level commission to coordinate the ethical aspects of biotechnology. The research and application of biotechnology is not region-specific, and the Western Region does not necessarily have competitive advantage in research and development. However, the Western Region could benefit most from the outcomes of biotechnological R&D and it has several research initiatives in the field that are very significant. Advances in biological technology can increase crop yields without the side effects associated with the use of chemical fertilizer. A recent study by Huang, Rozelle, Pray, and Wang6 shows that the PRC has the largest plant biotechnology capacity outside North America and is far ahead of almost all other developing countries. The pioneering project of the Ministry of Agriculture in 1997 promoting the use of Bt cotton (genetically modified cotton with Bacillus thuringiensis inserted) has reduced the use of chemical pesticides from 60.7 kg per hectare to 11.8 kg per hectare. Farmers save significantly on the quantity of pesticide and labor required for pest control. A rough estimate indicates that the adoption of Bt cotton has saved 650 million yuan. The figure would be much larger if the positive effects on the environment were taken into account.

Priority should be given to the following areas of biotechnology research: • Molecule breeding techniques for trees and crops: improving genes to enable trees and crops to resist diseases and insects and to improve quality • Animal breeding techniques: defining gene types for poultry and livestock, conducting embryo transfer and mass-producing embryos with improved species, applying vaccines on animal genes, breeding animals that resist diseases and insects and are of high quality, and cloning antibiotics • New pesticide marking techniques: fast-acting biopesticides, pesticides that promote plant growth and carry informosomes, bionic pesticides, microbial pesticides that help promote plant growth, and farming enzyme lotion The Chinese Academy of Sciences has conducted some biotechnological research in the Western Region, such as the following:7 • Research into the northwestern base of the ecosystem and sustained development • Research into the southwestern base of biodiversity and biological resources • Experimental agricultural zones based on advanced biotechnology in areas with highlands, oases, and pastures • Selection and refinement of 100 types of plants with high scientific and economic potentials Further R&D needs massive monetary inputs, which may not be forthcoming from the Government, given its other economic development priorities. Using the research capacities of universities and colleges and facilitating scientific exchange is a viable alternative. Moreover, fully utilizing the huge stock of knowledge and R&D human resources of overseas Chinese should be a high priority of technology policy. Also, bilateral aid projects in biotechnology often lead to international cooperation between research institutions that lasts long beyond the completion of the aid project.

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CHINESE TRADITIONAL MEDICINE Chinese traditional medicine is one area in which the Western Region does have competitive advantages. Chinese traditional medicine, practiced for thousands of years, comprises over 4,000 medicaments. Compared with Western chemistry-based medicine, Chinese traditional medicine has the following advantages: • It is based on natural ingredients and has little or no side effects. • It treats the human body as an integrated, complex cause-and-effect system. In addition to the circulation system, Chinese traditional medicine believes that there is another circulation system, roughly based on the reflection of the nerve system, called jinluo. The block of jinluo is regarded as the main cause of illness and disease. This integrated approach has been shown to be capable of dealing with complex diseases and disorders, such as cancer and AIDS. • It adopts a preventive or therapeutic approach rather than a curative approach.This approach has blurred the distinction between medicine and food. Chinese traditional medicine has not been well accepted in the world, despite the advantages identified above and the belief that Chinese traditional medicine and Western medicine will converge at the biotechnological level. The major obstacle is the research behind it, which is based on experience rather than scientific experiments. The Government should encourage research in the following areas: • Decoding and mapping human gene groups, in order to understand the effects of Chinese medicaments on specific genes and enzymes • Understanding the active components of each medicament and finding out the best combination and ratio • Inventing new technology for the manufacture of medicine, such as superfine filter and computer simulation to make medicaments portable and easy to use

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The Western Region stocks the best raw materials for making Chinese medicine and has a large number of practitioners and medicaments.Tibet and Qinghai have the best collection of certain precious herbs, and an independent system called “Tibetan medicine.”The Tianshan Mountains and other places in Xinjiang have the best collection of food-based herbs and other raw materials. Ningxia is well known for its stocks of top-quality medlar, liquorice, and abace. Gansu has already established its biotechnological base for refining medicaments. Yunnan has a reputation of producing a variety of “green food” and “preventive medicine.” Establishing a knowledge database for collecting and analyzing local practitioners’ experience and setting up clinics in well-connected cities will help these local practitioners export their services to outside regions and counties. POLICY IMPLICATIONS FOR BIOTECHNOLOGY DEVELOPMENT There are several ways in which the Government can support biotechnology development: • Encouraging networking among research personnel scattered around the country in the universities, colleges, and government research institutes • Either investing in basic research projects or subsidizing the activities of private research institutions • Encouraging the establishment of a professional association to standardize the registration and management of professional practitioners • Initiating a marketing campaign to promote Chinese traditional medicine • Encouraging the private sector to invest in the manufacture of medicaments and to develop a marketing network to bring these medicines to consumers • Seeking further bilateral aid from countries with special expertise in biotechnology relevant to the animal husbandry of the Western Region

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Information and communication technology Among the new technologies, ICT stands out for its huge potential to accelerate economic development in the Western Region. There is also, however, a risk that a “digital divide” will emerge, reinforcing existing income and wealth inequalities within and between regions. ICT represents a new tool for the creation, acquisition, processing, analysis, dissemination, and transmission of information. A properly constructed information infrastructure will have the effect of replacing the physical sphere with a virtual sphere and, therefore, significantly reducing transaction costs in the market. This is the major obstacle to economic development in the Western Region. However, international experience shows that the success of a country or region in exploiting ICT is dependent on flexible, competitive markets and a well-functioning legal framework that protects the consumer, the security of transactions, the privacy of records, and intellectual property. The Internet may yield smaller benefits in more tightly regulated economies with rigid labor and product markets and inefficient capital markets that prevent shifts in labor and capital in response to new opportunities.8 The Western Region lags behind not only in physical information infrastructure but also, and more seriously, in the understanding of the business conventions and legal aspects of ICT applications. ROLES OF ICT IN THE DEVELOPMENT OF THE WESTERN REGION The possible benefits of ICT to the Western Region are many. ICT is itself a fast-growing industry that would contribute to GDP, and its applications are everywhere—in health care, education, government administration, tourism, regional planning, and so on.

The specific benefits of ICT to the Western Region are as follows: • Facilitating movement of resources across regional borders, from areas of abundance to those of scarcity. ICT can thus give the Western Region access to markets, information, and other resources that would otherwise be inaccessible. • Facilitating access to global markets and increasing trade through e-commerce, making it possible for the Western Region to reap benefits from specialization and economies of scale and scope, and thereby reinforcing the benefits of trade liberalization and the open market. • Reducing the advantages of vertical integration and the optimal size of firms through Internet use, with its reduced transaction costs. Thus, barriers to entry would fall and the absolute advantages of the incumbent firms (normally SOEs) would vanish. This should have the effect of promoting private sector participation. • Revitalizing the traditional industries, which currently dominate the Western Region. ICT would decrease energy consumption, improve product quality, reduce production costs, and smooth market transactions. • Increasing price transparency and competition through the Internet.This should have a positive effect on markets with high margins, which are likely to see the biggest price reductions and efficiency gains. • Exposing local governments to more intense regional competition through the Internet, forcing them to rethink their old, inefficient habits and to seek new ways to get around or eliminate market rigidities. STATUS OF ICT DEVELOPMENT IN THE WESTERN REGION The PRC has achieved significant progress in ICT. The growth of cable networks, optical cable lines, and digital lines and the increase in the number of ICT users are two proxy measures of communication capacity (Table 8-7).

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Table 8-7 Growth of Cable Networks and ICT Users, 1991–1999 ICT Users Year

Mobile Phone Subscribers

1991 1992 1993 1994 1995 1996 1997 1998 1999

48,000 177,000 639,000 1,568,000 3,629,000 6,853,000 13,233,000 23,863,000 43,296,000

Communication Capacity

Subscribers of E-mail Services

Subscribers of Internet Services

2,329 6,068 10,107 15,246 20,959 19,855

7,213 35,652 160,157 676,755 3,014,518

Optical Cable Lines

Digital Lines

23,613 51,352 162,861 330,359 484,231 23,613 754,143 935,835 1,351,665

n.a. 109,300 298,045 518,915 677,672 n.a. 965,263 1,139,476 1,560,201

Source: China Statistical Yearbook 2000.

• Infrastructure constraints. The Western Region needs to overcome infrastructure constraints in telecommunications, transport, and logistics. While the construction of telecom and Internet infrastructure in developing countries can be left to private investors, official development assistance may be able to leverage private investments. • Governance aspects of e-commerce, including consumer protection, security of transaction, privacy of record, and intellectual property. With respect to legal and regulatory issues, capacity building programs can equip the PRC to participate in negotiations and discussions that are shaping global rules and protocols governing e-commerce.

• Computer hosts. By the end of 2000, there were about 8.92 million Internet-connected computers. Of these, 1.41 million were connected through leased lines and 7.51 million through dial-up connections. • Internet users. There were 22.5 million Internet users by the end of 2000, including 3.64 million users of leased-line connections, 15.43 million for dial-up connections, and 3.43 million for both methods of connection. The Western Region, with over 20 percent of the PRC’s population, accounted for only 8.5 percent of total domain name registration, 8.1 percent of websites, and 17.5 percent of Internet users at the end of 2000 (Table 8-8). MAJOR CONSTRAINTS AND OPTIONS FOR ACCELERATING E-COMMERCE IN THE WESTERN REGION Two major constraints are:

Relieving infrastructure bottlenecks A country’s readiness for e-commerce depends on its network infrastructure and technology diffusion.

Table 8-8 Internet Usage in the Western Region, 2000

Province Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi Western Region

Percentage of Population

Percentage of Domain Name Registration

Percentage of Websites

20

0.94 1.75 0.31 1.40 0.12 1.29 0.33 0.07 0.25 0.86 0.46 0.69 8.47

0.87 2.13 0.29 1.20 0.02 1.11 0.39 0.05 0.21 0.64 0.37 0.81 8.09

Source: China Internet Network Information Center (2001).

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Percentage of Internet Users 2.03 5.03 0.80 1.46 0.03 1.47 1.13 0.31 0.48 2.02 1.21 1.51 17.48

The growth of e-commerce is fostered by strong growth in infrastructure (including narrow- and broadband access), hardware investment, and Internet use, but it also depends on the growth of mobile applications, price reductions, service improvement, speed, and reliability. A key lesson from international experience is that telecommunications reform is a major determining factor for the emergence of the so-called “new economy.” Faster and more reliable network infrastructure and new ways of pricing, both for consumers and for the leased lines used in businessto-business (B2B) transactions, have led to increased Internet connection in homes and businesses. Low access costs are encouraging uptake, while competition among infrastructure providers and among Internet service providers (ISPs) has led to innovative pricing structures. A communication network is a key to the development of the Western Region. According to a survey made by the Center for E-Commerce, MoFTEC, the Western Region would experience a “digital divide.” Of the 10 most digital-intensive provinces and municipalities, none is in the Western Region, while the four least digital-intensive provinces are all in the Western Region. Telephone usage per capita is only 50 percent of that in the Eastern Region.9 Beyond the physical infrastructure, providing wide Internet access requires the emergence of local ISPs and portals that can arrange a reliable, low-cost connection to the web, develop sites with useful, local language content, and offer a range of other services demanded by local Internet users. Once telephone density is sufficiently high, it should be possible to offer access to most users at local call rates. This presumes that an ISP can lease a highcapacity line from a telecom service provider at a competitive rate. To encourage private sector provision of ICT infrastructure and Internet services the Government should overcome private sector concerns that may arise from a conflict in objectives, between maximizing revenue and delivering more, better, and

cheaper services to the remote Western Region. To deal with such concerns, the Government should consider: • Initiating investment in ICT infrastructure but encouraging private sector participation at a later stage via management contracts and other similar methods (see Chapter 1) • Leapfrogging traditional copper- and fiber-based landlines, and moving directly to leading-edge wireless technologies (such as satellite or microwave) that send voice and data over the same network • Encouraging Net tearoom and Internet shops in the Western Region to provide affordable Internet access and shared resources for lowincome users Institutional and policy requirements for accelerating e-commerce development Even assuming that the physical infrastructure bottlenecks to Internet expansion are overcome and access prices become more affordable in the Western Region, there are other significant policy challenges to be met before an environment conducive to e-commerce can be created. Ecommerce requires legal norms and standards (covering contract enforcement, consumer protection, liability assignment, privacy protection, and intellectual property rights) and process and technical standards (in such matters as Internet payments and product delivery to the final user, security, authentication, encryption, digital signatures, and connectivity protocols).The essential challenge facing the Western Region is therefore to create a climate of trust that makes it possible for agents to conduct business online without face-to-face contact. A solution would be a legal and judiciary framework that meets minimum standards of transparency, impartiality, and timeliness. Besides an enabling policy environment, merchandise e-commerce also requires complementary physical infrastructure, notably a logistics system capable of timely, secure, and

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affordable small-batch shipping to multiple destinations (see Chapter 6). Contribution of international donor agencies As for micro-level initiatives, a preferred investment objective for international lending agencies is the establishment of electronic community centers. In addition to the normal function of providing Internet access, they can also serve as centers for capacity building, skills enhancement, training, communication, and content development.The private sector and local governments should be encouraged to use these facilities, where they will be assisted in the website creation, digital web management, and the conduct of e-commerce. POLICY IMPLICATIONS FOR ICT With the exception of Chengdu, Chongqing, Lanzhou, Xi’an, and their surrounding areas, most cities in the Western Region do not have the capacity to produce ICT products in a competitive way. Priority should therefore be given to encouraging the wider use of ICT rather than its production. Furthermore, unlike a normal city-based information network, the information network in the Western Region should focus mainly on the business sector, that is, ICT should be used to revive and optimize traditional industries and make them more competitive in the national and international markets. Most policy suggestions in this section are equally applicable to ICT production.The following are important considerations in fine-tuning short-term policies for immediate action in this fast-changing area: • ICT exhibits strong economies of scale in its basic infrastructure component and significant network externality. Public finance could be justified on the base of natural monopoly and positive externality. Therefore, the Government should invest to improve the communication capacity in the Western Region. Options include pure public finance, public subsidy, public-private

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mix, and other forms of PSP in providing public utilities. • Public investment should be accompanied by a free-access policy that will remove barriers and encourage private sector investment and private ownership. For example, the Government should have policies to let the private sector pay a market competitive price to share the resources (land-based copper line, microwave tower, telephone exchange facilities, satellites, etc.) owned by China Telecom. • The initial Government investment in ICT infrastructure must be accompanied by subsequent measures to encourage private investment in value-added components, such as ISP services, Internet protocol (IP) telephony, and combined voice and IP services. • There should be a more liberal policy toward the private sector’s use of new technology, such as wireless and broadband communications, cable modems, and asymmetrical digital subscriber lines (ADSLs), in competing with the incumbent firms. • Deregulating the ICT industry would provide end users with a more flexible and affordable pricing structure. International practices presented in Table 8-9 shed some light on policy details.

Implications for policies to promote technological innovation Recognizing the competitive disadvantages in R&D, the Government should not try to: (i) invest in the Western Region to establish comprehensive R&D facilities; (ii) graft the high-tech zones model to the Western Region; or (iii) copy the venture capital model to the Western Region. Instead, the Government should emphasize the removal of barriers that prevent the mobility of R&D personnel and research funds. More specifically, it should formulate policies in the

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Table 8-9 Sample Country Practices in Promoting the IT Industry Country

Strategies

Programs/Projects

Canada

Ensure affordable access to essential communication services. Emphasize convenient, less expensive, and just-in-time lifelong learning to improve the ability of the labor force.

National access A Government working group is studying barriers to access, focusing on the influence of social factors (age, disability, ethnicity, education, and income). The Government has increased the budget of the Community Access Program to expand the coverage of the Federal Youth Employee Strategy. Community access Industry Canada’s Community Access Program enables people in rural and remote communities to access the Internet. The SchoolNet and LibraryNet programs facilitate the connectivity of Canadians by equipment donation from government, corporations, and individuals. Preferential tariffs for education and health entities There are preferential tariffs for telecommunications services bodies that are provided on a competitive basis to nonprofit education and health services.

Singapore

Extend the use of PCs and the Internet to low-income households. Address language and attitude issues in addition to income and gender issues.

Provision of free used PCs and training to low- income households. Provision of free broadband Internet access at community centers and locally relevant Web content in other Asian languages with the help of the private sector and tax incentives. Development of national Chinese Internet programs for different population segments to bridge the language gap. Extension of the “e-Ambassador” program, using current Internet users to voluntarily teach latecomers.

US

Lower the prices of hardware and software by adapting pro-competition policies. Provide tax incentives to encourage the private sector to donate computers to communities and to stimulate training and education programs. Improve information infrastructure in rural areas. Encourage women to pursue technical education and a technical career.

Government assistance to low-income households for monthly service bills and the installation costs of service connections. US Department of Agriculture’s rural service, which provides lending and technical consulting in rural areas. Improvement of the image of women scientists and technologists through female models in the media. Science encouragement programs, which increase female students’ interest in technical careers. Mentoring and sponsorship of women in schools and communities by influential colleagues, to develop their interest in IT. Expansion of technical training and job opportunities for women through an alliance between business, government, and education communities.

Source: World Bank (2000).

following five areas. All these policies should be treated as short-term policies requiring immediate attention and action.These policies will have prolonged effects in reshaping the comparative advantages in the Western Region.

• Establishing technology-specific funds to increase public investment in R&D • Establishing a legal framework to protect intellectual property rights • Facilitating the exchange of technology

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scope of services, objectives, desired outcomes, and the sharing of risks, while any application must specify the methodology and expected outcomes. • The research funds should be open to universities and any other qualified research institutes in the PRC as well as abroad, rather than being discriminately injected into R&D institutes in the Western Region. This competitive procedure would ensure the best use of research funds and avoid duplication among research projects. • There should be a monitoring mechanism to guarantee that the outcomes of a research project meet the objectives. One possible mechanism includes the use of (i) an internationally reorganized publication as a yardstick; (ii) a quality assurance panel comprising international and domestic experts to write an anonymous assessment report; and (iii) a database containing the assessment report for use in evaluating the institutional capability of universities and dedicated research institutes.

• Encouraging productivity improvements in R&D • Encouraging R&D activities in areas with competitive advantages INCREASING PUBLIC INVESTMENT IN R&D R&D exhibits the nature of a “public good,” and the rate of return of public R&D investment is the highest among all public investment, especially in the Western Region. The Government should therefore treat R&D as the top investment priority for the Western Region, higher in priority than other public investment items, such as infrastructure, education, and telecommunication. For the effective use of R&D-specific funds, the following methods could be considered: • The proposed fund(s) should concentrate on projects, rather than regions. A committee comprising experts in relevant areas (such as water conservation technology, specific agriculture technology, environmental protection, mining processing technology) could compile a priority list of R&D projects for the Western Region. Projects should specify the Table 8-10 Selected IPR-Related Legislation of the PRC IPR-related Legislation Trademark law Patent law Regulations on the administration of technology introduction contracts Implementing rules of the Ministry of Foreign Trade and Economic Cooperation for the examination and confirmation of export enterprises and technically advanced enterprises with foreign investment Rules for the implementation of the regulations on the administration of technology introduction contracts Copyright law Implementing regulations of the copyright law Regulations on computer software protection Implementing regulations of the patent law Implementing regulations of the trademark law Decision on copyright infringement punishment Source: Bosworth and Yang (2000)

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Year Passed, Revised 1983 and 1993 1984 and 1992 1985

1987 1988 1990 1991 1991 1992 1988 and 1993 1994

PROTECTION OF INTELLECTUAL PROPERTY RIGHTS From 1949 to 1978, no IPR system was in effect in the PRC. The view was that public property was a socialist priority. Since 1978, the Government has made considerable efforts to improve the IPR regime, introducing new laws (Table 8-10) and signing several international conventions (Table 8-11). Studies show foreign firms did respond positively to the new regime. They have migrated from using nonaffiliate licensing in the mid-1980s toward greater use of internal affiliate technology transfers in the middle to late 1990s. However, the prospect of attracting greater inflows of technology remains modest, certainly in value terms. This is mainly because foreign firms still hesitate to transfer advanced technologies to a country whose historic record on the protection and enforcement of IPR is seen as being patchy at best.10 This poses a big threat

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to the sustainability of economic growth, which needs continuous inflows of new technologies and innovations. The PRC, it would appear, still has some way to go in improving the environment for technology sales in both domestic and international markets. Further enhancement of the IPR system, particularly in policing and judicial enforcement, will play an essential role in this regard. POLICIES FACILITATING THE EXCHANGE OF INNOVATIONS New policy directions that the Government might consider for the Western Region include the following: • Establishing a regular exchange market to facilitate the spread of innovations.The Government should use its advantages in coordinating the participation of a large number of R&D enterprises and personnel to facilitate such a market. • Formulating policies to encourage PRC enterprises to engage in high-technology development overseas or to establish strategic alliances with foreign technological corporations • Abolishing the quota that limits foreign investment in projects with high R&D content • Providing infrastructure and regulatory support for hi-tech zones, but simplifying or even abolishing the approval procedure of the Government and the entry control rights of local governments, and encouraging the private sector to mutually develop hi-tech zones • Leaving it up to the private sector to provide venture capital and to guide the direction of venture capital movement. The Government should limit itself to establishing a fair and transparent legislative framework to protect the interests of private venture capitalists and facilitate the listing of R&D enterprises in the forthcoming second-board stock market.

Table 8-11 IPR-Related International Treaties Signed by the PRC International Convention

Year Signed

Convention establishing the World Intellectual Property Organization and a contracting country of WIPO Paris convention for the protection of industrial property (signatory country) Treaty on intellectual property in respect of integrated circuits Madrid agreement concerning the international registration of marks Berne convention for the protection of literary and artistic works Universal copyright convention Geneva convention for the protection of producers of phonograms against unauthorized depilation of their phonograms Patent cooperation treaty Budapest treaty on the international recognition of the deposit of microorganisms for the purposes of patent procedure TRIPS (signatory country)

1980 1985 1989 1989 1992 1992 1993 1994 1994 1994

Source: Bosworth and Yang (2000)

POLICIES TO ENCOURAGE MORE PRODUCTIVE R&D The Government should consider these measures: • Creating and maintaining an environment favorable to the fast and healthy development of SMEs engaged in new and high technology.The success of SMEs in developing high-tech industry at home and abroad shows that they are more flexible in meeting the market demand for new technology and are therefore able to achieve rapid growth in the market. • Reforming SOEs to diversify their ownership, promote the “publicly owned and privately run” model, or let the private sector buy them out. A modern corporate governance structure should be established to resolve problems associated with incentives and information. • Speeding up the transformation of “military” enterprises to “civil” enterprises, providing incentives for military enterprises to commercialize their technological innovations, and introducing modern corporate governance principles into military enterprises • Transforming state-owned R&D institutes to private-owned, independent R&D enterprises

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• Encouraging universities and colleges to establish their commercial arms to speed up the commercialization of technological innovations. The Ministry of Education should have a more liberal policy toward universities’ involvement in R&D activities.

The transfer of military technology to civilian use and production should be supported. Research institutions and institutions of higher learning in the region should be supported in their efforts to strengthen relevant applied research and basic research. The reform of the science and technology development system should be

MACRO POLICIES TO ENCOURAGE R&D ACTIVITIES IN AREAS WITH COMPETITIVE ADVANTAGES Macro policies that the Government might consider to encourage R&D include the following: • Reforming VAT to encourage enterprises in the Western Region to invest in high-tech equipment (see Chapter 2) • Allowing enterprises to deduct (or even overdeduct) R&D inputs from company income tax. For example, enterprises could be encouraged to fund R&D activities in universities and colleges and establish a strategic alliance between industry and the universities. Options might include allowing enterprises to deduct 150 percent of R&D funds invested in a university from company income.

deepened, speeding up the transformation of applies research institutions into enterprises, consolidating cooperation between schools, enterprises and research institutes, and integrating scientific development and economic growth. A proportion of sales income of enterprises in the Western Region may be used for technological development and the allowed amount may be raised as necessary. Innovation funds for small and medium-sized technology-oriented enterprises should intensify their support for qualified projects in the Western Region. The registration with local bureaus of industry and commerce should be simplified for scientists and technicians who wish to set up technology-oriented companies in the Western Region, and they are allowed to hold an increased proportion of shares, stock

Notes 1 The Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region states:

options or intellectual property equity.

2 3 4 5

More support will be given to the Western Region in the allocation of funds included in various science and technology plans, gradually increasing the overall amount of funding for science and technology. With the focus on the key tasks of Western Region development, the scientific and technological capacity of the Western Region should be built and enhanced, and arrangements should be made to tackle key, general technical problems and to disseminate and industrialize major technological advances.

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6 7 8 9 10

Fan et al. (2001). See Yong Sang (2001). Gao, Zhiqian (2000). In Australia, most biotechnological research is conducted by the Government-funded Commonwealth Science and Industry Research Organization. In the US, most research is conducted by the research department of drug companies, following strict procedures set by the Federal Government. Huang et al. (2001). China Daily (2000). See Goldstein and O’Connor (2000). Jingzhi Liu (2000). Clegg et al. (2000).

CHAPTER

9

COMPETITION POLICY In the EU and the US, the purpose of competition policy is to limit the monopoly powers and monopolizing conduct of large firms. In the PRC, however, the purpose of competition policy should be to reduce the monopoly power of governments.1 This is especially true in the Western Region, where provincial and other local governments monopolize various rights that should be left open to the market. It is a vicious circle: because governments need revenue, they seek to use their monopoly powers in issuing licenses and charge management fees that maximize revenues from enterprises. As a consequence, firms have no incentives to invest, and this reduces the tax revenues of local governments, making them even poorer, and the regions less developed.

Role of government in promoting competition In the context of the economic development of the Western Region, the central issue of competition policy for the Government is not how to regulate the private sector but how to progressively give up its own monopoly powers, facilitate the entry of the private sector, and therefore promote economic development. EXTENT OF MONOPOLY POWER IN THE PRC Although there are no publicly available data on the concentration ratios of industries in the PRC, most industries and enterprises are operating in a fairly competitive market after 20 years of economic reforms that have promoted the private sector. Monopoly and market power are therefore mainly the privilege of large-scale SOEs and the infrastructure sector because of their important positions in the national economy, such as in banking and insurance, managed funds, telecommunications, electricity, and, to a lesser extent, automobiles and the airline industry. For these protected industries, monopoly powers are further enhanced by the decentralized public administration introduced in 1994. Therefore, competition policy (or the lack of it) in the PRC mainly relates to state monopolies and local protectionism. This is especially true in the Western Region. Twenty years down the track, there will be many large private sector enterprises. The Government is promoting the formation of large enterprises via merger and acquisition, hoping that they can compete with multinational enterprises now that the PRC is a member of the WTO. Therefore, competition policy should extend naturally to include unfair business practices that lessen market competition. INTERNATIONAL PRACTICE International experience shows that competition policy aims at promoting competition by limiting

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market power and outlawing business practices that lead to large enterprises attaining a dominant position in the market. Antitrust laws, such as the Sherman Antitrust Act of 1890 in the US, the Restrictive Trade Practices Act in the UK, and the Trade Practices Act in Australia, grant legal status to the competition policies of the respective governments, which are normally implemented by legislative bodies. After the 1980s, there was more concern to reduce the market power of State monopolies, following academic studies and the implementation of policies of “deregulation,” “privatization,” and “access regimes.” In many countries with federal constitutions (such as the US, Canada, Australia, India, Germany, and Brazil) a major issue has been eliminating regional barriers to free trade. REGULATORY FRAMEWORK As yet, the PRC does not have a complete set of laws or decrees necessary to support competition policy. Instead, the country has proceeded through administrative measures and by negotiation. In many cases, a negotiated compromise was the only feasible outcome. Such compromise sometimes creates a minimal reaction and is often boycotted by concerned parties whose interests may be adversely affected. Therefore, the PRC faces the challenge of implementing meaningful reforms that would establish a coherent competition regime. Although there is no equivalent competition law or antitrust law in the PRC, there is certainly much academic interest and plenty of government interaction. This follows a reform model one could call “crossing the river by holding stones,” a sort of “acting after trials” strategy. For example, in relation to the legislative process, although private enterprise was allowed in the early 1980s, only in 1999 was an item protecting the private ownership of enterprises added to the Constitution. The PRC does have two regulations that contain some elements of a standard competition policy.

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The Anti–Unfair Competition Law of 1993 outlawed business conduct regarded as unfair competition, such as misrepresentation, imitation of trademarks, blocking of access for nonlocal companies, bribery, or stealing of business secrets. The Anti–Unfair Competition Law is more like a consumer protection regulation than a standard competition law. Notable omissions include sections dealing with monopoly and monopolization, price fixing and other predatory pricing strategies, merger and acquisition, and exclusive dealings and territory. More importantly, the law mainly targets the private sector, rather than problems of monopolistic conduct by administrative departments and local governments. The Telecommunication Industry law was passed on 25 September 2000 to regulate the operation of the information and communication technology (ICT) industry. The bylaw gave exclusive power to the Ministry of Information Industry to administer and regulate the whole information industry.The Ministry became a neutral regulator by taking over the initially confusing regulatory functions of the Ministry of Post and Telecommunication, the Ministry of Electrical Power, and the National Information Industry Steering Commission. This is the first and so far the only law in the PRC to set up a framework for the division of responsibility between the state regulatory body, the State Government, and possible private operators. The law unbundles the ICT industry into (i) basic infrastructure for infrastructure and communication services, and (ii) value-added information and communication services. While the State retains its monopoly power in the basic infrastructure for information and communication services with a legal minimum share of 51 percent, the private sector has rather unprecedented freedom to enter into the value-added information and communication services business. Some provisions of the law are very similar to those that underpin regulatory regimes in most western countries, such as:

• The dominant providers of information and communication services cannot set up barriers to keep new firms from entering the market. The State retains the power to tear down any such barriers. • The State could either allocate for a fee or auction among bidders ICT resources such as radio spectrum, satellite orbit, or domain names. • The State retains the right to set the standards in the nationwide telecommunication network. SHORTCOMINGS OF PRESENT ARRANGEMENTS Senior government officials readily admit that the present laws and regulations on competition are inadequate. It is fair to say that the PRC lacks a competition policy that would reduce the monopoly power of governments. As noted by two journalists of the Southern Weekend:2 Monopoly has become the major obstacle for the development of the economy. If we could break up monopoly, abolish industrial entry approval, the GDP could increase by 30 percent in the next couple of years. However, the breakup of the monopoly will not only touch the administrative system, but also the interest groups associated with the current monopoly. Asking the government to break up its own monopoly is like asking a person to cut off his own arm. It is too difficult.

The PRC’s accession to the WTO will call for the further opening up of private investment and trade. In most sectors, restrictions on private sector entry run against the spirit of the rule of law, since they are typically based on irrelevant distinctions. It is rarely the case that the form of ownership should be part of the ascertainable qualifications to perform specific economic activities. Therefore, all sectors in which form of ownership in the above sense is an irrelevant distinction should be open to private investors. Furthermore, it is a matter of urgency that the treatment of market access across localities be unified, especially since this would be required for WTO membership. Adjustment programs in various sectors should also be examined for their impact on

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private sector entry. More active involvement from private enterprises should be encouraged, for example, through mergers and acquisitions. The Anti–Unfair Competition Law of 1993 requires stricter enforcement of laws and regulations. The PRC is bound under WTO agreements to give “national treatment” to foreign institutions in a number of sectors. Establishing national treatment in such sectors should therefore be a priority. In this context, preferential policies toward SOEs and foreign investments should be gradually phased out and a policy of national treatments adopted to enable domestic private enterprises to compete with SOEs and foreign firms on an equal footing. Foreign trading rights should be extended to all qualified private enterprises to allow them to participate directly and more widely in the PRC’s foreign trade. ENFORCEMENT OF LAWS AND REGULATIONS PRC government experts have pointed out that good laws cannot produce good results by themselves; effective judicial and administrative systems as well as public understanding and confidence are also necessary. Law enforcement is neither strict nor just, legal efficiency is low, and responsibility is unclear, giving rise to frequent complaints. Governments at all levels at and above county level are responsible for enforcing competition law, yet these local governments themselves often engage in monopolistic conduct. An independent judicial system is therefore vital.

Obstacles to competition DIVISION OF POWERS BETWEEN LEVELS OF GOVERNMENT Uncompleted administrative decentralization could be the major obstacle to competition.The PRC inherited a public administration system with powers well beyond the scope of providing public goods. Importantly, the previous third round and the current fourth round of public administration decentralization have mainly concentrated on redistributing administrative duties

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from the Central Government to local governments rather than abolishing those duties.This “stuck-in-themiddle” system has created a complex scenario.The Central Government has lost control over issues that need nationwide cooperation; at the same time some local governments are abusing power to the point of restricting the entry of products into other provinces and setting up barriers to the entry of products into their own jurisdictions. LOCAL GOVERNMENT PRACTICE In the Western Region, local governments are the major obstacles to competition:3 • Most local governments are still absorbed in the traditional “planning economy” and disallow any market entry without their permission. • They reject any investment from outside their region and any repatriation of profits to other regions or other countries. • Local governments have imposed many “gray taxes and duties” on the private sector, especially on small private companies financed with foreign investment.This has significantly increased the costs of investing in the Western Region to finance their enlarging fiscal deficits.5 • The merger and acquisition of SOEs in the Western Region by investors or companies from outside the region normally encounter intervention from local governments. • Local governments protect local SOEs in which they have a stake against inter- and intraregional competition. VIEWS OF ACADEMICS IN THE PRC Less significantly, there are misconceptions, even among academics in the PRC, about the functions of competition law. These incorrect notions include the following: • Competition law should regulate the business conduct only of the private sector, not of the public sector. • Competition policy will reduce the scale and scope of business.

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• SMEs will not be able to compete with the multinational enterprises following the PRC’s entry into the WTO. • Competition law will hinder the reform of SOEs, because it outlaws the recommended contractual reform of mergers and acquisitions. • The Anti–Unfair Competition Law already exists, and it is equivalent to a competition law.

Subregional issues INTERREGIONAL TRADE A survey conducted by the Institute of Finance of the Chinese Academy of Social Sciences from 1987 to 1991 found a decline in interprovincial trade among six provinces and municipalities. With the exception of Shaanxi, all the other provinces had decreased their dependence on interprovincial trade from 25.1 percent to 22.3 percent. In Shanghai, of the 201,100 million yuan in retail trade and 130,000 million yuan in wholesale trade in 1997, goods sold to other provinces accounted for only 23,000 million yuan, or 17.6 percent. Measured by their similarity in industrial structure, the Central and Western regions have a similarity index of 97.9 percent, the Eastern and Western regions 93.5 percent, and the Central and Eastern regions 93.4 percent.4 This is an alarming indication that, in contrast to the globalization trend in the world, the national market in the PRC is a disintegrating. REGIONAL PROTECTIONISM Regional protectionism, in the form of territorial segmentation and confrontation, has gradually emerged as a major obstacle to national competition in the PRC, probably because of the incomplete decentralization of public administration. Poor regions responded to the negative effects of reform with protectionist behavior.They hoarded local resources and products, and blocked interregional trade, regardless of wastefulness, duplication, inefficiency, or the poor quality of local production by national standards. The local regions saw themselves

as better off with regionalism, thinking that at least they were not losing current interests. To protect their markets, local governments prohibited the importation of products and commodities from other regions or the sale of products from other regions in local markets. In the 1980s and 1990s many wars for the sake of protectionism were reported across the country. There have been trade wars over television sets, refrigerators, air conditioners, fertilizer, steel and iron, and cars. The significant benefits resulting from favorable treatment in the special economic zones and coastal open cities also promoted competition for favorable policies. Local governments competing with one another for outside investments promulgated special policies. Many investment projects were begun simply to take advantage of favorable treatment, regardless of duplication, small scale of operation, low demand, inappropriate location, and thus low efficiency.5 DANGERS OF REGIONAL PROTECTIONISM Because of the PRC’s vast size and internal natural barriers, its poor communications and inadequate transportation, its diverse dialects and identities and disparate traditions, there is segmentation in the country. Closed economic systems impair national economic coherence. Decentralization, administrative as well as economic, has turned out to be divisive and an explosive political issue, reinforced as it has been by latent but regionally significant factors that have emerged more recently in the PRC. Tibet’s and Xinjiang’s independence movements and the “rebellion or separatist riots” in the early and late 1980s and mid-1990s partly reflect these tensions.

Implications for competition policy IMPROVING COMPETITION IN THE NEXT FIVE YEARS Implicit in the Government’s strategy for the Western Region is recognition of the need to break up

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government monopolies.6 The Government should treat the establishment of a well-functioning competition law as the major vehicle for microeconomic reform. It should put in sufficient effort to create an economic environment that will force firms to adopt modern corporate governance structures to become more competitive.This task should be regarded as a short-term policy and finished within the Tenth FYP period. The failure to have such a well-functioning Competition Law in place within the next five years may leave PRC firms at a disadvantage when competing with multinational enterprises once the country attains full membership in the WTO. Specific measures that the Government could consider include the following: • Organizing a capacity building campaign to increase awareness that competition law should be independent of government administration and its legislative power should therefore extend to government administration. • Inviting international donor organizations to support the preparation of a competition law. • Passing a comprehensive competition law that prohibits monopolizing conduct in the private sector and provides for the progressive elimination of government monopoly on market access control. The law should set no barriers ex ante to free market entry but should rather emphasize ex post consumer protection after the entry. • The fourth round of public administration decentralization should change its focus from redistribution to the abolition of administrative powers that should be left to the market. For consistency with the proposed competition law, the reform of public administration should be gradually handed over by the Government (the State Council) to the National People’s Congress. • Establishing a national regulatory body under the National People’s Congress that is independent of the Government (the State Council) and has

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the task of interpreting and overseeing the implementation of the competition law. • Furthering reforming SOEs to sever their links with all levels of government. Mergers and acquisitions should be approved by the proposed regulatory body and managed by the companies involved, not by the central or local governments. • Further simplifying the local taxation system and making duties more accountable and transparent (see Chapter 2 for economic analysis and policy recommendations). • Facilitating the mobility of resources to promote inter- and intraregional competition. IMPROVING COMPETITION IN THE MEDIUM TO LONG TERM In the longer term, in order to achieve a consistent and broad economic development strategy toward 2020, the PRC Government could consider the international practice of introducing overlapping jurisdictions as a way to promote competition and reduce corruption.That is, public officials could be given overlapping domains for these duties that must be managed by the governments. Multiple offices should be established to manage a single duty, like the issuing of construction permits. Even better, private companies should be allowed to bid for the management of a public duty. The experience of the state of Victoria, Australia, has shown clearly the advantages of this private provision of public goods.7

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Notes 1 In the airline industry, for example, the Government introduced a price-fixing policy in 2000. According to the policy, airlines had to stick to a price published by the Bureau of Civil Aviation and could not sell discounted tickets to customers. A one-way economy-class air ticket from Beijing to Shanghai sold for 1,040 yuan. The Bureau of Civil Aviation abolished the price-fixing policy on 8 March 2001. Now customers can buy a one-way economy-class

2 3 4 5

6

air ticket from Beijing to Shanghai for as low as 650 yuan. The Government’s price-fixing policy for automobile sales was reported by the Financial Daily on 23 May 2001 (page 2). In the PRC, automobile production has to be approved by the Government through the restrictive “catalog management system.” Even after approval, manufacturers must seek a separate approval for any change in the type of automobile produced. Car sales are subject to 10% consumption tax. Local governments also impose other types of local tax, such as environment protection tax and city management fees. Taxes and fees come up to about 130% of the purchase price of a car. Southern Weekend, 31 May 2001, p.10. Fieldwork in Gansu, Xinjiang, Sichuan, and Yunnan. April and May 2001. Lizhen Yun (2001). A typical example was the property and airport craze of the early 1990s, which spread through the entire country, but particularly in Guangdong, where more than 20 airports were to be built as each county wanted one. One such airport had only 6,000 passengers a year. Throughout the country the craze left in its wake hundreds of hectares of barren land, construction sites, and incomplete buildings. In regard to the opening up of the initially monopolized domestic markets, the Circular suggested that:

The pilot operations of foreign investment in banks, retail stores, and foreign trade enterprises will be extended to municipalities directly under the central government and the capital cities of provinces and autonomous regions. Foreign banks in the Western Region will be allowed to engage in RMB transactions gradually, and telecommunications, insurance and tourism will be opened to foreign direct investment in accordance with relevant laws and regulations. Foreign investors are allowed to set up such Chinese-foreign joint ventures as accounting and law firms, engineering design companies, railway and highway cargo transport companies, and enterprises engaged in municipal public utilities and in other sectors designated to be opened to foreign investment. Priority is given to the Western Region in carrying out pilot operations in some of the sectors designated to open up to foreign investment.

7 Under the Jeff Kennet government of Victoria, Australia, many local councils’ duties have been privatized. Inspecting and issuing of building permits used to be a duty of local councils. The new arrangement allowed professional architecture consulting firms to apply for the right to inspect and issue building permits. To promote competition, there is at least one designated company in each suburb. The duty is overlapping in the sense that if one household is not happy with the company in the suburb, it can choose any company even outside the suburb. To prevent possible corruption, any other company may report forged building permits to the local council.

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I I I P A R T

Creating employment opportunities

CHAPTER

10

INDUSTRIAL POLICY Industrial structure is the outcome of resource allocation. The adjustment of industrial structure is the process of reallocating resources via entry and exit. There is a need for industry policies to facilitate the evolution of the private sector, especially SMEs.

History of industrial policy The Government has long regarded the optimization of industrial structure as the key to achieving long-term sustainable economic growth and modernization. It considers the industrial structure of the Western Region to be primitive and out-of-date; hence, industrial policy is required for renovating or optimizing the industrial structure. Under the planned economy, the PRC was a master at designing and implementing active industrial policy. The industry bases were relocated from the Eastern Region to the northeast and then to the Central and Western regions. Although they did achieve some objectives, such as selfsufficiency and national security, these industrial policies are widely regarded as failures at optimizing industrial structures. Nevertheless, the Government considers a new round of industrial policy to be necessary to correct the primitive industrial structure that resulted from the previous rounds of industry policy. This does not mean that the PRC was not skillful in implementing a new industrial policy; rather, the optimization objective is not well defined. The PRC’s entry into the WTO will also change the competitive advantages of the Western Region and make the objectives of industrial policy even less well defined. Various economic studies have also cast doubt on the effects of industrial policy.Their common conclusion is that the Government should remove any barriers that hamper the mobility of resources. The so-called optimum industrial structure will emerge after sufficient reallocation of resources. Public industrial policy will have positive effects only if the Government has well-specified advantages in information and coordination and could serve as a guarantor when the market fails to reallocate resources in a timely and efficient manner.

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Industrial structure of the Western Region INDUSTRIAL SECTORS The Western Region is dominated by the primary sector (7 percent higher than the national average) but relatively weak in the secondary and tertiary sectors (5.6 percent and 1.4 percent lower than national average, respectively). Its weakness in the tertiary sector is manifested in two industries in particular (Table 10-1): finance and insurance (3.3 percent below the national average), and real estate trade (1.9 percent below the national average). Local governments in the Western Region fail to take into account local competitive advantages and overemphasize the importance of creating a modern manufacturing industry and high-tech industry. As a result, the industrial structure of the various provinces and autonomous regions is very similar. SIZE AND OWNERSHIP OF ENTERPRISES The Western Region, especially the southwest, has a higher proportion of large firms (0.9 percent higher than the national average), but is lower in specialization and lacks division of labor and cooperation between upstream and downstream firms (Table 10-2). More than 50 percent of the firms are state-owned or state holding enterprises; the proportion of private sector enterprises is significantly lower (6 percent lower than the national average; see Table 10-3). Most SOEs have other social responsibilities such as retirement pensions, allocation of subsidized houses, childcare, and other social benefits. This feature significantly increases the cost of optimizing a firm’s organization structure. OTHER FEATURES OF THE INDUSTRIAL STRUCTURE OF THE WESTERN REGION There are other noteworthy features of the Western Region’s industrial structure:

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Table 10-1 Industrial Composition of GDP in 2000 Tertiary Industry Region PRC Eastern Central Western Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Primary Industry (%)

Secondary Industry (%)

Total (%)

Finance and Insurance (%)

Real Estate (%)

15.3 11.4 19.2 22.3 23.4 17.8 23.6 27.3 22.3 30.9 26.3 20.1 16.8 19.7 14.6 17.3 21.1 25.0

47.1 49.2 46.2 41.5 40.7 41.4 42.4 39.0 43.1 23.2 36.5 42.9 44.1 44.7 43.2 45.2 43.0 39.7

37.6 39.4 34.6 36.2 35.8 40.8 34.0 33.7 34.6 45.9 37.2 36.9 39.1 35.6 42.1 37.5 35.9 35.3

12.4 14.2 10.1 9.1 9.5 4.3 4.3 3.3 3.5 2.1 1.0 8.4 1.8 5.7 6.1 5.8 3.1 1.7

8.6 9.2 8.4 6.7 7.9 8.0 7.7 8.2 10.5 4.0 6.0 4.7 5.5 7.1 3.7 5.5 3.1 3.6

Source: China Statistical Yearbook 2001.

• Quality and variety of products. For lack of expertise and business experience, most firms can only produce low-value-added, low-profitmargin products, and not high-value-added, technology-intensive products.1 • Technology. Most firms use outdated technology and lack the motivation to invest in R&D and use new technology to upgrade the production process.2

Table 10-2 Industrial Enterprises, by Size, 2000 Region Eastern Central Western Southwest Northwest PRC

Large

Medium

Small

Total

4.8 4.8 5.6 5.8 5.2 4.9

7.9 8.9 10.0 10.9 8.6 8.4

87.3 86.3 84.5 83.3 86.3 86.7

100.0 100.0 100.0 100.0 100.0 100.0

Source: China Statistical Yearbook 2001.

Table 10-3 Industrial Enterprises,a by Ownership, 2000 Region Eastern Central Western Southwest Northwest PRC

SOEs

COEs

SHEs

FIEs

HMTs

PSEs

Total

23.1 46.2 54.6 54.2 55.2 32.8

22.2 28.7 19.0 16.3 23.2 23.2

2.4 4.4 4.4 4.9 3.6 3.1

10.2 2.4 2.4 2.8 1.7 7.3

14.6 2.6 2.3 2.6 1.7 10.1

27.5 15.7 17.3 19.1 14.6 23.3

100.0 100.0 100.0 100.0 100.0 100.0

Source: China Statistical Yearbook 2001. Note: SOEs = State-owned enterprises; COEs = collective-owned enterprises; SHEs = shareholding enterprises; FIEs = foreign investment enterprises; HMTs = enterprises funded by entrepreneurs from Hong Kong, China, Macau, and Taipei,China; PSEs = private sector enterprises. a With annual sales of over 5 million yuan.

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• Productivity. Compared with firms in advanced economies, most enterprises, especially SOEs, have surplus labor and therefore low labor productivity (Table 1-13).3 • Environmental impact. The private sector is still dominated by SMEs that often waste natural resources because of inadequate direct controls (such as enforceable property rights of natural resources) or indirect controls (such as resource tax; the tax is currently too low—see Chapter 2).4

Constraints on adjusting the industrial structure There is a consensus among PRC economists and planners that the “optimization of industrial structure” is the key to the survival of industries in the Western Region and that the dominant mechanism for optimizing the structure should be market-oriented resource mobility. The central question is where the proper dividing line between government industrial policy and the market’s “invisible” hand should be. The present industrial structure largely depends on government monopoly or regional protectionism. Entry into the WTO and the further open-door policy projected in the Tenth FYP threaten the survival of most secondary and tertiary industries and pose major challenges to the competitive advantages of primary industry in the Western Region.The challenges are as follows: • Globalization. WTO and globalization will challenge government monopoly and regional protectionism in the Western Region. Firms with no competitive advantages will perish facing competition from the FIEs and firms from the Eastern Region. Most firms in the Western Region are not ready to face the challenge. • New technology. The diffusion of new technology will eliminate the existing comparative advantages enjoyed by firms in the Western Region.Tradables will replace traditional

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nontradables. Redeemable resources will replace exhausted natural resources. • Protection of the ecological system. Awareness of environmental protection has posed another challenge to the resource-wasting production technology that many firms in the Western Region employ. The proposal of this report is to increase resource tax and environment levies, thereby significantly increasing the production cost of firms and providing them with the incentive to innovate and merge so as to attain competitive advantages in the global market. • “New Economy.” In the era of the New Economy, knowledge will become the most important asset. This will significantly influence consumers’ preference and demand for conventional products and services.The initial objective of industry policy to promote industrialization in the Western Region is facing the new challenges. • Regional protectionism. Decentralized public administration promotes regional protectionism (Chapter 9), which hinders the mobility of resources and the adjustment of industry policy. Because of the inherent complexity of industrial policy and the aforementioned uncertainties, any suggestion to “optimize” industrial structure should be subject to scrutiny and open to public criticism.

Role of industrial policy in economic development TYPES OF INDUSTRIAL POLICY In general, studies have identified three approaches to industrial policy, namely: • The active approach, which stimulates economic activity across the board • The passive approach toward correcting market failure in specific sectors • The supportive approach, which lends institutional support to the private sector to provide insurance for optimizing industrial structure

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Table 10-4 Classification of Industrial Policies

Sources of Market Failure

Manifestation in the Western Region

Active industrial policy aimed at promoting a new market Lack of information Lack of information and Coordination failure coordination in some industries: • High-value-added industries • Infrastructure • Education • High-tech industry (including e-commerce) • Tertiary industry

Self-regulated Market Corrections

Possible Industrial Policy

Trial-and-error market experiments

Investment coordination Market coordination Public provision

Manufacturing industry policies that Japan adopted in the 1960s and 1970s and Korea in the 1980s

International Practices

Passive industrial policy aimed at correcting market failure Natural monopoly

Resource industries in gas, electricity, and water Large-scale SOEs Infrastructure construction

Contestable market

Unbundling of industry into competitive components and noncompetitive components, and then regulation of the noncompetitive component

Regulation of utility industries in the UK and Australia in the 1990s

Externality

Environmental protection

Private negotiation in small-scale cases

Pollution tax Regulation

California pollution tax in the 1980s

Supporting industrial policy aimed at supporting evolution of industrial structure in private sector Institutional rigidity preventing the private sector from renovating its industrial structure

Lack of incentives in SOEs Local protectionism and other artificial barriers to entry Lack of bankruptcy laws and regulations

Not applicable

Institutional reforms to remove barriers and increase flexibility for the private sector to upgrade industrial structure

Privatization and deregulation in the 1980s and 1990s in most developed countries, including US, UK, and Australia

Source: Compiled by consultants.

Where externalities, lack of competition, barriers to entry and exit, lack of insurance for experimenting new industrial structures, or other market imperfections drive a wedge between private and social goals, most people accept that the Government may be able to enhance welfare through nationalization, regulation, and institutional strengthening. More controversial is whether it should also try to accelerate market development through more active forms of industrial policy. International experience shows no consensus on the effects of industry policies as well.5 The theoretical justification for active industrial policy rests on the proposition that information and coordination problems can be pervasive, more so in developing economies and regions like the Western Region.The argument essentially centers on the assumption that, in underdeveloped markets with few participants, awareness of the existence of opportunities can be extremely expensive to attain.

The maturing of a network to take advantage of strategic complementarities can also be costly. Public intervention could therefore speed up the establishment of markets by supplying information and taking an active role in coordinating market participants. Table 10-4 summarizes these three types of industry policy and their corresponding market and public solutions. ROLE OF ACTIVE INDUSTRIAL POLICY In the PRC, industrial policy is mainly referred to in terms of active policy. In theory, governments can act as brokers of information and facilitators of mutual learning and collaboration, and thereby play a marketenhancing role in support of industrial development. Whether governments can play this role in practice will depend on their institutional capability. Even aggressive proponents recognize that activism can enhance markets only if four critical background conditions are in place:

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• Governments should have a clear agenda on the objective and duration of policy and the timing for the private sector to take over and governments to exit.This agenda should be announced publicly and subjected to scrutiny by legislative authority. • Companies and officials need to work on the basis of mutual trust. Firms need to be confident not only that additional coordination has merit, but also that the government and the other firms involved will make good on their commitments. The participants also need confidence that arrangements will be flexible enough to adapt to changing circumstances. Ordinarily this will mean a credible government commitment to involve the private sector in implementation. • Initiatives to promote industrial development must be kept honest through competitive market pressures. Competition can come from other domestic firms or from imports, or take place in export markets. Unless one or more of these forms of competition systematically challenges firms, they will have little incentive to use resources efficiently or to innovate. Productivity will not improve, and industrial expansion will not be sustained. • A country’s strategy for industrial development has to reflect its evolving comparative advantage —its relative abundance of natural resources, skilled and unskilled labor, or capital. None of these conditions appear to exist in the PRC. IMPLEMENTING AN ACTIVE INDUSTRIAL POLICY In practice, governments could adopt one of three broadly classified policies: • Investment coordination • Market coordination • Public provision In the first two approaches, the government attempts to enhance market signals and private activity—although the institutional demands of investment coordination are much greater than those

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of market coordination.The third approach involves the government seeking to supersede the market altogether. Investment coordination The classical,“big push” rationale for government activism was that investment in an underdeveloped region posed a huge collective action problem. With markets undeveloped, firms could not perceive the demand for more and better products that the very act of producing them would create. Thus, it was argued, countries could benefit from coordinating such investments, which are mutually beneficial to firms but which they are unlikely to undertake by themselves. Postwar Japan’s development of its steel, coal, machinery, and shipbuilding industries illustrates this rationale for intervention, as well as the stringent institutional prerequisites for success. These institutional prerequisites are as follows: • A domestic private sector capable of efficiently managing complex, large-scale projects • A private sector willing to cooperate with government in pursuit of the shared goal of competitive industrial development • Strong technical capabilities in public agencies for analyzing evolving competitive advantages and market demand, technological innovations, and new opportunities • Sufficient mutual credibility to enable each party to base its investment decisions on the other’s commitments, and to adapt its actions in response to changing circumstances without undermining the overall commitment to collaborate Pursuing this style of investment coordination presupposes levels of public and private institutional capability that are beyond the reach of most developing countries and regions.The Philippine experience of the late 1970s and 1980s shows what can happen when the ambitions of policy do not match institutional reality, and efforts to coordinate investment are pursued where powerful private interests sway government.6

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Market coordination The aim of market coordination is to strengthen the private-to-private networks that flourish in mature market systems. Mature domestic, regional, and international market networks create numerous sources of learning and opportunity for firms in the developing region. Specialized buyers open up new market niches and offer information on product standards, equipment providers transfer technological knowhow, input suppliers help with product and process innovations, and competitors are a rich source of new ideas. Often, clusters of firms, buyers, equipment suppliers, input and service providers, industry associations, design centers, and other specialized cooperative organizations come together in the same geographic region. Public provision Sometimes information and coordination problems are so severe—markets so underdeveloped, and private agents so lacking in resources and experience—that market-enhancing initiatives are unlikely to yield any response. As a way of kick-starting industrial growth, states have been tempted to supplant market judgments with information and judgments generated in the public sector. ROLE OF PASSIVE INDUSTRIAL POLICY The argument favoring passive industry policy is that the free market system fails to achieve acceptable market performance, even under the constraints of a legislative environment set by competition policy (see Chapter 9). In economics,“market failure” is a common phrase to describe this type of situation. The market failure could be due to natural monopoly, externalities, public goods, and imperfect information. The essence of passive industry policy is that it is meant to be discriminatory. Certain industries or groups in the economy are meant to benefit firms with industry assistance. Although it is not widely recognized, it follows that other industries and groups are meant to be disadvantaged.

The difficulties of quantifying the benefits and costs of a passive industry policy lie at the heart of the industrial policy debate. Those who argue for free trade and minimum government involvement stress the general benefits that will flow from a reduction in industry assistance and the particular costs that the distribution of assistance impose on them.Those who receive the benefits of current assistance policies stress the costs to them of reducing industry assistance and the general economic dislocation that may occur if industry assistance is changed quickly. ROLE OF SUPPORTIVE INDUSTRIAL POLICY The rationale for supportive industrial policy is contestable market theory. As long as there are no barriers to entry and sunk cost, the incumbent firms will be forced to charge an average-cost price even if monopoly power is prevailing. The purpose of industry policy, therefore, is not to regulate monopoly, but to facilitate the entry and exit of potential entrants.

International experiences in industrial policy Today, almost all nations implement some kind of industrial policies. Although active industrial policies that include formal, explicit efforts of government (as in Japan and France) to enhance the development of specific industries (such as steel or electronics) are rare, informal and implicit industrial policies are implemented by even the traditionally freeenterprise nations (such as the United States, Australia, and New Zealand). INDUSTRIAL POLICIES OF THE UNITED STATES In the United States, explicit industrial policy has contradicted the dominant free-market ideology that precludes active government intervention in the economy. Policymakers have traditionally been cautious about intervening in the private sector and performing economic planning functions.This

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caution has been reinforced by theoretical inclination toward laissez-faire and the success of free enterprise in the US. With some notable exceptions, like support of the development of a transcontinental railroad in the 19th century, and the nurturing of industries such as airlines and electronics in the 20th century, the US does not have a full-blown industrial policy. Policy has been piecemeal in nature and develops in response to particular problems. Carbaugh7 shows that US industrial policy has not: (i) formulated industry-specific economic policy designed to promote national champions; (ii) nationalized basic industries, such as steel and aircraft; (iii) bailed out financially troubled firms with loan guarantees; (iv) encouraged cartelization of industries; or (v) provided strong governmental support for exports. Rather, the US Government has attempted to provide a favorable climate for business, given the social, environmental, and safety constraints imposed by modern society. Rather than formulating a coordinated industrial policy to affect particular industries, the US Government has generally emphasized macroeconomic policies (such as fiscal and monetary policies) aimed at objectives such as economic stability, growth, and the broad allocation of GDP. For example, in the area of promoting investment, the Reagan administration cut taxes in the 1980s, and the move resulted in expanding output and productivity. A general tax cut is really a macroeconomic policy, because it does not target specific industries. Even in the ICT industry and other knowledge-based sectors of the economy, the consensus is that government officials cannot consistently pick the winners among products and firms and thus encourage labor and capital to move into the industries with the highest growth prospects. This is because the development of commercially successful technology requires knowledge of scientific possibilities, an awareness of market demand for new or improved products, and a good sense of timing. The free market is better at picking winners than politicians and bureaucrats.

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INDUSTRIAL POLICIES OF JAPAN Advocates of active industrial policy often cite Japan as a successful case. They claim that protection from imports, R&D subsidies, and government assistance to specific industries, such as shipbuilding and steel during the 1950s, autos and machine tools during the 1960s, and high-tech industries in the 1970s, fostered the development of Japanese industry.The Ministry of International Trade and Industry is regarded as a successful model for implementing such active industrial policies. However, various texts on industrial economics contain the following observations:8 • Although government subsidies enhanced Japanese competitiveness and industrial development, most of the funds for R&D projects and production facilities came from private firms and commercial banks, and therefore followed the lead of the market. • Only a modest fraction of government subsidies go to emerging industries, as compared with the subsidies granted to other sectors of the economy, such as agriculture, transportation, and the environment.That implies government subsidies mainly targeted political support groups, public goods, and externalities rather than the promotion of industrial development. • Not all Japanese industrial policies have been successful, as seen in the cases of computers, aluminum, and petrochemicals. Industries in which Japan is competitive in world markets, such as shipbuilding and steel, have witnessed prolonged period of excess capacity. • Some of Japan’s biggest success stories, like televisions, stereos, and videocassette recorders, were not the industries most heavily targeted by the Japanese Government. In conclusion, the extent to which industrial policy contributed to Japan’s economic growth after World War II is unclear. Japan has benefited from a high domestic savings rate, an educated and motivated labor force, good labor-management relations, a timely shift of labor from low-productivity sectors

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(such as agriculture) to high-productivity manufacturing, and entrepreneurs willing to take risks.

Competitive advantages in the Western Region PRESENT COMPETITIVE ADVANTAGES IN THE WESTERN REGION A rough calculation of a competitive advantage index (Table 10-5) shows that: • The Western Region as a whole enjoys significant competitive advantage in the primary sector with three autonomous regions having an index value over 2. However, the PRC’s entry into the WTO is likely to lead to challenges to this competitive advantage. The Western Region will lose competitive advantage in the production of rice, cooking oil, sugar, and cotton. • No province or autonomous regions has a competitive advantage in the secondary industry, Tibet having the lowest index value (0.323) and Xinjiang the third lowest value in the PRC. The figure has been declining for 10 years and is likely to decline further. • The Western Region has competitive advantage in the tertiary sector, although not as strong as in the primary industry, with Tibet having the highest index of 2.32. Further analysis of the tertiary sector in Tibet shows that three industries have extremely high output ratios, namely, (i) farming, forestry, animal husbandry, and fishery services; (ii) education, culture and art, radio, film, and television; and (iii) government agencies, Party agencies, and social organizations. These three industries have less growth potential than other industries have, in particular finance and insurance, and social services in which Tibet has a ratio about half the national average. Table 10-6 lists industry products in which the Western Region has competitive advantage.

Table 10-5 Competitive Advantages Index in the Western Region, 1998 Province Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Primary Industry

Secondary Industry

Tertiary Industry

1.36 1.76 1.73 1.51 2.20 2.11

0.79 0.81 0.81 0.79 0.32 0.90

1.28 1.09 1.06 1.22 2.32 0.91

1.31 1.03 1.09 1.23 2.20 1.75

0.89 0.72 0.76 0.71 0.62 0.62

1.09 1.52 1.40 1.46 1.26 1.50

Source: Angang Hu (ed.) (2001). Note: This index is calculated as: industry output in j province/national total output in i industry)/ (GDP in j province/national GDP). J province has competitive advantage if the ratio is higher than 1; competitive disadvantage if the ratio is lower than 1. This index should be used with caution because it may include distortions due to regional protectionism, that is, the output in the local market may be higher than it should be, thanks to protection.

It is evident that the region is highly diversified and most provinces and autonomous regions have advantages in either agriculture-based products or building materials. With the exception of cigarette making, the whole region does not have advantages in highly value-added industries like oil refining, automobile manufacturing, and high-end household appliances. EMERGING COMPETITIVE ADVANTAGES IN THE WESTERN REGION Tourism industry Tourism is regarded as an industry with no diminishing returns. In the last four decades, the tourism income in the world increased from $2,100 million in 1950 to $444,740 million in 1998. It accounted for 10.7 percent of GDP and 10.6 percent of total employment in 1996. The Western Region has many tourism resources. In the World Heritage List published by UNESCO in 2000, the Western Region has four attractions listed in the cultural category and three attractions listed in

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Table 10-6 Competitive Advantages in Industrial Products in the Western Region, 2000

Province

Agriculture-based Products

Building Materials

Energy Products

Raw Materials

Chongqing

Chemical Products

Household Appliances

car parts

Sichuan

gas

Guizhou

cigarettes

Yunnan

cigarettes, sugar

Tibet Shaanxi

Machinery Products

television sets

coal

fertilizer

timber

engineering

sulfuric acid, fertilizer

timber cigarettes,

engineering

refrigerators,

cloth

television sets

Gansu

cooking oil

glass

Qinghai

cooking oil

glass

crude oil, gas

Ningxia

cooking oil

cement

coal, crude oil

Xinjiang

cooking oil, sugar, cloth

Inner Mongolia

cooking oil, sugar

glass, timber

Guangxi

sugar

cement, timber

steel

sulfuric acid, plastic

steel

fertilizer engineering

coal, crude oil coal

washing machines

sulfuric acid, fertilizer fertilizer, plastic

iron, steel car parts

Source: China Statistical Yearbook 2000.

the natural category (Table 10-7). In the Tourism Attraction List published by the Bureau of Tourism, the Western Region has 15 of the PRC’s 54 “excellent tourist cities.” Entry into the WTO will further enhance this emerging competitive advantage, since a globally integrated market will spread information and facilitate tourist access to these attractions in the remote areas. Tourism income in the Western Region, however, lags behind that in the Eastern Region and the world average; six provinces and autonomous regions have tourism income/GDP ratios below 5 percent. Five provinces and autonomous regions have a tourism income/GDP ratio between 5 percent and 10 percent, still below the world average. Only Tibet has a tourism income/GDP ratio above the world average (Table 10-8). Weaknesses of the tourism industry The main reason that the Western Region does not fully utilize its tourism resources could be its lack

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of understanding of the nature of the tourist industry and its rigidity in implementing marketing campaigns to attract high-quality tourists. The specific handicaps are as follows: • The tourist market in the Western Region is still controlled by SOEs and professional bodies, such as local bureaus of tourism. They have little knowledge of the market. As a result, there are frequent reports of abuse of tourist resources. • Because of the lack of motivation to protect tourist resources to maximize long-term benefits, most local governments are only interested in having the highest returns in a short period of time. This has significantly degraded the quality of attractions in the Western Region. • The Western Region relies heavily on income from tickets sold to tourists, but ignores tourism’s multiplier effect on other industries, such as hotels and restaurants, transportation, arts and

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Table 10-7 PRC Attractions Included in the World Heritage List Name of Heritage Site World heritage for cultural values Great Wall Imperial Palace of the Ming and Qing Dynasties Mogao Caves Mausoleum of the First Qin Emperor Peking Man Site at Zhoukoudian Mountain Resort and its Outlying Temples, Chengde Potala Palace and the Jokhang Temple Monastery, Lhasa Temple and Cemetery of Confucius and the Kong Family Mansion in Qufu Ancient Building Complex in the Wudang Mountains Lushan National Park Ancient City of Ping Yao Old Town of Lijiang Classical Gardens of Suzhou Summer Palace, an Imperial Garden in Beijing Temple of Heaven, an Imperial Sacrificial Altar in Beijing Dazu Rock Carvings Mount Qincheng and the Dujiangyan Irrigation System Ancient Villages in Southern Anhui-Xidi and Hongcun Longmen Grottoes Imperial Tombs of the Ming and Qing Dynasties World heritage for natural values Huanglong Scenic and Historic Interest Area Jiuzhaigou Valley Scenic and Historic Interest Area Wulingyuan Scenic and Historic Interest Area Mount Emei Scenic Area, including Leshan Giant Buddha Scenic Area World heritage for mixed values Mount Taishan Mount Huangshan Mount Wuyi

Year Listed

Location

1987 1987 1987 1987 1987 1994 1994, 2000 1994 1994 1996 1997 1997 1997, 2000 1998 1998 1999 2000 2000 2000 2000

Beijing Beijing Gansu Shaanxi Beijing Heibei Tibet Shangdong Hubei Jiangxi Zhejiang Yunnan Jiangsu Beijing Beijing Chongqing Sichuan Anhui Henan Hubei

1992 1992 1992 1996

Sichuan Sichuan Hunan Sichuan

1987 1990 1999

Shandong Anhui Fujian

Western Region

X X

X

X

X X

X X X

Source: UNESCO website: http://www.unesco.org/.

Table 10-8 Tourism in the Western Region, 1998 Province Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Guangxi

Number of Tourists

Tourism Income (million yuan)

Tourism Income/GDP (%)

Status of Tourisma

21,967,700 44,474,000 18,951,300 28,690,900 386,600 26,040,500 5,970,000 1,616,600 1,905,100 6,026,600 6,168,900 35,053,300

9,017 12,600 3,912 13,690 1,673 9,450 1,746 180 482 683 2,004 14,000

6.3 3.5 4.7 7.6 18.4 6.7 2.0 0.8 2.1 6.0 1.7 6.4

Average Poor Poor Average Good Average Poor Poor Poor Average Poor Average

Source: China Tourism Statistics Yearbook 1999. a Good = tourism income/GDP >10%; average = tourism income/GDP between 5% and 10%; poor = tourism income/GDP < 5%.

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craft exhibitions, and entertainment. International experience shows the income from the supply of supporting facilities is much higher than ticket sales. • The Western Region generally lacks the marketing skills needed to create a dynamic market for high-quality tourists. With the exception of Xi’an, the tourism market in the Western Region is still primitive: information availability in the international market is poor and unreliable, the quality of supporting facilities is well below standard, and tour guides do not have sufficient knowledge to attract interest from tourists. In addition, most sites fail to create a differentiated market for different tourists. The products are similar and normally at the low end of the market. Encouraging more private sector participation may be the only solution to all these problems. Owing to the local monopoly nature of tourist sites, a regulation regime must be in place to address social interests. Measures to strengthen the tourism industry Measures that would strengthen the tourism industry are as follows: • Local government should abandon its role in the operation of tourist sites, and focus instead on regulation and coordination, which is badly needed in the tourist market in the Western Region. • The market should be opened up to let professional tourism companies, including companies from overseas, take over the responsibilities of designing and selling tourist products. • An integrated or at least coordinated vertical value chain should be encouraged to look after all other tourism-related supporting industries. Vertical merger or alliance should be allowed. To prevent monopoly, the local government should allow the entry of multiple vertically integrated companies. Alternatively, an open and

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transparent tendering process should be arranged to select a company to take charge of the tourist market. • In designing the bidding procedure, due consideration should be given to long-term benefits to the regions. Most likely, the local governments should set multiple objectives including income to local governments, protection of tourist attractions, and other social interests. • International agencies could assist local governments in designing a well-functioning tendering procedure. CHINESE TRADITIONAL MEDICINE Another industry in which the Western Region does have competitive advantage is in Chinese traditional medicine. It has been widely anticipated that the demand for Chinese traditional medicine will increase with more scientific research. Scientific investigation into the curative effects of Chinese medicaments at the gene level will reveal new insights into disease pathology and possible mechanisms for treatment. (See Chapter 8 for technology policy to promote R&D on Chinese traditional medicine.) The “preventive” nature of Chinese traditional medicine with no side effects will also contribute to the increase in demand as society increasingly ages. Almost every minority group in the PRC has its own methods for the practice and use of traditional medicine.Tibetan, Mongolian, and Miao minorities have their own independent diagnostic and curative systems; each system has different effects, ranging from mysterious to exceptionally good. There are in total 132 minority medicine hospitals in the PRC: 57 Tibetan medicine hospitals, 39 Mongolian medicine hospitals, 30 Wei medicine hospitals, and 6 others. About 99 percent of the education and research and development facilities for minority medicine are located in the Western Region. There are 200 companies specializing in producing medicines (40 for Tibetan, 5 for Mongolian,

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120 for Miao, and 4 for Wei medicine). These companies are producing 600 types of medicaments. Among them, 100 types are commonly used in the PRC, with 47 types listed in the National Basic Medicine List.9 The Western Region is also rich in herb products, the raw materials for making Chinese medicaments (see Chapter 8 for a list). Among 11 major herb exchange markets, three are in the Western Region. They are Rongxi (Gansu), Cheng du Lianhuaci (Sichuan), and Xi’an (Shaanxi). Another four exchange markets also sell herb products of the Western Region: Shaodong (Hunan), Yueyang (Hunan), Zhangsu (Jiangxi), and Haozhou (Anhui). In 2000, the medicine output of Guizhou province alone amounted to 2,800 million yuan. This accounted for 10.5 percent of primary product output and about 3 percent of Guizhou’s GDP. Because of the lack of R&D and standardization, the PRC lags behind Japan and Korea in the export of Chinese medicine. However, it has been estimated that after the PRC’s entry into the WTO, total exports of Chinese traditional medicine could increase by 30 percent.10 Some Chinese medicine companies are already pursuing approval from the US Food and Drug Administration. That represents a small step in the right direction.

Implications for industrial policies The analysis in this chapter suggests that the Government does not need a full-blown industrial policy to “optimize” industrial structure in the Western Region. Instead, it should direct its efforts toward two priorities: • First, facilitating the entry and exit of private enterprises, especially private SMEs • Second, adopting a light-touch industrial assistance policy to support carefully selected industries

These policy reforms are suitable for the Tenth FYP period. REMOVING BARRIERS AND PROMOTING PRIVATE SECTOR PARTICIPATION Establishment of new enterprises In the context of Western Region development, the major barriers to entry come from regional protectionism (see Chapter 9). This is especially true in industries with natural monopoly characteristics and political importance. The legal infrastructure for commercial enterprises has room for several improvements: • The minimum registered capital requirements for forming a limited liability company should be significantly reduced (or eliminated, as in many Western countries). To the extent that high minimum capital requirements were felt to be necessary on account of the high perceived risk of making loans to businesses, this might be addressed by improving disclosure requirements. • The scope for official interference and substantive review in the registration of private enterprises must be significantly reduced. The new laws for private enterprises (for companies, partnerships, and individually owned enterprises)11 contain some provisions—such as the need for an excessively specific definition of business scope and for approval of changes in business scope, site,“necessary conditions for production,” and a “lawful enterprise name”— that open the possibility for bureaucratic interference in the registration and establishment of private enterprises. These provisions need to be significantly relaxed, in line with international practice, so as to reduce or completely eliminate the scope of bureaucratic discretion and possible corruption. • Removing unnecessary entry restrictions for private enterprises, as discussed above, would probably eliminate the need for requiring a narrow definition of business scope.

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• The five-year period of unlimited liability for wholly individually owned enterprises following liquidation should be eliminated.This period seems excessive, and such unresolved potential liabilities may discourage entrepreneurial activity. Forcing entrepreneurs to accept personal liability until their business can reach the minimum size required to form a limited liability company would appear to discourage startup activity or place entrepreneurs at unreasonable high risk of losing their personal property and that of their families to creditors. • Furthermore, it would be difficult to enforce this provision in practice. Up until now, the Western Region has not had a fully developed industry that investigates another person’s personal property. Anonymous banking, among other things, made such investigations impractical in the past. In recent years there have been a number of cases in which creditors sought to enforce court judgments against individually owned enterprises. Individual investors that looked liquid previously suddenly seemed unable to pay off debts. Bankruptcy There is also a need to unify bankruptcy law and to restore the normal priority of creditors’ claims. Bankruptcy regulations are one example of the “one country, two systems” principle in the area of law. The Enterprise Bankruptcy Law of 1986 applies to SOEs while the Civil Procedure Law of 1991 contains bankruptcy provisions that apply to “an enterprise with legal status” (see Chapter 4). The line between the two laws is not clear, since many SOEs are also persons. The definition of an SOE is not a trivial question, since stakes in many SOEs have been sold to nonstate enterprises and the public at large. Furthermore, the two laws differ substantially in areas that affect creditors’ rights. Under the Bankruptcy Law, for example, bankruptcy is not available if an enterprise is “public” or has “important bearing on the national economy and the people’s livelihood.” In those cases, relevant government departments “will

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provide economic assistance or take other measures to assist in the discharge of liabilities.”The law also gives the bankrupt’s department in charge two years to fashion reorganization and thereby delay bankruptcy proceedings.The definition of an SOE also determines the applicability of additional regulations (Supplementary Notice on Issues Concerning the Trial Implementation in Several Cities of State-Owned Enterprise Bankruptcy and Merger and Reemployment of Workers, March 1997) giving workers first priority in the distribution of recovery proceeds.This dual-track approach to bankruptcy could undermine creditors’ rights. Promotion of SMEs in the Western Region Broad consensus is emerging on the central role played by SMEs in growth, competitiveness, innovation, and employment creation. In the European Union, more than 99 percent of the 18 million enterprises in the nonagricultural market sectors are SMEs. They employ 66 percent of the work force and generate 55 percent of total turnover.12 In the construction industry, 88.8 percent of the labor force works in SMEs. In other serviceoriented industries, such as, trade, business activities, and transport and communication, the ratios are all around 50 percent. In World Bank (2001b), SMEs are a key vehicle for mobility in each of three areas that are linked to poverty reduction: • Empowerment. SMEs allow many poor people to gain control over their economic future. • Security. SMEs are the principal safety net for the bulk of the population in times of economic downturn when employment opportunities shrink. • Opportunity. In most poor counties, SMEs represent virtually the only employment opportunity for millions of low-income people. In order to create an environment conductive to the growth and development of SMEs, the Government should follow ILO recommendations, namely:13

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• Adopt and pursue appropriate fiscal, monetary, and employment policies to promote an optimal economic environment (as regards, in particular, inflation, interest and exchange rates, taxation, employment, and social stability). • Establish and apply appropriate legal provisions with regard to property rights, including intellectual property, location of establishments, enforcement of contracts, fair competition, as well as adequate social and labor legislation. • Improve the attractiveness of entrepreneurship by avoiding policy and legal measures that disadvantage those who wish to become entrepreneurs. These measures should be complemented with policies for the promotion of efficient and competitive SMEs able to provide productive and sustainable employment under adequate social conditions.The Government should: • Create conditions in which all enterprises, whatever their size or type, are afforded: – Equal opportunity in relation to access to credit, foreign exchange, and imported inputs – Fair taxation – Nondiscriminatory application of labor legislation, in order to raise the quality of employment in SMEs • Remove constraints on the development and growth of SMEs, arising in particular from: – Difficulties of access to credit and capital markets, a problem that can be addressed in the context of the guarantee funds provided for the 2002 Law in Promoting Small and Medium Enterprises – Low levels of technical and managerial skills – Inadequate information – Low levels of productivity and quality – Insufficient access to new technologies – Difficulty of access to new technologies – Lack of transport and communications infrastructure – Inappropriate, inadequate, or overly burdensome registration, licensing, reporting,

and other administrative requirements (including those that act as disincentives to the hiring of personnel), without prejudicing the level of effectiveness of inspections of conditions of employment or the system of supervision of working conditions and related issues GENERAL GUIDELINES ON IMPLEMENTING A LIGHT-TOUCH INDUSTRIAL POLICY International experience highlights why the debate over industrial policy has been unusually heated. Industrial policy is combustible. Economic theory and evidence suggest that the possibility of successful, market-enhancing activism cannot be dismissed out of hand. But institutional theory and evidence suggest that, implemented badly, activist industrial policy can be a recipe for disaster. There is a need to draw a sharp distinction between initiatives that require only a light touch from government and initiatives that require high-intensity government support. High-intensity initiatives should be approached cautiously, or not at all, unless countries have unusually strong institutional capability—a high level of administrative capability, commitment mechanisms that credibly restrain arbitrary government action, the ability to respond flexibly to surprises, a competitive business environment, and a track record of public-private partnership. In contrast, light-touch initiatives offer more flexibility.The essential institutional attribute for success is an unambiguous commitment by government to public-private partnership. Once this commitment exits, and when the business environment is reasonably supportive of private sector development, the benefits of experimentation with light-touch initiatives can be large, and the cost of failure low. Principles of light-touch industrial policy formulation The current institutional capability in the PRC cannot guarantee the success of a high-intensity

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industry policy.The light-touch initiatives may be the most suitable approach.The following principles are the most appropriate for the implementation of industry policy in the PRC: • Further reform of SOEs to diversify ownership and introduce modern corporate governance. Well-functioning firms and professional managers should have more information and incentives than the Government in determining the existence and magnitude of, and utilizing, regional competitive advantages, such as the well-known competitive advantages of rich natural resources, a cheap labor force, and abundant energy resources in the Western Region. The firms should be leading players to achieve the five objectives set by Premier Zhu Rongji in his Premier’s Report on the Outline of the Tenth Five-Year Plan for National Economic and Social Development.14 • The Government could use some light-touch initiatives to facilitate the mobility of resources and the formation of markets, such as the establishment of a market for the exchange of new and high technology (Chapter 9), the provision of guiding information to the private sector on the competitive advantages in some regions, demonstration of the economic benefits of using e-commerce, and the development of the tourism industry. • The Government might, within its capability, initiate investment in the construction of infrastructure such as, roads and railways, airports, cross-border ports, and water, electricity, gas, and telecommunication systems. Subsequent publicprivate partnerships should be arranged well in advance, and the principles and managerial rules should be transparent and open to the public. Several contractual arrangements should be compared and their relative merits should be identified and subject to public scrutiny (see Chapter 1 for a discussion of public-private partnerships).

