THE WORLD BANK W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T China An Evaluation of World Bank Assistance OPERATIONS EVALUATION DEPARTMENT ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Operations Evaluation Department (OED) is an independent unit within the World Bank; it reports directly to the Bank's Board of Executive Directors. OED assesses what works, and what does not; how a borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country's overall development. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank's work, and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T China An Evaluation of World Bank Assistance 2005 The World Bank http://www.worldbank.org/oed Washington, D.C. © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved Manufactured in the United States of America The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in the work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. 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World Bank InfoShop Operations Evaluation Department E-mail: pic@worldbank.org Knowledge Programs and Evaluation Capacity Telephone: 202-458-5454 Development (OEDKE) Facsimile: 202-522-1500 E-mail: eline@worldbank.org Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on Recycled Paper Contents v Acknowledgments vii Foreword, Prefacio, Avant-propos ix Executive Summary, Résumen, Résumé Analytique xv Acronyms and Abbreviations 1 1 Introduction 1 China's Achievements in a Quarter-Century of Reform 1 Shortcomings and Challenges 5 2 Evolution of World Bank Assistance Strategy 6 Evolution of the Relationship and Bank Strategy after 1991 11 3 Progress on Development Objectives 11 Macroeconomic Management and System Reform 17 Poverty Reduction 23 Infrastructure 25 Environment 27 Lending 33 4 Program Administration and Crosscutting Issues 33 Lending 37 AAA/ESW 39 Donor Cooperation 40 Safeguards 43 Crosscutting Issues 47 5 Evaluation of the Bank's Assistance 47 Outcome of the Bank's Assistance 48 Sustainability of Positive Outcomes 48 Institutional Development Impact 49 Bank Performance 51 6 Lessons and Recommendations 51 Lessons 52 Recommendations i i i C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E 55 Annexes 57 A: Summary: Analytical and Advisory Services Background Paper 61 B: Summary: Agriculture Background Paper 65 C: Summary: Decentralization Background Paper 67 D: Summary: Energy Background Paper 73 E: Summary: Finance Background Paper 77 F: Summary: Poverty Background Paper 81 G: Summary: Water Background Paper 87 H: Summary: Transport Background Paper 91 I: Summary: Health Background Paper 95 J: Client Consultations in Preparation for the Country Assistance Strategy 97 K: Client Survey Findings 99 L: Guide to OED's Country Evaluation Rating Methodology 103 M: Management Action Record 105 N: Comments from Bank Regional Staff on Draft CAE 115 O: Comments from the Government of China 121 P: Summary: China--IFC Country Impact Review 125 Q: Report from the Committee on Development Effectiveness (CODE) 127 R: Reference Tables 147 Endnotes 153 References Boxes 18 3.1 China's Poverty in International Perspective 20 3.2 A Best Practice Poverty Project 21 3.3 WBI/China Network for Training and Research in Health Economics and Finance 28 3.4 Rural Water Supply in China 39 4.1 A Chinese View of the Bank's AAA 41 4.2 Inspection Panel Investigation 42 4.3 The Views of the Borrower 43 4.4 Bank Involvement in the Three Gorges Project Tables 2 1.1 China: Selected Indicators, 1980­01 35 4.1 Overall Project Rating: China and Comparisons Figures 2 1.1 Average Annual Real GDP per Capita Growth, China and Comparisons, 1980­01 3 1.2 Real GDP Index of Selected Transition Countries, 1989­01 7 2.1 IBRD-IDA Commitments to China by Fiscal Year, 1981­03 8 2.2 World Bank Investment Lending for China by Sector 9 2.3 Ratios of Aid and DFI to GDP, 1990­00 13 3.1 Revenue Trend 36 4.1 Comparison of Bank Sector Investment Lending Activities 38 4.2 Ratio of ESW to Total Direct Cost i v Acknowledgments T he evaluation was prepared by Gene Ritchie (Decentralization and Safeguards), Robert Tidrick (Task Manager, OEDCR), with as- Varley (Water Resources and Environment), Peter sistance from Anthony Churchill and Cor- Nolan (Enterprise Reform), and Manuel Penalver dula Thum (Energy and Transport), Christopher (Portfolio Management). Qiang Cui provided Findlay (Agriculture), Azizur Khan (Poverty), Lu statistical analysis. Steven Kennedy edited the an- Mai (Analytical and Advisory Services), Elaine nexes. Betty Casely-Hayford and Agnes Santos Ooi (Health), S. Ramachandran (Finance), Daniel provided administrative support. Director-General, Operations Evaluation: Gregory K. Ingram Director, Operations Evaluation Department: Ajay Chhibber Senior Manager, Country Evaluation and Regional Relations: R. Kyle Peters Task Manager: Gene Tidrick Peer Reviewer: René Vandendries Peer Reviewer: Alan Gelb Peer Reviewer (Institute for International Economics): Nicholas Lardy v F O R E W O R D FOREWORD PREFACIO AVANT- PROPOS ~NOL A ENGLISH ESP FRANÇAIS This Country Assistance Eval- La presente Evaluación de la La présente Évaluation de uation (CAE) by the Operations Evalu- Asistencia al País (EAP) se basa en l'aide par pays (CAE) s'appuie sur les ation Department (OED) of the World proyectos, servicios no crediticios y évaluations des projets, des services Bank builds on evaluations of proj- programas de asistencia sectorial a hors prêts et des programmes d'aide ects, nonlending services, and sector fin de evaluar la eficacia del desarro- sectorielle pour évaluer l'efficacité au assistance programs to assess the de- llo de la asistencia que el Banco Mun- niveau du développement de l'aide de velopment effectiveness of Bank as- dial prestó a China durante el último la Banque mondiale en faveur de la sistance to China during the past decenio. Esta Evaluación se concentra Chine au cours des dix dernières an- decade (FY93­02). Although it focuses en el período comprendido entre los nées. La CAE est centrée sur la pé- on these years, it also includes some ejercicios económicos 1993 y 2002, riode EF93-02 mais comporte quelques references to developments in the ear- pero hace referencia a acontecimien- références aux développements réa- lier years of the relationship and to tos sucedidos en los primeros años de lisés au cours des premières années de more recent events. la relación y a hechos más recientes. la relation et à des événements plus Chapter 1 provides an overview of El Capítulo 1 ofrece una descripción récents. the achievements and shortcomings general de los logros y de las defi- Le chapitre 1 offre une vue d'en- of China's reforms since 1978. Chap- ciencias de las reformas implementa- semble des réussites et des insuffi- ter 2 summarizes the development das en China desde 1978. El Capítulo sances des réformes en Chine of the relationship between the Bank 2 resume el desarrollo de la relación depuis 1978. Dans le chapitre 2 fi- and China in the 1980s in order to entre el Banco y China en la década de gure une synthèse du développe- provide a context for the period los ochenta a fin de brindar un con- ment de la relation entre la Banque under review, and then outlines the texto para el período sometido a aná- et la Chine dans les années 80 afin evolution of the relationship and lisis y luego examina cómo ha que cela serve de contexte pour la the Bank's assistance strategy in the evolucionado la relación y la estrategia période étudiée puis y sont retra- past decade. Chapter 3 analyzes de asistencia implementada por el cées l'évolution de la relation et la China's development progress and Banco durante la última década. El Ca- stratégie de la Banque en matière the Bank's impact on the main ob- pítulo 3 analiza el avance y el impacto d'aide au cours des dix dernières jectives of the Bank's assistance. del Banco en los objetivos principales années. Sont analysés au chapitre 3 Chapter 4 reviews the use of lending trazados para la asistencia. El Capítulo l'avancement et l'impact de la and other instruments in achieving 4 examina el uso del financiamiento y Banque sur les principaux objectifs these objectives, compares out- de otros instrumentos para lograr estos de l'aide de la Banque. Est étudié au comes in China with those in other objetivos. También compara los re- chapitre 4 le recours aux prêts et à countries, and examines some cross- sultados logrados en China con los de d'autres instruments pour atteindre cutting issues. Chapter 5 draws on otros países y examina algunos temas ces objectifs. Y sont également com- the previous two chapters to provide transversales. El Capítulo 5 se basa en parés les résultats de la Chine avec a summary evaluation of the Bank's los dos capítulos anteriores y ofrece un ceux d'autres pays et y sont exami- assistance, and chapter 6 summa- resumen de la evaluación de la asis- nées certaines questions multidis- rizes the main lessons and recom- tencia del Banco, y el Capítulo 6 re- ciplinaires. Le chapitre 5 est la mendations. sume las principales lecciones y las récapitulation des deux chapitres The assistance of peer reviewers recomendaciones. précédents qui permet de donner in providing detailed comments on Deseamos expresar nuestro pro- une évaluation synthétique de l'aide an earlier draft is gratefully ac- fundo agradecimiento a los colegas de la Banque. Figure au chapitre 6 la v i i C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E knowledged. Their com- revisores por los comentarios synthèse des principales le- ments, as well as other com- pormenorizados que formu- çons et recommandations. ments received during OED's ~NOL laron a un borrador previo Nous tenons à remercier management review meet- A del presente trabajo. Tanto les réviseurs-pairs pour avoir ing, have been taken into ac- éstos como otros comenta- bien voulu apporter des com- ENGLISH count in the evaluation. The ESP rios que hemos recibido du- mentaires détaillés sur une FRANÇAIS factual and editorial com- rante el análisis de la gestión version antérieure du docu- ments of the Bank's East Asia del Departamento de Evalua- ment. Il a été tenu compte and Pacific (EAP) Region and the ción de Operaciones han sido toma- dans l'évaluation de ces commen- Government of China (Ministry of Fi- dos en cuenta en la evaluación. La taires, ainsi que d'autres commen- nance) on an earlier draft of the CAE Región de Asia Oriental y Pacífico del taires reçus au cours de la réunion have been taken into account in this Banco y el Gobierno de China (Mi- de réexamen de la direction de draft, the comments of the Bank's nisterio de Economía) también han l'OED. La Région Asie orientale et Pa- Regional staff are attached as Annex hecho comentarios sobre un borra- cifique de la Banque et le Gouver- N, and the China government's com- dor de la Evaluación de la Asistencia nement chinois (Ministère des ments are included as Annex O. al País. El Departamento de Evalua- finances) ont tous deux également ción de Operaciones ha tomado en offert leurs commentaires sur le pro- cuenta los comentarios objetivos y de jet de CAE. L'OED a tenu compte redacción realizados sobre este bo- des commentaires factuels et ré- rrador. En el Anexo N, se presentan dactionnels apportés sur le projet los comentarios efectuados por el de document. Les commentaires du personal regional. En el Anexo O, se personnel de la région figurent à detallan los comentarios del Go- l'annexe N. Les commentaires des bierno. gouvernements sont reproduits à l'annexe O. v i i i E X E C U T I V E S U M M A R Y EXECUTIVE RÉSUMEN RÉSUMÉ SUMMARY ANALYTIQUE ~NOL A ENGLISH ESP FRANÇAIS Desde que en 1978 China deci- Depuis qu'elle s'est ouverte au Since opening to the outside dió emprender su apertura monde extérieur et a démarré world and embarking on a program of hacia el mundo exterior e iniciar un un programme de réforme économique economic reform in 1978, China has programa de reformas económicas, ha en 1978, la Chine a l'un des taux les had one of the highest rates of sus- logrado uno de los índices de creci- plus élevés au monde de croissance tained economic growth in the world, miento económico sostenido más altos économique soutenue, multipliant par quadrupling per capita income in about del mundo, cuadriplicando el ingreso quatre le revenu par habitant sur en- 20 years and lifting more than a per cápita en 20 años y rescatando más viron 20 ans et en hissant plus de 250 quarter-billion people out of poverty. de 250.000 millones de personas de la millions de gens hors de la pauvreté. During the 1990s, however, several pobreza. Junto con estos logros tam- À côté des ces réussites sont apparus shortcomings and challenges emerged. bién surgieron algunas dificultades y au cours des années 90 des insuffi- Poverty reduction has slowed, and desafíos en la década de los noventa. sances et des défis. La réduction de la inequality and vulnerability have in- La reducción de la pobreza ha desa- pauvreté s'est ralentie tandis qu'aug- creased. China faces severe environ- celerado su marcha y la desigualdad y mentaient l'inégalité et la vulnérabilité. mental problems, in part because of vulnerabilidad han ido en aumento. La Chine se trouve confrontée à de the strains of high growth. And while China enfrenta serios problemas am- graves problèmes environnementaux a strategy of gradual reform has pro- bientales en parte, debido al desgaste en partie dus à l'astreinte de la forte moted both growth and stability, the que produjo el alto nivel de creci- croissance. La stratégie de réforme unfinished reform agenda poses fis- miento. Y si bien la estrategia de re- graduelle a promu tout à la fois la cal, financial, and social risks that formas graduales ha promovido tanto el croissance et la stabilité mais le pro- could undermine the achievement of crecimiento como la estabilidad, la gramme de réforme en suspens pose the past 20 years. agenda de reformas inconclusa genera des risques fiscaux, financiers et so- This Country Assistance Evalua- riesgos fiscales, financieros y sociales ciaux qui pourraient saper les réus- tion (CAE) focuses on the period que podrían socavar los logros alcan- sites des 20 dernières années. FY93­02. The World Bank's assis- zados durante los últimos veinte años. La présente Évaluation de l'aide tance strategy had four main objec- La Evaluación de la Asistencia al par pays est centrée sur la période tives during this period: (i) País se concentra en el período com- EF93-02. La stratégie d'aide de la promoting market-oriented system prendido entre los ejercicios econó- Banque avait pour objectif au cours reform and better macroeconomic micos 1993 y 2002. La estrategia de de cette période les quatre princi- management; (ii) poverty reduction; asistencia del Banco Mundial se pro- paux objectifs suivants : (i) promo- (iii) supporting infrastructure de- puso cuatro objetivos principales para tion de la réforme du système axé sur velopment for growth and market in- este período: (i) promover una re- le marché et d'une meilleure ges- tegration; and (iv) environmental forma del sistema con orientación tion macroéconomique, (ii) réduc- protection. Although China is the hacia el mercado y un mejoramiento tion de la pauvreté, (iii) soutien du Bank's largest International Bank de la gestión macroeconómica, (ii) développement de l'infrastructure for Reconstruction and Develop- reducir la pobreza; (iii) apoyar el de- pour l'intégration de la croissance ment (IBRD) borrower and the sec- sarrollo de la infraestructura para el et du marché, et (iv) protection de ond-largest recipient of International crecimiento y la integración del mer- l'environnement. Bien que la Chine Development Association (IDA) cado; y (iv) proteger el medio am- soit le plus gros emprunteur BIRD de credits, Bank lending accounts for biente. A pesar de que China es el la Banque et le deuxième bénéfi- only a small share of China's re- prestatario del BIRF más grande del ciaire des crédits IDA, les prêts de la source flows--about 0.6 percent of Banco y el segundo beneficiario en Banque ne représentent qu'une pe- i x C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E GDP at its maximum in the importancia de los créditos tite part des apports de res- early 1990s. The Bank has de la AIF, los créditos del sources de la Chine -- envi- therefore not tried to achieve ~NOL Banco representan sólo una ron 0,6 % du PIB au plus au its objectives primarily A pequeña parte de los flujos début des années 90. La through the direct impact of de recursos con que cuenta Banque n'a par conséquent ENGLISH its lending or through con- ESP China: alrededor de un 0,6 pas tenté d'atteindre ses ob- FRANÇAIS ditionality. Rather, the Bank por ciento del PIB como má- jectifs principalement par le has relied mostly on variants ximo a comienzos de la dé- biais de l'impact direct de ses of persuasion and example. These cada de los noventa. Por este motivo, prêts ou au travers de la condition- included a dual-track approach of el Banco no ha procurado alcanzar sus nalité. La Banque a plutôt dépendu (i) building trust through lending objetivos mediante el impacto directo dans une grande mesure de variantes while promoting policy dialogue de su financiamiento o a través de la de persuasion et d'exemple. Celles- through sector work and (ii) rely- imposición de condicionalidades. Por ci comportaient une approche ing on the demonstration effect of el contrario, el Banco ha recurrido double qui consistait à renforcer la successful project experience in in- fundamentalmente a variantes de per- confiance par le biais des prêts tout troducing new technologies, man- suasión y ejemplos, entre las que se en favorisant le dialogue de politique agement methods, or policy reforms incluyó un modelo dualista, que pro- par le biais des travaux sectoriels, et to leverage policy outcomes. cura generar confianza mediante el fi- à dépendre de l'effet de démonstra- The overall outcome of the nanciamiento promoviendo al mismo tion de l'expérience de projets réus- Bank's assistance strategy has been tiempo una política de diálogo a tra- sis en introduisant de nouvelles satisfactory. In macromanagement vés del trabajo sectorial, y confianza technologies, méthodes de gestion and system reform, the Bank played en el efecto de demostración de las ou réformes stratégiques pour don- an important role in supporting the experiencias exitosas en la introduc- ner un pouvoir multiplicateur aux acceleration of reforms in the early ción de nuevas tecnologías, métodos résultats des stratégies. 1990s, including macromanagement de gestión o las reformas de políticas Le résultat d'ensemble de la stra- reforms that helped stabilize the para la potenciación de resultados. tégie d'aide de la Banque est satis- economy. With respect to system re- En términos generales, el resul- faisant. La Banque a joué un rôle form more generally, the Bank tado de la estrategia de asistencia del important en matière de réforme helped identify the critical nexus of Banco ha sido satisfactoria. En cuanto macrogestion et système en soute- enterprise­financial sector­fiscal re- a la reforma de la gestión pública y del nant l'accélération des réformes au forms needed to underpin high sistema, el Banco ha tenido un papel début des années 90, y compris les growth with stability, but it was less preponderante en el apoyo a la agi- réformes de macrogestion qui ont successful in promoting implemen- lización de las reformas a comienzos aidé à stabiliser l'économie. En ce tation of some of the components. de la década de los noventa, incluidas qui concerne la réforme système Incomplete enterprise and financial las reformas introducidas en la ges- vue de façon plus générale, la sector reforms create heavy fiscal tión pública que ayudaron a estabili- Banque a aidé à identifier le lien cru- contingencies and pose significant zar la economía. En un plano más cial entre les réformes entre- risks to China's accomplishments. general, con respecto a la reforma prises/secteur financier/fiscales The Bank made several signifi- del sistema, el Banco ayudó a deter- nécessaires pour soutenir la forte cant contributions to poverty re- minar el nexo crítico de reformas croissance et la stabilité mais elle a duction in the 1990s. Most que era necesario introducir en el moins bien réussi à promouvoir la important, the Bank has helped es- área de las empresas públicas, el sec- mise en oeuvre de certains des élé- tablish successful models of targeted tor financiero y la política fiscal para ments. Des réformes incomplètes interventions through integrated poder sostener el alto índice de cre- au niveau des entreprises et du sec- rural development projects. Where cimiento con estabilidad, pero su teur financier créent des impondé- the Bank has been less successful-- labor no fue tan exitosa al promover rables fiscaux importants et posent despite writing good reports on the la implementación de alguno de sus de graves risques aux réussites de la issues--is in persuading the gov- componentes. Las reformas incon- Chine. x E X E C U T I V E S U M M A R Y ernment of the implications clusas del sector financiero y La Banque a contribué de of broader development poli- de las empresas públicas han diverses manières impor- cies for poverty and inequal- ~NOL generado serios imprevistos tantes à la réduction de la ity. The mismatch between A fiscales y ponen en riesgo de pauvreté au cours des années intergovernmental fiscal re- manera importante los logros 90 ; et ce qui est le plus im- ENGLISH sources and responsibilities ESP alcanzados por China. portant, la Banque a aidé à FRANÇAIS exacerbated regional in- En la década de los no- créer des modèles réussis equality and led to unequal venta, el Banco contribuyó en d'interventions ciblées au access to health services; grain pol- forma significativa en la lucha contra travers de projets intégrés de déve- icy penalized farmers in some of the la pobreza. Más aun, el Banco ha ayu- loppement rural. Là où la Banque a poorer areas; and migration restric- dado a crear modelos exitosos de in- moins bien réussi --bien qu'elle ait tions have limited economic inte- tervenciones dirigidas a través de écrit de bons rapports sur le sujet-- gration. proyectos integrados de desarrollo c'est à persuader le gouvernement China had a lot to gain from in- rural. Sin embargo, la labor del Banco des répercussions de politiques plus ternational experience in infra- ha sido menos exitosa -- a pesar de vastes de développement en ce qui structure development in the early que se escribieron muy buenos in- concerne la pauvreté et l'inégalité. 1990s, and the Bank had a lot to formes sobre estos temas -- a la hora Le décalage entre les ressources et offer. Bank support was highly suc- de persuadir al gobierno sobre las les responsabilités fiscales inter- cessful in promoting better project implicancias de adoptar políticas de gouvernementales a exacerbé l'in- management, competitive bidding, desarrollo más amplias para la lucha égalité régionale et a conduit à un and technical improvements. Even contra la pobreza y la desigualdad. La accès inégal aux services de santé, la resource transfer from the Bank was disparidad entre las responsabilida- politique des céréales a pénalisé les of some importance for breaking in- des y los recursos fiscales intergu- fermiers dans certaines des zones frastructure bottlenecks during this bernamentales exacerbaron la les plus pauvres, et les restrictions period. In addition, the Bank's dual- desigualdad regional y contribuye- des migrations ont limité l'intégra- track strategy of promoting sector ron a generar inequidad en el acceso tion économique. policy and institutional reform was a los servicios de salud; la política de La Chine avait beaucoup à gagner successful, particularly in power, granos penalizó a los granjeros en de l'expérience internationale en ma- though less so in transport (or algunas de las zonas más pobres; y las tière de développement de l'infra- water). The main question looking restricciones a la migración limita- structure au début des années 90 et forward is whether the Bank can still ron la integración económica. la Banque avait beaucoup à offrir. contribute significant value added China tenía mucho por ganar de Grâce à son soutien, la Banque a très in the sector, or whether the Bank la experiencia internacional en el de- bien réussi à promouvoir une finance that the government still de- sarrollo de infraestructura a co- meilleure gestion des projets, des sires is a substitute for reforms that mienzos de la década de los noventa appels d'offre concurrentiels et des could open up other modes of y el Banco tenía mucho para ofrecer. améliorations techniques. Même le finance. El apoyo del banco resultó muy exi- transfert de ressources provenant de The Bank has made some visible toso en su objetivo de promover una la Banque a eu une certaine impor- contributions to improving envi- mejor gestión de proyectos, las lici- tance dans la résolution des goulots ronmental protection, but there taciones públicas y las mejoras téc- d'étranglement de l'infrastructure have been shortcomings as well. nicas. Incluso la transferencia de durant cette période. En outre, la Bank-supported projects in natural recursos del Banco tuvo importancia stratégie double de la Banque de pro- resource management, forestry, para permitir superar las limitacio- motion de politiques sectorielles et power (both thermal and hydro), nes de la capacidad de infraestructura de réformes institutionnelles a été and multipurpose dams have had a durante este período. Además, la es- couronnée de succès, tout particu- direct and favorable impact and have trategia dualista del banco para pro- lièrement en ce qui concerne l'élec- also influenced design and imple- mover la reforma de políticas tricité, mais toutefois moins pour les mentation of non-Bank projects. The sectoriales e institucionales resultó transports (ou l'eau). La principale x i C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Bank has helped mainstream también exitosa, especial- question si l'on regarde l'ave- environmental concerns in a mente en el área de energía, nir est de savoir si la Banque number of sectors, notably ~NOL aunque los resultados no fue- peut encore contribuer une energy, where China has A ron tan alentadores en las valeur ajoutée non négli- made significant progress in áreas de transporte o agua. geable ou si le financement ENGLISH improving energy efficiency. ESP El primer interrogante que se de la Banque que le gouver- FRANÇAIS Environmental safeguard pol- plantea es si el Banco puede nement souhaite encore se icy has been highly variable, seguir aportando un valor substitue aux réformes qui ranging from best practice to a re- agregado significativo en el sector, o pourraient ouvrir la voie à d'autres buke from the Inspection Panel for si el financiamiento del Banco que el types de financement. not applying the Bank's own safe- gobierno sigue esperando constituye La Banque a visiblement contribué guard procedures. Overall, the Bank un sustituto de las reformas que po- dans certains cas à l'amélioration de has had a positive impact on the en- drían dar lugar a la apertura de otras la protection de l'environnement vironment, but improving coordi- formas de financiamiento. mais il y a également eu des insuffi- nation of environmental policy, El Banco ha hecho aportes visi- sances. Des projets soutenus par la especially water resource manage- bles al mejoramiento de la protec- Banque dans le domaine de la ges- ment, remains a considerable chal- ción ambiental, pero aquí también tion des ressources naturelles, de la lenge. hubo algunas dificultades. Los pro- foresterie, de l'énergie (tant ther- The Bank's assistance strategy yectos respaldados por el Banco en mique qu'hydroélectrique) et des and activities have been relevant in materia de manejo de recursos na- barrages polyvalents ont eu un im- the large, if not always in the small-- turales, forestales, energéticos (tanto pact direct favorable mais ils ont éga- at the broadest level of strategic energía termoeléctrica como hi- lement influencé la conception et la focus and allocation of resources, dráulica), y las represas para múltiples mise en oeuvre de projets autres que the Bank has done the right things. propósitos han tenido un impacto ceux de la Banque. La Banque a ap- Relevance at the level of sector or re- directo y positivo y también han in- porté son aide pour des questions gional allocation or the choice of fluido en el diseño e implementa- environnementales dominantes dans project components has always been ción de proyectos que no recibieron un certain nombre de secteurs, no- constrained by the project repay- el financiamiento del Banco. El Banco tamment le secteur énergétique où ment system. Projects were often ha contribuido a inculcar responsa- la Chine a progressé de façon no- skewed toward components that bilidad por la protección del medio table en ce qui concerne l'améliora- generated revenue, sometimes at ambiente en un número de secto- tion du rendement énergétique. La the expense of higher-return public res, especialmente en el sector ener- politique de mesures de protection goods components. With the loss gético en donde China ha hecho un environnementales est très variable, of IDA, Bank lending for social sec- avance importante en el mejora- allant de la meilleure pratique à un tors and poor regions has become miento de la eficacia energética. La blâme de la part du Groupe d'ins- increasingly constrained. política de protección ambiental ha pection pour ne pas avoir appliqué The Bank's record on efficacy-- sido muy variable: por un lado se les propres procédures de protec- doing things right--has been mixed. aplicaron prácticas óptimas y por otro tion de la Banque. La Banque a dans China has the best project outcome hubo una presentación de queja por l'ensemble eu un impact positif sur and other ratings of any large coun- parte del Grupo de Inspección por l'environnement mais l'amélioration try. Project implementation has been no haber aplicado los procedimien- de la coordination de la politique excellent in most sectors. But effi- tos del Banco en materia de protec- environnementale, tout particuliè- cacy also depends on achieving pol- ción ambiental. En general, la acción rement la gestion des ressources en icy and institutional change within del Banco ha tenido un impacto po- eau, demeure un défi considérable. sectors and on achieving coordina- sitivo en el medio ambiente. Sin em- La stratégie et les activités d'aide de tion across sectors and levels of gov- bargo, el mejoramiento de la la Banque ont été pertinentes dans les ernment for crosscutting objectives. coordinación de la política ambiental, grandes lignes, quoique pas toujours This has been successful in some en especial el manejo de los recursos dans le détail -- au niveau le plus x i i E X E C U T I V E S U M M A R Y areas (power sector and so- hídricos, sigue siendo un gran large de focalisation straté- cial security reform), but less desafío. gique et d'affectation des res- so in others, particularly in ~NOL La estrategia y las activida- sources, la Banque a fait ce areas that primarily depend A des de ayuda del Banco han qu'il fallait. La pertinence au on the demonstration effect sido importantes en el plano niveau de l'affectation secto- ENGLISH of projects at the local level. ESP general, aunque no siempre rielle ou régionale ou du choix FRANÇAIS Similarly, the Bank has been en temas más específicos. En des éléments des projets est more effective in coordina- general, con respecto a la toujours freinée par le sys- tion where there is a high-level gov- orientación estratégica y a la asigna- tème de remboursement des projets. ernment coordination body. ción de recursos el Banco ha tenido Les projets penchent souvent au pro- The main strength of the Bank un buen desempeño. En este sen- fit des éléments qui génèrent des re- has been its sustained support of tido, la relevancia en materia de asig- venus, parfois aux dépens d'éléments an activity or program over a num- nación sectorial o regional de de biens publics à meilleur rende- ber of years. Because of the Bank's recursos o la elección de los com- ment. Avec la perte d'IDA, les prêts de long-term involvement, it has been ponentes de los proyectos siempre la Banque au profit des secteurs so- able to have a substantial cumulative estuvo limitada por el mecanismo de ciaux et des régions pauvres sont de impact in a number of areas, its views pago del proyecto. Casi siempre los plus en plus restreints. gain a respectful hearing, and it has proyectos se orientaban a incorporar Les résultats de la Banque en ma- sometimes been well-placed to take componentes que generaran ingre- tière d'efficacité --de bien faire les advantage of opportunities when sos, y en algunas situaciones en des- choses-- sont mélangés. La Chine a China is looking for support for medro de los componentes de bienes le meilleur résultat de projets et change. Could the Bank have ac- públicos de mayor rentabilidad. Con autres notations par rapport aux complished more if it had been la desaparición de la AFI, se son cada autres grands pays. La mise en oeuvre more ambitious or aggressive in vez mayores las limitaciones del fi- des projets est excellente dans la pushing its own agenda through nanciamiento del Banco para los sec- plupart des secteurs. Mais l'effica- conditionality? That seems unlikely. tores sociales y las regiones pobres. cité dépend également de la capacité The Bank has clearly played an ad- La evaluación de eficacia del Banco, à effectuer des changements insti- visory role in China and could not es decir las cosas que se hicieron bien, tutionnels et de politique au sein have expected to achieve more es bastante heterogénea. De todos des secteurs et à parvenir à coor- through conditionality than through los países grandes, China es el que ha donner entre les secteurs et les ni- persuasion and demonstration. Per- logrado obtener los mejores resulta- veaux de gouvernement en ce qui suasion can be improved, however. dos en materia de proyectos y otras concerne les objectifs multidiscipli- The Bank's view on issues has some- calificaciones. La implementación de naires. Ceci a été couronné de suc- times been less than fully transpar- los proyectos ha sido excelente en la cès dans certains domaines (la ent. Looking forward, the Bank mayoría de los sectores. Pero la efi- réforme du secteur énergétique et should give more attention to trying cacia también depende de los cam- de sécurité sociale) mais a moins to promote and participate in a bios tanto políticos como bien réussi dans d'autres, notam- much broader debate on policy and institucionales que se puedan intro- ment dans les domaines qui dépen- sector issues, not only among offi- ducir dentro de los sectores, como así dent principalement de l'effet de cials, but also among researchers también de lograr coordinación entre démonstration des projets au niveau and other stakeholders. los sectores y los niveles de gobierno local. Dans le même ordre d'idées, para la consecución de objetivos la Banque est plus efficace en ma- transversales. Si bien en algunas áreas tière de coordination là où il y a un esto se logró (como por ejemplo, la organisme de coordination du gou- reforma del sector energético y de vernement à haut niveau. seguridad social) no ha sucedido lo Le principal point fort de la mismo en otras, en especial en aque- Banque est son soutien durable en llas que dependen principalmente faveur d'une activité ou d'un pro- x i i i C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E del efecto demostración de gramme sur un certain los proyectos en el plano local. nombre d'années. Grâce à sa ~NOL De la misma manera, la coor- participation sur le long A dinación del Banco ha sido terme, la Banque peut avoir más eficaz cuando existe un un impact cumulatif impor- ESP cuerpo de coordinación en tant dans un certain nombre FRANÇAIS las altas esferas del gobierno. de domaines, ses points de La fortaleza principal del vue reçoivent une attention Banco ha sido su apoyo sostenido a respectueuse et elle s'est parfois una actividad o programa a lo largo de trouvée en bonne position pour tirer una serie de años. Debido a la parti- parti d'occasions où la Chine cher- cipación prolongada del Banco, el im- chait un soutien pour le change- pacto logrado en algunas áreas es ment. La Banque aurait-elle pu acumulativo, sus opiniones son muy mieux réussir si elle avait été plus respetadas, y esto le ha permitido ambitieuse ou audacieuse en impo- aprovechar las oportunidades en que sant son propre ordre du jour au China busca apoyo para implementar travers de la conditionnalité ? Cela cambios. ¿Podrían haber sido mayo- semble peu probable. La Banque res los logros del Banco si hubiese joue clairement un rôle à caractère sido más ambicioso o agresivo e im- consultatif en Chine et n'aurait pu poner su propia agenda mediante s'attendre à mieux réussir par le biais condicionalidades? Esto parece im- de la conditionnalité que par le biais probable. El Banco ha desempeñado de la persuasion et de la démons- claramente una función de asesora- tration. Il est toutefois possible miento en China y no hubiese obte- d'améliorer la persuasion. L'avis de nido más logros con la imposición la Banque sur certaines questions de condicionalidades que los que al- n'est pas toujours totalement trans- canzó mediante la persuasión y la de- parent. La Banque devrait à l'avenir mostración. No obstante, la prêter une plus grande attention à persuasión puede mejorar. En algunas tenter de promouvoir et de partici- oportunidades, la opinión del Banco per à un plus vaste débat sur les en cuanto a los problemas no ha sido questions sectorielles et de poli- totalmente transparente. De cara al fu- tique, non seulement entre les fonc- turo, el Banco debería hacer más hin- tionnaires mais également entre les capié en tratar de promover un chercheurs et autres parties pre- debate mucho más amplio en temas nantes. sectoriales y de políticas que cuente con su participación y no hacerlo sólo entre los funcionarios de gobierno, sino también entre los investigadores y otras partes interesadas. Gregory K. Ingram Director-General, Operations Evaluation x i v ACRONYMS AND ABBREVIATIONS AAA Analytical and advisory activities ADB Asian Development Bank AIDS Acquired immunodeficiency syndrome CAE Country Assistance Evaluation CAS Country Assistance Strategy CCICED Chinese Council for International Cooperation on Environment and Development CPPR Country performance portfolio review DEC Development Economics and Chief Economist Vice Presidency DECRG Development Research Group DFID Department for International Development (United Kingdom) EAP East Asia and Pacific Region EBF Extrabudgetary fund EIA Environmental impact assessment ESMAP Energy Sector Management Assistance Program (IFC) ESW Economic and sector work FDI Foreign direct investment FSTAP Financial Sector Technical Assistance Project GDP Gross domestic product GEF Global Environment Facility GNI Gross national income HIV Human immunodeficiency virus IBRD International Bank for Reconstruction and Development (The World Bank) ICB International competitive bidding IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IP Inspection Panel LGPR Leading Group for Poverty Reduction LOC Line of credit MDG Millennium Development Goal M&E Monitoring and evaluation MFMP Multilateral Fund for the Montreal Protocol NGO Nongovernmental organization NPLs Nonperforming loans MIGA Multilateral Investment Guarantee Agency NRM Natural resource management O&M Operations and maintenance ODA Official development assistance ODS Ozone-depleting substances OED Operations Evaluation Department, World Bank PBC People's Bank of China PER Public Expenditure Review PPP Purchasing power parity PTI Poverty-targeted interventions x v C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E QAE Quality at entry QAG Quality Assurance Group QSA Quality of supervision assessments RSA Rapid supervision assessment RSAL Rural Sector Adjustment Loan RWSS Rural water supply and sanitation SCORES State Council Organization for Reform of the Economic System SEPA State Environmental Protection Agency SIDD Self-Financing Irrigation Development Districts SOEs State-owned enterprises TA Technical assistance TVE Township and village enterprise UNDP United Nations Development Program VAT Value added tax WBI World Bank Institute WHO World Health Organization WRM Water resource management WS Water supply WTO World Trade Organization WUA Water users association WWTP Wastewater treatment plants Note: All dollar amounts are U.S. dollars unless otherwise indicated. x v i 1 Introduction China's Achievements in a Quarter-Century of Reform In December 1978, China reversed its development strategy of the previous 30 years and launched a process of economic reform and opening up to the outside world. The results of China's strategic shift have been dramatic. Growth. Since 1980, China has had one of the economies. This stabil- Since 1980, China has highest sustained rates of growth of per capita ity is often attributed had one of the highest income in the world (see figures 1.1 and 1.2). to China's gradualist sustained rates of growth While there is a lively debate on the accuracy of approach to economic official statistics, there is widespread agreement reform ("crossing the of per capita income in that per capita gross domestic product (GDP) river by feeling the the world. in constant domestic prices doubled between stones"), in which 1980 and 1990 and then approximately doubled institutional changes again between 1990 and 2000.1 In constant have preceded or accompanied policy dollars and current purchasing power parity changes.2 (PPP) terms (see table 1.1), the increase was even greater, owing to exchange rate Shortcomings and Challenges movements. Exports in current U.S. dollars Despite China's enormous achievements in increased from $18 billion in 1980 to $249 growth, poverty reduction, and stability, there billion in 2000--a nearly 14-fold increase. have been shortcomings as well, especially in the 1990s. Poverty reduction. Between 1990 and 2000, the number of people living on a dollar a day fell by · Rising inequality and vulnerability. The 170 million--during a period when total popula- rural reforms of 1979­84 reduced inequality, as tion rose by more than 125 million. Over the past well as poverty. Since the late 1980s, however, two decades, China accounted for 75 percent of inequality and vulnerability have increased, and poverty reduction in the developing world. since the mid-1990s, poverty reduction has slowed.3 In the second half of the 1990s, the Stability. China also avoided the instability and share of people in poverty stagnated, despite an output declines of most other transition overall growth rate of more than 8 percent. 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E T a b l e 1 . 1 C h i n a : S e l e c t e d I n d i c a t o r s , 1 9 8 0 ­ 0 1 Indicator 1980 1990 1995 2000 2001 Population, total (million) 981 1,135 1,205 1,262 1,272 GDP per capita (constant 1995 US$) 167 350 581 825 878 GNI per capita, PPP (current international $) 430 1,300 2,460 3,690 3,950 Exports of goods and services (current US$ billion) 14 62 168 280 299 Exports of goods and services (% of GDP) 8 18 24 26 26 Manufactures exports (% of total exports) 50 74 86 90 90 Gross domestic savings (% of GDP) 35 38 43 39 40 Gross capital formation (% of GDP) 35 35 41 36 38 Overall budget balance (% of GDP) ­1.9 ­1.7 ­3.6 c ­3.3c Revenue (% of GDP) 26 20 11b 15 17 External debt, total (current US$ billion) 55 118 146 170c Reserves (current US$ billion) 2 29 105b 166 212 Poverty headcount (million)d 490a 375 212 204 Poverty incidence (%)d 51a 33 17b 16 Note: One billion = 1,000 million. PPP = purchasing power parity. a. 1978. b. 1996. c. Data from World Bank China Program real-time database; new definition was introduced in 2001 data that includes better measurement of short-term debt. d. World Development Indicators and China Statistical Yearbook. Source: The World Bank Sima database, data as of July 15, 2003, unless noted otherwise. A v e r a g e A n n u a l R e a l G D P p e r C a p i t a F i g u r e 1 . 1 G r o w t h , C h i n a a n d C o m p a r i s o n s , 1 9 8 0 ­ 0 1 Percent 9 8 7 6 5 4 3 2 1 0 China East Asia and Pacific Indonesia India Low and middle income Brazil This partly reflects the fact that coastal provinces fiscal redistribution, and reforms have led to have benefited more from reforms and open- less equal access to health and education serv- ing up than remote, resource-poor inland ices. A 1998 survey by the Ministry of Health provinces; but decentralization has also favored found that 22 percent of households below the coastal provinces and reduced the scope for poverty level were in that position because of 2 I N T R O D U C T I O N R e a l G D P I n d e x o f S e l e c t e d T r a n s i t i o n F i g u r e 1 . 2 C o u n t r i e s , 1 9 8 9 ­ 0 1 Index 350 300 250 200 150 100 50 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 China Vietnam Poland Hungary Czech Republic Romania Russian Federation a family member's serious illness or injury (Zhu (equivalent to about 30 percent of GDP), de- 2002). Gender inequality persisted in the 1990s, spite moving many such loans to asset man- when there were both advances and setbacks. agement corporations since 2000. It also poses · Environmental degradation. China's air direct risks of unemployment and social in- and water are heavily polluted, accounting for stability and compounds fiscal problems by tens of thousands of deaths annually. Seven of cutting into revenues needed for reforms of the 10 most polluted cities in the world in the pensions, housing, and social services and for late 1990s were in China.4 "Green" environ- redistribution to poorer provinces. Finally, in- mental problems are also serious. One-third of sufficient reform in regulatory and legal China's grasslands, which cover 40 percent of processes fosters corruption, which has be- land area, are seriously degraded. A falling water come an additional source of discontent and table in northern China has seriously restricted potential instability.5 A World Bank China Client the sustainable development of the region. Survey (2002) found that corruption and social · Risks from incomplete reform. The strat- protection were most frequently considered egy of gradual reform is hard to fault in terms the greatest challenges facing China (Annex K). of the growth and stability it has provided. "Growing out of the plan"--leaving state en- China was admitted to membership in the terprises relatively unreformed while encour- World Trade Organization (WTO) in 2001. This aging private sector competition and represents a significant commitment on all growth--can be seen as an ingenious way to sides. For the rest of the world, it implies compensate potential losers that purchases granting equal access to markets. For China, it precious time and stability. But the incom- is a commitment to continue market-oriented pleteness of enterprise reform poses risks that reforms and opening up to the outside world. could undermine some of the achievements of It thus poses both opportunities (for exports the past 20 years. Most notably, it weakens the and growth) and challenges (of adjustment to state-dominated banking system, which still competition in agriculture, industry, and has more than 20 percent nonperforming loans banking). 3 2 Evolution of World Bank Assistance Strategy T he People's Republic of China assumed its seat in the World Bank in 1980. China's membership was significant for both the World Bank and China. For the Bank, admission of the world's largest country offered the chance to be a truly World 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 of its opening up and reversal of isolation. The Bank was viewed by China as a source of technology and information-- a window on the outside world. Deng Xiaoping summed up initial Chinese expectations of the relationship this way: "We can do it with or without the Bank, but with you we can do it faster." The early years of the relationship were marked Some Chinese officials expected that China by patient efforts on both sides to overcome would reach immediate parity with India and cultural differences and mutual misunderstand- might even be compensated for the years ings or suspicions. Chinese officials were China had lost while not a member. Because of disconcerted by the extensive data requests in China's size and pressures for allocation to preparation for the Bank's first economic Africa, these expectations could not be met. report (World Bank 1982).1 For its part, the A compromise was reached in which China's Bank was surprised to be presented with fully IDA allocation gradually increased to a level prepared projects that were apparently comparable to India's, while China limited expected to be financed with no modification. International Bank for Reconstruction and Chinese suspicions that the Bank had an Development (IBRD) Establishment of trust ideological agenda were matched by Bank borrowing to maintain a concerns that the Bank would be used to 50­50 blend. This meant and mutual respect was a certify projects or policies on the basis of that overall lending to long and arduous government assurances, rather than independ- China rose less quickly process, but by the middle ent investigation and analysis. Finally, there than originally expected. were different expectations about International Establishment of trust of the 1980s relations Development Association (IDA) allocations. and mutual respect was were excellent. 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Chinese officials were a long and arduous strategy. At the behest of the G-7, the Bank impressed by the big process, but by the imposed a hiatus on lending to China.2 Bank middle of the 1980s management was concerned to avoid political picture painted by the relations were excellent conditionality and to help maintain the gains of Bank in the first report, and Bank prestige in economic reform that had taken place in China. and were surprised by the China was high. The The director of the Bank's China Department Bank's economic and traveled to China to take stock of the situation similarities of problems sector work (ESW) was a and report back to the Board, and in 1990, with other developing big factor (Stern 1997). World Bank President Conable pushed the countries. Chinese officials were Board to resume lending over the opposition impressed by the big of some shareholders (Gwin 1997). In 1991, picture painted by the Bank lending resumed and quickly built up to Bank in the first report, and were surprised by higher levels than before (see figure 2.1). the similarities of problems with other develop- The Bank thus emerged from the 1980s with ing countries (Jacobson and Oksenberg 1990). considerable prestige and as a trusted adviser The Brookings history of the Bank noted that to those Chinese policymakers and researchers this report "became a primer for senior Chinese who favored economic reform. Earlier evalua- officials and went a long way in establishing the tions gave the Bank high marks for its Bank's credibility in that country" (Kapur, Lewis, assistance to China in the 1980s. The Brookings and Webb 1997, p. 24). The second major report history (commissioned by the Bank) of the (World Bank 1985) had an even more dramatic Bank's first 50 years called the relationship impact. After reading it, Premier Zhao Ziyang "one of the most successful interactions of the asked the System Reform Commission to World Bank with a borrower" and "one of the prepare a new five-year plan incorporating some Bank's prouder achievements of the 1980s."3 of the main proposals of the report (Lu 2002). Lessons from the 1980s are limited, and Lending also helped promote mutual trust. comparisons between the 1980s and the past At first, the Bank largely accepted Chinese decade are fraught with difficulty. By the 1990s, project proposals with little modification, but China was a completely different country than insisted on application of standard procure- it had been in the previous decade. The Bank's ment and other procedures. The results of role in the 1980s as a source of knowledge for a international competitive bidding (ICB) long-isolated country was clear. But China in lowered project cost so much that China the 1990s had far greater capacity, international adopted competitive bidding for many of its experience, and access to other sources of own projects. By the mid-1980s, project knowledge and capital. In this more sophisti- preparation and appraisal involved much more cated and competitive environment, therefore, give and take, and in 1987 the Bank approved the Bank was bound to have a lower profile and the first (and only) adjustment loan to China-- play a different role. a Rural Sector Adjustment Loan (RSAL) in support of ongoing Evolution of the Relationship and Bank The Bank thus emerged rural reforms. Strategy after 1991 from the 1980s with The first real test of The overarching objective of the Bank's considerable prestige and the relationship arose assistance strategy during most of the 1980s in the aftermath of the and early 1990s was to promote economic as a trusted adviser to events in Tiananmen system reform.4 In focusing on reform, the those Chinese Square in June 1989. Bank was following a long tradition of policymakers and The Board of Executive outsiders who have sought "to change China" Directors was deeply for one reason or another (Spence 1969).5 researchers who favored divided over the System reform was seen by the Bank and economic reform. implications for Bank Chinese reformers alike as the key to long- 6 E V O L U T I O N O F W O R L D B A N K A S S I S TA N C E S T R AT E G Y I B R D - I D A C o m m i t m e n t s t o C h i n a b y F i s c a l F i g u r e 2 . 1 Y e a r , 1 9 8 1 ­ 0 3 $ millions 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 87 88 89 90 91 92 93 94 95 96 97 98 99 OO O1 O2 O3 Fiscal year IBRD commitment amount IDA commitment amount term growth, modernization, and poverty ture and rural development; and environmen- reduction. tal protection. The Bank's strategy on poverty System reform and macromanagement-- reduction and the environment evolved in line and continued reform for better macro with the approach in most of the Bank. The management--have remained prominent strategy for poverty reduction, for example, themes of Bank Country Assistance Strategy was to be pursued by helping China maintain (CAS) statements. Over the course of the high overall growth and by supporting agricul- 1990s, increasing emphasis was placed on tural and human resource development. other objectives that were already noted as Lending for agriculture, the social sectors, and secondary objectives in 1991. The first stand- (increasingly) inland areas was an important alone assistance strategy in 1995, for example, part of the Bank's stated strategy. had four areas of focus: macroeconomic and The Bank's strategy structural reforms; infrastructure bottlenecks; for China differed from The Bank consistently poverty reduction; and environmental protec- that for other countries, emphasized lending for tion. The 1997 strategy was similar, but in degree if not in kind, in infrastructure and grouped around five themes: macroeconomic two areas. First, the Bank stressed policy reform growth and stability; infrastructure; human consistently emphasized development and poverty reduction; agricul- lending for infrastructure within each sector. 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E W o r l d B a n k I n v e s t m e n t L e n d i n g f o r C h i n a F i g u r e 2 . 2 b y S e c t o r ( % o f t o t a l i n v e s t m e n t ) Health, Nutrition, and Education Population 3% Other 3% 5% Energy and Mining 20% Rural 24% Transport 29% Environment 5% Urban Development and Water Supply and Sanitation 11% in China at a time when such lending was falling ment. Like other large countries for which the Bank-wide6 (see figure 2.2 for sector allocation to Bank is a relatively modest source of capital, China and chapter 4 for a comparison with other China was reluctant to accept strong conditional- countries). Infrastructure bottlenecks were identi- ity. China was particularly sensitive to condition- fied as a major impediment to growth and ality because of its associations in the minds of macrostability, as well as to market integration. some with unequal treaties and extraterritorial Second, more than in other countries, the Bank's concessions. China also had no need for balance- strategy in China stressed policy reform within of-payments support, and the one adjustment each sector. loan (the RSAL of 1988) was an untranched How did the Bank aim to effect its ambitious operation based on already completed actions objectives? Not through the direct impact of its and disbursed against expenditures. There was lending. The Bank's lending was modest7 for a project-specific conditionality, of course, but country the size of China--$3.3 billion (0.6 sectorwide conditions were rare. percent of GDP) at its height in 1994. Direct The methods the Bank employed to pursue foreign investment at that time was already 10 its strategic objectives were mostly variants of times as high (see figure 2.3). Bank lending persuasion and example. was, however, 4.2 percent of government expenditure (and a higher but unknown · Persuasion through ESW, workshops, and other proportion of discretionary expenditure) at a analytical and advisory activities (AAA) was a key time of great fiscal stringency, so that for a brief method. The target audience was mainly sen- period in the mid-1990s the Bank made a ior officials and their policy advisers, and the noticeable incremental contribution to budget objective was to persuade them to implement resources. Nevertheless, resource transfer was top-down reforms. never seen as the main instrument of Bank · Dual-track approach of building trust through strategy or a major objective in its own right.8 lending while carrying the policy dialogue Nor was conditionality an important instru- through sector work. Each project was in- 8 E V O L U T I O N O F W O R L D B A N K A S S I S TA N C E S T R AT E G Y F i g u r e 2 . 