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THE WORLD BANKWORLD BANK OPERATIONS EVALUATION DEPARTMENTChinaAn Evaluation ofWorld Bank Assistance

OPERATIONS EVALUATION DEPARTMENTENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATIONThe Operations Evaluation Department (OED) is an independent unit within the World Bank; it reports directlyto the Bank’s Board of Executive Directors. OED assesses what works, and what does not; how a borrower plansto run and maintain a project; and the lasting contribution of the Bank to a country’s overall development. Thegoals of evaluation are to learn from experience, to provide an objective basis for assessing the results of theBank’s work, and to provide accountability in the achievement of its objectives. It also improves Bank work byidentifying and disseminating the lessons learned from experience and by framing recommendations drawnfrom evaluation findings.

WORLD BANK OPERATIONS EVALUATION DEPARTMENTChinaAn Evaluation ofWorld Bank Assistancehttp://www.worldbank.org/oed2005The World BankWashington, D.C.

© 2005 The International Bank for Reconstruction and Development / The World Bank1818 H Street, NWWashington, DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.orgAll rights reservedManufactured in the United States of AmericaThe findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect theviews 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 anyjudgment of the legal status of any territory or the endorsement or acceptance of such boundaries.Rights and PermissionsThe material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permissionmay be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grantpermission promptly.For permission to photocopy or reprint any part of this work, please send a request with complete information to theCopyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470,www.copyright.com.All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher,World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org.Cover photo courtesy of the World Bank Photo Library.ISBN 0-8213-5976-2e-ISBN 0-8213-5977-0Library of Congress Cataloging-in-Publication data have been applied for.World Bank InfoShopE-mail: pic@worldbank.orgTelephone: 202-458-5454Facsimile: 202-522-1500Operations Evaluation DepartmentKnowledge Programs and Evaluation CapacityDevelopment (OEDKE)E-mail: eline@worldbank.orgTelephone: 202-458-4497Facsimile: 202-522-3125Printed on Recycled Paper

ContentsvviiixxvAcknowledgmentsForeword, Prefacio, Avant-proposExecutive Summary, Résumen, Résumé AnalytiqueAcronyms and Abbreviations1 1 Introduction1 China’s Achievements in a Quarter-Century of Reform1 Shortcomings and Challenges5 2 Evolution of World Bank Assistance Strategy6 Evolution of the Relationship and Bank Strategy after 199111 3 Progress on Development Objectives11 Macroeconomic Management and System Reform17 Poverty Reduction23 Infrastructure25 Environment27 Lending33 4 Program Administration and Crosscutting Issues33 Lending37 AAA/ESW39 Donor Cooperation40 Safeguards43 Crosscutting Issues47 5 Evaluation of the Bank’s Assistance47 Outcome of the Bank’s Assistance48 Sustainability of Positive Outcomes48 Institutional Development Impact49 Bank Performance51 6 Lessons and Recommendations51 Lessons52 Recommendationsiii

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCE55 Annexes57 A: Summary: Analytical and Advisory Services Background Paper61 B: Summary: Agriculture Background Paper65 C: Summary: Decentralization Background Paper67 D: Summary: Energy Background Paper73 E: Summary: Finance Background Paper77 F: Summary: Poverty Background Paper81 G: Summary: Water Background Paper87 H: Summary: Transport Background Paper91 I: Summary: Health Background Paper95 J: Client Consultations in Preparation for the CountryAssistance Strategy97 K: Client Survey Findings99 L: Guide to OED’s Country Evaluation Rating Methodology103 M: Management Action Record105 N: Comments from Bank Regional Staff on Draft CAE115 O: Comments from the Government of China121 P: Summary: China—IFC Country Impact Review125 Q: Report from the Committee on Development Effectiveness (CODE)127 R: Reference Tables147 Endnotes153 ReferencesBoxes18 3.1 China’s Poverty in International Perspective20 3.2 A Best Practice Poverty Project21 3.3 WBI/China Network for Training and Research in Health Economicsand Finance28 3.4 Rural Water Supply in China39 4.1 A Chinese View of the Bank’s AAA41 4.2 Inspection Panel Investigation42 4.3 The Views of the Borrower43 4.4 Bank Involvement in the Three Gorges ProjectTables2 1.1 China: Selected Indicators, 1980–0135 4.1 Overall Project Rating: China and ComparisonsFigures2 1.1 Average Annual Real GDP per Capita Growth, China andComparisons, 1980–013 1.2 Real GDP Index of Selected Transition Countries, 1989–017 2.1 IBRD-IDA Commitments to China by Fiscal Year, 1981–038 2.2 World Bank Investment Lending for China by Sector9 2.3 Ratios of Aid and DFI to GDP, 1990–0013 3.1 Revenue Trend36 4.1 Comparison of Bank Sector Investment Lending Activities38 4.2 Ratio of ESW to Total Direct Costiv

AcknowledgmentsThe evaluation was prepared by GeneTidrick (Task Manager, OEDCR), with assistancefrom Anthony Churchill and CordulaThum (Energy and Transport), ChristopherFindlay (Agriculture), Azizur Khan (Poverty), LuMai (Analytical and Advisory Services), ElaineOoi (Health), S. Ramachandran (Finance), DanielRitchie (Decentralization and Safeguards), RobertVarley (Water Resources and Environment), PeterNolan (Enterprise Reform), and Manuel Penalver(Portfolio Management). Qiang Cui providedstatistical analysis. Steven Kennedy edited the annexes.Betty Casely-Hayford and Agnes Santosprovided administrative support.Director-General, Operations Evaluation:Gregory K. IngramDirector, Operations Evaluation Department:Ajay ChhibberSenior Manager, Country Evaluation and Regional Relations:R. Kyle PetersTask Manager: Gene TidrickPeer Reviewer: René VandendriesPeer Reviewer: Alan GelbPeer Reviewer (Institute for International Economics):Nicholas Lardyv

