china and the knowledge economy seizing the 21st century ppt

‘Stimulating research and development in the enterprise sector 134 Improving evaluation, foresight, and monitoring 135 Notes 136 Chapter 9 Exploiting global knowledge 139 Attracting fore

WBI Development Studies

China and the Knowledge Economy

SEIZING THE 21st CENTURY

Resin of Financial Dstree:

An International Pereectos onthe Design of Barkraicy Lame

died by Stn Claessens, Simeon Djnnkov, Athoks Mody

Economic Anabis of tvestment Operatives Analytical Tools and Practica! Aplications Pedto Well, Jock R Anderson, Howard N, Baroum, Jobn A, Dison, Jee-Peng Tan

The Chalo of Urban Gorrament: Polen and Pract

Edited by Mila Feice and Richatd Steen Privatgation and Regulation of Tramprt Infretracare

1 "

ited by Antonio Fstache and Gines de Rus Principles of Health Economics for Deeoping Cones

William Jack Che Re Pa Lemons and Ermerine Chainer Edited by Guillermo Persy and Danny M, Leipniger Curbing Corptons Tawar « Model for Balding National Iter

Edited by Rick Stspenhurst and Sabr } Kpnndch Rasa Price Contes fr Prince ei

A Maaal for Realtor Richard Geeen and Martin Rodrigues Pardina

bbe! Bank Fairer

Provntng Bork Crist: Leos from Recent

ited by Gerard Capeo, Je, Willam C Huater, George G Kaufman, and Dany N Lespsiger Entrrie Retnctoring and Unomphymont 1 Medel of Transition

ited by Simon Commande erty ix Raia: Pabe Palcy aed Private Repos

Baied by Jent Klages

Comins om inside back cover

| China and the Knowledge Economy

Seizing the 21st Century

Carl J Dahiman Jean-Eric Aubert

‘The World Bank Washington, D.C

In acy ans and otraden undetiding fhe cpclkrceof ivi countes wih economic nd social deveopmnet

‘Along WB publi re dexgn 0 supper is ining ace, many ae ire och bade aoe,

“The fining, nerpretations, an conckaons expressed inthis bok are enc thowe ofthe autos an should not bheausbute in any manver tothe Wd Bank, os fated organizations oo meets of ts Bo of Executive Dice torso the counts they represent The Wold Hank doesnot gusaniethe accuracy of the dita inl sn his publ {ation and accepts no responsi foe any consequence of Ue use The bounds cols, denominations, and eer Infomation shown on any map i this volume donot imply onthe pat the Work Bank Group any ment om the

te status of any tery othe endorsement of aceeptance of Sich buds

"The mitral inthis publsion copyrighted The Word Bank eacorigesdsemiation of te work ape wil nor rally grat person 0 reproduce potions ofthe work proms ermsson to hoxocopy ems for lternal or personal we, forthe internal or personal use of specie ens for cational clissoom we 6 ganied bythe World Hank, proved atthe appropriate ee pail dec to the Copy

‘ht Clearance Cente, nc, 222 Rowewood Dave, Danvers MA 01928, USA; telephone 9782508400, lay 978 750-H00, Please contact the Copyright Clearance Center before photocopying tems

For permission to eprint nial ails, or chapter please faa eet wi complete information the Rep aon Depart, Copyright Clearance Cntr fx 974-730-470

‘All other queries on rights apd lenses shoul be aed tớ thế Of of he Publisher Word Hank, at headdress tse fine 0 202522-222-

a), Dahman sed pci nthe Knomledge Networks al sane ang sion fhe Wd nk zine He was sor of he Wed Despont prt 19899 Kale and Infra for Delon

eam Esic Auber cently a senor policy adviser in the Knowle Networks and Distance Learning vision of the Work nk Inte on eave from the Onsniaton for eononse Co-operation and Developmen where he specialize sc ence, technology, and ianoaton polices

‘Cover photo of Shang, China by Bl Ks,

A Chinese ction fothcoming fom Being Universty Press

LUbary of Congress Catalogingin Publi Data

Dain, Ca, 1950

‘hie and the howe economy: slang the 25 century / Cl Daman, Jeane Aube

ent = CW development sus)

Incdes biblograpica references,

SUN 0821550055

1 Knowledge management ~ China 2 Information technology-Ciea-Managemert 3

“Technolog innovations Economic aspert-China 4 Technology and sate-China

5 Education and sate-Chia 6 China-Economie conions-200-1 Aubert,

—

D402 Đặt 2001

—

ADIs

Cina has mae impressive achkevements a economic growth and ponent reduc

tion over the ast quarer century, Now it faces daunting internal halle

‘as ensuring employment to millions over the coming decal, continuing to natin-

tain high growth, incresng is international competivencs, and reducing income

and regional inequalities, Compounding these challenges isthe new knowledge

and information revalution To pasper in this new ert, Chin must welcome

the Knowledge revolution and make effective use of knowledge in 5 ayieuk-

‘ral and industri sectors an especially in developing its service industry, Chia

also needs 19 manaye the trinstion to an eavimamentally sustainable eeono-

my that better izes its relatively Himited manual esources

This book outlines the main challenges that China faces in its fature devel

‘opment, an! the importance of shifting from a factorbase to a krowledue based

ssrategy I presents long tem stateuy for Cina tat integrates key knowledge

related policy components, improving relevant economic incentives and inst

tations, upgrading the education and taining system, baling the information

fnfrasractre, and Srenhening the innewation an esearch syste, comets

boy suggesting concrete steps for implementing the propasee! srategy

Tio tke advanage of this unprecedented! opportunity, the book rocommenkls

thả de goverment wu further fem hand-on marsagemens of he economy

nel take on # new roke—that of anarchist of appropriate instnutons and prowier

of incentives to establish a new socalst marker eonnonny based on knowledge:

(China anu te Knowledge Beamon Seizing the 215 Century bas been devel

‘oped by the World Bank Institute in collaboration with the East Asia ancl Paci

4c Region of the World Bank These two groups have been working closely

together over the past yets 19 suppom East Asian countries in developing

kknowlecge strategies ancl pioneering new approaches to remain competitive

in the Knorledge Eronomy Our hope is that this book will provide useful

insights for Chinese policymakers andl other countries 3s they embark on tans

forming their economies to ones based on knowledge

‘World Bank Institute Eas Asia and Pacific Region, World Bank

‘This repo, which was prepared at the sequest ofthe Chinese Government {sa significantly expanded and analytically enriched versio of the report enti> led China's Development Strategy: The Krowiealg ana hnmovation Perpectioe submitted to the Chinese Government in Sepuember 2000 a8 an input into the development of China's 10th Five-Year Plan 1is the result of a collaborative effort between the Fast Asia Vice Presidency of the World Bank and the World Bank lnsttute Funding for the swdy was provided by the Human Develop iment Network of the East Asia Vice Presidency’ of the World Bank

