Abstract

This paper takes off from a 1985 World Bank report entitled China: Long-Term Development Issues and Options. The first part of the paper briefly revisits that report – why it was produced, and how well its analysis has stood up to the test of time.

The second and main part of the paper also looks at long-term development issues, but starting from where China is now. It begins by considering the pattern of growth that would be needed for China to catch up with the developed countries, with higher total factor productivity (TFP), a different sectoral structure and a new relationship with the world economy. It then considers the economic system reforms required to achieve that pattern of growth and the social policies required to ensure that the benefits of growth are broadly shared.

One requirement for higher TFP is better management of China’s huge stock of public capital. Rearranging the ownership of state-owned enterprises (SOE) is a promising approach, but the economic effectiveness of the current experiments should be evaluated more scientifically, as should the relative performance of directly-controlled and market-regulated SOEs, especially in innovation. Another requirement for higher TFP is greater competition among firms: China has good competition laws, but needs to strengthen their enforcement, especially on SOEs.

China is now far from the relatively low level of inequality to which a socialist country should aspire. It could gradually reduce inequality by more redistribution of income through taxation and public spending and improved education and labour market policies. Rearranged public ownership and more competition would help to reduce perceptions of unfairness. China should also continue to improve its system of social protection, focusing on protecting people rather than protecting firms or jobs, and paying careful attention to long-term financing issues.