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• There should be a regulatory body, like the US Department of Justice and the Australian Consumer and Competition Commission, independent of the administration, to identify and prosecute any sources of market failure. Possible examples include pollution, government monopoly and regional protectionism, and any institutional barriers that hinder the mobility of resources (see Chapter 9 for a discussion of competition policy). • An “access regime” should be explicitly established as a guideline to facilitate the private sector’s entry into industries monopolized by the Government and probably the FIEs after the PRC becomes a member of the WTO. • A well-defined legislative framework should be set up to facilitate the mobility of resources and to protect property rights.The framework could include (i) patent law and copyright law to facilitate the exchange of innovations; and (ii) bankruptcy law to facilitate the exit of firms from the market. • Attention should also be given to protecting the interests of people who happen to be the victims of structural adjustment.The Government should consider seeking assistance from international lending agencies on the establishment of a social security system. • The Government should also reform its VAT to allow the deduction of fixed asset inputs so as to encourage the upgrading of equipment and the use of new technology (see Chapter 2 for a discussion of consumption-based VAT). • A flexible financial system is essential to guarantee the private sector receives financial support for structural adjustment (see Chapter 3 for a discussion of private sector financing). • Human resources development is another essential component in which the Government could contribute to enhance institutional capabilities and facilitate the implementation of industry policy.

Notes 1 These low-value-added products in the PRC are in surplus. For example, the manufacturers of 29-inch TV sets can only make a profit of 10 yuan on each set. For any size below that, profits are negative. About 80 percent of equipment operates below its designed capacity. Meanwhile, since 1995 the PRC has imported $140,000 million worth of manufactured goods each year to meet the demand for technology-intensive goods. (See Financial Review, 8 June 2001; and Peiyuan Zhen [2001]). 2 R&D expense in the large and medium-sized enterprises account for 1.28 percent of sales volume, much lower than the 5–10 percent spent by Fortune 500 enterprises on average. (See Peiyuan Zhen [2001]). 3 Surplus labor accounts for 30–40 percent in the PRC. In 1998, labor productivity in the steel industry in the PRC was only 29 percent of the world average. In the manufacturing sector, each laborer contributed $2,200, as compared with $97,300 in the US and $45,330 in the UK. 4 There are many small-scale mining companies in the Western Region. Simple equipment or no equipment at all is used to extract coal, crude oil, and other minerals, manufacture low-quality products, and sell these on the local market. These mining sites are full of dust and workers are not properly protected.

5 6 7 8 9 10 11

Ergas (1986); Andretsch (1993). See World Bank (1997). Carbaugh (2000). Carbaugh (2000). China Business (in Chinese), 26 June 2001. China Business (in Chinese), 28 June 2001. Partnership Enterprises Law of 1997; Company Law of 1999; and Wholly Individually Owned Enterprises Law of 1999. 12 Commission of the European Communities (2001). 13 The following section is a summary of the recommendations by International Labor Organization. (See International Labor Organization [1998].) 14 Premier Zhu Rongji, at the Fourth Session of the Ninth National People’s Congress on 5 March 2001, set out five objectives for optimizing the industrial structure: (i) enhancing traditional industries with high, new, and advanced technologies; (ii) continuing to close down plants and mines that produce shoddy goods, waste resources, cause serious pollution, or operate under unsafe conditions; (iii) developing new and high-tech industries, and using information technology to stimulate industrialization; (iv) intensifying the construction of water conservation, transportation, energy, and other infrastructure facilities and attaching great importance to strategic issues concerning resources; and (v) accelerating the development of the service industries.

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CHAPTER

11

HUMAN RESOURCES POLICIES In the Western Region, policymakers have concerned themselves with complex issues relating to the size of the population and labor force, education, training, labor mobility, earnings, and unemployment. This chapter explores the interrelationships between these policy areas in the contexts of the gradual progression toward a market economy and the overriding need to provide more jobs.

Size, skills, and knowledge of the labor force Apart from the impact of labor migration, the age structure of the present population will largely determine the size of the Western Region’s labor force over the next 20 years. Similarly, the skill and knowledge levels are to some extent already fixed by the education level of those already in the workforce. Table 11-1 Population, by Age Group, 1999

Population Group Cities Age 0–14 Age 15–64 Age 65 and over Towns Age 0–14 Age 15–64 Age 65 and over Counties Age 0–14 Age 15–64 Age 65 and over

Northwest (%)

Southwest (%)

Central (%)

Eastern (%)

PRC (%)

18.5 73.9 7.6 100.0

19.9 70.4 9.7 100.0

19.2 73.2 7.6 100.0

17.0 73.4 9.6 100.0

18.3 72.9 8.8 100.0

23.7 70.2 6.0 100.0

21.1 68.5 10.5 100.0

20.8 72.3 7.0 100.0

20.5 71.7 7.8 100.0

21.0 71.1 7.9 100.0

28.6 66.0 5.4 100.0

27.8 65.4 6.7 100.0

26.6 66.6 6.8 100.0

24.5 67.2 8.3 100.0

26.3 66.5 7.2 100.0

GROWTH OF THE LABOR FORCE Several studies have shown that the PRC’s labor force is expanding faster than the population and will continue to do so until 2020.1 In cities, towns, and counties alike, and in all regions, the population in the 15–64 years age bracket is well above the world average of 63 percent. The Western Region has a higher proportion of its population in the 0–14 age group, and, in the absence of net outward migration, its labor force will grow faster than that of the rest of the PRC (Table 11-1). Figure 11-1 shows that while the PRC’s age structure will lead to a rapid expansion of the labor force (entrants exceeding departures), that of Xinjiang is going to expand at an even faster rate. In 1999, the age 15–64 population of the PRC was 829 million, of which 234 million was in the Western Region; by 2020 these figures are likely to increase by about 120 million in the case of the PRC and 40 million in the case of the Western Region. In other words, without net outward migration the labor force of the Western Region could be nearly 20 percent higher by 2020. An age structure with very low proportions of dependent children and elderly is conducive to rapid economic growth.2 Even if there is very substantial net migration to the Eastern Region over

Source: Calculated from the China Population Statistical Yearbook 2000.

Figure 11-1 Age Structure of Xinijang’s Population and the PRC’s population, 1999 % of total population 12 PRC

Xinjiang

10 8 6 4 2 0 0-4

5-9

10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+ Age group

Source: Calculated by consultants from Xinjiang Statistical Yearbook 2000.

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Table 11-2 Net Population Gains Through Migration, 1990–1995 Region

the next 20 years, the age structure of the residual population in the Western Region will still have a low ratio of children and the old to people of working age. LABOR FORCE MOBILITY Labor mobility in the PRC at present consists of three components: • Migration • Temporary or seasonal change of place of work—the “floating” population • Change of jobs without relocation With economic reform, all three forms of mobility are on the increase. Migration With the decline in the birthrate and economic reforms (which greatly facilitate labor mobility), migration has become a much more important influence on the population distribution. The main migration flows have been from the counties to the cities, and from the Western and Central regions to the rapidly developing Eastern Region. These flows are very evident from the results of the Population Sample Survey of 1995 (Table 11-2 and Figure 11-2). Xinjiang was a significant exception to this trend; it had a net gain of 416,800 people between 1990 and 1995; moreover, the counties registered most of the net gain (Table 11-3). As the productivity of agricultural labor (Chapter 4) increases, there will be a large surplus rural labor force seeking to enter urban labor markets. At the same time, with the increasing demand for labor in advanced economic regions, higher earnings will attract labor from the Western Region.The remaining labor force will transfer from rural to urban, from less developed areas to developed areas. Economic and social reforms are increasing population mobility (as in many other countries). Surveys indicate that the coastal provinces are the main destination of migrant labor from poverty counties in the Western Region (Table 11-4).

Eastern Central Western Southwest Sichuana Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia PRC

Cities

Towns

Counties

Total

6,710,700 1,741,300

157,100 (255,700)

(2,731,200) (4,047,900)

4,136,600 (2,562,300)

224,500 (3,063,700) 87,400 (1,633,800) 46,300 (425,100) 11,700 (210,500) 10,000 (13,200) 69,100 (781,100) 96,100 (523,300) 45,300 (325,100) 34,700 (253,500) (7,600) (11,600) 11,900 (36,200) 38,000 262,100 (26,200) (159,000) 222,000 (10,366,100)

(1,773,300) (1,062,000) (249,700) (35,100) 7,500 (434,000) 199,300 (101,200) (111,400) (25,100) (5,600) 415,800 26,800 300

1,065,900 484,400 129,100 163,700 10,700 278,000 626,500 178,000 107,400 (5,900) 18,700 115,700 212,000 10,144,400

Source: Calculated from tables in the China Population Statistics Yearbook 2000. a Includes Chongqing.

Figure 11-2 Grape Cuttings Raised for Local Planting, Awati County (Xinjiang)

Villagers have been recruited from distant Sichuan province as labor to establish a vineyard.—Photo Dr. W. Forrest

Table 11-3 Net Migration Flows to Xinjiang, 1990–1995 Region Eastern Central Western Southwest Northwest PRC

To Cities

To Towns

To Counties

Total Net Gain

2,200 1,400

1,100 1,600

20,000 141,200

23,300 144,200

3,700 12,600 19,900

1,000 5,100 8,800

105,500 121,400 388,100

110,200 139,100 416,800

Source: Calculated from tables in the China Population Statistical Yearbook 2000. Note: At the time of writing, results from the 2000 Census were insufficient to provide a more up-todate picture. However, the preliminary results indicate very high net migration gains by the Eastern Region, and very high urban growth rates there.

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Table 11-4 Place of Work Outside Poverty County, 1999 Southwest Region

Sichuan (%)

Guizhou (%)

Within county Other county within province Other inland province Other coastal province Other area PRC

32.3 12.4 11.8 34.8 8.7 100.0

18.9 20.3 16.2 41.9 2.7 100.0

Yunnan (%) 20.5 59.0 17.9 2.6 100.0

Northwest Guangxi (%)

Ningxia (%)

23.1 19.4 2.5 51.3 3.8 100.0

38.9 44.4 5.6 11.1 100.0

Shaanxi (%)

Gansu (%)

29.9 15.6 9.1 42.9 2.6 100.0

14.0 28.7 41.1 10.9 5.4 100.0

Inner Mongolia (%) 29.6 29.6 33.3 3.7 3.7 100.0

Source: National Bureau of Statistics and Leading Group for Poverty Reduction (2000).

Floating population The term “floating population” refers to people living outside their places of household registration. The floating population of the PRC was about 30 million in 1982, but researchers put its 1998 size at 100 million, of which nearly 80 percent was officially resident in rural areas.3 There are reasons for believing that the proportion of the 100 million that is from the Western Region is disproportionately high. • Surveys of poverty counties in the Western Region show that remittances account for about 5 percent of household incomes, that remittances sent by workers are about a third of earnings, and that many floaters from the poverty counties work in the Eastern Region (these points together indicating that the numbers must be large). • Although the Western Region accounts for only 28 percent of the PRC’s labor force, it accounts for a larger proportion of those who are most typically floaters, i.e., young workers, workers in agriculture or with no local alternative to agriculture. • Higher earnings and better economic opportunities provide strong incentives for labor to move from the Western Region to the Eastern Region. Mobility The PRC’s labor market is segmented largely according to enterprise ownership types. However,

economic reforms have greatly reduced the balkanization of labor markets.4 Turnover rates have increased, but are much lower in SOEs than in urban COEs, and these are in turn lower again than in other ownership categories. In the SOE sector, a majority of the turnover is in fact transfers within the sector including relocations.The increasing mobility of labor is a positive step toward a more efficient labor market, where the wage mechanism allocates labor resources to their most productive use. However, many rigidities and regulations hinder the effectiveness of the labor market. In many cases, people got jobs because they were children of employees or had connections with people able to influence appointments, not because they were the best candidates. LITERACY LEVELS IN THE WORKFORCE The quality of the labor force is one of the important determinants of economic development. Literacy levels in the urban areas of the Western Region are much the same as the national average for urban areas. However, in the rural areas they are significantly lower than the national average for rural areas, especially among women (Table 11-5). The PRC has long placed great emphasis on literacy, and in the country as a whole literacy rates are much higher than in other developing countries. Illiteracy and semiliteracy will be an increasingly severe disadvantage in the labor market.

Table 11-5 Illiterate and Semilliterate Population Aged 15 and Over, by Sex, 1999 Cities Region Eastern Central Western Southwest Northwest PRC

Towns

Male (%)

Female (%)

Male (%)

Female (%)

Male (%)

Female (%)

3.7 3.6

13.4 11.0

3.4 4.1

13.3 13.5

9.4 10.1

25.6 23.3

5.8 3.8 4.0

14.8 11.8 12.7

5.6 5.1 4.2

16.0 15.2 14.1

13.5 16.6 11.1

31.1 32.6 26.5

Source: Calculated from China Population Statistical Yearbook 2000.

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LEVELS OF EDUCATION Differences between the northwest and the southwest In considering the level of education of the workforce, there is a big difference between the northwest and the southwest. In the northwest, the rural areas are more backward in education terms, whereas in the southwest the urban areas are more backward. Put another way, the rural-urban divide is greater in the northwest (Table 11-6). Primary education The PRC is well ahead of other developing countries in the development of primary education. The net enrollment rate of children of primary school age is over 99 percent nationally. However, in most of the Western Region net enrollment rates are much lower, e.g., 83.5 percent in Tibet, 93.5 percent in Qinghai, 95.5 percent in Sichuan, and 97.1 percent in Xinjiang. The main reason for the lower enrollment

rates is the inability of parents to afford the costs of school attendance.The cost to parents includes not just fees but travel expenses and boarding expenses. Primary education is now largely the responsibility of county- (fourth-) level governments; enrollment rates in poor counties tend to be low. In much of the PRC, the fall in the birthrate will result in lower primary school populations, making it much easier for county governments to meet the cost of primary education. Unfortunately, while birthrates in the Western Region have fallen, they have not fallen to the same extent. Secondary education The PRC has performed less well in expanding secondary education. In the case of primary education, the PRC’s performance exceeds the average for lower middle-income countries; in the case of secondary education, its performance is merely comparable (Table 11-7).

Table 11-6 Level of Education Reached (% of Total Population Aged 6 and Over), 1999 Males Region Cities Eastern Central Western Southwest Northwest PRC Towns Eastern Central Western Southwest Northwest PRC Counties Eastern Central Western Southwest Northwest PRC

Females

Illiterate

Primary

Junior

Senior

College

Total

Illiterate

Primary

Junior

Senior

College

Total

3.7 3.7

22.7 21.6

37.8 39.0

23.1 24.7

12.6 11.0

100.0 100.0

12.2 10.1

24.3 22.8

34.1 36.9

21.2 23.4

8.2 6.8

100.0 100.0

5.7 3.8 4.0

36.1 21.0 24.3

36.2 33.9 37.6

15.6 27.6 22.8

6.4 13.7 11.2

100.0 100.0 100.0

13.4 10.7 11.6

34.3 21.8 25.2

33.3 31.0 34.6

14.5 26.7 21.3

4.5 9.8 7.3

100.0 100.0 100.0

3.6 4.0

24.0 23.6

37.2 40.5

25.3 23.1

9.9 8.8

100.0 100.0

11.8 12.2

26.4 26.0

35.6 38.5

20.7 19.1

5.5 4.2

100.0 100.0

5.4 4.9 4.2

30.5 24.6 25.2

37.0 36.3 38.1

20.4 24.5 23.6

6.7 9.8 8.9

100.0 100.0 100.0

14.5 13.4 12.6

29.6 27.1 27.0

35.1 32.9 36.1

17.6 21.0 19.6

3.2 5.5 4.6

100.0 100.0 100.0

8.5 8.7

41.4 42.6

41.6 41.5

7.9 6.8

0.5 0.4

100.0 100.0

21.9 19.4

43.6 46.7

30.5 30.4

3.8 3.3

0.2 0.2

100.0 100.0

12.2 14.4 9.9

52.7 43.0 44.3

30.3 34.0 38.5

4.5 7.6 6.8

0.3 1.0 0.5

100.0 100.0 100.0

26.8 27.3 22.5

51.0 43.1 46.1

20.1 24.8 27.8

2.0 4.3 3.3

0.1 0.6 0.2

100.0 100.0 100.0

Source: Calculated by consultants from tables in the China Population Statistical Yearbook 2000. Note: Primary school entry is at 6 and lasts 6 years; secondary school comprises two stages, 3 years at junior middle school and 3 years at senior middle school. University education is normally for 4 years.

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Table 11-7 School Net Enrollment Ratios, 1980 and 1997 Primary Enrollment Ratio Country Group

Secondary Enrollment Ratio

GNP per Capita in 1999 ($ PPP)

1980 (%)

1997 (%)

1980 (%)

1997 (%)

3,291 3,960 8,320

84 85 88

100 98 96

63 64 59

70 70 75

PRC Lower middle income Upper middle income

Source: World Bank (2001b). Note: Net enrollment ratio is the ratio of the number of children of official school age who are enrolled in school to the population of the corresponding official school age. The numbers in the table are not directly comparable to others in this chapter.

Attendance at secondary schools is much lower in the Western Region than in the Eastern Region. Once again, the southwest is much worse than the northwest (Table 11-8). Table 11-8 Secondary School Attendance, 1999

Region Eastern Central Western Southwest Northwest PRC

Junior Secondary (%)

Senior Secondary (%)

98.4 88.3

24.6 17.3

63.9 74.4 85.2

11.6 19.4 18.8

Source: Calculated from the China Population Statistical Yearbook 2000. Note: As percent of the population in the relevant age group.

In the PRC much criticism of education is about its character and quality rather than the level of provision: Teachers [in the US] encourage students to doubt, refute and negate established theories and practices in a logical way and give students the highest score if their answers are reasonable and logical, whereas Chinese teachers emphasize “resolving doubts” and appraise students according to whether their answers are in conformity with the standard text books and memorize standard answers mechanically, not daring to go one step beyond the limit. Students trained in this way are narrow-minded. They may get high grades in examinations but are unable to handle complicated problems in their future career and lack a pioneering spirit.5

However, creativity and entrepreneurship are not simply products of the school system. For example, India, too, has a rote learning system, but its ICT software industry is booming because of the strong

220

sprit of innovation—the authoritarianism of the schools is bucked by the experience of daily life. In the PRC, however, traditional power structures still dominate over the career aspirations of students (Table 11-9). Senior secondary schools comprise vocational schools (specialized secondary schools) and schools for children aiming at higher education. Since the scale of higher education is sufficient to absorb only 50 percent of the high school graduates, there has seemed to be a role for specialized schools. However, by 1999 the percentage of senior secondary school students attending specialized schools had reached only 7.1 percent (6.8 percent in the Western Region). Moreover, it is in the nature of specialized schools that they tend to concentrate in the cities where the pool of students is large enough to permit a range of special training. Students graduating from specialized secondary schools are finding it harder to find employment because their education does not meet the demand of the employer, who is often looking for particular qualities rather than particular skills.6 Higher education In comparison with other Asian countries, the PRC has few students receiving tertiary education. With nearly twice India’s GNP in PPP terms, the PRC has fewer tertiary students (Figure 11-3). This is likely to become a serious constraint on the country’s economic development. In comparison with the rest of the PRC, the Western Region lacks higher education facilities relative to its population. Most of the elite tertiary institutions are in the Eastern Region. The deficiency is in the status and total capacity of these facilities as well as the number (Table 11-10). Often, therefore, Government documents presume that the Western Region is short of higher

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Table 11-9 Job Preferences among Different Urban Education Groups, 1999 Junior Middle School and Below

Senior Middle School/ Polytechnic School

Adult Higher Education

College and Above

First

Leading cadre in a Party or government body 11.8%

Leading cadre in a Party or government body 11.2%

Leading cadre in a Party or government body 13.6%

Leading cadre in a Party or government body 11.4%

Second

Industrial or commercial administrator/Tax officer 6.3%

Industrial or commercial administrator/Tax officer 6.8%

Computer engineer 7.7%

Computer engineer 10.1%

Third

Private entrepreneur 5.8%

Judge 5.8%

Lawyer 7.2%

Private entrepreneur 6.5%

Fourth

Judge 5.8

Computer engineer 5.8%

Industrial or commercial administrator/Tax officer 6.4%

Industrial or commercial administrator/Tax officer 6.3%

Fifth

Doctor 4.6%

Lawyer 5.5%

Judge 5.1%

University professor 5.5%

Sixth

Court prosecutor 4.6%

Private entrepreneur 5.3%

Private entrepreneur 5.1%

Natural scientist 5.1%

Seventh

Ordinary cadre in a Party or government body 4.4%

Doctor 4.6%

Doctor 4.8%

Lawyer 4.9%

Eighth

Lawyer 3.7%

Court prosecutor 4.0%

Court prosecutor 4.0%

Reporter 4.5%

Sample size

655

944

375

493

Job Preference

Source: Xu Xinxin (2001).

education graduates and that it will attract graduates from other regions.7 As there is a national shortage of graduates, this seems implausible. Also, the statistics in Table 11-6, which gives percentages of city, town, and county populations with college education, suggest that the comparative scarcity of graduates in urban and rural labor markets is true only of the southwest, and not the northwest. Graduates are mostly seeking work in the large cities of the east. In 1997, of 64,990 students graduating from universities and higher education institutes directly under the State Education Commission, 53 percent found employment in Guangdong, Sichuan, Beijing, Shandong, Jiangsu, and Shanghai, while only 5 percent went to the remote border provinces and autonomous regions.8 This pattern is only partly explained by more students graduating in the Eastern Region.

Figure 11-3 Number of Tertiary Students and GNP in Various Asian Countries No. of tertiary students, 1996 7,000,000 6,000,000

India

PRC

5,000,000 4,000,000 3,000,000 2,000,000

Rep. of Korea Turkey Iran

1,000,000

Viet Nam Thailand

0 0

500

1,000 1,500

2,000

2,500

3,000 3,500

4,000

4,500

GNP 1999, $ billion, PPP

Source: UNESCO Statistical Yearbook (number of tertiary students); World Bank (2001b) (GNP).

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Table 11-10 Higher Education Facilities in the Western Region, 1999

Comprehensive universities Science and engineering Agriculture and forestry Medicine Teacher training Linguistics and literacy Economics and finance Politics and law Physical culture Art institutes Minority academy Short-term vocational training All facilities Full-time teachers Student enrollment Population

Eastern (%)

Central (%)

Southwest (%)

Northwest (%)

PRC (%)

45.9 48.5 40.7 42.4 34.4 86.7 43.2 60.0 57.1 65.5 16.7 49.7 45.1 40.0 47.6 37.3

31.1 31.7 31.5 33.1 32.6 0.0 36.5 24.0 21.4 10.3 16.7 36.0 31.5 32.3 31.1 33.8

9.5 10.4 13.0 13.6 20.3 6.7 12.2 8.0 14.3 13.8 33.3 8.1 13.0 15.5 12.2 19.5

13.5 9.3 14.8 11.0 12.8 6.7 8.1 8.0 7.1 10.3 33.3 6.2 10.5 12.2 9.1 9.3

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Calculated from the China Statistical Yearbook 2000.

Since 1997 all university students have had to pay part of their tuition fees. Insufficient parent income could therefore be deterring students in the Western Region from proceeding to university. In 1998, the Government introduced a system of subsidized loans to help poor university students. However, the concept of student loans is not a familiar one in the PRC; there is a traditional mindset against debt.9 The lack of a credit rating system also limits the interest of banks in the system. As the economy matures, the demand for higher education graduates will increase. Investment in higher education also needs to redress imbalances in the Western Region. For example, over half the higher education institutions in Sichuan are in Chengdu, and over half of those in Xinjiang are in Urumqi. As the institutions in the capital cities are the larger ones, the concentrations of students in capital cities are even higher: over two-thirds of students in the case of Urumqi. This is part of a general investment bias toward provincial capitals that Chapter 15 discusses. A high percentage of the workforce must have upper secondary and tertiary education for service

industries to develop. The gross enrollment rate for senior secondary school is only 44 percent and for the tertiary sector only 11 percent. By 2005, the upper secondary percentage will have increased to 60 percent but the college and university enrollments will be only 5 percent higher.10 The latter is too low a figure if the PRC is to shift people to tertiary industries at speed. India’s expenditure on education, in contrast, has been biased toward the upper end of schooling. This is now paying off by enabling India to play a leading role in the world’s ICT software industry. Adult education The PRC has an extensive and rapidly expanding adult education system. Most of the adult education students are in secondary schools for adults. However, the level of provision varies (Table 11-11). With the improvement in literacy levels, the number of adult literacy students (i.e., attending primary schools for adults) has fallen. In 1992, the Government set a target of eliminating adult illiteracy by 2000. However, there are still a great many illiterate adults in the Western Region (Table 11-6).

Table 11-11 Basic Statistics on Enrollment in Adult Education No. of Students per Thousand Aged 15 to 64, 1999 Level Primary schools for adultsa Secondary schools for adults radio/TV universities Adult education schools

PRC

Gansu

Sichuan

Xinjiang

Yunnan

6.27 108.87 1.18 1.40

22.24 114.03 0.83 0.99

9.29 0.57 n. a. 0.62

4.89 85.21 2.89

Source: Calculated from various statistical yearbooks. a Mostly literacy courses.

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Total New Students (PRC) (thousands) 1993

1997

1.17 0.60

7,371 51,521

5,581 90,288

0.21

862

1,157

SKILLS OF THE LABOR FORCE Government policy toward the Western Region assumes that one of the region’s problems is a lack of “talent.” Unfortunately, there is a paucity of data on skill levels in the labor force. One proxy measure is the number of “technical” personnel as a proportion of the total labor force in a particular industry (Table 11-12). In the Western Region, the proportion of technical personnel in each industry is comparable to the rest of the PRC. However, because the percentages in Table 11-12 relate to a small total nonagricultural workforce, the pool of skilled labor is too small for a rapid growth of secondary or tertiary industry. VOCATIONAL TRAINING The Labor Law of 1994 requires the Government to take steps to expand vocational training: Article 67 People’s governments at various levels shall incorporate the development of vocational training into their plans of social and economic development, encourage and support enterprises, institutions, public organizations and

individuals, if conditions permit, to sponsor vocational training in various forms. Article 68 The employing unit shall establish a system of vocational training, retain and use vocational training funds in accordance with the provisions of the State, and provide laborers with vocational training in a planned way and in the light of the actual conditions of the unit.

However, enrollments in vocational training are often equivalent to only a tiny percentage of the urban workforce. Moreover, the training is of poor quality.11 The impact of the traditional vocational training system on the labor market is therefore insignificant. The level of provision in the Western Region is equivalent to the low level in the country as a whole. At the county level of government, there does seem to be an awareness of the importance of vocational training, and the constraint is merely financial. However, structural adjustment and retrenchment by SOEs is changing the country’s needs from training for a lifetime vocation to retraining (see “Unemployment Insurance and Assistance to Laid-Off Workers” below).

Table 11-12 Technical Personnel in the Labor Force, 1999

Industry

Northwest (%)

Farming, forestry, etc. Mining and quarrying Manufacturing Electricity, gas, water Construction Geological prospecting, water conservation Transport, storage, post and telecommunications Wholesale and retail trade Banking and insurance Real estate Social services Healthcare, sports, and social welfare Education, culture, art, radio, film, and TV Scientific research and polytechnic services Government agencies, party agencies Others All sectors

0.7 15.0 9.3 21.6 5.9 29.8 5.8 3.1 52.7 17.9 4.7 52.1 68.4 55.9 6.4 0.6 5.9

Southwest (%)

Central (%)

Eastern (%)

PRC (%)

0.2 14.2 7.6 21.0 3.6 30.9 5.3 3.4 54.6 26.5 5.0 61.7 69.8 49.2 8.3 0.1 3.5

0.2 14.8 6.2 19.9 3.7 24.9 3.9 3.0 43.8 20.0 4.9 67.0 69.2 52.5 7.4 0.3 4.4

0.2 13.3 5.4 21.7 4.2 28.1 5.9 3.9 55.1 25.3 8.3 69.2 73.2 57.3 7.6 0.6 5.8

0.2 14.3 6.1 21.0 4.1 27.6 5.1 3.5 51.3 23.7 6.6 65.8 70.9 54.8 7.5 0.4 4.9

Source: China Statistical Yearbook 2000. Note: The term “technical personnel” is used to refer to professionals holding scientific and technical titles or taking such positions, or graduates from departments of science, engineering, agriculture, or medicine, and/or working on research, teaching, and production in the scientific and technological fields such as science, engineering, agriculture, and medicine, and professionals doing administrative work related to science and technology in government agencies, enterprises, and institutions.

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Employment EMPLOYMENT BY INDUSTRY Agriculture and forestry dominate employment in the Western Region, accounting for 57.3 percent of employment in the northwest and 65.8 percent in the southwest. The varying growth rates for employment in each industry point to the changing demand for labor (Tables 11-13a and 11-13b). Employment in the tertiary sector is small by international standards—value added in the services sector as a proportion of 1999 GDP was only 33 percent in the PRC compared with 46 percent in India and 51 percent in the Republic of Korea. However, services employment is growing strongly, while employment in manufacturing is shrinking. Across most of the region, agriculture accounts for less than 25 percent of GDP and a declining proportion of employment. Industrial employment is concentrated in Sichuan, Shaanxi, Gansu, and Chongqing, and in the cities rather than the towns. There are two related aspects to this distribution of industrial employment in the PRC:

• Apart from industries processing raw materials to make intermediate products, most industry will locate in cities that offer a diversity of labor skills and technical services, and access to markets. • In the PRC, agglomeration diseconomies in the largest cities (in particular, Shanghai) have not yet encouraged industry to prefer secondary cities— a legacy of the planned economy and SOE dominance. In Shanghai, for example, the secondary sector still accounted for 44.3 percent of total employment in 1999. There are thus some possibilities for the four main industrial areas of the Western Region to expand manufacturing employment at the expense of the megacities of the Eastern Region. In a developed market economy, direct employment in manufacturing may be low yet have a strong local multiplier effect on demand for products and services. URBAN EMPLOYMENT, BY OWNERSHIP SECTOR In comparison with the Eastern Region, a larger proportion of Western Region employment is in SOEs and the self-employed sector (Table 11-14).

Table 11-13a Industry Distribution of Employment in the Western Region, 2000—Share of Total Employment, % Industry Farming, forestry, etc. Mining and quarrying Primary industry Manufacturing Electricity, gas, water Construction Secondary industry Transport, storage, post and telecommunications Wholesale and retail trade Banking and insurance Real estate Social services Healthcare, sports, and social welfare Education, culture, art, radio, film, and television Scientific research and polytechnic servicesa Government agencies, Party agencies, social organizations Others Tertiary industry All sectors

Northwest

Southwest

Central

Eastern

57.0 1.5 58.5 8.5 0.6 4.9 14.0 3.6 7.8 0.6 0.1 1.6 0.9 3.2 0.8 2.5 6.5 27.5 100.0

63.6 0.5 64.1 6.5 0.3 4.6 11.4 2.1 4.7 0.3 0.1 0.8 0.6 2.0 0.3 1.4 12.2 24.5 100.0

56.8 1.4 58.1 10.5 0.5 5.2 16.1 3.2 7.2 0.5 0.1 1.2 0.7 2.4 0.4 1.8 8.3 25.8 100.0

42.9 0.7 43.6 19.2 0.5 6.8 26.5 3.8 9.1 0.6 0.3 2.0 0.9 2.7 0.5 1.8 8.3 30.0 100.0

Source: Calculated from China Statistical Yearbook 1994 and 2001. a Includes geological prospecting, water conservation.

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PRC 53.0 0.9 53.9 12.8 0.5 5.6 18.9 3.2 7.4 0.5 0.2 1.5 0.8 2.5 0.5 1.8 9.0 27.2 100.0

Table 11-13b Industry Distribution of Employment in the Western Region, 2000—Average Annual % Increase, 1993–2000 Industry Farming, forestry, etc. Mining and quarrying Primary industry Manufacturing Electricity, gas, water Construction Secondary industry Transport, storage, post and telecommunications Wholesale and retail trade Banking and insurance Real estate Social services Healthcare, sports, and social welfare Education, culture, art, radio, film, and television Scientific research and polytechnic servicesa Government agencies, Party agencies, social organizations Others Tertiary industry All sectors

Northwest

Southwest

Central

Eastern

PRC

0.1 6.2 -0.1 -3.4 3.6 1.4 -1.7 3.6 9.2 1.7 10.5 13.3 1.8 4.0 -1.4 1.8 7.0 5.8 1.0

-0.9 -5.7 -0.9 -2.3 3.7 4.3 0.1 3.9 8.0 2.1 10.4 14.5 2.3 3.6 -0.6 0.9 10.5 7.5 0.8

0.6 -6.1 0.4 -2.3 2.8 3.3 -0.6 4.1 7.5 2.3 4.7 12.4 2.1 4.4 -0.8 1.2 5.7 5.4 1.3

-0.8 -6.1 -0.9 -1.3 2.5 1.0 -0.7 2.4 8.0 3.5 6.1 10.7 2.6 3.5 -1.4 0.6 3.5 4.6 0.6

-0.3 -6.1 -0.4 -1.8 2.9 2.2 -0.6 3.2 7.9 2.7 6.3 11.8 2.3 3.8 -1.1 1.0 6.1 5.5 0.9

Source: Calculated from China Statistical Yearbook 1994 and 2001. a Includes geological prospecting, water conservation.

Table 11-14 Urban Employment, by Ownership Sector

Region Eastern Central Western Southwest Northwest PRC

SOEs (%)

COEs (%)

Other Ownership Unitsa (%)

Private (%)

Individuals b (%)

Total (%)

50.5 56.1

11.7 11.5

16.3 8.5

8.5 5.0

13.0 19.0

100.0 100.0

60.9 63.2 55.0

10.0 7.6 11.0

9.0 6.8 11.8

6.0 5.8 6.7

14.1 16.6 15.5

100.0 100.0 100.0

Source: Calculated from the China Labor Statistical Yearbook 2000. a Includes shareholding units, jointly owned units, limited-liability corporations, and shareholding corporations. b Actually includes enterprises of eight persons or less.

The large proportion still working for SOEs suggests that the progress of SOE reform has been rather slower in the Western Region, as has the development of a market-oriented labor market. In 1997, the CCP’s Fifteenth Congress endorsed the corporatization of SOEs, that is, their conversion into legal entities responsible for their profits and losses. This is likely to greatly speed up the development of

the labor market. However, the larger proportion of employment in SOEs in the Western Region implies slower growth in employment opportunities, and hidden unemployment. RURAL EMPLOYMENT, BY SECTOR The rural labor force is mostly engaged in agriculture and simple manufacturing (Table 11-15).

Table 11-15 Rural Labor Force, by Sector, 1999

Region Eastern Central Western Southwest Northwest PRC

Farming, Forestry, etc. Industry (%) (%)

Construction (%)

Transportation and Storage (%)

Wholesale, Retail and Catering Trades (%)

Other Nonagricultural Trades (%)

Total (%)

57.7 73.8

15.3 6.5

7.6 4.9

3.4 2.2

4.8 3.1

11.1 9.5

100.0 100.0

77.2 79.1 69.5

3.7 3.7 8.6

3.9 4.2 5.5

1.4 2.3 2.4

2.2 2.7 3.5

11.6 8.1 10.5

100.0 100.0 100.0

Source: Calculated from the China Statistical Yearbook 2000.

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Table 11-16 Rural Employment in the Western Region, by Type of Enterprise, 1999 Region

Agricultural Labor (%)

TVEs (%)

Private Enterprises (%)

Self-employed (%)

Total (%)

47.6 65.5

37.4 25.3

4.0 1.1

11.1 8.2

100.0 100.0

82.4 60.9 75.4

13.1 30.0 18.2

0.6 1.7 1.0

3.9 7.4 5.4

100.0 100.0 100.0

Eastern Central Western Southwest Northwest Excluding Inner Mongolia, Shaanxi

Source: Calculated from the China Statistical Yearbook 2000.

In contrast to the Eastern Region, there is little nonagricultural employment in rural areas. Excluding Inner Mongolia and Shaanxi, the proportion of rural employment in TVEs is less than half that in the Eastern Region (Table 11-16). There are several reasons for the comparative absence of TVEs in the Western Region:12 • Higher agricultural productivity in the Eastern Region has enabled rural communities to apply surpluses of product, capital, and labor to the establishment of nonfarm economic activities. • Rural communities in the Eastern Region are close to cities that provide technologies, expertise, and markets. • The townships and villages owning TVEs naturally do not consider investing in factories in other areas unless and until they have fully utilized local labor resources. • The ABC and the credit cooperatives balance loans and deposits within their branch areas, and a branch in township A cannot take deposits from or lend money to people in township B, thus restricting the development of interregional capital markets. Local governments will be less eager to control enterprises in a competitive market environment.13 While rising labor costs in the Eastern Region may create opportunities for labor-intensive industries in the Western Region, the next few years are likely to reveal TVEs as a transitory phenomenon. Many will gradually metamorphose into various forms of private SMEs.

The labor market An efficient labor market is essential to the development of the Western Region, that is, it will promote effective and efficient allocation of labor resources to their most productive use. EARNINGS IN THE URBAN SECTOR Earnings differentials between regions are an indicator of the likely directions of labor migration. Earnings in the urban sector of the economy are much lower than in the Eastern Region, but higher than those in the Central Region (Table 11-17). These aggregate figures hide much bigger differentials between individual cities in the Western Region and those in the Eastern Region (Table 11-18). Average wages for higher education graduates are also much higher than for those with only secondary education. These differentials are indicative of a need to continue increasing the supply of higher education graduates (Table 11-19). While expanding higher education may restrain the escalation in wages for graduates, educationlinked income differentials are increasingly common in all sectors.14 Reforms have strengthened profit incentives and the enterprises’ discretion over wage and employment determination in the PRC’s state sector.15 Corporatized enterprises obtain various rights to operate firms including output, hiring, wage, and asset management. It is evident that there has been considerable penetration of market forces into SOE operations:16

Table 11-17 Average Earnings, by Ownership of Enterprise, 1999 All Industries Region Eastern Central Western Southwest Northwest PRC

SOEs

Manufacturing

Urban COEs

Other Ownership

SOEs

Urban COEs

Other Ownership

10,190 7,011

6,552 4,629

11,632 7,148

8,795 6,319

6,061 4,319

11,032 7,113

7,438 7,394 8,443

5,201 5,096 5,758

7,621 7,146 10,142

7,214 6,537 7,578

5,212 4,774 5,326

7,633 7,176 9,592

Source: China Labor Statistical Yearbook 2000.

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Table 11-18 Employee Wage Levels in Western and Eastern Region Cities, 1998–1999

• Insecurity has risen with the effective abolition of employee tenure. • Employee turnover has risen, especially among young workers with high levels of education. • Earnings are increasingly linked to group (if not individual effort). • Reforms have progressively reduced employee benefits, simplifying employment relations to the exchange of labor services for money wages. These changes pose considerable challenges for the Western Region, which has few higher education graduates in the total (even less so, the urban) population and a high proportion of urban employment in SOEs. EARNINGS IN THE RURAL SECTOR Average rural per capita incomes were 38 percent of average urban per capita incomes in 1999 compared with 45 percent in 1990 (Figure 5-4). Urban incomes have been improving faster than rural incomes. Moreover, the differential between urban and rural is wider in the Western Region. In the southwest, rural incomes are only 27 percent of those in the Eastern Region (Table 11-20), but average incomes in urban SOEs are 72.5 percent of those in the Eastern Region (Table 11-17). Measures to increase rural earnings from agriculture necessarily involve improving output and productivity (Chapter 4).This in turn implies a large surplus rural population seeking jobs in the urban sector because the prospects for SMEs in rural areas of the Western Region are generally not very bright (“Rural Employment, by Sector” above). EARNINGS OF MIGRANT LABOR Remittances from migrant labor are less than 10 percent of rural incomes in the Western Region (Table 11-20). However, surveys of poverty counties show that migrant labor has the capacity to remit about a third of their gross earnings, even if the earnings are quite low. As urban populations swell and rural ones shrink, labor remittances are likely to become a larger source of rural incomes (Table 11-21).

City

1998 (yuan)

1999 (yuan)

Region

1999/1998 (% increase)

Xining Xi’an Huhehaote Guiyang Nanning Chengdu Chongqing Yingchuan Shijiazhuang Shenyang Haikou Nanjing Qingdao Hangzhou Ningbo Tianjin Dalian Beijing Xiamen Guangzhou Shanghai Shenzhen

5,563 5,993 5,667 6,555 7,187 7,453 7,873 7,510 7,994 8,299 9,291 10,375 10,436 11,644 12,340 12,794 13,240 14,445 16,588 17,482 17,812 23,735

5,589 6,236 6,455 7,001 7,533 7,747 7,885 8,281 8,645 8,689 9,224 10,987 11,869 12,351 12,839 12,946 14,067 15,541 17,215 18,449 19,201 25,527

Western Western Western Western Western Western Western Western Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern Eastern

0.5 4.1 13.9 6.8 4.8 3.9 0.2 10.3 8.1 4.7 -0.7 5.9 13.7 6.1 4.0 1.2 6.2 7.6 3.8 5.5 7.8 7.6

Source: China Labor Statistical Yearbook 2000.

Table 11-19 Employee Wage Levels in 30 Cities, by Level of Education, 1998–1999

Level of Education

1998 (yuan)

1999 (yuan)

1999/1998 (%)

Doctor and above Master Bachelor College Senior secondary school Junior secondary and below

15,671 22,547 14,610 11,702 9,676 8,593

19,563 29,736 17,123 13,676 10,916 9,554

24.1 31.9 17.2 16.9 12.8 11.2

Source: China Labor Statistical Yearbook 2000.

Table 11-20 Per Capita Net Income of Rural Households, by Source and Region, 1999

Region Eastern Central Western‘ Southwest Northwest PRC

Remuneration (yuan)

Household Business (yuan)

Transfer (yuan)

Property (yuan)

Total (yuan)

1,219 508

1,741 1,433

150 75

60 19

3,171 2,034

394 328 710

1,204 1,137 1,460

104 60 106

16 18 32

1,718 1,544 2,309

Source: Calculated from the China Labor Statistical Yearbook 2000.

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Table 11-21 Income and Expenditure of Labor Working Outside Home County, 1999 Southwest Item

Gross income Living expenses Gift to others Remittance

Northwest

Sichuan (yuan/person)

Guizhou (yuan/person)

Yunnan (yuan/person)

Guangxi (yuan/person)

Ningxia (yuan/person)

Shaanxi (yuan/person)

Gansu (yuan/person)

Inner Mongolia (yuan/person)

4,112 1,720 270 1,819

3,617 1,614 540 1,397

3,821 1,902 325 1,022

3,331 1,773 318 1,409

2,109 605 200 1,566

3,298 1,470 161 1,707

2,886 1,129 80 1,643

3,284 1,472 37 1,667

Ningxia (%)

Shaanxi (%)

38.9 61.1

46.8 50.6 2.6

100.0

100.0

Source: National Bureau of Statistics and Leading Group for Poverty Reduction (2000).

Table 11-22 Method of Finding Job Outside Own Poverty County, 1999 Southwest Item

Friends/Relatives Self Employer Labor bureau Others Total

Sichuan (%)

Guizhou (%)

Yunnan (%)

56.5 42.9 0.6

52.7 44.6 2.7

33.3 61.5 5.1

100.0

100.0

100.0

Northwest Guangxi (%)

33.1 64.4 1.3 0.6 0.6 100.0

Gansu (%)

Inner Mongolia (%)

23.3 69.8 3.1 2.3 1.6 100.0

37.0 51.9 5.6 1.9 3.7 100.0

Source: National Bureau of Statistics and Leading Group for Poverty Reduction (2000).

JOB SEARCH BY RURAL MIGRANTS Another indicator that rural-urban migration is in its early stages is that most migrants found their jobs without assistance (Table 11-22). Normally in developing countries, migrants are highly dependent on friends and relatives for finding jobs. Large-scale migration to the cities is a recent phenomenon, and there are few well-developed social networks among migrants;17 most migrants can get little assistance with finding a job. The apparatus of local government does not recognize the migrant as having rights and entitlements. As with women and minorities, there is a need for affirmative action to help migrants.

URBAN UNEMPLOYMENT Unemployment in urban centers comprises three main categories: the registered unemployed, laid-off workers, and rural migrants not eligible for the first two categories. Registered unemployed The registered unemployed are about 3 percent of the workforce. A summary of official data on urban unemployment appears in Table 11-23. These figures suggest that rural-to-urban migration is adding 1.77 million workers a year to the urban labor force. This excludes the floating population, but nevertheless also points to the scale and effects of labor mobility.

Table 11-23 Official Urban Unemployment and New Entrants to Labor Force, 1999 Geographical Distribution Category

Unemployed at the end of 1998 Graduates from universities, secondary technical schools, and vocational schools Demobilized and transferred military personnel School leavers not proceeding to higher education Labor force from rural to urban Lost job during year Others Total seeking urban employment during year Total labor force at end of 1999a Unemployment rate at end of 1999b

PRC Total (million)

Eastern (%)

Central (%)

Southwest (%)

Northwest (%)

PRC (%)

5.21

41.3

33.0

16.5

9.2

100.0

2.42 0.43 3.24 1.77 1.82 0.37 15.25 163.5 3.0%

44.1 35.3 35.5 52.4 53.5 40.6 42.2 44.0

32.7 40.7 37.0 24.7 25.7 25.9 33.4 34.6 2.8%

14.7 13.1 15.6 10.9 12.0 11.7 13.8 11.7 3.0%

8.4 10.9 11.9 12.0 8.7 21.9 10.7 9.8 3.5%

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3.0%

Source: Calculated from China Labor Statistical Yearbook 2000. a These numbers are not consistent with urban employment statistics in the China Statistical Yearbook 2000 or, therefore, with other statistics on urban employment in this report. b Calculated by consultants: Urban unemployed ÷ [urban employed + urban unemployed].

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Laid-off workers Laid-off workers, a second category of unemployment, account for an additional 5.5 percent of the workforce. They are mainly employees of SOEs, but also include employees of other enterprises. Laid-off workers may join Reemployment Service Centers for up to three years, after which they must register as unemployed (unless their employer reemploys them, which is quite frequently the case). Migrant workers A third category of unemployment is migrant workers who lose their job and are not entitled to the benefits of “laid-off” or registered unemployed people. Workers from rural areas who lose their jobs in urban enterprises receive assistance under very restricted circumstances, and do not otherwise appear in the statistics for laid-off or unemployed persons. If an enterprise has paid insurance contributions for a year, the migrant is entitled to receive cost-of-living assistance. Rural migrants are not allowed to pay individual contributions; this has the effect of limiting the period for which they can draw benefits if they lose their job. Workers without urban residence permits (hukou) are not entitled to any assistance unless their employer has paid insurance fund contributions for a year. There are no statistics for migrant workers who choose to stay in urban centers after losing their job but who are not receiving unemployment benefit. However, it is

unreasonable to assume that the total urban unemployment (registered plus laid-off plus nonreturn migrants) exceeds 10 percent. Prospects for unemployment in the Western Region The PRC’s entry into the WTO will add structural unemployment to the prospective unemployment from the laid-off workers of SOEs, COEs, and other Government enterprises. Employment in capitalintensive industries in which the PRC lacks comparative advantage will contract. New jobs in labor-intensive industries are likely to more than offset this structural unemployment. However, the new jobs are likely to be mostly in the southeast, where export industries and FDI are concentrated. The coastal provinces will also find it cheaper to import many agricultural commodities than to buy domestic produce. Thus the prospects for an expansion of employment in the Western Region are poor. UNEMPLOYMENT INSURANCE AND ASSISTANCE TO LAID-OFF WORKERS Coverage The Government plans to expand the coverage of unemployment insurance,18 which at the end of 1999 was about 63 percent of the total urban employment. The coverage is lowest in the Western Region, 60 percent, compared with 66 percent in the Eastern Region (Table 11-24).

Table 11-24 Unemployment Insurance Cover, by Region, 1999 Insured Employees, as Proportion of Urban Residents Employeda Region

Eastern Central Western Southwest Northwest PRC

Urban Residents Employed (millions)

All Enterprises (%)

SOEs (%)

Urban COEs (%)

Other Enterprises (%)

68.9 51.0

66 61

76 74

104 74

42 36

20.0 15.9 156.0

60 59 63

62 68 72

68 56 86

52 41 41

Source: China Labour and Social Security Yearbook 2000. Note: Because the provincial figures for urban residents employed do not add up to the national figure, they have been adjusted pro rata such that they are consistent with the national total. a As some rural residents work for urban enterprises, it is possible for the number of insured employees to exceed the number of urban resident employees.

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229

and above the urban minimum cost of living. The benefit thus preserves the incentive to work. There are wide variations in the composition of fund expenditures (Table 11-26). The Eastern Region funds account for 63.9 percent of all fund expenditure, and moreover pay out a much higher percentage of funds in the form of unemployment benefit. By no means do the city funds constitute a national scheme under which all fund members contribute on the same basis, enjoy equal benefits, and share the risks.There is no portability.

In 2000 there was a 6 percent increase in coverage, with the biggest percentage increase in the “other enterprises” category.19 The insured employees include some rural residents working for urban enterprises. Apart from this, unemployment insurance does not extend to rural residents. Unemployment insurance funds Each city government has an unemployment insurance fund.The Unemployment Insurance Rules of 1998 specify a combination of individual contributions (1 percent of wages) and employer contributions (2 percent of wages). The Rules do not permit individual contributions by rural residents. In total, the funds are generating surpluses (Table 11-25), but the funds of some cities are in deficit. A combination of higher coverage rates and higher wages (see Table 11-18) means that the Eastern Region accounts for 59 percent of the PRC’s unemployment fund income even though it has only 44 percent of the country’s urban employment and 46.4 percent of employees with unemployment insurance.

Reemployment Service Centers Unemployment funds make payments both to the registered unemployed and to the laid-off in Reemployment Service Centers. While in Reemployment Service Centres, the laid-off receive a Basic Living Subsidy that is above the unemployment benefit. This entitlement lasts three years, after which the laid-off can become formally unemployed and entitled to receive unemployment benefit for up to two years. Especially in the Western Region, the Government meets the major part of the cost of the Reemployment Service Centers (Table 11-27).

Payment of unemployment benefits The Unemployment Insurance Rules of 1998 allow city governments considerable discretion in the administration of funds. They can fix the benefit rates, provided they comply with the requirement (Article 18 of the Unemployment Insurance Rules) that the benefit should be below the local minimum wage

RETIREMENT The age at which people retire affects the size of the labor force. The Government has set the retirement age at 60 for men, 55 for women in nonmanual work, and 50 for women in manual work.20 The tendency for people in the Eastern Region to retire earlier than

Table 11-25 Income and Expenditure of Unemployment Funds, by Region, 1999

Region Eastern Central Western Southwest Northwest PRC

Employer Contributions (million yuan)

Employee Contributions (million yuan)

Interest (million yuan)

Local Government Contribution (million yuan)

Other Income (million yuan)

Total Income (million yuan)

Total Expenditure (million yuan)

5,123 1,671

1,836 704

275 181

28 18

99 159

7,362 2,733

5,851 1,891

862 682 8,339

397 273 3,211

77 63 596

2 21 69

15 36 310

1,354 1,075 12,524

818 602 9,161

Source: Calculated from the China Labor and Social Security Yearbook 2000.

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Table 11-26 Payment of Unemployment Benefits, by Region, 1999 Breakdown of Provincial Fund Expenditures

Region

Surplus at Year End (million yuan)

Total Expenditure (million yuan)

Eastern 7,725.2 Central 4,411.5 Western Southwest 2,163.7 Northwest 1,685.2 PRC 15,985.5

Unemployment Medical Benefit Expenses (%) (%)

Training (%)

Labor Exchange Expenses (%)

Reemployment Service Centres (%)

Other (%)

Total (%)

5,851 1,891

42.4 18.0

1.9 0.5

4.6 7.0

4.3 1.2

39.2 54.2

7.6 19.1

100.0 100.0

818 602 9,161

28.6 21.8 34.8

2.0 0.6 1.5

4.5 3.6 5.0

0.8 0.5 3.1

48.5 62.1 44.6

15.6 11.4 10.9

100.0 100.0 100.0

Source: Calculated from China Labor and Social Security Yearbook 2000.

Table 11-27 Expenditure on Reemployment Service Centers and Source of Funds, 1999 Source of Funds Region Eastern Central Western Southwest Northwest PRC

Total (million yuan)

Enterprises (%)

Unemployment Insurance Fund (%)

Government (%)

Other (%)

Total (%)

6,698 6,892

37.1 25.8

19.7 13.2

37.6 55.8

5.6 5.2

100.0 100.0

2,192 2,192 17,974

26.5 19.4 29.3

12.3 17.8 16.1

58.2 61.7 50.0

2.9 1.1 4.6

100.0 100.0 100.0

Source: Calculated from China Labor Statistical Yearbook 2000.

these ages increases the employment opportunities for the Western Region workforce, which is younger (Table 11-1). Only a small proportion of the Western Region population is in the retirement age groups. However, in the cities the proportion of the population of retirement age is similar to that in PRC cities as a whole. In 1999, it appears that in the Eastern Region about 25 percent of special fiscal transfers were made to unemployment funds (Table 11-28). Government subsidies accounted for about 8 percent of retirement pension payments in 1999. The funds will find it harder to replace retirees with

new members for two reasons: the retirement age population is increasing, and opportunities for gaining new members by expanding the coverage will progressively decline. The Eastern Region accounted for 50 percent of the PRC’s pension payments in 1999, and there is a risk that Government subsidies could reduce the capacity of the Government to make other forms of financial transfer to the Western Region. ROLE OF LABOR EXCHANGES The PRC has both Government and private sector labor exchanges. The private ones are very much a

Table 11-28 Government Subsidies to Insurance Funds, 1999

Region Eastern Central Western Southwest Northwest PRC

For Laid-off Workers (million yuan)

For Lowest Cost-of-living Allowance (million yuan)

For Retirement Funds (million yuan)

For Veterans, Martyrs’ Families, etc (million yuan)

1,690 3,285

84 148

4,169 7,507

122 111

6,065 11,050

1,113 1,217 7,306

103 65 400

2,379 2,259 16,314

66 27 325

3,661 3,568 24,345

Total (million yuan)

Source: Calculated from China Labor and Social Security Yearbook 2000.

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231

minority and their geographic distribution is uneven, with some cities having many and others almost none. The government exchanges are hopelessly understaffed and underequipped, often lacking even computers.21 However, although the official statistics ignore temporary and long-term migrants from rural areas, and migrants appear to make little use of labor exchanges (Table 11-22), the Government Labor Bureaus and exchanges do seem to be paying serious attention to the problem. For example, the following data from the Yunnan Labor Employment Service Bureau gives a picture of the floating labor22 (percentages overlap): • Organized floaters account for about 20 percent of floaters. • Floaters visiting families or returning to previous employment accounted for 59 percent. • Floaters getting help from family or friends accounted for 30 percent. • Independent floaters getting jobs through employment exchanges accounted for 16 percent. • Independent floaters getting jobs through there own initiative accounted for 12 percent; however, they dominate out-of-province floaters. Out-of-province migrants are dominant in Yunnan, which unlike Sichuan and Guizhou suffers net income loss through migrant remittances. It seems that the less-educated population of Yunnan’s rural areas have difficulty competing in the urban labor markets against better-educated migrants from other provinces. LABOR STANDARDS The Labor Law of 1994 lays down minimum labor standards in relation to working hours, holidays, and other matters. As with so many other laws in the PRC and other developing countries, the weakness is less with the law itself than with its enforcement. Enforcing labor standards could improve labor productivity through better working conditions, and would not threaten the comparative advantage of the PRC’s labor-intensive industries.23

232

LABOR DEMAND IN THE WESTERN REGION IN THE NEXT 20 YEARS On the basis of the macroeconomic prospects for the Western Region (Chapter 1) and the likely development of agriculture (Chapter 4), it is possible to make some tentative predictions of the future structure of labor demand in the Western Region. Implications of entry into the WTO The Stolper-Samuelson theorem suggests that PRC workers will benefit from trade liberalization because labor is the abundant factor in the PRC; however, some labor will lose and some will gain.24 Those workers likely to lose are those in industries where the PRC does not have a comparative advantage, such as capital-intensive heavy industries and agriculture, and inefficient SOEs. One industry that will benefit is textiles, which is well established in Xinjiang, Shaanxi, and Sichuan. Import quotas under the Multi-Fiber Agreement currently restrict the PRC’s textile exports, but are due to go by 2005. Agriculture and natural resources Most PRC analysts stress the natural resources of the Western Region when analyzing its economic development potential. However, forecasts that it could create 5–6 million jobs along with 8–10 million in desert reclamation are impossible for lack of water. Employment in both agriculture and mining is in fact likely to continue to decline as productivity in these sectors improves. Measures that this report advocates in relation to labor-intensive production, tree planting (Chapter 4), and ecological protection will, however, slow this decline. Manufacturing Low labor costs in the Western Region are unlikely to attract manufacturers. The Central Region is much closer to major markets and has equally low labor costs. Only in those parts of the Western Region where there are other comparative advantages, for example, plentiful water or energy, are low labor costs likely to be important. On this basis, demand for

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factory labor is likely to expand fastest in the southwest, and only slowly in the northwest. However, distance can also work to the advantage of the Western Region. SMEs could serve local markets without bearing the full brunt of competition that SMEs face in the Eastern Region. Also, parts of the Western Region have access to markets across the PRC’s borders that are not as accessible to the Eastern Region or the Central Region (Chapter 14). There are, therefore, certainly opportunities for manufacturing in the Western Region, and these have a significant employment multiplier effect. Tourism The Western Region is rich in tourism resources and the tourism industry has considerable growth potential (“Industrial Policies of Japan,” in Chapter 10). Direct employment in the tourism industry amounted to only about 250,000 in 1999, or 13 percent of the total for the PRC.25 However, the multiplier effect of tourism expenditure means that it contributes much more to employment than this figure indicates. Trade and commerce Trade and commerce are already the fastestgrowing sectors of the labor force (Table 11-13). With the international trade set to grow at a faster rate than GNP, and with opportunities for expanding crossborder trade in the Western Region (Chapter 14), further rapid employment growth is likely. Education, health, and social services In the next 20 years, the education and health industries could develop very quickly in the Western Region. In 1999, they accounted for 6.1 percent of employment in the northwest and 5.0 percent in the southwest. The scale of expansion in services that is necessary could therefore absorb a significant part of the labor force. INTERNATIONAL LABOR MARKET The PRC has a long history of international migration, dating back to the Qin dynasty.26 The outflow is no

longer just from Fujian, Guangdong, and other coastal provinces but instead comes from a broad range of urban centers. Also, it now comprises better-qualified people. However, there remain major opportunities in international contract engineering and construction, fields in which the PRC will remain highly competitive for many years. The Government strongly supports overseas contracting and labor supply.27 However, the Western Region’s share in the PRC’s $2,623 million labor exports in 1999 was small and, apart from Sichuan, the numbers were very low (Table 11-29). The PRC currently accounts for only about 0.3 percent of the global labor market.28 Labor service exports make up only about 1.3 percent of the PRC’s exports, far lower than the figures for India, Pakistan, and Bangladesh.The governments of these three countries have left the business to the private sector, limiting their own role to regulation and facilitation.This suggests that the main impediment in the PRC is the process of licensing enterprises to enter the market. OBSTACLES TO MIGRATION There are many obstacles to migration besides finding a job. They include language (see Chapter 13), the hukou (household registration) system, the lack of secure and tradable land rights in rural areas, and accommodation. Hukou system Most analysts have paid particular attention to the hukou system. Unlike population registration systems in many other countries, the purpose of the hukou system is not merely to provide statistics and identify personal status, but also to regulate population distribution and facilitate the application of the various tools of State social control.29 In fact, under the Regulations Concerning Resident Identity Cards of 1985, the procedure for obtaining an identity card is separate from (and must follow) that for registering permanent residence.

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Table 11-29 Contract Engineering and Labor Supply, 1999

Region Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Workers Sent (no.)

Workers Overseas (no.)

Contracts ($ million)

Turnover ($ million)

45.9 382.4 17.4 339.2 n. a. 22.9

38.4 216.9 n. a. 166.9 n. a. 45.7

1,509 10,074 277 1,450 n. a. 639

3,006 n. a. 110 1,442 n. a. 1,006

80.1 60.3 n. a. 34.0 6.7 53.0

86.1 56.9 n. a. n. a. 8.0 31.7

1,390 n. a. n. a. 149 389 3,200

n. a. 1,000 n. a. n. a. n. a. 1,917

Countries Republic of Korea, Malaysia, Singapore, Indonesia, Tanzania, US Macau, Viet Nam, Cambodia, Philippines, Sri Lanka, Singapore Laos, Burma, Thailand, Pakistan Viet Nam, Cambodia, Bangladesh, Polynesia, Hong Kong, China Japan, Singapore, Saudi Arabia, Sudan, Papua New Guinea Zimbabwe, Côte d’Ivoire, Ghana, Guinea, Singapore Saudi Arabia, Rwanda, Uganda Tajikistan, Kazakhstan, Saudi Arabia Russia, Mongolia, Japan

Source: Almanac of China’s Foreign Economic Relations and Trade 2000.

Box 11-1 Advice about Solving Present Problems for Residential Status, Beijing Municipal Public Security Bureau, 5 February 2001 1 Infant’s residential status follows father’s 1.1 Women from other provinces who marry local residents, and whose infants were born after 22 July 1998 can request residence status according to their father’s. Children can obtain this when they are five years old, according to the principle of preference for preschool children. 1.2 Women from other provinces who marry local residents and whose infants were born before 22 July 1998 can request residence status according to their father’s, in batches. Children who are over five but not yet six can register according to their father’s residence; children who are six can apply for registration when both father and mother have residential status. 1.3 Women from other provinces who marry local residents and violate local family planning policies cannot obtain hukou in Beijing. 2 Spouse’s residential status If a man or woman has been married for over 10 years he or she can register according to the hukou status of the spouse in Beijing. 3 Old parents following children’s registration status Males over 65 years and females over 60 years who have no children in other cities or near where they live can follow their children’s hukou status in Beijing. 4 Citizens who invest and run enterprises in Beijing If citizens invest and run enterprises in Beijing apply for Beijing hukou, they can settle in pilot urban areas in the outskirts of the city according to the ways of residential registration in pilot urban areas for small urban construction in Beijing outskirts. 5 Other problems 5.1 For items 1, 2, 3, and 4, the issue of Beijing hukou is subject to stipulated maximum numbers. 5.2 Hukou for professional or technical staff is treated separately. 5.3 The policies for transfer from agricultural hukou to nonagricultural hukou will be adjusted according to this advice. The Municipal Public Security Bureau is responsible for explaining this Advice. The Advice takes effect from 1 January 2001.

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Reforms have opened urban residency to rural people and relaxed to some extent the policy control of nongzhuanfei (changing the place of hukou registration and converting the hukou status from agricultural to nonagricultural). In particular, the Government has substantially reformed the system in small towns in a manner that will facilitate registration of residence.The Ministry of Public Security issued a notice in March 2001, Advice for Residency Registration Management in Small Cities and Towns, which sets out the new procedures. However, there has been little relaxation in the case of provincial capitals and the megacities of Beijing, Tianjin, and Shanghai. Local governments in these cities continue to discourage rural migrants. The Central Government and local governments seem to think that they can influence migrants to migrate to small towns instead of to the megacities. However, wage differentials will continue to attract many migrants to the megacities, and data on migrants from the Western Region do not indicate any preference for migration to nearby small cities or towns instead of more distant large cities. The increasing phenomenon of the “floating population” is a consequence of a rapidly expanding market economy in the context of controls on nongzhuanfei. Even after significant reductions in urban hukou benefits, there are still substantial benefits like subsidized housing, medical care, and education that only people with local hukou can enjoy. The procedures for registering residence in the megacities remain immensely complex (Box 11.1).

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Regulations on floating population Migrants who work without hukou for the city in which they work are subject to local government regulations for the floating population. The Beijing Regulations for Nonresident Hukou Management, for example, include the following provisions, among many others: • Nonresidents must obtain a residence permit from the police within three days of arrival. • The police control the size of the floating population within the approved ceiling. • To obtain a residence permit, nonresidents or their landlord must present the landlord’s hukou. • To work legally, nonresidents must first obtain a residence permit and a work permit. • The residence permit is valid for one year and must be renewed yearly, and the prescribed fees must be paid. Nevertheless, many migrants work in Beijing and other large cities without the proper permits. Orderly migration (youxu liudong) Orderly migration (youxu liudong) is a concept without precise definition that has featured in Government planning since the early 1990s.30 Youxu liudong encourages Labor Bureaus in both laborimporting and labor-exporting areas to develop joint plans for recruitment. Urban Labor Bureaus issue work permits to migrants for a fee. The Tenth FYP advocates youxu liudong in conjunction with reform of the hukou system. Land rights in rural areas Land in rural areas is owned by peasant collectives. Individuals occupy land under 30-year contracts; they do not have any legal right to sell or otherwise transfer their contract rights. Furthermore, absence leads to the risk that the village committee will reassign the land to others; the law permits this. In cases where people move to towns, Government policy emphasizes the obligation of peasant collectives to enforce use contracts and ensure the proper cultivation of land.31

PROBABLE SCALE AND DIRECTION OF RURAL-URBAN MIGRATION According to Todaro’s classic migration model, ruralurban migration depends on expected rural-urban income differentials. Under the model, migration continues until the size of the urban informal sector is large enough (and the rural population small enough) to equalize the rural wage and the expected wage in the city.32 Seeborg, Jin, and Zhu have developed a version of Todaro’s model to suit conditions in the PRC.33 This version envisages potential migrants facing four basic outcomes: • Employment in SOE sector • Employment in the non-SOE contract wage sector • Employment in the informal or urban traditional sector • Unemployment The conclusion is that rural migrants will mainly compete in the contract labor and informal sectors, driving down wages and increasing urban unemployment. Todaro’s model implies that (i) migration will nevertheless continue in these circumstances; and (ii) without a reduction in the urban-rural earnings differential, the migration rate will increase along with the size of the informal sector.

Implications for labor and social security policies In the Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region, the Government set out policies for attracting skilled manpower and exploiting human resources in science and technology and education.34 However, the Government should consider several other important measures and policy refinements.The core argument of this chapter is that only if there is continuing and expanding labor mobility is there any hope of providing full employment for the labor force of the Western Region.

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STRENGTHENING THE MARKET MECHANISM The PRC has only recently accepted the principle of labor markets. It was the 14th Conference of the CCP in 1992 that put forward the concept of the labor market. In exploiting human resources, there should be a balance between what the Government does and what the market does. On the one hand, the labor market should ultimately have full play in allocating human resources effectively and efficiently. On the other hand, the intervention by governments will be essential both during the transition to a market economy and in the longer term in a regulatory capacity. In further strengthening the functioning of the labor market, the Government needs to pay particular attention to several areas including SOE recruitment (filling fewer positions by transfer), labor law, labor exchanges, employment agencies, gender equity (Chapter 12), minorities’ equity (Chapter 13), and SOE corporatization. Because there has already been considerable liberalization of labor markets, these measures will not by themselves lead to the absorption of all surplus labor. However, in conjunction with measures to improve capital allocation (Chapter 1), and to facilitate growth of SMEs (Chapter 10) in the Western Region, they will be effective. Policymakers cannot, however, treat the market for labor in exactly the same way as the market for grain. If the equilibrium price of labor drops too low, the Government may have to expand welfare programs for those with very low incomes. Similarly, the Government should do more to enforce minimum labor standards by giving unions more support in this important area. Entry into the WTO both facilitates and necessitates this. REFORMING THE HOUSEHOLD REGISTRATION SYSTEM Distinctions associated with residential status remain important in discouraging rural-urban migration. Recent reforms have freed urban registration in towns at the prefecture level and below, but not in provincial cities.35

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Social costs There is widespread concern that further relaxation of the system could lead to the large floating populations becoming a serious social problem in the cities, with increasing unemployment, criminal activities, overcrowding, and pressures on social and health services. However, the correct policy response is to adjust urban and rural taxes to reduce the urban-rural net income differential. Insofar as there are social costs to migration, they would accrue mainly to the rich Eastern Region cities, while the Western Region would gain through higher remittances by migrant labor and higher agricultural productivity. Moreover, determining social benefits according to residential status discriminates against the Western Region. The receiving cities get the benefit of low-cost labor while the areas of origin bear the social costs (when sickness or redundancy forces migrant workers to return home). It is for the receiving cities to develop programs to support migrants and minimize social costs. Economic benefits There are several economic benefits of a more mobile labor force. Agglomeration in the megacities will lead to diseconomies that will discourage industrial activities in these cities and encourage industrial growth in the secondary cities, including perhaps some cities in the Western Region. At present, Shanghai, for example, is still a major industrial center. Labor remittances will directly benefit the Western Region, and migration to cities in the Eastern Region will absorb some of the otherwise underemployed labor of the Western Region. Social benefits Local regulations on hukou that give advantages to migrants with educational, professional, or business qualifications over migrants without these advantages threaten to exacerbate the urban-rural social divide. Rural-urban migration has the potential to greatly reduce the social and economic gaps between urban and rural populations. These gaps are

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especially great between the rural populations of the Western Region and the large cities of the Eastern Region, to which many peasants already migrate. Method of reform For the Government, probably the simplest path of reform is to separate the registration system and the systems of entitlement to social security and other benefits.36 The Government should discourage the local governments of large cities from discriminating against rural migrants. In particular, the Government should take action to eliminate those discriminatory practices toward rural migrants by local governments that offend the rights of citizens under the Constitution. A long-term strategy should be to progressively eliminate the separate status of rural and urban residents under various laws. REFORMING UNEMPLOYMENT INSURANCE The Government should remove the restriction that keeps rural migrants to cities from paying personal contributions to unemployment insurance funds. It is hard to see what purpose this restriction on the labor market serves apart from possibly forcing some rural migrants who become unemployed back to the countryside. A long-term objective should be the establishment of a national unemployment insurance scheme. The system of funds for each large city and province is very much to the disadvantage of the Western Region. A social security tax could substantially benefit the Western Region by ensuring that the system has adequate funds. Increasing labor migration to the cities could drive down minimum (market) wages below the Basic Living Subsidy and unemployment benefit levels. There will be a need to preserve incentives to work by making appropriate adjustments in the benefit levels. CONTINUING LAND REFORM IN RURAL AREAS Further development of the Land Administration Law could support migration to cities and surrender of landholding rights. The present system encourages absentee or part-year farming and is not consistent

with maximizing agricultural productivity.The Land Administration Law already recognizes the principle of compensation for compulsory acquisition of land use rights in rural areas, so extending the principle to cover voluntary sale of land use rights to the collective should not be difficult. SUPPORTING AND MONITORING THE INFORMAL SECTOR The Government should change its discriminatory attitude toward the informal sector and play a supportive role.37 The development of the informal sector will certainly give rise to external diseconomies such as congestion of sidewalks, traffic intersections, and refuse in the streets and drains. However, the choice will be between accepting these diseconomies and accepting higher unemployment. Monitoring provides a means of assessing which diseconomies are tolerable and which are not. The key policy initiative is to relax the procedures for business licenses and, wherever practicable, substituting a registration system for a licensing system (licensing implies approval, which provides opportunities for petty corruption). EXPLOITING THE INTERNATIONAL LABOR MARKETS While government policies support labor working overseas, the results are far below those that South Asian countries and the Republic of Korea have achieved. The Western Region has been particularly slow in tapping the international market. With globalization, international labor markets will become more open and competitive and more opportunities will corresponding open up for the PRC. The main actions that local governments can take are to simplify procedures and encourage and facilitate applications by businesses (irrespective of ownership) for rights to engage in overseas contracting and labor cooperation. If more businesses participate, the likelihood is that new markets, such as ICT for software professionals, will take off in the PRC as they have in India. The potential benefits are not

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just the business profits and labor earnings, but include the acquisition of valuable work experience, technical expertise, and language skills. RAISING THE SKILL LEVEL OF THE LABOR FORCE Building human resources involves two distinct processes: skill development through formal education and training and capability formation through specific technology-based experience.38 The requirements of both differ according to level of development. Moreover, each level and strategy reflects and produces specific kinds of skills and capabilities (Figure 11-4).

In general, as an economy matures, the greater and more diverse its human capital needs become. The PRC’s great achievements in literacy have been at the expense of higher education. The needs of the economy will increasingly demand more higher education graduates. STRENGTHENING THE EDUCATION SYSTEM The need for more higher education graduates and the persistent deficiencies in basic education and literacy in the Western Region imply that the Government should attach a higher priority to investment in education at the expense of major

Figure 11-4 Human capital and industrial development patterns

Level pattern of industrial development

Human capital profile Skills

Technological

Low levels, mainly simple assembly and processing activity for domestic market

Literacy, simple technical and managerial training. Practically no in-firm training except informal on-job learning.

Ability to master assembly technologies, copy simple designs, repair machines, but many activities operate well below world best practice levels of technical efficiency.

Intermediate level, with export-oriented activities in light industry, some local linkages in low-tech products

Good secondary & technical schooling and management financial training. Low base of engineering and scientific skills. In-house training mainly by export enterprises. SMEs have low skill levels.

World-class assembly, layout, process engineering and maintenance in export industries. In others, capable of minor adaptations to processes and products. Little or no design/development capabilities. Technology institutions weak.

Deep industrial structure but mainly inwardoriented; technological lags in many activities

Broad but often low quality schooling, vocational and industrial training. Broad engineering base. In-house training lagging. Training institutes de-linked from industry. Management and marketing skills weak. SMEs have some modern skills.

Process mastery of capital and skill intensive technologies, but with inefficiencies. Considerable backward linkages, significant adaptation of imported technologies. Little innovation, few links with universities and technology institutions.

Advanced and deep industrial structure, with many world-class activities, own design & technology base

Excellent schooling and industrial training High levels of university trained managers, engineers and scientists. Training institutes responsive to industrial needs. Large investments in formal and informal in-firm training. SMEs have high skill levels and competence.

Ability to monitor, import and adapt advances in technologies. Good design and development capabilities in sophisticated technologies. Deep local links with suppliers, buyers, consultants, universities and technology institutions.

Source: Lall (1999).