vie Aubert Reseach

‘This repo was prepared by Cal J Dahman and Je

and analytical syppon was provided hy Dou

‘hibua Zeng, Subsantal com

Leburions were mace by Chaisine Zhen-Wei Qiang, who prepared the chapser

‘onthe information infrasnucture, Ania Adhat Uz and Prank Popp Adainiscive assistance was provided by Leons Luo and Lansong Zhang (of the World Bankes China Office), Megan Broece, and Nonna Iseva, Bruce Ross Lason and the rest

of the

‘Weare very gto Austin I and Deepak Bhatti from the Woda Bank's

1 from Comennniestions Development edited and li out the tex

‘China Office for ther guidance during this process, and to our various Chinese

‘counterparts for their insightful comments and valuable conssibutions, Sincere thanks go to Shuiin Wang ofthe State Council Office for Restructuring Eeooomic System for oganizing a review meeting forthe port in Belington June 14, 2001 During the course of preparing dis repo several missions visited five Chi nese cities Beijing, Guiyang, Shanghai, Suzhou, ane! Wuhan) to collet infor

‘mation and conduct broad consult fons with Chinese officials, entrepreneurs,

owned enterprises, scientists, diplomas, and staff from

‘ang, Ministry of Education, and Huiiooy Wang, Development Research Cen ter ofthe Sue Council Useful comments have also been received ont Justin Lin, Peking University, Nos Li State Counesl Research Office and from Xiuyu CChen, Ministry of Information Industries

“The report also benefited from an internal Bank review on June 20, 2001 chained by Maureen Law, Sector Director, Human Development Network, East Asia and Pacific Region Valuable contributions and comments were received from Charles Abelmann, Halsey Beemer, Jin He, Abert Ketel, Toby Linden, Saha Meyanathan, Alan Ruby, David Scott, ames Socknat, orn Welle

a from »wo external reviewers: Geoffrey Oldham, Sc cence Policy Research Uni, University of Sussex and Richard Suttmeier, Un versity of Oregon

Special thanks goto the authors of the

ickground documents prepared for the September 2000 repor, including Zhaoying Chen, National Center for Sci cence and Technology Evaluation, Ruichun Duan, Minisuy of Seience and Tech nology, Xin Fang, Chinese Acidemy of Sciences, Zhouying Jin, Chinese Academy of Social Sciences, Nuelin Liu, Ministry of Science and Technology, Junxiang Wang, Stale Economic and Trade Commission, Lan Nu, Tsing Ue

versity, and Vansheng Zhang, State Development and Planning Commission,

Abbreviations and currency equivalents xiv

Executive Summary xv

Chapter 4 Catching up with the advanced countrles 4

Daunting challenges ahead 2

Positioning China in the global knowledge revolution 3

Building the foundations for a knowledge economy 3

Using knowledge for China's development 3

Changing the role of government 4

Structure of the report 5

Notes 7

Part 1 Challenges to China's future 9

Chapter 2 Ensuring China's development 44

Four continuing transformations 42

Four daunting challenges 48,

‘The need for a new economic development strategy 23

Notes 26

Chapter 3 Positioning China in the global knowledge revolution 29

‘The knowiédge revolution and global competition 28,

‘The growing importance of knowledge 34

What's going on worldwide? Global tends in knowledge 34

Assessing China's situation 38

Knowledge disparities across China 48

Notes 48

Part 2 Building the foundations of the knowledge economy 49 Chapter 4 Updating economic Incentives and Institutions 51 Establishing a more formal and transparent rule of law 52

Enhancing labor's flexibility 63

‘Strengthening the financial sector 64 Notes 68

Chapter 5 Investing in China’s human capital 69 Strategic gozls and issues 70

Adapting basic education 73 Expanding higher education 78 Building 2 technology-based national learning framework 78 Establishing large retraining programs 79

Notes 81 [Chapter 6 Building the information infrastructure 83 Overview of China's ICT market 83

Regulating China's ICTs 88, Developing network infrastructure and information content — 9 Developing effective ecommerce 93

Applying ICTs to enhance Chinese public services 95, Notes 96

Part 3 Raising the technological level of the economy 401

‘Chapter 7 Diffusing technology throughout the economy 103 Technological weaknesses and disparities 403

Strengthening markets for technology dissemination 407 Redirecting technology-elated policies 107

Redeploying government programs for technology diffusion 108 Stimulating innovation in enterprises 143,

Promoting innovation sites and clusters 445

Strengthening the contribution of higher education institutions 434

‘Stimulating research and development in the enterprise sector 134

Improving evaluation, foresight, and monitoring 135

Notes 136

Chapter 9 Exploiting global knowledge 139

Attracting foreign direct investment 139

Engaging in international technology trade 446

Intemational collaboration in research and scientific initives 448

Tapping Chinese talent abroad 150

Notes 183

Chapter 40 Moving to action 155,

Defining priorities and related budgets 156

[Adopting a systemic approach, coordinated atthe highest level 460

Mobilizing local governments 264

Multipying experiments and evaluations 162

Conclusion — 164

Notes 165

References 167

Boxes

1 riot actions in moving toward the knowledge economy xxv

LA Key elements of a knowiedgetvased economy — 4

2.1 Highlignts of China’s Tenth Five-Year Plan (2001-05) 44

2.2 Aovession to the Werld Trade Organization entalls

important changes 20

2.3 Balancing growth and environmental sustainability 25

3⁄4 Country knowiedge stratogies 33

3.2 Knowledge management within rms 34

3.3 The national innovation system 42

4.1 Governance matters: How ineffective

policy administration hampers growth 58

4.2 Incentives and regulations to improve sustainability 87

4.3 Government support for smaller enterprises 6

4.4 Critical issues for developing venture capital in China 68

5.1 Basic facts on China's education system 72

5.2 Measuring educational achievements 72

5.3 Motorola's taining program in China 78

5.4 The United Kingdom's National Grid for Learning 80

6.1 China Telecommunications Regulation—September 2000 86

6.2 Telecom regulation: The U.S and Canadian experiences 89 7.1 How the most technologically advanced country in

the middle ages missed the industrial revolution 104 7.2 Improving the infrastructure for echnical standards 408 7.3 Development of hightechnology parks 408

7A Conditions for efficient technology diffusion programs 140 7.5 Knowledge management for enterprises 144

7.6 From miltary to civlian technologies 444 7.7 Sushou Technology Pork 447

7.8 The importance of regional clustering in OECD economies 447 8.1 Transformation of government institutes 126

8/2 Anovaluation of Program 863.4127 8.3 The National Natural Science Foundation 229 8.4 The decline of China’s agricultural research 130 8.5 Elite Chinese universities are key actors

in the knowledge economy 132 9.4 Foreign investment generating domestic industry 440 9.2 Nokia's global presence 146