FOREWORDENGLISHFOREWORDESPAÑOLPREFACIOFRANÇAISAVANT-PROPOSThis Country Assistance Evaluation(CAE) by the Operations EvaluationDepartment (OED) of the WorldBank builds on evaluations of projects,nonlending services, and sectorassistance programs to assess the developmenteffectiveness of Bank assistanceto China during the pastdecade (FY93–02). Although it focuseson these years, it also includes somereferences to developments in the earlieryears of the relationship and tomore recent events.Chapter 1 provides an overview ofthe achievements and shortcomingsof China’s reforms since 1978. Chapter2 summarizes the developmentof the relationship between the Bankand China in the 1980s in order toprovide a context for the periodunder review, and then outlines theevolution of the relationship andthe Bank’s assistance strategy in thepast decade. Chapter 3 analyzesChina’s development progress andthe Bank’s impact on the main objectivesof the Bank’s assistance.Chapter 4 reviews the use of lendingand other instruments in achievingthese objectives, compares outcomesin China with those in othercountries, and examines some crosscuttingissues. Chapter 5 draws onthe previous two chapters to providea summary evaluation of the Bank’sassistance, and chapter 6 summarizesthe main lessons and recommendations.The assistance of peer reviewersin providing detailed comments onan earlier draft is gratefully ac-La presente Evaluación de laAsistencia al País (EAP) se basa enproyectos, servicios no crediticios yprogramas de asistencia sectorial afin de evaluar la eficacia del desarrollode la asistencia que el Banco Mundialprestó a China durante el últimodecenio. Esta Evaluación se concentraen el período comprendido entre losejercicios económicos 1993 y 2002,pero hace referencia a acontecimientossucedidos en los primeros años dela relación y a hechos más recientes.El Capítulo 1 ofrece una descripcióngeneral de los logros y de las deficienciasde las reformas implementadasen China desde 1978. El Capítulo2 resume el desarrollo de la relaciónentre el Banco y China en la década delos ochenta a fin de brindar un contextopara el período sometido a análisisy luego examina cómo haevolucionado la relación y la estrategiade asistencia implementada por elBanco durante la última década. El Capítulo3 analiza el avance y el impactodel Banco en los objetivos principalestrazados para la asistencia. El Capítulo4 examina el uso del financiamiento yde otros instrumentos para lograr estosobjetivos. También compara los resultadoslogrados en China con los deotros países y examina algunos temastransversales. El Capítulo 5 se basa enlos dos capítulos anteriores y ofrece unresumen de la evaluación de la asistenciadel Banco, y el Capítulo 6 resumelas principales lecciones y lasrecomendaciones.Deseamos expresar nuestro profundoagradecimiento a los colegasLa présente Évaluation del’aide par pays (CAE) s’appuie sur lesévaluations des projets, des serviceshors prêts et des programmes d’aidesectorielle pour évaluer l’efficacité auniveau du développement de l’aide dela Banque mondiale en faveur de laChine au cours des dix dernières années.La CAE est centrée sur la périodeEF93-02 mais comporte quelquesréférences aux développements réalisésau cours des premières années dela relation et à des événements plusrécents.Le chapitre 1 offre une vue d’ensembledes réussites et des insuffisancesdes réformes en Chinedepuis 1978. Dans le chapitre 2 figureune synthèse du développementde la relation entre la Banqueet la Chine dans les années 80 afinque cela serve de contexte pour lapériode étudiée puis y sont retracéesl’évolution de la relation et lastratégie de la Banque en matièred’aide au cours des dix dernièresannées. Sont analysés au chapitre 3l’avancement et l’impact de laBanque sur les principaux objectifsde l’aide de la Banque. Est étudié auchapitre 4 le recours aux prêts et àd’autres instruments pour atteindreces objectifs. Y sont également comparésles résultats de la Chine avecceux d’autres pays et y sont examinéescertaines questions multidisciplinaires.Le chapitre 5 est larécapitulation des deux chapitresprécédents qui permet de donnerune évaluation synthétique de l’aidede la Banque. Figure au chapitre 6 lavii

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEknowledged. Their comments,as well as other commentsreceived during OED’smanagement review meeting,have been taken into accountin the evaluation. Thefactual and editorial commentsof the Bank’s East Asiaand Pacific (EAP) Region and theGovernment of China (Ministry of Finance)on an earlier draft of the CAEhave been taken into account in thisdraft, the comments of the Bank’sRegional staff are attached as AnnexN, and the China government’s commentsare included as Annex O.ENGLISHrevisores por los comentariospormenorizados que formularona un borrador previodel presente trabajo. Tantoéstos como otros comentariosque hemos recibido duranteel análisis de la gestióndel Departamento de Evaluaciónde Operaciones han sido tomadosen cuenta en la evaluación. LaRegión de Asia Oriental y Pacífico delBanco y el Gobierno de China (Ministeriode Economía) también hanhecho comentarios sobre un borradorde la Evaluación de la Asistenciaal País. El Departamento de Evaluaciónde Operaciones ha tomado encuenta los comentarios objetivos y deredacción realizados sobre este borrador.En el Anexo N, se presentanlos comentarios efectuados por elpersonal regional. En el Anexo O, sedetallan los comentarios del Gobierno.ESPAÑOLsynthèse des principales leçonset recommandations.Nous tenons à remercierles réviseurs-pairs pour avoirbien voulu apporter des commentairesdétaillés sur uneversion antérieure du document.Il a été tenu comptedans l’évaluation de ces commentaires,ainsi que d’autres commentairesreçus au cours de la réunionde réexamen de la direction del’OED. La Région Asie orientale et Pacifiquede la Banque et le Gouvernementchinois (Ministère desfinances) ont tous deux égalementoffert leurs commentaires sur le projetde CAE. L’OED a tenu comptedes commentaires factuels et rédactionnelsapportés sur le projetde document. Les commentaires dupersonnel de la région figurent àl’annexe N. Les commentaires desgouvernements sont reproduits àl’annexe O.FRANÇAISviii

EXECUTIVE SUMMARYENGLISHEXECUTIVESUMMARYSince opening to the outsideworld and embarking on a program ofeconomic reform in 1978, China hashad one of the highest rates of sustainedeconomic growth in the world,quadrupling per capita income in about20 years and lifting more than aquarter-billion people out of poverty.During the 1990s, however, severalshortcomings and challenges emerged.Poverty reduction has slowed, andinequality and vulnerability have increased.China faces severe environmentalproblems, in part because ofthe strains of high growth. And whilea strategy of gradual reform has promotedboth growth and stability, theunfinished reform agenda poses fiscal,financial, and social risks thatcould undermine the achievement ofthe past 20 years.This Country Assistance Evaluation(CAE) focuses on the periodFY93–02. The World Bank’s assistancestrategy had four main objectivesduring this period: (i)promoting market-oriented systemreform and better macroeconomicmanagement; (ii) poverty reduction;(iii) supporting infrastructure developmentfor growth and market integration;and (iv) environmentalprotection. Although China is theBank’s largest International Bankfor Reconstruction and Development(IBRD) borrower and the second-largestrecipient of InternationalDevelopment Association (IDA)credits, Bank lending accounts foronly a small share of China’s resourceflows—about 0.6 percent ofESPAÑOLRÉSUMENDesde que en 1978 China decidióemprender su aperturahacia el mundo exterior e iniciar unprograma de reformas económicas, halogrado uno de los índices de crecimientoeconómico sostenido más altosdel mundo, cuadriplicando el ingresoper cápita en 20 años y rescatando másde 250.000 millones de personas de lapobreza. Junto con estos logros tambiénsurgieron algunas dificultades ydesafíos en la década de los noventa.La reducción de la pobreza ha desaceleradosu marcha y la desigualdad yvulnerabilidad han ido en aumento.China enfrenta serios problemas ambientalesen parte, debido al desgasteque produjo el alto nivel de crecimiento.Y si bien la estrategia de reformasgraduales ha promovido tanto elcrecimiento como la estabilidad, laagenda de reformas inconclusa generariesgos fiscales, financieros y socialesque podrían socavar los logros alcanzadosdurante los últimos veinte años.La Evaluación de la Asistencia alPaís se concentra en el período comprendidoentre los ejercicios económicos1993 y 2002. La estrategia deasistencia del Banco Mundial se propusocuatro objetivos principales paraeste período: (i) promover una reformadel sistema con orientaciónhacia el mercado y un mejoramientode la gestión macroeconómica, (ii)reducir la pobreza; (iii) apoyar el desarrollode la infraestructura para elcrecimiento y la integración del mercado;y (iv) proteger el medio ambiente.A pesar de que China es elprestatario del BIRF más grande delBanco y el segundo beneficiario enFRANÇAISRÉSUMÉANALYTIQUEDepuis qu’elle s’est ouverte aumonde extérieur et a démarréun programme de réforme économiqueen 1978, la Chine a l’un des taux lesplus élevés au monde de croissanceéconomique soutenue, multipliant parquatre le revenu par habitant sur environ20 ans et en hissant plus de 250millions de gens hors de la pauvreté.À côté des ces réussites sont apparusau cours des années 90 des insuffisanceset des défis. La réduction de lapauvreté s’est ralentie tandis qu’augmentaientl’inégalité et la vulnérabilité.La Chine se trouve confrontée à degraves problèmes environnementauxen partie dus à l’astreinte de la fortecroissance. La stratégie de réformegraduelle a promu tout à la fois lacroissance et la stabilité mais le programmede réforme en suspens posedes risques fiscaux, financiers et sociauxqui pourraient saper les réussitesdes 20 dernières années.La présente Évaluation de l’aidepar pays est centrée sur la périodeEF93-02. La stratégie d’aide de laBanque avait pour objectif au coursde cette période les quatre principauxobjectifs suivants : (i) promotionde la réforme du système axé surle marché et d’une meilleure gestionmacroéconomique, (ii) réductionde la pauvreté, (iii) soutien dudéveloppement de l’infrastructurepour l’intégration de la croissanceet du marché, et (iv) protection del’environnement. Bien que la Chinesoit le plus gros emprunteur BIRD dela Banque et le deuxième bénéficiairedes crédits IDA, les prêts de laBanque ne représentent qu’une pe-ix

