China in Focus: Lessons and Challenges - OECD

1 China in Focus: Lessons and Challenges2012 This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily refl ect the offi cial views of the Organisation or of the governments of its member and partner document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or cite this publication as:OECD (2012), China in focus : Lessons and Challenges , OECD, , credits: CD OECD 2012 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given.

2 All requests for public or commercial use and translation rights should be submitted to Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Centre (CCC) at or the Centre fran ais d exploitation du droit de copie (CFC) at China IN focus : Lessons AND Challenges OECD 2012 FOREWORDThe OECD s mission is to help governments develop, adopt and implement better policies for better lives . To do so, the Organisation brings together the collective expertise and accumulated experience of a range of policy communities from all around the world. The main Challenges faced by our economies are indeed global and addressing them requires the OECD to work ever more closely with its partners to design better policy options and truly global solutions. China s experience and development path are thus of critical interest to the OECD.

3 The collaboration between China and the OECD is a two-way process. The OECD is increasingly incorporating China s perspectives into its policy analysis and recommendations in order to provide its Members with smarter, innovative policy choices. In turn, as China becomes a more prosperous country, the Challenges it faces in its economic development are also increasingly similar to those of many OECD countries, in particular regarding how to foster and sustain more inclusive and greener growth. The experiences of OECD countries are thus more and more relevant for China s own policy choices. This is evidenced by the fact that the OECD works on many policy issues identifi ed as priorities in the Chinese 12th Five Year Plan, including energy effi ciency, public service delivery, social protection, education and health care, just to cite a few. This publication China in focus : Lessons and Challenges has a two-fold objective.

4 First, it provides a snapshot of the current cooperation between China and the OECD by gathering analyses conducted by the OECD on China in 2011, including in the areas of poverty reduction, inequality, health care and foreign trade. Second, it shares with China the policy experience of OECD Members on issues of particular relevance for China , such as green growth and skills. Our intention is to make this publication a regular feature of the OECD- China policy dialogue to help shape and deepen our cooperation further. This cooperation dates back to the mid-90s and has since then been intensifi ed and extended to new policy areas. We consider this policy dialogue as strategic for the future of the OECD and to build together a stronger, cleaner and fairer world economy. Angel Gurr a OECD Secretary-GeneralFOREWORDii China IN focus : Lessons AND Challenges OECD 2012 ACKNOWLEDGEMENTSThis volume is the product of a collaborative project of different directorates of the OECD.

5 The authors are Ir ne Hors (Introduction), Richard Herd (Chapters 1, 2, 3), Samuel Hill (Chapter 1), Alessandro Goglio and Theodora Xenogiani (Chapter 2), Nathalie Girouard and Eugene Mazure (Chapter 3), Przemyslaw Kowalski and Hildegunn Nord s (Chapter 4), Dirk Pilat, Norihiko Yamano and Naomitsu Yashiro (Chapter 5), Kathrin Hoeckel and Andreas Schleicher (Chapter 6), Michael Borowitz and Val rie Paris (Chapter 7), Serge Gas (Chapter 8), Richard Carey and Li Xiaoyun (Senior Advisor to the International Poverty Reduction Centre in China ) (Chapter 9). The project was initiated and managed by Ir ne Hors, Senior Adviser in Beijing, under the direction of Richard Boucher, Deputy Secretary-General and Marcos Bonturi, Deputy Director of the Council and Global Relations Secretariat. Richard Herd, Sam Hill, Ir ne Hors and Vincent Koen provided extensive comments and editing on all chapters. Lynn Robertson and Lian Liu also provided comments on different chapters.

6 The publication was fi nalised in mid-February China IN focus : Lessons AND Challenges OECD 2012 TABLE OF CONTENTSTABLE OF CONTENTSI ntroduction ..viiChapter 1: Macroeconomic Overview ..1 Recent performance and near-term prospects ..1 The framework for monetary and exchange rate policy needs improvement ..8 The fi scal framework needs to be strengthened to meet economic and social objectives ..11 Medium-term Challenges ..12 Chapter 2: Inequality: Recent Trends in China and Experience in the OECD Area ..16 Introduction ..16 Trends in inequality ..17 The causes of inequality in China ..20 The social protection system has been widened but is far from universal ..20 The impact of taxes and cash transfers policies on inequality in the OECD area ..23 Complementarities between policies to reduce inequality and boost growth ..25 Taxing in a way that allows equitable and inclusive growth ..26 Dealing with the distributional consequences of short-term output fl uctuations of macroeconomic shocks.