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infrastructure projects. At 2.3 percent of GNP, public expenditure on education is very low even by the standards of most developing countries.39 Public education spending mainly comes from the Government’s budget, and though the share of education spending in government expenditure has risen, it has fallen in proportion to GNP because of the drop in the share of fiscal revenue in GNP.40 Primary education The PRC’s progress in raising primary school enrollments gives hope that universal primary school education in the Western Region is achievable within 10 years. As a means of dealing with the obstacle of parental inability to afford school costs, international best practice favors demand-side subsidies through vouchers, grants, scholarships, or stipends.41 There remains much scope for the Hope Project, Spring Bud Planning, Happiness Project,42 and so on. Secondary education In the Western Region, secondary education will need early and massive investment if attendance is to reach levels prevailing in the Eastern Region. It will not be possible to reduce the economic differentials between the Western Region and the Eastern Region without this investment. The expansion of secondary education facilities will especially benefit smaller urban centers now without such facilities, and their rural catchments. It will also lay the foundations for expanding higher education. These conclusions are consistent with the Education Strategy of the Tenth Five-Year Plan,43 which emphasizes improving the quality of secondary education in poverty counties. Higher education Increasing investment in higher education may not benefit the Western Region as much as the PRC as a whole. This is because of the tendency for graduates to seek better-paid jobs in the Eastern Region or pursue further education overseas. Nevertheless, investment in higher education must increase substantially, as indeed the Education

Strategy of the Tenth Five-Year Plan envisages.44 It should focus on correcting the imbalances in provision between the Western Region and the rest of the PRC, and between provincial capitals and other cities. It should be possible to partly finance the expansion of higher education by simultaneously increasing tuition fees and expanding the scope of the loan scheme for students. With more promotion, the loan scheme will increase the number of poor students entering university and reduce the regressive character of higher education expenditure. Adult education The focus of adult education services by governments should be to give people of working age the prerequisites for participating in the labor market. These prerequisites today center on functional literacy and language skills (especially for minority groups, see Chapter 13); tomorrow, they will include a wider range of skills that secondary education normally provides.The needs are very great among the surplus rural populations of the Western Region.The urban bias of adult education means that there is a risk that governments will fail to deliver on this core responsibility. Meanwhile, many of the urban adult education services are suitable for private sector delivery. There is great scope for distance education relying on modern communications technology, especially as many villages in the Western Region still do not have television, let alone a computer. ESTABLISHING A COMPREHENSIVE AND MULTILEVEL VOCATIONAL EDUCATION SYSTEM The Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region is silent on vocational training. Instead it stresses measures to “attract and retain talent.”With the increasing mobility of all sectors of the labor force, a better strategy would be to focus on vocational training. One of the main objectives should be to equip young people from rural areas to

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compete for jobs in the cities, whether in the Western Region or elsewhere in the PRC. Case for government intervention In the coming years, much of the rural labor force will be seeking nonagricultural jobs. Efficient intervention by the Government can accelerate the process of skill and knowledge upgrading. Planning should recognize the market failures in vocational training (Table 11-30).

Choice of system According to the International Labor Organization (ILO), there is no ideal training system that is applicable everywhere; various types of vocational training are in widespread use around the world. The PRC’s Labor Law prescribes both a State system and an enterprise-based system. Probably, the Government will need to consider adapting the enterprise system to a more cooperative system (Table 11-31).

Table 11-30 Market Failures in Vocational Training Component of Training System Type of Market Failure

Trainee

Indivisibilities

Externalities

Only some of the benefits of training accrue to the trainee

Information gaps

Lack of knowledge as to market value of particular skills

Policy Implications for Western Region

Education and Training System

Enterprise

Many types of training facility not feasible in smaller urban centers

Training not feasible for SMEs

Need for specific arrangements for smaller towns and SMEs

Bias toward providing training that has no value to other firms

Need for training standards Need for incentives for trainees and providers to achieve training objectives

Many SOEs are sheltered from competition and undervalue labor skills

Need for research on training needs

Lack of knowledge as to industry needs

Need for trainee loan scheme

May be unable to finance costs because capital markets lack information and monitoring capacity Source: Compiled by consultants.

Table 11-31 Main Types of Vocational Training Systems System

Examples

Main features

Cooperative

Austria, Germany, many Latin American countries

Pressures to train from cooperation between employers’ organizations, Government, and trade unions

Japan UK, US

Low labor mobility, lifetime employment, absence of stock market pressures Few institutional pressures to train

Hong Kong, China, Korea, Singapore, Taiwan

State plays leading role in coordinating demand for and supply of skills, in open competitive environment. Government takes prime responsibility for training in institutions. Little pressure for employers to train.

Enterprise-based Low labor turnover Voluntarist State-driven Demand-driven Supply-led

Economies in transition in Asia and Africa

Source: International Labor Organization (1998b), Table 3.2.

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ESTABLISHING FAIRNESS IN SOCIAL SECURITY Progressive reforms in the social security system will be necessary to extend its coverage in the Western Region and make it fairer. Social safety nets focus almost exclusively on the welfare of people with urban household registration.45 This will magnify the push factor in migration to the cities, and is unfair to the Western Region with its predominantly rural population.There is therefore a need to improve workfare programs (Chapter 5).

Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Zhai Zhenwu (2000). Rawski (1999). I Sun Changmin (2000). Seeboorg et al. 2000), p. 39. Wang Yongzhi (1999). Inquiries by international team member during visit to Gansu, March 2001. Wang Yongzhi (1999). Such as Wang Yongzhi (1999). Guo Xiaohong, www.china.org.cn/english/2001, accessed 1 October 2001. State Development Planning Commission (2001), p. 33. Wang Yongzhi (1999). Shujie Yao and Jirui Liu (1998), p. 735. Rawski (1999). Rawski (1999). Young Lee (1999). Rawski (1999). Yue, Victor Yuan, and Xin Wang (2000). Ministry of Labor and Social Security (2001a). Ministry of Labor and Social Security (2001b). State Council (1999). Field inquiries in Kunming and Lanzhou by team member, March 2001. Yunnan Employment Service Bureau (2000). Liew (2001). Liew (2001).

25 China Tourism Statistics Yearbook 2000. Employment in tourism comprises employment in hotels, travel agencies, coach companies, tourism administration, etc. 26 Ye Wenzhen (2000). 27 Ministry of Foreign Trade and Economic Cooperation (2001). 28 Yuan Shouqi (1999). 29 Kam Wing Chan and Li Zhang (1999). 30 Lei Guang (2001). 31 Ministry of Public Security (2001). 32 Todaro (1969). Todaro’s model is as follows: E* = where:

γ –β γ F (α) + γ – β E* is employment in the modern sector; γ is the growth rate of employment in the modern sector (the rate of industrial output growth less the rate of labor productivity growth); β is the natural rate of increase of the urban labor force;

α is the urban-rural real earnings differential.

Todaro gives the following example: Suppose the growth rate of modern sector employment is 4 per cent (g + .04), the natural rate of urban labor force growth is 2 per cent (b is .02), the urban-rural real earnings differential is 100 per cent (a =1.0), and, for simplicity F(a) = a.. Given these parameters [the] equation…says that, in equilibrium, modern sector employment would absorb only one-third of the urban labor force. Now suppose that the earnings differential between modern urban jobs and traditional agricultural work increases by an additional 20 per cent, i.e., da = dF(a) = 0.20. …Our model says that the rate of modern sector job creation must grow by an additional 1.9 per cent (i.e dg = .019) just to prevent the equilibrium employment rate from falling below its original level. Moreover, when it recalled that g = l-r and we recognize the fact that in order to increase employment growth (g) by 2 per cent, the growth rate of modern sector output (l) will probably have to increase by at least an

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additional 6 per cent due to the positive correlation between output expansion and productivity growth, we begin to appreciate the great difficulty of absorbing larger proportions of the urban labor force without a concentrated effort designed to prevent the further widening of urban-rural wage differentials.

33 Seeboorg et al. (2000). 34 1. Attracting talents and making good use of them. Specific policies should be formulated to attract and retain talents and encourage them to set up businesses in the Western Region. Along with salary reform, hardship allowances should be provided to people working in harsh, remote, or frontier areas. The salaries for personnel of Government agencies and nongovernment institutions in the Western Region should be gradually raised to reach the national average level or even a higher level. In the implementation of key development tasks, major development projects, and important studies in the Western Region, good working and living conditions should be provided to attract and retain talents from both home and abroad. The system of permanent residence registration will be revised to allow people to retain their original residence registration when they come to the Western Region to invest, trade, or otherwise participate in Western Region development. Any person who owns a permanent residence and has a stable job or other reliable sources of income in a city at or below the prefecture level in the Western Region may apply for local urban residence permit if that person so wishes. This policy is intended to stimulate an appropriate shift of the rural surplus labor force and a reasonable flow of population between regions. The exchange of government officials between the Eastern and Western regions should be expanded. Relevant Central Government agencies as well as universities and research institutions in the Eastern Region should

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provide more information services and human resource support to the Western Region. Efforts should be made to bring in more foreign experts and technologies. With assistance from the Central Government and coastal developed regions, more vigorous efforts should be made to nurture leaders and ethnic minority officials and train civil servants, professional and technical personnel, and business managers for the Western Region. 2. Taking advantage of the leading role of science and technology. More support will be given to the Western Region in the allocation of funds included in various science and technology plans, gradually increasing the overall amount of funding for science and technology. With the focus on the key tasks of Western Region development, the scientific and technological capacity of the Western Region should be built and enhanced, and arrangements should be made to tackle key general technical problems and to disseminate and industrialize major technological advances. The transfer of military technology to civilian use and production should be supported. Research institutions and institutions of higher learning in the region should be supported in their efforts to strengthen relevant applied research and basic research. The reform of the science and technology development system should be deepened, speeding up the transformation of applied research institutions into enterprises, consolidating cooperation between schools, enterprises, and research institutes, and integrating scientific development and economic growth. A proportion of the sales income of enterprises in the Western Region may be used for technological development and the allowed amount may be raised as necessary. Innovation funds for small and medium-sized technologyoriented enterprises should intensify their support for qualified projects in the Western Region. The registration with local bureaus of

industry and commerce should be simplified for scientists and technicians who wish to set up technology-oriented companies in the Western Region, and they should be allowed to hold an increased proportion of shares, stock options, or intellectual property equity. 3. Increasing investment in education. The compulsory education program should continue to be implemented throughout poverty-stricken areas in the Western Region, and the State will render more support for this program by increasing funding as part of a vigorous effort to make nine-year compulsory education available throughout the region. More support should be given to the development of institutions of higher learning in the Western Region, and universities and colleges based in the Eastern and Central regions should enroll more students from the Western Region. The counterpart aid program that matches eastern schools with schools based in poverty-stricken areas in the Western Region should be expanded along with the program that arranges for schools in large and medium-sized cities of the Western Region to assist schools in rural poverty-stricken areas. A system of distance education should be established in the Western Region. The training of rural grassroots officials and farmers should be stepped up to improve their scientific and general knowledge. 4. Stepping up the development of culture and public health. The Western Region should be favored in receiving state subsidies for building local cultural facilities and broadcasting facilities and preserving cultural relics. Economic policies for state-run cultural and mass media entities should be further implemented to facilitate literary and artistic production. The Connecting Every Village project should be carried out to make radio and television broadcasting available to every village so as to further expand effective radio and television coverage

in the Western Region. The culture of frontier areas and areas inhabited by ethnic minorities should be developed actively. Support should be provided for the development of culture and spiritual civilization in the Western Region. Stronger support should be given to the development of public health and family planning in the Western Region, with the focus on establishing and improving a primary healthcare system in rural areas. 35 Ministry of Public Security (2001). 36 Kam Wing Chan and Li Zhang (1999). 37 Zhang Xinghua (2000). For a recent similar argument for Indonesia, see Rice (2000). 38 Lall (1999). 39 See statistics in World Bank (2001b). 40 Wang Yongzhi (1999). 41 World Bank (2001b). 42 Hope Project is a welfare project established in 1989 by the China Youth Development Foundation that raises donations from society to help the backward build Hope Primary Schools, and it aids the children who are unable to go to school to continue their education. Spring Bud Planning is a social welfare project of the All China Women’s Federation that targets the two thirds of dropout students who are female. It raises funds from domestic and international sources to set up girl students’ classes so that girls in backward areas continue their schooling. Happiness Project aims at mothers in backward areas. While carrying through scientific knowledge education, reproductive health and family planning, it helps them improve the level of knowledge and health qualities, boost their social and economic status, lets them realize little breeding, eugenic breeding, fine child care, breaking through poverty into richness, building their civilized and happy little families. 43 State Development Planning Commission (2001a). 44 State Development Planning Commission (2001a). 45 Rawski (1999).

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CHAPTER

12

WOMEN

False assumptions about gender equality or indifference to the status of women have replaced the outright discrimination that preceded the founding of the PRC. In the next 20 years, economic reforms in the Western Region will put extra pressure on women. The strength of market forces and the relatively reduced capacity of government could make women more vulnerable in both the labor market and within the family. Development policies should therefore include special measures to shield women from the worst effects of socioeconomic dislocation.

Background of government policy THE CONSTITUTION AND GOVERNMENT POLICY The Constitution is very explicit about the position of women in society: Article 48 Women in the People’s Republic of China enjoy equal rights with men in all spheres of life, in political, economic, cultural, social and family life. The state protects the rights and interests of women, applies the principle of equal pay for equal work to men and women alike and trains and selects cadres from among women.

The Constitution, the Marriage Law of 1980, and the Inheritance Law of 1985 all give women equal rights. The Law on the Protection of Rights and Interests of Women of 1992 expanded and consolidated the legal position of women, stated the fundamental rights of women in more detail, and assigned responsibilities for enforcing the Law to various government agencies and to the women’s federations. The official policies of the Government recognize the long history of the movement toward gender equality. They also recognize the need to promote gender equality: … The condition of Chinese women is still not wholly satisfactory. There exist various difficulties and resistance which have prevented the full realization of equal rights to women with respect to their participation in political and government affairs, employment, access to education as well as marriage and family.1

The transition to an advanced market economy inevitably generates tension between traditional and modern views about women. The Maoist view has been that “Women hold up half of the sky.” However, daily reality conforms more closely to the

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traditional Confucian saying “For a woman to be without ability is a virtue.”2 But this does not deny the progress made by women since the 19th century when foot binding was widely practiced. Nor does it deny the contribution that the labor of women made to the revolutionary and postrevolutionary periods, a contribution often marred by extraordinary suffering through the neglect of family and self in the interests of the nation.3 But the defining characteristic of policy and ideology since 1950 has been that the State gave women equality in its ideology, policies, and rhetoric while remaining relatively indifferent to what happened to them in daily life. Before the 1992 law, the official position was that government policy automatically translated into practice and hence there was no need to examine the actual roles of women. These attitudes produced a curious indifference to the question of gender equality that so preoccupied many other countries. Women suffer from the poor definition of property rights in general. This is especially true of the Western Region with its predominantly rural population. Rural land is owned by collectives, and not by individuals.The village communities determine the actual land distribution and its redistribution, and these decisions follow the traditions of male-oriented rural society.4 INTERNATIONAL COMPARISONS International agencies providing development funds have been much exercised by the question of gender equity and have developed indicators to compare countries. Of the 168 countries ranked by the United Nations in 1998, the PRC ranked 93rd according to the Gender Development Index (GDI) and 98th according to the Human Development Index (HDI);5 putting it ahead of India (ranked 128th and 129th, respectively). The difference between GDI and HDI was small, suggesting a relatively good performance by the PRC.. However, there is a major problem with the UNDP definitions of HDI and GDI. Both indices use the simple average of three factors:

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

longevity, income, and education,6 and the GDI compares the disparity in achievement between females and males.7 As a rough indicator of development between different countries, these indices do reveal something of gender disparities. However, the three variables on which the index is calculated are not subtle enough to identify the nature of gender inequality that persists in the Western Region. WOMEN AND ECONOMIC DEVELOPMENT Since the 1950s, the main contribution of women to economic development has been through their participation in the workforce. Participation rates have been very high. As Table 12-1 shows, female participation in paid labor outside the home has been higher in the Western Region than in the Eastern Region. This is no doubt driven by the demands of agriculture, which dominates the economies of the Western Region. The greater poverty in the west also compels families to maximize outside earnings through the additional labor of women. In areas where men have been attracted to off-farm jobs, the employment of women has even intensified. Women have also had a greater role than men in unpaid household duties, while spending less time on leisure activities or sleeping. It seems that women in the PRC have been holding up more than “half the sky” for a very long time. Moreover, they have played their roles without making any special demands either on their male counterparts or on the State. Overall, they have been indifferent to the question of upward mobility, relatively unquestioning of their status, and less well informed about PRC and foreign politics than their male counterparts. RESEARCH IN THE PRC In the early 1980s, the question of gender in the PRC at last emerged as a subject of inquiry and research. Research has provided the State and other agencies with more accurate information, which can be used

Table 12-1 Female Economic Participation, by Province, 1998

Region

Percentage of Female Population Aged 15+ in Employment (%)

Central/Eastern Region Henan Jiangsu Anhui Shandong Hubei Hebei Hunan Hainan Jiangxi Guangdong Liaoning Shanghai Jilin Beijing Zhejiang Fujian Tianjin Shanxi Heilongjiang Western Region Yunnan Sichuan Guizhou Gansu Guangxi Tibet Ningxia Qinghai Shaanxi Xinjiang Inner Mongolia

78.5 76.1 76.0 73.9 73.4 72.5 71.5 68.4 68.2 65.0 62.3 62.0 60.3 60.0 59.7 58.0 57.1 56.9 54.0 80.1 78.4 77.6 76.4 76.2 75.6 73.8 71.1 70.1 65.7 63.6

Source: All-China Women’s Federation (2001).

to close the gap between the rhetoric and the practice of gender equality. The first all-PRC survey to examine the role and status of women, conducted in 1990–1991 by the Women’s Studies Institute of the All-China Women’s Federation (ACWF), confirmed these general observations while also noting that, despite the disparities, women in postrevolutionary PRC were

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much better off than ever before. Using various survey methods, the Federation collected information for rural and urban areas in 11 provinces including Qinghai, Gansu, and Guizhou.8 Unfortunately, separate results for the western provinces were not reported. Nevertheless, the survey provided some useful insights into the persistence of gender inequality in the early 1990s, 12 years after the liberalization of the economy in 1978. Liberalization considerably improved the economic position and status of women, yet gender differences remained significant, especially in rural areas. The survey findings included the following: • Eighty-six percent of rural women found employment either by taking their parent’s job or by farming like their parents, compared with 76 percent of rural men. In other words, rural women were much more dependent on the traditional economy of farming than rural men.9 • Only 3 percent of rural women found employment by relying on their own ability or by passing a test, compared with 8 percent of rural men. Urban women were better able to apply their abilities than rural women, and did quite well, even compared with urban men.10 • Women were paid less for “holding up half the sky” than men: about 79 percent of urban women but only 64 percent of urban men, earned less than 2,400 yuan per year.11 • The wage gap between rural women and rural men was smaller than that between urban women and urban men, but it was still significant, with 81 percent of rural women, but only 68 percent of rural men, earning less than 1,500 yuan a year.12 • There was considerable discrimination in favor of men in the matter of social security payments, including medical insurance, the one exception being the payment of salaries for maternity leave.13 • Men worked an average of 1.31 hours longer than women; in rural areas men worked an

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average of 1.47 hours longer than women and in urban areas, 54 minutes longer.14 Counterbalancing this difference was the greater number of hours that women spent on housework.15 • Women had much less knowledge of politics.16 With few exceptions, rural women were worse off in status, remuneration, and other indicators than their urban counterparts. As in other parts of the world, urbanization has brought with it many economic and social advantages, especially for women. In fact, the participation of women in the urban workforce is one of the highest in the world, with nine out of ten in employment.17 However, the Western Region remains primarily rural (Chapter 11), and women are in a particularly disadvantageous position simply because of this. THE GENDER-WAGE GAP IN URBAN PRC Whilst urbanization will bring many benefits to the socioeconomic status of women in the Western Region, it will not by itself deliver equal wages and opportunities for equal work and equal talent. Thus, the State will need to play some role in ensuring that gender discrimination does not become an endemic characteristic of the Western Region. Gender-wage gap, 1988 to 1994 This first systematic study of female wages in the PRC, by Margaret Maurer-Fazio et al.,18 covered the urban labor market in the period 1988 to 1994. It showed that regular female employees as a percentage of the urban labor force hardly changed, rising from 37 percent to 38 percent during this sixyear period. At the same time, the wage gap between female and male labor increased significantly. The basic conclusions of the study can be summarized as follows: • The average (unadjusted) wage of women in urban jobs was 55 percent of the average male wage in 1988, and fell to 42 percent of the male average in 1994.

• When adjusted for type of ownership and location, the female wage rate fell from 66 percent of the male rate in 1988 to 46 percent of the male rate in 1994. • When adjusted for sector of employment and location, the wage rate for women fell from 86 percent of the male rate in 1988 to 75 percent of the male rate in 1994. By all measures, female wages were considerably less than male wages and indeed fell between 1988 and 1994. Urban wages for women were relatively closer to male wages whenever the comparison was made within an industrial sector; but vast differentials opened up whenever female and male wages were compared between industries (Table 12-2). Female employment was predominantly in lowwage sectors, which also utilize relatively low levels of technology and scientific input. For example, urban women made up 55 percent of the workforce in healthcare, services, and hotels, and 40 percent to 41 percent of the workforce in primary schools, agriculture, and social welfare.19 Female employment in the highwage sectors was very low: only 16 percent of the workforce in waterways was female; in geological prospecting it was 23 percent; air transport, 27 percent; civil engineering and railways, 20 percent each.

Wage rates in Central SOEs, the category with the lowest representation of women, are much higher than wage rates in prefecture-level SOEs and countylevel SOEs. When Maurer-Fazio et al. (1999) compared trends in the gender-wage gap in the Western Region with those in eastern and central PRC, their basic characterization of the wage gap was confirmed. In the Western Region, both the adjusted and unadjusted wage ratio progressively worsened for women in the period 1988–1994. In 1994, the unadjusted female wage in the Western Region was about 43 percent of the male wage; this was much better than the unadjusted ratio in central PRC, which was only 23 percent, but not as good as the unadjusted ratio of almost 50 percent in eastern PRC. But when adjusted for economic sector and type of ownership, the wage ratio for women in the Western Region increased to 56 percent of the male wage. This was, however, still lower than the wage ratio for women in eastern PRC (57 percent) and central PRC (65 percent). Gender-wage gap, 1994 to 2000 In 1994, the Government introduced the Labor Law of 1994. The law is quite explicit on the rights of women to employment:

Table 12-2 Time Trends in the Ratio of Urban Female Wages to Urban Male Wages, by Major Region, 1988–1994 Eastern Region Year

Ratioa

1988 1989 1990 1991 1992 1993 1994

0.637 0.628 0.596 0.612 0.594 0.549 0.495

Adjusted No. of Ratiob Observations 0.734 0.734 0.832 0.827 0.746 0.661 0.571

1,421 1,472 1,171 1,177 1,206 958 1,017

Central Region Ratioa 0.417 0.416 0.338 0.333 0.284 0.283 0.235

Adjusted No. of Ratiob Observations 0.646 0.716 0.800 0.831 0.883 0.693 0.649

1,103 1,123 870 881 901 712 758

Western Region Ratioa

Adjusted Ratiob

No. of Observations

0.517 0.494 0.466 0.469 0.413 0.491 0.427

0.956 0.940 0.656 0.713 0.548 1.017 0.563

1,011 1,026 824 821 841 557 720

Source: Maurer-Fazio et al. (1999), Table 11, p. 78. Notes: Eastern Region: Beijing, Tianjin, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Guangxi, Hainan. Central Region: Shanxi, Inner Mongolia, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan. Western Region: Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Yunnan. a Based on the total wage gap. b Based on the wage gap after controlling for economic sector and ownership type.

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Article 13 Women shall enjoy equal right, with men, to employment. With the exception of the special types of work or posts unsuitable for women as prescribed by the State, no unit may, in employing staff and workers, refuse to employ women by reason of sex or raise the employment standards for women.

The observations of Maurer-Fazio et al. are confirmed by other studies20 and by recent government statistics. Between 1978 and 1994, female employment as a percentage of total employment in urban enterprises grew steadily. However, it seems that once economic reforms began to bite, women lost their jobs at a faster rate than men. The percentage of females in the SOE workforce is especially low in those SOEs under the Central Government (Table 12-3). In the Western Region the employment of women in SOEs and COEs is no higher than in the rest of the PRC. In the case of prefecture-level SOEs, county-level SOEs, and COEs it is actually lower. Employment in the Western Region is predominantly in agriculture—57.0 percent in the northwest and 63.6 percent in the southwest in 2000. Women account for 47.1 percent of rural laborers, a proportion that has been gradually increasing because of women’s lack of access to nonfarm employment. A recent survey by the State Statistical Bureau and the ACWF provide data on the wage gap in 1999.21 In 1999, the average annual income of female employees in urban areas was 7,410 yuan, which was 70.1 percent of male incomes. The

average annual income of females who were mainly engaged in farming, forestry, animal husbandry, and fishery was 2,369 yuan, only 59.6 percent of male incomes in rural areas. The income gap in 1999 was 19.4 percent higher than in 1990. In terms of income distribution, 47.4 percent of urban female employees had yearly incomes below 5,000 yuan, and 6.1 percent had yearly incomes over 15,000 yuan. Women with low incomes outnumbered their male counterparts by 19.3 percent, and women with above-mid-level incomes were 6.6 percent fewer than men with the same income level. In urban areas, the income gap between males and females is directly related to employment status and profession. Most females are engaged in low-income work. For the same work, women generally hold lower position levels than the men, although data indicate that the number of women in responsible positions has increased, and there is a greater proportion of female than male technical personnel of every kind. OTHER ASPECTS THAT CREATE GENDER INEQUALITIES IN THE LABOR MARKET In fact, when nonquantitative factors are taken into account, the gender gap is even wider. The following practices of managers of urban enterprises, in particular, contribute to discrimination against women: • The official retirement age of women is five years earlier than for men. • In SOEs whose operations are being downsized or rationalized, women are typically laid off before men.

Table 12-3 Female Employment as a Percentage of Total Employment in Different Types of Enterprise, 1999

Region Eastern Central Western Southwest Northwest PRC

Central SOEs (%)

Provincial SOEs (%)

Prefectural SOEs (%)

County SOEs (%)

Urban COEs (%)

Other (%)

31.3 31.5

34.2 33.3

41.3 40.4

38.8 36.4

41.5 41.6

44.5 38.8

34.1 36.0 32.5

35.8 35.0 34.2

40.5 40.2 40.8

35.5 37.0 37.2

37.7 40.9 41.1

38.3 41.5 42.4

Source: China Labor Statistical Yearbook 2000.

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• There is a tendency to assign greater value to the work of the least capable male employees than to the work of the most capable female employees. • Employers are often reluctant to employ women in the first place because of the indirect costs of providing childcare facilities and maternity leave.22 These nonquantifiable labor practices are likely to grow in importance as industry seeks to become more competitive following WTO entry. As Table 12-4 shows, the proportion of women employed in urban enterprises in the Western Region does not differ markedly from the all-PRC average of 29.6 percent but is only slightly lower. Table 12-4 also compares the proportion of female employees with the proportion of registered unemployed and laid-off workers (this figure relates exclusively to SOEs). The proportions of female unemployed and laid-off workers exceed the proportion of females in the workforce.

Economic and social position of women LONGEVITY An important measure of the socioeconomic position of women in contemporary PRC is their longevity, or life expectancy at birth. All the indicators for this are positive. As Table 12-5 shows, in 1999, women in the PRC compared relatively well with women in the second largest rural economy in the world, India. Life expectancy at birth for women in the PRC was 71.3 years, 3.2 years higher than for men in the PRC. This is good performance, given that the maximum difference between female and male longevity in developed countries like Australia is about five or six years. Compared with women in India, in 1999, women in the PRC were expected to live almost 10 years longer. The longevity of women will continue to improve while that of men will lag significantly not

Table 12-4 Female Employees as Percentage of Total Employees in Different Workforce Categories, 1999 Region Eastern Central Western Southwest Northwest PRC

Employeda

Registered Unemployed During the Year

Unemployed at Year-End

Laid Off

30.8 28.1

48.1 49.8

51.5 50.3

47.8 46.6

29.2 29.2 29.6

48.1 46.1 48.5

49.3 48.1 50.4

47.4 44.9 46.9

Source: Calculated by consultants from China Labor Statistical Yearbook 2000. a Excludes laid-off employees.

Table 12-5 Longevity of Women in the PRC, 1999 Probability of Dying (per 1,000) Total Fertility Rate Country PRC India Brazil Argentina Australia

Under 5 Years

5–59 Years

Life Expectancy at Birth (years)

1990

1999

Male

Female

Male

Female

Male

Female

2.2 3.8 2.7 2.9 1.9

1.8 3.0 2.2 2.6 1.8

35 97 47 23 7

40 104 42 20 5

170 275 295 178 94

125 217 157 92 53

68.1 59.6 63.7 70.6 76.8

71.3 61.2 71.7 77.8 82.2

Source: World Health Organization (2001), in www.who.org, accessed in June 2001.

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only for natural biomedical reasons but also because men in the PRC are heavy smokers of tobacco. Each year 3.5 million people die of tobacco-related deaths, and this figure will rise to 10 million in the first decade of the 21st century, according to WHO. In the PRC, this epidemic of tobacco-related deaths is expected to kill about 100 million of the 300 million men now under 29 years, half of these in middle age.23 However, longevity is not the only measure of welfare. Women may live longer, but this does not necessarily mean that their mental and physical health is consistent with the PRC’s development goals. The country’s excellent record in improving the life of women since 1950 has been marred by the high suicide rate and significant failures in daily health and hygiene (see the section “Physical Health as an Indicator of the Position of Women,” below).

of a boy to boost the morale.”26 The failure to have a son could lead to exclusion from ancestral graves and village weddings and funerals.27 Even if the first child were male, the longing for more sons did not stop. Tu women felt under such pressure to give birth to boys that their physical and psychological health suffered.28 Even among the Lahu, who observe the matrilineal custom of married men living with the families of their wives, there is a strong desire for male children. There are popular sayings expressing this desire but no similar sayings about female children, for example:“It is better to have a son sooner than to make a fortune sooner” and “The earlier one has a son, the earlier one enjoys happiness.”29 Instead of the scarcity of girls increasing their value, it is actually worsening their status by encouraging the abduction and kidnapping of potential wives.30

UNFAVORABLE SEX RATIO Counterbalancing the record on longevity, however, is the higher-than-normal infant mortality of females. Typically, for every 100 female births, between 105 and 106 males are born to compensate for the biological weakness of males. In 1994, the sex ratio was 116.3 male births for every 100 female births, indicating that cultural and social practices in favor of male births had seriously biased the sex ratio.24 In Gansu, the sex ratio was especially unfavorable to girls. The preference for sons has been strongest in rural areas because, in the absence of social security, the primary burden of caring for old parents falls on the boys. Girls normally leave home at the time of marriage and live with the husband’s parents. Even among minorities with matriarchal traditions, the married girl eventually leaves her parents’ home. In the case of the Zhuang, for example, this move may be delayed until pregnancy, when the taboo against giving birth in the maternal home forces a move.25 A study of attitudes toward infant gender in Qinghai showed that among the Tu minority more women and families “longed in their hearts to see the birth

MENTAL STRESSES OF ECONOMIC REFORM Economic reform has had a contradictory impact on women. On the one hand, it has improved the position of women in the labor market and brought more general economic growth and prosperity to agriculture.31 It has loosened the constraints on family life and production, and this in itself has been of benefit to women. It has increased the range of economic options for women, many of the older ones using their experience to set up small private businesses. Many of these women lacked the educational skills to find employment in other areas outside of agriculture. Despite these improvements, the new position of women in the labor market since 1978 has not automatically increased their welfare. The decollectivization of agriculture has produced a world of uncertainty and risk that has placed a special burden on women, who are disproportionately represented in the rural workforce relative to men. 32 The fiscal problems of the central, provincial, county, and township governments have also had a negative impact on women by reducing the capacity of the State to provide adequate social assistance. In

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

particular, the shift away from free medical care to a fee-for-service system has placed extra burdens on women. In addition to these burdens of rural life, women are increasingly left behind as husbands seek offfarm employment in towns and cities. This not merely increases the burden of work but also heightens the sense of dislocation. One indicator of the negative impact of all these changes on rural women is the high suicide rate.The family minidramas sometimes end up in suicide not because these were actually intended but because deadly poisons, few of which have antidotes, were available. Rural women have little knowledge of “attempted suicides”; most attempts turn out to be fatal.These minidramas are driven by deeper family and gender conflicts, many of which arise from the tension between traditional and modern expectations. PHYSICAL HEALTH AS AN INDICATOR OF THE POSITION OF WOMEN Morbidity Women in the PRC may live longer than men, but there is evidence to show that their daily health and welfare is far from satisfactory, especially in rural areas (Table 12-6). Morbidity has a detrimental impact on female productivity and their happiness. The poor health of rural women arises from both poverty and the traditional attitudes of family members, particularly husbands, toward women. The case of minority women in rural areas is slightly worse because they often live in more isolated villages. Gynecological disease and poverty Vaginitis and cervicitis are common in the PRC, but especially so in rural areas where clean water is scarce or difficult to come by. Field studies in rural Sichuan show that few women know how these diseases originate, blaming themselves for having acquired them and shunning family and society in shame. In the worst cases, the women have been subject to abuse and divorce for rejecting the sexual

Table 12-6 Morbidity Rates, by Sex and Locality, 1998

Regiona PRC Western Region Provincial cities Prefecture cities Southwest counties Northwest counties

Illness

Chronic Illness

Male (%0) Female (%0)

Male (%0) Female (%0)

26.8

33.3

23.1

28.4

42.6 37.6 27.0 23.7

46.6 43.8 33.6 32.6

22.3 15.9 8.8 10.2

23.9 17.7 10.6 14.6

Source: Calculated from Ministry of Health (1999). a The survey covered particular localities only, and these may not have been fully representative of each type of area.

advances of their husbands, who cannot understand why they are in pain. It is assumed that wives are simply being difficult or that they have contracted the illnesses through infidelity, when in fact poverty and the lack of clean water are the main causes. Given the lack of rural resources, women wash their panties in dirty pool water contaminated by animal and human waste.33 There is not enough water for daily baths for women and men (baths take place only every three or four days in summer and every 15 days in winter), and men rarely wash their genitals before intercourse.34 Occasionally, however, one comes across accounts of traditional practices that conform to modern hygienic practices. For example, Zhuang women successfully sterilize menstruation pads by “cleaning plant ashes with water, drying them in the sun, and then putting them in clear, long cloth bags.”35 Research has shown that quite often in the countryside neither women nor men know the relationship between poor hygiene and infection. Mortality In the PRC, the mortality rates for women are much higher in the countryside than in the cities (Figure 12-1). There is a big difference in neonatal mortality, and in childbearing years. Age-specific mortality rates for women are not available for the Western Region.

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Figure 12-1 Female Mortality, by Age Group and Residence Percentage 14 City

Town

County

12 10 8 6 4 2 0 0_4

5_9

10_14

15_19

20_24

25_29

30_34

35_39

40_44

45_49

50_54

55_59

60_64

Age group

However, it is likely that they are higher because of remoteness from health services and the higher incidence of poverty. Contraception and abortion The one-child policy has put enormous pressure on women to avoid pregnancy and, in the event of contraceptive failure, to resort to abortions. The minorities are not unaffected by the one-child policy either, because it is a condition of government employment. Hence, upwardly mobile minority couples are under as much pressure as the rest. Despite the official pressure to contain fertility, knowledge about effective contraception and reproductive health is surprisingly poor, even in sophisticated Beijing. In part, this reflects the fact that sex is a taboo subject between men and women and even among women.36 This taboo shows itself in a combination of factors that give rise to unwanted pregnancies and a high rate of abortions, namely: • Lack of adequate knowledge about what causes pregnancy and how it might be prevented • Sexual demands of husbands and their refusal to use condoms37 • High failure rate of modern contraception. An estimated 90.6 percent of women use contraceptives, yet the abortion rate has been rising, from about 13.8 percent in 1976 to 27.5 percent in 1987.38 • High rate of unwanted pregnancies among unmarried women39

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The high failure rate of modern contraception calls for special remedies. One study of 370 women in Urumqi (187 Uygur and 183 Han, aged 20 to 50, from urban and rural backgrounds) over 80 percent (168 Uygur and 154 Han women, or 89.8 percent and 84.1 percent, respectively) had had abortions. Among the Uygur women, abortions were caused by the failure of the intrauterine device (IUD) and the contraceptive pill in 29.2 percent and 22.0 percent, respectively. In the case of the Han women, the respective figures were 37.0 percent and 23.4 percent.40 Tubal ligations were much more successful, with abortions for only four Uygur women and two Han women who had undergone ligation. Illiteracy and gynecological diseases Field studies from the poverty counties of Shaanxi province have drawn attention to the lack of prenatal checkups and the lack of sufficiently trained midwives. Moreover, the midwives need to be women, given the discomfort women feel when being attended by a male nurse. The lack of attention to the health needs of pregnant women manifests itself later in gynecological diseases, which, although not necessarily lethal, reduce the productive capacity of women and their general welfare. There is an enormous employment opportunity in training more female doctors, nurses, and midwives to handle gynecological problems, given the universal reluctance of women to undergo physical examination by male attendants. Another major opportunity is in the use of ICT technologies to advise

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

women of the importance of prenatal checkups. Other means of disseminating information, for example, via billboards, posters, and bulletins, have been unreliable partly because they are distributed only in towns but also because they assume a significant degree of literacy among women—levels that many rural women have not attained. 41 Recent ACWF work Since 1991 the ACWF has recognized the serious impact of these health problems on the lives and productivity of women in the Western Region and has initiated a series of training programs in midwifery and other fields. Each year three counties in a minority area have been selected for the program, which has so far covered Yunnan, Xinjiang, Qinghai, Inner Mongolia, Sichuan, and Guizhou.42 In focusing on midwifery, the ACWF hopes to deal with various problems simultaneously: reduction of maternal mortality, reduction of neonatal mortality, and earlier detection of uterine cancers.43 The State Council has supported these initiatives and allocated 200 million yuan a year for the reduction of death rates in the Western Region; however, only a tiny fraction of this money (10,000 yuan) was allocated for the training of midwives. HEALTH OF CHILDREN AND ITS IMPACT ON WOMEN The status of women is affected not only by their health but also the health of their children, since the women are the primary caregivers when their

children fall sick. Thus, while economic reform has expanded the employment possibilities for women, it has also added an extra burden because of the contraction of heathcare and health infrastructure. These extra burdens reduce the capacity of women to contribute to productivity, despite the fact that they work longer hours. Expenditure on health services as a proportion of GDP has been falling and the PRC now ranks 139 among WHO countries in health expenditure per capita (Chapter 5). Rural areas have very poor access to health services, and where services exist, fees are less and less affordable. The gap between the Western Region and the east is particularly pronounced on this issue.Table 12-7 shows the detrimental effect which shrinking government funding is having on immunization programs in rural areas, particularly in Guizhou. In both cases, immunization is well below the national level for all childhood killers. In the case of measles (possibly the biggest child killer of all), as many as 47 percent of children in rural Guizhou had not been vaccinated; in rural PRC, the figure was 27 percent. These high rates for nonimmunized children suggest high rates of morbidity, if not mortality, and the burden is borne by women, who not only suffer the stress of dealing with the illness of children but also forgo opportunities in the workplace. One Australian aid project in Altai prefecture (Xinjiang), has as one of its objectives the establishment of a 60 percent immunization rate for four vaccines for children under 1 year old.44

Table 12-7 Immunization Coverage, 1993 Area National Urban Rural Rural Guizhou

BCG Vaccine (%) 90 95 85 72

96b -c -

Polio Vaccine (%) 88 94 86 74

97b -

Diphtheria Vaccine (%) 86 93 84 67

96 b -

Measlesa Vaccine (%) 85 85 73 53

95 b -

Source: Zhu Ling (2000). a National, urban, and rural figures for measles are inconsistent. b Figures refer to the year 1997; see United Nations Children’s Fund (1997), p.33. c No data are available.

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Table 12-8 shows that, except in Sichuan and Chongqing, the infant mortality rate is significantly higher than the average for the entire PRC. Table 12-8 Infant Mortality, by Province, 1998 Infant Mortality Province PRC Inner Mongolia Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

Newborn Infant Mortality

No. of Deaths

Rate (‰)

No. of Deaths

Rate (‰)

22,931 7,169 16,423 3,089 18,714 19,256 933 6,765 9,609 3,046 1,917 6,070

20.93 37.15 21.36 16.76 38.27 39.84 41.62 23.81 32.33 46.45 28.27 30.66

156,956 5,365 9,506 1,835 10,912 11,925 484 4,832 6,820 2,112 1,310 2,909

14.32 27.80 12.36 9.95 22.05 24.67 21.39 17.01 22.94 32.21 19.32 14.69

Source: All-China Women’s Federation (2001).

In Inner Mongolia, Guizhou,Yunnan,Tibet, and Qinghai, the rate is double the national average. Some of the deaths under the age of one year are due to poor immunization practices and coverage. Inadequate training is as much to blame as inadequate expenditure on equipment and buildings.45 ECONOMIC REFORM AND THE EDUCATION OF WOMEN While the literacy of women has been steadily rising since 1950 and the level of educational achievement also creeping upward, there is evidence that the economic opportunities created by the reforms since 1978 have contributed to a decline in the educational level of young women. An ACWF study in Jiahong, rural Sichuan, in the early 1990s compared young women aged 17–21 with those in the 22–27 age group. Only 50.4 percent of the younger group had completed junior middle school and only 1.6 percent had completed senior middle school, versus 55 percent and 5.1 percent, respectively, for the older

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age group.46 The ACWF offered three explanations for the puzzling decline in the level of education despite the rapid growth in rural incomes and prosperity:47 • With rural prosperity, the tempo of life has increased, adults are working more and so young girls are “burdened with housework and have no time to do homework”; interest in schooling is falling and the dropout rate rising as a result. • Farmers respond to the short-term opportunities for prosperity by putting children to work. They do not appreciate the long-term returns to family income from higher levels of education. • Rural employment is still largely labor-intensive with minimal technical and scientific skills. This devalues the importance of higher levels of education. In Jiahong, the lack of employment opportunities outside agriculture has also pushed young women in the direction of more housework.The companion study of Hengtang township in Jiangsu (Eastern Region) showed that between 1978 and 1986 the proportion of women employed in nonagricultural jobs increased from 5.4 percent to 33.3 percent; at the same time the proportion employed in agriculture fell from 86.5 percent to 56.8 percent and the proportion employed in housework increased only marginally from 8.1 percent to 9.9 percent. This pattern contrasted sharply with what happened in Jiahong, where the proportion of women employed in agriculture also declined but the proportion of women employed in housework rose from 17.8 percent to 29 percent, and the proportion of women with nonagricultural jobs actually fell from 2.7 percent to 2.3 percent.48 The essential difference was that Hengtang was in a province that had a higher overall level of economic development with diversified employment opportunities. Despite rural prosperity in Sichuan, women in Jiahong did not benefit to the same degree as women in the east because the provincial economy lacked the diversification of Hengtang.

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The preference for educating boys to higher levels than girls comes on top of local customs that already favor boys. Even among western minorities with residual matrilineal traditions, boys take priority in education. In the birthing ceremonies of the Zhuang, for example, boys are greeted with the cry,“Grow up quickly to follow us to school,” while the girls are greeted with the cry,“Grow up quickly to follow us to pick green feed for pigs.”49 PERSISTENT HIGH ILLITERACY AMONG WOMEN AGED 15 AND UP Despite improvements in basic literacy since 1950, rates of illiteracy and semiliteracy in the Western Region, especially in the southwest, significantly exceed the national average. This reality is not always revealed by the official statistics, which rarely take the problem of semiliteracy into account. However, Table 12-9 is based on a survey undertaken by the ACWF in late 1990 and provides more reliable indicators. In 1998, about 16 percent of the PRC population aged 15 years and over was illiterate or semiliterate.

Female illiteracy and semiliteracy was about 2.5 times that of men. The proportions are the same in the Western Region. However, in Inner Mongolia, Chongqing, Sichuan, and Shannxi the levels of illiteracy and semiliteracy are very close to the averages for the entire country. Xinjiang, however, has a much smaller illiteracy problem: only about 11 percent of the population are illiterate and the difference between female illiteracy (13 percent) and male illiteracy (10 percent) is also smaller. At the other extreme, female illiteracy is extremely high in Tibet (69 percent), Qinghai (55 percent), Guizhou (43 percent), Yunnan (34 percent), and Ningxia (35 percent). Provincial human development indicators published by the United Nations Development Program (UNDP) in 1990, 1995, and 1997 all confirm that Xinjiang sits apart from the other western provinces. Table 12-10 shows that the literacy index for Xinjiang is the highest among the western provinces.This and life expectancy taken together gives Xinjiang a ranking of 15 out of 32 PRC provinces, according to the Human Development Index (HDI).

Table 12-9 Percentage of Illiterates and Semiliterates Aged 15 and Up, by Sex and Province, 1998 Population of Illiterates and Semiliterates Aged 15 and Up Province PRC Inner Mongolia Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

Percentage of Illiterates and Semiliterates Relative to Population Aged 15 and Up

Total

Female

Male

Total

Female

Male

148,522 2,885 3,688 10,427 7,621 7,809 1,037 4,324 5,313 1,571 971 1,403

105,918 1,936 2,596 7,300 5,355 5,220 614 2,939 3,569 1,001 659 807

42,603 949 1,092 3,128 2,266 2,589 423 1,385 1,744 570 311 596

15.78 15.83 15.45 15.70 28.98 25.48 59.97 16.52 28.65 42.92 25.56 11.44

22.61 21.66 21.93 21.97 42.78 34.17 *69.41 22.74 39.08 54.95 35.14 *13.31

9.01 10.22 9.07 9.42 16.44 16.84 *50.09 10.45 18.53 31.00 16.20 *9.61

Source: All-China Women’s Federation (2001).

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Table 12-10 Human Development Index, by Province, 1997 Province Shanghai Beijing Tianjin Guangdong Liaoning Zhejiang Jiangsu Fujian Shandong Heilongjiang Hebei Jilin Hainan Hubei Xinjiang Shanxi Hunan Henan Guangxi Anhui Inner Mongolia Chongqing Jiangxi Sichuan Shaanxi Ningxia Yunnan Gansu Qinghai Guizhou Tibet

Life Expectancy Index

Education Index

GDP Index

GDP Rank

HDI

HDI Rank

0.832 0.798 0.789 0.792 0.754 0.780 0.773 0.726 0.760 0.700 0.756 0.716 0.750 0.704 0.627 0.733 0.699 0.753 0.729 0.741 0.678 0.689 0.685 0.689 0.707 0.699 0.642 0.704 0.593 0.655 0.577

0.824 0.840 0.810 0.789 0.801 0.735 0.735 0.737 0.702 0.790 0.759 0.804 0.745 0.761 0.773 0.782 0.776 0.745 0.741 0.713 0.740 0.727 0.764 0.723 0.741 0.669 0.665 0.667 0.545 0.659 0.435

0.975 0.963 0.957 0.949 0.939 0.949 0.945 0.944 0.849 0.809 0.676 0.610 0.632 0.655 0.656 0.522 0.511 0.487 0.478 0.482 0.517 0.489 0.455 0.441 0.404 0.440 0.442 0.339 0.445 0.233 0.345

1 2 3 4 8 4 6 7 9 10 11 15 14 13 12 16 18 19 21 20 17 22 22 26 28 27 25 30 24 31 29

0.877 0.867 0.852 0.843 0.831 0.821 0.817 0.802 0.770 0.766 0.730 0.710 0.709 0.707 0.685 0.679 0.662 0.611 0.649 0.646 0.645 0.635 0.635 0.617 0.617 0.603 0.583 0.570 0.528 0.516 0.542

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22 24 25 26 27 28 29 30 31

Source: United Nations Development Program (2000), p. 96; China Population Statistical Yearbook 1998; All-China’s Women’s Federation and State Statistical Bureau (n.d.); China Statistical Yearbook 1998; China Population Statistical Yearbook 1995; China Education Statistical Yearbook 1995; State Statistical Bureau 1997.

Indeed, Xinjiang’s literacy levels are surprisingly high for its level of GDP per capita. Low levels of illiteracy among women and men in Xinjiang compare favorably with the situation in the eastern provinces. A partial explanation could be that the Uygur have better-than-average literacy relative to other minorities. This could stem from the long tradition of courtly culture, literacy, and literary achievement among the Uygur in their native language. WOMEN AND POLITICAL LEADERSHIP ROLES The ACWF is aware of the reticent attitude of the women of the Western Region toward participation in leadership roles. The ACWF has responded by running leadership training courses, the first in late

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2000 and the second in May 2001. On each occasion about 100 women from the Western Region took part. Leadership training is important because it is only through articulate and confident women that the necessary changes in economic, health, and literacy policy and practices can be achieved. Women need to participate in the process of formulating and implementing policies, and for this leadership training can provide the necessary impetus. Despite the role of the ACWF in promoting the cause of women since 1950, the current placement of women in positions of political responsibility still falls far short of their percentage in the total population, as Table 12-11 shows. The PRC also has proportionately fewer women political leaders than other countries in East Asia.

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Table 12-12 shows that while the PRC (6.4 percent) compares well with Japan (6.7 percent) and the Philippines (8.3 percent) in the presence of women at the ministerial level, at the subministerial level representation is very low: only 3.5 percent for the PRC relative to 26.3 percent for Japan and for the Philippines. In fact, at the subministerial level the PRC’s record is worse than Malaysia’s, which is also low (4.7 percent). In other words, the political visibility of women in the PRC is not as impressive as the rhetoric of gender equality in official documents would make it out to be. Unless the participation by women in high-level decision making improves, policies for reducing the vulnerability of women in the labor market and in the family are unlikely to be drafted or implemented satisfactorily. So the lack of political leadership is something noticeable not merely at the national or provincial levels, but also at the local level, within the prefectures and counties.50

Table 12-11 Women Political Leaders, at the End of 2000 Position

No.

Government officers Officers above section chief Party leaders Ministers and deputy ministers of 29 ministries Mayors or vice mayors

14,895 77,300 4 18 400 of 1,360 (in 680 cities) 65 341

NPC delegates, 1998 9th National policy negotiation

Percentage 36.2 15.1 n.a. n.a. 29.0 21.8 15.5

Source: All-China Women’s Federation, Department of Urban and Rural Work, Beijing, 21 May 2001.

Table 12-12 Women Asian Political Leaders, 1995–1996 Country PRC Japan Philippines Malaysia

Ministerial

Subministerial

6.4 6.7 8.3 7.7

3.5 26.3 26.3 4.7

Source: Asian Development Bank (1998), Table 5, p. 12.

WOMEN AS THE POOREST OF THE POOR Women in the PRC have difficulty accessing programs designed to help the poor. The deficiencies of village infrastructure often affect women the most: women have primary responsibility for hauling water, collecting firewood, tending to farm animals, collecting fodder, selling agricultural produce, and accompanying small children to and from school. International aid agencies have sought to improve the status of women by empowering them economically. It is ironic, however, that where aid programs succeed in improving the economic prosperity of rural families they also typically increase the workload on women. According to one UNDP report, the distribution of microfinance had resulted in a 33 percent increase in the female workload.51 This increased burden, however, needs to be assessed against positive evidence showing that the new microcredit schemes enabled village women in Inner Mongolia to develop economic networks beyond the village. The women attend briefings at the UNDP microcredit center and frequent local

markets to sell animals six to seven times a year, instead of the old pattern of once or twice a year. The training programs that have accompanied the microcredit schemes have also improved the confidence of women by giving them better knowledge about husbandry and the details of how and what to feed farm animals to maximize the growth of their herds. Some women in the UNDPassisted village were demanding the establishment of a domestic violence center to provide women with a refuge from beatings. This was perhaps the most radical indicator of their growing sense of confidence and importance. On the other hand, there is evidence from southern Xinjiang that the women who have received microcredit advances for the weaving of carpets have not experienced a net benefit. In the Hotan area, the women now weave in addition to their other work, but it is the men who sell the carpets and usually pocket the earnings.

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Table 12-13 Dependency Ratios a of the Aged, 1999 Region Eastern Central Southwest Northwest PRC

Cities

Towns

Counties

13.0 10.5 13.8 10.3 12.1

10.9 9.7 15.3 8.6 11.2

12.3 10.3 10.3 8.2 10.8

Source: China Population Statistical Yearbook, 2000. a Population aged 65 and over, as a percentage of the population aged 15 to 64.

There is no guarantee, therefore, that programs designed to give women new opportunities to earn extra income by increasing either their participation in the labor force or their productivity in new cottage industries will automatically improve their status in the economy or at home. The implementation of new development policies must therefore pay attention to how women could become more rather than less vulnerable as a result of socioeconomic change. Potential opportunities need to be converted into genuine opportunities that improve the lives of women. WOMEN IN RETIREMENT Increasing the role, remuneration, and security of the women of the Western Region in the labor force by 2020 is critical not only for the welfare of women but for the economy as a whole. In 2020 not only will the size of the PRC’s labor force peak, but the aging of the population will also reach a critical dimension. By 2020, an estimated 18 percent of the population will be over 75 years of age. About 230 million people will be over 60 years old, and the proportion of the population over 65 will be larger than the proportion of those under the age of 19 years.52 This aged dependency burden will fall heavily on women for four reasons: • The longevity of women will continue to exceed that of men by some years. • Women typically retire earlier than men, at 55 instead of 60.53

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• The pressure for retirement on older female workers frequently comes on top of the psychological and physical problems they face during menopause, thereby giving rise to further social disorientation.54 • The capacity of women to provide for their own security in old age is reduced by the lower wages they receive relative to men. The age structure of the Western Region (Table 12-13) is such that in the rural areas the aged dependency burden is smaller than for the PRC as a whole. In the cities and towns of the northwest the burden is also smaller. But in the cities and towns of the southwest it is higher. Migration out of the Western Region (see Chapter 11) will increase the dependency ratio.

Implications for policies PROMOTING THE PARTICIPATION OF WOMEN IN THE LABOR FORCE To promote female participation in the labor force, education, labor, and social security policies should include the following objectives: • Diversifying the occupations that women take up, in particular to encourage them to move into jobs with a higher technology and science content, especially off-farm jobs, because it is in the rural areas where all the constraints on development are most obvious • Expanding reemployment support services for women in a manner that compensates for their unfair treatment in SOE retrenchments, reduces the pressure on their early retirement, allows them to provide for their own pensions, and helps them deal more effectively with menopause • Enforcing the provisions of the Labor Law of 1994 regarding the fair treatment of women • Improving job opportunities for women in areas where clients would prefer to have access to female expertise, for example, in health and

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

mental health care. On this particular point, there is no significant difference between the preferences of Muslim and non-Muslim women in the PRC. • Improving the possibilities of self-employment by giving women access to microcredit schemes so that they can breed farm animals, plant vegetables and fruit trees, or produce handicrafts • Improving technical training programs for women so that they improve their knowledge of better farming practices and develop the self-confidence that goes with more knowledge • Increasing government investment in educational infrastructure specifically designed to reduce female illiteracy and semiliteracy, prolonging the years of schooling for girls, and ensuring that a greater percentage of women enter tertiary education of a technical or academic kind Mental health has been a neglected area of public health and the consequences have been disastrous especially for women. The neglect by the State is serious, given the manner in which contemporary PRC stigmatizes the mentally ill. Hence, an educational campaign is also needed to better integrate those people who have manageable mental disorders into the workforce. NEED TO INTEGRATE WOMEN’S RIGHTS PROGRAMS WITH ECONOMIC DEVELOPMENT PROGRAMS There is a wide range of legal policies and constitutional safeguards that provide women with the necessary framework to develop their rights and move in the direction of more gender equality.What has been lacking is an integrated economic program capable of giving women the ability to make those laws meaningful. In particular, this applies to the needs of women from minority communities who, because of their greater isolation, require more consideration. As outlined in the previous section, a range of policy options is available to remedy this situation.

NEED TO EDUCATE AND INFORM WOMEN ABOUT THEIR LEGAL AND COMMERCIAL RIGHTS The second requirement is for women to become aware of their rights and how to safeguard them. The ACWF has identified this as a priority for its programs. The Law on the Protection of Women’s Rights and Interests of 1992 is being revised to take into account the new situations that economic reform is creating.55 The revision requires the involvement of women, and the ACWF has been promoting leadership training for minority women lawyers. The present programs focus on marriage laws, which are under review because of the shifts in ownership from public to private property since the promulgation of the Family Law of 1980. As the private sector grows, the drafting of new laws and regulations should recognize the rights of women to private property within and outside the family. The revisions in the property laws and marriage laws are proceeding in tandem. Other social pressures emerging as a result of economic changes need to be taken into account when formulating new marriage and property laws: • Men are more mobile now, and this has created special opportunities for them and also difficulties for the wives who are left behind to manage the family farm or business. The new responsibilities of women need to be reflected in new rights. • The ACWF is concerned that the new mobility of men will increase the divorce rate and create larger numbers of single-parent households headed by women. Again, special legal provisions need to be made to protect the rights of women and their dependents. The diversification of types of enterprise and ruralurban migration have rendered the notion of a homogeneous “women’s interest” increasingly untenable. This is making it much harder for the ACWF to tackle the full range of women’s issues effectively.56 The ACWF has tried to cope with this challenge by establishing new associations such as the China Socialist Women’s Entrepreneurs’ Association, and new services such as the

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Re-employment Guidance Centers.The Government should continue to facilitate the formation of new women’s groups so that there can be a better and faster response to emerging women’s needs. In the field of employment, there is a need to achieve much better enforcement of women’s rights under the Labor Law of 1994. NEED TO ENCOURAGE AND SUPPORT MORE ACWF ACTIVITIES IN THE WESTERN REGION The ACWF has played an important role in disseminating information about the rights of women. However, there has been a lack of funds and integration with the activities of bureaus charged with administering poverty and minorities affairs. In particular, the ACWF has not been especially focused on the needs of the Western Region or the women and minorities. As a semiofficial agency, the ACWF has been limited by the general assumption that the declaration of appropriate gender-sensitive policies will automatically translate into a changed situation and attitude at the local level. Strengthened national leadership is needed in order to increase the economic resources allocated for programs to improve the conditions of women in the Western Region.

That this has not happened has been recognized by the ACWF, which has responded during the last two years with a range of projects directly aimed at women and minority women in the Western Region. Table 12-14 gives an indication of the range of activities that have been undertaken in order to focus on the special needs of minority women. In addition to these, the ACWF has conducted two leadership training courses for women from the Western Region in late 2000 and in May 2001. These have not been focused exclusively on minority women, but some minority women have been involved. While many of the activities of the ACWF appear to be related to economic development programs, in reality few of them go beyond informing women of the existence of these programs, how to access them, and their legal and commercial rights.57 Four other regional projects will be completed by the ACWF at the end of 2001:58 • Sichuan Women Technicians Project • Gansu Women’s Environmental Protection Project • Education of women in Guangxi autonomous province • Shaanxi Women’s Entrepreneurship Project

Table 12-14 Activities of Provincial ACWF Branches among Minority Women, 1998 Activity

Provincial ACWF Office

Ethnic union and social stability Microcredit and poverty alleviation Ethnic union and regional economic development Increase in the number and success of women’s cadres Ethnic equality and legal protection for women Improvement of employment opportunities for women and facilitation of universal development of programs for ethnic people, Project 1 Healthcare for women and women’s work in healthcare, Project 2 Work for a national union of women Poverty reduction and progress for minority women Improvement of employment opportunities for minority women and other conditions Poverty alleviation for women

Xinjiang Guangxi Tibet Guizhou Jiangsu

Source: All-China Women’s Federation (1998).

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Hunan Hunan Shanghai Fujian Jilin Inner Mongolia

These focus on providing women with special training to diversify their employment possibilities. RURAL WATER SUPPLY The deficiencies in women’s health in rural areas reinforce the need to attach a much higher priority to rural water supply in conjunction with health and hygiene education (Chapter 5). The Government’s Trinity project (water environmental hygiene and health education) is a good model, but the coverage has been inadequate. There is also a need to improve the health infrastructure in a way that caters to the special needs of women and children, for example, by ensuring more effective modern contraception.

Notes 1 2 3 4 5 6 7 8

9 10 11

12

State Council Information Office (1994), Foreword. Judd (1994), p. 1. Croll (1995), pp. 87–90. Zhu Ling and Jiang Zhangyi (2001). United Nations Development Program (1998), p. 32. United Nations Development Program (1997), p. 12. United Nations Development Program (1997), p. 14. All-China Women’s Federation (1995), p. 43. About 6,000 questionnaires were distributed to a roughly equal proportion of men and women in these three western provinces. All-China Women’s Federation (1995), Table 4-10, p. 85. All-China Women’s Federation (1995), Table 4-10, p. 85. All-China Women’s Federation (1995), p. 93. Gives the monthly income, which the consultants have converted to annual income to make it comparable to the income for rural residents. All-China Women’s Federation (1995), p. 96. Rural incomes were on average much lower than urban

incomes, in conformity with global trends. 13 All-China Women’s Federation (1995), p. 98. 14 All-China Women’s Federation (1995), pp. 205–206. Hours worked were 5.74 for rural women, 7.21 for rural men, 7.05 for urban women, and 7.59 hours for urban men. 15 All-China Women’s Federation (1995), Table 8-5, p. 210. 16 All-China Women’s Federation (1995), Table 6-16, p. 170. 17 Bauer et al. (1992), p. 350. 18 Maurer-Fazio et al. (1999). 19 Maurer-Fazio et al. (1999), Table 10. 20 For example, Bauer et al. (1999), Table 8, p. 358, and pp. 359–360. 21 All-China Women’s Federation and State Statistical Bureau (2001). 22 All-China Women’s Federation and State Statistical Bureau (2001), pp. 362–364. 23 Brundtland (1998). 24 United Nations Development Program (1997), p.48. 25 Liu Xujin et al. (1995), p. 474. The Zhuang are one of the largest minorities in the PRC with an estimated population in excess of 15 million. Most of them live in the eastern provinces, but more than a million are scattered throughout Yunnan, Sichuan, and other provinces bordering the Guangxi Zhuang Autonomous Region (pp. 470–471). 26 Dang Huiqiao (1995), p. 369. In Qinghai, there are 42 minorities including the Tu who live mainly in the Huzhu Tu Autonomous County in eastern Qinghai (p. 367). 27 Dang Huiqiao (1995), pp. 371–372. 28 Dang Huiqiao (1995), p. 371. 29 Wang Xueling et al. (1995), p. 462. 30 Wang Xueling et al. (1995), p. 462. 31 For an example of the positive impact of economic reform on the industrial and agricultural output of rural western PRC, see the case study on Jiahong, Sichuan, in All-China Women’s Federation (1993), especially Table 2.3, p. 13. 32 Phillips (1998), p. 3. 33 Sun Rong and Duan Chengde (1995), p. 293.

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34 35 36 37 38 39

40 41 42

43

44 45

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Sun Rong and Duan Chengde (1995), p. 294 Liu Xujin et al. (1995) , p. 485. Xiao Yang et al. (1995), p. 236. Xiao Yang et al. (1995), pp. 239–241. Xiao Yang et al. (1995), p. 226. About a quarter of the abortions in the PRC are performed on unmarried women. (Xiao Yang et al. [1995], p. 245. Du Peiling et al. (1995), p. 395. Gaol Xiaoxian and Dun Li (1995). Interview with Shu Guang, Minority Group Division, All-China Women’s Federation, Beijing, 4 June 2001. Shu Guang pointed out that even the female employees of the Women’s Federation were not free of the threat of cancer. She cited the recent death of a colleague from uterine cancer. United Nations Development Program (1999b), p. 14. In an isolated Lahu village in Lancang County, Yunnan, a mere 70 km from the Burmese border town of Money and 150 km from Ruile (the major southern border town of Yunnan province), team members discovered in April 2001 that the village midwife was not aware of the threat of HIV/AIDS. The township authorities had supplied her with two pressure cookers for the sterilization of syringes. Among her duties, she was required to immunize children and provide other medicines and vaccinations. But the pressure cookers were too heavy to carry to neighboring villages, so she had acquired a small metal box in which she was able to boil up to 10 syringes at a time. It was not clear whether the box could contain sufficient water to adequately sterilize all the syringes at once. But the midwife did say that she boiled the syringes until all the water had evaporated. The reason she owned two pressure cookers was that the local town had recently given her a new cooker to replace the old one. Clearly they did not know that the old cooker had never been used and that the midwife had no intention of using the new cooker either. Both cookers were shown to the consultant. They were covered with copious amounts of dust.

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46 All-China Women’s Federation (1993), p.24 and Table 3.6. 47 All-China Women’s Federation (1993), p. 25. 48 All-China Women’s Federation (1993), pp.30–31 and Table 3.9. 49 Liu Xujin et al. (1995), p. 491. 50 During visits to the poverty counties of Yunnan and Xinjiang, team members encountered only two women in significant leadership positions—one was the Director of the Planning Committee of Wushi County in Aksu Prefecture and the other the head of the Ili municipality (interviews with Hong Lin Fang in Wushi County, Aksu Prefecture, 27 April 2001). Team members met other women who were heads of county departments, but there were few of these except for the county office of Wushi in Aksu prefecture. The most visible presence of women in leadership roles was within ACWF offices at all levels; needless to say, all leadership positions were filled by women. However, these women were not influential in affecting the direction of development planning. In discussions with representatives of the ACWF in Yunnan and Xinjiang, team members asked about examples of prominent women leaders outside the ACWF. The typical response was that there were many, but hardly any names came to mind. 51 United Nations Development Program (1999c). 52 Brundtland (1998). 53 Bauer et al. (1992), p. 353. 54 Ge Meiyun and Shen Meihua (1995). 55 Interview with Cui Shu Hui, Section Chief, Department of Rights and Interests, All-China Women’s Federation, Beijing 4 June 2001. 56 Howell (2000). 57 The international team members reached this conclusion from visits to Yunnan and Xinjiang. The one exception encountered was in Lancang County (Yunnan), where the Women’s Federation had decided to focus all of its energies on a single microcredit project based in the township of Xin Cheng, Simao prefecture. The annual value of the project was 1.5 million yuan, of which 1.0 million

yuan was provided by the ABC and the remainder by the government of Yunnan. Between May 1997 and March 2001, the All-China Women’s Federation received 4.3 million yuan to disburse as microcredit in the county. In the three years since the start of the pilot project the ACWF could point to numerous success stories of women who had received loans and produced commercially successful outcomes. One such story was a woman from a poor family who took out a microcredit loan three years earlier in order to buy a tractor. The family prospered and branched out by opening up a small restaurant that served meals around the clock and sold the locally made corn wine. The family was now building a new house. The ACWF in Lancang County was realistic in recognizing that the model of Xin Cheng would not be replicated in

the more remote areas of the Western Region for the simple reason that the success of microcredit depends on the beneficiaries living near a regular weekly market so that the produce generated by the microcredit loan could be sold. At the same time, the success of the Xin Cheng experiment provides further evidence for the need to encourage the rapid development of local markets. The information about this project was gathered during interviews with the ACWF in Lancang county on 20 April 2001. A team member spoke to Lien Ping (Chairman), Xu Jianping (Vice Chairman), and Li Yanmei (Director of the Office for Lancang County). 58 Interview with Associate Professor Jhang, Director, Women’s Research Institute, ACWF, Beijing, 30 May 2001.

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CHAPTER

13

MINORITIES The minorities make up 8.4 percent of the population (2000 census). They are divided into 55 officially recognized groups whose status is protected by the Constitution and other legislation. Equality, unity, and common prosperity are the fundamental objectives of the Government in handling relations between ethnic groups.

Regional autonomy for minorities According to the Constitution: All ethnic groups in the People’s Republic of China are equal. The state protects the lawful rights and interests of the ethnic minorities and upholds and develops a relationship of equality, unity and mutual assistance among all of China’s ethnic groups. Discrimination against oppression of any ethnic group is prohibited; any act which undermines the unity of the ethnic groups or instigates division is prohibited.

the different minorities. While all have equal status, their impact on the modernization of the PRC is far from equal. Moreover, the modernization process has affected each minority differently. For these reasons, the PRC’s position in 2020 will be influenced more by some minorities than others. This chapter therefore pays special attention to Xinjiang and its predominant minority, the Uygur.1 However, comparisons with other minorities and other provinces will demonstrate a variety of circumstances within the Western Region.

Social and economic conditions of minorities

Moreover, the Constitution states that: The state assists areas inhabited by ethnic minorities in accelerating their economic and cultural development according to the characteristics and needs of the various ethnic minorities.

The Constitution provides for autonomous regions and areas for minorities. In the Western Region, there are five autonomous regions (level 2 government) and 99 autonomous areas (lower levels of government). There has been considerable debate about the meaning of “autonomy,” given the complex history of interaction between the majority Han and the minorities. As the Preamble to the Constitution puts it: …It is necessary to combat big-ethnic chauvinism, namely Han chauvinism, and to combat local ethnic chauvinism. The state will do its utmost to promote the common prosperity of the ethnic groups.

The Government has attempted to adopt measures that respect the needs and sensitivities of the minorities and has preferential minority policies. PRC has made effort to study minority cultures and preserve large bodies of written material in minority languages. It is important to distinguish between

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The PRC’s minorities differ from the majority Han population in economy, society, and habitat. SOCIAL CHARACTERISTICS The minorities fall into three broad groups depending on the stage they have reached in the process of demographic transition.Transitional populations are those that have achieved sufficient economic development to bring down the level of mortality, especially infant mortality. As a result, their fertility has also declined and longevity (life expectancy at birth) is high.The percentage of the population under the age of 15 is relatively small and that of adults over 65 years relatively large. Pretransitional populations, in contrast, are those whose socioeconomic development is still too low to bring about any major changes in the demographic structure.Typically, they have high mortality (especially infant mortality), high fertility, and low longevity.Their age structures show a youthful population with only a small percentage of adults over the age of 65 years. Thus, we can distinguish between three groups of minorities (Table 13-2): • Group 1: the Koreans, Hui, and Manchu, all of which share the demographic characteristics of the Han

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Table 13-1 Minorities in the Autonomous Regions, 1999 Minority

Xinjiang

Daur Dong Han Hui Kazak Kirgiz Koreans Manchu Miao Mongol Tajik Tibetan Uygur Yao Zhuang Others Total Main minority as % of total Han as % of total

Ningxia

Inner Mongolia

Guangxi

Tibet

73,818 6,871,528 792,698 1,304,518 166,325

3,537,134 1,865,903

18,655,000 210,000

311,828 28,448,326 28,184

70,145 2,098

23,825 460,000

21,192

190 117 83

443,126 161,251 40,099

3,828,000

2,388,009 4

8,250,236

142,203 17,750,000 46.5% 38.7%

29,854 5,432,891 34.3% 65.1%

44,757 23,295,400 16.4% 80.1%

1,412,585 15,288,933 797,018 46,750,000 32.7% 60.9%

48 16,501 2,477,195 96.4% 2.8%

PRC (1990)a 121,463 2,508,624 1,039,190,000 8,612,001 1,110,758 143,537 1,923,361 9,846,776 7,383,622 4,802,407 33,233 4,593,072 7,207,024 2,137,033 15,555,820 26,340,901 1,130,510,000 91.9%

Source: Xinjiang Statistical Yearbook 2000, Inner Mongolia Statistical Yearbook 2000, Ningxia Statistical Yearbook 2000, Guangxi Statistical Yearbook 1999,Tibet Statistical Yearbook 2000 a At the time of writing, 2000 census numbers for the various minorities were not available.

Table 13-2 Demographic Characteristics of the Three Main Minority Groups, 1990 Longevity Group Group 1 Han Manchu Hui Korean Group 2 Miao Mongol Dai Group 3 Uygur Kazak Tibetan Kirgiz PRC

Infant Mortality Rates (‰)

Age Structure (%)

Male

Female

Total

Male

Female

Total

Under 15

65++

Intermarriage Rate (%)

68.7 70.7 69.0 64.1

72.3 73.6 72.4 71.0

70.5 72.0 70.6 67.6

22.9 15.0 33.0 19.4.

27.0 14.5 30.5 19.3

24.8 14.8 31.8 19.4

27.1 30.8 32.0 24.7

5.7 4.1 4.5 4.6

n. a. n. a. 21.1 11.1

63.6 62.5 62.5

65.2 68.2 67.2

64.4 66.4 64.8

55.7 27.3 78.4

58.7 25.8 67.4

57.2 26.6 73.0

34.8 35.8 33.6

4.1 3.1 4.5

39.2 52.1 32.6

63.2 61.0 59.6 61.0 68.4

63.7 64.4 63.6 60.6 71.9

63.4 62.6 61.7 61.0 70.1

82.6 52.2 86.7 103.3 25.5

68.7 44.3 73.4 95.8 29.4

75.8 48.4 80.4 99.5 27.3

39.4 43.1 35.9 44.0 27.7

4.8 2.6 4.8 4.2 5.6

1.0 7.5 8.3 n. a. n. a.

Source: Attane and Courbage (2000), Table 2, p. 263; intermarriage rates from Tian Qing (1999).

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Table 13-3 Crude Birth Rates and Death Rates for Minorities in Xinjiang, 1999 Han Local Government City Urumqi Shihezi Turpan Artux Kashgar County Qitai Taxkorgan Fuyun Xinyuan Hejing Kuche Moyu

Minority

Birth Rate (%)

Death Rate (%)

Natural Increase (%)

Birth Rate (%)

Death Rate (%)

Natural Increase (%)

Han Han Uygur Uygur Uygur

8.10 9.65 10.08 16.44 13.35

3.37 4.38 3.45 2.03 4.09

4.73 5.27 6.64 14.42 9.44

10.15 17.04 10.85 13.31 11.27

3.79 3.59 1.95 4.14 3.07

6.37 13.45 8.90 9.17 8.20

Han Tajik Kazak Kirgiz Mongol Uygur, north Uygur, south

10.44 8.36 9.67 13.10 8.19 7.78 8.06

4.02 n. a. 2.67 3.32 3.60 3.17 2.44

6.42 8.36 7.01 9.78 4.58 4.60 5.62

14.89 18.34 15.63 16.01 12.74 14.75 19.03

4.12 5.03 3.88 2.74 3.82 6.51 7.47

10.76 13.31 11.75 13.27 8.92 8.24 11.56

Majority

Source: Xinjiang Statistical Yearbook 2000.

• Group 2: the Miao, Dai, and Mongols, minorities whose demographic transition has started • Group 3: the Uygur,Tibetans, Kazaks, and Kirgiz, minorities whose demographic characteristics are pre-transitional—high death rates, high birth rates and very youthful populations Other factors distinguish the three groups. Groups 1 and 2 are highly Sinicized, meaning that close association with the Han has led to some cultural and social affinities. Partly this has to do with their location—either closer to Beijing or scattered across the PRC and therefore less culturally cohesive and distinct. The demographic evidence in Table 13-2 is only one indicator of their cultural proximity to the Han, for their fertility patterns reflect those of the Han despite the fact that family planning policies have treated all minorities leniently and have not insisted on the one-child norm.2 The minorities in Group 3 represent a very different case. These are the minorities that: • Are the least Sinicized and most remote from Beijing • Have historical and cultural traditions that are relatively cohesive and distinctive (low interethnic marriage rates) • Are geographically concentrated • Are located in the border regions Reinforcing this conclusion are the differences between rural and urban minority populations. Minority populations in rural areas have much higher

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crude birth rates and crude death rates than minority populations in cities (Table 13-3). Of the demographically distinct minorities (Uygur, Tibetan, Kazak, and Kirgiz) the Uygur are the most numerous—some 8 million. Development planners for the Western Region should give the Uygur minority special consideration for the following reasons: • The Xinjiang Uygur Autonomous Region accounts for one-sixth of the area of the PRC. • The Uygur account for 45 percent of the population of Xinjiang. • Xinjiang has a very long international border— some 5,500 km—which it shares with six countries: Pakistan, India, Afghanistan, the Kyrgyz Republic, Kazakhstan, and Russia. • Many border populations share Islamic beliefs with groups across the border, relationships that can be of great benefit or, if misunderstood, have the potential to bring disorder and grief. • Xinjiang has a prospective major role in the PRC’s energy sector (Chapter 7). No other minority group in the PRC represents such important economic, political, and cultural considerations. In 1949, the Uygur formed 76 percent of Xinjiang’s population and the Han, about 7 percent. By 1978, the Han proportion had risen to 41.6 percent, partly through inward Han migration and partly through outward migration of minorities to the Soviet Union at the time of the I-Ta incident in 1962.3

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Table 13-4 Xinjiang Population, by Minority, 1978–1999

Ethnic Group Uygur Han Kazak

In no other part of the PRC has the demographic balance changed so radically. Inner Mongolia has also received much inward migration, but Mongols have remained much the same percentage of the population since the 1940s: 14.8 percent in 1947, 10.7 percent in 1974, 12.9 percent in 1982, 13.5 percent in 1984, and 16.4 percent in 1999.4 Since 1978 the proportions of Han and Uygur in Xinjiang have also remained much the same, although the proportion of Han is lower than in 1978 (Table 13-4). It seems that the higher rate of natural increase among the minority populations is balancing the inflow of Han migrants. Also, there is probably a bigger outflow of Han from Xinjiang to other parts of the PRC than of minorities for reasons of language and family ties. ECONOMY The economic development of the autonomous areas has generally been slower than in the rest of the PRC. However, there are some exceptions, one of which is described at the end of this section. GDP Between 1990 and 1999, the GDP of the autonomous regions grew at an annual average rate of 18.6 percent as compared with 19.9 percent in the rest of the PRC. However, the population growth rate was faster in the autonomous regions, so the growth rate of GDP per capita averaged 18.1 percent as against 19.5 percent. In 1999, the GDP per capita in autonomous regions was only 5,042 yuan as against 7,418 yuan in the rest of the PRC. These aggregate figures conceal differences within provinces and autonomous regions. For example, in Sichuan over the same period the economic growth rate of the autonomous areas was much slower than that of the rest of the province (Figure 13-1).