3 R a t i o s o f A i d a n d D F I t o G D P , 1 9 9 0 ­ 0 0 % of GDP 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Official development assistance and official aid IBRD/IDA disbursement Foreign direct investment, net inflows tended to push the frontier of policy or insti- The approach just outlined fits well with tutional change, but the approach was gradu- China's preference for gradual and pragmatic alist and depended less on conditionality than reform. It clearly left the government "in the persuasion. driver's seat," with all that implies for country · Working with willing partners. The Bank ownership and performance. One drawback is worked with the power sector, which wanted that important issues may be omitted if key actors access to the technology that Bank lending on the government side are unwilling to be could provide and which was receptive to pol- partners with the Bank, or with other Chinese icy suggestions, but the Bank withdrew from agencies in cases such as the environment, where working in the coal sector because the Ministry coordination is vital.9 The dual-track approach was not interested in policy dialogue. In hous- can also lead to overly modest project objectives ing reform, the Bank worked with municipal- or complacency, and accountability for the Bank's ities that were willing to introduce economic performance can be difficult to assess when rents and excluded areas such as Shanghai policy issues are left to the uncertain timing and that were not. The Bank continued to work outcome of the second track (policy dialogue). with Shanghai in other sectors, however, and After the 1997 reorganization, the Bank Shanghai later introduced housing reforms decentralized the China department, moving on its own. the country director to Beijing and expanding · Demonstration effect. The Bank relied on the the size and functions of the resident mission. demonstration effect of successful project ex- This positive development for Bank-China perience in introducing new technologies, relations was offset by management methods, or policy reforms to three negative develop- The methods the Bank leverage the impact of project outcomes. This ments from China's employed to pursue its was largely a bottom-up process of diffusion by point of view. strategic objectives were example, though China also uses pilots to test First, IBRD lending changes before they are rolled out nationwide to China was increas- mostly variants of through changes in national policy. ingly constrained by the persuasion and example. 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Bank's limits on the share of its portfolio in a complete the project using its own funds. single country. As a result of this, IBRD lending, These three developments affected the which had built up rapidly in the early 1990s to Bank's assistance strategy. After the 1998 a peak of $3.3 billion in FY93, declined to below update of the 1997 strategy, the Board asked $1 billion by FY01. that no further CAS be sent until there was a Second, the Bank stopped lending IDA strategy to deal with the constraints posed by funds to China after FY99. Although plans to exposure limits. An agreement reached in July switch from blend to all-IBRD lending had been 2002 provided, among other things, for prepay- considered earlier and postponed for three ment of some Bank loans and for offset years, the loss of IDA was a disappointment to purchases of IBRD bonds so that the Bank can the government and placed strains on the increase its annual lending to a projected Bank's relationship with China. IDA donors $1.2­$1.3 billion. decided that China was sufficiently creditwor- The latest CAS, presented in December thy to dispense with IDA funding. The govern- 2002, is consistent with previous ones. The ment thought this unfair because per capita main objectives are to support China in GDP was still below the cutoff line at that time making two transitions, from a rural/agricul- and because there were still some 200 million tural to an urban/industrial society and from a people in China with consumption below a planned to a market economy. The CAS is dollar per day. The government also felt that organized around three themes--improving Bank senior management could have fought the business environment to help accelerate harder to retain China's access to IDA. Apart the transition to a market economy, address- from the strain this placed on the relationship, ing the needs of poor people and regions, and it greatly complicated Bank strategy. Beneficia- facilitating environmental sustainability. The ries right down to the village or individual main differences with previous strategies are farmer level have always been responsible for imposed more by the shift to all-IBRD terms loan repayment. With the loss of IDA, the than the overall reduction in lending. The government has decided that the Bank will be Bank is constrained from shifting its lending largely excluded from lending to poor to lagging regions and from maintaining the provinces or the social sectors because IBRD level, or even the share, of lending to agricul- terms would be too onerous. ture, the social sectors, and poverty projects The third significant negative development because of the difficulties these regions and was an Inspection Panel report on the Qinghai sectors would have in repaying IBRD. An component of the Western Poverty Project. The innovative arrangement, in which the U.K. Panel's report, issued on April 28, 2000, Department for International Development concluded that the Bank had failed to follow its (DFID) blends grants with IBRD loans to own safeguard procedures for the environment, simulate IDA terms, offers an opportunity for indigenous peoples, and involuntary resettle- the Bank (jointly with DFID) to remain ment. Following a Board engaged in social sectors and poverty The loss of IDA was a decision that the project projects. By also maintaining a relatively high disappointment to the be resubmitted for level of lending for infrastructure, the Bank government and placed approval after addi-tional aims to increase the share of lending to studies, China withdrew poorer, inland provinces. The effect of the strains on the Bank's its request for Bank Inspection Panel Report on safeguards policy relationship with China. funding and decided to is discussed in chapter 4. 1 0 3 Progress on Development Objectives T he 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 in- frastructure development for growth and market integration, and (4) envi- ronmental protection. This chapter reviews progress on these objectives over the past decade and the impact of the Bank's assistance on each objective. Macroeconomic Management Macroeconomic Management and System Reform China faced two critical tests to the mainte- System reform has been the most prominent nance of growth and stability in the past objective of the Bank's assistance strategy, decade. The first came in the early 1990s particularly in the early years of the period following the resumption of reform in 1992. By under review. Macroeconomic management mid-1993, inflation had again risen to about 20 and system reform have always been seen by percent per annum (as it had during 1988­89), the Bank as complementary. Growth and stabil- provoking a fierce debate in China on whether ity (low inflation) create a favorable climate for reform was compatible with macro stability. reform, and system reform (notably, creation of The Bank was able to make an important a "hard budget constraint" for enterprises and contribution to the debate through a confer- banks) creates the micro foundation (respon- ence on "Macroeconomic Management in siveness to price signals) for indirect macro China," held in Dalian in June 1993. This was management.1 China's macro management one of a series of annual conferences, co- could hardly have been better in the areas of sponsored by the Bank and the System Reform growth, inflation, and foreign trade and Commission, that brought together Chinese exchange rate management. Fiscal manage- officials and scholars ment has been more of a problem. While with Bank staff and China faced two critical progress has been made on enterprise and foreign experts to tests to the maintenance related reforms, the unfinished agenda of discuss some aspect of of growth and stability in system reform poses risks for financial, fiscal, reform. The Bank's and social stability. argument that macro the past decade. 1 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E instability was the result of incomplete reform, Fiscal policy is the most difficult long-term rather than inherent in reform itself, helped challenge of macro management. Although influence subsequent efforts to reform the government revenue never declined in central bank and monetary management and to absolute terms, it decreased sharply as a undertake fiscal reform to restore and partially percentage of GDP from 34.4 percent in 1978 re-centralize revenue collection.2 This to 19.1 percent in 1990, reaching a low of 11.1 influence seems to have carried over into trade percent in 1995 (figure 3.1). In part, this was an and exchange rate reform as Chinese reforms intended consequence of the declining in these areas were influenced by and largely financial intermediation role of the govern- consistent with the recommendations of a ment, but it was mainly due to the erosion of major Bank trade report (World Bank 1994b). state-owned enterprise (SOE) profits because The second test was the Asian financial crisis of competition from township and village of 1997. China's decision to forgo competitive enterprises (TVEs). Central government devaluation in the wake of the 1997 crisis helped finances were particularly hard hit because of a limit the crisis. China also countered that shock series of adverse (to the center) fiscal contracts with an expansionary fiscal policy. This negotiated with individual provinces in the maintained China's growth rate and helped mid- to late 1980s. The declining share of neighboring countries recover more quickly, but government revenue, attempts to maintain it also led to growing fiscal deficits and funding of SOE investment (through banks, as postponement of financial sector reform in well as the budget), and pressures to cushion order to sustain growth. Bank advice may have the effects of reforms through subsidies led to influenced China's response to the crisis. The growing inflation in the late 1980s. Fiscal Bank's chief economist met with the premier reforms in 1994 regularized intergovernmental and other officials and advised China to prevent fiscal relations and set the stage for a gradual deflation and competitive devaluation. Those recovery of the share of government revenue views were circulated within the government.3 to 17.2 percent in 2001 (Ahmad and others The ambitious China 2020 study (World Bank 2002).4 Although China experienced the same 1997) coincided with the Asian crisis, which relative decline in revenue as many other distracted policymakers from the long-term transition economies, it avoided fiscal collapse issues addressed in the report and the impend- and inflation because of its high savings rate ing loss of IDA, which strained relations. Chinese and implicit taxation of the financial system, officials and researchers interviewed for this and because it undertook timely fiscal reforms. Country Assistance Evaluation (CAE) also The Bank argued strongly for these reforms in criticized China 2020 order to improve the instruments of macro Although China because it had too little management. The Bank also gave advice on a experienced the same Chinese input and value added tax in 1993 and provided a fiscal relative decline in focused on problems technical assistance credit in 1995 to support and long-term goals, budget administrative and fiscal policy revenue as many other rather than on concrete improvements, including tax policy and transition economies, it steps to achieve them. intergovernmental grants. The momentum for avoided fiscal collapse Other donors, however, fiscal reform slowed in the late 1990s, and and inflation because of reported that they implementation of the project was delayed, but found this report interest in fiscal issues has recently increased. its high savings rate and valuable for helping Despite these achievements, China faces implicit taxation of the formulate their own two other difficult fiscal issues. First, continu- financial system, and assistance strategies, ing budget deficits and large contingent liabili- and sector ministries ties for pensions and the banking system create because it undertook found the background a debt management problem. Informal work on timely fiscal reforms. papers very useful. the implications of contingent liabilities for 1 2 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S F i g u r e 3 . 1 R e v e n u e T r e n d 25 20 GDP of 15 percent a as 10 Revenue 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Central revenue Non-central revenue debt management (see Krumm and Wong 2002 System Reform for a published version) has reportedly China's strategy of gradual economic reform has sensitized officials to the seriousness of this successfully sustained growth, stability, and politi- issue. Second, the intergovernmental fiscal cal support, but the unfinished reform agenda system remains deeply flawed. The Bank's poses significant risks.8 To some extent, these have Provincial Public Expenditure Review (PER) been calculated risks--the calculation being that it provides a good analysis of the issues (World was more important to sustain growth after the Bank 2002a). There is a mismatch between tax Asian crisis than to press ahead with enterprise and and expenditure assignments at different levels banking reform--but the risks are significant of government, and the overall incidence of the nonetheless. Although sometimes impatient with fiscal system is regressive. Per capita govern- the pace of reform, the Bank has broadly ment expenditures in the richest five provinces supported China's incremental approach. were 3.3 times those in the poorest five State-owned provinces in 1998 (up from a differential of 2.1 enterprise reform is The unfinished reform times in 1990).5 This imbalance accentuates central to reform of the agenda poses significant regional inequality. Moreover, provincial and entire economic system risks. local authorities impose a number of ad hoc for several reasons. fees that are a particular burden in poorer areas.6 The level and arbitrary nature of these · In the pre-reform system, SOE profits were fees have been a major source of discontent, the main source of savings and government rev- leading to "tax revolts" in some poorer rural enue. Prices bore little relationship to costs areas. A pilot program introduced by Anhui or scarcity and were used by the central au- Province to substitute taxes for fees and limit thorities as implicit taxes and subsidies. Thus the level of rural taxes is now being rolled out enterprise reform was closely linked to price in other provinces, but it does not address the reform and had enormous macroeconomic overall regressiveness of the fiscal system.7 implications--15 of the 23 percentage point 1 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E drop in the share of government revenue to growth of the non-state sector, rather than an GDP between 1978 and 1995 was attributable absolute decline of SOE output, but in recent to lower revenues from industrial SOEs. years SOE reform has accelerated. Under a 1997 · SOEs have traditionally had enormous social guideline of "focusing on the big and letting go responsibilities, providing lifetime employ- the small," reform strategy has been to corpora- ment and housing, pensions, health care, and tize large enterprises while putting small education for workers and their families. With- enterprises under private management or out unemployment insurance and housing ownership. By the end of 2000, 81 percent of the and pension reform, enterprise reforms re- 635,000 small SOEs had been transformed to sulting in dismissal of workers would create non-state ownership.11 The introduction of hardship and social unrest. bankruptcy legislation, unemployment · Reforms that shift responsibility for social serv- insurance, housing reform, and limited pension ices and insurance from the enterprise to the reform has enabled the closure of many loss- state (the socialization of welfare) have budg- making SOEs and a reduction in SOE employ- etary implications. They require additional ment of some 30 million jobs between 1998 and public funding and/or individual fees at the 2002. same time that revenues are tight. Enterprise and related reforms are far from · Much SOE investment previously financed complete, however, and this poses significant through budget grants is now funded through challenges and risks. Although reforms loans from state-owned commercial banks. boosted SOE productivity, the proportion of Banks, however, are subject to political and so- SOEs incurring losses increased from 26 cial pressures and often lend to SOEs that might percent of the total in 1992 to 50 percent in not qualify on strictly commercial criteria. 1998, as competing non-SOEs did even better.12 Despite housing and other reforms, It is not surprising that enterprise reform many SOEs still have social obligations that has been gradual. The social responsibilities of may partly account for their poor financial SOEs and the links between enterprise reform, performance. Privatization of small SOEs has social services and insurance, the budget, and lacked transparency, frequently leading to the financial sector mean that all aspects of asset-stripping and other forms of corrup- reform have to go forward together, or be tion. Large SOEs have been delinked from carefully sequenced, to avoid adverse macro or ministries and organized as corporations, but social consequences. corporate governance and regulation are Considerable progress has been made on weak.13 Coverage of unemployment system reform. Price reform took place gradually insurance and social security is limited to during the 1980s and early 1990s, and most urban areas, and programs are underfunded prices in China are now market-determined.9 because responsibility for funding remains SOEs themselves steadily declined in importance mainly at the municipal level. Finally, during the 1990s. Their share of industrial output commercial banks have become seriously declined from 78 exposed to risk of non-repayment by SOEs. It is not surprising that percent in 1978 to 54.6 Nonperforming loans (NPLs), mainly from enterprise reform has percent in 1990 and 23.5 SOEs, are officially estimated at around 25 been gradual. All aspects percent in 2000, percent of total loans despite an earlier shift although the share of of part of the portfolio to asset management of reform have to go industrial output of corporations. Ultimately, since the banks are forward together, or be "state-owned and state- also state-owned, NPLs create contingent carefully sequenced, to holding enterprises" was liabilities for the budget. still 47.3 percent in The Bank's role in enterprise and related avoid adverse macro or 2000.10 This relative reforms has been mixed. One of the most social consequences. declinereflectstherapid frequently cited areas of successful Bank 1 4 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S assistance by Chinese sources is pension the potential budget The biggest risk to China's reform. Bank support included ESW, research costs are mitigated by continued growth and the papers and participation in an international the fact that the state is biggest failure of the workshop, a policy note at the request of the both creditor (as owner premier, and a project to help support of the banks) and Bank's assistance strategy implementation of a pilot reform scheme in debtor (as owner of the thus far is the financial Liaoning Province (Lu 2002).14 The Bank has SOEs), the systemic risk sector. also contributed to housing reform through is still enormous projects as well as ESW. AAA on enterprise because different levels reform has been influential in promoting of government have different net positions, concepts such as corporatization; the Bank has the value of enterprise assets may be only a given a great deal of advice in reports, fraction of outstanding loan value, the govern- seminars, and technical assistance on ment has an implicit contingent liability to corporate governance and bankruptcy, but it household depositors, and entry into WTO will has also been criticized for being too generic increase competitive pressure on banks as well ("operating at a level of 30,000 feet," as one as enterprises. Financial sector reform cannot staff member put it) and too timid in discussing be separated from enterprise reform, because privatization (Lu 2002).15 Bank projects in the to reform one quickly risks forcing collapse of industrial sector were the least successful in the the other. The government has made progress lending program; five of eight industrial in recent years (see Annex E), but the stakes projects completed after 1992 had unsatisfac- and risks are still high. tory outcomes. Technology upgrading was the The Bank's financial sector review (World dominant objective in most projects, but some Bank 1990) was the basis for assistance also sought to pilot some type of reform. strategy in the 1990s, which sought to create Overall, they failed on both counts. The Bank is independent banks that, while still state- ill-suited to providing the kind of quick, flexible owned, would operate on commercial princi- assistance needed in industry, and partial ples, subject to an improved regulatory and reforms at the enterprise level do not succeed supervision system. The Bank recognized the without a wider change in policies and need to find ways to limit political interfer- incentives. More recent experience has also ence, especially from local authorities who had been less than satisfactory. A technical influence over local bank branches, as well as assistance project for enterprise reform control over SOEs. Bank advice to create attracted little interest from the local govern- regional branches of the People's Bank of ments that were meant to be its beneficiaries, China (PBC), along the lines of the U.S. Federal and the Shenyang Industrial Reform Project Reserve, represented an early (successful) had little impact on reform.16 The Bank has attempt to limit local political interference and incorporated the lessons learned into its reassert central authority over monetary current strategy and there have been no new aggregates. Although little subsequent industrial projects in recent years.17 progress was made on the objectives set out in The biggest risk to China's continued the 1990 review, the Bank did not recast its growth and the biggest failure of the Bank's strategy.18 assistance strategy thus far is the financial A Financial Sector Technical Assistance sector. The banking system has been Project (FSTAP) completed in 1994 supported extremely successful in mobilizing household development of financial sector "infrastructure" savings to replace SOE savings, but it does not in areas such as the payments system, pruden- allocate resources efficiently (a majority of tial supervision and regulation, and PBC's debt loans from the dominant state-owned banks management, and provided an opportunity for go to SOEs) and its alarming rate of NPLs poses discussion of policy issues. Other Bank lending a huge risk to the budget. While it is true that to the financial sector did little to build up 1 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E institutional capacity for independent financial Summary: Macro Management and intermediation, however. Although three of the System Reform six line-of-credit (LOC) projects completed after China's achievements in growth and stabilization 1991 were rated satisfactory and three were over the past decade have been outstanding. marginally satisfactory shortly after comple- Steady progress has also been made in key areas tion, they appear less successful now than at of system reform, but intermittent and the time. Subprojects had good rates of return, incomplete reform of the intergovernment fiscal but the Bank's loans neither improved the system, SOEs, and the financial sector pose risks overall quality of loan portfolios nor had much for continued growth and stability. The Bank impact on systemic financial sector issues. To made a significant contribution to China's the extent that project evaluation improved, it macroeconomic management following the may have been used to select the best projects resumption of reform in the early 1990s, helping for Bank funding, rather than to reject projects to persuade the top leadership that continued that showed a low rate of return. The last LOC reform was not only consistent with, but essential operation closed in 1996. The Bank had tried for, high growth with low inflation. With respect to develop a Financial Sector Development to system reform more generally, the Bank Project and then a project to support the helped identify the critical nexus of Construction Bank, but these efforts came to enterprise/financial sector/fiscal reforms needed nothing. The Bank was reluctant to include a to underpin high growth with stability, but it was large LOC component, and China disliked the less successful in promoting implementation of disclosure requirements and felt the Bank was some of the components. In the banking sector, not nimble enough in preparing the project. the Bank largely failed to engage with the relevant The Bank's analytical work suffered from lack authorities throughout the mid- and late 1990s, of staff with sufficient expertise or familiarity though it helped improve basic banking with China, and there was frequent turnover. infrastructure such as payment systems. The China also looked to investment banks and Bank has now reengaged in the financial sector, consultants rather than the Bank for the but the effectiveness of its advice remains to be increasingly specialized policy and institutional seen. In state enterprise reform, the Bank advice being sought. Financial sector work on provided useful support on bankruptcy legisla- China continued to dwindle after 1997. During tion and in associated housing and social security the 1997 Asian crisis, China's top leadership reform, but attempts to introduce reforms was interested in lessons of the crisis for through industrial projects were largely China's own banking and financial sector. unsuccessful, and overall reform advice remained However, there was little interest or confidence too generic to have much practical impact. In the in Bank advice or support at lower levels, and fiscal area, the Bank's advice was influential in the Bank accommodated this lack of interest, helping reverse the decline in government undertaking almost no Bank work in the sector revenues and the central share of revenues in the until 2001. early to mid-1990s, and more recently, the Bank In 2001, the Bank agreed with the govern- has stimulated government awareness of the ment to renew Bank support for financial large fiscal contingencies arising from non- sector reform and development through a performing loans and unfounded enterprise program of AAA. The Bank produced a series of pension obligations. Finally, Bank analysis and confidential policy notes on specific issues of advice helped stiffen China's resolve to complete interest.19 The notes provide a good survey of its successful negotiations on WTO entry. Overall, the issues, but are based mainly on interna- the Bank met with only mixed success in helping tional experience. If this promising renewal of move reform forward. Incomplete financial collaboration is to be effective, the Bank will sector and enterprise reform, and the associated need to ground its recommendations in heavy fiscal contingencies, pose significant risks analysis of Chinese experience.20 to China's accomplishments.21 1 6 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S Poverty Reduction growth naturally lags No country has been more No country has been more successful than behind output growth successful than China in China in reducing poverty in the past 20 to 25 because of the huge reducing poverty in the years. Some 220­290 million people have reserve army of hidden moved out of poverty, depending on the defini- unemployed in state and past 20 to 25 years. tion used. The biggest reductions in poverty collective enterprises.24 came in the early period, mainly due to rural But policy factors also inhibited poverty reforms.22 In the latter part of the 1990s, the reduction. Special privileges designed to attract number of poor remained roughly constant foreign investment (such as special economic despite high growth rates, and China's poverty zones) were long limited to the coastal region; rate, using the purchasing power parity dollar- the tax-sharing system has redistributed per-day measure was relatively high compared revenues in favor of rich localities; and migration with other countries at a similar PPP income from rural areas has been limited. This last policy level (see box 3.1). In contrast to the early has special significance because one of the main 1980s, the benefits of growth in the 1990s have ways in which growth trickles down from accrued disproportionately to the better-off, leading sectors and regions is through the and inequality has increased steadily. The ratio movement of labor. of urban-rural incomes, which had fallen from The Chinese government recognized early 2.9 in 1978 to 1.9 in 1985, rose to 2.2 in 1990 on that growth is not enough to reduce poverty. and 2.7 in 1999 (see Annex R, table R.8).23 In 1986, at about the same time that China's Vulnerability has also increased markedly. development strategy shifted from agricultural Particularly in rural areas, access to health care growth to export-led development in coastal has deteriorated. In urban areas, insecurity has regions, the government set up the Leading increased as enterprise reform has led to Group for Poverty Reduction (LGPR) under the redundancies and uncertainty about funding for State Council and started to identify poor pensions and unemployment benefits. And counties that would qualify for targeted while migration restrictions have been relaxed assistance. Studies have estimated that targeted somewhat, under the urban registration programs may have raised the rate of growth in (hukou) system, most migrants are not entitled poor counties by 1 to 2 percent per year.25 to resident benefits such as housing and Unfortunately, regional targeting may be a education. China is making good progress on "blunt instrument" for reaching the poor meeting most national Millennium Develop- (Lipton and Ravallion 1995). About half of ment Goals (see Annex R, table R.9 and China China's rural poor do not live in poor counties, CAS 2002), but progress has been highly uneven and a majority of people living in targeted geographically. On current trends, some poorer counties are not poor. Thus coverage (of the regions will not meet all the goals by 2015. poor) was weak and leakage (to the non-poor) Growth was the most important factor in substantial. China's success in poverty reduction. But the The government introduced several new recent slowing of poverty reduction and increas- elements into its poverty strategy during the period ing inequality and vulnerability show that 1999­01. The most significant new element was the growth--even very rapid growth--is not adoption of a 10-year plan in 2001. The plan enough. Several structural factors offset the introduced an explicit Growth was the most poverty-reducing effects of growth: remote, multi-sector approach, resource-poor areas have lower growth emphasizing agriculture important factor in potential than coastal areas; the scope for raising and rural development, China's success in poverty rural incomes by improving cropping patterns provision of education reduction. But growth-- and the terms of trade for agriculture had largely and training to the poor, been exhausted by the mid-1980s; and with and facilitation of even very rapid growth-- accelerating enterprise reform, employment voluntary migration and is not enough. 1 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E C h i n a ' s P o v e r t y i n I n t e r n a t i o n a l B o x 3 . 1 P e r s p e c t i v e While there is broad agreement on the tremendous progress US$4,500 in 1999 (see table below). Comparisons of poverty China has made in reducing poverty, estimates of the remain- among countries are sensitive to definitions, however--es- ing problem depend critically on how poverty is defined. Using pecially to the poverty line used to divide, somewhat arbitrarily, China's official poverty line (an income level equivalent to 66 the poor from the non-poor. The China household saving rate cents per day), the number of poor people has declined from 250 is high even in low-income households, making the compari- million (26 percent) of the population in 1978 to fewer than 30 mil- son based on levels of consumption less meaningful. Using in- lion (2.3 percent) in 2001. Using World Bank figures based on a come rather than consumption, only 9.8 percent of the dollar-per-day consumption level in PPP terms, the number of population would have been below the dollar-per-day poverty poor has declined from an estimated 490 million (51 percent) in line in 1999. Moreover, the PPP comparison is based on aver- 1978 to about 205 million (16.1 percent) in 2000. age consumption, whereas to compare poverty levels across China has a relatively high proportion of poor people com- countries, it ought to be based on the consumption basket of pared with other countries at similar income level. Based on low-income households. The main conclusion to be drawn is the most widely used poverty line of a dollar per day con- not that poverty is relatively high or low, but that a large pro- sumption in PPP terms, China ranked fourth among countries portion of the population is close to the poverty line, however with annual per capita PPP income between US$2,500 and defined. Comparison of Poverty among Selected Countries Per capita PPP income Percentage in poverty Country (US$) (measured by $1 per day consumption) El Salvador 4,260 26.9 Turkmenistan 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 <2.0 Source: World Development Indicators 2002. resettlement of people from ecologically disadvan- Finally, the Great Western Development Strategy taged areas. Another new element in its poverty adopted by the State Council in 2000 extended the reduction strategy involved the introduction of regional development approach to all of western programs for protection of the urban poor, includ- China. The program has multiple objectives that ing unemployment insurance and subsistence may dilute, or be at odds with, poverty reduction. allowances. Although meant to provide a compre- In particular, emphasis on capital-intensive hensive urban safety net, resources are inadequate resource extraction projects will do little for the to achieve this objective (ADB 2002), and programs poor in western provinces unless the traditionally are funded at too low a level (usually municipal) to low transfer prices for raw materials are raised and spread risk and provide a sustainable funding base. appropriate fiscal sharing arrangements are made. 1 8 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S Until the late 1990s, China's poverty strategy both scholarly and policy views.28 Both the was to push for the fastest possible growth, sector reports and research papers are widely combined with targeted regional development cited in the literature. DECRG has also worked interventions. Could China have done more to closely with China's Bureau of Statistics, reduce poverty faster? Or would such attempts providing training and advice on defining and have simply reduced growth without affecting measuring poverty and on the design of the poverty? The recent changes in strategy household survey and other monitoring activi- suggest that the government thinks it could ties. One gap in the Bank's poverty work has have done better. It is now recognized that been the neglect of studies on urban poverty poverty is not just a rural phenomenon and (although the Bank has been involved in that rural poverty is not just concentrated in analyzing pension reform and other vulnerabil- remote areas. Vulnerability is also recognized ity issues, as discussed in the previous section). as a serious problem, though many required But a report by the Asian Development Bank reforms (housing, pensions, social assistance (ADB 2002) has filled this gap admirably, and it for the poor and unemployed) need further makes sense to build on this division of labor, development and more secure funding, and rather than to duplicate efforts. One high- others (such as health finance reform) have priority area would be a study of labor market scarcely begun. Similarly, the importance of issues, including the informal sector and links migration in spreading the benefits of growth between rural and urban areas. and helping to create a more sustainable balance between population and resources in Poverty Lending fragile areas is now recognized, but migrants Lending for poverty-related projects, as still face restrictions and discrimination. What measured by "poverty-targeted intervention" is perhaps still not sufficiently recognized is (PTI) lending, has been relatively low--under that the regressive fiscal system offsets many of 15 percent of total lending in China, compared the benefits of targeted interventions.26 with 56 percent in India.29 However, the share The Bank has made a substantial contribu- of PTI lending may be a misleading measure of tion to China's evolving poverty reduction support for poverty reduction for several strategy through its AAA, poverty monitoring, reasons: non-PTI projects (such as highways and projects. The main strength of the Bank that integrate remote markets) may be more program has been the close integration of beneficial to the poor than direct interventions; these three instruments. projects may have poverty components, but still not qualify for PTI classification; and finally, the AAA and Poverty Monitoring Bank's impact will largely depend on providing The Bank's ESW and research on poverty have replicable examples of best practices, given the been influential both inside and outside China. small share of Bank lending in total investment. Two studies of rural poverty (World Bank 1992 In fact, the Bank's direct poverty lending and World Bank 2000) provided an overview of through integrated rural development projects poverty issues and sensible strategy proposals has provided a replicable model for targeted on targeting and the need for a multi-sector intervention. The Southwest Poverty Project, in approach to rural development. Combined particular, has introduced new concepts and with an international conference cosponsored practices that have benefited not only project by the Bank in 2000,27 these reports helped participants but also the government's own influence the reorientation of government targeted interventions and practices (see box strategy in the 10-year plan for poverty 3.2). Nevertheless, the share of poverty-related reduction adopted in 2001. Research by the projects in the lending program has probably Bank's Development Economics Research been less than optimal for demonstration Group (DECRG) on the determinants and purposes, and PTI lending has virtually measurement of poverty has also influenced disappeared following the loss of IDA. 1 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E This growing disparity Agricultural Sector reflects the growing importance of non-farm between the share of Agriculture is still the income, which grew from 26 percent of most important source farmers' household income in 1990 to agricultural employment of livelihood for rural 47 percent in 1999. and the share of residents, though it is The structural changes also show the agricultural GDP reflects declining in relative importance of looking at agricultural production importance. Half the as only one element in rural development and the growing importance population was still poverty reduction. The Bank's assistance strategy of non-farm income. employed in agriculture for agriculture in China has increasingly done in 2000, down from 60 that, gradually shifting its emphasis from increas- percent in 1990, but agriculture's share of GDP ing agricultural production to improving rural was only 16 percent in 2000 (down from 27 incomes in poorer areas and improving natural percent in 1990), despite continued annual resource management for a more sustainable growth of 3.5 to 4.0 percent. This growing rural economy in ecologically fragile areas. Most disparity between the share of agricultural agriculture sector projects have emphasized employment and the share of agricultural GDP diversification of production, including non-farm B o x 3 . 2 A B e s t P r a c t i c e P o v e r t y P r o j e c t An internal assessment review in 1995 identified the Southwest very successful. Preventive care was often preempted by ex- Poverty Project as best practice soon after the project began being penditure on curative measures. The project was also more implemented. Subsequent project performance has confirmed this successful in some provinces than in others. Success depended assessment. The project implements many of the recommenda- on the capacity and commitment of provincial and local gov- tions of the 1992 rural poverty report (World Bank 1992b) and in- ernments and on ability to monitor and enforce repayment of volved DECRG and Chinese poverty-monitoring organizations in credit in the project. M&E. The design of the project went against long-standing con- Several lessons have emerged from the project. Two lessons ventional wisdom that integrated rural development projects that the government is applying to its own projects are, first, the were too complex to implement. Because of involvement of the importance of project supervision--for ensuring that imple- Leading Group for Poverty Reduction (LGPR) and the support of mentation takes place and benefits reach intended beneficiar- the highest levels of the national government, it was able to ies and for making adjustments to take account of problems, overcome bureaucratic resistance to coordination. successes, and unexpected events--and second, the need to im- The outcome of the project has been highly satisfactory over- prove targeting to reach the poorest areas. Two additional les- all. Preliminary results of a review by DEC (Chen and Ravallion sons have yet to be assimilated. First, the project confirms the 2003) estimate a rate of return on investment in the project of value of a multisector approach to poverty interventions. Whether nearly 10 percent. Since the comparator villages were part of the this coordination should be done through national projects government's own program in poor counties, this is a measure under the LGPR or through provincial authorities, and whether of the Bank's value added. Poorest households benefited most. all sectors (such as health and education) should be integrated This was achieved by targeting the poorest townships and vil- under a single project umbrella are still matters of intense de- lages, rather than attempting to identify poor households within bate within the government and the Bank. Second, the project "poor counties." The latter approach has not worked well in very highlights the primacy of national or sector policies in some poor areas because it undermines political support and leads to areas. Labor mobility can be facilitated through a regional de- favoritism in allocation, with attendant leakage and corruption. velopment project, but national policies to remove obstacles to Not all components worked. Investments in TVEs, as in other movement and to protect migrants from exploitation are nec- projects, were largely unsuccessful, but this component was re- essary and more cost-effective. Improved education and (es- duced sharply during implementation. The health component, in- pecially) health outcomes in poor regions will also require volving an attempt to provide collective insurance, was not systemic changes and outside resources, as well as local efforts. 2 0 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S production, rather than just increasing produc- most comparator countries and the Bank tion or yields of traditional crops. average--but institutional development was The impact of the Bank's program in agricul- rated favorably only 63 percent of the time (see ture has been mixed. The Bank's sector work Annex R, table R.5b). Borrower feedback and policy advice on grain policy and other credited the Bank with substantial impact on broad aspects of agricultural strategy have been project management (procurement and project sound,30 but failed to overcome resistance in appraisal) and with introducing and populariz- some areas. By 1999, 83 percent of all agricul- ing many innovations and new plant varieties, tural products were sold at market prices, but which raised incomes and productivity. But grain marketing has been liberalized at a slow there were shortcomings as well. Selection of rate since the late 1980s. Quotas still exist, and project components has been distorted by policies on marketing arrangements were incentives for local governments to include reversed in 1998. This mainly reflects strategic income-generating activities to repay project concerns about dependence on grain imports; loans. Such incentives led to inclusion of many the economic case for liberalization is well unsuccessful TVE investments; although TVEs understood by Chinese policymakers.31 The contributed enormously to rural development national market has become increasingly in the 1980s and early 1990s, Bank-supported integrated, and domestic prices for most agricul- investments often failed because Bank tural products are close enough to world prices procedures are too cumbersome to support that WTO accession should have a relatively timely investment in commercial activities. TVE modest impact on agricultural output and components also tended to crowd out the incomes, though there will be some adverse private sector. (This lesson has been absorbed distributional effects that will need remedial and the Bank has cut down on such action (such as increased mobility of labor).32 components.) More generally, Bank projects OED ratings of Bank lending in agriculture have focused too much on specific production have been high--94 percent for outcomes results and on ad hoc arrangements for channel- during 1993­2002. Sustainability was rated as ing credit, rather than on helping to build a likely for 79 percent of lending--higher than viable rural credit system. The blame for this is W B I / C h i n a N e t w o r k f o r T r a i n i n g a n d B o x 3 . 3 R e s e a r c h i n H e a l t h E c o n o m i c s a n d F i n a n c e The WBI/China Network for Training and Research in Health are asking for the Network's policy and operational research Economics and Finance was established in 1991 at the request inputs in formulating local health initiatives and activities. Per- of the Ministry of Health to create capability in health financ- haps the greatest role the Network can play is influencing the ing and related policy issues among senior-level decision- State Planning and Development Commission (SPDC), Ministry makers in the ministries of health, finance, and planning and of Finance, and State Council decisions, which would facilitate among provincial and local government officials. Senior pol- changes at the wider country level and bring about larger cen- icy seminars (SPSs) organized by the Network have brought to- tral and provincial allocations for basic health services and pre- gether ministerial, director-general, and vice-gubernatorial ventive care. SPSs have reached only officials within these levels of governments from health and non-health sectors to de- entities with oversight for health. It is important to reach the de- bate health financing policy issues, some of which were sup- cisionmakers within these institutions who wield greater in- ported by policy research carried out by the Network's research fluence on broader fiscal and economic policies and to centers at six medical universities. Earlier seminars helped to demonstrate to them the critical contributions of health to demystify market mechanisms in the health sector, while later China's long-term productivity and growth. Thus far there has ones have facilitated decisions by individual provinces on al- not been good follow-up on the results/outcome of policy issues locations to rural health. Increasingly, provincial governments debated at the SPSs. 2 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Although physical shared between the own reports confirm the deterioration in health construction targets and Bank, which has been access. In 1975, 85 percent of the rural popula- too eager for production tion had access to cost-effective preventive and outputs were achieved in results at the expense of curative health services and shared at least to several cases, crucial institutional develop- some extent the risks of medically caused institutional issues did ment and sustainability, financial misfortunes. In 1995, this coverage had and the borrower dropped to about 10 percent (World Bank not receive the attention (especially local govern- 1996b). Decentralization of responsibility for they need. ments), which has health finance has widened disparities in health resisted surrendering resources, and the fee for service system has control to independent financial institutions.33 distorted incentives, leading to neglect of Finally, recent project assessments show that, preventive care and to the prescribing of although physical construction targets and inappropriate drugs and services. Serious illness outputs were achieved in several cases, crucial or injury is a major cause of poverty. institutional issues did not receive the attention The Bank's ESW has thoroughly analyzed they need. One such issue is the operation and health finance issues (see especially World maintenance (O&M) of irrigation infrastructure. Bank 1996b and the chapter on health finance Gains in productivity and incomes from greater in World Bank 2002b), and the World Bank water availability achieved with support from a Institute (WBI)­China Network has helped Bank project may well be short-lived if O&M expose senior officials to health sector issues are not given the attention they need. And problems (see box 3.3). However, this seems while it is commendable that physical to have had little impact at the highest level implementation often exceeds project targets in of decisionmaking responsible for intersector China, this has sometimes had unintended allocations or intergovernmental fiscal consequences; for example, in the Hebei relations. The lending program is small (3.2 Agricultural Development Project, overexpan- percent of total lending during 1993­02) sion of tube wells may have contributed to compared with other large comparator lowering the water table. countries, including IBRD countries such as Brazil (see Annex R, table R.5a). Project Health Sector ratings have been variable, but include a high China's health and nutrition indicators have proportion of highly satisfactory outcomes.36 always been good compared with countries at a The lending portfolio has rightly focused on similar income level, and they continued to rural health issues. Most projects have been improve on average in the 1990s.34 But average disease-oriented, with fewer projects indicators mask rising regional and urban-rural dedicated to addressing health systems differences and a near crisis in poorer rural performance and reforms. An important areas, where infant mortality and other indica- exception was the Integrated Regional Health tors have deteriorated.35 The World Health Development project of 1990­98, which Organization (WHO introduced a systematic approach to health Average indicators mask 2000) ranked China 61st planning and influenced the 1997 State rising regional and out of 191 countries on Council strategy on health sector reform. urban-rural differences overall quality of health, Within the constraints of the policy but 188th in terms of framework, the lending program has been and a near crisis in fairness of financial innovative, had substantial to high institu- poorer rural areas, where contribution to health. tional development impact, introduced state- infant mortality and While the WHO of-the-art concepts and technology, and methodology is contro- contributed to building technical capacity. other indicators have versial among health But overall the Bank assistance program has deteriorated. economists, the Bank's not managed to change the health financing 2 2 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S system, which continues to create perverse Infrastructure The Bank has helped incentives and widening disparities in health Infrastructure develop- establish successful outcomes. ment has been a central models of targeted element in the Bank's Summary: Poverty Reduction assistance strategy for interventions through China made substantial gains in poverty China. In the early and integrated rural reduction over the past decade, but progress mid-1990s, helping to development projects. has slowed significantly since the mid-1990s, break infrastructure despite continued high growth rates. Inequal- bottlenecks was seen as ity in incomes and access to social services has critical to the strategy of sustaining high growth grown. Vulnerability has also increased with a without inflation and thus preserving a rise in unemployment combined with slow conducive climate for reform; in more recent development of social protection. The Bank years, infrastructure development was consid- made several significant contributions to ered to be one of the most effective ways of poverty reduction in the 1990s. Its analytical promoting market integration, poverty work helped clarify the nature of rural poverty reduction, and development of inland China. and shape China's poverty reduction strategy. Sector reform and institutional development The Bank has also helped improve capacity for were important objectives as well, to be poverty measurement, as well as monitoring pursued mainly through parallel AAA and by and evaluation. Perhaps most important, the piloting individual reform elements in a series Bank has helped establish successful models of projects. China also placed high priority on of targeted interventions through integrated Bank support for infrastructure--to provide rural development projects. In addition, many new technology and management methods, as projects in agriculture, health, and transport well as finance. have contributed directly or indirectly to It is not surprising then that infrastructure poverty reduction. Where the Bank has been (narrowly defined as transport and energy) less successful is in persuading the govern- dominated the Bank's lending program. During ment of the implications of broader develop- the period 1993­02, energy and transport ment policies for poverty and for growing commitments were $11.1 billion, nearly half of inequality and vulnerability. The mismatch all lending.37 Highway projects alone were 20.9 between intergovernmental fiscal resources percent of all lending, and power projects and responsibilities exacerbated regional accounted for 17.2 percent. Other infrastruc- inequality; the health finance system in partic- ture lending was distributed across railways ular has created adverse incentives for (4.3 percent of total Bank lending), urban provision of preventive care and led to grossly transport (3.1 percent), ports and inland unequal access to health services; grain policy waterways, and natural gas. The energy sector has penalized farmers in some of the poorer received $90 million in Global Environment areas; and migration restrictions have limited Facility (GEF) grants Infrastructure economic integration, helped perpetuate the through the Bank as urban-rural income gap, and denied those who well. The Bank also development was did manage to migrate equal access to services. carried out a substantial considered to be one of The Bank has produced some excellent ESW amount of AAA, includ- the most effective ways of analyzing these problems, but has failed to ing support for national persuade the government of the importance sector and subsector promoting market or urgency of policy change. The situation may strategies. integration, poverty be changing, however, as the government has Overall, Bank support reduction, and recognized the risks that growing inequality for infrastructure was development of inland and vulnerability pose for social stability and highly successful. Portfo- economic progress. lio performance was China. 