Lu Zhongyuan, Development Research Center Research Report No.033, 2005

I. The Prominent Contradictions Faced by Economic and Social Development over the Next 5-15 Years

Thanks to hard work in the first four years of the 10thFive-Year Plan, the Chinese economy has entered a new round of growth. It is expected that the average annual GDP growth rate during the 10thFive-Year Plan period will exceed the 8.3 percent recorded during the 9thFive-Year Plan. In 2005, the per capita GDP is likely to surpass 1,300 U.S. dollars. A new material foundation has been laid, the economic restructuring has never been so active, and the space for development has expanded rapidly. While reform and opening up are entering a new stage and new system conditions are gradually becoming sound, the vitality and competitiveness of development are getting stronger. The new goals of struggle are clearer and a new concept of development is taking root, which will offer a scientific guide to the overall economic and social development and a good beginning for building a well-off society in a comprehensive way. In the next 5-15 years, however, we shall face grave challenges. And whether we can properly cope with them will dictate the basic trend of domestic development.

1. Sustainable development will face growing pressures from resources and the environment

This will be the most prominent contradiction confronting China’s economic development in the future. On the one hand, the economy is growing in a fast and sustained manner and is in a new round of growth, the aggregate amount of the economy is visibly larger and the pace of industrialization and urbanization is faster. All these promise new opportunities to expand the space for development and inevitably increase the demand for resources and the intensity of their consumption. On the other hand, the extensive mode of growth, characterized by high investment, high consumption, low output and low efficiency, is pushing up the cost of economic performance and makes it difficult for this mode of growth to continue. Sustainable development will face growing pressures from resources and the environment. In essence, they are problems with the extensive mode of economic growth, low technological contents and poor economic efficiency. The divorce of China’s scientific advance and its economic construction has not been fundamentally solved, and the low technological contents impede the raising of economic efficiency and the tapping of growth potentials.

2. The system and mechanism flaws hinder the qualitative enhancement of the economic growth

The incomplete market economy has been the underlying reason of the low quality of China’s economic growth. There are several manifestations. First, the reform of the investment system is lagging behind, which is harmful both to improving the economic efficiency of investments through the market and to government making up for the social costs arising from market flaws. Second, the financial and tax systems are not standard, which is harmful to removing the inherent motivation of excess government intervention in the economy. Third, the financial system is unsound and the financial parameters are distorted, which is harmful to optimizing and upgrading the domestic industrial structure and raising the efficiency of capital allocation. Fourth, the use-cost of the environment and resources is too low, which makes it difficult to form the corresponding mechanisms to stimulate and control the substitution and conservation of resources and tends to lead to low-level expansion that ignores costs and efficiency. Fifth, there is no standard and long-term management system for the allocation of land resources, which tends to encourage blind investment and induce new social contradictions. Sixth, political reforms are lagging behind economic ones, which tend to result in rivalry for growth speed and pursuit for quantitative expansion.

3. The change in social structure is speeding up, but the development of social undertakings is lagging behind

The Chinese society is in a period of unprecedented and dramatic changes. Therefore, new social frictions are inevitable. In the meantime, China’s social development is visibly slower than the development of the economic sector. There are prominent manifestations. First, the allocation of the resources of public health and education is grossly inequitable. Second, the existing public finance and social coordination mechanism are inadequate to cope with the new challenges arising from higher social mobility and faster social stratification. Third, the trend of population development is grave, exerting an enormous pressure on sustainable development and social stability during the period of social transformation. Fourth, the poverty-stricken population groups are expanding in both urban and rural areas and the problem of poverty is worsening again. During the period of dramatic social changes, diverse social contradictions will inevitably affect social stability and cohesive development if the allocation of public service resources is not properly adjusted, the social security system is defective, the non-governmental organizations are too weak, the channels for the exchange of public opinion are not smooth, and the conventional mechanisms for social coordination are incomplete.

4. Coordinated regional development faces the challenge of further marketization for allocating of factors

The gross imbalance in regional development is a basic national characteristic we must face over the long term. Developing the market economy in such a situation entails an increasingly freer flow of factors of production and a continuous widening of inter-regional disparity in economic development. The fundamental cause of the imbalance in regional development does not lie in the widening of the disparity in economic development. Rather it lies in whether there are integrated regional policies and whether sufficient and equalized public services are provided to the underdeveloped regions. Currently, the intensity of the transfer payment from the central finance to the underdeveloped regions is not strong enough, the regional policies are not fully playing their expected roles in making up for market flaws, and the infrastructure facilities, self-development capacities and welfare levels of the underdeveloped regions are badly in need of improvement and enhancement.

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*This report is one of the series of research papers on "Guiding Principles for the 11th Five-Year Plan and the Long-Term Goals by 2020" and has absorbed the views of group discussions by DRC researchers.