China - Country Assistance Evaluation : China - Country assistance evaluation

Report No. 29734 China Country Assistance Evaluation July 30, 2004 Operations Evaluation Department Document of the World Bank Contents ................................................................................................................................ i Preface Summary ......................................................................................................................... ... 111 1. Introduction .......................................................................................................... 1 China’s Achievements in a Quarter Century o f Reform .................................. 1 Shortcomings and Challenges .......................................................................... 3 2 . Evolution of World Bank Assistance Strategy .................................................... 4 Context: Development o f the Relationship .................................................... - 4 Evolution o f the Relationship and Bank Strategy after 1991 ........................... 6 3 . Progress on Development Objectives ................................................................. 11 Macroeconomic Management and System Reform ....................................... 11 Poverty Reduction .......................................................................................... 18 Infrastructure .................................................................................................. 26 Environment ................................................................................................... 29 4 . Program Administration and Cross-Cutting Issues ......................................... 37 Lending ........................................................................................................... 37 AAAIESW ...................................................................................................... 43 Donor Cooperation ......................................................................................... 46 Safeguards ...................................................................................................... 47 Cross-Cutting Issues ....................................................................................... 50 5 . Evaluation of the Bank’s Assistance .................................................................. 53 Outcome o f the Bank’s Assistance ................................................................. 54 Sustainability of Positive Outcomes .............................................................. - 5 5 Institutional Development Impact .................................................................. 55 Bank Performance .......................................................................................... 56 6 . Lessons and Recommendations .......................................................................... 57 Contents (continuation) Tables 1.1 China: Selected Indicators. 1980-2001 ........................................................... 1 4.1 Overall Project Rating-China and Comparisons .......................................... 40 Figures 1.1 Average Annual Real GDP Per Capita Growth 1980-2001 ............................. 2 1.2 Real GDP Index o f Selected Transition Countries ........................................... 2 2.1 IBRD/IDA Commitment to China by Fiscal Year ........................................... 6 2.2 Bank’s Investment Lending for China by Sector ............................................. 8 2.3 Ratios o f Aid and DFI to GDP ......................................................................... 8 3.1 Revenue Trend ............................................................................................... 13 4.1 Comparison o f Sector Investment Lending Allocation .................................. 39 4.2 Ratio o f ESW/Total Direct Cost (YO) .............................................................. 44 Text Boxes 3.1 China’s Poverty in International Perspective ................................................. 20 3.2 A Best Practice Poverty Project ..................................................................... 23 3.3 WBI/China Network for Training and Research in Health Economics and Finance ............................................................................. 25 3.4 Rural Water Supply ........................................................................................ 33 4.1 A Chinese View o f the Bank’s AAA ............................................................. 45 4.2 . . Inspection Panel Investigation........................................................................ 47 4.3 The Views ofthe Borrower ............................................................................ 48 4.4 Bank Involvement in the Three Gorges Project ............................................. 51 References ......................................................................................................................... 63 Annexes ............................................................................................................................. 67 Annex A: AAA Summary .......................................................................................... 69 Annex B: Agriculture Summary ................................................................................. 72 Annex C: Decentralization Summary ......................................................................... 75 Annex D: Energy Summary ....................................................................................... 76 Annex E: Finance Summary ....................................................................................... 81 Annex F: Poverty Summary ....................................................................................... 85 Annex G: Water Summary .......................................................................................... 89 Annex H: Transport Summary .................................................................................... 95 Annex I :Health Summary .......................................................................................... 99 Annex J: Client Consultation................................................................................... 102 Annex K: Client Survey ............................................................................................ 104 Annex L: Guide to OED’s Country Evaluation Rating Methodology ...................... 105 Annex M Management Action Record..................................................................... 109 Annex N: Comments from the China Region ........................................................... 111 Contents (continuation) Annex 0 : Comments from the Government o f China............................................... 121 Annex P: Executke Summary o f IFC Country Impact Review................................ 126 Annex Q : Chairman’s Summary Committee on Development Effectiveness (CODE) ......................................................................................... 130 Statistical Tables ............................................................................................................ 133  i Preface This Country Assistance Evaluation (CAE) builds o n evaluations o f projects, non- lending services and sector assistance programs to assess the development effectiveness o f World Bank assistance to China during the past decade. The C A E focuses on the period FY93-02, but includes some references to developments in the earlier years o f the relationship and to more recent events. Chapter 1 provides an overview o f the achievements and shortcomings o f China’s reforms since 1978. Chapter 2 summarizes the development o f the relationship between the Bank and China in the 1980s in order to provide a context for the period under review, and then traces the evolution o f the relationship and the Bank’s assistance strategy in the past decade. Chapter 3 analyzes progress and the Bank’s impact on the main objectives o f the Bank’s assistance. Chapter 4 reviews the use o f lending and other instruments in achieving these objectives. It also compares outcomes in China with those in other countries and examines some cross-cutting issues. Chapter 5 draws on the previous two chapters to provide a summary evaluation o f the Bank’s assistance and Chapter 6 summarizes the main lessons and recommendations. The assistance o f peer reviewers in providing detailed comments on an earlier draft i s gratefully acknowledged. Those, as well as other comments received during OED’s management review meeting, have been taken into account in the evaluation. The Bank’s East Asia and Pacific Region and the Government o f China (Ministry o f Finance) have also both commented on a draft o f the CAE. OED has taken account o f factual and editorial comments in this draft. Comments from the regional staff are attached as Annex N. Government comments are reproduced in Annex 0. The evaluation was prepared by Gene Tidrick (Task Manager, OEDCR), with assistance from Anthony Churchill and Cordula Thum (Energy and Transport); Christopher Findlay (Agriculture), Azizur Khan (Poverty), Lu M a i (Analytical and Advisory Services), Elaine Ooi, (Health); S. Ramachandran (Finance); Daniel Ritchie (Decentralization and Safeguards), Robert Varley (Water Resources and Environment); Peter Nolan (Enterprise Reform) and Manuel Penalver (Portfolio Management). Qiang Cui provided statistical analysis. Steven Kennedy edited the annexes. Betty Casely- Hayford and Agnes Santos provided administrative support.  . I . 111 Summary 1. Since opening to the outside world and embarking o n a program o f economic reform in 1978, China has had one o f the highest rates o f sustained economic growth in the world, quadrupling per capita income in about 20 years and lifting more than a quarter billion people out o f poverty. Accompanying these achievements are several shortcomings and challenges that have emerged in the 1990s. Poverty reduction has slowed and inequality and vulnerability have increased. China faces severe environmental problems in part because o f the strains o f high growth. And while a strategy o f gradual reform has promoted both growth and stability, the unfinished reform agenda poses fiscal, financial, and social risks which could undermine the achievement o f the past 20 years. 2. This Country Assistance Evaluation focuses o n the period FY93-02. The W o r l d Bank’s assistance strategy had four m a i n objectives during this period: (i)promoting market-oriented system reform and better macroeconomic management; (ii) poverty reduction; (iii) supporting infrastructure development for growth and market integration; and (iv) environmental protection. Although China i s the Bank’s largest IBRD borrower and second largest recipient o f IDA credits, Bank lending accounts for only a small share o f China’s resource flows-about 0.6 percent o f GDP at i t s maximum in the early 1990s. The Bank has therefore not tried to achieve i t s objectives primarily through the direct impact o f i t s lending or through conditionality. Rather, the Bank has relied mostly o n variants o f persuasion and example. These included a dual track approach o f building trust through lending while promoting policy dialogue through sector work, and reliance o n the demonstration effect o f successful project experience in introducing n e w technologies, management methods, or policy reforms to leverage policy outcomes. 3, The overall outcome o f the Bank’s assistance strategy has been satisfactory. In macro-management and system reform, the Bank played an important role in supporting the acceleration o f reforms in the early 1990s, including reforms in macro-management which helped stabilize the economy. With respect to system reform more generally, the Bank helped identify the critical nexus o f enterprisehancial sector/fiscal reforms needed to underpin high growth with stability, but it was less successful in promoting implementation o f some o f the components. Incomplete enterprise and financial sector reforms create heavy fiscal contingencies and pose significant risks t o China’s accomplishments. 4. The Bank made several significant contributions t o poverty reduction in the 1990s. M o s t importantly, the Bank has helped establish successful models o f targeted interventions through integrated rural development projects. Where the B a n k has been less successful-despite writing good reports o n the issues-is in persuading the government o f the implications o f broader development policies for poverty and inequality. The mismatch between inter-governmental fiscal resources and responsibilities exacerbated regional inequality, and led to unequal access to health services; grain policy penalized farmers in some o f the poorer areas; and migration restrictions have limited economic integration.  iv 5. China had a lot to gain from international experience in infrastructure development in the early 1990s and the Bank had a lot to offer. Bank support was highly successful in promoting better project management, competitive bidding, and technical improvements. Even resource transfer from the Bank was o f some importance for breaking infrastructure bottlenecks during this period. In addition the Bank’s dual track strategy o f promoting sector policy and institutional reform was successful, particularly in power, through less so in transport (or water). The main question looking forward i s whether the Bank can s t i l l contribute significant value added in the sector, or whether the Bank finance which the government s t i l l desires i s a substitute for reforms which could open up other modes o f finance. 6. The Bank has made some visible contributions to improving environmental protection, but there have been shortcomings as well. Bank-supported projects in natural resource management, forestry, power (both thermal and hydro), and multi-purpose dams have had a direct and favorable impact, and have also influenced design and implementation o f non-Bank projects. The Bank has helped mainstream environmental concerns in a number o f sectors, notably energy where China has made significant progress in improving energy efficiency. Environmental safeguard policy has been highly variable, ranging from best practice to a rebuke from the Inspection Panel for not applying the Bank’s own safeguard procedures. Overall, the Bank has had a positive impact on the environment, but improving coordination o f environmental policy, especially water resource management, remains a considerable challenge. 7. The Bank’s assistance strategy and activities have been relevant in the large, if not always in the small-at the broadest level o f strategic focus and allocation o f resources the Bank has done the right things. Relevance at the l e v e l o f sector or regional allocation or the choice o f project components has always been constrained by the project repayment system. Projects were often skewed toward components which generated revenue, sometimes at the expense o f higher return public goods components. With the loss o f IDA, Bank lending for social sectors and poor regions has become increasingly constrained. 8. The Bank’s record on efficacy-doing things right-has been mixed. China has the best project outcome and other ratings o f any large country. Project implementation has been excellent in most sectors. But efficacy also depends on achieving policy and institutional change within sectors and on achieving coordination across sectors and levels o f government for cross-cutting objectives. This has been successful in some areas (power sector and social security reform) but less so in others, particularly in areas which primarily depend o n the demonstration effect o f projects at the local level. Similarly, the Bank has been more effective o n coordination where there i s a high-level government coordination body. 9. The main strength o f the Bank has been i t s sustained support o f an activity or program over a number o f years. Because o f the Bank’s long-term involvement, it has been able to have a substantial cumulative impact in a number o f areas, i t s views gain a respectful hearing, and it has sometimes been well-placed to take advantage o f opportunities when China i s looking for support for change. Could the Bank have  V accomplished more if it had been more ambitious or aggressive in pushing i t s own agenda through conditionality? That seems unlikely. The Bank has clearly played an advisory role in China, and could not have expected to achieve more through conditionality than through persuasion and demonstration. Persuasion can be improved, however. The Bank’s view on issues has sometimes been less than f i l l y transparent. Looking forward, the Bank should give more attention to trying to promote and participate in a much broader debate on policy and sector issues, not only among officials, but also among researchers and other stakeholders. Gregory K. Ingram Director-General Operations Evaluation  1 1. Introduction China’s Achievements in a Quarter Century o f Reform 1.1 In December, 1978, China reversed i t s development strategy o f the previous 30 years and launched a process o f economic reform and opening up to the outside world. The results o f China’s strategic shift have been dramatic. Growth. Since 1980 China has had one o f the highest sustained rates o f growth o f per capita income in the world. While there i s a lively debate on the accuracy o f official statistics, there i s widespread agreement that per capita GDP in constant domestic prices doubled between 1980 and 1990 and then approximately doubled again between 1990 and 2000.’ In constant dollars and current purchasing power parity (PPP) terms (see Table 1.1) the increase was even greater owing to exchange rate movements. Exports in current U S dollars increased from $18 billion in 1980 to $249 billion in 2000-a nearly 14-fold increase. 0 Poverty reduction. Between 1990 and 2000 the number o f people living o n a dollar per day f e l l by 170 million-during a period when total population rose by over 125 million. Over the past two decades China accounted for 75 percent o f poverty reduction in the developing world. Table 1.1: China: Selected Indicators, 1980-2001 Indicators I980 1990 I995 2000 2001 Pouulation. total (million) 981 1.135 1.205 1262 1272 GDP per capita (donstant 1995 US$) 167 350 581 825 878 G N I per capita, PPP (current international $) 430 1,300 2,460 3690 3950 Exports o f goods and services (current US$billion 14 62 168 280 299 Exports o f goods and services (% o f GDP) 8 18 24 26 26 Manufactures exports (% o f total exports) 50 74 86 90 90 Gross domestic savings (YO o f GDP) 35 38 43 39 40 Gross capital formation (YOo f GDP) 35 35 41 36 38 Overall budget balance (% o f GDP) -1.9 -1.7 -3.6’ -3.3c Revenue (% o f GDP) 26 20 1 lb 15 17 External debt, total (current US$ billion) 55 118 146 170‘ Reserves (current US$billion) 2 29 105b 166 212 Povertv headcount (mil.)d 490a 375 212 204 Pover& incidence (%)‘ ’ 51a 33 17b 16 Source: The World Bank Sima database, data as o f 7/15/2003, unless noted otherwise. a1978. b1996. ‘Data from World bank China Program real-time database; New definition was introduced in 2001 data that includes better measurement o f short-term debt. dWorld Development Indicators and China Statistical Yearbook. 0 Maintaining stability. China also avoided the instability and output declines o f most other transition economies. This stability i s often attributed to China’s gradualist approach to economic reform (“crossing the river by feeling the stones”), in which institutional changes have preceded or accompanied policy changes.2 ’ See World Bank (1997a) for a lower bound estimate. Still, the de-collectivization o f agriculture after 1979 was quite radical-and arguably the most far-reaching and beneficial reform in the developing world in the past quarter century-but China’s overall approach to reform has been gradualist. Sachs and Woo (1997) have argued that China had the luxury o f being able to choose a gradual reform path because, unlike most other transition economies, it had a large agricultural sector.  2 Figure 1.1: Average Annual Real GDP Per Capita Growth 1980-2001 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.oo 0.00 Figure 1.2: Real GDP Index of Selected Transition Countries Index 350 300 250 200 150 100 50 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 +China -8- Czech Republic +Vietnam + Romania - -0- Poland Russian Federation -X- Hungary  3 Shortcomings and Challenges 1.2 Despite China’s enormous achievements in growth, poverty reduction, and stability, there have been shortcomings as well, especially in the 1990s. Rising inequality and vulnerability. The rural reforms o f 1979-84 reduced inequality as well as poverty. Since the late 8Os, however, inequality and vulnerability have increased, and since the mid-1990s poverty reduction has slowede3In the second half o f the 1990s’ the share o f people in poverty stagnated despite an overall growth rate o f more than 8 percent. This partly reflects the simple fact that coastal provinces have benefited more from reforms and opening up than inland provinces, but decentralization has also favored coastal provinces and reduced the scope for fiscal redistribution, and reforms have led to less equal access to health and education services. A 1998 survey by the Ministry o f Health found that 22 percent o f households below the poverty level had reached that position due to a family member’s serious illness or injurya4 Gender inequality has persisted in the 1990s, with both advances and setbacks. 0 Environment. China’s air and water are heavily polluted, accounting for tens o f thousands o f death annually. Seven o f the ten most polluted cities in the world in the late 1990s were in China.’ “Green” environmental problems are also serious. One-third o f China’s grasslands, which cover 40 percent o f land area, are seriously degraded. A falling water table in northern China has seriously restricted the sustainable development o f the region. 0 Risksfrom incomplete reform. The strategy o f gradual reform i s hard to fault in terms o f the growth and stability it has provided. “Growing out o f the plan”-leaving state enterprises relatively unreformed while encouraging private sector competition and growth-can be seen as an ingenious way to compensate potential losers which has purchased precious time and stability. But the incompleteness o f enterprise reform poses risks which could undermine some o f the achievements o f the past 20 years. Most notably, it weakens the state-dominated banking system, which has over 20 percent non-performing loans (equivalent to about 30 percent o f GDP) even after a previous partial clean-up. It also poses direct risks o f unemployment and social instability, and compounds fiscal problems by cutting into revenues needed for reforms o f pensions, housing, and social services, and for redistribution to poorer provinces. Finally, insufficient reform in regulatory and legal processes fosters corruption which has become an additional source o f discontent and potential instability.6 A World Bank China Client Survey See the background paper by Khan (2002). See also Khan and Riskin (2001), and Kanbur and Zhang (2001). The Gini Index has risen from 28.8 in 1981 (Chen and Wang 2001) to 40.3 in 1998. B y this widely-used measure o f inequality China has gone from one o f the most equal income distributions to a distribution more unequal than average. Figures for comparator countries at the end o f the 1990s (from World Development Indicators 2002) were: Brazil (60.7), India (37.8), and Indonesia (31.7). Zhu (2002). Based on WHO’S list o f most polluted cities in terms o f air quality. Cited in OECD (2002), p. 589. For an expression o f concern by Chinese scholars, see Wang Shaoguang, Hu Angang, and Ding Yanzhu, (2002).  4 (2002) found that corruption and social protection were most frequently considered the greatest challenges facing China. 1.3 China was admitted to membership o f the World Trade Organization (WTO) in 2001. This represents a significant commitment on all sides. For the rest o f the world, it implies granting equal access to markets. For China, it i s a commitment to continue market-oriented reforms and opening up to the outside world. It thus poses both opportunities (for exports and growth) and challenges (of adjustment to competition in agriculture, industry, and banking). 2. Evolution o f World Bank Assistance Strategy Context: Development o f the Relationship 2.1 The People’s Republic o f China assumed i t s seat in the World Bank in 1980. China’s membership was significant for both the World Bank and China. For the Bank, admission o f the world’s largest country offered the chance to be a truly JTorld Bank, and provided an opportunity to work with a country trying to introduce market socialism. For China, gaining membership in the Bank (and the IMF) was part o f i t s opening up and reversal o f isolation. The Bank was viewed by China as a source o f technology and information-a window on the outside world. Deng Xiaoping summed up initial Chinese expectations o f the relationship this way: “We can do it with or without the Bank, but with you we can do it faster.” 2.2 The early years o f the relationship were marked by patient efforts on both sides to overcome cultural differences and mutual misunderstandings or suspicions. Chinese officials were disconcerted by the extensive data requests in preparation for the Bank’s first economic report7 For i t s part, the Bank was surprised to be presented with fully-prepared projects which were apparently expected to be financed with no modification. Chinese suspicions that the Bank had an ideological agenda were matched by Bank concerns that the Bank would be used to certify projects or policies on the basis o f government assurances rather than independent investigation and analysis. Finally, there were different expectations about IDA allocations. Some Chinese officials expected that China would reach immediate parity with India and might even be compensated for the years China had lost while not a member. Because o f China’s size and pressures for allocation to Africa, these expectations could not be met. In the event, a compromise was reached in which China’s IDA allocation gradually increased to a level comparable to India’s, while China limited IBRD borrowing to maintain a 50-50 blend. This meant that overall lending to China rose less quickly than originally expected. 2.3 Establishment o f trust and mutual respect was a long and arduous process, but by the middle o f the 1980s relations were excellent and Bank prestige was high. The Bank’s economic and sector work (ESW) was a big factor.’ Chinese officials were impressed by ’World Bank (1982=3), China: Socialist Economic Development (3 volumes). The Bank worked with Chinese counterpart teams which included Zhu Rongji, then head o f the State Economic Commission. See the study o f “The World Bank as ‘Intellectual Actor”’ (Stem 1997).  5 the big picture painted by the Bank in the f i r s t report, and were surprised by the similarities o f problems with other developing countries.’ The Brookings history o f the Bank noted that this report “became a primer for senior Chinese officials and went a long way in establishing the Bank’s credibility in that country” (Kapur, Lewis, and Webb 1997, p. 24). The second major report (World Bank 1985) had an even more dramatic impact. After reading it, Premier Zhao Ziyang asked the System Reform Commission to prepare a new Five Year Plan incorporating some o f the main proposals o f the report (Lu 2002). 2.4 Lending also helped promote mutual trust. At first, the Bank largely accepted Chinese project proposals with l i t t l e modification, but insisted on application o f standard procurement and other procedures. The results o f international competitive bidding (ICB) lowered project cost so much that China adopted competitive bidding for many o f i t s own projects. By the mid-1980s project preparation and appraisal involved much more give and take, and in 1987 the Bank approved the first (and only) adjustment loan to China-a Rural Sector Adjustment Loan in support o f ongoing rural reforms. 2.5 The f i r s t real test o f the relationship arose in the aftermath o f the events in Tiananmen Square in June, 1989. The Board o f Executive Directors was deeply divided over the implications for Bank strategy. At the behest o f the G-7 the Bank imposed a hiatus o n lending to China.” Bank management was concerned to avoid political conditionality and to help maintain the gains o f economic reform which had taken place in China. The Director o f the Bank’s China Department traveled to China to take stock o f the situation and report back to the Board, and in 1990 President Conable pushed the Board to resume lending over the opposition o f some shareholders (Gwin 1997). In 1991 Bank lending resumed and quickly built up to higher levels than before. 2.6 The Bank thus emerged from the 1980s with considerable prestige and as a trusted adviser to those Chinese policymakers and researchers who favored economic reform. Earlier evaluations have given the Bank high marks for i t s assistance to China in the 1980s. The Brookings history (commissioned by the Bank) o f the Bank’s first 50 years called the relationship “one o f the most successful interactions o f the World Bank with a borrower,” and “one o f the Bank’s prouder achievements o f the 1980s.”” Jacobsen and Oksenberg (1990). loIn FY88 lending to China was $1,693.6 million and through 5/30/1989 lending was $1,348.4 million (ofwhich 38 percent was IDA over the two years). N o projects were taken to the Board between 513011989 and 2/27/1990. Five projects totaling $590 million (all IDA) were approved in FY90. On 1/29/1991 IBRD lending resumed, and total lending during FY91 was $1,579.3 million. Kapur, Lewis and Webb (1997), pp. 24 and 25, respectively. Jacobsen and Oksenberg (1990) also rate this period as a big success, but note that the Bank was not the source o f reform, only a facilitator (p. 140). They also l i s t a number o f challenges and trouble spots, including long project processing times by the Bank, access to data, the level o f IDA, and various issues regarding the pace and extent o f reform (pp. 152-4).  6 Figure 2.1: IBRD/IDA Commitment to China by Fiscal Year ($m) 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0 81 82 83 84 85 86 07 88 89 90 91 92 93 94 95 96 97 98 99 00 01 0 2 0 3 Fiscal Year IBRD C o m m i t h t 0 IDACommit h t 2.7 Lessons from the 1980s are limited and comparisons between the 1980s and the past decade are fraught with difficulty. By the 1990s China was a completely different country than it had been in the previous decade. The Bank’s role in the 1980s as a source o f knowledge for a long-isolated country was clear. But China in the 1990s had far greater capacity, international experience, and access to other sources o f knowledge and capital. In this more sophisticated and competitive environment, therefore, the Bank was bound to have a lower profile and play a different role. Evolution o f the Relationship and Bank Strategy after 1991 2.8 The overarching objective o f the Bank’s assistance strate y during most o f the 1980s and early 1990s was to promote economic system reform.’ In focusing o n reform the Bank was following in a long tradition o f outsiders who have sought “to change China”13 for one reason or another. In this case, system reform was seen by the Bank and ’* The Bank’s first formal assistance strategy statement in 1991 stated: “Since China’s change in representation in 1980, the fundamental objective of the Bank’s lending activities, economic and sector work and associated technical assistance has been to provide analytical and material support to China’s economic reform and modemizationprocess.” (para. 25). The report goes on to list six elements of the CAS, four o f which highlighted reform as the key component. l3The term i s from Jonathan Spence (1969) To Change China: Western advisors in China 1620-1960. This book provides a useful historical perspective on the limited impact outsiders have typically had in China.  7 Chinese reformers alike as the key to long-term growth, modemization, and poverty reduction. 2.9 System reform and macro management-and continued reform for better macro management-have remained prominent themes o f Bank CAS statements. Over the course o f the 1990s increasing emphasis was placed on other objectives which were already noted as secondary objectives in 199 1. The first stand-alone assistance strategy in 1995, for example, had four areas o f focus: macroeconomic and structural reforms; infrastructure bottlenecks; poverty reduction; and environmental protection. The 1997 strategy was similar, but grouped around five themes: macroeconomic growth and stability; infrastructure; human development and poverty reduction; agriculture and rural development; and environmental protection. The Bank’s strategy on poverty reduction and environment evolved in line with the approach in most o f the Bank. The strategy for poverty reduction, for example, was to be pursued by helping China maintain high overall growth and by supporting agricultural and human resource development. Lending for agriculture, the social sectors, and (increasingly) inland areas was an important part o f the Bank’s stated strategy. 2.10 Where the Bank’s strategy for China differed from that for other countries, in degree if not in kind, was in two areas. First, the Bank consistently emphasized lending for infrastructure in China at a time when such lending was falling B a n k ~ i d e . ’(See ~ Figure 2.2 for sector allocation to China, and chapter 4 for a comparison with other countries). Infrastructure bottlenecks were identified as a major impediment to growth and macro stability, as well as to market integration. The other notable feature o f the Bank’s strategy in China was the stress given to policy reform within each sector. 2.1 1 H o w did the Bank aim to effect i t s ambitious ob‘ectives? N o t through the direct impact o f i t s lending. The Bank’s lending was modest IJ for a country the size o f China- about $3 billion (0.6 percent o f GDP) at i t s height in 1994. Direct foreign investment at that time was already 10 times as high (see Figure 2.3). Bank lending was, however, 4.2 percent o f government expenditure (and a higher but unknown proportion o f discretionary expenditure) at a time o f great fiscal stringency, so that for a brief period in the mid-1990s the Bank made a noticeable incremental contribution to budget resources. Nevertheless, resource transfer was never seen as the main instrument o f Bank strategy or a major objective in i t s own right.16 2.12 N o r was conditionality an important instrument. Like other large countries for which the Bank i s a relatively modest source o f capital, China was reluctant to accept strong conditionality. China was particularly sensitive to conditionality because o f i t s associations in the minds o f some with unequal treaties and extraterritorial concessions. l4Lending for infrastructure was about half o f lending to China during both FY83-92 and FY93-02. The Bankwide average share o f infrastructure in investment lending f e l l from 46 percent to 35 percent in the respective periods, and as a share o f total lending Bankwide, infrastructure lending fell from 39 percent to 25 percent. See Regional comments, Annex N. l6Transfer o f foreign exchange resources has been even less an objective. At the end o f 2001, total reserves minus gold were over $215 billion-equivalent to 70 years o f World Bank lending at the highest annual rate achieved in the mid-1990s.  8 China also had no need for balance o f payments support and the one adjustment loan (the RSAL o f 1988) was an untranched operation based on already completed actions and disbursed against expenditures. There was project-specific conditionality, o f course, but sector-wide conditions were rare. Figure 2.2. BanKs Investment Lendingfor China by Sector (FY93-02) (?4 of Total Investment) Education 3% Other Health. Nutdtionand 5% Population Energy and Mning 20% Urban Developmnt and water Supply and Snitahon 29% 11% Figure 2.3: Ratios of Aid and DFI to GDP (% of GDP) 7.00 1 6.00 5.00 4.00 3.00 2.00 1.oo m A m Y n 0.00 Y Y I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 +Official development assistance and official aid +IBRDllDA Disbursement +Foreign direct investment, net inflows  9 2.13 The methods the Bank employed to pursue i t s strategic objectives were mostly variants o f persuasion and example: 0 Persuasion through ESW, workshops, and other AAA activities was a key method. The target audience was mainly senior officials and their policy advisers, and the objective was to persuade them to implement top-down reforms. 0 Dual-track approach o f building trust through lending while carrying the policy dialogue through sector work. Each project was intended to push the frontier o f policy or institutional change, but the approach was gradualist and depended less on conditionality than persuasion. 0 Working with willingpartners. The Bank worked with the power sector which wanted access to the technology Bank lending could provide and which was receptive to policy suggestions, but the Bank withdrew from working in the coal sector because the Ministry was not interested in policy dialogue. In housing reform, the Bank worked with municipalities that were willing to introduce economic rents and excluded areas such as Shanghai that were not. The Bank continued to work with Shanghai in other sectors, however, and Shanghai later introduced housing reforms on i t s own. 0 Demonstration effect. The Bank relied on the demonstration effect o f successful project experience in introducing new technologies, management methods, or policy reforms to leverage the impact o f project outcomes. This was largely a bottom-up process o f diffusion by example, though China also uses pilots to test changes before they are rolled out nationwide through changes in national policy. 2.14 The approach just outlined f i t s well with China’s preference for gradual and pragmatic reform. It clearly l e f t the government “in the driver’s seat” with all that implies for country ownership and performance. One drawback i s that important issues may be omitted if key actors on the government side are unwilling to be partners with the Bank, or with other Chinese agenc.ies in cases such as the environment where coordination i s ~ i t a 1 . lThe ~ dual track approach can also lead to overly modest project objectives or complacency, and accountability for the Bank’s performance can be difficult to assess when policy issues are l e f t to the uncertain timing and outcome o f the second track (policy dialogue). 2.15 After the 1997 reorganization, the Bank decentralized the China Department, moving the Country Director to Beijing and expanding the size and functions o f the resident mission. This positive development for Bank-China relations was offset by three negative developments from China’s point o f view. 2.16 First, IBRD lending to China was increasingly constrained by the Bank’s limits on the share o f i t s portfolio in a single country. As a result o f this, IBRD lending, which ” See Regional comments, Annex N.  10 had built up rapidly in the early 1990s to a peak o f $3.3 billion in FY93, declined to below $1 billion by FYO1. 2.17 Second, the Bank stopped lending IDA to China after FY99. Although plans to switch from blend to all-IBRD lending had been considered earlier and postponed for three years, the loss o f IDA was a disappointment to the government and placed strains on the Bank’s relationship with China. IDA donors decided that China was sufficiently creditworthy to dispense with IDA funding. The government thought this unfair because per capita GDP was s t i l l below the cutoff line at that time and because there were s t i l l some 200 million people in China with consumption below a dollar a day. The government also f e l t that Bank senior management could have fought harder to retain China’s access to IDA. Apart from the strain this placed o n the relationship, it greatly complicated Bank strategy. Beneficiaries right down to the village or individual farmer level have always been responsible for loan repayment. With the loss o f IDA the government has decided that the Bank will be largely excluded from lending to poor provinces or the social sectors because IBRD t e r m s would be too onerous. 2.18 The third significant development was an Inspection Panel Report on the Qinghai Component o f the Western Poverty Project. The Panel’s Report, issued on April 28, 2000, concluded that the Bank had failed to follow i t s own safeguard procedures for the environment, indigenous peoples, and involuntary resettlement. Following a Board decision that the project be resubmittedfor approval after additional studies, China withdrew i t s request for Bank funding and decided to complete the project using i t s own funds. 2.19 These three developments affected the Bank’s assistance strategy. After the 1998 update o f the 1997 strategy the Board asked that no further CAS be sent until there was a strategy to deal with the constraints posed by exposure limits. An agreement reached in July, 2002, provided inter alia for prepayment o f some Bank loans and for offset purchases o f IBRD bonds so that the Bank can increase i t s annual lending to a projected $1.2-1.3 billion. 2.20 The latest CAS presented in December, 2002, i s consistent with previous ones. The main objectives are to support China in making two transitions, from a rurallagricultural to an urbadindustrial society and from a planned to a market economy. The CAS i s organized around three themes-improving the business environment to help accelerate the transition to a market economy; addressing the needs o f poor people and regions; and facilitating environmental sustainability. The main differences with previous strategies are imposed more by the shift to all-IBRD terms than the overall reduction in lending. The Bank i s constrained from shifting i t s lending to lagging regions and from maintaining the level, or even the share, o f lending to agriculture, the social sectors, and poverty projects because o f the difficulties these regions and sectors would have in repaying IBRD. An innovative arrangement in which DFID blends grants with IBRD loans to simulate IDA t e r m s offers an opportunity for the Bank (jointly with DFID) to remain engaged in social sectors and poverty projects. By also maintaining a relatively high level o f lending for infrastructure, the Bank aims to increase the share o f lending to  11 poorer, inland provinces. The effect o f the Inspection Panel Report on safeguards policy i s discussed in chapter 4. 3. Progress on Development Objectives 3.1 The Bank’s assistance strategy had four main objectives during the past decade: (1) promoting market-oriented system reform and better macroeconomic management; (2) poverty reduction; (3) supporting infrastructure development for growth and market integration; and (4) environmental protection. This chapter reviews progress o n these objectives over the past decade and the impact o f the Bank’s assistance on each objective. Macroeconomic Management and System R e f o r m 3.2 System reform has been the most prominent objective o f the Bank’s assistance strategy, particularly in the early years o f the period under review. Macroeconomic management and system reform have always been seen by the Bank as complementary. Growth and stability (low inflation) create a favorable climate for reform, and system reform (notably, creation o f a “hard budget constraint” for enterprises and banks) creates the micro foundation (responsiveness to price signals) for indirect macro management. China’s macro management could hardly have been better in the areas o f growth, inflation, and foreign trade and exchange rate management. Fiscal management has been more o f a problem. And while progress has been made on enterprise and related reforms, the unfinished agenda o f system reform poses risks for financial, fiscal, and social stability. Macroeconomic Management 3.3 China faced two critical tests to the maintenance o f growth and stability in the past decade. The first came in the early 1990s following the resumption o f reform in 1992. By mid-1993 inflation had also risen again to about 20 percent per annum as it had during 1988-89), provoking a fierce debate in China on whether reform was compatible with macro stability. The Bank was able to make an important contribution to the debate through a conference on “Macroeconomic Management in China” held in Dalian in June 1993. This was one o f a series o f annual conferences co-sponsored by the Bank and the System Reform Commission which brought together Chinese officials and scholars with Bank staff and foreign experts to discuss some aspect o f reform. The Bank’s arguments that macro instability was the result o f incomplete reform rather than inherent in reform i t s e l f helped influence subsequent efforts to reform the central bank and monetary management and to undertake fiscal reform to restore and partially re-centralize revenue collection. l 9 This influence seems to have carried over into trade and exchange rate reform as Chinese reforms in these areas were influenced by and largely consistent with the recommendations o f a major Bank trade report (World Bank 1994b). The link made by the Bank between macro management and system reform i s well-illustrated by the sub-title o f the 1996 CEM: The Chinese Economy: Fighting Inflation, Deepening Reform. l 9 See Harrold, Hwa, and Lou (1993), Lu (2002), and discussion below.  12 3.4 The second test was the Asian Crisis o f 1997. China’s decision to forego competitive devaluation in the wake o f the 1997 crisis helped limit the crisis. China also countered that shock with an expansionary fiscal policy. This maintained China’s growth rate and helped neighboring countries recover more quickly. But it also led to growing fiscal deficits and postponement o f financial sector reform in order to sustain growth. Bank advice may have influenced China’s response to the crisis. The Bank’s Chief Economist met with the Premier and other officials, and advised China to prevent deflation and competitive devaluation. Those views were circulated within the government.20 The Bank continued to produce broad-based economic reports throughout the 1990s, but these had less evident impact on macro policy. The ambitious China 2020 study (World Bank 1997) coincided with the Asian crisis, which distracted policy-makers from the long-term issues addressed in the report, and the impending loss o f IDA, which strained relations. Interviewees also criticized the report because it had too l i t t l e Chinese input and focused on problems and long-term goals, rather than on concrete steps to achieve them. Other donors, however, reported that they found this report valuable for helping formulate their own assistance strategies, and sector ministries found the background papers very useful. 3.5 Fiscal policy i s the most difficult long-term challenge o f macro management. Although government revenue never declined in absolute terms, it decreased sharply as a percentage o f GDP from 34.4 percent in 1978 to 19.1 percent in 1990, reaching a l o w o f 11.1 percent in 1995. In part, this was an intended consequence o f the declining financial intermediation role o f the government, but it was mainly due to the erosion o f state- owned enterprise (SOE) profits because o f competition from township and village enterprises (TVEs). Central government finances were particularly hard hit due to a series o f adverse (to the center) fiscal contracts negotiated with individual provinces in the mid to late 1980s. The declining share o f government revenue, attempts to maintain funding o f SOE investment (through banks as well as the budget), and pressures to cushion the effects o f reforms through subsidies led to growing inflation in the late 1980s. Fiscal reforms in 1994 regularized intergovernmental fiscal relations and set the stage for a gradual recovery o f the share o f government revenue to 17.2 percent in 2001.21 Although China experienced the same relative decline in revenue as many other transition economies, it avoided fiscal collapse and inflation because o f i t s high savings rate and implicit taxation o f the financial system, and because it undertook timely fiscal reforms. The Bank argued strongly for these reforms in order to improve the instruments o f macro management. The Bank also gave advice on a value added tax in 1993, and provided a Fiscal T A credit in 1995 to support budget administrative and fiscal policy improvements, including tax policy and intergovernmental grants. The momentum for fiscal reform slowed in the late 1990s, and implementation o f the project was delayed, but interest in fiscal issues has recently increased. ’OAlthough the Bank supported an expansionary fiscal policy in the aftermath o f the Asian Crisis, it stressed the risks in numerous reports and policy notes if such a policy were not used as a temporary measure. See comments from the Region in Annex N. ” Ahmad, et. al. (2002). This uses the IMF definition which differs from the official definition in that losses o f SOEs are classified as expenditures rather than negative revenues.  13 3.6 Despite these achievements, China faces t w o other difficult fiscal issues. First, continuing budget deficits and large contingent liabilities for pensions and the banking system create a debt management problem. Informal w o r k o n the implications o f contingent liabilities for debt management (see Krumm and W o n g 2002 for a published version) has reportedly sensitized officials to the seriousness o f this issue. Second, the intergovernmental fiscal system remains deeply flawed. The Bank’s Provincial Public Figure 3.1: Revenue Trend 25 , (Revenue as % of GDP) I 20 I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Central Revenue 0 Non-Central Revenue Expenditure Review (World Bank 2002a) provides a good analysis o f the issues. There i s a mismatch between tax and expenditure assignments at different levels o f government and the overall incidence o f the fiscal system i s regressive. Per capita government expenditures in the richest five provinces were 3.3 times those in the poorest five provinces in 1998 (up f r o m a differential o f 2.1 times in 1990).22 This imbalance accentuates regional inequality. Moreover, provincial and local authorities impose a number o f ad hoc fees which are a particular burden in poorer areas.23 The level and arbitrary nature of these fees have been a major source o f discontent, leading to “tax ” Calculated from World Bank (2002a), Table 2.6. Shanghai’s per capita govemment expenditures were 19 times those of Hebei Province in 1998 (Table 2.5). Per student recurrent expenditure on compulsory primary education was more than 10 times higher in the top-spending province than in the bottom-spending province (Table 6.6). The central govemment transfers a large portion o f its revenue to the provinces, but most transfers are tax rebates based on source so that the transfers are not equalizing. 