2 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E without equal in the Bank. All 28 transport power sector, the Bank helped build 20 percent projects that closed during the period 1993­02 of the transmission lines and 20 gigawatts of were rated at least fully satisfactory (and 2 were generating capacity, including the first 300- rated highly satisfactory). None of the 12 megawatt, 600-megawatt, and 900-megawatt completed energy projects was rated unsatisfac- generating plants in China. tory, although 3 were marginally satisfactory Apart from its direct contribution to supply (balanced by 3 highly satisfactory). Sustainability expansion, the Bank leveraged its influence in was rated likely or highly likely for all transport two ways. First, Bank AAA contributed signifi- projects and all but one energy project, and cantly to sector policy reform and institutional institutional development was rated substantial development, especially in the power sector. for 20 of 28 transport and 10 of 12 energy sector Over the course of the decade, and especially projects. OED sector reviews broadly confirmed in the past five years, China introduced that China's performance in the infrastructure extensive policy and institutional changes that sector was the best in the Bank. The energy were first outlined in a Bank report on power sector review (OED 2001) concluded that the sector reform (World Bank 1994c) and further Bank's assistance strategy was highly relevant developed in other AAA and through pilot and fully satisfactory, and that Bank performance projects. These changes include price reform, was highly satisfactory. The transport sector separation of management and regulation, review (OED 1999), while more mixed in its corporatization of government energy produc- assessment, still rated outcomes satisfactory. tion units, introduction of competitive power Client satisfaction has also been high. Interview markets, and improvements in the policy feedback was largely favorable,38 and respon- framework for private participation in dents in the 2002 Client Survey ranked "helping infrastructure. The energy sector is perhaps the to strengthen infrastructure development" as the most successful example of the Bank's dual- most effective area of Bank activity (Annex K). track approach to lending and policy reform. Many of the sector and macro objectives of Transport reforms have been slower in coming, the Bank's assistance strategy were also met. but the Bank introduced the concept of toll China's road network grew by 40 percent during roads and worked with the government (which the decade of the 1990s, and power generation came up with the proposal) to promote securi- capacity now exceeds 300 gigawatts, making tization of revenue-producing highways, thus China the second-largest producer in the world opening the way for private participation and (World Bank 2003).39 China's growth in power faster expansion of the sector.41 and transportation networks certainly helped Second, the Bank introduced the discipline sustain growth, dampen inflation, and integrate of the project process to civil works. Compet- market networks. Transport costs fell, and many itive procurement brought large efficiency previously local or regional markets, such as gains and new technology. Improving the grain, moved toward national integration.40 The project process laid the foundations for more Bank's role in expanding supply is debatable general reforms in the economic and adminis- since Bank finance trative framework. The financial management China's road network accounted for less than systems required by the Bank have revealed grew by 40 percent during 5 percent of road invest- weaknesses and lack of accountability in the the 1990s, and power ment and about 3.5 existing framework, and the introduction of percent of power invest- modern management tools and technology generation capacity now ment, but Bank projects opened up the possibility of change in most exceeds 300 gigawatts, contributed to 40 of the infrastructure sector. In the railways, making China the second- percent (3,500 kilome- for example, new information and cost ters) of the expressways accounting systems have made possible the largest producer in the built since 1985 (World consideration of separating infrastructure world. Bank 2003); in the costs from operating costs and thus could 2 4 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S bring about eventual changes in ownership Market integration is The energy sector is and administration. constrained by low perhaps the most Despite these achievements, Bank assistance density of transport successful example of the strategy has been less successful in other areas. infrastructure, to be First, the Bank has been little involved in sure, but it is equally Bank's dual-track primary fuel subsectors such as coal and gas, limited by policies. approach to lending and where it might have brought new technology policy reform. and useful international experience.42 Second, Summary: Infrastructure institutional and policy components of projects Development were less successful than physical implementa- China successfully broke infrastructure bottle- tion. It is not clear whether many of the necks that imperiled growth and stability in the proposed management techniques and policy early 1990s. A growing transport network also changes have been internalized, nor how widely promoted market integration and development they have been disseminated. In the power of lagging regions. China had a lot to gain from sector, for example, a multiple pricing arrange- international experience in infrastructure ment was a source of dispute in the Ertan development in the early 1990s, and the Bank Hydroelectric Project; elsewhere in the sector, had a lot to offer. Bank support was highly multiple pricing still creates incentives favoring successful in promoting better project manage- the use of thermal over hydro and the use of ment, competitive bidding, and technical older, less efficient plants.43 improvements. Even resource transfer from the Reforms and institutional changes have also Bank was of some importance for breaking been less successful in transport than in energy infrastructure bottlenecks during this period. In for a number of reasons. First, policy and addition, the Bank's dual-track strategy of institutional change have been less successful promoting sector policy and institutional whenever coordination was required among reform was successful, particularly in power, ministries or levels of government, as is less so in transport and water. The main generally the case in transport.44 For example, question looking forward is whether the Bank in highways, agreement has been reached in can still contribute significant value added in principle to introduce a fuel tax, but implemen- the infrastructure sector, or whether the Bank tation has been stymied by disagreements finance that the government still desires is a between the center and provinces over alloca- substitute for reforms that could open up other tion of charges and revenues. Second, China's modes of finance. infrastructure finance and loan repayment system has distorted the allocation of invest- Environment ment, especially in highways, which have a China faces serious environmental problems, higher public goods element than power or and because of its size, some of the effects, such even railways. In particular, China has relied too as greenhouse gas emissions, are also worldwide. much on toll road financing. While economi- During the 1990s, government gave increased cally justifiable under conditions of congestion, attention to the environment. Aware-ness was toll roads otherwise distort the provision of heightened by widely publicized inter-national public goods and constrain the ability of the reports45 and by events in China. Widespread Bank to assist the government in stimulating illness among users of China faces serious economic growth, for example, to finance roads the Huai River in China's in poorer regions with limited capacity to repay. indus-trial Northern environmental problems, Finally, and most importantly, the benefits of Plain in 1994 was a and some of the effects, transport investment have been diminished by turning point for govern- such as greenhouse gas the government's broader development ment, resulting in the policies. Migration controls and local protec- eventual closure of emissions, are also tionism limit demand for transport services. 75,000 small, high- worldwide. 2 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E As a result of policy shifts, polluting TVEs nation- Environmental Protection Agency (SEPA).46 China has had some wide. Floods in 1997 and Many of the recommendations found their way 1998 prompted the into China's own environment strategy of 1994. successes in reversing or introduction of a logging The most recent major report Air, Land, and containing some forms of ban in sensitive areas. Water (World Bank 2001) updates the 1992 environmental The government has strategy; it was produced collaboratively with also used less drastic SEPA and has had a significant impact on official degradation. measures, including thinking; 47 some of its recommendations were more open environmen- incorporated into the tenth five-year plan. tal reporting, price incentives, and new laws and ESW on individual environmentally regulations. Leaders regularly address environ- important sectors has been variable. A major mental issues in major speeches, and China has agricultural sector report, Accelerating adopted "sustainable development" as a guiding China's Rural Transformation (World Bank principle for the tenth five-year plan (2001­05). 1999), provided a good basis for public As a result of these policy shifts, China has discussion of environmental issues. In the had some successes in reversing or containing water sector, a jointly produced comprehen- some forms of environmental degradation, sive quantitative plan built around a though serious problems remain and future "dynamic optimizing model"48 gave highly trends are uncertain: valued assistance to the Ministry of Water Resources. An internal study of planning for · Although China remains one of the most in- the Yellow River Basin highlighted the efficient major economies in terms of primary importance of integrated river basin manage- energy use per unit of GDP (3.3 times higher ment and contained some prescient remarks than the United States in 2001 and 40 percent about the opportunity cost of abstracting higher than India), unit energy use improved water.49 Most water sector AAA has been by 30 percent between1995 and 2001. In a pe- based on informal reports and workshops and riod of increasing industrial production, in- seminars with project or individual ministry dustrial pollution loads have fallen drastically counterparts. More recently, however, the since the late 1990s. Bank published a water resources assistance · China increased forest area during the 1990s, strategy (World Bank 2002b), which should albeit with some loss of species diversity. provide a broader basis for dialogue with the · Erosion on the extended Loess Plateau area has many agencies involved in water resource been contained, with benefits not only to the management. The only formal report on the people living there but also in the quality of the forestry sector is OED's own sector review Yellow River and the amelioration of dust (OED 2000). The lack of sector work in storms as far away as Beijing. forestry has limited the Bank's ability to judge · China made a major contribution to the global whether it is working in the right areas, to environment through a sharp reduction in conduct policy dialogue, and to reach an ozone-depleting substances (ODS) in recent important wider audience of social scientists years. concerned with forestry issues and their broader environmental implications. How- AAA ever, in 2002, the World Bank helped form a Bank environmental ESW has generally been of task force on Forestry and Grasslands high quality and has helped raise environmen- through the Chinese Council for Interna- tal consciousness and influenced policy. The tional Cooperation on Environment and China Environmental Strategy Paper (World Development (CCICED). The task force has Bank 1992a) outlined the Bank's environmen- produced reports and promoted discussion tal assistance strategy and marked the on policy issues among Chinese officials and beginning of a major partnership with the State scholars and international efforts. 2 6 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S Lending environmental manage- China's power authorities World Bank lending has two environmental ment and supervision. themselves have taken dimensions: (a) to avoid or mitigate any The Bank has financed responsibility for adverse impact of projects in any sector--the several large hydro and "do no harm" principle; and (b) to "do good" multipurpose dams that environmental through projects that are intended, in whole or substitute for thermal management and part, to have environmentally beneficial effects. coal-powered plants. supervision. The Bank's activity to prevent harm, mainly While dams have their through safeguards and environmental impact own environmental problems, the Bank has assessments (EIAs), is discussed in chapter 4.50 adequately addressed these in Bank projects. This section focuses on lending intended to The multipurpose Xiaolangdi Dam, supported have a positive impact. Projects intended to by the Bank, has been credited with drastically have a positive environmental impact are found reducing silt and enabling continuous flow in in many sectors, and the definition of an the lower reaches of the Yellow River, environmental project is sometimes arbitrary. something which has not been achieved in the Many power projects, for example, are not previous 10 years. The OED review of China classified as environmental even though they energy operations concluded that the Bank had may have substantial environmental implica- made substantial environmental contributions tions. Of the 11 completed projects from in power generation, district heating, and many various sectors classified as "environmental," 3 other areas, though it has not been successful were rated as having highly satisfactory in promoting the introduction of gas on a large outcomes--an unusually high proportion. But scale to substitute for coal (OED 2001). projects with an environmental theme China is the world's biggest producer of attracted a large number of relatively weak ozone-depleting substances and the second- ratings as well--one unsatisfactory outcome largest producer of carbon dioxide (CO2), and and four marginally satisfactory. The remain- both are being reduced through international ing three projects were rated satisfactory. agreements and provision of grant funds Because of the crosscutting nature of through the Multilateral Fund for the Montreal environmental concerns and the arbitrary Protocol (MFMP) and the GEF. Energy conser- classification of projects, it makes more sense vation and fuel diversification policies have to review the extent to which environmental made significant contributions to reducing concerns are mainstreamed in individual global CO2 levels. Current Bank support sectors. In general, the Bank has done a includes lending projects for renewable energy commendable job of mainstreaming the scale-up, heating reform, and urban transport environment in energy, forestry, agriculture, programs to address emerging vehicular and transport. Performance in the water sector pollution trends. has been mixed, while little has been done in Land. Past neglect of land and watershed the area of environmental health. Some of management has caused severe and widespread these assessments are elaborated in the erosion, land degradation, and desertification. sections below on air, land, and water. Bank-supported projects made major contribu- Air. Air quality improvements have been tions to increased efficiency of water use by strongly influenced by technological changes demonstrating that China is the world's in the energy sector, where the Bank has been profitable orchard and heavily involved. The environmental perform- mixed farming models biggest producer of ozone- ance of Bank-funded coal-fired power plants are compatible with depleting substances and has been very good when compared with non- watershed rehabilitation the second-largest Bank plants. Not only are emissions much and soil preservation. producer of carbon lower, but also China's power authorities Terracing and erosion themselves have taken responsibility for control projects in the dioxide. 2 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E B o x 3 . 4 R u r a l W a t e r S u p p l y i n C h i n a The Bank has supported four rural water supply and sanitation sumers. Rural consumers supplied by Bank-supported RWSS (RWSS) projects, mainly in poor counties. Designs have evolved consume an average of 28 liters per capita per day (lcd). While by combining the strengths of existing village administrations lower than U.N. standards of minimum daily need, this level of and community financial participation with international best consumption and the implied tariff captures most of the consumer practices. Design concepts include appropriate technology, surplus generated by supplying RWSS services. The high cost- financial cost recovery, decentralization of regulation, and fi- recovery and sustainability, good quality, continuous service, and nancial autonomy. This contrasts with the more popular ap- a cost-recovering tariff have increased welfare. Consumers, proach of justifying non-cost-recovery tariffs in poor averaging five per household, are willing to pay a higher price communities by claiming the "beneficiaries are willing but for a better-quality product and to adjust their consumption not able to pay." downward to fit the household budget. In the latest generation of RWSS projects, the investment cost The oft-quoted "affordability index" for this project was that for water supply is 75 percent, paid for by cost recovery, and 95 water charges were 3 percent of disposable income. If the U.N. percent of villages abide by the tariff covenant. The average cost definition of supply or need had been used for planning purposes of two yuan per cubic meter (about 25 cents) provides star- (implying 112 lcd consumption), then the affordability index tlingly clear evidence that even the poor can and are willing to would have been 12 percent and the project would presumably pay tariffs that raise eyebrows when proposed for urban con- have been rejected as "unaffordable." Source: Varley (2002). larger basins also have significant downstream sector review (2000) concluded that the Bank's benefits, reducing silt loads and increasing forestry work in China has been remarkably incomes. Building, among other things, on the successful--"a high point in one of the highest- Bank-supported central Loess Plateau and Red quality portfolios." Soils projects in southeast China, these technolo- Water. The Bank has been involved in many gies have been replicated. aspects of water resource management (WRM) Land degradation is closely correlated with with varying degrees of success.52 Hydro- rural poverty. Erosion arising from deforesta- power, watershed management, and forestry tion increases the silt load in rivers, increasing have been discussed in previous sections. The flood frequency and severity. In 1998, the other areas of WRM with substantial environ- government introduced a blanket ban over mental implications are water resources/flood much of the country on logging of natural control, irrigation, and urban water supply and forests and on opening new lands at the waste management. Rural water supply expense of forest. This reduced incomes in projects, while more important for poverty these often-poor areas while increasing timber reduction than the environment, have been import requirements.51 Reforestation has been highly successful and provide useful lessons for implemented on a vast scale, with plantations China and other countries on the importance representing 40 percent of forest area; while of pricing and cost recovery (see box 3.4). this has arrested the decline in forest area, it A noted Bank success story was the Taihu has not reversed the loss of biodiversity. Bank Flood Control Project, praised by the vice forestry projects have contributed 3.3 million minister of WRM for reducing losses during the hectares of new high-quality forestry land (one- 1998 floods. Several Bank-supported projects in sixth of the increase in forest areas) since the the 1990s have been in the vanguard of Bank- early 1980s. Despite some evidence that China cooperation on integrated WRM. The China's forestry regulations and policies have Yangtze Basin Water Resources Project (1995) negatively affected forests, OED's forestry incorporated both autonomous, locally run Self- 2 8 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S Financing Irrigation Development Districts ficiency. For instance, Rural water supply (SIDDs) to improve O&M and an integrated the appraisal of run-of- projects have been highly river-basin development component. The first the-river pumping successful and provide and second Tarim Basin projects (1992/1998) in schemes on the upper the western Xinjiang Uygur Autonomous Region reaches of the Yellow useful lessons for China have the best-developed framework for River should have sub- and other countries on integrated water management--both the tracted the opportunity the importance of pricing financial components of SIDD and a comprehen- costs (to high-value sive set of procedures/regulations for integrated municipal and indus- and cost recovery. WRM. Even with these successful models, only trial users in the lower limited progress has been made in introducing reaches) of water supplied during the dry sea- integrated river-basin approaches to WRM in son. China. China has been reluctant to borrow for · A seeming disregard of an obvious and serious management components in Bank projects, water resource constraint contributed to the devoting only about 5 percent of project funds to mining of groundwater resources on the North this purpose, compared with 25 percent in Brazil China Plain. A recent Bank audit notes that in and Mexico (World Bank 2002b). addition to the impact of the demand on The scale of Bank involvement in irrigation groundwater, the Hebei Project put in many has been very limited, but has had a positive more new wells than planned at appraisal (OED effect on Chinese practices for procurement, 2002a). Conservation aspects do not appear to project management, and (more recently) have been high on the agenda. Even the eco- irrigation management, especially at the provin- nomic benefits were overstated, as the antici- cial level. Irrigation has usually been a pated supply of irrigation water cannot be component of an integrated area development sustained. project. Poor and underfunded irrigation O&M is still a problem, but the organization of One of the largest and fastest-growing farmers within SIDDs on both Bank- and non- programs of Bank support has been in water Bank-supported projects has improved supply (WS) and wastewater treatment plants management and accountability, empowering (WWTPs).53 An OED sector review (OED 2002) farmers, through legal contracts, to pay for and judged the outcomes of China WS/WWTP receive water services, both from local govern- projects to be moderately satisfactory with ment agencies and publicly owned bulk-water respect to overall development objectives, companies. Water user associations (WUAs) are which are themselves described as modest. part of SIDDs, playing a key role in many OED rated project outcomes satisfactory in aspects of improved water resources manage- terms of efficacy and standards of construction, ment that can increase productivity. The Bank but efficiency only marginally so, and the has supported water conservation through institutional impact, modest or negligible. The technical innovations (for example, drip irriga- Bank approach has supported capacity tion, drought-resistant crop varieties), conser- building, with relatively little control over the vation pricing, and agricultural engineering quality of institutional reform. Projects still live support services, but these have not been in both a nonmarket and an under-regulated replicated on a large scale. environment. There has been no significant In two important areas, the Bank's initial difference between Bank- and non-Bank- approach to irrigation diminished its contribution supported water utilities, raising questions . about whether the Bank offers any real value · Failing to allow for a very high opportunity cost added. Bank-supported projects may have of water in the economic analysis of upstream been better implemented than others, but irrigation projects largely undermined the overall water quality targets are not being met. claimed high rates of economic return and ef- Statistics for China show that, despite an 8 2 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E percent increase in water consumption and a such as water tariffs and integrated river basin 19 percent increase in wastewater treatment management into its projects. Yet the impact of capacity, the proportion of waterways meeting the Bank on changing critical approaches to minimum standards has decreased. There are water resource management and other two broad reasons for the disappointing sector environmental policies has been less than performance and World Bank impact. hoped. Continued shortcomings in China's environmental strategy include: · Institutional arrangements do not match the source of the problem. Municipalities are re- · Strategy still favors expanding supply rather sponsible for WWTP, but much of the pollu- than reducing demand, and technical and en- tion comes from "non-point" agricultural gineering rather than economic approaches. For runoff and periurban TVEs. Overall responsi- example, the proposed South-North Transfer bility for management is fragmented among Project (in which the Bank is not involved) several agencies, many of whose environ- would require a water tariff of 6 to 10 yuan per mental mandates may conflict with financial cubic meter to cover costs, while the maxi- interests, public and private. mum tariff level achieved, even in the most se- · Low prices for urban water supply and waste- riously affected cities, is still in the range of 1 water treatment perpetuate unsustainable pol- to 2 yuan.56 The proposed project may be jus- lution levels for two reasons: they fail to restrain tified as it ameliorates social conflicts over com- demand for water, and they provide insuffi- petition for water in rural areas, but the transfer cient financial resources for expansion of retic- might not even be necessary if tariffs were ulation (network collection facilities). The raised sufficiently to restrain urban demand. maximum water supply tariff level achieved is · Coordination among overlapping agencies and in the range of one to two yuan per cubic levels of government remains a major problem. meter, compared with an average of two yuan Coordination of both water and environmen- per cubic meter for rural water supply. Bank tal responsibilities and decisions will not be re- WS/WWTP projects have introduced higher solved without a supra-ministerial body to tariffs and other policies, but the Bank has lit- push through reforms. tle influence over the degree of institutional re- · Neither the Bank nor the government has form required to address environmental faced up to the reality of tradeoffs between eq- management needs.54 Bank operations are tied uity and efficiency or between short-term to particular municipal governments that can- growth and poverty reduction on the one hand not themselves resolve the institutional prob- and long-term growth and environmental sus- lems. Bank projects, if successful, are at best tainability on the other. Although there are demonstrations of what can be achieved within important complementarities between poverty the existing framework. Project designs have reduction and environmental protection in to go beyond existing agency partnerships and some areas (such as NRM in the Loess Plateau), reach out to a broader array of public and pri- there may be difficult tradeoffs between up- vate partnerships.55 stream irrigation and downstream urban use of the Yellow River or between the effects of Strengths and Weaknesses of the Bank's higher urban water tariffs on poverty and the Environment Assistance environment. Recognition that it is not always The Bank has influenced environment policy a "win-win" situation would permit exploration and legislation, has helped introduce environ- of ways (such as tradable property rights in mental concerns into the mainstream of several water) to mitigate some of these tradeoffs. sectors, and has directly contributed to improv- · More than in most sectors, the fiscal transfer sys- ing natural resource management (NRM), flood tem leads to inaction, conflict of interest, and control, and other areas. The Bank also misallocation or underinvestment in environ- introduced policy and institutional changes mentally sound projects. Environmental pro- 3 0 P R O G R E S S O N D E V E L O P M E N T O B J E C T I V E S tection is a quintessential public good, and re- through water user Coordination among quirements that investment costs be recovered associations, but it may overlapping agencies and at the source can literally lead to underinvest- also have contributed to levels of government ment upstream because of inability to capture unsustainable expansion the benefits downstream. The recently com- of irrigation in some parts remains a major problem. pleted Loess Plateau project, for example, was of the North China Plain. exemplary in every respect but one: there was In water supply and wastewater treatment plants, underinvestment in dams that provided bene- Bank projects have been well-implemented and fits mainly outside the project area. have introduced useful policy and institutional innovations, but because these are implemented at Summary: Environment the municipal level, diffusion seems to have been China's air, land, and water resources have been limited. The Bank has also helped mainstream put under tremendous strain by high growth and a environmental concerns in a number of sectors, legacy of poor environmental policies. Over the notably energy--China has made significant past decade, progress in the environment has been progress in improving energy efficiency. Environ- mixed, with some successes in reversing adverse mental safeguard policy (discussed in chapter 4) trends. The Bank has made some visible contribu- has been highly variable. Most EIAs are now done tions to improving environmental protection, but collaboratively with Chinese research institutes. there have been shortcomings as well. The Bank's Exposure to international practice through Bank collaborative AAA with SEPA has influenced support has strengthened China's EIA system, environmental legislation, but it has had less which predates the Bank's. However, increased influence on integrated water resource manage- technical competence has not been matched by ment and, until recently, has generated little institutional independence from political inter- dialogue on forestry sector policy. Bank-supported ference, and environmental safeguards still tend projects in natural resource management, forestry, to be applied too late in the project cycle to have power (both thermal and hydro), and multipur- sufficient impact on project design. Overall, the pose dams have had a direct and favorable impact Bank has had a positive impact on the environ- and may have influenced design and implementa- ment, but improving coordination of environ- tion of non-Bank projects as well. The Bank has mental policy, especially WRM, remains a helped improve irrigation practices, especially considerable challenge. 3 1 4 Program Administration and Crosscutting Issues C hapter 3 reviewed progress in, and the Bank's impact on, the four main development assistance objectives. This chapter reviews the use of lend- ing and other instruments in achieving assistance objectives, com- pares outcomes in China with other countries, and examines some important crosscutting issues. Lending This allocation is consistent with the By most measures, China's portfolio is the overwhelming emphasis given to reform in the largest in the Bank Group. As of June 30, 2002, early 1990s and to a belief that the trickle-down China had the largest total of IBRD loans ($18.4 effects of growth were the dominant mechanism billion vs. $13.8 billion for number two for poverty reduction. The most willing and Mexico), second largest total of IDA credits reform-minded partners were often in the ($9.6 billion, well behind India's $24.3 billion), coastal areas; in Shanghai (the richest province), and an active portfolio of 101 projects, by far the Bank had a special reform support program the largest in the Bank Group. in the early 1990s. The Bank was following the The regional allocation of Bank lending to lead of the government, which also favored China has gradually shifted from eastern to coastal development throughout most of the central and western China,1 with the share of early period. Moreover, the Bank found it the central and western provinces shifting from difficult to shift lending toward poor provinces 37 percent during FY81­92 to 43 percent in (or to poorer regions within provinces) because FY93­97 to 56 percent in FY98­02. Despite the of China's requirement that all loans be repaid shift from the better-off coastal region to by beneficiaries. Here, too, Bank lending poorer inland areas, the Bank's overall regional patterns were shaped by the same factors that lending allocation was regressive during most limited the government's ability to develop a of the past decade. Per capita Bank lending was system of fiscal transfers to benefit poorer positively and significantly correlated with provinces. Finally, political sensitivities have also provincial income per capita during 1993­97 influenced Bank lending allocations. Poorer and still positively, though not significantly, provinces generally have a higher proportion of correlated during 1997­02.2 minorities, which entails more safeguards for 3 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E China has the best- projects and attracts projects closed and evaluated through FY02, less performing portfolio of widespread outside than 9 percent were rated unsatisfactory attention. The Bank has (compared with a Bank average of 31 percent any large country in the never been asked, for unsatisfactory for FY80­02). In the past decade, Bank Group. example, to finance a China's percentage of satisfactory outcomes has project in Tibet, one of remained above those of the Bank, the East Asia China's poorest provinces.3 and Pacific (EAP) Region, and (with the exception The sector allocation of Bank lending in of Brazil during 1998­02) other large comparator China has always differed from that in the rest countries (table 4.1). China's performance is even of the world and has diverged even more in more striking with respect to sustainability and recent years (figure 4.1). The most important institutional development ratings. During the difference is that, with the exception of the period FY98-02, sustainability was judged likely Rural Sector Adjustment Loan in 1988, there for 96 percent of China's projects (weighted by has been no adjustment lending in China. The commitments), compared with 75 percent Bank- allocation of investment lending has been wide; institutional development was rated distinctive on several dimensions: substantial for 80 percent of evaluated projects (50 percent Bankwide). · Emphasis on infrastructure. Lending for in- Of the 12 projects rated unsatisfactory in the frastructure (transport, energy and mining, past decade, 6 were industrial sector projects, telecommunications) has always been unusu- and 3 were in agriculture and rural develop- ally high in China, and the share of infrastruc- ment; environment, health, and water supply ture has been increasing in China (representing and sanitation each had one project rated 52 percent of the Bank's loans during FY98­02) unsatisfactory (annex table R.5b shows while declining elsewhere (32 percent Bank- comparative country performance by sector). wide average during FY98­02). Transport alone What accounts for China's exemplary project accounted for 25 percent of the Bank's com- performance? The most frequently cited factor mitments to China during FY98­02.4 is the high degree of country "ownership" of · Declining share for human resource devel- projects. Projects are identified and largely opment. Bank lending to China for human re- prepared by the government, and there is a sources development has declined. In the rest strong commitment to implement projects of the Bank, it has increased. quickly and thoroughly, along with a generally · Increasing share for environment, urban, and strong determination to abide by project water (EUW). Environment lending only started agreements and conditions. Ownership is after 1990, but reached nearly 8 percent of total reinforced by the Chinese system of repayment lending in China in the most recent five-year pe- obligations. The requirement to repay project riod. Overall EUW lending rose from 6 percent loans concentrates the minds of local govern- during FY81­92 to 20 percent in FY98­02. Lend- ments and project beneficiaries on the costs ing for infrastructure, broadly defined to in- and benefits of individual project components clude EUW increased from 57 percent during and lends a sense of urgency to project FY81­92 to 72 percent during FY98­02. implementation.5 · Sustained rural lending. Lending for agricul- At the same time, the success of World Bank ture and the rural sector ranged from 22 to projects in China may have been overstated for 25 percent in China between FY81 and FY02, two reasons. First, there is a possible "halo compared with a declining Bankwide trend effect," whereby projects are seen as success- (from 23 percent to 14 percent). ful, or given the benefit of a doubt, because of the strong performance of the Chinese Project Performance economy.6 Second, project performance China has the best-performing portfolio of any criteria give less emphasis to policy change in large country in the Bank Group. Of the 138 China than elsewhere. An OED review of 3 4 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S O v e r a l l P r o j e c t R a t i n g : C h i n a T a b l e 4 . 1 a n d C o m p a r i s o n s Net commitments Institutional Total net development Number of commitments Outcome Sustainability impact Exit fiscal year projects ($ million) (% satisfactory) (% likely) (% substantial) 1993­97 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 East Asia and Pacific Region 146 11,153 82 68 40 Bankwide 1,195 90,962 74 56 36 1998­02 China 53 8,546 93 96 80 Brazil 41 7,314 94 95 62 India 58 8,260 77 77 49 Indonesia 53 6,043 78 24 40 Other East Asia and Pacific Region 142 19,752 89 72 46 Bankwide 1,314 102,095 82 75 50 lending to China's water and sanitation sector satisfactory or better. There is a strong rated overall sector performance as only As before, this is commitment to marginally satisfactory, despite satisfactory higher than both the implement projects outcomes in 20 of 22 projects, on the grounds Bankwide and the EAP that project objectives were insufficiently Regional average (88 quickly and thoroughly, ambitious. Project objectives often give a lot of percent and 92 per- along with a generally weight to physical implementation, which is cent, respectively). strong determination to nearly always excellent in China, while the · Reviews of quality of dual-track strategy means that indicators such supervision assess- abide by project as improving sector policy are outside the ments (QSAs) from agreements and project framework. Effectiveness in improving FY97­02 gave China conditions. policies and in diffusing best practice need to similar ratings (81 per- be evaluated in a top-down approach (see cent of 54 projects were satisfactory or better) chapter 3). to the region (82 percent) and the Bank as a whole (79 percent). China's ratings started Portfolio Management below average and rose to above average dur- The evaluation of completed projects gives a ing the latter part of this period. picture mainly of the project portfolio · Only 5 percent of the projects in the active port- approved in the late 1980s and early 1990s.7 folio were considered at risk at the end of Evidence from internal assessments can be FY02 (compared to 16.5 percent for the Bank used to illuminate the status of the current as a whole), and disbursements at risk were portfolio. only 2.6 percent (14.5 percent Bank average). As of January 2003, there were only three prob- · Internal quality-at-entry (QAE) reviews from lem projects (3 percent) in the portfolio, com- FY97­02 rated 20 of 21 projects (95 percent) pared to 12 percent for the Bank as a whole. 3 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E C o m p a r i s o n o f B a n k S e c t o r I n v e s t m e n t F i g u r e 4 . 1 L e n d i n g A c t i v i t i e s Human Resource Development,a FY81­92 and FY93­02 Infrastructure,b FY81­92 and FY93­02 30 70 60 India lending 25 lending Indonesia China Bankwide 50 20 Indonesia Brazil 40 investment 15 investment Brazil Bankwide India 30 total 10 China total 20 of of 5 10 Percent Percent 0 0 FY82­92 FY93­02 FY82­92 FY93­02 Environment, Urban Development, Water Supply, Rural Development, FY81­92 and FY93­02 and Sanitation, FY81­92 and FY93­02 30 25 lending 25 20 lending China Brazil Indonesia 20 India 15 Bankwide Brazil Bankwide investment China 15 investment 10 total India total 10 of Indonesia 5 of 5 Percent 0 Percent 0 FY82­92 FY93­02 FY82­92 FY93­02 a. Includes education, health, nutrition, population, social development, and social protection. b. Includes energy and mining, transport, global information-communication technology. Source: World Bank data as of 12/16/02. Although overall portfolio risks are low in involving the full Bank management team and China, there are a number of recurring government officials from the finance, planning, problems. Internal portfolio risk assessments and line ministries, as well as from provincial and show that 10 percent of projects were flagged municipal governments. The last CPPR in 1996 for effectiveness delays in FY02, 14 percent for highlighted three broad problem areas: slow disbursement, and 14.3 percent for the new indicator for financial performance. · Systemic issues: Counterpart funding, pro- Counterpart fund problems had affected 13 curement, and project management weak- percent of projects in 2001, but this was nesses--all of which pointed to the need to reduced to only 1 percent in 2002. In addition, strengthen field-office capability. the disbursement ratio improved significantly · Supervision: Need for more management at- in FY02 to 24.1 percent, which was above the tention, more cross-fertilization across sectors, Bank average (20.7 percent) for the first time in increasing government capacity for supervi- several years.8 sion and project monitoring, and more atten- Several problems in portfolio management tion to resettlement and other safeguard issues. became apparent around 1997. Through the · Lengthy procedures: Both the project ap- mid-1990s, the Bank conducted periodic proval process in China and processing in the country performance portfolio reviews (CPPRs) Bank were slowing project implementation. 3 6 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S The Bank reorganization of 1997, which put objectives to promote Beginning in the mid- sector directors in charge of large units dealing system reform and to act 1980s, the Bank and the with the entire region, and the Asian crisis, as a source of knowledge government agreed on a which occurred about the same time, reduced on international experi- attention to portfolio management. The CPPR ence. Chinese expecta- rolling three-year process was interrupted, and the position of tions of the "knowledge program of studies. project adviser for China was eliminated. An Bank" were also high, internal assessment in 1998 found the QSA in and in China, prime ministers have been regular China (at 57 percent satisfactory) to be below readers of World Bank reports or have asked the Bank's average of 75 percent. Most specifically for World Bank advice on policy important, the adequacy of supervision inputs issues. The relevance of ESW was enhanced by and realism of ratings were rated very low (at 43 institutionalized arrangements for its program- percent and 50 percent satisfactory, respec- ming. Beginning in the mid-1980s, the Bank and tively). Thus inadequate management attention the government agreed on a rolling three-year led very quickly to a drop in Bank performance. program of studies, subject to approval by the Spurred by these findings, the EAP Region State Council. Programming extended beyond initiated its own review of supervision in 1999, formal reports. For example, the Bank and the shortly before the Inspection Panel investiga- System Reform Commission11 cosponsored an tion of the Western Poverty Project. The annual conference that brought together Chinese intensified scrutiny, both internal and external, officials and scholars with Bank staff and foreign of Bank-China relations after the Inspection experts to discuss some aspect of reform. This Panel report led to a huge increase in manage- arrangement allowed the Bank to respond to ment attention to the portfolio.9 The Region changing concerns and to facilitate access to introduced a new portfolio and risk-manage- foreign expertise. This facilitative role was as ment process; decentralized a number of important as the Bank's own ESW in the early functions (selected task management, procure- days of the relationship, but became less ment, financial management, and disburse- important as Chinese officials became increas- ments) to the resident mission; and introduced ingly capable of attracting and screening outside thematic supervision for groups of projects. advice on their own. These measures seem to have had a positive The prominence of AAA/ESW in country impact and may be responsible for the strategy prompts several questions. Were the improved QSA ratings (100 percent satisfactory high ambitions and expectations realized? Were in FY01). Both staff and government officials they realistic? How could AAA have been more particularly praised decentralization for effective? Is stand-alone ESW effective (a partic- improving procurement and other services. ularly important question because of the But the higher attention to safeguard and other declining lending program)? Some of these portfolio issues may also account for renewed issues are addressed here and some in the final complaints by China about the "cost of doing chapter on lessons and recommendations. business" with the Bank. There is a gap between the Bank's rhetoric on the importance of ESW in country assistance AAA/ESW strategy and ESW budget allocations. ESW as a Analytical and advisory activities (AAA), especially proportion of the total administrative budget economic and sector work, have always featured was lower for China than for other large prominently in the Bank's statements of its comparator countries and for the Bank as a assistance strategy for China.10 In part this whole throughout the past decade, and reflected the relatively low weight of project spending on ESW declined both absolutely and lending in investment for a very large country and relatively during FY98-0212 (see figure 4.2). The the limited scope for nonproject conditionality. effect is most apparent on sector work. In But it also stemmed from the Bank's ambitious several sectors, new work is needed to take 3 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E F i g u r e 4 . 2 R a t i o o f E S W t o T o t a l D i r e c t C o s t Percent 20 18 India 16 Brazil 14 Indonesia EAP 12 China Bankwide 10 8 6 FY93­97 FY98­02 stock of progress and problems and to lay the the Bank was slow to adjust to the growing foundation for better policy dialogue and new knowledge and sophistication of Chinese directions in lending. counterparts and continued to provide generic Within China, there is a widespread view that advice based on international experience, rather the Bank's AAA, which was so valued in the than discussing relevant policy options.14 As one 1980s, declined in relevance and quality during researcher put it, the Bank's glossy reports were the 1990s.13 There were exceptions, and there thorough and competent, but "Where is the has been an improvement in Chinese percep- value added?" There was also a feeling that the tions of the relevance and quality of the Bank's Bank did too many reports on its own, making AAA in the last few years. The Bank's macroeco- too little use of Chinese collaborators.15 nomic advice in the early to mid-1990s and the Internal ratings for a sample of twelve ESW more recent work on pension reform were reports on China from FY98­02 were similar to repeatedly cited in interviews as examples of the Bank average. Nine reports (75 percent) highly relevant and effective work (box 4.1). were rated satisfactory or above and two of These examples were particularly well known those were highly satisfactory. All reports were because of press coverage and public acknowl- rated relevant, but some reports fell short on edgment of the Bank's contribution by Premier criteria of internal quality, presentation/ Zhu Rongji. Other areas in which respondents dialogue, and likely impact. One surprising cited important Bank contributions to debate result was that half the reports were rated less and policy change in the past decade included than satisfactory for Bank processes. Specific value added tax (VAT) reform, WTO entry, public shortcomings included failure to provide utility reform, environmental policy, and prepara- concept papers or peer reviews at a critical tion of the most recent five-year plan. Still, stage, but a more general theme was that there despite these examples, was inadequate management attention. This Within China, there is a Chinese officials and may partly reflect organizational changes in widespread view that the researchers often 1997 that broadened sector managerial respon- Bank's AAA declined in expressed disappoint- sibility from the country to the region. ment with the overall OED's assessments of the Bank's AAA in its relevance and quality relevance and quality of sector background studies was also mixed. The during the 1990s. the Bank's ESW. They felt general quality of AAA was good, and the 3 8 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S B o x 4 . 1 A C h i n e s e V i e w o f t h e B a n k ' s A A A A specially commissioned review of analytical and advisory ac- To be more effective, the paper suggested the Bank should: tivities and system reform (Lu 2002) concluded that the Bank's AAA had been largely successful because the Bank consis- · Pay more attention to dissemination of results through more tently advocated reform even when the political climate was un- innovative formats. favorable; relied on cooperation and persuasion, rather than · Be more forward-looking in choice of topics. Devote more trying to impose its views; used a variety of outputs; and devel- attention to emerging sector and structural issues such as oped a sound knowledge base and extensive contacts. The urbanization, education, and urban transport, rather than to paper, which was based on extensive interviews with leading state-owned enterprises and other reform topics. scholars and officials familiar with the Bank, as well as a doc- · Extend its range of cooperation and revitalize its contacts. ument review, also found that Bank influence declined some- The Bank should, of course, be responsive to requests for what in the 1990s because of a reduction in the knowledge gap work from the top leadership, but it should also expand its between the Bank and China, increasing political difficulty in network to replace its dwindling contacts from an earlier taking reform measures, and the Bank's failure to recognize period and renew its collaborative approach to analytical and exploit the strengths that contributed to past success. work. impact was significant in a number of areas. At mentalized to take advantage of the inherently the macro level, special mention should be close links between the two areas. made of the recent outstanding provincial public expenditure review (PER) (World Bank Donor Cooperation 2002a), as well as the Dalian conference and The Bank has been the second largest donor in related macro and fiscal advice in the early and China, after Japan. During 1991­00, IBRD and mid-1990s. ESW on poverty (both within the IDA together accounted for 17.7 percent of Region and in DEC) has made a significant China's net receipts from donors; Japan contribution, as has the Bank's work on accounted for 24.9 percent; and the Asian environment and the energy sector. In some Development Bank (ADB), 5.9 percent (Annex sectors, however, AAA has been less effective or R, table R.3). Considering only concessional absent altogether. In forestry, for example, the assistance (ODA), IDA accounted for Bank made loans of about $1 billion without 23.3 percent of total net disbursements during any sector work (OED 2000).16 1993­01 (25.9 percent during 1993­97 and 18.7 The Bank has also had mixed results in percent during 1998­00), Japan accounted for exploiting its comparative advantage in doing 41.7 percent, and Germany 13.5 percent. cross-sector work. A very good internal report China fits the Comprehensive Development on rail-coal-power coordination had seemingly Framework model of donor coordination more little impact on China's investment planning or closely than most countries.17 Donors, includ- Bank lending, largely because China did not ing the World Bank, play a negligible role in aid have a government agency prepared to coordi- coordination. China sets its own priorities nate across sectors. Because the State Environ- and tries to match these with individual mental Protection Agency (SEPA) is a donor interests through China fits the cross-sector agency, the Bank has been more agreements on sectors successful in influencing environmental and location of projects. Comprehensive thinking and policy. In the water sector, where The government's own Development Framework China's own coordination is weak, the Bank has aid management is model of donor failed to gain a cross-sector audience. In the fragmented, however, coordination more closely case of enterprise reform and financial sector between the Ministry of reform, the Bank's work has been too compart- Finance, which coordi- than most countries. 