Hui Kirgiz Mongol Others Total

5.56 45.1% 5.13 41.6% 0.82 6.7% 0.53 4.3% 0.10 0.8% 0.11 0.9% 0.09 0.7% 12.33 100.0%

5.76 44.9% 5.31 41.4% 0.88 6.8% 0.57 4.4% 0.11 0.8% 0.11 0.9% 0.10 0.7% 12.83 100.0%

6.29 46.2% 5.35 39.3% 0.99 7.3% 0.60 4.4% 0.12 0.9% 0.12 0.9% 0.13 1.0% 13.61 100.0%

7.25 47.4% 5.75 37.6% 1.14 7.4% 0.69 4.5% 0.14 0.9% 0.14 0.9% 0.18 1.2% 15.29 100.0%

7.80 46.9% 6.32 38.0% 1.24 7.4% 0.75 4.5% 0.16 0.9% 0.15 0.9% 0.20 1.2% 16.61 100.0%

8.25 46.5% 6.87 38.7% 1.30 7.3% 0.79 4.5% 0.17 0.9% 0.16 0.9% 0.20 1.1% 17.75 100.0%

Source: Xinjiang Statistical Yearbook 2000.

population of the PRC as a whole. The incidence of poverty is greatest in Tibet and Xinjiang, which each have about 30 percent of their rural population living below the $1.08/day level, and about 20 percent below the 625 yuan level (Figure 13-2). Within the autonomous regions, the minorities have much lower average incomes than the Han population. In Xinjiang, for example, there is a correlation between the percentage of a county

Figure 13-1 Growth of GDP Per Capita in Autonomous Areas of Sichuan Province, 1990–2000 GDP per capita 5,000

4,000

3,000

2,000

1,000 1990

Poverty The rural populations of the autonomous regions all have much lower incomes than the rural

1978 1980 1985 1990 1995 1999 (millions) (millions) (millions) (millions) (millions) (millions)

1991

1992

Rest of Sichuan

1993

1994

1995

1996

1997

1998

1999

Autonomous areas

Source: Calculated by consultants from Sichuan Statistical Yearbook 2000.

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Figure 13-2 Rural Income Distribution in Minority Autonomous Regions of the PRC, 1999 % of rural population 100 Yuan 625

$1/day

80 60 40 20 0 0

500

1,000

1,500 2,000 2,500 3,000 3,500 Per capita net income (yuan)

Guangxi Rural PRC

Tibet Ningxia

4,000

4,500

Inner Mongolia Xinjiang

Source: Calculated by consultants from the statistical yearbooks of the autonomous regions.

population that is Han and the average GDP per capita. Most poor counties have a minority population at least 90 percent of the total (Figure 13-3). Minority participation in the nonagricultural labor force Article 23 of the Regional National Autonomy Law of 2001 states: When recruiting personnel, enterprises and institutions in the national autonomous areas shall give priority to minority nationalities and may enlist them from the population of minority nationalities in rural and pastoral areas.

Figure 13-3 GDP Per Capita Correlated with Percentage of Han Population, Xinjiang Counties, 1999 GDP per capita (yuan) 10,000 R2 = 0.6662 8,000

6,000

4,000

2,000

0 0

10

20

30

40

50

60

70

80

90

Recent figures for Xinjiang indicate lower and declining minority participation in urban employment. In particular, the minorities’ share of urban employment declined from 28 percent in 1990 to 20 percent in 1999 (Table 13-5). The lack of occupational diversification among the minorities of Xinjiang is cause for concern for the following reasons: • It indicates that there are some factors such as language and education that affect the employment of minorities in the urban sector. • People from other provinces come to Xinjiang to work, and some Xinjiang people, especially those who are well educated, go to the Eastern and Central regions to find jobs. • Over the next few years, large numbers of young people from minority groups will join the workforce (see Figure 11-1) but with little hope of finding employment. The aggregate figures hide significant regional variations.The Uygur of Turpan, for example, have achieved relative prosperity from a commercially viable grape industry.They dominate the industry in all its aspects and employ temporary, migrant labor to do the most backbreaking and menial work including cleaning the irrigation wells. Migrant workers from Gansu and Anhui, for example, are desperately poor and willing to work at tasks that the local Uygur shun.5 The Uygur of Turpan have come to realize that their economic position is one of relatively prosperity and this has given rise to ethnic pride and a consciousness of achievement relative to the poor, itinerant Han, who are described locally as“selfdrifters.” Since 1987, about 250,000 self-drifters have come to Xinjiang each year, attracted by the perceived work opportunities and the relative ease of life in such small things as the provision of winter heating in houses.6 Turpan is relatively prosperous, and governments at all levels have made efforts to promote the cultural achievements of the Uygur, and recognize their tourist potential. More importantly, Turpan illustrates what is achievable by minorities under the right conditions.

100

Han as % of total population Source: Calculated by consultants from Xinjiang Statistical Yearbook 2000.

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Table 13-5 Full-Time Employees of Minority Nationalities in Xinjiang, 1990 and 1999 1990 Total (thousands)

Industry Mining Manufacturing Production and provision of electricity, gas, water Construction Geology reconnaissance and water management Transportation, storage, and postal and telecommunication services Wholesale, retail trade, and catering services Finance and insurance Real estate Social service Health, physical education, and social welfare Education, cultural arts, film, and TV Scientific research and general technology service State agencies, party department and social groups Others Total

138 560 55 23 78 163 222 40 2 48 72 240 29 189 — 2,062

Minorities (thousands)

1999 %

38 106 8 27 16 34 73 15 1 13 30 133 3 81

27.5 18.9 15.2 11.9 20.1 20.9 32.8 38.0 22.7 25.8 41.8 55.2 11.0 42.6

576

27.9

Total (thousands)

Minorities (thousands)

226 529 55 235 36 254 713 54 9 171 93 328 26 247 114 3,088

42 79 13 17 11 28 54 15 1 17 42 181 5 107 3 615

% 18.6 14.9 23.8 7.3 29.4 11.0 7.6 28.0 12.4 10.1 44.9 55.4 18.8 43.4 2.6 19.9

Source: Xinjiang Statistical Yearbook 1991 and Xinjiang Statistical Yearbook 2000.

Autonomous areas that have prospered While the economic development of autonomous areas has generally been slower than in other areas, there are exceptions. Honghe Autonomous Prefecture in Yunnan is one example that the Minorities Commission gives; its per capita GDP of 3,422 yuan is well below that of Yunnan (4,442 yuan) but its annual rate of GDP growth has exceeded that of Yunnan (Table 13-6). Honghe Autonomous Prefecture is located in the south of Yunnan province and borders Viet Nam on the south. The minority population is 44.8 percent of the total population of the prefecture. The total land area is 32,931 km2. The prefecture has a complex terrain with high plateaus, mountains, and deep valleys.The climate is subtropical and monsoonal. There are rich mineral resources, especially tin reserves, which are the most important in the PRC; the coal industry is well developed. In short, a

favorable location and natural resource endowment probably account for much of the recent progress of the prefecture. HABITAT In the Western Region, the minorities mainly inhabit the mountainous areas. They are predominantly rural populations. Besides the association between poverty counties and environmentally fragile areas (“Poverty and Fragile Ecology” section, Chapter 1), there is an association between minorities and environmentally fragile areas. Population growth in rural areas without migration to the cities has led to minority populations expanding into marginal areas, and settling marginal areas more intensively. The combination of remoteness and adverse environmental conditions makes the economic and social development of many minority populations an especially intractable problem.

Table 13-6 GDP Growth in Honghe Autonomous Prefecture, Yunnan Yunnan 1995

Honghe

1999

1995

Sector

(million yuan)

(million yuan)

(% of total)

Annual Increase (%)

(million yuan)

Primary Secondary Tertiary Total

3,052,700 5,366,300 3,647,800 12,066,800

4,121,700 8,251,200 6,184,500 18,557,400

22.2 44.5 33.3 100.0

7.8 11.4 14.1 11.4

282,958 334,056 230,595 847,609

1999 (million yuan) 360,273 571,823 401,246 1,333,342

(% of total)

Annual Increase (%)

27.0 42.9 30.1 100.0

6.2 14.4 14.9 12.0

Source: Yunnan Statistical Yearbook 1996 and 2000.

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Participation of minorities in decision making MINORITY PARTICIPATION AT THE NATIONAL LEVEL The visibility of minorities in national and regional life is an important way of promoting their wider participation in the socioeconomic development of the PRC. This visibility can be measured in different ways, beginning with a comparison of the representation of minorities in various national organizations and administrative levels.The apex body that looks after minority affairs, the State Ethnic Affairs Commission in Beijing, has good representation: about 52.8 percent relative to the total weight of minorities in the population of the PRC, which is 8.41 percent (Table 13-7). The visibility of minorities in the People’s Liberation Army is also satisfactory, with some six national minority groups being overrepresented relative to their weight in the population (Table 13-8). Table 13-7 Representation of Minorities on the Minorities Commission, 2001 Minority Han Man Mongol Hui Croxian Zhuang Tibetan Pumi Yi. Miao Bai Tu Dawol Kazak Dong Tujia Uygur Sugo Yao Naxi She Ni Total

No.

%

76 10 12 11 5 6 7 1 8 8 2 2 1 1 1 3 2 1 1 1 1 1 161

47.2 6.2 7.5 6.8 3.1 3.7 4.3 0.6 5.0 5.0 1.2 1.2 0.6 0.6 0.6 1.9 1.2 .6 .6 .6 .6 .6 100

Similarly, minority representation in the National People’s Congresses and the Chinese People’s Political Consultative Conferences has been strong (Table 13-9). With the economic reforms, the role of these legislative bodies has increased with more members refusing to vote for policies that they strongly oppose.7 At the national level, the public visibility of the minorities according to these indicators has been good and indeed is greater than what would be predicted from the population of the minorities. This is important because it means that minorities, at least by formal criteria, have some representation in national institutions, and this can be emulated by the rest of the communities. MINORITY PARTICIPATION AT THE REGIONAL AND SUBREGIONAL LEVELS Few studies on the minorities have dealt with the question of representation and participation at the regional level of administration. A study by Wang Zongli et al. concluded that, on average, minority cadres as a percentage of all cadres in the mid-1990s were only about half of what would have been predicted on the basis of the minority share of the population:8 • In Ningxia Hui Autonomous Region, where minorities compose 33.6 percent of the total population, minority cadres make up only 16.6 percent of all cadres. • In Xinjiang Uygur Autonomous Region, where minorities compose 62.2 percent of the total population, minority cadres make up only 46.1 percent of all cadres. • In Qinghai Province, where minorities compose 42.1 percent of the total population, minority cadres make up only 22.1 percent of all cadres. According to another study, in 1997 there were 639,000 cadres in Xinjiang, excluding central-level cadres living in the province and cadres belonging to the Xinjiang Production and Construction Corps (XPCC). Of these, 312,000, or 49 percent, were from minorities, at a time when the minorities made up

Source: Data supplied by the Personnel Department, State Ethnic Affairs Commission, PRC, July 2001.

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Table 13-8 Representation of Minorities in the Army, 1990

Nationality

about 62 percent of the total population of Xinijang.9 Minority representation among cadres has improved over time. Significantly, the Government itself has been concerned about the shortfall in the minority representation achieved relative to its goals.10 Minority representation within prefecture and county governments with large minority populations is sometimes limited to second-level positions of executive authority rather than toplevel.11 In contrast to what happens at the provincial and prefecture levels, leadership at the village level today does tend to reflect the numerically important minorities in the villages. The Organization Law of the Villagers’ Committee of 199812 requires that villagers directly elect the chairman, vice chairman, and members of the villagers’ committee. The numerically significant minorities tend to vote for someone from their own community, and the Law requires representation of minorities. However, this minority representation may not have much impact because the village committee still functions as the bottom level of a hierarchical system of government policy implementation (Chapter 12). Active minority participation at all levels should be an integral part of poverty alleviation programs.

Language policies as inhibitors of upward mobility The visibility of minorities in senior positions remains low. This seems to be the consequence of the past lack of job diversification and the use of minority languages as the medium of instruction. There are differences between local governments with respect to language policies. For example, in Yunnan, Chinese is taught at the primary school level, whereas in Xinjiang the Uygur typically attend schools that neglect Chinese language instruction.

Hui Zhuang Uygur Mongol Manchu Miao Yi Korean Tibetan Bouyei Others Total

No. in Army

Percentage of Total Minority Representation in Army

6,723 6,559 4,756 4,604 4,317 3,937 3,041 2,358 2,042 1,348 5,146 44,831

Percentage of PRC’s Minority Population

15.0 14.6 10.6 10.3 9.6 8.8 6.8 5.3 4.6 3.0 11.5 100.0

9.4 17.0 7.9 5.3 10.8 8.1 7.2 2.1 5.0 2.8 24.4 100.0

Source: Mackerras (1994), p. 256. Note: See the figures for population by nationality, including those in the People’s Liberation Army, in State Statistical Bureau (1990), pp. 76–86.

Table 13-9 Minorities Deputies in National People’s Congresses and People’s Political Consultative Conferences, 1954 and 1998

No. of Deputies

First Congress, 1954

Ninth Congress, 1998

National People’s Congresses Total 1,226 2,979 Female 147 650 Minorities 178 428 People’s Political Consultative Conferences Total 198 2,196 Female n.a. n.a. Minorities 19 258

% of Deputies 1954

1998

12 15

22 15

n.a. 10

12

Source: Statistical Yearbook 2000, p. 745.

LANGUAGE POLICY AND EDUCATION IN YUNNAN A notable characteristic of Yunnan minorities is the emergence of an intelligentsia. In the poverty counties of Luquan and Lancang, for example, there are many senior officials who are the first in their families to become literate and attain tertiary qualifications.13 In Lancang County, the strength of Lahu culture is very evident. In the town of Lancang, the Lahu symbol of the apogu or kulu14 is prominently displayed on public buildings, in statues and paintings, in street decorations, and in the public gardens.The bilingual language policy in Lancang County involves the use of Lahu language in the first three grades of primary school and then a switch to Chinese instruction from grade 4 onward. This policy

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275

has produced modern Lahu leaders at the township and county level who are very competent in the Chinese language.There is no doubt that this competence has allowed them to achieve rapid upward socioeconomic mobility. The Lahu are typical of those minority groups who have become closely identified with the cultural orientations of the Han. As a result, they feel very comfortable with the rapprochement that has occurred in recent times between the minority language and Chinese. LANGUAGE POLICY AND EDUCATION IN XINJIANG15 In Xinjiang there is a different interpretation of bilingual language policy in the schools.16 In Uygur majority areas, Uygur is the language of schooling from primary school to senior secondary school. In order to proceed to tertiary education students must study Chinese full time for a year or even longer. For example, the best Uygur medical students, those who gain admission to the prestigious Shanghai Medical School, need to study Chinese for a full year in Lanzhou. After they transfer to Shanghai private study in Chinese is essential in order to keep up with lectures. The first six months are exceedingly difficult; a student who cannot keep up will take even longer to complete medical school. It takes a bright Uygur student at least an extra year to complete medical training.17 In the meantime, an ambitious Han medical student from Xinjiang can surge ahead by concentrating on the English language alone. There are similar barriers in other parts of the advanced sector of the economy. The lack of minority presence among the employees in the banks and airlines of Xinjiang probably reflects the low level of Chinese language competence. The other consideration is the centralized nature of recruitment into the better jobs. A Uygur student from Aksu seeking employment in, say, the local branch of the PBC and having an appropriate degree would have to apply to the provincial headquarters of the PBC in Urumqi. But even if a vacancy did exist in Aksu, it would not necessarily go to the best applicant

276

because many SOEs continue to recruit employees from the children of former employees. Thus a third factor inhibiting the employment of a talented Chinese-speaking Uygur student is the pattern of labor recruitment in urban areas, which has tended to favor the Han. The discrepancy between the educational attainments of the Han and those of the ethnic minorities of Xinjiang is not limited to the tertiary sector (Table 13-10). In 1990, the proportion of minority male workers who had attended junior and senior high school was roughly half the proportion of Han workers.Table 1310 also shows that although development has benefited all communities, the educational gap between the Han and the ethnic minorities has increased, not decreased. For example, in 1982 male Han illiterates were roughly a third of the proportion of illiterates among the minorities in the workforce. By 1990, however, that proportion had declined to about one-fifth. Similarly, the mean years of education showed a growing gap between the Han and the ethnic minorities from 1982 to 1990: from 1.6 years to 2.3 years for men, and from 1.3 years to 2.4 years for women. The relatively low educational level of the minority labor force was a key factor that prevented the minorities from achieving greater job diversification. As economic reforms progress and reliance on market forces increases, the disadvantages and vulnerabilities of the past are likely to get worse unless local governments foster minority advancement in the labor force. Two areas warrant special attention: community participation in the planning and implementation of development policies and projects, and changes in language policies in order to accelerate the acquisition of Chinese language competence by minorities. There is a major language dilemma: on the one hand, the official language is Chinese; on the other hand, in deference to minority cultures, the Government and legal institutions recognize the need to respect and promote minority languages.

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Table 13-10 Educational Qualifications of the Xinjiang Labor Force, by Ethnic Group and Sex, 1982 and 1990 1982 Level of Education Postsecondary University Junior college Senior high school Academic Technical Junior high school Primary school Illiterate Total No. of observations Mean years of education

Men Han (%) Minority (%)

1990 Women Han (%) Minority (%)

2.8

1.2

1.3

0.7

12.8

7.7

10.5

5.0

36.8 38.0 9.7 100.0 7,306 6.1

20.6 41.1 29.3 100.0 8,686 4.5

28.0 32.4 27.8 100.0 6,990 5.0

13.6 40.3 40.3 100.0 7,211 3.7

Men Han (%) Minority (%)

Women Han (%) Minority (%)

7.0 1.3 5.8 24.9 19.5 5.5 48.3 16.5 3.4 100.0 9,294 7.9

4.4 0.4 4.0 26.5 19.9 6.6 41.2 18.9 9.1 100.0 8,026 7.3

3.3 1.2 2.1 12.8 7.8 5.0 25.6 43.0 15.4 100.0 10,999 5.6

1.5 0.5 1.0 11.1 6.2 4.9 19.8 48.2 19.4 100.0 9,176 5.0

Source: Hannum and Yu Xie (1998), p.329.

Ambitious non-Han people need to master Chinese in order to compete for the top jobs in government, SOEs, and other fields. However, neither the leaders of the Han nor those of the non-Han communities advocate mastering Chinese. Indeed, Chinese speakers among the non-Han people are often ridiculed.There is also tension between those intellectuals who speak Chinese well and those who do not. In Xinjiang, the Min Kao Han (minorities tested in Han language) and the Min Kao Min (Uygur educated at Uygur schools) constantly argue about the relative merits of the Han and Uygur languages and cultures.18 Often the arguments come down to the question of who the real Uygur is.These arguments about Uygur identity are a microcosm of many other arguments in modern PRC about who is “Chinese.”

Implications for policies on minorities Two dimensions of the minority issue need special attention and a response by Government: the emergence of minority concerns over the development of the Western Region, and the difficulties of establishing market forces. RESPONSE TO MINORITY VIEWS ON THE DEVELOPMENT OF THE WESTERN REGION Improving the participation of minorities in the labor market requires a combination of language, education, affirmative action, and participatory interventions. This question has become quite urgent, given the large numbers of young people from

minority groups about to join the labor force. There is now a risk that the minorities who are supposed to benefit from economic development of the Western Region will reject it because they doubt whether it will improve their lives. Some Uygur fear that the new development strategy will take the disadvantages that they have so far tolerated to a new level. This concern serves the useful function of providing a check against which the benefits of different approaches to development can be measured, and policies and strategies can be identified to ensure that the minorities do, in fact, benefit from accelerated development. Appropriate policies to improve the employment opportunities for minorities and give them greater visibility in the decision-making process are crucial to achieving the Constitution’s promise of economic development.They are also fundamental considerations in the evolution of development strategies for 2020, in particular those strategies that aim to alleviate poverty and generate new jobs for the poor. The concerns arising from the Great Western Development Strategy, or the “Go West” campaign, include the following: • Possible further demographic decline of the Uygur in the population of Xinjiang,Tibetans and other minorities in the population in their areas, as a result of the inward migration of Han • Mounting concern about the southward push of the non-Uygur groups, facilitated, among other things, by the new railway between Urumqi and Kashgar that opened in May 1999.19 Similar concerns have been voiced about the possible impact of the Qinghai-Tibet Railway

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• Possible damage to Uygur, Tibetan and other minority cultures following the opening of the previously isolated areas to Han migration • Skepticism as to the availability of new jobs for minorities rather than for migrants from the east, and fear that construction workers will continue to be 90 percent Han (Table 13-5) • Fears that with the downsizing of SOEs, there will be a continuing reduction in urban employment opportunities for minorities The wide-ranging nature of these fears shows how insecure some minorities feel. The bulk of these fears stem from the competition that confronts them in the labor market; this in turn has repercussions for their living standards and aspirations for the next generation. Unfortunately, accelerated economic development could increase their insecurities and anxieties. Local governments should provide the most vulnerable minorities with a social safety net against the worst-case scenarios, and the rest with affirmative action strategies. In the case of prosperous minorities, planning strategies should ensure that they regard themselves as stakeholders in the project to develop the Western Region. Once they feel themselves to be beneficiaries of growth and modernization, their insecurities and fears of slippage back into poverty will evaporate. ROLE OF THE STATE SECTOR Conditions in the autonomous regions also make it more difficult for market forces to take root. In the urban sector, the State plays a much larger role in the west than in the east. Measures to reduce the size of the state sector to a level more comparable to that of the rest of the country are to be desired. In the rural sector, military farms have been a feature of the PRC’s border regions since the Qing dynasty.20 After the civil war and the partial demobilization of the People’s Liberation Army, the Government assigned land and other resources in Xinjiang to former soldiers. Since the 1950s these farms and rural enterprises have grown into a considerable economic force, now under the control

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of the Xinjiang Production and Construction Corps (XPCC). They comprise some 2.4 million persons (half of these are dependent women and children), or one-seventh of the population of Xinjiang.Together they represent a major economic force in Xinjiang as the following facts show:21 • The XPCC today has 170 urban settlements and about 2,000 villages throughout Xinjiang. • It runs its own agricultural farms, agro-industries, schools, hospitals, police, and prisons. • It owns seven universities and 37 technical colleges. • It controls about 48 percent of the area in Xinjiang, and 30 percent of arable and irrigated land. • XPCC output in 1997 represented about 14 percent of Xinjiang’s GDP, 20 percent of its export trade, 24 percent of its agricultural production, and 40 percent of its textile output. • Some XPCC towns (e.g., Shihezi, 250 km west of Urumqi) are almost entirely Han settlements that have attracted large numbers of seasonal and permanent migrant workers. The scale of its operations means that XPCC will continue to play a major role in the development of the Western Region. In addition to its economic importance, the XPCC plays a critical role in matters of border and internal security. In 1990, the significance of the XPCC was recognized when it was redefined as a “Stand Alone Planning Unit” and made directly accountable to the State Council.22 Further administrative reform in the late 1990s gave the XPCC the status of a corporation in addition to its other multifaceted roles, so that it can raise foreign direct investment in Hong Kong and abroad. Like the SOEs, the XPCC is facing major challenges and difficulties. Its agricultural productivity has slipped below that of the nonstate sector. In particular, agricultural output per hectare is low compared with the nongovernment sector, despite the heavier application of fertilizers and electricity, and despite the high proportion of paddy fields in the regimental farms (Table 13-11).

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 13-11 XPCC Agricultural Output, 1999

Sector XPCC Others Total Xinjiang

Gross Output (million yuan) 12,206 26.5% 33,906 73.5% 46,112 100.0%

Land (thousand hectares) Paddy 27.9 39.3% 43.0 60.7% 70.9 100.0%

Dry 69.7 30.9% 156.1 69.1% 225.9 100.0%

Irrigable 958.0 31.0% 2,129.1 69.0% 3,087.1 100.0%

Fertilizers (Mt) 1.69 34.8% 6.44 65.2% 8.14 100.0%

Electricity (MWh) 104.3 44.5 130.1 55.5 234.4 100.0%

Source: Xinjiang Statistical Yearbook 2000.

Entry into the WTO will create severe difficulties for the XPCC because of the likely reduction in cotton prices. The enterprises run by the XPCC are already heavily subsidized and loans are given with insufficient concern for long-term economic sustainability.23 Minorities are underrepresented in the workforce, although exact figures are not available. For the XPCC to play a leading role in promoting rural development and in accelerating the economic development of minorities, major changes will have to be made in its operations. AFFIRMATIVE ACTION POLICIES Regional growth demands a concerted effort by governments at all levels to meet two essential preconditions: • Improved employment prospects for minorities, with greater job diversification away from dependency on agriculture • Improved minority representation at the highest levels of government and of the management of old and new enterprises These development strategies have a better chance of long-term, sustainable success in creating stable conditions for economic growth than alternative ad hoc policies. If the interests of the minorities are made part of the routine business of government and administration, then it will be no longer necessary to formulate policies on the basis of perceived national emergencies. Economic development will not automatically benefit minorities, even if political leaders wanted it to.24 It requires integrating minority needs and perceptions in the daily, routine business of government and administration. The objective of uplifting the minorities is a laudable one, but it requires a pragmatic response to their frustrations and vulnerabilities.

AFFIRMATIVE ACTION PROGRAMS TO PROMOTE MINORITY INTERESTS Since the days of Mao’s revolution, the PRC has had an ambitious program of affirmative action to promote the needs and interests of the country’s minorities. Despite this, the minorities in the Western Region remain relatively backward and disadvantaged compared with their Han counterparts. How has this paradox come about? A recent review by Sautman25 of the PRC’s preferential policies for minorities stresses the wide coverage of these programs. He argues that the needs of the minorities have been served relatively well and with minimal opposition from the Han. The policies for minorities include: • Family planning preferences • Educational preferences • Hiring and promotion of minority cadres and leadership • Minority representation in representative bodies Not all of these policies have produced equally desirable results, however. The greatest success has been the family planning program, which has handled culturally sensitive issues well by exempting minority groups from the one-child family restrictions that apply to the Han. At the same time, as Sautman may have noted, once a minority person is employed by the State, these privileges end. So minorities that achieve upward socioeconomic mobility face the same restrictions as the Han.This is a reasonable position for the State to maintain, but it also demonstrates the limits of preferential policies for minorities. The record of educational preferences is variable. Many programs give minority children benefits through subsidies, special boarding schools, and access to colleges with lower entrance requirements. However, these policies have proven inadequate in

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areas of extreme poverty where the indirect costs of education prevent children from attending school no matter how large the subsidy (Chapter 6). Many preferential policies are also only partially successful because they act in an environment of segregation. Boarding schools and colleges especially for minorities are separated from the mainstream Han facilities.This fragments educational opportunities and can lead to minority students suffering feelings of inferiority. Moreover, higher up in the educational scale, the percentage of minority representation declines. In Ningxia, 18 percent of tertiary students are from minorities although the minority population is a third of the total population. In Tibet, Tibetans represent around 97 percent of the population but tertiary institutes report minority representations ranging from only 66 to 92 percent. It is not possible to provide better employment opportunities for minorities without removing these bottlenecks in the educational infrastructure. As the economies of the west move toward a greater emphasis on sophisticated industries such as tourism, the pressure for better and higher education will increase. Responding to this pressure by creating appropriate facilities will ensure that the minorities can participate in the economic benefits of the western development strategy. There is also a need to improve preferential programs to increase minority representation among the cadres. To expedite the advancement of the minorities, preferential employment is most important. Jobs in culturally sensitive areas or for the production of goods and services for particular minorities are often set aside for employees from those minorities.26 Many SOEs, even in Xinjiang, require applicants to pass employment exams and typically these allow minority candidates to pass with lower scores. Whether or not employment then flows according to the results of the exams is unclear. Moreover, there are claims to the effect that new enterprises prefer not to employ local minorities. The history of preferential policies suggests that there is a need to deal with the fundamental problems of

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improving the minority groups’ education and employment. In particular, measures need to be taken to ensure that production follows the discipline of the market, and to protect the minorities against the side effects of the PRC’s entry into the WTO. Preferential policies by themselves are unlikely to produce an adequate response to needs. This will be even truer in the coming decades as the pressures on the PRC to emerge as a globally competitive producer increase. Serious consideration therefore needs to be given to a range of policies: • Increasing Government action to improve education, particularly in those areas most likely to improve the employment mobility of minorities, considering the new requirements under the Regional National Autonomy Law of 2001 • Providing special loan programs to assist minorities in developing SMEs (Article 35 of the Regional National Autonomy Law of 2001 requires national autonomous areas to establish RCCs and local commercial banks) • Adopting policies to ensure that the minorities are not the first to be made redundant when SOEs are downsized • In areas where new migrants and cadres are building up new industries, formulating policies to ensure that local people, and not merely the migrant workers, are given jobs • Introducing statistical reporting on employment and education of minorities to enable more systematic study of the relevant issues • Developing integrated ICT services to disseminate information about opportunities in employment, education, and language training to towns and villages that are remote from the cities INCREASED MINORITY REPRESENTATION IN DECISION MAKING AND MANAGEMENT A critical ingredient of minority policies is measures to promote participation by minority leaders in the decision-making and planning processes of

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

government and production. Governments at all levels need to consider the following kinds of initiatives: • Developing appropriate benchmarks to measure the involvement of minorities in government • Promoting minority leaders to the top levels of provincial, prefecture, and county governments • Accelerating training programs to equip minorities for leadership roles • Accelerating language training programs to increase the Chinese and English language skills of minorities WHY MINORITY PARTICIPATION IN DECISION MAKING IS ESSENTIAL Minority representation in national institutions, with the exception of the Party itself, has been very good (see “Minority Participation at the National Level” above). However, in provincial, prefecture, and county governments, minority representation at the highest administrative and party levels still needs to be improved. Minority participation in economic and social development should achieve the following outcomes: • Minority ownership and support for the policies and priorities that evolve • Evolution of the Western Region’s cultural diversity consistent with the needs of modern society • Mobilization of minority resources for imaginative and innovative development projects. For instance, a thriving tourist industry is predicated on visible minority participation at every level. • Empowerment of minorities to participate in the market economy rather than requiring government intervention to “protect” their interests There are precedents in the PRC’s recent history for minority leaders achieving greater visibility. For example, Saifudinin, a Uygur, was First Party Secretary in Xinjiang from 1973 to 1978.27

Too often policies toward the minorities promote the preservation of“traditional cultural achievements” rather than their modernization. Government policies appear to assume that minority cultures must be captured as some kind of distilled essence. The classical understanding of minority culture leads to an emphasis on festivals of music, dance, and food in which the minorities provide “performances” rather than a more routine integration of minority culture in the broad sweep of contemporary life in the PRC. There is a tendency to conceptualize minority culture in paradigms more appropriate to cultural displays in museums, instead of the active evolution of minority cultures as part of the rich, multiculturally modern PRC that needs to emerge. NEED FOR A LINK LANGUAGE Language competencies are a core determinant of a person’s employment opportunities and career advancement. If the needs and vulnerabilities of minorities are to be an integral part of development planning, then the complexities of language policy need to be part of the strategy for achieving growth and alleviating poverty in the Western Region. This implies that: • The Government should establish a dialogue with minorities on the question of language, beginning with the Uygur, focusing on how to promote Chinese language competence without jeopardizing minority languages and cultures. • The State Ethnic Affairs Commission should mount a campaign to promote multiculturalism, reduce language barriers, and break down racial stereotypes. The campaign should begin with exchange programs for university students from different regions. The brightest students from the Western Region often study in the east, but the reverse is very rare. Short-term study experience in the west would give students from the east an opportunity to understand and appreciate minority cultures.

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Notes 1 SDPC urged the consultants to study Xinjiang as one of three “case studies,” the other two being Gansu and Yunnan. 2 Attane and Courbage (2000), p. 262. 3 Li Danhui (2001). 4 Wang (1998), p. 56, note 71. 5 Rudelson (1997), pp. 68–69. 6 Rudelson (1997), 66. 7 United Nations Development Program (1999a), p. 47. 8 Wang Zongli et al. (1998), pp. 180–185. The authors explain that the managers or cadres they mention refer to those that are listed as cadres administered by the Organizing Department of the Communist Party and the Government Personnel Department. These cadres mainly include: the working staff of various Party and government organizations, social organizations, the management staff of enterprises, and the management staff of nonprofit institutions. 9 Mackerras (2001), p. 3. 10 Mackerras (2001), pp. 157–159. 11 Observations made by the international team during fieldwork in Aksu Prefecture, April 2001. 12 The Law was passed in 1998 but the history of village elections dates back to 1988. 13 In Luquan, team members came across Miao, Dai, and Yi men and women who had achieved astonishing degrees of upward socioeconomic mobility. The current generation is the first to abandon the traditional employment constraints of the past. Luquan County is the second-poorest county in Yunnan. Team members had the same findings in the southern poverty county of Lancang, which is ranked as the poorest county in Yunnan and is an autonomous county. Many Lahu have broken through the barriers of previous illiteracy. In one memorable case, the Lahu leader had come from a family of 11 children; one of his brothers had attained great public prominence in a neighboring county.

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14 The apogu or kulu (gourd) embodies the myth of the origins of the Lahu people. A very long time ago there was a kulu. Then along came a rat. Hearing strange noises from the kulu the rat gnawed a hole in it. Out of the hole stepped the ancestors of the Lahu. The Kulu festival, on 15 October, coincides with the Mula agricultural calendar (“Mula” comes from mu, a unit of land). The festival is not a traditional event, but was invented in the 1980s to celebrate Lahu culture. Dr. David Bradley has pointed out that while Lahu leaders used the word kulu to explain to us the story of the origin of the Lahu, the Lahu really use the word apogu for the gourd. Since the consultant was traveling with Han officials, the Lahu must have thought that the Han version of Lahu history was what we wanted to hear. 15 South China Morning Post (1998). 16 Fieldwork in the poverty counties of Kelpin and Wushi (Aksu prefecture) and interviews with people from the north of Xinjiang, April 2001. 17 See also Sautman (1999). 18 Rudelson (1997), pp. 127–128. 19 South China Morning Post (1999) 20 Rong Xinjiang (2000). 21 Most of the following information is based on the best available assessment of the Xinjiang Production and Construction Corps, namely, Becquelin (n.d.), pp. 77–80. 22 Becquelin (n.d.), p. 79. 23 Becquelin (n.d.), p. 80, for estimates of Central Government subsidies and loans, including World Bank loans. 24 Ruztam Minasuv, member of the CPPCC National Committee from Xinjiang, claimed recently that the minorities would be the “greatest beneficiaries” of western development. He was addressing the Ninth Chinese People’s Political Consultative Conference. (Minasuv [2001]). 25 Sautman (1999), p. 187. 26 Barry Sautman, n.d., “Preferential Policies for Ethnic Minorities in China,” p. 97. 27 Dreyer (1986), p. 272.

I V P A R T

Enhancing local capabilities

CHAPTER

14

CROSS-BORDER COOPERATION This chapter examines the scope for expanding economic cooperation between the Western Region and its four adjoining economic regions: (i) Russia and Mongolia; (ii) the Central Asian Union (CAU), comprising the Kyrgyz Republic, Tajikistan, Kazakhstan, and Uzbekistan;1 (iii) the Association of Southeast Asian Nations (ASEAN), comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam; and (iv) the South Asian Association for Regional Cooperation (SAARC), comprising India, Bangladesh, Nepal, Pakistan, Sri Lanka, Maldives, and Bhutan. These four huge and populous regions together account for only 10.5 percent of the PRC’s merchandise trade,2 and much of the trade with these regions goes by sea. Thus, while crossborder cooperation is very significant for parts of the Western Region, it is much less important for the PRC as a whole.

Figure 14-1 Trade Regions Adjoining the Western Region

R U S S I A N F E D E R ATI O N K A Z A K H S TA N

CAU

MO N G O L IA

SAARC ASEAN Russia and Mongolia

286

Russian and Mongolia are the two northern neighbors of the Western Region, both having borders with Xinjiang and Inner Mongolia.The PRC and Russia have 4,283 km of common border, of which 52 km is in Xinjiang and 915 km in Inner Mongolia.

share of the PRC’s cross border trade with Russia. Nevertheless, Russia is the key to expanding crossborder economic cooperation with the CAU. The PRC’s relations with the countries of the CAU are likely to take place in the shadow of its relations with Russia,3 and some of the potentially important trade routes with Russia pass through Kazakhstan.

TRADE POTENTIAL OF RUSSIA AND MONGOLIA Russian and Mongolia are of declining importance in the PRC’s trade.Traditional products dominate the trade, and the Russian economy has been shrinking rather than growing. In 1999, trade with the Russian Federation and Mongolia amounted to about 1.5 percent of the PRC’s trade (Table 14-1). The Western Region’s (Inner Mongolia’s) crossborder trade accounts for about 11 percent of the trade. However, Heilongjiang and Jilin account for rather more of the PRC’s cross-border trade with Russia.Thus, the Western Region has only a minority

Pipeline imports from Russia Russia’s Far East is a potential source of crude oil imports. The Russian and PRC Governments have had many discussions on the feasibility of pipelines to make such exports possible. Russia’s Yukos Oil proposes a $1,700-million pipeline from Irkutsk to Beijing via Mongolia, which could carry 400,000 barrels of oil a day, mainly from the Tomsk region. The PRC has proposed an alternate route that would bypass Mongolia and terminate at its Daqing oilfield, linking into existing pipelines. Another project operated by East Siberian Oil at Yurubchenskoye is

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 14-1 Trade Potential with Russia and Mongolia, 1999

Country

Population (millions)

GNP ($ million)

GNP at PPP ($ million)

PRC Trade ($ million)

Border Trade ($ million)

Russia Mongolia Total

147 3 150

332,500 900 333,400

928,800 3,900 932,700

5,720 263 5,983

n. a. n. a. 664

No. of Tourists

Border Crossingsa (no.)

832,995 354,500 1,187,495

1 7 8

Source: World Bank (2001b); China Statistical Yearbook 2000. a Western Region only and first grade only; in the Central Region Heilongjiang and Jilin have several border crossings with Russia.

exporting crude oil to the PRC by a combination of road and rail transport. Quantities are small, but East Siberian claims the field has a production potential of 400,000 barrels a day if fully developed.

BORDER CROSSINGS FOR TRADE WITH RUSSIA Four border crossings in the Western Region carry significant volumes of trade with Russia (Figure 14-2).

Figure 14-2 Border Crossings in the Western Region

21 20 19 18

10 8

9

11 12

7 6

13 5

17 14 16

4 3

15

2

1

23

22

a b c d f g e h i k j l m

n o

p q rs

t

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Kunjirap port Turgart port Biedieli port Muzart port Dulata port Korgas port Alataw port Baketu port Jeminay port Ahetubike port Hongshanzui port Takeshiken port Ulastai port Laoyemiao port Ganqimaodao Erenhot Zhuenhadabuqi Arihashate Manzhouli Heitoushan Shiwei Yadong Nyalam

a b c d e f g h i j k l m n o p q r s t

Pianma Tengcong Yinjiang Longchuan Ruili Chengguan Nansan Mengding Menglian Daluo Jinghong Ganlanba Mohan Jinshuihe Hekou Tianbao Shuikou Pingxiang Youyiguan Dongxin

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Manzhouli Manzhouli (Inner Mongolia) is the largest railway port in the PRC.4 Trains traveling from Beijing to Moscow pass through Harbin (Heilongjiang, Central Region) and this point. Manzhouli is also the only direct road connection between the Western Region and Russia. A Sino-Russian mutual trade zone has been established there. However, Manzhouli has no communication links with the rest of the Western Region other than via the Central Region and is therefore of little real relevance to Western Region development. Erenhot The main north-south road in Mongolia, passing through its capital Ulaan Baatar, connects Russia and the PRC. A railway line, which involves a gauge change at the border, parallels this road. The border city in Inner Mongolia is Erenhot. ADB is providing finance for two road projects in Mongolia to upgrade this route.The new expressway connecting Erenhot to Beijing and Tianjin is partially complete. To facilitate cross-border traffic flow, which is well below its potential, the three countries are working on a transit traffic agreement with the assistance of United Nations organizations. Jeminay and Baketu Russian trade with Xinjiang was very important prior to the Russian revolution; the Russians enjoyed special trade privileges and there was even a Russian bank in Urumqi.5 Jeminay and Baketu, in the far north of Xinjiang, were important border crossings.They were closed from 1960 until the early 1990s, and are now border crossings into Kazakhstan rather than the Russian Federation. However, they are about 400 km by road from the Russian border with Kazakhstan and have some potential for trade with Russia. Baketu has the advantage of being only 2 km from the Xinjiang town of Tacheng, which has an airport. Ala Pass Like Jeminay and Baketu, Ala Pass has a long history of trade. It is now important as Xinjiang’s only rail border crossing. The railway from Urumqi to Ala Pass is

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part of the “China Land Bridge” (see Chapter 6) railway. Although the railway connects to the Russian rail system, most rail traffic between the PRC and Russia goes via Manzhouli. BORDER CROSSINGS WITH MONGOLIA Mongolia is a special case, being a landlocked country between Russia and the PRC. Although it has a population of only 3 million and GNP of only $900 million, cross-border trade is locally significant because it is a landlocked country. Inner Mongolia has four first-grade crossings, while Xinjiang has only seasonal second-grade crossings.Trade mainly comprises exports of manufactures and imports of animal products and raw materials. Passenger traffic is important. Xing-an ADB is financing a technical assistance (TA) project to help the Governments of the PRC and Mongolia to develop economic cooperation in respect of Eastern Mongolia and the adjoining Xing-an prefecture of Inner Mongolia. The TA will look at the feasibility of a border bridge and new border port at Arxan City, in the northwest of Xing-an prefecture. Arxan and the prefecture city of Ulanhot lie on a route that runs through Changchun and Jilin (Jilin province) to the Tumen River border area, where Russia, the Democratic People’s Republic of Korea, and the PRC meet next to the Sea of Japan. Both sides of the border near Arxan are very poor areas. Wulusatai and Takeshiken Wulusatai (Chanji Autonmous Hui prefecture) and Takeshiken (Qinghe County of Altai prefecture) ports are of interest because while they now handle small volumes of trade between Mongolia and Xinjiang, there is the potential for trade and travel between Kazakhstan and Mongolia via Xinjiang.Takeshiken is 396 km by road from the border port with Kazakhstan of Jeminay (see above). Wulusatai is on the road between Ulaan Baatar and Urumqi. Both ports are seasonal: Wulusatai is open from March to November,

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

and Takeshiken from April to November. Takeshiken is the more important of the two, with substantial facilities and a town; trade and passenger traffic are both growing rapidly. Qinghe is a poverty county. Laoyemiao Laoyemiao is an example of a border port in a minority poverty county, Barkol Kazak Autonomous County, Xinjiang. After it opened in 1991, trade was initially little more than simple barter trade. However, trade has gradually grown. Like Wulusatai and Takeshiken, it is a seasonal port.

The Central Asian Union ECONOMIC COOPERATION Prior to 1991, the economies of the CAU member countries were simply part of the Soviet economy. The Soviet republics of Central Asia swapped raw materials and semimanufactured goods for capital goods and finished products.The breakup of the Soviet Union meant a severe contraction of demand for their products, the loss of an administrative and political framework for trade and investment, and the creation of thousands of miles of new international borders and trade barriers.The subsidies that had artificially supported the economies dried up. Markets for raw materials and sources of supply of capital and manufactured goods disappeared. The long-term growth of the CAU countries depends on finding new sources of raw materials and

manufactured goods and new markets for traditional products, as well as developing new industries to replace those created and sustained by the Soviet economy. Their economies are too small and too similar to sustain economic growth simply through local economic cooperation and integration. In short, their economic future depends on developing new trading partners and new trading routes. For landlocked countries, transport corridors to the sea are by far the most important strategic objective. A direct route, through Afghanistan and Pakistan, could soon be practicable. The wealth of the oil and gas reserves in Uzbekistan and Kazakhstan means that investment funds for the direct route will be forthcoming as soon as the political constraints disappear. The CAU has not yet been effective in achieving economic cooperation. There are, however, several bilateral trade agreements between member countries; these agreements are registered with the WTO. ADB has actively supported efforts to improve cooperation between the CAU countries, all of whom are ADB members, along with cooperation with Xinjiang. However, for all five countries, economic ties with more distant countries are of much greater economic importance. In 1999, the PRC ’s trade with the CAU countries amounted to $1,322 million, or less than a quarter of the value of the PRC’s trade with Russia (Table 14-2). However, cross-border trade with the Western Region accounted for about 75 percent of this trade.

Table 14-2 Trade Potential with CAU Countries, 1999

Country

Population (millions)

GNP ($ million)

GNP at PPP ($ million)

PRC Trade ($ million)

15 25 5 6 51

18,000 17,600 1,400 1,800 38,800

68,000 51,500 10,500 6,100 136,100

1,139 40 135 8 1,322

Kazakhstan Uzbekistan Kyrgyz Republic Tajikistan Total

No. of Tourists 68,704 n. a. n. a. n. a. 176,273

Border Crossingsa (no.) 7 0 2 1

Source: World Bank (2001b); China Statistical Yearbook 2000.

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COMPLEMENTARITY BETWEEN XINJIANG AND CAU COUNTRIES Xinjiang has common borders, economic interests, and cultural ties with Central Asia. Lying along the historic “Silk Road,” it has had commercial and cultural links with Central Asia for centuries. In contrast to Central Asia, however, Xinjiang experienced rapid economic growth in the 1990s. With the national commitment to expand international trade and economic cooperation, Xinjiang has new opportunities. The collapse of the Soviet Union makes it possible once again to reconsider regional economic cooperation and economic linkages. Xinjiang’s external trade is already skewed toward Central Asia. Over 60 percent of its imports come from Kazakhstan, and a further 4 percent from the Kyrgyz Republic (Table 14-3). About 45 percent of Xinjiang exports go to Kazakhstan, and a further 10 percent go to the Kyrgyz Republic. Xinjiang imports oil, gas, coal, and clothing from Kazakhstan, and agricultural machinery, wool, and tobacco from the Kyrgyz Republic. In return, Xinjiang exports agricultural products, including sugar, maize, hops, pears, and cotton, together with processed products, to Central Asia. BORDER TRADING AND POTENTIAL OF ENERGY IMPORTS FROM CENTRAL ASIA Border trading Energy trade between Xinjiang and Central Asia is likely to boom. First, economic growth generates

demand for energy—energy shortages already occur in Xinjiang. Second, an uneven geographic distribution of energy resources leaves each country in need of energy forms that another can more efficiently supply. The Kyrgyz Republic has few proven gas and oil resources, and depends heavily on imports from Kazakhstan and Uzbekistan. At the same time, Kazakhstan depends on the Kyrgyz Republic and Uzbekistan for about 60 percent of its power supply. Uzbekistan depends on hydropower from the Kyrgyz Republic to meet seasonal peak demand. Xinjiang is seeking to import power, gas, and oil to meet its increasing demand. Central Asian countries are poised to become a new supplier of energy to the PRC. Table 14-4 illustrates the trading market on the borders of Xinjiang and several other Central Asian countries. Gas imports For the sake of energy security and the accelerated development of natural gas resources in Central Asia and Russia, the PRC is negotiating with several countries for the building of gas pipelines to the PRC. Under consideration are three proposed pipelines, which would terminate at Shanshan in the northwest of Xinjiang: • A 1,865-km gas pipeline from Western Siberia to Shanshan. The $3,620-million pipeline would be able to transport 30 GL of gas to the PRC. • A 2,150-km pipeline from Turkmenistan to Shanshan, to transport 25 GL of gas, at a cost of about $4,700 million.6

Table 14-3 Exports and Imports of Xinjiang and Inner Mongolia, by Country, 1999

Country Kazakhstan Russia US Germany Kyrgyz Republic Hong Kong, China Other countries Total Cross-border trade

PRC ($ million) 644 4,223 19,478 8,335 32 6,892 126,094 165,699

Imports Xinjiang ($ million) 463 60 50 38 32 1 94 738 537

(% ) 62.7 8.2 6.7 5.1 4.3 0.2 12.8 100.0

Inner Mongolia ($ million)

(% )

n. a. n. a. n. a. n. a. n. a. n. a. n. a. 771 331

n. a. n. a. n. a. n. a. n. a. n. a. n. a.

Source: Almanac of China’s Foreign Economic Relations and Trade 2000.

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PRC ($ million) 494 1,497 41,947 7,780 103 36,863 106,247 194,931

Exports Xinjiang ($ million) 464 29 49 11 100 102 274 1,027 450

(%) 45.1 2.8 4.7 1.1 9.7 9.8 26.7 100.0

Inner Mongolia ($ million)

(% )

215 37

23.7 4.0

535 333

100.0

Table 14-4 Trading among Central Asian Countries and Xinjiang Country

Primary Products

Major Eexports

Major Imports

Trading Partners

Kazakhstan

Wheat, barley, meat, wool, metallurgy, textiles, machines, petrochemicals

Oil, gas, coal, nonferrous metallurgy, grain, garments, footwear

Machinery, oil, gas, processed food, beverages, ferrous metallurgy

Russia, Ukraine, Uzbekistan, Kyrgyz, PRC, Germany, Sweden, Switzerland

Kyrgyz Republic

Tobacco, livestock, wool, metallurgy, agro-processing, electronics, textiles, sugar

Agro-machinery, wool, tobacco products

Oil, gas, wheat, processed food, machinery, chemicals, light industrial products

Russia, Ukraine, Kazakhstan, Kyrgyz Republic, Germany, Bulgaria, Czech and Slovak republics, Xinjiang, PRC

Uzbekistan

Cotton, fruits, vegetables, textiles, cotton harvesters, textile machinery, metallurgy

Cotton, gold, gas, fertilizers, light industrial goods

Machinery, oil, gas, chemicals

Russia, Ukraine, Kazakhstan, Kyrgyz Republic, Switzerland, South Korea, Turkey, Xinjiang, PRC

Xinjiang, PRC

Cotton, corn, sugar beets, animal husbandry, mineral extraction, petrochemicals, textiles

Sugar, maize, tomato ketchup, pears, hops, cotton, sheep’s casings, wool, garments, carpets

Steel products, chemical raw materials, fertilizers, building materials

Kazakhstan, Uzbekistan, Kyrgyz Republic, Russia, Ukraine, Inland PRC

Source: Dorian et al. (1999).

• A 3,370-km pipeline from Kazakhstan’s supergiant Karachaganak gas, condensate, and oil field to Shanshan, to move 25 GL of gas to the PRC. Of these three options, the pipelines from Karachaganak and Turkmenistan look the least plausible. The PRC also has the option of importing liquefied natural gas from Australia and Southeast Asia. Gas imported by sea will be especially attractive for cities in the Eastern Region. Oil imports from Kazakhstan With the expectation of growing dependence on oil imports, the PRC has been acquiring stakes in exploration and production abroad. One of the oil import sources is Kazakhstan, whose oil reserves are vast. The China National Petroleum Corporation (CNPC) has major investments in two fields (Aktyubinsk and Uzen) but these two fields are very distant from the Xinjiang border. The potential for oil imports from Kazakhstan across the Xinjiang border are therefore very sensitive to world oil prices. When prices are low, oil imports by sea are much more attractive. Oil imports by sea It is likely that the PRC will import much of the oil it needs by sea rather than through the Western Region.

Sinopec has operations in Iran, while CNPC has operations in the Middle East, North Africa, and North America with confirmable exploitable reserves of 460 Mt in 2000.7 This oil can reach the PRC only by sea. Power grid connection between Xinjiang and Kazakhstan Interconnection of the PRC’s power grid with CAU countries is not practicable. Kazakhstan is far from the PRC’s power load center, and there are many technical and security issues for a power transmission grid of 500 kV or 750 kV and over 8,000 km in length. However, local interconnections may be feasible. Along the border, Kazakhstan has an extensive grid. It would be economic for some border counties to buy electricity from Kazakhstan; such electricity trading would save capital investment in the power sector (mostly the power transmission grid), reduce poverty in border areas, and strengthen economic cooperation between the two countries. Trade with the Kyrgyz Republic Although the Kyrgyz Republic has only a small economy, its trade with the PRC is far below its potential. The main obstacle is the lack of good transport links.The two border crossings are at high altitudes and on relatively long routes. An alternative

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Table 14-5 Movements Across the Kyrgyz Republic and Kazakhstan Borders, 1998 Freight Country

Post

Kazakhstan

Jeminay Baketu Ala Pass Huo’erguosi Dulata Muzaerte Yi’erkesleata Tu’errengte

Kyrgyz Republic Total

People

Exports (t)

Imports (t)

Arrivals (no.)

1,000 76,000 302,000 324,000 n.a. n.a. 10,000 16,000 729,000

4,000 43,000 2,137,000 37,000 n.a. n.a. 12,000 42,000 2,275,000

1,100 10,900 11,700 94,400 n.a. n.a. 7,000 5,700 130,800

Departures (no.) 1,100 11,400 14,600 94,800 n.a. n.a. 7,000 5,700 134,600

Source: Wiemer (2000).

and shorter route for most traffic would be via the lower-altitude Muzaerte crossing into Kazakhstan. This point is only 90 km from the Kyrgyz Republic, and could form a much more direct route if there were suitable arrangements for transit traffic through Kazakhstan and a road linking Kazakhstan and the Kyrgyz Republic could be constructed.

The Association of Southeast Asian Nations This section first reviews the PRC’s trade with ASEAN, and then the trade of Yunnan and Guangxi, which border ASEAN countries. THE PRC’S TRADE WITH ASEAN The PRC’s total trade with ASEAN countries amounted to $27,200 million in 1999, or nearly four times the volume of trade with CAU, Russia, and Mongolia together, and nearly seven times the volume of trade with South Asia. However, crossborder trade with ASEAN (Yunnan and Guizhou) amounted to only $449 million, or 1.7 percent of trade with ASEAN. This is mainly because the adjoining countries (Viet Nam, Laos, and Myanmar) are all among the smaller economies of ASEAN (Table 14-6). It is also partly because trade with Viet Nam is most practicable by sea transport to Viet Nam’s main ports of Haiphong and Ho Chi Minh City. The five ASEAN countries closest to the PRC (Myanmar, Laos, Cambodia, Viet Nam, and Thailand) participate with Yunnan in the Greater Mekong Subregion (GMS) economic cooperation program.The

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program promotes the development of the participating countries by helping to strengthen economic links. It seeks to achieve the following results: • Realize and enhance economic development opportunities • Encourage trade and investment among GMS countries • Resolve or mitigate cross-border problems • Meet common resource and policy needs A ministerial body coordinates subregional cooperation and provides overall policy guidance. ADB has provided technical, administrative, and logistical support since the inception of the GMS program in 1992. With the exception of Thailand, the GMS countries have low per capita incomes and account for only about a quarter of the PRC’s exports to ASEAN countries. While the GMS program is important to all its members, it can represent at best a minor part of Yunnan’s international trade and economic cooperation. YUNNAN AND THE GMS Yunnan borders three ASEAN (and GMS) countries. Trade Manufactures account for most of Yunnan’s exports and imports. GMS countries account for 32.7 percent of Yunnan’s exports and 13.1 percent of its imports (Table 14-7). Apart from the GMS countries, trade with ASEAN is insignificant. Myanmar accounts for 24 percent of Yunnan’s exports. Probably much of this trade is in fact destined for South Asia.

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Table 14-6 Trade Potential with ASEAN, 1999

Country Border countries Viet Nam Laos Myanmar Subtotal Rest of ASEAN Indonesia Malaysia Philippines Singapore Thailand Cambodia Subtotal Total

Population (millions)

GNP ($ million)

GNP at PPP ($ million)

PRC Trade ($ million)

No. of Tourists

Border Crossingsa (no.)

78 5 45 128

28,200 1,400 n. a.

136,100 8,800 n. a.

1,219 32 508 1,759

51,894 n. a. 33,263

4 1 11

207 23 77 3 62 12 384 512

119,500 77,300 78,000 95,400 121,000 3,000 494,200

505,000 180,800 292,900 87,100 345,400 15,100 1,426,300 1,571,200

4,830 5,279 2,287 8,563 4,216 160 25,335 27,093

182,904 372,870 298,285 352,479 206,424 n. a.

0 0 0 0 0 0

1,498,119

16

Source: World Bank (2001b); China Statistical Yearbook 2000. Note: Excluding Brunei, for which figures are not readily available.

Table 14-7 Exports and Imports of Yunnan Province, by Country, 1999 Imports Country GMS countries Laos Myanmar Viet Nam Cambodia Thailand Subtotal Other countries Hong Kong, China US Australia Germany Japan Indonesia India Other countries Subtotal Total Cross-border trade

Exports

Yunnan

PRC ($ million)

($ million)

9.6 101.7 354.3 55.8 2,780.4 3,301.8

5.4 53.5 9.7 n.a. 6.0 74.6

6,891.9 19,478.3 3,607.2 8,335.4 33,763.4 3,050.9 825.8 86,444.4 162,397.3 165,699.1

119.0 79.8 53.7 10.0 23.1 0.9 16.9 193.5 496.9 571.5 55.0

Yunnan

PRC ($ million)

($ million)

1.0 9.4 1.7 n.a. 1.0 13.1

22.2 406.5 863.9 104.3 1,435.2 2,832.1

10.2 246.0 62.5 0.8 18.6 338.1

1.0 23.8 6.0 0.1 1.8 32.7

20.8 14.0 9.4 1.9 4.0 0.2 2.9 33.7 86.9 100.0

36,862.8 41,946.9 2,704.4 7,779.6 32,410.6 1,779.1 1,162.0 67,453.4 192,098.8 194,930.9

173.5 48.6 12.5 20.2 111.5 64.2 10.8 255.0 696.3 1,034.4 231.8

16.8 4.7 1.2 1.9 10.8 6.2 1.0 24.7 67.3 100.0

(% )

(%)

Source: Almanac of China’s Foreign Economic Regulations and Trade 2000.

Border crossings and cross-border trade There are 12 crossing points along Yunnan’s long border with Myanmar. However, Ruili and Wanding, which are only 22 km apart, are by far the most important.The existence of a border port has a direct impact on the GDP per capita of a county (Table 14-8).

Almost all border counties without border crossings are poverty counties, and among the poorest poverty counties in the PRC (Chapter 5). Of course, it is probably impracticable and undesirable for many border counties to have an official port, let alone an airport or airstrip. However, there is plenty of scope for improving the accessibility of

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Table 14-8 GDP Per Capita of Yunnan’s Border Counties, 1999 County Status Border Port

County Population

GDP per Capita (yuan)

Bordering Country/Remarks

Jinhong

366,000

6,422

County also has Ganlanba port

Ruili Mengla Hekou

108,000 195,000 78,000 127,000

6,844 5,375 4,605 5,608

Myanmar, two crossings Laos Vietnam

265,000 310,000 292,000 108,000 245,000 154,000 163,000 256,000 584,000 152,000 252,900

2,153 1,059 2,832 1,885 3,255 2,095 2,744 3,022 2,758 2,256 2,406

Viet Nam Viet Nam Myanmar Myanmar Myanmar Myanmar Myanmar Myanmar Myanmar Myanmar

34,000 89,000 155,000 326,000 319,000 157,000 461,000 90,000 265,000 355,000 143,000 345,000 241,000 375,000 239,600

3,130 1,501 1,555 3,883 1,505 2,166 1,154 2,307 1,456 1,394 1,888 1,760 1,618 1,844 1,940

Myanmar Myanmar

County

Airports Jinghong First-grade port Ruili Mohan Hekou Average Second-grade port Tianbao Jinshuihe Daluo Menglian Mengding Nansan Longchuan Yingjiang Tengchong Pianma Average No border port

Malipo Jinping Menghai Menglian Gengma Zhenkang Longchuan Yingjiang Tengchong Lushui

Gongshan Fugong Lianghe Luxi Yongde Cangyuan Lancang Jiangcheng Honghe Yuanyang Pingbian Maguan Xichou Funing

Autonomous

X X X

Poverty

X X X X

X

X

X X X

X

X X X X X X X X X X X X X

Average

Airport, Myanmar Myanmar Myanmar Laos, Vietnam

Viet Nam Viet Nam

Source: Yunnan Statistical Yearbook 2000.

all border counties to their nearest crossing point. It seems that in some cases road planning has neglected this; for example, Lancang County (GDP per capita of 1,154 yuan) has poor road connections with the nearest border crossings at Menghai and Menglian. Other economic cooperation There are several GMS transport projects or proposals that could improve Yunnan’s links or facilitate trade: • Chiang Rai–Kunming via Laos Road Improvement Project

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• Kunming-Lashio Road System Improvement Project • Kunming-Hanoi-Haiphong Multimodal Transport Corridor Project • Upper Lancang/Mekong River Navigation Improvement Project, and Upper Lancang/ Mekong River Commercial Navigation Agreement • Project to Establish New Subregional Air Routes • Singapore-Kunming Railway Link • New air links within the GMS • Agreement to facilitate the cross-border movement of goods and people

Table 14-9 Imports and Exports of Guangxi, by Country, 1999 Imports Country GMS countries Laos Myanmar Viet Nam Cambodia Thailand Subtotal Other countries Hong Kong, China US Australia Germany Japan Indonesia India Other countries Subtotal Total Cross-border trade

Exports

Guangxi

PRC ($ million)

($ million)

9.6 101.7 354.3 55.8 2,780.4 3,301.8

n.a. n.a. 39.3 n.a. 9.7 49.0

6,891.9 19,478.3 3,607.2 8,335.4 33,763.4 3,050.9 825.8 86,444.4 162,397.3 165,699.1

12.9 49.5 16.5 24.2 45.2 8.9 8.4 390.4 556.0 605.0 40.8

Guangxi

PRC ($ million)

($ million)

n.a. n.a. 6.5 n.a. 1.6 8.1

22.2 406.5 863.9 104.3 1,435.2 2,832.1

n.a. n.a. 253.9 n.a. 20.1 274.0

n.a. n.a. 14.1 n.a. 1.1 15.2

2.1 8.2 2.7 4.0 7.5 1.5 1.4 64.5 91.9 100.0

36,862.8 41,946.9 2,704.4 7,779.6 32,410.6 1,779.1 1,162.0 67,453.4 192,098.8 194,930.9

680.1 184.8 15.7 46.1 87.3 5.0 8.5 502.6 1,530.1 1,804.1 160.8

37.7 10.2 0.9 2.6 4.8 0.3 0.5 27.9 84.8 100.0

(% )

(%)

Source: Almanac of China’s Foreign Economic Regulations and Trade 2000.

Power interconnection and trade As with transport, there are, or have been, several GMS projects concerning power interconnection and trade.There are some significant possibilities for Yunnan exporting electricity to Thailand, because the export price is likely to be higher than the domestic price.8 Planning work on the interconnection of the Thai and Yunnan power grids via Jinhong commenced in 1993. International experience suggests that there are significant economic benefits from interconnecting power grids, mainly to reduce the costs of managing peak demand. However, it is much more questionable that there is potential for Yunnan to be a net exporter of power on a significant scale. GUANGXI AND VIET NAM Since most of the 1,343-km border between Viet Nam and Yunnan is mountainous and transport is generally more convenient through Guangxi, 80 percent of border trade occurs over the 1,020-km border between Guangxi and Viet Nam.9 Much of the PRC’s trade with Viet Nam is with the south of Viet Nam, for which only sea transport is economic. The northern border regions of Viet Nam are at such a competitive disadvantage within the

country that they lag behind the rest of the country in development.10

Afghanistan and the South Asian Association for Regional Cooperation In 1999, the PRC’s trade with the eight SAARC nations was $4,178 million. Five countries accounted for almost all of this trade (Table 14-10). This is a very low level of trade given the total size of the South Asian economies, which in PPP terms dwarfs those of ASEAN, CAU, and Russia. Cross-border trade with the four South Asian countries bordering the Western Region (Pakistan, India, Nepal, and Bhutan) is insignificant. After independence, South Asian countries adopted restrictive trade policies with stringent barriers, quantitative and tariff restrictions, and a prominent role for the public sector.11 Their share of world trade dropped to a fraction of preindependence levels.The restrictions also applied to cross-border trade. As these barriers are now rapidly disintegrating, and economic growth is

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Table 14-10 Trade Potential with South Asia, 1999

Country India Pakistan Bangladesh Nepal Sri Lanka Total

GNP

Population (millions)

($ million)

($ million, PPP)

PRC Trade ($ million)

Border Crossingsa (no.)

998 135 128 23 19 1,303

442,200 64,000 47,000 5,100 15,700 574,000

2,144,100 236,800 188,300 28,500 58,000 2,655,700

1,988 971 715 215 268 4,157

0 1 0 1 0 2

Source: World Bank (2001) (population and GNP); Almanac of China’s Foreign Economic Regulations and Trade 2000 (PRC trade).

accelerating, there is reason to suppose that trade between the PRC and South Asia could grow rapidly. Nepal and Bhutan are landlocked countries between India and the PRC whose potential for trade with the Western Region is accordingly greater than the tiny size of their economies might indicate. There is no open border with Bhutan, and only one of three potential routes to Nepal is open. BORDER CROSSINGS Although the Western Region has borders with Afghanistan, Pakistan, India, Nepal, and Bhutan, there are currently only two cross-border routes, one with Pakistan via the Karakoram highway, and one with Nepal via Xigaze (Tibet). The Himalayas greatly restrict the practicable crossing points, but there is at least one additional route that would be of great value, at Yardong. Hongqilapu and Kunjirap (Karakoram highway) The Karakoram highway stretches between Islamabad (Pakistan) and Kashgar (Xinjiang), a distance of 1,300 km. Urumqi is a further 1,441 km from Kashgar.The highway reaches an altitude of 4,800 m and is open only from 1 May to 30 November.12 The border post at Hongqilapu is itself at an altitude of 4,200 m. Zhangmu, Nielamu, and Xigaze The three open ports in Tibet, Zhangmu, Nielamu, and Xigaze, all lie on the Friendship Highway between Kathmandu (Nepal) and Lhasa. In effect, therefore, there is only one border crossing between the PRC and Nepal, and as there is open crossing with India, this also carries transit traffic to and from India. The border town of Zhangmu used to be just a village but now has a comprehensive range of facilities.

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Tibet’s cross-border trade amounted to $80.4 million in 1999. Zhangmu is also important for tourism, with about 300,000 border crossings a year. Yardong Tibet has proposed the reopening of the Yardong port in its Tenth FYP.13 The port is at the southern tip of Tibet and borders India, Sikkim, and Bhutan. It has been closed since the 1962 border war between India and the PRC.There are good road links to Kathmandu, Calcutta, and Dhaka, while on the PRC side of the border Tibet plans to upgrade the road to Xigaze, the second largest urban center in Tibet and a significant tourist destination. TRADE ROUTES WITH SOUTH ASIA The Zhangmu and Yardong border crossings are unlikely ever to constitute major trade routes between the PRC and India. The distances are too great and the regular winter closure and frequent temporary closure at other times rule them out as major trade routes. Neither route is suitable for rail construction.The border crossings will be very significant for tourism and local trade, but not for long-distance trade.The big opportunities for the Western Region lie in developing trade routes from Yunnan through Myanmar to India and Bangladesh (Chapter 6 discusses alternative routes for these).

Implications for cross-border economic cooperation policies The Government’s strategy for the Western Region already recognizes the importance of foreign trade and economic cooperation and proposes various

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initiatives.14 This section discusses possible further strategies or possible variations on existing initiatives. LESSONS FROM INTERNATIONAL PRACTICE The development of cross-border economic cooperation between the US and its two neighbors, Canada and Mexico, provides some useful lessons for the PRC.15 The high level of cross-border trade did not come about simply through the North American Free Trade Agreement or any other regional economic cooperation agreement. Rather, it evolved over three decades of initiatives in industry policies, economic deregulation, and transport privatization, which complemented trade liberalization. However, nontariff barriers to cross-border economic cooperation are still significant. Coordination by government agencies is critical to speeding up border crossings. IMPORTANCE OF TRADE IN THE DEVELOPMENT OF THE WESTERN REGION In a classic paper,16 the economist Douglass North argued that the success of the export base is the determining factor in the growth of regions. Consistent with this hypothesis, exports are much more important in the Eastern Region, the most dynamic of the PRC’s regions (Table 14-11). In a dissenting comment17 on Douglass North’s paper, Tiebout argued that the ability to develop “residentiary industries” was the decisive factor, because without them the cost of developing export activities would be prohibitive (the term “residentiary” designates industry for the local market that develops where the consuming population resides). Climate and water resources dictate that only parts of the Western Region are well suited to “residentiary activities,” principally the southwest and the north of Xinjiang. While cross-border trade will always be locally beneficial, its contribution to regional economic growth is likely to depend on two factors: the export potential and the existence of suitable conditions for

Table 14-11 Exports and GDP Per Capita in the PRC’s regions, 1999 Region Eastern Central Southwest Northwest

Exports (% of GDP)

GDP per Capita (yuan)

29.7 3.4 3.6 5.2

10,693 5,409 4,090 4,702

Source: Calculated from the China Statistical Yearbook 2000.

the growth of cities. Without trade, a border area suffers the disadvantage of being on the edge of a closed national economy. Even with trade, a border area may not account for much of the PRC’s total trade with a neighboring country. Export potential of the Western Region Primary sector products account for a steadily declining proportion of the PRC’s exports, and of world trade generally. In 1999, primary sector products accounted for just 10.2 percent of the PRC’s exports. But the orientation of the Western Region economy is much more toward the primary sector than is that of the rest of the PRC. Quite apart from the transport disadvantages, the structure of the economy is not conducive to the generation of major export flows. The leading export areas of the Western Region are likely to be those with manufacture and machinery exports (Table 14-12). Existence of suitable conditions for the growth of cities The geography of most of the Western Region is not conducive to the growth of cities. The main obstacles are the rugged topography, high altitude, harsh climate, lack of water resources, and physical isolation from other population centers and the sea by reason of high mountain ranges or simply distance. Only in parts of the southwest are conditions really favorable; appropriate investments in transport (Chapter 6) and energy infrastructure (Chapter 7) could create suitable conditions for export-led growth on a large scale.

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Table 14-12 Exports, by Category of Commodity, 1999

Commodity

Yunnan (%)

Xinjiang (%)

Shaanxi (%)

Sichuan (%)

Guangxi (%)

Primary products Chemicals and related products Light manufactures Machinery and transport equipment Miscellaneous Total Total exports ($ million)

26.7 21.4 42.2 9.2 0.5 100.0 922

22.4 3.7 20.3 3.0 50.5 100.0 1,003

10.3 7.3 60.5 22.0 0.0 100.0 1,098

5.3 2.9 63.1 28.7 0.0 100.0 1,165

20.5 14.8 60.0 4.7 0.0 100.0 700

PRC (%) 6.4 5.5 17.8 31.5 38.8 100.0

Source: Various statistical yearbooks.

MANAGEMENT OF BORDER TOWNS The Foreign Trade Law of 1994 refers specifically to the management of border towns: Article 42 The State shall adopt flexible measures and provide favorable treatment and convenience to the trade between its border towns and the border towns of bordering countries as well as fairs among the inhabitants of border areas. Specific measures shall be formulated by the State Council.

Spontaneous urban development has taken place at all but the minor border crossings. With trade growing faster than GDP, the border towns have the potential to continue rapid growth. Most of them are on flat, flood-free sites that are very suitable for urban development.The Government and local governments should recognize this and ensure the provision of appropriate infrastructure, including roads and airports. There is scope for increasing the number of border crossings and raising their status.This could especially benefit some poverty counties (in Inner Mongolia, poverty banners), along the Western Region’s borders. BUILDING ON CROSS-BORDER CULTURAL AND SOCIAL LINKS Many of the minorities living near the borders share languages and culture with peoples on the other side

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of the border. This is a crucial consideration in developing cross-border economic cooperation.18 A pilot project of the State Ethnic Affairs Commission for 19 minority border areas,“Rejuvenate the Frontier, Enrich the People,” recognizes the potential of the border areas and seeks to promote stability, cooperation with the nations and minorities along the PRC’s frontiers, and cross-border trade via the establishment of free markets on the PRC side. The project began in 2000 with the selection of 10 poverty counties as pilots for a larger program. In 2001 the project was expanded to an additional nine counties. The project has already had some modest success: In one county on the border with Viet Nam, the project identified a local businessman who had considerable experience and a good capital base. The State Ethnic Affairs Commission provided him, via the support of local, prefecture, and provincial governments, with financial incentives to establish a free market in light consumer goods. Land, for example, was provided at half the usual cost. Goods began to flow between the borders as never before, and within some months the Government of Viet Nam had sent a delegation to the border area to study how and why this program was working so well. The Viet Nam Government has now announced its own project to develop similar initiatives, borrowing ideas and terminology from the PRC project.19

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The project is important because of the scope of its objectives: • To alleviate poverty in border counties • To bring minorities into the mainstream of economic development • To bring economic stability to border counties by developing cross-border trade • To mobilize local entrepreneurs to support growth and innovation in the border regions The opportunities for the exchange of goods, services, and tourists with the PRC’s neighbors are extensive. However, there is a need to ensure that benefits from cross-border trade accrue to local people, especially minorities and women.To maximize local participation, the cross-border markets should be maintained as free markets in which the role of government is to ensure that no one trader or company or family establishes a monopoly. Finally, the selection of counties needs to be consistent with the objectives of the project, since the present selection of counties seems to overlook the poorest minority border counties in favor of counties that are already comparatively well off (Table 14-13).

NATIONAL ECONOMIC ZONES Preferential policies for special national economic zones have not been effective in promoting trade and cross-border economic cooperation in the Western Region. They primarily benefit the Eastern Region. The complexity of the tax exemptions and the discretionary powers of local governments and the Central Government to determine the tax rates of individual enterprises (Table 14-14) gives rise to rentseeking activities by enterprises. Institutional responsibilities The Office for Special Economic Zones under the State Council (SEZO) is the government agency responsible for the formulation of policies in relation to special economic zones and open areas. These areas include Economic and Technological Development Zones, bonded zones, Border Economic Cooperation Zones, open coastal cities, and open inland cities. Tax exemption policies are the responsibility of the Economic and Trade Commission.

Table 14-13 “Rejuvenate the Frontier, Enrich the People” Project Province/Autonomous Region

Name of County/City

Heilongjiang Jilin

Tongjiang City Huichun City Changbai Chaoxian Autonomous County Kuandian Man Race Autonomous County Donggang City Daerhanmaomingan Abaga Subeimenggu Race Autonomous County Huocheng County Fuyun County XPCC No. 89 and No. 62 Gamba County Kejia County Malipo County Luchun County Longzhou County Jingxi County

Liaoning Inner Mongolia Gansu Xinjiang

Tibet Yunnan Guangxi

GDP per Capita (yuan) 6,594 5,393 5,054 5,948 10,054 6,128 7,847 9,658 3,008 5,967 n.a. n.a. n.a. 2,153 905 3,760 2,001

Source: Interview with Mr. Zhang, State Ethnic Affairs Commission, Beijing, 29 May 2001, and various SEAC documents.

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Table 14-14 Preferential Policies for Special Development Zones

Preferential Policies/Eligible Enterprises

Nationwide

Special Economic Zones

ETDZs

Taxprotected Zones

Border Economic Cooperation Zones

Enterprise income tax rate Manufacturing 30% 15% 15% 15% 15% Nonmanufacturing 30% 15% 30% 30% 30% Special industries: Projects that are high-tech or have long investment return periods 30% 15% 15% 15% 15% Energy, transport, or national special planning projects 15% 15% 15% 15% 15% Enterprises whose exports account for 70% of total production value 15% 10% 10% 10% 10% Financial institutions with foreign capital or more than $10 million and operating for more than 10 years 30% 15% 15% 15% 15% Local income tax 3% 1.5% 1.5% 1.5% 2.4% Withholding income tax rate Foreign investors with taxable income (income 20% 10% 10% 10% 10% from foreign enterprises can be exempt) Can be exempted with Government permission, or get more preferential rate than 10%, Providers of advanced technology according to the local government’s decision Profit acquired from foreign enterprises by foreign investors Duration of exemption and reduction of enterprise income taxa First and second years: tax-free; from third to fifth year: half Manufacturing and high-tech enterprises First year: tax-free; second and third years: half Nonmanufacturing enterprises When tax concession expires, can have 50% tax rebate for three years High-tech enterprises First five years: tax-free; sixth to tenth year: half Enterprises constructing ports and operating for more than 15 years When tax-free period expires, if authorized by Government, can continue to be taxed at Agriculture or forestry in border or 15-30% of normal enterprise income tax for 10 years undeveloped regions Return of income tax for reinvestment Entitled to refund of 40% of reinvestment part of enterprise income tax Applying FIE profits to increase registered capital or set up new FIE Entitled to complete refund FIEs reinvesting in production for export or high-tech enterprises Customs In tax-protected zones, importation of equipment and materials for production, construction, Equipment import and management and transfer of goods can be exempted from import tariff and VAT Exempt from import tariff and import process VAT on foreign investment projects that comply with Building Catalog of Foreign Investment Enterprises except items in Import Goods Catalog of Foreign Investment Projects which Cannot be Exempted Production for export Exempt (except exports of restricted products) Products processed in ETDZ and with 20 percent increment can be exempted from export tariff with CIQ certification if export tariff has been levied on the product Value-added tax

Fixed asset, investment orientation tax City construction tax Farmland occupation tax Foreign exchange management Preferential regulations of local governments Local income tax Tax refund Depreciation Urban real estate tax Preferential discounts

Loss offset Output sales in domestic market

Various rates depending on product

Nil for products manufactured in zone

Nil for products sold in zone

Various rates depending on product

FIEs are not taxable FIEs are tax-free FIEs engaged in manufacturing pay no tax. FIEs are allowed to change renminbi into foreign exchange Enterprises in tax-protected zones are allowed to reserve foreign exchange Tax rebates according to decisions of local governments Tax refunds to FIEs. Accelerated depreciation according to type of project Tax rebate in specified period and proportion According to type of industry, scale, technology level, and payment method of foreign investment projects, preferential discounts on land transfer fee, house rental fees, energy, water resources, telecommunications Losses can be offset against future profits for up to five years Broaden the proportion of output sold in domestic market according to technology level and market condition (level 2 governments)

Source: Adapted from information on http://cadz.org.cn.