9.3 Existing policies concerning overseas Chinese talent 462 10.1 Mass training for the knowledgebased economy 187 10.2 Implementing Finland and the Republic of Korea's

knowledge strategies 461

10.3 China's preferential policies for the development

fof the western region 164

capita, and tertiary enrollment rates (1998 PPP) 4d

2.2 Chinas increasing its share of world wade 42 2.3 China's output stucture, 1978-2020 43 2.4 China's employment structure, 1978-2020 44 2.5 Agiculture productivity versus GDP per capita for China

‘and other countries, 1979-81 compared to 1996-98 48 2.8 Manufacturing productivity versus GDP per capita,

1980-84 compared with 1995-99 19

2.7 China's labor productivity 1987-97 49

3.4 Protection of intellectual property on the rise:

patents granted by the U.S Patent Office 30

3.2 Woridwide payments of royalty and license fees, 1979-99 37

3.3 Knowledge scorecards for China and the United States 39

44 The private sector, developing in China 88

5.1 Enrollment ratios, selected countries 70

7.1 Industrial enterprise performances,

domestic and foreign-unded 105

7.2 Cereal yields in Chinese regions 406

8.1 China's research and development effort

inthe world perspective 4122

9.1 Total FDI: Top five countries 44

9.2 FDI stocks and flows bysector 442

9.3 FDI in China by source country, 1979-98 4⁄43

1.1 GDP per capita by selected country or region, year 0-198 2

2.1 Number and share of workers in manufacturing industries,

selected years 47

2.2 Gereal yields, selected counties 48

2⁄4 China's export structure by main categories 21

24 China's top 40 export commodities, 1997-98 24

2.5 China's overall competitiveness 22

2.6 China's regional income disparities, 1998 22

2.7 Trends in household income inequality,

China versus other regions 23

2.8 Natural resources per capita—how China compares,

with the world 24

2.9 Responding to the challenges with aknowledgebased strategy 24

2.4 Increased share of rade in global GDP 34

3.2 Value-added of knowledge-based industries, OECD counties 32

3.3 Employment is low in China's knowledgeintensive services 32

3.4 Gross domestic expenditures on R&D as.a%of GDP 38

3.5 RAD effort in selected countries, by Income level 38

3.6 Intangibles overtaking the tangles 36

ar

38

39

440 4a

42

43 4a

SA s2

sa 6+

s2

63

64 s5

Tả

aa s2 a3

Ba a5 s6

‘of educational atainment 38 Vast differences in knowledge across Chinese provinces 44 Growth of GDP per capita and its sources

in seven Chinese provinces 45

‘Structure of employment, by ype of ownership in China 59 Best practice in SME promotion 64

The banking sector—China and the rest of the world 68

‘Stock market development—China compared with the rest of the wodd 68

Differences between traditional and new teeching strategies and workplaces 69

Education expenditure 26 a share of GDP, selected counties 74 China's higher education system, 1998 76

ICT penetration, selected countries and regions 84 Market structure of telecoms sectors in China 87 Competitive environment in telecoms segments,

‘selected countries and regions 87 Telecom tariff structure, selected countries and regions 89 WTO requirements and timetable for foreign

Investment in telecoms 90 Productivity inion and steel, selected counties 406 Chinese research and development spending 42

China's spending on research and development compared with the world, 1996 421 Research and development spending by performing organizations 428 Personnel involved in R&O 125 Government funding of research and development programs, 1997 128

Funding of R&D within the enterprise sector 134 Barriers to foreign involvement in the Chinese service sector 142 FDIin China by region 445

Imports by sector, 1985-88 147 Licensing fees by country 148 Domestic R&D versus foreign technology spending

in large and medium-sized Chinese industrial enterprises 448 Chinese personnel involved in international science

‘and technology cooperation 150

9.7 Foreign doctoral recipients from U.S universities

with frm plans to stay in the United States, 1995-97 451

9.8 Overseas Chinese share af population, GOP

(selected countries) 152

10.1 Shanghai's knowledge strategy 163

‘Appendix tables

2.1 Changes inthe urvan employment structure, 1990-89 27

3.1 Foreign direct investment in the global economy 46

3.2 Employment in China's hightech industries 46

7.4 Summary of China's technology programs 420

HEIs ICRG ict imp

China Aecelersted Management Progam Directorate General of Telecommunication Engineering Technology Research Center

Knowledge-based economy

Minisry of Information key Mulbinational comorations Ministry of Baducation Ministry of Science and Technology

National engineering research centers

‘National engineering technology research centers National Natural Science Foundation

Township and

‘World Bank Instiute World Health Organization World Trade Ong

age enterprises

For a lage part ofthe last ro millennia, China was the world's largest ant

most advanced economy, Then it missed the Industrial Revolution al sta

nated, Only after opening to the outside world tn 1979 was China's econom,

fe performance again impressive And its achievements in increasing welfare

and reducing poverty are unparalleled But China cannot sstain sch progiess

‘without major changes in ts development strtegy

the tenth

as elaborated seventy in

China faces daunting internal challenges compounded by the knowles

and information revolution, To overconse these challenges the Chinese gov

ferment must uke on new role t© quickly exploit the knowledge revolu-

‘on architect of appropriate institutions ane provider of incentives to promexe

and regulate a new socialist market economy based! on knowledge

China's srategy will have to baud solid foundations fora knowledge-based

economy by:

Updating the economic and insttional regime

Upgrading education and learning

Building information infrastructure

CChina must also aise the technology

Dis

‘+ Improving the research and de

‘+ Exploiting global knowledge

Level ofthe economy’ by

ing new technologies actively throughout the economy’

opment system

FACING DAUIVEENG INTERNAT ch

‘China faces two dramatic economic wansions from an agicutural to an inlus-

trial and service econonny—an from 3 command 10 4 socialist market econ:

‘omy In addition, i faces oxher challenges dae to is Targe size and present

growth tectory

Psovive eumtorsenr

In this decade, conservative estimates place necessary jb creation within China

1 90 (0 100 millon to tke in the projected 40 0 49 milion people released

China faces daunting Internat challenges

compounded by the knowledge and information

revolution

‘eymakers’ ist of prioiies,

‘Most jobs created have come from low-skill industries But China's share

in services is smaller than would be expected for a country at China's stage

‘of development due to past policy biases toward industry and against the serv- Most new jobs will be in informal service employment and basic ina structure services (construction, transport, clecommunications), retailing, tourism, and commerce But many should also bein small, private high-value Dusinessservices—such as marketing logistics, distribution, financial, consulting, and management And many should be in other professional services histor ically underdeveloped in China but critical in knowledge-hased economies MAISTAISING GROWTH AND INTERNATIONAL COMPETTIVENESS

‘China's fast growth has been possible thanks to shifts of workers and resources {rom low productivity agriculture to industey—and to very high rates of both

‘domestic and foreign investment, But maintaining economic growth will be lfficut with the drag of lange, inefficient state-owned enterprises and finan