23 Extra-budgetary funds (EBFs) may account for as much as 20 percent o f GDP (World Bank 2002), so the overall tax “take” may not have declined. This gives the worst o f both worlds: high tax burdens combined with the inefficiency, inequity, and lack o f transparency o f EBFs.  14 revolts,, in some poorer rural areas. A pilot program introduced by Anhui Province to substitute taxes for fees and limit the level o f rural taxes i s now being rolled out in other provinces, but it does not address the overall regressiveness o f the fiscal system.24 System Reform 3.7 China’s strategy o f gradual economic reform has successfully sustained growth, stability, and political support,25but the unfinished reform agenda poses significant risks. To some extent these have been calculated risks-the calculation being that it was more important to sustain growth after the Asian Crisis than to press ahead with enterprise and banking reform-but the risks are significant nonetheless. Although sometimes impatient with the pace o f reform, the Bank has broadly supported China’s incremental approach. 3.8 State owned enterprise (SOE) reform i s central to reform o f the entire economic system for several reasons. 0 In the pre-reform system, SOE profits were the main source o f savings and government revenue. Prices bore l i t t l e relationship to costs or scarcity, and were used by the central authorities as implicit taxes and subsidies. Thus, enterprise reform was closely linked to price reform and had enormous macroeconomic implications-1 5 o f the 23 percentage points drop in the share o f government revenue to GDP from 1978 to 1995 was attributable to lower revenues from industrial SOEs. 0 SOEs have traditionally had enormous social responsibilities, providing lifetime employment and housing, pensions, health care, and education for workers and their families. Without unemployment insurance and housing and pension reform, enterprise reforms resulting in dismissal o f workers would create hardship and social unrest. 0 Reforms which shift responsibility for social services and insurance from the enterprise to the state (the socialization o f welfare) have budgetary implications. They require additional public funding and/or individual fees at the same time that revenues are tight. 0 M u c h SOE investment previously financed through budget grants i s now funded through loans from state-owned commercial banks. Banks, however, are subject to political and social pressures and often lend to SOEs which might not qualify on strictly commercial criteria. 3.9 It i s not surprising that enterprise reform has been gradual. The social responsibilities o f SOEs and the l i n k s between enterprise reform, social services and insurance, the budget, and the financial sector mean that all aspects o f reform have to go forward together, or be carefully sequenced, to avoid adverse macro or social consequences. 24See Regional comments, Annex N. 25Qian (2002) provides a good review o f China’s approach to reform and the reasons it has been largely successful thus far. For a review o f the early reform period and the debate over gradual vs. “big bang” reform, see Tidrick (1994).  15 3.10 Considerable progress has been made on system reform. Price reform took place gradually during the 1980s and early 1990s and most prices in China are now market- determined.26SOEs themselves have steadily declined in importance during the 1990s. Their share o f industrial output has declined from 78 percent in 1978 to 54.6 percent in 1990 and 23.5 percent in 2000, thou h the share o f “state-owned and state-holding enterprises” was s t i l l 47.3 percent in 2 0 0 0 4 This relative decline reflects the rapid growth o f the non- state sector rather than an absolute decline o f SOE output, but in recent years SOE reform has accelerated. Under a 1997 guideline o f “focusing on the big and letting go the small,” reform strategy has been to corporatize large enterprises while putting small enterprises under private management or ownership. By the end o f 2000, 81 percent o f the 635,000 small SOEs had been transformed to non-state ownership.28 The introduction o f bankruptcy legislation, unemployment insurance, housing reform, and limited pension reform have enabled the closure o f many loss-making SOEs and a reduction o f SOE employment o f some 30 million jobs in the past four years. 3.1 1 Enterprise and related reforms are far from complete, however, and this poses significant challenges and risks. While reforms boosted SOE productivity, loss-making SOEs rose from 26 percent o f the total in 1992 to 50 percent in 1998 as competing non-SOEs did even better.29Despite housing and other reforms, many SOEs s t i l l have social obligations which may partly account for their poor financial performance. Privatization o f small SOEs has lacked transparency, frequently leading to asset-stripping and other forms o f corruption. Large SOEs have been delinked from ministries and organized as corporations, but corporate governance and regulation are weak.30 Coverage o f unemployment insurance and social security i s limited to urban areas and programs are underfunded because responsibility for funding remains mainly at the municipal level. Finally, commercial banks have become seriously exposed to risk o f non-repayment by SOEs. Non-performing loans (NPLs), mainly from SOEs, are officially estimated at around 25 percent o f total loans despite an earlier shift o f part o f the portfolio to asset management corporations. Ultimately, since the banks are also state-owned, NPLs create contingent liabilities for the budget. 3.12 The Bank’s role in enterprise and related reforms has been mixed. One o f the most frequently-cited areas o f successful bank assistance by Chinese sources i s pension reform. Bank support included ESW, research papers and participation in an international workshop, a policy note at the request o f the Premier, and a project to help support implementation o f a pilot reform scheme in Liaoning Province.31 The Bank has also contributed to housing reform 26 This does not mean that price reform i s complete, but relative prices are not significantly out o f line with those in other countries. Utility prices are s t i l l mainly regulated, but cost-based. See also the next section on progress in agriculture. 27 ChinaNational Bureau o f Statistics (2001) and earlier years. Although the Chinese term (guoyou konggu qiye) i s often translated as “ state-holding enterprises” the term “state-controlled shareholding companies” would be more accurate. Comparisons are approximate because o f changes in definitions over time. ’* See the background paper by Lu (2002). 29 SOEs retum on assets was estimated at 6 percent in 1996 compared to 8.4 percent in collectives, and 9.9 percent in joint ventures. Part o f the poor financial retum may reflect ongoing social obligations. 30 See Regional comments, Annex N. 3’ See Lu (2002). The Bank’s study o f pension reform worldwide (World Bank 1994a) and the follow-up report on China (World Bank 1996c) helped persuade China to follow a “three-pillar model” which includes a mandatory pay as you go defined-benefit component, a mandatory defined-contribution component, and a voluntary defined-contribution  16 through projects as well as ESW. AAA on enterprise reform has been influential in promoting concepts such as corporatization and the Bank has given a great deal o f advice in reports, seminars, and technical assistance on corporate governance and bankruptcy, but it has also been criticized for being too generic (operating at a level o f 30,000 feet as one staff member ~ ~ projects in the industrial sector were put it) and too timid in discussing p r i ~ a t i z a t i o n .Bank the least successful in the lending program; five o f eight industrial projects completed after 1992 had unsatisfactory outcomes. Technology upgrading was the dominant objective in most projects, but some also sought to pilot some type o f reform. Overall, they failed on both counts. The Bank i s ill-suited to providing the kind o f quick, flexible assistance needed in industry, and partial reforms at the enterprise level do not succeed without a wider change in policies and incentives. More recent experience has also been less than satisfactory. A TA project for enterprise reform attracted l i t t l e interest from the local governments which were meant to be i t s beneficiaries, and the Shenyang Industrial Reform Project had little impact on reform.33 The Bank has incorporated the lessons learned into i t s current strategy and there have been no new industrial projects in recent years.34 3.13 The biggest risk to China’s continued growth and the biggest failure o f the Bank’s assistance strategy thus far i s the financial sector. The banking system has been extremely successful in mobilizing household savings to replace SOE savings, but it does not allocate resources efficiently (a majority o f loans from the dominant state-owned banks go to SOEs) and i t s alarming rate o f NPLs, poses a huge risk to the budget. While it i s true that the potential budget costs are mitigated by the fact that the state i s both creditor (as owner o f the banks) and debtor (as owner o f the SOEs), the systemic risk i s s t i l l enormous because different levels o f government have different net positions, the value o f enterprise assets may be only a fraction o f outstanding loan value, the government has an implicit contingent liability to household depositors, and entry into W T O will increase competitive pressure on banks as well as enterprises. Financial sector reform cannot be separated from enterprise reform, because to reform one quickly risks forcing collapse o f the other. The government has made progress in recent years (see Annex E), but the stakes and risks are s t i l l high. 3.14 The Bank’s Financial Sector Review (World Bank 1990) was the basis for assistance strategy in the subsequent decade-to create independent banks which, while s t i l l state-owned, would operate on commercial principles, subject to an improved regulation and supervision system. The Bank recognized the need to find ways to limit component. The workshop was the “China Development Forum on Social Security Reform” sponsored by the Development Research Center o f the State Council in 2000. 3 2 See background paper by Lu (2002). For an overview o f the issues and the Bank’s advice, see the IFC-Bank sponsored publication by Tenev and Zhang (2002). Nolan (2002) also criticized the Bank for failing to support the govemment’s strategy o f creating globally competitive enterprise groups. It i s unclear that the Bank would either be effective or should be involved in pursuing this objective. 33 The ambitious Shenyang Industrial Reform Project supported technology upgrading and reorganization of the Shenyang Machine Tool Company, including a component supporting severance payments for redundant workers. The technology upgrading appears to have been successful, but the reform impact has been minimal. The severance payment component was superseded by a municipal scheme, and continuing disputes over the company’s debt repayment obligations to the municipality suggest a failure to replace the prevailing bargaining culture o f SOEs with a binding hard budget constraint. 34 See Regional comments, Annex N.  17 political interference, especially from local authorities who had influence over local bank branches as well as control over SOEs. Bank advice to create regional branches of the People’s Bank o f China, along the lines o f the US. Federal Reserve, represented an early (successful) attempt to limit local political interference and reassert central authority over monetary aggregates. Although little subsequent progress was made on the ob‘ectives set out in the 1990 Financial Sector Review, the Bank did not recast i t s strategy. 3 4 3.15 A recently-completed Financial Sector Technical Assistance Project (FSTAP) supported development o f financial sector “infrastructure” in areas such as the payments system, prudential supervision and regulation, and PBC’s debt management, and provided an opportunity for discussion o f policy issues. Other Bank lending to the financial sector did l i t t l e to build up institutional capacity for independent financial intermediation, however. Although three o f the six line o f credit (LOC) projects completed after 1991 were rated satisfactory and three were marginally satisfactory, they appear less successful now than at the time. Sub-projects had good rates o f return, but the Bank’s loans neither improved the overall quality o f loan portfolios, nor had much impact on systemic financial sector issues. To the extent that project evaluation improved, it may have been used to select the best projects for Bank funding rather than to reject projects which showed a l o w rate of return. The last L O C operation closed in 1996. The Bank tried to develop a Financial Sector Development Project and then a project to support the Construction Bank, but these efforts came to nothing. The Bank was reluctant to include a large L O C component and China disliked the disclosure requirements and felt the Bank was not nimble enough in preparing the project. The Bank’s analytical work suffered from lack o f staff with sufficient expertise or familiarity with China, and there was frequent turnover. China also looked to investment banks and consultants rather than the Bank for the increasingly specialized policy and institutional advice being sought. Financial sector work o n China continued to dwindle after 1997. During the 1997 Asian Crisis China’s top leadership was interested in lessons o f the crisis for China’s own banking and financial sector. However, there was little interest or confidence in Bank advice or support at lower levels and the Bank accommodated this lack o f interest, undertaking almost no Bank work in the sector until 2001. 3.16 In 2001, the Bank agreed with the government to renew Bank support for financial sector reform and development through a program o f AAA. The Bank produced a series o f confidential policy notes o n specific issues o f interest.36 The notes provide a good survey o f the issues, but are based mainly on international experience. If this promising renewal o f collaboration i s to be effective, the Bank will need to ground i t s recommendations in analysis o f Chinese e ~ p e r i e n c e . ~ ~ 3.17 Summary: Macro management and system reform. China’s achievements in growth and stabilization over the past decade have been outstanding. Steady progress has also been made in key areas o f system reform, but intermittent and incomplete reform o f 3 5 Other ESW included a review o f capital market development (World Bank 1995a) but this did not alter the Bank’s approach to banking sector development. 36 The issues include: bank supervision, deposit insurance, interest rate liberalization, and state commercial bank reform. 37 See Regional comments, Annex N.  18 the inter-government fiscal system, SOEs, and the financial sector pose risks for continued growth and stability. The Bank made a significant contribution to China’s macroeconomic management at a critical stage in the early 90s and to the resumption o f reform, helping persuade the top leadership that continued reform was not only consistent with, but essential for, high growth with l o w inflation. With respect to system reform more generally, the Bank helped identify the critical nexus o f enterprise/financial sectorhiscal reforms needed to underpin high growth with stability, but it was less successful in promoting implementation o f some o f the components. In the banking sector, the Bank largely failed to engage with the relevant authorities throughout the mid and late 1990s, though it helped improve basic banking infrastructure such as payment systems. The Bank has now re-engaged in the financial sector, but the effectiveness o f i t s advice remains to be seen. In state enterprise reform, the Bank provided useful support on bankruptcy legislation and in associated housing and social security reform, but attempts to introduce reforms through industrial projects were largely unsuccessful, and overall reform advice remained too generic to have much practical impact. In the fiscal area, the Bank’s advice was influential in helping reverse the decline in government revenues and the central share o f revenues in the early to mid-1990s, and more recently, the Bank has stimulated government awareness o f the large fiscal contingencies arising from non-performing loans and unfounded enterprise pension obligations. Finally, Bank analysis and advice helped stiffen China’s resolve to complete i t s successful negotiations on W T O entry. Overall, the Bank met with only mixed success in helping move reform forward. Incomplete financial sector and enterprise reform, and the associated heavy fiscal contingencies, all pose significant risks to China’s accomplishment^.^^ Poverty Reduction 3.18 N o country has been more successful than China in reducing poverty in the past 20-25 years. Some 220-290 million people have moved out o f poverty, depending o n the definition used. The biggest reductions in poverty came in the early period mainly due to rural reforms.39 In the latter part o f the 1990s the number o f poor remained roughly constant despite high growth rates, and China’s poverty rate using the PPP dollar per day measure i s relatively high compared to other countries at a similar PPP income l e v e l (see B o x 3.1). In contrast to the early 1980s, the benefits o f growth in the 1990s have disproportionately accrued to the better-off and inequality has steadily increased. The ratio o f urban-rural incomes, which had fallen from 2.9 in 1978 to 1.9 in 1985, rose to 2.2 in 1990 and 2.7 in 1999 (see Annex Table 8).40 Vulnerability has also increased markedly. In rural areas particularly, access to health care has deteriorated. In urban areas insecurity has increased as enterprise reform has led to redundancies and uncertainty about fimding for pensions and unemployment benefits. And while migration restrictions have been relaxed somewhat, under the urban registration (hukou) system, 38 See Regional comments, Annex N. 39 De-collectivization and a gradual move to higher, market-determined prices increased incentives; partial abandonment o f the goal o f grain self-sufficiency at the local level and relaxation o f constraints on rural marketing helped reverse distorted cropping patterns; and industrial planning and marketing reforms permitted the rapid expansion o f rural township and village enterprises (TVEs) which generated about 65 million jobs in the first decade o f reforms. 40 However, recent unpublished research by A.R. Khan indicates that there may have been a reversal in the trend o f inequality during the last two or three years.  19 most migrants are not entitled to resident benefits such as housing and education. China i s making good progress on meeting most national Millennium Development Goals (see Annex Table 10 and China CAS 2002), but progress has been highly uneven geographically. O n current trends some poorer regions will not meet all the goals by 2015. 3.19 Growth was the most important factor in China’s success in poverty reduction. But the recent slowing o f poverty reduction and increasing inequality and vulnerability show that growth-even very rapid growth-is not enough. Several structural factors offset the poverty-reducing effects o f growth:41 remote, resource-poor areas have lower growth potential than coastal areas; the scope for raising rural incomes by improving cropping patterns and the terms o f trade for agriculture had largely been exhausted by the mid-1980s; and with accelerating enterprise reform, employment growth naturally lags behind output growth because o f the huge reserve army o f hidden unemployed in state and collective enterprises. But policy factors also inhibited poverty reduction. Special privileges designed to attract foreign investment (such as special economic zones) were long limited to the coastal region; the tax sharing system has redistributed revenues in favor o f rich localities; and migration from rural areas has been limited. This last policy has special significance because one o f the main ways in which growth trickles down from leading sectors and regions i s by the movement o f labor. 3.20 The Chinese government recognized early on that growth i s not enough to reduce poverty. In 1986, at about the same time that China’s development strategy shifted from agricultural growth to export-led development in coastal regions, the government set up the Leading Group for Poverty Reduction (LGPR) under the State Council and started to identify poor counties that would qualify for targeted assistance. Studies have estimated that targeted programs may have raised the rate o f growth in poor counties by 1 to 2 percent per year.42 Unfortunately, regional targeting may be a “blunt instrument” for reaching the poor (Lipton and Ravallion 1995). About half o f China’s rural poor do not live in poor counties and a majority o f people living in targeted counties are not poor. Thus, coverage (of the poor) was weak and leakage (to the non-poor) substantial. 3.21 The government introduced new elements into i t s poverty strategy during 1999-2001. In 2001 it adopted a new Ten Year Plan for poverty reduction. This introduced an explicit multi-sector approach, emphasizing agriculture and rural development, provision o f education and training to the poor, and facilitation o f voluntary migration and resettlement o f people from ecologically disadvantaged areas. Second, the government adopted new programs for protection o f the urban poor, including unemployment insurance and subsistence allowances for the urban poor. Although meant to provide a comprehensive urban safety net, resources are inadequate to achieve this objective (ADB 2002), and programs are funded at too l o w a level (usually municipal) to spread risk and provide a sustainable funding base. The third new element i s the “Great 4’See the background paper by Khan (2002). 42Jalan and Ravallion (1998) estimated that living in a designated poor county raised consumption by 1.1 percent per year from 1985-90. Park, Wang, and Wu (2002) estimated the effect on rural income growth in designated counties at 2.28 percent from 1985-92 and 0.91 percent during 1992-95. The rates o f return on poverty investments were 15.5 percent and 11.6 percent, respectively, for the two periods.  20 Western Development Strategy” adopted by the State Council in 2000. This i s basically an extension o f the regional development approach to all o f Western China. The program has multiple objectives which may dilute, or be at odds with, poverty reduction. In particular, emphasis on capital-intensive resource extraction projects will do l i t t l e for the poor in Western provinces unless the traditionally l o w transfer prices for raw materials are raised and appropriate fiscal sharing arrangements are made. While there i s broad agreement on the tremendous progress China has made in reducing poverty, estimates o f the remaining problem depend critically on how poverty i s defined. Using China’s official poverty line (an income level equivalent to 66 cents per day), the number o f poor people has declined from 250 million (26 percent) o f the population in 1978 to less than 30 million (2.3 percent) in 2001. Using World Bank figures based on a dollar per day consumption level in PPP terms, the number o f poor has declined from an estimated 490 million (51 percent) in 1978 to about 205 million (16.1 percent) in 2000. The differences in estimates highlight the sensitivity o f poverty headcounts to definitions- especially to the poverty line used to divide, somewhat arbitrarily, the poor from the non-poor. Based on the most widely-used PPP$ comparator, China s t i l l has the second-largest population o f poor people o f any country (next to India), and a relatively high proportion o f poor compared to other countries with comparable PPP$ income per capita. The comparison i s based on levels o f consumption, but in China household saving i s high, even in low-income households. Using income rather than consumption, however, only 9.8 percent o f the population would have been below the dollar per day poverty line in 1999. Moreover, the PPP comparison i s based on average consumption, whereas it ought to be based on the consumption basket o f low-income households for comparison o f poverty levels. The main conclusion to be drawn i s not that poverty i s relatively high or low, but that a large proportion o f the population i s close to the poverty line, however defined. Comparison o f Poverty Using PPP$ Per Day Country Per Capita PPP$ Percent in Poverty El Salvador 4,260 26.9 Turkemenistan 3,340 20.9 Paraguay 4,380 19.5 China 3,550 18.5 Peru 4,480 15.5 Guatemala 3,630 10.0 Indonesia 2,660 7.7 Sri Lanka 3,230 6.6 Jamaica 3,390 3.2 Egypt 3,460 3.1 Ukraine 3,360 2.9 Jordan 3,880 <2.0 Morocco 3,320 c2.0 Source. World Develonment Indicators 2002.  21 3.22 Until the late 1990s China’s poverty strategy was to push for the fastest possible growth, combined with targeted regional development interventions. Could China have done more to reduce poverty faster? Or would such attempts have simply reduced growth without affecting poverty? Recent changes in strategy suggest that the government thinks it could have done better. It i s now recognized that poverty i s not just a rural phenomenon and that rural poverty i s not just concentrated in remote areas. Vulnerability i s also recognized as a serious problem, though many o f the required reforms (housing, pensions, social assistance for the poor and unemployed) need further development and more secure funding, and others (such as health finance reform) have scarcely begun. Similarly, the importance o f migration in spreading the benefits o f growth and helping create a more sustainable balance betweenpopulation and resources in fragile areas i s now recognized, but migrants s t i l l face restrictions and discrimination. What i s perhaps s t i l l not sufficiently recognized i s that the regressive fiscal system offsets many o f the benefits o f targeted intervention^.^^ 3.23 The Bank has made a substantial contribution to China’s evolving poverty reduction strategy through i t s AAA, poverty monitoring, and projects. The main strength o f the Bank program has been the close integration o f these three instruments. 3.24 AAA andpoverty monitoring. The Bank’s ESW and research o n poverty have been influential both inside and outside China. Two studies o f rural poverty (World Bank 1992 and World Bank 2000) provided an overview o f poverty issues and sensible strategy proposals on targeting and the need for a multi-sector approach to rural develo ment. Combined with an international conference co-sponsored by the Bank in 49 2000, these reports helped influence the re-orientation o f government strate y in the 49 Ten-Year Plan for poverty reduction adopted in 2001. Research by DECRG on the determinants and measurement o f poverty have also influenced both scholarly and policy views. Both the sector reports and research papers are widely cited in the literature. D E C has also worked closely with the Bureau o f Statistics, providing training and advice on defining and measuring poverty and on the design o f the household survey and other monitoring activities. One gap in the Bank’s poverty work has been the neglect o f studies on urban poverty. (The Bank has, o f course, been involved in analyzing pension reform and other vulnerability issues, as discussed in the previous section). But a recent ADB (2002) report has admirably filled this gap, and it makes sense to build on this division o f labor rather than to duplicate efforts. One high priority area would be a study o f labor market issues, including the informal sector and l i n k s between rural and urban areas. 43 In 1995 an average rural household paid net taxes o f 0.5 percent o f income while the average urban household received a net subsidy o f 11 percent. Net tax per capita o f extremely poor rural households in 1995 was 36 times higher than that o f non-poor households. In urban areas, transfers accounted for 5.4 percent o f the income o f poor households compared to 11.1 percent for the non-poor. I f the distribution o f net urban subsidies in 1995 had been merely equal, the increase in the urban Gini coefficient between 1988 and 1995 would have been half o f what i t actually was. See Khan (2002) and Khan and Riskin (2001). 44 “International Conference on China’s Poverty Reduction Strategies in the Early 21’‘ Century” in May, 2000, co- sponsored by the govemment, the World Bank, UNDP, and the Asian Development Bank. 45 See various papers by Jalan and Ravallion, Chen and Wang (2001), and Ravallion and Chen (1998).  22 3.25 Poverty lending. Lending for poverty-related projects, as measured b y “poverty- targeted interventions” (PTI) lending, has been relatively low-under 15 percent o f total lending in China compared to 56 percent in India.46 The share o f PTI lending may be a misleading measure o f support for poverty reduction for several reasons: non-PTI projects (such as highways which integrate remote markets) may be more beneficial to the poor than direct interventions; projects may have poverty components but s t i l l not qualify for P T I classification; and, finally, the Bank’s impact will largely depend on providing replicable examples o f best practices, given the small share o f Bank lending in total investment. In fact, the Bank’s direct poverty lending through integrated rural development projects has provided a replicable model for targeted intervention. The Southwest Poverty Project in particular has introduced new concepts and practices which have benefited not only project participants but also the government’s own targeted interventions and practices (see B o x 3.2). Nevertheless, the share o f poverty-related projects in the lending program has probably been less than optimal for demonstration purposes, and P T I lending has virtually disappeared following the loss o f IDA. 3.26 Agricultural sector. Agriculture i s s t i l l the most important source o f livelihood for rural residents, though it i s declining in relative importance. H a l f the population was s t i l l employed in agriculture in 2000, down from 60 percent in 1990, but agriculture’s share o f GDP was only 16 percent in 2000 (down from 27 percent in 1990) despite continued growth at 3.5-4.0 percent. This reflects the growing importance o f non-farm income for farm households. Non-farm income grew from 26 percent in 1990 to 47 percent in 1999. The structural changes also show the importance o f looking at agricultural production as only one element in rural development and poverty reduction. The Bank’s assistance strategy for agriculture has increasingly done that, gradually shifting i t s emphasis from increasing agricultural production to improving rural incomes in poorer areas, and improving natural resource management for a more sustainable rural economy in ecologically fragile areas. Most agriculture sector projects have emphasized diversification o f production, including non-farm production, rather than just increasing production or yields o f traditional crops. 3.27 The impact o f the Bank’s program in agriculture has been mixed. The Bank’s sector work and policy advice o n grain policy and other broad aspects o f agricultural strategy have been but failed to overcome resistance in some areas. By 1999 83 percent o f all agricultural products were sold at market prices, but grain marketing has been liberalized at a slow rate since the late 1980s. Quotas s t i l l exist and there were policy reversals on marketing arrangements in 1998. This mainly reflects strategic concerns about dependence o n grain imports; the economic case for liberalization i s well- 46 Projects are classified as “poverty-targeted interventions” if the have a specific mechanism for targeting the poor and/or the proportion o f poor among the beneficiaries i s significantly higher than the proportion o f poor in the total population. This i s an assessment made at the time o f Board approval. The figures for China are for 1990-2001, and those for India are for 1994-99. See Annex F for further discussion o f PTI projects. 47 See Annex Table 4 for a l i s t o f ESW products.  23 B o x 3.2: A Best Practice Poverty Project An internal assessment review in 1995 identified the Southwest Poverty Project as best practice soon after the project began being implemented. Subsequent project performance has confirmed this assessment. The project implements many of the recommendations o f the 1992 rural poverty report and involved DECRG and Chinese poverty monitoring organizations in M&E. The design went against longstanding conventional wisdom that integrated rural development projects were too complex to implement. Because o f involvement o f the Leading Group for Poverty Reduction (LGPR) and the support o f the highest levels o f the national government, it was able to overcome bureaucratic resistance to coordination. The outcome o f the project has been highly satisfactory overall. Preliminary results o f a review by DEC (Chen and Ravallion 2003) estimate a rate o f return on investment in the project o f nearly 10 percent. Since the comparator villages were part o f the government’s own program in poor counties, this i s a measure o f the Bank’s value added. Poorest households benefited most. This was achieved by finer-grain regional targeting focusing on the poorest townships and villages rather than on household level targeting within villages. The latter has not worked well in very poor areas because it undermines political support and leads to favoritism in allocation, with attendant leakage and corruption. Not all components worked. Investments in TVEs, as in other projects, were largely unsuccessful, but this component was reduced sharply during implementation. The health component, involving an attempt to provide collective insurance, was not very successful. Preventive care was often pre-empted by expenditure on curative measures. The project was also more successful in some provinces than in others. Success depended on the capacity and commitment o f provincial and local governments and on ability to monitor and enforce repayment o f credit in the project. Several lessons have emerged from the project. Two lessons which the government i s applying to its own projects are, first, the importance ofproject supervision-for ensuring that implementation takes place and benefits reach intended beneficiaries, and for making adjustments to take account o f problems, successes, and unexpected events and, second, the need to improve targeting to reach the poorest areas. Two additional lessons have yet to be assimilated. First, the project confirms the value o f a multi-sector approach to poverty interventions. Whether this coordination should be done through national projects under the LGPR or through provincial authorities, and whether all sectors (such as health and education) should be integrated under a single project umbrella are still matters o f intense debate within the government and the Bank. Second, the project highlights the primacy o f national or sector policies in some areas. Labor mobility can be facilitated through a regional development project, but national policies to remove obstacles to movement and protect migrants from exploitation are necessary and more cost-effective. Improved education and (especially) health outcomes in poor regions will also require systemic changes and outside resources as well as local efforts. understood b y Chinese p o l i c y - m a k e r ~ .The ~ ~ national market has become increasingly integrated and domestic prices for most agricultural products are close enough to world prices that W T O accession should have a relatively modest impact on agricultural output and incomes, though there will be some adverse distributional effects which will need remedial action such as increased mobility o f labor.49 3.28 OED ratings o f Bank lending in agriculture have been high-94 percent for outcomes during 1993-2002. Sustainability was rated as likely for 79 percent o f lending-higher than most comparator countries and the Bank average-but institutional development was rated favorably only 63 percent o f the time (see Annex Table 5b). 48 There are many people inside and outside China (e.g., Brown 1995) who s t i l l view self-sufficiency in grain production as an important economic objective, o f course. As the background paper on agriculture (Findlay 2003, citing Lu Feng 1996) notes: “The answer to the question o f ‘who will feed China’ i s that China will feed i t s e l f through trade.” 49 DEC has sponsored some useful analytical work on WTO accession, culminating in an intemational “Seminar on WTO Accession, Policy Reform and Poverty Reduction in China” in June, 2002.  24 Borrower feedback credited the Bank with substantial impact on project management (procurement and project appraisal), and the introduction and popularization o f many innovations and new varieties which raised incomes and productivity. But there were shortcomings as well. Selection o f project components has been distorted by incentives for local governments to include income-generating activities to repay project loans. This led to inclusion o f many TVE investments which have been unsuccessful. Although TVEs have contributed enormously to rural development in the 1980s and early 1990s, Bank-supported investments often failed because Bank procedures are too cumbersome to support timely investment in commercial activities. TVE components have also tended to crowd out the private sector. (This lesson has been absorbed and the Bank has cut down on such components.) More generally, Bank projects have focused too much on specific production results and on ad hoc arrangements for channeling credit, rather than on helping to build a viable rural credit system. The blame for this i s shared between the Bank, which has been too eager for production results at the expense o f institutional development and sustainability, and the Borrower (especially local b governments ,which has resisted surrendering control to independent financial institution^.^ Finally, recent project assessments show that while in several cases physical construction targets and outputs have been achieved crucial institutional issues have not received the attention that they need. One such issue i s the operation and maintenance (O&M) or irrigation infrastructure. Gains in productivity and incomes from greater water availability achieved with support from a Bank project may well be short- lived if O & M issues are not given the attention they need. And while it i s commendable that physical implementation often exceeds project targets in China, this has sometimes had unintendedconsequences-for example in the Hebei Agricultural Development Project in which over-expansion o f tube wells may have contributed to lowering the water table. 3.29 Health sector.” China’s health and nutrition indicators have always been good compared to countries at a similar income level, and continued to improve o n average over the past decade. But average indicators mask rising regional and urban-rural differences and a near crisis in poorer rural areas where infant mortality and other indicators have d e t e r i ~ r a t e d .W ~~H O (2000) ranked China 6 lSt out o f 19 1 countries o n overall quality o f health, but 188th in t e r m s o f fairness o f financial contribution to health. While the W H O methodology i s controversial among health economists, the Bank’s own reports confirm the deterioration in health access. In 1975, 85 percent o f the rural population had access to cost-effective preventive and curative health services and some sharing o f the risks o f medically caused financial misfortunes. In 1995, this coverage had dropped to about 10 percent (World Bank 1996b). Decentralization o f responsibility for health finance has widened disparities in health resources, and the fee for service system 50 The Bank supported four rural credit projects, the last one being approved in 1990 and closed in 1996. These ceased due to a growing realization that no progress was being made in developing an independent and sustainable rural financial system. Although sub-project rates o f return were high, the portfolio o f the Agricultural Bank o f China remained poor, suggesting that banks did not use credit analysis for general lending but to select sub-projects for the Bank to finance. 5 ’ The CAE could not cover all sectors. Health rather than education was selected for review because the Bank’s education lending has declined in the 1990s and has been less poverty-oriented. 52 See background paper by Ooi (2002).  25 has distorted incentives, leading to neglect o f preventive care and prescription o f inappropriate drugs and services. Serious illness or injury i s a major cause o f poverty. 3.30 The Bank’s E S W has thoroughly analyzed these issues (see especially the sector report o n “Issues and Options o f Health Financing,” 1996, and the chapter o n health finance in the 2002 Provincial Public Expenditure Review), and the WBI/China Network has helped expose senior officials to health sector problems (see B o x 3.3). This seems to have had little impact at the highest level o f decision-making responsible for inter-sector Box 3.3: WBUChina Network for Training and Research in Health Economics and Finance The Network was established in 1991 at the request o f M O H to create capability in senior level decision makers o f Health, Finance, Planning and sub-national governments in health financing and related policy issues. Senior policy seminars (SPS) organized b y the WBIMetwork have brought together ministerial, director-general and vice-gubernatorial levels o f governments from health and non health sectors to debate health financing policy issues, some o f which were supported by policy research carried out b y the Network’s research centers at six medical universities. Earlier seminars have helped demystify market mechanisms in the health sector while later ones have facilitated decisions b y individual provinces on allocations to rural health. Increasingly there are demands from provincial governments for the network’s policy and operational research inputs in formulating local health initiatives and activities. Perhaps the greatest role the WBIMetwork can play i s the influencing o f SPDC, M O F and State Council decisions which would facilitate changes at the wider country level, and bring about larger central and provincial allocations for basic health services and preventative care. The SPS forum has reached only the entities within SDPC, M O F and SC with oversight for health. It w i l l be more critical to reach the decision makers within these institutions who wield greater influence on broader fiscal and economic policies, and to demonstrate to them the critical contributions o f health towards China’s long term productivity and growth. Thus far there has not been good follow up on the results/outcome o f policy issues debated at the SPS. allocations or inter-governmental fiscal relations, however. The lending program i s small (3.2 percent o f total lending during 1993-2002) compared to other large comparator countries, including IBRD countries like Brazil (see Annex Table 5a). Project ratings have been variable, but include a high proportion o f highly satisfactory outcomes.53 The lending portfolio has rightly focused o n rural health issues. M o s t projects have been disease-oriented with fewer projects dedicated to addressing health systems performance and reforms. An important exception was the Integrated Regional Health Development project o f 1990-98 which introduced a systematic approach to health planning and influenced the State Council strategy o n health sector reform in 1997. Within the constraints o f the policy framework the lending program has been innovative, had substantial to high institutional development impact, introduced state o f the art concepts and technology, and contributed t o building technical capacity. But overall the Bank assistance program has not managed to change the health financing system which continues to create perverse incentives and widening disparities in health outcomes. 3.3 1 Summary: poverty reduction: China made substantial gains in poverty reduction over the past decade, but progress has slowed significantly since the mid- 1990s despite 53O f the six completed projects, three have been rated highly satisfactory, and one each satisfactory, marginally satisfactory, and marginally unsatisfactory.  26 continued high growth rates. Inequality in incomes and access to social services has grown. Vulnerability has also increased with a rise in unemployment combined with slow development o f social protection. The Bank made several significant contributions to poverty reduction in the 1990s. I t s analytical work helped clarify the nature o f rural poverty and shape China’s poverty reduction strategy. The Bank has also helped improve capacity for poverty measurement, and monitoring and evaluation. Perhaps most importantly the Bank has helped establish successful models o f targeted interventions through integrated rural development projects. In addition, many projects in agriculture, health, and transport have contributed directly or indirectly to poverty reduction. Where the Bank has been less successful i s in persuading the government o f the implications o f broader development policies for poverty and for growing inequality and vulnerability. The mismatch between inter-governmental fiscal resources and responsibilities exacerbated regional inequality; the health finance system in particular has created adverse incentives for provision o f preventive care and led to grossly unequal access to health services; grain policy has penalized farmers in some o f the poorer areas; and migration restrictions have limited economic integration, helped perpetuate the urban rural income gap, and denied those who did manage to migrate equal access to services. The Bank has produced some excellent ESW analyzing these problems, but has failed to persuade the government o f the importance or urgency o f policy change. The situation may be changing, however, as the government has recognized the risks which growing inequality and vulnerability pose for social stability and economic progress. Infrastructure 3.32 Infrastructure development has been a central element in the Bank’s assistance strategy for China. In the early and mid-1990s, helping break infrastructure bottlenecks was seen as critical to the strategy o f sustaining high growth without inflation, thus preserving a conducive climate for reform, and in more recent years infrastructure development was considered to be one o f the most effective ways o f promoting market integration, poverty reduction, and development o f inland China. Sector reform and institutional development were important objectives as well, to be pursued mainly through parallel AAA and by piloting individual reform elements in a series o f projects. China also placed high priority on Bank support for infrastructure-to provide new technology and management methods as well as finance. 3.33 I t i s not surprising then that infrastructure dominated the Bank’s lending program. From 1993-2002 energy and transport commitments were $1 1.1 billion, nearly half o f all lending.s4Highway projects alone were 20.9 percent o f all lending, and power projects accounted for 17.2 percent. Other infrastructure lending was distributed across railways (4.3 percent o f the total), urban transport (3.1 percent), ports and inland waterways, and natural gas. The energy sector received $90 million in Global Environmental Facility grants through the Bank as well. The Bank also carried out a substantial amount o f AAA, including support for national sector and sub-sector strategies. 54Infrastructure i s narrowly defined as energy and transport. Water supply and sanitation projects accounted for an additional 8.6 percent o f lending. These are considered in the next section.  27 3.34 Overall, Bank support for infrastructure was highly successful. Portfolio performance was without equal in the Bank. All 28 transport projects which closed during 1993-2002 were rated at least fully satisfactory (and 2 were rated highly satisfactory). None o f the 12 completed energy projects were rated unsatisfactory, though 3 o f these were marginally satisfactory (balanced by three highly satisfactory). Sustainability was rated likely or highly likely for all transport projects and all but one energy project as well, and institutional development was rated substantial for 20 o f 28 transport and 10 o f 12 energy sector projects. OED sector reviews broadly confirmed that China’s performance in the infrastructure sector was the best in the Bank. The energy sector review (OED 2001) concluded that the Bank’s assistance strategy was highly relevant and fully satisfactory, and that Bank performance was highly satisfactory. The transport sector review (OED 1999), while more mixed in i t s assessment, s t i l l rated outcomes satisfactory. Client satisfaction has also been high. Interview feedback was largely favorable55 and respondents in the 2002 Client Survey ranked “helping to strengthen infrastructure development” as the most effective area o f Bank activity. 3.35 Many o f the sector and macro objectives o f the Bank’s assistance strategy were also met. China’s road network grew by 40 percent during the decade o f the 1990s and power generation capacity now exceeds 300 gigawatts, making China the second largest producer in the world (World Bank 2003).56 This certainly helped sustain growth, dampen inflation, and integrate market networks. Transport costs f e l l and many previously local or regional markets, such as grain, moved toward national i n t e g r a t i ~ n . ~ ~ The Bank’s role in expanding supply i s debatable since Bank finance accounted for less than 5 percent o f road investment and about 3.5 percent o f power investment, but Bank projects contributed to 40 percent (3500 km) o f the expressways build since 1985 (World Bank 2003), and in the power sector the Bank helped build 20 percent o f the transmission lines and 20 gigawatts o f generating capacity, including the f i r s t 300 MW, 600 MW, and 900 M W generating plants in China. 