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Various rates depending on product

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Economic and Technological Development Zones The Government decided in late 1984 to establish Economic and Technological Development Zones (ETDZ) in 14 coastal cities. The Government later approved ETDZs in various inland locations.The average size of an EDTZ is 8.3 km2. ETDZs receive a heavy concentration of home and overseas investment. Of 117 special development zones on the list of the Ministry of Foreign Trade and Economic Cooperation (MoFTEC), 17 are in the Western Region and 45 in the Central Region.20 Table 14-15 gives details of the ETDZs in the Western Region. The distribution of ETDZs corresponds closely to that of the major urban centers. Very few cities with a population of under 1.5 million have an ETDZ. Enterprises in ETDZs enjoy significant tax concessions for fixed periods. The Eastern Region has the most and the largest ETDZs and is therefore the main beneficiary of tax concessions. There is also much less scope for developing ETDZs in the Western Region, where only a few significant urban centers, mostly in Sichuan, are without them. Border Economic Cooperation Zones Border Economic Cooperation Zones are usually smaller than ETDZs, and are found in smaller urban centers close to borders (Table 14-16).

Table 14-15 ETDZs in the Western Region Province

City

Northwest Inner Mongolia Shaanxi Gansu

Qinghai Ningxia Xinjiang

Southwest Chongqing Sichuan

Guizhou

Yunnan

Guangxi Tibet

Hohhot Xi’an Lanzhou Jinchan Baiyin — — Shihezi Kuytun Urumqi Chongqing Chengdu Yibin Luzhon Guangan Suining Deyang Shangxi Guiyang Zunyi Zhongstan Dingxiao Duyun Anshun Hongguo Kunming Yuxi Chuxiong Nanning None

Population (millions) 2.1 6.7 2.9 0.4 1.7

0.6 0.3 1.6 30.7 10.0 5.0 4.6 4.3 3.7 3.8 n.a. 3.2 6.8 0.4 n.a. 0.5 0.8 n.a. 4.7 2.0 0.5 2.9

Source: MoFTEC, www.chinemorket.com.cn/e/invest/zme/retdz.html, 13 June 2001. Note: The MoFTEC list may not be complete. It lists no zones in Chongqing and does not list the Qingshuihe zone in Yili, Xinjiang.

Table 14-16 Border Economic Cooperation Zones Province

Zone

Inner Mongolia

Erenhot Manzhouli Yining Bole Tachenga Ruili Wanding Hekou Pingxiang

Xinjiang

Yunnan

Guangxi

Distance from Border (km) 0 108 86 2 0 0 0

Area (km2)

6.5 7.8 6.5 5.0 7.2

Higher Authority

Border Country

Municipal government Municipal government Yining Municipal Government Buole government Tacheng government Ruili government Municipal government County government Pingxiang government

Mongolia Mongolia and Russia Kazakhstan Mongolia Kazakhstan Myanmar Myanmar Viet Nam Viet Nam

Source: MoFTEC. a Tacheng is 2 km from Baketu border post; see Table 14-4.

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DEVELOPMENT OF INFRASTRUCTURE Deficiencies in transport links partly explain the low levels of trade between the Western Region and its neighbors. In most cases the deficiencies are on both sides of the border, so international cooperation is essential in overcoming them.The strength of the PRC’s trade with ASEAN mainly reflects the ease of sea transport between the major economic centers of Asia. Since it is impossible to replicate these sea links in the Western Region or to construct competitive land links, the focus of transport investment, especially in the medium term, should be on links to improve local cross-border economic cooperation rather than longer-distance trade. In general, investments in long-distance land links, such as the China Land Bridge (Chapter 6) are unlikely to contribute much to the expansion of trade. Various road projects would, however, promote medium-distance trade. An important exception to this generalization is overland routes to South Asia. Trade between the PRC and South Asia is very small relative to the size of the South Asian economies. Opening up a transport corridor from Kunming (Yunnan) through northern Myanmar into northeast India, Bangladesh, and the port of Chittagong would certainly facilitate trade (see Chapter 6 for further discussion). Nonphysical impediments to trade will gradually wither under the economic pressures of globalization, and in the medium term this route is likely to become very important. DEVELOPMENT OF TOURISM The strategy of focusing on medium-distance links rather than long-distance ones also applies to tourism. Facilitating tourist access from neighboring countries may mean opening more airports near the borders, in particular Yining, to short-distance international flights and building new airports.21 Unfortunately, current plans ignore the needs of border trade and traffic in favor of developing interior airports.There may also be opportunities for developing airports at borders to provide services for

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both countries, for example Manzhouli (PRC and Russia) and Hekou (Viet Nam and the PRC). The majority of foreign visitors to the Western Region arrive by land not by air. In 1999, 56.5 percent of visitors to the PRC from mainland Asian countries arrived by rail or other land means. REGIONAL ECONOMIC COOPERATION GROUPS With the PRC’s accession to the WTO and the growing importance of the WTO’s regulatory and policy formulation functions, there is a need to rethink the PRC’s participation in regional economic cooperation. In particular, the following questions need consideration: • Should the GMS and Central Asia subregional cooperation discussions take place as WTO working groups? • Do any of the cooperation arrangements under discussion require registration of their agreements with the WTO Committee on Regional Trade Agreements? As long as the informal character of the regional cooperation groups lasts, the answer is probably no. But the GMS cooperation is moving to the stage of formal agreements, and at this stage the answer will become yes. The WTO views regional integration initiatives (which it defines very broadly) as complements rather than alternatives in the pursuit of more open trade. For the Western Region, and even more so for the CAU countries, the pursuit of more open trade is the main objective, not local economic integration. A limitation of the GMS cooperation is that it does not cover Yunnan’s important trading partners outside the GMS, for example, India. It also does not include Sichuan and Guizhou, provinces likely to have significant trading relationships with GMS countries. A similar comment is valid for ADB’s more recent efforts in Central Asia.22 ADB might therefore consider supplementing these regional cooperation programs with programs that focus on particular trade links and trade routes, in particular Western Region–South Asia and Western Region–Russia.

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As regards the responsibility for promoting crossborder economic cooperation, this lies with MoFTEC and the province-level trade bureaus. Article 37 of the Foreign Trade Law of 1994 requires the State to support and promote the national autonomous regions and economically underdeveloped areas to develop foreign trade. Cross-border economic cooperation is especially important for the autonomous regions and economically underdeveloped areas because many of them are border areas.

Notes 1 Kazakhstan, Uzbekistan, and the Kyrgyz Republic formed the CAU in 1994. Tajikistan became an observer in 1996 and a full member in 1994 (Shiping Tang [2000], p. 360). 2 In this chapter, all statistics relate to merchandise (visible) trade. According to the National Bureau of Statistics, the value of imports is in CIF terms, while the value of exports is in FOB terms. However, in practice the PRC’s import and export transactions are (in both cases) on both CIF and FOB terms. 3 Shiping Tang (2000), p. 360. 4 Yu Gouzheng and Wang Rongfen (1999). 5 Gaubatz (1996). 6 PennWell (2000). 7 Xu Yihe (2001). 8 Asian Development Bank (2000d). 9 Gu Xiaosong and Brantly Womack (2000). 10 Roper (2000). 11 Subramanian (2001). 12 Na Ri (2000), p. 175. 13 Xie Ye (2001), p. 5. 14 Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region: Expanding Foreign Trade and Economic Cooperation, 26 October 2000:

Enterprises based in the Western Region are granted more decision-making power in foreign trade and economic cooperation. The enterprises are encouraged to produce competitive products for exportation, contract foreign projects, export labor, and invest in manufacturing overseas, especially in neighboring countries, and restrictions on the entry and exit of personnel should be relaxed. Appropriate consideration should be given to the import of technology and equipment urgently needed for the economic development of the Western Region. When foreign tourists enter the country at major tourist cities in the Western Region, they will be granted visa upon arrival where conditions permit, and other visa policies that facilitate entry will also be implemented. More favorable border trade policies should be implemented, easing restrictions on export tax refund, expanding the scope of imports and exports, reducing quotas for commodity import and export, and relaxing the control of licenses and entry and exit of people. Efforts should be made to open up markets in the Western Region towards neighboring regions and countries and vice versa, and thus to promote the healthy development of regional economic and technological cooperation with surrounding countries.

15 This section is a brief summary of Lakshmanan and Anderson (2001). 16 North (1955). 17 Tiebout (1956). 18 Wu Xinmu and Yu Shujun (2001). 19 Interview with Mr Jhang, State Ethnic Affairs Commission, Beijing, 29 May 2001, and various documents from SEAC. 20 MoFTEC, www.chinamarket.com.cn/e/invest/zone/ retdz.htm/. 21 Xinjiang plans to build six feeder airports during the Tenth FYP period, none of them near its borders. http://english.easday.com/epublish/gb/paper1/56/ class000100001/hwz10543, 15 June 2001. 22 Asian Development Bank (1998a).

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CHAPTER

15

LOCAL GOVERNMENT Local governments at all levels are fundamental to the implementation of government strategies for the development of the Western Region. This chapter first reviews the structure of local government in the Western Region, then some critical issues concerning local government and economic development, and finally possible strategies for improving governance.

Structure of local government Article 30 of the Constitution provides for the division of administration into five levels. All local governments are part of this single administrative hierarchy and do not have independent powers. Almost all decisions are subject to reversal by the superior level of government; the autonomous areas have independent jurisdiction in some matters.

The Constitution and the Regional National Autonomy Law of 2001 contain numerous special provisions for the autonomous areas, which comprise autonomous regions, autonomous prefectures, and autonomous counties. For the purposes of this report, the following provisions of the Constitution are noteworthy: Article 118 In exploiting natural resources and building enterprises in the ethnic autonomous areas, the state shall give due consideration to the interests of those areas.

LEVEL TWO: PROVINCES, AUTONOMOUS REGIONS, AND MUNICIPALITIES The Western Region has twelve second-level governments comprising five autonomous regions, six provinces, and one municipality (Chongqing) directly under the Central Government (Figure 15-1).

Article 122 The state provides financial, material and technical assistance to the ethnic minorities to accelerate their economic and cultural development.

Figure 15-1 Structure of Local Government in the Western Region

Central government

Level 1

Provinces

Autonomous regions

Municipalities

6

5

1

Level 2

Urban Level 3

Level 4

Prefecture level cities

Prefectures

Autonomous prefectures

Leagues*

61

35

27

7

Districts under cities

County cities

Counties

Autonomous counties

Banners*

Autonomous banners*

Special and forest areas

130

91

601

69

49

3

2

Level 5

Grassroots organizations

Rural

Towns

Townships

Districts under counties

6,431

12,009

218

Agencies for household

Neighborhood committee

Village committee

1,116

25,233

216,623

Source: Civil Affairs Statistical Yearbook 2001. * Inner Mongolia only.

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Table 15-1 Average Areas, Populations, and GDPs of Level 3 and Level 4 Governments

Region Eastern Central Western Southwest Northwest

Average Population Level 3 Level 4 (millions) (thousands)

Average Area Level 3 Level 4 (km2) (km2)

Average GDP Level 3 Level 4 ( million yuan) ( million yuan)

2.3 2.2

422 396

5,500 8,900

1,000 1,600

25,700 12,000

4,600 2,200

2.5 1.3

356 218

26,700 55,400

3,900 9,500

10,300 6,100

1,500 1,100

Source: Calculated from data in the China Statistical Yearbook 2000.

Table 15-2 Number of Cities, by Size and Region, 1999 Population Region Eastern Central Western PRC Western Region, as % of PRC

>2 Million

Over 1 Million to 2 Million

7 3 3 13 23.1

11 8 5 24 20.8

Over 500,000 to 1 Million 23 22 4 49 8.2

Over 200,000 to 500,000 96 74 46 216 21.3

200,000 or Less 144 120 101 365 27.7

Total 281 227 159 667 23.8

Source: China Statistical Yearbook 2000.

It is important that the strategies for the development of the Western Region are consistent with these articles of the Constitution. LEVEL THREE: PREFECTURES AND CITIES On average, level 3 and level 4 governments in the Western Region are larger in area but have smaller populations and much smaller GDPs than local governments in the rest of the PRC. On average, a level 3 government in the northwest has less than a quarter of the GDP that one in the Eastern Region has (Table 15-1). The contrast with local government areas in the Eastern Region is particularly large. These differences mean that there is always a risk that the local governments in the Western Region will be weaker than those in the Eastern Region, and the cost of the bureaucracy heavier on a per capita basis. Differences in geography and economy demand a different approach to local government. The number of cities at level 3 is slightly less than the number of cities with over 200,000 people (Table 15-2). The level of urbanization in the PRC is not only far below that in developed countries but is also below

average for developing countries.1 In 1999, 30.9 percent of the PRC’s population was urban. Less than 24 percent of the PRC’s 667 cities are in the Western Region, and these tend to be smaller than the cities in the other two regions (Table 15-2). While there are as many level 3 cities in the Western Region as city populations justify (level 3 cities normally have a population of at least 200,000) there are fewer level 3 cities in the Western Region than in the Eastern Region. LEVEL FOUR: COUNTIES, COUNTY LEVEL CITIES, AND CITY DISTRICTS The phrase “at or above county level” appears repeatedly in the Constitution. The county level is the lowest level of government that produces comprehensive social and economic development plans. At the county level there are enormous differences in level of economic development. In Sichuan, for example, average per capita incomes in the counties in 1999 ranged from under 1,500 yuan to over 10,000 yuan. While the average population of a level 4 government is 218,000 in the north and 356,000 in the south, many counties have much smaller populations. In Yili prefecture, Xinjiang, for

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example, three out of eight counties have populations under 150,000. In Xinjiang as a whole, 28 counties have populations under 100,000. In developed countries, a population of 100,000 would be regarded as near the lowest level for the effective and efficient delivery of comprehensive local government services. LEVEL FIVE: TOWNSHIPS AND TOWNS The Constitution does not provide any specific functions for towns and townships; it provides that the level 2 governments determine the establishment and boundaries of towns and townships. Some townships and town governments provide a wide range of government services. In addition to local government functions, they organize many businesses. However, the number of businesses organized by town governments has been declining.These business activities evolved from the communes.2 The number of towns and townships in each county varies from an average of 40 in densely populated Sichuan to about 12 in Xinjiang (Table 15-3). The growth of TVEs during the reform period has made some townships and towns much more important than they used to be. The Tenth FYP refers to the need to dissolve or merge some townships and towns, where possible, to reduce the size of the bureaucracy. Many townships in the Western Region are simply too small in population and resources to support the cost of a local government. Table 15-3 Number of Level 4 and Level 5 Governments, 1999 Level 4

Level 5

Province

City Districts

Cities

Counties

Towns

Townships

Sichuan Guizhou Gansu Xinjiang Shaanxi

36 10 11 — 19

17 10 8

124 66 67 68 83

1,705 685 228 186 908

3,320 779 1,327 667 1,112

5

Source: Statistical yearbooks for the level 2 governments, 2000.

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GRASSROOTS ORGANIZATIONS Village committees (and neighborhood committees in cities) are not part of the government bureaucracy but are, in principle, autonomous.This has implications for the implementation of poverty programs or other development policies in the Western Region.The law clearly implies that village committees assist the township in carrying out its work, not the other way around. A system of hierarchical policy implementation still prevails. Nevertheless, under the law,3 village committees enjoy considerable economic powers relating to TVEs, land administration, local infrastructure, and welfare undertakings.The introduction of elections for village committees is recent, and not everywhere effective. The ability of village committees to exercise their powers effectively depends on the government bureaucracy creating the right enabling environment. • The role of the government bureaucracy in ensuring that village committees are properly elected and carry out their responsibilities in accordance with the law is vital. • The government bureaucracy has to ensure the provision of the main infrastructure systems. • It must assist poverty villages. However, having fulfilled its basic obligations, government must allow village committees to manage their own affairs.

Critical governance issues for the Western Region STRUCTURE OF LOCAL GOVERNMENT There is no single, best way to organize local government. It depends on what the national government is seeking to achieve. However, the structure of local government in the PRC differs from that in other large countries in that the Central Government for the most part does not have regional and local offices that are directly subordinate. Now that the Government has stated some strategic goals for the Western Region, it has become possible to

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Table 15-4 Concentration of Economic Activity in Provincial Capitals, 1999 Foreign Trade Province

Province ($ million)

Xinjiang Gansu Yunnan Sichuan

1,765 406 1,660 2,471

GDP

Capital Citya ($ million) (%) 594 307 1,088 n. a.

33.7 75.6 65.6 n. a.

Province (million yuan) 116,855 93,198 185,574 371,161

GDP per Capita

Capital Citya (million yuan) (%) 24,878 27,525 59,189 119,003

21.3 29.5 31.9 32.1

Capital Citya Rest of Province (million yuan) (million yuan) 15,647 9,462 12,503 11,858

5,692 2,963 3,398 3,428

Source: Provincial statistical yearbooks. a Relevant level 3 government.

consider whether the structure of local government helps or hinders the achievement of those goals. For several reasons, the presence of regional and local offices of the Central Government would, at first glance, appear to be the most appropriate for some government functions: • It would facilitate correcting disparities in fiscal capacity between the Western Region and the Eastern Region. • It would give the Government maximum flexibility to mobilize and allocate resources for the development of the Western Region and the reduction of poverty. • It would lead to the consideration of policy issues in the various parts of the country from a national as well as a local perspective. Recent fiscal reforms, and the ones that Chapter 2 proposes, will have the effect of increasing the fiscal resources of Central Government and giving it the power to make bold strategy decisions such as the development of the Western Region. But recentralizing economic power is a high-risk strategy in that its success depends on an inordinate amount of rationality and capability at the center. 4 This report, on the other hand, has argued for a greater reliance on the market to allocate resources. Many measures proposed for the Western Region in earlier chapters neither require nor would benefit from a centralized structure. For large areas and populations, there are efficiency gains from a decentralized structure. Furthermore, the proposals in earlier chapters would generally facilitate decentralization: • The greater mobility of the labor force (Chapter 11) may facilitate fiscal decentralization by acting to “limit local government action or to equilibrate demand and supply of public goods at the margin.”

• The separation of business enterprises from local government will make it much easier for the Government to contemplate fiscal decentralization. • Measures to let the market determine the allocation of capital and facilitate its mobility would facilitate the separation of business from local government. Since 1978, there has been a progressive devolution of responsibility and control over resources to lower levels of government. However, earlier chapters have also highlighted the need for strong Central Government action in relation to social assistance, social security, and health. OVERCONCENTRATION OF ECONOMIC ACTIVITY IN PROVINCIAL CAPITALS Coupled with the great urban-rural divide in the PRC is the dominance of the provincial capitals in the provincial economies of the Western Region (Table 15-4). In the large Western Region provinces, this concentration means that rural areas are even farther away from cities than they would be otherwise. Also, there is the risk that measures to develop the Western Region will mostly benefit the provincial capitals. FUNCTIONS OF LOCAL GOVERNMENTS The Organic Law of the Local People’s Congresses and Local People’s Governments of 1995 lays down the functions of local government. The Law refers to administrative work in relation to the economy, education, science, culture, public health, physical culture, protection of the environment and natural resources, urban and rural development, finance, civil affairs, public security, nationality affairs, judicial administration, and family planning.There is no

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reference to the operation of businesses, but local governments at all levels are very much involved in just this. There is little separation between the provision of essential local public services and the management of SOEs and TVEs. As a senior Government official put it in 1999: As far as the functions of governments at all levels in the PRC are concerned, their functions are not separated from those of enterprises. They are characterized by excessive management and an excessively wide range of functions, and the problem of failure to manage well.5 Local agricultural, environmental, forest industry, and commerce bureaus are under the administrative control of local governments, but under the technical supervision of departments of the Central Government. TRIMMING THE SIZE OF LOCAL GOVERNMENT Reducing and rationalizing the functions of local government should reduce staffing and save on the cost of operations.There is a widespread view that there is overstaffing at the township level in particular: As the township governments represent the lowest level in the PRC’s administrative ladder, they Table 15-5 Tax Collection Staff in Altay Prefecture State Tax Collection

County

Staff (no.)

Habahe Qinghe Beitun Burqin Fuyun Fuhai Jeminay Altay prefecture Total

42 42 34 31 56 47 40 450 742

Taxpayer Households (no.)

Revenue (yuan) 3,200,000 4,800,000

733 500 730

Local Tax Collection (no.) 44 36

7,000,000 48 36 307

Source: Office of the CPC Prefectural Party Committee, Office of Altay Prefecture Administrative Government, and Gansu Legend Culture Disseminating Co. Ltd., eds. (1999).

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are the most closely related to the farmers’ interests. Therefore, the streamlining of the township government is of the most immediate significance in reducing the farmers’ burdens.Throughout the country now, there are on average twice as many as Party functionaries and administrative personnel at the township level as are actually needed.6 The Tenth FYP acknowledges the need to reduce the number of employees in towns and townships.7 For example, the staffing levels of taxation bureaus in Altay prefecture (population 588,000) indicate that at the county level the collection of each 1 million yuan of state tax requires four tax collectors, working under a prefecture office with a staff of 450 (Table 15-5). A similar ratio seems to apply to tax collection by the county governments. However, this is just a part of the bureaucracy that controls business in Altay prefecture. Also governing business are the Industrial and Commercial Bureaus of each county, the Industrial and Commercial Bureau of the prefecture, the Town and Village Enterprises Bureau of the prefecture, the Commercial Office of Altay Prefecture (which looks after SOEs), and the Grain Bureaus in each county and at the prefecture level (which govern companies besides engaging in the grain trade). The Tenth Agro Division, for one, is virtually a local government on its own, administering 21 agricultural companies, nine factories, three hydro plants, a cement plant, and a population of nearly 15,000. A transitional economy cannot avoid having a multitude of local government agencies operating the local economies. The switch to a market economy cannot be made in an instant.The objective of a local government system that concentrates on regulatory functions and delivery of services rather than managing businesses is clear enough; the policy issue is how to go about making the transition. VERTICAL RELATIONS BETWEEN LOCAL GOVERNMENTS There is a perceptible move for vertical relations between local governments to progress from direct

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subordination to guidance. As a senior Government official put it in 1999: Local governments at all levels should operate within their respective domains. A government at a higher level may not go beyond its domain to interfere in the rights and activities of a government at a lower level.8 The greatest difficulties in vertical relations have occurred at the lower levels of local government, where much tax collection takes place.9 The introduction of elections of village heads and village councils has given the villages some counterweight against tax impositions by towns and townships (see “Grassroots Organizations” section above). Decentralizing service delivery away from Central Government monopolies should open the door to alternative service providers, including local governments, the private sector, and NGOs. The pressure of competition provides incentives for government to be responsive to demand, which often leads to higher quality services. Effective decentralization requires an active role for the Government, because rules and restraints are necessary for distributing responsibilities across levels of government, encouraging fiscal discipline, and providing a basis for effective auditing. A particularly complex set of rules revolves around the design of an internally consistent system of intergovernmental fiscal relations. These rules assign functional responsibilities to the most suitable level of government (depending on the nature of the service and national objectives), assign revenue sources and transfers adequate to meet those functions (no “unfunded mandates”), and design transfers to enable local governments to be more flexible as well as to accomplish central objectives. These rules, perhaps above all else, must be transparent and predictable to enable provincial governments to plan and execute their functions in a responsible way. Other critical rules set clear parameters within which provincial government borrowing can occur, including a legal framework

for local bankruptcy, regular auditing, and financial reporting requirements. Still others govern political processes that link citizens to their government and determine pay and employment conditions for civil servants.Taken together, the rules and incentives provided by a central decentralization framework are essential for creating fiscal discipline and enabling effective service delivery. HORIZONTAL COOPERATION BETWEEN LOCAL GOVERNMENTS The Government, in the 1980s, called for “spatial specialization and cooperation” between local governments according to their comparative advantages. It revived the policy in the mid-1990s with the Ninth FYP and 2010 Long-Term Plan.10 However, this policy was not successful, for various reasons:11 • Local governments were concerned about the risks of investing in areas outside their control. • There was a lack of market references against which to assess comparative advantages. • A distorted price system created large profit gaps between agricultural and manufactured goods and between raw materials and final products, so that the more the poor regions traded primary products the more they lost. • The system did not have a means of clearly how to divide profits and apportioning the State’s entitlement. The Government advocates regional cooperation between local governments in the Eastern Region and the Western Region.12 However, PRC governance specialists see this primarily in terms of horizontal relations at the provincial level: The relations between local governments have to be handled correctly. These relations consist of the vertical relations between governments below the provincial level and the horizontal relations between provinces.13 The lack of definition of independent powers of governments inhibits horizontal cooperation between level 3 and 4 governments in different

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provinces. Every action by a local government is subject to reversal by a superior government. In 1995 the Government initiated the Projects for Cooperation between the Township Enterprises in East and West China to encourage the development of TVEs in the Western Region. Programs such as these will be less effective than creating a business environment in which SMEs can operate freely across local government boundaries. URBAN INFRASTRUCTURE Compared with rural life, urban living requires more government intervention. This is because the high population density of cities generates externalities that require government services, such as public transport, traffic management, and infrastructure. Urbanization will require additional expenditures by local government. For this reason, the Western Region will benefit if urbanization takes place partly through migration to other parts of the PRC (Chapter 11). The Western Region already spends proportionately more on urban maintenance than its share of the country’s nonagricultural GDP (Table 15-6). Table 15-6 Expenditure on Urban Maintenance Compared with Share of Nonagricultural GDP, 1999 Region Eastern Central Southwest Northwest PRC

GDP (%)

Urban Maintenance Expenditure (%)

59.9 24.3 10.2 5.6 100.0

59.1 21.0 12.7 7.2 100.0

Source: Calculated from China Statistical Yearbook 2000.

There is a danger, therefore, that urbanization in the Western Region could actually force a reduction in local government spending in rural areas. With this risk in mind, Chapter 18 takes an in-depth look at urban development in the Western Region and Chapter 19 at rural development.

312

POVERTY ALLEVIATION The execution of poverty alleviation programs at the grassroots level often runs into difficulties because the officials at this level lack the necessary training. Managing poverty programs in a particular locality should be a temporary administrative task as distinct from permanent ones such as road maintenance, education, and health services. The objective of poverty programs should be to reduce the incidence of poverty to the point where normal social assistance and health services suffice. It does not make sense to give local government officials in every locality specialist training. Rather there is a need for local governments to use the specialist services of quasi-government or nongovernment organizations. RESPONSIBILITY FOR SOCIAL ASSISTANCE AND SOCIAL SECURITY The division of responsibility for social security and for social assistance is not clear. Both the Central Government and local governments perform social assistance functions (Chapter 5) and social security functions (Chapter 11). Local government in the Western Region would benefit if these functions predominantly belonged to the Central Government.

Future role of local government The development of the Western Region will require stronger and more effective local governments at all levels. Size and distances make the role of local government a very important one. DEFINING THE FUNCTIONS OF GOVERNMENTS AT EACH LEVEL There is a need to distribute functions across the various levels of local governments and to give local governments appropriate specific independent powers. In a market economy, only when there is a comprehensive legal framework setting out obligations and discretionary powers can local government be effective. In distributing functions to

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

different levels of local government, the Government should seek to devolve powers to local decision takers, and move the implementation of development programs and projects closer to the beneficiaries. DEVELOPING LOCAL CAPABILITY Local governments at levels 3 and 4 in the Western Region have varying capacities to respond to opportunities and threats. There are enormous variations in local resources between level 4 governments. An examination of local Tenth FYPs shows that some have been quite successful in developing “visions” for their development that derive from a realistic assessment of their strengths and weaknesses. There is less evidence of success in coordinating and mobilizing local resources through regional development organizations. Local governments lack sensitivity to, and understanding of, the needs and interests of the private sector. In particular, they do not understand the need to “market” a region and its products, or to provide business information.Today, local governments compete for government funds; in 2020 they will be competing for private sector and foreign investment. Parallel to efforts to improve local government capabilities, the Government should encourage public demand for better local administration and better services. SEPARATING BUSINESS FROM LOCAL GOVERNMENT Local governments should work to separate the delivery of public services, regulatory functions, and the management of business enterprises. There are various ways of achieving this reform: • Splitting bureaus that now have both regulatory and service delivery or enterprise management functions • Transferring responsibilities from industrial and commercial bureaus to finance bureaus, to clarify the financial nature of primary goals • Concentrating regulatory functions at level 3 and service delivery functions at level 4

• Transferring responsibilities for SOEs under local governments to an asset management corporation with powers to sell or merge operations The Government can assist this process by developing the regulatory environment for local government, for business, and for the machinery for resolving disputes. The separation of judicial administration from local government is also important for creating a more attractive environment for investment in the Western Region. Investors must have confidence in the independence of courts in resolving commercial disputes. OVERCOMING OVERCONCENTRATION IN PROVINCIAL CAPITALS The term “local government” often seems synonymous in the PRC with level 2 government. Provincial capitals are invariably wealthier, healthier, and better provided with services than other cities. In part this reflects the hierarchical nature of local government in the PRC. However, an objective of PRC planning has long been to constrain the growth of very large cities and promote secondary cities. Article 4 of the City Planning Law of 1989 states: The State puts into effect the principle of keeping strict control over the size of large cities and developing rationally mediumsized cities and small cities, so as to promote a rational structure of productivity and population.

The Tenth FYP also recognizes the need to develop the secondary cities: Concentrating on developing small towns, taking the initiative to develop small and medium-sized cities, giving full play to the role of large cities in promoting the development of surrounding areas and guiding the orderly development of concentrated towns and cities.14

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CHAPTER

16

WATER RESOURCES MANAGEMENT With increasing demand for water from the growing population, industry, agriculture, and environmental programs, local governments must manage water resources better. Low rainfall, the naturally low quality of groundwater, and obligations to share water all limit opportunities to develop water resources. Until at least 2020, less and less water will be available per capita. This chapter therefore examines ways to make the best use of water resources in the Western Region, using the dry, northwestern province of Gansu to illustrate the difficult choices that local governments face.

Water resources The extent and characteristics of water resources vary widely across the Western Region according to climatic, topographic, and geological factors. CLIMATE The PRC receives monsoon winds from the east. There are very distinct seasonal changes. In winter, high-pressure systems dominate, with northerly winds, and there is very little precipitation. In summer, southerly winds bring rain.Temperatures in the PRC are much lower in winter and higher in summer than in other countries at the same latitude. The climate varies widely across the Western Region. The northwest is much drier than the

southwest (Figure 16-1), with an average annual rainfall generally under 250 mm. In the wettest, and most populous, province of the northwest, Shaanxi, annual rainfall average is 547 mm, but in the second most populous, Gansu, it is only 280 mm. The precipitation varies greatly across the province with a small proportion of it occurring as snowfall on both the peaks and on the plains. Representative precipitation patterns for the eastern and western parts of the northwest are given in Figure 16-2. Both have dry cold winters but the eastern regions are more influenced by the summer monsoons that dominate the climate of eastern PRC. Insolation also affects water resources. Generally, insolation is much higher in the water-short northwest than in the water-rich southwest.

Figure 16-1 Average Rainfall in Northwest PRC

250 250 250

250 250

250

1,0 0 0

250

1,0 0 0 1,0 0 0

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 16-2 Annual Rainfall Distribution East (Lanzhou)

West (Urumqi)

Precipitation (% of annual)

Precipitation (% of annual)

30

30

25

25

20

20

15

15

10

10

5

5

0

J

F

M

A

M

J

J

A

S

O

N

TOPOGRAPHY The topography divides the Western Region into 25 main drainage basins (Figure 16-3). High mountains generally make transfers of water between these basins difficult and expensive to achieve. They also have the effect of making the basins distinctive in climatic terms. SURFACE WATER The runoff per area of land in the Western Region’s drainage basins is low in comparison with the coastal basins. With the exception of the Ertix basin (Xinjiang), the variation in annual runoff from year to year is also lower for the inland and southwest than for most other river basins (Table 16-1). The implications of these climate characteristics are as follows: • The inland basins have fewer resources for a given land area. • It is cheaper to regulate a larger portion of the mean annual runoff in the basins of the northwest (because of the low variability in runoff ); however, the runoff is of an order of magnitude less than that of southern rivers, and available resources are correspondingly lower. • The natural aquatic and terrestrial environment of inland rivers may not be adapted to survival under highly variable flows as may occur after resource exploitation. Accordingly, it may be difficult to meet environmental and water resource development objectives in the drier northwest basins.

0

D

J

F

M

A

M

J

J

A

S

O

N

D

Table 16-1 Summary of Surface Runoff and Its Variability Basin/Region Inland Yellow Hai-Luan Ertix Yangtze Southwest PRC

Mean Annual Runoff (mm) 32.0 83.2 90.5 189.6 526.0 687.5 284.1

Variabilitya 0.26 0.56 1.10 0.88 0.40 0.38 0.26

a

Estimate of coefficient of variation (standard deviation divided by the mean). Source: Gan Hong (1999).

GROUNDWATER Groundwater availability is very much a function of the local geology, which defines the occurrence of aquifers, their storage capacities, their recharge rates, the transmissivity between aquifers, and their natural water quality. Groundwater is used extensively for agriculture, living, and industry. Shallow aquifers, as typically found in much of the northwest, are easier to manage as they can recover from overuse at a faster rate than deeper aquifers. However, the quality of groundwater is not always satisfactory. For example, 25 percent of the groundwater quality in Gansu is class 5 or lower (according to GB3838-88) and is therefore probably unsuitable for urban water supply and irrigation (Table 16-2). Often, high levels of naturally occurring mineral salts would make class 5 groundwater unsuitable for irrigation. Surveys have shown that large numbers of people in parts of Gansu have diseases from drinking

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317

Figure 16-3 River Basins of the Western Region

23 1 30 31 6 26 32 28

Beijing

27 29 22 10

33 22

S hang hai

19

21

13

18 20

15 17 Hong Kong, China

Table 16-2 Groundwater Water Quality in the Northwest, 1999

Province Inner Mongolia Ningxia Gansu Qinghai Xinjiang

Class 1 (%)

Class 2 (%)

Class 3 (%)

Class 4 (%)

Class 5 (%)

Total (%)

0 0 0 0 0

29 0 0 0 16

24 0 42 0 42

12 0 33 0 19

25 100 25 100 23

100 100 100 100 100

Source: Gan Hong (1999).

groundwater with naturally occurring high fluoride concentrations over a long period.1 Water table levels are falling in parts of Gansu, and there is an ongoing program of well construction.2 There is the

318

risk of overexploitation of deeper groundwater aquifers, with permanent damage and long-term loss of the resource, if the expansion of wells is not based on thorough assessment of the resources.

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Basin River 10 10 10 10 10 13 13 13 13 13 13 13 13 13 13 13 16 16 17 18 19 21 23 30 31 30 32 32 32 32 32 32 29 28 28

Huang Tao Big hei Fen Wei Yangtse Yalong Da du Min Jialin Wu Li Yuan Zi Xiang Han Jian Nan du Yuan Lancang Nu Yarlung zangbo Ertix Ulungur Ili Manas Aksu Tarim Kashgar Yarkant Hotan Qarqan Golmud Shule Hei

Length (km)

Area (km2)

Volume (m3/s) Outfall

5,464 725,443 1,820 669 31,400 172 274 13,679 5.7 695 39,400 53 818 107,304 292 6,300 1,807,199 29,000 1,500 129,930 1,800 1,070 90,700 2,033 735 135,788 2,752 1,119 159,710 2,165 1,018 86,815 1,650 372 18,872 553 1,060 88,815 2,158 590 28,899 797 817 95,738 2,288 1,532 150,710 1,729 211 9,433 270 340 6,841 180 640 39,840 634 2,153 161,430 2,354 2,013 124,830 2,000 2,057 240,480 4,425 546 50,860 342 715 22,032 35.6 441 65,000 410 406 4,056 40.5 419 35,871 195 2,137 505 11,500 61.9 1,037 48,100 203 1,090 28,232 142 527 18,119 16.4 419 15,477 23.5 540 20,197 26.4 780 35,634 47.3

Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Pacific Indian Indian Arctic Inland Inland Inland Inland Inland Inland Inland Inland Inland Inland Inland Inland

OVERALL WATER RESOURCE DEVELOPMENT Table 16-3 is a summary assessment of water resources in the Western Region. Resource capacity and development statistics such as those in Table 16-3 are generally unhelpful or even misleading without corresponding definitions of the basis of capacity or yield assessment and without statistics for each of the separate aquifer systems. It is likely that the values in the table derive from averages and that the potential or usable resource is much less than stated after allowing for natural climate variability, physical limitations on storage sizes, water quality considerations, and allowances for the environment. The assessed yield of inland groundwater resources seems high in the light of information from the local government about groundwater quality in Xinjiang and Gansu.3

Use of water resources WITHDRAWALS FOR CONSUMPTIVE USE The PRC’s economic growth has been generating increasing demand for domestic and industrial water

Table 16-3 Summary of Water Resources in the Western Region

Prefecture Southwest Sichuan Chonging Yunnan Guizhou Guangxi Tibet Subtotal % Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia Subtotal % PRC

Precipitation (109 m3)

Surface Water Resources (109 m3)

Groundwater Resources (109 m3)

Total Water Resources (109 m3)

Per Capita Water Resources (m3)

Water Resources per mu (m3/mu)

457.05 102.18 539.14 218.48 379.67 714.92 2,411.44 40.4

261.84 62.56 249.25 120.62 185.52 454.84 1,334.63 49.1

63.46 6.33 82.45 31.34 29.67 143.41 356.66 42.5

262.14 62.56 249.67 120.62 185.52 454.84 1,335.35 47.4

3,048 2,041 5,910 3,301 3,906 178,127 5,440

5,106 2,756 10,029 7,813 6,183 72,662 8,865

142.98 115.82 208.30 16.21 334.07 166.70 984.08 14.6 5,970.24

37.03 19.52 61.57 0.92 91.43 4.47 214.94 6.6 2,720.38

14.73 12.58 26.49 3.09 66.26 11.88 135.02 14.4 838.67

40.34 20.69 62.16 1.12 97.87 12.24 234.43 6.9 2,819.57

1,122 821 12,358 208 5,602 1,208 2,364

523 275 6,023 59 1,637 395 860

2,219

2,441

Source: China Water Resources Almanac 1999 and 1998.

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319

supply. However, total withdrawals for consumptive use may have temporarily peaked. At the same time, there has been continuing expansion of irrigation (Table 16-4). The 1999 numbers indicate that domestic consumption has continued to increase, but that reductions in agricultural and industrial use are now offsetting the increase. However, the picture varies greatly from one region to another. In the northern half of the PRC, water resources are overstretched and withdrawals cannot increase further; there is heavy reliance on groundwater, the yield of which is not sustainable. In the south of the PRC, withdrawals are still well below the available resources and can continue to increase (Table 16-5). However,

allowance still has to be made for populations in other regions that depend on these water resources. WATER FOR AGRICULTURE The main reason for the increase in agricultural consumption of water is the expansion of the irrigation areas. In recent years, this expansion has been especially rapid in the northwest and in the Central Region (Table 16-6). In most of the northwest, average annual rainfall is below 250 mm (Figure 16-1), and agriculture is not feasible without irrigation. In Gansu the increase in irrigated area has been more than 3 percent per year since 1995 and has been accelerating.

Table 16-4 Consumptive Use of Water and Withdrawals for Consumptive Use, 1980–1997 Annual Growth 1980 (GL) Consumptive use Domestic (urban/rural) Industrial Agriculture, forestry, husbandry Total consumptive use Withdrawals for consumptive use Surface water Groundwater Reuse and others Total withdrawals

1993 (%)

(GL)

1997 (%)

(GL)

1999 (%)

(GL)

(%)

1980–1993 1993–1997 (%) (%)

27,000 6.2 46,000 10.4 370,000 83.4 443,000 100.0

47,000 8.5 89,000 17.0 382,000 73.2 522,000 100.0

53,000 9.4 127,000 22.6 392,000 69.8 562,000 100.0

56,300 10.1 115,900 20.7 386,900 69.2 559,100 100.0

4.36 5.21 0.25 1.27

0.86 9.30 0.65 1.64

381,000 86.0 62,000 14.0 – – 443,000 100.0

422,000 80.8 87,000 16.7 13,000 2.5 522,000 100.0

457,000 81.2 103,000 18.3 3,000 0.5 562,000 100.0

451,400 80.3 107,500 19.1 3,200 0.6 562,100 100.0

0.79 2.64 – 1.27

2.01 4.31 – 1.86

Source: Hydrosult Inc. (1999); and China Water Resources Report, http:/www.chinawater.net.cn/gb99. Note: According to the source document, these numbers give a broad picture of trends and are not necessarily accurate.

Table 16-5 Consumptive Use of Water and Sources of Withdrawals, by Region, 1999

Use/Source Consumptive use Domestic (urban/rural) Industrial Agriculture Total Source Surface water Groundwater Others Total Withdrawals/Resources (%)

Northeasta (GL)

Southeastb (GL)

Central (GL)

Northwest (GL)

PRC (GL)

8,622 11,938 48,678 69,238

16,919 45,671 80,490 143,080

16,298 37,095 115,270 168,663

10,330 15,483 54,501 80,314

4,108 5,708 87,978 97,794

56,277 115,895 386,917 559,089

29,624 40,084 1,079 70,787 142.0

137,907 5,228 155 143,290 30.4

130,283 38,665 1,079 170,027 24.0

75,132 4,226 737 80,095 6.0

78,476 19,260 148 97,884 38.1

451,422 107,463 3,198 562,083 19.9

Source: Calculated from China Water Resources Report, http:/www.chinawater.net.cn/gb99. a Beijing, Tianjin, Liaoning, Hebei and Shandong. b Jiangsu, Zhejiang, Shanghai, Fujian, Guangdong, and Hainan.

320

Southwest (GL)

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Table 16-6 Development of Irrigation Infrastructure, 1993–1999

Region Eastern Central Western Southwest Northwest PRC

Irrigated Area 1999 (km2) 1993 (km2)

Reservoir Capacity 1999 (GL) 1993 (GL)

Increase, 1993–1999 Irrigation (%) Reservoirs (%)

194,851 188,487

185,787 167,536

187,950 200,300

200,588 214,474

4.9 12.5

-6.3 -6.6

66,955 81,292 531,585

61,634 72,322 487,279

50,400 53,770 492,420

46,704 28,293 490,059

8.6 12.4 9.1

7.9 90.0 0.5

Source: Calculated from China Statistical Yearbook 1994 and 2000.

In 1999 alone, projects increased the irrigation area by 273 km2 and treated 3,813 km2 of water and wind erosion areas. Despite the many soil conservation projects (which themselves require water) the rate of increase in water supplied for irrigation has been lower than the rate of increase in area. This phenomenon could arise from one or more of the following factors: • Increasing efficiency of water use (with greater production) • Lower depth of application of water over more land (with less production) • Reduced usage due to higher rainfall, floods, etc. (with similar production) Reference to studies in other parts of the PRC suggests that the second factor is the probable cause.4 The proposal is to introduce more water-saving measures including a change to crops that do not require a lot of water, improvement of facilities for more efficient water use, and promotion of watersaving technology. Gansu’s aim is to reduce water

Table 16-7 Agricultural Areas in Gansu, 2000 Arable (km2)

Basin Inland Yellow Yangtze Total Increase by 2005a Final area

Irrigated (km2)

8,667 36,000 6,667 51,333

% of Arable

6,667 4,667 467 11,800 1,333 15,667

51,333

77 13 7 23 31

Source: Gansu Water Resource Bureau. a The total arable area has not increased in recent years, and is unlikely to increase as a result of irrigation.

demand from 648 per mu (957 mm) to 600 m3 (900 mm) with 58 percent efficiency. Assuming irrigation water in Gansu is 10,000 GL per year, the economic value of water is about 130 L per yuan. A comparison between Gansu and other parts of the Western Region (Table 16-8) leads to some further questions.

Table 16-8 Western Region Agriculture and Hydropower Profile, 1999

Item

PRCa

Western Region Chongqing

Statistics for hydroelectricity areas Total population (million) 204.2 142.15 Agriculture population (million) 175.8 123.74 Cultivated area (km2) 1,570,821 996,022 Irrigated area (km2) 737,213 451,437 GDP (agriculture) (million yuan) 618,350 279,832 GDP TVE (million yuan) 631,954 228,527 Derived ratios GDP/Irrigated area (yuan/ha) 8,388 6,199 GDP/Cultivated area (yuan/ha) 3,936 2,809 Agricultural GDP (yuan per capita) 71,102 132,973 Hydropower Hydropower capacity (new) (MW) 2,884 725 Hydropower capacity (total) (MW) 27,729 9,205

Sichuanb Guizhou

Yunnan

Shaanxi

Gansu

Qinghai

Xinjiang

18.95 16.66 110,812 37,815 58,903 33,806

50.97 44.79 345,110 132,876 113,542 126,477

26.57 29.61 22.82 26.42 12,203 253,944 5,127 104,183 6,212 72,969 4,504 50,998

2.23 5.78 1.99 5.21 26,547 80,720 6,371 17,832 4,539 7,951 6,226 4,200

0.76 0.55 7,633 2,970 1,847 104

7.28 5.30 159,054 144,263 13,869 2,212

15,577 5,316 55,649

8,545 3,290 307,415

12,116 5,091 4,697

7,004 2,873 46,917

7,124 4,459 1,710 985 54,212 23,318

6,219 2,420 35,468

961 872 30,356

46 965

233 3,415

75 899

300 2,276

16 187

0 608

63 383

20 309

Source: Almanac of China Water Resources 2000. Note: Excludes Tibet and Ningxia for lack of data. a Some comparisons between the Western Region and the PRC total are unreliable because of gaps in the source data. b There are some anomalies in the Sichuan data.

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321

Agricultural output per capita, per hectare of cultivation, and per hectare of irrigation is generally lower than in the rest of the Western Region. WATER FOR FORESTRY Tree planting usually requires water to establish and maintain the trees. Soil stabilization also requires water. The magnitude of the supply is approximately half of that needed for farmlands. Irrigation normally uses sprinkler and not microdrip methods; hence, efficiencies are lower than they might be with drip irrigation.5 DOMESTIC CONSUMPTION Domestic consumption of water is steadily increasing as incomes rise and piped water supply reaches more urban and rural households.There are big differences between urban and rural consumption and between regions (Table 16-9). Table 16-9 Domestic Water Consumption Region Southeast Northeast Central Southwest Northwest PRC

Urban (L per capita per day)

Rural (L per capita per day)

330 212 186 241 135 228

121 67 80 92 83 88

Source: Calculated from China Water Resources Report, http:/www.chinawater.net.cn/gb99.

Chapters 18 and 19 contain further discussion of domestic and industrial supply in the Western Region. Gansu uses much water for industry. WATER SUPPLY AND WASTEWATER Water consumption and wastewater generation data for Gansu in 1996–1997 are presented in Table 16-10. The data show high water usage by urban residents and industry in the inland areas along the Hexi Corridor. This may be a result of the dryer and hotter climate and the particular types of industry, for example, a high proportion of power generation. This

322

contrasts with lower use in the Yellow River basin areas, where the water resources are more restricted. IN-STREAM USE In-stream use encompasses use of water for navigation, the environment, pollution control, and power generation. These uses place additional limits on the water volumes available at particular times for agriculture or water supply. In Gansu, large hydropower and flood control dams on the Yellow River and its tributaries generate electricity that feeds the national grid.The 918-km section of the Yellow River between Longyang Gorge and Qingtong Gorge has a drop of 1,324 m. Shaanxi, Qinghai, Gansu, Ningxia, and the National Power Corporation have formed the Yellow River HydroElectric Development Company Ltd. to construct 25 power stations with a combined capacity of 15.8 MW.6 In poverty areas, there are local hydropower stations that may not be connected to the national grid. These local stations are run by the prefectures or county governments, which also set the energy charges. Power charges are generally about 1 fen per kWh, compared with a cost of around 5 fen/kWh. Other than the inland river basins, there is significant potential for hydropower development in the Western Region. Southern provinces of the Western Region have precipitation that exceeds 600 mm per year and in places is in the range of 1,200– 1,600 mm per year.

Future water requirements OVERALL GROWTH IN REQUIREMENTS In Gansu, water demand in the Yellow River basin is likely to grow by 35 percent by 2020 (Table 16-11). Such projections are illustrative of the types of expected changes in demand, by sector, in other parts of the Western Region. IRRIGATION To accommodate an increase in industrial and domestic consumption, there will have to be

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Table 16-10 Gansu Water Supply Statistics, 1996–1997

City/Urban Area

River Basin

Population Daily Daily Per Industry Industry Served Production Average Average Capita Production Water Population With Capacity Total Life Consumption Value Rate Total Water (ML/d) (ML/d) (ML/d) (L/d) (million yuan) (M3/104 yuan)

Lanzhou

Yellow, Central

2,876,000 1,505,000

Baiyin

Yellow, Central

1,711,000

430,000

Linxia

Yellow, Central

195,000

99,000

40

11.0

8.9

90

133.8

56.8

4,782,000 2,034,000

1,760

1,181

334

164

41,698

74.2

Subtotal

1,370

843.1

252.7

168

34,573

623

350

327.0

72.1

168

6,992

133.1

Tianshui

Yellow, Eastern

3,328,000

450,000

240

103.4

48.4

108

2,965

67.6

Pingliang

Yellow, Eastern

441,000

147,000

50

38.6

14.9

101

348.31

248.1

Xifeng

Yellow, Eastern

128.4

314,000

136,000

20

16.9

11.3

83

158.83

4,083,000

733,000

310

159

75

102

3,472

88.5

Inland

447,000

178,000

180

173.0

39.7

223

4,030

120.7

Wuwei

Inland

984,000

152,300

80

61.8

25.2

165

970.4

137.7

Jiayuguan

Inland (Beida)

146,000

145,500

440

263.3

88.6

609

3,498

182.4

Yumen

Inland (Beida)

180,000

180,400

80

76.7

15.8

87

3,594

61.9

Jiuquan

Inland (Beida)

325,000

102,000

130

45.2

17.1

167

440.87

232.9

Zhangye

Inland (Hei)

468,000

240,000

40

60.7

27.0

113

499.03

246.1

Dunhuang

Inland (Shule)

131,000

35,200

6

7.7

2.7

76

222.11

81.9

79,000

35,500

10

3.3

3.3

93

79.44

-

2,760,000 1,069,000

966

692

219

205

13,334

129.3

3,036

2,032

628

164

58,504

87.6

Subtotal Jinchang

Fiezuou Subtotal, Hexi Corridor Total

11,624,000

3,836

Source: Gansu Yearbook 2000.

cutbacks in irrigation consumption, at least in the northwest. However, a small percentage reduction in allocation for irrigation can satisfy a large increase in industrial and domestic supply (Table 16-12). Option 1 shows an overall increase in irrigation water demand upon completion of the proposed expansion of irrigated agriculture. Option 2 illustrates how, with water-saving technology and with irrigation efficiency improvements, the future gross demand could be constrained, in spite of an increase in the net water requirements. Irrigation efficiencies are reported to be already high in the Inland Basin areas west of Lanzhou, no doubt because of the water shortages. INDUSTRIAL DEMAND Future urban and rural industrial demand projections by the Institute of Hydropower and Water Resources (IWHR) are summarized in Table 16-13. These projections help illustrate that, with future industrial expansion, water consumption is likely to increase in spite of the use of water-saving technology by industry and an industry mix that will consume less water overall per yuan of product value. Alternatively, demand growth can be curtailed by limiting the types

Table 16-11 Potential Water Use in the Yellow River Basin in Gansu, 2000–2020 Water Use Urban industry Rural industry Livestock Rural life Urban life Subtotal Irrigation Total

2000 (GL)

2020 (GL)

1,232 118 82 237 208 1,877 5,700 7,577

1,479 197 97 344 412 2,528 5,100 7,628

Increase (%) 20 67 19 45 98 35 –11 0.6

Source: Institute of Hydropower and Water Resources (2000).

Table 16-12 Future Irrigation Demand from the Yellow River Basin in Gansu Future Demand Item

2000

Area (km2) Water saving (%) Gross depth (mm) Gross supply (GL) Assumed efficiency (%) Net supply (mm) Net supply (GL)

4,667 100 1,222 5,704 36 440 2,053

Option 1 Option 2 7,700 100 1,100 8,470 40 440 3,388

7,700 90 660 5,082 60 396 3,049

Option 2/2000 Growth (%) 65 –46 –11

48

Note: Assumes that 80% of Gansu’s future irrigation expansion will occur in the Yellow River basin.

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Table 16-13 Future Industrial Water Demand from the Yellow River Basin in Gansu Urban Industry Urban industrial production (million yuan) Quota (m3/yuan) Quota (m3/104) Water use (GL) Rural industrial production (million yuan) Quota (m3/yuan) Quota (m3/104) Water use (GL)

2000

2020

Increase (%)

62,422 269,392 0.0197 0.0055 197.4 54.9 1,232 1,479 31,354 164,820 0.0038 0.0012 37.5 11.9 118 197

332 –72 20 426 –68 67

Source: Calculated by consultants.

Table 16-14 Growth in Water Use in Gansu, 1995–1999 Item

Unit

Total irrigated area Effective irrigated area Yearly increase Total water (supply quota) Agriculture (irrigation) Yearly increase Industry (urban and rural nonpower) Living (urban and rural) Industry/Living Irrigation depth (gross)

2

km km2 % GL GL % GL GL % mm

1995

1998

1999

11,060 10,102 9,404 8,976

11,763 10,776 2.18 10,097 9,662

140 288 49 889

150 285 53 897

12,118 11,222 2.66 10,254 9,722 2.02 252 278 91 886

Source: Gansu Yearbook 2000.

Table 16-15 Summary of Water Headworks in Gansu, 1995–1999 Item Total reservoirs (no.) Large Medium Small Total capacity (GL) Large Medium Small Average capacity (GL) Large Medium Small Source: Gansu Statistical Yearbook 2000.

324

1995

1998

1999

286 6 25 255

289 6 25 258

291 6 26 259

7,287 869 399

7,287 914 405

7,315 924 415

1,214 35 1.6

1,214 37 1.6

1,219 36 1.6

of industries in Gansu.The experience in Tianjin, which is very short of water, has been that many industries can reduce their water consumption below the normal values. Integrated management of development and water resources is called for in Gansu and other watershort areas of the Western Region. The availability to Gansu of the extra quantity of water from the Yellow River is extremely uncertain. It would require one or more of the following measures: • Increasing the Yellow River resources available to Gansu (at the expense of downstream users), through further dam construction • Transferring water from water basins in the southwest • Reducing water use downstream and at the same time revising water allocations Surplus water resources from the inland rivers west of Lanzhou could be further developed to make up for shortfalls from the Yellow River, but this measure would be constrained by the high transfer costs to the east and the competition for the resource from Inner Mongolia to the north and Qinghai to the south. A similar situation applies with respect to the resources from the small area of the Yangtze basin to the south. These assessments for the Yellow River basin in Gansu are illustrative of the options for water-short parts of the Western Region. GROWTH RATES FOR HEADWORKS AND WATER USE Gansu’s industrial water use has increased, from some 50 percent of living water use in 1995 to more than 90 percent in 1999 (Table 16-14). This large increase in the proportion of industrial use could be a result of an increase in industrial activity, but its sudden nature suggests that industries with high water usage are establishing in Gansu, possibly to escape water shortages in the northern coastal provinces.The increase in consumption has only been possible because of a substantial expansion of headworks (Table 16-15).

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Water resource planning and management options This section reviews the critical policy issues and possible solutions. Since schemes with the highest economic returns are normally constructed first, the unit cost of water supply for new resource developments is likely to increase. The planning and management of water resources in the Western Region must consider not only the increasing cost of resource development, but also the general shortage of resources. GROUNDWATER In many parts of the northern coastal basins of the PRC, volumes of groundwater use exceed the sustainable yield, creating high risks of permanent deterioration of quality and quantity and of land subsidence. Xinjiang, Gansu, and other parts of the Western Region are now very dependent on groundwater for daily living and agricultural needs. The development of groundwater resources continues in spite of the lack of an overall assessment of the resource, its yield, and its optimum management (in terms of limiting exploitation to sustainable levels). There may be areas along the Tarim River (Xinjiang) and Yellow River (Gansu, Ningxia, Inner Mongolia) with significant potential for groundwater use.7 In these locations, groundwater quality may be a natural constraint on the overall level of development of the resource. SURFACE WATER Besides the northwest, the entire northern coastal plains of the PRC are experiencing a shortage of surface water resources. One difference between these two areas is that, save for the Yellow River basin, the surface water resources of the northwest have not yet been fully developed. In the inland basins, some further development of surface water resources should be possible after the environmental constraints are investigated.

The waters of the Yellow River are in heavy use for irrigation throughout the river’s length, to the point where the river has ceased to flow at times. This is not sustainable from an economic or environment viewpoint and the almost inevitable additional water usage in the Yellow Basin will only reduce the reliability of supply for all users, to everyone’s economic detriment. Unless water is allocated in sustainable quantities and use controlled according to allocation, there will be serious economic, social, and environmental consequences. The options for a solution are manifold. DEMAND MANAGEMENT Water-saving technology Current techniques create a demand on scarce water resources, which should be minimized by investigating and applying water-saving techniques, including research into alternative treatments, reducing irrigation leakage, and improving the cost-effectiveness of irrigation techniques. This is one of the main thrusts of Gansu’s policies. However, at current price levels farmers are reluctant to borrow money to invest in new water-saving technology. The finite limits to water resources and the declining proportion likely to be available for agriculture call for more emphasis on improving the efficiency of water use and much less on expanding the area of irrigation. One measure of the scope for improvement is that the water use efficiency of grain crops in the PRC is approximately 1.1 kg/m3, compared with 2.3 in Israel.8 Investments that could conserve water include canal lining, pipeline delivery, sprinkler systems, and microtubes.9 Some irrigation systems are not suitable under all conditions; sprinklers have limitations because of the high silt content of water from the Yellow River and because high-salinity water burns plants.10 Water pricing Increasing prices for water is both practicable and likely to reduce consumption:

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• In Gansu, electricity for pumping is subsidized down to about 1 fen per kWh, compared with a real cost of around 5 fen per kWh from the grid. • In Gansu, water charge is around 20 fen/m3, compared with a cost of production of 30 fen per m3 in some places. • Gansu prices are significantly higher than in other provinces.This suggests that other watershort provinces can increase prices. • Occupants of irrigated land are usually not in poverty.This suggests that there is room to raise the price of irrigation water, with the local government providing small conservation projects in poverty areas. Water allocation The allocation strategy of Gansu’s Tenth FYP is that industrial developments should be low water users, and that agricultural use should expand. However, this may not be the best strategy: • Irrigation is a heavy user of water but the value of output per unit of water is much less than from secondary industry. • Secondary industry needs, on average, at least 20 m3 of water for every 1,000 yuan of output. This will reduce to 5 m3 or less in the future. • Irrigation in Gansu at present uses about 130 m3 of water per 1,000 yuan of output (excluding TVE output). • Economic development is best served by a change to secondary and tertiary industry, from a water perspective. • Industrial and life demands will grow and the application of water-saving technology to irrigation may not be enough to provide for industry and living, unless the industry is of a type with low water requirements. • Cultivation in the east is difficult because of poor soils, and salinity is a problem in the west, requiring drainage for irrigation areas. However, topography divides Gansu into several inland drainage basins (among others, the Shule, Beida/Hei, and Jingchang), as well as the Yellow River.

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Opportunities for industrial and urban development are much greater in the Yellow River basin than in the more remote inland drainage basins. Therefore, an expansion in water allocation for agriculture may be possible in some inland basins. Licensing and enforcement According to the Regulation of Water Use Permits of 1993, all departments or individuals getting water from rivers, lakes, or underground should get permission from the appropriate authorities, and then observe closely the exact prescribed location, scale, and manner of using the resources. The regulations have laid a solid foundation for controlling the use of water resources. However, at the time when the Regulation came into force, the overall system of water resource management was rather fragmentary. Therefore, it is hard for some agencies to enforce it vigorously. Even now, some areas have not implemented the regulation.11 After the reform of the water resource regulatory system, it should be possible to improve the regulations. Data and reporting At all levels of water resources administration there are insufficient data to manage water allocation and supervise its use. The deficiencies fall into two categories: on the one hand, the lack of routine, accurate measurement, and on the other hand, the lack of regular and comprehensive reporting. No system of planning, allocation, licensing, or enforcement will work satisfactorily unless there is good measurement and reporting. INSTITUTIONAL IMPROVEMENTS Several studies have recommended the establishment of high-level River Basin Coordinating Committees, which would develop broad policies and programs to promote sustainable water resource use for flood control and soil conservation, among other responsibilities.12 Generally, proposals envisage the following arrangements:

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• Legal confirmation of the status of the existing River Basin Committees as the primary agencies for flood control, among other areas of responsibility • Legal confirmation of the primary stewardship of water resources by the provinces, subject to oversight by the River Basin Committees • Establishment of Provincial Water Resources Coordinating Committees to function in a similar manner to the River Basin Committees but at the province level Local governments are responsible for formulating regional water resource plans, but these are often inconsistent with the water resource plans drawn up by the River Basin Committee. In the Western Region (as is often the case elsewhere) high mountain ranges mean that river basins are logical units not only for water resource management but also for natural resource management in general and for pollution control. However, establishing river basin commissions or committees is often not practicable in the Western Region. The rivers are often smaller than in the Central and Eastern regions, the populations and financial resources are much less, and local governments are administratively stretched. WATER RESOURCES INFRASTRUCTURE In the Ninth FYP Gansu’s investment was in the order of 8,000 million yuan; the proposal for the Tenth FYP is 14,000 million yuan. The Gansu Water Resources Bureau estimates that to complete all identified water resource development and irrigation projects in Gansu would cost 30,000– 40,000 million yuan. Expansion of water resources is limited by lack of money and technical constraints.The technical constraints are as follows: • Soil erosion problems • Relatively high costs because of the hilly terrain with scattered irrigation fields • Low rainfall, unevenly distributed over the year especially in the west

• Seasonal stream flow, making it necessary to build dams to improve the reliability of supply, not just to augment it • Topography, which divides Gansu into seven or more surface water basins and has necessitated costly water transfer projects to match resource with development • Overutilization of Yellow River water and unsuitability of groundwater use for Gansu The thrust of the Tenth FYP for Gansu is for an increase in medium and small-scale irrigation projects, distribution system improvements, environmental enhancements, and a solution to the water shortage problem. There are probably enough water resources for the strategy, but the question arises as to whether it is a sensible strategy in view of the costs. To attract industry will mean locating industry close to the least-expensive available water resources. However, it is probably not feasible to obtain further water from the Yellow River. Transferring water from the basins of southern PRC to the Yellow River may be technically feasible but the price of this water may not be affordable to consumers. The cost of the water resource projects leads to the question of whether investing in irrigation compares favorably with investing in, say, education, not just industry. Water saved by users downstream and upstream will most likely go to irrigation expansion in their own province or to their own industry. The institutional framework is not up to trading in water rights. In purely engineering terms, there is potential for conservation projects to serve the Western Region and provide flood control in western and downstream reaches. Sichuan, Guangxi, Xinjiang, Qinghai, Shaanxi, Gansu, and Ningxia have potential for large conservation projects. In some areas geology and geography limits projects to small-scale water conservation and diversion and water lifting projects in poverty-stricken areas. However, the question of feasibility is one of economics not engineering.

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Physical protection measures Most rivers have extensive flood control systems with various combinations of catchment reservoirs, floodplain detention basins, and levee systems. All rivers in Gansu will be subject to periodic flooding in the summer months. Some 2,400 km of levees have been constructed in Gansu to protect 1,420 km2 of lands. Silt loads are a particular concern, especially in the Yellow River. This is so not only because of their blanketing effect after floods and the interference with irrigation systems but also because they progressively reduce river channel capacity, thereby increasing the risk of flood or creating a need for remedial works. Soil conservation and reforestation measures are being undertaken within the catchments to control sediment loads and enhance catchment water yields. These measures will benefit local farmers in some western provinces, occupiers of the downstream floodplains, river ecology, and the coastal waters. The Yellow River has a number of reservoirs that have a flood control function. In addition, two large detention areas have been constructed. These facilities provide approximately a 1-in-60 year standard but are of more benefit to downstream provinces than to Gansu.

CATCHMENT MANAGEMENT Under the Water and Soil Conservation Law of 1991, the local Water Bureaus are responsible for drawing up plans for water and soil conservation in conjunction with other relevant departments. Among other functions, these plans define priority areas for preventive action and for rehabilitation activities. Water Bureaus are also responsible for monitoring erosion. The Law provides for fines but not for the collection of fees to fund preventive works. The Ministry of Water Resources has also prepared a 50-year master plan for soil and water conservation and a five-year action plan (2001-2005). FLOODPLAIN MANAGEMENT Incidence The incidence of floods is above the national average in the southwest, but below the national average in the northwest (Table 16-16). However, the majority of flood damage in the PRC is in the coastal plains, where development densities are high and the largest rivers have their flood plains. Throughout the PRC, flood damage has been higher in recent years but it is impossible to tell the cause of the phenomenon. There is a suggestion that the damage value per unit area flooded has been relatively constant, with some indication that the extent of seriously affected areas is being contained. Other reports mention increasing flood damages, but this is misleading since there is no adjustment for annual flood size.

Management A National Flood Prevention Command Center is being developed for the large basins.13 This center will have data collection, communication, computer

Table 16-16 Flood-Affected Areas, 1993 and 1999 Flood-affected Area Region Eastern Central Western Southwest Northwest PRC

2

Cultivated Area 2

2

1993 (km )

1999 (km )

1996 (km )

1993 (%)

1999 (%)

17,100 32,200

9,600 25,800

325,500 479,200

5.2 6.7

2.9 5.4

14,700 9,500 73,500

11,700 3,700 50,700

252,600 243,100 1,300,400

5.8 3.9 5.7

4.6 1.5 3.9

Source: China Statistical Yearbook 1994 and 2000.

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Flood-affected Area as % of Cultivated Area

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network, and decision support systems. Legislation with respect to flooding is contained in the Water Law of 1988, the Flood Prevention Law of 1998, the Standard for Flood Control (GB 5021-94-1995), the Code for the Design of Levee Projects (GB 50286-98, 1998), and Regulations for Preventing Floods and on Emergency Works of 1991. Future conditions Flooding should not be a major constraint on development in the Western Region and in fact may be an advantage compared with other high-density areas on flood plains. Issues to approach with caution in the Western Region will include: • Possible adverse effects of protecting agricultural land from flooding, where the flooding is a natural mechanism for salinity control • Potential river channel and structure damage due to accelerated flows where soils are fragile and flows are confined within levee systems • Avoidance of high-value development in highflood-risk areas and generally without due regard for the flood hazard • Existence of institutional and legal mechanisms for the approval and monitoring of structural flood mitigation works in those areas where they can be justified by the returns from the development, where the overall proposals are sustainable, and the adverse effects on the environment and adjacent lands are acceptable Future management The principal issues to be coordinated for the effective management of the flood risk include (in no particular order): • Floodplains – land use planning – structural measures – development and building controls – flood emergency plans • Catchments

– land management practices – land use planning – development controls (dams, etc.) Typically, in developing countries, the aspects of floodplain and catchment controls are only loosely coordinated. Urban flooding and rural flooding need to be approached somewhat differently owing to socioeconomic differences, although neither can be considered in isolation. Future effects would be minimized if agriculture had proper regard for flood hazard and developed the flood-prone lands accordingly. Some level of flood mitigation may be essential for any irrigated cropping or pasture development in the inland areas of Gansu. However, the benefits of levees must be balanced against the impact on downstream flooding and on long-term land productivity. WATER ALLOCATION There is little effective control over water allocation to users in the Western Region except that major projects involving funding from the Central Government would be subject to some degree of control through funding approvals. It is unlikely that such approvals are tightly linked to available water resources. In true market economies, the allocation of water between users would take place according to price and consumers’ willingness to pay. In general, the allocation is managed through a system of licensing consumers, with close monitoring of the resource and of usage. In the Western Region, water prices are subsidized heavily in favor of irrigated agriculture; farmers generally pay only 30 percent of the cost.14 Subsidies are offered on the basis of ability to pay, poverty alleviation objectives, etc. In the long run, this puts industries and city dwellers at a competitive disadvantage with respect to access to water and may lead to suboptimal outcomes, that is, industries can produce a higher economic output per cubic meter of water and provide more employment. While the Government has recognized the need to reform the pricing system, it is far from ready to allow the market to determine prices:

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Three principles govern the water pricing system. First, the water price must reflect cost of supply, including operation and maintenance cost, depreciation, and other expenses. Second, it must support the prevailing economic policies in different sectors. For example, the water price for irrigation must support the national policy for agriculture. The water price must also take into account the fact that the PRC has low fresh water per capita, distributed unevenly across the country. Third, the water price will vary among user categories….15

Bulk water allocation process Bulk allocation of water to each water administration entity, be it a province, county, city, or water company, needs to be made in the best interests of the nation and of each region. Accordingly, centralized administration, with consultation with autonomous entities, is desirable. Continued emphasis on developing the northwest may require new surface water and groundwater allocations to be made for undeveloped basins. Provinces that lie within the Yellow River basin, for example, are currently constrained from further water resource development by downstream water supply commitments. These provinces may benefit, therefore, from a process of water allocation adjustments within that basin. If this is not done, the following options could be considered in providing for growth in the domestic and industrial water sectors: • Accelerating the reduction in irrigation supplies within that basin with the attendant social effects or with a high cost for accelerating implementation of water-saving technology • Constructing expensive and problematic interbasin water transfer schemes Water allocation should follow a sound assessment of the sustainable resource. Past assessments of available resources, however, have been either nonexistent (some groundwater

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systems) or technically deficient (due to simplistic assumptions, lack of reliable data, or use of average statistics), or did not fully consider the impact on the environment. Water allocation format Water allocation licenses or agreements need to contain provisions for a number of conditions and contingencies such as: • Average annual flow volumes • Seasonal and possibly weekly flows • Resource sharing of facilities such as reservoir storage contents (rule curves for each allocation) • Quality of return-flow water • Emergencies (dam or structure failure, pollution spills, flood damage, etc.) • Use of off-allocation flows, if any • Property rights to water • Resource royalties To date, no factual information has been provided about the basis of water allocation within Western River basins but anecdotal information suggests that only a few of the above conditions are dealt with in existing agreements.16 Water conservation projects Most of the rain in the northwest falls in a few summer months.Therefore, the construction of underground storage is very important. Some storage constructed in the plains is unsatisfactory because of high evaporation rates and effects on salinity.17 Others have safety problems. Therefore there is a need for investment just to maintain the current levels of water use. Better information, including runoff forecasting, is necessary to improve water conservation, flood control, and dam safety.There is also a place for microscale cistern systems in the northwest.18 Interbasin water transfers The south-north transfer project would transfer water from the Yangtze River northward to the watershort Huai, Yellow, and Hai River basins.Three alignments are under consideration:19 eastern,

central, or western (Figure 16-2). Of these, only the western route would have any impact on the Western Region. Water would be taken by gravity from new dams on two tributaries of the Yangtze in Sichuan (the Tongtian and the Yalong) to the upper Yellow River. The quantity of water would be relatively insignificant in comparison with the need, only about 14,500 m3 to 20,000 m3. Planning for the western route is less advanced than for the other two routes. If implementation proceeds, it could marginally benefit the middle reaches of the Yellow River in Gansu, Ningxia, and Inner Mongolia. However, even this would depend on the sharing of the costs by the provinces (Gansu, Ningxia, and Inner Mongolia).20 It seems improbable that in the future Gansu will have a greater capability to pay for outside water resources, especially if the cost of that water is greater than that of local sources. Also, there is no evidence that the Government attaches a high priority to the western route.21 The difficulty of the western route lies in the high altitude and mountainous terrain. Various alternative western routes are being proposed to avoid these particular difficulties.22

Scope of cooperation Sustainable management of a river requires a whole-of-catchment approach.The important aspects for coordination are water conservation, flooding, water quality, and environmental management. These issues are closely related to land management, hydropower, transport (navigable rivers), as well as soil conservation, catchment development, and land use. Effective management across administrative boundaries within a country is difficult enough but an international border introduces special requirements for cooperation within possibly vastly different economic, nationalistic, and security climates. Any cross-border cooperation should focus on areas of common interest and mutual benefit in order to facilitate agreement on the more difficult issues. It is not only for better water resource management that countries cooperate on river basin management. Cross-border disagreement over water resource sharing is not conducive to developing cross-border trade (Chapter 14). Forces for cooperation will vary depending on the priority issues and on the position within the river basin; a broad perspective across all possible cooperation sectors is desirable.

WATER LAW REFORM The Government attaches a high priority to reforming the PRC’s legal system. Continuing reform is especially necessary in relation to the management of water reserves.The main gap is the law relating to the management of river basins.23 The unclear relationship between local laws and regulations and Ministry regulation in terms of their relative legal power is the source of much disorderly management.24 The amendments to the Water Law adopted in 2002, after the research for this report was completed, provide a legal framework within which to address these issues.

International rivers of the Western Region Within the Western Region the international rivers include (among many others): • The Ertix River, which rises in Xinjiang then flows through Kazakhstan and Russia to the Arctic Ocean • The Yili River, which rises in Kazakhstan and flows through Xinjiang and back into Kazakhstan • The upper reaches of the Indus River, which originate in Tibet • The Yarlung Zangbo in Tibet, the upper reaches of the Brahmaputra, which flows through India and Bangladesh • The Nu Jiang, which originates in Tibet and Yunnan and flows into Myanmar and Thailand • The headwaters of the Mekong of Viet Nam, Thailand, and Lao PDR, including the Lancang River

INTERNATIONAL COOPERATION IN RIVER MANAGEMENT About 27 percent of the PRC’s natural runoff flows into neighboring countries,25 almost all of this across the Western Region’s borders.

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Figure 16-4 Routes for Water Transfer from the South to the North

• The Yuan Jiang (Hong or Red River), which originates in Yunnan and passes into Viet Nam and Lao PDR The Yili and Ertix rivers are the most complex and important cases for consideration given the dry climate, the potential for water resources development in Xinjiang, and the advantages to the PRC of developing cross-border trade (Chapter 14). On both rivers there is some navigation. Use of the headwaters of the Mekong within the PRC is another example where cooperation exists but more robust arrangements may be needed. International practice Examples of international river coordination include the Mekong River in Asia, the Ganges in South Asia, the Rhine in Europe, the Senqu River in Africa, and around 14 river basins that span the Canada-US border and are under the oversight of the International Joint Commission. The Ganges watersharing treaty of 1996 demonstrates that, with goodwill, it is possible to agree on a formula for

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sharing water even after long-running disputes between countries.26 The following is a summary of the steps leading to an agreement on the sharing of the Ganges River: • It commenced in the early 1960s with acceptance of the principle of sharing, agreement to discuss the amount of water, and the establishment of a forum for discussion. • Flood control became a common concern and cooperation proceeded on that aspect. • A basis for agreement emerged from the realization that, owing to insufficient water, there was a need for cooperation to optimize use by the two countries. • Negotiations became deadlocked over quantities but an interim agreement was reached in 1975 (in the face of the Farakka Dam being a fait accompli). • A five-year agreement was signed in 1977 and it established the principle of bilateralism. • The method of augmentation of flows became an issue after the agreement expired in 1982. Meetings and discussions continued between parties at various levels.

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• A new agreement in 1996 opened up potential mutual benefits in the areas of economics and finance, trade and commerce, transportation, agriculture, and science and technology. Critics have said that the agreement states absolute volumes and not resource shares.This may lead to friction during droughts, when resources fall short and demand is high. Obstacles to full realization of the potential benefits have included internal political opposition, inability to attract other participant governments, lack of funds, and poor basic infrastructure. FINANCING Water resource project funding may be by BOT for small electricity projects, but the Government has funded all significant water supply projects in Gansu to date.