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEENGLISHESPAÑOLGDP at its maximum in theearly 1990s. The Bank hastherefore not tried to achieveits objectives primarilythrough the direct impact ofits lending or through conditionality.Rather, the Bankhas relied mostly on variantsof persuasion and example. Theseincluded a dual-track approach of(i) building trust through lendingwhile promoting policy dialoguethrough sector work and (ii) relyingon the demonstration effect ofsuccessful project experience in introducingnew technologies, managementmethods, or policy reformsto leverage policy outcomes.The overall outcome of theBank’s assistance strategy has beensatisfactory. In macromanagementand system reform, the Bank playedan important role in supporting theacceleration of reforms in the early1990s, including macromanagementreforms that helped stabilize theeconomy. With respect to system reformmore generally, the Bankhelped identify the critical nexus ofenterprise–financial sector–fiscal reformsneeded to underpin highgrowth with stability, but it was lesssuccessful in promoting implementationof some of the components.Incomplete enterprise and financialsector reforms create heavy fiscalcontingencies and pose significantrisks to China’s accomplishments.The Bank made several significantcontributions to poverty reductionin the 1990s. Mostimportant, the Bank has helped establishsuccessful models of targetedinterventions through integratedrural development projects. Wherethe Bank has been less successful—despite writing good reports on theissues—is in persuading the govimportanciade los créditosde la AIF, los créditos delBanco representan sólo unapequeña parte de los flujosde recursos con que cuentaChina: alrededor de un 0,6por ciento del PIB como máximoa comienzos de la décadade los noventa. Por este motivo,el Banco no ha procurado alcanzar susobjetivos mediante el impacto directode su financiamiento o a través de laimposición de condicionalidades. Porel contrario, el Banco ha recurridofundamentalmente a variantes de persuasióny ejemplos, entre las que seincluyó un modelo dualista, que procuragenerar confianza mediante el financiamientopromoviendo al mismotiempo una política de diálogo a travésdel trabajo sectorial, y confianzaen el efecto de demostración de lasexperiencias exitosas en la introducciónde nuevas tecnologías, métodosde gestión o las reformas de políticaspara la potenciación de resultados.En términos generales, el resultadode la estrategia de asistencia delBanco ha sido satisfactoria. En cuantoa la reforma de la gestión pública y delsistema, el Banco ha tenido un papelpreponderante en el apoyo a la agilizaciónde las reformas a comienzosde la década de los noventa, incluidaslas reformas introducidas en la gestiónpública que ayudaron a estabilizarla economía. En un plano másgeneral, con respecto a la reformadel sistema, el Banco ayudó a determinarel nexo crítico de reformasque era necesario introducir en elárea de las empresas públicas, el sectorfinanciero y la política fiscal parapoder sostener el alto índice de crecimientocon estabilidad, pero sulabor no fue tan exitosa al promoverla implementación de alguno de suscomponentes. Las reformas incontitepart des apports de ressourcesde la Chine — environ0,6 % du PIB au plus audébut des années 90. LaBanque n’a par conséquentpas tenté d’atteindre ses objectifsprincipalement par lebiais de l’impact direct de sesprêts ou au travers de la conditionnalité.La Banque a plutôt dépendudans une grande mesure de variantesde persuasion et d’exemple. Cellescicomportaient une approchedouble qui consistait à renforcer laconfiance par le biais des prêts touten favorisant le dialogue de politiquepar le biais des travaux sectoriels, età dépendre de l’effet de démonstrationde l’expérience de projets réussisen introduisant de nouvellestechnologies, méthodes de gestionou réformes stratégiques pour donnerun pouvoir multiplicateur auxrésultats des stratégies.Le résultat d’ensemble de la stratégied’aide de la Banque est satisfaisant.La Banque a joué un rôleimportant en matière de réformemacrogestion et système en soutenantl’accélération des réformes audébut des années 90, y compris lesréformes de macrogestion qui ontaidé à stabiliser l’économie. En cequi concerne la réforme systèmevue de façon plus générale, laBanque a aidé à identifier le lien crucialentre les réformes entreprises/secteurfinancier/fiscalesnécessaires pour soutenir la fortecroissance et la stabilité mais elle amoins bien réussi à promouvoir lamise en œuvre de certains des éléments.Des réformes incomplètesau niveau des entreprises et du secteurfinancier créent des impondérablesfiscaux importants et posentde graves risques aux réussites de laChine.FRANÇAISx