3 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E nates loans, and the Ministry of Foreign Trade tion for rolling out successful pilots nationwide. and Economic Cooperation, which coordinates The Bank could provide a valuable service by grants. Generally the government allocates helping to organize collaborative sector work to donor activities to areas or sectors that comple- compare donor experiences in project design ment each other; in the highway sector, for and implementation in key sectors. example, the World Bank and ADB work on different sections of the national highway Safeguards system. World Bank experience with safeguards in Weak coordination within the government China is highly variable. China has been held up puts a premium on information sharing and as a model of how safeguards should be coordination between the Bank and other applied. An OED multicountry study of involun- donors. The Bank and the Fund, which have tary resettlement cited China's approach in the collaborated effectively on fiscal policy advice, Shuikou and Yantan dam projects as best recently discovered that they had received practice because of its participatory approach separate requests for advice on debt manage- and its emphasis on jobs and incomes, rather ment. The requests were from different govern- than mere relocation and shelter (Picciotto, ment agencies and overlapped in part; because Rice, and Van Wicklin 2000). At the other they shared information, the Bank and Fund extreme, an Inspection Panel Report found that were able to provide more effective support. the Bank had violated several of its own The most notable coordination effort safeguard policies in the Western Poverty involving the Bank is the agreement to blend Reduction Project (see box 4.2). DFID grants and IBRD loans to mimic IDA China recognizes the need for safeguard terms. The first blend project was the Tubercu- policies and applies them to its own projects. losis Control Project approved in FY02. Given China was among the first developing countries the constraints of China's fiscal transfer and with environmental safeguards, and environ- repayment system, this partnership makes mental impact assessments for Bank projects sense. It enables the Bank to work on poverty are now conducted by Chinese research reduction projects otherwise unavailable to it. institutes. But all levels of government In DFID's view, the Bank (and China) have also complain that the Bank's safeguard policies benefited from DFID's contribution to ideas impose high transactions costs and that the and policy innovations (such as provision of Bank has more stringent standards than other provincial counterpart funding for poor donors. China's view is that Bank procedures counties and the introduction of social assess- are intrusive, do not mesh with its own, lead to ments at the design stage) that would have long delays in project implementation, increase been unlikely from the Bank working alone. costs, and are unnecessary because China has Nevertheless, the Bank/DFID arrangement is its own safeguards (some incorporating Bank an inferior solution to the serious problem of a practices). China argues that its "3-simultane- weak fiscal transfer system. ous policy," requiring environmental supervi- Other donors, active in many of the same sion at design, construction, and operational sectors as the Bank, are highly complimentary phases, is more comprehensive than the about the Bank's ESW and use it in formulating Bank's safeguard policies (box 4.3). their own strategies. A major objective of their In 2000, an independent internal review was assistance is to provide a demonstration effect undertaken of Bank supervision of safeguards from their projects, but for six of the largest projects in China. Some of All levels of government the mechanisms of the principal findings were: complain that the Bank's dissemination of good practice in China are not · Policy design, implementation, and Bank over- safeguard policies impose well developed, notwith- sight of safeguards were generally satisfactory, high transactions costs. standing China's reputa- but variable. Two projects each were highly 4 0 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S B o x 4 . 2 I n s p e c t i o n P a n e l I n v e s t i g a t i o n The 15-month Inspection Panel (IP) investigation (from April The fact is that any resettlement project in areas of traditional 1999 to July 2000) of the Qinghai Component of the Western Tibetan settlement would be politically controversial. Poverty Reduction Project had a significant impact on Bank- The investigation revealed the need to correct a number of China relations and on the Bank's approach to risk management weaknesses in safeguard procedures: to distinguish advisory and safeguard policies. A request for inspection had been lodged from mandatory procedures; to strengthen managerial over- by the International Campaign for Tibet claiming that the proj- sight of risk assessment; and to ensure that staff treat safe- ect might irreversibly harm the livelihoods of Tibetan and Mon- guards as an integral part of project design, rather than an golian ethnic peoples in the Qinghai area. The Board authorized impediment to project implementation. The Bank responded by a review--the first full review since the creation of the IP in 1994. accelerating revisions of some operational guidelines (for en- The Panel found that the Bank had violated a number of its own vironment but not indigenous peoples), overhauling risk as- policies, including environmental assessment, indigenous peo- sessment, and improving managerial assessment. This was a ples, and involuntary resettlement (Operational Directives 4.01, mostly welcome swing of the pendulum ("rebalancing the ma- 4.20, and 4.30, respectively). When the Board asked for resub- trix"), which had gone too far in the direction of decentraliza- mission of the project for approval following additional studies, tion. But some feel that the reaction has gone too far, leading to China withdrew its request for financing of the Qinghai com- lengthy and costly safeguard procedures and to risk aversion. ponent and has since implemented the project on its own on an These concerns are captured in phrases such as the increasing accelerated schedule. "cost of doing business" and charges that Bank safeguards are The Bank was naïve in thinking this was a routine project no longer designed to make sure projects "do no harm," but to of little interest to the outside world, and it was lax in its as- "avoid any criticism." The Bank has since avoided some polit- sessment of risks and acceptance of government reassurances. ically sensitive components; for example, Xinjiang Province Outside critics charged that the Bank was being used to legit- (with a majority Muslim population) was removed from an ed- imate a politically motivated project designed to dilute Tibetan ucation project shortly after September 11, 2001. Whether this influence, and the government felt that criticisms of the project shows undue risk aversion or mere prudence will be contro- were politically motivated and that the Bank's management and versial, but such issues must be confronted and debated openly Board did too little to uphold the Bank's political neutrality. The as the Bank shifts its emphasis toward western China with its government was as surprised as the Bank at outside reaction. large concentration of minorities. satisfactory, satisfactory, and marginally sat- · Management input to safeguard design and isfactory. Rated by safeguard, involuntary re- supervision was inadequate. At the time the re- settlement was highly satisfactory, dam safety port was prepared (in August 2000) sector and indigenous peoples (minorities) were sat- managers had no responsibility for oversight, isfactory, and environmental mitigation was and line managers had rarely visited the six proj- marginally satisfactory. ects reviewed by the Panel, despite their size · Risk avoidance is creating a "safeguard and importance ($1.7 billion loan amount).18 dilemma"--the minimum standard is gravi- tating toward "best practice" regardless of cost. The principal recommendation of the review · External monitoring by local institutes typi- was that the Bank should be more strategic in cally suffered from insufficient candor and lack its approach to safeguards. In particular, sector of explicit recommendations for action. and policy work is needed to provide a context · Despite some excellent work on social as- for project development, and early involvement sessment and mitigation planning, the Bank is is critical. Safeguards also at times reluctant to risk offending the should be seen as an The Bank should be more Borrower by directly raising issues relating to integral part of develop- strategic in its approach minorities. Social assessment is the weak point ment and project in project design and delivery. design and not as an to safeguards. 4 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E B o x 4 . 3 T h e V i e w s o f t h e B o r r o w e r Chinese officials, researchers, and representatives of civil so- donors, for a number of reasons: overly stringent application ciety all agree that the World Bank has made an important con- of safeguard procedures; ambitious project objectives (for ex- tribution to China's development. The consistent theme in all ample, sector reform in railways) that slow preparation; proj- comments, ranging from researchers and policymakers con- ect complexity due to unwelcome components (such as rural cerned with structural reform and macro policy issues to proj- road components in highway projects); and limited Bank ad- ect officials at the local level, was that the Bank's main ministrative budget, which leads to delays as the Bank seeks contribution has been in the realm of ideas--introducing new trust funds to carry out many of its core activities. concepts, methods, and technologies to China. Innovations at- · Loss of IDA is seen as a severe constraint. Because of China's tributed to the Bank by the Chinese included economywide repayment system, poor provinces and social sector projects concepts such as the economic value of services and corporate may be excluded from Bank projects if only IBRD terms are governance reform; international development best practices available. The initiative to blend DFID grants and IBRD is ap- such as feasibility studies, project appraisal, and international preciated, but should be applied on a larger scale. competitive bidding; and numerous specific technologies, new · Inflexibility in adapting to China's unique circumstances. organizational methods, and training at the project level. In a A consistent theme in Chinese comments was that China is Client Survey commissioned by the Bank in late 2002, more than different from other borrowers and the Bank needs to adapt half of all respondents said that transfer of new project concepts its advice and procedures accordingly. The Bank was slow was either the greatest value or second greatest value of the to recognize China's growing sophistication and need for Bank, and nearly half said that the Bank's knowledge was ei- detailed and specialized AAA in the 1990s, though the rel- ther the first or second greatest value. Financial resources and evance and effectiveness of AAA have improved signifi- other contributions were seen as less important. cantly in the past three or four years. The Bank should There are also a number of criticisms of Bank assistance: show more respect for local capacity by using local con- sultants. China's standards on procurement and safeguards · Cost of doing business. Projects take longer than they used are high and often based on World Bank advice on inter- to, and the World Bank is said to be slower and more de- national norms. The Bank should harmonize with local manding than the Asian Development Bank and bilateral standards in these areas. Source: Annex J. add-on or a "cost of doing business" to be China has more often adopted Bank standards minimized. As noted previously, the Bank has than the reverse, but the Bank has accepted since responded to concerns about safeguard China's standards and definitions on resettle- issues by strengthening risk management and ment and on indigenous peoples, where by providing a separate budget for thematic Chinese "minorities" are treated as equivalent supervisions. These steps have improved to the Bank's "indigenous peoples" (see OED quality-of-supervision assessment ratings, but 2003a). Differences still exist in a number of more needs to be done to move safeguard areas--for example, applicability of resettle- planning upstream and enhance strategic focus ment provisions to illegal squatters, but further through sector work and social assessments at harmonization should be possible. the design stage. There have also been suggestions for devolu- There is a strong case for moving toward tion of responsibility for safeguard policies to greater harmonization of safeguard procedures China, but this would be premature. Experience between the World Bank and China, rather than with local preparation of environmental impact simply ring-fencing World Bank projects with assessments shows some significant weaknesses in the Bank's own procedures. Harmonization China's safeguard design and implementation: has already taken place in a number of areas. perspectives are too narrowly focused on compli- 4 2 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S ance rather than problem solving and on the and without regard to political or other non- project rather than the sector or region, including economic influences or considerations" (Arti- downstream areas; technical capacity is variable, cle III, Section 5(b) of Articles of Agreement). though the general standard is good and improv- · As an international organization with devel- ing; and technical evaluations are too often opment expertise, the Bank may be well placed distorted or preempted by anticipation of adverse to play a certification role on sensitive projects political consequences. Some provinces are closer if the borrower and the board agree. The Three to meeting implementation standards then others, Gorges Project is a good example of the pos- and it should be possible to move gradually toward sibilities and limitations for the Bank in this role further devolution, but for the time being the Bank (see box 4.4). will need to retain ultimate responsibility for · The Bank should not shy away from projects just safeguards for reasons of competence, independ- becausetheyarecontroversial,butneithershould ence, and reputational risk. itplaceitselfinasituationthatrisksitsreputation as a nonpolitical development institution. In de- Crosscutting Issues ciding whether to participate in controversial projects, the Bank must weigh its potential con- How Should the Bank Deal with Politically tribution against its reputational risk. Sensitive Projects and Issues? · Safeguards are a particularly important tool for Controversies such as application of safeguards risk management of controversial projects, but under the Western Poverty Project pose the Bank has to have the courage and inde- difficult issues for the Bank. How can the Bank pendence both to call for studies and remedies fulfill its obligations to borrowers and preserve it considers necessary and to resist ramping its institutional integrity as a nonpolitical up standards and requirements unnecessarily. development institution? There are no univer- sal rules that will avoid the need for case-by- Similar considerations apply to other politi- case decisions in which a balance must be cally sensitive issues, such as labor standards or struck, but there are guidelines and lessons insider privatization, where safeguards may not from experience. be applicable, but which have important social and economic implications and pose reputa- · The Bank has a mandate to promote devel- tional risks. For example, the CAE mission was opment in member states "with due attention told in a visit to a factory where the Bank had to considerations of economy and efficiency supported severance payments for redundant B a n k I n v o l v e m e n t i n t h e T h r e e G o r g e s B o x 4 . 4 P r o j e c t The massive Three Gorges Project was controversial both in- ligible effect on the rate of return while entailing resettlement side and outside China, especially because it involved invol- of an additional 600,000 people. Based on these findings, the untary resettlement of 1.3 million people. At the request of the Bank stated that variants that only marginally raised the eco- government, the Canadian International Development Agency nomic benefits while greatly raising the numbers of people to financed, and the Bank supervised, a detailed appraisal of the be resettled would be economically suboptimal and would re- proposed project. The appraisal report concluded that the first quire further studies if the Bank were to participate in the proj- two stages of the proposed project would have a high economic ect. However, the government decided to go ahead with the full rate of return, but that taking the project to stage three (to allow three-stage project. The Bank did not participate in financing navigation from the sea to Chongqing) would have only a neg- the project. Source: OED (2001). 4 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E workers that a group of remaining workers had program is slated to rise even further in the been working 84-hour weeks for a lengthy coming CAS period, though this will be a larger period to complete export contracts. China's share of a smaller lending program.21 A number Labor Law limits monthly overtime to 36 hours. of arguments have been made in favor of A Bank supervision mission followed up but concentration on infrastructure. The rate of was told that the CAE mission had misunder- return on infrastructure investments remains stood.19 When the Bank supports a project it high. Infrastructure investment has a high should make special provision to monitor such payoff in growth and, when directed toward the issues both to protect its reputation and to poorer parts of China, in reduction of regional provide a good-practice model. The Southwest disparities as well. Infrastructure projects are Poverty Project provides a good example of generally low risk and, with the exception of what should be done. The project supported hydro projects, relatively noncontroversial. seasonal migration of young women to coastal Last but not least, it is a country priority. factory jobs, but also arranged for preinspec- The question is not simply whether tion of firms and monitoring of labor infrastructure investment has a high return. It conditions. The Bank should go beyond best does. The critical question is, what is the value practice at the project level, however. It should added of the Bank's participation in infrastruc- use project experience as an entry point for ture projects? Through the early to mid-1990s ESW and policy dialogue on important issues the Bank contributed a measurable amount of of social protection. incremental funding and a great deal to techni- Responsibility for cal upgrading and improved efficiency. In What is the value added improvements in trans- recent years the dual-track approach of of the Bank's parency, the rule of law, sustained lending involvement plus policy participation in corruption, and other dialogue through AAA has also yielded infrastructure projects? aspects of governance important policy reforms in energy. In the lies squarely with China, future, there are likely to be diminishing but the Bank can help by supporting institutional returns from direct Bank involvement in and policy changes that have proven effective in projects because competitive procurement and other countries. The Bank has long promoted other project management methods have changes in corporate governance, regulatory diffused across China. Where these methods reform, and improvements in procurement have not spread, the problems of the sector practices to help reduce incentives for corrup- cannot be solved through retailing of Bank tion. Notable activities in recent years include an repeater projects, suggesting the need for economic law reform project, fiscal and financial broader institutional and policy reforms.22 sector technical assistance projects, training in Selectivity and sector allocation gains added procurement practices, and co-sponsorship of significance in the face of exposure constraints an international conference on "Economic on the size of the lending program. When Reform and Good Governance: Fighting Corrup- lending peaked at about $3 billion in the early tion in Transition Economies" (see World Bank 1990s (two to three times projected lending in 2003, Annex G). It is noteworthy that respon- current dollars for the coming CAS period), dents to the Client Survey (Annex K in this the Bank decided, and China reluctantly document) gave high ratings for the importance agreed, to "graduate" the port subsector, and effectiveness of Bank support on the issue of recognizing that the Bank's value added would corruption, but low ratings for the Bank's diminish in the future and that China could importance and effectiveness on judicial access technology directly from the private reform.20 sector. More recently, the Bank has phased out of power generation projects. Because Has the Bank Overinvested in Infrastructure? infrastructure projects can absorb an The share of infrastructure in the lending enormous amount of funds, a hard look is 4 4 P R O G R A M A D M I N I S T R AT I O N A N D C R O S S C U T T I N G I S S U E S needed at the value added of conventional recovery, corporatization, and unbundling highway and wastewater projects. generation and delivery, but projects (and But what if these are what the client wants? project conditionality) were the means of China should, of course, have the ultimate say "pushing the envelope" of policy change. But in what projects it borrows for. But if the choice given the need for greater selectivity in lending, is driven mainly by a self-imposed repayment should the Bank rely only on AAA in some system, it would be a pity. So far, the compro- sectors? This is a high-risk strategy. It might work mise has been to agree on projects that push in energy, where Bank advice seems to be valued the envelope through marginal policy or for its own sake, but would probably not do so technical innovation in each project; but China in transport. Unfortunately, free advice is seldom will do itself a disservice, both in the value valued, and governments are not always able to added it will receive from the Bank and in the implement advice because of competing effectiveness of its own projects, if it fails to interests (as in the case of the fuel tax). make the necessary changes to enable it to Moreover, the Bank is unlikely to be able to finance its own low-risk projects and to diffuse sustain a program of stand-alone nonlending already-tested techniques. services. Even with the large infrastructure lending program in China, the resources Should the Bank Rely More on Stand-Alone devoted to sector work have been relatively AAA? limited. The Bank's comparative advantage in The Bank's dual-track approach--lending to the advisory business is that it is not free; Bank gain trust and detailed sector knowledge plus support is tied to a lending program. It is in the ESW to persuade the government on policy Bank's interest, if it wants to be repaid, to ensure issues--has been broadly effective in many that the borrower is in a position to generate the sectors. In agriculture, for example, ESW had necessary resources. Given that the money has stressed the importance of land contract reform, to be repaid, however, countries are reluctant to but projects were essential to work out some of commit to activities they do not perceive to be the practical details of implementation and to in their best interests. In any case, development demonstrate the effectiveness of contract is about both what to do and how to do it. The reforms in practice. In the power sector, sector "how to" is the great strength of the Bank's work introduced the importance of cost project lending. 4 5 5 Evaluation of the Bank's Assistance T he performance of China's economy with respect to growth and poverty reduction over the past decade is without equal in the world. What has the Bank contributed to this performance? And to what extent is the Bank responsible for shortcomings in performance, such as growing inequality and continued environmental problems? These are difficult questions to an- swer because the Bank's program is small (and has been declining) in rela- tion to China's overall economy. It would be presumptuous to think the Bank could take credit for the successes, or be held responsible for the failures, of such a large and dynamic economy.1 Nevertheless, by focusing on the value added of Bank assistance and by addressing a series of smaller questions, it should be possible to reach some conclusions about the overall impact of the Bank's assistance. Outcome of the Bank's Assistance tal protection--have helped address China's Overall impact can be assessed by considering most pressing development issues. The gradual the outcomes of the four main objectives of the shift of emphasis toward poverty reduction and Bank's assistance strategy and the relevance, environmental protection has also been in the efficacy, and efficiency of the program as a right direction, though the Bank was whole. sometimes slow to recognize the importance Relevance of Bank assistance. The Bank's of issues such as growing inequality and vulner- assistance strategy and activities have been ability, intergovernmental fiscal problems, and relevant in the large, if not always in the small, the need for better coordination of environ- context--at the broadest level of strategic mental policy and WRM. Within some activities, focus and allocation of resources, the Bank has such as the financial sector and enterprise done the right things. The four main Bank reform, the relevance of Bank advice waned objectives--promoting system reform and during the mid- to late 1990s, though in the better macro management, poverty reduction, financial sector the Bank has embarked on a infrastructure development, and environmen- promising reengagement. Relevance at the 4 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E level of sector or regional allocation or the issues (such as thematic supervision, which is choice of project components has always been under way). One measure of efficiency, elapsed constrained by the project repayment system. time for various stages of lending, shows no Projects were often skewed toward trend, but this is an issue that needs further components that generated revenue, investigation. The second qualification is that sometimes at the expense of higher-return the low cost of the China program may actually public goods components. With the loss of IDA, represent inadequate allocation of resources. Bank lending for social sectors and poor The budget allocation for AAA, particularly regions has become increasingly constrained. sector work, declined during the late 1990s and Blending IBRD loans with bilateral grants can certainly seems to have been inadequate to ease these constraints, but not eliminate them. carry out the dual-track strategy. The recent Efficacy of Bank assistance. The Bank's budget increase for ESW may change this. More record on efficacy--doing things right--has generally, the China program seems to have been mixed. Project implementation has been become increasingly reliant on trust funds to excellent in most sectors, but efficacy also finance many of its activities. The Bank sees the depends on achieving policy and institutional use of trust funds as a way to leverage its scarce change within sectors and on achieving coordi- administrative budget, but the borrower sees nation across sectors and levels of government this as a source of delay and uncertainty. for crosscutting objectives such as poverty Overall outcome is based on the outcomes reduction and environmental protection. Bank of particular objectives and on the relevance, strategy has been to rely on a dual-track efficacy, and efficiency of the Bank's assistance. approach, in which policy and institutional Outcome of Bank assistance to China is rated change depend mainly on persuasion through satisfactory. AAA combined with piloting incremental changes through projects. This has been Sustainability of Positive Outcomes successful in some areas (power sector and Reform and institutional change in China have social security reform), but less so in others, been gradual, but once changes have been particularly in areas that primarily depend on made, they are rarely reversed. Sustainability of the demonstration effect of projects at the local completed projects in China was rated likely or level. Similarly, the Bank has been more highly likely for 84 percent of net commitments effective on coordination where there is a high- during 1993­97 and 94 percent during level government coordination body (such as 1998­02. This is well above the Bankwide the LGPR, SEPA, and the erstwhile SCORES). average (56 percent and 73 percent, respec- Efficiency of Bank assistance. OED tively, for the two periods) and higher than normally measures efficiency by the cost of large-country comparators. The main risks to lending, supervision, and ESW per approved sustainability are a financial crisis, external project, per $1,000 of net commitment, and shock, or social instability leading to an (more refined yet) by cost per dollar commit- economic slowdown. Even a slowing of the ment of satisfactory projects. By all these growth rate could put poverty reduction at risk, measures, the China program scores well (see given that poverty reduction has slowed or Annex R, table R.6). Two qualifications are in stagnated with an 8 percent growth rate in order, however. First, the government has recent years. In spite of these risks, sustain- complained about the high cost of doing ability is rated likely. business with the Bank, both in comparison with other donors and compared with earlier Institutional Development Impact periods for the Bank itself. The Bank clearly The institutional development impact (IDI) of needs to balance the costs and benefits of Bank projects in China was rated substantial for safeguard studies at the project level and find 46 percent of net commitments on projects more systemic ways of addressing safeguard completed during 1993­97, rising to 84 percent 4 8 E VA L U AT I O N O F T H E B A N K ' S A S S I S TA N C E during 1998­02. Performance of the China or program over a Reform and institutional portfolio was marginally higher than the number of years. change in China have Bankwide average (36 percent) during the Because of the Bank's been gradual, but once earlier period and substantially higher than the long-term involvement, Bank average (50 percent) and comparator it has been able to have a changes have been made, countries during the latter period. The review substantial cumulative they are rarely reversed. of institutional development impact by sector impact in a number of and objectives showed a mixed performance. areas, its views have Bank impact on project management, procure- gained a respectful hearing, and it has sometimes ment procedures, and capacity building has been well placed to take advantage of opportuni- clearly been substantial at the project level, ties when China was looking for support for though there are questions about how widely change. Bank performance has varied across these institutional developments have diffused, sectors and over time, but the Bank has made a particularly across provincial and lower-level positive contribution in a large number of areas. boundaries. Bank encouragement of citizen In the Chinese context, the Bank is relatively and community participation in decision- small, but it has punched above its weight. making (through water user associations, One case of poor Bank performance should consultations on project designs, and the like) be highlighted--the handling of the Western seems to have had some impact beyond the Poverty Project, which led to the Inspection Bank's own projects. At the ministerial or Panel investigation. Unfortunately, the individual organizational level, the impact has repercussions of the Inspection Panel continue. also been substantial (for example, for the The Bank still sometimes fails to get the right separate transport ministries or for SEPA), but balance between development objectives and the impact of projects involving coordination protecting against reputational risk. (for example, water basin management or Could the Bank have accomplished more if it integrated rural development) seems to have had been more ambitious or aggressive in had limited impact beyond the particular pushing its own agenda? That seems unlikely. project. At the macro and sector level, IDI has China clearly values the Bank more for its advice ranged from modest to substantial. At the and knowledge of international experience than micro or project level, IDI has been improving its money, and the Bank could not have and in recent years has been substantial. expected to achieve more through conditional- Overall, institutional development impact is ity than through persuasion and demonstra- rated substantial. tion. Demonstration has generally worked well when the partner agency had the authority to Bank Performance diffuse good practice and less well where To what extent can China's development authority was fragmented. Persuasion could outcomes be attributed to the Bank? It would be have been better in some cases. The Bank has hard to argue that Bank assistance has made sometimes toned down its advice in anticipa- China worse off in any way, but apportioning tion of what it believes to be politically accept- attribution for successes is difficult. China's own able.2 China would, in fact, be better served by efforts, along with advice and support from many more candid expression of Bank views. sources, mean that most of China's successes are On balance, the Bank has performed well in "overdetermined." The main strength of the China, and overall Bank performance is rated Bank has been its sustained support of an activity satisfactory. 4 9 6 Lessons and Recommendations C hina's experience offers lessons for other countries, as well for future development efforts in China. This chapter first addresses lessons learned and then makes recommendations on the repayment system, improving ESW, and improving performance of Bank lending. Lessons experience is the importance of pursuing re- form before systemic collapse. Lessons from China's Experience for Other · Reform will be more sustainable if sequenced Countries to protect potential losers during the early Too much has been made (by the Bank and stages. Mechanisms such as China's strategy of others) of China's exceptionalism and the growing out of the plan or using transitional inapplicability of China's experience to other dual pricing may not be applicable in other countries. The Bank should make a systematic countries, but the principle of using gradual effort to analyze and disseminate lessons for changes to reduce opposition and build a con- other countries from China's experience. The stituency for further reform is important. 2004 Shanghai conference on lessons of · China's policy of beneficiary repayment has poverty reduction was a commendable step in been an important factor in promoting strong this direction. Some of the important lessons project implementation and ownership. Yet from China are: overly strict application of the principle creates problems of its own (see discussion below). · China's reform experience is relevant for China and other countries have much to learn many countries. China's gradualist reform from each other on this issue. strategy has often been portrayed as irrele- vant to other countries because of its unique China has always been receptive to lessons characteristics, such as a large agricultural sec- from other countries, especially newly industri- tor. If the economic system has broken down, alizing countries and other success cases. In its the only option may be to pursue radical re- aspiring role as a "knowledge bank," the Bank form, as China did with the dysfunctional com- should increase its effort to learn and dissemi- mune system, but the main lesson of Chinese nate lessons from China, as well as for China. 5 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Broadening the Dialogue countries. In particular, working on an equal The Bank's dual-track approach of building footing has promoted gradual but sustainable trust and supporting new techniques through reform and mutual learning. But much greater lending while promoting policy reform candor and openness are needed on both through AAA has been broadly effective. But sides. For example, more collaborative ESW there are a number of important areas-- could have a high payoff, but China needs to poverty, water, health, agriculture, and rural provide access to data and knowledgeable development--that have issues that need to be sources, and the Bank needs to be more willing discussed at a higher or more inclusive level to speak frankly and openly about problems than the ministerial or regional project and policy options. In the banking sector, for counterpart. Progress in reducing poverty and example, China has been reluctant to share inequality, for example, depends on addressing data on nonperforming loans, which have weaknesses in the intergovernmental fiscal emerged as a major problem. But when the system. Finding an appropriate counterpart, Bank was allowed to study four bank branches especially for complex issues that require and found an emerging problem, it did not sustained effort rather than stroke-of-the-pen pursue the findings with relevant officials. In decisions, is a major challenge for Bank the Air, Land, and Water study (2001), the assistance strategy. Bank was rightly criticized by the Quality Assurance Group (QAG) for not discussing Implications of a Smaller Lending Program organizational issues and options more With a smaller lending program, the Bank's forthrightly in the summary report. One impact in China will depend more than ever on Chinese researcher remarked that the Bank is effective persuasion and demonstration. This "too polite" to be effective. The Bank should implies that the Bank should: not strive to be impolite, of course, but speaking hard truths serves China better. · Be more innovative in project selection and de- sign. Recommendations · Pay more attention to monitoring and evalua- tion and to dissemination of project lessons. Repayment System · Rely more on systemic or policy changes than China's repayment system is the source of both on replication of projects. the greatest strength and the greatest · Systematically evaluate projects in terms of weakness of World Bank project performance the Bank's value added. in China. Its strength is that beneficiary · Review personnel policy to ensure that teams repayment focuses attention on project detail have the right balance of China knowledge and builds ownership. This is something other and relevant up-to-date experience from other countries could learn from China. Its weakness countries. is that the system biases the allocation of project funds against poor regions and public One option that should be used sparingly is goods whose benefits are widely dispersed and stand-alone sector work. In general, there are generate no revenue. Blending bilateral grants important synergies between ESW and lending. and IBRD loans can overcome the constraint on a case-by-case basis, but this is cumbersome Importance of Candor and Openness and has no effect on the overall concessionality The relationship between China and the Bank of foreign assistance. China could get the best has generally been based on working on an of both worlds by retaining the principle of equal footing, mutual respect, and persuasion, beneficiary repayment, but differentiating rather than conditionality. This has served both repayment terms by ability to repay and by China and the Bank well and could provide an sector. The government operates a limited example for the Bank's relations with other version of such a system for its domestic fiscal 5 2 L E S S O N S A N D R E C O M M E N D AT I O N S transfers, but refining the system and applying Bank has been moving in this direction, but per- it more widely to externally funded projects haps not fast enough. would improve the efficiency and equity of · Carry out more sector work. ESW on China is public investment allocation. under-resourced. The effect is most apparent on sector work. It is unusual for there to be no Improving ESW work on an important sector, but in several There are several ways in which the Bank's ESW sectors new work is needed to take stock of could be made more effective: progress and problems and to lay the founda- tion for better policy dialogue and new direc- · Focus more on China, less on international tions in lending. experience. The Bank has given too much em- phasis to lessons of international experience Portfolio Management and too little to analysis of the Chinese econ- There has been no CPPR since 1996. The China omy. Lessons of international experience Department argues that CPPRs are too should remain an important part of the Bank's unwieldy and costly to use in a country with work (though perhaps more through WBI than such a large portfolio and that instruments like ESW), but the relevance should be tested thematic supervision are more effective. against China's problems and experience. Pol- Nevertheless, we recommend revisiting the icy advice should also be grounded in analysis possibility of having another CPPR after more of the Chinese economy rather than being experience is gained with thematic supervi- based solely on international experience. Fi- sion. We also recommend that a full-time nally, analysis of China's problems and ac- portfolio manager be appointed to help follow complishments would help the Bank draw up on systemic issues and facilitate cross-fertil- lessons from China's experience for other ization among project teams and sector units. countries. · Broaden the audience. In the early days of Safeguards and the Cost of Doing Business China's reform, the Bank sought especially to While safeguards will remain a cost of doing influence senior policymakers. As the agenda business with the Bank, finding more efficient has moved from broad concepts to imple- ways of implementing them and strengthening mentation and problem solving, the Bank the systemic use of safeguards in China is should try to promote and participate in a possible within the constraints of existing much broader debate on policy and sector is- policy. Much could be done to further sues, not only among officials, but also among harmonize procedures and perspectives, while researchers and other stakeholders. Bank ESW developing China's capacity for technically can help ensure that this broader debate is competent and independent environmental grounded in analysis. The Bank still has a role safeguard management. More sector work, as confidential policy adviser, but its long-term such as Sector Environment Assessments, impact may be greater as a participant in pol- would provide a broader context for project icy analysis before a broader audience. EIAs. Doing the work collaboratively would · More collaborative work would enhance ef- help develop China's own capacity. Continua- fectiveness. The latest environment report tion of thematic supervision will also broaden (World Bank 2001), done in collaboration with perspectives, lower costs, and build long-term SEPA, is a good example of the advantages to capacity. Within China, use of a tiered system of be gained in access to data, understanding of evaluation, in which experienced Chinese local conditions, and ownership of recom- research institutes from coastal areas collabo- mendations. More collaborative work would rate with and monitor less experienced help broaden the policy dialogue among re- institutes in central and western China searchers and officials and facilitate Bank con- (analogous to the relationship between tacts with a new generation of scholars. The international and Chinese groups in conduct- 5 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E ing EIAs), could promote diffusion of methods construction and, more important, place the and skills throughout China. Finally, introduc- Bank in a position where it could influence the tion of more participatory and publicized overall resource allocation decision on what is safeguard methods could strengthen the to be built, as well as where and when. The independence of Chinese experts and broaden Bank's experience in highway design and the debate on environment and other network construction would be spread over a safeguard issues. large program and contribute substantial value added to transportation in China. Other sugges- New Directions in Infrastructure tions are given in the three background papers The Bank should not rely only on ESW in on infrastructure (Churchill 2002; Churchill and infrastructure, nor should it retreat into periph- Thum 2002a, b; see also Annexes D and H). eral activities such as renewable energy. At the same time, it should not simply continue a large Poverty Lending lending program devoted to expanding the The Bank's poverty-targeted lending has been supply of infrastructure into new regions of the effective and offers useful lessons (see box 3.2), country. Rather, it should try to move into but direct lending for poverty reduction is not relatively neglected, but mainstream, areas of necessarily the most expedient or effective lending and expand the sector work to provide approach in each sector. This is particularly the analytical base for lending and policy true in the case of infrastructure, where invest- dialogue.1 In energy, potential areas include gas, ment is essential for growth and benefits widely where the Bank could play a catalytic role in distributed across all income classes. The Bank, creating an environment for the private sector, for example, may contribute more to poverty and electric power distribution, where China reduction through the road sector by lending could learn a lot from international experience. for highways than for feeder roads. It may make The time might also be right to try again to more sense for the Bank to confine feeder road interest the government in Bank assistance for lending to integrated rural poverty projects coal, where there are a number of important than as components of highway projects. issues of technology upgrading, environmental However, in the case of electric power, protection, cross-sector coordination, and improved distribution systems will have a enterprise reform. In transport, one strategy for major impact on lower-income groups, but if the Bank would be to support the needed these groups become the exclusive target of highway investments by becoming a partner in this lending, the benefits will never reach them a road fund or funds that would draw on a fuel as they will be preempted by commercial and tax for most of its revenues. This would allow business interests, as well as higher-income the Bank to wholesale its practices in highway groups. 5 4 ANNEXES ANNEX A: SUMMARY: ANALYTICAL AND ADVISORY SERVICES BACKGROUND PAPER When the World Bank began its operations in growth of markets and of the economy as a China in 1982, Chinese policymaking was hin- whole. dered by significant ideological debates. The During this period, the World Bank's analysis government directly controlled the prices of al- of China's situation laid the foundation for com- most all industrial inputs. It controlled distribu- prehensive policy research. China: Long-Term tion through planned allocations and a variety of Development Issues and Options, published in quotas. 1985, was a particularly important and influen- Since then, the Bank has contributed to tial country report. It forecast China's economic China's policymaking, reform efforts, and de- growth, affirmed the possibility of rapid growth, velopment through research and advisory ac- and provided policy analysis and recommenda- tivities, as well as project investment and tions on several key subjects: technical assistance. After exerting considerable influence throughout the 1980s, however, the · Structural adjustments, system reform, and Bank's role waned during the 1990s. Have social policies during economic growth China's economic advances and the growing · Development of infrastructure and service sec- skill of its own officials, economists, planners, and tors such as education, agriculture, energy, analysts made the Bank's advisory and analytical transportation, and urbanization services less important? Or do the Bank's serv- · Reform of SOEs ice modalities and methodologies need correc- · Pricing reform tion? · Creation of accounting and legal systems meet- ing international standards The Role of the World Bank in China's · Social policies, including social security, hous- Reform and Development Processes ing, social services, population, and rural To ease China's transition to a modern market poverty. economy in the 1980s, the government prac- ticed "incremental reform," retaining the planned China adopted as government policy many of allocation structure while allowing some activi- the report's recommendations on economic de- ties to adopt the market system, with prices de- velopment. For instance, sectors such as agri- termined by the market and producers getting culture, education, energy, and transportation the lion's share of revenues. The government de- became development priorities. But other rec- centralized local finance, introduced two-tiered ommendations, such as SOE reform and social pricing, made rural households responsible for security reform, failed to get the attention of production, and entered into contracts with the Chinese government until the need became state-owned enterprises (SOEs) in urban areas. pressing, whereupon the recommendations were Together, these changes spurred the rapid added to the government's agenda one by one. This is a summary of the CAE Background Paper, "Evaluation of the Effectiveness of the World Bank's Analytical and Advisory Services in China Since 1990," by Lu Mai, Secretary General, China Development Research Foundation. 5 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E The burgeoning market economy helped World Bank experts were correct in many cases, China double its GDP in the 1980s. The Chinese the Chinese government has found them very government pressed its advantage with dramatic hard to adopt because of various political con- economic reforms in the 1990s. Significant straints. among these reforms were (a) reforming macro- · Because it has not been able to isolate the fac- economic management in order to integrate the tors behind its earlier successes, the Bank in two-tiered economy (particularly on fiscal, tax- some cases has proved unable to deploy its ation, foreign exchange, and pricing issues), (b) strengths effectively. reforming the inefficient state-owned economy, · The Bank's research findings are not published and (c) reforming the social security system. in formats that are well suited to most Chinese The Bank's considerable impact on Chinese audiences. Few Chinese read its lengthy re- government policy during the period of incre- search reports because Chinese translations mental reforms can be attributed to several fac- appear after a long lag. tors. The Bank worked cooperatively and · Since the 1990s, the World Bank's research in respectfully with the Chinese government, build- China has been insufficiently forward- ing and maintaining effective channels of com- looking. The Bank has failed to focus on de- munication to key Chinese officials. In the 1980s, velopmental issues with significant implica- the chief representatives of the World Bank Bei- tions for China's development prospects, such jing Office had friendly personal relations with as urbanization, education, and urban trans- the leaders of the Chinese State Council and port. In contrast, it has devoted dispropor- many ministries and commissions. In the 1990s, tionate efforts and resources to the issue of some crucial researchers who had always had SOE reform. A related problem concerns the good working relationships with the Bank were gap between clearly identifying actual policy promoted to ministers or department directors research needs and supporting what may be in the government. a totally different set of priorities articulated Bank studies and recommendations were by the government. based on a sound knowledge base and ongoing experience and supported China's incremental Recommendations reform model. The Bank was able to transform World Bank project loans and policy research its research findings into concise policy recom- have been closely related in China--to good ef- mendations in response to clearly defined pol- fect. But with the elimination of soft loans and icy needs from the Chinese leadership. This is the reduction in project loans, policy research important because, although China's reform has decreased in volume and significance. If the process is gradual, the government maintains a Bank wants to retain its influence on China's fu- long list of development topics; successive top- ture reforms and development, it should ad- ics usually present themselves as urgent needs. just its research and analysis services. Among the recommended adjustments are the following: Issues of Concern Despite these successes, the influence of the · Expanding networks and channels for policy re- World Bank's policy research diminished in the search so that when a current group of Chinese 1990s as resources were devoted to research re- collaborators is promoted or retired, a new ports that failed to get leaders' attention. The rea- network is ready to take its place. sons for the dwindling of influence are manifold. · Identifying current and future needs through proactive collaboration with Chinese re- · China developed substantial capacity to per- searchers and specialists in various govern- form its own theoretical and policy research. ment agencies who could define needs and · The reform process in the 1990s became much make suggestions in key research fields, as more difficult because it directly affected strong well as assess the Bank's reports from the per- vested interests. While the suggestions from spective of Chinese experts. 5 8 A N N E X A : S U M M A RY: A N A LY T I C A L A N D A D V I S O RY S E RV I C E S B A C K G R O U N D PA P E R · Formulating improved output and delivery nese experts, following the model of the World formats for reports so that recommendations Bank surveys that shed so much light on the focus on the one or two most important find- changing Chinese economy and society in the ings. Proposals of no more than 3,000 words late 1980s and early 1990s. could be released separately and periodically · Upgrading the training of Chinese policy re- (possibly 20 times per year) and circulated searchers in government, academia, and non- within the Chinese government. This ap- profit organizations. The World Bank should proach could achieve a stable and loyal read- continue its efforts to provide support and as- ership. sistance to the capacity building effort of Chi- · Strengthening the studies of China's funda- nese research institutions by offering personnel mental conditions in cooperation with Chi- training and short-term study tours. 5 9 ANNEX B: SUMMARY: AGRICULTURE BACKGROUND PAPER Changes in the Agricultural and Rural China has recognized this problem, and the Bank Sectors can provide new perspectives on how to solve it. Like most of China, the agricultural sector changed significantly between 1970 and 2000, Challenges for Rural China both demographically and economically. Agri- The focus of Chinese agriculture for decades culture slipped from 40 percent of China's econ- was national self-sufficiency. To this end, the omy to 16 percent, as industry and services government regulated what was grown, with an advanced. The share of the population engaged emphasis on grains. A government monopoly still in agriculture shrank from 81 percent to 50 per- controls the grain market, but farmers are chang- cent; the population share living in rural areas ing the rural output mix in favor of commodities declined from 83 percent to 64 percent. Even so, not subject to price or market regulations, such in 2000, the rural economy still employed 475 as oilseeds, fruit, meat, and fish. Consequently million people, with 347 million working in agri- the share of these products in agricultural out- culture and 128 million in town and village en- put has risen rapidly, while the share of output terprises. Historically tightly regulated, insulated, sold at regulated prices has fallen--from 76 per- and protected, the agricultural sector is in- cent in 1980 to 56 percent in 2000. These shifts creasingly subject to market forces, the pres- are driven by changes in demand, by policy, and sures of internationalism, shifting government by attempts to find loopholes in policy. policies, and changes in technology and con- Shifts in the mix of agricultural output and in sumer preferences. Rural enterprises now pro- agriculture's share in national output and em- vide more diverse employment opportunities ployment are typical of the structural changes and an important source of income for rural that occur with growth in an economy at China's and agricultural workers. A demand in urban stage of development. However, challenging the areas for more diverse foods is widening op- process of change are conditions specific to China portunities for farmers to join China's dynamic and China's policy choices to date. These condi- domestic economy, although improved ways to tions and policy choices are the basis of the chal- market their products are needed. lenges confronting rural China that will guide the But prosperity is not equally spread through- priorities in the Bank's program of assistance to out China, nor has the agricultural sector shared China. The most prominent issues that appear to in the wealth of industry and commerce. Incomes concern policymakers include the following: in urban areas are 2.7 times those in rural areas. Some provinces are remote, poor, and largely · A focus on product quality, rather than vol- unconnected to the modern Chinese economy. ume, to meet shifting consumer tastes, and an In other provinces, high levels of prosperity co- explicit shift in public discussion of food se- exist with equally high levels of rural poverty. curity to reflect this change This is a summary of the CAE Background Paper, "World Bank's Assistance to China's Agriculture Sector," by Christopher Findlay, Professor, Asia Pacific School of Economics and Government, Australian National University. 