3.36 Apart from i t s direct contribution to supply expansion, the Bank leveraged i t s influence in two ways. First, Bank AAA contributed significantly to sector policy reform and institutional development, especially in the power sector. Over the course o f the decade, and especially in the last five years, China introduced extensive policy and institutional changes in the power sector which were first outlined in a sector report o n power sector reform (World Bank 1994c) and further developed in other AAA and through piloting in projects. These include price reform, separation o f management and regulation, corporatization o f government energy production units, introduction o f competitive power markets, and improving the policy framework for private participation in infrastructure. The energy sector i s perhaps the most successful example o f the Bank’s dual track approach to lending and policy reform. In transport reforms have been slower in coming, but Bank introduced the concept o f toll roads, and worked with the 5 5 As in other sectors there were many criticisms o f the (increasing) cost o f doing business with the Bank, especially from the Ministry o f Railways, but there was nearly unanimous appreciation for the Bank’s role in bringing new technology and management concepts. 56 Water production and the length o f the water network also grew by over 50 percent during the decade. The Bank’s role in the water sector i s covered in the section on the environment. 57 See Findlay (2003) for evidence o f increasing integration o f grain markets.  28 government (which came up with the proposal) to promote securitization o f revenue- producing hi hways, thus opening the way for private participation and faster expansion o f the sector. % 3.37 The second contribution o f the Bank was to introduce the discipline o f the project process to civil works. Competitive procurement brought large efficiency gains and new technology. Improving the project process laid the foundations for more general reforms in the economic and administrative framework. The financial management systems required by the Bank has revealed weaknesses and lack o f accountability in the existing framework. The introduction o f modern management tools and technology has opened up the possibility o f change in most o f the infrastructure sector. In the railways for example, new information and cost accounting systems have made possible the consideration o f separating infrastructure costs from operating costs and thus eventual changes in ownership and administration. 3.38 Despite these achievements, Bank assistance strategy has been less successful in other areas. First, the Bank has been little involved in primary fuel sub-sectors such as coal and gas where it might have brought new technology and u s e f u l international e ~ p e r i e n c e .Second, ~~ institutional and policy components o f projects were less successful than physical implementation. It i s not clear whether many o f the proposed management techniques and policy changes have been internalized, nor h o w widely they have been disseminated. In the power sector, for example, a multiple pricing arrangement was a source o f dispute in the Ertan Hydroelectric Project, and elsewhere in the sector multiple pricing s t i l l creates incentives favoring the use o f thermal over hydro and the use o f older, less efficient plants.60 3.39 Reforms and institutional changes have also been less successful in transport than in energy for a number o f reasons. First, policy and institutional change have been less successful whenever it involved coordination among ministries or levels o f government, as it generally does in transporta61For example, in highways agreement has been reached in principle to introduce a fuel tax, but implementation has been stymied by 58 As argued later, however, the use o f toll roads has been overdone, and i s largely inappropriate for the low-density traffic outside the coastal regions. Still, i t was a clever piece o f financial engineering which helped overcome a financing constraint at the time. Moreover, Bank participation and subsequent securitization helped attract private sector finance by eliminating the risk o f construction delay which i s a major impediment to private investment in such projects. In the longer term, even if toll roads are appropriate i t will be important for the government to compare the cost o f finance through private investment with the cost o f long-term government borrowing. 59 In coal this was because o f Chinese reluctance. In gas the Bank has been reluctant to become involved for fear o f crowding out the private sector, but given the risks associated with lack o f a regulatory infrastructure and explicit public support, a large Bank or IFC presence might actually help crowd in private sector involvement. 6o See Regional comments, Annex N, on this and other issues in infrastructure. 6' In energy, policy changes could be decided within a single ministry. In transport, not only has the fuel tax been stalled, but the Bank has made l i t t l e headway in gaining acceptance for its arguments for a unified Ministry o f Transport or for incorporating safety components into highway projects (because safety i s under the jurisdiction o f another ministry). There was also little response to an excellent Bank report (1995b) on coordination and trade-offs o f investments in rail transport, coal-washing, mine-mouth generation, and transmission lines. This i s perhaps not surprising for the degree o f coordination implied by this study never existed even at the height o f central planning. China was a command economy but never a centrally-planned economy to the same extent as the Soviet Union. The potential for efficiency gains remains, but i t might be more productive to concentrate on introducing reforms in market structure and differential pricing in order to create incentives for optimization o f inter-sector investment decisions.  29 disagreements between the center and provinces over allocation o f charges and revenues. Second, China’s infrastructure finance and loan repayment system has distorted the allocation o f investment, especially in highways, which have a higher public goods element than power or even railways. In particular, China has over-relied on toll road financing. While economically justifiable under conditions o f congestion, toll roads otherwise distort the provision o f public goods and constrain the ability o f the Bank to assist the government in i t s development role in stimulating economic growth, for example, in financing roads in poorer regions with limited capacity to repay. Finally, and most importantly, the benefits o f transport investment have been diminished by the government’s broader development policies. Migration controls and local protectionism limit demand for transport services. Market integration i s constrained by l o w density o f transport infrastructure, to be sure, but it i s equally limited by policies. 3.40 Summary: infrastructure development. China successfully broke infrastructure bottlenecks which imperiled growth and stability in the early 1990s. A growing transport network also promoted market integration and development o f lagging regions. China had a lot to gain from international experience in infrastructure development in the early 1990s and the Bank had a lot to offer. Bank support was highly successful in promoting better project management, competitive bidding, and technical improvements. Even resource transfer from the Bank was o f some importance for breaking infrastructure bottlenecks during this period. In addition the Bank’s dual track strategy o f promoting sector policy and institutional reform was successful, particularly in power, through less so in transport (or water). The main question looking forward i s whether the Bank can s t i l l contribute significant value added in the sector, or whether the Bank finance which the government s t i l l desires i s a substitute for reforms which could open up other modes o f finance. Environment 3.41 China faces serious environmental problems, and because o f i t s size, some o f the effects, such as greenhouse gas emissions, are also worldwide. During the 1990s government gave increased attention to the environment. Awareness was heightenedby widely-publicized international reports62and by events in China. Widespread illness among users o f the Huai River in China’s industrial Northern Plain in 1994 was a turning point for government, resulting in the eventual closure o f 75,000 small, high polluting TVEs nationwide. Floods in 1997 and 1998 prompted the introduction o f a logging ban in sensitive areas. The government has also used less drastic measures, including more open environmental reporting, price incentives, and new laws and regulations. Leaders regularly address environmental issues in major speeches and China has adopted “sustainable development” as a guiding principle for the loth 5-Year Plan. 62 Vaclav Smil (1993) argued that China could not sustain i t s high rate o f economic growth without an environmental disaster, and Lester Brown’s (1995) question, “Who Will Feed China?,” received international attention and fueled a debate about China’s environmental degradation, exhaustion o f natural resources and the unsustainability o f a “growth at any cost” policy. For an up-to-date assessment o f the state o f the environment in China, see UNDP 2002.  30 3.42 As a result o f these policy shifts, China has had some successes in reversing or containing some forms o f environmental degradation, though serious problems remain and future trends are uncertain Although China remains one o f the most inefficient major economies in terms o f primary energy use per unit o f GDP (3.3 times higher than the U.S.in 2001 and 40 percent higher than India), unit energy use has improved by 30 percent from 1995-2001. In a period o f increasing industrial production, industrial pollution loads have fallen drastically since the last part o f the 1990s. China has increased forest area during the 1990s, albeit with some loss o f species diversity. Erosion on the extended Loess Plateau area has been contained, with benefits not only to the people living there, but also in the quality o f the Yellow River and the amelioration o f dust storms as far away as Beijing. China made a major contribution to the global environment through a sharp reduction in ozone depleting substances (ODS) in recent years. 3.43 M A . Bank environmental ESW has generally been o f high quality and has helped raise environmental consciousness and influenced policy. The China Environmental Strategy Paper (World Bank 1992a) outlined the Bank’s environmental assistance strategy and marked the beginnin o f a major partnership with the State Environmental Protection Agency (SEPA).6F Many o f the recommendations found their way into China’s own environment strategy o f 1994. The most recent major report Air, Land, and Water (World Bank 2001), updates the 1992 China Environmental Strategy. It was produced collaboratively with SEPA and for that reason has had a significant impact on official thinking.64Some o f the recommendations were incorporated into the loth Five Year Plan. 3.44 ESW on environmentally-important sectors has been highly variable. A major agricultural sector report, Accelerating China ’s Rural Transformation (World Bank 1999), provided a good basis for public discussion o f environmental issues. In the water sector, a jointly-produced comprehensive quantitative plan built around a “dynamic optimizing model”65 gave highly-valued assistance to the Ministry o f Water Resources. A Yellow River Basin planning study highlighted the importance o f integrated river basin management and contained some prescient remarks about the opportunity cost o f abstracting water.66 Most water sector AAA has been based on informal reports, 63 SEPA drafts environmental legislation, oversees regulation and monitoring o f environmental policy, and provides technical direction to provincial Environmental Protection Bureaux. SEPA has ministry status but it i s not a cabinet ministry, i.e.it i s still not involved in some important government decision-making processes. 64 A previous Bank report, Clear Water, Blue Skies, was technically more sophisticated, but has been criticized in China for being too much o f a Bank product. Air, Land, and Water was criticized within the Bank (by QAG) as insufficiently cutting-edge technically, but it seems to have had more impact in China. 65 “Agenda for Strategy for North China”-available on the Beijing website-worldbank.org.cn. 66 The study noted that sooner, rather than later, Yellow River planners will have to squarely face equity vs. efficiency issues. Policymakers seem to be operating under the assumption that the Yellow River i s a free good with low opportunity costs or none.. . Until there are realistic allocation provisions that YRCC can enforce, the upper and middle reach regions will probably continue to follow what we have termed the “first-come, first-served” rule, to the potential detriment o f basin-wide economic performance.”  31 workshops and seminars with project or individual ministry counterparts. More recently, however, the Bank has published a water resources assistance strategy (World Bank 2002b) which should provide a broader basis for dialogue with the many agencies involved in water resource management. In forestry, the only formal report on the sector i s OED’s own sector review (OED 2000). The lack o f sector work in forestry has limited the Bank’s ability to judge whether it i s working in the right areas, to conduct policy dialogue, and to reach an important wider audience o f social scientists concemed with forestry issues and their broader environmental implications. However, in 2002 the World Bank helped form a task force on Forestry and Grasslands through the Chinese Council for International Cooperation on Environment and Development (CCICED). The Task Force has produced reports and promoted discussion on policy issues among Chinese officials and scholars and intemational efforts. 3.45 Lending. World Bank lending has two environmental dimensions: (a) to avoid or mitigate any adverse impact o f projects in any sector-the “do no harm” principle; and (b) to “do good” through projects which are intended, in whole or part, to have environmentally beneficial effects. The Bank’s activity to prevent harm, mainly through safeguards and environmental impact assessments (EIAs), will be discussed in chapter 4.67 This section will focus on lending intended to have a positive impact. Projects intended to have a positive environmental impact are found in many sectors and the definition o f an environmental project i s sometimes arbitrary. Many power projects, for example, are not classified as environmental even though they may have substantial environmental implications. O f the eleven completed projects from various sectors classified as “environmental” projects, three were rated as having “highly satisfactory” outcomes-an unusually high proportion. But projects with an environmental theme also attracted a large number o f relatively weak ratings as well-one “unsatisfactory” outcome and four “marginally satisfactory.” The remaining three projects were rated fully “satisfactory.” 3.46 Because o f the cross-cutting nature o f environmental concems and the arbitrary classification o f projects, it makes more sense to review the extent o f mainstreaming the environment in individual sectors. In general, the Bank has done a commendable job o f mainstreaming the environment in energy, forestry, agriculture, and transport. Performance in the water sector has been mixed, while l i t t l e has been done in the area o f environmental health. Some o f these assessments are elaborated in the sections below on air, land, and water. 3.47 Air. Air quality improvements have been strongly influenced by technological changes in the energy sector where the Bank has been heavily involved. The environmental performance o f Bank-funded coal-fired power plants has been very good when compared to non-Bank plants. N o t only are emissions much lower but the Chinese power authorities themselves have taken responsibility for environmental management and supervision. The Bank has financed several large hydro and multi-purpose dams that 67Safeguards and EIAs should, in fact, go beyond the “do no harm” principle. One o f the main shortcomings o f safeguard analysis as now conducted in China i s that it should be employed upstream at the design stage rather than simply as damage mitigation at a later stage.  32 substitute for thermal coal-powered plants. While dams have their own environmental problems, the Bank has adequately addressed these in Bank projects. The multi-purpose Xiaolangdi Dam, supported by the Bank, has been credited with drastically reducing s i l t and enabling continuous flow in the lower reaches o f the Yellow River, something which has not been achieved in the previous ten years. The 2001 OED review o f China energy operations concluded that the Bank had made substantial environmental contributions in power generation, district heating, and many other areas, though it has not been successful in promoting the introduction o f gas o n a large scale to substitute for coal. 3.48 China i s the biggest producer o f Ozone Depleting Substances (ODS) and second largest o f C 0 2 and both are being reduced through international agreements and provision o f grant finds through the Multilateral Fund for the Montreal Protocol (MFMP) and the Global Environment Facility (GEF). Energy conservation and fuel diversification policies have made significant contributions to reducing global C 0 2 levels. The current Bank support includes lending projects for renewable energy scale-up, heating reform and urban transport programs to address emerging vehicular pollution trends. 3 -49 Land. Past neglect o f land and watershed management has caused severe and widespread erosion, land degradation and desertification. Bank-supported projects made major contributions to increased efficiency o f water use by demonstrating that profitable orchard and mixed farming models are compatible with watershed rehabilitation and soil preservation. Terracing and erosion control projects in the larger basins also have significant downstream benefits, reducing s i l t loads and increasing incomes. Building, inter-alia, o n the Bank-supported central Loess Plateau and Red Soils Projects in the South East, these technologies have been replicated. 3.50 Land degradation i s closely correlated with rural poverty. Erosion arising from deforestation, increases the s i l t road in rivers, increasing flood frequency and severity. In 1998 the Government introduced a blanket ban over much o f the country o n logging o f natural forests, and opening new lands at the expense o f forest. This reduced incomes in these often-poor areas while increasing timber import requirements.6* Reforestation has been implemented o n a vast scale, plantations representing 40 percent o f forest area, and while this has arrested the decline in forest area, it has not reversed the loss o f biodiversity. Bank forestry projects have contributed 3.3 million hectares o f new high- quality forestry land (one-sixth o f the increase in forest areas) since the early 1980s. Despite some evidence that China’s forestry regulations and policies have negatively affected forests, OED’s forestry sector review (2000) concluded that the Bank’s forestry work in China has been remarkably successful-“a high point in one o f the highest- quality portfolios.” 68 This may have increased unsustainable logging in other countries to meet China’s import demand.  33 3.51 Water. The Bank has been involved in many as ects o f water resource management (WRM) with varying degrees o f success.6 8 Hydro power, watershed management and forestry have been discussed in previous sections. The other areas o f WRM with substantial environmental implications are water resources/flood control, irrigation, and urban water supply and waste management. Rural water supply projects, while more important for poverty reduction than the environment, have been highly successful and provide useful lessons for China and other countries on the importance o f pricing and cost recovery (see B o x 3.4). Box 3.4: Rural Water Supply The Bank has supported 4 rural water supply and sanitation (RWS) projects, mainly in poor counties. Designs have evolved by combining the strengths o f existing village administrations and community financial participation, with international best practices. Design concepts include appropriate technology, financial cost-recovery, decentralization o f regulation, and financial autonomy. This contrasts with the more popular approach o f justifying non cost-recovery tariffs in poor communities by claiming the “beneficiaries are willing but not able to pay.” In the latest generation o f these RWS projects the investment cost for water supply i s 75 percent paid for by-cost recovery, and 95 percent o f villages abide by the tariff covenant. The average cost o f Y2/m3 (about 25 cents) provides startlingly clear evidence that even the poor can and are willing to pay tariffs that raise eyebrows when proposed for urban consumers. Rural consumers supplied b y Bank-supported RWSS consume an average o f 28 liter per capita per day (lcd). While lower than UN standards o f minimum daily need, this level o f consumption and the implied tariff, captures most o f the consumer surplus generated by supplying RWS services. The high cost-recovery and sustainability, good quality, continuous service, and a cost-recovering tariff, have increased welfare. Consumers, averaging 5 per household, are willing to pay a higher price for a better quality product, and to adjust their consumption downwards to fit the household budget. The oft-quoted “affordability index” for this project was that water charges were 3 percent o f disposable income. If the UN definition o f supply or need had been used for planning purposes (implying 112 lcd consumption), then the affordability index would have been 12 percent and the project would presumably have been rejected as “unaffordable.” Source: Varley 2002. 3.52 A noted Bank success story was the Taihu Flood Control Project, praised by the Vice Minister o f MWR for reducing losses during the 1998 floods. Several Bank- supported projects in the 1990s have been in the vanguard o f Bank-China cooperation on integrated WRM. The Yangtze Basin Water Resources Project (1995) incorporated both S e l f Financing Irrigation Development Districts (SIDD) to improve O&M, and an integrated river-basin development component. The Tarim Basin I& I1Projects (1992/1998) in the western Xinjiang Uygur Autonomous Region have the best-developed framework for integrated water management-both the financial components o f SIDD and a comprehensive set o f procedures/regulations for integrated WRM. Despite the models, only limited progress has been made in introducing integrated river-basin approaches to WRM in China. China has been reluctant to borrow for management 69From 1993-2002, the Bank supported 47 water related projects, most o f them with environmentalimplications. By sub-sector, these included: 9 in agricultureiirrigation;5 in watershed managemenuforestry; 18 in urban water supply and waste management; 6 multi-purposeihydropowerdams; 3 inland waterways; 4 water resourcesifloodcontrol; 2 rural water supply. See the background paper on water (Varley 2002) and Annex G.  34 components in Bank projects, devoting only about 5 percent o f project funds to this purpose compared to 25 percent in Brazil and Mexico (World Bank 2002b). 3.53 The scale o f Bank involvement in irrigation has been very limited but has had a positive effect on Chinese practices for procurement, project management and more recently irrigation management, especially at provincial level. Irrigation has usually been a component o f an integrated area development project. Poor and under funded irrigation operation and maintenance (O&M) i s s t i l l a problem (para 3.28), but the organization o f farmers into groups within S e l f Financing Irrigation Development Districts (SIDD) on Bank and non-Bank supported projects has improved management and accountability, empowering farmers, through legal contracts to pay for and receive water services, both from local government agencies and publicly owned bulk-water companies. Water User Associations (WUAs) are part o f SIDDs, playing a key role in many aspects o f improved water resources management that can increase productivity. The Bank has supported water conservation through technical innovations (drip irrigation, drought-resistant varieties), conservation pricing, and agricultural engineering support services, but these have not been replicated on a large scale. Finally, Bank in two important areas diminished i t s contribution in i t s earlier approach to irrigation. 0 Failing to allow for a very high opportunity cost o f water in the economic analysis o f upstream irrigation projects largely undermined the claimed high rates o f economic return and efficiency. For instance, appraisal o f run-of the river pumping schemes o n the upper reaches o f the Yellow River, should have subtracted the opportunity costs (to high-value municipal and industrial users in the lower reaches) o f water supplied during the dry season. 0 A seeming disregard o f an obvious and serious water resource constraint, which contributed to the mining o f groundwater resources o n the North China Plain. A recent Bank audit notes that in addition to the impact o f the demand on groundwater, the Hebei Project put in many more new wells than planned at appraisal (OED 2002a). Conservation aspects do not appear to have been high on the agenda. Even the economic benefits have been overstated, as the anticipated supply o f irrigation water cannot be sustained. 3.54 One o f the largest and fastest-growing programs o f Bank support has been in water supply (WS) and waste water treatment plants (WWTP).70 A recent OED sector review (OED 2002) has judged the outcomes o f China WS/WWTP projects to be “moderately satisfactory” with respect to overall development objectives, which are themselves described as “modest” OED rated project outcomes “satisfactory” in terms o f efficacy and standards o f construction, but efficiency only marginally so, and the institutional impact, “modest ” or “negligible.” The Bank approach has supported capacity building with relatively little control over the quality o f institutional reform. Projects s t i l l live in both a non-market and an under-regulated environment. For water supply there has been no significant difference between Bank and non Bank-supported utilities, leading to a questioning o f whether there i s really any Bank value-added. Bank ’O Since 1985 the Bank has committed $2.2 billion oftotal project costs o f $7.7 billon to finance major water investments (water conveyance, treatment, and distribution and WWTPs.)  35 supported projects may have been better implementedthan others, but overall water quality targets are not being met. Statistics for China show that despite an 8 percent increase in water consumption and a 19 percent increase in wastewater treatment capacity, the proportion o f waterways meeting minimum standards has decreased. There are two broad reasons for the disappointing sector performance and World Bank impact. Institutional arrangements do not match the source o f the problem. Municipalities are responsible for WWTP but much o f the pollution comes from “non-point” agricultural run-off and peri-urban TVEs. Overall responsibility for management i s fragmented among several agencies, many of whose environmental mandates may conflict with financial interests, public and private. L o w prices for urban water supply and waste water treatment perpetuate unsustainable pollution levels for two reasons. They fail to restrain demand for water, and they provide insufficient financial resources for expansion o f reticulation (network collection facilities). The maximum water supply tariff level achieved i s in the range o f Y 1to 2/m3, compared to an average o f Y2/m3 for rural water supply. 3.55 Bank WWWWTP projects have introduced higher tariffs and other policies, but the Bank has l i t t l e influence over the degree o f institutional reform required to address environmental management needs.71 Bank operations are tied to particular municipal governments who cannot themselves resolve the institutional problems. Bank projects if successful are at best demonstrations o f what can be achieved within the existing framework. Project designs have to go beyond existing a ency partnerships and reach out to a broader array o f public and private partnerships. 7 F Strengths and weaknesses of Bank Is environment assistance 3.56 The Bank has influenced environment policy and legislation, helped introduce environmental concerns into the mainstream o f several sectors, and has directly contributed to improving NRM, flood control, and other areas. The Bank also introduced policy and institutional changes such as water tariffs and integrated river basin management into i t s projects. Yet the impact o f the Bank o n changing critical approaches to water resource management and other environmental policies has been less than hoped. Continued shortcomings in China’s environmental strategy include: 0 Strategy s t i l l favors expanding supply rather than reducing demand, and technical and engineering rather than economic approaches. For example, the proposed South-North Transfer Project (in which the Bank i s not involved) would require a water tariff o f Y6-10/m3 to cover costs, while the maximum ” See Regional comments, Annex N, on this and other environmental issues. ’*The Bank has not been involved in privatization in China and government has adopted a cautious approach. The misallocationo f project risks between public and private sectors has limited the scope for non-recourse project-based lending-BOTS are in reality a non-competitiveform of public procurement (returns are guaranteed, the assets are largely for bulk-water and remain in public control and even management, while water distribution i s off-limits to investors).  36 tariff level achieved, even in the most seriously affected cities, i s s t i l l in the range Y 1-2/m3. 73 The proposed project may be justified as it ameliorates social conflicts over competition for water in rural areas, but the transfer might not even be necessary if tariffs were raised sufficiently to restrain urban demand. 0 Coordination o f overlapping agencies and o f levels o f government remains a major problem. Coordination o f both water and environmental responsibilities and decisions will not be resolved without a supra-ministerial body to push through reforms. 0 Neither the Bank nor the government has faced up to the reality o f trade-offs o f equity vs. efficiency, or o f short-term growth and poverty reduction vs. long-term growth and environmental sustainability. Although there are important complementarities between poverty reduction and environmental protection in some areas (such as NRM in the Loess Plateau), there may be difficult trade-offs between upstream irrigation and downstream urban use o f the Yellow River, or betweenthe effects o f higher urban water tariffs on poverty and the environment. Recognition that it i s not always a “win-win” situation would permit exploration o f ways (such as tradable property rights in water) to mitigate some o f these trade-offs. 0 More than in most sectors, the fiscal transfer system leads to inaction, conflict o f interest, and misallocation or under-investment in environmentally sound projects. Environmental protection i s a quintessential public good, and requirements that investment costs be recovered at the source can literally lead to under-investmentupstream because o f inability to capture the benefits downstream, The recently completed Loess Plateau project, for example, was exemplary in every respect but one, there was under-investment in dams which provided benefits mainly outside the project area. 3.57 Summary: environment. China’s air, land, and water resources have been put under tremendous strain by high growth and a legacy o f poor environmental policies. Over the past decade progress in the environment has been mixed, with some successes in reversing adverse trends. The Bank has made some visible contributions to improving environmental protection, but there have been shortcomings as well. The Bank’s collaborative AAA with SEPA has influenced environmental legislation, but it has had less influence on integrated water resource management and, until recently, little dialogue on forestry sector policy. Bank-supported projects in natural resource management, forestry, power (both thermal and hydro), and multi-purpose dams have had a direct and favorable impact, and may have influenced design and implementation o f non-Bank projects as well. The Bank has also helped improve irrigation practices, especially through water user associations, but it may also have contributed to unsustainable expansion o f irrigation in some parts o f the North China Plain. In water supply and waste water treatment plants, Bank projects have been well-implemented and have introduced useful policy and institutional innovations, but because these are implementedat the municipal level, diffusion seems to have been limited. The Bank has also helped 73 See Regional comments, Annex N.  37 mainstream environmental concerns in a number o f sectors, notably energy where China has made significant progress in improving energy efficiency. Environmental safeguard policy (discussed in chapter 4 below) has been highly variable. Most EIAs are now done collaboratively with Chinese research institutes. Exposure to international practice through Bank support has strengthenedthe Chinese system o f EIAs which pre-dates the Bank’s own system. However, increased technical competence has not been matched by institutional independence from political interference, and environmental safeguards s t i l l tend to be applied too late in the project cycle to have sufficient impact on project design. Overall, the Bank has had a positive impact o n the environment, but improving coordination o f environmental policy, especially WRM, remains a considerable challenge. 4. Program Administration and Cross-Cutting Issues 4.1 The previous chapter reviewed progress and the Bank’s impact on the four main development assistance objectives. This chapter reviews the use o f lending and other instruments in achieving assistance objectives, compares outcomes in China with other countries, and examines some important cross-cutting issues. Lending 4.2 By most measures China’s portfolio i s the largest in the Bank Group. As o f June 30, 2002, China had the largest total o f IBRD loans ($18.4 billion vs. $13.8 billion for number 2 Mexico), second largest total o f IDA credits ($9.6 billion, well behind India’s $24.3 billion), and an active portfolio o f 101 projects, by far the largest in the Bank Group. 4.3 The regional allocation o f Bank lending has gradually shifted from Eastern to Central and Western China,74 with the share o f the Central and Western provinces shifting from 37 percent during FY81-92 to 43 percent in FY93-97 to 56 percent in FY98-02. Despite the shift from the better-off coastal region to poorer inland areas, the Bank’s overall regional lending allocation was regressive during most o f the past decade. Per capita Bank lending was positively and significantly correlated with provincial income per capita during 1993-97 and s t i l l positively, though not significantly, correlated during 1997-2002.7s 4.4 This allocation i s consistent with the overwhelming emphasis given to reform in the early 1990s and to a belief that the trickle-down effects o f growth were the dominant mechanism for poverty reduction. The most willing and reform-minded partners were often in the coastal areas; in Shanghai (the richest province) the Bank had a special reform support program in the early 1990s. The Bank was following the lead o f the 74 This i s an official classification. The eastern region includes 11 provinces o f Liaoning, Hebei, Beijing, Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong and Hainan; the central region includes 8 provinces o f Heilongjiang, Jilin, Shanxi, Henan, Hubei, Hunan, Anhui, and Jiangxi; and the western region includes 11 provinces o f Inner Mongolia, Xinjiang, Ningxia, Gansu, Qinghai, Shaanxi, Sichuan, Chongqing, Tibet, Guizhou, Yunnan and Guangxi. 75 For 93-97: t= 5.97, Adj. R-squared = 0.5443. For 98-02: t = 1.00, Adj. R-squared = 0.0001.  38 government which also favored coastal development throughout most o f the early period. Moreover, the Bank found it difficult to shift lending toward poor provinces (or to poorer regions within provinces) because o f China’s loan repayment requirements. Here, too, Bank lending patterns were shaped by the same factors which limited the government’s ability to develop a system o f fiscal transfers to benefit poorer provinces. Finally, political sensitivities have also influenced Bank lending allocations. Poorer provinces generally have a higher proportion o f minorities, which entails more safeguards for projects and attracts widespread outside attention. The Bank has never been asked to finance a project in Tibet, one o f China’s poorest provinces.76 4.5 The sector allocation o f Bank lending in China has always differed from that in the rest o f the world, and has diverged even more in recent years (Figure 4.1). The most important difference i s that, with the exception o f the Rural Sector Adjustment Loan in 1988, there has been no adjustment lending in China. The allocation o f investment lending has also been distinctive on several dimensions: 0 Emphasis on infrastructure. Lending for infrastructure (transport, energy and mining, telecommunications) has always been unusually high in China, and the share o f infrastructure has been increasing in China (52 percent in FY98-02) while declining elsewhere (32 percent Bankwide average during FY98-02). Transport alone accounted for 25 percent during FY98-02.77 e Declining share for human resource development. Bank lending to China for H R D has declined. In the rest o f the Bank it has increased. 0 Increasing share for environment, urban, and water. Environment lending only started after 1990, but reached nearly 8 percent o f total lending in China in the most recent five-year period. Overall EUW lending rose from 6 percent during FY81-92 t o 20 percent in FY98-02. Lending for infrastructure broadly defined to include EUW increased from 57 percent during FY81-92 to 72 percent during FY98-02. 0 Sustained rural lending. Lending for agriculture and the rural sector ranged from 22-25 percent in China, compared to a declining Bankwide trend (from 23 percent to 14 percent). Project Performance 4.6 China also has the best-performing portfolio o f any large country in the Bank Group. O f the 138 projects closed and evaluated through FY02, less than 9 percent were rated unsatisfactory (Bank average 3 1 percent for FY80-02). In the past decade China’s percentage o f satisfactory outcomes has remained above those o f the Bank, the Region, and (with the exception o f Brazil during 1998-2002) other large comparator countries (Table 4.1). China’s performance i s even more striking with respect to sustainability and 76The government considers Tibet eligible only for grants, not loans, because o f low repayment capacity. 77Other donors have also stressed infrastructure projects in China, though the trend i s downward. Bilateral official development assistance (ODA) commitments for infrastructure were 6 1 percent o f the bilateral total during 1993-97, falling to 38 percent during 1999-2001. The corresponding figures for health plus education were 9 percent and 14 percent in the respective periods.  Figure 4.1: Comparison of Sector Investment Lending Allocation Human Resource Development ', FY81-92 and FY93-02 7 i 30 1 E' e 25 &+-- a. - 1 w c 20 E P 15 - c - I E 5 FY81-92 FY93-02 Infrastructure 2, FY81-92 and FY93-02 70 I i - " -z - s '0 0 FY81-92 FY93-02 Environment, Urban Development, Water Supply and Sanitation. FY81-92 and FY93-02 -" I FY81-92 FY93-02 Rural Development, FY81-92 and FY93-02 30 1 Indonesi'a' ... : : E '5 FY81-92 FY93-02 Source: Business Warehouse, The World Bank. Data as o f 12/16/02 'Includes Education, Health, Nutrition Population, Social Development and Social Protection. Includes Energy Mining, Transport, Global InformatiodCommunication Technology.  40 institutional development ratings. In the most recent five-year period sustainability was judged likely for 96 percent o f China’s projects (weighted by commitments) vs. 75 percent Bankwide, and institutional development was rated substantial for 80 percent o f evaluated projects (50 percent Bankwide). Table 4.1: Overall Project Rating-China and Comparisons Inst. Dev. No. of Total Net Outome % Sustainability % Impact % Exit FY Proj. Comm ($m) Satisfactory. Likely Substantial By Net Comm By Net Comm By Net Comm 1993-1997 China 54 6,760 89 83 46 Brazil 41 4,679 72 65 41 India 70 10,858 71 55 29 Indonesia 49 5,432 86 68 40 Other EAP 146 11,153 82 68 40 Bankwide 1,195 90,962 74 56 36 1998-2002 China 53 8,546 93 96 80 Brazil 41 7,3 14 94 95 62 India 58 8,260 77 77 49 Indonesia 53 6,043 78 24 40 Other EAP 142 19,752 89 72 46 Bankwide 1,314 102,095 82 75 50 4.7 H a l f o f the projects rated unsatisfactory in the past decade were industrial sector projects (six o f twelve projects). O f the other six unsatisfactory projects, three were in agriculture and rural development, and one each in environment, health, and water supply and sanitation. Annex Table 5b shows comparative country performance by sector. 4.8 What accounts for China’s exemplary project performance? The most frequently- cited factor i s the high degree o f country “ownership” o f projects. Projects are identified and largely prepared by the government and there i s a strong commitment to implement projects quickly and thoroughly, along with a generally strong determination to abide by project agreements and conditions. Ownership i s reinforced by the Chinese system o f repayment obligations. The requirementto repay project loans concentrates the minds o f local governments and project beneficiaries o n the costs and benefits o f individual project components and lends a sense o f urgency to project implementati~n.~’ ’’The repayment system i s also one of the main sources o f inequity and perverse incentives. See the concluding section for a discussion of this dilemma.  41 4.9 At the same time, the success o f World Bank projects in China may have been overstated for two reasons. First, there i s a possible “halo effect” whereby projects are seen as successful, or iven the benefit o f a doubt, because o f the strong performance o f the Chinese economy.5 3 Second, project performance criteria give less emphasis to policy change in China than elsewhere. A recent OED review o f lending to China’s water and sanitation sector rated overall sector performance as only marginally satisfactory, despite satisfactory outcomes in 20 o f 22 projects, on the grounds that project objectives were insufficiently ambitious. Project objectives often give a lot o f weight to physical implementation, which i s nearly always excellent in China, while the dual track strategy means that indicators such as improving sector policy are outside the project framework Effectiveness in improving policies and in diffusing best practice need to be evaluated in a top-down approach (see chapter 3). Portfolio Management 4.10 The evaluation o f closed projects gives a picture mainly o f the project portfolio approved in the late 1980s and early 1 9 9 0 ~ Evidence .~~ from internal assessments can be used to illuminate the status o f the current portfolio. 0 Internal quality at entry reviews from FY97-02 rated 20 o f 21 projects (95 percent) satisfactory or better. China’s ratings were again above average (88 percent Bank average, 92 percent for EAP). 0 Reviews o f quality o f supervision assessments from FY97-02 gave China similar ratings (81 percent o f 54 projects were satisfactory or better) to the Region (82 percent) and the Bank as a whole (79 percent). China’s ratings started below average and rose to above average more recently. 0 Projects at risk were only 5 percent o f the active portfolio at the end o f FY02 compared to 16.5 percent for the Bank as a whole, and disbursements at risk were only 2.6 percent (14.5 percent Bank average). As o f January, 2003, there were only three problem projects (3 percent) in the portfolio compared to 12 percent for the Bank as a whole. 4.1 1 Although overall portfolio risks are l o w in China, there are a number o f recurring problems. Internal portfolio risk assessments show that 10 percent o f projects were flagged for effectiveness delays in FY02, 14 percent for slow disbursement, and 14.3 percent for the new indicator for financial performance. Counterpart fund problems had affected 13 percent o f projects in 2001, but this was reduced to only 1 percent in 2002. In 79 It i s difficult to test for the existence of a halo effect because good policy i s normally associated with better outcomes. That such an effect exists, however, i s shown by the example o f Indonesia which saw its combined percentage o f satisfactory and highly satisfactory ratings drop from 79 percent in FY92-97 to 47 percent in FY98-02, mainly due to a sharp increase in marginally satisfactory ratings. The decline surely owed as much to changes in perceptions o f Indonesia’s overall performance after the Asia Crisis as to actual changes in performance o f investment projects exiting during that period. O f the 82 projects approved from FY96-02, only 13 have been completed and 8 evaluated.  42 addition, the disbursement ratio improved significantly in F Y 0 2 to 24.1 percent which was above the Bank average (20.7 percent) for the first time in several years.” 4.12 Several problems in portfolio management became apparent around 1997. Through the mid-1990s the Bank conducted periodic CPPRs involving the full Bank management team and government officials from Finance, Planning, line ministries, and provincial and municipal governments. The last CPPR in 1996 highlighted three broad problem areas: 0 Systemic issues o f counterpart funding, procurement, and project management weaknesses-all o f which pointed to the need to strengthen field office capability. Supervision: need for more management attention, more cross-fertilization across sectors, increasing government capacity for supervision and project monitoring, and more attention to resettlement and other safeguard issues. Lengthyprocedures: both the project approval process in China and processing in the Bank were slowing project implementation. 4.13 The reorganization o f 1997, which put sector directors in charge o f large units dealing with the entire Region, and the Asian Crisis, which occurred about the same time, reduced attention to portfolio management. The CPPR process was interrupted and the position o f Project Advisor for China was eliminated by the Country Unit. An internal assessment in 1998 found the quality o f supervision in China (at 57 percent satisfactory) to be below the Bank’s average o f 75 percent. Most importantly, the adequacy o f supervision inputs and realism o f ratings were rated very l o w (at 43 percent and 50 percent satisfactory, respectively). Thus, inadequate management attention led very quickly to a drop in Bank performance. 4.14 Spurred by these findings, the Region initiated i t s own review o f supervision in 1999, shortly before the Inspection Panel investigation o f the Western Poverty Project. The intensified scrutiny, both internal and external, o f Bank-China relations after the Inspection Panel report led to a huge increase in management attention to the portfolio.82 The Region introduced a new portfolio and risk-management process; decentralized a number o f functions (selected task management, procurement, financial management, and disbursements) to the resident mission; and introduced thematic supervision for groups of projects. These measures seem to have a positive impact and may be responsible for the higher QSA ratings (100 percent satisfactory in FYO1). Both staff and government officials particularly praised decentralization for improving procurement and other services. But the higher attention to safeguard and other portfolio issues may also account for renewed complaints by China about the “cost o f doing business” with the Bank. *’ The improvement in disbursements and availability o f counterpart funds may be a response to lower interest rates on IBRD loans. After the Asian Crisis in 1997 the govemment lowered domestic interest rates causing many provincial and local govemments to substitute domestic borrowing for use o f Bank project funds. 82 See Regional comments, Annex N.  43 4.15 Analytical and advisory activities (AAA), especially economic and sector work (ESW), have always featured prominently in the Bank’s statements o f i t s assistance strategy for China.83 In part this reflected the relatively l o w weight o f project lending in investment for a very large country and the limited scope for non-project conditionality. But it also stemmed from the Bank’s ambitious objectives to promote system reform and to act as a source o f knowledge on international experience. Chinese expectations o f the “knowledge Bank” were also high, and in China prime ministers have been regular readers o f World Bank reports or have asked specifically for World Bank advice on policy issues. The relevance o f ESW was enhanced by institutionalized arrangements for i t s programming. Beginning in the mid-1980s, the Bank and the government agreed o n a rolling 3-year program o f studies which was subject to approval by the State Council. Programming extended beyond formal reports. For example, the Bank and the System Reform Commission84co-sponsored an annual conference which brought together Chinese officials and scholars with Bank staff and foreign experts to discuss some aspect o f reform. This arrangement allowed the Bank to respond to changing concerns and to facilitate access to foreign expertise. This facilitative role was as important as the Bank’s o w n ESW in the early days o f the relationship, but became less important as the Chinese became increasingly capable o f attracting and screening outside advice on their own. 4.16 The prominence o f AAAESW in country strategy prompts several questions. Were the high ambitions and expectations realized? Were they realistic? H o w could AAA have been more effective? And particularly important because o f the declining lending program, i s stand-alone ESW effective? Some o f these issues are addressed here and some in the final chapter on lessons and recommendations. 4.17 There i s a gap between the Bank’s rhetoric on the importance o f ESW in country assistance strategy and ESW budget allocations. ESW as a proportion o f the total administrative budget was lower for China than in other large comparator countries and the Bank as a whole throughout the past decade, and spending on ESW declined both absolutely and relatively during FY98-0285(See Figure 4.2). The effect i s most apparent on sector work. In several sectors new work i s needed to take stock o f progress and problems and to lay the foundation for better policy dialogue and new directions in lending. 