Five-year plans miss the main goals: U.S. monitor

PUBLISHED : Monday, 04 July, 2011, 12:00am
UPDATED : Monday, 04 July, 2011, 12:00am

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China failed to meet targets set in its 11th five-year plan and is unlikely to meet others set for the current 12th five-year plan to 2015, according to a top United States watchdog agency.

The comments came in the latest report of the US-China Economic and Security Review Commission (USCC), which was set up to monitor, investigate, and report on the national security implications of bilateral trade and economic relationship between the US and China, and advise Congress on Sino-US relations.

While some economists agree with USCC's pessimistic prognosis, others are more bullish on China's economic prospects.

'There are reasons to suspect that the 12th five-year plan will not be any more successful than the 11th five-year plan, even if it does meet most of its key indicators,' said the USCC report.

According to Chinese government figures, the 11th five-year plan, for 2006-2010, met 18 of its 22 goals. One of the main targets that failed to be met was reducing energy consumption intensity per unit of gross domestic product.

'Despite meeting most of its targets, the 11th five-year plan was nevertheless unsuccessful because of its failure to address underlying structural problems,' the USCC report argued.

'Even its overwhelming success in exceeding its GDP goals can be seen as a failure, since the 11th five-year plan meant to rein in growth, and instead the GDP growth objectives for 2010 had already been met by 2007.'

A scorecard from The Economist Intelligence Unit gives the 11th five-year plan an A+ in economic growth and job creation, a B in inclusive growth, a D in economic rebalancing, and a C in environment.

The 12th five-year plan is distinctive in its focus on economic restructuring, environment and energy efficiency, as well as scientific development, said the USCC report.

Earlier plans focused intensively on the single measurable objective of raising GDP growth. In contrast, the 12th five-year plan places greater emphasis on holistic economic development by taking into account scientific education and overall welfare.

For the first time, the 12th five-year plan includes a 'well-being' target with a goal of increasing average life expectancy by a year over the next five years.

It also places greater stress than the 11th five-year plan on expanding domestic demand.

'Although the 12th five-year plan calls for economic restructuring and a preference for quality growth over growth at any cost, it is unclear whether the provinces really understand or appreciate this,' the USCC said.

'A critical disconnect remains between the central government and local governments.'

The 12th five-year plan targets annual GDP growth of 7 per cent, well below the 11 per cent growth target set in the 11th five-year plan. But despite the current plan's call for slower GDP growth, every province and major city have growth targets that exceed the 7 per cent target, noted the USCC.

Shanghai's 12th five-year plan aims for 8 per cent growth and several provinces have announced growth targets of 13 per cent or higher.

'The political transition underway in Beijing may make it more difficult to make major changes to the incentive structure than it was for the 11th five-year plan,' the USCC said.

The Chinese system of encouraging independence and competition among local governments was a driver of the country's spectacular economic growth, but in future will be an obstacle against the success of the 12th five-year plan, said Xu Chenggang, an economics professor at Hong Kong University.

In China, local governments are responsible for implementing most policies, and are responsible for more than 90 per cent of the nation's infrastructure investments, Xu said at a recent seminar in Washington, hosted by the Brookings Institution, a US think tank.

In the past, competition among local governments was a source of economic growth because the main goal of the Chinese government was GDP growth, said Xu.

'But now, when the government is facing multiple goals in the current five-year plan, regional competition may end up with multiple equilibriums and many [of these will have] undesirable results.'

Some local officials experiment 'with novel ways of corruption and how to block judicial independence,' Xu said.

'Local governments also experiment with novel taxes, entry barriers and so forth. They may experiment in novel ways with appropriating land. Moreover, local governments are robust in what they want to do when they face some policies by the central government.'

The last five-year plan did not work in correcting structural problems in the Chinese economy, said Xu. 'These had been identified many years ago, but things have got worse since the last-five year plan. If the last plan did not work, why should we have confidence that the current one is going to work?'

One of China's main structural problems is that its consumption-to-GDP ratio is lower than other major economies, Xu said. Others include environmental degradation, income inequality, and land appropriation by local officials that threatens social stability.

But not all economists are so pessimistic about China's economic prospects.

Commenting on the 12th five-year plan, Tao Dong, Credit Suisse chief economist for Asia excluding Japan, said the current plan may see some failures or delays or amendments. 'But are we going to see a failure of the 12th five-year plan? I don't think so. Beijing shows a better ability to execute policies that most governments.

'It is a big exaggeration to claim China's 11th five-year plan has failed,' Tao said.

'Anyone who travels on a freeway, visits an airport, or checks figures for power production and machinery exports would agree that China has made tremendous progress in the past five years.'