6 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E · Less reliance on collectively owned township Policy change can be expected to respond to and village enterprises, which tend to be spe- the pressures associated with the foregoing is- cially favored and inefficient, and more re- sues, as China's experience with grain market reg- liance on true private enterprises ulation and the household registration system · More interest in trade in food--not only food suggests. But a body of knowledge about policy imports but also exports and access to markets options and their impacts is critical if policy- for exports--again leading to a different per- makers are to choose and implement policies spective on food security, including an appre- that promote growth and reduce poverty. ciation of product values and input costs and a reappraisal of China's strategy with respect Review of World Bank Assistance to the World Trade Organization's Doha Round Strategy · Continuing pressure for reform of domestic World Bank lending is large in absolute terms but grain marketing systems to capture, through small relative to capital inflow into China. The comparative advantage, more gains from the World Bank has made the case for continuing to internal trade in grain and to facilitate ad- lend to China, observing that foreign direct in- justment to WTO commitments in the grain vestment (FDI) has tended to exaggerate re- sector gional disparities and has not met the need for · Removing impediments evident in markets for public investment in essential sectors. Priorities farm inputs and services that restrict farmers' in the Bank's program--poverty alleviation, ability to respond to opportunities and to ad- health, education, natural resource manage- just production in the face of new competition ment, the environment, and urban develop- · Reform of rural finance markets to help farm- ment--have had a low priority in FDI flows, ers and rural entrepreneurs improve their op- whereas Bank projects have piloted innovative erations approaches to areas of need, catalyzed repeater · Better infrastructure for agricultural product projects that demonstrated sound policy prin- markets, especially logistics and multi-modal ciples, and helped to build institutions necessary transport, to enhance trade and income to complete structural reform. growth, particularly in poor areas The 2002 country assistance strategy (cover- · Redressing the growing imbalance in income ing the period 2003­05) contains several goals rel- distribution between rural and urban residents evant to agriculture and the rural population. It and the large gap between prosperity and builds on a broad strategy that includes improv- poverty in rural areas ing agricultural practices, upgrading marginal · Removing impediments to internal migration land, improving township and village enterprises, and relaxing other rural labor regulations, with boosting employment and productivity, and pay- implications for the management of markets in ing more attention to lagging inland regions. Im- agricultural inputs, especially land; for the man- provements to agricultural productivity growth agement of poverty programs; and for diver- are expected to come from changing the mix of sifying farmers' income sources output, strengthening land property rights, in- · Greater focus on environmental constraints vesting in irrigation, reforming water resource that limit the sustainability of Chinese agricul- management, reforming systems of fees and taxes ture and rural enterprises and threaten fur- in agriculture, engaging more private sector par- ther degradation of water, soil, and other ticipation, and improving transport and market natural resources infrastructure. Rural development programs will · Correction of incentives in the national public reflect key themes of the Bank's program for finance systems that appear to be widening transition to a market economy, assistance to disparities rather than narrowing them disadvantaged people and regions, the rural- · Reform of financial and bureaucratic arrange- urban transition, and sustainable development. ments that prevent local and inter-regional Over the next two years, assistance priorities funding and development strategies. will shift further from direct interest in produc- 6 2 A N N E X B : S U M M A RY: A G R I C U LT U R E B A C K G R O U N D PA P E R tion to poverty alleviation, natural resource man- into provincial-level activity. The sensible ap- agement (with special attention to water), revi- proach to poverty reduction, involving an in- talizing agricultural research and extension tegrated set of activities, then leads to large, programs, and environmental sustainability. The complex projects requiring a high degree of overall interest in moving toward a market econ- micromanagement, thus exposing the Bank to omy remains. The changes in the portfolio of significant risk. projects are consistent with the new priorities The responses to this situation include con- identified above. However, how project imple- tinuing work to anticipate pressures for change mentation proceeds will depend on whether in the three key areas of grain marketing, labor China focuses on narrower or broader inter- mobility, and public finance; to deliver a steady pretations of economic development: Will ef- flow of ideas about policy innovation; and to forts focus on rural areas in general or agriculture ensure, through project design and evaluation, in particular? Should the goal be to bring pros- that public goods, including capacity and insti- perity to the countryside or to facilitate the mi- tution building, are not underrepresented in gration of the rural poor into the cities? the portfolio. The fundamental issue is the degree to which Review and Further Questions World Bank projects focusing on agricultural The biggest issue remains the system of subna- production boost the welfare of the poor in tional finance and the incentives it creates in proj- rural China and the economies of the regions in ect selection and design. The consequence of which they live. Although the Chinese govern- this system is that the Bank's contribution to pub- ment has recognized the need to address lic goods is being driven by its participation in the poverty in rural areas, it has traditionally used production of private goods. Ideally, the interac- World Bank loans for projects that will quickly tion should be in the other direction. The origins generate income to repay the loans. This has dis- of the current circumstances are understandable, tracted attention from a focus on building in- given China's public finance system, but this ori- stitutions, economic capacity, health, education, entation leads to a bias in the portfolio and to and other social lending of the sort that bene- problems in project design, implementation, and fits the rural population over the long term. In- evaluation. It has also raised demands on Bank tegrating such lending into the Chinese staff and crowded out the private sector. development strategy will require a shift in Chi- In order to achieve the goal of participa- nese domestic economic policy and new ways tion in projects, the Bank tends to be drawn of approaching and managing change. 6 3 ANNEX C: SUMMARY: DECENTRALIZATION BACKGROUND PAPER Evaluations by Bank staff, borrower representa- Disbursement and Financial Management. Financial tives, implementation agencies, and non- management staff and disbursement staff are in- governmental organizations (NGOs) have shown terchangeable in Beijing, streamlining their speed that decentralization has had a positive impact and effectiveness. Withdrawal applications are on the Bank's effectiveness and efficiency since now all processed in Beijing; the requisite forms some functions were decentralized to the Resi- and supporting documentation are digitized and dent Mission in China (RMC) after 1997. The sent electronically; the service standard for pro- presence of project staff in the RMC, many of cessing applications is now 10 days; and finan- whom speak Chinese, has helped (i) resolve cial management assessments for projects under project problems promptly, (ii) speed up trans- appraisal and oversight of financial reporting action times, (iii) enhance the Bank's apprecia- and audits have increased. (About 220 project au- tion of the local situation, (iv) facilitate local dits and 50 trust fund audits are reviewed every capacity building through regular training and year.) The RMC is helping the Chinese National other support, and (v) build long-term rela- Audit Office adopt auditing standards in line tionships and trust by virtue of continuous pres- with Bank and international norms. ence in the community. Several improvements were made possible by the Bank's presence in Beneficiary Participation. The Bank has promoted Beijing, including the following: the engagement of stakeholders in the design and implementation of development projects, Project Management. With portfolio tasks being notably in the creation of water user associa- managed in Beijing, increasingly by Chinese staff, tions and in stakeholder consultation, through RMC staff have spent more time within imme- techniques such as rapid rural appraisal. diate reach of project staff, solving problems in real time and engaging in almost continuous su- Safeguards. The Bank's safeguard policies have pervision. Also, the persistence of Bank staff in helped the Chinese improve the content and the RMC has led to positive changes in project application of their own environmental and so- design, implementation, and procurement. cial safeguard policies. The Bank and RMC staff are supervising the implementation of Environ- Public Procurement. The borrower consistently mental Action Plans and Resettlement Action cited the Bank's role in public procurement as Plans, unlike many Chinese agencies (and even a major contribution to China's development. other donors). With two notable exceptions--re- RMC staff helped prepare the National Public settlement of illegal squatters and the definition Procurement Law of 2000. It also played an im- of indigenous peoples--there has been an in- portant role in drafting standardized bidding creasing acceptance of the Bank's policy stan- documents for Bank projects in the early 1990s. dards and practices. Environmental policies are Annex C summarizes the CAE Background Paper, "Impact of Decentralization," by Daniel Ritchie, Consultant. 6 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E now more or less synchronized with the Bank, even though the definition of what constitutes a significant impact continues to vary. Possibly the most significant contribution by the Bank is in the application of the policies. 6 6 ANNEX D: SUMMARY: ENERGY BACKGROUND PAPER China is now the second largest energy con- impressive. However, its institutional structure sumer in the world. The country's energy in- is complex and inefficient. The tenth five-year tensity is about 60,000 BTU (British thermal plan (2001­05) continues a number of ongoing units) per dollar of GDP, three times the world institutional and organizational reforms: com- average and twice that of all developing coun- pletely separating the distribution network from tries. It generates more than 300 gigawatts, mak- generation; restructuring both generation and ing it both the world's second largest producer power network enterprises; establishing com- and second largest consumer of energy. Indus- petitive and open regional markets; and devel- try accounts for as much as 75 percent of total oping efficient management throughout the energy consumption, and although conserva- electricity chain, including generation, trans- tion efforts over the past two decades have re- mission, distribution, retail tariffs, and environ- sulted in more efficient consumption, household mental protection. use (10 percent in 1999) is growing fast with re- cent improvements in the standard of living. Na- Sustainable Energy, including Conservation, Efficiency, tionwide, although service is of uneven quality, and Renewables. China has one of the world's rural access to electricity is high: about 96 per- largest renewable energy programs, with 20 gi- cent of the nation's villages and about 80 percent gawatt small hydropower and large-scale instal- of rural families now have access to electricity. lation of improved woodstoves and biogas plants. Three prominent issues in China's energy The tenth five-year plan emphasizes renewable sector are the use of coal, management of elec- energy as an important measure to reduce the tric power, and efforts at energy sustainability that power sector's use of coal in the medium to include improving efficiency, conservation, and long term and to provide energy services to re- developing renewable energy. mote rural households. Coal. China is the world's largest producer and The Bank's Energy Sector Assistance consumer of coal. It is, in the foreseeable fu- Strategy ture, largely energy self-sufficient, although crude Between 1983 and 2002, China has been the oil imports have increased steadily since 1993. Bank's largest borrower in the energy sector, Coal also presents problems concerning infra- with about $7 billion in loans, and energy is structure issues of transportation and distribu- about 20 percent of the Bank's total lending to tion, air pollution and health, and the efficiency China. Electric power received the most (86 per- of the technology used to burn coal (in power cent), followed by oil and gas (10 percent), en- plants, as well as households). ergy efficiency and renewables (2 percent), and coal (2 percent), with substantial analytical and Electric Power. The sheer size and the level of advisory services. The sector also received $90 growth in China's power sector have been very million in Global Environment Facility grants Annex D summarizes "World Bank Assistance for China's Energy Sector," by Anthony Churchill and Cordula Thum, Consultants. 6 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E through the Bank. Nonetheless, given the sec- ate achievements of Bank projects, which ulti- tor's sheer size, the Bank is a relatively marginal mately account for only a minute portion of financial player in China's energy sector (less overall sector investments. In this respect, the than 5 percent). And the Bank has had only lim- Bank's strategy from 1985 to 1993 was highly rel- ited involvement in the subsectors most critical evant to the sector's needs and consistent with to China's energy strategy--coal and petroleum. the Bank's support of China's gradualist ap- The Bank's activities have progressed from proach to economic reform. Most projects had helping China integrate into the global econ- minimal policy content, but they all shared a omy and build an energy infrastructure that sup- strong emphasis on technology transfer and ca- port's the country's accelerating economic pacity building. Projects were targeted to maxi- growth to developing the institutions, practices, mize their demonstration value to the rest of the organizational and market reforms, and envi- sector, with benefits to be gained from modern ronmental and resettlement programs to make technology and management methods, inter- China's energy system equitable, efficient, and national procurement, and good resettlement sustainable. practices. These early physical and institutional After a period of significant loans during achievements were fully sustainable and paved 1983­98, there has been a dramatic decrease in the way for the more ambitious policy reforms overall energy lending. Only four energy loans of the mid- and late 1990s. were made in the period FY99­02. Three loans The outcome of the Bank's energy assis- totaling US$420 million were made during tance program since 1994 is rated satisfactory, FY99­00, but only one loan since then, for its institutional development impact substantial, US$10.5 million, in FY04. This is a shift from fi- and its achievements sustainable. The Bank's nancing major capital projects to organizational power sector strategy continues to be highly rel- and market reform programs. In the past two evant and is supported by the government's years, the establishment of a competitive power stated commitment to reform. However, the market in Zhejiang Province is an example of Bank needs to renew a dialogue on the critical effective AAA, and the Hubei Hydroelectric Pro- coal and petroleum sectors, where reform has ject (2002) is a model for technical assistance, been lagging, and on promoting an integrated providing lessons on reforming electricity gen- approach to energy planning. Bank perform- eration, distribution, trade, and management. ance during the period is rated highly satisfac- tory, while borrower performance is rated Efficacy of Bank Projects: satisfactory, with excellence in such aspects as Performance and Outcomes resettlement, sustained commitment to energy efficiency, and renewed promotion of renew- Completion and Supervision Ratings. The record of ables, offset by weaknesses such as lack of ef- completed energy and energy-related projects is fective sectoral coordination at the central level, comparable to the transport sector: 6 were rated slow pace of power tariff reform, insufficient en- highly satisfactory; 4 were rated marginally satis- forcement of environmental regulations, and in- factory; none of the 20 projects had an unsatis- sufficient progress in reforming the coal sector. factory outcome; and one project was not rated.1 Sustainability was rated likely for all but one proj- Sector Reform, Institutional Development Impact, and ect (the Daguangba multipurpose hydroelectric Sustainability. The fundamental restructuring of project, which was rated uncertain). And institu- the power sector has been the most ambitious tional development impact was rated substantial institutional objective pursued by the Bank in the or high for all but three projects (the Daguangba, energy sector since 1994. In 2000, a joint report Changcun Mining, and Fertilizer Rationalization of the State Power Corporation and the Bank laid projects, which all had a modest rating). out a plan to introduce competitive power mar- An assessment of the Bank's impact in a coun- kets into the Chinese power sector, starting on try like China needs to go beyond the immedi- a provincial or regional scale. Pilot programs are 6 8 A N N E X D : S U M M A RY: E N E R G Y B A C K G R O U N D PA P E R under way in Shanghai and Zhejiang. The elec- of Bank assistance has to be seen primarily in tricity industry in China is shifting to a compet- terms of whether it was geared, through tar- itively based electricity market framework, geting, type of instruments, or partnerships, to particularly Shanghai and Zhejiang in the East achieve maximum catalytic or demonstration China power grid. Zhejiang is piloting the im- effect and policy impact in areas emphasized by plementation of competitive power markets with the Bank's corporate, sector, and country as- assistance of the World Bank. The Bank is in a sistance strategies. unique position to bring international experi- The Bank's investments in the electric power ence to bear in power market design. sector reflect the Bank's comparative advan- Zhejiang's competitive electricity market tage and were driven by the high priority in began trial operations in January 2000. A 2001 China given to increasing power production. Fi- World Bank review found that impressive nancing big hydro projects, and later large ther- achievements have already been made: mal plants, has historically been the Bank's comparative advantage. Lack of electric power · Sound trading mechanisms, operating rules, to support economic growth, combined with an and risk management have been established. inefficient and obsolete supply system made · Information systems to operate a competitive power plant construction an obvious high- energy pool have been well conceived, devel- return activity for the Bank and high ownership oped, and put in operation. value for the government. But there has been · Reform has been widely accepted and sup- less ownership concerning solving difficulties ported by government authorities. associated with pricing, financial matters, and · Improvements have been widely accepted and other needed reforms that accompanied these supported by government authorities. projects. · Improvements have been made by generators In the past few years, the Bank has encouraged in cost control, internal performance man- China to seek private sources of financing to in- agement, and contract trading analysis and crease electric power supplies. In spite of Bank risk management. encouragement, China has been able to attract · And most important, average generation avail- only relatively minor amounts of private financ- ability (92 percent in 2000) continued to im- ing, usually with substantial government sup- prove as a result of competition. port. Without an appropriate market structure, private capital is reluctant to enter this market. There are, however, problems that have pre- Getting the market structure "right" is the chal- vented the market from advancing further. The lenge for the future. In any case, given the size pilot project has revealed the constraints and of the sector, most of the resources will have to problems that arise if the government persists in come from domestic savings, with external cap- adopting a fragmented, piecemeal approach to ital playing only a limited role. power sector reform. Given the large size (for the Bank) of the electric power supply program, it has been dif- Relevance of Bank Assistance ficult for the Bank to find the resources and the An assessment of Bank involvement in China's will to move into other areas of energy invest- energy sector needs to start with the recogni- ments. The supply problems associated with pri- tion that Bank financial support represents a mary fuels, oil, gas, and coal are obvious, but tiny portion of the sector's total investment taking action has been beyond the capacity of the needs: even in the power sector, where the Bank, particularly in the face of China's unwill- Bank has been most active, total lending be- ingness to deal with the associated institutional tween 1984 and 1995 (US$3.4 billion) accounted issues. The few attempts to do so have not been for a mere 3.4 percent of sector investments. successful and have discouraged further action. Consequently, aside from any actual or poten- The fuel sector is the major unfinished business tial direct benefits of Bank projects, the relevance for the future. 6 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Lessons within a truly comprehensive dialogue on na- tional energy policy issues. This evaluation clearly · An incremental approach to institutional de- suggests that this is where the Bank's compara- velopment, initially emphasizing technology tive advantage lies. In particular, the Bank can: transfer and capacity building, can be extremely effective. · Help promote comprehensive energy plan- · Internal Bank factors are critical to building up ning in China. The Bank should offer to help and sustaining an effective long-term sector di- at two levels: regionally, preferably in Sichuan alogue. province, which has a varied resource supply · In focusing on the ultimate introduction of and where the Bank has ongoing operations and market forces in the energy sector as part of its institutional relationships; and nationally. The policy dialogue, Bank staff should not lose Bank could build on its recent working dialogue sight of the importance of fundamentals. with the State Council, a recently completed · A two-pronged approach that combines high- studyonliquidnationalgasfinancedbytheJapan level policy dialogue with central authorities PolicyandHumanResourcesDevelopmentFund and a direct operational involvement with a rep- (PHRD), and an older Bank study of China's coal resentative set of provincial utilities is essen- and electricity delivery services. tial to success. · Continue to balance assistance in terms · The Bank should be particularly sensitive to of subsectoral priorities, mix of instru- possible misinterpretation by outsiders of its ments, and central versus local dialogue. stance on private sector development issues. An appropriate mix of lending and nonlending · The Bank's emphases on ensuring compliance instruments will continue to be needed for with environmental guidelines in the design of maximum impact, and sector interventions at the projects it finances and on designing and central and provincial levels need to continue enacting appropriate environmental regula- on parallel tracks. tions at the national level must be comple- mented by similar efforts at the monitoring While future energy policy dialogue will need and enhancing enforcement levels. to be comprehensive, calling for broad-ranging economic and sector work, the scope of indi- Future Bank Involvement in the vidual project interventions need not be. In- Energy Sector stead, individual projects may be geared to areas The Bank is at a crossroads in its energy sector di- neglected in past Bank lending and areas in alogue with China. After the major policy break- which IFC involvement is less likely: throughs of the mid-1990s in the power sector, progress on sector reform has slowed, and major · In the power sector, the Bank should in- policy issues in such critical subsectors as coal, oil, crease its attention to inefficiencies at the and gas have largely gone unattended. To address distribution level. It should broaden the ef- this, the Bank could choose to focus increasingly forts initiated in Zhejiang province under the on "peripheral" subsectors such as renewables and Tongbai project. This increased emphasis on energy efficiency where policy issues are less sen- local issues, together with the photovoltaic sitive and government buy-in more likely. But this pilot financed by the Bank under the Renew- approach may lead to a marginalization of the able Energy Project, could pave the way for a Bank's role in a sector of central importance to more proactive and better-integrated Bank the country's future development, at a time when strategy on rural energy. IFC is not positioned to expand its involvement-- · The Bank should provide direct assis- precisely because major institutional and policy tance toward municipal-level natural issues remain to be addressed. A more difficult gas distribution and demand, for exam- path is for the Bank to continue its sizable finan- ple, by replacing coal-fired furnaces with gas- cial support to the energy sector, but frame it fired furnaces, co-generation, and district 7 0 A N N E X D : S U M M A RY: E N E R G Y B A C K G R O U N D PA P E R heating. Loans to municipalities could help Bank should give higher priority to the expand municipal gas-distribution infrastruc- early resolution of pending asset own- ture and utilization of natural gas in urban dis- ership issues, which continue to cloud the re- trict heating systems. liability of many sector agencies' financial · The Bank should make a renewed and de- statements. In this context, the Bank should termined attempt to engage Chinese au- consider revisiting its current auditing re- thorities in a full-fledged dialogue on the quirements (which only provide for certifica- coal sector. The Bank must address coal in its tion by government audit bureaus) and, at a assistance strategy; the coal sector is too im- minimum, ask to be provided with audit re- portant to China's future social, environmental, ports from international auditors whenever and economic development, and the issues the these have been prepared (for example, for sector must resolve are too daunting. those power companies that have obtained, or · In its future lending to the power sector-- are seeking, partial listing on foreign stock ex- and possibly the petroleum sector--the changes). 7 1 ANNEX E: SUMMARY: FINANCE BACKGROUND PAPER China's economy grew spectacularly through vestments were funded through budget grants. the 1990s. The banking system grew even faster, Credit, too, was an integral part of planning. But but there is widespread concern that its mount- then as now, Beijing set targets and flows at a high ing problems may mar what is otherwise a re- level of aggregation, and provincial or municipal markable economic transformation. governments effectively controlled most SOEs. After China's economic transition began in As budget-financed investment fell from 16 1978, output and incomes grew quickly and de- percent of GDP in 1978 to 3 percent in 1995, posits flooded into Chinese banks. The banks-- Bank lending took up much of the slack, and government-owned investment arms of the when some SOEs could not qualify on strictly Ministry of Finance (MOF)--had little experi- commercial criteria, banks were pressed, or di- ence in making sound loans. With depositors rected, to fund them. After 1980, economic re- protected against losses from bad loans, de- forms and increasing competition among firms posits became contingent government liabili- exposed the financial weakness of many SOEs. ties, posing significant fiscal and macroeconomic Loss-making SOEs rose from 26 percent of the risks. But with national income doubling every total in 1992 to 50 percent in 1998. decade and domestic savings at 35­40 percent of GDP, the steady flow of new deposits has so The Bank's Role far spared China a banking crisis and allowed a In the 1980s, the Bank offered China a window risky situation to continue largely unchecked. on the world of market economics, in banking The magnitudes are staggering: banking de- as in other sectors. The Chinese authorities lis- posits were about 150 percent of GDP in 2003, tened to the Bank's general advice and used the up from less than 30 percent in 1978. Four state Bank to vet the legions of experts who came to banks account for about two thirds of these de- offer guidance. posits. Banks lend mostly to state-owned enter- During this period, the Bank approved nine prises (SOEs), not the booming private sector, line-of-credit projects that benefited borrowers which relies on retained earnings and informal in light industry and agriculture but did not finance. If non-performing loans constitute one achieve their stated purpose: to improve the third of the portfolio and are worth 10 percent soundness of banks or the overall quality of their of their face value, the government's contingent loan portfolios. The last of these projects was ap- liability is about 45 percent of GDP. proved in 1990 and closed in 1996. Before 1978, "the plan" covered almost every When Beijing lost control of its monetary ag- decision by SOEs. Prices, which bore little rela- gregates in the late 1980s, the Bank worked tion to costs or scarcity, were used by central au- closely with Chinese counterparts to take stock thorities as implicit taxes and subsidies. Firms had of the banking system. A Financial Sector Re- no role in allocating resources, and most in- view, completed in mid-1989, described the con- This is a summary of the CAE Background Paper, "China's Financial System and the World Bank's Role dur- ing the 1990s," by S. Ramachandran, Senior Evaluation Officer, Operations Evaluation Department, Country Evaluation and Regional Relations (OEDCR), World Bank. 7 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E flict between having banks operate autonomously The Bank, meanwhile, did not increase the an- and governments (at various levels) funding fa- alytical rigor of its reports, which then became vored enterprises regardless of profitability. less useful to the technocrats in the govern- The review's prescriptions were sensible, but ment, who nevertheless proceeded to use them generic: to have banks, although government- in bureaucratic battles for influence. owned, operate commercially and be subject to No further financial sector projects and no the central bank's prudential regulation and su- major economic and sector work were con- pervision. The review also suggested removing ducted after 1997. The Bank's China Depart- interest rate controls and credit ceilings and in- ment, reorganized in 1994, was again shaken by troducing indirect instruments of monetary pol- the mid-1997 reorganization of the East Asia Re- icy. But the effort to remake the Chinese system gion. Bank staff fought to resuscitate or replace in the image of industrial countries ignored Chi- canceled financial sector projects, but work dwin- nese realities: "loans" were often understood dled. By 1999, most financial sector staff work- by all parties to be equity stakes, and the central ing on China had left. bank's power was very limited. Enterprises had Hopes for reviving the Bank's involvement unclear ownership, high debts, and unchecked in the financial sector rose in mid-2000 when the access to bank loans. Banks' head offices had lit- Bank's new Regional vice president designated tle oversight and virtually no control over their a full-time program manager for financial sector own branches, which often kept two sets of work in China with a greatly augmented budget. books, one for the head office and central au- Regional sector staff think that they have turned thorities and another for the local authorities, a new page, but it is too early to tell if the Bank's which exerted de facto control over local effectiveness has improved. branches. Central authority was splintered among rival The Decade's Developments agencies--among them the Ministry of Finance, in Perspective State Planning Commission, central bank, and the China has made significant improvements in the State Council's research arm. Each of the many institutional setting of its financial sector. The groups had to agree on the scope and design of central bank law and commercial bank law were a Bank project, and their rivalries were not con- revised in 1994­95. National financial account- ducive to addressing difficult problems. The am- ing standards and standards for risk-based loan bitious Financial Sector Development Project, first classification were introduced in 1998. The credit proposed in the mid-1980s and continually pre- quota system has been replaced by a less rigid pared and altered during the 1990s, was finally system of indicative quotas. Banks are trying to abandoned in 1997, because the Bank and its Chi- resolve their nonperforming loans (through nese partners could not agree on its components. asset management companies). A troubled re- A Financial Sector Technical Assistance Project gional commercial bank was closed. Several for- (FSTAP), approved in August 1992, was designed eign banks were licensed, and further opening to help the central bank better understand the is set for 2004 under the World Trade Organiza- inner workings of the banking system and so tion. For the capital markets, a long-delayed se- indirectly influence policies. At $60 million, it was curities law, approved in late 1998, defines insider the largest technical assistance loan the Bank had trading and permits criminal prosecution of of- ever made. But the project's approval did not end fenders. Capital market oversight responsibilities tensions among the various counterparts. Be- have been clarified and consolidated, and a new cause each entity liked only specific features, agency has been established to oversee the in- project implementation was difficult. surance industry. As China's banking deposits increased in the Despite these advances, the problems of 1990s and a new generation of policymakers re- China's huge banks are daunting. Deposit growth turned from advanced study abroad, the tech- may continue to postpone a banking crisis, but nical abilities of Chinese officials rose dramatically. nonperforming loans must fall as a proportion 7 4 A N N E X E : S U M M A RY: F I N A N C E B A C K G R O U N D PA P E R of GDP if China is to grow out of the problem-- rate or misleading to avoid annoying every offi- and this requires drastic improvements in the cial through which they were transmitted. But quality of bank lending. oblique criticism or sugar-coated reports are of Poorly defined property rights and reports little interest to technically able counterparts, and of corruption and misappropriation suggest that some reports have not been passed on to the de- the central government may find it harder to cisionmakers, sometimes on technical grounds, realize the value of what it purportedly owns but also in battles over turf. (as a shareholder) than what it is owed (as a Second, after the mid-1990s, the Bank's work creditor). If so, the banks' nonperforming loans on Chinese finance did not reflect what other could jeopardize central government finances. Bank staff already knew about Chinese enter- When added to Beijing's external debts and the prises. The Bank would have been more per- unfunded pension liabilities promised to a rap- suasive had it showed, for example, that idly aging population, the fiscal implications of value-subtracting enterprises were being funded. the contingent liabilities from nonperforming Moreover, the Bank has framed the issue as mak- loans of state banks are worrying. ing banks sound, while the authorities at the central and provincial levels have been more An Evaluation concerned about enterprise restructuring and its The Bank's work in the Chinese financial sector, attendant social and political implications. Pow- especially during 1993­94, fell short in two ways. erful factions in China favor state support for a First, project preparation documents con- stable of large, "strategically important" firms. tained no analytical work on banking. To some Had the Bank integrated its banking work with extent, this was because data were not easily its work on enterprises, its prescriptions may available--or not forthcoming--but no great at- have been more appropriate and convincing to tempt was made to get them, and readily avail- the authorities. able data were never analyzed. Five years after The Bank's regional Poverty Reduction and the East Asian crisis, for example, the Bank has Economic Management (PREM) Network is now not analyzed such issues as the size distribution responsible for financial sector work in China. of deposits that would greatly help in the orderly The program manager appointed in 2000 has handling of a banking crisis that many fear will an ample budget to draw on expertise within follow if banking does not improve. And despite other parts of the Bank and outside. The work considerable Chinese interest in asset manage- has shifted from capacity-building projects with ment companies, the Bank has not examined individual banks to broader issues of overall fi- their efficacy. Academics and commercial bankers nancial sector reform and sequencing. Such appear to know more about what is happen- strategic advice will be effective only if it is an- ing--and are therefore more influential--than chored on analytical work specific to China. Hav- the Bank. ing Chinese scholars and academics do analytical After 1993­94, the Bank's technical work failed work under the Bank's aegis could sharpen its to keep pace with the technical abilities of Chi- relevance while augmenting the country's policy- nese officials. Written reports became inaccu- oriented capabilities. 7 5 ANNEX F: SUMMARY: POVERTY BACKGROUND PAPER However one chooses to measure the available have grown at a much slower rate. Other policies data, poverty rates fell in China during the 1990s. impeded progress in the "backward" regions, in- The proportion of the population living on less cluding an almost colonial approach to extraction than $1 per day (in purchasing power parity) de- of natural resources at extremely low ex-factory clined from 32.9 percent in 1990 to 17.8 percent prices, price controls on agriculture, and low in- in 1999. Yet most of that reduction took place in vestment in infrastructure. Only after the mid- 1994­96. Using an income-poverty threshold for 1990s did signs of a reversal of some of these rural China, one gets a less extreme difference policies become discernible. in the rates of poverty reduction during the three thirds of the decade. However, the broad Slow Growth in Rural Income. At the end of the pattern still holds: the rate of reduction in decade, poverty in China was overwhelmingly poverty was rapid during 1994­96 and far slower concentrated in rural areas, which accounted during the earlier and later years. for nearly 70 percent of the population in 1999. But even after two decades of rapid growth, The ratio of urban to rural per capita household the overall incidence of poverty in China was income increased from 2.20 in 1990 to 2.65 in higher than in many countries in similar cir- 1999. This widening disparity was due to the cumstances. During the first and last thirds of the slow growth of agriculture, discriminatory terms decade, China experienced very high rates of of trade, and reductions in public investment in GDP growth that coincided with a rapid increase agriculture. in per capita real personal income in both rural and urban China. Yet both subperiods saw a Regressive Transfers to Households and Reduced slow or negative decline in poverty, indicating Transfers from Rich to Poor Provinces. The system of that China failed to realize the potential for taxation and transfers practiced by the state and poverty reduction created by rapid growth. That collectives is highly regressive. An average house- failure was due to a sharp increase in inequality. hold in rural areas paid a net tax amounting to The increase in inequality is ascribable to five sets 0.5 percent of income, whereas an average urban of circumstances: household received a net subsidy of 11 percent of income. China's budget system has under- Increase in Inter-regional Inequality. Since the 1980s, gone changes that restrict the ability of the poor China's economic growth has been concentrated regions to fund essential services, such as edu- in the coastal and eastern provinces, which enjoyed cation and health, and to invest in economic natural advantages and public policy preferences development. The provinces, not the central in attracting export industries and foreign direct government, must repay external lenders like the investment. In contrast, the central and western World Bank and bear foreign exchange risks for regions were excluded from those advantages and loans for many social-sector projects. As a con- This is a summary of CAE Background Paper, "Poverty Reduction in the 1990s," by A. R. Khan, Professor, Uni- versity of California, Riverside. 7 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E sequence, the extremely poor counties are often ually took hold during this period. Growth was not eligible to participate in externally funded expected to alleviate poverty in most of China, poverty-reduction projects. but the need for targeted assistance for the eco- logically disadvantaged poor areas also came to Low Employment Growth. During the 1990s, eco- be recognized. nomic growth in China created very little em- The third period began with a well-articu- ployment, the primary conduit through which lated strategy to commit greater resources to the poor benefit from growth. In the mid-1990s, poverty reduction. In January 1994, the State state and collective enterprises began reducing Council put into effect the national "8-7 Plan" to a significant payroll of nonworkers employed in lift 80 million rural poor out of poverty in the re- a form of "concealed unemployment insurance." maining seven years of the century. Serious short- The reductions affected about 29 percent of comings compromised this plan. their urban workforce--41.24 million people-- The fourth period of China's public response and 6 percent of the workforce of township and to poverty may be said to have started around the village enterprises. No alternative system of so- turn of the millennium. New programs now aim cial protection has been developed. to improve agriculture and farm production, pro- vide education and training for the poor, promote Discriminatory Treatment of Migrants. The incidence productivity through science and technology, fa- of poverty among urban migrants is about 50 per- cilitate out-migration, voluntarily resettle peo- cent higher than among the registered urban ple from ecologically disadvantaged areas, and residents. Migrants have been denied access to promote economic development in the western health and education services and the opportu- provinces, as well as in the relatively poor nity to seek employment on an equal footing with provinces of the central region. There are also so- registered urban residents. Restrictions on mi- cial protection programs for the urban poor. gration have also prevented laborers from leav- ing rural areas in response to market forces, The World Bank's Role thus contributing to the urban-rural inequality. Through its economic and sector work on If these adverse factors were completely off- poverty assessment and analysis, IDA's Poverty- set, China's income distribution would probably Targeted Intervention (PTI) projects, and poverty- have become more equal in the 1990s, directing reduction components in non-PTI projects, the more than the entire benefit of economic growth Bank has proven the importance and viability of to poverty reduction. It is possible, however, poverty reduction as the principal goal of its as- that the steep fall in the incidence of poverty in sistance to China. During the 1990s, the Bank the 1980s precluded similar reductions in the made important contributions to China by dis- 1990s, as the remaining poverty became more in- seminating methods of poverty monitoring, serv- tractable: heavily concentrated in poor areas ing as a friendly critic of China's poverty- with inadequate infrastructure and little contact reduction strategy, and offering a set of best- with the rest of the economy. practice projects for poverty reduction. Projects have been less important an instru- The Chinese Government's Response ment for the Bank's poverty-reduction strategy The evolution of the problem of poverty and in China than in other comparable countries. China's public response to it may be divided Even so, the Bank's project portfolio for China into four distinct periods. From the late 1970s to in the 1990s included outstanding examples of the mid-1980s, poverty fell rapidly in response best-practice poverty-reduction projects. In the to a growth strategy based on agriculture. From 1990s, examples were available for all major the mid-1980s until 1994, China's development poverty-oriented sectors, although some sec- strategy shifted to export-led growth as the na- tors were unable for one reason or another to tion rapidly joined the global economy. The five classify the poverty-oriented components of sets of unequalizing forces outlined above grad- their projects as PTI lending. 7 8 A N N E X F : S U M M A RY: P O V E RT Y B A C K G R O U N D PA P E R Since China became ineligible for IDA funds Adjustment and Broadening of the Poverty-Reduction in 2000, the Bank's lending has included only one Strategy. Two main directions for improving PTI project, thus jeopardizing the role of the China's poverty-reduction strategy are empha- Bank as the provider of best-practice examples sized in the Bank's recent poverty assessment: of poverty-reduction projects. The Bank should (a) targeting of the poor should be improved in not completely abandon projects as an instru- designated rural counties and (b) the poor who ment for poverty reduction in China, a country reside outside the designated rural counties with a higher absolute incidence of poverty than should be brought under the umbrella of the most countries with comparable real income. poverty-reduction programs. A third natural ex- The Chinese government's aversion to borrow- tension is the need to provide an official umbrella ing for poverty-reduction projects, except on for the program of urban poverty reduction. soft terms, is a very puzzling phenomenon in view of the high financial rates of return on such Economic and Sector Work. The Bank's ESW agenda projects. should include an early and comprehensive analysis of household taxes and transfers, with Future Priorities a view to making these at least mildly progres- The Bank's analytical and operational instru- sive. Restructuring state finance to increase trans- ments can provide effective assistance for further fers from rich states to poor states is a necessary poverty reduction in China. concomitant of the shift in the regional alloca- tion of public expenditure that is contemplated Poverty Monitoring. Any analysis of poverty in under the poverty-reduction strategy. China must contend with unreliable statistics. The inherent problems of the data include a Lending Program. The Bank's lending program in poverty threshold that is too low and does not China helped reduce poverty in the 1990s by in- differentiate adequately between urban and rural cluding in its portfolio a set of projects that pro- differences, the exclusion of a significant urban vided a large benefit to the poor, projects that population of migrant workers, the exclusion of served as examples of best-practice methods of rural poor who live outside county jurisdictions investment for poverty reduction. Since 2000, (estimated at 30­50 percent of the rural poor), PTI projects have been almost absent from the records for lower-income groups that are either Bank's lending operation. To maintain the Bank's withheld from study or do not exist, and poor role as a source of best-practice poverty-reduc- survey methodology. tion project blueprints and to preserve the cred- The system of poverty monitoring in China ibility of the Bank's anti-poverty strategy, Bank needs to be improved, first by making house- lending in China should include such projects in hold-level survey data available both to the its portfolio, a challenge complicated by China's Bank and to independent researchers in China aversion to borrowing for poverty-reduction proj- so that estimates of poverty become more ac- ects on IBRD terms. A combination of a "third win- curate and transparent. A plurality of estimates dow" and a serious effort at persuading China's would promote healthy debate and open dis- decisionmakers of the rates of return on these cussion. projects might help overcome this problem. 7 9 ANNEX G: SUMMARY: WATER BACKGROUND PAPER China has an ancient tradition of water manage- implicit values that are far removed from eco- ment, but in the past half century exploitation of nomic realities. (The value to users of untreated the country's water resources has intensified as but usable water for municipal and industrial a result of population and economic growth. (M&I) and household demand, for example, is Since 1949, China has increased the number of a multiple of 10 to 40 times that in agriculture.) its large dams from 22 to 22,000, almost half the The adjustment to available supplies over time global total. It also has more than 80,000 reser- is mediated by often arbitrary institutional re- voirs and 240,000 kilometers of dikes. Most rivers sponses from fragmented agencies, unrelated and streams are used for irrigation, power gen- to economic or social priorities in a systematic eration, transport, urban water supply, or waste way. And tariff reforms have been slow in com- disposal--some for all of these purposes. ing as a means of addressing water resource With all these demands, China now faces an constraints because, until recently, setting rates acute version of the global water crisis. Flooding was seen purely as a financial matter. and drought, always a problem in China, now The central government's successful leader- occur with increasing frequency and greater im- ship in large projects involving multiple provinces pact. Associated water pollution imposes major has not been repeated with water resources costs that offset economic growth. Users con- management (WRM). The existing water man- sume manmade and natural reservoirs (such as agement framework is insufficiently compre- groundwater and natural lakes) at rates well hensive or unified to optimize uses or resolve above recharge. Unsustainable depletion is ex- conflicts in a socially optimal manner. Negotia- acerbated by watershed degradation and organic tions have not settled differences among sector and chemical pollution. Siltation, a very serious interests (such as industry and agriculture), the problem for centuries, continues with increased ministries responsible for different aspects of erosion from development, deforestation, and WRM, or competing political jurisdictions. While poor farming practices that imperil flood control the river basin is clearly the most appropriate and storage/irrigation objectives. In key industrial locus for negotiation, effective institutions cor- areas, surface and groundwater pollution have responding to basins, rather than provinces, caused widespread sickness, requiring central have proved very difficult to establish, despite government intervention to compensate for much central government commitment and poor enforcement of environmental regulations. awareness. The devolution of political and eco- China's most serious water problems are ex- nomic power to separate riparian provinces perienced in four river systems that dominate life along the great rivers has made central govern- in the eastern third of the country. The available ment control over allocation of water resources water, surface and ground, has been allocated by even more difficult. This is a summary of the CAE Background Paper, "World Bank Assistance for Water Resources Management," by Robert C.G. Varley, Consultant. 