Implications for policy directions The Strategic Options for the Water Sector study identified seven priority issues:27 • Lack of unified water administration and management • Gap between planning and implementation • Inadequacy of financial resources • Escalating flood damage • Water scarcity and inefficient water use • Increasing water pollution • Soil erosion and ecosystem degradation This section proposes strategies for the Western Region to resolve the first five of these issues, Chapter 5 having already reviewed the last two issues. LACK OF UNIFIED WATER ADMINISTRATION AND MANAGEMENT The following institutional reforms would bring more unity and integration to water administration and management in the Western Region:

• Adjusting the boundaries of level 3 and 4 governments where possible to correspond more closely with hydrological and topographical boundaries • Merging some local government units to create a bigger pool of technical expertise (see Chapter 15 for information on the small population size of many Western Region level 3 and 4 governments) • Organizing level 2 government environmental, land administration, and water resource bureaus along common boundaries dividing the region into its major topographical units GAP BETWEEN POLICY PLANNING AND IMPLEMENTATION Technical standards for evaluation, planning, design, and construction of water resource projects are the basis of water conservation design and project construction, and of all other water-related activities such as administering according to the law and scientifically controlling water. Good project criteria and technical standards help strengthen project management and water resources management. The Ministry of Water Resources should take steps to standardize criteria for projects, to establish technical and economic criteria and rules on water resources allocation, project construction, and management. INADEQUACY OF FINANCIAL RESOURCES In Industry Policies for the Water Sector28 the State Council laid down the basis for funding water resources projects. The policies provide for two classes of water projects. Class A projects comprise major infrastructure projects for water resource management, and Class B projects comprise water supply, secondary and tertiary irrigation and drainage systems, hydropower, and recreation projects. Class A projects Class A projects comprise both national or interprovincial projects and local government projects. There is a tendency to look to the

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Government to substantially fund most class A projects.29 However, this does not imply that there should be no charge for the water that class A projects provide. Unless such payment becomes the norm, it is unlikely that the sector will attract foreign investment. An additional major obstacle to foreign investment, whether by the private sector or by multilateral agencies, is the need for multiple approvals from different Government agencies.30 Moreover, the current approval regime is set out in many documents that various agencies have issued over the last 20 years or so, and the provisions are not always consistent.31 Promotion of cost recovery is also important for Central Government and local government projects. One of the most effective uses of Government money to develop the water resources of the Western Region would be to provide financial incentives to promote specific reforms by local governments.The Government will always have a particular interest in financial reforms, and the main thrust of these will be cost recovery from beneficiaries. Class B projects The Government’s intention is that class B projects should ultimately be financed from operating income from user fees. Funds from capital investment can come from borrowing in financial markets or from equity investment. Among the options that the Strategic Options for the Water Sector study suggested for overcoming financing problems for class B projects were the following: • Promoting water user associations to manage irrigation schemes • Separating the finances of headworks and operating regions • Drawing a clear distinction between public-good projects and commercial projects (not all public good projects are class A) • Formalizing relationships between multipurpose and service entities to promote transparency and accountability

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• Exploring options for public-private partnerships In water-scarce areas of the Western Region, water pricing should reflect the real costs of production and delivery, except under very special circumstances. Irrigation is not a good cause to subsidize; the capital cost of rural water supply to poor communities is a much better cause. ESCALATING FLOOD DAMAGES Consistent with best international practice, local governments should progress from implementing structural solutions to mitigating flood risks to improving floodplain and catchment management. They should pay particular attention to the following measures: • Controlling land use and development on valley floors, considering regional development needs and flooding risks, and using risk management analyses • Making the community aware of flood risks • Installing flood warning systems WATER SCARCITY AND INEFFICIENT WATER USE The severity of the water shortage in parts of the Western Region and the scale of inefficiencies in water use suggest that a broad range of actions will be necessary. Mobilizing uncommitted supplies In purely engineering terms, there is some potential for developing water resources to expand supply. However, the construction of reservoirs, pumping structures, and diversions should be subject to more stringent economic, financial, social, and environmental analysis. Otherwise, efficient allocation of local government resources and matching of development targets with sustainable water resource development may not be achievable. Allocating and reallocating water There is a need to improve the allocation of water among users by improving the measurement and reporting of water flows and consumption, upgrading

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the regulations governing permits, and ensuring better enforcement. Issues to be dealt with include the following: • Flow measurement • Licensing to control use • Incentives for farmers to use water more efficiently • Incentives for farmers to use less land • Incentives for administrators to use less water (more water, more income) • Preservation of water for the environment Managing demand Demand management strategies appropriate to the Western Region include the following: • Ensuring sufficient water for the living and energy sectors • Setting limits on irrigated agriculture based on available water resources (or their affordability) • Undertaking irrigated farming only on suitable lands • Allocating surface water on a whole-ofcatchment basis, taking into account the sustainable resources, land capability, water for the environment, and benefits to the farmers, the regional economy, and the nation • Allocating and managing groundwater on a resource-unit basis • Managing water resource demand through appropriate crop selection, water-saving techniques in the urban and rural areas, efficient means of water delivery, better consumer awareness of resource constraints, and better tariff structures

Notes 1 Gan Hong (1999). 2 Discussion with Gansu Water Resources Bureau by international team member, April 2001. Gansu has

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

22 23 24 25 26 27 28 29 30 31

40,261 electrified bore wells to irrigate some 15.5 million mu, and the Gansu Tenth FYP proposes to construct 1,500 new and rehabilitated wells to provide 3,000 GL. Visit by international team member, April 2001. Ministry of Water Resources and World Bank (2000). Based on a brief inspection by international team member, April 2001. Xinhua, 18 January 2001. Pan Shengzhou (2000). Duan Aiwang and Zhang Jiyang (2000). Feng Guangzhi (2000). Lei Xianlong et al. (2000). Pan Shengzhou (2001). Asian Development Bank (2000e). Hydrosult Inc. (1999). Pan Shengzhou (2001). Wei Bingcai (1996). Inquiries by international team member in Gansu and Xinjiang, April 2001. Pan Shengzhou (2001). Pan Shengzhou (2001); Cook et al. 2000), p. 112. Ministry of Water Resources (1999). Mechanisms for this are discussed in Hydrosult Inc. (1999). Speech delivered by Zeng Peiyang, Minister in charge of the State Development Planning Commission, at the Fourth Session of the Ninth National People’s Congress on 6 March 2001. Pan Shengzhou (2001). Pan Shengzhou (2001). Chen Miajian (1999). Hydrosult Inc. (1999), p. 4-3. Hossain (1997). Hydrosult Inc. (1999). State Council Decree No. 35, 1997. For example, see Pan Shengzhou (2001). Renton (1996). Lin Huawei (2000), p. 344.

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CHAPTER

17

ENVIRONMENTAL CONSERVATION AND POLLUTION CONTROL This chapter discusses ways in which local governments can enhance the extent and quality of their natural resources and environment, in addition to existing programs and activities.

Institutional arrangements This section describes the institutional arrangements for environmental conservation and pollution control at local government level. LAND ADMINISTRATION BUREAUS Under the Land Administration Law of 1998, local governments at all levels must draw up overall land use plans. Article 19 of the Law requires that these plans conform to the following principles: • Protection of agricultural land • Land reclamation to compensate for agricultural land taken for urban development • Protection and improvement of agricultural environment Article 23 requires that plans for the harnessing of rivers and lakes be dovetailed with the overall plan for land utilization. Therefore, the plans should incorporate consideration of water and soil conservation issues, which are the responsibility of Water Resource Bureaus (Chapter 16). The preparation of the plans is the responsibility of the Land Administration Bureaus. Although the Land Administration Law is clear enough on the planning responsibilities of Land Administration Bureaus, in practice the bureaus have not paid sufficient attention to these responsibilities (Table 17-1).

ENVIRONMENTAL PROTECTION BUREAUS The functions and operations of provincial and county Environmental Protection Bureaus in Western Provinces fall into three main classes: • Environmental monitoring and reporting • Regulation of industry and other pollution sources to achieve national pollution standards • Identification, recommendation, supervision, and support of projects to enhance or rehabilitate the environment, particularly the ecological conditions of degraded areas The third of these functions, ecological improvement, particularly requires a high level of collaboration and coordination with other agencies. The growth of local environmental institutions and their effectiveness is evident in the provinces, prefectures, and counties, though at a slower pace in the Western Region. For example, in Yunnan, all municipalities and counties have independent Environmental Protection Bureaus, though many were established only during the past two years. Similarly in Aksu Prefecture (Xinjiang), independent Environmental Protection Bureaus are operating in Aksu City and three of the eight counties. The other five counties each have small environmental units within the county Construction and Environment Bureau, and the establishment of the remaining five Bureaus has been proposed.

Table 17-1 Activities of Land Administration Bureaus in Xinjiang, 1998 Activities Mentioned in Department Description Bureau Yili Prefecture Gongliu County Nilek County Fuyun County Teks County

No. of Staff 700 56 60 15 70

Land Use Planning

✔

Land Registration

Collection of Taxes and Rents

Land Assessment

Dispute Resolution

✔ ✔ ✔ ✔

✔ ✔ ✔ ✔ ✔

✔ ✔ ✔ ✔

✔ ✔

Source: Office of the CPC Prefectural Party Committee, Office of Altay Prefectural Administrative Government, and Gansu Legend Culture Disseminating Co. Ltd., eds. (1999); Office of Yili Prefecture Committee (1998)

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The transition from a section within a bureau to an independent bureau results in greater operational independence and authority in environmental protection.The change also brings a substantial increase in operational staff (from two to about 10 per county bureau in Aksu Prefecture)1 and essential increases in level of staff qualification and capability; better operational planning; stronger staff management and supervision; and better opportunities for staff development. Staffing levels in the Environmental Protection Bureaus of Aksu prefecture are as follows: Aksu prefecture . . . . . . . . . 40 Aksu city . . . . . . . . . . . 23 3 Asku counties (with Environmental Protection Bureaus) . . . . . 8–23 5 Aksu counties (with Environmental Sections in Construction Bureau) . . . 1–2 In contrast, in Datong, a secondary city of Shanxi (Central Region), the Environmental Protection Bureau was established in 1973 and has a staff of 270.2 FORESTRY BUREAUS The Forestry Bureaus at prefecture and county levels are long established. All counties (at least in Yunnan and Xinjiang) have an operational Forestry Bureau. In Aksu prefecture, in addition to prefecture and county bureaus, about 80 townships and villages have a local Forestry Bureau, and there is a separate wild animal station and a forestry garden. Outstations for specific operational purposes, such as logging control and natural reserve management, are common. Forestry Bureaus are reasonably well staffed. There are a total of 550 management and technical staff in forestry offices of the Aksu prefecture (including 80 township bureaus), and about 3,300 persons employed in fieldwork. Being an agency directly responsible for resource management, the functions of the Forestry Bureaus are more specific then those of the Environmental Protection Bureaus, which have a substantial and broad coordination function.

Forestry Bureau functions include: • Regulation and control of timber extraction (now minimal) • Protection of natural forests and natural reserves, including protection from illegal logging and firewood removal, and protection from fire and damage by animals • Conservation of natural forests and natural reserves, including restoration by planting • Advice and support for ecological forest development, mostly on community land • Advice and support for commercial forestry (fruit, nut, silkworm leaves, and other nontimber products), mainly on community land • Advice and support for measures to reduce ecological degradation, such as tree planting schemes for soil stabilization and installation of methane gas generators to reduce need for firewood The short- to mid-term future of commercial production forestry in the Western Region is limited, because the remaining productive forests outside nature reserves are quite limited in extent and stock. Current reforestation and plantation establishment will result in increased capacity for timber production in the longer term. For the next one or two decades, the main functions of Western Region Forestry Bureaus should be as follows: • Forest resource conservation, particularly related to regulation of illegal logging, removal of firewood, prevention and control of plant diseases, and prevention and fighting of forest fires • Forestry extension work • Rehabilitation of degraded forest land to reduce further soil erosion and enhance water retention in catchment areas • Promotion of afforestation The Forestry Bureaus are responsible for the rehabilitation of public forest land directly under Bureau management; the Bureaus also support and manage programs for the reforestation of community land, and encourage and support villagers in planting

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trees in and around the village, on community and private land.

Information, monitoring, and reporting DATA MANAGEMENT Effective environmental management depends on reliable information about pollution from industry and the quality of the ambient environment, but monitoring results are unreliable in many Western Region counties for the following reasons: • The monitoring equipment is old and inadequate. • Monitoring staff have little opportunity for technical development. • Quality assurance and quality control practices are minimal. The consequences of unreliable data are as follows: • Environmental agencies cannot determine whether industries are complying with pollution standards, and therefore cannot make informed decisions on whether to close down any industrial plant or how much to collect in excess pollution fees. • The community cannot be reliably informed about environmental conditions. Such information is important in specific situations relating to the protection of public health, such as for ensuring that contaminated water is not being used inappropriately. More generally, information about the state of the ambient environment is an essential basis for community support for the policies and activities of the environmental agency. ENVIRONMENTAL REPORTING Effective environmental protection depends on the availability of reliable information to decision makers as well as to the interested community. The community must be informed about prevailing

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environmental conditions, the causes of any degradation, and the implications for the economy, health, and welfare, to ensure support for government policies and regulations and appropriate personal attitudes and behavior. A program of regular, structured state-of-theenvironment reporting by each level 2 government would provide a stronger foundation for policy and program formulation and raise community awareness. Inputs to each provincial report should come mainly from county Environmental Protection Bureaus.

Environmental planning REGIONAL DEVELOPMENT PLANS Increasingly, development proposals are being assessed individually for their potential environmental effects, and environmental control conditions are being applied to each new industry. The question for this report is how best to integrate environmental planning and assessment with the economic planning and assessment of projects. INDIVIDUAL PROJECT PROPOSALS In the PRC, there is a high overall rate of noncompliance with the full set of environmental regulatory requirements for new projects.3 In general, the level of compliance is better at the provincial level than at lower levels. It is hoped that routine environmental impact assessment will become more rigorous and the process will become more effective as those preparing impact statements and those assessing them gain experience. While there may be administrative solutions to this weakness, a case can be made for a simple system of environmental screening to precede the full environmental impact assessment (Figure 17-1). Thereafter, it is important that the costs of environmental protection be made part of the overall cost-benefit analysis. The early focus on conspicuous industry pollution obscures effects from other sources. As industrialpoint sources of pollution are progressively

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 17-1 Decision-Making Process for Projects

Proposed investment

Environmental screening

No Stop the project for further analysis

Yes

Decisive benefit cost analysis

Environment screening and impact analysis

No Stop the project for further analysis

Yes

Competitive contestable market

Yes Private sector provision

Market analysis

Design a suitable contractual arrangement

PSP feasibility analysis

No

PSP feasible

Yes

No Design and make public the objectives and monitoring mechanism Beneficial scope analysis

Local benefits

No Provision by central government

Yes Provision by local government

controlled, environmental effects are seen to come mainly from the following: • Effects of major regional developments • Multiple and diffuse sources of pollution, e.g., stormwater runoff and agricultural chemicals • Cumulative effects • Inadequate planning REGIONAL DEVELOPMENT PLANS Increasingly, the techniques of environmental impact assessment are being extended to assist regional planning and the evaluation of major regional development proposals. For example, the construction of a large dam has immediate local effects during construction and longer-term effects both upstream (as a result of inundation) and downstream (as a result of generally reduced river flow). The potential effects from such a proposal require more comprehensive assessment, over a wider area and over a longer time. Regional planning can require a still higher level of environmental impact assessment. For example, the issue might be, which of several locations along the river is most suitable for dam construction, or whether water should be transferred from another river. The impact assessment process then must provide for full assessment of costs and benefits, including environmental costs and benefits, of each development option. In the whole of the northwest, water resources and land resources limit the expansion of the economy. There is a need to assess the sustainability of any province-level or prefecture-level growth strategy. Examination of the Tenth FYPs for Xinjiang and Gansu does not indicate that planners have made this assessment. The European Commission4 has recommended a model for preparing regional development plans and assessing the environmental impact of the plans. It involves a staged preparation process, with concurrent and complementary activity by the development authority and the environmental authority (Figure 17-2).

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The PRC Government has reportedly adopted a related environmental impact assessment process.5 This is to involve the analysis, forecast, and evaluation of possible consequences that certain policies, planning, and projects may have on the environment. Developments, including land use schemes, water resource plans, tourism plans, and communication plans, are to be subject to this scrutiny.The approach is particularly relevant to the Western Region, where the Government should be paying particular attention to very large projects involving the exploitation of natural resources or the construction of major transport infrastructure—projects that will affect wide areas. Apart from more effective implementation of the Law, the plan needs to be reviewed by the higher level of government and an assessment made by the environmental protection agency.

Pollution control The Western Region’s industrial structure is such that, in proportion to its total industrial output, it comprises more polluting industries than the Eastern Region. WATER POLLUTION In the Western Region, industrial wastewater volumes per yuan of industrial output are above the national average (Table 17-2). The proportion of wastewater discharge that meets standards, that receives treatment, and that is treated to standard is lower in the Western Region. This is true not only as a whole but also of specific industries (Table 17-3). There are three basic reasons for this state of affairs: • Most investment in pollution control is in making new industrial projects comply with discharge regulations, and most new industrial investment is not in the Western Region. • Investment in pollution control at industrial facilities largely reflects the financial health of the enterprise.

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Figure 17-2 Regional Development Plans and Strategic Environmental Assessment

Structural funds planning process Preparation of the Regional Development Plan Role and Actions of Development Authorities

Strategic Environmental Assessment Preparation of Regional Development Plan Role and Actions of Environmental Authorities

Environment law and policy at Community national and regional levels

Assessment of the environmental situation define the environmental strengths, weaknesses and priorities for environmental protection and economic development

Baseline data on economic and social strengths & weaknesses. Identify available indicators

Environmental assessment of strategic objectives and priorities

Strategic objectives and Priorities Discussion

Contribute to Draft Plan, identifying sustainable development options

Draft Plan, including alternatives Discussion

Assessment of environmental impacts of development priorities

Assessment of development priorities and/or measures Discussion

Definition of indicators for monitoring of environmental impact of priorities

Overall assessment of the Plan

The results of the socio-economic and environmental evaluations and their Implications for the draft RDP are considered

Final version of the RDP approved by all authorities involved

The RDP is transmitted to the European Commission

Table 17-2 Industrial Water Pollution Indicators, 1999 Industrial Output

Eastern Central Western Southwest Northwest PRC

Wastewater

Total (109 yuan)

Per Enterprise (106 yuan)

Per Unit Output ML/$ million

Discharged to Standard (%)

Treated (%)

Treated to Standard (%)

5,009 1,406

173.9 99.4

418 1,025

28.1 25.8

58.9 57.5

22.0 21.1

522 333 7,271

71.7 71.1 132.4

1,126 811 604

24.5 22.6 26.5

50.1 56.7 57.1

20.9 18.7 21.4

Source: Data on industrial output and output per enterprise calculated from the China Statistical Yearbook 2000; data on water pollution calculated from China Environmental Statistics 2000.

Table 17-3 Industrial Wastewater Discharge and Treatment, 1999 Proportion of Total Discharge PRC (%)

Industry Chemicals and chemical products Paper making and paper products Smelting and pressing of ferrous metals Electric power, gas, and water Food, beverage, and tobacco industry Other industries All industries

18.1 14.1 13.3 11.0 5.5 37.9 100.0

Proportion of Discharge Treated

Proportion of Discharge Treated to Standard

Gansu (%)

Sichuan (%)

PRC (%)

Gansu (%)

Sichuan (%)

PRC (%)

Gansu (%)

Sichuan (%)

19.2 0.8 28.7 6.7 2.3 42.3 100.0

26.6 8.6 24.6 10.5 3.1 26.5 100.0

17.0 40.2 9.9 33.7 34.5 38.5 23.6

29.5 9.1 10.8 55.3 38.8 38.8 21.5

28.7 23.0 10.4 32.4 27.0 25.5 19.4

71.6 37.4 83.9 77.7 41.6 74.7 66.7

63.2 9.7 85.8 19.5 32.3 75.1 55.5

55.0 23.2 74.1 50.6 14.3 57.6 49.4

Source: Calculated from China Statistical Yearbook 2000, Gansu Yearbook 2000 and Sichuan Statistical Yearbook 2000.

Table 17-4 Industrial Air Emission and Treatment, 2000

Region Eastern Central Western Southwest Northwest PRC

Sulfur Dioxide Recovered (%)

Soot Recovered (%)

Dust Recovered (%)

20.1 37.4

94.3 91.3

86.1 80.1

24.5 26.3 26.6

83.4 91.4 91.8

77.6 72.4 82.1

Source: Calculated from China Statistical Yearbook 2001.

• Although the PRC follows the “polluter pays” principle, it pays to pollute because the financial penalties are too low. AIR POLLUTION Urban air quality is a national issue, and cities of the Western Region generally suffer no more than others. For example, according to reports from the National Environmental Monitoring Center for the period 19– 25 May 2001, of 19 provincial capital cities with a recorded air pollution index over 100 units, only five

were Western Region cities—Chongqing, Guiyang (Guizhou), Lanzhou (Gansu), Urumqi (Xinjiang), and Xining (Qinghai).The nature of urban air pollution varies according to the predominance of local specific sources. Acid gases from coal-fired furnaces, particularly from the burning of high-sulfur coal, other industrial gas emissions, and suspended particulates from industrial and rural (dust) sources are dominant pollutants in many cities.The exhaust emissions from petrol and diesel vehicles add to the levels of pollution in all cities. In the Western Region, air emissions of pollutants per unit value of industrial output are above the national average. The proportion of pollutants in emissions that treatment recovers is also below the national average (Tables 17-4 and 17-5). However, if one examines recovery rates by industry (Table 17-5), there are wide variations within each industry and between provinces. This reinforces the point that Chapter 10 makes with regard to the need for industry policy to allow the market to determine the distribution of industry across the country. There is no sense in massive

Table 17-5 Sulfur Dioxide (SO2) Emissions, 1999 Proportion of Total Emissions in Region Industry Power generation and water supply Nonferrous metals Chemicals Ferrous metals Cement Mining and quarrying Food, beverage, and tobacco Other industries All emissions

PRC (%) 36.7 17.6 7.4 4.4 5.6 2.5 2.7 23.1 100.0

Gansu (%)

Sichuan (%)

PRC (%)

Gansu (%)

Sichuan (%)

11.2 73.9 2.6 2.8 1.5 0.4 0.9 6.7 100.0

29.3 5.8 6.1 7.3 7.9 6.5 13.0 24.0 100.0

9.8 80.2 42.0 16.0 18.0 32.0 24.5 8.5 26.0

21.2 80.4 28.7 3.1 7.5 19.7 78.6 11.5 58.8

2.9 76.0 24.8 18.0 1.5 6.6 33.7 8.5 27.1

Source: Calculated from China Statistical Yearbook 2000, Gansu Yearbook 2000, and Sichuan Statistical Yearbook 2000.

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Proportion of SO2 Recovered

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investment to improve pollution control in industries that market competition will close down tomorrow anyway. In recent years, the control of industrial pollution in the Western Region has made considerable progress. In Aksu prefecture, for example, of 93 industrial plants operating in 1998, only 13 met national air and water pollution standards; the other 80 were required to cease operating until pollution levels could be reduced to comply with the standards. By May 2001, 23 plants had made the required changes and reopened; a further 14 had made substantial changes and applied for reassessment. Consistent with national policy, plants not complying with national standards by the end of June 2001 will remain closed.

In a few cases, such as the case of a city power generator, the social cost of closing the plant may be greater than the social and environmental costs associated with its continued operation. In these cases, continued operation may be permitted, subject to a contract between the operator and the local government that includes a binding commitment to upgrade the plant to the required level of performance. The contracts should provide for financial commitment, assured technological feasibility, short-term targets, and arrangements for community representation to monitor all aspects of the contract.

Nature reserve management

Figure 17-3 Cement Factory Burning Coal as Fuel, Aksu Prefecture (Xinjiang)

Unsuccessful pollution control.—Photo Dr. W. Forrest

Nature reserves of the Western Region are an extremely valuable resource, for the maintenance of biodiversity, gene pool, and scientific study, and for tourism and aesthetic uses (Chapter 4). The PRC can be justifiably proud of the magnificent scenery, geographic features, rare plants, and fascinating animals in the reserves. Not surprisingly, international experts have taken very great interest in the nature reserves of the Western Region and in threats to their conservation.6 Urgent action is needed in the Western Region in three areas: comprehensive coverage, integrated administration, and adequate funding. COMPREHENSIVE COVERAGE The reserves of the Western Region are incomplete; not all species, habitats, or ecosystems are adequately represented. Except for Tibet, only 41 percent of all nature reserves (Table 4.3) are in the Western Region, despite the great need and opportunity for more complete cover. Many of the reserves have areas that are smaller than required to sustain an adequate habitat for the flora and fauna within them. Various surveys have been undertaken or are planned with a view to extending the coverage of reserves, and resource management agencies are encouraged to propose new reserves

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to address specific situations, or to upgrade the status of existing reserves. This line of activity should be systematized and completed. That would be an important early initiative of an integrated administration. INTEGRATED ADMINISTRATION The need for improvement in the administration of nature reserves is evident on several fronts: • Some reserves remain as “paper parks,” with paper authority but no actual administrative powers and no staff or budget. • There is no cohesive system of administration and management.The array of diverse administrative arrangements includes many agencies competent in one aspect but with no particular interest in integrated reserve management. • There is no opportunity for a core group of scientific and management specialists to give advice, guidance, and on-the-ground assistance to local reserve management, and only limited opportunity for knowledge and experience from one reserve to be applied elsewhere. • The remoteness of many reserves, which initially served to protect those areas, leads to their neglect and mismanagement, and inevitably to their degradation. The cost of dispersed administration is enormous. It is unreasonable to assume that each of the bodies now administering reserves has the capacity or interest to undertake full management functions. Most administering bodies have the capacity and interest to manage a reserve for one primary purpose, the main function of that body. At best, other values of the reserve will be underdeveloped and opportunities for enhancing those values will be lost; at worst, serious mistakes will be made and damage done because of lack of knowledge. Ideally, a new national agency should be established with overall responsibility for policy, administration, and management of nature reserves.

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Corresponding agencies would be established at provincial level and, where needed, at county level. This is the model the PRC uses for the administration and management of all other resources. It enables focused specialist management of the resource and is the model used widely elsewhere. An alternative model, assigning to the Forestry Bureau full responsibility for nature reserve administration, might be considered for the Western Region in the short term (10–20 years). Normally this would be unsuitable because of internal conflicts between conservation and commercial production. But there will be very little production forestry in the Western Region for some considerable time, except for forest establishment, and the professional skills required for good forest management are relevant (though insufficient) for the management of most nature reserves. Because many (terrestrial) nature reserves are forests, nature reserve management is sometimes established as a division within a forestry department. In the absence of a single nature reserve management agency, that could be an effective model for the PRC, particularly for the Western Region. In the Western Region, at least for the next decade and probably much longer, much of the work of the Forestry Bureau will involve the replanting of forests, ecological rehabilitation, protection of forest land against damage from fire and pests, and prevention of illegal activity including the removal of timber and firewood. This should not be regarded as a permanent model, however, because of the conflict between the legitimate primary objectives of production forestry and ecosystem conservation.The cycle of harvesting and regeneration for production forestry inevitably favors some species and changes ecosystems. Moreover, ecosystem conservation involves more than management of trees, and includes fauna and nonforest ecosystems, requiring specialist knowledge not normally required by a forestry agency. Notably, international practice is for nature reserve management not to be a function of the

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Table 17-6 Some Tax Sources for Funding the Administration of Nature Reserves Tax Option

Advantages

International plane and ship travel

Taxes international travelers, many of whom are tourists Efficient collection

Disadvantages

National plane and train travel

Not primarily tourists Less efficient collection Minimal relevance to purpose

PRC-wide hotel tax

Not primarily tourists Less efficient collection Minimal relevance to purpose

Western Region hotel tax

Focus on Western Region Some (small) relevance to purpose

Not primarily tourists Less efficient collection

Entry to major reserves

Focus on tourists Acceptable in principle

Individual entry rate would need to be very high Would discourage many local visitors Relatively high cost of collection

Vehicle fuel tax

Efficient collection

Not primarily tourists Not relevant to purpose

Cigarette tax

Efficient collection Socially acceptable to nonsmokers

Not primarily tourists Not relevant to purpose Foreign tourists virtually omitted

Resource tax, e.g., on mining or coal extraction

Efficient collection Reasonably relevant to purpose

Foreign tourists largely omitted

Carbon tax (on greenhouse gas emissions)

Some relevance to purpose Reasonably efficient collection

Foreign tourists largely omitted Could be required for other purposes

environmental agency. Environmental agencies have a wider policy and regulatory function; there is potential for serious conflict of interest when the environmental regulator is also a resource manager. Local governments should likewise undertake the following measures: • Setting up a seed nursery base for local pharmaceutical plants • Establishing or improving botanical gardens to collect and protect local plant resources • Resettling and rehabilitating residents of nature reserves ADEQUATE FUNDING Virtually all reserves are seriously underfunded. Their staffs are few in number, usually undertrained and often underpaid and undermotivated, and vehicles and equipment are poorly managed and run. In pursuit of meager funds, reserve managers exploit limited commercial opportunities, often with adverse effects.

The problem of adequate funding is potentially the most difficult. At present, funding for nature reserves competes for all other demands on government. There is some useful external finance but usually for specific high-profile tasks or locations. This base situation is unlikely to change to the extent needed to overcome current deficiencies. A new source of funding is needed. The level of funding required needs further study. The current costs involved in managing nature reserves are obscure because of the dispersed nature of the agencies and the manner of allocating costs within agencies. As a starting point, a budget for nature reserve management might be estimated to be 50 percent of the current costs of the Forestry Bureau. Additional funding to such a level, above current funding, should be sought from other sources. Some form of tourist tax is most often proposed, has been used in other situations, and has merit. Some options are examined briefly in Table 17-6.

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Of the options considered, a tax on international travel or cigarette sales, or a resource or carbon tax (Chapter 5), could have promise for future development and application. Figure 17-4 Logs Confiscated by Forestry Bureau Officers, Lancang County (Yunnan)

Photo Dr. W. Forrest

Figure 17-5 Firewood Cut from Steep Hillsides in Upper Catchment of Yangtze River, Luquan County (Yunnan)

Photo Dr. W. Forrest

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Ecological remediation FORESTRY BUREAUS The roles and functions of the Forestry Bureau are of three broad classes: • Management of forest land for the production of timber and other forest produce • Operational management of natural reserves • Rehabilitation of degraded forests and establishment of new plantations The first of these roles, the management of forests for timber production, is unimportant in most of the Western Region because of the scarcity of forest land and government policy to restrict logging and conserve the remaining forest. Therefore, the main functions of the Forestry Bureau are resource conservation, particularly to prevent illegal logging (Figure 17-4) and removal of firewood (Figure 17-5), and the rehabilitation of degraded forests to reduce further soil erosion and enhance water retention within catchment areas (Figure 17-6). The Forestry Bureaus are responsible for the rehabilitation of public forest land directly under Bureau management; the Bureaus also support and manage programs for the reforestation of community land, and assist villagers in planting trees in and around the village, on community and individually owned land. The Forestry Bureaus also act to prevent further destruction of the remaining forests. A priority function of Forestry Bureau staff in Lancang County, Yunnan, for example, is to assist villagers in installing biogas generation facilities so as to reduce the continuing demand for firewood from already degraded forests (Figure 17-7). Degradation of the natural resources of the Western Region has been severe, particularly in recent decades. It has occurred largely as a result of increased population pressure for agriculture and urban development, involving logging, livestock grazing, and clearing, followed by cropping in areas with steep slopes, erosion-prone soils, or low rainfall, beyond the sustainable capacity of the land. This has been periodically exacerbated by inadequate land

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Figure 17-6 Taomur Peak Reserve, Tianshan Mountains, Xinjiang

management planning and controls. Continuing severe damage is evident in widely varied situations, including the high slopes of the Tianshan Mountains, around the Taklamakan Desert, the Loess Plateau, and the steep slopes of the mountains of Yunnan.7 Dust storms following wind erosion and flooding following soil erosion are the most conspicuous outcomes of land degradation, and productivity decline is critical. The broad issues and their importance are recognized and major programs have been introduced to reverse the trend. These include preventive policies and strategies, particularly the prohibition of logging on steep slopes and of grazing on sensitive lands, and ecological replanting programs.8 Less immediately apparent programs include the reduction of the impact on forests through the provision of substitutes for firewood. For example, a waste biogas generator reduces the demand of a household for firewood by 5 m3 each year, and can be installed at a cost equivalent to replanting tree seedlings on one hectare. It is essential to the future prosperity of the Western Region, and for the welfare of downstream provinces, that these ecological rehabilitation policies and programs continue. There is scope, however, for substantial improvement in their quality and effectiveness (see Figures 17-8 and 17-9).

Ecological research and development

Even at an elevation of 2,500 m, soil erosion continues as a result of logging and overgrazing. Planting with spruce from the local nursery is increasing the density of trees at the rate of 20–40 ha (10,000 seedlings) each year.—Photo Dr. W. Forrest

Figure 17-7 Biogas Generation, Near Dong Hui, Lancang County (Yunnan)

Waste facility beneath pigpens (left) produces methane gas for cooking (right) and light. The facility, which was installed with the help of the Forestry Bureau, reduces demand for firewood.—Photo Dr. W. Forrest

Figure 17-8 Ecological Rehabilitation in Lancang County, Yunnan Province

Considerable experience has been gained in ecological remediation, plantation, and shelterbelt establishment in the past quarter of a century since the start of major tree planting programs (stage 1 of the Three Norths Shelter Project, for example, began in 1978). Virtually all level 2 governments in the Western Region have substantial programs dealing with different forms of degradation and using techniques appropriate to local conditions (Figures 17-10 and 17-11).

Pinus simaoensis planted in 1997 at Mina Mountain, a provincial government project for the ecological rehabilitation of degraded village land, established with village labor.—Photo Dr. W. Forrest

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Figure 17-9 Shelterbelt Project in Xinjiang

One-year poplar cuttings established in new shelterbelt near Tarim River, at the edge of the Taklamakan Desert. Note wire cages for rabbit control. —Photo Dr. W. Forrest

Figure 17-10 Successful Kekeya Desert Rainbow Poplar Shelterbelt, Age 12 Years, Aksu Prefecture (Xinjiang)

Photo Dr. W. Forrest

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COST-EFFECTIVENESS OF COMMON TECHNIQUES There is a need to subject all techniques of widespread application to rigorous cost-benefit analysis. Otherwise, there could be considerable waste of public funds. Because of the adverse factors causing the local degradation, such as steep, infertile, and eroding soils or low rainfall, the task of remediation is often difficult and costly.Yet there has been relatively little development in the silvicultural techniques used, or research for the purpose of increasing long-term cost-effectiveness. There are various practices in common use where alternative approaches might be preferable, for example: • In many locations, local species have been used for plantation establishment or forest enrichment because they were known to be suitable for the site. This is appropriate where native species conservation is the primary objective, but is not necessarily most suitable for programs with multiple objectives. International experience is that many species grow faster when planted as an exotic, largely because of freedom from native pests and diseases, and can then be more productive than local species. • Most ecological plantings use fast-growing species planted as tube stock in bare soil. This might not be the most suitable technique for initial establishment in harsh conditions. Where soil is bare and stabilization is the initial, primary objective, planting with a groundcover or shrub species is likely to be more immediately successful; tree seedlings can then be established more readily in the more sheltered microsite. This approach follows nature more closely and is used, for example, for the stabilization of coastal sand dunes in many countries. • For the establishment of shelterbelts, tree seedlings are normally placed close to each other for early protection against wind erosion (interestingly, poplar species are commonly used but, being deciduous, are less effective in

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Figure 17-11 Degraded Landscape, Aksu Prefecture (Xinjiang)

winter). Wider spacing at planting would be more efficient and require less water; it would delay, though only for a short time, achieving the full benefit of the shelterbelt but would result in larger individual trees and possibly a more effective long-term result. Also, in later years, the required wind reduction effect could be retained at lower tree density, with opportunity for managed thinning of the stand. There is scope for more research into optimal spacing and thinning management for optimal benefit. • In areas of low rainfall, poplar shelterbelts are irrigated periodically throughout the year, into old age. Once they are established and at a height required for wind reduction, the wind effect could be maintained with little or no irrigation.There appears to be little information about potential water savings. These examples serve only to indicate the wide scope for research and development in ecological remediation and forest establishment. Many other countries with less forest resources than the PRC have needed to increase forest area or production, and benefited from investment in silvicultural research. The PRC’s need is relatively recent and such a program would be potentially beneficial.

Retained untreated as historical record at the time of Kekeya shelterbelt establishment.—Photo Dr. W. Forrest

efficiency and effectiveness of forest establishment and management would return good dividends. The formation of a new “Center for Steep Land Ecology” could meet this need and generally increase the scientific base for ecological programs in the province and beyond. Such a center might involve the collaborative involvement of: • The Provincial Forestry Bureau • The Forestry University of the South West • Another university in Yunnan with ecological specialist expertise • The forestry faculty of an Australian University, probably Australian National University

SPECIAL PROBLEMS There is also need for much more research into special problems specific to a particular area. Three situations appear most promising for new and increased research and development programs. Establishment of forests on steep slopes There is a need for increased research effort into the reestablishment of forests on steep slopes and eroded land in Yunnan . For example, there appears to be minimal local research capability and technical advice available to improve field-to-forest programs in Luquan County. In view of the scale of the task of restoring the ecology of the headwaters of the Yangtze River, additional investment to improve the

Desertification in Xinjiang There is a need for more R&D on techniques for ecological remediation to resist desertification in Xinjiang. There has been considerable R&D in this field but much of this effort has been either relatively short-term, usually based on fixed-term projects funded from external (foreign assistance) sources or scientific study, such as research into the botanical

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characteristics of oases. These are valuable contributions to the field, but do not give the necessary basis for continuing improvement in shelterbelt establishment and maintenance. The PRC will continue to invest heavily in programs to reverse the process of desertification and to improve regional living conditions. R&D is essential to optimize the return on this investment. Water for ecological conservation In Xinjiang, there is a need for additional investigation into water requirements for ecological conservation.There is a fundamental tension occurring between water availability and supply for diverse purposes. For example, measures to save water and reduce consumption are being investigated, partly to enable the Tarim River to flow further through the Tarim/Turpan basins. At the same time, new large-scale irrigation projects are beginning, including large-scale shelterbelts and vineyards and substantial expansion of cotton cropping.There is a risk of serious water shortage in years of low rainfall and snowfall in the catchment, or if measurable climate change occurs as a result of global warming. A World Bank project is examining water balance, potential for water saving, and engineering aspects. Additional study is needed to better understand water requirements for ecological conservation, and to ensure that the required flows are available.

Implications for environmental protection and pollution control Throughout the Western Region, Land Resources, Forestry, and Environmental Protection Bureaus are taking on new responsibilities and activities. In each case, local government bureau officials are taking on unfamiliar tasks. In Environmental Protection Bureaus in particular, young and enthusiastic officials are discharging

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difficult tasks, including law enforcement, in a field where there is yet little organizational experience and in consultation with an interested community (including the regulated industrial community), which is substantially uninformed on environmental laws, issues, policies, and objectives. In Forest Bureaus there has been relatively abrupt change from the management of forests mainly for timber production to a situation where logging is severely restricted and the priorities are forest protection and rehabilitation, including replanting. In Land Resource Bureaus, there is a need to first establish effective land use planning in accordance with the Land Administration Law of 1998 and subsequently to develop more sophisticated regional development plans along European Commission lines (see the section “Regional Development Plans”). In all three fields there are significant technological changes occurring in environmental monitoring and assessment, the use of satellite imagery, and the management of data and information. Policy and operational guidelines and instructions are issued from the Central Government through the provincial and municipal or prefecture bureau to the county. Meanwhile, the transition from a planned economy to a market economy has many implications for environmental management, for example, the need for Forestry Bureaus to divest themselves of commercial forestry operations. Monitoring and regulatory capabilities can be strengthened by: • Increasing resources to provide modern and reliable monitoring and analytical equipment • Upgrading the arrangements for ongoing quality control and quality assurance, including interlaboratory comparisons • Ensuring staff have continuing relevant training in technology and analytical techniques, scientific method for sampling, data management, data critical analysis, and laboratory management • Using electronic data management

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In this context, it is critical that there be an active program of continuing training for officers and staff at all levels. There are indications that the existing inservice programs are not adequate for current needs. Too often, for example, technical and operational guidelines are issued without training sessions being planned to explain and give supervised experience in implementation. The action plan for implementing the forestry component of the PRC’s Agenda 219 recognizes the importance of training even if the envisaged reforms have not yet been completed: To meet the need of having qualified personnel to carry out sustainable forestry development, forestry education has the goal of optimizing the structure of education and giving priority to on the job training and adult education. Inevitably, the nature and amount of training possible are constrained by inadequate resources. Officials of the Western Region have additional difficulty arising from their relative remoteness and the cost of transport. For example, serious constraints inhibit officers in Xinjiang, particularly those in the outer counties, from participating in technical exchanges with specialists from other provinces. They are clever and motivated, but professionally isolated. Formal and informal networks should be extended or created to enhance the level and effectiveness of communication. New tools are increasingly available, using modern electronic equipment and facilities such as the Internet.Training staff should become skilled in the use of these tools and be provided with

the resources to deliver effective training sessions remotely.

Notes 1 Discussion of team member with Aksu prefecture officials, April 2001. 2 Datong Municipal Environmental Protection Bureau officials, May 2001. 3 Asian Development Bank (2000e). 4 European Commission (1998), pp. 29-56. 5 People’s Daily (2000). 6 Harkness (1998). 7 These areas have remained less developed because they are less suitable or accessible, while more suitable and accessible areas were developed and changed over past centuries. The difference now is the greater rate of development and, because of their generally greater sensitivity, the greater cost of the impacts. 8 Programs implemented mainly for other purposes, including plantations for timber production and commercial plantations, have potential for both economic and ecological benefits. It is essential that these be optimally successful. The commercial chestnut plantings in Luquan County, Yunnan, are reported to have a potential annual production capacity of 1,000 t, but there appears to be no mechanism for orderly marketing. 9 Ministry of Forestry (1995).

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CHAPTER

18

URBAN DEVELOPMENT This chapter discusses strategies for accelerating and improving urban development in the Western Region.

Urban land management Most land in cities is held in the form of very limited land use rights. Urban land cannot be freely transferred or mortgaged. URBAN PLANNING Legislation The City Planning Law of 1989 lays down the basic principles for city planning. The law provides for plans at two levels: a comprehensive city plan and detailed land use plan: Article 19. City comprehensive plans should include the designated function of the city, the development goal and development size of the city, the standards, norms and criteria for the main constructions in the city and the land use structure, zoning, comprehensive arrangement for all types of development, comprehensive transportation system, water space, and green space system, planning for specific sectors and plans for short term construction thereof. Article 20. The detailed plans… should include the land use for each construction project within the planned plot, control indexes for building density and building height, general layout, utilities engineering and site engineering.

responsibility for these to local Construction Bureaus. Institutional responsibilities There is an organizational separation between urban planning as a profession and the government bureaucracy. Professional planners work in planning institutes under the auspices of the China Academy of Urban Planning and Design. At the various levels of local government there are local planning bureaus under the Ministry of Construction with professional staff who are mainly municipal engineers. In practice, City Planning Bureaus exercise control over urban development proposals with little reference to the plans. In rapidly growing urban economies, plans quickly become out of date, especially as the approval process for plans is a lengthy one. Local governments are less concerned with the technical and rational basis of city plans than with accommodating the requirements of SOEs, urban collectives, and other government agencies, and promoting development. Illegal construction and land use are common; violators go unpunished.1

Challenges With the transition to a market economy and the rapid expansion of cities, the system is facing severe Cities under the direct jurisdiction of the State challenges. These challenges include: Council (such as Chongqing), provincial capitals, and • Providing a mix of land use zonings and density cities with a population of over 500,000 must submit controls that are consistent with market their comprehensive plans to the State Council for demand approval. • Matching infrastructure to the likely The City Planning Law contains some basic development of buildings provisions for public participation. Article 28 requires a • Controlling the conversion of rural land to urban city government to publicize a plan after its adoption, uses while Article 10 permits any individual to take action. • Accommodating the redevelopment of old These basic provisions are essential for the protection industrial sites of historic and cultural sites, ethnic traditions, local • Coordinating and negotiating with different characteristics, the traditional cityscape, and the interest groups natural landscape—values that Article 14 espouses. • Managing the emergence of the informal sector The Construction Law of 1997 lays down the (for example, the City Planning Act says that procedures for construction permits and assigns temporary constructions should be demolished)

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LAND TENURE The State owns the land in urban areas. Land administration departments of local governments sell land use rights by means of public auction or tender, or by agreement. The law does not require that there be any term to the transfer of land use rights. The rights to use state land are transferable.The primary market transactions are almost entirely by agreement rather than auction or tender, although the Government is seeking to promote auctions. THE MARKET FOR THE TRANSFER OF LAND USE RIGHTS The Ministry of Land Resources describes the secondary market for the transfer of land use rights as “totally competitive.” However, there are many obstacles to the operation of the market. The major defects in the local markets are as follows: • The intervention of local government officers can cause delays and add uncertainty to the outcome of transactions. • The registration of rights is imperfect. • The ownership of land use rights is often unclear. Evidence of the lack of development of the secondary market comes from the extremely low numbers of notarized documents relating to property transactions. Despite the low levels, these numbers do not show strong growth (Table 18-1). Many urban property transactions take place without registration of title or notarized documents. Employees cannot sell the dwellings sold to them by their work units until after a specified period, and even then must first register the dwellings. CONVERSION OF AGRICULTURAL LAND The Government has long recognized the importance of carefully controlling the conversion of agricultural land to urban uses. There have been uncertainties as to the respective responsibilities of the Ministry of Construction and the Ministry of Land Resources in this regard. The Land Administration Law of 1998 now specifies in some detail the procedures for this conversion, which are mainly the responsibility of local Land Administration Bureaus.

Table 18-1 Number of Notarial Documents Relating to Property Transactions, 1996–2000 Item Business Property leases Transfer of land use rights Mortgage registration Civil Property rights Purchase and sale of houses House leases Rights to housing site

1996

1997

1998

1999

2000

40,751

36,684 36,239 34,085

37,791 87,209 35,504

35,714 70,206 58,242

30,037 72,934 48,819

84,873 55,388 71,535 70,526 53,636 231,537 322,660 435,934 451,864 503,505 61,525 41,997 42,064 57,287 37,848 53,782 82,917 37,174 66,066 87,073

Source: China Statistical Yearbook, various issues.

DEVELOPMENT DENSITIES The development densities of Western Region cities are lower than those of other regions, especially in the northwest (Table 18-2). Gross densities in cities with nonagricultural populations over a million are quite low by the standards of India and Indonesia.This suggests that the use of land in cities in the PRC is not very efficient, and the attempt to control the conversion of agricultural land by administrative and regulatory means has not been effective. If urban planning has failed to make efficient use of land in the past, it will need the help of market forces to succeed in the Table 18-2 Population Per Hectare in Cities, 1999 Region Eastern Southeast Northeast Central Western Southwest Northwest PRC

Cities With Population > 1 Million

Other Cities

All Cities

137.0 129.1 103.6

83.1 98.0 53.4

103.5 116.7 108.4

125.4 98.5 128.7

90.7 81.7 91.1

105.1 89.3 107.1

Source: Calculated by consultants from Urban Statistical Yearbook of China 2000. Note: PRC statistics normally express population density with reference to administrative boundaries; for cities the statistics refer to the population within urban district boundaries. However, urban districts include rural areas and rural populations, so these density statistics are not meaningful for discussing the management of urban development. For this table, the nonagricultural population was divided by the developed area to calculate densities.

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future. In a market economy, density would normally reflect per capita incomes (which affect ability to afford larger homes and the demand for nonresidential land uses) and land prices (which is the main influence on density). Land prices are normally higher in large cities; hence, the higher densities.

Urban infrastructure The urban areas of the Western Region have much poorer urban infrastructure than those of the Eastern Region. Urban infrastructure is indispensable for developing business and improving the welfare of residents. The challenge for planners is how to ensure that investment in infrastructure is consistent with local priorities for achieving economic growth.

Table 18-3 Urban Water Supply, by Region, 1999

Region Eastern Southeast Northeast Central Western Southwest Northwest PRC

No. of Citiesa

Total Population (millions)

Nonfarm Population (millions)

Annual Water Consumption (m3 per capita)

55 42 85

55.9 65.1 79.8

37.2 43.4 49.0

110.5 67.2 77.0

30 24 236

39 .4 20.0 260.2

17.4 12.6 159.6

80.1 65.8 81.4

Source: Urban Statistical Yearbook of China 2000. a Data relate to cities at prefecture level and above.

URBAN WATER SUPPLY Domestic supply The level of service of urban water supply normally reflects income and the cost of supply. Per capita water consumption in the cities is thus highest in the southeast PRC, where water is relatively abundant and cities are rich. Being a necessity, water has an income elasticity of demand less than unity, and in the northwest the shortage of water rather than income differences largely explains the subregion’s lower per capita water consumption (Tables 18-3 and 18-4). The per capita consumption in the Western Region is relatively high for the living standards. The consumption figures probably include a high proportion of nonrevenue water and leakage. Industrial supply Industry uses much more water than is normal in other countries. In fact, less than half of water consumption in cities is for personal use (Table 18-5). The reduction in industrial consumption is partly offsetting the increase in domestic consumption. It would be good if this were because of more efficient use of water and more recycling by industry. Unfortunately, the numbers in Table 18-5 relate only to the largest cities; industrial restructuring probably explains part of the reduction, and water use by industry may be increasing in secondary towns and cities. At any rate, Table 18-5 indicates that reduced water use by industry could help meet much of the growth in domestic demand over the next few years.

Table 18-4 Per Capita Consumption of Potable Water in Cities, 1996 and 2000

Region Eastern Central Western Southwest Northwest PRC

1996 (L/d)

2000 (L/d)

Average Annual Increase (%)

220 203

243 202

2.4 -0.2

194 173 208

207 169 220

1.6 -0.5 1.4

Source: China Statistical Yearbook 2001 and 1997.

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URBAN SANITATION Each of the main components of urban sanitation systems—sanitation in dwellings, sewerage, wastewater treatment, and solid waste management—is much inferior to that in the Eastern Region. Household sanitation systems The proportion of households with WCs is very much lower than the proportion with piped water supply (Table 18-6).

Table 18-5 Consumption of Water in Cities, by Use, 1996 and 2000 1996 Region Eastern Central Western Southwest Northwest PRC

2000

Rate of Increase

Residential a (Mt)

Industrial (Mt)

Residential (Mt)

Industrial (Mt)

Residential %

Industrial %

8,801 4,924

11,806 9,772

11,055 5,485

10,579 8,378

5.86 2.73

–2.71 –3.77

1,856 1,125 16,707

2,773 1,831 26,181

2,239 1,221 20,000

2,329 1,507 22,792

4.80 2.07 4.60

–4.26 –4.76 –3.41

Source: China Statistical Yearbook of China 2001. a Refers to the water consumption of households for daily life and the water consumption of public welfare facilities, including the consumption of restaurants, hotels, hospitals, barber shops, public bathhouses, laundries, swimming pools, shops, schools, institutions, army units, and other units.

Many households are dependent on public toilets. This is an indicator that the requirements for housing investment include upgrading or replacing existing housing stock as well as expanding the housing stock. Sewerage On average, sewerage systems in the Western Region are less than half as extensive as water supply reticulation. Sewerage systems in both the Central and Eastern regions are much more extensive (Table 18-7). Wastewater treatment Most of the wastewater that the sewerage systems collect does not receive any treatment. The capacity of sewage treatment plants in the northwest is equivalent to only 11.4 percent of the water supply volume (Table 18-7). The impact of the lack of treatment on water quality is especially serious in the northwest, where the treatment plants have least capacity and they discharge the wastewater into receiving waters that are much less in volume than those in the southwest. Solid waste management The PRC disposes of its municipal solid waste through sanitary landfills, composting, and incineration. However, classified collection of solid

Table 18-6 Households with Piped Water Supply and WCs, 1998 (%) Source of Water Supply (%) Regiona PRC Western Provincial cities Prefecture cities Southwest counties Northwest counties

Tap Water

Tubewell

Others

Total

WCs (%)

46.5

22.5

31.0

100.0

23.1

92.2 85.3 24.1 20.0

6.6 10.8 14.6 19.0

1.2 3.9 61.3 61.0

100.0 100.0 100.0 100.0

63.2 58.4 4.1 3.7

Source: Calculated from Ministry of Health (1999). a The survey covered particular localities only, and these may not be fully representative of each type of area.

Table 18-7 Levels of Urban Sanitation Service, 1999

Region Eastern Central Western Southwest Northwest PRC

Length of Sewers/Length of Water Pipesa (%)

Capacity of Sewage Treatment Plantsb (%)

Garbage Collection per Capitac (t/yr)

58.9 57.9

24.8 14.9

0.33 0.20

47.7 47.8 56.5

18.2 11.4 19.9

0.26 0.26 0.28

Source: Calculated from the China Statistical Yearbook 2000. a Total length of sewers as a percentage of the total length of water pipes.. b As a percentage of water supply volume. The capacity refers to the design capacity of the sewage treatment works. c Per capita of the urban population.

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waste is rare, technologies for collection and transport are often primitive, and landfill techniques substandard.The adoption of classified collection would enable cities to reduce the disposal volumes by up to 80 percent. URBAN ROADS In the provision of urban roads the Western Region cities compare favorably with the rest of the country. This possibly reflects the smaller size and lower densities of Western Region cities (Table 18-8). Table 18-8 Urban Roads, by Region,a 1999

Region

No. of Cities

Eastern Southeast 55 Northeast 42 Central 85 Western Southwest 30 Northwest 24 PRC 236

Total Population (millions)

Nonfarm Population (millions)

Population Average Densityb Road Space c (persons/ha) (m2 per capita)

55.9 65.1 79.8

37.2 43.4 49.0

103.5 116.7 108.4

6.8 5.6 4.1

39.4 20.0 260.2

17.4 12.6 159.6

105.1 89.3 107.0

10.3 38.6 5.9

Source: Urban Statistical Yearbook of China 2000. a Data relate to cities at prefecture level and above. b Nonfarm population divided by the built-up area. c Roads with a paved surface and wider than 3.5 m.

The derived numbers in Table 18-8 are indicative rather than precise measures. However, it does seem that urban road investment has been given too high a priority in the Western Region relative to the need for sewerage and wastewater infrastructure.

Housing In small cities and towns, most residents own their own homes, which they have built or otherwise acquired on their own. In the larger cities, the sale of SOE-owned apartments at subsidized prices, together with the sale of commercially priced commodity housing, is boosting homeownership.

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HOUSING SUPPLY AND DEMAND In terms of total floor area constructed, urban housing construction has been expanding at an annual rate of between 5 percent and 18 percent since 1995. The main drivers of this increase are higher incomes, and expanding urban populations. Higher incomes lead to a demand for bigger homes. As homes are still quite small (an average of 9.8 m2 net living space per person), the level of urbanization is still low, and housing expenditure is only 4.2 percent of total living expenditures, the expansion of the housing construction industry could run for many years yet. The industry is also making a significant contribution to creating new jobs, at the rate of one new construction job for every 10 m2 of increase in output. An increase in demand for consumer durables accompanies the increase in new housing construction. However, there are some longer-term threats to the continuation of these desirable trends. For various reasons, affordability will eventually start to decline. Downward pressures on wages, the removal of Government subsidies, the increasing cost of providing serviced sites as cities expand could all affect affordability. Sources of finance may become less available. HOUSING SUBSIDIES FOR LOW-INCOME GROUPS The Ministry of Construction advocates housing subsidies for low-income groups.2 Singapore and Hong Kong, China are commonly cited as examples of the successful application of subsidized housing for low-income groups. However, important factors that contributed to the success of public housing schemes in Hong Kong, China are not valid in the Western Region. Among the important differences are the following: • Relatively high incomes made housing more affordable and provided the tax base for subsidies. • High land prices necessitated high-rise forms of residential development. Government investment in housing crowds out private investment. All income groups would be

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willing and able to finance housing construction if the land rights and services were available. High-rise forms of residential development are not necessary in most of the cities of the Western Region. In some of the northern cities, the need for district heating systems may offer some advantages to the largescale development of high-density housing schemes.

Table 18-10 Fiscal Revenue Per Capita in Cities, 1999

HOME OWNERSHIP Nearly half the homes in Western Region cities are in private ownership, similar to the national average (Table 18-9). With a high level of private ownership, the private sector should be dominating the industry. In fact, however, housing providers are still predominantly public sector.

Source: Calculated from Urban Statistical Yearbook of China 2000.

Financing urban development The cities of the Western Region have fewer financial resources than those of the Eastern Region. This is evident in terms of average household incomes, finances of city governments, and regional GDP. FISCAL REVENUES City governments in the Western Region have very low fiscal revenues per capita in comparison with cities in the Eastern Region (Table 18-10).

Region Eastern Central Western Northwest Southwest PRC

No. of Cities

Provincial Capitals (yuan)

Other Cities (yuan)

97 85

2,570 1,041

851 604

30 24 236

1,025 821 1,806

524 391 657

Most Western Region cities will therefore not be able to grow at nearly the same pace as Eastern Region cities. In the short term, fiscal transfers can provide the necessary funds for infrastructure investment. Fiscal transfers will be especially necessary in those cities that are not provincial capitals. UTILITY REVENUES In 1998 SDPC and the Ministry of Construction issued a notice laying down the principles for charging for urban water supply and wastewater treatment.3 However, local governments have been very slow to act. In October 2000, SDPC issued a further notice that referred to the need to implement the 1998 notice.4 In November 2000, the State Council issued an advice that again called for speeding up reforms of water prices. Finally, in August 2001, the Ministry of Construction’s Advice on Construction in the Western Region advocated accelerating tariff reforms in urban

Table 18-9 Home Ownership in Cities, 1999 Floor Area per Person Region Eastern Central Western Southwest Northwest PRC

Private Ownership

All Cities (m2)

Provincial Cities (m2)

Other Cities (m2)

All Cities (%)

Provincial Cities (%)

Other Cities (%)

21.8 18.5

21.0 18.9

18.7 18.3

49.7 47.3

47.8 34.9

54.7 50.9

20.7 17.8 20.3

20.8 19.2 20.0

20.5 17.0 18.6

46.3 47.3 48.5

39.9 27.8 39.3

50.6 60.4 53.5

Source: Urban Construction Yearbook 2000.

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Figure 18-1 Urban Household Expenditure, 1999

900

Expenditure on particular items (yuan)

800 700 600 500 400 300 200 100 0 1,000

2,000

3,000

4,000 5,000 6,000 7,000 Total expenditure (yuan)

Clothing Medicine and medical service Education

8,000

9,000

Residence Water, electricity, fuel and others

Source: China Statistical Yearbook, 2000

Table 18-11 Average Annual Expenditures of Urban Households, 1999

Region Southwest Chongqing Sichuan Guizhou Yunnan Tibet Guangxi Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Total Household Utilities Expenditure Expenditure Water Electricity (yuan) (yuan) (yuan)

Utilities/Total Water (%)

Electricity (%)

5,444 4,499 3,964 4,941 5,309 4,587

37 35 34 28 10 43

140 124 111 101 63 128

0.68 0.78 0.85 0.56 0.19 0.94

2.6 2.8 2.8 2.0 1.2 2.8

3,953 3,682 3,904 3,548 4,164 3,469

21 11 16 18 16 14

72 44 51 65 54 71

0.52 0.31 0.42 0.51 0.39 0.41

1.8 1.2 1.3 1.8 1.3 2.0

Source: China Statistical Yearbook of Prices and Urban Household Survey 2000

infrastructure systems.5 It recognized the importance of raising water tariffs to water conservation. Financial and economic reforms at the center might work better than the fiat approach. It seems clear that it is practicable to raise tariffs, but local governments have been slow to do so. As is normal for a necessity, household expenditure on utilities does not increase much with income (Figure 18-1).

362

However, this also suggests that there is scope for raising tariffs for consumption above a minimum level of, say, 50 L/d. Supporting this conclusion is the fact that household expenditure on water is actually much less in the water-short provinces than in the water-abundant provinces (Table 18-11). The difference in expenditure is much greater than the difference in per capita consumption (Table 18-3). PRIVATE SECTOR INVESTMENT IN INFRASTRUCTURE The Ministry of Construction advocates an expansion of private investment in urban infrastructure in the Western Region through build-operate-transfer (BOT) arrangements.6 The BOT model involves a company or consortium bidding for a concession from a local government to build and operate a water facility for a concession period, and transferring ownership to the local government at the end of the concession period. The first BOT scheme for water supply in the PRC is in Chengdu (Sichuan), the largest city in the Western Region after Chongqing. The scheme is complex, involving agreements between many different parties (Figure 18-2). There is no comprehensive BOT law in the PRC, so the legal arrangements can be difficult to complete and expensive. It is likely that BOT will only be practicable in the larger cities, and there are very few of these in the Western Region. For smaller cities, there are alternatives for securing private sector involvement in water supply, namely, service contracts and management contracts. Service contracts, whereby the local government contracts out discrete functions such as meter reading and billing and collection, are common internationally. In India, contracts for the management of specific facilities are common, and provide significant gains in efficiency. REAL ESTATE INVESTMENT Legal framework The Administration of the Urban Real Estate Law of 1994 provides a comprehensive legal framework for

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Figure 18-2 Agreements for the Chengdu No. 6 B Water Treatment Plant

Guarantee Chengdu General Waterworks Company

Chengdu Government Off t ake a gree men t

Concession agreement

Financing agreement

ADB

ing nc a n Fi

Commercial Banks

Marubeni, 40%

nt me e re ag

Construction contract

Commercial risk guarantee European Investment Bank

, Shareholders agreement

Project Company t en em re ag es vic er ls ca ni ch Te

Funded participation agreement

Vivendi, 60%

Consortium of Vivendi affiliates

Vivendi

Source: Silk and Black (2000).

the real estate industry. In particular, it provides for transactions in real estate and for the mortgage of real estate.

Even adding “construction” to the “real estate” category still brings the PRC figure to only 1.9 percent.

Level of investment The PRC defines real estate investment as comprising buildings and associated site preparation and infrastructure, but excluding the cost of land. By this seemingly broad definition, real estate investment accounted for only 0.8 percent of total investment in fixed assets in 2000. Residential buildings account for over 80 percent of real estate investment in the PRC. While it is difficult to find exact international comparisons, it is sufficient to point out that in Australia buildings and structures account for over 25 percent of all capital investment.

Enterprises undertaking real estate investment SOEs and COEs account for a declining proportion of real estate investment—only 37.1 percent in 2000. Increasingly, real estate investment is by “other domestic funded enterprises,” a category that includes shareholding units, joint-ownership units, and individuals (in each case, other than enterprises or individuals from Hong Kong, China,Taipei,China, or foreign countries). In the Western Region,“other domestic funded enterprises” account for about 60 percent of real estate investment (Table 18-12).

Table 18-12 Real Estate Investment, by Ownership of Enterprise, 2000

Eastern Central Western Southwest Northwest PRC

SOE (%)

COE (%)

Other Domestic-funded Enterprises (%)

Funded by Entrepreneurs from Hong Kong, China, Macau, and Taipei,China (%)

FIE (%)

Total (%)

23.3 31.9

15.0 9.8

44.5 45.9

12.7 8.9

4.6 3.5

100.0 100.0

18.5 24.8 24.3

9.2 9.4 12.8

61.3 59.7 48.1

7.5 3.3 10.6

3.4 2.9 4.1

100.0 100.0 100.0

Source: Statistical Yearbook of China 2001.

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Sources of funds The Eastern Region accounts for 75 percent of the PRC’s real estate investment. In the Western Region, real estate investment is stronger (relative to urban population) in the southwest than in the northwest (Table 18-13). Domestic loans account for only 23 percent of the funds invested in real estate. Since property is an obvious form of collateral, and since real estate investment is relatively weak in the PRC, it seems that noncommercial or nonmarket factors are directing investment in other directions (see Chapter 3). However, reforms to change this may not benefit the Western Region because most real estate investment is in the Eastern Region.

improvements in urban planning practice are nevertheless practicable. Important practicable reforms include the following: • More public participation so that there is a wider appreciation of the contents of plans and so that public support can strengthen plans (the City Planning Law provides for this, but unfortunately local governments do not adequately follow the law) • Rationalization of the law on change of use (the City Planning Law does not cover change of use) • Separation of regulatory functions of local governments from management and development functions

Implications for policies for urban development While the level of urbanization is low, not all parts of the Western Region are equally suitable for urban development (the City Planning Law does not permit new urban development except in areas where there are ample water resources). The low level of urbanization is a consequence of past macroeconomic policies, not failures in urban development policies. However, good urban management can promote sustainable urban development and improve the quality of urban environments. UPDATING URBAN PLANNING Reform of urban planning cannot take place other than as part of the wider process of economic and political reform.7 Within this broad constraint

PROMOTING THE URBAN LAND MARKET The Government recognizes the deficiencies in the operation of the urban land market. Among the reforms that it intends to make are the following: • Introducing regulations and technical codes for land information collection and use • Introducing a land registration system in large and medium cities • Bringing transparency to the primary market for land use rights by increasing sale of rights by auction or tender and reducing disposals by agreement • Strengthening the secondary market for land use rights in urban areas by simplifying transfer procedures, clarifying ownership, disposing of government property rights, and expanding registration of land use rights While these reforms are important, the most important reform of all is for local governments to become regulators of the market rather than active participants in real estate development.

Table 18-13 Real Estate Investment, by Source of Funds, 2000

Region

State Domestic Loans Bonds Foreign Investment Fundraising (million yuan) (million yuan) (million yuan) (million yuan) (million yuan)

Eastern Central Southwest Northwest PRC

495 109 37 46 687

108,080 11,790 13,834 4,803 138,508

217 80 43 8 348

14,929 1,019 780 142 16,870

Source: China Yearbook of Statistics 2001.

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112,480 23,332 17,543 8,066 161,421

Others (million yuan)

Total (million yuan)

215,895 26,834 27,205 11,995 281,929

452,097 63,164 59,442 25,060 599,763

IMPROVING URBAN INFRASTRUCTURE The Western Region cities suffer from inadequate fiscal revenues and poor infrastructure. These twin problems indicate a need to promote the role of the private sector in urban development. Measures consistent with this approach include the following: • Confining government investment to infrastructure rather than buildings • Progressively increasing user charges (for water supply, sewerage, heating supply, solid waste collection, and public transport); higher user charges would encourage efficient use of infrastructure, discourage wasteful consumption, and reduce subsidies to higher-income groups and to nondomestic users ENCOURAGING THE HOUSING MARKET To stimulate the real estate industry, there be must be real, strong, and effective demand for housing. While incomes will always put a ceiling on this demand, the availability of housing finance is also crucial. Even high-income people must normally borrow to buy a house. Since the legal framework for the real estate transactions, including mortgages, has been in place since 1994, the main impediment holding back the housing market appears to be lack of competition in the financial sector (Chapter 3). Local governments should provide a steady supply of serviced sites in cities and towns for private sector and self-build development. If necessary, local governments can subsidize the sale prices of housing plots for low-cost housing on the basis of the future revenue streams from taxes following the construction of dwellings. This could minimize illegal construction. In the short term, there will be a place for public housing. However, the Government should consolidate its provision under Municipal Housing Bureaus, and allow SOEs to concentrate on their core business activities. PROMOTING URBAN DEVELOPMENT Under the Tenth FYP, the Government intends to push urbanization as a major task facilitating the

development of the national economy.8 There are two distinct strategies: • Developing small cities and towns9 • Developing major cities in key economic zones of the Western Region (identified as the economic zones along the Tongguan-LanzhouUrumqi line, the upper reaches of the Yangtze River, and the Nanning-Guiyang-Kunming line) to promote the development of the surrounding areas In both cases, caution is appropriate. International experience in accelerating the construction of inland cities to promote economic development is overwhelmingly negative. More importantly, the evidence in this chapter is that Western Region cities already lack adequate infrastructure and adequate fiscal resources. Additionally, in the northwest water shortages already constrain urban development. Investment in urban infrastructure should be demand-led rather than attempt to lead demand. It should also be consistent with the available water resources (as indeed the City Planning Law requires). The level of urbanization in the PRC is low for its stage of economic development. The best way to rectify this to gradually remove the preferential access to investment funds that SOEs in the secondary sector enjoy, and allow private enterprises in the tertiary sector to expand faster.

Notes 1 Wang Jingxia (1999). 2 Ministry of Construction (2001a). 3 State Development Planning Commission and Ministry of Construction (1998). 4 State Development Planning Commission (2000b). 5 State Development Planning Commission (2000b). 6 State Development Planning Commission (2000b). 7 See Tang (2000). 8 Ministry of Construction (2001b). 9 State Council (2000).

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CHAPTER

19

RURAL DEVELOPMENT Whatever the Government’s development strategies over the next 20 years, the majority of the people in the Western Region will still live in rural areas. Poverty will remain largely a rural phenomenon, albeit less so than now. Therefore, local governments will want to vigorously pursue rural development. This chapter examines the relative priorities for rural development in the Western Region.

Rural infrastructure Improvements in rural infrastructure have greatly contributed to the economic growth of the Western Region and to poverty alleviation.The policy issue now is the extent to which there is room for further productive investment in the various rural infrastructure sectors. TELEPHONES Access to telephones is much less common in the Western Region than in the rest of rural PRC. Only 9.2 percent of rural households in the southwest have telephones, and only 13.5 percent in the northwest, compared with 44.6 percent in the Eastern Region. Only 19.2 percent of Western Region villages have telephones (Table 19-1). Telephone service is the infrastructure item most likely to be absent in a poverty village, after tap water. With the ICT revolution, telephone access is becoming more important. There is a risk of a “digital divide” between those who have access to the potential benefits of ICT and knowledge and those who do not.

The poverty alleviation programs make no special provision for the use of information technology to overcome the problems of isolation, poor education, and lack of timely information. POST OFFICES Many villages in the Western Region lack a post office (Table 19-1). Part of the importance of a post office lies in the financial services that post offices provide in the PRC. TELEVISION Even the most remote village, with terrible access roads, can be instantaneously linked to the contemporary world through satellite television. It is likely that nearly all the 88.9 percent of villages in the Western Region with electricity also have TV. Under a project funded by the Central TV and Broadcasting Bureau in Beijing, all 157 administrative villages of Lancang county (Yunnan) have received a satellite dish and two TV sets. Only half of these villages are using the TVs. The other half are waiting to be linked into the electricity grid; this will probably happen by the end of 2001. The

Table 19-1 Proportion of Villages with Infrastructure, 1999 Region PRC Eastern Western Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Inner Mongolia

Electricity (%)

Post Office (%)

Telephones (%)

Roads (%)

Tap Water (%)

Health Units (%)

98.1 100.0 88.9 91.9 100.0 95.6 79.5 79.8 18.0 95.0 87.6 77.2 95.3 80.0 97.1

92.4 100.0 75.1 94.5 100.0 70.6 31.8 84.4 15.2 91.9 87.5 51.8 80.6 72.8 86.5

48.8 76.6 19.2 27.4 12.1 15.0 6.1 81.9 1.4 14.3 9.0 4.7 15.9 26.5 6.8

89.4 94.1 79.3 86.3 74.5 82.2 70.3 76.0 73.9 84.7 82.3 77.9 82.0 83.5 71.0

17.8 33.8 9.1 8.0 9.9 7.1 9.6 16.6 2.0 8.2 7.9 15.7 10.8 15.6 8.0

89.9

98.0 87.0 85.1 81.1 98.7 51.6 88.6 90.4 86.2 90.8 85.1 94.1

Source: Calculated from Western China Rural Statistics 2000, China Civil Affairs Statistical Yearbook 2001, and China Social Statistics 2000. Note: These figures may understate the provision of infrastructure in that it is probable that the average size of villages lacking infrastructure is smaller than that of villages with infrastructure. Overall, the average village population is about 980 in the northwest and about 1,280 in the southwest.

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Box 19-1 A Lahu Minority Village in Lancang County, Southern Yunnan

A

fter travelling for two hours via very rough roads in a modern Japanese jeep we arrived at the village. By tractor the journey from Lancang town would have taken 15 hours and by walking 5 days. The area was mountainous and the road difficult. On reaching the top of the last hill, the first sight was a very bright, white satellite dish amongst the thatched roofs of the village huts. What difference had the arrival of TV and electricity made to this isolated village? The vast informational gap that normally separates the poor and isolated from the mainstream of society had collapsed over night. Every evening, the entire village of 200 decamped to the Village Committee room to watch the 7 pm news. The most talked about news topic during the last month had been the US spy plane. The schoolteachers thought that the Chinese government had been too lenient in its handling of the event. The animated conversation that followed could

have taken place in any urban living room in any part of the world. The teachers also pointed out the big difference that the arrival of electricity and television had made to the students. For years, science had been taught but the children had difficulty understanding what electricity was. Now it was easier to deal with this problem. The school included boarding facilities for grade 6 students who lived too far away to commute daily. Each bedroom now had a light bulb, allowing students to study after dark. The teachers were very keen to further their studies and one of them was about to be examined in four subjects over the weekend. He had purchased the necessary textbooks at the local town a year ago and was now ready for the test. When we explained that it was now possible to study and undertake exams using computers and the Internet, he had no trouble in understanding the concept and appreciating what a difference this kind of technology could make.

Source: Field visit by team members, April 2001.—Photo Dr. M. Vicziany

impact of TV on people’s lives is substantial and almost immediate (Box 19-1). In Yunnan, the 211 Project for installing satellite TV receiving stations was started in 1991. By the end of 1998, 21,553 stations had been built and radio broadcasts and TV programs reached between 81 percent and 84 percent of the population of Yunnan. With some 3,000 villages already linked up for satellite communication, the focus is increasingly shifting to scotoma villages.1 Despite this, TV and radio coverage in Yunnan is much lower than in the rest of the PRC by about 5–6 percent, and, relative to the eastern seaboard, by 10 percent. About 600,000 people in remote, poor areas do not have access to modern communication. Providing modern communications via satellite TV, radios, and mobile phones provides the poor with timely and current information. It increases choice, whether regarding the merchant to whom vegetables can be sold or regarding the town to migrate to during the next construction season. ROADS There is considerable scope for transport to play a proactive role in poverty alleviation.2 Certainly inadequate transport and low access contribute to

poverty.The World Bank experience is that the provision of all-weather roads helps reduce rural poverty, especially when combined with programs for socioeconomic development. However, the World Bank admits that“relatively little is known about the impact of the Bank’s transport interventions on the welfare of the poor.”3 While transport improvements may lead to higher incomes for some, others, including the very poor, may experience welfare and income losses.The poor may suffer from the displacement of nonmotorized vehicles, pedestrian fatalities, or the relocation of labor- intensive manufacturing. The impact of transport improvements may be direct or indirect.Transport has a direct impact on poverty where an improvement in facilities or a change in policy leads directly to a desirable outcome, for example, where the construction of an all-weather local road leads to an expansion of employment opportunities in local industry.Transport improvements have an indirect impact when investment in a new facility causes a chain reaction that creates upstream or downstream employment benefits. For example, port privatization and trade facilitation may lower container movement costs, thereby increasing the competitiveness of the agricultural processing industries and cash crop sales

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to the industries by poor farmers. While the indirect effects of transport improvements may be very important, it is difficult to forecast their scale. The direct effects of transport improvements on poverty appear to be greatest in rural areas.Targeting can be effective because the rural poor are a relatively homogeneous group in terms of transport needs. Since access to markets and to health and social services is essential to daily life, the provision of basic, all-weather access roads and the improvement of transport services contribute directly to rural poverty alleviation. Yunnan province is arguably one of the worst affected by isolation and weather. It is also the poorest province by most standard measures. An estimated 70 percent of Yunnan’s villages are in remote areas, and only 76 percent of villages have road access. Villages in Yunnan that are served by roads may still be relatively inaccessible because of remoteness, the condition of the road, or the lack of suitable vehicles.4 The lack of such roads is a major factor in the poverty of the Western Region for the following reasons: • The absence of an all-weather road separates the village from local markets and this in turn acts as an enormous constraint on the relevance of microcredit: without access to diversified markets, there is no point in taking out a loan. • When people and animals fall ill or have an accident or women have difficult pregnancies, the lack of an all-weather road makes it impossible to seek timely help from the local town where the bulk of the medical and veterinary services are based. All-weather roads make it possible to rationalize the use of these scarce medical services, given that there are insufficient funds to build an extensive medical infrastructure that reaches the villages. • Roads bring essential imports into the village all year round with immediate benefit to the peasants who can now buy, for example, coal as they need it rather than only from local

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merchants in winter when the village is cut off from the town. In Guangxi and Guizhou an average family of four needs about 3,000 kg of coal per year. A strong man can carry only 50 kg at a time along an all-weather road. Moreover, poor households that lack cash flow prefer to buy essential commodities in small quantities to avoid borrowing money and paying interest. But the lack of an all-weather road pushes peasant into the hands of the village middleman who has the resources to warehouse coal locally.5 The road standard should match the traffic. At present, roads in the Western Region seem to be either highways or roads that are so primitive as to be almost impassable or dangerous. More often, something in between is needed. Common sense is also needed—the foregoing account is not intended to provide a justification for a road construction mania that infringes on delicate ecological areas or forests. New information automatically calls for allweather roads so that the physical connections between remote villages and the towns can be established. And the movement of people, goods, animals, and services along all-weather roads needs to be assured through programs that deliver good health to the peasants and their animals. As a recent review by the ADB argues:6 …many of the expected gains from electrification have failed to materialize. In particular, the notion that electricity alone can push ahead development and growth in the absence of other factors and forms of infrastructure has been discredited.