‘ial sector burdened with nonperforming loans Furthermore, according to some rankings China's international compet: tiveness is declining, so it needs to improve its productivity Average worker productivity in agriculture is mere 0.9% that in the United States; in manu: facturing is 3.6% Ironically China boosts productivity it will ned less labor,

‘exacerbating unemployment, unless there is increased demand for Chinese

‘goods and services, A critical element of China's new strategy will be to diver sify its goods and services by taking advantage of new knowledge

Repucive Income AND auGrONAL INeQuALiNIES

‘China’s fast yrowth has been concentrated in the coastal regions, those most

‘open to international trade and receiving the most foreign direct investment

‘GDP growth rates inthe central and western provinces have been significantly slower Inequalities are also growing, Some people have access to capital, ed

‘ation, and other assets—and connections to use them (© exploit business

‘opportunites Others stil ely primarily on their own labor in subsistence agi-

‘culture or in Iow-productivity enterprise

China's ve is exceptional It is a very large country with considerable

spares among regions, cities, and industries, The tie world coexists with

the fist world in China's advanced regions fn the vibrant ees of the eas,

extremely dynamic enterprises and universities operate in high tech parks ben-

citing from band new infrastructure In neatby’ cies, and of course fn dis:

tant western provinces, povery is broadly spread, not only in terms of income

buralso in knowledge, education, and information infestauctare, Any know

cụ strategy will have to take full account of such diversity

`

dey caded water quality has damaged aggiculture, ecasystems, and fisheries —

‘with air pollution becoming a serious threat to the economy and the people

More than 2 million deaths oceur each year from air and water pollution, the

result of pk! industalization and urbanization, The depletion of China's

already scant supply of foress, water stocks, and other natural resources is

dling tothe sigificant constants on the enormous population China mast

away from resource intensive development and move efficent into ser

cs and knowledge-based development

(Coxrnoxnne THE GLOMAL KNOWLEDGE REVOLUTION

Adding to the challenge of China's development isthe “revolution” in the pro:

duction and dissemination of knowledge, Bilective use of policy and techni-

cal knowledge has always determines the process of economic development

explaining in ta

Tokay that knowledge is even more important

Advances in scientific al technical knowledge make possible the infor

part the dilflerences in counties’ levels of development

+ Dighization and informatization of numerous aetvities reduce teinsaction

coats and inerease productivity

“These trends herald a new era charcterized by

+ Development ofa service-based economy, with activites demanding intel

Fecal content becoming more pervasive and decisive

= Increased emphasis on higher education and life-long learning to make

effective use of the rapidly expanding knowledge base

China must shift away from resource-intensive development and move efficiently into services and knowledge-based development

China has to open

more and hamess

the forces shaping

‘the global economy,

+ Intensifi jon of competition between enterprises and nations based on

‘new product design, marketing methods, and organizational forms

‘= Continual restructuring of economies to cope with constant change, Knowledge and information are thus becoming the key drivers of inter:

‘national competitiveness and the global economy, making it crucial to respond rapidly and efficiently to changes Parly as a result ofa high growth rate, but also because of the knowledge revolution, China faces a period of wrench {ng and continual restructuring affecting all sectors, as noted in the tenth five- year plan,

‘To compete and prosper in this new environment, Chins has to open more sand! harness the forces shaping the global economy, leapfrogging 1 take advan- tage of rapidly evolving technologies It must welcome the knowledge revo- ution, which, though t presents considerable challenges, also grant significant

‘opportunities to make China's development sustainable by:

* Improving competitiveness of existing agriculture, industy, and services — and saving jobs

+ Developing new activities, services in panicular, to create new jobs and new sources of wealth

‘+ Fuciltating the tansition toa more sustainable and environmentally friend

ly economy that makes more effective use of China's relatively limited natu-

ADAPTING CHINA'S DEVELOPMENT STRATEGY

China has already taken a number of measures to cope with these challenges and exploit these opportunities, Science, technology and education were put the forefront of development policy in the mid-1990s Investments in infor-

‘mation infrastructure have been considerable, and a reform process is active-

ly pursued in a myriad of fies to adapt the economy and society and prepare them to enter the World Trade Organization (WTO),

‘China's tenth five-year plan clearly focuses on economic development and restructuring (aggely moving out of agriculture, upgrading industry, and mov- ing into services) It emphasizes dealing with inequality and regional immbal- ances, sustainability, social security, and continuing market reform Science, technology, and education are again given a prominent role for diving the change The plan spells out China's goals, but does not detail a path to achieve them, This report offers specific policy recommendations in the con- text ofthe broader ideological and political shift needed to address the grow ing social, poiical, and economic pressures ofthe 21st century

significant role through control of some 70% of the national budget and

through inf

aspects of Chinese society 1ce on local enterprises, juliciary systems, schools, and other

LUnpariNe FCONOMIC INCENTIVES AND INSIRIUTIONS

‘The main change will he she new tole for the sate, The goverment must

move fanher from controller andl producer to becoming the architect ofa new

socialist market and knowledge-based syster, a system that is more sel-re

lating trough apprepr te aurket-supporting institutions, The govesment

thas already heen engaged! tn a vast array of bold structural reforms to adapt

the Chinese economy Masket-supposing intitions need te be actively built

fn six areas that support and shape a vibrant knowledge-based economy

1 Sirengtbortng be kal and eda freon for supponing enmeprenenrial

capabilites To 1p te creative and entrepreneurial capability of people, ti

Important to establish a clear rile of law and clear propery eights that allow

people 1 enter contetts and expect that they will be honored, This requines

et ust transparent and sable mles bạt ao thee fair enforcement, ih no excep

tions oF special privleyes This also means reducing all form of bureaucracy

‘hur impede innovation, Much farther progress is needed on all dese issues

+ Promoting economic competition, Proving stronger pressure 10 make effec

Live use of knowledge for development involves reducing harsets to foreign

trade, which China is addressing by joining the WTO But itis also necessary

to reduce the intemal bases to the free Now of yoods and services across

Chinese provinces —and establish effective competition-promoting agencies

to address domestic and foreign competition

1+ Sirengghening the nancial ystem Finance—and the key institutions and

rules that regulate are the “brains” of a market and knowledge-base! econ

‘omy, heeause they process information to allocate capital 10 its most efficient

use, What does this require? Improving the risk assessment and supervision

capability of banks Developing an effective stock market with appropriate

cdkelosune mules and safeguards against insider tauling and elfecive governance

of traded firms and financial intetmediates, ‘ncouraging the venture capital

‘market—to Finance entrepreneurs with new ideas, And pasting in place app

priate bankruptey legisation to redeploy the productive assets ofiled enter

prises to new evonomie uses

© Factttating tabor market flesbiity The rapid transition from an agdedl

tural to an flustial economty ane now to service ecomomy—compound

ce by China's eventual full accession to the WTO—creates a massive need

‘The goverment must

‘move farther from controller and producer to becoming the architect of a new socialist market and knowledge-based economy