83 This section draws on: a workshop with Chinese officials and researchers on AAA, supplementary interviews, a specially commissioned review o f AAA and system reform (Lu 2002), other sector and thematic background papers, and internal assessment reviews of ESW. 84 Later named SCORES, the State Council Organization for Reform o f the Economic System. In November, 2002, SCORES was merged with the State Development and Planning Commission to create the National Development and Reform Commission. Trust funds and central research and network budgets supplement spending on China-related ESW, but it i s unlikely that this significantly affects China’s relative position. The budget allocation for ESW increased by two-thirds between FYOl and FY03, however.  44 16 14 c 12 10 4.18 Within China, there i s a widespread view that the Bank’s AAA, which was so . ~ ~ were valued in the 1980s, declined in relevance and quality during the 1 9 9 0 ~ There exceptions, and there has been an improvement in the last few years. The Bank’s macroeconomic advice in the early to mid-1990s and the more recent work on pension reform were repeatedly cited in interviews as examples o f highly relevant and effective work. These examples were particularly well-known because o f press coverage and public acknowledgement o f the Bank’s contribution by Premier Zhu Rongji. Other areas in which respondents cited important Bank contributions to debate and policy change in the past decade included VAT reform, WTO entry, public utility reform, environmental policy, and preparation o f the most recent Five Year Plan. Still, despite these examples, Chinese officials and researchers often expressed disappointment with the overall relevance and quality o f the Bank’s ESW. They felt the Bank was slow to adjust to the growing knowledge and sophistication o f Chinese counterparts. The Bank continued to provide generic adviceg7-based on international experience-rather than discussing relevant policy options. As one researcher put it, the Bank’s glossy reports were thorough and competent, but “Where i s the value added?” There was also a See Regional comments, Annex N. *’ 86 This complaint i s not unique to China. See report by OED (2003b) on knowledge services.  45 feeling that the Bank did too many reports on i t s own, making too l i t t l e use o f Chinese collaborators.88 4.19 Internal ratings for a sample o f 12 ESW reports on China from FY98-02 were similar to the Bank average. Nine reports (75 percent) were rated satisfactory or above and two o f those were highly satisfactory. All reports were rated relevant, but some reports f e l l short o n criteria o f internal quality, presentatioddialogue, and likely impact. One surprising result was that half the reports were rated less than satisfactory for Bank processes. Specific shortcomings included failure to provide concept papers or peer reviews at a critical stage, but a more general theme was that there was inadequate management attention. This may partly reflect organizational changes in 1997 which broadened sector managerial responsibility from the country to the region. Box 4.1: A Chinese View o f the Bank’s AAA A specially commissioned review o f AAA and system reform (Lu 2002) concluded that the Bank’s AAA had been largely successhl because the Bank: consistently advocated reform even when the political climate was unfavorable; relied on cooperation and persuasion rather trying to impose i t s views; used a variety o f outputs; and developed a sound knowledge base and extensive contacts. The paper, which was based on extensive interviews with leading scholars and officials familiar with the Bank as well as a document review, also found that Bank influence declined somewhat in the 1990s because o f a reduction in the knowledge gap between the Bank and China; increasing political difficulty in taking reform measures; and because the Bank failed to recognize and exploit the strengths that contributed to past success. To be more effective, the paper suggested the Bank should: Pay more attention to dissemination o f results through more innovative formats. Be more forward looking in choice o f topics. Devote more attention to emerging sector and structural issues such as urbanization, education, and urban transport, rather than to SOEs and other reform topics. Extend i t s range o f cooperation and revitalize i t s contacts. The Bank should, o f course, be responsive to request for work from the top leadership, but it should also expand i t s network to replace i t s dwindling contacts from an earlier period, and renew i t s collaborative approach to analytical work. 4.20 OED’s o w n assessment o f the Bank’s AAA in i t s sector background studies was also mixed. The general quality o f AAA was good and the impact was significant in a number o f areas. At the macro level special mention should be made o f the recent outstanding Provincial PER (World Bank 2002a) as well as the Dalian conference and related macro and fiscal advice in the early and mid-1990s. ESW on poverty (both within the Region and in DEC) has made a significant contribution, as has the Bank’s work on environment and the energy sector. But in some sectors AAA has been less effective, or absent altogether. In forestry, for example, the Bank made loans o f about $1 billion without any sector work (OED 2000).s9 88 The Bank’s ESW has multiple purposes, as well as other audiences than Chinese officials and researchers, o f course. ESW informs the Board, other donors, and the broader development community o f the Bank’s assessment of developments in China, and i t provides the analytical underpinning for Bank strategy and lending. 89 See Regional comments, Annex N.  46 4.21 The Bank has also had mixed results in exploiting i t s comparative advantage in doing cross-sector work. A very good report o n rail-coal-power coordination had seemingly little impact on China’s investment planning or Bank lending. Effectiveness o f such work depends on whether China has any government agency to coordinate across sectors. O n the environment, where the Bank had the advantage o f working with a cross-sector agency (the State Environmental Protection Agency, SEPA), sector work has been more successful in influencing thinking and policy, but in water, where China’s own coordination i s weak, the Bank has failed to gain a cross-sector audience. In the case o f enterprise reform and financial sector reform, the Bank’s work has been too compartmentalized to take advantage o f the inherently close links between the two areas. Donor Cooperation 4.22 The Bank has been the second largest donor in China, after Japan. During 1991-2000 IBRD and IDA accounted for 17.7 percent o f China’s net receipts from donors compared to 24.9 percent from Japan and 5.9 percent from the ADB (Annex Table 3). Considering only concessional assistance (ODA), IDA accounted for 23.3 percent o f total net disbursements during 1993-2001 (25.9 percent during 1993-97 and 18.7 percent during 1998-2000) compared to 41.7 percent from Japan and 13.5 percent from Germany. 4.23 China f i t s the Comprehensive Development Framework model o f donor Donors, including the World Bank, coordination more closely than most c o ~ n t r i e s . ’ ~ play a negligible role in aid coordination. China sets i t s o w n priorities and tries to match these with individual donor interests through agreements on sectors and location o f projects. The government’s o w n aid management i s fragmented, however, between the Ministry o f Finance, which coordinates loans, and the Ministry o f Foreign Trade and Economic Cooperation, which coordinates grants. Generally the government allocates donor activities to areas or sectors which are complementary. In the highway sector, for example, the World Bank and Asian Development Bank work o n different sections o f the national highway system. 4.24 Weak coordination within the government puts a premium on information sharing and coordination between the Bank and other donors. The Bank and the Fund, which have collaborated effectively on fiscal policy advice, recently discovered that they had received separate requests for advice o n debt management. The requests were from different government agencies and partly overlapped, but because they shared information, the Bank and Fund were able to provide more effective support. 4.25 The most notable coordination effort involving the Bank i s the agreement to blend DFID grants and IBRD loans to mimic IDA terms. The f i r s t blend project was the Tuberculosis Control Project approved in FY02. Given the constraints o f China’s fiscal transfer and repayment system, this partnership makes sense. It enables the Bank to work o n poverty reduction projects otherwise unavailable to it. In DFID’s view, the Bank (and China) have also benefited from DFID’s contribution to ideas and policy See Regional comment, Annex N.  47 innovations (such as provision o f provincial counterpart funding for poor counties and the introduction o f social assessments at the design stage) which would have been unlikely from the Bank working alone, even assuming that the Bank could have found a way to engage through non-lending. Nevertheless, the arrangement i s an inferior solution to a serious problem. 4.26 Other donors are highly complimentary about the Bank’s ESW which they use in formulating their own strategy. Other donors are active in many o f the same sectors as the Bank. A major rationale for their involvement i s to provide a demonstration effect from their projects, but the mechanisms o f dissemination o f good practice in China are not well- developed, notwithstanding China’s reputation for rolling out successful pilots nationwide. The Bank could provide a valuable service by helping to organize collaborative sector work to compare donor experiences in project design and implementation in key sectors. Safeguards 4.27 World Bank experience with safeguards in China i s highly variable. China has been held up as a model o f how safeguards should be applied. An OED multi-country Box 4.2: Inspection Panel Investigation The fifteen month Inspection Panel (IP) investigation(from April 1999 to July 2000) o f the Qinghai Component o f the Western Poverty Reduction Project had a significant impact on Bank-Chinarelations and on the Bank’s approach to risk management and safeguard policies. A request for inspection had been lodged by the InternationalCampaign for Tibet claiming that the project might irreversibly harm the livelihoods o f Tibetan and Mongolian ethnic peoples in the Qinghai area. The Board authorized a review - the first full review since the creation o f the IP in 1994. The Panel found that the Bank had violated a number o f its own policies, including environmental assessment, indigenous peoples, and involuntary resettlement (OD 4.01,4.20, and 4.30, respectively). When the Board asked for re-submission o f the project for approval following additional studies, China withdrew its request for financing o f the Qinghai component, and has implemented the project on its own on an accelerated schedule. The Bank was nai‘ve in thinking this was a routine project o f little interest to the outside world, and it was lax in i t s assessment o f risks and acceptance o f government reassurances. Outside critics charged that the Bank was being used to legitimate a politically-motivatedproject designed to dilute Tibetan influence, and the government felt that criticisms o f the project were politically-motivatedand that the Bank’s management and Board did too little to uphold the Bank’s political neutrality. The government was as surprised as the Bank at outside reaction. The fact i s that any resettlement project in areas o f traditional Tibetan settlement would be politically controversial. The investigation revealed the need to correct a number o f weaknesses in safeguard procedures: to distinguish advisory from mandatory procedures; to strengthen managerial oversight o f risk assessment; and to ensure that staff treat safeguards as an integral part o f project design rather than an impediment to project implementation. The Bank responded by accelerating revisions o f some operational guidelines (for environment but not indigenous peoples), overhauling risk assessment, and improving managerial assessment. This was a mostly welcome swing o f the pendulum (“rebalancing the matrix”) which had gone too far in the direction o f decentralization. But some felt that the reaction has gone too far, leading to lengthy and costly safeguard procedures and to risk aversion. These concerns are captured in phrases such as the increasing “cost o f doing business” and charges that Bank safeguards are no longer designed to make sure projects “do no harm” but to “avoid any criticism.” The Bank has, in fact, since avoided some politically sensitive components, e.g. Xinjiang Province (with a majority Muslim population) was removed from an education project shortly after September 11,2001. Whether this shows undue risk aversion or mere prudence will be controversial, but such issues must be confronted and debated openly as the Bank shifts its emphasis toward Western China with its large concentration o f minorities.  48 study o f involuntary resettlement cited China’s approach in the Shuikou and Yantan dam projects as best practice because o f its participative approach and i t s emphasis o n jobs and incomes, rather than mere relocation and shelter (Picciotto, et. al., 2000). At the other extreme, a n Inspection Panel Report found that the Bank h a d violated several o f i t s own safeguard policies in the Western Poverty Reduction Project (see Box 4.2). ~ ~~ ~~ ~~ Box 4.3: The Views of the Borrower Chinese officials, researchers, and representatives o f civil society all agree that the World Bank has made an important contribution to China’s development. The consistent theme in all comments, ranging from researchers and policymakers concerned with structural reform and macro policy issues to project officials at the local level, was that the Bank’s main contribution has been in the realm o f ideas -- introducing new concepts, methods, and technologies to China. Innovations attributed to the Bank by the Chinese included economy-wide concepts such as the economic value o f services and corporate governance reform; international development best practices such as feasibility studies, project appraisal, and international competitive bidding; and numerous specific technologies, new organizational methods, and training at the project level. In a Client Survey commissioned by the Bank in late 2002 over h a l f o f all respondents said that transfer o f new project concepts was either the greatest value or second greatest value o f the Bank, and nearly half said that the Bank’s knowledge was either first or second greatest value. Financial resources and other contributions were seen as less important. There are also a number o f criticisms o f Bank assistance: Cost o f doing business. Projects take longer than they used to and the World Bank i s said to be slower and more demanding than the Asian Development Bank and bilateral donors, for a number o f reasons: overly stringent application o f safeguard procedures; ambitious project objectives (e.g., sector reform in railways) which slow preparation; project complexity due to unwelcome components (e.g., rural road components in highway projects); and limited Bank administrative budget which leads to delays as the Bank seeks trust funds to carry out many o f i t s core activities. Loss of IDA i s seen as a severe constraint. Because o f China’s repayment system, poor provinces and social sector projects may be excluded from Bank projects if only IBRD terms are available. The initiative to blend DFID grants and IBRD i s appreciated, but should be applied on a larger scale. Inflexibility in adapting to China ’s unique circumstances. A consistent theme in Chinese comments was that China i s different from other borrowers and the Bank needs to adapt i t s advice and procedures accordingly. The Bank was slow to recognize China’s growing sophistication and need for detailed and specialized AAA in the 1990s, through the relevance and effectiveness o f AAA has improved significantly in the last three or four years. The Bank should respect local capacity more in i t s use o f local consultants. China’s standards on procurement and safeguards are high, and often based on World Bank advice on international norms. The Bank should harmonize first with local standards in these areas.  49 4.28 China recognizes the need for safeguard policies and applies them to i t s own projects. China was among the first developing countries with environmental safeguards, and environmental impact assessments for Bank projects are n o w conducted by Chinese research institutes. But all levels o f government complain that the Bank’s safeguard policies impose high transactions costs and that the Bank has more stringent standards than other donors. China’s view i s that Bank procedures are intrusive, do not mesh with i t s own, lead to long delays in project implementation, increase costs, and are unnecessary as China has i t s own safeguards (some incorporating Bank practices). China argues that i t s “3-simultaneous policy,” requiring environmental supervision at design, construction and operational phases, i s more comprehensive than the Bank’s safeguard policies. 4.29 In 2000 an independent internal review was undertaken o f Bank supervision o f safeguards for six o f the largest projects in China. Some o f the principal findings were: Policy design, implementation and Bank oversight o f safeguards were generally satisfactory but variable. Two projects each were highly satisfactory, satisfactory, and marginally satisfactory. Rated by safeguard, involuntary resettlement was highly satisfactory, dam safety and indigenous peoples (minorities) were satisfactory, and environmental mitigation was marginally satisfactory. Risk avoidance i s creating a “safeguard dilemma”-the minimum standard i s gravitating toward “best practice” regardless o f cost. External monitoring by local institutes typically suffered from insufficient candor and lack o f explicit recommendations for action. Despite some excellent work on social assessment and mitigation planning, the Bank i s also at times reluctant to risk offending the Borrower by directly raising issues relating to minorities. Social assessment i s the weak point in project design and delivery Management input to safeguard design and supervision was inadequate. At the time the report was prepared (in August 2000) sector managers had no responsibility for oversight, and line managers had rarely visited the six projects reviewed by the Panel, despite their size and importance ($1.7 billion loan amount).” 4.30 The principal recommendation o f the review was that the Bank should be more strategic in i t s approach to safeguards. In particular, sector and policy work are needed to provide a context for project development, and early involvement i s critical. Safeguards should be seen as an integral part o f development and project design and not as an add-on or a “cost o f doing business” to be minimized. As noted previously, the Bank and the Region have since responded to concerns about safeguard issues by strengtheningrisk management and by providing a separate budget for thematic supervisions. These steps have improved quality o f supervision assessment ratings, but more needs to be done to This i s as much a commentary on the Bank’s approach to risk management as on the China program. Low management engagement in supervision i s a Bankwide problem.  50 move safeguard planning upstream and enhance strategic focus through sector work and social assessments at the design stage. 4.3 1 There i s a strong case for moving toward greater harmonization o f safeguard procedures between the World Bank and China, rather than simply ring-fencing World Bank projects with the Bank’s own procedures. Harmonization has already taken place in a number o f areas. China has more often adopted Bank standards than the reverse, but the Bank has accepted Chinese standards and definitions o n resettlement and o n indigenous peoples, where Chinese “minorities” are treated as equivalent to the Bank’s “indigenous peoples” (see OED 2003a). Differences s t i l l exist in a number o f areas, e.g. applicability o f resettlement provisions to illegal squatters, but further harmonization should be possible. 4.32 There have also been suggestions for devolution o f responsibility for safeguard policies to China, but this would be premature. Experience with local preparation o f environmental impact assessments shows some significant weaknesses in Chinese safeguard design and implementation: perspectives are too narrowly focused on compliance rather than solving problems, and on the project rather than the sector or region, including downstream areas; technical capacity i s variable, though the general standard i s good and improving; and technical evaluations are too often distorted or pre- empted by anticipation o f adverse political consequences. Some provinces are closer to meeting implementation standards then others, and it should be possible to move gradually towards further devolution, but for the time being the Bank will need to retain ultimate responsibility for safeguards for reasons o f competence, independence, and reputational risk. Cross-Cutting Issues How should the Bank deal with politically sensitive projects and issue? 4.33 Controversies such as application o f safeguards under the Western Poverty Project pose difficult issues for the Bank. H o w can the Bank fulfill i t s obligations to borrowers and preserve i t s institutional integrity as a non-political development institution? There are no universal rules which will avoid the need for case by case decisions in which a balance must be struck, but there are guidelines and lessons from experience. 0 The Bank has a mandate to promote development in member states “with due attention to considerations o f economy and efficiency and without regard to political or other non-economic influences or considerations” (Article 111, Section 5(b) o f Articles o f Agreement). 0 As an international organization with development expertise, the Bank may be well-placed to play a certification role on sensitive projects if the Borrower and the Board agree. The Three Gorges Project i s a good example o f the possibilities and limitations for the Bank in this role (see B o x 4.4). The Bank should not shy away from projects just because they are controversial, but neither should it place i t s e l f in a situation which risks i t s reputation as a non-political development institution. In deciding whether to  51 participate in controversial projects, the Bank must weigh i t s potential contribution against i t s reputational risk. Safeguards are a particularly important tool for risk management o f controversial projects, but the Bank has to have the courage and independence both to call for studies and remedies it considers necessary and to resist ramping up standards and requirements unnecessarily. Box 4.4: Bank Involvement in the Three Gorges Project The massive Three Gorges Project was controversial both inside and outside China, especially since it involved involuntary resettlement o f 1.3 million people. At the request o f the government, the Canadian InternationalDevelopment Agency financed and the Bank supervised a detailed appraisal o f the proposed project. The appraisal report concluded that the first two stages o f the proposed project would have a high economic rate o f return, but that taking the project to stage three (to allow navigation from the sea to Chongqing) would have only a negligible effect on the rate o f return while entailing resettlement o f an additional 600,000 people. Based on these findings, the Bank stated that variants which only marginally raised the economic benefits while greatly raising the numbers o f people to be resettled would be economically suboptimal and would require further studies if the Bank were to participate in the project. However, the government decided to go ahead with the full three-stage project. The Bank did not participate in financing the project. Source: OED (2001), The Bank’s Assistance to China’s Energy Sector. 4.34 Similar considerations apply to other politically sensitive issues, such as labor standards or insider privatization, where safeguards may not be applicable but which have important social and economic implications and pose reputational risks. For example, the C A E mission was told in a visit to a factory where the Bank had supported severance payments for redundant workers, that a group o f remaining workers had been working 84 hour weeks for a lengthy period to complete export contracts. China’s Labor L a w limits monthly overtime to 36 hours. A Bank supervision mission followed up but was told that the C A E mission had misunder~tood.’~ When the Bank supports a project it should make special provision to monitor such issues both to protect i t s reputation and to provide a good practice model. The Southwest Poverty Project provides a good example o f what should be done. The project supported seasonal migration o f young women to coastal factory jobs, but also arranged for pre-inspection o f f i r m s and monitoring o f labor conditions. The Bank should go beyond best practice at the project level, however. It should use project experience as an entry point for ESW and policy dialogue on important issues o f social protection. 4.35 Responsibility for improvements in transparency, the rule o f law, corruption, and other aspects o f governance l i e s squarely with China, but the Bank can help by supporting institutional and policy changes which have proven effective in other countries. The Bank has long promoted changes in corporate governance, regulatory reform, and improvements in procurement practices to help reduce incentives for corruption. Notable activities in recent years include an Economic L a w Reform project, 92According to the Region, the company’s management told the supervision mission that some employees had been working up to 30 percent overtime, but they assured the mission that overtime i s voluntary (indeed, workers are eager for the overtime) and that workers are paid overtime premiums as required by law.  52 the Fiscal and Financial Sector technical assistance projects, training in procurement practices, and co-sponsorship o f an international conference on ccEconomic Reform and Good Governance: Fighting Corruption in Transition Economies” (see Annex G o f CAS 2003). It i s noteworthy that respondents to the Client Survey (Annex K o f CAE) gave high ratings for the importance and effectiveness o f Bank support o n the issue o f corruption, but l o w ratings for the Bank’s importance and effectiveness on judicial reform.93 Has the Bank over-invested in infrastructure? 4.36 The share o f infrastructure in the lending program i s slated to rise even further in the coming CAS period, though this will be a larger share o f a smaller lending p r ~ g r a m . ’ ~ A number o f arguments have been made in favor o f concentration on infrastructure. The rate o f return on infrastructure investments remains high. Infrastructure investment has a high payoff in growth, and when directed toward the poorer parts o f China, in reduction o f regional disparities as well. Infrastructure projects are generally l o w risk and, with the exception o f hydro projects, relatively non-controversial. Last but not least, it i s a country priority. 4.37 The question i s not simply whether infrastructure investment has a high return. It does. The critical question is, what i s the value added o f the Bank’s participation in infrastructure projects? Through the early to mid-1990s the Bank contributed a measurable amount o f incremental funding and a great deal to technical upgrading and improved efficiency. In recent years the dual track approach o f sustained lending involvement plus policy dialogue through AAA has also yielded important policy reforms in energy. But there should now be diminishing returns from direct Bank involvement in projects as competitive procurement and other project management methods have diffused across China. Or if these methods have not spread, then the problems o f the sector cannot be solved through retailing o f Bank repeater projects. This would imply the need for broader institutional and policy reform^.'^ 4.38 Selectivity and sector allocation gains added significance in the face o f exposure constraints on the size o f the lending program. When lending peaked at about $3 billion in the early 1990s (two to three times projected lending in current dollars for the coming CAS period), the Bank decided, and China reluctantly agreed, to “graduate” the port sub- sector, recognizing that the Bank’s value added would diminish in future and that China 93 Perceptions may have been influenced by the fact the Bank was not formally involved in judicial reforms before the August 2002 approval o f two subprojects under the Economic Law Reform Project. 94 The share o f transport will rise from 24.6 percent during 1993-2002 to 34 percent in the coming CAS period. (The figures refer to the share o f number o f projects, which i s the only figure presented in the CAS.) Using a broad definition o f infrastructure which includes energy, transport, urban, and water supply and sanitation, the share by number o f projects will rise from 51.5 percent to 65 percent. The Region has noted that though the share o f infrastructure lending will rise, the absolute amount will fall because o f the smaller lending program. See Regional comments, Annex N. 95 CAE mission members were, in fact, surprised to be told repeatedly by local officials that the biggest advantage o f Bank projects was the introduction of competitive procurement and other project management techniques because these practices had supposedly diffused throughout China years before. One senior official explained that Bank involvement still provides a barrier to political interference in procurement, resulting in large procurement savings on big ICB projects. If this i s the case, the Bank may need to look for other instruments than direct involvement in project finance.  53 could access technology directly from the private sector. More recently, the Bank has phased out o f power generation projects. Since infrastructure projects can absorb an enormous amount o f funds, a hard look i s needed at the value added o f conventional highway and waste water projects. 4.39 But what if these are what the client wants? China should, o f course, have the ultimate say in what projects it borrows for. But if the choice i s driven mainly b y a self- imposed repayment system, it would be a pity. So far the compromise has been to agree on projects which push the envelope through marginal policy or technical innovation in each project, but China will do i t s e l f a disservice, both in t e r m s o f the value added it will receive from the Bank and in the effectiveness o f i t s own projects if it fails to make the necessary changes to enable it to finance i t s own low-risk projects and to diffuse already- tested techniques. Should the Bank rely more on stand-alone AAA? 4.40 The Bank’s dual-track approach-lending to gain trust and detailed sector knowledge plus ESW to persuade the government on policy issues-has been broadly effective in many sectors. In agriculture, for example, ESW had stressed the importance o f land contract reform, but projects were essential to work out some o f the practical details o f implementation and demonstrate the effectiveness o f contract reforms in practice. In the power sector, sector work introduced the importance o f cost recovery, corporatization, and unbundling generation and delivery, but projects (and project conditionality) were the means o f “pushing the envelope” o f policy change. But given the need for greater selectivity in lending, should the Bank rely only on AAA in some sectors? This i s a high risk strategy. I t might work in energy, where Bank advice seems to be valued for i t s own sake, but would probably not do so in transport. Unfortunately, free advice i s seldom valued, and governments are not always able to implement advice because o f competing interests (as in the case o f the fuel tax). Moreover, the Bank i s unlikely to be able to sustain a program o f stand-alone non-lending services. Even with the large infrastructure lending program in China, the resources devoted to sector work have been relatively limited. The Bank’s comparative advantage in the advisory business i s that it i s not free; Bank support i s tied to a lending program. It i s in the Bank’s interest, if it wants to be repaid, to insure that the borrower i s in a position to generate the necessary resources. O n the country’s part, given that the money has to be repaid, there i s a reluctance to commit to activities that, in their view, i s not in their best interests. In any case, development i s about both what to do and how to do it. The ‘how to’ i s the great strength o f the Bank’s project lending. 5. Evaluation o f the Bank’s Assistance 5.1 The performance o f China’s economy with respect to growth and poverty reduction over the past decade i s without equal in the world. What has the Bank contributed to this performance? And to what extent i s the Bank responsible for shortcomings in performance, such as growing inequality and continued environmental problems? These are difficult questions to answer because the Bank’s program i s small  54 (and has been declining) in relation to China’s overall economy. I t would be presumptuous to think the Bank could take credit for the successes, or be held responsible for the failures, o f such a large and dynamic economy. 96 Nevertheless, by focusing on the value added o f Bank assistance, and by addressing a series o f smaller questions, it should be possible to reach some conclusions about the overall impact o f the Bank’s assistance. Outcome o f the Bank’s Assistance 5.2 Overall impact can be assessed by considering the outcomes o f the four main objectives (see paragraphs 3.17, 3.31, 3.40, and 3.57) o f the Bank’s assistance strategy and the relevance, efficacy, and efficiency o f the program as a whole. 5.3 Relevance o f Bank assistance. The Bank’s assistance strategy and activities have been relevant in the large, if not always in the small-at the broadest level o f strategic focus and allocation of resources the Bank has done the right things. The four main Bank objectives-promoting system reform and better macro management, poverty reduction, infrastructure development, and environmental protection-have helped address China’s most pressing development issues. The gradual shift o f emphasis toward poverty reduction and environmental protection has also been in the right direction, though the Bank was sometimes slow to recognize the importance o f issues such as growing inequality and vulnerability, inter-governmental fiscal problems, and the need for better coordination o f environmental policy and WRM. Within some activities such as the financial sector and enterprise reform, the relevance o f Bank advice waned during the mid to late 1990s, though in the financial sector the Bank has embarked o n a promising re-engagement. Relevance at the level o f sector or regional allocation or the choice o f project components has always been constrained by the project repayment system. Projects were often skewed toward components which generated revenue, sometimes at the expense o f higher return public goods components. With the loss o f IDA, Bank lending for social sectors and poor regions has become increasingly constrained. Blending IBRD loans with bilateral grants can ease these constraints, but not eliminate them. 5.4 Efficacy ofBank assistance. The Bank’s record o n efficacy-doing things right- has been mixed. Project implementation has been excellent in most sectors, but efficacy also depends on achieving policy and institutional change within sectors and o n achieving coordination across sectors and levels o f government for cross-cutting objectives such as poverty reduction and environmental protection. Bank strategy has been to rely on a dual track approach, in which policy and institutional change depend mainly on persuasion through AAA combined with piloting incremental changes through projects. This has been successful in some areas (power sector and social security reform) but less so in others, particularly in areas which primarily depend on the demonstration effect o f projects at the local level. Similarly, the Bank has been more effective o n coordination where there i s high-level government coordination body (such as the LGPR, SEPA, and the erstwhile SCORES). 96 See Regional comments, Annex N.  55 5.5 Eflciency o f Bank assistance. OED normally measures efficiency by the cost o f lending, supervision, and ESW per approved project, per $1,000 o f net commitment, and (more refined yet) by cost per dollar commitment o f satisfactory projects. By all these measures, the China program scores well (see Annex Table 6). Two qualifications are in order, however. First, the government has complained about the high cost o f doing business with the Bank, both in comparison with other donors and compared to earlier periods for the Bank itself. The Bank clearly needs to balance the costs and benefits o f safeguard studies at the project level and find more systemic ways o f addressing safeguard issues (such as thematic supervision which i s underway). One measure o f efficiency, elapsed time for various stages o f lending, shows no trend, but this i s an issue which needs further investigation. The second qualification i s that the l o w cost o f the China program may actually represent inadequate allocation o f resources. The budget allocation for AAA, particularly sector work, declined during the late 1990s and certainly seems to have been inadequate to carry out the dual track strategy. The recent budget increase for ESW may change this. More generally, the China program seems to have become increasingly reliant on trust funds to finance many o f i t s activities. The Bank sees the use o f trust funds as a way to leverage i t s scarce administrative budget, but the Borrower sees this as a source o f delay and uncertainty. 5.6 Overall outcome i s based on the outcomes o f particular objectives and on the relevance, efficacy, and efficiency o f the Bank’s assistance. Outcome of Bank assistance to China is rated satisfactory. Sustainability o f Positive Outcomes 5.7 Reform and institutional change in China have been gradual, but once changes have been made they are rarely reversed. Sustainability o f completed projects in China was rated likely or highly likely for 84 percent o f net commitments during 1993-97 and 94 percent for 1998-2002. This i s well above the Bankwide average (56 percent and 73 percent, respectively, for the two periods) and higher than large country comparators. The main risks to sustainability are a financial crisis, external shock, or social instability leading to an economic slowdown. Even a slowing o f the growth rate could put poverty reduction at risk, given that poverty reduction has slowed or stagnated with an 8 percent growth rate in recent years. In spite o f these risks, sustainability is rated likely. Institutional Development Impact 5.8 The institutional development impact o f Bank projects in China was rated substantial for 46 percent o f net commitments on projects completed during 1993-97, rising to 84 percent during 1998-2002. Performance o f the China portfolio was marginally higher than the Bankwide average (36 percent) during the earlier period and substantially higher than the Bank average (50 percent) and comparator countries during the latter period. The review o f institutional development impact (IDI) by sector and objectives showed a mixed performance. Bank impact o n project management, procurement procedures, and capacity building has clearly been substantial at the project level, though there are questions about how widely these institutional developments have diffused, particularly across provincial and lower-level boundaries. Bank encouragement o f citizen and community participation in decision-making (through water user  56 associations, consultations on project designs, and the like) seems to have had some impact beyond the Bank’s own projects. At the ministerial or individual organizational level, the impact has also been substantial (for example, for the separate transport ministries or for SEPA), but the impact o f projects involving coordination (for example, water basin management or integrated rural development) seems to have had limited impact beyond the particular project. At the macro and sector level, ID1has ranged from modest to substantial. At the micro or project level ID1has been improving and in recent years has been substantial. Overall, institutional development impact is rated substantial. Bank Performance 5.9 To what extent can China’s development outcomes be attributed to the Bank? I t would be hard to argue that Bank assistance has made China worse o f f in any way, but apportioning attribution for successes i s difficult. China’s own efforts, along with advice and support from many sources, mean that most o f China’s successes are “over- determined.” The main strength o f the Bank has been i t s sustained support o f an activity or program over a number o f years. Because o f the Bank’s long-term involvement, it has been able to have a substantial cumulative impact in a number o f areas, i t s views gain a respectful hearing, and it has sometimes been well-placed to take advantage o f opportunities when China i s looking for support for change. Bank performance has varied across sectors and over time, but the Bank has made a positive contribution in a large number o f areas. In the Chinese context, the Bank i s relatively small but it has punched above i t s weight. 5.10 One case o f poor Bank performance should be highlighted-the handling o f the Western Poverty Project which led to the Inspection Panel investigation. Unfortunately, the repercussions o f the Inspection Panel continue. The Bank s t i l l sometimes fails to get the right balance between development objectives and protecting against reputational risk. 5.1 1 Could the Bank have accomplished more if it had been more ambitious or aggressive in pushing i t s own agenda? That seems unlikely. China clearly values the Bank more for i t s advice and knowledge o f international experience than i t s money and the Bank could not have expected to achieve more through conditionality than through persuasion and demonstration. Demonstration has generally worked well when the partner agency has the authority to diffuse good practice, and less well where authority i s fragmented. Persuasion could also have been better, in some cases. The Bank has sometimes toned down i t s advice in anticipation o f what it believes to be politically a~ceptable. ~ ~ would, in fact, be better served by more candid expression o f Bank China views. 5.12 O n balance the Bank has performed well in China, and overall Bankperformance is rated satisfactory. 97 See background paper by Lu (2002), paragraph 6.5 below, and Annex E.  57 6. Lessons and Recommendations 6.1 Paragraphs 6.2-6.5 address general lessons and principles. The remaining paragraphs make recommendations on the repayment system, (para 6.6) improving ESW (para 6.7) and improving performance o f Bank lending (paras 6.8-6.1 1). 6.2 Lessons from China’s experience for other countries. Too much has been made (by the Bank and others) o f China’s exceptionalism and the inapplicability o f Chinese experience to other countries. The Bank should make a systematic effort to analyze and disseminate lessons for other countries from China’s experience. The upcoming Shanghai conference on lessons o f poverty reduction i s a commendable step in this direction. Some o f the important lessons from China are: 0 China’s reform experience i s relevant for many countries. China’s gradualist reform strategy has often been portrayed as irrelevant to other countries because o f i t s unique characteristics, such as a large agricultural sector. If the economic system has broken down, the only option may be to pursue radical reform, as China did with the dysfunctional commune system, but the main lesson o f Chinese experience i s the importance o f pursuing reform before systemic collapse. 0 Reform will be more sustainable if sequenced to protect potential losers during the early stages. Mechanisms such as China’s strategy o f growing out o f the plan or using transitional dual pricing may not be applicable in other countries but the principle o f using gradual changes to reduce opposition and build a constituency for further reform i s important. 0 China’s policy o f beneficiary repayment has been an important factor in promoting strong project implementation and ownership. Overly strict application o f the principle creates problems o f i t s own (see discussion below). China and other countries have much to learn from each other on this issue. China has always been receptive to lessons from other countries, especially newly industrializing countries and other success cases. In i t s aspiring role as a knowledge bank, the Bank should increase i t s effort to leam and disseminate lessons from China, as well as for China. 6.3 Broadening the dialogue. The Bank’s dual track approach o f building trust and supporting new techniques through lending while promoting policy reform through AAA has been broadly effective. But there are a number o f important areas-poverty, water, health, agriculture and rural development-which have issues that need to be discussed at a higher or more inclusive level than the ministerial or regional project counterpart. Progress in reducing poverty and inequality, for example, depends o n addressing weaknesses in the inter-governmental fiscal system. Finding an appropriate counterpart, especially for complex issues which require sustained effort rather than stroke-of-the-pen decisions, i s a major challenge for Bank assistance strategy.  58 6.4 Implications of a smaller lendingprogram. With a smaller lending program, the Bank’s impact in China will depend more than ever o n effective persuasion and demonstration. This implies that the Bank should: 0 Be more innovative in project selection and design. 0 Pay more attention to monitoring and evaluation and to dissemination o f project lessons. 0 Rely more on systemic or policy changes than o n replication o f projects. Systematically evaluate projects in terms o f the Bank’s value added. 0 Review personnel policy to ensure that teams have the right balance o f China knowledge and relevant up-to-date experience from other countries. One option which should be used sparingly i s stand-alone sector work. In general, there are important synergies between ESW and lending. 6.5 Importance o f candor and openness. The relationship between China and the Bank has generally been based on working on an equal footing, mutual respect, and persuasion rather than conditionality. This has served both China and the Bank well, and could provide an example for the Bank’s relations with other countries. In particular, working on an equal footing has promoted gradual but sustainable reform and mutual learning. But much greater candor and openness are needed on both sides. For example, more collaborative ESW could have a high payoff, but China needs to provide access to data and knowledgeable sources and the Bank needs to be more willing to speak frankly and openly about problems and policy options. In the banking sector, for example, China has been reluctant to share data o n non-performing loans which have emerged as a major problem. But when the Bank was allowed to study four bank branches and found an emerging problem, it did not pursue the findings with relevant officials. In the Air, Land, and Water study, the Bank was rightly criticized by QAG for not discussing organizational issues and options more forthrightly in the summary report. One Chinese researcher remarked that the Bank i s “too polite” to be effective. The Bank should not strive to be impolite, o f course, but speaking hard truths serves China better. 6.6 Repayment system. China’s repayment system i s the source o f both the greatest strength and the greatest weakness o f World Bank project performance in China. I t s strength i s that beneficiary repayment focuses attention on project detail and builds ownership. This i s something other countries could learn from China. I t s weakness i s that the system biases the allocation o f project funds against poor regions and public goods whose benefits are widely dispersed and generate no revenue. Blending bilateral grants and IBRD loans can overcome the constraint case by case, but this i s cumbersome and has no effect on overall concessionality o f foreign assistance. China could get the best o f both worlds by retaining the principle o f beneficiary repayment, but differentiating repayment terms by ability to repay and by sector. The government operates a limited version o f such a system for i t s domestic fiscal transfers, but refining the system and applying it more widely to externally-funded projects would improve the efficiency and equity o f public investment allocation.  59 6.7 Improving ESW. There are several ways in which the Bank’s ESW could be made more effective: Focus more on China, less on international experience. The Bank has given too much emphasis to lessons o f international experience and too l i t t l e to analysis o f the Chinese economy. Lessons o f international experience should remain an important part o f the Bank’s work (though perhaps more through WBI than ESW), but the relevance should be tested against Chinese problems and experience. Policy advice should also be grounded in analysis o f the Chinese economy rather than being based solely o n international experience. Finally, analysis o f China’s problems and accomplishments would help the Bank draw lessons from Chinese experience for other countries. Broaden the audience. In the early days o f China’s reform, the Bank sought especially to influence senior policymakers. As the agenda has moved from broad concepts to implementation and problem-solving, the Bank should try to promote and participate in a much broader debate o n policy and sector issues, not only among officials, but also among researchers and other stakeholders. Bank ESW can help ensure that this broader debate i s grounded in analysis. The Bank s t i l l has a role as confidential policy adviser, but i t s long-term impact may be greater as a participant in policy analysis before a broader audience. 0 More collaborative work would enhance effectiveness. The latest environment report (China: Air, Land, and Water (2001), done in collaboration with SEPA, i s a good example o f the advantages t o be gained in access to data, understanding o f local conditions, and ownership of recommendations. More collaborative work would help broaden the policy dialogue among researchers and officials and facilitate Bank contacts with a new generation o f scholars. The Bank has been moving in this direction, but perhaps not fast enough. 