EXECUTIVE SUMMARYernment of the implicationsof broader development policiesfor poverty and inequality.The mismatch betweenintergovernmental fiscal resourcesand responsibilitiesexacerbated regional inequalityand led to unequalaccess to health services; grain policypenalized farmers in some of thepoorer areas; and migration restrictionshave limited economic integration.China had a lot to gain from internationalexperience in infrastructuredevelopment in the early1990s, and the Bank had a lot tooffer. Bank support was highly successfulin promoting better projectmanagement, competitive bidding,and technical improvements. Evenresource transfer from the Bank wasof some importance for breaking infrastructurebottlenecks during thisperiod. In addition, the Bank’s dualtrackstrategy of promoting sectorpolicy and institutional reform wassuccessful, particularly in power,though less so in transport (orwater). The main question lookingforward is whether the Bank can stillcontribute significant value addedin the sector, or whether the Bankfinance that the government still desiresis a substitute for reforms thatcould open up other modes offinance.The Bank has made some visiblecontributions to improving environmentalprotection, but therehave been shortcomings as well.Bank-supported projects in naturalresource management, forestry,power (both thermal and hydro),and multipurpose dams have had adirect and favorable impact and havealso influenced design and implementationof non-Bank projects. TheENGLISHclusas del sector financiero yde las empresas públicas hangenerado serios imprevistosfiscales y ponen en riesgo demanera importante los logrosalcanzados por China.En la década de los noventa,el Banco contribuyó enforma significativa en la lucha contrala pobreza. Más aun, el Banco ha ayudadoa crear modelos exitosos de intervencionesdirigidas a través deproyectos integrados de desarrollorural. Sin embargo, la labor del Bancoha sido menos exitosa — a pesar deque se escribieron muy buenos informessobre estos temas — a la horade persuadir al gobierno sobre lasimplicancias de adoptar políticas dedesarrollo más amplias para la luchacontra la pobreza y la desigualdad. Ladisparidad entre las responsabilidadesy los recursos fiscales intergubernamentalesexacerbaron ladesigualdad regional y contribuyerona generar inequidad en el accesoa los servicios de salud; la política degranos penalizó a los granjeros enalgunas de las zonas más pobres; y lasrestricciones a la migración limitaronla integración económica.China tenía mucho por ganar dela experiencia internacional en el desarrollode infraestructura a comienzosde la década de los noventay el Banco tenía mucho para ofrecer.El apoyo del banco resultó muy exitosoen su objetivo de promover unamejor gestión de proyectos, las licitacionespúblicas y las mejoras técnicas.Incluso la transferencia derecursos del Banco tuvo importanciapara permitir superar las limitacionesde la capacidad de infraestructuradurante este período. Además, la estrategiadualista del banco para promoverla reforma de políticassectoriales e institucionales resultóESPAÑOLLa Banque a contribué dediverses manières importantesà la réduction de lapauvreté au cours des années90 ; et ce qui est le plus important,la Banque a aidé àcréer des modèles réussisd’interventions ciblées autravers de projets intégrés de développementrural. Là où la Banque amoins bien réussi —bien qu’elle aitécrit de bons rapports sur le sujet—c’est à persuader le gouvernementdes répercussions de politiques plusvastes de développement en ce quiconcerne la pauvreté et l’inégalité.Le décalage entre les ressources etles responsabilités fiscales intergouvernementalesa exacerbé l’inégalitérégionale et a conduit à unaccès inégal aux services de santé, lapolitique des céréales a pénalisé lesfermiers dans certaines des zonesles plus pauvres, et les restrictionsdes migrations ont limité l’intégrationéconomique.La Chine avait beaucoup à gagnerde l’expérience internationale en matièrede développement de l’infrastructureau début des années 90 etla Banque avait beaucoup à offrir.Grâce à son soutien, la Banque a trèsbien réussi à promouvoir unemeilleure gestion des projets, desappels d’offre concurrentiels et desaméliorations techniques. Même letransfert de ressources provenant dela Banque a eu une certaine importancedans la résolution des goulotsd’étranglement de l’infrastructuredurant cette période. En outre, lastratégie double de la Banque de promotionde politiques sectorielles etde réformes institutionnelles a étécouronnée de succès, tout particulièrementen ce qui concerne l’électricité,mais toutefois moins pour lestransports (ou l’eau). La principaleFRANÇAISxi

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBank has helped mainstreamenvironmental concerns in anumber of sectors, notablyenergy, where China hasmade significant progress inimproving energy efficiency.Environmental safeguard policyhas been highly variable,ranging from best practice to a rebukefrom the Inspection Panel fornot applying the Bank’s own safeguardprocedures. Overall, the Bankhas had a positive impact on the environment,but improving coordinationof environmental policy,especially water resource management,remains a considerable challenge.The Bank’s assistance strategyand activities have been relevant inthe large, if not always in the small—at the broadest level of strategicfocus and allocation of resources,the Bank has done the right things.Relevance at the level of sector or regionalallocation or the choice ofproject components has always beenconstrained by the project repaymentsystem. Projects were oftenskewed toward components thatgenerated revenue, sometimes atthe expense of higher-return publicgoods components. With the lossof IDA, Bank lending for social sectorsand poor regions has becomeincreasingly constrained.The Bank’s record on efficacy—doing things right—has been mixed.China has the best project outcomeand other ratings of any large country.Project implementation has beenexcellent in most sectors. But efficacyalso depends on achieving policyand institutional change withinsectors and on achieving coordinationacross sectors and levels of governmentfor crosscutting objectives.This has been successful in someENGLISHtambién exitosa, especialmenteen el área de energía,aunque los resultados no fuerontan alentadores en lasáreas de transporte o agua.El primer interrogante que seplantea es si el Banco puedeseguir aportando un valoragregado significativo en el sector, osi el financiamiento del Banco que elgobierno sigue esperando constituyeun sustituto de las reformas que podríandar lugar a la apertura de otrasformas de financiamiento.El Banco ha hecho aportes visiblesal mejoramiento de la protecciónambiental, pero aquí tambiénhubo algunas dificultades. Los proyectosrespaldados por el Banco enmateria de manejo de recursos naturales,forestales, energéticos (tantoenergía termoeléctrica como hidráulica),y las represas para múltiplespropósitos han tenido un impactodirecto y positivo y también han influidoen el diseño e implementaciónde proyectos que no recibieronel financiamiento del Banco. El Bancoha contribuido a inculcar responsabilidadpor la protección del medioambiente en un número de sectores,especialmente en el sector energéticoen donde China ha hecho unavance importante en el mejoramientode la eficacia energética. Lapolítica de protección ambiental hasido muy variable: por un lado seaplicaron prácticas óptimas y por otrohubo una presentación de queja porparte del Grupo de Inspección porno haber aplicado los procedimientosdel Banco en materia de protecciónambiental. En general, la accióndel Banco ha tenido un impacto positivoen el medio ambiente. Sin embargo,el mejoramiento de lacoordinación de la política ambiental,en especial el manejo de los recursosESPAÑOLquestion si l’on regarde l’avenirest de savoir si la Banquepeut encore contribuer unevaleur ajoutée non négligeableou si le financementde la Banque que le gouvernementsouhaite encore sesubstitue aux réformes quipourraient ouvrir la voie à d’autrestypes de financement.La Banque a visiblement contribuédans certains cas à l’amélioration dela protection de l’environnementmais il y a également eu des insuffisances.Des projets soutenus par laBanque dans le domaine de la gestiondes ressources naturelles, de laforesterie, de l’énergie (tant thermiquequ’hydroélectrique) et desbarrages polyvalents ont eu un impactdirect favorable mais ils ont égalementinfluencé la conception et lamise en œuvre de projets autres queceux de la Banque. La Banque a apportéson aide pour des questionsenvironnementales dominantes dansun certain nombre de secteurs, notammentle secteur énergétique oùla Chine a progressé de façon notableen ce qui concerne l’améliorationdu rendement énergétique. Lapolitique de mesures de protectionenvironnementales est très variable,allant de la meilleure pratique à unblâme de la part du Groupe d’inspectionpour ne pas avoir appliquéles propres procédures de protectionde la Banque. La Banque a dansl’ensemble eu un impact positif surl’environnement mais l’améliorationde la coordination de la politiqueenvironnementale, tout particulièrementla gestion des ressources eneau, demeure un défi considérable.La stratégie et les activités d’aide dela Banque ont été pertinentes dans lesgrandes lignes, quoique pas toujoursdans le détail — au niveau le plusFRANÇAISxii