Improving education

is perhaps the most

critical reform for the

medium and long runs

for mobile labor Bu is bor market is severely constrained by rules reste ingg modbility—aod by the old system that Hed the health snd housing bene- Fis 10 enterprises

+ Devoloping an effective social security system Reforms in the unemploy sent insurance snd pensions systems are entcal 10 ensure that labor is rede- ployed to more productive activites, twill be necessary to fatliate productive

‘employment ofthe millions of workers not yet part ofthe formal employment system, particulary the lange floating population in urban areas and the mil lions of underemployed in agriculture

1+ Prometing the grove of small ancl medium-size enterprises key element

‘of the employment promotion strategy should be promoting small and medi tumsize industries Proactive measures wil a mvore even playing field boy reducing the biases toward lange state-owned indastaes and encouraging slevelopment of small and medium size indastries across all economic sectors, These measures include reducing the regulatory hunlles to establishing new enterprises and providing them access to finance, technical an marketing infor nation, andl Iusiness skills

Higher education and greater skills are fundamental in a knowledge econo: my: But despite tremendous improvements, the average educational achleve-

‘nent i China is sil ow, Ths is perhaps the most critical reform forthe meat

ul long rns, China is endowed with a ganic and growing population, the

‘aw material for a knowledge economy, Bur people must be educated and taught to be ereative, withthe ability to learn through thet lives,

Centuries of Confucian tition, decades of planes economy regime, and emphasis on rote fearing rather than creative thinking has shaped Chinese philosophies and methods of teaching Most government support has gone

tw basic education, ceating a very iterate population, Now there {8 demand for well rained, state-of the an, husiness-oriented peopl This demand is being satisfied by a thriving pri cate higher education sector, which, for ideological reasons, is not offically ecognized

Some of the mujor initiatives needed:

+ Modemmize the curriculum at all levels to provide the new basic sills that the knowledge economy demands, Beyond solid core skills in eeading

‘writing, and arithmetic are computer and Internet skillsand the ability t0

think creatively t0 be able to adjust © constantly changing job needs and sal mises

4+ Increase the efficiency of current spending by introducing bet indicators

+ Integrate the private higher education system into the official system

+ Redirect the national ang provincial miniies of education from primar

ly providing education w assuring the quality ofthe educational system and

facitating its proper functioning, paniculaly for higher education

+ Focus on equity and develop programs to ensure that talented but poor

students have access 10 education, espectly to higher education,

+ Renovate the training sax! vocational education system to make st more

responsive to local business needs and iniatives,

+ Provide retraining programs forthe millions of displaced workers so they

‘can find akernative preduetive jobs,

+ Tap the enormous potential of Intemet- based education to provide the

above-mentioned skills and fo expand the outeeach of formal education

atall levels, making use of an already well-developed distance learning

Infessirucrare

Dynamic telecommunications and information infrasinicure is eritieal for

Jeaplrogging into the knowledge economy, something the tenth five-year plan

‘does not emphasize suicienly, Such infrastructure redices tnsaction cost,

provides economies of scale and overcomes some constants of diane Chins

sill lags behing miost East Asian courses in telephones, computer, and Inter

pet connections pet capita

Most of the economy has Linited and poor quality secess to information

lnfrasteucture, Some actions to imiprove the situston include

+ Promote greater competition hy father opening markets dominate by Chis

Telecom and ether state-owned enterprises

+ Create an independent regulatory body

+ Open more to foreign favesiment as a source of capital and technical exper

ise for information technology services

+ Expand Intemet access and promote development of dontestic content on

the Internet

+ Promote greater use of information and communication technologies

throughout the economy, such as: giving technica stppport fo small and

medium size enterprises improning the efficiency ofthe banking system, inca

ing electronic banking, payment systems, an national ened rating system

and delivering Internettuased education and beak services,

‘© Promote electronic commerce—husiness to consumer and business 10

business This will equite electronic payments systems, secuity, electronse

signanunes, and proper legal Framework to setle domestic an international

electronic commerce disputes

China needs to promote greater use

of information and communication technologies throughout the

‘economy

There Is a need to

Promote massive raining in information and communication technologies Dirrusine TECHNOLOGY THROUGHOUT THE PeONOMY

“Modern industrial infrastructures have been primarly concentrated in some fity

“high tech” parks esabished along the cous But these are smal skids in the less productive economy There is @ need 10 dramatically improve dissemina- tion and use of technology and related knowledge, including greater transfer of knowledge from the mos efficient producers in each sector to the least efficient Performance disparities within industries among the differen regions ane dant ing and contribute to severe economic and socal tensions

| better functioning market economy system is a prerequisite for efficient knowledge and technology dissemination The most effective means of dis semination are expansion of efficient enterprise and promotion of private sup-

plier-—of equipment, specialized inputs, and technical and managerial services for all sectors Upgrading the economic incentive nl instnutional regime, as out- lined above, i critical to simulate the growth of these speciilized providers and faciliate access to the capital and other resources they need to grow and thrive

‘To complement this market-based! technology diflusion process the gov

‘emment, working in concer with local and provincial governments and through joint Funding, should:

+ Give higher priority and g

x resources 10 technology dissemination schemes: engineering, research and productivity centers, renovated programs for rural industries, extension services in agriculture, and regional technical

‘centers to suppor small and medium

‘+ Further suppor—by appropriate, decentralized funding schemes—t inno- vative enterprises, particularly inthe small-scale sector

+ Facilitate the establishment of incubators—which can support new tech- nology-based enterprises throughout the country—and the development of

ize enterprises

regional clusters forthe renewal of local economies

‘+ Strengthen the development and use of technical standards, a ential

‘mechanism to stimulate the diffusion of modern technologies, but consider ably neglected in China

[STRENGTHENING THE RESEARCH AND DEVELOPMENT SYSTEM

Important and drastic reforms have been implemented over the past decade {0 adapt the R&D system inherited from the planned economic regime and

to reorlent the research effort by launching government programs These actions

‘have contributed to dynamic and fui iterations among all actos, but prob

Jems remain In the rush to the market the government has strongly reduced

funeling for government insures and encouraged them to privatize But it

may have gone too fa Basic and precompetitive re sacl and areas of spe

ial social concern, such as heath and environmental research—ate uncle

fonded Moreover, government R&D programs are being designed and

implemented with no involvement of the enterprise sector and other endaser,

‘The government should:

+ Increase public support for basic research and channel more pubic

reseuich funds to such pressing problems as promoting agriculure, provet

ing the environment, and exploiting China’s traditional enh

+ Reform applied and technical government R&D programs and involve enter

prises in their design and implementation

‘+ Use technology foresight to identify areas where China should allocate

its research efforts while improving the monivorin

‘+ suengthen the research capabilities at Chinese universities an! better reg

ulate their relations with the market

‘© Encourage the productive sector to do more research on is own by incen-

tives directed to smaller enterprises ancl improves government progam,

‘+ Support greater collaboration among dowestc researchers and with for

‘ign researchers through expanded! bilateral programs and development of

information technology-based research ne«wvorks,

‘+ Promote greater awareness of the importince of intellecuual property

rights and encourage Chinese researchers and companies 10 patent mone—

in China and abroad—to protect their interests

[EXPLOING GLOBAL KNOWLEDGE

‘One reason forthe rapid increase in global knowledge is the massive invest

ment in global RSD China's RAD spending is only 0.66% of the work's, 5

China needs to tap into the rapidly growing sock of wlobal knowledge Since

‘opening to the world, China has heen importing more capital ooxs, com

ponents, and high technology products—and increasing foreiga direct invest

ment, technology lensing, foreign study, copying and reverse-engineering,

tnd acquiring technical publications, The tenth five-year plan appropriately

emphasizes opening even more to the outse work, but China could he even

more aggressive by

+ Improving he general business climate, the rule of law, ane! the enforcement

‘of ingelecual property sighs

important considerations for foreign investors,

‘The government should increase public support for basic research, encourage the productive sector to

do more research on Its own, and promote greater awareness of the Importance of intellectual property rights

China will have to

find its own way

of resolving the

tensions and contradictions

of moving fom

Its past legacy

+ A ting foreign investment in ateas of strategic interest to China, So far foreign investment has been concentrated in manufacturing activites, along the coast, and more than 6096 has been of Chinese origin (Hong Kong, China;

“Macao; Singapore: and Taiwan, China) Measures need to be taken to diver Sify sectoral distribution and origin of foreign investment,

+ Opening more to foreign investment in services Foreign investors have temen- dous experts in finance, insurance, logistics sourcing, marketing, dsbation, cus tomer relations, branding, taining, consulting, RAD, and managing intelectual ipitaand China needs to take advantage of al ofthis intangible knowledge

‘Being more proactive in acquiring disembodied technology through licens- ing and other payments instead of relying so strongly on technology embod- ied in capital goods,

‘= Developing more strategic alliances with multinational corporations, par- ticularly before fully opening to free foreign investment inflows—to build domestic capability in critical areas

‘+ Underking more joint publicand private research with foreign fms nel pub- lic R&D centers and buying foreign companies and research labs to aoquie for- ign knowledge, as was done by Japan the Republic of Korea, and Taiwan, Cina

‘+ Tumingtbe Chinese brain drain ino a brain gain (ofthe 330,000 students recens-

ly sent overseas for taining, only 110,000 returned) and using the technical and manager cacy ofthe overs Chinese community by providing a very rocep- tive domestic environment to tum their ideas an expertise into value in China

Movine 10 actos This report has along list of recommendations These include reforms that are fusly easy to implement and need no additonal resources—only a change:

‘of emphasis oF policy The list also includes reforms that need financial resources, equiting budgetary priorities, as well as reforms that requite major policy and political shifts Perhaps the most dificult recommendations are the proposed change of the role of the government, the development of a dynam-

ie private sector, and the establishment of a clear rule of law

Such changes cannot happen overnight They require a change of mind set that may not be consistent with past ideology’ and practice And there is delicate balance to be achieved Moving t00 fast could risk social and polic ical stability because of the adjustment costs But moving too slowly could

‘cause social instability because of the pressure of rising unemployment

“There is thus no readymade solution China should look atthe experiences

‘of others and adapt them to its context China will have to find its own way

‘of resolving the tensions and contradictions of moving from its past legacy to respond to the new demands Some suggestions:

‘+ Priontizing and budgeting Though refoems inal policy planks must proceed

together in a systemic way, seting priorities and sequencing eforms in each of

these planks are also indispensable This requires identifying the most pressing

‘problems and the best solutions, with an estimate of resources needed and poten

‘al financing (including from the private sectors ancl foreign investor), Prot actions

are suggested below (box 1) Most ofthese measures have low cost inthe short

rin They have heen selected because oftheir leverage on job creation he most

Important challenge that China faces in the shor and medium terms The proposed

actions have ako been selected with a view to mobilizing resources for longer-

tem massive investments The measies, which mostly address improving the inti

tutional and regulatory framework afecting the clifferent policy planks, will help

involve non-state actors in all key ares: the innovation system, infomation ina:

stevcture, and education The efficiencyof the economy should then be inreased

faciating funding for more expensive longer-term investments

* Coordinating action Promoting a knowledge economy, as most successful

countries have shown, requires coordinated action across multiple domains

Priority actions in moving toward the knowledge economy

+ Puce reform fhe econo incertive and isto ep though de núc

‘of aw ad is enforcement, property righ clearer regulatory famework

Stronger econ competion, and exacting poll Infuences fron buss

management

+ “Take wep toward fuer reform of the education sytem, suing with a nation

Wie evaluation of stent ersey adapted to knowlege economy requiement

sabe regulations tht fara teration of he pate set othe otal

cation sem sad expt opportunities for 3 learning gel ase on infor

«improve the regulatory framework for he ieforation infrastruc, wi mi

envesreatey agency prmse greater competion i the mop sk

{els make, open ip more Illy orien sven, provide greater Fe

‘dom on the Intret sid expand acces 1 i

+ ile ne ecient the concen by stengcning techni sin

Cực vi lo infest, suppening ew lưycee am her ages of

technology dsennation, sed multiplying local supp states nation

sd tects asc

Reform goverment research and đecloprenl prgrams to ign the business

esto, nctease "core undng a selected networks of pbc and ners ti

filer ce rch forehead chicos Wil lpn fr

‘i ad Chinese exptiateexpents

+ rat orig investors in tale ares, parca service sect cate gb

ltechnelogieaallanes for Chinese extexpries: and inten Incentives for Chi

te heen core ne

+ Promote mnsive taining of public officials io adap the management of the ecm

‘my aad sect to more knee aed development the ow pay cakes

ta big evel cl servis, gonernnen og mages, and goverment ll

‘als om provincial ens

In each of these planks are also indispensable

China's leadership

‘must not waver in

driving this transition

‘central, provincia, county, and municipal eves, Fast developing regions in Chins (Gnd elsewhere) have clearly designed and implemented integrated progres

1 Sharing experiences Given China's wemendous diversi, ateady has may

provinces or even smaller regions, Seeing what otters have accomplished can forums for exchanging sich experiences across

motivate local governments: act + Experimenting with reforms and programs Following a welLesablshed Chinese practice, learning what works best under different circumstances and

ne successful eases iS another important way to affect dhs

then expanding transition, This should be done mote aggressively by launching coherent peo grams to promote more effective use of knowledge in specific regions, bald