0 More sector work. ESW o n China i s under-resourced. The effect i s most apparent o n sector work. It i s unusual for there to be no work o n an important sector, but in several sectors new work i s needed to take stock o f progress and problems and to lay the foundation for better policy dialogue and new directions in lending. 6.8 Portfolio management. There has been no CPPR since 1996. The China Department argues that CPPRs are too unwieldy and costly to use in a country with such a large portfolio, and that instruments like thematic supervision are more effective. Nevertheless, we recommend revisiting the possibility o f having another CPPR after more experience i s gained with thematic supervision. W e also recommend that a full- time Portfolio Manager be appointed to help follow up o n systemic issues and facilitate cross-fertilization among project teams and sector units. 6.9 Safeguards and the cost o f doing business. While safeguards will remain a cost o f doing business with the Bank, finding more efficient ways o f implementingthem and strengthening the systemic use o f safeguards in China i s possible within the constraints o f existing policy. M u c h could be done also to further harmonization o f procedures and  60 perspectives, while developing China’s capacity for technically competent and independent environmental safeguard management, More sector work, such as Sector Environment Assessments, would provide a broader context for project EIAs. Doing the work collaboratively would help develop China’s own capacity. Continuation o f thematic supervision will also broaden perspectives, lower costs, and build long-term capacity. Within China, use o f a tiered system o f evaluation, in which experienced Chinese research institutes from coastal areas collaborate with and monitor less experienced RIs in Central and Western China (analogous to the relationship between international and Chinese groups in conducting EIAs), could promote diffusion o f methods and skills throughout China. Finally, introduction o f more participatory and publicized safeguard methods could strengthen the independence o f Chinese experts and broaden the debate on environment and other safeguard issues. 6.10 New directions in infrastructure. The Bank should not rely only on ESW in infrastructure, nor should it retreat into peripheral activities such as renewable energy. At the same time, it should not simply continue a large lending program devoted to expanding the supply o f infrastructure into new regions o f the country. Rather, it should try to move into relatively neglected, but mainstream areas o f lending, and expand the sector work to provide the analytical base for lending and policy dialogue.98In energy, potential areas include gas, where the Bank could play a catalytic role in creating an environment for the private sector, and electric power distribution, where China could learn a lot from international experience. The time might also be right to try again to interest the government in Bank assistance for coal, where there are a number o f important issues o f technology upgrading, environmental protection, cross-sector coordination, and enterprise reform. In transport, one strategy for the Bank would be to support the needed highway investments by becoming a partner in a road fund or funds that would draw o n a f u e l tax for most o f i t s revenues. This would allow the Bank to wholesale i t s practices in highway construction and, more importantly, place the Bank in a position where it could influence the overall resource allocation decision on what i s to be built as well as where and when. The Bank’s experience in highway design and network construction would be spread over a large program and contribute substantial value added to transportation in China. Other suggestions are given in the three background papers on infrastructure (Churchill and Thum, 2002a and 2002b, and Churchill 2002; see also Annex D and Annex H). 6.1 1 Poverty lending. The Bank’s poverty-targeted lending has been effective and offers useful lessons(see B o x 3.2), but direct lending for poverty reduction i s not necessarily the most expedient or effective way in every sector o f addressing poverty issues. This i s particularly true o f infrastructure where investment i s essential for growth and benefits widely distributed across all income classes. The Bank, for example, may contribute more to poverty reduction through the road sector by lending for highways than for feeder roads. I t may make more sense for the Bank to confine feeder road lending to integrated rural poverty projects than as components o f highway projects. However, in the case o f electric power, improved distribution systems will have a major 98 Both the Region and the Government have reservations about the recommendations in this section. See Annex N and Annex 0, respectively.  61 impact on lower income groups but if they become the exclusive target o f this lending, the benefits will never reach them as they will be preempted by commercial and business interests as well as higher income groups.  63 References CAE Background Papers Churchill, Anthony (2002). The Bank’s Assistance to Energy and Transport: Summary and Conclusions. Churchill, Anthony and Thum, Cordula (200.2a). World Bank Assistance for China ’s Energy Sector. Churchill, Anthony and Thum, Cordula (2002b). World Bank Assistance for China ’s Transport Sector. Nolan, Peter (2002). Evaluation of the World Bank’s Contribution to Chinese Enterprise Reform. Findlay, Christopher (2003). World Bank’s Assistance to China ’s Agricultural Sector. Khan, Azizur R. (2002). 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Hwa, and L o u Jiwei (1993). “Macroeconomic Management in China: Proceedings o f a Conference in Dalian, June 1993.” World Bank Discussion Paper No. 222. Jacobson, Harold K. and Michel Oksenberg (1990). China ’s Participation in the IMF, the World Bank and GATT. Ann Arbor: University o f Michigan Press. Jalan, Jyotsna and Martin Ravallion (1998). “Are there Dynamic Gains for a Poor-Area Development Program?” Journal o f Public Economics, 67; 65-85. Kapur, Devesh, John P. Lewis and Richard Webb (1997). The World Bank: Its First Half Century. Two volumes. Washington: The Brookings Institution. Kanbur, Ravi and Xiaobo Zhang (2001). F$ty Years o f Regional Inequality in China. Cornel1University and International Food Policy Research Institute. Processed, April 2001. Khan, Azizur R. and Carl Riskin (2001). Inequality and Poverty in China in the Age o f Globalization. Oxford: Oxford University Press. 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Washington, D.C.: World Bank.  67 CHINA COUNTRY ASSISTANCE EVALUATION LIST OF ANNEXES Annex A: AAA Summary Annex B: Agriculture Summary Annex C: Decentralization Summary Annex D: Energy Summary Annex E: Finance Summary Annex F: Poverty Summary Annex G: Water Summary Annex H: Transport Summary Annex I: Health Summary Annex J: Client Consultation Annex K: Client Survey Annex L: Guide to OED’s Country Evaluation Rating Methodology Annex M: Management Action Record Annex N Comments from the China Region Annex 0 : Comments from the Government o f China Annex P: Executive Summary o f IFC Country Impact Review Annex Q: Chairman’s Summary Committee on Development Effectiveness(CODE) Annex Tables 1 to 9 (Statistical tables)  69 Annex A CHINA Country Assistance Evaluation Evaluation of the Effectivenessof the World Bank’s Analytical and Advisory Services in China Since 1990 Author: LU Mai, Secretary General China Development Research Foundation 1. When the World Bank began i t s operations in China in 1982, Chinese policymaking was hindered by significant ideological debates. The government directly controlled the prices o f almost all industrial inputs. I t controlled distribution through planned allocations and a variety o f quotas. 2. Since then, the Bank has contributed to China’s policymaking, reform efforts, and development through research and advisory activities, as well as project investment and technical assistance. After exerting considerable influence throughout the 1 9 8 0 ~ ~ however, i t s role waned during the 1990s. Have China’s economic advances and the growing skill o f i t s o w n officials, economists, planners, and analysts made the Bank’s advisory and analytical services less important? Or do the Bank’s service modalities and methodologies need correction? The Role of the World Bank in China’s Reform and Development Processes 3. T o ease China’s transition to a modern market economy in the 1 9 8 0 the ~ ~ government practiced “incremental reform,” retaining the planned allocation structure while allowing some activities to adopt the market system, with prices determined by the market and producers getting the lion’s share o f revenues. The government decentralized local finance, introduced two-tiered pricing, made rural households responsible for production, and entered into contracts with state- owned enterprises (SOEs) in urban areas. Together, these changes spurred the rapid growth o f markets and o f the economy as a whole. 4. During this period, the W o r l d Bank’s analysis o f China’s situation laid the foundation for comprehensive policy research. China: Long-Term Development Issues and Options, published in 1985, was a particularly important and influential country report. It forecast China’s economic growth, affirmed the possibility o f rapid growth, and provided policy analysis and recommendations o n several key subjects: 0 Structural adjustments, system reform, and social policies during economic growth 0 Development o f infrastructure and service sectors such as education, agriculture, energy, . transportation, and urbanization 0 Reform o f SOEs 0 Pricing reform 0 Creation o f accounting and legal systems meeting international standards 0 Social policies, including social security, housing, social services, population, and rural poverty. 5. China adopted as government policy many o f the report’s recommendations o n economic development. For instance, sectors such as agriculture, education, energy, and transportation became development priorities. But other recommendations, such as SOE reform and social Annex A (continued) 70 security reform, failed to get the attention o f the Chinese government until the need became pressing, whereupon the recommendations were added to the government’s agenda one by one. 6. The burgeoning market economy helped China double i t s GDP in the 1980s. The Chinese government pressed their advantage with dramatic economic reforms in the 1990s. Significant among these reforms were (a) reforming macroeconomic management in order to integrate the two-tiered economy (particularly on fiscal, taxation, foreign exchange, and pricing issues), (b) reforming the inefficient state-owned economy, and (c) reforming the social security system. 7. The Bank’s considerable impact on Chinese government policy during the period o f incremental reforms can be attributed to several factors. The Bank worked cooperatively and respectfully with the Chinese government, building and maintaining effective channels o f communication to key Chinese officials. In the 1980s’ the chief representatives o f the W o r l d Bank Beijing Office had friendly personal relations with the leaders o f Chinese State Council and many ministries and commissions. In the 1990s some crucial researchers who had always had good working relationships with the Bank were promoted to ministers or department directors in the government. 8. Bank’s studies and recommendations were based on a sound knowledge base and ongoing experience and supported China’s incremental reform model. The Bank was able to transform i t s research findings into concise policy recommendations in response to clearly defined policy needs from the Chinese leadership. This i s important because, although China’s reform process i s gradual, the government maintains a long l i s t o f development topics; successive topics usually present themselves as urgent needs. Issues of Concern 9. Despite these successes, the influence o f the World Bank’s policy research diminished in the 1990s, as resources were devoted to research reports that failed to get leaders’ attention. The reasons for the dwindling o f influence are manifold. 0 China developed substantial capacity to perform i t s o w n theoretical and policy research. 0 The reform process in the 1990s became much more difficult because it directly affected strong vested interests. While the suggestions from World Bank experts were correct in many cases, the Chinese government has found them very hard to adopt because o f various political constraints. 0 Because it has not been able to isolate the factors behind i t s earlier successes, the Bank in some cases has proved unable to deploy and deploy i t s strengths effectively. 0 The Bank’s research findings are not published in formats that are well suited to most Chinese audiences. Few Chinese read i t s lengthy research reports because Chinese translations appear after a long lag. 0 Since the 1990s, the World Bank’s research in China has been insufficiently forward- looking. The Bank has failed to focus o n developmental issues with significant implications for China’s development prospects, such as urbanization, education, and urban transport. In contrast, it has devoted disproportionate efforts and resources to the issue o f SOE reform. A related problem concerns the gap between clearly identifying actual policy research needs and supporting what may be a totally different set o f priorities articulated by the government.  71 Annex A (continued) Recommendations 10. W o r l d Bank project loans and policy research have been closely related in China-to good effect. But with the elimination o f soft loans and the reduction in project loans, policy research has decreased in volume and significance. If the Bank would retain i t s influence on China’s future reforms and development, it should adjust i t s research and analysis services. Among the recommended adjustments: 0 Expanding networks and channels for policy research so that when a current group o f Chinese collaborators i s promoted or retired, a new network i s ready to take their place. 0 Identifying current and future needs through proactive collaboration with Chinese researchers and specialists in various government agencies who could define needs and make suggestions in key research fields as well as assess the Bank’s reports from the perspective o f Chinese experts. 0 Formulating improved output and delivery formats for reports so that recommendations focus on the one or two most important findings. Proposals o f n o more than 3,000 words could be released separately and periodically (possibly 20 times per year) and circulated within the Chinese government. This approach could achieve a stable and loyal readership. 0 Strengthening the studies o f China’s fundamental conditions in cooperation with Chinese experts, following the model o f the World Bank surveys that shed so much light on the changing Chinese economy and society in the late 1980s and early 1990s. 0 Upgrading the training o f Chinese policy researchers in government, academia, and nonprofit organizations. The World Bank should continue i t s efforts to provide support and assistance to the capacity building effort o f Chinese research institutions by offering personnel training and short-term study tours. Annex B 72 CHINA Country Assistance Evaluation World Bank’s Assistance to China’s Agriculture Sector Author: Christopher Findlay, Professor Asia Pacific School o f Economics and Government Australian National University CHANGES IN THE AGRICULTURAL AND RURAL SECTORS 1. Like most o f China, the agricultural sector changed significantly between 1970 and 2000, both demographically and economically. Agriculture slipped from 40 percent of China’s economy to 16 percent, as industry and services advanced. The share o f the population engaged in agriculture shrank from 81 percent to 50 percent, the share living in rural areas from 83 percent to 64 percent. Even so, the rural economy s t i l l employs 475 million people, with 347 million working in agriculture and 128 million in town and village enterprises. Historically tightly regulated, insulated, and protected, the agricultural sector i s increasingly subject to market forces, the pressures o f internationalism,shifting government policies, and changes in technology and consumer preferences. Rural enterprises now provide more diverse employment opportunities and an important source o f income for rural and agricultural workers. A demand in urban areas for more diverse foods i s widening opportunities for farmers to join the China’s dynamic domestic economy, although improved ways to market their products are needed. 2. But prosperity i s not equally spread throughout China, nor has the agricultural sector shared in the wealth o f industry and commerce. Incomes in urban areas are 2.7 times those in rural areas. Some provinces are remote, poor, and largely unconnected to the modern Chinese economy. In other provinces, high levels o f prosperity coexist with equally high levels of rural poverty. China has recognized this problem, and the Bank can provide new perspectives on how to solve it. CHALLENGESFOR RURAL CHINA 3. The focus o f Chinese agriculture for decades was national self-sufficiency. To this end, the government regulated what was grown, with an emphasis on grains. A government monopoly still controls the grain market, but farmers are changing the rural output mix in favor o f commodities not subject to price or market regulations, such as oilseeds, fruit, meat, and fish. Consequently the share o f these products in agricultural output has risen rapidly, while the share o f output sold at regulated prices has fallen-from 76 percent in 1980 to 56 percent in 2000. These shifts are driven by changes in demand, by policy, and by attempts to find loopholes in policy. 4. Shifts in the mix o f agricultural output and in agriculture’s share in national output and employment are typical o f the structural changes that occur with growth in an economy at China’s stage o f development. However, challenging the process o f change are conditions specific to China and China’s policy choices to date. These conditions and policy choices are the basis o f the challenges ahead in rural China that will guide the priorities in the Bank’s program o f assistance to China. The most prominent issues that appear to concern policymakers include:  73 Annex B (continued) A focus on product quality, rather than volume, to meet shifting consumer tastes, and an explicit shift in public discussion o f food security to reflect this change. Less reliance on collectively owned township and village enterprises, which tend to be specially favored and inefficient, and more on true private enterprises. More interest in trade in food-not only food imports but also exports and access to markets for exports-again leadingto a different perspective on food security, including an appreciation o f product values and input costs and a reappraisal o f China’s strategy with respect to WTO’s Doha Round. Continuing pressure for reform o f domestic grain marketing systems to capture, through comparative advantage, more gains from the internaltrade in grain and to facilitate adjustment to WTO commitments in the grain sector. Removing impediments evident in markets for farm inputs and services that restrict farmers’ ability to respond to opportunities and to adjust production in the face o f new competition. Reform o f rural finance markets to help farmers and rural entrepreneurs improve their operations. Better infrastructure for agricultural product markets, especially logistics and multi-modal transport, to enhance trade and income growth, particularly in poor areas. Redressing the growing imbalance in income distribution between rural and urban residents and the large gap between prosperity and poverty in rural areas. Removing impediments to internal migration and relaxing other rural labor regulations, with implications for the management o f markets in agricultural inputs, especially land, for the management o f poverty programs, and for diversifying farmers’ income sources. Greater focus on environmentalconstraints that limit the sustainability of Chinese agriculture and rural enterprises and threaten further degradation o f water, soil, and other natural resources. Correction o f incentives in the national public finance systems that appear to be widening disparities rather than narrowing them. Reform o f financial and bureaucratic arrangementsthat prevent local and inter-regional funding and development strategies. Policy change can be expected to respond to the pressures associated with the foregoing issues, as China’s experience with grain market regulation and the household registration system suggests. But a body o f knowledge about policy options and their impacts i s critical if policymakers are to choose and implement policies that promote growth and reduce poverty. REVIEWOF WORLD BANKASSISTANCE STRATEGY 6. World Bank lending i s large in absolute terms but small relative to capital inflow into China. The World Bank has made the case for continuingto lend to China, observingthat FDI has tended to exaggerate regional disparities and has not met the need for public investment in essential sectors. Priorities in the Bank’s program-poverty alleviation, health, education, natural resource management, the environment and urban development-have had a low priority in FDI flows, whereas Bank projects have piloted innovative approaches to areas o f need, catalyzed repeater projects that demonstrated sound policy principles, and helped to build institutions necessary to complete structural reform. 7. The 2002 CAS (covering the period 2003-05) contains several goals relevant to agriculture and the rural population. I t builds on a broad strategy that includes improving agricultural practices, upgrading marginal land, improvingtownship and village enterprises, boosting employment and productivity, and paying more attention to lagging inland regions. Improvements to agricultural productivity growth are expected to come from changing the mix o f Annex B (continued) 74 output, strengthening land property rights, investing in irrigation, reforming water resource management, reforming systems o f fees and taxes in agriculture, engaging more private-sector participation, and improved transport and market infrastructure. Rural development programs w i l l reflect key themes of the Bank’s program for transition t o a market economy, assistance to disadvantaged people and regions, the rural-urban transition, and sustainable development. 8. Over the next two years, assistance priorities will shift further from direct interest in production to poverty alleviation, natural resource management (with special attention to water), revitalizing agricultural research and extension programs, and environmental sustainability. The overall interest in moving toward a market economy remains. The changes in the portfolio o f projects are consistent with the new priorities identified above. However, how project implementation proceeds will depend on whether China focuses o n narrower or broader interpretations o f economic development: Will efforts focus o n rural areas in general or agriculture in particular? Should the goal be to bring prosperity to the countryside or to facilitate the migration o f the rural poor into the cities? REVIEWAND FURTHER QUESTIONS 9. The biggest issue remains the system o f subnational finance and the incentives it creates in project selection and design. The consequence o f this system i s that the Bank’s contribution to public goods i s being driven by i t s participation in the production o f private goods. Ideally the interaction should be in the other direction. The origins o f the current circumstances are understandable, given China’s public finance system, but this orientation leads to a bias in the portfolio and problems in project design, implementation, and evaluation. It has also raised demands on Bank staff and crowded out the private sector. 10. In order to achieve the goal o f participation in projects, the Bank tends to be drawn into provincial level activity. The sensible approach to poverty reduction, involving an integrated set o f activities, then leads to large, complex projects requiring a high degree o f micro-management, thus exposing the Bank to significant risk. 11, The responses to this situation include not only continuing work to anticipate pressures for change in the three key areas o f grain marketing, labor mobility, and public finance, but also to deliver a steady f l o w o f ideas about policy innovation and to ensure, through project design and evaluation, that public goods, including capacity and institution building, are not underrepresented in the portfolio. 12. The fundamental issue i s the degree to which World Bank projects focusing on agricultural production boost the welfare o f the poor in rural China and the economies o f the regions in which they live. Although the Chinese government has recognized the need to address poverty in rural areas, it has traditionally used World Bank loans for projects that will quickly generate income to repay the loans. This has distracted attention from a focus on building institutions, economic capacity, health, education, and other social lending o f the sort that benefits the rural population over the long term. Integrating such lending into the Chinese development strategy will require a shift in Chinese domestic economic policy and new ways o f approaching and managing change.  75 Annex C CHINA Country Assistance Evaluation Impact o f Decentralization Author: Daniel Ritchie, Consultant 1. Evaluations by Bank staff, borrower representatives, implementation agencies, and NGOs have shown that decentralization has had a positive impact on the Bank’s effectiveness and efficiency since some functions were decentralized to the Resident Mission in China (RMC) after 1997. The presence o f project staff in the RMC, many o f whom speak Chinese, has helped (i) resolve project problems promptly, (ii) speed up transaction times, (iii) enhance the Bank’s appreciation o f the local situation, (iv) facilitate local capacity building through regular training and other support, and (v) build long-term relationships and trust by virtue o f continuous presence in the community. Several improvements were made possible by the Bank’s presence in Beijing, including: 2. Project management. With portfolio tasks being managed in Beijing, increasingly by Chinese staff, R M C staff have spent more time within immediate reach o f project staff, solving problems in real time and engaging in almost continuous supervision. Also, the persistence o f Bank staff in the R M C has led to positive changes in project design, implementation, and procurement. 3. Public procurement. The borrower consistently cited the Bank’s role in public procurement as a major contribution to China’s development. R M C staff helped prepare the national public procurement law o f 2000. It also played an important role in drafting standardized bidding documents for Bank projects in the early 1990s. 4. Disbursement and financial management. Financial management staff and disbursement staff are interchangeable in Beijing, streamlining their speed and effectiveness. Withdrawal applications are now all processed in Beijing; the requisite forms and supporting documentation are digitized and sent electronically; the service standard for processing applications i s now 10 days; and financial management assessments for projects under appraisal and oversight o f financial reporting and audits have increased. (About 220 project audits and 50 trust fund audits are reviewed every year.) The R M C i s helping the Chinese National Audit Office adopt auditing standards in line with Bank and international norms. 5. Beneficiary participation. The Bank has promoted the engagement o f stakeholders in the design and implementation o f development projects, notably in the creation o f water user associations and in stakeholder consultation, through techniques such as rapid rural appraisal. 6. Safeguards. The Bank’s safeguard policies have helped the Chinese improve the content and application o f their o w n environmental and social safeguard policies. The Bank and R M C staff are supervising the implementation o f EAPs and RAPS, unlike many Chinese agencies (and even other donors). With two notable exceptions-resettlement o f illegal squatters and the definition o f indigenous peoples-there has been an increasing acceptance o f the Bank’s policy standards and practices. Environmental policies are now more or less synchronized with the Bank, even though the definition o f what constitutes a significant impact continues to vary. Possibly the most significant contribution by the Bank i s in the application o f the policies. Annex D 76 CHINA Country Assistance Evaluation World Bank Assistance to China’s Energy Sector Author: Anthony Churchill and Cordula Thum, Consultants OVERVE I W 1. China i s now the second largest energy consumer in the world. The country’s energy intensity i s about 60,000 BTU per dollar o f GDP, three times the world average and twice that o f a l l developing countries. I t generates over 300 gigawatts, making it both the world’s second largest producer and consumer o f energy. Industry accounts for as much as 75 percent o f total energy consumption, and although conservation efforts over the past two decades have resulted in more efficient consumption, household use (10 percent in 1999) i s growing fast with recent improvements in the standard o f living. Nationwide, although service i s o f uneven quality, rural access to electricity i s high: about 96 percent o f the nation’s villages and about 80 percent o f rural families now have access to electricity. 2. Three prominent issues in China’s energy sector are the use o f coal, management o f electric power, and efforts at energy sustainability that include improving efficiency, conservation, and developing renewable energy. Coal - China i s the world’s largest producer and consumer o f coal. I t is, in the foreseeable future, largely energy self-sufficient, although crude o i l imports have steadily increased since 1993. Coal also presents problems concerning infrastructure issues o f transportation and distribution, air pollution and health, and the efficiency o f the technology used to burn coal (in power plants as well as households). Electric Power - The sheer size and the level o f growth in China’s power sector have been very impressive. However, i t s institutional structure i s complex and inefficient. The 10th Five Year Plan (200 1-2005) continues a number o f ongoing institutional and organizational reforms: complete separation o f distribution network from generation; restructuring both generation and power network enterprises; establishment o f competitive and open regional markets; developing efficient management throughout the electricity chain, including generation, transmission, distribution, retail tariffs, and environmental protection. Sustainable Energy, including Conservation, Efficiency, and Renewables - China has one o f the world’s largest renewable energy programs, with 20 GW o f small hydropower and large-scale installation o f improved woodstoves and biogas plants. The 10th FYP emphasizes renewable energy as an important measure to reduce the power sector’s use o f coal in the medium to long term and to provide energy services to remote rural households. THE BANK’S SECTOR ASSISTANCE ENERGY STRATEGY 3. Between 1983 and 2002, China has been the Bank’s largest borrower in the energy sector with about $7 billion in loans, and energy i s about 20 percent o f the Bank’s total lending to China. Electric power received the most (86 percent), followed by o i l and gas (1 0 percent), energy efficiency and renewables (2 percent), and coal (2 percent), with substantial analytical and advisory services. The sector also received $90 million in Global Environment Facility grants through the Bank. Nonetheless, given the sector’s sheer size, the Bank i s a relatively marginal financial player in the Chinese energy sector (less than 5 percent). And the Bank has had only  77 Annex D (continued) limited involvement in the subsectors most critical to China’s energy strategy-coal and petroleum. 4. The Bank’s activities have progressed from helping China’s integration into the global economy and helping it build an energy infrastructure to support the country’s accelerating economic growth to developing the institutions, practices, organizational and market reforms, and environmental and resettlement programs to make China’s energy system equitable, efficient, and sustainable. 5. After a period o f significant loans from 1983-98, there has been a dramatic decrease in overall energy lending. Only four power loans have been made since 1998. 6. In total, the Bank has approved only I Energy - 1999-2002 -- Sector Lending, 1 energy and energy-related loan totaling to U S $ 105 million over the last two FYs. This FY1999 I U S $100 million i s a shift from financing major capital projects FY2000 US $320 million to organizational and market reform programs. In the past two years, the establishment o f a FY2002 US $105 million EFFICACYOF BANKPROJECTS: PERFORMANCE AND OUTCOMES 7. Completion and Supervision Ratings-The record o f completed energy and energy- related projects i s comparable to the transport sector: 6 were rated highly satisfactory; 4 were rated marginally satisfactory; none o f the 20 projects had an unsatisfactory outcome; and one project was not rated.99Sustainability was rated likely for all but one project (the Daguangba multipurpose hydroelectric project, which was rated uncertain). And institutional development impact was rated substantial or high for all but 3 projects (the Daguangba, Changcun Mining, and Fertilizer Rationalization projects, which all had a modest rating). 8. An assessment o f the Bank’s impact in a country like China needs to go beyond the immediate achievements o f Bank projects, which ultimately account for only a minute portion o f overall sector investments. In this respect, the Bank’s strategy from 1985 to 1993 was highly relevant to the sector’s needs and consistent with the Bank’s support o f China’s gradualist approach to economic reform. Most projects had minimal policy content, but they all shared a strong emphasis on technology transfer and capacity building. Projects were targeted and to maximize their demonstration value to the rest o f the sector, with benefits to be gained from modern technology and management methods, international procurement, and good resettlement practices. These early physical and institutional achievements were fully sustainable and paved the way for the more ambitious policy reforms o f the mid- and late 1990s. 9. The outcome o f the Bank’s energy assistance program since 1994 i s rated satisfactory, i t ’ s institutional development impact substantial, and i t s achievements sustainable. The Bank’s power sector strategy continues to be highly relevant and i s supported by the government’s stated, commitment to reform. However, the Bank needs to renew a dialogue on the critical coal and petroleum sectors, where reform has been lagging, and at promoting an integrated approach to energy planning. Bank performance during the period i s rated highly satisfactory, while borrower performance i s rated satisfactory, with excellence in such aspects as resettlement, sustained ”The Henan (Qinbei) Power project (Loan 3980, approved in fiscal 1996) was cancelled at China’s request before being declared effective. Annex D (continued) 78 commitment to energy efficiency, and renewed promotion o f renewables offset by weaknesses such as lack of effective sectoral coordination at the central level, slow pace o f power tariff reform, insufficient enforcement o f environmental regulations, and insufficient progress in reforming the coal sector. 10. Sector Reform, Institutional Development Impact and Sustainability. The fundamental restructuring o f the power sector has been the most ambitious institutional objective pursued by the Bank in the energy sector since 1994. In 2000, a joint report o f the State Power Corporation and the Bank laid out a plan to introduce competitive power markets into the Chinese power sector, starting on a provincial or regional scale. Pilot programs are underway in Shanghai and Zhejiang. The electricity industry in China i s shifting to a competitively based electricity market framework, particularly Shanghai and Zhejiang in the East China power grid. Zhejiang i s piloting the implementation o f competitive power markets with assistance o f the World Bank. The Bank i s in a unique position to bring international experience to bear in power market design. 11. Zhejiang’s Competitive Power Market. Zhej iang’s competitive electricity market began i t s trial operations began in January 2000. A 2001World Bank review found that impressive achievements have already been made, including: 0 Sound trading mechanisms, operating rules, and risk management have been established; 0 Information systems to operate a competitive energy pool have been well conceived, developed and put in operation; 0 Reform has been widely accepted and supported by government authorities; 0 Improvements have been widely accepted and supported by government authorities; 0 Improvements have been made by generators in cost control, internal performance management, and contract trading analysis and risk management; 0 And most important, average generation availability (92 percent in 2000) continued to improve as a result o f competition. 12. There are however, problems that have prevented the market from advancing further. The pilot project has also revealed the constraints and problems that arise if the government persists in adopting a fragmented, piece-meal approach to power sector reform. RELEVANCE OF BANKASSISTANCE 13, An assessment o f Bank involvement in China’s energy sector needs to start with the recognition that Bank financial support represents a tiny portion o f the sector’s total investment needs: even in the power sector where the Bank has been most active, total lending between 1984 and 1995 (US$3.4 billion) accounted for a mere 3.4 percent o f sector investments. Consequently, aside from any actual or potential direct benefits o f Bank projects, the relevance o f Bank assistance has to be seen primarily in terms o f whether it was geared, through targeting, type o f instruments, or partnerships, to achieve maximum catalytic or demonstration effect and policy impact in areas emphasized by the Bank’s corporate, sector, and country assistance strategies. 14. The Bank’s investments in the electric power sector reflect the Bank’s comparative advantage and were driven by the high priority in China given to increasing power production. Financing big hydro projects, and later large thermal plants, has historically been the Bank’s comparative advantage. Lack o f electric power to support economic growth, combined with an inefficient and obsolete supply system made power plant construction an obvious high return activity for the Bank and high ownership value for the government. But there has been less ownership concerning solving difficulties associated with pricing, financial matters, and other needed reforms that accompanied these projects.  79 Annex D (continued) 15. In the last few years, the Bank has encouraged China to seek private sources o f financing for increasing electric power supplies. In spite o f Bank encouragement, China has only been able to attract relatively minor amounts o f private financing, usually with substantial government support. Without an appropriate market structure, private capital i s reluctant to enter this market. Getting the market structure ‘right’ i s the challenge for the future. In any case, given the size o f the sector, most o f the resources will have to come from domestic savings and external capital can only play a limited role. 16. Given the large size (for the Bank) o f the electric power supply program, it has been difficult for the Bank to find the resources and the will to move into other areas o f energy investments. The supply problems associated with primary fuels, oil, gas, and coal are obvious but taking action has been beyond the capacity o f the Bank particularly in the face o f Chinese unwillingness to deal with the associated institutional issues. The few attempts to do so have not been successful and discouraged further action. The fuel sector i s the major unfinished business for the future. LESSONS An incrementalapproach to institutionaldevelopment, initially emphasizing technology transfer and capacity building can be extremely effective. 0 Internal Bank factors are critical to building up and sustaining an effective long-term sector dialogue. In focusing on the ultimate introduction of market forces in the energy sector as part o f its policy dialogue, Bank staff should not lose sight o f the importance o f fundamentals. 0 A two-prongedapproach that combines high-levelpolicy dialogue with central authorities and a direct operational involvement with a representative set of provincial utilities i s essential to success. 0 The Bank should be particularly sensitive to possible misinterpretationby outsiders o f its stance on private sector development issues. 0 The Bank’s emphasis on ensuring compliance with environmental guidelines in the design o f the projects it finances and on the design and enactment of appropriate environmental regulations at the national level, needs to be complemented by similar efforts at the monitoring and enhancing enforcement levels. BANKINVOLVEMENT IN THE ENERGY FUTURE SECTOR 17. The Bank i s at a crossroads in i t s energy sector dialogue with China. After the major policy breakthroughs o f the mid-1990s in the power sector, progress on sector reform has slowed and major policy issues in such critical subsectors as coal, o i l and gas have largely gone unattended. To address this the Bank could choose to focus increasingly o n “peripheral” subsectors such as renewables and energy efficiency where policy issues are less sensitive and government buy-inmore likely. But, this approach may lead to a marginalization o f the Bank’s role in a sector o f central importance to the country’s future development, and at a time when IFC i s not positioned to expand i t s involvement - precisely because major institutional and policy issues remain to be addressed. A more difficult path i s for the Bank to continue i t s sizeable financial support to the energy sector but frame it within a truly comprehensive dialogue o n national energy policy issues. This evaluation clearly suggests that this is where the Bank’s comparative advantage lies. In particular, the Bank can: Annex D (continued) 80 Help promote comprehensive energy planning in China. The Bank should offer to help at two levels: regionally, preferably in Sichuan province, which has a varied resource supply and where the Bank has ongoing operations and institutional relationships; and nationally, possibly building on the recent working dialogue with the State Council, the just-completed PHRD-financed study o f LNG demand, and an older major study o f China’s coal and electricity delivery services. Continue to balance assistance in terms o f subsectoral priorities, mix of instruments, and central versus local dialogue. A n appropriate mix o f lending and non-lending instruments will continue to be needed for maximum impact. And sector interventions w i l l need to continue following a parallel track, at both the central and provincial levels. 18. While future energy policy dialogue will need to be comprehensive, calling for broad-ranging economic and sector work, the scope o f individual project interventions need not be. Instead, they may be geared to areas neglected in past Bank lending, and where potential IFC involvement i s less likely: I n the power sector, the Bank should increase its attention to inefficiencies at the distribution level and broaden the efforts initiated in Zhejiang province under the recently approved Tongbai project. This increased emphasis on local issues, together with the photovoltaic pilot financed by the Bank under the recent Renewable Energy project could pave the way for a more proactive, and better-integrated, Bank strategy on rural energy. Direct assistance toward municipal-level natural gas distribution and demand - for example, by replacing coal-fired furnaces with gas-fired furnaces, co-generation, and district heating. Loans to municipalities could help expand municipal gas-distribution infrastructure and utilization o f natural gas in urban district heating systems. M a k e a renewed and determined attempt to engage Chinese authorities in a full- fledged dialogue on the coal sector. The Bank must address coal in its assistance strategy: the coal sector i s too important to China’s future social, environmental, and economic development; and the issues the sector must resolve are too daunting, I n its future lending to the power sector - andpossibly the petroleum sector - the Bank should give a higher priority to the early resolution o f pending asset ownership issues, which continue to cloud the reliability o f many sector agencies’ financial statements. In this context, the Bank should consider revisiting i t s current auditing requirements (which only provide for certification by government audit bureaus) and at a minimum ask to be provided with audit reports from international auditors whenever these have been prepared (e.g. for those power companies which have obtained, or are seeking, partial listing on foreign stock exchanges).  81 Annex E CHINA Country Assistance Evaluation China’s Financial System and the World Bank’s Role during the 1990s Author: S. Ramachandran, Sr. Evaluation Officer, OEDCR 1. China’s economy grew spectacularly through the 1990s. The banking system grew even faster, but there i s widespread concern that i t s mounting problems may mar what i s otherwise a remarkable economic transformation. 2. After China’s economic transition began in 1978, output and incomes grew quickly and deposits flooded into Chinese banks. Government-owned investment arms o f the Ministry o f Finance (MoF), the banks had little experience in making sound loans. With depositors protected against losses from bad loans, deposits became contingent government liabilities, posing significant fiscal and macroeconomic risks. But with national income doubling every decade and domestic savings now at 35-40 percent o f GDP, the steady f l o w o f new deposits has so far spared China a banking crisis and allowed a risky situation to continue largely unchecked. 3. The magnitudes are staggering: banking deposits are now almost 150 percent o f GDP, up f r o m less than 30 percent in 1978. Four state banks account for about two-thirds o f these deposits. Banks lend mostly to state-owned enterprises (SOE), not the booming private sector, which relies on retained earnings and informal finance. If non-performing loans constitute one- third o f the portfolio and are worth 10 percent o f their face value, the government’s contingent liability i s about 45 percent o f GDP. 4. Before 1978, “the plan” covered almost every decision o f SOEs. Prices, which bore l i t t l e relation to costs or scarcity, were used by central authorities as implicit taxes and subsidies. Firms had no role in allocating resources, and most investments were funded through budget grants. Credit, too, was an integral part o f planning. But then as now Beijing set targets and flows at a high level o f aggregation, and provincial or municipal governments effectively controlled most SOEs. 5. As budget-financed investment f e l l from 16 percent o f GDP in 1978 to 3 percent in 1995, Bank lending took up much o f the slack, and when some SOEs could not qualify on strictly commercial criteria, banks were pressed, or directed, to fund them. After 1980, economic reforms and increasing competition among firms exposed the financial weakness o f many SOEs. Loss-making SOEs rose from 26 percent o f the total in 1992 to 50 percent in 1998. The Bank’s Role 6. In the 1980s, the Bank offered China a window o n the world o f market economics, in banking as in other sectors. The Chinese authorities listened to the Bank’s general advice and used the Bank to vet the legions o f experts who came to offer guidance. 7. During this period, the Bank approved nine line-of-credit projects that benefited borrowers in light industry and agriculture but did not achieve their stated purpose: t o improve Annex E (continued) 82 the soundness o f banks or the overall quality o f their loan portfolios. The last o f these projects was approved in 1990 and closed in 1996. 8. When Beijing lost control o f i t s monetary aggregates in the late 1980s, the Bank worked closely with Chinese counterparts to take stock o f the banking system. A Financial Sector Review, completed in mid-1989, described the conflict between having banks operate autonomously and governments (at various levels) funding favored enterprises regardless o f profitability. 9. The review’s prescriptions were sensible but generic: to have banks, although government owned, operate commercially and be subject to the central bank’s prudential regulation and supervision. The review also suggested removing interest rate controls and credit ceilings and introducing indirect instruments o f monetary policy. But the effort to remake the Chinese system in the OECD image ignored Chinese realities: “loans” were often understood by all parties to be equity stakes, and the central bank’s power was very limited. Enterprises had unclear ownership, high debts, and unchecked access to bank loans. Banks’ head offices had l i t t l e oversight and virtually no control over their own branches, which often kept two sets o f books, one for the head office and central authorities, and another for the local authorities, which exerted de facto control over local branches. 10. Central authority was splintered among rival agencies-among them the MoF, State Planning Commission, central bank, and the State Council’s research arm. Each o f the many groups had to agree on the scope and design o f a Bank project, and their rivalries were not conducive to addressing difficult problems. The ambitious Financial Sector Development Project, first proposed in the mid-1980s and continually prepared and altered during the 1990s was finally abandoned in 1997, because the Bank and i t s Chinese partners could not agree on i t s components. 11. A Financial Sector Technical Assistance Project (FSTAP), approved in August 1992, was designed to help the central bank better understand the inner workings o f the banking system and so indirectly influence policies. At $60 million, it was the largest technical assistance loan the Bank had ever made. But the project’s approval did not end tensions among the various counterparts. Because each entity only liked specific features, project implementation was difficult. 