EXECUTIVE SUMMARYareas (power sector and socialsecurity reform), but lessso in others, particularly inareas that primarily dependon the demonstration effectof projects at the local level.Similarly, the Bank has beenmore effective in coordinationwhere there is a high-level governmentcoordination body.The main strength of the Bankhas been its sustained support ofan activity or program over a numberof years. Because of the Bank’slong-term involvement, it has beenable to have a substantial cumulativeimpact in a number of areas, its viewsgain a respectful hearing, and it hassometimes been well-placed to takeadvantage of opportunities whenChina is looking for support forchange. Could the Bank have accomplishedmore if it had beenmore ambitious or aggressive inpushing its own agenda throughconditionality? That seems unlikely.The Bank has clearly played an advisoryrole in China and could nothave expected to achieve morethrough conditionality than throughpersuasion and demonstration. Persuasioncan be improved, however.The Bank’s view on issues has sometimesbeen less than fully transparent.Looking forward, the Bankshould give more attention to tryingto promote and participate in amuch broader debate on policy andsector issues, not only among officials,but also among researchersand other stakeholders.ENGLISHhídricos, sigue siendo un grandesafío.La estrategia y las actividadesde ayuda del Banco hansido importantes en el planogeneral, aunque no siempreen temas más específicos. Engeneral, con respecto a laorientación estratégica y a la asignaciónde recursos el Banco ha tenidoun buen desempeño. En este sentido,la relevancia en materia de asignaciónsectorial o regional derecursos o la elección de los componentesde los proyectos siempreestuvo limitada por el mecanismo depago del proyecto. Casi siempre losproyectos se orientaban a incorporarcomponentes que generaran ingresos,y en algunas situaciones en desmedrode los componentes de bienespúblicos de mayor rentabilidad. Conla desaparición de la AFI, se son cadavez mayores las limitaciones del financiamientodel Banco para los sectoressociales y las regiones pobres.La evaluación de eficacia del Banco,es decir las cosas que se hicieron bien,es bastante heterogénea. De todoslos países grandes, China es el que halogrado obtener los mejores resultadosen materia de proyectos y otrascalificaciones. La implementación delos proyectos ha sido excelente en lamayoría de los sectores. Pero la eficaciatambién depende de los cambiostanto políticos comoinstitucionales que se puedan introducirdentro de los sectores, como asítambién de lograr coordinación entrelos sectores y los niveles de gobiernopara la consecución de objetivostransversales. Si bien en algunas áreasesto se logró (como por ejemplo, lareforma del sector energético y deseguridad social) no ha sucedido lomismo en otras, en especial en aquellasque dependen principalmenteESPAÑOLlarge de focalisation stratégiqueet d’affectation des ressources,la Banque a fait cequ’il fallait. La pertinence auniveau de l’affectation sectorielleou régionale ou du choixdes éléments des projets esttoujours freinée par le systèmede remboursement des projets.Les projets penchent souvent au profitdes éléments qui génèrent des revenus,parfois aux dépens d’élémentsde biens publics à meilleur rendement.Avec la perte d’IDA, les prêts dela Banque au profit des secteurs sociauxet des régions pauvres sont deplus en plus restreints.Les résultats de la Banque en matièred’efficacité —de bien faire leschoses— sont mélangés. La Chine ale meilleur résultat de projets etautres notations par rapport auxautres grands pays. La mise en œuvredes projets est excellente dans laplupart des secteurs. Mais l’efficacitédépend également de la capacitéà effectuer des changements institutionnelset de politique au seindes secteurs et à parvenir à coordonnerentre les secteurs et les niveauxde gouvernement en ce quiconcerne les objectifs multidisciplinaires.Ceci a été couronné de succèsdans certains domaines (laréforme du secteur énergétique etde sécurité sociale) mais a moinsbien réussi dans d’autres, notammentdans les domaines qui dépendentprincipalement de l’effet dedémonstration des projets au niveaulocal. Dans le même ordre d’idées,la Banque est plus efficace en matièrede coordination là où il y a unorganisme de coordination du gouvernementà haut niveau.Le principal point fort de laBanque est son soutien durable enfaveur d’une activité ou d’un pro-FRANÇAISxiii

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEdel efecto demostración delos proyectos en el plano local.De la misma manera, la coordinacióndel Banco ha sidomás eficaz cuando existe uncuerpo de coordinación enlas altas esferas del gobierno.La fortaleza principal delBanco ha sido su apoyo sostenido auna actividad o programa a lo largo deuna serie de años. Debido a la participaciónprolongada del Banco, el impactologrado en algunas áreas esacumulativo, sus opiniones son muyrespetadas, y esto le ha permitidoaprovechar las oportunidades en queChina busca apoyo para implementarcambios. ¿Podrían haber sido mayoreslos logros del Banco si hubiesesido más ambicioso o agresivo e imponersu propia agenda mediantecondicionalidades? Esto parece improbable.El Banco ha desempeñadoclaramente una función de asesoramientoen China y no hubiese obtenidomás logros con la imposiciónde condicionalidades que los que alcanzómediante la persuasión y la demostración.No obstante, lapersuasión puede mejorar. En algunasoportunidades, la opinión del Bancoen cuanto a los problemas no ha sidototalmente transparente. De cara al futuro,el Banco debería hacer más hincapiéen tratar de promover undebate mucho más amplio en temassectoriales y de políticas que cuentecon su participación y no hacerlo sóloentre los funcionarios de gobierno,sino también entre los investigadoresy otras partes interesadas.ESPAÑOLgramme sur un certainnombre d’années. Grâce à saparticipation sur le longterme, la Banque peut avoirun impact cumulatif importantdans un certain nombrede domaines, ses points devue reçoivent une attentionrespectueuse et elle s’est parfoistrouvée en bonne position pour tirerparti d’occasions où la Chine cherchaitun soutien pour le changement.La Banque aurait-elle pumieux réussir si elle avait été plusambitieuse ou audacieuse en imposantson propre ordre du jour autravers de la conditionnalité ? Celasemble peu probable. La Banquejoue clairement un rôle à caractèreconsultatif en Chine et n’aurait pus’attendre à mieux réussir par le biaisde la conditionnalité que par le biaisde la persuasion et de la démonstration.Il est toutefois possibled’améliorer la persuasion. L’avis dela Banque sur certaines questionsn’est pas toujours totalement transparent.La Banque devrait à l’avenirprêter une plus grande attention àtenter de promouvoir et de participerà un plus vaste débat sur lesquestions sectorielles et de politique,non seulement entre les fonctionnairesmais également entre leschercheurs et autres parties prenantes.FRANÇAISGregory K. IngramDirector-General, Operations Evaluationxiv

ACRONYMS AND ABBREVIATIONSAAAADBAIDSCAECASCCICEDCPPRDECDECRGDFIDEAPEBFEIAESMAPESWFDIFSTAPGDPGEFGNIHIVIBRDICBIDAIFCIMFIPLGPRLOCMDGM&EMFMPNGONPLsMIGANRMO&MODAODSOEDPBCPERPPPPTIAnalytical and advisory activitiesAsian Development BankAcquired immunodeficiency syndromeCountry Assistance EvaluationCountry Assistance StrategyChinese Council for International Cooperation on Environment and DevelopmentCountry performance portfolio reviewDevelopment Economics and Chief Economist Vice PresidencyDevelopment Research GroupDepartment for International Development (United Kingdom)East Asia and Pacific RegionExtrabudgetary fundEnvironmental impact assessmentEnergy Sector Management Assistance Program (IFC)Economic and sector workForeign direct investmentFinancial Sector Technical Assistance ProjectGross domestic productGlobal Environment FacilityGross national incomeHuman immunodeficiency virusInternational Bank for Reconstruction and Development (The World Bank)International competitive biddingInternational Development AssociationInternational Finance CorporationInternational Monetary FundInspection PanelLeading Group for Poverty ReductionLine of creditMillennium Development GoalMonitoring and evaluationMultilateral Fund for the Montreal ProtocolNongovernmental organizationNonperforming loansMultilateral Investment Guarantee AgencyNatural resource managementOperations and maintenanceOfficial development assistanceOzone-depleting substancesOperations Evaluation Department, World BankPeople’s Bank of ChinaPublic Expenditure ReviewPurchasing power parityPoverty-targeted interventionsxv

