The World Bank released a report on Thursday on its Mid-Term Evaluation of the implementation of China's 11th Five Year Plan (5YP). The evaluation was conducted at the request of the National Development and Reform Commission (NDRC), in the context of the government's own evaluation.

The evaluation was undertaken to assess progress with implementing the 11th 5YP during the first two and a half years, draw preliminary lessons, and make suggestions for policy adjustments. It focused on seven of the nine main objectives of the 5YP: (i) stable operation of the macro economy; (ii) optimization and upgrading of the industrial structure; (iii) significant increase of resource utilization efficiency; (iv) coordinated urban and rural development; (v) improved basic public services; (vi) enhanced sustainable development; and (vii) improved living standards. A summary of the draft report was finalized and submitted in early July 2008 and the full draft report in early October.

"Significant progress has been made toward several of the major objectives of the 11th 5YP, but important challenges remain," say David Dollar, the World Bank Country Director for China. Economic growth has far exceeded expectations. Considerable progress has been made toward the 5YP's most important social objectives: improving basic public services in social protection, education, health, and conditions in rural areas (even though income disparities between rural and urban areas continue to widen). Progress on the environmental and resource use objectives has been mixed: insufficient progress has been made in reducing energy intensity, but improvements were seen in reducing air and water pollution, treating industrial solid waste, increasing the efficiency of water use, and expanding forest coverage.

"However, China has been less successful in rebalancing its overall pattern of growth, which has limited progress on many key objectives of the 5YP," says Louis Kuijs, Senior Economist and Task Manager of the Mid-Term Evaluation. There has been little rebalancing away from industry and investment towards services and consumption. This, in turn, has made it difficult to meet the objectives on energy efficiency, the environment, and reducing China's large external imbalance (the current account surplus). The lack of decisive rebalancing has also made further widening of urban-rural income inequality almost unavoidable, despite strong government efforts. The report notes that, going forward, ambitious rebalancing is needed to help meet these objectives and solidify the social gains that have been achieved. The policy agenda for rebalancing discussed in the report is broad ranging, involving macroeconomic policy adjustments and structural reforms.

Since the report was written, important changes have occurred in China's macroeconomic environment." The impact of the global economic and financial turmoil on China's economy intensified substantially since September 2008," notes Mr. Dollar. "Combined with ongoing weakness in China's housing sector, this is putting downward pressure on growth." The particularly pronounced slowdown in heavy industry led to a substantial decline in energy intensity at the end of 2008. However, this is an accidental, temporary development. Indeed, the government's forceful macroeconomic policy response to the economic shocks aims at offsetting the slowdown, including in heavy industry.

The World Bank thinks that the thrust of the analysis and recommendations of the report remains valid and important in the current circumstances." Indeed, in several ways, current economic conditions strengthen the case for rebalancing," says Mr. Kuijs. "The subdued prospects for the global economy have increased the importance of boosting domestic demand and domestic consumption, which also is a key element of the rebalancing agenda." Thus, several types of measures needed for rebalancing—such as increasing the role and spending of the government in health, education, and social security and measures to boost household disposable income, particularly of lower income people -- are also good for stimulating growth in the short term. This is not true for all policies: some rebalancing policies will not stimulate growth in the short term and some policies to stimulate growth in the short term do not help rebalancing. However, given the underlying strength of China's economy, the objectives of the 11th 5YP are important enough to keep rebalancing high on the policy agenda and to shape economic policy decisions in 2009 as much as possible by the rebalancing and long term agenda.

China has a good track record in basically achieving its medium and long term objectives. The World Bank believes that, with appropriate policy adjustments, China should be able to meet both the challenges of the current global downturn and meet the medium and long term objectives that feature in the 11th 5YP.

(China Development Gateway February 12, 2009)