8 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E The Scope of Bank Operations in China the Bank and China. The Bank-China relationship From 1982 to 1993, before the Bank formally achieved a truly productive interaction, for ex- adopted the Water Resource Management Policy ample, with the cross-sectoral "China Water Re- in 1993, operations responded almost entirely to sources Assistance Strategy/EAP 2002"(CWRAS), the borrower's investment priorities, financing a strategic vision for future cooperation on water projects that had already been identified and resources management (WRM). But China's need the basic concepts designed. Projects were not for ESW and AAA exceeds the Bank's level of derived from an overarching policy or strategy. support. There is no evidence of a comprehensive lend- The 1997 assistance strategy for China did ing strategy for individual sectors such as irri- not discuss water specifically--particularly sur- gation and water supply, let alone for "integrated prising since the government of China has long water resources management." The approach acknowledged water to be a key problem area. was pragmatic and ad hoc, but significant in- The following Bank sector categories all have cremental reforms were introduced and included high relevance for water resources management in projects where possible. in China. In return for substantial transfer of some kinds of knowledge, access to high-caliber specialist ex- Land and Watershed Management, Forestry. Bank- pertise, and financing, the Chinese tolerated supported projects made major contributions to what they feel to be intrusive Bank covenants and increased efficiency of water use by demon- burdensome procedures. China and the Bank strating that profitable orchard and mixed farm- have developed over time a partnership that in ing models are compatible with watershed the early years cast the Bank in a more humble rehabilitation and soil preservation. Terracing, up- role than it is accustomed to. However, the re- stream forestation, and erosion-control projects lationship has produced significant results. in the larger basins also have provided down- Overall and particularly more recently, the stream benefits, reducing silt loads and increas- Bank can claim credit for articulating a water ing incomes. Building on the successful central conservation and financial sustainability policy Loess Plateau and Red Soils projects in the south- and for championing river basins as the basis of east, these practices and technologies have been integrated water resources management. The replicated. But for these to be truly effective, Yangzi Basin Water Project was the Bank's first basin-level management is needed. truly integrated water resources project. China has supported and provided the majority of the Water Resources and Flood Control. The Bank sup- funds for Bank projects that piggybacked inno- ports several projects in integrated WRM. These vative institutional components on what were include the Tarim Basin I and II Projects largely conventional water supply, wastewater (1992/1998) in the western Xinjiang Uygur Au- treatment, irrigation, drainage, and flood control tonomous Region, which feature a well-devel- projects. These new components were seen to oped framework for integrated water be effective and have been replicated. management through self-financing irrigation The Bank's considerable influence has also development districts and a comprehensive set been conveyed through professional interac- of procedures/regulations. Another, the Hai River tions at the project-management level, a high Basin Project, focuses on China's most complex quality of technical advice, continuity of high- and intensively developed basin. The Bank will quality staff, and a discerning client, very eager help finance the components for river basin and able to learn. The Bank also performed a use- management. Beijing, the site of the 2008 ful function during changing relationships be- Olympics, lies in the basin. tween central and provincial governments, China has been reticent to borrow for technical playing the roles of intermediary, honest broker, assistance to support river basin institutional de- and convener. Several significant reports velopment, but the Bank and other donors have emerged from the close partnership between coordinated assistance in a very cost-effective 8 2 A N N E X G : S U M M A RY: WAT E R B A C K G R O U N D PA P E R manner. Chinese and Bank staff, supported by between energy and WRM objectives have not leading international consultants, have devel- been systematically weighed in decisionmaking. oped a comprehensive plan for the North China Notwithstanding widespread criticism of re- Plain, built on a "dynamic optimizing model" that settlement and environmental impacts of World represents the state of the art in analytic and Bank-supported dams in China (and elsewhere), technical engineering for WRM planning. an OED study on resettlement ranked China highly. The Xiaolangdi Dam, supported by the Agriculture, Irrigation, and Drainage. Before open- Bank, has been credited with drastically reduc- ing to the world in 1978, China had an extensive, ing silt and enabling continuous flow in the but troubled, irrigation program. Though limited, lower reaches of the Yellow River, something Bank involvement in irrigation has had a positive not achieved in the previous ten years. effect on Chinese practices in procurement, On the negative side, hydropower has costs project management, and, more recently, irri- in silt accumulation in reservoirs, environmen- gation management, especially at the provincial tal damage, resettlement, loss of cultural heritage, level. Geographical poverty targeting has been and potential conflicts between peak energy de- refined to a county and township level, accom- mand and water supply/irrigation priorities. panied by some concessionary IDA funding and full loan recovery from the beneficiaries. Al- Inland Waterways. Three Bank projects have sup- though the distributional effects and provincial ported the largest system of inland water trans- bearing of foreign exchange risk on the Bank loan portation in the world. The Quality Assurance have been criticized, the emphasis on sound fi- Group's quality-at-entry report for the Second In- nance has been central to motivating project land Waterway Project noted the absence of an participants, from governors on down. It has action program on key sector issues, an institu- created a cascade of accountability and respon- tional component, and any effort to engage gov- sibility for results, from project managers who ernment in a policy dialogue. have to collect levies down to beneficiaries who have to pay them. Urban Water Supply and Wastewater Treatment Plants The organization of farmers into self-manag- (WWTPs). Since 1985 the Bank has committed ing irrigation development districts (SIDDs) has $2.2 billion to finance major water investments improved management and accountability, em- (water conveyance, treatment, and distribution, powering farmers to pay for and receive water and WWTPs). Because of the country's high pop- services. Water user associations (WUAs) within ulation concentration, urbanization, and rapid the development districts play a key role in many growth, the economic and health impacts of aspects of improved WRM, including water pro- poor WRM are major costs to Chinese society, es- vided by both local government agencies and timated variously at 5­15 percent of GNP. But al- publicly owned bulk-water companies. These though water supply and quality issues are innovations have been incorporated in Bank- entwined, management and regulatory systems supported projects, but have not been repli- remain fragmented among at least three gov- cated on a wide scale. ernment bodies with overlapping responsibilities. Bank WS/WWTP projects usually address, but Multipurpose and Hydroelectric Dams. Traditionally, have not significantly changed, the prevalence of Bank energy project documents equated water local political interference, weak commercial resources with "hydroelectric resources." Many management, distorted tariffs, variable legal and of the large dams built with financing and assis- regulatory frameworks, unstable central-local tance from the Bank were driven by the energy relations, and the lack of long-term local finance. sector and met their objectives. But most of the Overlapping agency responsibilities are com- investments were not part of integrated WRM pounded by conflicts with local financial inter- plans for the catchments concerned. For the ests and a desire to avoid the social unrest of most part, the complementarities and conflicts closing high-polluting industries. 8 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E For water supply, China's sector performance evaluation by OED. The success of the Bank's at- relative to developing-country benchmarks has tempts to influence water reforms in China also put the country in the best practice quintile of owes much to its humility in the policy sphere, Bank clients. However, the costs of new water the continuity of high-level professional staff, sources are very high, and there is a large gap be- and earning the respect of its clients. tween the current tariffs and those that are nec- The Bank's strengths begin with its low-key, essary to finance the new supplies. client-centered approach, ensuring good project Although a survey of 16 projects concluded performance by requiring cost recovery from that the three Bank-supported wastewater treat- beneficiaries, and taking risks that projects might ment plants in the sample were among the best not perform as intended. Critics would cite these operated in the country, WWTPs in general suf- same factors as being weaknesses--particularly fer from significant technical and financial prob- the chance that beneficiaries will be saddled lems--among them an absence of timely sewer with foreign-exchange risk and that flexibility in connections, poor design, reliance on expen- procurement compliance will be exploited. On sive combined-treatment plants, a lack of efflu- the other hand, the Bank's weaknesses include ent guideline enforcement, and grossly early compromises to its commitment to sound inadequate funding from service fees. economic analysis in the evaluation of some ir- Overall, WS and WWTP projects lack reliable rigation projects. The analysis of expected eco- estimates of usage, as well as realistic rates. Pre- nomic rate of return (ERR) neglected important dicting the demand response to changes in tar- factors such as sustainability of water resources iff requires accurate measurement of and their downstream opportunity cost. Failure consumption, as well as control and collection to make an adjustment helped ensure a viable systems, and these are not well understood. ERR and Board approval (not an uncommon Bank practice), but did not indicate the true Rural Water Supply. The Bank has supported four economic cost of the projects. rural water supply and sanitation (RWSS) projects, The Bank may not have initially been suffi- mainly in poor counties. Designs have evolved by ciently focused in its advice or forthright in crit- combining the strengths of existing village ad- icism of the sustainability of China's emphasis on ministrations and community financial partici- major investments in hydraulic structures. But pation with international best practices in with strong support from the Bank, China has appropriate technology, financial cost recovery, now made a course correction and is putting decentralization of regulation, and financial au- more emphasis on WRM and less on new infra- tonomy. In the latest generation of RWSS projects, structure. 75 percent of the investment cost is recovered in Finally, the lack of coordination between Bank fees and 95 percent of villages abide by the tar- sector units is a recurrent theme, which is being iff covenant--startlingly clear evidence that the addressed by the China Water Resources Assis- poor can and are willing to pay tariffs that raise tance Strategy. It is mirrored by China's lack of eyebrows when proposed for urban consumers. a natural home for water resources management and river-basin projects among institutions that Strengths and Weaknesses of the Bank's cannot transcend parochial sector and provincial Operation in China interests. Given the enormity of the issues, it is As part of a global study (Bridge Over Troubled disappointing that so little money has been ap- Waters) of the Bank's 1993 Water Resources plied to critical high-return projects to address Management Policy, OED sampled 18 of 35 water institutional reform and demand management. projects for China. The study found China's proj- ects to have a higher degree of compliance with The Bank's Impact on Water Reform in the 1993 policy than any other large country. China But out of 82 approved projects, only 29 had China faces problems found in most countries-- been completed and subjected to independent conflicts between upstream and downstream 8 4 A N N E X G : S U M M A RY: WAT E R B A C K G R O U N D PA P E R users, overlapping jurisdictions, and quality and Future success in Bank-China cooperation allocation problems. Overcoming these prob- should continue to be based on pragmatism and lems was initially treated as a problem of aug- pilot testing new ideas where they are most menting supply rather than devising a needed and most likely to succeed. The Bank demand-led strategy for water management. should consider reordering its priorities in China While China has successfully used major hy- to continue the following initiatives: draulic infrastructure to control, use, and man- age water resources, it has not conserved · Watershed management resources to meet future needs. Efficient water · River-basin planning and management allocation, pricing, groundwater and water qual- · Self-managing irrigation districts ity regulation, and institutional reform were not · Corporatization and privatization in the water given sufficient emphasis. While engineering ex- supply and wastewater treatment sector pertise, money, and commitment to a structural · Demand management and pricing approach have been partially successful in meet- · Adequate funding of ESW/AAA ing social goals, success has often come at a high environmental and economic cost. With China must conduct a strategic dialogue on water, the economic tradeoffs have become water policy at a level higher than that of the com- starker as demand for municipal and industrial peting ministries. Duplication of data collection uses competes with agriculture. and divided responsibilities frustrate water re- The Bank has played a significant role in con- sources management and must be rationalized struction, capacity building, and knowledge through institutional reform, new administra- transfer in the past. While its influence on achiev- tive processes, and incentives attuned to sus- ing policy, demand management, and institu- tainable development. Fundamental reforms are tional reforms has worked slowly, it can point to needed--not just changes in policies within the significant innovations that could end up being present institutional and regulatory framework. applied all over China. SIDDs and WUAs, the The coordination of water management re- Loess Plateau approach to watershed manage- sponsibilities and decisions between ministries ment, and new approaches to water saving have will not be resolved without a supraministerial been taken beyond the pilot stage and prospects body to push through reforms and "bang heads for replication are good. River basin manage- together." The China­World Bank partnership in ment in the Tarim project and also in the Li River water resources management, which up to now (a tributary to the Yangtze under the Yangtze has been fragmented between Bank sector units Basin Project) has taken hold, providing practi- and Chinese line ministries, needs high-level cal examples to other more complex basins. De- oversight, perhaps at the level of the State Coun- mand management with increased pricing is cil, to implement the cross-sectoral China Water beginning to take hold in water supply. Resources Assistance Strategy. 8 5 ANNEX H: SUMMARY: TRANSPORT BACKGROUND PAPER Rapid economic development since the opening The chief component of China's transport of China's economy in the late 1970s has caused strategy is the development of the "national demand for transport to surge. Supply has not trunk highway system"(NTHS), a 35,000-kilo- kept pace. In fact, limited capacity of roads, rail- meter network of 12 interprovincial highways ways, and inland waterways is one of the most that will link 95 major Chinese cities and 600 mil- serious bottlenecks to the country's future eco- lion people. The trunk system will link smaller nomic growth. In response, the government's roads and five north-south and seven east-west tenth five-year plan (2001­05) envisages an in- highway routes. Estimates of the capital required crease in total outlays of around 15­20 percent over the span of the tenth five-year plan range per year. Even if only a fraction of this is finally as high as $20 billion annually. An expected dou- implemented, surface transport will be radically bling of car ownership (to 34 million cars) by transformed. 2010 will ensure that demand-side pressures re- Several trends are evident from international ex- main high. perience about the demand for transport: (1) One of the consequences of improving the freight transport will grow more slowly and pas- road system will be a large movement of people senger transport more quickly than the economy; out of agriculture and rural areas. The rapidity (2) the infrastructure and assets needed to satisfy of the urban transition usually catches most a given level of transport demand will increase as countries by surprise--and China is no excep- users demand higher-quality service; (3) rail's tion. The Bank can provide assistance in ad- share of the transport total will fall; and (4) demand dressing the transport problems of the growing for multimodal transport services will grow faster urban areas, with their growing concentration of than demand for single-mode services. lower-income groups. Of particular concern will be the growth of the Transport Sector Performance and Policy medium-size cities, which lack the resources Challenges and experience to manage the rapid growth and China's road network of 1.4 million kilometers which receive inadequate attention from central ranks among the sparsest in the world relative and provincial institutions. Early interventions to geographic area and population. Only about can have a significant impact on the efficiency and 16 percent of the network is high-grade highway. equity of their growth. In urban transport, for ex- A few interprovincial expressways have been ample, early reservation of roadway rights of built, but about 20 percent of rural communities way can lay the basis for improved future mobility still have no all-weather vehicular access. More and efficient land use. than half the nation's highways are exceeding de- China's 68,000 km rail system serves all its signed traffic capacity limits, hindering foreign provinces. Some 5,500 kilometers are provin- investment in other sectors. cially administered and locally maintained, in- This annex summarizes the CAE Background Paper, "World Bank Assistance for China's Transport Sector," by Anthony Churchill and Cordula Thum, Consultants. 8 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E cluding 193 kilometers of urban track in Beijing, and urban transport (7 percent). The Bank has Shanghai, Guangzhou, Tianjin and Hong Kong-- carried out a substantial amount of analytical a remarkably small total given the area and pop- and advisory activities (AAA), financed under a ulation of these cities. China Rail aims to lay variety of trust funds as well as the Bank's own down 6,000 kilometers of new rail, 3,000 kilo- budget. meters of double tracks, and 5,000 kilometers of Bank highway projects in China focus on electrified railways by 2005. Another 450 kilo- roads that have a strong development poten- meters of urban rail in up to 10 major centers is tial, but not yet enough traffic to be attractive to envisaged. At around $80 million per kilometer private lenders. In railways, the Bank is chiefly for subway construction, the latter commitment involved in financing lines to developing inland alone is a sizable undertaking. areas, and in waterways, to improving the major China has a long history of using its waterway accesses to the principal rivers. The focus of network, but inadequate funding has caused the urban transport projects is now moving away infrastructure and floating equipment to dete- from the construction of ring roads, putting a riorate badly, reducing the net size of the navi- new focus on corridor development, traffic man- gable network from 170,000 kilometers in 1960 agement, and public transport. to 11,930 kilometers in 2000. Although China Out of 28 transport sector projects rated by has 5,800 navigable rivers, 15 rivers more than OED, all had satisfactory or better outcomes 1,000 kilometers long, and 12 lakes with an area and were deemed to be likely or highly likely to greater than 1,000 kilometers, the major inland be sustainable. On the other hand, only 19 were waterways comprise only four rivers and one seen as likely to have substantial institutional canal that carry 80 percent of total traffic. The lack development impact. of a multipurpose development plan among the various ministries in charge of infrastructure has Roads. By 2001, total lending to China's highway contributed to the decline. sector had exceeded $5.96 billion for 27 projects. Bank operations in the highway sector have Impact and Direction of the Bank's been combined with technical assistance and Assistance Strategy training on a variety of topics related to the re- Transport accounted for a major share (close to form and modernization of the sector. Most proj- 30 percent) of the Bank's total lending to China ects were intended to increase road capacity between 1983 and 2001. Since 1983, the World and, to a smaller extent, to improve mainte- Bank has approved $10.5 billion in loans and nance. The Bank strategy supports ongoing in- credits for 58 transport projects. At the end of stitutional development and sectoral reforms to fiscal year 2002, 31 projects had been completed modernize the highway system and its manage- and 22 were being implemented. In its trans- ment, and investment in high-priority links of the port sector lending program (as in the other NTHS and the provincial road network that feeds sectors), the Bank has used a pilot-project ap- into it. Many World Bank transport projects in proach to sector reform. China are for roads that have strong development Since 1993, the Bank's comprehensive trans- potential, but not yet enough traffic to be at- port strategies have focused on increasing com- tractive to private lenders. petition and efficiency, identifying the changing patterns of demand for transport, analyzing in- Railways. With project costs totaling $8.6 billion, vestment needs of the sector and their financing, China is the Bank's largest borrower in the railway suggesting improvements for transportation sector. The Bank's strategy focuses on providing services and safety, and addressing problems of sufficient transport capacity and ensuring that administrative rivalries. technical and management capabilities keep pace Overall, highways have taken the lion's share with economic growth. Most projects have in- of lending (59 percent), followed by railways cluded substantial funds for institutional compo- (23 percent), ports and waterways (11 percent), nents--training, studies, and consulting services. 8 8 A N N E X H : T R A N S P O RT B A C K G R O U N D PA P E R The Bank strategy has been to support in- forms, operating systems and equipment, and ef- creases in capacity while at the same time in- fective Bank supervision, China's ports learned troducing China Rail to modern railway how to do business and substantially improve port management and technologies. Better track-lay- performance in an environmentally sound way. ing technologies, modern communications, and The Bank has been involved in the waterways axles designed to take heavier loads have all sector since 1995 and has provided three wa- been part of the Bank's contribution to im- terways loans totaling $433 million in support of proving the efficiency and capacity utilization more efficient and economic inland waterway of the railways. transport. Through preparation of inland wa- The Bank has also made a significant contri- terway projects, the Bank is helping to implement bution to improving the social and environmen- national policy guidelines for modernizing the in- tal side of railway investments. The Bank's land waterway transport fleet at the provincial insistence on the application of various safeguard level. The major issue with respect to inland wa- requirements appears to have proved accept- terway projects is their relationships to water able and to have become an integral part of in- management. Given the close interrelationships vestment planning. The Bank has also introduced between water use in agriculture, flood control, modern accounting, management, and financial power, and transport, there is a strong case for practices into the overall structure of railway ad- making sure all investments take place within a ministration. In particular, the application of comprehensive framework. modern administrative tools has alerted China Rail to the real costs of many of its operations. Urban Transport. The Bank has sought to enhance The issue for the Bank is how to support a re- urban economic productivity by improving the form process that is likely to take several decades. efficiency of the urban transport system and to The relationship between the role of govern- strengthen public sector management by im- ment as a regulator and the Ministry of Railways proving the planning and management of urban as an operator or enterprise remains an issue. transport. The Bank's lending to China's urban Economic tariffs designed to reflect costs will be- transport sector began in 1991 with the First come increasingly important as the railways face Shanghai Metropolitan Transport Project, which more and more competition. The debate has increased capacity, reduced congestion, and im- only begun on the extent to which China Rail proved efficiency while improving planning, pro- should remain a monolithic structure or become gramming, financing, and management of the more independent units designed to meet new city's urban transport system. competitive pressures. Fragmented administration and regulation are There appears to be agreement on the need an obstacle to tackling urban transportation. for a clear separation between the government's Cities tend to focus on expensive building solu- role and that of the railway. The government tions, new highways, and urban rail systems, understands the principle (if not always the prac- which appear to be more straightforward to ad- tice) that railways should be organized along minister and receive priority from the city lead- lines of business, with clear financial goals, ad- ers. But better management in several areas can equate compensation for public services, and multiply the benefits of such projects: better traf- sufficient authority to set tariffs. Major barriers fic management of the existing street system, such as redundant labor and employee welfare greater autonomy and incentives to bus opera- obligations will need to be removed. tors (with government restricting itself to a reg- ulatory role), and effective control of the demand Ports and Inland Waterways. The Bank played an im- for transport through pricing policies. All these portant role in China's port improvement from issues are now being examined in greater depth. 1983 to 1996; since 1993, the private sector has taken over funding. A 1999 OED evaluation found Analytical and Advisory Activities and Economic and that through new management styles and re- Sector Work. Although the World Bank has loaned 8 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E more than $10.5 billion to the Chinese trans- tween China and the Bank needed strengthening. port sector, its most important contribution has The issue of highway safety is just one area where been to introduce new ideas and stimulate new a Bank study, drawing on global experience, could approaches to problems. be of assistance to Chinese officials in identifying The 1999 OED assessment of the China trans- where institutional and other changes are re- port portfolio determined that policy dialogue be- quired and how the Bank might help. 9 0 ANNEX I: SUMMARY: HEALTH BACKGROUND PAPER China's gross health and nutrition indicators cannot afford the costs of care at many such fa- have always been impressive. In 2000, the World cilities, so scarce resources are spent on facilities Health Organization ranked the country 61st inaccessible to the poor. out of 191 countries in overall quality of health. Nationwide statistics have masked the near cri- From the 1950s through the 1970s, the country sis in the poorer rural areas. The national gov- achieved unprecedented reductions in infant ernment now supports just 3 percent of health and child mortality, as well as gains in nutrition expenditures and has handed funding respon- and overall life expectancy--all due to broad sibility for health care to subnational govern- public health improvements. ments, many of which cannot afford it. Without In the past two decades, as China adopted an outside infusion of funds, economically lag- economic reforms, growth and prosperity have ging regions are too poor to provide adequate pulled up its health and nutrition indicators. But health services and preventive care. WHO's re- wide regional and rural-urban differences have ap- port for 2000 ranked China 188th out of 191 peared, as inequalities in development and access countries for fairness of financial contributions to care have grown. Gains in the fight against in- to health care. fectious diseases have slowed and in some areas Fiscal decentralization and the country's tran- regressed. Rates of immunization have dropped sition to a market economy has reduced public in some areas, and outbreaks of immunizable financing of health care and services markedly. diseases have occurred. The percentage of mal- More than for any other sector in China, the nourished children increased in rural areas be- major share of public expenditure for health is tween 1987 and 1992, while urban malnutrition borne at the subnational levels. Close to 60 per- dropped sharply in the same period. Meanwhile, cent of total budgetary expenditure for health is TB and HIV/AIDS infection rates have grown ex- the responsibility of counties and townships. ponentially. For both diseases, China is a coun- Most subsidies pay for infrastructure costs and try of global strategic importance. staff salaries, with little money left to cover serv- Even some of China's encouraging health sta- ices. The situation is compounded by the un- tistics can be misleading. The number of physi- equal subsidization of urban areas, which receive cians per 100,000 population in China is 80 percent of total public spending, leaving 20 estimated at 162--against India's 48, for exam- percent for the rural areas in which 70 percent ple--but only a small proportion of rural "doc- of the population lives. tors" in China actually have post-secondary Before this transition, rural Chinese were training. Funding of public sector facilities are served by a Cooperative Medical System (CMS). based on numbers of beds, which encourages Its "barefoot doctors" delivered free preventive managers to increase the number of beds to tap and primary care services. Beyond basic services, national allocations. But the uninsured majority patients paid coinsurance fees for drugs, hospi- This annex summarizes the CAE Background Paper, "World Bank Assistance for China's Health Sector," by Elaine Ooi, Consultant. 9 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E talization, and inpatient services. In this way, ance, but progress has been slow. Budgetary al- more than 80 percent of the population had ac- locations and management do not fall under the cess to care of reasonable quality and some pro- purview of health authorities, so sustained re- tection against catastrophic expenses. Abolished forms are less likely. The need remains to link in the mid-1980s, CMS programs were not re- health projects more closely with the larger is- placed by an alternative financing system. Health sues of national budget priorities and public ex- facilities and providers looked to boost revenue penditures. The Bank has not fully exploited to ensure economic survival, recover costs, or non-project and non-health avenues for health seize opportunities for tremendous profits. reform. Several trends drove the decline of public The constraints on good health policy in health and the rise of inequalities in health ac- China--lack of public finance, disincentives for cess. Government regulations set the prices of good health practices, and varying levels of health preventive care and essential public health serv- management competency--have not been ad- ices, such as immunization, below cost. Providers dressed successfully. While Bank assistance has opted not to immunize or compromised on qual- had considerable success in addressing man- ity and safety. Profitable but inappropriate drugs, agement competency, the other problems are long hospital stays, and unnecessary diagnostic systemic and require interventions outside the tests replaced prevention. Facilities began to health sector. purchase expensive equipment--such as CAT An example of a project designed to address scanners--in order to charge high fees for their all four of these constraints is the Basic Health Ser- use. The system of cooperation, supervision, vices Project of 1998. Primarily targeting systems and referral broke down as facilities competed reform, it faces difficult, politically sensitive issues, for paying clients and resisted referring patients including personnel management, drug pre- as required. scription behavior, and increased budgetary al- locations to health at the county level. The project The World Bank's Health Program introduced innovative mechanisms to fund and in China monitor cost-effective health interventions for Since China became a member of the World the very poor and hopes to demonstrate con- Bank in 1980, the Bank's program of assistance vincingly that fiscal transfers to poor areas will pay in health has consisted of 11 projects and 3 eco- off. But the project will have to overcome polit- nomic and sector work (ESW) reviews. Bank as- ical interference and loopholes created by those sistance has emphasized the demonstration value who stand to lose from project innovations. of projects in order to pursue high-level dia- Although not formally part of the country logue on health policy reforms, health systems program, the WBI-China Network can greatly fa- performance, and financing. Since the mid 1990s, cilitate health finance reform. Established in projects have allowed experiments with rural 1991 at the request of China's Ministry of Health insurance models and CMS-type schemes to im- when non-health forces increasingly influenced prove health care access for the poor. Results health financing, the Network has made a good have been mixed. start in exposing senior-level officials and provin- There is a wide consensus that during the cial governments to the complex problems faced period of Bank assistance, China's health system by the health sector. Closer collaboration be- deteriorated in critical areas--it may serve much tween WBI-China Network and the country pro- of the majority, but fails to supply a social safety gram will be highly beneficial. net to the poorest. The problems are direct con- The Bank's projects were complex and ad- sequences of government policy, and not only dressed a wide range of health issues. Some fo- health policy. cused on specific diseases, others on institutions Bank dialogue with government agencies aims and management; most combined them. Some at increasing budget allocations to counties and have been highly innovative, especially in the townships to improve health system perform- Chinese context: shifting from health propa- 9 2 A N N E X I : S U M M A RY: H E A LT H B A C K G R O U N D PA P E R ganda to health promotion in support of tobacco macroeconomic dialogue more effectively with control; maintaining anonymity in surveillance sector dialogue, particularly on issues of health and treatment of HIV/AIDS; and increasing the finance, the health work force, and civil service use of social assessment instruments in project reform. designs. Portfolio quality was generally high, re- A health sector review for China is long overdue. flecting best practices for the sector, even if over- Although the Bank has been working in the health all sector performance was less than hoped for. sector in China for 18 years, the first Project Per- formance Assessment Report (PPAR) was part of an Future Bank-China Cooperation eight-project cluster. The Bank has not evaluated Opening up of China's western regions and meet- the extent to which other poorer regions outside ing the needs of migrants working in unregulated Bank project areas have benefited from Bank proj- hazardous industries will require engagement with ects and other assistance. governmental departments over issues related to Nonproject and non-health-sector avenues for the environment and to occupational health and influencing health outcomes should be thoroughly safety. The country is poised to undertake policies exploited. Changes in other sectors will affect the and reforms that will exert more pressure on the health sector. To be part of this process, the Bank's health system. Many of these challenges will test health program must engage with other sectors the limits of Bank expertise, capability, and expe- and entities. rience. The Bank's health program will have to The Bank should follow up on its Provincial Pub- make strategic choices about its future role in lic Expenditure Review 2002 to bring health issues China. Given the dynamic, complex situation, the to the forefront, with a target audience of senior Bank should consider several actions. country-level decisionmakers from the Bank and The Bank should be more involved with up- borrower. stream policy advice so as to reach the deci- Collaboration between the various channels sionmakers who control broader fiscal and for Bank interventions in health should be in- economic policies. The new leadership has to be creased through ESW/AAA, anchor work, the convinced of the critical contributions of health WBI/China Network, and project lending. In order to China's long-term productivity and growth. to achieve a sustained and well-directed effort for Health concerns should be included in a policy and reforms, inputs from these channels country-level, macroeconomic dialogue with have to be better coordinated as parts of a com- China. The Bank has a responsibility to link its mon health strategy. 9 3 ANNEX J: CLIENT CONSULTATIONS IN PREPARATION FOR THE COUNTRY ASSISTANCE STRATEGY In conjunction with preparation of the 2002­05 should expand its support for development Country Assistance Strategy (CAS), a series of of civil society/NGOs in China, particularly consultation workshops were held in Beijing, NGOs in western provinces and those dealing Liaoning, and Zhejiang provinces on the coast, with issues such as sustainable development, and in Ningxia Hui Autonomous Region in west- laid-off workers, urban poverty, HIV/AIDS, etc. ern China in June 2002. Attending the work- shops and sharing their views were Findings from Consultations with representatives of all stakeholder groups--key Central Ministries and Agencies, government ministries; officials from these and Provincial Government Officials, many other provinces; project staff gathered and Project Management Offices from throughout China; and leaders of civil so- ciety involved in economic reform, gender equal- They Value the Bank's Contributions ity, poverty reduction, environment, national and Procedures minorities, rural development, health, and non- profit agencies. The results of those exchanges · The major benefit is the Bank's advice on pol- are described below. This annex is based on icy and management, technology transfer, Annex C of the CAS. human resources development, and intro- duction of knowledge and innovation. Findings from Consultation with Civil · Bank projects introduced international best Society Representatives practice to China, such as competitive bidding procedures ensuring project quality and cost · The Bank's major contribution to China is the savings, a project supervisory system promot- transfer of knowledge. The Bank has intro- ing successful implementation, use of inter- duced new ideas, supported reforms, and national consultants, and helpful approaches helped to change management systems. to environmental and resettlement assessment. · The Bank's support to basic and higher edu- These all supported changes and reforms in the cation and the development of science and way institutions function. As a result, Bank-as- technology contributed significantly to China's sisted projects have higher quality and better development. management than domestic projects. · Inclusion of social assessments in Bank proj- · The Bank's project preparation cycle, pro- ects is helpful and has improved project design curement procedures, and the supervision sys- and beneficiary participation. tem improve the chances for success. In some · The Bank used to work only with the govern- provinces, all civil works projects have adopted ment, but in recent years provided support to the Bank's project management procedures as information sharing and capacity building of standard practice. China's nongovernmental organizations. Since · The Bank's environmental assessment and re- NGOs play a complementary role to the gov- settlement policies take a new, thoughtful ap- ernment and are more innovative, the Bank proach to these issues. 9 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E · Competitive bidding, whether international can cause delays and result in the purchase of or national, has reduced investment costs to already obsolete equipment. levels much below original budgets. Bank pro- · The use of international consultants to super- curement procedures may be less flexible than vise projects is considered uneconomical, par- for some other donors, but they also provide ticularly in the case of consultants unfamiliar more benefits. with China. Borrowers favor use of local ex- · Bank expertise and the quality of its nonlend- perts, given the experience they have accu- ing services are viewed as high quality. mulated over the past decades. · Bank assistance is particularly valued for health, · Chinese collaboration on studies is particu- water resources management, forestry, envi- larly important to ensure quality and relevance. ronmental protection, poverty reduction, and in- · Safeguard requirements are often seen as ex- frastructure. Future assistance was requested in cessive and complicated. some of these areas and for post-WTO training, · Representatives of poor western provinces rural employment, and cross-sectoral studies. would like to have concessional financing for · The Bank's decentralization to Beijing facilitated projects, particularly for rural development efficient communications, timely Bank re- projects. sponses, and faster loan disbursement. · Bank lending terms are not attractive. The front-end fee is too high and a major burden. But Some See Room for Improvement, If indirect costs such as for international con- Sometimes in Areas Valued by Others sultants and training are included, the costs of Bank loans are higher than financing from · The preparation and approval process for Bank- other sources. assisted projects should be further stream- · Counterpart funding requirements may be too lined. Current procedures require borrowers high for poorer provinces. to carry out duplicate tasks; they should be har- · Loan commitment and front-end fees should monized with local approaches. be rebated when project components are ad- · Projects sometimes have components that the justed and part of the loan is canceled. borrower does not want and subsequently has · While missions are effective and useful, the difficulties in implementing. timing (twice a year) may be too frequent and · Procurement procedures should be more flex- the length of missions too long. The number ible. For example, the Bank requires award of of supervision missions should be decided contracts to the lowest responsive bidder, flexibly on the basis of implementation per- which in China might encourage bidders to formance, so as to lower costs for both the offer very low prices to get contracts, with the Bank and the borrower. result that prices must be increased later or · While the shift in the Bank strategy to the quality suffers. western provinces is correct, the eastern · The Bank should reduce the time for review- provinces still need new, innovative ideas; in- ing bidding documents by setting a deadline. stitutional improvements; and lessons from In the case of procuring computers, borrower the Bank's experience, which come from con- problems with the bidding and review process tinued lending. 9 6 ANNEX K: CLIENT SURVEY FINDINGS The figure below is based on a Client Survey con- (such as the environment) where Bank involve- ducted by the China Department in 2002. It plots ment is both important and effective; high- respondents' ratings of the relative importance of priority improvements (regulatory framework is having the Bank involved in various areas vs. their the only example) where Bank involvement is ratings of Bank effectiveness in these same areas. seen as important, but relatively ineffective; im- The correlation between perceived importance provements (for example, judicial system) where and perceived effectiveness is high. The horizon- Bank involvement is seen as neither very impor- tal and vertical lines represent the mean ratings and tant nor effective;1 and exceeding expectations permit a rough classification of activities into four (economic growth) where Bank assistance is seen quadrants representing perceived areas of strengths as less important, but relatively effective. Respondents Rate Importance versus Effectiveness of Bank Involvement in Various Areas Exceeding Expectations Strengths 4.14 Infrastructure 4.04 3.95 Environment 3.85 Corruption Interior Provinces 3.75 Agriculture Natural Resources 3.66 Mgmt. Poverty effectiveness Transparency in Governance 3.56 Economic Growth Health Coordinated Education 3.46 Regulatory Framework Mean Gender Strategy Public Sector 3.37 Disparities Information Technology Financial System 3.27 Social Protection Private Sector 3.17 3.07 2.98 Judicial System Improvements High-Priority Improvements 2.88 3.57 3.63 3.69 3.75 3.81 3.87 3.93 3.99 4.05 4.11 4.17 4.23 4.29 4.35 4.41 4.47 4.53 Mean importance 9 7 ANNEX L: GUIDE TO OED'S COUNTRY EVALUATION RATING METHODOLOGY This methodological note describes the key el- Bank performance was also unsatisfactory, and ements of OED's Country Assistance Evaluation vice-versa. This becomes clearer once we con- (CAE) methodology.1 sider that the Bank's contribution to the outcome of its assistance program is only part of the story. CAEs rate the outcomes of Bank assistance programs, The assistance program's outcome is determined not clients' overall development progress. by the joint impact of four agents: (a) the client, An assistance program needs to be assessed on how (b) the Bank, (c) partners and other stakehold- well it met its particular objectives, which are typ- ers, and (d) exogenous forces (such as events of ically a subset of the client's development objec- nature, international economic shocks, and so tives. If an assistance program is large in relation on). Under the right circumstances, a negative to the client's total development effort, the program contribution from any one agent might over- outcome will be similar to the client's overall de- whelm the positive contributions from the other velopment progress. However, most Bank assis- three, and lead to an unsatisfactory outcome. tance programs provide only a fraction of the total OED measures Bank performance primarily resources devoted to a client's development by on the basis of contributory actions the Bank di- donors, stakeholders, and the government itself. rectly controlled. Judgments regarding Bank In CAEs, OED rates only the outcome of the Bank's performance typically consider the relevance program, not the client's overall development out- and implementation of the strategy; the design come, although the latter is clearly relevant for and supervision of the Bank's lending interven- judging the program's outcome. tions; the scope, quality, and follow-up of diag- The experience gained in CAEs confirms that nostic work and other analytical and advisory program outcomes sometimes diverge signifi- activities; the consistency of Bank's lending with cantly from the client's overall development its nonlending work and with its safeguard poli- progress. CAEs have identified assistance pro- cies; and the Bank's partnership activities. grams that had: Evaluation in Three Dimensions · Satisfactory outcomes matched by good client As a check on the inherent subjectivity of ratings, development OED examines a number of elements that con- · Unsatisfactory outcomes with clients that tribute to assistance program outcomes. The achieved good overall development results, consistency of ratings is further tested by ex- notwithstanding the weak Bank program amining the country assistance program across · Satisfactory outcomes with clients that did not three dimensions: achieve satisfactory overall results during the period of program implementation. (a) A Products and Services Dimension, in- volving a "bottom-up" analysis of major pro- Assessments of assistance program outcome and gram inputs--loans, analytical and advisory Bank performance are not the same. activities, and aid coordination By the same token, an unsatisfactory assistance (b) A Development Impact Dimension, involv- program outcome does not always mean that ing a "top-down" analysis of the principal 9 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E program objectives for relevance, efficacy, out- Highly Satisfactory: The assistance program come, sustainability, and institutional impact achieved at least acceptable progress toward all (c) An Attribution Dimension, in which the eval- major relevant objectives, and had best practice uator assigns responsibility for the program development impact on one or more of them. outcome to the four categories of actors. No major shortcomings were identified. Satisfactory: The assistance program achieved Rating Assistance Program Outcome acceptable progress toward all major relevant In rating the outcome (expected development objectives. No best practice achievements or impact) of an assistance program, OED gauges major shortcomings were identified. the extent to which major strategic objectives Moderately Satisfactory: The assistance pro- were relevant and achieved, without any short- gram achieved acceptable progress toward most comings. Programs typically express their goals in of its major relevant objectives. No major short- terms of higher-order objectives, such as poverty comings were identified. reduction. The Country Assistance Strategy (CAS) Moderately Unsatisfactory: The assistance may also establish intermediate goals, such as im- program did not make acceptable progress to- proved targeting of social services or promotion ward most of its major relevant objectives, or of integrated rural development, and specify how made acceptable progress on all of them, but ei- they are expected to contribute toward achieving ther (a) did not take into adequate account a key the higher-order objective. OED's task is then to development constraint or (b) produced a major validate whether the intermediate objectives pro- shortcoming, such as a safeguard violation. duced satisfactory net benefits and whether the re- Unsatisfactory: The assistance program did sults chain specified in the CAS was valid. Where not make acceptable progress toward most of its causal linkages were not fully specified in the CAS, major relevant objectives, and either (a) did not it is the evaluator's task to reconstruct this causal take into adequate account a key development chain from the available evidence and assess rel- constraint or (b) produced a major shortcoming, evance, efficacy, and outcome with reference to the such as a safeguard violation. intermediate and higher-order objectives. Highly Unsatisfactory: The assistance pro- Evaluators also assess the degree of client gram did not make acceptable progress toward ownership of international development prior- any of its major relevant objectives and did not ities, such as the Millennium Development Goals, take into adequate account a key development and Bank corporate advocacy priorities, such as constraint, while also producing at least one safeguards. Ideally, any differences in dealing major shortcoming, such as a safeguard violation. with these issues would be identified and re- solved by the CAS, enabling the evaluator to The institutional development impact focus on whether the tradeoffs adopted were ap- (IDI) can be rated as: high, substantial, modest, propriate. However, in other instances, the strat- or negligible. IDI measures the extent to which egy may be found to have glossed over certain the program bolstered the client's ability to make conflicts or avoided addressing key client de- more efficient, equitable, and sustainable use of velopment constraints. In either case, the con- its human, financial, and natural resources. Ex- sequences could include a diminution of amples of areas included in judging the institu- program relevance, a loss of client ownership, tional development impact of the program are: and/or unwelcome side-effects, such as safe- guard violations, all of which must be taken into · The soundness of economic management account in judging program outcome. · The structure of the public sector and, in par- ticular, the civil service Ratings Scale · The institutional soundness of the financial OED utilizes six rating categories for outcome, sector ranging from highly satisfactory to highly un- · The soundness of legal, regulatory, and judicial satisfactory: systems 1 0 0 A N N E X L : G U I D E T O O E D ' S C O U N T RY E VA L U AT I O N R AT I N G M E T H O D O L O G Y · The extent of monitoring and evaluation sys- · Technical resilience tems · Financial resilience (including policies on cost · The effectiveness of aid coordination recovery) · The degree of financial accountability · Economic resilience · The extent of building NGO capacity · Social support (including conditions subject to · The level of social and environmental safeguard policies) capital. · Environmental resilience · Ownership by governments and other key Sustainability can be rated as highly likely, stakeholders likely, unlikely, highly unlikely, or, if available · Institutional support (including a supportive information is insufficient, nonevaluable. Sus- legal/regulatory framework, and organizational tainability measures the resilience to risk of the and management effectiveness) development benefits of the country assistance · Resilience to exogenous effects, such as in- program over time, taking into account eight ternational economic shocks or changes in factors: the political and security environments. 1 0 1 ANNEX M: MANAGEMENT ACTION RECORD Recommendations Management Response 1. Repayment system. China's loan repayment system en- 1. To increase resource flows to poor areas, China's new courages good project performance, but distorts the allo- government leaders are strongly committed to reform of cation of resources. While continuing to pursue blend the fiscal system and intergovernmental fiscal relations, operations in the interim, the Bank should try to persuade and have welcomed substantial Bank advisory support in the government of the need to modify the repayment sys- this area. They are also considering innovative financing tem and to give high priority to reform of the overall inter- arrangements to expand on the donor partnerships that now governmental fiscal system. facilitate Bank-China collaboration on poverty reduction. 2. Improving the effectiveness of ESW. The Bank should 2. Our clients and we continue to see the need for policy focus more on China and less on international experience; advice based on a mix of international and Chinese lessons do more collaborative ESW; and increase its sector work learned, as suited to issues and audiences. The question to take stock of sectoral changes and lay the foundation is not whether the Bank should rely more or less on inter- for better policy dialogue and new directions in lending. national experience, but how it can bring to bear the most pertinent views on issues. As to our collaboration with local institutions on AAA, it is already substantial and still in- creasing as Chinese expertise expands. And our sector work program has expanded in line with budget allocations. 3. Improving the effectiveness of lending. The Bank's China 3. Ongoing measures to enhance investment effective- portfolio is one of the largest and most successful. To im- ness include: recruitment of a portfolio manager for FY05; prove it further in a period of lower lending levels, the Bank harmonization and streamlining of safeguard procedures should take steps to improve portfolio management; of the government and the Bank and joint formulation of strengthen the systemic use of safeguards within a col- regulatory guidelines for investments; design of invest- laborative framework; pursue new directions in infra- ments--including those in infrastructure--to promote in- structure lending; and enhance the poverty impact of novation and change, as appropriate, and address poverty lending. issues; and identification of additional innovative financ- ing arrangements to facilitate Bank support for poverty re- duction and the Millennium Development Goals. 