Wd see how it can leverage its resources and those

as foreign investment and inte

‘of he grossing private domestic sector—as wel national finance

China's leadership mist not waver in deving this transition or backtrack

ry, bat beet

For along par of hisiory, China was the largest anal most advanced economy

in the world Over the past 2000 years China's share of global GDP hovered!

around 25% unl the fate 1700s, I 1820 China accounted for 33% global GDP,

‘Then for 182) to 1950 kt suffered reat intemal se and foreign exploitation,

lis GDP collapsed —as it increased elsewhere, As result China's share of glob

Al GDP fell just 5% in 1980 (gure 11) China’s per capita income also ted

the Western Europe unl about the 12th cenmury’ and worl uni the 1h cen

‘uy (ble 1.1), Then other ats of the world caught up and roszed by

‘Outside of China, the codification and exploitation of scientific an! tech

nical knowledge and the development of economic incentives sind insti

tions were stn lating the © stion and elfecive dissemination and use of

knowledge

wi

ảng g

amusements, not for commercial exploiation.! In the 16th century, th

1 happened in China Ic had developed some radial innovations pin

nporde, sipping, calculus, Bur many of them mores curiosities oF

‘of sea exploration, China had larger anel moze technologically adanced ships

‘Sar of wort GOP in FPP by slected country

For a long part

of history China was the largest

‘and most advanced economy

{Chi GOP per cept: moving to convergence

oP pr aa (195 cosa USE 106509)

Then nme

ae

than the Portuguese or the Dutch, But it used them for seven voyages of glob

al exploration to Asia and Africa—and then deactivated them, It had a well-

‘established bureaucracy based on a menitocratic civil service, Butts instiutional and economic regime did not systematically exploit knowledge—causing the county t0 fall nto stagnation China also closed itself from most interaction with the rest of the world and ld not benefit from the many advances that took place outside ts borders

“Then, after reaching its nadir i the early 1950s, China began to grow faster tan the world average—pantculaly since the late 1970, alter major reforms and opening to the world, Iris now on a path to convergence (figure 1.2)

Dawntine CHALLENGES AnEAD Despite recent optimism, China faces daunting intemal challenges (chapter 2) Chief among them: how to productively employ its labor force of 700 mil-

Hion asi shifts from an agricultural to an iogusirial econorny—and soon tos

service evonomiy, I's estiated that Chis will have to create 150-308 i

lion new jobs in the coming decade So it mast maintain 2 high race of GDP

owth and deal with income and regional i

ronmental constesints, cqyity —as well us serious envi

POSHOVING CiHtVA 18 THE GLORAL KNOWLEDGE REVOLUTION

“The world is undergoing # knowledge revolution, unique inthe speed ane per

isiveness of change (chapter 3) The cxkfiction of our sient understand!

ing of nature and the rap dissemintion anal exploitation ofall knowledge ase

<iving this revolution China cannot afforl to miss this I ust seize the 2Ist

century exploiting knowledge to ne Jin fs place inthe world economy

‘The effective development and exploitation of knowledge are becoming

_more important for economic activity, competitiveness, and growth, key

aspect of the knowledge economy is greater investment i such intangh

ble assets as education, taining, research, development, software, brand

Ing, marketing, and distribution Indeed, in OBCD countees, investment

Usixe kNOwLEDGE EOR CHIXA'S DEVELOPMENT

CChina sill has much to gain by catching up with global knowledge ts aver

age level of technology and productivity is sl far behind the work leaders

in almost every area, And within is boundasies are very wide dispersions of

productivity ard technologies Some firms are lose to worl leaders, bul many

are using technologies that are centuries ol

China now needs to strengthen the domestic diffusion of teclinology 10

raise ts average productivity to best domestic practice id best domestic prc

tice to best international practice, That wowld give

‘economy than investing lor in domestic R&D far Digger boost 10 is

China mast continue to haeness the knowledge evolution, This micas tap

ping global knowledge through tre, echnology transfer, foreign education,

direct Foreign investment, and access to data arxd knowledge on the internet

China, of course, has been doing this, Buti hy

focused mainly on man factoring and on hard technologies and hardware, It needs now co turn its

attention to services and intangibles

must seize the 2ast century—

exploiting knowledge

to regain its place in

the world economy

Investing in education and

training, in the new

For China, seizing the 21st century to postion itself for the knowledge rev

‘olution mainly means opening more to the outside world, But i also means

‘strengthening China's ability to use knowledge more effectively across the board (box 1.D And it means investing in education and training in the new infer structure for information and communication technologies, and in domestic RAD But to get the greatest returns fom these investments, it must also upgrade its economic and instiutional regime—which includes changing the role of government

“CHANGING TH ROLE OF GovERNMENT China is moving from a command economy to a socialist market economy— {nts own way, doing pragmatic things that westem economists could never have imagined, such as township anc! village entegpries, strict controls in Finance, and dual pricing structures

But the context has changed, with daunting internal challenges, tumultuous

‘external pressures, and more international competition, all requiring speed, And speed means quick decentralized decision making, which efficient mar-

Key olements of a knowledge-based economy

Al economies are knowledge-base What ifeent, today, however, that eap- ity growing economies depend more on the een, sequin dstiution, sn Use of knowlege The efletve te of ere becoming the ms pant facoc for enernaionalconnpeivenese and fr eeaing weal and pening cat welt ‘This does not mean that China must sinply develop high technology means that Chins mus encourage Is organizations and people co vex, exe= ate, disseminate, and use knowledge more effectively for greater economic snd

‘och development

‘The four plas of «knowledge ase economy ae + Anecomomic and ison epi thal pris incentives fre ice se

‘feng krclege an, the creation of new hooded entrench

‘An educate and sll populace tha ean Greate and use knowl

2 Aynamic information snare tha can acta the eftive caren thn, dissemination, and processing of information

+ An lective innovation sytem ompriigg 4 new of Fins reser center, waMenlie consftans, aed eheroganizations hat can ap ta the growing sock

of lol kleine aa adap ito local ee ar create new bow fle and tetowy “The economists regi allows onpanations aul people 10 ads 1 angling oppomunites and demands in leible and innoeative ways In te, isthe fundamental ple of the knowlege based economy since el sương cờ fom centives and inshiions cn deploy these Fesurcen to pradactive nes ak take advantage of 4 song eduevlevulbaee am u highy-developed HCT and RAD

