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International Finance

Shifting the Gear toward Green Growth

By Stephen Groff, Vice-President for East Asia, Southeast Asia and the Pacific at the Asian Development Bank. 9th December 2013 The uncertain global economy has created a volatile environment for policy makers in the People’s Republic of China (PRC). Weak external demand and domestic imbalances pose challenges to economic growth. However, it also creates an opportunity to address structural constraints and allocate resources more efficiently...

By Stephen Groff, Vice-President for East Asia, Southeast Asia and the Pacific at the Asian Development Bank.

9th December 2013

The uncertain global economy has created a volatile environment for policy makers in the People’s Republic of China (PRC). Weak external demand and domestic imbalances pose challenges to economic growth. However, it also creates an opportunity to address structural constraints and allocate resources more efficiently for development needs in the second largest economy in the world.

Against this background, the PRC face high expectations to deliver comprehensive socio-economic reforms that will ensure sustainable growth and help stabilize the global economy. Without equivocation, leaders have indicated their intention to focus on the quality, inclusiveness and sustainability of growth.

To that end, changing the growth pattern toward a more services and consumption driven model is a critical element of the government’s reform agenda. These changes are essential to rebalance growth and ensure its quality and sustainability. Moreover, environmental protection and resident-benefitting rather than resource-consuming urbanization feature prominently among the leader’s priorities.

Environmental sustainability is also part of the PRC’s long-term strategy. Ambitious green targets for low-carbon energy, energy efficiency and clean technology are embedded in the 12th Five-Plan (2011-2015). More importantly, the 18th National Congress of the Communist Party of China introduced the concept of “ecological civilization” into the Party’s Charter. Coined in 2007 for the first time, ecological civilization is understood as the cornerstone of balancing economic development and environmental sustainability.

Since March this year, the government has reiterated in key pronouncements its commitment to environmental protection to curb escalating costs associated with resource depletion and environmental damage after decades of rapid economic growth. Recently, specific reforms have been added to the green agenda, including plans to develop new pricing mechanisms for natural resources, and setting up a carbon emissions trading scheme through pilot projects.

The leaders have also pointed out that while reductions in energy intensity are often associated with slower economic growth, green growth will offer important economic opportunities and create new jobs. However, capturing the benefits of this transformation requires adjustments in the policy framework.

In this regard, the government has taken commendable steps to make growth more inclusive and sustainable by proposing a shift in focus from the quantity to the quality of growth. This is reflected in the government’s determination to lower the country’s annual GDP growth target to enhance inclusive and environmentally sustainable growth. Moreover, by setting innovation-driven growth at the core of the new industrial policy, energy efficient products, renewable energy, and new technologies will gradually dominate industrial production.

Efforts are being channeled to rebalance the economy by shifting to a growth model more driven by consumption and services. Indeed, a larger services sector will support economic restructuring and the achievement of some of the social and environmental targets set in the 12th Five-Year Plan, in particular employment generation and environmental sustainability.

Services play a major role in improving production efficiency, and promoting technical progress and innovation. In advanced economies, services have become the primary source of output and employment, accounting for about 70 percent of GDP and 60 percent of total employment. In developing economies, the adequate provision of transportation, telecommunications, logistics and financial services, is a prerequisite to ensure and sustain economic growth. Additionally, the carbon footprint of services is significantly smaller than that of manufacturing. Hence, a higher reliance on services will support government efforts toward green growth.

Services in the PRC have expanded rapidly since economic reforms were launched, and in particular since the PRC’s accession to the World Trade Organization, but their size appears to be smaller than expected based on the country’s per capita income level. This implies that there is room for expansion. While manufacturing will remain a significant sector in the PRC in the coming years, services, through adequate policy changes, has the potential to turn into an important source of growth addressing unemployment pressures and fostering green growth.

Interestingly, synergies arise from the interaction of expanding services and urbanization as a certain critical mass?together with access and affordability of services?is needed for real demand for services to thrive. At the same time, the scale and structure of the services depend on the level of urbanization. For this reason, developing services in the context of increasing urbanization is an appropriate path for more sustainable growth.

A larger services sector would help to absorb the rural-urban migration stemming from the announced urbanization plans, and reduce the environmental impact of expanding cities. Urbanization stands as a key source of future economic growth in the PRC. Government targets to increase the urbanization rate from 51 percent to 65 percent by 2020 underpin this potential. However, greater urbanization should be undertaken under the framework of a low-carbon economy to ensure environmental sustainability, and supported by increased social public expenditure.

While making cities more livable and green is vital, improving social protection systems for the vulnerable?including those in the informal sector?is also an area in need of urgent attention. We welcome the ongoing reform of the country’s household registration system or hukou, coupled with the rural land rights system reform. This is a central element to address the challenge of absorbing more than 20 million people moving into cities every year. However, more supporting policies are also needed to reduce migrant households’ uncertainty about the cost of healthcare and lack of security in regard to retirement income. For that, further improvement in social protection and a shift in emphasis from coverage to benefits are essential policy actions.

Advancing urbanization will entail substantial investments in urban infrastructure to accommodate the increasing number of rural residents moving into cities. New and greener towns and cities will require high quality infrastructure, green areas, efficient transportation networks, and effective public services. For that, urban planning should focus on increasing urban density while improving urban viability. Neighborhoods could be designed where people can both live and work by providing communities with adequate jobs, schools, health services and public transport. This will shorten commuting distance and reduce traffic congestion. Together with energy efficiency and green building technologies, this should be made a standard in new constructions to limit urban carbon emissions minimizing the environmental impact of expanding urbanization.

The PRC has taken important steps toward ecological civilization. It has become a global leader in the production of solar panels and renewable energy, which indicates that the country has the technology and the knowledge to support urban greening, and position itself as a global green export leader. Ongoing efforts to adjust the growth model bode well for this purpose.

At the Asian Development Bank, the region’s key development partner, we stand alongside the Government of the PRC in its efforts to gear toward green growth. The PRC can be assured of our continued support as we work together to achieve the same goals. In this connection, the Asian Development Bank has pledged its support for green and inclusive growth in the PRC by committing $4.2 billion in the next three years to key development projects, including urban development, energy efficiency, sustainable transport, and natural resources conservation.

Source: Asian Development Bank

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