1 0 3 ANNEX N: COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAE 1. General Observations ther been short of the mark or less involved The Department agrees with the general thrust than warranted. We agree with many of these ob- of the CAE. Put simply, China has performed servations, but on some issues the judgment is very well over the past two decades. It has been too simplistic, particularly regarding how coun- very much "in charge" of the developmental try circumstances can influence Bank priorities agenda, and this is a major factor in explaining or the way the Bank has approached issues in the country's impressive accomplishments to China. Reform is not a smooth or a continuous date. The Bank has played an important but process. For some issues, such as the financial varying role in the process depending on the sec- sector (see more on this below), circumstances tor, issue, and time period--in part due to chang- dictate when a topic is ripe for serious atten- ing country circumstances and in part due to tion--particularly so in China where the politi- factors specific to the Bank. As noted in the cal/planning process determines the timing, Summary, "The main strength of the Bank has speed, and nature of how and when key reforms been its sustained support of an activity or pro- are to be addressed. gram over a number of years." This has allowed We recognize that the scale and diversity of is- the Bank to "have a substantial cumulative im- sues facing China are unparalleled in world his- pact in a number of areas" and to be "well- placed tory and that the continuing progress of China to take advantage of opportunities when China is as remarkable as the complexity of the devel- is looking for support for change." opment challenges it faces. On the Bank's side, Against this broad premise, we are puzzled by while our performance may have varied across the statement in the same paragraph that, "The sectors and over time and Bank contributions Bank's view on issues has sometimes been less could never be considered dominant, given than fully transparent. Looking forward, the China's scale and government ownership (as Bank should give more attention to trying to the CAE notes), the Bank has certainly "punched promote and participate in a much broader de- above its weight." In light of these two factors, bate on policy and sector issues, not only among it is not clear that more could have been ac- officials, but also among researchers and other complished or that performance was anything stakeholders." While the Bank has publicly shared less than fully satisfactory. Any suggestion of a broad range of its analytical work and partici- "mixed success" on either the government's or pated in an open dialogue on most subjects, it the Bank's part seems to imply that total success has treated some sensitive issues more discreetly. would ever have been feasible in such a complex Our aim in doing so is to reach our clients in a context. sensitive but effective way, not to educate an ex- In addition, while the report acknowledges ternal audience. We have thus been able to main- that "China fits the Comprehensive Develop- tain a dialogue on difficult issues being debated ment Framework model of donor coordination within the government and have helped our more closely than most countries," the Bank is clients to shape important policy reforms. criticized throughout for not being involved in The report notes areas where the Bank has every aspect of every issue. However, no one de- been quite effective and areas where we have ei- velopment institution--including the World 1 0 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Bank--can be expected to assist all areas of a cal response in 2001 and 2002, and the do- country's development agenda, much less a mestic debt risks study in 2003). Avoiding de- country with an economy as diverse and complex flation and competitive devaluation were as China's. On issues that China's other devel- important--and sometimes conflicting--con- opment partners were better placed to provide cerns at different times; accordingly, the Bank assistance or were already involved, the Bank has offered advice on different occasions. rightly taken a supplemental role in providing · The discussion of fiscal issues should support or has even decided to forgo any in- note that the Bank has provided several writ- volvement. So, although the CAE points out ten inputs and organized specialized work- areas of limited or nonexistent Bank involve- shops on the composition of public ment, such as in the coal subsector, forestry sec- expenditures, the reform of the malfunction- tor work, or judicial reform, it should be ing intergovernmental finance system, do- recognized that development partners, such as mestic debt risks, reform of the trade the IFC for coal, the FAO and Ford Foundation promotion and export tax regime, the man- for forestry, and bilaterals and the EU for judicial agement of rural public finance, and the co- reform, provided the support required and prob- ordination of fiscal-monetary and external ably better than we could have. policies. The Bank has positioned itself to be Broadly, then, we wonder at the tone of parts an adviser in this area as political windows of the evaluation, which suggests that the Bank open. Recently, the new government requested has failed to achieve results as though we were the assistance (and the Bank responded) on issues sole implementers of change in China, rather related to increased external sector liberal- than an adviser and facilitator. Reform in China is ization, reform of the financial sector and rural driven by the government and not outsiders such finance, and other issues tied to the sustain- as the Bank. The current tone seems contrary to ability of the fiscal situation. the opening statement in Chapter 5: "It would be presumptuous to think that the Bank could take Privatization credit for successes, or be held responsible for the As the evaluation notes, the Bank has expressed failures, of such a large and dynamic economy." impatience with the pace of reform while broadly We agree and would therefore urge that the re- supporting China's phased approach. We rec- port put China back in the "driver's seat." ognized that, in the short run, an exclusive focus on privatization and assumptions that market 2. Policy Agenda discipline would provide good governance was unlikely to be appropriate in a country (and en- Macroeconomic Management terprise sector) as large and diverse as China. We concur with the assessment's highlighting of While pursuing privatization, there was an im- two critical periods that tested China's macro portant parallel track of improving governance management, the prominence of fiscal policy, of public agencies and separating the functions and the remaining difficult issues. However, the of state-as-owner and state-as-regulator. Hence, description of the Bank's role would benefit the Bank was not "too timid in discussing pri- from a broader view. vatization" as the evaluation states, but rather rec- ognized that the issues are differentiated and · The discussion of the Asian Crisis should complex. Indeed, privatization was a politically note that, despite supporting an expansionary (and philosophically) sensitive issue in China fiscal policy, the Bank consistently flagged the during the 1990s and thus was more appropri- risks if such a policy were not used as a tem- ately handled on a confidential basis; for exam- porary measure (see, for example, our fiscal ple, in the mid-1990s, the Bank's Regional Vice policy notes in 1998, the CEM in 1999, notes President raised this issue directly with the Vice on the tenth five-year plan in 2000, notes on Premier and both recognized the delicate nature the composition of public spending and on fis- of the topic. 1 0 6 A N N E X N : C O M M E N T S F R O M B A N K R E G I O N A L S TA F F O N D R A F T C A E Financial Sector the Bank's advice or support. We would instead The CAE highlights the importance of financial point to the changed circumstances of those sector reforms--which we agree with--and cor- banks. At the time, both the World Bank and rectly notes that following some important early the government recognized that the rationale for work, the Bank's support for these reforms fell continued Bank assistance for the credit opera- off during much of the 1990s. As in other areas, tions of State commercial banks no longer ex- China's experience has shown that unless a coun- isted: (i) the banks were flush with liquidity and try is serious about addressing an issue, partic- did not need our financial support; (ii) without ularly in the financial sector, advisory or financial more serious policy efforts in dealing with non- support from outsiders--whether the Bank or performing loans (NPLs) and restructuring, World others--is likely to be ineffective. For much of Bank lending would not likely be effective at the early to mid-1990s, China pursued financial any rate; and (iii) since the government relied on sector reform slowly. Against this background, expansionary fiscal/monetary policy as a response Bank advisory support and financial intermedi- to the Regional Financial Crises, Bank-supported ation loans had limited impact. At the time, the credit operations were unlikely to be effective as Bank recognized that significant support in this an instrument for reform. Our scaled-back in- area would be both costly and difficult and that volvement, therefore, had a logical basis. Once until a stronger government commitment to re- these circumstances changed and the environ- forms in this area emerged, a more ambitious as- ment for our support improved, the govern- sistance effort might be wasted. As noted by the ment has sought our involvement on issues CAE, in line with a renewed government com- besetting the State banks and other sector in- mitment brought on by lessons of the Asian Fi- stitutions, as the CAE mentions. nancial Crisis, we have over the past few years mounted an ambitious financial sector reform Recent AAA. The evaluation casts doubts on the program for China--the largest effort in the potential effectiveness of the more recent AAA Bank--reflecting our perception that the gov- for financial sector reform. This is contrary to the ernment is now taking this issue more seriously. feedback consistently given to Bank manage- ment by the government and is puzzling in view Sector Strategy. While the evaluation is correct in of the rapidly increasing requests for assistance noting no major sectorwide reviews after the from the MOF, the central bank, financial regu- influential 1989 report, it is incorrect in stating lators, and the planning commission on both that the Bank never recast its strategy after that general architectural and specific technical as- time. This issue received considerable manage- pects of financial sector reform. rial attention regarding implications for country vulnerabilities and searching for opportunities for Poverty Reduction constructive engagement. Meanwhile, imple- While we agree with the CAE that regional and mentation of the Financial Sector Technical As- rural/urban inequalities have increased sub- sistance Project kept the financial sector very stantially and need to be addressed, it should be much on our agenda. The sector was an impor- noted that the inequality issue in China differs tant component in the Bank's country assistance from that in many other countries. It does not strategies during the 1990s, and several country stem from one group or one region stagnating economic memoranda, including the China 2020 relative to others; rather, urban areas and coastal report, devoted separate sections to policy issues provinces are growing annually at near double and development strategy for the sector. digits, while growth in rural areas and some in- terior provinces is closer to 4 to 5 percent. Rec- Involvement with State Banks. The CAE incorrectly ommendations should therefore reflect this fact. attributes the Bank's lack of involvement in the Some of the problems are a consequence of an State commercial banks during the Asian crisis excessive concentration of riches, not poor per- to our client's lack of interest or confidence in formance more generally. 1 0 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E We also question the CAE's finding that the production. In sum, then, we do not concur Bank was less successful in "persuading the gov- with the point made that the Bank has been ernment of the implications of broader devel- "less successful in persuading the government" opment policies for poverty and inequality." in these areas. For all three of the major issues cited--inter- governmental fiscal relations, grain pricing poli- Infrastructure cies, and restrictions on migration--the Bank produced major economic reports in recent Lending for Infrastructure. The CAE notes the pos- years that set out the necessary reform agenda. itive role that Bank lending for infrastructure Further, the government has been moving in has played in China--in both stimulating growth the right direction on all three fronts, albeit not and directly or indirectly reducing poverty and so rapidly as one would have hoped in some regional inequalities. We strongly concur. How- areas. It is also debatable whether the govern- ever, the CAE questions whether the share of ment could or should have moved more ag- lending for infrastructure should increase as gressively than it did. For example, fiscal reforms proposed in the recent CAS. In terms of lending in other large transition countries where rev- amounts, the proposed lending for infrastructure enues have also sharply fallen indicate that the is actually declining as China mobilizes more necessary institutional changes and shifts in from domestic resources for such investments. tax/revenue policies to promote more equity To illustrate, the Bank's infrastructure lending to take years if not a decade or more to put in China totaled $5.5 billion in FY94­96, but only place. Similarly, while China's restrictive policy about $2.3 billion in FY01­03. However, the on migration has accelerated regional inequali- share of infrastructure is increasing in the Bank ties, in the view of many it has also made it pos- program only because, with the loss of IDA, sible for the country to avoid many of the lending in the social sectors is much less than be- undesirable social consequences that other de- fore. Moreover, given the substantial infrastruc- veloping nations have experienced regarding ture needs in the interior provinces, the rationale rural-urban migration in the face of weak social for continued support is as strong today as it was service systems. Now that such systems are be- 10 years ago in promoting growth and poverty ginning to take shape in China, cities and re- reduction. The more relevant issue, therefore, is gions are better equipped to cope with pressures whether China should make more use of IBRD from more flexible migration policies, and this resources for social investments--a point with in fact is now happening. Finally, regarding grain which we would agree. prices, since 1997, the government has been We do, however, agree that a hard look is purchasing smaller amounts of grain at the ad- needed at our involvement in some infrastruc- ministered procurement prices--less than 10 ture issues. For example, in view of the disap- percent of the crop in the latest years for which pointing results regionally and globally with BOT information is available. Overproduction since (build, operate, and transfer) and PPI (private par- 1997 has resulted in a sharp divergence between ticipation in infrastructure), it is sensible to re- official and free market prices, and the resulting examine the respective roles of public and private losses of grain marketing entities, combined sources of financing for infrastructure. with the widespread rural distress that resulted from falling free-market prices, have resulted in Impact on Reforms and Institutional Change in Infra- a substantial relaxation of grain marketing quo- structure Sectors. We agree that our policy im- tas. Moreover, post-WTO developments are seen pact has been more striking for energy than largely in the form of the removal of restrictions transport, with the proviso that we have made on crop diversification, and by making deep con- a significant difference in the urban transport cessions in agriculture, China has essentially arrangements in many cities and that a core avoided going down the path of most countries group of national professionals are now viewing that have subsidized increasingly inefficient food policies and issues differently compared with a 1 0 8 A N N E X N : C O M M E N T S F R O M B A N K R E G I O N A L S TA F F O N D R A F T C A E decade ago when we first started working in the 2000 has co-hosted with the Ministry of Land and subsector. In particular, we have helped develop Resources annual conferences aimed at giving the a cadre of professionals around the country overseas mining industry and potential investors (mostly in the design institutes) who know how a full picture of the present mining investment cli- to study problems better and develop more ef- mate in China. In addition, a major IFC-supported fective solutions. "Study on Coal Sector Reform in China" was done Regarding the institutional shortfalls in other in 2001 in collaboration with the government, fol- transport subsectors, we wish to complement the lowed early this year by a "China Coal Industry Ad- report with the following information: ministration and Regulation Workshop," which was based on several in-depth technical studies. · In highways, the report notes three areas where The Bank has also maintained a dialogue with the the Bank has made little headway: fuel tax re- government on clean coal technologies over the form, establishment of a unified Ministry of past five years through technical and policy stud- Transport, and traffic safety. This, of course, has ies, awareness workshops (the last one in Sep- to do with constraints also noted in the re- tember 2004), and recently a stand-alone GEF port. Since Bank lending accounts for only a project. Several reports on the coal sector were also small share of China's resource flows, the Bank published by the Energy Sector Management As- relied mostly on a dual-track approach of build- sistance Program (ESMAP). ing trust through lending while promoting Regarding the gas sector, the Bank has done policy dialogue through sector work. This has extensive AAA and TA in the past three years. led to a reduced efficacy in transport where suc- Some of our outputs include the 2001 studies on cess largely depends on achieving coordination "Modernizing China's Oil and Gas Sector: Struc- across sectors and/or levels of government. ture, Reform and Regulation," "Power and Gas We have therefore expanded our AAA pro- Regulation," "Regulatory Framework for China's gram, including dissemination seminars to Downstream Gas Sector," and, in 2002, "Eco- show (i) the unsustainability of the current fi- nomic Regulation of Long-distance Gas Trans- nancing mechanisms in the sector (which rely mission and Urban Gas Distribution." In fact, too much on toll financing), (ii) the necessity the Bank's activities are helping to shape re- of intermodal coordination for logistics im- forms in the gas sector. provement and further market integration, and (iii) the need to mainstream sector de- Environment velopment externalities such as traffic acci- We question the implication that the Bank had dents. a limited impact on environmental issues. While · In railways, the dual-track approach stumbled China's rapid economic growth has posed im- on difficulties in building trust. Now that this mense environmental challenges, we suggest has been achieved to some extent, the that the Bank has had a significant influence in prospects for institutional reforms are im- this area and prevented existing problems from proving. becoming even more severe. The recent CAS indicates the range of the Bank's support to Bank Group Involvement in the Gas and Coal Sectors. China in addressing environmental issues, in- The recommendation that the Bank should be cluding those of global importance, the institu- involved in lending for gas and coal is questionable. tional and regulatory framework in China, and In the context of the Bank's current poverty and the challenges of protecting air, land, and water growth objectives, coal and gas are clearly not pri- resources. We note that the CAE omits discussion ority areas for financing and are better addressed of significant areas of the Bank's contribution to through policy-related work since the chief prob- environmental management such as air pollution lems involve regulatory, environmental, and--for reduction, industrial pollution control programs, coal--serious social issues. IFC has, in fact, been and strengthening of environmental monitor- actively involved in the mining sector, and since ing and regulation in municipalities. 1 0 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Water-Related Issues. There appears to be a dis- innovations and that are now national norms in- connect between the views expressed in Annex clude full cost recovery on water supply and re- G and the main text section on water. The gen- covery of at least the operating costs for sewerage eral tone of the annex is that the Bank's assistance services, formal independence of utilities, proper in the water sector has been effective, is on the financial management, and proper investment right track, and is making significant contribu- planning and implementation. The Bank is now tions. The general tone of the main text seems pursuing further institutional advances such as full to be that the Bank's assistance has been less than commercialization of certain services and satisfactory, particularly in water resources man- strengthening of the regulatory framework. agement. Needless to say, we agree with the annex and not with the main text. 3. Operational Instruments In general, the main text characterizes our per- formance as "mixed," despite achievements under Analytical and Advisory Services projects such as those for the Tarim Basin, the Yangtze Basin, Water Conservation, the Loess Changing Needs, Changing Products. The evaluation Plateau, and others that have significantly con- recognizes that our client's needs changed in tributed to mainstreaming the environment into the course of the 1990s and that AAA was there- water sector operations. On institutional reform fore refocused on more quickly prepared tech- in water, the report questions our performance, nical pieces, sometimes of a multisectoral nature, although the Bank has had considerable success and on issues that often defied easy solutions. At in irrigation reform, river basin management, and the same time, the CAE shows a nostalgic hope watershed management. Water Users' Associa- that the Bank will continue to produce long, tions started under World Bank projects are now general reports for senior leaders as if they still becoming national policy. River basin manage- needed to be schooled in basic principles or re- ment is becoming more common, albeit slowly, quired advice on the simpler issues of the past. and the Bank-assisted Tarim Basin and Yangtze As China's reform process shifted from the lib- Basin projects have played an important role in eralization phase to the more difficult structural this. The Loess Plateau watershed management and institution-building phase, the Bank's ESW model is also being replicated. Regarding inte- had to evolve by moving away from reports to a grated water resources management (IWRM), combination of policy notes, workshops, studies, while progress has been slow, it is positive, as and research. Moreover, WBI and Development shown in various projects and in the Bank's Water Economics and Chief Economist Vice Presidency Resources Assistance Strategy prepared in 2002. (DEC) activities have been integrated more Achieving integrated water resources manage- closely with the need to provide a range of ad- ment is a monumental, very long-term process, visory services supported by capacity building and China--with Bank assistance--is on the right and in-depth research on current as well as future track, but still has some way to go. challenges to economic management. The CAE Similarly, on water supply and wastewater should unequivocally acknowledge and endorse management, we disagree with the report's con- this shift. Otherwise, it runs the risk of being in- clusion that our impact on institutional devel- ternally contradictory by acknowledging the opment has been negligible. We believe that change in knowledge requirements since the China's achievements of expanding and im- mid-1990s while criticizing the Bank's decision to proving urban water supply and wastewater man- shift away from reliance on the lengthy strategic agement services, as well as their financial and documents produced during the early stages of institutional frameworks over the last 15 years its involvement in China. have been remarkable and compare well with In this regard, we would also point out the those of other Bank borrowers. The Bank has CAE's discussion of the themes of our 2002 CAS made a significant contribution to this achieve- should also mention the major CAS emphasis on ment. Advances that the Bank first pushed for as knowledge transfer. There is now a two-way ex- 1 1 0 A N N E X N : C O M M E N T S F R O M B A N K R E G I O N A L S TA F F O N D R A F T C A E change of knowledge between the Bank and the overall budget situation for the China program. China, in which the Bank is both a provider and The Bank's budget allocation system has consis- a recipient of knowledge in its interactions with tently constrained funding for China below what an ever more sophisticated and informed client. might be regarded as "normal." Given the sub- This mutually beneficial exchange reflects our stantial budget needs for project supervision and new relationship. lending as a result of the large lending program, the amount available for ESW--particularly when International vs. Chinese Experience. The CAE rec- expressed as a percentage of the overall pro- ommends grounding policy advice more on Chi- gram--seems low. Resource constraints, how- nese experience as opposed to international ever, have become less binding recently, and the lessons learned. However, we see the need to 2002 CAS, which recognizes the importance of the look at both sources, with the proper "mix" de- Bank's advisory services relative to lending, could pending on the issue and the audience. We will therefore envisage an increased share of resources continue to approach issues in this way, con- for nonlending services. sidering international and/or domestic experi- ence as warranted. The CAE also recommends China's View of the Bank's AAA. Regarding con- that the Bank draw lessons from Chinese expe- cerns about the Bank's ESW expressed by Chi- rience for the benefit of other countries. This ob- nese officials, we strongly agree that many reports jective was built explicitly into the China CAS of are produced for external and institutional pur- 2002, and, as mentioned in the CAE, the up- poses and not solely for Chinese technical spe- coming Shanghai Conference on "Scaling Up cialists. This was true of the China 2020 report, Poverty Reduction" is a notable example. which was timed for release at the Hong Kong Annual Meetings in 1997. This report was mainly Collaborative Work. The local research commu- produced to help the external world better un- nity's desire to increase its work with the Bank derstand China, and it remains one of the most is welcome, and we are doing this where possi- requested World Bank documents on China. ble. One of the strategic elements for the knowl- The report was not, however, without a Chinese edge agenda and AAA program outlined in the audience. While it may have lacked immediate 2002 CAS is, indeed, to accelerate the use of operable suggestions for macroeconomists, many local experts and institutions. However, since line ministry and sector experts greatly appre- local capabilities are still uneven, it will be im- ciated it, particularly its companion background portant to continue to support institutional de- studies on the environment, social protection, velopment as part of this collaborative work. health financing, food security, income dispari- The Bank's extensive use of trust funds to ties, and integration into the global economy. support AAA work supports such longer-term ef- Other outputs were meant to serve the needs of forts to build local capacities, while also estab- macroeconomists, such as policy notes on the lishing networks of communication and expertise five-year plans. The first set of notes in 1995 was and sustaining reform. Research-support grants well received, and the Bank has been requested to Beijing University and the Chinese Academy to provide similar support to the two plans since of Social Sciences are examples. Moreover, for- then. mal cosponsorship with the authorities of im- Regarding the recommendation in box 4.1 portant institutional mechanisms, such as the that the Bank needs to do more work on ur- APEC Finance and Development Program, helps banization, education, and urban transport, sig- to transfer cutting-edge knowledge to local col- nificant analysis has been carried out in all three laborators and, more broadly, to East Asia Re- areas and provided to the government, although gional networks. not as yet to the public. AAA Budget. The portrayal of our budget alloca- Quality of AAA. On the observation that the Bank tions for AAA reveals a lack of understanding of needs to tighten management oversight over 1 1 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E task implementation and dissemination, we linkages and in the process helped develop use- would point out that the EAP Region has for- ful policy analysis and design frameworks. Third, malized sector lead economist positions in all sec- on a more limited scale, technical analysis in tor units, and these individuals have taken on several sectors has combined perspectives from greater quality assurance functions in their re- other sectors. For example, the China CEM 1999 spective units, complementing the role being carried out stress testing on the financial sector played by the country lead economists. At the based on enterprise sector analysis. However, same time, the focus remains on impact and re- more needs to be done. In the area of enterprise sults, which usually require a range of activities and financial sector reform, for example, ESW and which depend on what others are doing-- under way on state-owned commercial bank re- features that are more difficult to reflect in the form and on domestic debt risks is building earlier QAG approach. upon perspectives from banking, management of local government finance, social security re- Absence of Forestry Sector Work. Despite lending for form, and the housing market and urbanization. forestry of more than $1 billion and a body of In part, this has been facilitated by unifying the work that OED's sector review of 2000 charac- Poverty Reduction and Economic Management terized as "a high point in one of the highest-qual- (PREM) unit with previous units for the financial ity portfolios," no Bank sector work was done on sector and private sector development. More forestry. As the OED review mentions, however, important, however, is the evolving focus of the the Bank attempted to launch AAA activities, but authorities on regional and subnational devel- our client did not see the need for such work be- opment issues, which explicitly lend themselves cause of the perceived relative health of the for- to cross-sectoral approaches. The Bank is the est sector policy framework. Forest sector leading agency among China's development analytical work was, however, done by the FAO partners involved in providing analytical and ad- and the Ford Foundation, while the Bank used its visory support on this set of issues. resources for topics not well covered by other donors, such as rural development, poverty, grain Impact of Lending marketing, and agricultural research. The report characterizes Bank lending as "negli- gible" and never the main instrument of our strat- Cross-Sectoral Work. This, indeed, poses chal- egy. However, the Bank's financial contribution had lenges, especially for a large country like China. an impact greater than its quantitative size would Three developments are worth noting to flesh suggest and should not be considered too small out the evaluation. First, the shift in requests to have had an effect. This was the case since: (i) from the authorities for nonlending support in Bank lending to specific geographic areas had a sus- areas requiring meaningful cross-sectoral analy- tained, cumulative impact over time (for example, sis is fairly recent, reflecting the complexity of the Xinjiang benefited from $1.2 billion in support issues faced in moving from the stroke-of-the-pen for more than 20 projects and Sichuan received liberalization phase to the current stage of build- more than $2.3 billion under about 40 projects); ing institutions for a rapidly growing, highly ar- (ii) for much of the 1990s until 1997/98, China's ticulated, globalized, and market-oriented reserves were still recovering from their near de- economy. In many instances, the immediate im- pletion in the early 1990s, so that during much of pulse to request such assistance from the Bank the decade foreign exchange was, in fact, an issue; arose from the need to go beyond the com- and (iii) by viewing our lending from the per- partmentalization (and the narrower perspectives spective of national foreign reserves and rev- that result from it) that exists among government enue/GDP ratios, the report overlooks the fact departments. Second, the Bank has used the that, unlike other countries, our lending in China opportunity of the request for inputs into the is largely provincially based and most provinces five-year plans and the Western Region Devel- have major fiscal and foreign exchange access is- opment Plan to exploit some of the cross-sectoral sues, which the Bank helped to relieve. 1 1 2 A N N E X N : C O M M E N T S F R O M B A N K R E G I O N A L S TA F F O N D R A F T C A E Portfolio Management With some 120 active projects scattered over The depiction of factors that improved the QAG more than 20 provinces and with managers vis- rating in subsequent years appears incomplete iting China no more than twice a year, it would by attributing the improvement to Regional ef- seem impossible for most projects to be visited forts and increased scrutiny of the portfolio after more than once or twice by managers in the issues surfaced under the Western Poverty Pro- course of even five years. ject (in May 1999). We, however, see the turn- around that began at the start of FY99 (in July 4. Conclusion 1998) as largely the result of efforts initiated by Overall, we broadly endorse the recommendations Country management during that year to (i) of the evaluation, which in general are consis- provide budget to accelerate decentralization tent with our current strategy. In particular, we of staff, task management, and core services to strongly agree that many lessons from China's the field; (ii) designate a senior Beijing Office staff experience are applicable to other countries, and member to oversee portfolio performance as a for this reason we are sponsoring an upcoming de facto Project Adviser; (iii) increase funding of poverty conference in Shanghai aimed in part at supervision--which averaged about 21 staff sharing lessons from China with others in the de- weeks per project in FY99 or 22 percent above velopment community. We also agree on the im- the Regional goal of 17 staff weeks; and (iv) portance of broadening our dialogue and have carry out a QAG-type supervision assessment therefore in the past few years reoriented our with assistance from the Region's Operations policy support to respond better to the needs of Adviser, which found satisfactory supervision of the government's most-senior decisionmakers. the sample projects. The impact of these meas- Testament to the effectiveness of this reorienta- ures was reflected in QAG's FY99 RSA, which tion is the substantial increase in government re- rated China's supervision at 85 percent, slightly quests for Bank assistance with the most complex higher than the Bank's average (at 82 percent). institutional and structural policy issues, includ- By the time of the RSA in FY00, China's super- ing the eleventh five-year plan. Further, we agree vision was rated 100 percent, compared with 92 that our somewhat smaller lending program must percent Bankwide. be used strategically and are therefore designing each operation to introduce innovation and Safeguards change in the sectors supported, where needed, As noted in box 4.2, the Western Poverty Project including poverty reduction and infrastructure was a major blemish on an otherwise relatively development. In our analytical and advisory work, strong performance in the Bank's involvement we will continue to provide our client with ob- in safeguard issues. However, this single opera- jective advice that draws on relevant lessons tion should not detract from the reality that only learned from other countries as well as China. one of some 250 investment projects during Maintaining the quality of this support is our top more than two decades has been subject to such priority, and our approach on each issue will be controversy. tailored to ensure greatest effectiveness. At the The criticism that line managers had rarely vis- same time, efforts to protect portfolio quality will ited the six projects reviewed by a Panel assess- continue, so that our future performance shows ing safeguards compliance seems unrealistic. the excellent outcomes realized in the past. 1 1 3 ANNEX O: COMMENTS FROM THE GOVERNMENT OF CHINA 1 1 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E 1 1 6 A N N E X O : C O M M E N T S F R O M T H E G O V E R N M E N T O F C H I N A 1 1 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E 1 1 8 A N N E X O : C O M M E N T S F R O M T H E G O V E R N M E N T O F C H I N A 1 1 9 ANNEX P: SUMMARY: CHINA--IFC COUNTRY IMPACT REVIEW China and the International Finance form initiatives, IFC's potential to add value, Corporation (IFC) and IFC's lessons from its difficult early portfo- China has the largest economy, and attracted lio experiences. Beginning with the country as- the most foreign direct investments (FDI) in re- sistance strategy for 1997, IFC placed increased cent years, among countries in which IFC oper- emphasis on developing capital markets, pri- ates. In 2002, China surpassed the U.S. as the top vate sector participation in infrastructure and FDI destination country. IFC approved its first in- extractive industries, and SME development. vestment in China in June 1985, a US$17 million Subsequent strategies (1999, 2001, and 2003) loan. For the next seven years, IFC activity lev- added priority consideration to frontier provinces els remained low, gaining momentum only after and corporate governance--partly by expanding 1992. By the end of FY03, cumulative commit- technical assistance and advisory services (TA to- ments totaled $811 million, and IFC's held port- taled more than US$10 million from 1997 to folio stood at US$510 million, about 3 percent 2003)--and to improving access by private com- of its total held portfolio. China now represents panies, particularly SMEs, to financing from local IFC's sixth largest country portfolio exposure banks and financial markets. While less than 15 and its third largest country equity portfolio. At percent of total FDI flows into China to date has the end of FY03, IFC's China held portfolio was gone to the frontier provinces and less than 1 per- about 49 percent equity, 44 percent loans (in- cent into the financial sector, IFC directed more cluding guarantees and risk management facili- than 20 percent and 30 percent, respectively, of ties), and 7 percent quasi-equity. The equity its commitments to these two areas, demon- share in the China portfolio was unusually high strating a strong pioneering and leadership role, compared with the IFC overall portfolio equity in line with the CAS and corporate priorities of share of about 20 percent. maximizing IFC's development impact addi- tionality. IFC's Strategies IFC's strategies in China have been relevant and Project Outcomes well-tailored to the country context. IFC pro- Despite China's large economy, above average gressively adapted them initially to the market GDP growth rate, stable political environment, opportunities, and then later to more pioneer- low sovereign risk rating, and substantial FDI ing selectivity in line with IFC's corporate strate- flows since 1993, IFC's mature projects (approved gic priorities. The strategies reflected successively FY90­FY99) have had development and invest- the evolution of the government's economic re- ment outcomes below the IFC averages. While the This Executive Summary has been extracted from the report of the International Finance Corporation's Op- erations Evaluation Group (OEG), "China: Country Impact Review," dated March 29, 2004. Consistent with the provisions of 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. 1 2 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E development outcome and investment outcome ation phases) yielding less than satisfactory "win-win" success rate matches the average of the project outcomes, including exit problems for Transition Countries, the proportion of "lose- IFC's equity investments, and has also limited lose" outcomes for the China projects is sub- IFC's use of quasi-equity instruments. stantially higher than for the Transition Countries · Restrictions on private investments in sectors and IFC as a whole. However, mature projects that have been most profitable for IFC world- within two of IFC's present strategic priorities, wide. Government policies restrict private sec- namely in the frontier regions of China and in the tor, particularly foreign, sponsorship of projects financial markets (excluding collective invest- in several major sectors in which IFC equity in- ment vehicles or CIVs)--together comprising 38 vestments generally performed above average percent of the 29 mature projects evaluated, in other developing countries during the 1990s. show a much higher proportion of "win-win" These restricted sectors included extractive in- outcomes compared with projects in the coastal dustries, infrastructure, and, until recently, petro- regions, and compared with all of IFC. The en- chemicals/chemicals and financial markets. vironmental performance of the China projects · High project-risk intensity. About 87 percent is better than the IFC average. of the 29 mature IFC projects in China ap- proved in FY90­FY99, feature three or four Profit Contribution. For the period FY90­FY03, the high-risk factors (out of four evaluated). These China loan and equity portfolio, excluding un- projects have had much lower development as realized capital gains, made a negative cumula- well as investment outcome success rates com- tive contribution to IFC's net income. Including pared with the projects (13 percent) with two the unrealized capital gains expected to be re- or fewer high-risk factors. alized in future fiscal years, the net profit con- · The rapid growth of IFC's commitments in tribution remained negative. an unfamiliar environment prevented expe- rience from informing IFC's appraisal of later Outcome Drivers. Four major factors mainly ac- projects. IFC increased its China project com- count for the poor project development out- mitments in an unfamiliar country environ- comes and portfolio profitability. ment much faster than IFC could acquire lessons from mature projects approved earlier. · Excess capacity and a challenging business cli- Its appraisal work quality for the mature China mate. Other than in the frontier regions, over- projects was therefore weaker than for projects capacity in many manufacturing industries, in countries with a much longer history of IFC particularly in the coastal regions, has resulted operations (that is, non-transition countries), from FDI exuberance, government-directed and was similar to the average for transition or induced investments (including FDI) and the countries that also had rapid portfolio growth "soft" budget constraints on expansion of state- with lagged experience accumulation. owned enterprises (SOEs) through their easy access to low-interest loans from government- Prospects for Recent Projects owned banks, rather than market-based re- The most recent IFC projects (approved in source allocation. The overcapacity has FY00­FY03) show better project screening, ap- depressed both profit margins and capacity praisal and structuring quality, and feature rela- utilization during the initial operating years of tively less layering of high-risk factors, compared many IFC real sector projects, putting devel- to the evaluated mature projects approved in opment outcomes and investment returns FY90­FY99. In addition, the new Chinese gov- below satisfactory return thresholds. In addi- ernment appears intent on more aggressively tion, the difficult business climate for private addressing the problems related to the SOEs companies has overwhelmed even some of and the banking sector that contribute to a dif- the high-quality sponsors with well-imple- ficult business climate for the private sector, and mented IFC projects (construction and oper- overall there are indications that manufacturing 1 2 2 A N N E X P : S U M M A RY: C H I N A -- I F C C O U N T RY I M PA C T R E V I E W capacity utilization is higher now than during the orous analysis and structuring of equity exit past few years. Nonetheless, the overall risk level mechanisms of the recent projects as a group is still high be- 3) Better management of project-level risks in cause: (a) SOEs are expected to continue their the appraisal and structuring of projects, par- dominant role in the financial and other "vital sec- ticularly in assessing the future supply-demand tors" for many more years, prolonging the "un- balance and the role of SOEs in the product level playing field" for private sector firms market or in the financial sector, as well as competing with such SOEs, and (b) the high closer supervision proportion, almost 50 percent, of equity invest- 4) Reflecting in IFC's loan terms and conditions, ments in the recent IFC commitments, will con- both the potential for higher income through tinue to face exit and value realization risks, contingent payments when projects do well particularly in the financial sector where IFC's eq- ("loan sweeteners" and/or equity acquisition uity commitments are concentrated. The out- features), as well as the possibility of lost in- comes of the recently approved projects may come from loan prepayments by successful therefore not be significantly better than those client companies receiving attractive refi- of the mature projects. nancing offers in a likely increasingly compet- itive banking system Going Forward 5) Continue as a high priority for IFC (and the WBG), the use of technical assistance (TA) and Apply Lessons of Experience and Stress Strategic Pri- advisory operations for project preparation ority and Quality over Quantity. China's transition and sector reforms to help accelerate the tran- challenges and prospects--in the context of sition process and improve the business cli- both new projects and the partial or full privati- mate, including removal of the regulatory zation of SOEs in the financial, energy, extractive barriers to the use of quasi-equity instruments industries, and infrastructure sectors--present and the timely remittance in foreign currency opportunities for IFC, but also pose high risks. of the full realized value of negotiated equity In addressing these opportunities, IFC should divestments by foreign investors. grow its investment operations, particularly eq- uity investments, within its strategic priorities, IFC management should satisfy itself that the and in pace with improvements in the business necessary incentives and procedures are in place climate and exit avenues. The essential opera- for project selectivity applying the above crite- tional considerations for achieving better results ria, portfolio oversight, and corporate monitor- from new IFC projects in China are: ing of adherence to IFC's strategic priorities as well as to project and investment instrument 1) Strategic selectivity at screening in favor of pri- selection guidelines. ority frontier provinces and sectors, and on the strength of IFC's role and value added Consider How to Address the Finding of Low Prof- 2) Also greater selectivity in project screening, itability of Large Middle-Income-Country Portfolios. instrument selection, and pricing from aware- The Board and IFC management should address ness of past results for projects featuring sim- the low net profitability levels of the combined ilar intensity of high-risk factors, and in the portfolios of middle-income countries with large use of equity investments, including more rig- economies, FDI flows, and IFC exposure. 1 2 3 ANNEX Q: REPORT FROM THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE) On March 29, 2004, the Committee for Devel- ment partnership between China and the Bank, opment Effectiveness (CODE) discussed China: and suggested that these lessons should be Country Assistance Evaluation (CAE), prepared transmitted to other clients, specifically middle- by the Operations Evaluation Department (OED). income countries (MICs). The challenges of de- veloping further a program in China with reduced Background IBRD and no IDA allocations was raised. Some The China CAE focuses on the period of members expressed a view that OED's evaluation FY93­02. The main findings of the evaluation are of the Bank's performance in China could well that the overall outcome of the Bank's assis- be rated higher than "satisfactory" for its ex- tance strategy was satisfactory, with China hold- ceptional contribution to assisting the country ing the best performing portfolio in the Bank in its overall poverty reduction achievements. Group. The Bank made significant contributions OED responded that the Bank has made some in all of its key objectives and played an impor- outstanding contributions, but that shortcomings tant role in poverty reduction, macro-manage- in the financial sector and lapses on safeguards ment, and systemic reform. The CAE found that precluded a highly satisfactory rating. the Bank has been less successful in supporting Among the specific issues raised by the Com- financial sector reforms, in persuading the gov- mittee were: ernment to forge the linkages between broader development policies and poverty and inequal- Fiscal Transfer and Income Inequality ity, and in environmental safeguard policy. The Committee members expressed the view that project repayment system has also constrained China's beneficiary repayment and fiscal trans- sector and regional allocation and the choice of fer system has both rewarding and challenging project components. The CAE found that the effects. It has served China well by strengthen- Bank has generally played a relevant role in ing client ownership, which led to the develop- China, specifically due to its long-term engage- ment of coastal provinces. However, this system ment and working with the client more through poses hindrances for poor inland provinces that dialogue and persuasion than conditionality, but may not have the ability to repay, consequently the Bank now needs to adapt its strategy to a re- constraining the impact of the Bank's interven- duced lending program. tions. Management responded that the Bank of- fered advice regarding beneficiary repayment, Conclusions and Next Steps recommending ways to avoid the distortion of The Committee welcomed the opportunity to incentives. They further emphasized that the discuss the document and praised the impact provincial expenditure review indicated that dif- that the World Bank Group had in support of ferentiation needs to be built into the repay- China's development during the past decade. ment system to reflect the "ability to pay" of the The Committee commended the quality of the region and the sector. Some members pointed report, and broadly supported the findings and out that income inequality across geographical recommendations. Members noted there were areas and sectors in China has grown and should many lessons to be learned from the develop- be addressed. Management explained that in- 1 2 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E equality in China can chiefly be attributed to applied to all investments. Some members felt, faster growth of urban areas (8 percent over the and the Management agreed, that for the dual- past 20 years) vs. rural areas (4 percent over the track approach to continue to work in China past 20 years). Management also stressed that (and also be applied elsewhere), careful bal- sustained rural growth can be considered suc- ancing is necessary between country ownership cessful by any standard and pointed out that and the Bank Group's mandate. poverty mapping was done on a regional basis, but agreed that inequality in terms of access to Deepening Reforms services needs to be addressed. It was further Some members observed that investment lend- noted that the lessons drawn from this CAE ing strategy pursued in China should be utilized should help the Bank and the country develop to support systemic reforms, private sector de- an appropriate strategy in this regard. velopment, and inequality reduction. The mem- bers pointed out that "deepening" reforms could Dual-Track Approach and Country Ownership be effectively married with investment opera- Some speakers observed that the CAE clearly tions, especially in infrastructure for poor areas. highlights the positive outcomes of the dual- The Management agreed with the observations track nature of the development partnership of the Committee and confirmed that China con- between the Bank and the country: a mix of in- tinues to have basic infrastructure lending needs vestment operations bolstered by long-term and that the Bank could help finance. continuous dialogue, persuasion, and demon- stration. The Management clarified that this sys- Quality of ESW tem is successful with clients who have both a Members broadly supported the finding of the clear idea of their development direction and suf- CAE that the Bank needs to improve its ESW, par- ficient implementation ability. Some Commit- ticularly by focusing on timely delivery and rel- tee members stressed the crucial importance of evant experiences, both Chinese and foreign. It safeguards for the Bank's fiduciary responsibil- was observed that China was one of the Bank's ity, but emphasized that they be built into coun- rare clients where the synergy between ESW try systems to reduce their cost of and investment operations was probably used in implementation. The Management explained a most productive manner. They noted the po- that China has formal safeguard standards sim- tential for high-quality and timely ESW on the ilar to those of the Bank and that these are being Bank Group's lending activities. Pietro Veglio, Acting Chairman 1 2 6 ANNEX R: REFERENCE TABLES Table R.1: China at a Glance Table R.2: Key Economic and Social Indicators--China and Comparisons, 1992­01 Table R.3a: China: Average Annual Net Receipts from All Donors for 1980­98 (US$m) Table R.3b: China: Net Receipts from All Donors for 1980­98 (US$m) Table R.4: List of Economic and Sector Work for China Table R.5a: Allocation of Investment Lending by Sector (%), 1993­02 Table R.5b: Project Rating by Sector and Exit Fiscal Year: China and Comparisons Table R.5c: Portfolio Status Indicators: China and Comparisons Table R.6: Costs of Bank Programs for China and Comparison Countries, FY91­01 Table R.7: China: The World Bank's Senior Management Table R.8: China: Poverty and Inequality Table R.9: Millennium Development Goals: China 1 2 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E T a b l e R . 1 C h i n a a t a G l a n c e East Asia Lower-middle- POVERTY and SOCIAL China and Pacific income 2002 Population, mid-year (millions) 1,281.0 1,838 2,411 Development diamond* GNI per capita (Atlas method, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1,219.1 1,740 3,352 Life expectancy Average annual growth, 1996­02 Population (%) 0.8 1.0 1.0 Labor force (%) 0.9 1.2 1.2 GNI Gross Most recent estimate (latest year available, 1996­02) per primary Poverty (% of population below capita enrollment national poverty 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 (% of children under 5) 10 15 11 Access to an improved water source Access to improved water source (% of population) 75 76 81 Illiteracy (% of population age 15+) 14 13 13 China Gross primary enrollment (% of school-age population) 106 106 111 Lower-middle-income group Male 105 105 111 Female 108 106 110 KEY ECONOMIC RATIOS and Economic ratios* LONG-TERM TRENDS 1982 1992 2001 2002 Trade GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7 Gross domestic investment/GDP 33.2 36.2 38.5 41.0 Exports of goods and services/GDP 8.9 19.5 25.5 29.5 Gross domestic savings/GDP 34.8 37.7 40.9 44.0 Gross national savings/GDP 35.1 38.0 40.0 43.8 Domestic Investment Current account balance/GDP 2.4 1.9 1.5 2.9 savings Interest payments/GDP 0.2 0.6 0.5 0.5 Total debt/GDP 3.8 15.9 14.6 12.6 Total debt service/exports 8.0 8.6 7.7 6.1 Present value of debt/GDP .. .. 14.1 .. Present value of debt/exports .. .. 51.8 .. Indebtedness 1982­92 1992­02 2001 2002 2002­06 China (average annual growth) GDP 9.7 9.0 7.5 8.0 7.5 Lower-middle-income group GDP per capita 8.1 8.0 6.7 7.2 6.6 Exports of goods and services 5.9 14.3 9.6 29.4 14.8 Growth of investment and GDP (%) STRUCTURE of the ECONOMY 1982 1992 2001 2002 20 15 (% of GDP) 10 Agriculture 33.3 21.8 15.8 14.5 5 Industry 45.0 43.9 50.1 51.7 0 Manufacturing 37.3 33.1 34.2 44.5 97 98 99 00 01 02 Services 21.7 34.3 34.1 33.7 GDI GDP 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 Growth of exports and imports (%) 40 1982­92 1992­02 2001 2002 (average annual growth) 30 Agriculture 4.6 3.7 2.8 2.9 20 Industry 11.6 11.3 8.4 9.9 10 Manufacturing 11.2 10.4 9.0 8.1 0 Services 11.7 8.4 8.4 7.3 ­10 97 98 99 00 01 02 Private consumption 11.4 8.1 2.8 1.9 Exports Imports 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 services 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. 1 2 8 A N N E X R : R E F E R E N C E TA B L E S PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices (% change) Inflation (%) Consumer prices 6.0 6.4 0.7 ­0.8 10 Implicit GDP deflator ­0.2 7.9 1.2 ­2.6 5 Government finance (% of GDP, includes current grants) 0 Current revenue 22.9 14.7 17.1 17.9 ­5 97 98 99 00 01 02 Current budget balance .. 