7 28 The infl uence of institutions on the distributional implications of shocks ..29 Reforms in product markets can also improve the income distribution ..30 Financial reforms as well can have redistributive effects ..31 Conclusions ..31 Chapter 3: Key Lessons from OECD Work on Greening Growth ..35 What are the benefi ts of green growth? ..36A framework for green growth ..37 What are the essentials of green growth policies? ..39 Institutions and multi-level governance ..43 Employment and distributional aspects ..44 The international dimension ..46 Measuring progress towards green growth ..47 Chapter 4: China s 10 Years in the WTO: Sustaining Openness-based Growth into the ..50 China s accession to the WTO as the cornerstone of its re-emergence as an economic power ..50iv China IN focus : Lessons AND Challenges OECD 2012 TABLE OF CONTENTSG lobal trade networks, global value chains and FDI ..54 Trade specialisation patterns ..55 Moving up the income ladder and sustaining openness-based growth.

8 58 Summary and conclusions ..69 Chapter 5: Moving up the Value Chain: China s Experience and Future Prospects ..72 Introduction ..72 China s involvement in global value chains ..73 Strategies for China s upgrading within global value chains ..80 The shift in global markets and opportunities for China ..84 Chapter 6: Measuring Skills to Support Economic Transformation ..89 Introduction ..89 Measuring skills through PISA ..89A framework for the measurement of skills ..90 Current and emerging measures of skills for economic transformation: skills supply ..92 Measuring skills demand ..93 Matching of skills demand and supply and outcomes ..96 Contextual factors having an impact on skills development ..98 Implementing a strategic approach to skills policies based on sound evidence ..99 Chapter 7: Health Care in China : Recent Trends and Policy Challenges ..102 Introduction ..102 The challenge of non-communicable diseases ..104 Health insurance coverage has expanded, but fragmentation remains.

9 108 Further reform of the public hospital system is required ..109A national pharmaceuticals scheme is being implemented to improve access to affordable medicines ..112 Chapter 8: Nuclear Energy in China : Views and Prospects from the OECD Nuclear Energy Agency s Perspective ..115 Introduction ..115 The fl eet of reactors and the impact of the Fukushima-Daiichi accident ..115 The fuel cycle ..116 China and the OECD Nuclear Energy Agency ..117 Increased co-operation between China and the NEA: mutual benefi ts ..118 Concluding remarks ..120 Chapter 9: Economic Transformation and Poverty Reduction: How it Happened in China , Helping it Happen in Africa ..121 Introduction ..121 Economic transformation and poverty reduction ..123 Key elements of China s experience ..124 Applying the Lessons of China to Africa ..126v China IN focus : Lessons AND Challenges OECD 2012 TABLE OF CONTENTSL essons for development cooperation ..129 TablesTable The impact of tax reforms on growth and equality.

10 27 Table Synthesis of empirical fi ndings on the distributional impact ..28 Table Overview of proposed OECD green growth indicator groups and topics covered ..47 Table China s tariffs on agricultural and industrial products ..53 Table Technology expenditures by Chinese industrial enterprises ..83 Table Hospitals and hospital beds in China ..110 FiguresFigure Consumer and producer prices, year-on-year change ..2 Figure Bank lending growth and interest rates ..3 Figure Contributions to GDP growth ..4 Figure Housing sales and property under construction ..5 Figure The trade balance and terms of trade ..5 Figure Cyclical developments: the OECD leading indicator and the national PMI ..6 Figure Borrowing by non-fi nancial companies by source ..9 Figure Offshore renminbi deposits and trade settlement in renminbi ..10 Figure Nominal and effective exchange rate of the renminbi ..11 Figure Government expenditure and the budget balance.