——

ets ca offer To succeed inthis fast paced environment, the government must

move even more from providing most goods and services fo becoming the

architect ofa socialist market economy

A market economy, not developed overnight, requires institutions to sup

‘port? It requires clear property rights, the enforcement of rights and rales

defending contractual rights It is up 10 the government to define these rights

‘Torake advannage of fs erreprencural people, Chins nec to clearly deine

property rights andl enforce them fy and predictably, constraining goverment

imerference How? Through a sưonger rule of le

China also eels good information flows sbout busines opptodniies,about

market players and their reliability, about the quality of goods and services,

Public and private instiutions have to produce, collet, analyze, verify, and

disseminate information among them-—accounting firms, credit segistries,

testing, quality contro, and pesformance-rating agencies ate crscal The gow

cemment can do much to help develop thes

regulations to govern their behavior, It ean also promote competition to spur

{innovation and productivity ~with polices forthe fe exchange of goods andl

stiutions—and the rules and

services, for the openness (new ideas, and for setting up institutions to pro

smote such competition and to discipline the rale-breakers

Bur the market can’ do everything When i fils, the government has 0

provide public goods, such as defense, the eule of la, environmental pro-

tection, basic education, some aspects of basic infrastruc

esearch and development But government ako fails, and that makes i hec- c, and basic

essary’ 10 limit the power oft

parency, more accountability, and better governance This report does not tate—prowiding mechanisms for greater trans

‘20 into all these areas, Instead, it covers what is most relesint for geting

China to make more effective use of knowledge forts economic and social

development —snd to prepare the way for its becoming a knowledge-based

economy

STRUCTURE OF THEE REFORT

‘Chapter 2 highlights the challenges vo China's development In the short term

the critical challenge for China is to ensure as smooth and efficient a transi

sion as possible, minimizing the unemployment that wil inevitably result fiom

the resrturing, as wel asthe socal tensions that wil follow, anl maximizing

the opportunites for growth and job creation In the longer term the chal-

lenge will be to maintain high and sustainable growth that wil not exhaust

China's limited natural resources,

Chapter 3 summarizes key clements of what could be called a knowledge

evolution, Ihalso assesses China's proggess in addressing some ofthe hey sues

The government must move even more to becoming the architect of a soclalist market economy

In the short term

‘economic incentive and institutional regime to dea

1 that is part of the knowledge economy

er 5 summarizes the challenges to the education system These include not only inereasing the educational anainment ofthe vast population, but also modernizing the curriculum so that people have the new skis

‘demanded by the knowledge economy and can pursue lifelong learning to keep up with the continuously evolving technologies It also proposes that China undenake a major expansion of Intemet based education,

‘with the constant restr

Chapter 6 looks at what China has to do to hamess the information and

‘communications infrastucty € to leverage its development It needs to pro-

‘idea competition and regulatory regime that promotes investment inthe new telecommunications technologies and brings the incredible cos reductions in this sector to consumers And it neds to provide training inthe use of these new technologies and in their application,

Chapter 7 examines the important isue of difusing technology through- fut the economy to bring up the overall technological level of the country 1k discusses the technological weaknesses and disparities in the country Which are enormous It also looks at issues of markets for technology dis-

‘semination, redirecting technology-related polices, strengthening govem-

‘ment programs for technology diffusion, simulating innovation in enterprises, and promoting innovation sites and clute

(Chapter # focuses on China's domestic R&D system, Necessary measures Include reorienting top down government programs to respond more 10 the needs of the market, involving the enterprise sector in the decisions on research priors, strengthening suppor for public Rood research, setting up better teh- nology foresight mechanism to decide where to allocate the public R&D budg-

«t,and how to establish effective incentives to stimulate the productive sector

1 invest more in R&D,

‘les with how litle it has spend acquiring disembodied knowledge inthe form

‘of patents and licensing, It also highlights the imponance of gưeater parici- pation in international collaborative public and private research and of tap-

ping the lige overseas Chinese community, whieh is strategic aset to pet

access to global knowledge and experience,

Finally, chapter 10 Focuses on how to develop and implement a coherent

strategy for China, ft sets up some of the Key priorities andl sequencing for

cach of the main policy planks, Itthen highlights the need for coordination

between different pans of the cental government and between the central

and provincial governments ‘well as the need to develop more effective

mechanisms for sharing knowledge across provinces,

Non

1 lại ok Ter of ch, Oo Os Unveil any, The Wen

sand Prey of Nan, New Vk, Non, 198 J

1 ee Vouyi Quan Galan Poesia ral ef Comparten Ss 2 Mac

2.5 the ting Wiel Deion fpet 2002002 a apporing

‘Major internal challenges dhat China is confronted widh—arassive job creation, sustaining high economie growth rates, reduction of income and regional dis- parities, and environmental issues—are detailed in chapter 2 Chapker 3 explains the nanute ofthe knowledge revolution and related global transformations, and

ced counties,

positions China sccontingly, notably visa-vis

Aer two decades of exceptional growth, China has become a major player

in the world economy Iti now the second largest economy in GDP meas-

‘ured in purchasing power parity (PPPyfigure 2.1), increased its share of work

‘merchandise export from 0.95% in 1980 103.4% in 1998 (figure 2.2 ls moxl-

‘mization, particularly in the coastal areas an cites, has been extraordinary:

"New industries have been developing, progress inthe business environment

‘has been enormous, and competitiveness and participation in the global

economy have improved considerably

China's policy of openness—allowing import of capital flows, technologies,

and management competencies—began inthe late 1970s and, along with major

policy reforms, triggered China's extraordinary takeofl:' Modemization thrives

‘on an exceptional entrepreneurial spin, a sense of trad, high rate of savings

nd investment (more than 40% of GDP), and a thirst for education (with ite

{racy rate of more than 80% in 1997) Wise policies based on a gradual open-

ing of the economy and society have heen essential in promoting rapid,

sustained, and socially acceptable economic growth

‘Comparions of major counties by sanomie sand PPP, GD pe capt, nd tertiary ‘rome rte (2998 PPP)

China's fist wansformation is from a rural agyiculture-based economy to an wban-industial economy The sbare of the primary sector in employment declined from more than 70% in 1978 to about 50% i the late 1990s, Indus- tay, which employed only 17% of the labor force in 1978, now employs almost 259 (figures 2.3 and 2.4),

‘The second isthe transition to a service economy The service sector is sill underdeveloped compared with China's per capita income, largely because

of past policy biases toward trdtional industry, The service sector will bea _major source of employment growth

“The third isthe major restructuring to integrate into the global economy

‘The share of imports and expons in China's GNP increased from 16% in 1980 {to 4196 in 1999, This restructuring is likely to get even more wrenching with CChina’s accession to the World Trade Organization Agriculture and man: facturing ate likely to be hit hardest In addition, rapid ereation and dissem- ination of knowledge makes the international environment very dema

‘This presents risks and opportunites that will pressure China to embrace and exploit the dynamic global economy

‘The fourth transformation is from a planned economy to a market-based regime, starting with the rural sector Reforms have included land transfers to households and the household responsibilty system, allowing farmers to sell rocluction above their required quotas on the market Reforms were aso intro

The service sector

In China is very

underdeveloped rimy for a country of its

Chie’ employment srctr, 1878-2020,

duced in ownership andl management ofthe entesprise sector, with the town-

ship and village enterprises benefiting more than state-owned enterprises from

Jess state hands-on activity In 1999 China formally recognized a private sec-

tor, Although these reforms have significantly improved enterprise productivity