2.0 1.1 0.0 Overall surplus/deficit ­0.3 ­1.0 ­4.7 ­3.0 GDP deflator CPI TRADE 1982 1992 2001 2002 (US$ millions) Total exports (fob) 22,321 84,940 266,155 325,565 Export and import levels (US$ mill.) Food 2,908 8,309 12,780 14,623 Fuel 5,314 4,693 8,420 8,372 400,000 Manufactures 12,271 67,936 239,802 297,085 300,000 Total imports (cif) 19,285 80,585 243,610 295,203 Food 4,201 3,146 4,980 5,237 200,000 Fuel and energy 183 3,570 17,495 19,285 Capital goods 3,204 31,312 107,040 137,030 100,000 0 Export price index (1995=100) 41 85 83 78 96 97 98 99 00 01 02 Import price index (1995=100) 71 95 91 86 Exports Imports Terms of trade (1995=100) 58 89 91 90 BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) 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 Current account balance to GDP (%) Resource balance 4,350 7,446 28,085 37,383 5 Net income 376 249 ­19,174 ­14,945 4 Net current transfers 486 1,155 8,492 12,984 3 Current account balance 5,212 8,850 17,401 35,422 2 Financing items (net) ­995 ­10,952 30,046 40,085 1 Changes in net reserves ­4,217 2,102 ­47,447 ­75,507 0 96 97 98 99 00 01 02 Memo: Reserves including gold (US$ millions) .. 24,842 220,051 297,721 Conversion rate (DEC, local/US$) 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Total debt outstanding and disbursed 8,358 72,428 170,110 155,678 IBRD 0 3,752 11,550 12,051 Composition of 2002 debt (US$ mill.) IDA 1 4,287 8,654 8,729 A: 12,051 Total debt service 2,125 8,618 24,297 22,688 B: 8,729 IBRD 0 460 1,550 1,631 G: 43,920 IDA 0 30 151 175 D: 6,987 Composition of net resource flows Official grants 47 327 240 .. E: 21,888 Official creditors 657 2,343 2,156 ­839 Private creditors ­122 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 1,865 782 563 Disbursements 1 1,131 1,791 1,733 A - IBRD E - Bilateral B - IDA D - Other multilateral F - Private 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 1 841 90 ­73 Note: This table was produced from the Development Economics central database. 1 2 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E K e y E c o n o m i c a n d S o c i a l I n d i c a t o r s -- T a b l e R . 2 C h i n a a n d C o m p a r i s o n s , 1 9 9 2 ­ 0 1 China Series name 1992 1993 1994 1995 1996 1997 GNI per capita, Atlas method (current US$) 390 410 450 520 620 710 GNI per capita, PPP (current international $) 1,810 2,060 2,340 2,650 2,900 3,110 GDP growth (annual %) 14.3 13.5 12.8 10.5 9.6 8.8 GDP per capita growth (annual %) 12.9 12.2 11.6 9.3 8.4 7.7 Agriculture, value added (% of GDP) 21.8 19.9 20.2 20.5 20.4 19.1 Services, etc., value added (% of GDP) 34.3 32.7 31.9 30.7 30.1 30.9 Industry, value added (% of GDP) 43.9 47.4 47.8 48.8 49.5 50.0 Manufacturing, value added (% of GDP) 33.1 34.5 34.4 34.7 34.7 34.6 Exports of goods and services (% of GDP) 19.5 17.1 25.3 24.0 21.0 23.1 Imports of goods and services (% of GDP) 18.0 18.6 23.4 21.7 18.9 18.3 Manufactures exports (% of merchandise exports) 78.7 80.6 82.3 84.0 84.4 85.4 Manufactures imports (% of merchandise imports) 80.4 84.0 83.9 78.5 79.1 77.1 Current account balance (% of GDP) 1.5 -2.7 1.3 0.2 0.9 4.1 Foreign direct investment, net inflows (% of GDP) 2.7 6.4 6.2 5.1 4.9 4.9 Total debt service (% of GNI) 2.1 2.4 2.1 2.2 2.0 2.1 Gross international reserves in months of imports 3.8 3.2 5.9 6.3 7.7 9.7 Current revenue, excluding grants (% of GDP) 4.2 3.0 6.4 5.7 5.5 5.8 Expenditure, total (% of GDP) 8.0 6.4 9.4 8.2 8.0 8.1 Overall budget balance, excluding capital grants (% of GDP) ­1.0 ­0.8 ­1.2 ­1.0 ­0.8 ­0.8 Inflation, consumer prices (annual %) 6.3 14.6 24.2 16.9 8.3 2.8 Life expectancy at birth, total (years) 69.0 .. .. 69.4 .. 69.7 Illiteracy rate, adult total (% of people ages 15 and above) 21.5 20.8 20.0 19.2 18.6 18.0 Immunization, DPT (% of children under 12 months) 94.0 95.0 93.0 92.0 95.0 96.0 Improved water source (% of population with access) 71* .. .. .. .. .. Improved sanitation facilities (% of population with access) 29* .. .. .. .. .. Mortality rate, under-5 (per 1,000 live births) 47* .. .. .. .. 43.0 School enrollment, primary (% gross) 119.0 116.9 116.8 117.5 119.8 123.0 School enrollment, secondary (% gross) 55.0 56.8 61.0 65.8 68.9 58.9 Population, total (million) 1,165 1,178 1,192 1,205 1,218 1,230 Population growth (annual %) 1.2 1.1 1.1 1.1 1.0 1.0 Urban population (% of total) 28.9 29.7 30.5 31.4 32.2 33.1 *1990 Data. Source: World Bank WDI & Central Database, data as of 12/10/02; and China Statistic Yearbook, 2001. 1 3 0 A N N E X R : R E F E R E N C E TA B L E S Average 1992­01 1998 1999 2000 2001 China Brazil India Indonesia EAP World 740 780 840 890 635 3658 398 815 741 4,976 3,300 3,580 3,920 4,260 2,993 6,669 1,971 2,731 3,028 6,514 7.8 7.1 7.9 7.3 10.0 2.7 5.9 3.9 7.5 2.6 6.7 6.1 7.2 6.5 8.9 1.3 4.0 2.2 6.2 1.2 18.6 17.6 15.9 15.0 18.9 8.2 28.2 17.4 17.9 5.5 32.1 32.9 33.2 32.9 32.2 57.3 45.0 39.8 37.3 61.4 49.3 49.4 50.9 52.2 48.9 34.6 26.9 42.8 44.8 33.1 33.7 33.6 34.5 35.4 34.3 23.5 16.4 24.5 30.7 21.8 21.9 22.0 25.9 25.6 22.5 9.5 11.4 33.3 33.8 21.6 17.3 19.1 23.2 24.7 20.3 10.4 14.1 29.1 31.4 21.2 87.3 88.3 88.2 .. 84.4 55.5 74.9 50.4 74.7 77.0 81.3 80.3 75.7 .. 80.0 69.8 52.2 70.3 78.7 74.7 3.3 2.1 1.9 1.7 1.4 -2.6 -1.1 0.0 .. .. 4.6 3.9 3.6 .. 4.7 2.3 0.5 0.6 3.8 1.7 2.0 2.1 2.0 .. 2.1 5.6 3.0 11.3 4.5 .. 9.9 9.1 7.4 8.8 7.2 6.6 5.5 4.1 6.1 4.6 6.3 7.2 .. .. 5.5 24.9 12.2 17.6 10.8 25.3 9.3 10.9 .. .. 8.5 30.3 15.5 17.1 12.7 28.3 ­1.2 ­2.1 ­2.8 .. ­1.3 ­6.9 ­5.6 0.0 .. .. ­0.8 ­1.4 0.3 .. 7.9 506.6 8.0 14.3 .. .. .. .. 70.3 .. 69.6 67.1 61.6 64.5 68.2 66.1 17.3 16.6 15.9 15.3 18.3 16.2 45.5 15.5 16.8 25.6 98.0 90.0 .. .. 94.1 79.1 62.0 69.1 88.3 74.3 .. .. 75.0 .. 75.0 87.0 88.0 76.0 74.4 80.5 .. .. 38.0 .. 38.0 77.0 31.0 66.0 47.1 56.2 .. 41.0 39.5 .. 41.2 44.0 96.9 59.6 47.3 78.8 107.4 106.4 .. .. 115.9 122.7 100.2 113.0 114.0 102.5 61.7 62.8 .. .. 61.4 56.6 48.9 49.8 59.2 62.8 1,242 1,254 1,262 1,272 1,222 162.7 955.8 198.9 1,739.0 5,777.2 0.9 0.8 0.9 0.8 1.0 1.4 1.8 1.6 1.2 1.4 33.9 34.9 35.8 36.7 32.7 79.0 26.9 37.2 33.5 45.5 1 3 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E C h i n a : A v e r a g e A n n u a l N e t R e c e i p t s f r o m T a b l e R . 3 a A l l D o n o r s f o r 1 9 8 0 ­ 9 8 ( U S $ m ) Donors 1981­90 1991­00 1991­95 1996­00 1998 1999 2000 IBRD 239.2 878.7 759.8 997.6 1,078.0 788.3 968.0 IDA 264.3 648.8 746.8 550.8 553.8 406.8 315.5 ADB 7.5 504.8 342.6 667.1 721.6 704.3 700.8 ADB Special Funds 0.9 7.8 15.6 .. .. .. .. JAPAN 1,392.9 2,146.0 3,566.7 725.4 968.9 ­1,889.9 ­2,295.8 EC + EU members 809.1 2,936.3 2,583.1 3,289.6 3,343.3 3,187.1 946.9 UNITED STATES 42.5 785.3 662.4 908.3 144.9 1,802.7 ­393.3 Total multilateral 650.6 2,198.1 2,002.3 2,393.9 2,571.7 2,072.9 2,119.6 Total bilateral 2,327.1 6,118.5 7,189.5 5,047.6 4,643.3 3,294.1 ­1,576.4 Other donors 17.0 298.7 372.7 224.7 529.2 143.8 210.8 Total of all donors 2,994.9 8,615.4 9,564.6 7,666.2 7,744.2 5,510.8 754.0 C h i n a : N e t R e c e i p t s f r o m A l l D o n o r s f o r T a b l e R . 3 b 1 9 8 0 ­ 9 8 ( U S $ m ) Donors 1981­90 1991­00 1991­95 1996­00 1998 1999 2000 IBRD 2,391.9 8,787.23 3,799.17 4,988.06 1,077.97 788.34 967.99 IDA 2,643.26 6,488.03 3,734.15 2,753.88 553.82 406.81 315.48 ADB 75.38 5,048.38 1,712.75 3,335.63 721.59 704.32 700.83 ADB Special Funds 9.02 77.99 77.99 0 .. .. .. JAPAN 13,929.3 21,460.44 17,833.39 3,627.05 968.93 ­1,889.94 ­2,295.75 EC + EU members 8,090.92 29,363.33 12,915.34 16,447.99 3,343.27 3,187.07 946.94 UNITED STATES 425 7,853.27 3,312 4,541.27 144.85 1,802.73 ­393.31 Total multilateral 6,505.84 21,981.12 10,011.54 11,969.58 2,571.66 2,072.88 2,119.55 Total bilateral 23,271.26 61,185.39 35,947.61 25,237.78 4,643.33 3,294.09 ­1,576.42 Other donors 170.38 2,987.24 1,863.65 1,123.59 529.24 143.84 210.84 Total of all donors 29,948.78 86,153.9 47,822.95 38,330.95 7,744.23 5,510.81 753.97 Source: OECD Beyond 2020 CD rom data, 2002. 1 3 2 A N N E X R : R E F E R E N C E TA B L E S L i s t o f E c o n o m i c a n d S e c t o r W o r k T a b l e R . 4 f o r C h i n a No. Document Title Date Report No. Document Type 1 China - Country assistance strategy Vol. 1 1/22/2003 25141 Country Assistance Strategy Document 2 China - Agenda for water sector strategy for North China - summary report 5/9/2002 22040 Sector Report 3 China - National development and sub-national finance : a review of provincial expenditures 4/9/2002 22951 Economic Report 4 Technology assessment of clean coal technologies for China, Vol. 2 5/31/2001 23488 ESMAP Paper 5 China - Overcoming rural poverty 10/18/2000 21105 Sector Report 6 Assessing markets for renewable energy in rural areas of Northwestern China 8/31/2000 21359 ESMAP Paper 7 China - Managing public expenditures for better results : country economic memorandum 4/25/2000 20342 Economic Report 8 Strategic goals for Chinese education in the 21st century 11/30/1999 18969 Sector Report 9 China - Improving the technical efficiency of decentralized power companies 9/30/1999 ESM222 ESMAP Paper 10 China - Rural China : transition and development 5/28/1999 19361 Sector Report 11 China - Weathering the storm and learning the lessons : country 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 14 China - Forward with one spirit: 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 16 China ` s management of enterprise assets : the state as a shareholder 6/5/1997 16265 Economic Report 17 China - Country Assistance Strategy 2/25/1997 16321 Country Assistance Strategy Document 18 China - Fruit and vegetable marketing performance 11/6/1996 15658 Sector Report 19 China - Container transport services and trade : framework for an efficient container transport system 10/10/1996 15303 Sector Report 20 China - Renewable energy for electric 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 23 China - Energy for rural development in China : an assessment based on a joint Chinese/ESMAP study in six counties 7/31/1996 ESM183 ESMAP Paper 24 China - Higher education reform 6/27/1996 15573 Sector Report 25 China - Reform of state-owned enterprises 6/21/1996 14924 Sector Report 26 China - The Chinese economy : fighting inflation, deepening reforms 5/31/1996 15626 World Bank Country Study 27 China and Vietnam - project evaluation by the ESMAP Technical Advisory Group (TAG) 3/24/1996 18671 ESMAP Paper 28 China - Social sector expenditure review 2/29/1996 17348 Sector Report (Table continues on the following page.) 1 3 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E L i s t o f E c o n o m i c a n d S e c t o r W o r k T a b l e R . 4 f o r C h i n a ( c o n t i n u e d ) No. Document Title Date Report No. Document Type 29 China - The emerging capital market 11/3/1995 14501 Sector Report 30 China - Public investment and finance 10/18/1995 14540 Economic Report 31 China - Country assistance strategy 5/4/1995 14454 Country Assistance Strategy Document 32 China - Investment strategies for China ` s coal and electricity delivery system 3/8/1995 12687 Sector Report 33 China - Strategies for road freight development 2/17/1995 12600 Sector Report 34 China - Energy efficiency and pollution control in township and village enterprises (TVE) industry 12/31/1994 ESM168 ESMAP Paper 35 China - Internal market development and regulation 12/31/1994 13664 World Bank Country Study 36 China - Urban environmental service management 12/31/1994 13073 Sector Report 37 China - GNP per capita 12/15/1994 13580 Economic Report 38 China - Country economic memorandum : macroeconomic stability in a decentralized economy 10/26/1994 13399 Economic Report 39 China - Power sector reform : toward competition and improved performance 9/15/1994 12929 Sector Report 40 China - Agro-industrial crop marketing 6/17/1994 12974 Sector Report 41 China - Environmental action plan of China 1991-2000 3/31/1994 E37 Environmental Action Plan 42 China - Internal market development and regulation 3/17/1994 12291 Sector Report 43 China - Foreign trade reform 2/28/1994 12914 World Bank Country Study 44 China - Highway development and management : issues, options, and strategies 2/24/1994 11819 Sector Report 45 China - Industrial organization and efficiency case study : the automotive sector 12/31/1993 12134 Sector Report 46 China - Southeast coastal region : strategic issues in ports and shipping development 12/10/1993 11771 Sector Report 47 China - New skills for economic development : the employment and training implications of enterprise reform 11/24/1993 11785 Sector Report 48 China - Budgetary policy and intergovernmental fiscal relations 7/28/1993 11094 Sector Report 49 China - Strategic options for power sector reform : summary, speeches, and documents from a Workshop, Beijing July 8 - 10, 1993 7/10/1993 ESM156 ESMAP Paper 50 China - Updating economic memorandum : managing rapid growth 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 11641 Sector Report 55 China - The achievement and challenge of price reform 3/31/1993 11772 World Bank Country Study 1 3 4 A N N E X R : R E F E R E N C E TA B L E S No. Document Title Date Report No. Document Type 56 China - Railway strategy 2/25/1993 10592 Sector Report 57 China - Energy conservation study 2/4/1993 10813 Sector Report 58 Industrial restructuring : a tale of three Chinese cities 12/15/1992 10479 Sector Report 59 China - Long-term issues and options in the health transition 10/31/1992 11269 World Bank Country Study 60 China - Strategies for reducing poverty in the 1990s 10/31/1992 11245 World Bank Country Study 61 China - Urban land management : options for an emerging market 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 64 China - Strategies for reducing poverty in the 1990s 6/29/1992 10409 Sector Report 65 China - Country economic memorandum : reform and the role of the 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 68 China - Telecommunications sector study : survey, assessment and strategy recommendations 2/14/1992 9413 Sector Report 69 China - Implementation options for urban housing reform 1/31/1992 10315 World Bank Country Study 70 China - Options for reform in the grain sector 7/31/1991 9804 World Bank Country Study 71 China - Provincial education planning and finance sector study 6/26/1991 8657 Sector Report 72 China - Urban housing reform : issues and implementation options 6/26/1991 9222 Sector Report 73 China - Economic development in Jiangsu Province 6/25/1991 9354 Economic Report 74 China - Managing an agricultural transformation : grain sector review 4/9/1991 8652 Sector Report 75 China - Efficiency and environmental impact of coal use 3/20/1991 8915 Sector Report 76 China - Financial sector review : financial policies and World Bank Country institutional development 12/31/1990 PUB8415 Study 77 China - Revenue mobilization and tax policy 6/30/1990 PUB7605 World Bank Country Study 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 81 China - Country economic memorandum : between plan and market 5/8/1990 8440 Economic Report 82 China - Fuelwood development and conservation project Hunan province 12/31/1989 ESM105 ESMAP Paper 83 China - Revenue mobilization and tax policy 6/15/1989 7605 Sector Report 84 China - Macroeconomic stability and industrial growth under decentralized socialism 6/12/1989 7483 Economic Report (Table continues on the following page.) 1 3 5 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E L i s t o f E c o n o m i c a n d S e c t o r W o r k T a b l e R . 4 f o r C h i n a ( c o n t i n u e d ) No. Document Title Date Report No. Document Type 85 County - level rural energy assessments : a joint study of ESMAP and Chinese experts 5/31/1989 ESM101 ESMAP Paper 86 China - Rural industry : overview, issues, and prospects 3/1/1989 7267 Sector Report 87 China - External trade and capital reform issues and options 9/30/1988 PUB6680 World Bank Country Study 88 China - Finance and investment 9/30/1988 PUB6445 World Bank Country Study 89 China - Growth and development in Gansu province 9/30/1988 PUB6064 World Bank Country 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 98 China - Issues and prospects in education 5/31/1986 18954 World Bank Country Study 99 China - Management and finance of higher education 5/31/1986 5912 Sector Report 100 China - Long-term issues and options 5/31/1985 5206 Economic Report 101 China - The health sector 4/30/1984 4664 Sector Report 102 China - Socialist economic development 8/31/1983 PUB3391 World Bank Country Study 103 China - Recent economic trends and policy developments 3/31/1983 4072 Economic Report 104 China - Shanghai sector memorandum 12/15/1982 4227 Sector Report 105 China - Rural finance : a sector study 8/31/1982 3864 Sector Report 106 China - Socialist economic development 3/2/1982 3391 Economic Report Source: Imagebank, data as of 11/10/02. 1 3 6 A N N E X R : R E F E R E N C E TA B L E S A l l o c a t i o n o f I n v e s t m e n t L e n d i n g b y T a b l e R . 5 a S e c t o r ( % ) , 1 9 9 3 ­ 0 2 China Brazil India Indonesia Other EAP Bankwide Economic policy 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 1.0 4.0 4.6 3.1 3.8 Global information/communications technology 1.1 0.0 0.4 4.7 3.2 1.0 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 11.4 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 17.2 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 1.0 4.5 6.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Total investment lending (million US$) 22,762.8 8,126.58 17,467.9 7,654.287 18,307.5 146,791.4 Source: World Bank data as of 12/16/02. 1 3 7 138 CHINA: P r o j e c t R a t i n g b y S e c t o r a n d E x i t F Y : C h i n a T a b l e R . 5 b a n d C o m p a r i s o n s AN Institutional development Outcome, % satisfactory Sustainability, % likely impact , % substantial EV Number of Total net By By By net ALUA Sector Board projects comm. ($m) By number net comm. By number net comm. By number comm. Education 1998­02 TION Brazil 6 818.0 50 49 67 68 17 12 China 5 558.2 100 100 100 100 100 100 OF India 5 812.0 100 100 100 100 80 85 WORLD Indonesia 7 364.0 100 100 14 13 29 24 EAP 23 1,550.0 96 99 57 72 61 73 Bankwide 120 7,323.0 82 85 64 72 41 45 BANK Education 1993­97 Brazil 1 140.0 100 100 0 0 100 100 ASSIST China 5 489.6 100 100 80 88 60 61 India 0 ANCE Indonesia 7 637.0 86 92 86 92 71 68 EAP 22 1,753.0 91 87 86 84 68 69 Bankwide 98 4,592.0 74 76 50 56 31 39 Energy and mining 1998­02 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 Indonesia 7 1,040.0 43 46 0 0 43 35 EAP 30 3,479.0 69 68 57 54 45 52 Bankwide 131 13,818.0 68 68 59 61 46 50 Energy and mining 1993­97 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 Indonesia 7 1,275.0 71 91 86 93 29 29 EAP 40 5,002.0 85 82 80 81 50 50 Bankwide 206 20,200.0 62 70 53 64 32 36 Environment 1998­02 Brazil 3 181.0 67 80 100 100 67 80 China 3 564.7 67 57 100 100 33 36 India 4 351.0 75 60 50 36 50 36 Indonesia 2 61.0 50 76 50 76 0 0 EAP 5 625.0 60 59 80 98 20 33 Bankwide 41 1,819.0 78 70 77 79 54 40 Environment 1993­97 Brazil 3 156.0 100 100 67 72 33 40 China 2 0.0 100 100 100 100 0 0 India 0 Indonesia 0 EAP 2 49.0 50 61 50 61 0 0 Bankwide 9 275.0 56 74 44 58 22 29 Financial sector 1998­02 Brazil 0 China 1 114.2 0 0 0 0 0 0 India 2 557.0 50 31 100 100 50 31 Indonesia 3 256.0 0 0 0 0 0 0 EAP 12 6,331.0 50 92 50 92 18 23 Bankwide 70 11,920.0 71 90 70 87 46 50 Financial sector 1993­97 Brazil 1 184.0 0 0 0 0 0 0 China 2 300.6 100 100 100 100 0 0 ANNEX India 2 266.0 50 30 50 30 50 30 Indonesia 4 609.0 75 61 75 61 50 37 EAP 12 1,465.0 55 71 55 71 25 36 R: Bankwide 63 8,876.0 56 58 44 53 37 47 REFERENCE Global information 1998­02 & communication Brazil 0 technology China 1 208.2 100 100 100 100 0 0 India 0 T Indonesia 1 288.0 100 100 100 100 100 100 ABLES 139 EAP 4 536.0 100 100 100 100 50 59 Bankwide 15 1,082.0 100 100 100 100 73 74 (Table continues on the following page.) 140 CHINA: P r o j e c t R a t i n g b y S e c t o r a n d E x i t F Y : C h i n a a n d T a b l e R . 5 b C o m p a r i s o n s ( c o n t i n u e d ) AN Institutional development EV Outcome, % satisfactory Sustainability, % likely impact , % substantial Number of Total net By By By net ALUA Sector Board projects comm. ($m) By number net comm. By number net comm. By number comm. Health, nutrition & 1993­97 TION population Brazil 3 214.0 100 100 100 100 67 72 China 1 93.8 0 0 0 0 100 100 OF India 4 412.0 100 100 75 88 25 12 WORLD 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 BANK Health, nutrition & 1998­02 population Brazil 2 376.0 100 100 100 100 50 42 ASSIST China 4 288.7 75 64 100 100 75 62 India 6 459.0 83 82 83 85 33 34 ANCE Indonesia 4 127.0 50 95 50 95 25 57 EAP 11 562.0 64 74 60 76 36 45 Bankwide 87 4,207.0 65 75 58 69 33 39 Public sector 1998­02 governance Brazil 3 810.0 100 100 67 87 67 87 China 1 82.6 0 0 0 0 0 0 India 2 400.0 100 100 100 100 50 38 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 Public sector 1993­97 governance Brazil 1 24.0 0 0 0 0 0 0 China 1 20.0 100 100 100 100 100 100 India 0 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 Transport 1998­02 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 Indonesia 5 468 100 100 100 100 100 100 EAP 28 3,881.0 100 100 93 98 82 90 Bankwide 121 10,516.0 91 92 77 84 72 76 Transport 1993­97 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 Indonesia 7 1,018.0 100 100 43 57 29 40 EAP 37 3,618.0 92 95 76 80 30 31 Bankwide 135 9,956.0 72 82 51 52 31 32 Rural sector 1993­97 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 Indonesia 15 999.0 73 67 40 29 33 18 EAP 42 3,161.0 74 81 55 60 38 29 Bankwide 296 15,606.0 66 74 39 48 33 36 Rural sector 1998­02 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 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 52 Water supply & 1998­02 sanitation Brazil 2 383.0 100 100 100 100 50 36 ANNEX China 2 195.7 50 57 50 57 50 57 India 3 271.0 67 64 33 34 67 64 R: Indonesia 3 317.0 100 100 33 14 33 14 REFERENCE EAP 8 650.0 88 87 50 38 50 39 Bankwide 60 3,815.0 59 58 42 36 31 24 Water supply & 1993­97 sanitation Brazil 2 360.0 100 100 50 22 50 22 China 1 75.9 100 100 100 100 0 0 T ABLES 141 India 4 318.0 75 60 75 91 75 60 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 Source: OED data as of 11/08/02. C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E P o r t f o l i o S t a t u s I n d i c a t o r s : C h i n a a n d T a b l e R . 5 c C o m p a r i s o n s Number Net commit- Projects at Commitment Projects at Commitment Country of projects ment amount risk (%) at risk (%) risk (%) at 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: World Bank data as of 11/08/2002. C o s t s o f B a n k P r o g r a m s f o r C h i n a a n d T a b l e R . 6 C o m p a r i s o n C o u n t r i e s , F Y 9 1 ­ 0 1 Regions/countries Total costs, $m Lending costs, $m Supervision costs, $m ESW costs, $m Bank 3,478.1 1,243.0 1,150.8 1,084.2 EAP 523.6 205.1 172.7 145.9 China 154.0 69.4 59.4 25.2 Brazil 82.9 28.5 38.4 15.9 India 166.0 68.5 65.8 31.7 Indonesia 116.8 44.6 47.2 25.0 Cost Structure by Percentage Bank 100 36 33 31 EAP 100 39 33 28 China 100 45 39 16 Brazil 100 34 46 19 India 100 41 40 19 Indonesia 100 38 40 21 Efficiency Table Average Average Average costs per Number of Gross costs costs $1,000 of gross projects Gross commit. of per approved per $1,000 commitment Average Regions/ Total costs, approved commitment, sat. & nonrisky project, of gross of sat. & non- project countries $m in FY91­01 $m projects, $m $1,000 commitment risky projects size, $m Bank 3,478 2,671 242,060 208,551 1,302 14.4 16.7 91 EAP 524 448 62,095 56,042 1,169 8.4 9.3 139 China 69 151 26,306 24,217 1,020 2.6 2.9 174 Brazil 29 82 12,398 10,733 1,011 2.3 2.7 151 India 69 112 21,071 19,182 1,482 3.3 3.6 188 Indonesia 45 102 12,977 10,999 1,146 3.4 4.0591 127 Note: Total costs include lending completion, supervision, and ESW costs/ Lending, supervision, and ESW costs are actual costs covering all projects in FY91­01. Source: World Bank data as of August, 2001. 1 4 2 A N N E X R : R E F E R E N C E TA B L E S C h i n a : T h e W o r l d B a n k ' s S e n i o r T a b l e R . 7 M a n a g e m e n t Year Vice President Country Director Chief/Resident Representative 1990 Attila Karaosmanoglu Shahid Javed Burki Edwin R. Lim 1991 Attila Karaosmanoglu Shahid Javed Burki Attila Sonmez 1992 Gautam S. Kaji Shahid Javed Burki Attila Sonmez 1993 Gautam S. Kaji Shahid Javed Burki Pieter P. Bottelier 1994 Gautam S. Kaji Nicholas Hope Pieter P. Bottelier 1995 Russell J. Cheetham Nicholas Hope Pieter P. Bottelier 1996 Russell J. Cheetham Nicholas Hope Pieter P. Bottelier 1997 J. Khalilzadeh-Shirazi (Acting) Nicholas Hope Pieter P. Bottelier 1998 Jean-Michel Severino Yukon Huang 1999 Jean-Michel Severino Yukon Huang 1999 Jemal-ud-din Kassum Yukon Huang 2000 Jemal-ud-din Kassum Yukon Huang 2001 Jemal-ud-din Kassum Yukon Huang 2002 Jemal-ud-din Kassum Yukon Huang Source: The World Bank Telephone Directories, 1990­02. T a b l e R . 8 C h i n a : P o v e r t y a n d I n e q u a l i t y 1978 1980 1985 1990 1993 1996 1998 1999 2000 2001 Official estimate Total headcount 250 97 86 76 59 43 2.9 National (%) 26 9.2 7.5 6.4 4.8 3.4 2.3 Rural (%) 11.9 9.5 8.2 6.3 4.6 Urban (%) 0.4 0.4 0.3 0.3 0.3 PPP ($) 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 (%) 1.0 0.4 1.0 0.5 0.5 Inequality Gini coeff. 28.8a 33.5 40.3 41.6 Urban/rural 2.9 2.7 1.9 2.2 2.7b 2.7 Urban/rural (real) 3.4 2.2 2.3 2.8b 2.7 a. 1981. b. 1995. Source: World Development Indicators and China Statistical Yearbook. 1 4 3 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E T a b l e R . 9 M i l l e n n i u m D e v e l o p m e n t G o a l s : C h i n a China Country Profile 1990 1995 1999 2000 1 Eradicate extreme poverty and hunger 2015 target = halve 1990 $1 a day poverty and malnutrition rates Population below $1 a day (%) .. .. 18.8 .. Poverty gap at $1 a day (%) .. .. 4.4 .. Percentage share of income or consumption held by poorest 20% .. .. 5.9 .. Prevalence of child malnutrition (% of children under 5) 17.4 12.9 9 10 Population below minimum level of dietary energy consumption (%) 16 .. 9 .. 2 Achieve universal primary education 2015 target = net enrollment to 100 Net primary enrollment ratio (% of relevant age group) 97.4 97.9 93.2 .. Percentage of cohort reaching grade 5 (%) 86 93.8 97.3 .. Youth literacy rate (% ages 15­24) 94.7 96.5 97.6 97.8 3 Promote gender equality 2005 target = education ratio to 100 Ratio of girls to boys in primary and secondary education (%) 81.1 87.3 88.6 .. Ratio of young literate females to males (% ages 15­24) 94.3 96.1 97.1 97.3 Share of women employed in the nonagricultural sector (%) .. .. .. .. Proportion of seats held by women in national parliament (%) 21.3 .. 65.0 .. 4 Reduce child mortality 2015 target = reduce 1990 under 5 mortality by two-thirds Under 5 mortality rate (per 1,000) 47 43 41 39.5 Infant mortality rate (per 1,000 live births) 38 36.2 33 32 Immunization, measles (% of children under 12 months) 98 93 90 .. Note: In some cases the data are for earlier or later years than those stated. Goal 1 targets: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Halve, between 1990 and 2015, the proportion of people who suffer from hunger. Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling. Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015. Goal 4 target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. Goal 5 target: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio. Goal 6 targets: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases. Goal 7 targets: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers. Goal 8 targets: Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system. Address the special needs of the least developed countries. Address the Special Needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international meas- ures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooper- ation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications. Source: World Development Indicators database, April 2002. 1 4 4 A N N E X R : R E F E R E N C E TA B L E S China Country Profile 1990 1995 1999 2000 5 Improve maternal health 2015 target = reduce 1990 maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. 60 .. .. Births attended by skilled health staff (% of total) .. 85 .. .. 6 Combat HIV/AIDS, malaria and other diseases 2015 target = halt, and begin to reverse, AIDS, etc. Prevalence of HIV, female (% ages 15­24) .. .. 0 .. Contraceptive prevalence rate (% of women ages 15­49) 84.6 90.4 83 .. Number of children orphaned by HIV/AIDS .. .. 4,500.00 .. Incidence of tuberculosis (per 100,000 people) .. .. 103 .. Tuberculosis cases detected under DOTS (%) .. .. 32 .. 7 Ensure environmental sustainability 2015 target = various (see notes) Forest area (% of total land area) 15.6 .. .. 17.5 Nationally protected areas (% of total land area) .. 6.4 6.4 .. GDP per unit of energy use (PPP $ per kg oil equivalent) 1.8 3 4.2 .. CO2 emissions (metric tons per capita) 2.1 2.6 2.5 .. Access to an improved water source (% of population) 71 .. .. 75 Access to improved sanitation (% of population) 29 .. .. 38 Access to secure tenure (% of population) .. .. .. .. 8 Develop a Global Partnership for Development 2015 target = various (see notes) Youth unemployment rate (% of total labor force ages 15-24) .. 2.9 3.1 3.1 Fixed line and mobile telephones (per 1,000 people) 5.9 35.9 120 177.6 Personal computers (per 1,000 people) 0.4 2.3 12.2 15.9 General indicators Population (billion) 1.1 1.2 1.3 1.3 Gross national income ($) 368.1 billion 622.7 billion 978.1 billion 1.1 trillion GNI per capita ($) 320 520 780 840 Adult literacy rate (% of people ages 15 and over) 76.9 80.8 83.4 84.1 Total fertility rate (births per woman) 2.1 1.9 .. 1.9 Life expectancy at birth (years) 68.9 69.4 .. 70.3 Aid (% of GNI) 0.6 0.5 0.2 0.2 External debt (% of GNI) 15.6 17.2 15.8 14.1 Investment (% of GDP) 34.7 40.8 37.2 37.3 Trade (% of GDP) 31.9 45.7 41.2 49.1 1 4 5 ENDNOTES Chapter 1 were approved in FY90. On January 29, 1991, IBRD 1. See World Bank (1997a) for a lower bound es- lending resumed and total lending during FY91 was timate. $1,579.3 million. 2. Still, the decollectivization of agriculture after 3. Kapur, Lewis, and Webb (1997), pp. 24 and 25, 1979 was quite radical--and arguably the most far- respectively. Jacobson and Oksenberg (1990) also reaching and beneficial reform in the developing rate this period as a big success, but note that the Bank world in the past quarter century--but China's over- was not the source of reform, only a facilitator (p. 140). all approach to reform has been gradualist. Sachs and They also list a number of challenges and trouble Woo (1997) have argued that China had the luxury of spots, including long project-processing times by the being able to choose a gradual reform path because, Bank, access to data, the level of IDA, and various is- unlike most other transition economies, it had a large sues regarding the pace and extent of reform (pp. agricultural sector. 152­54). 3. See the background paper by Khan (2002). See 4. The Bank's first formal assistance strategy state- also Khan and Riskin (2001) and Kanbur and Zhang ment in 1991 stated, "Since China's change in repre- (2001). The Gini Index rose from 28.8 in 1981 (Chen sentation in 1980, the fundamental objective of the and Wang 2001) to 40.3 in 1998. By this widely used Bank's lending activities, economic and sector work measure of inequality, China has gone from one of the and associated technical assistance has been to pro- most equal income distributions to a distribution vide analytical and material support to China's eco- more unequal than average. Figures for comparator nomic reform and modernization process." The report countries at the end of the 1990s (from World De- goes on to list six elements of the CAS, four of which velopment Indicators 2002) were Brazil (60.7), India highlighted reform as the key component. (37.8), and Indonesia (31.7). 5. This book provides a useful historical perspec- 4. Based on WHO's list of most polluted cities in tive on the limited impact outsiders have typically terms of air quality. Cited in OECD (2002), p. 589. had in China. 5. For an expression of concern by Chinese schol- 6. Lending for infrastructure was about half of ars, see Wang, Angang, and Yanzhu (2002). lending to China during both FY83­92 and FY93­02. The Bankwide average share of infrastructure in in- Chapter 2 vestment lending fell from 46 percent to 35 percent 1. World Bank (1982), China: Socialist Economic in the respective periods; as a share of total lending Development (3 volumes). The Bank worked with Bankwide, infrastructure lending fell from 39 percent Chinese counterpart teams, which included Zhu to 25 percent. Rongji, then head of the State Economic Commis- 7. For comments by the Bank's Regional staff on sion. this and other issues, see Annex N. 2. In FY88, lending to China was $1,693.6 million, 8. Transfer of foreign exchange resources has been and through May 30, 1989, total Bank lending to even less an objective. At the end of 2001, total reserves China was $1,348.4 million (of which 38 percent was minus gold were more than $215 billion--equivalent IDA over the two years). No projects were taken to to 70 years of World Bank lending at the highest an- the Board between May 30, 1989, and February 27, nual rate achieved in the mid-1990s. 1990. Five projects totaling $590 million (all IDA) 9. See Annex N. 1 4 7 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Chapter 3 11. See the background paper by Lu (2002). 1. The link made by the Bank between macro- 12. The return on assets of SOEs was estimated at management and system reform is well illustrated by 6 percent in 1996, compared with 8.4 percent for col- the title of the 1996 Country Economic Memoran- lectives and 9.9 percent for joint ventures. Part of the dum (CEM), The Chinese Economy: Fighting Inflation, poor financial return may reflect ongoing social obli- Deepening Reform (World Bank 1996a). gations. 2. See Harrold, Hwa, and Jiwei (1993), Lu (2002), 13. See Annex N. and discussion below. 14. The Bank's study of pension reform world- 3. Although the Bank supported an expansionary wide (World Bank 1994a) and the follow-up report on fiscal policy in the aftermath of the Asian crisis, it China (World Bank 1996c) helped persuade China to stressed in numerous reports and policy notes that follow a "three-pillar model," which includes a manda- such a policy was risky if it was not a temporary meas- tory pay-as-you-go defined-benefit component, a ure. See Annex N. mandatory defined-contribution component, and a 4. This uses the IMF definition, which differs from voluntary defined-contribution component. The work- the official definition in that losses of SOEs are clas- shop was the "China Development Forum on Social sified as expenditures, rather than negative revenues. Security Reform," sponsored by the Development Re- 5. Calculated from World Bank (2002a), Table 2.6. In search Center of the State Council in 2000. 1998, Shanghai's per capita government expenditures 15. For an overview of the issues and the Bank's were 19 times those of Hebei Province in 1998 (Table advice, see Tenev and Zhang (2002). Nolan (2002) 2.5). Per student recurrent expenditure on compulsory also criticized the Bank for failing to support the gov- primary education was more than 10 times higher in ernment's strategy of creating globally competitive en- the top-spending province than in the bottom-spend- terprise groups. It is unclear that the Bank either ing province (Table 6.6). The central government trans- would be effective or should be involved in pursuing fers a large portion of its revenue to the provinces but, this objective. because most transfers are tax rebates based on source, 16. The ambitious Shenyang Industrial Reform the transfers are not equalizing. Project supported technology upgrading and reor- 6. Extrabudgetary funds (EBFs) may account for as ganization of the Shenyang Machine Tool Company, much as 20 percent of GDP (World Bank 2002), so the including a component supporting severance pay- overall tax "take" may not have declined. This gives the ments for redundant workers. The technology up- worst of both worlds: high tax burdens combined grading appears to have been successful, but the with the inefficiency, inequity, and lack of transparency reform impact has been minimal. The severance pay- of EBFs. ment component was superseded by a municipal 7. See Annex N. scheme, and continuing disputes over the company's 8. Qian (2002) provides a good review of China's debt repayment obligations to the municipality sug- approach to reform and the reasons it has been largely gest a failure to replace the prevailing bargaining cul- successful thus far. For a review of the early reform pe- ture of SOEs with a binding hard budget constraint. riod and the debate over gradual vs. "big bang" reform, 17. See Annex N. see Tidrick (1994). 18. Other ESW included a review of capital market 9. This does not mean that price reform is com- development (World Bank 1995a), but this did not alter plete, but relative prices are not significantly out of line the Bank's approach to banking sector development. with those in other countries. Utility prices are still 19. The issues include bank supervision, deposit mainly regulated, but cost-based. See also the next sec- insurance, interest rate liberalization, and state com- tion on progress in agriculture. mercial bank reform. 10. China, National Bureau of Statistics (2001) and ear- 20. See Annex N. lier years. Although the Chinese term (guoyou konggu 21. See Annex N. qiye) is often translated as "state-holding enterprises," 22. Decollectivization and a gradual move to higher, the term "state-controlled shareholding companies" market-determined prices increased incentives; par- would be more accurate. Comparisons are approximate tial abandonment of the goal of grain self-sufficiency because of changes in definitions over time. at the local level and relaxation of constraints on rural 1 4 8 E N D N O T E S marketing helped reverse distorted cropping pat- 31. Many people inside and outside China (for ex- terns; and industrial planning and marketing reforms ample, Brown 1995) still view self-sufficiency in grain permitted the rapid expansion of rural township and production as an important economic objective. As the village enterprises (TVEs), which generated about 65 background paper on agriculture (Findlay 2003, cit- million jobs in the first decade of reforms. ing Feng Lu 1996) notes, however, "The answer to the 23. However, recent unpublished research by A.R. question of `who will feed China' is that China will feed Khan indicates that there may have been a reversal in itself through trade." the trend of inequality during the past two or three 32. DECRG has sponsored some useful analytical years. work on WTO accession, culminating in an interna- 24. See the background paper by Khan (2002). tional "Seminar on WTO Accession, Policy Reform, and 25. Jalan and Ravallion (1998) estimated that living Poverty Reduction in China" in June 2002. in a designated poor county raised consumption by 33. The Bank supported four rural credit projects; 1.1 percent per year during the period 1985­90. Park, the last one was approved in 1990 and closed in 1996. Wang, and Wu (2002) estimated the effect on rural in- These ceased because of a growing realization that no come growth in designated counties at 2.28 percent progress was being made in developing an inde- during the period 1985­92 and 0.91 percent during pendent and sustainable rural financial system. Al- 1992­95; the rates of return on poverty investments though subproject rates of return were high, the were 15.5 percent and 11.6 percent, respectively, for portfolio of the Agricultural Bank of China remained the two periods. poor, suggesting that banks did not use credit analy- 26. In 1995, an average rural household paid net sis for general lending, but to select subprojects for taxes of 0.5 percent of income, while the average the Bank to finance. urban household received a net subsidy of 11 percent. 34. The CAE could not cover all sectors. Health Net tax per capita of extremely poor rural households rather than education was selected for review be- in 1995 was 36 times higher than that of nonpoor cause the Bank's education lending has declined in the households. In urban areas, transfers accounted for 1990s and has been less poverty-oriented. 5.4 percent of the income of poor households, com- 35. See background paper by Ooi (2002). pared with 11.1 percent for the nonpoor. If the dis- 36. Of the six completed projects, three have been tribution of net urban subsidies in 1995 had been rated highly satisfactory, and one each satisfactory, merely equal, the increase in the urban Gini coefficient marginally satisfactory, and marginally unsatisfactory. between 1988 and 1995 would have been half of what 37. Water supply and sanitation projects accounted it actually was. See Khan (2002) and Khan and Riskin for an additional 8.6 percent of lending. These are con- (2001). sidered in the next section. 27. "International Conference on China's Poverty 38. As in other sectors, there were many criticisms Reduction Strategies in the Early 21st Century" in of the (increasing) cost of doing business with the May 2000, cosponsored by the government, the World Bank, especially from the Ministry of Railways, but Bank, UNDP, and the Asian Development Bank. there was nearly unanimous appreciation for the 28. See Jalan and Ravallion (1998), Chen and Wang Bank's role in bringing new technology and manage- (2001), and Ravallion and Chen (1998). ment concepts. 29. Projects are classified as "poverty-targeted in- 39. Water production and the length of the water terventions" if they have a specific mechanism for network also grew by more than 50 percent during the targeting the poor or the proportion of poor among decade. The Bank's role in the water sector is covered the beneficiaries is significantly higher than the pro- in the section on the environment. portion of poor in the total population. This is an as- 40. See Findlay (2003) for evidence of increasing sessment made at the time of Board approval. The integration of grain markets. figures for China are for 1990­01, and those for India 41. As argued later, however, the use of toll roads are for 1994­99. See Annex F for further discussion of has been overdone and is largely inappropriate for the PTI projects. low-density traffic outside the coastal regions. Still, it 30. See Annex R, table R.4, for a list of ESW prod- was a clever piece of financial engineering, which ucts. helped overcome a financing constraint at the time. 1 4 9 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E Moreover, Bank participation and subsequent secu- environmental protection bureaus. SEPA has ministry ritization helped attract private sector finance by elim- status, but it is not a cabinet ministry (that is, it is still inating the risk of construction delay, which is a major not involved in some important government deci- impediment to private investment in such projects. In sionmaking processes). the longer term, even when toll roads are appropri- 47. A previous Bank report, Clear Water, Blue Skies ate, it will be important for the government to com- (1997b), was technically more sophisticated, but has pare the cost of finance through private investment been criticized in China for being too much a Bank with the cost of long-term government borrowing. product. Air, Land, and Water was criticized within the 42. In coal, this was because of Chinese reluc- Bank (by QAG) as insufficiently cutting-edge techni- tance. In gas, the Bank has been reluctant to become cally, but it seems to have had more impact in China. involved for fear of crowding out the private sector, 48. "Agenda for Strategy for North China" is avail- but given the risks associated with lack of a regulatory able on the Beijing Web site and at www.world infrastructure and explicit public support, a large bank.org.cn Bank or IFC presence might actually help bring in 49. The study noted that "sooner, rather than later, private sector involvement. Yellow River planners will have to squarely face equity 43. See Annex N for Regional comments on this and vs. efficiency issues. Policymakers seem to be operating other infrastructure issues. under the assumption that the Yellow River is a free 44. In energy, policy changes could be decided good with low opportunity costs or none.... Until within a single ministry. In transport, not only has the there are realistic allocation provisions that YRCC fuel tax been stalled, but the Bank has made little [Yellow River Control Commission] can enforce, the headway in gaining acceptance for its arguments for upper and middle reach regions will probably continue a unified Ministry of Transport or for incorporating to follow what we have termed the `first-come, first- safety components into highway projects (because served' rule, to the potential detriment of basin-wide safety is under the jurisdiction of another ministry). economic performance." There was also little response to an excellent Bank re- 50. Safeguards and EIAs should, in fact, go beyond port (1995b) on coordination and tradeoffs of invest- the "do no harm" principle. One of the main short- ments in rail transport, coal-washing, mine-mouth comings of safeguard analysis as now conducted in generation, and transmission lines. This is perhaps China is that it should be employed upstream at the not surprising because the degree of coordination im- design stage, rather than simply as damage mitigation plied by this study never existed, even at the height of at a later stage. central planning. China was a command economy, but 51. This may have increased unsustainable log- never a centrally planned economy to the same extent ging in other countries to meet China's import de- as the Soviet Union. The potential for efficiency gains mand. remains, but it might be more productive to concen- 52. From 1993 to 2002, the Bank supported 47 trate on introducing reforms in market structure and water-related projects, most of them with environ- differential pricing in order to create incentives for op- mental implications. By subsector, these included 9 in timization of intersector investment decisions. agriculture/irrigation, 5 in watershed management/ 45. Smil (1993) argued that China could not sus- forestry, 18 in urban water supply and waste man- tain its high rate of economic growth without an en- agement, 6 multipurpose/hydropower dams, 3 inland vironmental disaster, and Brown's (1995) question, waterways, 4 water resources/flood control, and 2 rural "Who Will Feed China?," received international at- water supply. See the background paper on water tention and fueled a debate about China's environ- (Varley 2002) and Annex G. mental degradation, exhaustion of natural resources, 53. Since 1985, the Bank has committed $2.2 bil- and the unsustainability of a "growth at any cost" pol- lion of total project costs of $7.7 billon to finance icy. For an up-to-date assessment of the state of the major water investments (water conveyance, treat- environment in China, see UNDP (2002). ment, and distribution and WWTPs.) 46. SEPA drafts environmental legislation, over- 54. See Annex N. sees regulation and monitoring of environmental pol- 55. The Bank has not been involved in privatization icy, and provides technical direction to provincial in China, and the government has adopted a cau- 1 5 0 E N D N O T E S tious approach. The misallocation of project risks be- 8. The improvement in disbursements and avail- tween public and private sectors has limited the scope ability of counterpart funds may be a response to for nonrecourse project-based lending--build, oper- lower interest rates on IBRD loans. After the Asian cri- ate, transfer (BOT) projects are in reality a noncom- sis in 1997, the government lowered domestic inter- petitive form of public procurement (returns are est rates, causing many provincial and local guaranteed, the assets are largely for bulk-water and governments to substitute domestic borrowing for use remain in public control and even management, while of Bank project funds. water distribution is off-limits to investors). 9. See Annex N. 56. See Annex N. 10. This section draws on a workshop with Chinese officials and researchers on AAA, supplementary in- Chapter 4 terviews, a specially commissioned review of AAA and 1. This is an official classification. The eastern region system reform (Lu 2002), other sector and thematic includes 11 provinces of Liaoning, Hebei, Beijing, Tian- background papers, and internal assessment reviews jin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, of ESW. Guangdong, and Hainan; the central region includes 11. Later named the State Council Organization for 8 provinces of Heilongjiang, Jilin, Shanxi, Henan, Hubei, Reform of the Economic System (SCORES). In No- Hunan, Anhui, and Jiangxi; and the western region in- vember 2002, SCORES was merged with the State De- cludes 12 provinces of Inner Mongolia, Xinjiang, Ningxia, velopment and Planning Commission to create the Gansu, Qinghai, Shaanxi, Sichuan, Chongqing, Tibet, National Development and Reform Commission. Guizhou, Yunnan, and Guangxi. 12. Trust funds and central research and network 2. For 1993­97: t= 5.97, Adj. R-squared = 0.5443. budgets supplement spending on China-related ESW, For 1998­02: t = 1.00, Adj. R-squared = 0.0001. but it is unlikely that this significantly affects China's 3. The government considers Tibet eligible only for relative position. The budget allocation for ESW in- grants, not loans, because of low repayment capacity. creased by two-thirds between FY01 and FY03, how- 4. Other donors have also stressed infrastructure ever. projects in China, though the trend is downward. Bi- 13. See Annex N. lateral official development assistance (ODA) com- 14. This complaint is not unique to China. See re- mitments for infrastructure were 61 percent of the port by OED (2003b) on knowledge services. bilateral total during 1993­97, falling to 38 percent dur- 15. The Bank's ESW has multiple purposes, as well ing 1999­01. The corresponding figures for health as other audiences than Chinese officials and re- plus education were 9 percent and 14 percent in the searchers. ESW informs the Board, other donors, and respective periods. the broader development community of the Bank's as- 5. The repayment system is also one of the main sessment of developments in China, and it provides sources of inequity and perverse incentives. See chap- the analytical underpinning for Bank strategy and ter 6 for a discussion of this dilemma. lending. 6. It is difficult to test for the existence of a halo 16. See Annex N. effect because good policy is normally associated with 17. See Annex N. better outcomes. That such an effect exists, however, 18. This is as much a commentary on the Bank's is shown by the example of Indonesia, which saw its approach to risk management as on the China pro- combined percentage of satisfactory and highly sat- gram. Low management engagement in supervision isfactory ratings drop from 79 percent in FY92­97 to is a Bankwide problem. 47 percent in FY98­02, mainly because of a sharp in- 19. According to the Region, the company's man- crease in marginally satisfactory ratings. The decline agement told the supervision mission that some em- surely owed as much to changes in perceptions of In- ployees had been working up to 30 percent overtime, donesia's overall performance after the Asian crisis as but they assured the mission that overtime is voluntary to actual changes in performance of investment proj- (indeed, workers are eager for the overtime) and that ects exiting during that period. workers are paid overtime premiums as required by law. 7. Of the 82 projects approved during FY96­02, only 20. Perceptions may have been influenced by the 13 have been completed and 8 evaluated. fact the Bank was not formally involved in judicial re- 1 5 1 C H I N A : A N E VA L U AT I O N O F W O R L D B A N K A S S I S TA N C E forms before the August 2002 approval of two sub- Chapter 5 projects under the Economic Law Reform Project. 1. See Annex N. 21. The share of transport will rise from 24.6 per- 2. See background paper by Lu (2002), chapter 6, cent during 1993­02 to 34 percent in the coming CAS and Annex E. period. (The figures refer to the share of number of projects, which is the only figure presented in the Chapter 6 CAS.) Using a broad definition of infrastructure that in- 1. Both the Bank's Regional staff and the government cludes energy, transport, urban, and water supply and have reservations about the recommendations in this sanitation, the share by number of projects will rise section. See Annexes N and O, respectively. from 51.5 percent to 65 percent. The Bank's regional staff has noted that, though the share of infrastructure Annex D lending will rise, the absolute amount will fall because 1. The Henan (Qinbei) Power project (Loan 3980, of the smaller lending program. See Annex N. approved in fiscal 1996) was canceled at China's re- 22. CAE mission members were, in fact, surprised quest before being declared effective. to be told repeatedly by local officials that the biggest advantage of Bank projects was the introduction of Annex K competitive procurement and other project man- 1. The rating for the judicial system may reflect the agement techniques because these practices had sup- fact that Bank activity in this area only began in 2002. posedly diffused throughout China years before. One senior official explained that Bank involvement still Annex L provides a barrier to political interference in pro- 1. 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September 17, 2002. 1 5 5 OED PUBLICATIONS Study Series 2003 Annual Review of Development Effectiveness: The Effectiveness of Bank Support for Policy Reform Agricultural Extension: The Kenya Experience Assisting Russia's Transition: An Unprecedented Challenge Bangladesh: Progress Through Partnership Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy The CGIAR: An Independent Meta-Evaluation of the Consultative Group on International Agricultural Research Debt Relief for the Poorest: An OED Review of the HIPC Initiative Developing Towns and Cities: Lessons from Brazil and the Philippines The Drive to Partnership: Aid Coordination and the World Bank Financial Sector Reform: A Review of World Bank Assistance Financing the Global Benefits of Forests: The Bank's GEF Portfolio and the 1991 Forest Strategy and Its Implementation Fiscal Management in Adjustment Lending IDA's Partnership for Poverty Reduction Improving the Lives of the Poor Through Investment in Cities India: The Dairy Revolution Information Infrastructure: The World Bank Group's Experience Investing in Health: Development Effectiveness in the Health, Nutrition, and Population Sector Jordan: Supporting Stable Development in a Challenging Region Lesotho: Development in a Challenging Environment Mainstreaming Gender in World Bank Lending: An Update The Next Ascent: An Evaluation of the Aga Khan Rural Support Program, Pakistan Nongovernmental Organizations in World Bank­Supported Projects: A Review Poland Country Assistance Review: Partnership in a Transition Economy Poverty Reduction in the 1990s: An Evaluation of Strategy and Performance Power for Development: A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector Promoting Environmental Sustainability in Development Reforming Agriculture: The World Bank Goes to Market Sharing Knowledge: Innovations and Remaining Challenges Social Funds: Assessing Effectiveness Uganda: Policy, Participation, People The World Bank's Experience with Post-Conflict Reconstruction The World Bank's Forest Strategy: Striking the Right Balance Zambia Country Assistance Review: Turning an Economy Around Evaluation Country Case Series Bosnia and Herzegovina: Post-Conflict Reconstruction Brazil: Forests in the Balance: Challenges of Conservation with Development Cameroon: Forest Sector Development in a Difficult Political Economy China: From Afforestation to Poverty Alleviation and Natural Forest Management Costa Rica: Forest Strategy and the Evolution of Land Use El Salvador: Post-Conflict Reconstruction India: Alleviating Poverty through Forest Development Indonesia: The Challenges of World Bank Involvement in Forests Uganda: Post-Conflict Reconstruction Proceedings Global Public Policies and Programs: Implications for Financing and Evaluation Lessons of Fiscal Adjustment Lesson from Urban Transport Evaluating the Gender Impact of World Bank Assistance Evaluation and Development: The Institutional Dimension (Transaction Publishers) Evaluation and Poverty Reduction Monitoring & Evaluation Capacity Development in Africa Public Sector Performance--The Critical Role of Evaluation Multilingual Editions Allègement de la dette pour les plus pauvres : Examen OED de l'initiative PPTE Appréciation de l'efficacité du développement : L'évaluation à la Banque mondiale et à la Société financière internationale Determinar la eficacia de las actividades de desarrollo : La evaluación en el Banco Mundial y la Corporación Financiera Internacional Côte d'Ivoire : Revue de l'aide de la Banque mondiale au pays Filipinas: Crisis y oportunidades Reconstruir a Economia de Moçambique : http://www.worldbank.org/oed TMxHSKIMBy359761zv":&:*:=:< THE WORLD BANK ISBN 0-8213-5976-2