12. As China’s banking deposits increased in the 1990s and a new generation o f policymakers returned from advanced study abroad, the technical abilities o f Chinese officials rose dramatically. The Bank, meanwhile, did not increase the analytical rigor o f its reports which then became less useful to the technocrats in the government who nevertheless proceeded to use them in bureaucratic battles for influence. 13. N o further financial sector projects, and no major economic and sector work, were conducted after 1997. The Bank’s China Department, reorganized in 1994, was again shaken by the mid-1997 reorganization o f the East Asia Region. Bank staff fought to resuscitate or replace cancelled financial sector projects, but work dwindled. By 1999, most financial sector staff working on China had left. 14. Hopes for reviving the Bank’s involvement in the financial sector rose in mid-2000 when the Bank’s new regional vice president designated a full time program manager for financial sector work in China with a greatly augmented budget. Regional sector staff think that they have turned a new page, but it i s too early to t e l l if the Bank’s effectiveness has improved.  83 Annex E (continued) The Decade’s Developments in Perspective 15. China has made significant improvements in the institutional setting o f i t s financial sector. The central bank law and commercial bank law were revised in 1994-95. National financial accounting standards and standards for risk-based loan classification were introduced in 1998. The credit quota system has been replaced by a less rigid system o f indicative quotas. Banks are trying to resolve their non-performing loans (through asset management companies). A troubled regional commercial bank was closed. Several foreign banks were licensed, and further opening i s set for 2004 under WTO. For the capital markets, a long delayed securities law, approved in late 1998, defines insider trading and permits criminal prosecution o f offenders. Capital market oversight responsibilities have been clarified and consolidated, and a new agency has been established to oversee the insurance industry. 16. Despite these advances, the problems o f China’s huge banks are daunting. Deposit growth may continue to postpone a banking crisis, but non-performing loans must fall as a proportion o f GDP if China i s to grow out o f the problem-and this requires drastic improvements in the quality o f bank lending. 17. Poorly defined property rights and reports o f corruption and misappropriation suggest that the central government may find it harder to realize the value o f what it purportedly owns (as shareholder) than what it i s owed (as a creditor). If so, the banks’ non-performing loans could jeopardize central government finances. When added to Beijing’s external debts and the un- funded pension liabilities promised to a rapidly aging population, the fiscal implications o f the contingent liabilities from non-performing loans o f state banks are worrying. An Evaluation 18. The Bank’s work in the Chinese financial sector, especially from 1993-94, f e l l short in two ways. 19. First, project preparation documents contained no analytical work on banking. To some extent this was because data were not easily available-or not forthcoming-but no great attempt was made to get them, and readily available data were never analyzed. Five years after the East Asian crisis, for example, the Bank has not analyzed such issues as the size distribution o f deposits that would greatly help in the orderly handling o f a banking crisis that many fear w i l l follow if banking does not improve. And despite considerable Chinese interest in asset management companies, the Bank has not examined their efficacy. Academics and commercial bankers appear to know more about what i s happening-and are therefore more influential-than the Bank. 20. After 1993-94, the Bank’s technical work failed to keep pace with the technical abilities o f Chinese officials. Written reports became inaccurate or misleading to avoid annoying every official through which they were transmitted. But oblique criticism or sugar-coated reports are o f l i t t l e interest to technically able counterparts, and some have not been passed on to the decision makers, sometimes on technical grounds but also in battles over turf. 21. Second, after the mid-1990s, the Bank’s work on Chinese finance did not reflect what other Bank staff already knew about Chinese enterprises. The Bank would have been more persuasive had it showed, for example, that value-subtracting enterprises were being funded. Annex E (continued) 84 Moreover, the Bank has framed the issue as making banks sound, while the authorities at the central and provincial levels have been more concerned about enterprise restructuring and i t s attendant social and political implications. Powerful factions in China favor state support for a stable o f large, “strategically important” firms. H a d the Bank integrated i t s banking work with that on enterprises, i t s prescriptions may have been more appropriate and convincing t o the authorities. 22. The Bank’s regional P R E M i s n o w responsible for financial sector work in China. The program manager appointed in 2000 has an ample budget to draw o n expertise from other parts o f the Bank and outside. The work has shifted from capacity-building projects with individual banks to broader issues o f overall financial sector reform and sequencing. Such strategic advice w i l l be effective only if it i s anchored on analytical work specific to China. Having Chinese scholars and academics do analytical work under the Bank’s aegis could sharpen its relevance while augmenting the country’s policy-oriented capabilities.  85 Annex F CHINA Country Assistance Evaluation Poverty Reduction in the 1990s Author: A. R. Khan, Professor University o f California Riverside 1. However one chooses to measure the available data, poverty rates fell in China through the 1990s. The proportion o f the population living on less than $1 per day (in purchasing power parity) declined from 32.9 percent in 1990 to 17.8 percent in 1999. Yet most ofthat reduction took place in 1994-96. Using an income-poverty threshold for rural China, one gets a less extreme difference in the rates o f poverty reduction during the three thirds o f the decade. However, the broad pattern s t i l l holds: the rate o f reduction in poverty was rapid during 1994-96 and far slower during the earlier and later years. 2. But even after t w o decades o f rapid growth, the overall incidence o f poverty in China was higher than in many countries in similar circumstances. During the first and last thirds o f the decade, China experienced very high rates o f GDP growth that coincided with a rapid increase in per capita real personal income in both rural and urban China. Yet both subperiods saw a slow or negative decline in poverty, indicating that China failed to realize the potential for poverty reduction created by rapid growth. That failure was due to a sharp increase in inequality. The increase in inequality i s ascribable to five sets o f circumstances: 3. Increase in inter-regional inequality. Since the 1980s, China’s economic growth has been concentrated in the coastal and eastern provinces, which enjoyed natural advantages and public policy preferences in attracting export industries and foreign direct investment. In contrast, the central and western regions were excluded from those advantages and have grown at a much slower rate. Other policies impeded progress in the “backward” regions, including an almost colonial approach to extraction o f natural resources at extremely l o w ex-factory prices, price controls o n agriculture, and l o w investment in infrastructure. Only after the mid 1990s did signs o f a reversal o f some o f these policies become discernible . 4. Slow growth in rural income. At the end o f the decade, poverty in China was overwhelmingly concentrated in rural areas, which accounted for nearly 70 percent o f the population in 1999. The ratio o f urban to rural per capita household income increased from 2.20 in 1990 to 2.65 in 1999. This widening disparity was due to the slow growth o f agriculture, discriminatory terms o f trade, and reductions in public investment in agriculture. 5. Regressive transfers to households and reduced transfers f r o m rich to poor provinces. The system o f taxation and transfers practiced by the state and collectives i s highly regressive. An average household in rural areas paid a net tax amounting to 0.5 percent o f income, whereas an average urban household received a net subsidy o f 11 percent o f income. China’s budget system has undergone changes that restrict the ability o f the poor regions to fund essential services, such as education and health, and to invest in economic development. The provinces, not the central government, must repay external lenders like the W o r l d Bank and bear foreign exchange risks for loans for many social-sector projects. As a consequence, the extremely poor counties are often not eligible to participate in externally funded poverty-reduction projects. Annex F (continued) 86 6. Low employment growth. Duringthe 1990s, economic growth in China created very l i t t l e employment, the primary conduit through which the poor benefit from growth. In the mid-1990s state and collective enterprises began reducing a significant payroll o f nonworkers employed in a form o f “concealed unemployment insurance.” The reductions affected about 29 percent o f their urban workforce-41 -24 million people-and 6 percent o f the workforce o f township and village enterprises. N o alternative system o f social protection has been developed. 7. Discriminatory treatment o f migrants. The incidence o f poverty among urban migrants i s about 50 percent higher than among the registered urban residents. Migrants have been denied access to health and education services and the opportunity to seek employment on an equal footing with registered urban residents. Restrictions o n migration have also prevented laborers from leaving rural areas in response to market forces, thus contributing to the urban-rural inequality. 8. If these adverse factors were completely offset, China’s income distribution would probably have become more equal in the 1990s, directing more than the entire benefit o f economic growth to poverty reduction. It i s possible, however, that the steep fall in the incidence o f poverty in the 1980s precluded similar reductions in the 1990s’ as the remaining poverty became more intractable: heavily concentrated in poor areas with inadequate infrastructure and little contact with the rest o f the economy. The Chinese Government’s Response 9. The evolution o f the problem o f poverty and China’s public response to it may be divided into four distinct periods. From the late 1970s to the mid-1980s poverty f e l l rapidly in response to a growth strategy based on agriculture. From the mid-1980s until 1994, China’s development strategy shifted to export-led growth as the nation rapidly joined the global economy. The five sets o f unequalizing forces outlined above gradually took hold during this period. Growth was expected to alleviate poverty in most o f China, but the need for targeted assistance for the ecologically disadvantaged poor areas also came to be recognized. 10. The third period began with a well-articulated strategy to commit greater resources to poverty reduction. In January 1994, the State Council put into effect the national “8-7 Plan” to lift 80 million rural poor out o f poverty in the remaining seven years o f the century. Serious shortcomings compromised this plan. 11. The fourth period o f China’s public response to poverty may be said to have started around the turn o f the millennium. New programs n o w aim to improve agriculture and farm production, provide education and training for the poor, promote productivity through science and technology, facilitate out-migration, voluntarily resettle people from ecologically disadvantaged areas, and promote economic development in the western provinces as well as the relatively poor provinces o f the central region. There are also social protection programs for the urban poor. The World Bank’s Role 12. Through i t s economic and sector work o n poverty assessment and analysis, IDA’S Poverty-Targeted Intervention (PTI) projects, and poverty-reduction components in non-PTI projects, the Bank has proven the importance and viability o f poverty reduction as the principal goal o f i t s assistance to China. Duringthe 1990s the Bank made important contributions to China by disseminating methods o f poverty monitoring, serving as a friendly critic o f China’s poverty- reduction strategy and offering a set o f best-practice projects for poverty reduction.  87 Annex F (continued) 13. Projects have been less important an instrument for the Bank’s poverty-reduction strategy in China than in other comparable countries. Even so, the Bank’s project portfolio for China in the 1990s included outstanding examples o f best-practice poverty-reduction projects. In the 1990s examples were available for all major poverty-oriented sectors, although some sectors were unable for one reason or another to classify the poverty-oriented components o f their projects as P T I lending. 14. Since China became ineligible for IDA funds in 2000, the Bank’s lending has included only one P T I project, thus jeopardizing the role o f the Bank as the provider o f best-practice examples o f poverty-reduction projects. The Bank should not completely abandon projects as an instrument for poverty reduction in China, a country with a higher absolute incidence o f poverty than most countries with comparable real income. The Chinese government’s aversion t o borrowing for poverty-reduction projects, except on soft terms, i s a very puzzling phenomenon in view o f the high financial rates o f return o n such projects. F u t u r e Priorities 15. The Bank’s analytical and operational instruments can provide effective assistance for further poverty reduction in China. 16. Poverty monitoring. Any analysis o f poverty in China must contend with unreliable statistics. The inherent problems o f the data include: a poverty threshold that i s too l o w and does not differentiate adequately between urban and rural differences, the exclusion o f a significant urban population o f migrant workers, the exclusion o f rural poor who live outside county jurisdictions (estimated at 30-50 percent o f the rural poor), records for lower-income groups that are either withheld from study or do not exist, and poor survey methodology. 17. The system o f poverty monitoring in China needs to be improved, first by making household-level survey data available both to the Bank and to independent researchers in China so that estimates o f poverty become more accurate and transparent. A plurality o f estimates would promote healthy debate and open discussion. 18. Adjustment and broadening o f the poverty-reduction strategy. T w o main directions for improving China’s poverty-reduction strategy are emphasized in the Bank’s recent poverty assessment: (a) targeting o f the poor should be improved in designated rural counties; and (b) the poor who reside outside the designated rural counties should be brought under the umbrella o f the poverty-reduction programs. A third natural extension i s the need to provide an official umbrella for the program o f urban poverty reduction. 19. Economic and sector work. The Bank’s ESW agenda should include an early and comprehensive analysis o f household taxes and transfers with a view to making these at least mildly progressive. Restructuring state finance to increase transfers from r i c h states to poor i s a necessary concomitant o f the shift in the regional allocation o f public expenditure that i s contemplated under the poverty-reduction strategy. 20. Lendingprogram. The Bank’s lending program in China helped reduce poverty in the 1990s by including in i t s portfolio a set o f projects that provided a large benefit to the poor, projects that served as examples o f best-practice methods o f investment for poverty reduction. Since 2000, PTI projects have been almost absent from the Bank’s lending operation. To maintain the Bank’s role as a source o f best-practice poverty-reduction project blueprints and t o Annex F (continued) 88 preserve the credibility o f the Bank’s anti-poverty strategy, Bank lending in China should include such projects in its portfolio, a challenge complicated by China’s aversion to borrowing for poverty-reductionprojects on IBRD terms. A combination o f a “third window” and a serious effort at persuading China’s decision-makers o f the rates o f return on these projects might help overcome this problem.  89 Annex G CHINA Country Assistance Evaluation World Bank Assistance for Water Resources Management Author: Robert C.G. Varley, Consultant 1. China has an ancient tradition o f water management, but in the past half-century exploitation o f the country’s water resources has intensified as a result o f population and economic growth, Since 1949, China has increased the number o f i t s large dams from 22 to 22,000, almost h a l f the global total. It also has over 80,000 reservoirs and 240,000 km o f dikes. Most rivers and streams are used for irrigation, power generation, transport, urban water supply, or waste disposal-some for all o f these purposes. 2. With all these demands, China now faces an acute version o f the global water crisis. Flooding and drought, always a problem in China, now occur with increasing frequency and greater impact. Associated water pollution imposes major costs that offset economic growth. Users consume manmade and natural reservoirs (such as groundwater and natural lakes) at rates well above recharge. Unsustainable depletion i s exacerbated by watershed degradation and organic and chemical pollution. Siltation, a very serious problem for centuries, continues with increased erosion from development, deforestation, and poor farming practices that imperil flood- control and storagehrrigation objectives. In key industrial areas surface and groundwater pollution have caused widespread sickness, requiring central government intervention to compensate for poor enforcement o f environmental regulations. 3. China’s most serious water problems are experienced in four river systems that dominate life in the eastern third o f the country. The available water, surface and ground, has been allocated by implicit values that are far removed from economic realities. (The value to users o f untreated but usable water for municipal and industrial (M&I) and household demand, for example, i s a multiple o f 10 to 40 times that in agriculture.) The adjustment to available supplies over time is mediated by often arbitrary institutional responses from fragmented agencies, unrelated to economic or social priorities in a systematic way. And tariff reforms have been slow in coming as a means o f addressing water resource constraints because, until recently, setting rates was seen purely as a financial matter. 4. The central government’s successful leadership in large projects involving multiple provinces has not been repeated with water resource management (WRM). The existing water management framework i s insufficiently comprehensive or unified to optimize uses or resolve conflicts in a socially optimal manner. Negotiations have not settled differences among sector interests (such as industry and agriculture), the ministries responsible for different aspects o f WRM, or competing political jurisdictions. While the river basin i s clearly the most appropriate locus for negotiation, effective institutions corresponding to basins, rather than provinces, have proved very difficult to establish, despite much central government commitment and awareness. The devolution o f political and economic power to separate riparian provinces along the great rivers has made central government control over allocation o f water resources even more difficult. Annex G (continued) 90 THE SCOPE OF BANKOPERATIONS IN CHINA 5. From 1982 to 1993, before the Bank formally adopted the Water Resource Management Policy in 1993, operations responded almost entirely to the borrower’s investment priorities, financing projects that had already be identified and the basic concepts designed. Projects were not derived from an overarching policy or strategy. There i s no evidence o f a comprehensive lending strategy for individual sectors such as irrigation and water supply, let alone for “integrated water resources management”. The approach was pragmatic and ad hoc, but significant incremental reforms were introduced and included in projects where possible. 6. In return for substantial transfer o f some kinds o f knowledge, access to high-caliber specialist expertise, and financing, the Chinese tolerated what they f e e l to be intrusive Bank covenants and burdensome procedures. China and the Bank have developed over time a partnership that in the early years cast the Bank in a more humble role than it i s accustomed to. However, the long-standing relationship has produced significant results. 7. Overall and particularly more recently, the Bank can claim credit for articulating a water conservation and financial sustainability policy, and championing river basins as the basis o f integrated water resources management. The Yangzi Basin Water Project was the first truly integrated water resources project for the Bank. The Chinese have supported and provided the majority o f the funds for Bank projects that piggybacked innovative institutional components o n what were largely conventional WS, WWTP, irrigation, drainage, and flood control projects. These new components were seen to be effective and have been replicated. 8. The Bank’s considerable influence has also been conveyed through professional interactions at the project-management level, a high quality o f technical advice, continuity o f high-quality staff, and a discerning client, very eager and able to learn. The Bank also performed a useful function during changing relationships between central and provincial governments, playing the roles o f intermediary, honest broker, and convener. Several significant reports emerged from the close partnership between the Bank and i t s Chinese client. The Bank-China relationship achieved a truly productive interaction, for example, with the cross-sectoral “China Water Resources Assistance StrategyEAP 2002”(CWRAS), a strategic vision for future cooperation on WRM. But China’s need for E S W and AAA exceeds the Bank’s level o f support. 9. The 1997 assistance strategy for China did not discuss water specifically-surprising given the Chinese Government has long acknowledged water to be a key problem area. 10. The following Bank sector categories all have high relevance for WRM in China: 11. Land and watershed management, forestry. Bank-supported projects made major contributions to increased efficiency o f water use by demonstrating that profitable orchard and mixed farming models are compatible with watershed rehabilitation and soil preservation. Terracing, upstream forestation, and erosion-control projects in the larger basins also have provided downstream benefits, reducing s i l t loads and increasing incomes. Building o n the successful central Loess Plateau and Red Soils Projects in the South East, these practices and technologies have been replicated. But for these to be truly effective basin-level management i s needed. 12. Water resources andjlood control. The Bank supports several projects in integrated WRM. These include the Tarim Basin Iand I1Projects (1992/1998) in the western Xinjiang Uygur Autonomous Region, which feature a well-developed framework for integrated water  91 Annex G (continued) management through self-financing irrigation development districts and a comprehensive set o f procedures/regulations. Another, the H a i River Basin Project, focuses on China’s most complex and intensively developed basin. The Bank will help finance the components for river basin management. Beijing, the site o f the 2008 Olympics, lies in the basin. 13. China has been reticent to borrow for TA to support river basin institutional development, but the Bank and other donors have coordinated assistance in a very cost-effective manner. Chinese and Bank staff, supported by leading international consultants, have developed a comprehensive plan for the North China Plain, built on a “dynamic optimizing model” that represents the state o f the art in analytic and technical engineering for WRM planning. 14. Agriculture, irrigation and drainage. Before opening t o the world in 1978, China had a very extensive, but troubled, irrigation program. Though limited, Bank involvement in irrigation has had a positive effect on Chinese practices in procurement, project management, and, more recently, irrigation management, especially at the provincial level. Geographical poverty- targeting has been refined to a county and township level, accompanied by some concessionary IDA funding and full loan-recovery from the beneficiaries. Although the distributional effects and provincial bearing o f foreign exchange risk on the Bank loan have been criticized, the emphasis on sound finance has been central to motivating project participants, from governors on down. It has created a cascade o f accountability and responsibility for results, from project managers who have to collect levies, down to beneficiaries, who have to pay them. 15. The organization o f farmers into s e l f managing irrigation development (SIDD) districts has improved management and accountability, empowering farmers to pay for and receive water services. Water user associations (WUAs) within the development districts play a key role in many aspects o f improved WRM, both from local government agencies and publicly owned bulk- water companies. These innovations have been incorporated in Bank supported projects but have not been replicated o n a wide scale. 16. Multipurpose and hydroelectric dams. Traditionally, Bank energy project documents equated water resources with “hydroelectric resources.” Many o f the large dams built with financing and assistance from the Bank were driven by the energy sector and met their objectives. But most o f the investments were not part o f integrated WRM plans for the catchments concerned. For the most part, the complementarities and conflicts between energy and WRM objectives have not been systematically weighed in decision-making. 17. Notwithstanding widespread criticism o f resettlement and environmental impacts o f World Bank-supported dams in China (and elsewhere), an OED study o n resettlement ranked China highly. The Xiaolangdi Dam, supported by the Bank, has been credited with drastically reducing s i l t and enabling continuous f l o w in the lower reaches o f the Yellow River, something not achieved in the previous ten years. 18. On the negative side, hydropower has costs in s i l t accumulation in reservoirs, environmental damage, resettlement, loss o f cultural heritage, and potential conflicts between peak energy demand and water supply/irrigation priorities. 19. Inland waterways. Three Bank projects have supported the largest system o f inland water transportation in the world. The Quality Assurance Group’s quality-at-entry report for the Second Inland Waterway Project noted the absence o f any effort to engage government in a policy dialogue, an action program on key sector issues, or an institutional component. Annex G (continued) 92 20. Urban water supply (WS) and wastewater treatmentplants (WWTP). Since 1985 the Bank has committed $2.2 billion to finance major water investments (water conveyance, treatment, and distribution, and WWTPs.) Because o f the country’s high population concentration, urbanization, and rapid growth, the economic and health impacts o f poor WRM are major costs to Chinese society, estimated variously at 5-1 5 percent o f GNP. But although water supply and quality issues are entwined, management and regulatory systems remain fragmented among at least three government bodies with overlapping responsibilities. Bank WS/WWTP projects usually address, but have not significantly changed, the prevalence o f local political interference, weak commercial management, distorted tariffs, variable legal and regulatory frameworks, unstable central-local relations, and the lack o f long-term local finance. Overlapping agency responsibilities are compounded by conflicts with local financial interests and a desire to avoid the social unrest o f closing high-polluting industries. 21. For WS, China’s sector performance relative to developing-country benchmarks has put the country in the “bestpractice” quintile o f Bank clients. However, the costs o f new water sources are very high, and there i s a large gap between the current tariffs and those that are necessary to finance the new supplies. 22. Although a survey o f sixteen projects concluded that the three Bank-supported WWTPs in the sample were among the best operated in the country, WWTPs in general suffer from significant technical and financial problems-among them an absence o f timely sewer connections, poor design, reliance on expensive combined-treatment plants, a lack o f effluent guideline enforcement, and grossly inadequate funding from service fees. 23. Overall, W S and WWTP projects lack reliable estimates o f usage as well as realistic rates. Predicting the demand response to changes in tariff requires accurate measurement o f consumption, as well as control and collection systems, and these are not well understood. 24. Rural water supply. The Bank has supported four rural water supply and sanitation (RWSS) projects, mainly in poor counties. Designs have evolved by combining the strengths o f existing village administrations and community financial participation with international best practices in appropriate technology, financial cost-recovery, decentralization o f regulation, and financial autonomy. In the latest generation o f RWSS projects, 75 percent o f the investment cost i s recovered in fees and 95 percent o f villages abide by the tariff covenant-startlingly clear evidence that the poor can and are willing to pay tariffs that raise eyebrows when proposed for urban consumers. STRENGTHS AND WEAKNESSES OF THE BANK’SOPERATION IN CHINA 25. As part o f a global study o f W R M P implementation (“Bridge Over Troubled Waters”), OED sampled 18 o f 35 water projects for China and rated them for compliance with the Bank’s 1993 WRMP. China’s projects showed a higher degree o f compliance than for any other large country. But out o f 82 approved projects only 29 had been completed and subjected to independent evaluation by OED. The success o f the Bank’s attempts to influence water reforms in China also owes much to i t s humility in the policy sphere, the continuity o f high-level professional staff, and earning the respect o f i t s clients. 26. The Bank’s strengths begin with i t s low-key, client-centered approach, ensuring good project performance by requiring cost-recovery from beneficiaries, and taking risks that projects might not perform as intended. Critics would cite these same factors as being weaknesses-  93 Annex G (continued) particularly the chance that beneficiaries will be saddled with foreign-exchange risk and that flexibility in procurement compliance will be exploited. 27. On the other hand, the Bank’s weaknesses include early compromises to its commitment to sound economic analysis in the evaluationo f some irrigationprojects. The analysis o f expected economic rate of return (ERR) neglected important factors such as sustainability o f water resources and their downstream opportunity cost. Failure to make an adjustment helped ensure a viable ERR, and Board approval (not an uncommon Bank practice), but did not indicate the true economic cost o f the projects. 28. The Bank may not have initially been sufficiently focused in its advice or forthright in criticism o f the sustainability o f China’s emphasis on major investments in hydraulic structures. But with strong support from the Bank, China has now made a course correction and i s putting more emphasis on WRM and less on new infrastructure. 29. ’ Finally, the lack o f coordination between Bank sector units i s a recurrent theme, which i s being addressed by the CWRAS. It i s mirrored by China’s lack o f a natural home for WRM and river-basin projects among institutions that cannot transcend parochial sector and provincial interests. Given the enormity o f the issues it i s disappointingthat so little money has been applied to critical high-returnprojects to address institutionalreform and demand management. THE BANK’SIMPACT ON WATER REFORM IN CHINA 30. China faces problems found in most countries-conflicts between upstream and downstream users, overlappingjurisdictions, and quality and allocation problems. Overcoming these problems was initially treated as a problem o f augmenting supply rather than devising a demand-led strategy for water management. While China has successfully used major hydraulic infrastructure to control, use, and manage water resources, it has not conserved resources to meet future needs. Efficient water allocation, pricing, groundwater and water quality regulation, and institutional reform were not given sufficient emphasis. While engineering expertise, money, and commitment to a structural approach have been partially successful in meeting social goals, success has often come at a high environmentaland economic cost. With water, the economic tradeoffs have become starker as demand for municipal and industrial uses competes with agriculture. 3 1. The Bank h as played a significant role in construction, capacity building, and knowledge transfer in the past. While its influence on achieving policy, demand management, and institutional reforms h as worked slowly, it can point to significant innovations which could end up being applied all over China. SIDDs and W A S ,the Loess Plateau approachto watershed management and new approaches to water saving have been taken beyond the pilot stage and prospects for replicationare good. River basin management intheTarim project and also in the Li river (a tributary to Yangtze under the Yangtze Basin Project) has taken hold, providing practical examples to other more complex basins. Demandmanagement with increased pricing i s beginning to take hold in water supply. 32. Future success in Bank-Chinacooperation should continue to be based on pragmatism and pilot-testingnew ideas where they are most needed and most likely to succeed. The Bank should consider reordering i t s priorities in China to continue the following initiatives: 0 Watershed management 0 River-basinplanning and management Self-managing irrigation districts Annex G (continued) 94 0 Corporatization and privatization in the WSIWWTP sector 0 Demand management and pricing 0 Adequate funding o f ESWJAAA 33. China must conduct a strategic dialogue on water policy at a level higher than that o f the competing ministries. Duplication o f data collection and divided responsibilities frustrate WRM and must be rationalized through institutional reform, new administrative processes, and incentives attuned to sustainable development. Fundamental reforms are needed-not just changes in policies within the present institutional and regulatory framework. The coordination o f water management responsibilities and decisions between ministries will not be resolved without a supra-ministerial body to push through reforms and “bang heads together.” The China-World Bank partnership in WRM, which up to now has been fragmented between Bank sector units and Chinese line ministries, needs high-level oversight, perhaps at the level o f the State Council, to implement the cross-sectoral China Water Resources Assistance Strategy.  95 Annex H CHINA Country Assistance Evaluation World Bank Assistance for China’s Transport Sector Authors: Anthony Churchill and Cordula Thum, Consultants 1. Rapid economic development since the opening o f China’s economy in the late 1970s has caused demand for transport to surge. Supply has not kept pace. In fact, limited capacity o f roads, railways, and inland waterways i s one o f the most serious bottlenecks to the country’s future economic growth. In response, the government’s tenth five-year plan (2001-05) envisages an increase in total outlays of around 15-20 percent per year. Even if only a fraction o f this i s finally implemented, surface transport will be radically transformed. 2. Several trends are evident from international experience about the demand for transport: (1) freight transport will grow more slowly and passenger transport more quickly than the economy; (2) the infrastructure and assets needed to satisfy a given level o f transport demand will increase as users demand higher-quality service; (3) rail’s share of the transport total will fall; (4) demand for multi-modal transport services will grow faster than demand for single-mode services. Transport Sector Performance and Policy Challenges 3. China’s road network o f 1.4 million km ranks among the sparsest in the world relative to geographic area and population. Only about 16 percent o f the network i s high-grade highway. A few interprovincial expressways have been built, but about 20 percent o f rural communities s t i l l have no all-weather vehicular access. More than half the nation’s highways are exceeding designed traffic capacity limits, hindering foreign investment in other sectors. 4. The chief component of China’s transport strategy i s the development o f the “national trunk highway system” (NTHS), a 35,000 km network o f 12 interprovincial highways that will link 95 major Chinese cities and 600 million people. The trunk system will link smaller roads and five north-south and seven east-west highway routes. Estimates o f the capital required over the span o f the current five-year plan range as high as $20 billion annually. An expected doubling o f car ownership (to 34 million cars) by 20 10 will ensure that demand-side pressures remain high. 5. One o f the consequences of improving the road system will be a large movement o f people out o f agriculture and rural areas. The rapidity o f the urban transition usually catches most countries by surprise-and China i s no exception. The Bank can provide assistance in addressing the transport problems o f the growing urban areas, with their growing concentration o f lower income groups. 6. O f particular concern will be the growth o f the medium-size cities, which lack the resources and experience to manage the rapid growth and receive inadequate attention from central and provincial institutions. Early interventions can have a significant impact on the efficiency and equity o f their growth. In urban transport, for example, early reservation o f roadway rights o f way can lay the basis for improved future mobility and efficient land use. (0 Annex H (continued) 96 7. China’s 68,000 km rail system serves all i t s provinces. Some 5,500 km are provincially administered and maintained locally, including 193 km o f urban track in Beijing, Shanghai, Guangzhou, Tianjin and Hong Kong-a remarkably small total given the area and population o f these cities. China Rail aims to lay down 6,000 km o f new rail, 3,000 km o f double tracks, and 5,000 km o f electrified railways by 2005. Another 450 km o f urban rail in up to ten major centers i s envisaged. At around $80 million dollars per kilometer for subway construction, the latter commitment alone i s a sizeable undertaking. 8. China has a long history o f using i t s waterway network, but inadequate funding has caused the infrastructure and floating equipment to deteriorate badly, reducing the net size o f the navigable network from 170,000 km in 1960 to 11,930 km in 2000. Although China has 5,800 navigable rivers, 15 rivers over 1,000 km long and 12 lakes with an area greater than 1,OO0kmz2 the major inland waterways comprise only four rivers and one canal that carries 80 percent o f total traffic. The lack o f a multipurpose development among the various ministries in charge o f infrastructure has contributed to the decline. Impact and Direction of the Bank’s Assistance Strategy 9. Transport accounted for a major share (close to 30 percent) o f the Bank’s total lending to China between 1983 and 2001, Since 1983, the World Bank has approved $10.5 billion in loans and credits for 58 transport projects. At the end o f fiscal year 2002,31 projects had been completed and 22 were being implemented. In i t s transport sector lending program (as in the other sectors), the Bank has used a pilot-project approach to sector reform. 10. Since 1993 the Bank’s comprehensive transport strategies have focused on increasing competition and efficiency, identifying the changing patterns o f demand for transport, analyzing investment needs o f the sector and their financing, suggesting improvements for transportation services and safety, and addressing problems o f administrative rivalries. 11. Overall, highways have taken the lion’s share o f lending (59 percent), followed by railways (23 percent), ports and waterways (1 1 percent), and urban transport (7 percent). The Bank has carried out a substantial amount o f analytical and advisory (AAA) services, financed under a variety o f trust funds as well as the Bank’s own budget. 12. Bank highway projects in China focus on roads that have a strong development potential but not yet enough traffic to be attractive to private lenders. In railways, the Bank i s chiefly involved in financing lines to developing inland areas, and in waterways, to improving the major accesses to the principal rivers. The focus o f urban transport projects i s now moving away from the construction o f ring roads, putting a new focus on corridor development, traffic management, and public transport. 13. Out o f 28 transport sector projects rated by OED, all had satisfactory or better outcomes and were deemed to be likely or highly likely to be sustainable. On the other hand, only 19 were seen as likely to have substantial institutional development impact. 14. Roads. B y 2001, total lending to China’s highway sector had exceeded $5.96 billion for 27 projects. Bank operations in the highway sector have been combined with technical assistance and training on a variety o f topics related to the reform and modernization o f the sector. Most projects were to increase road capacity and, to a smaller extent, to improve maintenance. The Bank strategy supports ongoing institutional development and sectoral reforms to modernize the  97 Annex H (continued) highway system and i t s management, and investment in high-priority links o f the N T H S and the provincial road network that feeds into it. Many World Bank transport projects in China are for roads that have a strong development potential but not yet enough traffic to be attractive to private lenders. 15. Railways. With project costs totaling $8.6 billion, China i s the Bank’s largest borrower in the railway sector. The Bank’s strategy focuses on providing sufficient transport capacity and ensuring that technical and management capabilities keep pace with economic growth. Most projects have included substantial funds for institutional components-training, studies, and consulting services. 16. The Bank strategy has been to support increases in capacity while at the same time introducing China Rail to modern railway management and technologies. Better track-laying technologies, modern communications, and axles designed to take heavier loads have a l l been part o f the Bank’s contribution to improving the efficiency and capacity utilization o f the railways. 17. The Bank has also made a significant contribution to improving the social and environmental side o f railway investments. The Bank’s insistence o n the application o f various safeguard requirements appears to have proved acceptable and become an integral part o f investment planning. The Bank has also introduced modern accounting, management, and financial practices into the overall structure o f railway administration. In particular, the application o f modern administrative tools has alerted China R a i l t o the real costs o f many o f i t s operations. 18. The issue for the Bank i s how to support a reform process that i s likely to take several decades. The relationship between the role o f government as a regulator and the Ministry o f Railways as an operator or enterprise remains an issue. Economic tariffs designed t o reflect costs will become increasingly important as the railways face more and more competition. The debate has only begun on the extent to which China Rail should remain a monolithic structure or a set o f more independent units designed to meet new competitive pressures. 19. There appears to be agreement o n the need for a clear separation between the government’s role and that o f the railway. The government understands the principle (if not always the practice) that railways should be organized along lines o f business, with clear financial goals, adequate compensation for public services and sufficient authority to set tariffs. Major barriers such as redundant labor and employee welfare obligations will need to be removed. 20. Ports and inland waterways. The Bank played an important role in China’s port improvement from 1983 to 1996; since 1993, the private sector has taken over funding. A 1999 OED evaluation found that through new management styles and reforms, operating systems and equipment, and effective Bank supervision, China’s ports learned h o w to do business and substantially improve port performance in an environmentally sound way. 21. The Bank has been involved in the waterways sector since 1995 and provided three waterways loans totaling $433 million to provide more efficient and economic inland waterway transport. Through preparation o f inland waterway projects, the Bank i s helping t o implement national policy guidelines for modernizing the inland waterway transport fleet at the provincial level. The major issue with respect to inland waterway projects i s their relationships to water management. Given the close interrelationships between water use in agriculture, flood control, Annex H (continued) 98 power, and transport there i s a strong case for making sure all investments take place within a comprehensive framework. 22. Urban transport. The Bank has sought to enhance urban economic productivity by improving the efficiency o f the urban transport system and to strengthen public-sector management by improving the planning and management o f urban transport. The Bank’s lending to China’s urban transport sector began in 1991 with the First Shanghai MetropolitanTransport Project, which increased capacity, reduced congestion, and improved efficiency while improving planning, programming, financing, and management o f the city’s urban transport system. (ii) 23, Fragmented administrationand regulationare an obstacle to tackling urban transportation. Cities tend to focus on expensive building solutions, new highways, and urban rail systems, which appear to be more straightforward to administer and receive priority from the city leaders. But better management in several areas can multiply the benefits o f such projects: better traffic management o f the existing street system, greater autonomy and incentives to bus operators (with government restricting i t s e l f to a regulatory role), and effective control of the demand for transport through pricing policies. All these issues are now being examined in greater depth. 24. Analytical and advisory activities and economic and sector work. Although the World Bank has loaned more than $10.5 billion to the Chinese transport sector, i t s most important contributionhas been to introduce new ideas and stimulate new approaches to problems. 25. The 1999 OED assessment o f the China transport portfolio determined that policy dialogue between China and the Bank needed strengthening. The issue o f highway safety i s just one area where a Bank study, drawing on global experience, could be o f assistance to the Chinese in identifying where institutionaland other changes are required and how the Bank might help.  99 Annex I CHINA Country Assistance Evaluation World Bank Assistance for China’s Health Sector Author: Elaine Ooi, Consultant A profile of China’s health program 1. China’s gross health and nutrition indicators have always been impressive. In 2000, WHO ranked the country 61 out o f 191 countries in overall quality o f health. From the 1950s through the 1970s the country achieved unprecedented reductions in infant and child mortality, as well as gains in nutrition and overall l i f e expectancy-all due to broad public health improvements. 2. In the last two decades, as China adopted economic reforms, growth and prosperity have pulled up i t s health and nutrition indicators. But wide regional and rural-urban differences have appeared, as inequalities in development and access to care have grown. Gains in the fight against infectious diseases have slowed and in some areas regressed. Rates o f immunization have dropped in some areas, and outbreaks o f immunizable diseases have occurred. The percentage o f malnourished children increased in rural areas between 1987 and 1992, while urban malnutrition dropped sharply in the same period. Meanwhile, TB and HIV/AIDS infection rates have grown exponentially. For both diseases, China i s a country o f global strategic importance. 3. Even some o f China’s encouraging health statistics can be misleading. The number o f physicians per 100,000 population in China i s estimated at 162-against India’s 48, for example-but only a small proportion o f rural “doctors” in China actually have postsecondary training. Funding o f public sector facilities are based oq numbers o f beds, which encourages managers to increase the number o f beds to tap national allocations. But the uninsured majority cannot afford the costs o f care at many such facilities, so scarce resources are spent on facilities inaccessible to the poor. 4. Nationwide statistics have masked the near crisis in the poorer rural areas. The national government now supports just 3 percent o f health expenditures and has handed funding responsibility for health care to subnational governments, many o f which cannot afford it. Without an outside infusion o f funds, economically lagging regions are too poor t o provide adequate health services and preventive care. WHO’S report for 2000 ranked China 188 o f 191 countries for fairness o f financial contributions t o health care. 5. Fiscal decentralization and the country’s transition to a market economy has reduced public financing o f health care and services markedly. More than any other sector in China the major share o f public expenditure for health i s borne at the subnational levels. Close to 60 percent o f total budgetary expenditure for health i s the responsibility o f counties and townships. Most subsidies pay for infrastructure costs and staff salaries, with little money left to cover services. The situation i s compounded by the unequal subsidization o f urban areas, which receive 80 percent o f total public spending, leaving 20 percent for the rural areas in which 70 percent o f the population lives. 