Challenges and Strategies for Sustainable Growth in China

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China has experienced significant economic growth in the past three decades, moving millions out of poverty and becoming a global economic powerhouse. However, challenges such as growing inequality, environmental strains, and the need for more sustainable growth strategies have emerged. Addressing these challenges calls for a shift towards economically, environmentally, and socially sustainable growth models, as well as the development of new metrics to measure progress accurately. The 11th five-year plan laid out a framework to tackle these issues, emphasizing the importance of innovation and new economic models.


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  1. TOWARDS A MORE SUSTAINABLE GROWTH STRATEGY FOR CHINA Joseph E. Stiglitz China Development Forum Beijing March 2008

  2. 30 years of reform Enormous successes In growth average growth rate of 9.8% (8.4% GDP per capita), historically unprecedented Moving more than 300 million people out of poverty Becoming the world s fourth largest economy, the third largest trading economy Constantly adapting economic strategies to changing situations Movement towards the market economy TVE s, Joint Ventures Joining the WTO Building a harmonious society

  3. New Challenges Growing Inequality (Ginii coefficient grown from .29 to .47 Including urban rural, migrant/permanent residents, geographical disparities Including access to education and health Point of reference: U.S. .41; India, .31; Japan, .25 ; Sweden .25; Brazil, .53 Excessive dependence on exports High savings rate (42%) Growing global protectionism

  4. New Challenges Environmental challenges Growth has put huge strains on the economy New global challenges of global warming Limited success in curbing energy usage and emissions China second largest energy consumer and source of carbon emissions (may be no. ! Source of emissions by end of year) In spite of marked increases in energy efficiency (4.4% rate in 2004) China increasingly dependent on imported energy Adapting China s economic model to changing situation As a result of China s own success And the changing global landscape Has been hallmark of China s success in the past

  5. KEY CHALLENGE: MAINTAINING ROBUST GROWTH Sustainable growth Economically sustainable Environmentally sustainable Socially sustainable Important to use appropriate measures of success What you measure affects what you strive for Accounting frameworks are important for firms but also governments GDP is a bad measure, HDI is a better measure But there is a need to include resource depletion and environmental degradation (green GDP) Metrics of inequality New global effort (OECD, Commission on the Measurement of Economic Performance and Social Progress) Even more important for developing countries

  6. 11thfive-year plan 11thfive-year plan laid out framework for dealing with many of these challenges Including establishing a new economic model For example, new socialist countryside strategy New innovation strategies Less dependence on exports More concern for the environment, growing inequalities Need to create the institutional infrastructure for the market economy But changes, e.g. in the global economy, new understandings of the importance of global warming, highlight need to strengthen key elements of that strategy

  7. Lessons from the looming downturn in the U.S. Inadequate regulatory structures can have profound economic and social consequences Market fundamentalism is wrong Markets are not self-regulating Notion that regulators could rely on banks own risk management systems and rating agencies was questionable Products that were supposed to mitigate risk increased it

  8. Long known lessons of economic theory, empirical evidence, and historical experience had been ignored Downside of securitization new problems of information asymmetries Broadened scope for conflicts of interest (e.g. in appraisals) Models were badly flawed Problems have been repeatedly noted Fat-tailed distributions Correlated risks Systemic risk New instruments were changing structure, implying inferences based on past were of limited relevance As were incentive structures

  9. Loss of Balance Balance between the market and government Market did not even produce products that would help ordinary individuals manage their risks well Balance between Wall Street and Main Street Systemic effects on the credit, financial system, spill-over into the real sector 2 million Americans are likely to lose their homes

  10. Challenge of designing appropriate regulatory framework Not just in financial markets, but product safety, workplace and worker protection, environment Can lead to a more productive economy and a more harmonious society Not so much a question of too much or too little regulation, but the design of an efficient, fair and effective regulatory system Disclosure requirements, reducing scope for conflicts of interests, mitigating externalities Complement tax and expenditure policies Distributional concerns cannot be ignored

  11. Inequality Magnitude of inequality means that distributive impacts have to be an important part of every policy decision Design of property rights legal framework Design of regulatory system Design of tax system Warning about excessive reliance on value-added tax Example exchange rate policy In past, adjustment would have had adverse effects on farmers But with increasing food prices, these effects are no longer the center of concern Rice price has increased 75% in past year To 25 year high But the impacts on inflation, cost of living in urban sector becomes more important Exchange rate policy will help change structure of the economy Reduce dependence on exports

  12. Weakening social protections go counter to harmonious society And may even interfere with future productivity Most Chinese have no health insurance Families may be bankrupted by lack of health care Some estimate that 1 million children are not in school because parents cannot afford fees China falling behind others Over past decade, China has spent less on education and health than Brazil as % of GDP (Education, 2002-2005: 1.9% versus 4.4%; Health: around 5% vs. 8.8%; from 1978 to 2003, government share in health expenditures halved) Contrast between India and China

  13. Trickle down economics doesnt work Strategy of Grow first, then deal with problems of inequality won t work Lack of investment in health, education of children has decade-long effects Political economy: wealth inequalities generate pressures to preserve status quo, distort political process Most obvious in case of lobbyists, special interests, campaign contributions China now has the resources to deal with the problem Increased income Increased share of GDP going to government

  14. Environment New IPCC report reflects growing awareness of the problem Will affect all countries Matter of global social justice Global problem Requiring global solution China slated to become largest emitter in world Over past 30 years, emissions have grown 2.5 fold 1990-2004 have been growing at rate of 7.8%--slight increase in emissions efficiency Though not in per capita terms Still, much higher emissions per dollar of GDP than OECD countries Many other local environmental problems (water, air, toxic wastes)

  15. Environmental taxes may be most efficient and effective way of dealing with problems in large market economy Makes more sense to tax bad things than good things Additional revenues can be used to address other social needs Including carbon taxes, recycling taxes Further benefit help move China away from dependence on resource intensive manufactured exports Warding off initiative for border adjustments Hopefully, China s leadership would be followed by other countries

  16. An Alternative China could auction off emission permits With revenues being used to achieve broad social, environmental, and economic objectives Problems of inequality Investments in innovation reforestation

  17. But taxes alone are not enough Regulations and standards transportation, power plants, buildings cover large fraction of emission May be particularly important given long life of assets Government investments and urban planning Public transportation Design of cities Green cities can also be more livable There is a place for planning even in a market economy Part of the balanced role discussed earlier

  18. A dynamic economy and a dynamic society requires constant change A new economic model Resource profligate life-styles of West are not viable in the long run the planet cannot survive Innovation Focusing on saving resources, not saving labor Changing economic model can lead to a more harmonious society Leading in these changes will provide China with a competitive edge And lay the foundations for long term, robust growth

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