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEQAEQAGQSARSARSALRWSSSCORESSEPASIDDSOEsTATVEUNDPVATWBIWHOWRMWSWTOWUAWWTPQuality at entryQuality Assurance GroupQuality of supervision assessmentsRapid supervision assessmentRural Sector Adjustment LoanRural water supply and sanitationState Council Organization for Reform of the Economic SystemState Environmental Protection AgencySelf-Financing Irrigation Development DistrictsState-owned enterprisesTechnical assistanceTownship and village enterpriseUnited Nations Development ProgramValue added taxWorld Bank InstituteWorld Health OrganizationWater resource managementWater supplyWorld Trade OrganizationWater users associationWastewater treatment plantsNote: All dollar amounts are U.S. dollars unless otherwise indicated.xvi

1IntroductionChina’s Achievements in a Quarter-Century of ReformIn December 1978, China reversed its development strategy of the previous30 years and launched a process of economic reform and opening up to theoutside world. The results of China’s strategic shift have been dramatic.Growth. Since 1980, China has had one of thehighest sustained rates of growth of per capitaincome in the world (see figures 1.1 and 1.2).While there is a lively debate on the accuracy ofofficial statistics, there is widespread agreementthat per capita gross domestic product (GDP)in constant domestic prices doubled between1980 and 1990 and then approximately doubledagain between 1990 and 2000. 1 In constantdollars and current purchasing power parity(PPP) terms (see table 1.1), the increase waseven greater, owing to exchange ratemovements. Exports in current U.S. dollarsincreased from $18 billion in 1980 to $249billion in 2000—a nearly 14-fold increase.Poverty reduction. Between 1990 and 2000, thenumber of people living on a dollar a day fell by170 million—during a period when total populationrose by more than 125 million. Over the pasttwo decades, China accounted for 75 percent ofpoverty reduction in the developing world.Stability. China also avoided the instability andoutput declines of most other transitioneconomies. This stabilityis often attributedto China’s gradualistapproach to economicreform (“crossing theriver by feeling thestones”), in whichinstitutional changesSince 1980, China hashad one of the highestsustained rates of growthof per capita income inthe world.have preceded or accompanied policychanges. 2Shortcomings and ChallengesDespite China’s enormous achievements ingrowth, poverty reduction, and stability, therehave been shortcomings as well, especially inthe 1990s.• Rising inequality and vulnerability. Therural reforms of 1979–84 reduced inequality, aswell as poverty. Since the late 1980s, however,inequality and vulnerability have increased, andsince the mid-1990s, poverty reduction hasslowed. 3 In the second half of the 1990s, theshare of people in poverty stagnated, despite anoverall growth rate of more than 8 percent.1

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable 1.1China: Selected Indicators, 1980–01Indicator 1980 1990 1995 2000 2001Population, total (million) 981 1,135 1,205 1,262 1,272GDP per capita (constant 1995 US$) 167 350 581 825 878GNI per capita, PPP (current international $) 430 1,300 2,460 3,690 3,950Exports of goods and services (current US$ billion) 14 62 168 280 299Exports of goods and services (% of GDP) 8 18 24 26 26Manufactures exports (% of total exports) 50 74 86 90 90Gross domestic savings (% of GDP) 35 38 43 39 40Gross capital formation (% of GDP) 35 35 41 36 38Overall budget balance (% of GDP) –1.9 –1.7 –3.6c–3.3 cRevenue (% of GDP) 26 20 11 b 15 17External debt, total (current US$ billion) 55 118 146 170 cReserves (current US$ billion) 2 29 105 b 166 212Poverty headcount (million) d 490 a 375 212 204Poverty incidence (%) d 51 a 33 17 b 16Note: 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.Figure 1.1Average Annual Real GDP per CapitaGrowth, China and Comparisons, 1980–01Percent9876543210ChinaEast Asia and Pacific Indonesia India Low and middle income BrazilThis partly reflects the fact that coastal provinceshave benefited more from reforms and openingup than remote, resource-poor inlandprovinces; but decentralization has also favoredcoastal provinces and reduced the scope forfiscal redistribution, and reforms have led toless equal access to health and education services.A 1998 survey by the Ministry of Healthfound that 22 percent of households below thepoverty level were in that position because of2

INTRODUCTIONFigure 1.2Real GDP Index of Selected TransitionCountries, 1989–01Index3503002502001501005001989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001China Vietnam Poland HungaryCzech Republic Romania Russian Federationa family member’s serious illness or injury (Zhu2002). Gender inequality persisted in the 1990s,when there were both advances and setbacks.• Environmental degradation. China’s airand water are heavily polluted, accounting fortens of thousands of deaths annually. Seven ofthe 10 most polluted cities in the world in thelate 1990s were in China. 4 “Green” environmentalproblems are also serious. One-third ofChina’s grasslands, which cover 40 percent ofland area, are seriously degraded. A falling watertable in northern China has seriously restrictedthe sustainable development of the region.• Risks from incomplete reform. The strategyof gradual reform is hard to fault in termsof the growth and stability it has provided.“Growing out of the plan”—leaving state enterprisesrelatively unreformed while encouragingprivate sector competition andgrowth—can be seen as an ingenious way tocompensate potential losers that purchasesprecious time and stability. But the incompletenessof enterprise reform poses risks thatcould undermine some of the achievements ofthe past 20 years. Most notably, it weakens thestate-dominated banking system, which stillhas more than 20 percent nonperforming loans(equivalent to about 30 percent of GDP), despitemoving many such loans to asset managementcorporations since 2000. It also posesdirect risks of unemployment and social instabilityand compounds fiscal problems bycutting into revenues needed for reforms ofpensions, housing, and social services and forredistribution to poorer provinces. Finally, insufficientreform in regulatory and legalprocesses fosters corruption, which has becomean additional source of discontent andpotential instability. 5 A World Bank China ClientSurvey (2002) found that corruption and socialprotection were most frequently consideredthe greatest challenges facing China (Annex K).China was admitted to membership in theWorld Trade Organization (WTO) in 2001. Thisrepresents a significant commitment on allsides. For the rest of the world, it impliesgranting equal access to markets. For China, itis a commitment to continue market-orientedreforms and opening up to the outside world.It thus poses both opportunities (for exportsand growth) and challenges (of adjustment tocompetition in agriculture, industry, andbanking).3

2Evolution of World BankAssistance StrategyThe 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 thechance to be a truly World Bank and provided an opportunity to work with acountry trying to introduce market socialism. For China, gaining membershipin 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 Chineseexpectations of the relationship this way: “We can do it with or without theBank, but with you we can do it faster.”The early years of the relationship were markedby patient efforts on both sides to overcomecultural differences and mutual misunderstandingsor suspicions. Chinese officials weredisconcerted by the extensive data requests inpreparation for the Bank’s first economicreport (World Bank 1982). 1 For its part, theBank was surprised to be presented with fullyprepared projects that were apparentlyexpected to be financed with no modification.Chinese suspicions that the Bank had anideological agenda were matched by Bankconcerns that the Bank would be used tocertify projects or policies on the basis ofgovernment assurances, rather than independentinvestigation and analysis. Finally, therewere different expectations about InternationalDevelopment Association (IDA) allocations.Some Chinese officials expected that Chinawould reach immediate parity with India andmight even be compensated for the yearsChina had lost while not a member. Because ofChina’s size and pressures for allocation toAfrica, these expectations could not be met.A compromise was reached in which China’sIDA allocation gradually increased to a levelcomparable to India’s, while China limitedInternational Bank for Reconstruction andDevelopment (IBRD)borrowing to maintain a50–50 blend. This meantthat overall lending toChina rose less quicklythan originally expected.Establishment of trustand mutual respect wasEstablishment of trustand mutual respect was along and arduousprocess, but by the middleof the 1980s relationswere excellent.5