What this does not, however, show is that in provinces such as Yunnan that are subjected to heavy rainfall, these roads are accessible only during the dry season and virtually unusable during the wet season. RURAL WATER SUPPLY AND SANITATION At the end of 1999, only 9.1 percent of villages in the Western Region had access to tap water. One study of Guangxi and Guizhou7 reports that the trip to collect

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

drinking water for humans and animals typically ranges from a 20-minute to an hour’s walk from villages and that water is collected between two and four times a day. On average, a family of four to five people, with one ox and two pigs, uses a minimum of 150 kg of water per day. Each family spends on average two hours every day fetching water—in a village of 200 households, that means a total of 400 hours each day are spent fetching water. The economic and social cost of this is self-evident: • Water shortages constrain animal husbandry and the cultivation of fruit trees and vegetables. Given the difficulty of fetching water for human consumption, some families are reluctant to expand the number of their farm animals and trees. • Water shortages give rise to disease and death. Medical science has established that the greater the quantity of water, the greater the dilution of pollutants and microbes in the water supply and, hence, the lower the risk of serious illness or death. Water-borne diseases, particularly diarrhea and typhoid, are a major problem in the Western Region. Women and children are the main victims (Chapter 12). • Water shortages give rise to fights between neighboring villages over water supplies, an issue that calls for intervillage cooperation. Most of the above problems are soluble. However, what cannot be solved is the absolute shortage of water during droughts. A three-year drought in northern Gansu has virtually wiped out the benefits of the previous poverty alleviation programs.The impact has been so severe that farmers have withdrawn their children from schools because they cannot afford the slightest extra expenditure.8 VILLAGE HEALTH FACILITIES About 87.5 percent of villages in the Western Region have health units. There is considerable variation from province to province. The average number of health workers per village in the PRC is 1.82, and the number of villages with doctors appears to exceed

the number with clinics (although exact figures are not available). However, these statistics hide the difficulties of access to health services and the inequities beween urban and rural areas that Chapter 5 discusses. ELECTRICITY At the end of 1999, about 11 percent of villages in the Western Region lacked electricity. Elsewhere peasants have reported the other obvious benefits of electricity: the ability to employ labor-saving devices such as mills for grinding rice, to work late in the fields knowing that they can feed animals at the homestead after dark, to sew at night, and to go out at night in the village without fear because of lighting.9 Most important of all, electricity made it possible to receive radio and TV transmissions. The problem of supplying western PRC with rural energy can be partially alleviated by broadening the definition of electricity to include alternatives sources of energy, in particular a combination of methane gas through the anaerobic combustion of human, animal, and vegetable wastes and solar energy. From discussions with government officials during the Lanzhou workshop, however, it is clear that there has been considerable bureaucratic resistance to alternative energy models. Given the cost of electricity generated by the burning of coal or hydropower, these alternatives should be put back onto the agenda of governments in western PRC. Box 19-2 Rural Infrastructure in Lancang County, Yunnan

T

he third type of local infrastructure most frequently demanded by villagers in our discussions was energy—their word for this was “electricity.” In the Lahu village that we visited in April 2001, the headmaster of the school explained how, since a connection was established with the county electricity grid, students were able to study after dark. This was especially important for boarders in grades 5 and 6, who had come to live at the school from considerable distances and whose parents were especially poor. The cost of schooling these children was high—they all brought their own food supplies from home and cooked their own meals. So, the arrival of electricity enabled these students to study longer and harder, thereby maximizing their chances of educational success.—Field visit by team member, April 2001

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Food for Work programs FFW funds are used for construction projects that employ the poor who receive food as payment, thus increasing a family’s access to resources. Central funds need to be matched by provincial and county funds, but the latter have declined in recent years and been supplemented by the provision of voluntary labor.This voluntary labor system predated the FFW. Estimates suggest that about 40 percent of the labor employed in the FFW comes from this voluntary system. Given that better-off families can buy out their labor commitments, it is not surprising the poor families regard the FFW as a “labor tax” rather than a scheme to transfer resources and assistance to them. In the FFW, poor people find themselves employed “voluntarily” on construction projects without remuneration simply because they cannot buy their release from the commitments made by local governments.10 So, even when the FFW correctly targets the poor, the targeting does not result in a net transfer of wealth. On the other hand, given that 60 percent of the labor used in the FFW is not involved in this“voluntary” scheme, the employment has been beneficial to poor families. Although detailed government data on the FFW was not available for this study, the experience of countries like India suggests that the benefits that filter down to the nonpoor are less than with poverty programs involving loans. Laboring on FFW brings no prestige or status, in contrast to loans. Hence, FFW programs throughout the world do tend to attract the most needy—people who have long since set aside thoughts about status. Such considerations are counterbalanced by the opportunities for corruption and pilfering in the administration of public works and the supply of construction materials.11 The extent of these problems in the Western Region is unknown. The infrastructure built with the labor of the FFW system helps to promote local development. However, the FFW program suffers leakage as a result of funds being allocated to better-off villages rather than the poorest villages. There is also evidence to

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show that when the poorest villages have been correctly selected for assistance, the funds may be spent on projects that the local people do not regard as the priority. For instance, a case has been cited where “villagers voiced a clear need and preference for more roads, but were instead told to build terraces by county officials.”12 The PRC shares with India a top-down approach to rural development and poverty alleviation, despite the fact that the PRC has been a socialist country and India a country in which agricultural land has always been in the hands of private farmers who are frequently large landlords. In the Indian case, the debate is about who benefits the most from the construction of rural infrastructure—the landlord or the landless laborer. In the case of the PRC, however, the benefits of rural construction have gone disproportionately to the better-off villages. Hence inequality in the PRC has persisted at the rural level despite the absence of landlordism.13 But the fundamental problem with a FFW approach to poverty alleviation is the difficulty of constructing a rational plan that identifies sufficient numbers of construction projects that not only create jobs but also make meaningful contributions to rural infrastructure.

Microcredit In addition to substituting small-scale, local projects for large-scale projects in better-off villages and townships, the poverty alleviation program needs a clearer focus on appropriate microcredit schemes. Scale of microcredit in the PRC Microcredit in the PRC is still on an experimental basis with funds coming largely from the ABC and international donors.There have also been pilot projects by, among others, CASS.14 About 266 pilot microfinance projects are operating; 90 percent of these are projects by external donor agencies. None of them has yet become financially viable, but this does not mean that they never can. Donors agree

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that the constraints arise from the lack of proper legal and institutional environments.15 In contrast to the eastern provinces, the credit options available to farmers in the Western Region are much more limited. In the PRC as a whole, informal credit to farmers in 1998 was four times more important than formal credit via the ABC (Table 19-2). However, informal credit practices such as hui are largely a feature of eastern PRC. Although they remain illegal, they still play a critical role. Although the international donor agencies are more involved in microcredit, from the viewpoint of making microcredit into an enduring form of rural finance, the funds currently dispensed by the ABC are likely to have a greater impact on development thinking. Comparing the operations of the ABC with the projects supported by international donor agencies is therefore important. There have been numerous case studies of the use of credit by poor households. A recent one found that most households in poor areas have access to the formal credit market, although the amount of loans is small.16 Surprisingly, poor households participate in the credit markets more than rich ones. Poor households are more likely to use loans for consumption, especially house construction

Table 19-2 Average Borrowings per Person, by Region, 1996

Region

From Formal Credit Institutions (yuan)

From Informal Credit Institutions (yuan)

Eastern Central Western

17.79 44.20 61.26

201.39 209.57 106.37

Percentage of Formal to Informal Credit (%) 8.8 21.1 57.6

Source: Asian Development Bank (2000g), Chapter A8,“PRC Rural and Microfinance Approaches and Experience,”Table 2, p. 2.

(25 percent), medical expenditure (15 percent), or daily expenditure (7 percent) (Table 19-3). Improving access to credit would help households with production and consumption. However, the survey found that it would not help with the development of nonfarm activities. Inappropriateness of ABC for microcredit The ABC is not an appropriate vehicle for the development of microcredit because it operates along increasingly commercial lines.This evolution generates an approach and attitude quite antithetical to the intentions of microcredit.The defining characteristic of microcredit, according to the grameen approach envisaged by its founder Professor

Table 19-3 Use of Loans by Rural Households in Poverty Counties Purpose of Loan Production Fertilizer Other investment Animals Fixed asset Private activities Subtotal Consumption Daily expenditure Marriage and death Education of children Visits to the doctor Subtotal Housing Repayment of other loans Others Total

Richest in Assets (%)

Second Richest (%)

Third Richest (%)

Poorest (%)

All Households (%)

4.1 2.9 29.3 5.0 5.8 47.0

9.9 15.9 7.5 13.8 0.5 47.6

12.2 10.9 3.7 12.2 7.9 47.0

10.1 1.8 11.2 0.0 4.0 27.0

8.0 7.0 16.4 7.1 4.5 43.0

1.6 3.8 7.2 4.2 16.8 24.1 5.7 6.4 100.0

4.3 15.2 4.3 1.7 25.5 5.1 15.7 6.1 100.0

2.5 3.8 7.7 4.9 18.9 11.6 4.1 18.5 100.0

7.0 3.5 6.5 14.5 31.6 24.5 3.3 13.6 100.0

3.5 6.4 6.5 5.9 22.2 17.8 7.3 9.7 100.0

Source: Wang, Park, and Li (2001). Note: The survey covered six poverty counties in six provinces. The percentages relate to the total value of loans.

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Mohammed Yunus,17 is to generate a local spirit of self-help and cooperation between households. Through this means, microcredit has a chance of becoming a self-sustaining approach to poverty alleviation rather than just another scheme of Government subsidies. Need to involve local communities of farmers, minorities, and women NGOs, rural cooperatives, and the Women’s Federation are possible intermediaries for the administration of microcredit schemes. Without suitable intermediaries, the problem of identifying the right kind of poor families will remain insoluble. For microcredit to work effectively, the poor households that receive loans need to have some capacity to change their lives. If their poverty is desperate, they will lack the capacity to repay their loans. On the other hand, if they are relatively well-todo, they are not the intended beneficiaries.18

Box 19-3 Microcredit in Luquan County, Yunnan

F

rom the beginning of our conversation, it was clear that this family was not among the poorest and indeed perhaps not even poor. We sat on the veranda of a well-constructed house, outside the main living room in which the new TV was located. Adjacent to this building was another building in which the bedrooms and the kitchen were located. To the right of where we sat was a large brick kiln used to cure tobacco. This farmer had 4 mu, half of which he had converted to tobacco, the most profitable cash crop in Luquan County. Two years earlier, he had also received a microcredit loan with which he purchased 12 lambs. Now there were two dozen. The children were absent during our interviews; the oldest, a 12-year-old girl, attended boarding school in the nearby township. Our informant told us that he was among the 20 out of 50 poor families in the village who were selected for special assistance with microcredit. But from the time of our arrival in the village, it was clear from the substantial nature of the houses, the large number of farm animals, and the abundance of equipment that this was not a poor village. This village is an example of what happens when the poverty alleviation program is targeted at poor counties rather than poor villages or poor townships. The family complained of wasting time walking for 20 minutes each way (sometimes more than once a day) to the local pond to collect drinking water. This particular village is located in a region where water is much more abundant than elsewhere in the Western Region.—Field visit by team member, April 2001

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Economic problems facing current microcredit schemes The PRC’s microcredit schemes suffer from a range of common economic problems that adversely affect loans dispensed by both ABC and donor agencies: • Most microcredit is for farming schemes rather than husbandry, small industries, marketing, and other projects. This lack of diversification exposes the farmer to great risk in the event that drought or pests destroy crops.19 • The huge demand for microcredit is not met by the availability of loans.The loans are, moreover, too small to allow borrowers, especially small industries, to go into more ambitious projects. Typically, loans range from 200 yuan to 1,000 yuan, and the second loan is limited to an increase of 50 percent on the previous loan. • The huge demand for microcredit is partly due to the low interest rate compared with the 1.5–2.0 percent per month charged by professional moneylenders. Increasing the interest rate would help ration scare resources to those who have a better chance of generating sustainable incomes. • The fixed loan and repayment periods do not match the client’s cash flow. Typically the first payment is due after 30 days and every 10 days thereafter. Repaying loans every 10 days is costly, as it requires spending time traveling to the loan centers. • The peasants are opposed to the compulsory saving implied by setting aside 5 percent of the loan principal as a risk fund against the failure of a family to meet loan repayments. These criticisms need to be taken into account if microcredit is to become a major instrument for poverty alleviation. At the same time, the final architecture of microcredit in rural western PRC must be based on principles that ensure sustainability. Many of the current criticisms merely demonstrate that peasants still have a long way to go in the transition from the mentality of subsidies to a more self-reliant approach to improving their living standards.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Administrative problems facing microcredit schemes The following administrative problems are widely reported by both donor agencies and the administrators of ABC loans: • Proper staff training is needed to ensure that the right approaches and attitudes are adopted when loans are distributed to the poor. • There must be a clear definition of the roles of local government to avoid duplication and overlap between provincial, county, and township staff. • There needs to be official acceptance of the evidence that microcredit schemes are best implemented by nongovernment organizations or cooperatives. • Finally, an appropriate legal framework is needed for a sustainable microcredit scheme, including rules and regulations for the writing off of bad debts. Enough case studies exist to show that if microcredit is to become a major instrument for reducing poverty, then reform is necessary.20 Reform could help increase the retention rate; at the moment this varies between 80 percent and 33 percent. The retention rate has been better in areas where farmers have applied their loans to diversified investments. On the other hand, no amount of reform will make microcredit relevant to the most inaccessible areas. A precondition for even a modestly successful microcredit loan is proximity to a local market, and such proximity typically requires access to an allweather road.21

Assessment of priorities and implications for policies A major study by the International Food Policy Research Institute (IFPRI)22 has examined the impact of most of the various forms of government spending that this chapter is considering.The IFPRI research analyzed the impact of different forms of

government spending on agricultural growth, rural poverty, and regional inequality.The IFPRI study findings tell us what worked best in the past, and as such are a valuable starting point for considering future strategies and priorities. IMPACT ON AGRICULTURAL GDP The IFPRI study found that in the Western Region R&D investment has so far produced by far the best returns in terms of impact on agricultural GDP, and education investment the next best (Table 19-4). Table 19-4 Returns of Public Investment to Production, per Year, 1997 Yuan per Yuan Expenditure Item Returns to total rural GDP R&D Irrigation Roads Education Electricity Telephone Returns to agricultural GDP R&D Irrigation Roads Education Electricity Telephone Returns to nonfarm GDP Roads Education Electricity Telephone

Eastern Regiona

Central Regionb

Western Regionc

PRC

8.60 2.39 8.38 9.75 1.52 7.12

10.02 1.75 13.37 7.78 1.35 8.54

12.69 1.56 4.29 5.06 0.61 4.13

9.59 1.88 8.83 8.68 1.26 6.98

8.60 2.39 1.67 3.53 0.55 1.58

10.02 1.75 3.84 3.66 0.63 2.64

12.69 1.56 1.92 3.28 0.40 1.99

9.59 1.88 2.12 3.71 0.54 1.91

6.71 6.22 0.97 5.54

9.89 4.13 0.71 5.91

2.37 1.78 0.21 2.14

6.71 4.97 0.72 5.07

Source: Shenggen Fan, Linxiu Zhang, and Xiaobo Zhang (2001) a Includes Guangxi. b Includes Inner Mongolia. c Excludes Tibet (lack of data), Guangxi, and Inner Mongolia.

Agricultural productivity per hectare, per person, and per animal, remains low in the Western Region in comparison with other regions of the PRC. Therefore, it is reasonable to suppose that agricultural R&D and extension services will continue to produce high returns in the Western Region.

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The case for education investment is not so clear. During the 1980s and 1990s there were substantial improvements in education in the Western Region. Chapter 11 argued that education investment continues to be a high priority for the Western Region, but it may not produce returns as high as those in the past. Investment in irrigation has produced lower returns in the past than investment in agricultural R&D and education.This is likely to remain the case. Any new irrigation opportunities will inevitably be less attractive than past schemes. Moreover, as Chapters 16 and 18 have pointed out, the needs of industry and domestic water supply will severely constrain the use of water for irrigation in the northwest. Investment in roads has also had much less impact on rural GDP than investment in R&D and education. However, road investment will become more attractive as rural GDP rises and transport demand increases. IMPACT ON POVERTY The IFPRI study found that in the Western Region R&D investment and education investment have so far produced by far the best returns in terms of impact on poverty. Road investment was the third most effective, but well behind R&D and education (Table 19-5). Table 19-5 Returns of Public Investment to Poverty Reduction, per Year, 1997 Yuan per Yuan Expenditure Sector R&D Irrigation Roads Education Electricity Telephone Poverty loan

Eastern Regiona

Central Regionb

Western Regionc

PRC

1.99 0.55 0.83 2.73 0.76 0.60 0.88

4.40 0.77 3.61 5.38 1.65 1.90 0.75

33.12 4.06 10.73 28.66 6.17 8.51 1.49

6.79 1.33 3.22 8.80 2.27 2.21 1.13

Source: Shenggen Fan, Linxiu Zhang, and Xiaobo Zhang (2001) . Includes Guangxi. b Includes Inner Mongolia. c Excludes Tibet (lack of data), Guangxi, and Inner Mongolia.

a

376

Chapter 5 explained that there are unlikely to be many opportunities for developing nonfarm activities in the remaining poor villages. Therefore, agricultural extension and education are likely to continue to be crucial investments in the Western Region for poverty alleviation. The IFPRI study did not cover health because the researchers were not able to get suitable data to incorporate in the analysis. However, Chapter 5 concluded that health investment was extremely important to poverty alleviation in the Western Region, certainly ahead of roads. Since only 9.1 percent of villages in the Western Region have tap water supply, investment in rural water supply is an essential for health programs to be effective, and health education programs need to accompany all rural water supply projects. One of the most significant findings of the IFPRI study is the ineffectiveness of poverty loans in reducing poverty.This is consistent with case study findings on the actual use of poverty loans. The poverty loan program ties up substantial government resources in terms of both administration and the loan funds themselves. Therefore, better results in poverty alleviation are likely to flow from a redirection of effort to agricultural extension, health, education, and welfare assistance programs. Concentration on a few core poverty alleviation programs is likely to greatly reduce the opportunities for maladministration of funds. VILLAGES LACKING INFRASTRUCTURE It is probable that the villages lacking basic infrastructure are the smaller, more remote villages. Even so, it is also likely that they accommodate the majority of the rural poor in the Western Region. The basic policy options open to local governments are resettlement or provision of infrastructure. Resettlement may be the best option for villages in nature reserves, villages for which infrastructure construction would be inordinately expensive, or villages that clearly do not have a long-term future. International experience is that remote rural

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communities often lose their economic viability in a market economy. It may be appropriate to develop special adjustment programs to assist residents of remote villages. It is essential to provide computers and Internet connections to all units of government and schools. Other countries have recognized the importance of ICT for tackling poverty, social inequality, and regional imbalance.23

Notes 1 Yunnan Development Planning Commission, supplement to internal press release, March 2001. 2 Zhi Liu and Colin A. Gannon (1999), p.1. 3 World Bank (n.d.), “Transport and Poverty Reduction: A Background Note,” p.1. http://www.worldbank. org/html/tpd/transport/poverty. 4 Team members’ observations in Yunnan. Team members did not visit the most remote villages, but even those within a two-hour drive by jeep suffer from all kinds of development constraints. A twohour drive by jeep is very deceptive: by tractor the same trip takes 15 hours and on foot five days. All the villagers that the team met said that the first requirement for poverty alleviation is the construction of all-weather roads. 5 The example in this paragraph comes from the UNDP Volunteers Inspection Report of 2000–2001 on the ADB Infrastructure Construction Pilot Project. 6 Asian Development Bank (2000g), Chapter A13, p. 9. 7 UNDP Volunteers Inspection Report of 2000–2001 on the ADB Infrastructure Construction Pilot Project. 8 Discussions with the Poverty Alleviation Office and academics from the Lanzhou University during the third workshop by the consultants in May 2001. 9 UNDP Volunteers Inspection Report of 2000–2001 on the ADB Infrastructure Construction Pilot Project. 10 UNDP Volunteers Inspection Report of 2000–2001 on the ADB Infrastructure Construction Pilot Project, p. 50. 11 Mendelsohn and Vicziany (1998), p. 160. 12 UNDP Volunteers Inspection Report of 2000–2001 on the ADB Infrastructure Construction Pilot Project, p. 51.

13 On the Indian debate, see Mendelsohn and Vicziany (1998), pp.159–161. 14 The Chinese Academy of Social Sciences was one of the first groups in the PRC to experiment with microcredit as a way of alleviating poverty. The CASS is the PRC’s most prestigious research institute and think tank. Most of its research projects are policy-oriented and often quite influential. 15 Asian Development Bank (2000g), Chapter 3, p. 93. 16 Wang, Park, and Li (2001). 17 Keynote address of Professor Mohammed Yunus, founding CEO and chief economist, Grameen Bank, Dhaka, Bangladesh, at the conference entitled “Democracy and Development in Bangladesh,” National Center for South Asian Studies, Melbourne, 22 March 1997. For a review of the operations of the Grameen Bank see Asian Development Bank (2000g), Chapter A7, pp. 24–27. 18 Team members visited a minority village in Luquan County on 18 April 2001 and met a Mongolian family that had received a microcredit loan and had done very well. However, this was neither a particularly poor household nor was it a particularly poor village. 19 One good example of a successful scheme comes from Shaanxi, where 70 percent of the loans go to animal husbandry; 13 percent, trade; 10 percent, mining equipment; and 7 percent, crop planting. 20 Various commentators on the PRC’s experience with microcredit have mentioned these limitations. See, for example, Park and Ren (2001) and Conroy (n.d.). 21 The consultants attended this monthly meeting on 20 April 2001 at the county headquarters, Lancang town. The managers were accountants, cashiers or vice presidents of townships administering the loans. Of the 16 managers, seven were women and nine were men. Microcredit first became available in Lancang County three years ago. The total amount of credit so far has been 11.4 million yuan, from three sources: ABC, the provincial government of Yunnan, and the Shanghai government. The Shanghai government had given an interest-free grant to the Yunnan government as part of the strategy for the eastern provinces and cities helping the Western Region. 22 Shenggen Fan et al. (2001). 23 See, for example, World Bank and the Organization for Economic Cooperation and Development (2000).

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APPENDIXES APPENDIX A

Comments from Meghnad Desai1 Introduction The two documents before us—the Draft Final Report and Policy Directions—are comprehensive and detailed. The Report carries out an extensive quantitative and qualitative analysis of the Western Region of the People’s Republic of China (PRC) with a view to aiding the Great Western Development Strategy (GWDS). The 19 chapters of the Report cover a range of topics—natural resources, human development including gender and minorities, industrial and financial policies, transport, water and the environment, labor and competition policies, fiscal policy, and institutional reform. The 290 pages of the Report will constitute a valuable resource for future study and planning of the Western Region as well as the PRC economy. In my remarks I want to get away from details, but using the Report I want to frame the issues involved in the GWDS, which may help clarify the policy recommendations contained in the Policy Directions document. Objectives of the Strategy: Statics and dynamics The Report begins by stating that the two primary objectives of the GWDS are: •reducing income disparities •preventing further degradation of the environment These objectives have to be pursued, however, in the broader context, as the Report makes clear, of the PRC’s overall modernization and the response to globalization, especially the membership in the World Trade Organization (WTO). Thus, the GWDS is part of a general strategy and is subject to many of the same forces as the PRC economy as a whole is subject to. The important point in any regional strategy is to be able to combine the specific regional interest with the general national interest. This is more than a cliché. If we are pursuing the goal of improving the share of a region in national gross domestic product (GDP) then a static view will tell us to transfer resources from the richer to the poorer regions. But in a dynamic context where the richer regions are facing structural challenges as much as the poorer regions, we have to think differently. An example of the dynamic view is as follows. Income inequality between regions is a summary of income inequality between individuals and households. But if there were to be a large-scale migration from the poor to the rich areas, interpersonal incomes of the population as measured by their region of “origin” will equalize while the published numbers measuring regional inequality may not improve. Thus, we have to take a view as

to whether we wish to improve incomes of regions or of people. Of course, migration flows may be limited, as seems to be the case in the PRC (Report, Table 11-2), in which case we have to pursue a joint strategy of equalizing both regional and personal incomes. But there is another dimension of inequality of incomes. In a static or steadily growing economy (both fictions of economists, of course), income inequalities can be reduced by resource transfers. The idea here is that the productive system generates a particular income outcome and then resource transfers enter to correct the outcome. But in reality, economies do not change steadily. Certainly the PRC, along with many other countries that are both developing and effecting a transition to a market economy, is undergoing a profound structural change. Income distribution is changing rapidly even before one can speak of transfers. Industries are facing competition and closure while other industries are growing. An increase in inequality has been experienced by many countries, rich as well as poor, because with globalization and the rise of the knowledge economy, rewards to education are rising much faster than rewards to unskilled or semiskilled labor. In such a situation, reducing inequality may require not so much resource transfer of the textbook variety but equipping the population with skills and education to adapt to new opportunities. Industries that are losing competitiveness need to be wound down and their employees retrained to earn better and more secure incomes. This is a painful process in the short run but effective eventually. Inequality in the Western Region Against this general background let me examine the twin issues of redressing income inequality and reversing environmental degradation. The Report describes the specificities of the Western Region in great detail. It is a natural resource–intensive area with a predominance of primary industries in which state enterprises are still important and where foreign direct investment is scarce. Relative to the Eastern Region the disparity ratio (population share ratio divided by GDP share ratio) of the Western Region is 2.2. There is also some indication (Table 1-5) that the ratio is getting worse. Several remarks are in order here. Across the world, regions that have fallen behind are regions with characteristics similar to those of the Western Region. Natural resource intensity is often a sure sign of relative backwardness. The northeast regions of England or Wales are examples in the United Kingdom where coal mining and heavy industries trapped the regions into relative decline. In India, Bihar is an example of a resource-rich region that is income-poor. Coal and iron and oil were important assets in the early era of the Industrial Revolution. Today they are still useful but no longer high-value-added sectors. They are also typically capital-intensive. This means not only that they generate limited local employment but that the multiplier effects of their presence are felt more outside the region than within the region. (These are the backward and forward linkages that have been known in the development literature through the work of Hirschman.) Although I state this proposition as obvious, it could be empirically demonstrated if we had the input-output tables for the relevant regions and industries. In this respect, it has to be noticed that that within the Western Region, the north and the south have different characteristics. The Report does mention some of these (Tables

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1-4, 1-11, 1-12). But much more needs to be made of these differences. The southwest has an industrial structure in terms of the ratio of heavy to light industries—57.6:42.4, which is more typical of the national ratio of 58:42 than is the northwest with 75.1:24.9. One gets the impression that the southwest economy is not tied as much into mineral resources as the northwest is. In terms of value added the activities in the southwest may need less restructuring than those in the northwest. One indication of this is given in the Report where it discusses the likely impact of WTO membership. It says in Chapter 1, in the section “Economic Growth in the Western Region”: Primary industry will encounter competition in the international market, especially in food, cooking oil, sugar, and cotton—the so-called four “pillar” products of the Western Region. The reference here to “pillars” of the Western Region as being four agricultural rather than mineral products is quite revealing. The Report does not match agricultural output data on the two subregions sufficiently for me to follow up this insight. But we do have some information. Thus, Table 4-8 shows the data on food output and the southwest is the bigger area in terms of output of all food items except milk. There are no comparable data on cotton but for sugar Table 4-16 shows the much larger contribution of the southwest relative to the north—5.44 metric tons compared with 0.69. Thus, it would seem that the structural reasons for relative low income could be different in the south as against the north in the Western Region. By the same token, in the response to globalization and larger structural changes ahead, the south may be more adaptable than the north though I should add that this is my guess. The southwest seems to be producing exportable goods for final consumption while the northwest is into industrial raw material that is an input to further production at home or abroad. As the buyers and sellers are firms, markets in intermediate products are more competitive than those in final consumption goods. Raw-material industries have also had to face intense substitution in recent years as the “weightless economy” has grown. The material content of output is going down in physical terms and even faster in value terms. How unequal is the Western Region In light of the above considerations let me reverse the argument and ask if the degree of inequality is serious enough to worry about. This may seem surprising since the stated objective of the GWD Strategy is to reduce inequality. I would argue that relative to other countries, regional inequality in the PRC is not excessive. This is not to say it does not exist or that it should not be reduced. But as an objective to be pursued with other objectives such as rapid structural adjustment and growth in the PRC to face a rapidly globalizing world, the inequality objective should not be pursued unless it is compatible with the overall objective. My reasons for saying that the regional inequality is not excessive is to contrast the PRC with India as the only other similar-size economy that has a comparable record of development though with different outcomes. The PRC has lower poverty than India, as the Report points out (Chapter 5, in the sec tion “The Nature of Rural Poverty”), but it is also clear that in terms of the Human Development Index (HDI) the range of HDI values

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is much smaller in the PRC than in India or South Africa or even the USA (I shall provide numbers later for this assertion). The PRC’s HDI range is 0.877 to 0.512. This means that all of the PRC is either in high or middle HDI level. It may be that HDI levels should be calculated for the minorities. The data in Table 13-2 are tantalizing in this respect. Of course, the two areas with a majority non-Han population, Xinjiang and Tibet, contrast markedly in this respect, with the HDI for Xinjiang being 0.685 and that for Tibet 0.512. The other three regions with substantial non-Han population (Table 13-1)— Ningxia, Inner Mongolia, and Guangxi—all have also reasonable HDI scores of 0.603, 0.645, and 0. 649. Thus, while there is inequality, its extent is less than in other countries. Another indication of the truth of this assertion is in Table 7-38. 2 It shows that the per capita income in the Western Region is 65 percent of the national average. Tibet as the poorest area has just around half the national average (53.5 percent). The range between the highest per capita income (3,952 yuan in Beijing) and the lowest (1,232 yuan in Tibet) is 3.2 but again this is much less than in other developing countries. The most impressive statistic in my view is the savings ratio. The average savings rate for the PRC is 46 percent; for the Western Region it is 52 percent. (The figure for savings per household is divided by the figure for household income arrived at by taking per capita income times number of members in a family.) This is for rural households. If these numbers are to be believed Tibet saves 62 percent. In their paper, Khan and Riskin3 argue that “China was among the more unequal societies in developing Asia by the middle of the 1990s.” They, however, deal with interpersonal income inequality across the PRC and discuss rural-urban inequality but not interregional inequality. It is easily possible for interpersonal inequality to be high, with interregional inequality being moderate. This will be the case if within regions inequality is similarly large across the PRC. But the assertion of Khan and Riskin comparing the PRC with other Asian countries is dubious, as they themselves admit in a footnote. They have a Gini coefficient for income for the PRC and Pakistan but only for expenditure for India and Indonesia. There is reason to doubt the accuracy of high income reporting in Pakistan in any case, and expenditure distributions are less unequal than income distributions for obvious reasons. Thus, the Khan-Riskin conclusion about the PRC as compared with other Asian countries should be taken with a pinch of salt.4 I would maintain that interregional inequality in the PRC seems to be relatively less acute a problem than the other challenges facing the PRC such as the impact of membership in the WTO. It is in the PRC’s response to the structural changes that will be forced upon it that the outcome on regional incomes will emerge. Inasmuch as it is efficient to relocate industries to the west or to facilitate the move out of primary products to tertiary products and services, it should be followed. There is no scope for correcting mistakes of the past as the economy needs to move on in new directions in any case. Environmental degradation The Report gives some idea of the environmental degradation. The Policy Directions document does list environmental policies under headings 4 (agriculture and natural

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resources), 7 (energy), 16 (water resources management), and 17 (environmental conservation and pollution control). The policy recommendations are a combination of institutional reform and price adjustments. In general, this is quite correct. I have a few additional remarks in this respect which supplement rather than replace those recommendations. Firstly, there is likely to be not conflict but synergy in reconciling the environmental agenda with the WTO competitiveness agenda. Pollution has become an important dimension of quality of products, and environmentally efficient products will sell better in the markets of developed countries than dirty products. Secondly, the restructuring of the economy will require either a shift away from extractive industries or the adoption of cleaner technology in their operations. Natural resource industries are notoriously dirty polluting industries. In the developed countries they have been forced to adopt cleaner technologies or have been eliminated (coal mining in the United Kingdom, for example). Thirdly, the WTO regime will enforce a reliance on market-based incentives rather than quantitative restrictions by administrative fiat. This is the surer and more efficient way of arresting ecological degradation. As the Report and Policy Directions indicate in several places, price distortions need to be removed and environment has to be priced into the product. In this respect it may be helpful in the future to recalculate value added after allowing for the environmental effects which are currently hidden. Environmental degradation is eventually tackled by changing the product mix and the technological processes used. Thus, foreign direct investment incorporating the latest technology will be less polluting than older technology. The energy efficiency of Organization for Economic Cooperation and Development (OECD) countries has improved enormously since the early 1970s, thanks to the technology that was installed as a response to the quadrupled oil prices. Similarly, in other respects such as effluents, production technology has improved. This requires a combination of tough legislation and smart incentives. This combination is reflected in the Policy Directions document. Conclusion The PRC faces enormous challenges ahead as it joins the WTO. In this context industrial changes will be required across the entire economy. The laudable objectives of the GWDS can be pursued only within this overall context. As the economy adapts there will be new and different income outcomes. Migration, hitherto a trickle, will become a big flow. This will alter interpersonal and interregional incomes in many ways. It is only at the margin after these changes have been allowed their play that income and resource transfers should be used to mitigate the relative income inequality between the regions. The Report and the Policy Directions document have to be read in this context. The same message goes for the other dimension of environmental degradation. Here again the dominant force will be the adaptation to the WTO discipline but this is likely to be helpful rather than not. Price signals will have to be used along with uniform environmental standards to achieve high-quality exportable outputs. The change will not be easy nor will it be painless but it will be worth making if the PRC is to be a prosperous economy with a high level of human development.

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APPENDIX B

Comments from Carl Riskin5 This valuable and comprehensive Report is a response to the decision of the Government of the People’s Republic of China (PRC) to concentrate on the economic development and opening up of the Western Region. That decision itself was a natural reaction to the unevenness of the rapid development that has been taking place in the PRC for the past two decades. The policy of Great Western Development is a response to growing regional inequality and the persistence of poverty especially in the Western Region. As such, the initiative deserves to be taken seriously as a major poverty reduction effort, and it is worth asking how the poverty reduction aspects of this initiative might be made as effective as possible. In the PRC it is widely acknowledged that, despite rapid growth and years of poverty alleviation efforts, there are still many poor people. I do not think it is useful to implicitly marginalize the problem of poverty by characterizing it as “residual.” I don’t wish to play the numbers game but, in fact, the available estimates of the rural income poverty rate vary widely, and to my mind the most persuasive ones are still quite high. The estimate for 1995 that A. R. Khan and I derived from a subsample of the National Bureau of Statistics’ rural household income survey, using the lowest of our three poverty thresholds, came to 15.5 percent of the rural population, or about 133 million people. The low-income rural population is heavily bunched in the area of the poverty threshold, so that a 14 percent increase in the threshold produced a 35 percent increase in the poverty rate (to 21 percent of the rural population). Even if one accepts a lower figure for the poverty rate, one must recognize that, while it is obviously better for people to be above than below it, the official income poverty threshold itself represents an extremely meager standard of living; also, that very small decreases in rural income can put many people back below it. The plunge in farm prices in the late 1990s (by some 30 percent between 1997 and 2000) and the deterioration in agriculture’s terms of trade probably pushed many farm families back into poverty. As the title of a recent article in the journal Dushu (Reading) put it, “Farmers are really suffering, villages are really poor” (Nongmin zhen ku, nongcun zhen qiong). And such downward pressure on farmers is expected to increase with the PRC’s accession to the World Trade Organization (WTO). Moreover, as the present draft report fully recognizes, the problem of poverty is particularly acute in the Western Region. An analysis in The China Quarterly (by B. Gustaffson and W. Zhong) of the same 1995 survey that I already alluded to, and of an earlier one in 1988, concluded that the Western Region was the only region in which the rural poverty rate rose between 1988 and 1995—from 27 percent to 31 percent of the rural population. Also, the average depth of poverty (the average distance from a poor person’s income to the poverty threshold) rose in the west, unlike elsewhere in the PRC where the average depth of poverty fell sharply. In other words, the problem of rural poverty

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remains a substantial one in the PRC, and especially in the Western Region. In attacking the long-run problem of eliminating it, let us begin by giving it its due and not make it appear smaller than it is. There are two additional themes that I should like to address today. They arise from my understanding of the now fairly long history of the PRC’s poverty alleviation efforts in general. These efforts, which gathered force toward the end of the 1990s, showed an admirable commitment to eliminating poverty and no doubt played an important role in enabling many poor rural residents to rise above the absolute poverty threshold used by the PRC. At the same time, some observers have suggested ways in which these efforts might be augmented and adjusted in the hope of having an even greater impact, and the PRC’s poverty alleviation programs have been very receptive to such suggestions. My two themes are taken from these suggestions. The first is the desirability of bringing poverty considerations into the core policymaking process, that is, giving some attention to the ways in which mainstream policies themselves affect poverty. The second is the importance of what has come to be called “empowerment”—that is, giving poor people the capability of improving their lot through their own efforts. Mainstreaming the antipoverty effort Environmentalists distinguish between end-of-line policies and those designed to influence economic activity from the start. End-of-line policies stand by while environmental degradation occurs, then try to clean it up. Far better to put in place incentives to eliminate or minimize the degradation in the first place (especially since some kinds of degradation cannot be reversed at all, or only after very long periods of time). As in the case of pollution, the effect of economic activity on poverty depends greatly upon the nature of that activity, which is why some have advocated making “poverty impact assessments” a regular part of economic policy formation. In the case of the PRC the link between poverty trends and broad economic policies is particularly clear. For instance, when policy has successfully promoted rural income growth (as through farm price increases), rural poverty has receded rapidly, whereas it has remained stubbornly intransigent when rural incomes have stagnated. Similarly, state enterprise reform that produced growing unemployment has correlated with an increase in urban poverty. The latter result was of course an unintended (if not unanticipated) result of the policies that produced it. The reason that macro policies may have a far greater impact on poverty alleviation (or its absence) than specific antipoverty programs is that vastly more resources are likely to be involved and on a broader scale. An improvement in agriculture’s terms of trade with industry in the early 1980s, for instance, put significant amounts of money in the hands of tens of millions of farmers. Not coincidentally, that was the period during the last twenty-odd years in which the number of rural poor declined fastest. Conversely, partly owing to the stagnation in agriculture’s terms of trade during the second half of the 1980s and the siphoning of resources away from the interior that occurred then in response to the new coastal development strategy, farm incomes declined and the poverty

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rate failed to improve. Again in the late 1990s, the deterioration in absolute and relative farm prices greatly increased economic hardship for many farm families that remain dependent on sales of farm products and purchases of industrially produced farm inputs. Another example, relevant to the Western Development Strategy, concerns the pricing of natural resources. The coal produced in Shanxi province fuels eastern factories and is exported to many foreign countries. Yet, local poverty alleviation officials in Shanxi a few years ago complained that little or no revenue from coal sales was returned to the poor localities where it was mined, while the mining process itself uses prodigious amounts of scarce water in this dry province, which negatively affects agricultural incomes. Similarly, the fiscal decentralization of the early reform decades deprived poorer regions of significant central subsidies on which they had depended to fund basic education and other services. A predictable result is that it became harder for the rural poor to send their children to school. It appears, too, that the local interaction between the state and collective, on the one hand, and the household, on the other, is quite regressive, with poor households paying much higher fractions of their incomes as net taxes and fees than better-off households. This, too, is related to fiscal decentralization and the resultant inability of local governments in poor areas to finance basic services without imposing taxes that represent very heavy burdens for their poor constituents. Also, the disappearance of the cooperative medical system from the countryside and the general shift from a public health orientation to a fee for service approach to healthcare left most rural residents dependent on their own pocketbooks to finance their medical needs. A predictable result is a decline in crucial perinatal care in some poor communities. The PRC’s rapid economic growth from the mid-1980s would no doubt have produced greater income inequality in any case, but the kinds of institutional and policyrelated factors I have alluded to probably caused the rise in inequality to be substantially greater than it would otherwise have been. And because the head-count rate of income poverty is a function not only of the rate of growth of income but also of the change in its distribution, much of the beneficial effect that rapid income growth would have had on the poverty rate was canceled out by mounting inequality of income distribution. For instance, according to a simple calculation made by my colleague, A. R. Khan, had the distribution of rural income remained constant between 1988 and 1995, the headcount rate of “broad” poverty (poverty defined in terms of a relatively high income poverty threshold) would have fallen by 50 percent between those dates, rather than the 19 percent that it actually did decline. In viewing the great Western development initiative as a poverty reduction strategy, we might want to look for ways to avoid the replication within the Western Region of the disequalizing effect that rapid growth produced for the PRC as a whole, by addressing these kinds of issues. Poverty reduction and empowerment As the PRC moves to a market economy, the people will benefit to the extent that they are capable of competing vigorously in the market. Of course, they need to have access to the market, and the Great Western Development Strategy promises to greatly enhance

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market access for the region by investing heavily in transport, communications, and energy infrastructure. Still, much attention should be given to directing infrastructure projects toward meeting the particular needs of the poor, such as local access roads, safe drinking water supply, irrigation, electricity, and telecommunications, all of which are crucial to the ability of poor people to access and participate in markets. However, even with better roads and railroads, electrification, and modern communications in place, people must be able to make productive use of this infrastructure. In particular, they need to be healthy, well nourished and well educated, and able to participate fully in the social life around them. In other words, they must be free of what the United Nations Development Program (UNDP) calls “human poverty”—the deprivation of the opportunities and choices most basic to human development, such as the opportunity to lead a long and healthy life, enjoy freedom, dignity, self-esteem, and the respect of others. The concept of “human poverty” is multidimensional and puts emphasis on the importance of improving the quantity and quality of assets actually possessed by the poor, their personal, social, environmental, and institutional resources. This is an aspect that was somewhat neglected in the PRC’s early approach to poverty reduction, with its emphasis on increasing production and raising incomes. It is important that the reduction of human poverty, in its several dimensions, be a fully recognized and even emphasized part of the long-run initiative for developing the Western Region. The dismantling of collective rural structures in the early 1980s led to the disappearance of the rudimentary rural cooperative medical system that had previously covered about 80 percent of villages. While the quality of healthcare improved greatly in better-off regions, individuals in poorer areas of the countryside often found themselves unable to afford the medical care that was now available only on a fee-for-service basis. The Leading Group for Poverty Reduction, World Bank, and UNDP have labeled as “deplorable” the “educational, health and nutritional status of China’s remaining absolute poor.” Several studies have found a strong link between poverty and the existence of ongoing health problems. People in poor health who are prevented by poverty from obtaining the medical care they need will not be in a position to take advantage of new infrastructure and new market opportunities and will remain in poverty. Poor counties and townships do not have the resources to finance basic healthcare for their residents. They cannot pay for the control of infectious disease, the monitoring of health and nutritional status and disease prevalence, and the provision of health information. The decentralization of the fiscal system has left them dependent on their own very limited revenue base to finance all public services, including public health. This they must do by raising local taxes or imposing fees. The World Bank reported that in the mid-1990s about 80 percent of health are payments in poor counties were made out-ofpocket, whereas the figure for the PRC as a whole was only 40 percent. Public health comes rather far down the list of priorities in county budgets, composing an average of only 4 percent of expenditures. Calls for reestablishing a rural cooperative medical insurance system and for training more students from the countryside in secondary medical schools are unlikely to be enough

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to address this problem effectively. There needs to be a substantial increase in central and provincial government assistance in providing basic public health services in poor areas. The PRC is committed to achieving general nine-year basic education by 2010, but only to three to four years of basic education for the poorest 5 percent of the population within that time frame. Education in poor regions has suffered on a number of counts. Poor areas cannot afford to pay teachers and provide school materials without charging fees. Parents in poor areas cannot afford these fees: a survey in a rural Hubei county, for instance, found that if all children in a family are at school, the expenses would absorb 40 percent to 50 percent of the family’s net income. Small wonder that the enrollment rate in that county had fallen below 50 percent (Nongmin ribao, 13 Oct. 1999). Jonathan Unger, the scholar who cites that example, has found that in several poor Qinghai villages where annual per capita incomes come to less than 600 yuan, school expenses during the 2000– 2001 school year averaged 120 to 160 yuan per year at the primary school level, and up to 400 yuan for ninth grade. Unger also finds in his fieldwork that poor parents are often eager for their children to get an education, knowing that without it they will be greatly disadvantaged in whatever they do. But the financial reality is such that poor children, and especially girls, drop out of school early or are never sent. To accept gross inequality in basic educational targets for rich and poor regions is to ensure the perpetuation and even the widening of existing regional inequalities. As the PRC moves forward to develop the Western Region, it should find ways to integrate improved access to basic education, as well as healthcare, into poverty reduction projects, as has successfully been done with multisectoral projects supported by international donors. Beyond that, both the central and provincial governments should take direct aim at regional inequalities in access to basic education by providing the resources needed to bring all children up to a defined minimum standard of schooling. A substantial increase is needed in the funds earmarked for education in poor counties. Finally, the idea of empowerment suggests providing opportunities for poor communities and people to participate more fully in designing the poverty reduction and local development programs that affect them. In recent years, the spread of village elections to a majority of the PRC’s villages and the formation of local social organizations around microfinance provision have put increased participation on the agenda. Bringing poor people into the process of planning, implementing, and supervising poverty programs can sharpen the programs’ focus on real needs, promote local enthusiasm and initiative in realizing their goals, and reduce costs of implementation and monitoring. The idea that education, health, nutrition, and participation should be given increased emphasis in the long-term mission of developing the Western Region suggests a shift of emphasis from economic growth to human or—as the PRC prefers to call it—social development. The prevailing view used to be that the first must precede the second; that economic growth is the foundation on which social development can proceed. A more modern view is that they can and should proceed together, each contributing to and strengthening the other. The Great Western Development Strategy provides an opportunity for the PRC to activate this human development paradigm and, in so doing, to vastly improve the life chances of its poorest citizens.

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APPENDIX C

Comments from Keijiro Otsuka6 Introduction There is no question that it is socially imperative to develop the Western Region of the People’s Republic of China (PRC) to reduce regional parity between the coastal and inland regions, alleviate the incidence of poverty, and improve ecological environments in this region. It is, however, a major and difficult challenge in view of the dominance of inefficient state-owned enterprises (SOEs) in industrial sectors, the overwhelming importance of employment in agriculture, and deteriorating trends in the natural resource base, such as deforestation and desertification. Furthermore, social infrastructure, such as roads, railways, and telecommunication networks, are underdeveloped and human capital investment is far from adequate in the Western Region. Since the development of social infrastructure and human resources is the necessary condition for economic development, the focus of the Great Western Region Development Strategy on investments in social infrastructure and human capital can be justified. Yet there is no guarantee that rates of return on such investments will have high social payoffs unless they accompany the development of the manufacturing sectors. Indeed, it is my contention that the social rates of return on the general development strategy contemplated by the PRC Government will be sufficiently high only if a complementary industrial development strategy is also implemented. More specifically, I argue that a clear strategy to develop labor-intensive industries in the Western Region (such as the garment, shoe, simple electric appliances, and machine parts industries) must be properly designed to achieve the goal of the overall economic development and the improvement of the environment in the Western Region. There are several justifications for my emphasis on the development of labor-intensive industries. First, given low grain prices and, hence, the low profitability of crop farming at present, it is likely to be unfeasible to develop agriculture to provide ample employment opportunities for the rural poor.7 Second, it is the rule, rather than the exception, that the development of industrial sectors leads to the development of the service sectors in developing economies, implying that the service sectors cannot be a leading sector of the economy. Third, and most importantly, there is a great opportunity to develop the industrial sectors in selected cities in the Western Region, such as Chongqing, Chengdu, Mianyang, Xi’an, and Lanzhou.8 While I admit that the development of selected cities may not be enough to develop the whole region, it must also be true that the development of the Western Region cannot be possible without developing labor-intensive industries to the maximum extent. It is a major purpose of this paper to demonstrate that rapid industrial development is possible around major cities in the Western Region if appropriate development policies are implemented. For this purpose, we first review the thrust of the existing models of industrial development in the PRC, such as the Sunan, Wenzhou, and Guangdong-Fujian

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models, in the next section. On the basis of these models and considering the specific conditions for industrial development in the Western Region, I propose a new model of industrial development for the Western Region in the third section. The fourth section considers the appropriate policies required for the achievement of rapid, equitable, and environment-friendly industrial development in the Western Region. Finally, I conclude this paper by clarifying the wider implications of my development strategy for poverty alleviation and the improvement of the natural and urban environments. Models of industrial development in the PRC9 In order to initiate the operation of a new industrial enterprise, knowledge of production technology, management knowhow, and marketing capacity must be acquired in the first place.10 Thus, the sources of technological knowledge, knowhow, and marketing channels characterize the patterns of industrial development. This is clearly the case in the PRC, as shown in Table C-1. One of the earliest successful development models in the PRC was the Sunan model of development. In the 1980s, the Sunan area, or southern areas of Jiangsu province, developed rapidly owing to the development of collective enterprises run by township and village governments (TVEs).11 As is demonstrated by Otsuka et al. (1998), the key to the successful development in this area lay in the utilization of production and marketing capacities of SOEs, particularly those in Shanghai. TVEs often employed retired managers and engineers of SOEs, purchased their used machines, and engaged in subcontracting with them. Furthermore, some TVEs became “branch factories” of SOEs, in which managers and engineers were sent from SOEs and profits were shared in accordance with their investment shares. In this way, TVEs produced machines and machinery parts, which used to be produced by SOEs, and sold them often through established marketing channels of SOEs. Since free-market transactions were underdeveloped, the management of TVEs was assisted by local governments, which helped face-to-face transactions between TVEs and SOEs. The cooperation between

Table C-1 Models of Industrial Development in the PRC

a

Model

Entrepreneurs/Leaders

Ownership

Characteristics of Original Industries

Sunan

Former SOE employees, including engineers

Collective TVEs

Copies of SOEs (machinery, parts, and miscellaneous products)

Wenzhou

Local merchants and farmersa

Private

Unskilled, labor-intensive (such as shoes, apparel, simple electric appliances)

Guangdong-Fujian

Foreigners

Joint ventures

Light industries and comparatively advanced industries

Zhongguan

Scientists

Private

High-tech (IT-related)

Although the numbers are relatively small, former employees of SOEs also made important contributions to the Wenzhou model of development.

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TVEs and SOEs was mutually beneficial because the management of SOEs was subject to strict regulations, whereas TVEs did not possess production knowledge and marketing capacity, even though they faced relatively unregulated management environments. As TVEs acquired the production knowledge and marketing capacity of SOEs and free-market transactions became efficient, the advantages of the Sunan model faded away, resulting in the slowdown of development in the Sunan region in the 1990s. Inspired by the successful industrial development led by private enterprises in Zhejiang province, the privatization of collective enterprises became the major issue in the Sunan area in the late 1990s (Sonobe, Hu, and Otsuka 2001a). More conspicuous industrial growth was achieved in Zhejiang province in the 1990s, centered particularly on Wenzhou city located in the southern part of this province. In Wenzhou, only a small number of SOEs existed during the pre-reform period. Consequently, reliance on SOEs was not a feasible development strategy. Farmers had been very poor in Wenzhou owing to the meager endowment of fertile farmland. In order to sustain their livelihood, farmers began to produce simple products, such as pillowcases and low-quality garments, in their houses by hand, and these were then sold by local merchants in large cities in the late 1970s. Also, some farmers repaired simple parts for SOEs in Zhjiang province and Shanghai even though it took them a day or so to go to those cities where SOEs were located. Gradually they accumulated capital and production knowledge to expand the scale of their enterprise operations. Furthermore, marketplaces were established in which even new enterprises could purchase the necessary materials and sell their products to local merchants as well as merchants coming from a number of large cities in the PRC. Leading enterprises in Wenzhou are all private enterprises, which are profit seeking and, hence, highly efficient. Another major characteristic is the clustering of industries in concentrated areas, which confers benefits of agglomeration economies in the form of production information spillovers, subcontracting between small and specialized enterprises, and the development of skilled labor markets.12 The quality of their products and the efficiency of their production gradually improved over time, resulting in accelerated development in the 1990s. Thus, the Wenzhou model of development led by private enterprises became well known in the PRC, and began to be recognized widely as a new model of successful industrial development Sources of advanced production knowledge and marketing capacity do not have to be confined to domestic sources. In fact, Guangdong and Fujian provinces have successfully developed because of the inflow of technology and management knowhow resulting from the geographical and cultural proximity to Hong Kong, China and Taipei,China. Shenzhen, Guangzhou, Pearl River Industrial District, and Tongguang are examples of areas where joint ventures mushroomed successfully in both high-tech and low-tech industries. Another successful development has been taking place in Zhongguang Village in Beijing, where information technology–oriented venture-businesses have grown remarkably rapidly. This model is similar to the Silicon Valley model, in which scientific capacities of universities and research laboratories were transferred to private enterprises

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through cooperative research projects and the employment of scientists. Such development has been possible in Zhongguang because of the clustering of first-rate, internationally competitive PRC universities in Beijing. This brief review of successful development models suggests that in order to fuel the development of industries in the Western Region, utilization of production and management knowhow, marketing network, or scientific knowledge accumulated outside the present TVE sectors is needed. Toward a new model of industrial development in the Western Region13 Although SOEs still dominate in the Western Region, we must not overlook the fact that TVEs began to develop rapidly in large cities in this region in the mid-1990s. Indeed, there is little exaggeration in saying that the current view of downtown Chongqing is reminiscent of that of Shanghai around 1995. TVE development in the western cities lagged behind by nearly a decade partly because of the early focus of the PRC Government on the development of the Eastern Region and partly because of the time lag in information dissemination on industrial reforms to this region. There are several notable features of this development. First, like the Sunan model, TVEs copy products of local SOEs, such as motorcycles, and develop new products based on the technology used in SOEs, such as industrial machineries and commercial vehicles based on the production of tractors. Second, extending the Sunan model, TVEs not only employ retired managers and engineers but also recruit the staff of SOEs that tend to suffer from deficits. There are TVEs where most, if not all, engineers and managers have come from SOEs. The engineers transfer technology in the same industrial areas from SOEs to TVEs, and the managers, who came from SOEs engaged in various fields, transfer general management knowhow. Third, more often than not, the successful TVEs used to be collective TVEs but were reformed into private TVEs in the late 1990s, similar to the Wenzhou model. Unlike the Wenzhou model, however, there is a tendency that enterprises producing the same and related products do not locate in the same areas, reflecting the fact that the intention of township and other local governments, and not the profit motives of private enterprises, determine the locational choice of enterprises. Fourth, unlike the Guangdong-Faijian and Zhongguang models, there are a relatively small number of TVEs jointly managed by foreign enterprises and supported by universities and scientific research institutions.14 It is likely that these two models are difficult to follow in the Western Region partly because of the geographical disadvantages and partly because of the paucity of strong scientific institutions. Thus, in general, products currently produced by private enterprises in the Western Region are labor-intensive and relatively simple products, even though there are exceptions. From the viewpoint of poverty reduction, this development is desirable because the Guangdong-Faijian and Zhongguang models are not conducive to the development of labor-using industries. Because of the policy to develop industries to serve military purposes in the Western Region during the socialist periods, SOEs in this region employed engineers and scientists who are as capable as those in the Eastern Region. In other words, SOEs in

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large cities in the Western Region can be powerful sources of technological information and management knowhow, which can be effectively utilized for the development of TVEs in this region. It is also possible to transfer the production capacity of enterprises in the Eastern Region, where wages are higher, to the Western Region, where wages are lower. In fact, there are a nonnegligible number of enterprises that have already moved to the Western Region. Of course, such locational moves are desirable for the development of industries in the Western Region. Enterprises in the Western Region can also learn from the experience of more advanced enterprises in the Eastern Region by inviting engineers and managers. We should not overemphasize, however, the possibility of interregional technology transfer, because wage rates of a similar quality of industrial workers in large cities are not widely different between the two regions because of the active interregional migration of workers from the west to the east.15 My recommended strategy of industrial development in the Western Region is to go beyond the existing models of successful development in the PRC in terms of the fuller utilization of the potential capacities of SOEs and human resources based on the development of private enterprises. A caveat is in order here. Although I strongly recommend the development of new or modern labor-intensive industries, in no way do I deny the importance of traditional industries in the Western Region, such as the food processing and building material industries. Particularly important is the food processing industries, which are sometimes located in rural areas and often employ the poor rural labor force. I believe that there is a large room for these industries to gain from the fuller utilization of the management and technology capacities of local SOEs. Strategy for industrial development in the Western Region While there is a great potential for developing manufacturing industries in the Western Region, the potential will remain mere potential unless supporting industrial policies are implemented. In my view, there are three sets of critically important supporting policies. They are: (i) further reform of SOEs; (ii) the construction of industrial parks in suburbs of large cities and new satellite cities; and (iii) the establishment of secure individual land rights on farmland. Further reform of SOEs In order to trigger the development of private enterprises in the Western Region, perhaps the most important policy is to undertake the complete privatization of SOEs. Needless to say, potentially efficient SOEs will prosper after the reform, a good example being the Changhong Electric Company in Mianyang City.16 Such SOEs will offer expanded employment opportunities, so long as the Western Region has a comparative advantage in labor-intensive industries. Furthermore, as in the case of Changhong, such SOEs will develop subcontracting networks with labor-using and often low-tech private SMEs because subcontracting has proven to be cost-saving not only in Japan and Taipei,China but also in Wenzhou and other cities in Zhejiang province. Therefore, this development will provide further employment opportunities.

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A considerable number of privatized SOEs will be closed or merged with private enterprises after the reform. In this process, a large number of workers will lose employment, at least temporarily. It must be emphasized, however, that a large number of capable workers will find new employment in private enterprises and that this is precisely the prerequisite for the development of private enterprises in the Western Region. Eventually those who suffer from unemployment for prolonged periods will find new employment opportunities not only in growing enterprises, including low-tech subcontracting sectors, but also in service sectors, which will certainly develop as a result of the development of the manufacturing industries. I conceive with much confidence that without the political will to reform SOEs and tolerate the painful transition process, the development of industrial sectors in the Western Regions will never be realized. Construction of industrial parks Although most former TVEs in the Western Region have been privatized, the legacy of TVEs remains an obstacle to the further development of industries, namely, the generally dispersed location of enterprises producing similar and vertically related products. This implies that private enterprises fail to enjoy the benefits of agglomeration economies to the same extent. Therefore, local governments should create clusters of industries in industrial parks. The relocation of enterprises to industrial parks is no longer difficult because they are now privatized so that they can make locational choices independent of the influence of local governments. The construction of social infrastructure should be concentrated in industrial parks in the suburbs of large cities and newly created satellite cities, consistent with the guiding principle of the industrial policy of the PRC Government (Report 2001, p. 15-7-8). In the course of industrial development in Japan and Taipei,China for the last several decades, industries moved from congested large cities to their suburbs and neighboring towns to form industrial clusters (Mano and Otsuka 2000; Sonobe and Otsuka 2001). In order to stimulate the entry of new enterprises and to lessen the costs of transactions, local governments should invest in the construction of marketplaces. This policy is not so costly and can precede the construction of industrial parks. It is expected that the establishment of marketplaces will promote the shipping of relatively simple products and low-quality products from industrial centers in the Western Region to other areas of the same region and the Central Region. Aside from the private gains from the relocation of enterprises, there are two additional advantages in the construction of industrial parks. First, the congestion of urban areas, which is a major source of environmental problems, can be lessened. Second, the concentration of the same and similar industries in one location will make it easier to implement environmental regulations. Strengthening of individual land rights One of the major purposes of developing industries is to absorb the poor rural labor force. Since the majority of rural workers are uneducated and, hence, not qualified to be productive industrial workers, investment in their schooling must be an integral part of

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the industrial policy. Another important but often-neglected policy is to strengthen individual land rights on farmland. Because of the weak individual rights to transfer their farmlands through rental and outright sale, those rural workers who want to move to industrial areas cannot earn land rentals or land sale revenue. As a result, they are forced to hold land-use rights by cultivating their lands during weekends and lending them without charging rental fees. If those workers can freely rent out their lands with land rentals or sell their land rights, the benefit of rural-to-urban migration can be enhanced. I wonder if the weak land rights currently perceived by farmers greatly reduce the geographical mobility of rural workers. I anticipate that strengthened individual land rights will promote the geographical mobility of the cheap rural labor force for the development of industries. Furthermore, the transfer of land rights to those who remain in rural villages will benefit them simply because they can expand the size of their cultivation. This, in turn, will contribute to the reduction in rural poverty. In addition, the reallocation of land from those who do not want to continue farming to those who do will improve the allocative efficiency of scarce farmland (Hayami and Otsuka 1993). Therefore, I recommend the implementation of the policy to establish secure individual rights on farmland for both industrial development and the alleviation of rural poverty. Concluding remarks People in the Western Region are generally poor, but particularly poor are the rural labor force. Thus, in order to reduce poverty, it is imperative to create sufficient employment opportunities for those dependent on labor earnings. Herein lies the most fundamental reason to advocate the private sector–led, labor-intensive industrial development strategy in the Western Region. Although not mentioned explicitly so far, the absorption of the rural labor force in suburban areas and new satellite cities is necessary to conserve highly degraded natural resources. This is because a major factor affecting the deterioration of natural environments is population pressure on marginal lands not only in the PRC (Report 2001, p. 17-8) but also in other developing countries (Otsuka and Place 2001). As I pointed out earlier, the development of industries in suburbs and satellite cities will help improve urban environments. It is also worth emphasizing that ultimately it is an increase in the living standards of people that enhances the people’s preference for a better urban environment. This is amply demonstrated in the literature on urban environment, which finds that urban environments deteriorate initially with income growth but improve with further increase in income, a phenomenon known as an “inverted-U” relationship between the emission of pollutants and per capita income. Thus, industrialization is not only an engine of economic growth but also a catalyst of environmental improvement. The upshot is that there is no tradeoff between poverty reduction and the improvement of urban and natural environments. In all likelihood, there is no substitute for the successful industrialization recommended in this paper that can both alleviate poverty and improve environments in the Western Region of the PRC.

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Notes Appendix A 1 London School of Economics. 2 Editors’ note: Table 5-3 in the Final Report replaces Table 7-38 in the Draft Final Report but without data on savings, for which reliable data are not available. 3 There is some discussion of the reliability of the income estimates of the State Statistical Bureau (SSB) in A. R. Khan and C. Riskin, “Income and Inequality in China: Composition, Distribution and Growth, 1988 to 1995 (in China Quarterly, 1998, no. 154, pp. 221–253). The authors of the article find that relative to their survey, the SSB underestimates income (Table 4). This may account for the high ratios in poor areas if for some reason savings are much more accurately measured than income, especially in poor rural areas. 4 Carl Riskin responds as follows: Meghnad Desai criticizes a published statement by A. R. Khan and me to the effect that the PRC has become one of the more unequal societies in Asia, and he argues that the degree of inequality in the PRC is not “serious enough to worry about.” A brief reply is in order. From the mid-1980s on, the PRC has had one of the fastest increases in income inequality on the historical record. As the World Bank puts it, “China’s steep rise in inequality is exceptional in international perspective” (World Bank, China 2020: Development Challenges in the New Century, 1997, p. 8). The PRC Government’s attitude toward fast-rising inequality was at first fairly complacent, but in recent years it has become more concerned about the potential threat to social stability posed by growing regional polarization. Although Meghnad Desai urges the Government back toward its former complacency on this issue, the PRC has good reason to want to stem the rapid growth of regional inequality before it becomes excessive and threatening. “Is China’s inequality still low by the standards of the region? The point of the Khan/ Riskin statement to which Meghnad Desai takes exception was to dramatize the fact that income inequality in China, as measured by the Gini coefficient, was in fact near the top of the range of available such estimates by 1995, whereas a few years earlier it had been at the bottom of the range. The caveats given by Lord Desai, and, indeed, by Khan and Riskin, (Khan, Azizur Rahman and Carl Riskin, “Income and Inequality in China: Composition, Distribution and Growth of Household Income, 1988 to 1995,” China Quarterly, 154, 1998) do not change this broad conclusion. It is true that the available Gini ratios of some countries are for consumption expenditures rather than income, and thus would be expected to be somewhat lower. However, it is quite implausible that an income Gini as high as the 0.45 that we calculated for China could be consistent with expenditures Ginis of 0.34 (India) or 0.32 (Indonesia). “It is also true that inequality between Chinese provinces is smaller than inequality within provinces. However, inter-provincial inequality has been growing much faster, its contribution to total rural inequality increasing from 22 percent in 1988 to 31 percent in 1995 (see Zhang Ping, “Rural Interregional Inequality and Off-Farm

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Employment,” in C. Riskin, R. Zhao and S. Li, China’s Retreat from Equality: Income Distribution and Economic Transition, Armonk, NY, M.E. Sharpe, 2001). Moreover, if we focus not on average inter-provincial inequality but specifically on the disparity between the developed east coast and the backward western provinces, then regional inequality takes on much greater dimensions. “Finally, a note of agreement: It is certainly true that China faces major problems coming from its accession to WTO and the need for structural adjustments to cope with globalization. However, it is not evident that the need to face these issues conflicts with attempts to stem growing regional inequalities by investing in human and physical resources in the west. On the contrary, there would appear to be important synergies between the demands of globalization and the human development policies needed to improve the competitiveness of China’s western residents.” Appendix B 5 Queens College and Columbia University. Appendix C 6 Foundation for Advanced Studies on International Development, Japan. 7 In the case of rice farming in Asia including the PRC, employment capacity is limited even after the introduction of improved rice varieties. See David and Otsuka (1994). 8 It seems to me that the Draft Final Report (Asian Development Bank 2001) is overly pessimistic about the possibility of industrialization in the Western Region. (Editors’ note: The Final Report is less pessimistic than the Draft Final Report). 9 This section draws on my ongoing project entitled “Models of Industrial Development in China,” jointly being carried out with T. Sonobe and D. Hu. 10 Another important factor that affects the initial development of industries is the availability of investment funds. According to the development experience of small and medium enterprises (SMEs) in Japan, Taipei,China, and Zhejiang province, the limited availability of funding is not a critical constraint since enterprise operation can begin with labor-intensive production methods and small-scale facilities. 11 Note that township and village enterprises (TVEs) include both collective and private enterprises in rural areas or areas outside large cities. 12 Other cities in Zhejiang province followed the Wenzhou model in later periods. See, for example, Sonobe, Hu, and Otsuka (2001b). 13 Perspectives developed in this section depend on my brief visits to the Chongqing municipality and two cities in Sichuan province—Chengdu, and Mianyang. 14 We found, however, a few exceptions in Mianyang city in Sichuan province. 15 According to my interviews with enterprise managers in Chongqing, Chengdu, and Mianyang, monthly wages of ordinary workers are 600–800 yuan in these cities and 800–1,000 yuan in major cities in Zhejiang and Jiangsu provinces. Considering migration costs and the higher costs of living in the Eastern Region, such wage differentials are surprisingly small. 16 Strictly speaking, Changhong has not been fully privatized. In practice, however, this company can be considered fully privatized.

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References Asian Development Bank. 2001. Policy Support for the China 2020 Project (Phase III): Draft Final Report. Prepared by Monash International under T.A. 3468-PRC in cooperation with the State Development Planning Commission. David, C. C., and K. Otsuka. 1994. Modern Rice Technology and Income Distribution in Asia. Boulder: Lynne Rienner. Hayami, Y., and K. Otsuka. 1993. The Economics of Contract Choice: An Agrarian Perspective. Oxford: Clarendon Press. Mano, Y., and K. Otsuka. 2000. “Agglomeration Economies and Changes in Industrial Locations: A Case Study of Manufacturing Sectors in Post-War Japan.” Journal of the Japanese and International Economies 14 (3): 189–203. Otsuka, K., N. Murakami, and D. Liu. 1998. Industrial Reform in China: Past Performance and Future Prospects. Oxford: Clarendon Press. Otsuka, K., and F. Place. 2001. Land Tenure and Natural Resource Management: A Comparative Study of Agrarian Communities in Asia and Africa. Baltimore, Maryland: Johns Hopkins University Press. Sonobe, T., D. Hu, and K. Otsuka. 2001a. “Dynamic Process of Cluster Formation and the Role of Traders: A Case Study of a Garment Town in China.” Mimeo. Tokyo: Foundation for Advanced Studies on International Development. ________. 2001b. “Privatization of Township-Village Enterprises in China: Case Studies of Garment and Metal Casting Enterprises in the Greater Yangtze River Region.” Mimeo. Tokyo: Foundation for Advanced Studies on International Development. Sonobe, T., and K. Otsuka. 2001. “The Division of Labor and Changing Industrial Locations: Evidence from Taiwan.” Mimeo. Tokyo: Foundation for Advanced Studies on International Development.

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Policy Directions

POLICY DIRECTIONS

399

1 The macroeconomy The Western Region now lags behind the rest of the People’s Republic of China (PRC) in economic development, and could lag even farther behind.

Strategic considerations

Issues

Policy Directions

The potential for rapid growth in gross domestic product (GDP) is limited. The Western Region does not have a rich factor endowment. Urban-rural income disparities are very large and have been widening.

Give more emphasis to social development rather than economic growth. Increase the Western Region’s share of national fiscal resources. Identify the barriers to the integration of the urban and rural economies and the regional economies. Remove the remaining government price controls and dismantle monopolies. Implement microeconomic reform, competition policy, and institutional innovations to improve the allocation of resources. Remove subsidies and incentives to exporters.

The Western Region has suffered from price subsidies. Inferior factor productivity is the main reason for the slower economic growth in the Western Region. The Western Region does not participate significantly in international trade. Promoting opportunity—by stimulating economic growth and removing access barriers—is fundamental to reducing poverty. Institutional reform

In the PRC, macroeconomic management is synonymous with public administration and the functions of government. In the Western Region, unlike the rest of the economy, state-owned enterprises (SOEs) still dominate economic growth.

Focus on the remaining barriers to market operations.

Commit to protect private property rights. Implement the Protection Against Unfair Competition Law of 1993 more strictly. Phase out preferential policies for SOEs and WFOEs so that firms compete on an equal basis irrespective of ownership. Extend foreign trading rights to more enterprises. Reduce the minimum registered capital requirements for forming limited-liability companies. Erase the distinction between a getihu and a private firm. Take steps to assist disadvantaged groups, including women, the poor, and minorities.

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2 The fiscal system This section considers ways to strengthen the fiscal system so that governments have adequate revenues to support the development of the Western Region.

Fairness of taxation system • Tax evasion

• Lack of equity in treatment

Issues

Policy Directions

There is widespread evasion and avoidance of the company income tax. There is widespread evasion and avoidance of the personal income tax.

Encourage bank transfers for company transactions. Introduce a withholding system for personal income tax and encourage bank-transfer transactions.

The tax system must be made more transparent and applied more equitably across firms. Arbitrary interpretations of tax laws and regulations should be avoided.

Prohibit all forms of rent-seeking behavior by government officials and departments. Make rules simple and easy to enforce. Clarify or eliminate vague provisions in laws that provide opportunities for government to interfere in private economic activities. Decentralize some taxation powers and rights to revenue, where appropriate, and make policies more consistent across locations.

Local governments are not allowed to adjust the rate of local taxes or create new taxes to meet their needs. This has encouraged the imposition of arbitrary and nontransparent fees. As a result, the burden on firms is uneven, in terms of size as well as location. • Treatment of Western Region

The Government has introduced a preferential tax policy to leverage the development of the Western Region, as summarized in the Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region.1

Introduce a system of direct lump-sum subsidy (instead of the preferential tax system), proportional to the total investment volume.

• Reform of tax system to increase tax revenues

Production-based value-added tax (VAT) disallows the offsetting of VAT for the purchase of fixed assets and imported capital goods. This discourages capital-intensive enterprises in the Western Region from investing in fixed assets and importing high-tech capital goods. Small enterprises (retailers with an annual turnover of less than 1 million yuan, or wholesalers with an annual turnover of less than 1.8 million yuan) are not eligible to use the designated VAT invoice. This makes it hard for small enterprises to deal with enterprises that are eligible to use the designated VAT invoice. Enterprises can only claim a 10% offset for VAT on the purchase of transport services. This increases the tax burden of enterprises in the Western Region that rely more on transport services.

Switch to a consumption-based VAT, consistent with the depreciation of fixed assets.

Introduce a VAT number to replace the eligibility test for using the designated VAT invoice. Encourage the development of a recording and processing system based on e-commerce.

Streamline the VAT rate to make it neutral to goods and services transactions.

Continued next page ➤➤➤ 1

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See note 5 in Chapter 2 of the Draft Final Report for relevant extracts.

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Issues

Policy Directions

The resource tax rate is too low to reflect the negative externality of using natural resources, and the tax base is too narrow. These lead to wasteful use of resources and lower tax revenues for local governments.

Increase the resources tax rate to (i) reflect the opportunity costs of using resources (including the adverse effects on the ecological system); and (ii) increase the tax revenues of local governments. Widen the tax base to include the use of forest, grassland, and water resources. Merge the business tax with the value-added tax and the company income tax.

The business tax on tertiary industry encourages local governments to enter the tertiary industries, and distorts the rational choice of industrial structure. Because of the underdeveloped state of tertiary industry, local governments in the Western Region collect less tax than their counterparts in the Eastern Region. The tax base for sumptuary goods is too narrow and the tax rate is too low.

Widen the tax base to include more sumptuary goods and increase the tax rate for goods with significant externality and having “demonstration effects.”

• Reduction of the tax burden on farmers

There is a need to reduce the tax burden on poor farmers, many of whom live in the Western Region.

Abolish the township and village levies, phase out corvee labor, and raise state agricultural taxes.2

Government transfer payments

While the tax system is not an ideal vehicle to remedy regional imbalances because of the distortions it creates in the market system, a transparent and accountable lump-sum subsidy system is both desirable and feasible. It could be justified on the grounds that: (i) it would meet the minimum funds requirement of local governments for performing their normal functions; and (ii) it would help equalize access to public services for people from different regions, avoiding excessive differences in public service delivery.

Maximize lump-sum transfer payments. Merge the five channels of government transfer payment into regular transfer payment, which consists of tax returns, institutional subsidy, transitional transfer payment, and special subsidy (special project subsidy and end-ofbalance subsidy). Use regular transfer payments to balance regional fiscal capabilities. Special subsidy is embodied mainly in industryspecific policies intended to correct market failure. Examples are money and in-kind subsidy for people in absolute poverty, and subsidy for natural disasters. Design a fair and effective system of regular transfer payments to fill the gaps in fiscal capacity among regions, and also incorporate incentives for local government. Avoid moral hazard3 while making transfer payments. Continued next page ➤➤➤

2

The Government has announced its intention to carry out these measures. According to the Report on the Outline of the Tenth Five-Year Plan for National and Economic and Social Development, delivered by Zhu Rongji, Premier of the State Council, at the Fourth Session of the Ninth National People’s Congress on 5 March 2001: The system of administrative fees and taxes in rural areas needs to be reformed by abolishing all administrative fees imposed exclusively on farmers, such as contributions to township and village public accumulation funds, and at the same time by raising the current rates of agricultural tax and special agricultural product tax where it is appropriate. This is a sound policy for safeguarding the legitimate rights and interests of farmers and reducing their burden.

3

The Oxford Dictionary of Economics defines moral hazard as, “the danger that if a contract promises people payments on certain conditions, they will change their conduct so as to make these conditions more likely to occur. For example, moral hazard suggests that if possessions are fully insured, their owners are likely to take less good care of them than if they were uninsured, or even to connive at their theft or destruction.”

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Issues

Policy Directions

Government bond financing

While it seems feasible to use government bonds to finance major projects, the ways of assessing the costs, benefits, and risks are major concerns.

Improve the regulation of investment in public debt projects, and strengthen control over the quality of the projects and the management of funds. Ensure that enough complementary funds are in place when needed to ensure timely project construction.

Other sources of public finance

The purchase ratio of lotteries is rather small, leaving much room for expansion.

Allow local governments in the Western Region to use lotteries.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

3 The financial system The financial system of the PRC has developed more slowly than the economy and is particularly backward in the Western Region. This section suggests ways to address that imbalance. Issues

Policy Directions

Inefficiencies in the financial system

Banks have little incentive to lend to firms in the Western Region, where risks and unit transaction costs are perceived to be high. The inflexible interest rate scheme makes banks even less eager to finance projects in the Western Region.

Establish a level playing field for SOEs and the private sector. Allow state commercial banks to decide on loan applications and determine interest rates according to the financial risks involved. Introduce incentives to encourage system innovation, more activity by financial institutions, and better performance of financial services.

Diversification of the financial system

The insurance industry is backward and the overall supply of and demand for insurance is low. The scale of lending in the Western Region is small.

Facilitate the entry of foreign insurance companies.

Policy banks have been competing against commercial banks.

There are no foreign banks in the Western Region.

The central bank should support the development of commercial financing in the Western Region. It could set different legal reserve requirements for small and medium cooperatives or joint-stock financial institutions in the Western Region. That would facilitate its own operations and increase the funds available for use in the Western Region. Coordinate policy-oriented financing and commercial financing. The policy banks should take the lead in increasing investment in the Western Region but should stick to their core functions. Facilitate the entry of foreign banks.

Improvement of access to bank finance for private enterprises

Small and medium enterprises (SMEs) have difficulty obtaining external financing not only because risks and unit transaction costs are high, but also because state policy is somewhat biased against lending to SMEs.

Allow the entry of private financial institutions. Monitor the impact of financial sector consolidation on SME access to bank finance. Further liberalize interest rates. Allow banks to charge transaction and administration fees. Improve incentives in credit guarantee schemes and management of risks.

Strengthening of capital market functions

Equity finance has been small in percentage terms and narrow in range of application, and the capital market is slow to grow. Attention should also be paid to the ratio of loan financing and equity financing. To provide increased capital for enterprises through equity financing, the equity markets must be developed.

Promote the development of a financial center in the Western Region. Relax listing requirements. Broaden and strengthen the range of exit mechanisms. Simplify share buybacks.

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Issues

Policy Directions Establish a legal framework for private equity markets. Ensure adequate venture capital flows. Encourage the establishment of an insurance industry.

RCCs, postal savings, and other informal markets

The accumulation of bad loans has reduced the incentive of rural credit cooperatives (RCCs) to lend to the agriculture sector. Excess reserves imply inefficient use of savings. The Western Region lacks an informal financial market.

Inducement of international financing

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International concessional development assistance is limited. International investment has underpinned the growth of the PRC economy.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

Further regulate the RCC market and use “interest subsidy” to encourage RCCs to finance projects in the Western Region. Establish a postal savings bank to fully utilize the postal savings infrastructure. Demonstrate the institutional innovations of the Eastern Region in the Western Region and further regulate the informal financial market. Make better use of concessional assistance through careful selection of projects and better administration. Open up more sectors of the economy to foreign direct investment (FDI). Use the restructuring of SOEs in the Western Region to attract FDI. Invite foreign companies to participate in bids for SOE mergers and acquisitions.

4 Agriculture and natural resources This section considers ways of making agriculture and forestry more sustainable, and protecting the natural resources of the Western Region. Issues

Policy Directions

Acid rain seriously affects plant growth in the southwest. Industrial and urban pollution affects the quality of irrigation water.

Reformulate pollution standards to match international best practice in technology, and set a timetable for implementation. Develop a system of licensing whereby industries pay a fee based on the actual load and toxicity of pollutants they produce. Authorize local governments to enter into pollution reduction contracts with industry. Implement a program of cleaner production, with incentives for industry to adopt voluntary environmental audits, seek certification of compliance with international performance standards, and continuously improve their environmental performance.