6. Before this transition, rural Chinese were served by a Cooperative Medical System (CMS). I t s “barefoot doctors” delivered free preventive and primary care services. Beyond basic services, patients paid coinsurance fees for drugs, hospitalization, and inpatient services. In this Annex I (continued) 100 way, more than 80 percent o f the population had access to care o f reasonable quality and some protection against catastrophic expenses. Abolished in the mid 1980s, C M S programs were not replaced by an alternative financing system. Health facilities and providers looked to boost revenue to ensure economic survival, recover costs, or seize opportunities for tremendous profits. 7. Several trends then drove the decline o f public health and rise o f inequalities in health access. Government regulations set the prices o f preventive care and essential public health services, such as immunization, below cost. Providers opted not t o immunize or compromised on quality and safety. Profitable but inappropriate drugs, long hospital stays, and unnecessary diagnostic tests replaced prevention. Facilities began to purchase expensive equipment-such as C A T scanners-in order to charge high fees for their use. The system o f cooperation, supervision, and referral broke down as facilities competed for paying clients and resisted referring patients as required.. The World Bank’s program in China 8. Since China became a member o f the World Bank in 1980, the Bank’s program o f assistance in health has consisted o f 11 projects and 3 economic and sector work reviews (ESW). Bank assistance has emphasized the demonstration value o f projects in order to pursue high-level dialogue on health policy reforms, health systems performance, and financing. Since the mid 1990s, projects have allowed experiments with rural insurance models and CMS-type schemes to improve health care access for the poor. Results have been mixed. 9. There i s a wide consensus that during the period o f Bank assistance, China’s health system deteriorated in critical areas-it may serve much o f the majority but fails to supply a social safety net to the poorest. The problems are direct consequences o f government policy, and not only health policy. 10. Bank dialogue with government agencies aims at increasing budget allocations to counties and townships to improve health system performance, but progress has been slow. Budgetary allocations and management do not fall under the purview o f health authorities, so sustained reforms are less likely. The need remains to link health projects more closely with the larger issues o f national budget priorities and public expenditures. The Bank has not fully exploited nonproject and nonhealth avenues for health reform. 11. The constraints on good health policy in China-lack o f public finance, disincentives for good health practices, and varying levels o f health management competency-have not been addressed successfully. While Bank assistance has had considerable success in addressing management competency, the other problems are systemic and require interventions outside the health sector. 12. An example o f a project designed to address all four o f these constraints i s the Basic Health Services project o f 1998. Primarily targeting systems reform, it faces difficult, politically sensitive issues, including personnel management, drug prescription behavior, and increased budgetary allocations t o health at the county level. The project introduced innovative mechanisms to fund and monitor cost-effective health interventions for the very poor, and hopes to demonstrate convincingly that fiscal transfers to poor areas will pay off. But the project will have to overcome political interference and loopholes created by those who stand to lose from project innovations. 13. Although not formally part o f the country program, the WBUChina Network can greatly facilitate health finance reform. Established in 1991 at the request o f the Chinese Ministry o f  101 Annex I (continued) Health when nonhealth forces increasingly influenced health financing, the Network has made a good start in exposing senior level officials and provincial governments to the complex problems faced by the health sector. Closer collaboration between WBI/China Network and the Country Program will be highly beneficial. 14. The Bank’s projects were complex and addressed a wide range o f health issues. Some focused o n specific diseases, others on institutions and management; most combined them. Some have been highly innovative, especially in the Chinese context: shifting from health propaganda to health promotion in support o f tobacco control; maintaining anonymity in surveillance and treatment o f HIV/AIDS; and increasing the use o f social assessment instruments in project designs. Portfolio quality was generally high, reflecting best practices for the sector, even if overall sector performance was less than hoped for. Future Bank-China cooperation 15. Opening up o f China’s western regions and meeting the needs o f migrants working in unregulated hazardous industries will require engagement with governmental departments over issues related to the environment and to occupational health and safety. The country i s poised to undertake policies and reforms that will exert more pressure o n the health system. Many o f these challenges will test the limits o f Bank expertise, capability, and experience. The Health program will have to make strategic choices about i t s future role in China. Given the dynamic, complex situation, the Bank should consider several actions. 16. The Bank should be more involved with upstream policy advice so as to reach the decisionmakers who control broader fiscal and economic policies. The new leadership has to be convinced o f the critical contributions o f health to China’s long-term productivity and growth. 17. Health concerns should be included in a country level, macroeconomic dialogue with China. The Bank has a responsibility to link i t s macroeconomic dialogue more effectively with sector dialogue, particularly o n issues o f health finance, the health work force, and c i v i l service reform. 18. A health-sector review for China i s long overdue. Although the Bank has been working in the health sector in China for 18 years, the first PPAR was part o f an eight-project cluster. The Bank has not evaluated the extent to which other poorer regions have benefited from Bank projects and other assistance. 19. Nonproject- and nonhealth-sector avenues for influencing health outcomes should be thoroughly exploited. Changes in other sectors will affect the health sector. T o be part o f this process the Bank’s Health program must engage with other sectors and entities. 20. The Bank should follow up on i t s Provincial Public Expenditure Review 2002 to bring health issues to the forefront, with a target audience o f very senior country-level decisionmakers from the Bank and borrower. 21, Collaboration between the various channels for Bank interventions in health should be increased through ESW/AAA, anchor work, the WBUChina Network, and project lending. In order to achieve a sustained and well-directed effort for policy and reforms, inputs from these channels have to be better coordinated as parts o f a common health strategy. Annex J 102 Client Consultations 1. In conjunction with preparation o f the CAS, a series o f consultation workshops were held in Beijing, Liaoning and Zhejiang Provinces o n the coast, and Ningxia Hui Autonomous Region in western China in June, 2002. Attending the workshops and sharing their views were representatives o f all stakeholder groups-key government ministries, officials from these and many other provinces, project staff gathered from throughout China, and leaders o f c i v i l society involved in economic reform, gender equality, poverty reduction, environment, national minorities, rural development, health, and non-profit agencies. The results o f those exchanges are described below. This annex i s based on Annex C o f the CAS. Consultationwith Representatives of Civil Society The Bank’s major contribution to China i s the transfer o f knowledge. The Bank has introduced new ideas, supported reforms and helped to change management systems. 0 The Bank’s support to basic and higher education and the development o f science and technology contributed significantly to China’s development. Inclusion o f social assessments in Bank projects i s helpful and has improved project design and beneficiary participation. 0 The Bank used to work only with the government, but in recent years provided support to information sharing and capacity building o f China’s NGOs. Since N G O s play a complementary role t o the government and are more innovative, the Bank should expand i t s support for development o f c i v i l society/NGOs in China, particularly NGOs in western provinces and those dealing with issues such as sustainable development, laid-off workers, urban poverty, AIDS, etc. Consultations with Central Ministries and Agencies, Provincial Government Officials, and Project Management Offices They Value the Bank’s Contributions and Procedures 0 The major benefit i s the Bank’s advice on policy and management, technology transfer, human resources development, and introduction o f knowledge and innovation. Bank projects also introduced international best practice to China, such as competitive bidding procedures ensuring project quality and cost savings, a project supervisory system promoting successful implementation, use o f international consultants, and helpful approaches to environmental and resettlement assessment. These a l l supported changes and reforms in the way institutions function. As a result, Bank-assisted projects have higher quality and better management than domestic projects. 0 The Bank’s project preparation cycle, procurement procedures and the supervision system improve the chances for success. All c i v i l works projects in some provinces have adopted the Bank’s project management procedures as standard practice. 0 The Bank’s environmental assessment and resettlement policies take a new, thoughtful approach to these issues. 0 Competitive bidding, whether international or national, has reduced investment costs to levels much below original budgets. Bank procurement procedures maybe less flexible than for some other donors but they also provide more benefits. 0 Bank expertise and the quality o f i t s non-lending services are viewed as high quality.  103 Annex J (continued) 0 Bank assistance i s particularly valued for health, water resources management, forestry, environmental protection, poverty reduction, and infrastructure. Future assistance was requested in some o f these areas and for post-WTO training, rural employment and cross- sectoral studies, 0 The Bank’s decentralization to Beijing facilitated efficient communications, timely Bank responses, and faster loan disbursement. But Some See Roomfor Improvement, Sometimes in Areas Valued by Others 0 Project Preparation Procedures. The preparation and approval process for Bank- assisted projects should be further streamlined. Current procedures require borrowers to carry out duplicate tasks and should be harmonized with local approaches. 0 Project Design - projects, sometimes have components that the Borrower does not want and subsequently has difficulties in implementing. 0 Procurement procedures should be more flexible. For example, the Bank requires award o f contracts to the lowest responsive bidder, which in China might encourage bidders to offer very l o w prices to get contracts, with the result that prices must be increased later or quality suffers. 0 The Bank should reduce the time for reviewing bidding documents by setting a deadline. In the case o f procuring computers, borrower problems with the bidding and review process can cause delays and result in the purchase o f already obsolete equipment. 0 Use o f International Consultants for Project Supervision and T A Components. The cost and benefits o f foreign technical assistance were queried, particularly for consultants unfamiliar with China. Borrowers favor use o f local experts, given the experience they have accumulated over the past decades. 0 Chinese collaboration on studies i s particularly important to ensure quality and relevance. 0 Safeguard Requirements are often seen as excessive and complicated. 0 Bank Lending Terms. Representatives o f poor western provinces sought concessional financing for projects, particularly those for rural development. 0 Bank lending terms are not attractive. The front-end fee i s too high and a major burden. If indirect costs such as for international consultants and training are included, the costs o f Bank loans are higher than financing from other sources. 0 Counterpart funding requirements may be too high for poorer provinces. 0 Loan commitment and front-end fees should be rebated when project components are adjusted and part o f the loan i s cancelled. 0 Supervision. While missions are effective and useful, the timing (twice a year) may be too frequent and the length o f missions too long. The number o f supervision missions should be decided flexibly on the basis o f implementation performance, so as to lower costs for both the Bank and the Borrower. 0 GeographicalFocus. While the shift in the Bank strategy t o the western provinces i s correct, the eastern provinces s t i l l need new, innovative ideas, institutional improvements and lessons from the Bank’s experience which come from continued lending. Annex K 104 Client Survey The figure below i s based on the 2002 Client Survey. It plots respondents' ratings o f the relative importance o f having the Bank involved in various areas vs. their ratings o f Bank effectiveness in these same areas. The correlation between perceived importance and perceived effectiveness i s high. The horizontal and vertical lines represent the mean ratings and permit a rough classification o f activities into four quadrants representing perceived areas o f strengths (such as the environment) where Bank involvement i s both important and effective; high priority improvements (regulatory framework i s the only example) where Bank involvement i s seen as important, but relatively ineffective; improvements (for exam le, judicial system) where Bank involvement i s seen as neither very important nor effective;;" and exceeding expectations (economic growth) where Bank assistance i s seen as less important but relatively effective. Importance vs. Effectiveness ixceeding Expectations Strength2 4 14 Infrastructure 4 04 3 95 3 85 I Environment Corruption , *lnbriOrProvlnces 2 375 Agriculture. Natural Resources Mom aJ 366 .- * Economic Growth 4 Pover(y *Transpsnncy in Governance 0 356 Health* t Coordina!ed t Education Framework 346 Gender, Strategy *Public Sector C 2 337 Disparities z 3 27 Private Sector 3 17 3 07 2 98 .Judicial System The loo rating for the judicial system may reflect the fact that Bank activity in this area only began in 2002  105 Annex L Guide to OED’s Country Evaluation Rating Methodology 1. This methodological note describes the key elements o f OED’s country assistance evaluation (CAE) methodology. lo’ (iii) CAEs rate the outcomes of Bank assistance programs, not Clients’ overall development progress 2. An assistance program needs to be assessed on how well it met i t s particular objectives, which are typically a sub-set o f the Client’s development objectives. If an assistance program i s large in relation to the Client’s total development effort, the program outcome will be similar to the Client’s overall development progress. However, most Bank assistance programs provide only a fraction o f the total resources devoted to a Client’s development by donors, stakeholders, and the government itself. In CAEs, OED rates only the outcome o f the Bank’s program, not the Client’s overall development outcome, although the latter i s clearly relevant for judging the program’s outcome. 3. The experience gained in CAEs confirms that program outcomes sometimes diverge significantly from the Client’s overall development progress. CAEs have identified assistance programs which had: 0 satisfactory outcomes matched by good Client development; 0 unsatisfactory outcomes in Clients which achieved good overall development results, notwithstanding the weak Bank program; and, 0 satisfactory outcomes in Clients which did not achieve satisfactory overall results during the period o f program implementation. Assessments of assistance program outcome and Bank performance are not the same 4. By the same token, an unsatisfactory assistance program outcome does not always mean that Bank performance was also unsatisfactory, and vice-versa. This becomes clearer once we consider that the Bank’s contribution to the outcome o f i t s assistance program i s only part o f the story. The assistance program’s outcome i s determined by the joint impact o f four agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events o f nature, international economic shocks, etc.). Under the right circumstances, a negative contribution from any one agent might overwhelm the positive contributions from the other three, and lead to an unsatisfactory outcome. 5. OED measures Bank performance primarily o n the basis o f contributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation o f the strategy, the design and supervision o f the In this note, assistance program refers to products and services generated in support o f the economic development o f a Client country over a specified period o f time, and client refers to the country that receives the benefits o f that program. Annex L (continued) 106 Bank’s lending interventions, the scope, quality and follow-up o f diagnostic work and other AAA activities, the consistency o f Bank’s lending with i t s non-lending work and with i t s safeguard policies, and the Bank’s partnership activities. Evaluation in Three Dimensions 6. As a check upon the inherent subjectivity o f ratings, OED examines a number o f elements that contribute to assistance program outcomes. The consistency o f ratings i s further tested by examining the country assistance program across three dimensions: (a) a Products and Services Dimension, involving a “bottom-up” analysis of major program inputs -- loans, AAA, and aid coordination; (b) a Development Impact Dimension, involving a “top-down” analysis o f the principal program objectives for relevance, efficacy, outcome, sustainability, and institutional impact; and, (c) an Attribution Dimension, in which the evaluator assigns responsibility for the program outcome to the four categories o f actors (see paragraph 4 above). Rating Assistance Program Outcome 7. In rating the outcome (expected development impact) o f an assistance program, OED gauges the extent to which major strategic objectives were relevant and achieved, without any shortcomings. Programs typically express their goals in terms o f higher-order objectives, such as poverty reduction. The country assistance strategy (CAS) may also establish intermediate goals, such as improved targeting o f social services or promotion o f integrated rural development, and specify how they are expected to contribute toward achieving the higher-order objective. OED’s task i s then to validate whether the intermediate objectives produced satisfactory net benefits, and whether the results chain specified in the CAS was valid. Where causal linkages were not fully specified in the CAS, it i s the evaluator’s task to reconstruct this causal chain from the available evidence, and assess relevance, efficacy, and outcome with reference to the intermediate and higher-order objectives. 8. Evaluators also assess the degree o f Client ownership o f international development priorities, such as the MillenniumDevelopment Goals, and Bank corporate advocacy priorities, such as safeguards. Ideally, any differences on dealing with these issues would be identified and resolved by the CAS, enabling the evaluator to focus on whether the trade-offs adopted were appropriate. However, in other instances, the strategy may be found to have glossed over certain conflicts, or avoided addressing key Client development constraints. In either case, the consequences could include a diminution o f program relevance, a loss o f Client ownership, and/or unwelcome side- effects, such as safeguard violations, all o f which must be taken into account injudging program outcome.  107 Annex L (continued) Ratings Scale 9. OED utilizes six rating categories for outcome, ranging from highly satisfactory to highly unsatisfactory: Highly Satisfactory: The assistance program achieved at least acceptable progress toward all major relevant objectives, and had best practice development impact on one or more o f them. N o major shortcomings were identified. Sat isfactory: The assistance program achieved acceptable progress toward a l l major relevant objectives. N o best practice achievements or major shortcomings were identified. Moderately Satisfactory: The assistance program achieved acceptable progress toward most o f its major relevant objectives. N o major shortcomings were identified. Moderately Unsatisfactory: The assistance program did not make acceptable progress toward most o f its major relevant objectives, or made acceptable progress on a l l of them, but either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Unsatisfactory: The assistance program did not make acceptable progress toward most o f its major relevant objectives, and either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Highly Unsatisfactory: The assistance program did not make acceptable progress toward any of its major relevant objectives and did not take into adequate account a key development constraint, while also producing at least one major shortcoming, such as a safeguard violation. 10. The institutional development impact (IDI) can be rated as: high, substantial, modest, or negligible. ID1measures the extent to which the program bolstered the Client’s ability to make more efficient, equitable and sustainable use o f i t s human, financial, and natural resources. Examples o f areas included injudging the institutional development impact o f the program are: the soundness o f economic management; the structure o f the public sector, and, in particular, the civil service; the institutional soundness o f the financial sector; the soundness o f legal, regulatory, and judicial systems; the extent o f monitoring and evaluation systems; the effectiveness o f aid coordination; the degree o f financial accountability; the extent o f building NGO capacity; and, the level o f social and environmental capital. (iv) Annex L (continued) 108 11. Sustainability can be rated as highly likely, likely, unlikely, highly unlikely, or, if available information i s insufficient, non-evaluable. Sustainability measures the resilience to risk of the development benefits o f the country assistance program over time, taking into account eight factors: technical resilience; financial resilience (including policies o n cost recovery); economic resilience; social support (including conditions subject to safeguard policies); environmental resilience; ownership by governments and other key stakeholders; institutional support (including a supportive legal/regulatory framework, and organizational and management effectiveness); and, resilience to exogenous effects, such as international economic shocks or changes in the political and security environments.  109 Annex M eF om Q) EW.5  111 , Annex N Comments from the Region on the Draft Country Assistance Evaluation 1. General Observations The Department agrees with the general thrust o f the CAE. Put simply, China has performed very well over the past two decades. I t has been very much “in charge” o f the developmental agenda, and this i s a major factor in explaining the country’s impressive accomplishments to date. The Bank has played an important but varying role in the process depending on the sector, issue and time period-in part due to changing country circumstances and in part due to factors specific to the Bank. As noted in paragraph 9 o f the Summary, “The main strength o f the Bank has been i t s sustained support o f an activity or program over a number o f years.” This has allowed the Bank to “have a substantial cumulative impact in a number o f areas” and to be “well- placed to take advantage o f opportunities when China i s looking for support for change.” Against this broad premise, we are puzzled by the statement in the same paragraph that, “The Bank’s view on issues has sometimes been less than fully transparent. Looking forward, the Bank should give more attention to trying to promote and participate in a much broader debate on policy and sector issues, not only among oflcials, but also among researchers and other stakeholders.” While the Bank has publicly shared a broad range o f i t s analytical work and participated in an open dialogue on most subjects, it has treated some sensitive issues more discreetly. Our aim in doing so i s to reach our clients in a sensitive but effective way, not to educate an external audience. We have thus been able to maintain a dialogue on difficult issues being debated within the Government and have helped our clients to shape important policy reforms. The report notes areas where the Bank has been quite effective and areas where we have either been short o f the mark or less involved than warranted. We agree with many o f these observations, but on some issues the judgment i s too simplistic, particularly regarding how country circumstances can influence Bank priorities or the way the Bank has approached issues in China. Reform i s not a smooth or a continuous process. For some issues, such as the financial sector (see more on this below), circumstances dictate when a topic i s ripe for serious attention-particularly so in China where the political/planning process determines both the timing, speed and nature o f how and when key reforms are to be addressed. We recognize that the scale and diversity o f issues facing China are unparalleled in world history and that the continuing progress o f China i s as remarkable as the complexity o f the development challenges it faces. O n the Bank’s side, while our performance may have varied across sectors and over time and Bank contributions could never be considered dominant given China’s scale and government ownership (as the C A E notes), the Bank has certainly “punched above i t s weight.” In light o f these two factors, it i s not clear that more could have been accomplished or that performance was anything less than fully satisfactory. Any suggestion o f ‘mixed success’ on either the government’s or the Bank’s part seems to imply that total success would ever have been feasible in such a complex context. In addition, while the report acknowledges that “China f i t s the Comprehensive Development Framework model o f donor coordination more closely than most countries” (paragraph 4-23), the Bank i s criticized throughout for not being involved in every aspect o f every issue. However, no one development institution-including the World Bank-can be expected to assist all areas o f a country’s development agenda, much less a country with an economy as diverse and complex as China’s. O n issues that China’s other development partners were better placed to provide assistance or were already involved, the Bank has rightly taken a supplemental role in providing support or has even decided to forego any involvement. So, although the C A E points out areas o f limited or nonexistent Bank Annex N (continued) 112 involvement, such as in the coal subsector, forestry sector work, or judicial reform, it should be recognized that development partners, such as the IFC for coal, the FA0 and Ford Foundation for forestry, and bilaterals and the EU for judicial reform, provided the support required and probably better than we could have. Broadly, then, we wonder at the tone o f parts o f the evaluation, which suggests that the Bank has failed to achieve results as though we were the sole implementers o f change in China, rather than an advisor and facilitator. Reform in China i s driven by the government and not outsiders such as the Bank. The current tone seems contrary to the opening statement in Chapter 5: “It would be presumptuous to think that the Bank could take credit for successes, or be held responsible for the failures, o f such a large and dynamic economy.“ We agree and would therefore urge that the report put China back in the “driver’s seat.” 2. Policy Agenda Macroeconomic Management We concur with the assessment’s highlightingo f two critical periods that tested China’s macro management, the prominence of fiscal policy, and the remaining difficult issues. However, the description o f the Bank’s role would benefit from a broader view. The discussion o f the Asian Crisis (paragraph 3.4) should note that, despite supporting an expansionary fiscal policy, the Bank consistently flagged the risks if such a policy were not used as a temporary measure (see, for example, our fiscal policy notes in 1998, the C E M in 1999, notes on the 1O* Five-Year Plan in 2000, notes on the composition o f public spending and on fiscal response in 2001 and 2002, and the domestic debt risks study in 2003). Avoiding deflation and competitive devaluation were important-and sometimes conflicting-concerns at different times; accordingly, the Bank offered advice on different occasions. The discussion o f Fiscal Issues (paragraphs 3.5-3.6) should note that the Bank has provided several written inputs and organized specialized workshops on the composition o f public expenditures, the reform o f the malfunctioning intergovernmental finance system, domestic debt risks, reform o f the trade promotion and export tax regime, the management o f rural public finance, and the coordination o f fiscal-monetary and external policies. The Bank has positioned i t s e l f to be an adviser in this area as political windows open. Recently, the new government requested assistance (and the Bank responded) on issues related to increased external sector liberalization, reform o f the financial sector and rural finance, and other issues tied to the sustainability o f the fiscal situation. Privatization As the evaluation notes, the Bank has expressed impatience with the pace o f reform while broadly supporting China’s phased approach. We recognized that in the short run, an exclusive focus on privatization and assumptions that market discipline would provide good governance were unlikely to be appropriate in a country (and enterprise sector) as large and diverse as China. While pursuing privatization, there was an important parallel track o f improving governance o f public agencies and separating the functions o f state-as-owner and state-as-regulator. Hence, the Bank was not “too timid in discussing privatization’’ as stated in paragraph 3.12 but rather recognized that the issues are differentiated and complex. Indeed, privatization was a politically (and philosophically) sensitive issue in China during the 1990s and thus was more appropriately handled on a confidential basis; for example, in the mid-l990s, the Bank’s Regional Vice President raised this issue directly with the Vice Premier and both recognized the delicate nature o f the topic.  113 Annex N (continued) Financial Sector The C A E highlights the importance o f financial sector reforms-which we agree with-and correctly notes that following some important early work, the Bank’s support for these reforms f e l l o f f during much o f the 1990s. As in other areas, China’s experience has shown that unless a country i s serious about addressing an issue, particularly in the financial sector, advisory or financial support fiom outsiders-whether the Bank or others-is likely to be ineffective. For much o f the early-to-mid-90~, China pursued financial sector reform slowly. Against this background, Bank advisory support and financial intermediation loans had limited impact. At the time, the Bank recognized that significant support in this area would be both costly and difficult and that until a stronger government commitment to reforms in this area emerged, a more ambitious assistance effort might be wasted. As noted by the CAE, in line with a renewed government commitment brought on by lessons o f the Asian Financial Crisis, we have over the past few years mounted an ambitious financial sector reform program for China-the largest effort in the Bank-reflecting our perception that the Government i s now taking this issue more seriously. Sector Strategy. While the evaluation i s correct in noting no major sector wide reviews after the influential 1989 report, it i s incorrect in stating that the Bank never recast its strategy after that time. This issue received considerable managerial attention regarding implications for country vulnerabilities and searching for opportunities for constructive engagement. Meanwhile, implementation o f the Financial Sector Technical Assistance Project kept the financial sector very much on our agenda. The sector was an important component in the Bank’s country assistance strategies during the 1990s’ and several country economic memoranda, including the China 2020 report, devoted separate sections to policy issues and development strategy for the sector. Involvement with State Banks. The C A E incorrectly attributes the Bank’s lack o f involvement in the State commercial banks during the Asian crisis to our client’s lack o f interest or confidence in the Bank’s advice or support. We would instead point to the changed circumstances o f those banks. At the time, both the World Bank and the Government recognized that the rationale for continued Bank assistance for the credit operations o f State commercial banks no longer existed: (i) the banks were flush with liquidity and did not need our financial support; (ii)without more serious policy efforts in dealing with non-performing loans (NPLs) and restructuring, World Bank lending would not likely be effective at any rate; and (iii)since the Government relied on expansionary fiscal/monetary policy as a response to the Regional Financial Crises, Bank-supported credit operations were unlikely to be effective as an instrument for reform. Our scaled back involvement, therefore, had a logical basis. Once these circumstances changed and the environment for our support improved, the government has sought our involvement on issues besetting the State banks and other sector institutions, as the C A E mentions. Recent AAA. The evaluation in paragraph 3.17 casts doubts on the potential effectiveness o f the more recent AAA for financial sector reform. This i s contrary to the feedback consistently given to Bank management by the government and i s puzzling in view o f the rapidly increasing requests for assistance from the MOF, the central bank, financial regulators, and the planning commission on both general architectural and specific technical aspects o f financial sector reform. Poverty Reduction While we agree with the C A E that regional and rurallurban inequalities have increased substantially and need to be addressed (paragraph 1.2), it should be noted that the inequality issue in China differs from that in many other countries. I t does not stem from one group or one region stagnating relative to others; rather, urban areas and coastal provinces are growing annually at near double digits while growth in rural areas and some interior provinces i s closer to 4-5 percent. Recommendations should therefore reflect this fact. Some o f the problems are a consequence o f an excessive concentration o f riches, not poor performance more generally. Annex N (continued) 114 We also question the CAE's finding that the Bank was less successful in "persuading the government of the implications o f broader development policies for poverty and inequality" (Summary, paragraph 4). For all three o f the major issues cited-intergovernmental fiscal relations, grain pricing policies and restrictions on migration-the Bank produced major economic reports in recent years that set out the necessary reform agenda. Further, the government has been moving in the right direction on all three fronts, albeit not so rapidly as one would have hoped in some areas. It i s also debatable whether the government could or should have moved more aggressively than it did. For example, fiscal reforms in other large transition countries where revenues have also sharply fallen indicate that the necessary institutional changes and shifts in tadrevenue policies to promote more equity take years if not a decade or more to put in place. Similarly, while China's restrictive policy on migration has accelerated regional inequalities, in the view o f many it has also made it possible for the country to avoid many o f the undesirable social consequences that other developing nations have experienced regarding rural-urban migration in the face of weak social service systems. N o w that such systems are beginning to take shape in China, cities and regions are better equipped to cope with pressures from more flexible migration policies, and this in fact i s now happening. Finally, regarding grain prices, since 1997, the Government has been purchasing smaller amounts o f grain at the administered procurement prices-less than 10 percent o f the crop in the latest years for which information i s available. Over-production since 1997 has resulted in a sharp divergence between official and free market prices, and the resulting losses o f grain marketing entities, combined with the widespread rural distress that resulted from falling free-market prices, have resulted in a substantial relaxation o f grain marketing quotas. Moreover, post-WTO developments are seen largely in the form o f the removal o f restrictions on crop diversification, and by making deep concessions in agriculture China has essentially avoided going down the path o f most countries that have subsidized increasingly inefficient food production. In sum, then, we do not concur with the point made that the Bank has been "less successful in persuading the government" in these areas. Infrastructure Lending for infrastructure. The C A E notes the positive role that Bank lending for infrastructure has played in China-both in stimulating growth and directly or indirectly reducing poverty and regional inequalities. We strongly concur. However the C A E questions whether the share o f lending for infrastructure should increase as proposed in the recent CAS. In terms o f lending amounts, the proposed lending for infrastructure i s actually declining as China mobilizes more from domestic resources for such investments. To illustrate, the Bank's infrastructure lending to China totaled $5.5 billion in FY94-96, but only about $2.3 billion in FYO1-03. However, the o f infrastructure i s increasing in the Bank program only because, with the loss o f IDA, lending in the social sectors i s much less than before. Moreover, given the substantial infrastructure needs in the interior provinces, the rationale for continued support i s as strong today as it was ten years ago in promoting growth and poverty reduction. The more relevant issue, therefore, i s whether China should make more use o f IBRD resources for social investments-a point with which we would agree. We do, however, agree that a hard look i s needed at our involvement in some infrastructure issues. For example, in view o f the disappointing results regionally and globally with B O T and PPI, it i s sensible to re-examine the respective roles o f public and private sources o f financing for infrastructure. Impact on reforms and institutional change in infrastructure sectors. W e agree that our policy impact has been more striking for energy than transport, with the proviso that we have made a significant difference in the urban transport arrangements in many cities and that a core group o f national professionals are now viewing policies and issues differently compared to a decade ago when we first started working in the subsector. In particular, we have helped develop a cadre o f professionals around the country (mostly in the design institutes) who know how to study problems better and develop more effective solutions.  115 Annex N (continued) Regarding the institutional shortfalls in other transport subsectors, we wish to complement the report with the following information: 0 In highways, the report notes three areas where the Bank has made l i t t l e headway: fuel tax reform, establishment of a unified Ministry o f Transport, and traffic safety. This, o f course, has to do with constraints also noted in the report. Since Bank lending accounts for only a small share o f China’s resource flows, the Bank relied mostly on a dual-track approach o f building trust through lending while promoting policy dialogue through sector work. This has led to a reduced efficacy in transport where success largely depends on achieving coordination across sectors and/or levels o f government., We have therefore expanded our AAA program, including dissemination seminars to show (i) the unsustainability o f the current financing mechanisms in the sector (which rely too much on toll financing), (ii)the necessity o f intermodal coordination for logistics improvement and further market integration, and (iii) the need to mainstream sector development externalities such as traffic accidents. 0 In railways, the dual-track approach stumbled on difficulties in building trust. N o w that this has been achieved to some extent, the prospects for institutional reforms are improving. Bank Group involvement in the gas and coal sectors. The recommendation that the Bank should be involved in lending for gas and coal i s questionable. In the context o f the Bank’s current poverty and growth objectives, coal and gas are clearly not priority areas for financing and are better addressed through policy-related work since the chief problems involve regulatory, environmental and- for coal-serious social issues. I F C has, in fact, been actively involved in the mining sector, and since 2000 has co-hosted with the Ministry o f Land and Resources annual conferences aimed at giving the overseas mining industry and potential investors a full picture o f the present mining investment climate in China. In addition, a major IFC-supported “Study on Coal Sector Reform in China” was done in 2001 in collaboration with the government, followed early this year by a “China Coal Industry Administration and Regulation Workshop,‘‘ which was based on several in-depthtechnical studies. The Bank has also maintained a dialogue with the government on clean coal technologies over the past five years through technical and policy studies, awareness workshops (the last one in September 2004) and recently a stand- alone GEF project. Several reports on the coal sector were also published by ESMAP. Regarding the gas sector, the Bank has done extensive AAA and TA in the past three years. Some o f our outputs include the 2001 studies on “Modernizing China’s O i l and Gas Sector: Structure, Reform and Regulation,” “Power and Gas Regulation,” “Regulatory Framework for China’s Downstream Gas Sector,” and in 2002 “Economic Regulation o f Long-distance Gas Transmission and Urban Gas Distribution.’’ In fact, the Bank’s activities are helping to shape reforms in the gas sector. Environment We question the implication in paragraph 2.14 that the Bank had a limited impact on environmental issues. While China’s rapid economic growth has posed immense environmental challenges, we suggest that the Bank has had a significant influence in this area and prevented existing problems from becoming even more severe. The recent CAS indicates the range o f the Bank’s support to China in addressing environmental issues, including those o f global importance, the institutional and regulatory framework in China, and the challenges o f protecting air, land and water resources. We note that the C A E omits discussion o f significant areas o f the Bank’s contribution to environmental management such as air pollution reduction, industrial pollution control programs and strengthening o f environmental monitoring and regulation in municipalities. Water-related Issues. There appears to be a disconnect between the views expressed in Annex G and the main text section on water. The general tone o f the Annex i s that the Bank’s assistance in the water sector has been effective, i s on the xight track and i s making significant contributions. The general tone o f the main text seems to be that the Bank’s assistance has been less than satisfactory, particularly in water resources management. Needless to say, we agree with the annex and not with the main text. Annex N (continued) 116 In general, the main text characterizes our performance as ‘mixed,’ despite achievements under projects such as those for the Tarim Basin, the Yangtze Basin, Water Conservation, the Loess Plateau and others that have significantly contributed to mainstreaming the environment into water sector operations. On institutional reform in water, the report questions our performance, although the Bank has had considerable success in irrigation reform, river basin management and watershed management. Water Users’ Associations started under World Bank projects are now becoming national policy. River basin management i s becoming more common, albeit slowly, and the Bank-assisted Tarim Basin and Yangtze Basin projects have played an important role in this. The Loess Plateau watershed management model i s also being replicated. Regarding integrated water resources management ( I W M ) , while progress has been slow, it i s positive, as shown in various projects and in the Bank’s Water Resources Assistance Strategy prepared in 2002. Achieving integrated water resources management i s a monumental, very long-term process, and China-with Bank assistance-is on the right track but s t i l l has some way to go. Similarly, on water supply and wastewater management, we disagree with the report’s conclusion that our impact on institutional development has been negligible. We believe that China’s achievements o f expanding and improving urban water supply and wastewater management services as well as their financial and institutional frameworks over the last 15 years have been remarkable and compare well with those o f other Bank borrowers. The Bank has made a significant contribution to this achievement. Advances that the Bank first pushed for as innovations and that are now national norms include: full cost recovery on water supply and recovery o f at least the operating costs for sewerage services; formal independence o f utilities; proper financial management; and proper investment planning and implementation. The Bank i s now pursuing further institutional advances such as full commercialization o f certain services and strengthening o f the regulatory framework. 