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEChinese officials wereimpressed by the bigpicture painted by theBank in the first report,and were surprised by thesimilarities of problemswith other developingcountries.a long and arduousprocess, but by themiddle of the 1980srelations were excellentand Bank prestige inChina was high. TheBank’s economic andsector work (ESW) was abig factor (Stern 1997).Chinese officials wereimpressed by the bigpicture painted by theBank in the first report, and were surprised bythe similarities of problems with other developingcountries (Jacobson and Oksenberg 1990).The Brookings history of the Bank noted thatthis report “became a primer for senior Chineseofficials and went a long way in establishing theBank’s credibility in that country” (Kapur, Lewis,and Webb 1997, p. 24). The second major report(World Bank 1985) had an even more dramaticimpact. After reading it, Premier Zhao Ziyangasked the System Reform Commission toprepare a new five-year plan incorporating someof the main proposals of the report (Lu 2002).Lending also helped promote mutual trust.At first, the Bank largely accepted Chineseproject proposals with little modification, butinsisted on application of standard procurementand other procedures. The results ofinternational competitive bidding (ICB)lowered project cost so much that Chinaadopted competitive bidding for many of itsown projects. By the mid-1980s, projectpreparation and appraisal involved much moregive and take, and in 1987 the Bank approvedthe first (and only) adjustment loan to China—a Rural Sector Adjustment Loan (RSAL) inThe Bank thus emergedfrom the 1980s withconsiderable prestige andas a trusted adviser tothose Chinesepolicymakers andresearchers who favoredeconomic reform.support of ongoingrural reforms.The first real test ofthe relationship arosein the aftermath of theevents in TiananmenSquare in June 1989.The Board of ExecutiveDirectors was deeplydivided over theimplications for Bankstrategy. At the behest of the G-7, the Bankimposed a hiatus on lending to China. 2 Bankmanagement was concerned to avoid politicalconditionality and to help maintain the gains ofeconomic reform that had taken place in China.The director of the Bank’s China Departmenttraveled to China to take stock of the situationand report back to the Board, and in 1990,World Bank President Conable pushed theBoard to resume lending over the oppositionof some shareholders (Gwin 1997). In 1991,Bank lending resumed and quickly built up tohigher levels than before (see figure 2.1).The Bank thus emerged from the 1980s withconsiderable prestige and as a trusted adviserto those Chinese policymakers and researcherswho favored economic reform. Earlier evaluationsgave the Bank high marks for itsassistance to China in the 1980s. The Brookingshistory (commissioned by the Bank) of theBank’s first 50 years called the relationship“one of the most successful interactions of theWorld Bank with a borrower” and “one of theBank’s prouder achievements of the 1980s.” 3Lessons from the 1980s are limited, andcomparisons between the 1980s and the pastdecade are fraught with difficulty. By the 1990s,China was a completely different country thanit had been in the previous decade. The Bank’srole in the 1980s as a source of knowledge for along-isolated country was clear. But China inthe 1990s had far greater capacity, internationalexperience, and access to other sources ofknowledge and capital. In this more sophisticatedand competitive environment, therefore,the Bank was bound to have a lower profile andplay a different role.Evolution of the Relationship and BankStrategy after 1991The overarching objective of the Bank’sassistance strategy during most of the 1980sand early 1990s was to promote economicsystem reform. 4 In focusing on reform, theBank was following a long tradition ofoutsiders who have sought “to change China”for one reason or another (Spence 1969). 5System reform was seen by the Bank andChinese reformers alike as the key to long-6

EVOLUTION OF WORLD BANK ASSISTANCE STRATEGYFigure 2.1IBRD-IDA Commitments to China by FiscalYear, 1981–03$ millions3,500.03,000.02,500.02,000.01,500.01,000.0500.00.081 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 OO O1 O2 O3Fiscal yearIBRD commitment amount IDA commitment amountterm growth, modernization, and povertyreduction.System reform and macromanagement—and continued reform for better macromanagement—have remained prominentthemes of Bank Country Assistance Strategy(CAS) statements. Over the course of the1990s, increasing emphasis was placed onother objectives that were already noted assecondary objectives in 1991. The first standaloneassistance strategy in 1995, for example,had four areas of focus: macroeconomic andstructural reforms; infrastructure bottlenecks;poverty reduction; and environmental protection.The 1997 strategy was similar, butgrouped around five themes: macroeconomicgrowth and stability; infrastructure; humandevelopment and poverty reduction; agricultureand rural development; and environmentalprotection. The Bank’s strategy on povertyreduction and the environment evolved in linewith the approach in most of the Bank. Thestrategy for poverty reduction, for example,was to be pursued by helping China maintainhigh overall growth and by supporting agriculturaland human resource development.Lending for agriculture, the social sectors, and(increasingly) inland areas was an importantpart of the Bank’s stated strategy.The Bank’s strategyfor China differed fromthat for other countries,in degree if not in kind, intwo areas. First, the Bankconsistently emphasizedlending for infrastructureThe Bank consistentlyemphasized lending forinfrastructure andstressed policy reformwithin each sector.7

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEFigure 2.2World Bank Investment Lending for Chinaby Sector (% of total investment)Other5%Education3%Health, Nutrition, andPopulation3%Energy and Mining20%Rural24%Environment5%Transport29%Urban Development andWater Supply and Sanitation11%in China at a time when such lending was fallingBank-wide 6 (see figure 2.2 for sector allocation toChina and chapter 4 for a comparison with othercountries). Infrastructure bottlenecks were identifiedas a major impediment to growth andmacrostability, as well as to market integration.Second, more than in other countries, the Bank’sstrategy in China stressed policy reform withineach sector.How did the Bank aim to effect its ambitiousobjectives? Not through the direct impact of itslending. The Bank’s lending was modest 7 for acountry the size of China—$3.3 billion (0.6percent of GDP) at its height in 1994. Directforeign investment at that time was already 10times as high (see figure 2.3). Bank lendingwas, however, 4.2 percent of governmentexpenditure (and a higher but unknownproportion of discretionary expenditure) at atime of great fiscal stringency, so that for a briefperiod in the mid-1990s the Bank made anoticeable incremental contribution to budgetresources. Nevertheless, resource transfer wasnever seen as the main instrument of Bankstrategy or a major objective in its own right. 8Nor was conditionality an important instrument.Like other large countries for which theBank is a relatively modest source of capital,China was reluctant to accept strong conditionality.China was particularly sensitive to conditionalitybecause of its associations in the minds ofsome with unequal treaties and extraterritorialconcessions. China also had no need for balanceof-paymentssupport, and the one adjustmentloan (the RSAL of 1988) was an untranchedoperation based on already completed actionsand disbursed against expenditures. There wasproject-specific conditionality, of course, butsectorwide conditions were rare.The methods the Bank employed to pursueits strategic objectives were mostly variants ofpersuasion and example.• Persuasion through ESW, workshops, and otheranalytical and advisory activities (AAA) was a keymethod. The target audience was mainly seniorofficials and their policy advisers, and theobjective was to persuade them to implementtop-down reforms.• Dual-track approach of building trust throughlending while carrying the policy dialoguethrough sector work. Each project was in-8