• Improvement of grassland management

Rehabilitation of grasslands is essential both for livelihoods and for environmental protection. Grassland management through administrative measures to enforce carrying capacities has either not worked well or been unduly expensive.

Apply science and technology to improve the management of grasslands. Develop model husbandry practices appropriate to the resources, climate, and geography. Review the Grassland Law of 1985 with a view to strengthening the role of villages in grassland management and reducing the role of government in direct operations. Adjust the focus of animal husbandry, from the function of maximizing animal populations, to incorporate the protection of ecological environments. Give up the objective of grain self-sufficiency and allow the development of an animal feed industry.

• Biodiversity conservation

Despite the effects of centuries of habitation and loss of natural ecosystems, the PRC and its Western Region remain one of the world’s main centers of biological diversity. Forests are the most important ecosystems in the PRC in terms of the diversity of the species that they harbor. Loss or degradation of habitat poses the main threat to loss of species, but other factors, including weak ex situ measures to protect biodiversity, are also significant.

Introduce new or improved laws dealing with access to genetic resources, intellectual property rights relating to biological resources, conservation of ecosystems, and species conservation. Introduce a program for local governments to prepare biodiversity policies and action plans (especially for protected areas) within the framework of State Environment Protection Agency (SEPA) guidelines. Introduce a system of natural resource accounting and amend resource taxes.

Natural resources • Reduction of pollution

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Issues

Policy Directions

The PRC ratified the Convention on Biological Diversity in 1993. It prepared a National Strategy and Action Plan for Biodiversity Conservation in accordance with the Convention, but has made slow progress in implementing the Plan.

Establish more national nature reserves in the Western Region. Set up seed nurseries for pharmaceutical plants. Establish or improve botanical gardens to collect and protect local plant resources.

• Planting of forests

Even at the higher planting rate planned, degraded lands needing rehabilitation would take more than 50 years to restore. The rate of planting must be increased, particularly on degraded sites where water or wind erosion continues to cause costly damage.

Introduce a greenhouse tax and establish a Greenhouse Gas Abatement Fund to provide low-interest loans for reforestation. The Fund will be based on a tax levied on dominant sources of greenhouse gas emissions, and will be administered by a bank assigned or established to administer all financial aspects, within the framework of government policy.

Techniques and technology

Productivity per hectare is low. There are ecological, economic, and social imperatives for improving agricultural techniques.

Increase investment in science and technology in the major research centers. Promote green agriculture and the production of green food. Publicize and enforce intellectual property rights for agricultural technology. Build a network of adult education for peasants and herdsmen. Revitalize agricultural extension programs. Concentrate extension efforts in poor areas, leaving other areas to the private sector (through such means as input marketing). Improve the adult education program in rural areas. Encourage the industrialization model of “leading company + agencies + peasants.” Open up the agriculture sector to foreign investment. Allow areas to specialize according to their comparative advantage and increase the proportion of production entering the market. Encourage foreign investment in pesticides by progressively banning highly toxic products.

Land tenure and institutional reform

The Land Administration Law of 1998 left many matters for future determination. There is still much scope for progressive reforms in institutions and land tenure.

Improve the contract system for grasslands and promote the raising of animals according to the quantity of pasture. Clarify the ownership and usufruct of grasslands, and hand out certificates of use and ownership. Forbid the improper use and destruction of grasslands through legal means. Adjust the frequency and intensity of grassland use, and enforce the proper use of pasture. Allow peasants and herdsmen to buy shares in exchange for their land ownership and the usufruct of land. Give compensation for the increment of land in the ecological protection region. Continued next page ➤➤➤

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Issues

Policy Directions Improve and regularize the operation of the land rental system in the Western Region. Introduce a legal system for the transfer of land rights. Build financial systems to support the development of agriculture and husbandry. Try to find a way that is both convenient to the peasants and safe to financial institutions. Reform the tax on agriculture and husbandry in the Western Region by passing new regulations on permissible taxes and fees, and by transferring township fiscal powers to the counties. Change the mode of compensation from the circulate stage to the production stage. Standardize the allocation of land proceeds among the state, the collective, and the farmers.

Infrastructure

Very low use of machinery indicates lack of electricity. Low productivity also indicates infrastructure constraints.

Increase rural power supply and distribution, rural roads, and rural water supply. Avoid further extension of irrigation in the northwest, but continue to invest in more efficient use of water for irrigation.

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5 Social conditions The Government has had considerable success in reducing poverty. Much of the residual poverty is concentrated in the rural areas of the Western Region.

Incidence and nature of poverty • Urban poverty

• Rural poverty

Issues

Policy Directions

The poorest 5 percent of urban households enjoy a standard of living that is improving gradually but not as rapidly as that of the rest of the urban population.

Progressively expand social assistance programs (under the Ministry of Civil Affairs).

Using the Government’s definition of poverty (income of 625 yuan per day), the incidence of poverty declined from about 70 million in 1994 to 34.1 million in 1999. Of the 34.1 million, 48.2 percent lived in the Western Region proper (excluding Inner Mongolia and Guangxi). However, there are reasons for reconsidering the poverty county system: • The falling incidence of poverty means that it is becoming harder to identify areas of mass poverty, and money spent on area programs could benefit many people who are not in need. • The falling incidence of mass poverty is leading to a closer correlation between poverty and the onset of old age, disability, natural disasters, disease, and other conditions. • The mixed results of poverty county programs, the long duration of poverty county designations, the large number of very poor counties that have not been designated as poverty counties, and the lack of improvement in average incomes in Xinjiang poverty counties are all • The combination of targeting areas and targeting people leads to “double dipping” by beneficiaries (for example, veterans’ families benefit both from the poverty county programs and from the social assistance programs for veterans’ families). • There are substantial inequities in health expenditures, and health expenditures are very low in parts of the Western Region while at the same time the burden of disease is very high. • There are similarly inequities in social assistance expenditures, and levels of social assistance are also very low in the Western Region.

Progressively move away from targeting poor areas (poverty counties) toward targeting poor people. Progressively cut programs and concessions for poverty counties.

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Self-reliance

Issues

Policy Directions

The poor in the Western Region are generally much better off than the poor in South Asia, and with the gradual emergence of a market economy there is much more potential for selfhelp than previously.

Encourage the emergence of a civil society in which self-help is a more practicable proposition. Encourage mobility within the labor markets. Increase the choices of the poor by making information more readily available through information technology. Allow the market to work effectively to the benefit of the poor, by removing obstacles to the development of SMEs and other means. Develop an appropriate institutional framework for micro-credit. Create the necessary legal and institutional framework to encourage the growth of NGOs.

The private sector is now the most dynamic sector of the economy.

NGOs are increasing their activities without a supportive institutional framework. Social welfare programs

The coverage of social welfare programs is small relative to the extent of need. The distribution of beneficiaries across the PRC does not match the distribution of need.

Progressively increase the coverage of “livelihood guaranteed in five aspects” programs to reach all the poor. Coordinate food-for-work programs with social assistance programs of the Ministry of Civil Affairs.

Health programs

Mortality, morbidity, and disability rates are all higher in the Western Region than in the rest of the PRC, and are major causes of poverty. The incidence of risk factors such as malnutrition, poor water supply, and accidents is generally higher in the Western Region, partly explaining the lower level of health.

Concentrate government health expenditures on free or subsidized services to the poor. Progressively reduce out-of-pocket payments for health care at the time of service.

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6 Transport policies An effective transport system is crucial to economic development. It provides access to resources and markets, facilitates trade, allows economies of scale, lowers costs and prices, and widens production choices. Issues

Policy Directions

Intermodal transport system

With GDP growth, demand for transport will continue to grow. However, experience with market economies suggests that the demand will diversify and focus on quality. Shippers will want speed and reliability, shorter waiting times, minimal damage to goods, and the ability to move small loads efficiently. There will be more demand for specialized services, such as refrigerated, containerized, and express parcel transport. Road transport better satisfies these types of demand, at least over short and intermediate distances, and is likely to account for much of the traffic growth, assuming that regulation does not constrain growth. The railways will continue to carry bulk cargoes over long distances; an efficient rail system could expand its role in long-distance container haulage.

Promote competition in the market for intermodal transport services. Increase the number, capacity, and facilities of inland container terminals. Eliminate bottlenecks in the inland movement of containers by rail.

Financing of investments

Investments in transport infrastructure have had a beneficial impact on economic growth in the PRC. However, despite rapid infrastructure development, the isolation of the Western Region remains an obstacle to its development. The Government has inadequate fiscal resources to finance the necessary investments.

Increase cost recovery from beneficiaries of investments in transport infrastructure. Modify the role of government from providing transport to creating a stable environment for operators, and regulating operations where there is market failure (where there is evidence of anticompetitive behavior by service providers). Separate railways and national highways from government by creating state-owned enterprises to build, own, and operate transport networks. Allow free entry into transport markets to ensure that shippers receive the types of service they require at the lowest possible price. After undertaking careful social and environmental analysis, use direct government grants or subsidies, rather than a cross-subsidy from freight shippers, to fund projects without a financial justification.

Some national development projects have no immediate financial or economic return. Crosssubsidies risk making long-distance traffic uneconomic, further isolating the Western Region.

Cross-border trade links • Transport links with Central Asia

Like the Western Region, the Central Asian republics are landlocked, and their exports and imports must be shipped through a third country. International cooperation is essential. The physical condition of the road and rail transport links to the major cities of Central Asia is poor and the routes are often indirect.

Give priority to rehabilitating existing links while planning new rail and road links for construction in the medium term. Ensure that key regional arteries meet modern standards so that they can carry the projected loads.

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• Transport links with South Asia

Issues

Policy Directions

Despite a long common border with South Asia, the Western Region has very poor or very roundabout transport links with the latter. South Asia is likely to become an increasingly important trading partner of the PRC.

Investigate options for railways linking Kunming (Yunnan) with the ports of Chittagong or Yangon or both, and road links through Myanmar to Bangladesh and northeast India.

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7 Energy policies The PRC is the second-largest energy consumer after the United States. Rising demand for energy is a significant factor in the economic development of the PRC, especially its Western Region. Issues

Policy Directions

Pollution control

The use of fossil fuels is a major source of pollution in the PRC. The pollution load varies widely from fuel to fuel, as well as from one type of coal to another.

Calculate taxes for dirty energy sources: the dirtier the fuel, the higher the tax. Impose these taxes on the sale of energy.

Renewable energy

The Western Region is rich in renewable energy sources, including wind power, solar energy, and biomass. However, renewable energy use is at a very low level.

Introduce renewable energy quotas and encourage trading in them. Introduce regulations to support the policy goals for renewable energy. Rationalize the pricing rules for wind power. Increase public awareness of the benefits of renewable energy. Introduce new renewable energy technologies through international cooperation.

Energy conservation

Energy generation is a capital-intensive industry. Therefore, national energy conservation is likely to be of substantial indirect benefit to the Western Region.

Invest the proceeds of the tax on dirty energy consumption in energy and environment conservation.

Institutional reform

The PRC still has two pricing systems for natural gas: a planned (government-subsidized and hence lower) gas price and a market price.

Link the subsidy with the social security system and abolish the price subsidy to firms.

Improvement of efficiencies

Small and inefficient coal-fired power plants and coalmines must be replaced with highly efficient power plants and coalmines. Time-of-use tariffs are good for the economic operation of the power system, the promotion of demand-side management, and hydropower development, but are not in much use. Combined-cycle technology with gas turbines is state-of-the-art for power generation and has the advantages of using less land per megawatt than coal power, easy installation in load centers, little negative environmental impact, high efficiency, and short installation period. The northwest has substantial space heating requirements. An integrated combined-cycle gas turbine with co-generation technology should be the best thermal power technology.

Set up independent agencies to monitor and regulate efficiency and safety issues in power plants and coalmines. Extend the use of time-of-use tariffs with the development of power sector reform.

Promote the use of combined-cycle technology with gas turbines for power generation.

Promote the use of co-generation technologies in the northwest.

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Increased security of energy supply

Issues

Policy Directions

Coal liquefaction and gasification technologies may help revive the coal industry, especially if international oil prices stay high. It is important to diversify oil import sources and bring the PRC’s oil companies up to international standards.

The Government should make special policies, such as a tax-free policy, to promote coal liquefaction and gasification technologies. Abolish the current oil import quota management system, and allow national oil companies to decide channels, time, types, and quantities of oil imports. Support the overseas development of oil companies with special incentives.

Generally, PRC oil and gas companies do not have the capability to make major investments in Central Asia.

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8 Technology policy The Government attaches great importance to the role of science and technology in the development of the Western Region. Issues

Policy Directions

Protection of intellectual property rights

Economic growth needs inflows of new technologies and innovations. Foreign firms hesitate to transfer advanced technologies to a country whose record in protecting intellectual property rights they regard as poor.

Improve the protection of intellectual property rights, and policing and enforcement systems.

Productivity of research and development

Research and development (R&D) output in the Western Region is proportionally lower than R&D input. This indicates lower productivity in transferring input to output and a lack of ability to market technological innovations.

Create and maintain an environment favorable to SMEs that use new and a high level of technology. SMEs are more flexible in meeting the market demand for new technology and can therefore spur rapid growth. Speed up the transformation of “military” enterprises to “civil” enterprises, and provide incentives for them to commercialize their technological innovations. Transform state-owned R&D institutes into private-owned, independent R&D enterprises. Encourage universities to establish commercial arms to market technological innovations. Take a more liberal view of universities’ involvement in R&D.

Encouragement of R&D

The social rates of return on R&D are the highest among all public investment, exceeding the return on infrastructure, health, education, and irrigation in the Western Region.

Increase investment in R&D projects.

Establish a project-oriented R&D fund to bring R&D capacities of the Eastern Region to the Western Region. Reform the VAT to encourage enterprises in the Western Region to invest in high-tech equipment. Allow enterprises to deduct (or even overdeduct) R&D inputs from company income tax. For example, enterprises could be encouraged to establish a strategic alliance between industries and universities, or they could be allowed to deduct 150% of R&D funds invested in a university from company income. Information and communications technology

Information and communications technology (ICT) exhibits strong economies of scale in its basic infrastructure component and significant network externality. Public finance could be justified on the basis of natural monopoly and positive externality.

Improve communication capacity in the Western Region. Options include pure public finance, public subsidy, public-private mix, and other forms of private sector participation in providing public utilities. Continued next page ➤➤➤

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Issues

Policy Directions Introduce a policy of free access to remove any barriers to access and thus encourage private sector investment and private ownership. Allow the private sector to pay a market-competitive price to share state-owned resources (such as a land-based copper line, a microwave tower, telephone exchange facilities, satellites).

Biotechnology

Biotechnology research and use is not regionspecific, and the Western Region does not necessarily have competitive advantage in R&D capability. However, the Western Region could benefit most from the outcomes of biotechnology R&D, especially in animal husbandry, crops, and fruit, and it has several research initiatives that are very significant in the field.

Encourage research in areas important to the Western Region, namely: • Molecule breeding techniques for trees and crops: improving genes to enable trees and crops to resist diseases and insects and to improve quality • Animal breeding techniques • New pesticide marking techniques: fast-acting bio-pesticides, pesticides that promote plant growth and carry informosomes, bionics pesticides, microbial pesticides that help promote plant growth

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9 Competition policy In the European Union and the United States, the purpose of competition policy is to limit monopoly powers and monopolization by large firms. In the PRC, however, the purpose of competition policy should be to reduce the monopoly power of governments.

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Issues

Policy Directions

Anticompetition practices of local governments

Most industries and enterprises are operating in a fairly competitive market after 20 years of economic reform. Monopoly and market power is mainly the privilege of large SOEs and the infrastructure sector. For these protected industries, monopoly powers were strengthened by the decentralization of public administration in 1994.

Organize a capacity-building campaign to increase awareness that the Competition Law should be independent of government administration and therefore the legislative power of the Competition Law should be extended to include government administration.

Lack of regulatory framework

The PRC does not have a complete set of laws or decrees necessary to support competition policy. Instead, it has proceeded through administrative measures and by negotiation. In many cases, a negotiated compromise was the only feasible outcome. Yet the relevant parties have often failed to honor the compromises. Therefore, the PRC faces the challenge of implementing radical reforms that would establish a coherent competitive regime. Although there is no equivalent competition law or antitrust law, there is certainly much academic interest and plenty of government interaction. This follows a reform model one could call “cross the river by holding stones,” a sort of “act after trials” strategy.

Invite international donor organizations to support the drafting of a Competition Law. Enact a comprehensive Competition Law that outlaws not only the monopolizing behavior of the private sector, but also government monopoly on the control of market access. The Competition Law should set no barriers to ex ante free-market entry but should emphasize ex post consumer protection after the entry. Establish a national regulatory body under the National People’s Congress (NPC) and independent of the Government (the State Council) to interpret and oversee the implementation of the Competition Law. Abolish administrative powers that should be left to the market. The Government (the State Council) should also change the procedure and make it more consistent with the proposed Competition Law, and gradually hand over the reform of public administration to the NPC.

Administrative obstacles to competition

The unfinished administrative decentralization might be the major obstacle to competition. The PRC inherited a public administrative system with powers well beyond the scope of providing public goods. Importantly the previous third round and the current fourth round of public administrative decentralization only “redistributed” (but did not “abolish”) administrative duties from the central Government to local governments. This “stuck in the middle” system results in a complex scenario in which the central Government has lost its control over the issues that need nationwide cooperation, but some local governments have abused the power to the extent that they restrict products from entering other provinces and set barriers on products entering into their own jurisdictions.

Reform SOEs to break the linkage with all levels of government. Mergers and acquisitions should be approved by the proposed regulatory body and managed by the companies involved, not by any central or local government. Further simplify the local taxation system and make duties more accountable and transparent. Introduce overlapping jurisdictions to promote competition and reduce corruption, that is, give public officials overlapping domain for duties that must be managed by the governments. Multiple offices should be established to manage a single duty, such as the issuing of construction permits. Even better, let several private companies bid for the management of a public duty.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

10 Industry policy Industrial structure is the outcome of resource allocation. The adjustment of industrial structure is the process of relocating resources through entry and exit. There is a need for industry policies to facilitate the evolution of the private sector, especially SMEs. Issues

Policy Directions

Active industry policy to promote new markets

There is lack of information and coordination in the following industries: • High-value-added industries • Infrastructure • Education • High-tech industry (including e-commerce) • Tertiary industry

Improve investment coordination and marketing coordination in those industries that the Government is retaining in public ownership.

Passive industry policy to correct market failure

A natural monopoly exists in the following industries: • Resource industries in gas, electricity, and water • Large-scale SOEs • Infrastructure construction

Corporatize operations under direct government management (such as railways and national highways). Unbundle industry into competitive components and noncompetitive components, and then regulate the noncompetitive component.

Industry policy to support the evolution of industrial structure in the private sector

Institutional rigidity preventing the private sector from renovating its industrial structure manifests itself in the following: • Lack of incentives for SOEs • Local protectionism and other artificial barriers to entry • Lack of bankruptcy laws and regulations

Remove barriers to market entry and increase flexibility for the private sector to upgrade the industrial structure. Set up a regulatory body independent of the administration, like the Department of Justice in the US and the Australian Consumer and Competition Commission, to identify and prosecute sources of market failure.

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11 Human resources There is not enough demand for labor in the Western Region to absorb all the new entrants into the workforce and laid-off workers. Therefore, policies should seek to improve the skills and knowledge of the workforce and increase labor mobility.

Restrictions on labor mobility

Issues

Policy Directions

The labor market is segmented according to enterprise ownership and residence registration (urban and rural labor markets are separate in many respects). Impediments to labor mobility prevent access to urban employment among the rural population, slow the acquisition of labor skills, and lead to inefficient use of labor resources.

Encourage mobility into and out of the SOE sector by reducing reliance on transfers to fill vacancies. Reform the household registration system to facilitate labor mobility, especially in respect of migration to the major cities. Support and monitor the development of the informal sector. Remove impediments to entry into the international labor market by individuals and enterprises. Simplify procedures and encourage and facilitate applications by enterprises (irrespective of ownership) for the right to engage in overseas contracting.

Labor service exports account for only 1.3 percent of the PRC’s exports, far lower than the figures for India, Bangladesh, and Pakistan. The PRC accounts for only 0.3 percent of the international labor market. The Western Region’s share of the market is very small.

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Levels of skills, knowledge, and experience

Earnings differentials in the labor market indicate that a shortage of higher-education graduates is developing. The Western Region does not have a big pool of graduates and unless the output of higher-education graduates increases it could find itself very short of these. Likewise, the labor market is increasingly demanding better levels of education in the workforce generally. With a large population of school age or less, the Western Region faces the prospect of having workers in excess of the needs of the economy.

Achieve universal primary education by using vouchers, grants, stipends, or other demand-side measures. Expand secondary education, and establish secondary facilities in more centers. Finance the necessary expansion of higher education as far as possible through tuition fees and student loans. Concentrate free adult education services on giving adults functional literacy. Establish a comprehensive and multilevel vocational education system.

Social security system

The Central and Eastern Regions together dominate the PRC’s social security system, accounting for 84.5 percent of social security expenditure in 1999.

Continue the emphasis on expanding the coverage of unemployment insurance. Remove restrictions that now prevent rural migrants to cities from paying personal contributions to unemployment insurance funds. Progressively move toward a national unemployment insurance system, funded by a social security payroll tax.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

12 Women The Constitution provides for equality of rights for women in economic and social life. Various laws protect women’s rights, but there have been shortcomings in the enforcement of these laws. Issues

Policy Directions

Participation of women in the labor force

The participation of women in the labor force is unsatisfactory on several grounds: • Women are more dependent on traditional rural activities than men. • On average, in urban areas women’s incomes are 70 percent of male incomes. • The official retirement age is less for women and women are encouraged to retire earlier. • There is discrimination against women in filling vacancies. • In SOEs whose operations are being downsized or rationalized, women workers are typically laid off before men.

Diversify the occupations that women take up, in particular to encourage them to move into jobs having a higher technology and science content, especially off-farm jobs. Expand the employment opportunities for older women in a manner that reduces the pressure for them to retire early and hence allows them to provide for their own pensions and also deal more effectively with menopause. Improve job opportunities for women in areas where clients would prefer to have access to female expertise, for example, in the provision of physical and mental health care. Improve access to technical training programs so that women improve their knowledge of better farming practices and develop self-confidence. Increase investment in education programs that reduce female illiteracy and semiliteracy, prolong the years of schooling for girls, and ensure that more women enter tertiary education. Improve the health infrastructure in a way that caters to the special needs of women and children, for example, in ensuring more effective modern contraception. Increase budgetary allocations for education, training, physical health, mental health, and employment programs in order to improve employment opportunities for women in the Western Region. Ensure better integration between the Women’s Federation and central, provincial, county, township, and village planning efforts, and channel more resources such as micro-credit through their agency. Maintain and expand measures to inform the women of the Western Region about their rights so that they develop the strength and determination to claim the benefits of development funds such as micro-credit.

Social security and welfare

There is discrimination against women in social security. Infant mortality among women is higher than normal. In rural areas women’s health suffers from inadequate water supply.

Ensure better integration between the Women’s Federation and central, provincial, county, township, and village planning efforts, and channel more resources such as micro-credit. Reform and expand mental health services in the Western Region to contain the rural suicide rate among women.

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13 Minorities The Constitution and the Law on Regional National Autonomy of 2001 extend significant privileges and entitlements to ethnic minorities. However, the Government has generally not succeeded in accelerating the economic and social development of areas where ethnic minorities live.

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Issues

Policy Directions

Minority representation and participation

Affirmative action programs have not been very successful.

Develop appropriate benchmarks to assess the involvement of minorities in the decision-making processes of government. Accelerate the promotion of minority leaders to top levels in the national institutions, including the PRC’s highest decision-making process. Accelerate the promotion of minority leaders to the top levels of local government. Accelerate training programs for leadership roles by minorities. Accelerate language training for minorities to increase their Chinese and English language competencies.

Diversification of employment

The accelerated education of minorities is urgently needed if the transition to a service economy is to be realized. In the past it was simply assumed that preferential policies would deliver the right results. This has not always been the case.

Increase government investment in education, in particular where it is most likely to improve the educational mobility of minorities. Draw up policies to ensure that minorities are not the first to be made redundant when SOEs are downsized. In provinces where new migrants and cadres are building up new industries, ensure that local people, and not merely the migrant workers, are given jobs. Introduce a system for monitoring employment and educational opportunities for minorities to permit more systematic study of the issues with a view to making policy adjustments. Establish a dialogue between the Government, local governments, and minority communities on how best to promote Chinese language competency without threatening the cultural value of minority languages. Develop an integrated information technology (IT) policy to disseminate information about opportunities for employment, education, and language initiatives to small towns and villages that are remote from the large urban centers. In the case of Xinjiang, reform the Production and Construction Corps to make it more responsive to market forces and create employment opportunities for minorities.

Language policies

There is a major language dilemma. On the one hand, the official language is Chinese. On the other hand, in deference to minority cultures, the Government and legal institutions recognize the need to respect and promote minority languages. This bilingual policy leads to some paradoxical results because of the importance of competence in Chinese.

Establish a dialogue on the language question by bringing together all the relevant stakeholders from the minorities, beginning with the Uygur community of Xinjiang. Mount a national campaign through the State Ethnic Affairs Commission to promote multiculturalism in order to break down language and racial stereotypes, and begin the campaign with university students on student exchange programs between the eastern and western provinces.

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14 Cross-border cooperation Cross-border trade and economic cooperation is well below its potential. Issues

Policy Directions

Management of border towns

Spontaneous urban development has taken place at all but the minor border crossings. With trade growing faster than GDP, the border towns have the potential to continue growing rapidly. Most of them are on flat, flood-free sites that are suitable for urban development.

Ensure the provision of appropriate facilities and infrastructure, including roads and, in a few places, airports.

Cross-border cultural and social links

Per capita GDP is higher in counties with border crossings. Similar ethnic communities exist on both sides of many borders in the Western Region.

Provide more border crossings and improve infrastructure and facilities at existing ones. Provide local markets. Relax restrictions on the movement of vehicles across borders.

Special development zones

Governments have established special development zones at appropriate locations but these have not fulfilled expectations. The tax concessions that the Government permits are complex. The Border Economic Cooperation Zones have not been particularly successful.

Progressively abolish preferential tax policies and concentrate efforts on promoting regional economic cooperation and facilitating crossborder traffic and trade. Continue to open up the economy to the private sector. Remove institutional obstacles to the participation of SMEs in cross-border trade.

Regional economic cooperation

ADB and international organizations have promoted informal regional cooperation among groups of countries, including the Greater Mekong Subregion (GMS) and the Central Asian subregion. These groups differ from ASEAN or other regional groupings in that they are informal and pragmatic: the participants agree to plan and implement projects to their mutual benefit. From the perspective of the Western Region, their limitation is that they do not cover important trading partners outside the subregion, for example, India in the case of the GMS, and the Russian Federation in the case of Central Asia. The GMS also does not include Sichuan and Guizhou, provinces that are likely to have significant trading relationships with GMS countries.

Supplement these regional cooperation programs with programs that focus on specific trade links and trade routes, particularly those between the Western Region and South Asia, and between the Western Region and Russia. Consider replacing informal regional cooperation with formal World Trade Organization (WTO) working groups.

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15 Local government The performance of local governments at all levels is crucial to the success of programs to develop the Western Region.

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Issues

Policy Directions

Interregional cooperation

The distribution of economic activities across the PRC does not reflect regional specialization according to the principle of comparative advantage.

Progressively separate business from government by transferring responsibilities to Financial Bureaus or to asset management corporations.

Over-concentration in provincial capitals

There is an over-concentration of economic activity in the provincial capitals.

Devolve local government functions to third-level cities. Develop additional higher-education facilities in third-level cities.

Competitive cities

A property market needs a legal framework that clearly establishes land rights.

Develop a regulatory framework for private sector development in cities, consistent with the objectives of competition in the real estate market, ease and safety in transactions in land rights, clarity of real estate tax regimes, and environmental performance standards.

Allocation of government functions

There is little statutory distribution of local government functions between the different levels of government.

Distribute local government functions and taxes between levels of government.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

16 Water resources management With rapidly increasing water demand and finite water resources, the improvement of water resources management is vital.

Issues

Policy Directions

Lack of unified water administration and management

The Water Law of 1988 calls for unified water administration and management. However, the number of agencies involved, the size of the river basins, and the seriousness of the water shortage make this objective difficult to achieve. (After the research for this report was completed, the Water Law was amended in 2002.)

Reconstitute the River Basin Committees as statutory authorities. Strengthen and clarify the powers of provincial Water Resource Bureaus to implement their water administration mandates. Separate the role of regulation from that of supply.

Inadequate funding

Class A projects comprise both national or interprovincial projects and local government projects. There is a tendency to look to the Government to substantially fund most Class A projects. However, this should not imply that water will not be paid for. Until payment becomes normal, it is unlikely that the water sector can attract foreign investment. The need for multiple approvals from different government agencies and the lack of consistency in approval requirements also discourage foreign investment. The Government intends Class B projects ultimately to be financed with operating income from user fees. Capital investment funds can take the form of borrowings in financial markets or equity investment. In water-scarce areas of the Western Region, water pricing should reflect the real costs of production and delivery, except under very special circumstances. Irrigation is not a good cause to subsidize; the capital cost of rural water supply to poor communities is a much better cause.

Escalating flood damage

The incidence of floods is above the national average in the southwest, but below it in the northwest. With economic growth, the cost of flood damage will increase even if the incidence of flooding does not.

Water scarcity and inefficient use

There is little effective control over water allocation to users in the Western Region except that Category A projects would be subject to some degree of control by funding approvals. Such approvals are unlikely to be tightly linked to

Provide financial incentives to promote specific reforms by local governments when funding Class A projects. Review and simplify the approval procedures.

Promote the formation of water user associations to manage irrigation schemes. Separate the finances of headworks and operating regions. Formalize the relationship between multipurpose and service entities to promote transparency and accountability. Draw a clear distinction between public-good projects and commercial projects (not all publicgood projects are Class A). Restrict subsidies to public-good projects and social (poverty alleviation) works. Explore options for public-private partnerships. Improve the management of flood risks by avoiding high-value development in high-risk areas, improving technical scrutiny of structural flood mitigation measures, and strengthening catchment management. Promote use of water-saving technology in agriculture. Increase prices for water use. Review the allocation of water for agriculture to ensure adequate supply for industrial and urban development. Continued next page ➤➤➤

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Issues

Policy Directions

In true market economies, water would be allocated between users according to price and willingness to pay. In general, the allocation is managed through a system of licensing consumers, with close monitoring of the resource and of usage. In the Western Region, farmers generally pay only 30 percent of the cost of water. This policy puts industries and city dwellers at a competitive disadvantage and may lead to suboptimal outcomes (industries can produce more output per cubic meter of water and provide more employment).

Improve licensing and enforcement systems. Upgrade measurement and reporting systems.

THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA

17

Environmental conservation and pollution control

Economic development will increase the need for pollution control and environmental conservation.

Issues

Policy Directions

Information, monitoring, and reporting

Effective environmental management depends on reliable information about pollution from industry and the quality of the ambient environment, but monitoring results are unreliable in many Western Region counties because of the following: • old and inadequate monitoring equipment • little opportunity for technical development among the monitoring staff • minimal quality assurance and quality control

Introduce a program of regular, structured, state-of-the-environment reporting by each province, with county-level data.

Environmental planning

The potential effects of major development proposals require more comprehensive assessment, over a wider area and over a longer time. Regional planning can require a still higher level of environmental impact assessment. The impact assessment process then must provide for full assessment of the costs and benefits, including environmental costs and benefits, of each development option.

Adopt a model for preparing regional development plans and environmental assessment of plans in stages, with concurrent and complementary activity by Planning Commissions and Environmental Bureaus.

Pollution control

Levels of air and water pollution indicate the inadequacy of pollution control arrangements.

After revising pollution control standards, introduce the negotiation of contracts between local governments and polluters covering financial commitment for plant upgrades, shortterm targets, and community representation to monitor implementation.

Nature reserve management

There are major deficiencies in nature reserve management. Some reserves really exist only on paper. There is no cohesive system of administration and management. There are few arrangements for the provision of specialist scientific and management advice.

Consolidate the management of nature reserves under Forest Bureaus (in the short term). Establish a new national agency for nature reserves with corresponding agencies at the local government level (in the medium term).

Human resource development

Local Environmental Protection Bureaus and Forest Bureaus are taking on new responsibilities in areas of rapid technical advances.

Upgrade training programs.

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18 Urban development The level of urbanization may be low, but not all parts of the Western Region are equally suitable for urban development (the City Planning Law does not permit new urban development except in areas with ample water resources). The low level of urbanization is a consequence of past macroeconomic policies, not failures in urban development policies. Good urban management can promote sustainable urban development and improve the quality of urban environments.

Urban land management

Issues

Policy Directions

With the transition to a market economy and the rapid expansion of cities, the urban planning system is facing severe challenges. These challenges include: • Providing a mix of land use zonings and density controls that are consistent with market demand • Matching infrastructure to development needs • Controlling the conversion of rural to urban uses • Accommodating the redevelopment of industrial sites • Coordinating different interest groups • Managing the informal sector

Increase public participation so that there is a wider appreciation of the contents of plans and so that public support can strengthen plans (the City Planning Law provides for this, but unfortunately local governments do not adequately follow the law). Rationalize the law on change of use (the City Planning Law does not cover change of use). Separate the regulatory functions of local governments from management and development functions.

On a per capita basis urban infrastructure is much Urban infrastructure less developed in the Western Region than in the Eastern Region.

Concentrate government efforts on infrastructure development rather than investment in buildings. Progressively increase charges for water supply, sewerage, heat supply, and solid waste management.

Housing

Urban housing construction has been expanding at an annual rate of between 5 percent and 18 percent since 1995. The main drivers of this increase are higher incomes and expanding urban populations. Higher incomes lead to a demand for bigger homes. As homes are still quite small (an average of 9.8 square meters net living space per person), the level of urbanization still low, and housing expenditure only 4.2 percent of total living expenditures, the expansion of the housing construction industry will require many years.

Ensure a steady supply of serviced sites for private sector and self-build development. Consolidate the supply and management of public housing in the hands of Municipal Housing Bureaus, and encourage work units to give up the provision of housing to employees.

Promotion of urban development

City governments in the Western Region have very low fiscal revenues per capita compared with cities in the Eastern Region. Since there is already an infrastructure backlog, it will be difficult for many cities in the Western Region to develop as fast as cities in the Eastern Region.

Avoid government investment in urban development other than in response to market demands; rely on market-led urban development.

Treat tertiary and secondary industries on an equitable basis in respect of fiscal and financial policies so that the tertiary sector can create more urban employment.

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19 Rural development Whatever the Government’s development strategies over the next 20 years, many people in the Western Region will still live in rural areas. Poverty will remain largely a rural phenomenon, albeit less so than now. Therefore, local governments should vigorously pursue rural development. Issues

Policy Directions

Research indicates that agriculture R&D has contributed the most to poverty reduction and agriculture GDP growth in the Western Region. Many villages in the Western Region still lack essential infrastructure. At the end of 1999, 11.1 percent had no electricity, 24.9 percent no post offices, 80.8 percent no telephones, 20.7 percent no roads, 80.9 percent no tap water, and 10.1 percent no health units.

Strongly promote R&D and extension work in agriculture and forestry.

Food-for-work programs

International experience supports the use of food-for-work programs for rural development, as long as they are well managed and their use is appropriate to local needs and priorities.

Continue with food-for-work programs and concentrate expenditure on completing basic infrastructure connections to villages and poverty villages.

Rural credit

Research has shown that poverty loans are not effective in reducing poverty.

Progressively reduce the roles of government and government-owned banks in poverty loans and micro-credit, and encourage the development of rural credit cooperatives.

Rural infrastructure

Complete infrastructure connections to those villages that economic analysis confirms as having long-term economic viability.

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GLOSSARY accelerated depreciation. The right to write off capital goods for tax purposes faster than the rate at which they would normally be depreciated. This is intended to encourage investment, as it enables a company to defer its taxes when it invests. agglomeration diseconomy. Agglomeration economies are external economies available to firms in large concentrations of population and economic activity. Beyond some point, continued agglomeration gives rise to diseconomies because of factors such as congestion, pollution, and land prices. big push. The argument that development can succeed only if the various sectors of an economy expand together, since each provides markets for the other. (From Oxford Dictionary of Economics) broad money. A relatively broad definition of money. This applies to definitions such as M2, which includes building society deposits, or M3, which includes interest-bearing bank deposits. Broad money measures of the money supply tend to be less stable relative to gross domestic product than more narrow measures. (From Oxford Dictionary of Economics) chemical oxygen demand (COD). An indicator of potential oxygen demand in milligrams per liter of a waste or polluted receiving water, derived from a chemical laboratory test. Two COD methods can be used depending on the strength of the waster. The test is particularly applicable to industrial wastes where the noncarbonation oxygen demand is significant. comparative advantage. A country or region has a comparative advantage in producing a good, relative to another country or region, if the opportunity cost (relative cost of producing the good) in terms of other goods forgone is lower. The law of comparative advantages says that countries tend to export goods in which they have a comparative advantage and import goods in which they have a comparative disadvantage. computable general equilibrium model. A model of the economy so specified that all equations in it can be solved numerically. contestable market. A market that can be entered without sunk costs and left without loss. (From Oxford Dictionary of Economics) corporatization. Conversion into a shareholding enterprise. cost, insurance, and freight (CIF). CIF value is the value of goods when they reach the port of entry to their country of destination. It includes their purchase price in the country of origin, and the freight and insurance costs of shipping them to a foreign port. CIF does not include import duty or costs of transport within the country of destination. crowding in. The possibility that an increase in one form of spending causes another to increase, for example, through the operation of the Keynesian multiplier or through an increase in investor confidence.

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crowding out. The possibility that an increase in one form of spending causes another to fall. For example, an increase in government investment might deter private sector investment. Disability Adjusted Life Years (DALYs). The sum of Years of Life Lost (YLLs) and Years Lived with Disability adjusted for the severity of disability (YLDs). One DALY may be thought of as one lost year of “healthy” life. (From Murray and Lopez 1994) equilibrium price. A price at which the quantity of a good supplied is equal to the quantity demanded. If the supply curve is sloping upward and the demand curve is sloping downward, this price is unique. (From Oxford Dictionary of Economics) externality. A cost or benefit arising from any activity that does not accrue to the person or firm undertaking the activity. Pollution causes damage to the environment, a negative externality. factor endowment. A country’s stock of factors of production: • Land. The area and location of land and the minerals under it are given by nature. Irrigation or drainage can improve the quality of land, while deforestation and erosion can damage it. Known mineral resources reflect the effort put into discovering them. • Labor. The labor force at any given time is given by history, but in the long run can be affected by education, health programs, migration, and social measures. • Capital. The capital stock is predetermined at any moment by past investment, but savings and policy on capital movements affect its growth. (From Oxford Dictionary of Economics) floating population. People living outside their place of household registration. Food for Work Program (FFW). A rural relief program for which the Department of Rural Economic Development of the State Development Planning Commission is responsible. foreign direct investment (FDI). The acquisition by residents of a country of real assets abroad. This may be in the form of land, buildings, mines, machinery, or businesses. foreign investment enterprise (FIE). PRC law does not define a FIE precisely (Lin 2000). According to the current classification under PRC law, FIEs are of four types: • PRC-foreign equity joint ventures (EJVs) • PRC-foreign cooperative joint ventures (CJVs) • wholly foreign-owned enterprises (WFOEs) • foreign investment companies limited by shares (FICLBSs) free on board (FOB). The value of exports when they are placed on a truck, ship, or plane en route to a foreign destination. FOB includes the costs of production and transport to the port, but does not include the costs of insurance and freight to the destination. Gini coefficient. A statistical measure of inequality. If yi is the income of individual i, for example, the Gini coefficient is half the expected absolute difference in the incomes of any two individuals i and j chosen at random, as a proportion of the mean income. In a Lorenz-curve graph, the Gini coefficient is the ratio of the area between the diagonal and the curve to the total area under the diagonal. gross domestic product (GDP). Goods and services produced within a country by residents and nonresidents in a given period of time (normally a year).

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gross national product (GNP). A measure of national economic activity. “Gross” indicates that the measurement is made without subtracting any allowance for capital consumption; “national,” that the economic activity measured includes residents’ incomes from economic activities abroad as well as at home, and excludes incomes earned at home by nonresidents; “product,” that real output produced, rather than real output absorbed by residents, is measured. (From Oxford Dictionary of Economics) hui. A collection of households that are willing to contribute a fixed amount of money to a common pool with either an implicit or an explicit contract. The money collected is used to finance projects undertaken by each household in an agreed order. A hui could be as small as two households, or as large as a thousand households. Most hui use houses or other fixed assets as collateral. The cost of default includes the confiscation of collateral, loss of face (reputation), permanent exile from the hui, and other financial punishments. hukou. A household registration system, under which each citizen must register in one and only one place of regular residence. income elasticity of demand. The ratio of proportional increase in quantity demanded to proportional increase in income, with all prices held constant. A necessity has an income elasticity of demand that is positive but less than 1. indivisibility. A minimum scale at which further dividing will be either technically impossible or uneconomical. intellectual property rights (IPRs). Private property rights in ideas. IPRs may take the form of copyrights, which require the permission of the copyright owner for the copying of computer software, books, music, and other such materials; or patents, which require the permission of the patent holder (who can charge a license fee) for the use of processes or product designs. laissez-faire. A policy of complete nonintervention by governments in the economy, leaving all decisions to the market. Lorenz curve. A graphical representation of inequality. Personal incomes are arranged in ascending order and the cumulative share of total income is plotted against the cumulative share of the population. For complete equality of income the Lorenz curve should be a straight diagonal line. market failure. A brief label for the view that the market does not provide a panacea for all economic problems. There are various ways in which an unregulated market may fail to produce an ideal state of affairs. The main sources of market failure are monopoly, externalities, and income distribution. (From Oxford Dictionary of Economics) moral hazard. The danger that if a contract promises certain people payments on certain conditions, these people will change their conduct so as to make these conditions more likely to occur. For example, moral hazard suggests that if possessions are fully insured, their owners are likely to take less care of them than if they were uninsured, or even to connive at their theft or destruction. (From Oxford Dictionary of Economics) mu. A traditional Chinese unit of area; 15 mu = 1 hectare. Multi-Fiber Agreement. An international agreement restricting exports of textiles and clothing from less-developed countries to industrialized countries.

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multiplier. A formula that relates an initial change in spending (for example, investment, government expenditure, or net export) to the total change in economic activity that results. The multiplier is applicable to an economy in which supply is elastic, so that activity is demand-determined. net enrollment rate. The net enrollment rate is the total number of children in school whose age is within the prescribed age range for the type of school, expressed as a percentage of the total number of children in the age range. It is a net rate because it excludes children outside the age range. net present value. The present value of a security or an investment project, calculated by discounting all present and future receipts and expenditure at an appropriate rate of interest. nongzhuanfei. Converting hukou status from agricultural to nonagricultural. overheating. A level of economic activity leading to excess demand. pH. A logarithmic index for the hydrogen ion in an aqueous solution, used as a measure of the acidity or alkalinity of a substance. A pH below 7 indicates acidity and one above 7 indicates alkalinity (at 25¡æ). public goods. Goods or services that, if provided at all, are open to use by all members of society. There is usually no rivalry among the members, and the goods or services are nonexclusive to each member of society. Defense, law and order, public parks, and monuments are examples of public goods. As nobody can be excluded from using them, public goods cannot be provided for private profit. purchasing power parity (PPP). The theory that exchange rates between currencies are determined in the long run by the amount of goods and services that each currency can buy. (From Oxford Dictionary of Economics) rent seeking. Spending time and money not on the production of real goods and services, but rather on trying to get the government to change the rules so as to make one’s business more profitable. (From Oxford Dictionary of Economics) shareholding enterprise (SHE). Economic unit registered in accordance with the Regulation of the People’s Republic of China on the Management of Registration of Corporate Enterprises, with a total registered capital divided into equal shares and raised by issuing stock. Each investor has limited liability to the corporation depending on shareholding, and the corporation bears liability for its debts to the maximum of its total assets. soft budget constraint. Concept popularized by J Kornai (in The Economics of Shortage [1980]). It is a limit on spending by some public body, which those supposed to be subject to it believe can be breached without serious consequences (unlike a hard budget constraint). For example, the managers of state-owned enterprises may believe that if they run at a loss or make smaller profits than they have been instructed to, the state will meet the enterprise’s losses and not sack them. (From Oxford Dictionary of Economics) state-owned enterprise (SOE). Economic unit whose assets are owned by the state and have been registered in accordance with the Regulation of the People’s Republic of China on the Management of Registration of Corporate Enterprises.

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Stolper-Samuelson theorem. A theory concerning the income distribution effects of interindustry trade. It shows the effects of trade in a two-good, two-factor model with constant returns to scale and incomplete specialization. The theorem shows that trade raises the real income of a country’s plentiful factor, which is used relatively heavily by the exportables industry, but lowers the real income of the country’s scarce factor, which is used relatively heavily in the importables industry. (From Oxford Dictionary of Economics) total factor productivity (TFP). Relates the value of output to total factor inputs, aggregated at some set of relative prices. It can change through changes in effort or managerial efficiency, through new techniques, or through scale effects when the level of output varies. township or village enterprise (TVE). Defined by the Township Enterprises Law of 1996 as an enterprise established in a township or a village under the township’s jurisdiction that has the bulk of its capital invested by rural economic collectives or farmers and that undertakes the obligation to support agriculture. The capital invested by the rural economic collective or farmers must be at least 50 percent of the total. However, the term “TVE” is often used in a broader sense. tradable. Goods or services of a type that can be traded internationally, irrespective of whether or not they actually are. tragedy of the commons. Refers to the dangers of overexploitation of resources due to the lack of property rights over them. Beyond a certain intensity of use, some form of rationing of the use of “commons” becomes necessary for efficiency. This may be done through quantitative allocation or through a charge levied for their use. (Oxford Dictionary of Economics) transitional transfer payment (TTP). An intergovernmental payment designed to balance the regional disparities in the PRC. It is computed according to the following formula: TTP = [(standard expenditure – standard revenue) x (objective TP parameter) + (policy TP amount)] x (1 + incentive factor parameter).

twenty-foot equivalent unit (TEU). The standard ISO container of 20 ft x 8 ft x 8 ft. World Trade Organization (WTO). An international body responsible for supervising and promoting world trade, set up after the Uruguay Round of trade talks in 1994. The PRC became a member in November 2001. youxu liudong. A concept of orderly migration from rural areas to cities in the PRC. The concept lacks precise definition, but it has featured in government policy statements since the early 1990s. The Tenth FYP advocates it.

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________. 2000f. Regional Economic Cooperation in Central Asia, Phase II: PRC Trade with Central Asia. Final report. ________. 2000g. A Study on Ways to Support Rural Poverty Reduction Prospects. Final report. TA 3150-PRC. October. ________. 2001. Almaty-Horgos Road Improvement. Project profile. Asian Development Bank, Global Environment Facility, and United Nations Development Program. 1998. Asia’s Least-Cost Greenhouse Gas Abatement Strategy (ALGAS). Attane, Isabelle, and Youseef Courbage. 2000. “Transition Stages and Identity Boundaries: The Case of Ethnic Minorities in China.” Population and Environment 21 (3). January. Australian Bureau of Statistics website (http://www.abs.gov.au/ausstats/) Bauer, John, Wang Feng, Nancy E. Riley, and Zhao Xiaohua. 1992. “Gender Inequality in Urban China: Education and Employment. Modern China 18, July. Becquelin, Nicholas. n.d. Xinjiang in the Nineties. Bernstein, Thomas, and Xiaobo Lu. 2000. “Taxation Without Representation: Peasants, the Central and the Local States in Reform China. The China Quarterly 163: 742–763. Black, John, ed. 1997. Oxford Dictionary of Economics. Oxford University Press. Bosworth, D., and D. Yang. 2000. “Intellectual Property Law, Technology Flow and Licensing Opportunities in the People’s Republic of China.” International Business Review 9 (4). Boyes, J. R. C. 1995. “The Long March.” Containerisation International, September, 86–87. Bradley, David. 2001. “Language Policy for the Yi.” In Perspectives on the Yi in Southwest China, edited by Stevan Harrell. Berkeley: University of California Press. Brundtland, Dr. Gro Harlem, Director General, World Health Organization. 1998. China keynote speech at Beijing Medical University, Beijing, 23 November 1998. http:// www.who.int/director-general/. Accessed in June 2001. Carbaugh, Robert. 2000. International Economics. 7th ed. SW College. Chen Jiyun. 1999. “The Restructuring of China’s Agricultural System to Speed Up Agricultural Modernization.” In Striding Toward the Year 2020. TA 2965-PRC. Asian Development Bank. Chen Miajian. 1999. Policies and Legislation. Working paper for TA 2817-PRC. Asian Development Bank. Chen Xiwen. 2000. “Reform of Economic Structure in China’s Rural Areas.” In China’s Economic Transformation over 20 Years, edited by Wang Mengkai. Beijing: Foreign Languages Press. Chen Yao. 2000. “Case Studies of Inland Region: Xinjiang.” In Physical Distribution and Economic Development of Inland China, edited by Yasuo Onishi and Jin Bei. Institute for Developing Economies, Japan External Trade Organization. China Business (in Chinese). Various issues. China Civil Affairs Statistical Yearbook 2001 China Daily. 2000. “Pundits to Float Ideas on the West.” http://www.chinadaily.com.cn/. ________. 2001. 2–3 June. China Education Statistical Yearbook 1995 China Energy Development Report. 1997. Beijing: Economic Management Publishing House.

437

China Energy Strategy Study, 2000–2005. 1997. Beijing: China Electrical Power Press. China Environmental Statistics. Various issues. China Financial Yearbook. Various issues. China Fiscal Yearbook. Various issues. China Internet Network Information Center. 2001. Survey Report on the Development of China’s Internet. http://www.cnnic.gov.cn/ China Labor and Social Security Yearbook 2000 China Labor Statistical Yearbook 2000 China Natural Gas and Petroleum Company. 1994. Report of Second Survey of Oil and Natural Gas Resources of China. December. China Population Statistical Yearbook. Various issues. China Rural Energy Statistical Yearbook 1998–1999 China Rural Household Statistical Yearbook 2000 China Rural Poverty Monitoring Report 2000 China Social Statistics 2000 China Statistical Yearbook. Various issues. China Statistical Yearbook of Prices and Urban Household Survey 2000 China Tourism Statistics Yearbook. Various issues. China Transportation and Communications Yearbook 2001 China Water Resources Almanac. Various issues. China Water Resources Report, http:/www.chinawater.net.cn/gb99. China Youth Daily, 10 April 2001 Chinese Academy of Social Sciences (CASS). 1999. Environment and Poverty in China: Current Situation and Trend (Country Paper). Working paper. Center for Environment and Development. August. Civil Affairs Statistical Yearbook 2001 Clegg, J., Cross, A. and Xiao, L. 2000. “US Technology Sales to China: Investigating the Role of Legislation.” World Economy & China 5: 46–54. Cnossen, Sijbren. 1998. “Global Trends and Issues in Value Added Taxation.” International Tax and Public Finance 5: 399–428. Commission of the European Communities. 2001. Creating an Entrepreneurial Europe: The Activities of the European Union for Small and Medium-Sized Enterprises (SMEs). Conroy, John D. n.d. “People’s Republic of China.” In The Role of Central Banks in Microfinance in Asia and the Pacific. 30–60. Cook, Seth, Li Fengrui, and Wei Huilan. 2000. “Rainwater Harvesting Agriculture in Gansu Province, People’s Republic of China.” Journal of Soil and Water Conservation 55 (2). Croll, Elisabeth. 1995. Changing Identities of Chinese Women: Rhetoric, Experience and Self-Perception in Twentieth Century China. London and New Jersey: Zed Books/Hong Kong University Press. Citing Jung Chang’s Wild Swans and Chen Rong’s At Middle Age. Dai, H., G. Xiao, and C. Xie. 1992. “The Strategic Development Plan of Wind Power Generation in China.” In Chinese. Wind Power, 6–12. Dang Huiqiao. 1995. “The Impact of Different Attitudes Towards Infant Gender in the Tu Ethnic Group of Qinghai Province.” In Research on Women’s Reproductive Health in China, edited by Tao Chunfang and Xiao Yang. New World Press.

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Dong, Fureng, and Fuqing Ye. 2001. “The Macroeconomic Policies in the Development of the Western Region.” Research paper for ADB TA 3468-PRC, Policy Support for PRC 2020 Project (Phase III). Dorian, J., et al. (1999), “Energy in Central Asia and Northwest China: Major Trends and Opportunities for Regional Cooperation.” Energy Policy 27: 281–297. Dreyer, June Teufel. 1986. “The Xinjiang Uygur Autonomous Region at Thirty.” Asian Survey 26 (7–12). July–December. Duan Aiwang and Zhang Jiyang. 2000. “Water Use Efficiency of Grain Crops on Irrigated Fields in China.” In Theory and Practice of Water-Saving Agriculture: Proceedings of Chinese-Israeli Bilateral International Workshop on Water-saving Agriculture, edited by Huang Guanhua. Beijing: Water, Irrigation and Hydroelectricity Publishing House. Du Peiling, Hasyeti, Zhang Lin, Ajuna, and Awakhan. 1995. Induced Abortions among the Uygur and Han people in Urumqi.” In Research on Women’s Reproductive Health in China, edited by Tao Chunfang and Xiao Yang. New World Press. Edmonds, Richard Louis. 1994. Patterns of China’s Lost Harmony. London: Routledge. Ergas, H. 1986. “Does Technology Policy Matter?” In Technology and Global Industry: Companies and Nations in the World Economy, edited by B. Guile and H. Brooks. Washington, D. C.: National Academy Press. European Commission. 1998. Environmental Assessment and the Drafting of Regional Development Plans. Directorate-General for the Environment, Nuclear Safety, and Civil Protection. Fan, S., L. Zhang, and X. Zhang. 2001. “Growth, Inequality, and Poverty in Rural China: The Role of Public investments.” IFPRI Research Report. Presented at the Rural Investment, Growth and Poverty Reduction Conference, Beijing, 5–6 November. Feng Chen. 2000. Great Western Development Strategy and New Policy Initiative. Chinese Communist Party Publishing House. Feng Guangzhi. 2000. “Some Topics on Developing Water-saving Irrigation. In Theory and Practice of Water-Saving Agriculture: Proceedings of Chinese-Israeli Bilateral International Workshop on Water-Saving Agriculture, edited by Huang Guanhua. Beijing: Water, Irrigation and Hydroelectricity Publishing House. Finance Yearbook of China 2000. Finance Book Press. Fogel, R. W. 2001. “Forecasting the Demand for Health Care in China.” China & World Economy 9 (5): 9–15. Fu Ma Li and Yang Shonyi, eds. 1996. Atlas of China. China Atlas Publishing House. Gan Hong. 1999. Overview of the Hydrology in the People’s Republic of China. Working Paper 6, Strategic Options for the Water Sector. TA 2851-PRC. Asian Development Bank. Gansu Province. 2001. Tenth Five-year Plan of Gansu Province (Draft Plan). January. Gansu Yearbook 2000 Gao, J., S. Tang, R. Tolhurst, and K. Rao. 2001. “Changing Access to Health Services in Urban China: Implications for Equity. Health Policy and Planning 16 (3): 302–312. Gao, Zhiqian. 2000. “The Development of China’s New and High Technology Industry Zones.” World Economy & China 6: 36–40.

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Gaol Xiaoxian and Dun Li. 1995. “Low Rate of Prenatal Check-ups in Shaanxi. In Research on Women’s Reproductive Health in China, edited by Tao Chunfang and Xiao Yang. New World Press, pp. 280–286. Gaubatz, Piper Rae. 1996, Beyond the Great Wall: Urban Form and Transformation on the Chinese Frontiers. Stanford University Press. Ge Meiyun and Shen Meihua. 1995. “Symptoms Related to Women’s Menopause and Methods to Alleviate Them.” In Research on Women’s Reproductive Health in China, edited by Tao Chunfang and Xiao Yang. New World Press, pp. 434–435. Goldstein, Andrea, and David O’Connor. 2000. “E-Commerce for Development: Prospects and Policy Issues.” OECD Working Paper. http://www.oecd.org/dev. Guangxi Statistical Yearbook 1999 Gu Xiaosong and Brantly Womack. 2000. “Border Cooperation Between China and Vietnam in the 1990s.” Asian Survey 40 (6): 1042–1058. Haig-Prothero, C. 1999. “Policy Issues and Investment Needs in Transportation.” In Challenges and Opportunities in Transportation: First Workshop on Economic Cooperation in Central Asia, Asian Development Bank. Hamann, Bettina. 1999. “Chinese Agriculture and Kazakh Pastoralists along the Southern Fringe of the Dsungarian Basin, Xinjiang, China.” Quarterly Journal of International Agriculture 38 (2): 165–171. ________. 2001. “Die Auswirkungen der chinesischen Reformpolitik auf die kaschishe Weidewirtschaft in Xinjiang/VR, China.” Geographische Zeitschrift 87(1): 46–53. Han, W.K. 1999. Status of China’s Gas Consumption. Speech at the Fourth International Gas Conference, Qingdao, Shandong, PRC, August. ________. 2001. Research paper for TA 3468-PRC. In Chinese. Asian Development Bank. Hannum, Emily, and Yu Xie. 1998. “Ethnic Stratification in Northwest China: Occupational Differences Between Han Chinese and National Minorities in Xinjiang, 1982–1990.” Demography 35 (3). August. Harkness, James. 1998. “Recent Trends in Forestry and Conservation of Biodiversity in China.” The China Quarterly 156: 911–934. Harrell, Stevan, ed. 1995. Cultural Encounters on China’s Ethnic Frontier. Seattle/London: University of Washington Press. Hayashi, Y., Z. Yang, and Osman. 1998. “The Effects of Economic Restructuring on China’s System for Financing Transport Infrastructure.” Transportation Research 32 (3): 183–195. Health Care Financing and Organization in Poor Rural Areas of China Project Group. 1998. Health Care Financing and Organization in Poor Rural Areas of China: Data on 30 Poverty Counties. Heggie, I. G., and P. Vickers. 1998. Commercial Management and Financing of Roads. World Bank Technical Paper # 409. Washington, D. C.: The World Bank. Hossain, Ishtiaq. 1997. The 1996 Bangladesh-India Ganges Water-Sharing Treaty: Problems and Prospects. Paper delivered at the Democracy and Development in Bangladesh Conference, Melbourne. Howell, Jude. 2000. “Organising Around Women and Labour in China: Uneasy Shadows, Uncomfortable Alliances. Communist and Post-Communist Studies 33: 355–377.

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Hu, Angang, ed. 2001. Regional Development: A New Strategy for the Development of the Western Region. Chinese Planning Publishing House. Huang, J., S. Rozelle, C. Pray, and Q. Wang. 2001. “Plant Biotechnology in the Developing World: The Case of China.” Presented at the Rural Investment, Growth and Poverty Reduction Conference, Beijing, 5–6 November. Huo Yongzhe. 2001. “Massive Gas Field Fund in North China.” China Daily, 22 January. Hu Yixun et al., eds. 1993. Railway Transportation Atlas of China. Beijing. Hydrosult Inc. 1999. Strategic Options for the Water Sector. TA 2817-PRC. Asian Development Bank. Inner Mongolia Statistical Yearbook 2000 Institute of Hydropower and Water Resources. 2000. Estimates for the China Water Sector Action Program (a World Bank project). International Finance Corporation. 2000. China’s Emerging Private Enterprises: Prospects for the New Century. Washington, D.C.: International Finance Corporation. International Labor Organization. 1998a. Job Creation in Small and Medium-Sized Enterprises: Recommendations. ________. 1998b. World Employment Report. I Sun Changmin. 2000. “The Floating Population and Internal Migration in China.” In The Changing Population of China, edited by Peng Xizhe with Zhigang Guo. Blackwell, Oxford. Jahiel, Abigail R. 1998. “The Organization of Environmental Protection in China.” The China Quarterly 156: 757–787. Jiahua Che and Yingyi Qian. 1998. “Institutional Environment, Community Government and Corporate Governance: Understanding China’s Township-Village Enterprises.” Journal of Law, Economics and Organization 14 (1): 1–22. Jiangnan Huang and Jing Wang, eds. 2001. Venture Capital and Investment Banks. Guangdong People’s Press. Jikum Huang, Scott Rozelle, and Mark W. Rosegrant. 1999. “China’s Food Economy to the Twenty-first Century: Supply, Demand, and Trade.” Economic Development and Cultural Change 47: 737. Jin Bei and Lu Tie. 2000. “Transportation Facilities and Physical Distribution in Western Region: Status Quo and Prospects.” In Physical Distribution and Regional Economic Development in China: Problems and Prospects, edited by Yasuo Onishi and Lu Zheng. Tokyo: Institute for Developing Economies, Japan External Trade Organization. Jin Bei and Wei Houkai. 1999. “General Situation in Transportation.” In Physical Distribution and Regional Economic Development in China: Problems and Prospects, edited by Yasuo Onishi and Lu Zheng. Tokyo: Institute for Developing Economies, Japan External Trade Organization. Jingzhi Liu. 2000. “The Western Region Should Emphasize the Development of Information Technology.” Guangmin Daily, 28 July. Judd, Ellen R. 1994. Gender and Power in Rural North China. Stanford University Press. Kam Wing Chan and Li Zhang. 1999. “The Hukou System and Rural-Urban Migration in China: Processes and Changes. The China Quarterly, 818–853.

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Lakshmanan, T. R. and W. Anderson. 2001. “Transport and Trade in the North American Free Trade Agreement.” In Integration of Transport and Trade Facilitation, edited by T. R. Lakshmanan, U. Subramanian, W. Anderson, and F. Léautier. Washington, D. C.: World Bank. Lall, Sanjaya. 1999. Competing with Labour: Skills and Competitiveness in Developing Countries. Geneva: International Labor Organization. Land Population Census Office, 2001. Major Figures on 2000 Population Census of China. Leading Group for Poverty Reduction. 2001. Outline for Poverty Alleviation and Development of China’s Rural Areas, 2001 to 2010. Lei Guang. 2001. “Reconstituting the Rural-Urban Divide: Peasant Migration and the Rise of ‘Orderly Migration’ in Contemporary China. Journal of Contemporary China 10 (28): 471493. Lei Xianlong, Zhan Weihua, and Zheng Yaoquan. 2000. “Strategic Considerations of Efficient Irrigation and Salinity Control on Hetao Plain of Inner Mongolia.” In Theory and Practice of Water-Saving Agriculture: Proceedings of Chinese-Israeli Bilateral International Workshop on Water-Saving Agriculture, edited by Huang Guanhua. Beijing: Water, Irrigation and Hydroelectricity Publishing House. Li Danhui. 2001. “A Historical Examination of the Origin of the I-Ta Incident, Supported by Materials from Archives in Xinjiang, China.” Social Sciences in China 22 (3): 140–161. Li Dasheng, John Davis, and Liming Wang. 1998. “Industrialisation and the Sustainability of China’s Agriculture.” Economics of Planning 31: 213–230. Li, Santong, Fan Ju, and Hou Yongzhi. 2000. “Prospects for Economic Growth in China.” In China 2010: Target, Policy, and Prospects, edited by Wang Menkui. China Development Publishing House. Li, ___, and ___ Han. 2000. Energy Structure and Renewable Energy Commercialisation in China. Proceedings of the Fifth Gas Meeting, Beijing, PRC. Liew, Leong H. 2001. “What Is To Be Done? WTO, Globalisation and State-Labour Relations in China.” The Australian Journal of Politics and History 47 (1): 39–58. Lin Huawei. 2000. Legal Guide to Foreign Investment in China. Liu Jun. 2001. “Research into the Long-Term Agricultural Development of the Western Region.” Research paper prepared for TA 3468-PRC (in Chinese). Asian Development Bank. Liu Yongong, Stephan Baas, et al. 2001. Strengthening Pastoral Institutions in Northwest China Pastoral Area to Access Improved Extension Services for Risk Management and Poverty Alleviation: Study Report on Qinghai. Collaborative research by the Food and Agriculture Organization, the Center for Integrated Agricultural Development at the China Agriculture University, and the Ministry of Agriculture and Department of Animal Husbandry (Qinghai), under the UN Task Force on Sustainable Agriculture, Rural Development and Food Security. Liu Xujin, Wang Qihui, Li Tuyu, Deng Yuan, and Qin Hailing. 1995. “The Fertility Customs and Traditions of the Zhuang Women. In Research on Women’s Reproductive Health in China, edited by Tao Chunfang and Xiao Yang. New World Press. Lizhen Yun. 2001. “China Needs an Integrated Domestic Market.” Economic Highlights (in Chinese) 439 (13).

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Local Fiscal Statistics of 1998. China Fiscal Economy Publishing House. Lou, Jiwei, ed. 2000. New China Fifty Years’ Government Finance Statistics. Economic Science Press. Lu, Ziqiang, et al., ed. 2000. Guidebook of the Western Region Development: Statistics and Information. China Social Publishing House. Lunjun Zhang. 1999. “ The Positive Analysis of Tax Burden.” Economic Science (in Chinese) 114(4): 71–78. Lu Zheng and Lue Tie. 1999. “General Situation in Physical Distribution.” In Physical Distribution and Regional Economic Development in China: Problems and Prospects, edited by Yasuo Onishi and Lu Zheng. Institute for Developing Economies, Japan External Trade Organization. Mackerras, Colin. 1994. China’s Minorities. Hong Kong: Oxford University Press. ________. 2001. Xinjiang at the Turn of the Century and the Causes of Separatism. Maurer-Fazio, Margaret, Thomas G. Rawski, and Wei Zhang. 1999. “Inequality in the Rewards for Holding up Half the Sky: Gender-Wage Gaps in China’s Urban Labor Market, 1988–1994.” The China Journal 41, January. Mendelsohn, Oliver, and Marika Vicziany. 1998. The Untouchables: Poverty, Subordination and the State in Modern India. Cambridge University Press. Meyer, R., and G. Nagarajan. 2001. Rural Financial Markets in Asia: Policies, Paradigms, and Performance. Asian Development Bank. Minasuv, Ruztam. 2001. “Ethnic Minorities Biggest Beneficiaries of West China Development.” English.eastday.com. 4 March. (Eastday is an Internet source compiled by the Shanghai Daily.) Ministry of Communications. 2000a. Study of Channels and Modes for Direct Finance of Highway Construction from the Market. Transport Planning and Research Institute. ________. 2000b. Toll Finance Study. Transport Planning and Research Institute. Ministry of Construction. 2001a. Advice on Construction Systems for Western Development. Advice No. 183. ________. 2001b. Outline of the Tenth Five-Year Plan for the Construction Sector. Ministry of Finance, PRC, website: http://www.mof.gov.cn/mof-internet/m-6/tizhi.htm Ministry of Foreign Trade and Economic Cooperation. 2001. Basic Policies Governing China’s Foreign Trade and Economic Cooperation. moftec.gov.cn. 13 June. Ministry of Forestry. 1995. “Forestry Action Plan for China’s Agenda 21.” Ministry of Health. 1999. An Analysis Report of the Second National Health Services Survey in 1998. ________. 2001a. Advice from Ministry of Health about Strengthening Health Work in the Western Region. 26 March. ________. 2001b. Final Accounts for Health Expenditure 2000. Department of Finance and Planning. Ministry of Labor and Social Security. 2001a. Development of Labor and Social Security During the Tenth Five-Year Plan. www.molss.gov.cn. ________. 2001b. Annual Report for 2000.

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Ministry of Public Security. 2001. Advice for Residence Registration Management System in Small Towns. 19 March. Ministry of Water Resources. 1999. North-South Water Transfer: The Backbone Project for China’s Sustainable Development. In Chinese. Ministry of Water Resources and World Bank. 2000. China Water Sector Action Program. Morgan, Stephen. 2000. “Richer and Taller: Stature and Living Standards in China, 1979– 1995.” The China Journal 44 (5), July. Murray, C. J. L., and J. Frenk. 2000. “A Framework for Assessing the Performance of Health Systems. Bulletin of the World Health Organization 76 (6): 717–728. Murray, C. J. L., and A. D. Lopez, eds. 1996. The Global Burden of Disease. Harvard School of Public Health. Murray, C. J. L., J. Lauer, A. Tandon, and J. Frenk. 2001. Overall Health System Achievement for 191 Countries. Discussion Paper Series No. 28. World Health Organization. Murray, C. J. L., A. D. Lopez, C. D. Mathers, and C. Stein. 2001. The Global Burden of Disease Project: Aims, Methods, and Data Sources. World Health Organization Global Program on Evidence for Health Discussion Paper No. 36. Na Ri. 2000. China’s Border Markets. In Chinese. Minorities Publishing House. National Bureau of Statistics. 2001. Major Figures on 2000 Population Census of China. China Statistics Press. National Bureau of Statistics and Leading Group for Poverty Reduction. 2000. Poverty Monitoring Report 1999 (World Bank Western Poverty Reduction Project, World Bank Southwest Poverty Reduction Project, World Bank Qinba Mountain Poverty Reduction Project). National Environmental Protection Agency (now the State Envirionmental Protection Agency). 1998. China’s National Report on Implementation of the Convention on Biological Diversity. China Environmental Science Press. National Environmental Protection Agency and State Planning Commission. 1994. Environmental Action Plan of China, 1991–2000. China Environmental Science Press. National Environmental Protection Agency, State Planning Commission, and State Economic and Trade Commission. 1997. China Trans-Century Green Project Phase 1 (1996–2000). China Environmental Science Press. Ningxia Statistical Yearbook 2000 North, Douglass. 1955. “Location Theory and Regional Economic Growth.” Journal of Political Economy 63 (3): 243–258. Office of the CPC Prefectural Party Committee, Office of Altay Prefecture Administrative Government, and Gansu Legend Culture Disseminating Co. Ltd., eds. 1999. A Guide to Economic and Tourist Development in Altay Office of Yili Prefecture Committee. 1998. Yili Opens to the Outside World. Pan Shengzhou. 2000. Water Resources Development. Research paper prepared for TA 3468PRC (in Chinese). Asian Development Bank. ________. 2001. Water Resource Development and Use. Research paper prepared for TA 3468-PRC (in Chinese). Asian Development Bank. Park, Albert, and Changqing Ren. 2001. “Microfinance with Chinese Characteristics.” World Development 29 (1): 39–62

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Peiyuan Zhen, ed. 2001. Lectures on the Tenth Five-Year Plan. People’s Press/State Development Planning Commission. PennWell. 2000. “China Launches Massive Gas Pipeline Campaign.” Oil & Gas Journal. June. Tulsa. People’s Bank of China. 1988. State Council notice on improving and regulating the management of rural credit cooperatives. ________. 2000. China Financial Outlook 2000. ________. 2001. Annual Report 2000. ________. 2001. Fifty Years of Development of Rural Credit Cooperatives: 1951–2001. Cooperative Financial Institutions Department. ________. n.d. Press conference. Published at http://www.china.com.cn/. People’s Daily, http://english.peopledaily.com.cn/200105/29/eng20010529_71271.html. People’s Daily. 2000. “Legislators to Legalise Environmental Assessment.” 28 December. Phillips, Michael R. 1998. “The Transformation of China’s Mental Health Services.” The China Journal 39. Qin, S. P. 2000. Prefeasibility Study of Biomass Gasification in China. Project report. Energy Research Institute, State Development Planning Commission, Beijing. Rawski, Thomas G. 1999. China: Prospects for Full Employment. Employment and Training Papers 47. Geneva: International Labor Organization. Renton, David. 1996. “Legal and Regulatory Reform for Water Supply Projects.” In BOT in the Water Supply Sector in the People’s Republic of China. Asian Development Bank. Rice, Robert C. 2000. Small Enterprises as an Essential Part of the Indonesian Development Strategy. Rong Xinjiang. 2000. “Research on the History of the Western Regions: A Retrospect and Prospects. Social Sciences in China 21 (2): 111–133. Roper, Christopher T. 2000. “Sino-Vietnamese Relations and the Economy of Vietnam’s Border Region.” Asian Survey 40 (6): 1019–1041. Rosenthal, Elisabeth. 1999. “Suicides Reveal Bitter Roots of China’s Rural Life.” New York Times, 24 January. Ross, Lester. 1998. “China: Environmental Protection, Domestic Policy Trends, Patterns of Participation in Regimes and Compliance with International Norms.” The China Quarterly 156: 809–836. Rudelson, Justin Jon. 1997. Oasis Identities: Uyghur Nationalism along China’s Silk Road. New York: Columbia University Press. Rules for Provision of Rural Five Aspects Assistance 1994 Runsheng Yin. 1998. “Forestry and the Environment in China: The Current Situation and Strategic Choices.” World Development 26 (12): 2153–2167. Rural Household Survey Yearbook 2000 Sautman, Barry. 1999. “Expanding Access to Higher Education for China’s National Minorities: Policies of Preferential Admissions.” In China’s National Minority Education, Culture, Schooling and Development, edited by Gerard A. Postiglione. London: Falmer Press. ________. n.d. “Preferential Policies for Ethnic Minorities in China.”

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Schiavo-Campo, Salvatore, and Pachampet Sundaram. 2001. To Serve and To Preserve: Improving Public Administration in a Competitive World. Asian Development Bank. Secretariat of China National Committee for the Implementation of the United Nations Convention to Combat Desertification (CCICCD). 2000. China National Report on the Implementation of United Nations Convention to Combat Desertification. Seeboorg, Michael C., Zhenhu Jin, and Yiping Zhu. 2000. “The New Rural-Urban Labor Mobility in China: Causes and Implications. The Journal of Socio-Economics 29 (1). Shenggen Fan, Linxiu Zhang, and Xiaobo Zhang. 2001. Growth, Inequality and Poverty in Rural China. Paper delivered at the International Conference on Rural Investment, Growth and Poverty Reduction, Beijing, 5 and 6 November. Shiping Tang. 2000. “Economic Integration in Central Asia.” Asian Survey 40 (2). Shujie Yao and Jirui Liu. 1998. “Economic Reforms and Regional Segmentation in Rural China. Regional Studies 32 (8). Sichuan Statistical Yearbook 2000 Silk, M. A., and S. Black. 2000. “Financing Options for PRC Water Projects.” The China Business Review, July–August. South China Morning Post. 1998. “Uygurs Learn Unspoken Rule of Getting Ahead.” 4 November. ________. 1999. “Wild West Rail Link to Open Up Trade, Tourism to Muslim Outposts.” 15 May. Southern Weekend, 31 May 2001 State Council. 1999. Advice about Basic Cost of Living for Laid-Off Workers in StateOwned Enterprises and Pensions for Retired Staff and Workers of Enterprises. Advice No. 10. ________. 2000. Advice for Facilitating Healthy Development of Small Towns. State Council Information Office. 1994. The Situation of Chinese Women. White paper. http://www.china.org.cn/e-white/chinesewomen/index.htm. ________. 2001a. The Development-Oriented Poverty Reduction Program for Rural China. October. ________. 2001b. “WTO Entry to Promote Free Agricultural Market.” Xinhua 15 May. State Development Planning Commission. 1999a. Analysis of Demand and Supply of Energy in China. Unpublished. Energy Research Institute. ________. 1999b. China’s New and Renewable Energy. White Book. Department of Basic Industry Development. ________. 2000a. New and Renewable Energy Report of China. White Paper. Department of Infrastructure Industry Development. ________. 2000b. Notice About Advice for Water Price Reform and Facilitating Water Saving. Issued on 17 October. ________. 2000c. Oil and Natural Gas Resource Strategy of China. Energy Research Institute. ________. 2001a. Education Development Strategy of the Tenth FYP. ________. 2001b. Energy of China. Energy Research Institute.

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CONTRIBUTORS State Development Planning Commission counterparts WANG Fei WU Yuetao QU Yongguan

International team

People’s Republic of China team

John FREEMAN Team leader/Macroeconomic planning and regional development specialist

DONG Fureng Deputy team leader/Macroeconomic planning specialist

Heling SHI Macroeconomic and institutional planning specialist

GUI Shiyong Institutional specialist

Marika VICZIANY Poverty reduction specialist and socio-anthropologist

WEI Ligun Regional development specialist FANG Weizhong Energy specialist

Philip CHANG Human resources and institutional planning specialist

SHANG Yong Information technology specialist

Keith TRACE Transportation planning specialist

XIE Ping Finance specialist

David MITCHELL Water resources planning specialist

LIU Jun Rural development and agricultural specialist

Warwick FORREST Environmental analyst

PAN Shengzhou Water resources specialist

Ming YANG Energy specialist

SUN Jian Biodiversity and forestry conservation specialist WANG Jian Socio-anthropologist JU Songdong Transport planning specialist TANG Renwu Education specialist WU Xinmu Regional development (training) specialist LIU Jianming Economic and institutional planning specialist WANG Lusheng Health specialist HUANG Shunjiang Urban specialist

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Support staff

Translators and interpreters

LIU Feng Office manager

BEIJING

WANG Tong Project secretary and translation manager

Maps WANG Nian

LU Jiaxiang LI Zhanwu ZHU Lei CHENG Gang LIN Yang YU Shouyue LI Shuangjie ZHANG Jun SHAO Jiajun FANG Weijun LIN Tao LI Zheng WU Danhua LU Zhiwang MAO Xin Fang SICHUAN, GANSU, YUNNAN ZHANG Guibin MEI Mei GAN Qiwei LIANG Ting XINJIANG Ibrahim OMAR LU Qing YANG Yong

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THE 2020 PROJECT: POLICY SUPPORT IN THE PEOPLE’S REPUBLIC OF CHINA