3. Operational Instruments Analytical and Advisory Services Changing needs, changingproducts. The evaluation recognizes that our client’s needs changed in the course o f the 1990s (paragraph 2.7) and that AAA was therefore refocused on more quickly prepared technical pieces, sometimes o f a multisectoral nature and on issues that often defied easy solutions. At the same time, the C A E shows a nostalgic hope that the Bank w i l l continue to produce long, general reports for senior leaders as if they s t i l l needed to be schooled in basic principles or required advice on the simpler issues o f the past. As China’s reform process shifted from the liberalization phase to the more difficult structural and institution-building phase, the Bank‘s ESW had to evolve by moving away from reports to a combination o f policy notes, workshops, studies and research. Moreover, WBI and D E C activities have been integrated more closely with the need to provide a range o f advisory services supported by capacity building and in-depth research on current as well as future challenges to economic management. The C A E should unequivocally acknowledge and endorse this shift. Otherwise, it runs the risk o f being internally contradictory by acknowledging the change in knowledge requirements since the mid-1990s while criticizing the Bank’s decision to shift away from reliance on the lengthy strategic documents produced during the early stages o f i t s involvement in China. In this regard, we would also point out the CAE’s discussion o f the themes o f our 2002 CAS (paragraph 2.20) should also mention the major CAS emphasis on knowledge transfer. There i s now a two-way exchange o f knowledge between the Bank and China, in which the Bank i s both a provider and a recipient o f knowledge in i t s interactions with an ever-more sophisticated and informed client. This mutually beneficial exchange reflects our new relationship. International vs. Chinese experience. The C A E recommends grounding policy advice more on Chinese experience as opposed to international lessons learned. However, we see the need to look at both sources, with the proper ‘mix’ depending on the issue and the audience. We will continue to approach issues in this way, considering international and/or domestic experience as warranted. The C A E also recommends that the Bank draw lessons from Chinese experience for the benefit o f other countries. This  117 Annex N (continued) objective was built explicitly into the China CAS o f 2002, and, as mentioned in the CAE, the upcoming Shanghai Conference on Scaling Up Poverty Reduction i s a notable example. Collaborative work. The local research community’s desire to increase i t s work with the Bank i s welcome, and we are doing this where possible. One o f the strategic elements for the knowledge agenda and AAA program outlined in the 2002 CAS is, indeed, to accelerate the use o f local experts and institutions. However, since local capabilities are s t i l l uneven, it will be important to continue to support institutional development as part o f this collaborative work. The Bank’s extensive use o f trust funds to support AAA work supports such longer-term efforts to build local capacities, while also establishing networks o f communication and expertise and sustaining reform. Research-support grants to Beijing University and the Chinese Academy o f Social Sciences are examples. Moreover, formal co-sponsorship with the authorities o f important institutional mechanisms, such as the APEC Finance and Development Program, helps to transfer cutting-edge knowledge to local collaborators and, more broadly, to East Asia Regional networks. AAA budget. The portrayal o f our budget allocations for AAA in paragraph 4.17 reveals a lack o f understanding o f the overall budget situation for the China program. The Bank’s budget allocation system has consistently constrained funding for China below what might be regarded as “normal.” Given the substantial budget needs for project supervision and lending as a result o f the large lending program, the amount available for ESW-particularly when expressed as a percentage o f the overall program- seems low. Resource constraints, however, have become less binding recently, and the 2002 CAS, which recognizes the importance o f the Bank‘s advisory services relative to lending, could therefore envisage an increased share o f resources for non-lending services. China’s view o f the Bank’s AAA. Regarding concerns about the Bank’s E S W expressed by Chinese officials and mentioned in paragraph 4.18, we strongly agree with the point made in footnote 88 that many reports are produced for external and institutional purposes and not solely for Chinese technical specialists. This was true o f the China 2020 report, which was timed for release at the Hong K o n g Annual Meetings in 1997. This report was mainly produced to help the external world better understand China, and it remains one o f the most requested World Bank documents on China. The report was not, however, without a Chinese audience. While it may have lacked immediate operable suggestions for macro-economists, many line ministry and sector experts greatly appreciated it, particularly i t s companion background studies on the environment, social protection, health financing, food security, income disparities and integration into the global economy. Other outputs were meant to serve the needs o f macroeconomists, such as policy notes on the five-year plans. The first set o f notes in 1995 was well received, and the Bank has been requested to provide similar support to the two plans since then. Regarding the recommendation in B o x 4.1 that the Bank needs to do more work on urbanization, education and urban transport, significant analysis has been carried out in all three areas and provided to the government, although not as yet to the public. Quality of AAA. O n the observation that that the Bank needs to tighten management oversight over task implementation and dissemination, we would point out that the E A P Region has formalized Sector Lead Economist positions in all sector units, and these individuals have taken on greater quality assurance functions in their respective units, complementing the role being played by the Country Lead Economists. At the same time, the focus remains on impact and results, which usually require a range o f activities and which depend on what others are doing-features that are more difficult to reflect in the earlier QAG approach. Absence of forestry sector work. Despite lending for forestry o f more than $1 billion and a body o f work that OED’s sector review o f 2000 characterized as “a high point in one o f the highest quality portfolios,” no Bank sector work was done on forestry. As the O E D review mentions, however, the Bank attempted to launch AAA activities but our client did not see the need for such work due to the perceived Annex N (continued) 118 relative health of the forest sector policy framework. Forest sector analytical work was, however, done by the FA0 and Ford Foundation, while the Bank used its resources for topics not well covered by other donors, such as rural development, poverty, grain marketing and agricultural research. Cross-sectoral work. This, indeed, poses challenges, especially for a large country like China. Three developments are worth noting to flesh out the evaluation. First, the shift in requests from the authorities for non-lending support in areas requiring meaningful cross-sectoral analysis i s fairly recent, reflecting the complexity o f the issues faced in moving from the stroke-of-the pen liberalization phase to the current stage o f building institutions for a rapidly growing, highly articulated, globalized and market- oriented economy. In many instances the immediate impulse to request such assistance from the Bank arose from the need to go beyond the compartmentalization (and the narrower perspectives that result from it) that exists among government departments. Second, the Bank has used the opportunity o f the request for inputs into the Five-Year Plans and the Western Region Development Plan to exploit some o f the cross-sectoral linkages, and in the process helped develop useful policy analysis and design frameworks. Third, on a more limited scale, technical analysis in several sectors has combined perspectives from other sectors. For example, the China C E M 1999 carried out stress testing on the financial sector based on enterprise sector analysis. However, more needs to be done. In the area o f enterprise and financial sector reform, for example, ESW under way on state-owned commercial bank reform and on domestic debt risks i s building upon perspectives from banking, management o f local government finance, social security reform, and the housing market and urbanization. In part, this has been facilitated by unifying the Poverty Reduction and Economic Management (PREM) unit with previous units for the financial sector and private sector development. More important, however, i s the evolving focus o f the authorities on regional and subnational development issues, which explicitly lend themselves to cross-sectoral approaches. The Bank i s the leading agency among China’s development partners involved in providing analytical and advisory support on this set o f issues. Impact o f Lending The report in paragraph 2.1 1 characterizes Bank lending as “negligible” and never the main instrument o f our strategy. However, the Bank‘s financial contribution had an impact greater than i t s quantitative size would suggest and should not be considered too small to have had an effect. This was the case since: (i)Bank lending to specific geographic areas had a sustained, cumulative impact over time, e.g., Xinjiang benefited from $1.2 billion in support for over 20 projects and Sichuan received more than $2.3 billion under about 40 projects; (ii)for much o f the 1990s until 1997/98 China’,s reserves were s t i l l recovering from their near depletion in the early 1990s, so that during much o f the decade foreign exchange was, in fact, an issue; and (iii)by viewing our lending from the perspective o f national foreign reserves and revenue/GDP ratios, the report overlooks the fact that, unlike other countries, our lending in China i s largely provincially based and most provinces have major fiscal and foreign exchange access issues, which the Bank helped to relieve. Portfolio Management The depiction in paragraph 4.14 o f factors that improved the QAG rating in subsequent years appears incomplete by attributing the improvement to Regional efforts and increased scrutiny o f the portfolio after issues surfaced under the Western Poverty Project (in M a y 1999). We, however, see the turnaround that began at the start o f FY99 (in July 1998) as largely the result o f efforts initiated by Country management during that year to (i) provide budget to accelerate decentralization o f staff, task management and core services to the field; (ii) designate a senior Beijing Office staff member to oversee portfolio performance as a de facto Project Advisor; (iii) increase funding o f supervision-which averaged about 21 staff-weeks per project in FY99 or 22% above the Regional goal o f 17 staff-weeks; and (iv) carry out a QAG-type supervision assessment with assistance from the Region’s Operations Advisor, which found satisfactory supervision o f the sample projects. The impact o f these measures was reflected in QAG’s F Y 9 9 RSA, which rated China’s supervision at 85%, slightly higher than the Bank’s  119 Annex N (continued) average (at 82%). By the time o f the RSA in FYOO, China’s supervision was rated loo%, compared to 92% Bankwide. Safeguards As noted in B o x 4.2, the Western Poverty Project was a major blemish on an otherwise relatively strong performance in the Bank’s involvement in safeguard issues. However, this single operation should not detract from the reality that only one o f some 250 investment projects during more than two decades has been subject to such controversy. The criticism expressed in paragraph 4.28 that line managers had rarely visited thesix projects reviewed by a Panel assessing safeguards compliance seems unrealistic. With some 120 active projects scattered over more than 20 provinces and with managers visiting China no more than twice a year, it would seem impossible for most projects to be visited more than once or twice by managers in the course o f even five years. 4. Conclusion Overall, we broadly endorse the recommendations o f the evaluation, which in general are consistent with our current strategy. In particular, we strongly agree that many lessons from China’s experience are applicable to other countries, and for this reason we are sponsoring an upcoming poverty conference in Shanghai aimed in part at sharing lessons from China with others in the development community. We also agree on the importance o f broadening our dialogue and have therefore in the past few years reoriented our policy support to respond better to the needs o f the government’s most senior decision-makers. Testament to the effectiveness o f this reorientation i s the substantial increase in government requests for Bank assistance with the most complex institutional and structural policy issues, including the 1lth Five-year Plan. Further, we agree that our somewhat smaller lending program must be used strategically and are therefore designing each operation to introduce innovation and change in the sectors supported, where needed, including poverty reduction and infrastructure development. In our analytical and advisory work, we will continue to provide our client with objective advice that draws on relevant lessons learned from other countries as well as China. Maintaining the quality o f this support i s our top priority, and our approach on each issue will be tailored to ensure greatest effectiveness. At the same time, efforts to protect portfolio quality will continue, so that our future performance shows the excellent outcomes realized in the past.  121 Annex 0 Comments from the Government o f China (vii) Annex 0 (continued) 122 123 Annex 0 (continued) Annex 0 (continued) 124 125 Annex 0 (continued) Annex P 126 China: IFC Country Impact Reviewlo2 Executive Summary China & IFC. China has the largest economy, and attracted the most foreign direct investments (FDI) in recent years, among countries in which I F C operates. In 2002, China surpassed the U.S. as the top FDI destination country. I F C approved i t s f i r s t investment in China in June 1985, a US$17 million loan. For the next seven years, IFC activity levels remained low, gaining momentum only after 1992. By the end o f FY03, cumulative commitments totaled $81 1 million, and IFC’s held portfolio stood at US$510 million, about 3% o f i t s total held portfolio. China now represents IFC’s 6th largest country portfolio exposure and i t s 3‘d largest country equity portfolio. At the end o f FY03, IFC’s China held portfolio was about 49% equity, 44% loans (including guarantees and risk management facilities), and 7% quasi-equity. The equity share in the China portfolio was unusually high compared to the IFC over-all portfolio equity share o f about 20%. IFC’s Strategies. IFC’s strategies in China have been relevant and well-tailored to the country context. IFC progressively adapted them initially to the market opportunities, and then later to more pioneering selectivity in line with IFC’s corporate strategic priorities. The strategies reflected successively the evolution o f the government’s economic reform initiatives, IFC’s potential to add value, and IFC’s lessons from i t s difficult early portfolio experiences. Beginning with the country assistance strategy for 1997, I F C placed increased emphasis on developing capital markets, private sector participation in infrastructure and extractive industries, and SME development. Subsequent strategies (1999,200 1 and 2003) added priority consideration to frontier provinces and corporate governance -- partly by expanding technical assistance and advisory services (TA totaled more than US$lO million from 1997 to 2003) -- and to improving access by private companies, particularly SMEs, to financing from local banks and financial markets. While less than 15% o f total FDI flows into China to-date has gone to the frontier provinces and less than 1% into the financial sector, I F C directed more than 20% and 30%, respectively, o f i t s commitments to these two areas, demonstrating a strong pioneering and leadership role in line with the CAS and corporate priorities o f maximizing IFC’s development impact additionality. Proiect Outcomes. Despite China’s large economy, above average GDP growth rate, stable political environment, l o w sovereign risk rating, and substantial FDI flows since 1993, IFC’s mature projects (approved FY90-FY99) have had development and investment outcomes below the IFC averages. While the development outcome and investment outcome “win-win” success rate matches the average o f the Transition Countries, the proportion o f “lose-lose” outcomes for the China projects i s substantially higher than for the Transition Countries and IFC as a whole. However, mature projects within two o f IFC’s present strategic priorities, namely in lo* This Executive Summary has been extracted from the report o f IFC’s Operations Evaluation Group (OEG) “China -- Country Impact Review” dated March 29, 2004. Consistent with the provisions o f IFC’s disclosure policy, detailed profit contribution data have been removed. Questions on this document should be referred to the OEG Task Manager, Denis Carpio (DCarpio@ifc.org), 202-473-1013.  127 Annex P (continued) the frontier regions o f China and in the financial markets (excluding collective investment vehicles or CIVs) - together comprising 38% o f the 29 mature projects evaluated, show a much higher proportion o f “win-win” outcomes compared to projects in the coastal regions, and compared to all o f IFC. The environmental performance o f the China projects i s better than the IFC average. Profit Contribution. For the period FY90-FY03, the China loan and equity portfolio, excluding unrealized capital gains, made a negative cumulative contribution to IFC’ s net income. Including the unrealized capital gains expected to be realized in future fiscal years, the net profit contribution remained negative. Outcome Drivers. Four major factors mainly account for the poor project development outcomes and portfolio profitability. Excess capacitv and a challenninn business climate. Other than in the frontier regions, over-capacity in many manufacturing industries, particularly in the coastal regions, has resulted from FDI exuberance, government-directed or induced investments (including FDI) and the “soft” budget constraints on expansion o f state-owned enterprises (SOE’s) through their easy access to low-interest loans from government-owned banks, rather than market- based resource allocation. The over-capacity has depressed both profit margins and capacity utilization during the initial operating years o f many I F C real sector projects, putting development outcomes and investment returns below satisfactory return thresholds. In addition, the difficult business climate for private companies has overwhelmed even some o f the high-quality sponsors with well-implemented I F C projects (construction and operation phases) yielding less than satisfactory project outcomes, including exit problems for IFC’s equity investments, and has also limited IFC’s use o f quasi-equity instruments. Restrictions on private investments in sectors that have been most profitable for IFC worldwide. Government policies restrict private sector, particularly foreign, sponsorship o f projects in several major sectors in which IFC equity investments generally performed above average in other developing countries during the 1990s. These restricted sectors included extractive industries, infrastructure, and until recently, petrochemicals/chemicals and financial markets. High project -risk intensitv. About 87% o f the 29 mature IFC projects in China approved in FY90-FY99, feature three or four high-risk factors (out o f four evaluated). These projects have had much lower development as well as investment outcome success rates compared to the projects (13%) with two or fewer high-risk factors. The rapid nrowth of IFC ’s commitments in an unfamiliar environment prevented experience .from informinn IFC ’s appraisal of later proiects. I F C increased i t s China project commitments in an unfamiliar country environment much faster than IFC could acquire lessons from mature projects approved earlier. I t s appraisal work quality for the mature China projects was therefore weaker than for projects in countries with a much longer history Annex P (contined) 128 o f IFC operations (Le., non-transition countries), and was similar to the average for transition countries that also had rapid portfolio growth with lagged experience accumulation. Prospects for Recent Proiects. The most recent I F C projects (approved in FY00-FY03) show better project screening, appraisal and structuring quality, and feature relatively less layering o f high-risk factors, compared to the evaluated mature projects approved in FY90- FY99. In addition, the new Chinese government appears intent on more aggressively addressing the problems related to the SOEs and the banking sector that contribute to a difficult business climate for the private sector and overall, there are indications that manufacturing capacity utilization i s higher now than during the past few years. Nonetheless, the over all risk level o f the recent projects as a group i s s t i l l high because: (a) SOEs are expected to continue their dominant role in the financial and other “vital sectors” for many more years, prolonging the “un- level playing field” for private sector f i r m s competing with such SOEs, and (b) the high proportion, almost 50%, o f equity investments in the recent I F C commitments, will continue to face exit and value realization risks, particularly in the financial sector where IFC’s equity commitments are concentrated. The outcomes o f the recently approved projects may therefore not be significantly better than those o f the mature projects. Going Forward: Applv Lessons o f Experience and Stress Strategic Priority and Oualitv - Over Ouantitv. China’s transition challenges and prospects in the context o f both new projects and the partial or full privatization o f SOEs in the financial, energy, extractive industries, and infrastructure sectors - present opportunities for IFC, but also pose high risks. In addressing these opportunities, IFC should grow i t s investment operations, particularly equity investments, within i t s strategic priorities, and in pace with improvements in the business climate and exit avenues. The essential operational considerations for achieving better results from new IFC projects in China are: strategic selectivity at screening in favor o f priority frontier provinces and sectors, and on the strength o f IFC’s role and value-added; also greater selectivity in project screening, instrument selection and pricing from awareness o f past results for projects featuring similar intensity o f high-risk factors, and in the use o f equity investments, including more rigorous analysis and structuring o f equity exit mechanisms; better management o f project-level risks in the appraisal and structuring o f projects, particularly in assessing the future supply-demand balance and the role o f SOEs in the product market or in the financial sector, as well as closer supervision; reflecting in IFC’s loan terms and conditions, both the potential for higher income through contingent payments when projects do well (“loan sweeteners” and/or equity acquisition features), as well as the possibility o f lost income from loan prepayments by successful client companies receiving attractive refinancing offers in a likely increasingly competitive banking system; and  129 Annex P (continued) 5) continue as a high priority for IFC (and the WBG), the use o f technical assistance and advisory (TA) operations for project preparation and sector reforms to help accelerate the transition process and improve the business climate, including removal o f the regulatory barriers to the use o f quasi-equity instruments and the timely remittance in foreign currency o f the full realized value o f negotiated equity divestments by foreign investors. IFC management should satisfy i t s e l f that the necessary incentives and procedures are in place for project selectivity applying the above criteria, portfolio oversight, and corporate monitoring o f adherence to IFC’s strategic priorities as well as to project and investment instrument selection guidelines. Consider how to address the finding; o f l o w profitability o f large middle income country portfolios. The Board and I F C management should address the l o w net profitability levels o f the combined portfolios o f middle income countries with large economies, FDI flows and IFC exposure. Annex Q 130 Chairman’s Summary Committee o f Effectiveness (CODE) Meeting of March 29,2004 1. On March 29,2004, the Committee for Development Effectiveness (CODE) discussed China: Country Assistance Evaluation (CAE), prepared by the Operations Evaluation Department (OED). 2. Background. The CAEfor China focuses on the period o f FY93-02. The main findings o f the evaluation are that the overall outcome o f the Bank’s assistance strategy was satisfactory, with China holding the best performing portfolio in the Bank Group. The Bank made significant contributions in all o f i t s key objectives and played an important role in poverty reduction, macro- management, and systemic reform. The CAE found that the Bank has been less successful in supporting financial sector reforms, in persuading the government to forge the linkages between broader development policies and poverty and inequality, and in environmental safeguard policy. The project repayment system has also constrained sector and regional allocation and the choice o f project components. The CAE found that the Bank has generally played a relevant role in China, specifically due to i t s long-term engagement and working with the client more through dialogue and persuasion than conditionality, but the Bank now needs to adapt i t s strategy to a reduced lending program. 3. Conclusions and Next Steps. The Committee welcomed the opportunity to discuss the document and praised the impact that the World Bank Group had in support o f China’s development during the past decade. The Committee commended the quality o f the report, and broadly supported the findings and recommendations. Members noted there were many lessons to be learned from the development partnership between China and the Bank, and suggested that these lessons should be transmitted to other clients, specifically middle income countries (MICs). The challenges o f developing further a program in China with reduced IBRD and no I D A allocations was raised. Some members expressed a view that OED’s evaluation o f the Bank’s performance in China could well be rated higher than “satisfactory” for i t s exceptional contribution to assisting the country in i t s overall poverty reduction achievements. OED responded that the Bank has made some outstanding contributions, but that shortcomings in the financial sector and lapses on safeguards precluded a highly satisfactory rating. Among the specific issues raised by the Committee were: 4. Fiscal Transfer and Income Inequality. Committee members expressed the view that China’s beneficiary repayment and fiscal transfer system has both rewarding and challenging effects. It has served China well by strengthening client ownership which led to the development o f coastal provinces. However, this system poses hindrances for poor inland provinces which may not have the ability to repay, consequently constraining the impact o f Bank’s interventions. Management responded that the Bank offered advice regarding beneficiary repayment, recommending ways to avoid the distortion o f incentives. They further emphasized that the provincial expenditure  131 Annex Q (continued) review indicated that differentiationneeds to be built into the repayment system to reflect the “ability to pay” o f the region and the sector. Some members pointed out that income inequality across geographical areas and sectors in China has grown and should be addressed. Management explained that inequality in China can chiefly be attributedto faster growth o f urban areas (8 percent over the past 20 years) vs. rural areas (4 percent over the past 20 years). Management also stressed that sustained rural growth can be considered successful by any standard and pointed out that poverty mapping was done on a regional basis, but agreed that inequality in terms o f access to services needs to be addressed. It was further noted that the lessons drawn from this CAE should help the Bank and the country develop an appropriate strategy in this regard. 5. Dual-Track Approach and Country Ownership. Some speakers observed that the CAE clearly highlights the positive outcomes o f the dual-track nature o f the development partnership between the Bank and the country: a mix o f investment operations bolstered by long-term and continuous dialogue, persuasion, and demonstration. The Management clarified that this system i s successful with clients who have both a clear idea o f their development direction and sufficient implementation ability. Some Committee members stressed the crucial importance o f safeguards for the Bank’s fiduciary responsibility, but emphasized that they be built into country systems to reduce their cost o f implementation. The Management explained that China has formal safeguard standards similar to those o f the Bank and that these are being applied to a l l investments. Some members felt, and the Management agreed, that for the dual-track approach to continue to work in China (and also be applied elsewhere), careful balancing i s necessary between country ownership and the Bank Group’s mandate. 6. Deepening Reforms. Some members observed that investment lending strategy pursued in China should be utilized to support systemic reforms, private sector development, and inequality reduction. The members pointed out that “deepening” reforms could be effectively married with investment operations, especially in infrastructurefor poor areas. The Management agreed with the observations o f the Committee and confirmedthat China continues to have basic infrastructurelending needs that the Bank could help finance. 7. Quality of ESW. Members broadly supported the finding o f the CAE that the Bank needs to improve its ESW, particularly by focusing on timely delivery and relevant experiences, both Chinese and foreign. It was observed that China was one o f the Bank’s rare clients where the synergy between ESW and investment operations was probably used in a most productive manner. They noted the potential for high quality and timely ESW on the Bank Group’s lending activities. Pietro Veglio, Acting Chairman  133 Annex Table 1 China at a glance 8/29/03 East Lower- POVERTY and SOCIAL Asla 8 mlddle- China Paciflc Income Development diamond. 2002 Population,mid-year (millions) 1,281 0 1,838 2,411 Life expectancy GNI per capita (Atlas method, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1219 1 1,740 3,352 Average annual growth, 199602 Population(%) 08 1.o 1.o Laborforce (%) 09 I.2 1.2 GNI Gross per primary Most recent estlmate (latest year available, 199642) caplta enrollment Poverty (% ofpopulation below national poveriy line) 5 Urban population (% of total population) 38 38 49 Life expectancy at birth (years) 71 69 69 Infant mortality (per 1.000 live births) 30 33 30 Child malnutrition (% ofchildren under5) 10 15 11 Access to improved water source Access to an improved water source (% ofpopulation) 75 76 81 Illiteracy (% ofpopulation age 15+) 14 13 13 Gross primary enrollment (“9 ofschool-age population) 106 106 111 -China Male 105 105 111 Lower-middle-income group Female 108 106 110 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios‘ GDP (US$ billions) 221.5 454 6 1,167.1 1,232.7 Gross domestic investmenffGDP 33.2 36 2 38.5 41 .O Trade Exports of goods and servicesIGDP 8.9 19 5 25.5 29.5 Gross domestic savingslGDP 34.8 37 7 40.9 44.0 Gross national savings/GDP 35.1 36 0 40.0 43.8 T Current account baiancelGDP 2.4 19 1.5 2.9 Domestic Investment Interest paymentsIGDP 0.2 06 0.5 0.5 14.6 savings Total debtlGDP 3.8 15 9 12.6 Total debt servicelexports 8.0 86 7.7 6.1 Present value of debffGDP 14.1 Present value of debffexports 51.8 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annual growth) GDP 9.7 9.0 75 8.0 7.5 -China GDP per capita 8.1 8.0 67 7.2 6.6 Exports of goods and services 5.9 14.3 96 29.4 14.8 STRUCTURE of the ECONOMY 1982 1992 2001 2002 (% of GDP) Agriculture 33.3 21.8 15.8 14.5 Industry 45.0 43.9 50.1 51.7 Manufacturing 37.3 33.1 34.2 44.5 Services 21.7 34.3 34.1 33.7 Private consumption 50.7 49.2 45.7 42.5 General government consumption 14.5 13.1 13.4 13.5 imports of goods and services 7.3 18.0 23.1 26.5 1982-92 199202 2001 2002 Growth of exports and Imports (%) (average annual growth) Agriculture 4.6 3.7 2.8 2.9 40 T Industry 11.6 11.3 8.4 9.9 Manufacturing 11.2 10.4 9.0 8.1 Services 11.7 8.4 6.4 7.3 Private consumption 11.4 8.1 2.8 1.9 General government consumption 9.9 8.4 10.5 7.0 Gross domestic investment 9.5 9.7 13.9 14.9 Imports of goods and sewices 9.7 12.8 10.8 27.5 Note: 2002 data are preliminary estimates. ‘The diamonds show four key indicators In the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Annex Table 1 (contined) 134 China PRICES and GOVERNMENT FINANCE I 1982 1992 2001 2002 Inflation (Oh) Domestic prices (% change) Consumer prices 6.0 6.4 0.7 -0.8 Implicit GDP deflator -0.2 7.9 1.2 -2.8 Government finance (X of GDP, includes current grants) Current revenue 22.9 14.7 17.1 17.9 Current budget balance .. I 2.0 1.1 0.0 -GDP deflator -0-CPI Overall surpius/deficit -0.3 -1.0 -4.7 -3.0 7 1 TRADE 1982 1992 2001 2002 Export and Import levels (US$ mill.) (US$ millions) Total exports (fob) 22,321 84,940 266,155 325,585 Food 2,908 8,309 12,780 14,623 Fuel 5,314 4,693 8,420 8,372 300,000 Manufactures 12,271 67,936 239,802 297,085 Total imports (cif) 19,285 80,585 243,610 295,203 200,000 Food 4,201 3,146 4,980 5,237 100,000 Fuel and energy 183 3,570 17,495 19,285 Capital goods I I 3,204 31,312 107,040 137,030 0 96 97 98 99 00 01 02 Export price index (1995=100) 41 85 83 78 Import price index (1995=100) 71 95 91 86 Eports IImports Terms of trade (1995-100) 58 89 91 90 BALANCE of PAYMENTS I 1982 1992 2001 2002 (US$ millions) account balance to GDP (Oh) Exports of goods and services 24,906 94,198 299,409 365,395 Imports of goods and services 20,555 86,752 271,325 328,013 Resource balance 4,350 7,446 28,084 37,383 Net income 376 249 -19,174 -14,945 Net current transfers 486 1,155 8,492 12,984 Current account balance 5,212 8,850 17,401 35,422 Financing items (net) -995 -10,952 30,046 40,085 Changes in net reserves -4,217 2,102 -47,447 -75,507 1 96 97 98 99 00 01 02 I Memo: Reserves including gold (US$ millions) .. 24,842 220,051 297,721 Conversion rate (DEC, local/US$) 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 1 Composition of 2002 debt (US$ mill.) '2001 2002 (US$ millions) Total debt outstanding and disbursed 8,358 72,428 170,110 155,678 IBRD 0 3,752 11,550 12,051 IDA 1 4,287 8,854 8,729 I A: 12,051 G 43, ,729 Total debt service 2,125 8,618 24,297 23,688 IBRD 0 6 987 460 1,550 1,631 IDA 0 30 151 175 Composition of net resource flows E 21 888 Official grants 47 327 240 Official creditors 657 2,343 2,156 -839 Private creditors -1 22 8,949 -4,017 -13,593 Foreign direct investment 430 11,156 44,241 49,308 Portfolio equity 0 1,243 3,015 2,286 F:62,103 World Bank program Commitments 330 1,865 782 583 A - IBRD E. Bilateral Disbursements 1 1,331 1,791 1,733 B - IDA . D Other multilateral - F Prime Principal repayments 0 197 904 1,157 . C iMF . G Short-term Net flows 1 1,134 887 576 Interest payments 0 293 797 649 Net transfers 1 84 1 90 -73 Development Economics 8/29/03 135 Annex Table 2 Annex Table 3 136 IBRD 239.21 878.71 759.81 997.6) 1078.01 788.31 968.0 IDA - 264.31 648.8 746.8 550.81 553.81 406.81 315.5 ADB 7.51 504.81 342.61 667.11 721.61 J 704.31 700.8 ADB Special Funds 0.9 7.8 15.6 JAPAN 1392.9 2146 0 3566.7 725.4 968.9 -1889 9 -2295.8 EC + EU Members 809.1 29363 2583 1 32896 3343.3 3187 1 9469 UNITED STATES 425 7853 6624 9083 144.9 1802.7 -393.3 Total Multilateral - 1 650 61 2198.11 2002.31 2393 91 2571.71 2072.91 2119.6 Total Bilateral 2327.1 61 18.5 7189.5 5047.6 4643.3 3294.1 -1576.4 Other Donors __ 17.0 298.7 372.7 224.7 529.2 143.8 210.8 Total of All Donors 2994.9 8615.4 9564.6 7666.2 7744.2 5510.8 754 0 Donors 1981-1990 1991-2000 1991-1995 1996-2000 1998 1999 2000 IBRD 2391 9 8787.23 3799.17 4988.06 1077 97 788.34 967.99 IDA 2643 26 6488.03 3734.15 2753.88 553.82 406 81 315 48 ADB 75.38 5048.38 1712.75 3335.63 721.59 704 32 700.83 ADB Special Funds 9 02 77.99 77.99 0 JAPAN 13929 3 21460.44 17833.39 3627.05 968 93 -1889 94 -2295.75 EC + EU Members 8090 92 29363.33 12915.34 16447.99 3343.27 3187 07 946.94 UNITED STATES 425 7853.27 3312 4541.27 144 85, 1802.73 -393 31 Total Multilateral 6505.84 21981.12 10011.54 11969.58 2571 66 2072.88 2119.55 Total Bilateral 23271.26 61 185.39 35947 61 25237.78 4643.33 3294.09 -1576 42 Other Donors 170 38 2987.24 1863.65 1123 59 529.24 143 84 210.84 Total of All Donors 29948.78 86153.9 47822.95 38330 95 7744 23 5510.81 753 97 Source: OECD Beyond 2020 CD Rom Data, 2002  137 Annex Table 4 China -Agenda for water sector strategy for North China - summary China - National development and sub-national finance a review of i 3 provincial expenditures 4/9/2002 22951 Economic Report ;i 4 - assessment of clean coal technologies for China, Vol 2 5/31/2001 'Technology 123488 ESMAP Paper 5 China -Overcoming rural poverty 10/18/2000 21105 .Sector Report Assessing markets for renewable energy in rural areas of 6 Northwestern China 8/31/2000 '21359 ESMAP Paper - China Managing public expenditures for better results country ieconomic memorandum 4/25/2000 20342 .Economic Report -r Strategic goals for Chinese education in the 21st century 111/30/1999 j 18969 Sector Report - China improving the technical efficiency of decentralized power i 9 lcompanies 9/30/1999 ESM222 ESMAP Paper 10 China - Rural China transition and development 5/28/1999 '19361 .Sector Report China -Weathering the storm and learning the lessons country 11 economic memorandum 5/25/1999 18768 Economic Report 12 Power trade strategy for the Greater Mekong Sub-region 3/31/1999 19067 Sector Report 13 China -Country assistance strategy progress report 5/6/1998 20541 . CAS Progress Report - i 14 China Forward wth one spint a strategy for the transport sector 4/23/1998 15959 Sector Report 15 China 2020 development challenges in the new century 9/18/1997 ' 17027 Sector Report China ' s management of enterprise assets . the state as a 16 shareholder 6/5/1997 16265 Economic Report Country Assistance 17 China - Country Assistance Strategy 18 China - Fruit and vegetable marketing performance I 2/25/1997 11/6/1996 116321 , 15658 - Strategy Document Sector Report 20 China - Renewable energy for electnc power 9/11/1996 15592 Sector Report 21 China - Pension system reform 8/22/1996 15121 Sector Report 22 China - Issues and options in health financing 8/12/1996 15278 Sector Report - China Energy for rural development in China an assessment based 24 China - Higher education reform 6/27/1996 15573 Sector Report iChina and Vietnam - project evaluation by the ESMAP Technical 27 iAdvisory Group (TAG) 3/24/1996 ,18671 ESMAP Paper - 28 /China Social sector exDenditure review 2/29/1996 '17348 Sector ReDort 1 29 China -The emerging capital market - 30 China Public investment and finance 111/3/1995 '10/18/1995 14501 14540 Sector Report Economic ReDort Country Assistance 31 China -Country assistance strategy 5/4/1995 14454 Strategy Document - China Investment strategies for China ' s coal and electricity delivery 32 system 31811995 12687 Sector Report I 33 'China -Strategies for road freight development 2/17/1995 ,12600 Sector Report China - Energy efficiency and pollution control in township and village 34 enterpnses (TVE) industry '12/31/1994 ESM168 ESMAP Paper World Bank Country - 35 /China Internal market development and regulation 12/31/1994 ,13664 Study 36 /China - Urban environmental service management 12/31/1994 13073 Sector Report Annex Table 4 (continued) 138 No. 1 Document Title I Date 1 Report No. 1 Document T E 37 /China - GNP per capita 11211511994 113580 /Economic Report - China Country economic memorandum macroeconomic stability in 38 a decentralized economy 10/26/1994 13399 Economic Report - China Power sector r e G m toward competition and improved 39 performance 9/15/1994 12929 Sector Report 40 China - Agro-industrial crop marketing 6/17/1994 12974 Sector Report EnvironmentalAction 41 - China Environmental action plan of China 1991-2000 3/31/1994 E37 Plan 42 - China lntemal market development and regulation 3/17/1994 12291 Sector Report World Bank Country 43 China - Foreign trade reform 2/28/1994 12914 Study China - Highway - . development and management issues, options, and 44 lstrategies 12/24/1994 111819 \Sector Report \China - Industrial organization and efficiency case study : the 45 automotive sector 12/31/1993 12134 -~ Sector Report - China Southeast coastal region : strategic issues in ports and 46 shipping development 12/10/1993 11771 Sector Report --t---- China - New skills for economic development : the employment and 47 training implications of enterprise reform 11/24/1993 11785 Sector Report 48 China - Budgetary policy and inkgovemmental fiscal relations 7/28/1993 11094 Sector Report China - Strategic options for power sector reform summary, 49 speeches, and documents from a Workshop, Belling July 8 - 10, 1993 7/10/1993 ESM156 ESMAP Paper - China Updating economic memorandum managing rapid growth 50 and transition 6/30/1993 11932 Economic Report 51 China -Yellow river basin investment planning study 6/30/1993 11146 Sector Report 52 China -Animal feed sector study 6/24/1993 10922 Sector Report 53 China - Foreign trade reform meeting the challenge of the 1990s 6/18/1993 11568 Sector Report _______ - 54 China Involuntary resettlement 6/8/1993 Sector Report /World Bank Country 55 China -The achievement and challenge of price reform 3/31/1993 111772 Study 56 China - Railway strategy 2/25/1993 10592 Sector Report - 57 China Energy conservation study 2/4/1993 10813 Sector Report - of three Chinese cities 58 Industrial restructuring a tale - 12/15/1992 10479 Sector Report World Bank Country --A- issues and options in the health transition 10/31/1992 11269 Study World Bank Country for reducing poverty in the 1990s 10/31/1992 111245 Study _ _ market management : options for an emerging 61 economy 10/1/1992 10692 Sector Report 62 China -Statistical system in transition 9/22/1992 9557 Economic Report 63 China - Reforming the urban employment and wage system 6/30/1992 10266 Sector Report =China -Strategies for reducing poverty in the 1990s 6/29/1992 10409 Sector Report China -Country economic memorandum reform and the role of the 65 plan in the 1990s 6/19/1992 10199 Economic Report 66 Price reform in China - 5/28/1992 10414 Economic Report 67 China - Environmental strategy paper 4/30/1992 9669 Sector Report - China Telecommunications sector study survey, assessment and 68 strategy recommendations 2/14/1992 9413 Sector Report World Bank Country 69 China - Implementation options for urban housing reform 1/31/1992 10315 Study World Bank Country 70 China -Options for reform in the grain sector 7/31/1991 9804 Study 71 China - Provincial education planning and finance sector study 6/26/1991 8657 Sector Report 72 lChina - Urban housing reform issues and implementation options 16/26/1991 ,9222 lSector Report  139 Annex Table 4 (continued) - /China Financial sector review : financial policies and institutional 1 /World Bank Countrv 76 development 77 China - Revenue mobilization and tax policy - 78 China Long term issues and options in the health transition 6/25/1990 7965 Sector Report 79 China - Reforming social ....... ............... .............. .. .. .. ................... security ....... ... .................. ...... in a socialist ........................ ....................... economy ............. . ........... ......... ......... ....................... 6/25/1990 8074 ................... ......... ............. .... . ..................... Economic ......... ......... Report ................... .. ... . .... ... . ................... - 80 China Electronics sector report 6/21/1990 7962 Sector Report 5/8/1990 8440 Economic Report 12/31/1989 ESMlO5 ESMAP Paper 83 China - Revenue mobilization and tax policy 6/15/1989 7605 Sector Report - China Macroeconomic stability and industnal growth under 84 decentralized socialism 6/12/1989 7483 Economic Report County - level rural energy assessments a joint study of ESMAP and 85 Chinese experts 5/31/1989 ESMlOl ESMAP Paper 86 China - Rural industry . overview, issues, and prospects 31111989 7267 Sector Report World Bank Country 87 - China External trade and capital reform issues and options 9/30/1988 PUB6680 Study !World Bank Country 88 /China - Finance and investment /9/30/1988 /PUB6445 IStudy \World Bank Country 89 China - Growth and development in Gansu province 9/30/1988 PUB6064 Study 90 - China External trade and capital reform issues and options 10/20/1987 6680 Sector Report 91 - China Technical and vocational education development 8/7/1987 6789 Sector Report 92 China - Zhejiang challenges of rapid urbanization 8/3/1987 6612 Sector Report 93 China -Textbook development 7/1/1987 6735 Sector Report 94 China - Finance and investment 6/11/1987 6445 Economic Report 95 China -Water transport sector study 2/12/1987 6383 Sector Report 96 China - Livestock sector study 1/15/1987 6589 Sector Report 97 China -Growth and development in Gansu province 11/20/1986 6064 Economic Report World Bank Country 98 - China Issues and prospects in education 5/31/1986 18954 Study 99 - China Management and finance of higher education 5/31/1986 5912 Sector Report 104 /China - Shanohai sector memorandum 112/15/1982 14227 - 105 /China Rural finance : a sector studv 18/31/1982 13864 /Sector ReDort - 106 /China Socialist economic develooment 13/2/1962 13391 (Economic ReDort Source: Imagebank, data as of 11/10/02. Annex Table 5 140 Table 5a. Allocation of Investment Lending by Sector (%), 1993-2002 China Brazil India Indonesia Other EAP Bankwide Economic Policv 0.2 0.0 0.3 0.0 0.2 0.5 Education 3.0 17.3 8.4 13.8 13.7 10.6 Energy and Mining 19.6 2.1 17.7 16.0 22.5 14.3 Environment 4.8 5.5 2.1 2.8 2.4 3.6 Financial Sector 0.4 1.o 4.0 4.6 3.1 3.8 Global 1nformationlCommunication.s 1.I 0.0 0.4 4.7 3.2 1.o Technology Health, Nutrition and Population 3.2 9.8 17.5 7.3 6.0 8.3 Private Sector Development 0.0 2.6 2.0 1.4 2.0 3.9 Public Sector Governance 1.3 4.8 0.0 3.2 2.5 2.6 Rural Sector 24.1 17.3 19.3 6.4 1.4 14.7 Social Development 0.5 0.0 0.0 0.0 0.0 0.2 Social Protection 1.2 0.1 0.1 4.8 4.5 4.4 Transport 29.1 25.8 19.0 19.4 7.2 19.9 Urban Development 2.8 4.8 4.5 14.6 6.6 6.1 Water Supply and Sanitation 8.6 8.9 4.8 1.o 4.5 6.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Total Investment Lending (million 22762.8 8126.58 17467.9 7654.287 18307.5 146791.4 $1 Source: Business Warehouse. Data as of 12/16/02.  141 Annex Table 5 (continued) Table 5b: Project Rating by Secl Sector Board Comm. By # By Net Comm. 1998-2002 Brazil 6 818.0 50 49 67 68 17 12 China 5 558.2 100 100 100 100 100 100 India 5 812.0 100 100 100 100 80 85 Education 24 Indonesia 7 364.0 100 100 14 13 29 EAP 23 1,550.0 96 99 57 72 61 73 Bankwide 120 7,323.0 82 85 64 72 41 45 1993-1997 Brazil 1 140.0 100 100 0 0 100 100 China 5 489.6 100 100 80 88 60 61 India 0 Education 71 68 Indonesia 7 637.0 86 92 86 92 EAP 22 1,753.0 91 87 86 84 68 69 Bankwide 98 4,592.0 74 76 50 56 31 39 1998-2002 Brazil 3 484.0 100 100 100 100 67 46 China 6 1,028.9 100 100 80 93 80 93 India 12 2,731.0 58 72 55 66 58 51 Energy and Mining 35 Indonesia 7 1,040.0 43 46 0 0 43 EAP 30 3,479.0 69 68 57 54 45 52 Bankwide 131 13,818.0 68 68 59 61 46 50 1993-1997 Brazil 3 555.0 0 0 100 100 0 0 China 14 2,198.1 79 81 71 78 57 36 India 26 4,606.0 58 70 62 72 27 26 Energy and Mining 29 29 Indonesia 7 1,275.0 71 91 86 93 EAP 40 5,002.0 85 82 80 81 50 50 Bankwide 206 20,200.0 62 70 32 36 1998-2002 Brazil 3 181.0 67 80 100 100 80 China 3 564.7 67 57 100 100 36 India 4 351.0 75 60 50 36 36 Environment 0 Indonesia 2 61.0 50 76 50 76 EAP 5 625.0 60 59 80 98 33 Bankwide 41 1,819.0 78 70 77 79 40 1993-1997 Brazil 3 156.0 100 100 67 72 33 I 40 China 2 0.0 100 100 100 100 0 India 0 Environment O I Indonesia 0 EAP 2 49.0 50 61 50 61 0 0 Bankwide 9 275.0 56 74 44 58 22 29 1998-2002 Brazil 0 China 114.2 0 0 0 0 0 India 557.0 50 31 100 50 31 Financial Sector 0 Indonesia 3 256.0 0 0 0 0 EAP 12 6,331.0 50 92 92 18 23 Bankwide 70 11,920.0 711 90 87 46 50 1993-1997 Brazil 1 184.0 0 0 0 0 0 China 300.6 100 100 100 100 0 0 21 India 2 266.0 50 30 50 30 50 30 Financial Sector 37 Indonesia 4 609.0 75 61 75 61 50 EAP 12 1,465.0 55 71 55 71 25 36 Bankwide 63 8,876.0 56 58 44 53 37 47  Annex Table 5 (contined) 142 lnst Dev Impact O h Sector Board Substantial 3Y# - By Net Comm 1998-2002 Brazil 0 China 1 208.2 100 100 100 100 0 0 Global Information & India 0 Communication Indonesia 1 288.0 100 100 100 100 100 100 Technology EAP 4 536.0 100 100 100 100 50 59 Bankwide 15 1,082.0 100 100 100 100 - 73 74 1993-1997 Brazil 3 214.0 100 100 100 100 67 72 China 1 93.8 0 0 0 0 100 100 Health, Nutrition & India 4 412.0 100 100 75 88 25 12 Population Indonesia 4 212.0 75 82 100 100 50 67 EAP 7 393.0 71 67 86 76 43 60 Bankwide 47 1,688.0 68 84 55 68 - 23 32 1998-2002 Brazil 100 100 50 42 China 100 100 75 62 Health, Nutrition & India 83 85 33 34 Population Indonesia 127.0 50 95 25 57 EAP 74 60 76 36 45 Bankwide 75 58 69 - 33 39 I; 1998-2002 Brazil 810.0 100 100 67 87 67 87 China 82.6 0 0 0 0 0 0 Public Sector India 2 400.0 100 100 100 100 50 38 Governance Indonesia 2 512.0 100 100 0 0 0 0 EAP 8 1,168.0 88 93 67 84 50 41 _ _ Bankwide_. 82 5,748.0 86 91 83 91 - 60 57 1993-1997 Brazil 1 24.0 0 0 0 0 0 0 China 1 20.0 100 100 100 100 100 100 Public Sector India 0 Governance Indonesia 2 140.0 100 100 100 100 100 100 EAP 4 179.0 75 90 75 90 75 90 Bankwide 62 2,559.0 48 73 36 47 -19 34 1998-2002 Brazil 4 504.0 100 100 100 100 100 100 China 13 2,705.6 100 100 100 100 100 100 India 4 370.0 75 49 75 49 75 49 Transport 100 Indonesia 5 468 100 100 100 100 100 EAP 28 3,881.0 100 100 93 98 82 90 Bankwide 121 10,516.0 91 92 77 84 -72 76 1993-1997 Brazil 4 695.0 100 100 50 42 50 67 China 15 1,711.4 100 100 100 100 47 38 India 4 721.0 50 48 50 48 0 0 Transport 40 Indonesia 7 1,018.0 100 100 43 57 29 EAP 37 3,618.0 92 95 76 80 30 31 Bankwide 135 9,956.0 72 82 51 52 - 31 32 1993-1997 Brazil 19 1.943.0 84 72 79 79 68 41 China 11 1,531.6 82 87 73 69 36 34 India 23 2,745.0 65 67 17 21 35 39 Rural Sector Indonesia 15 999.0 73 67 40 29 33 18 EAP 42 3,161.0 74 81 55 60 38 29 B ankwide 296 15,606.0 66 74 39 48 - 33 36 1998-2002 Brazil 9 882.0 78 58 89 74 88 79 China 11 1,978.8 100 100 100 100 91 90 India 13 1,090.0 85 83 82 80 69 57 Rural Sector Indonesia 8 342.0 71 73 14 4 14 26 EAP 29 3,084.0 86 96 67 87 46 70 Bankwide 197 10,480.0 68 79 53 69 - 40  143 Annex Table 5 (continued) Sector Board # of Total Net Outcome %Satisfactory Comm. . Sustainability %Likely I lnst Dev Impact % Substantial Proj ($m) By# By NetComm. By # By Net Convn. By # By Net Comm. 1998-2002 Brazil 2 383.0 100 100 100 100 50 36 China 2 195.7 50 57 50 57 50 57 Water Supply & India 3 271.0 67 64 33 34 67 64 Sanitation Indonesia 3 317.0 100 100 33 14 33 14 EAP 8 650.0 88 87 50 38 50 39 Bankwide 60 3,815.0 59 58 42 36 31 24 1993-1997 Brazil 2 360.0 100 100 50 22 50 22 China 1 75.9 100 100 100 100 0 0 Water Supply & India 4 318.0 75 60 75 91 75 60 Sanitation Indonesia 1 42.0 100 100 0 0 0 0 EAP 7 296.0 86 87 57 64 0 0 Bankwide 47 3,248.0 60 58 32 27 23 16 Annex Table 5 (contined) 144 Table 5c: Portfolio Status Indicators: China and Comparisons Net Comm % Proj At % Commit at proi At Risk Comm At Risk Country #Proj Amt Risk Risk Brazil 52 4,899.5 7.7 6.7 4 328.4 China 97 15,400.4 5.2 2.6 5 397.1 India 67 12,725.3 9.0 8.6 6 1,093.5 Indonesia 43 3,404.6 23.3 28.8 10 979.5 EAP 242 24,868.3 13.2 8.8 32 2,197.8 Bankwide 1,435 100,075.5 18.0 16.3 258 16,280.3 Source: Business Warehouse, data as of 11/08/2002. 145 Annex Table 6 Annex Table 7 146 Table 7: China: The World Bank’s Senior Manaaement 1990 Attila Karaosmanoglu Shahid Javed Burki Edwin R. Lim 1991 Attila Karaosmanoglu Shahid Javed Burki Attila Sonmez 1992 Gautam S Kaji Shahid Javed Burki Attila Sonmez 1993 Gautam S. Kaji Shahid Javed Burki Pieter P. Bottelier 1994 Gautam S. Kaji Nicholas Hope Pieter P Bottelier 1995 Russell J. Cheetham Nicholas Hope Pieter P. Bottelier 1996 Russell J Cheetham Nicholas Hope Pieter P. Bottelier J. Khalilzadeh-Shirazi 1997 (Acting) Nicholas Hope Pieter P Bottelier 1998 Jean-Michel Severino Yukon Huang 1999 Jean-Michel Severino Yukon Huang 1999 Jemal-ud-din Kassum Yukon Huang 2000 Jemal-ud-din Kassum Yukon Huang 2001 Jemal-ud-din Kassum Yukon Huang 2002 Jemal-ud-din Kassum Yukon Huang  147 Annex Table 8 - Table 8: China Poverty and Inequality 1978 1980 1985 1990 1993 1996 1998 1999 2000 2001 OfficiaI estimate Total headcount 250 97 86 76 59 43 2.9 National (%) 26 9.2 7.5 6.4 4.8 3.4 2.3 Rural (%) 11.9 9.5 8.2 6.3 4.6 Urban (%) 0.4 0.4 0.3 0.3 0.3 PPP ($1 Total Headcount 490 375 212 223 224 204 National (%) 51 32.9 17.4 17.8 17.8 16.1 Rural (%) 44.4 24.8 26.2 27 Urban (%) 1.o 0.4 1.0 0.5 0.5 Inequality Gini coeff. 28.8a 33.5 40.3 41.6 Urbanlrural 2.9 2.7 1.9 2.2 2.7b 2.7 Urbanhural (real) 3.4 2.2 2.3 2.8b 2.7 a1981 1995 Source: World Development Indicators and China Statistical Yearbook.  Annex Table 9 148 Table 9: Millennium Development Goals: China Poverty aap at $1 a day (%l 4.4 Percentaae share of income or consumption held by poorest 20% 5.9 Prevalence of child malnutrition (% of children under 5) 17.4 12.9 9 I Percentaae of cohort reachina grade 5 (%) 86 93.8 97.3 Ratio ofvounq literate females to males (% aaes 15-24) 94.3 96.1 97 1 97 Share o f w o m e n employed in the nonaqricultural sector (%) Infant mortality rate (per 1,000 live births) 38 36.2 33 Contraceptive prevalence rate (% of women ages 15-49) 84.6 90 4 83 N u m b e r of children orphaned by H l V l A l D S 4,500.00 Incidence of tuberculosis (per 100,000 people) 103 Nationally protected areas (% of total land area) 6.4 6.4 G D P per unit of energy use (PPP $ per ka oil equivalent) 1.8 3 4 2 C 0 2 emissions (metric tons per capita) 2.1 2.6 2 5 Access to an improved water source (% of population) 71 Fixed line and mobile telephones (per 1,000 people] 5.9 35.9 120 177 Gross national income ($1 3 6 8 . 1 billion 6 2 2 . 7 billion 978.1 billion 1.1 trillic G N I per capita ($1 320 520 780 81 Adult literacv rate ( % of people aaes 1 5 and over) 76.9 80.8 83.4 84 Total fertility rate (births per woman) 2.1 1.9 1 Life expectancy at birth (years) 68.9 69.4 70 Aid (% of GNl] 0.6 0.5 0 2 0 External debt (% of GNl) 15.6 17.2 15.8 14 Investment ( % of GDP) 34.7 40.8 37.2 37 Source: World Development Indicators database, April 2002.