EVOLUTION OF WORLD BANK ASSISTANCE STRATEGYFigure 2.3Ratios of Aid and DFI to GDP, 1990–00% of GDP7.006.005.004.003.002.001.000.001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Official development assistance and official aidIBRD/IDA disbursementForeign direct investment, net inflowstended to push the frontier of policy or institutionalchange, but the approach was gradualistand depended less on conditionality thanpersuasion.• Working with willing partners. The Bankworked with the power sector, which wantedaccess to the technology that Bank lendingcould provide and which was receptive to policysuggestions, but the Bank withdrew fromworking in the coal sector because the Ministrywas not interested in policy dialogue. In housingreform, the Bank worked with municipalitiesthat were willing to introduce economicrents and excluded areas such as Shanghaithat were not. The Bank continued to workwith Shanghai in other sectors, however, andShanghai later introduced housing reformson its own.• Demonstration effect. The Bank relied on thedemonstration effect of successful project experiencein introducing new technologies,management methods, or policy reforms toleverage the impact of project outcomes. Thiswas largely a bottom-up process of diffusion byexample, though China also uses pilots to testchanges before they are rolled out nationwidethrough changes in national policy.The approach just outlined fits well withChina’s preference for gradual and pragmaticreform. It clearly left the government “in thedriver’s seat,” with all that implies for countryownership and performance. One drawback isthat important issues may be omitted if key actorson the government side are unwilling to bepartners with the Bank, or with other Chineseagencies in cases such as the environment, wherecoordination is vital. 9 The dual-track approachcan also lead to overly modest project objectivesor complacency, and accountability for the Bank’sperformance can be difficult to assess whenpolicy issues are left to the uncertain timing andoutcome of the second track (policy dialogue).After the 1997 reorganization, the Bankdecentralized the China department, movingthe country director to Beijing and expandingthe size and functions of the resident mission.This positive development for Bank-Chinarelations was offset bythree negative developmentsfrom China’spoint of view.First, IBRD lendingto China was increasinglyconstrained by theThe methods the Bankemployed to pursue itsstrategic objectives weremostly variants ofpersuasion and example.9

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEThe loss of IDA was adisappointment to thegovernment and placedstrains on the Bank’srelationship with China.Bank’s limits on the share of its portfolio in asingle country. As a result of this, IBRD lending,which had built up rapidly in the early 1990s toa peak of $3.3 billion in FY93, declined to below$1 billion by FY01.Second, the Bank stopped lending IDAfunds to China after FY99. Although plans toswitch from blend to all-IBRD lending had beenconsidered earlier and postponed for threeyears, the loss of IDA was a disappointment tothe government and placed strains on theBank’s relationship with China. IDA donorsdecided that China was sufficiently creditworthyto dispense with IDA funding. The governmentthought this unfair because per capitaGDP was still below the cutoff line at that timeand because there were still some 200 millionpeople in China with consumption below adollar per day. The government also felt thatBank senior management could have foughtharder to retain China’s access to IDA. Apartfrom the strain this placed on the relationship,it greatly complicated Bank strategy. Beneficiariesright down to the village or individualfarmer level have always been responsible forloan repayment. With the loss of IDA, thegovernment has decided that the Bank will belargely excluded from lending to poorprovinces or the social sectors because IBRDterms would be too onerous.The third significant negative developmentwas an Inspection Panel report on the Qinghaicomponent of the Western Poverty Project. ThePanel’s report, issued on April 28, 2000,concluded that the Bank had failed to follow itsown safeguard procedures for the environment,indigenous peoples, and involuntary resettlement.Following a Boarddecision that the projectbe resubmitted forapproval after addi-tionalstudies, China withdrewits request for Bankfunding and decided tocomplete the project using its own funds.These three developments affected theBank’s assistance strategy. After the 1998update of the 1997 strategy, the Board askedthat no further CAS be sent until there was astrategy to deal with the constraints posed byexposure limits. An agreement reached in July2002 provided, among other things, for prepaymentof some Bank loans and for offsetpurchases of IBRD bonds so that the Bank canincrease its annual lending to a projected$1.2–$1.3 billion.The latest CAS, presented in December2002, is consistent with previous ones. Themain objectives are to support China inmaking two transitions, from a rural/agriculturalto an urban/industrial society and from aplanned to a market economy. The CAS isorganized around three themes—improvingthe business environment to help acceleratethe transition to a market economy, addressingthe needs of poor people and regions, andfacilitating environmental sustainability. Themain differences with previous strategies areimposed more by the shift to all-IBRD termsthan the overall reduction in lending. TheBank is constrained from shifting its lendingto lagging regions and from maintaining thelevel, or even the share, of lending to agriculture,the social sectors, and poverty projectsbecause of the difficulties these regions andsectors would have in repaying IBRD. Aninnovative arrangement, in which the U.K.Department for International Development(DFID) blends grants with IBRD loans tosimulate IDA terms, offers an opportunity forthe Bank (jointly with DFID) to remainengaged in social sectors and povertyprojects. By also maintaining a relatively highlevel of lending for infrastructure, the Bankaims to increase the share of lending topoorer, inland provinces. The effect of theInspection Panel Report on safeguards policyis discussed in chapter 4.10

3Progress on DevelopmentObjectivesThe Bank’s assistance strategy had four main objectives during the pastdecade: (1) promoting market-oriented system reform and bettermacroeconomic management, (2) poverty reduction, (3) supporting infrastructuredevelopment for growth and market integration, and (4) environmentalprotection. This chapter reviews progress on these objectives overthe past decade and the impact of the Bank’s assistance on each objective.Macroeconomic Managementand System ReformSystem reform has been the most prominentobjective of the Bank’s assistance strategy,particularly in the early years of the periodunder review. Macroeconomic managementand system reform have always been seen bythe Bank as complementary. Growth and stability(low inflation) create a favorable climate forreform, and system reform (notably, creation ofa “hard budget constraint” for enterprises andbanks) creates the micro foundation (responsivenessto price signals) for indirect macromanagement. 1 China’s macro managementcould hardly have been better in the areas ofgrowth, inflation, and foreign trade andexchange rate management. Fiscal managementhas been more of a problem. Whileprogress has been made on enterprise andrelated reforms, the unfinished agenda ofsystem reform poses risks for financial, fiscal,and social stability.Macroeconomic ManagementChina faced two critical tests to the maintenanceof growth and stability in the pastdecade. The first came in the early 1990sfollowing the resumption of reform in 1992. Bymid-1993, inflation had again risen to about 20percent per annum (as it had during 1988–89),provoking a fierce debate in China on whetherreform was compatible with macro stability.The Bank was able to make an importantcontribution to the debate through a conferenceon “Macroeconomic Management inChina,” held in Dalian in June 1993. This wasone of a series of annual conferences, cosponsoredby the Bank and the System ReformCommission, that brought together Chineseofficials and scholarswith Bank staff andforeign experts todiscuss some aspect ofreform. The Bank’sargument that macroChina faced two criticaltests to the maintenanceof growth and stability inthe past decade.11

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEinstability was the result of incomplete reform,rather than inherent in reform itself, helpedinfluence subsequent efforts to reform thecentral bank and monetary management and toundertake fiscal reform to restore and partiallyre-centralize revenue collection. 2 Thisinfluence seems to have carried over into tradeand exchange rate reform as Chinese reformsin these areas were influenced by and largelyconsistent with the recommendations of amajor Bank trade report (World Bank 1994b).The second test was the Asian financial crisisof 1997. China’s decision to forgo competitivedevaluation in the wake of the 1997 crisis helpedlimit the crisis. China also countered that shockwith an expansionary fiscal policy. Thismaintained China’s growth rate and helpedneighboring countries recover more quickly, butit also led to growing fiscal deficits andpostponement of financial sector reform inorder to sustain growth. Bank advice may haveinfluenced China’s response to the crisis. TheBank’s chief economist met with the premierand other officials and advised China to preventdeflation and competitive devaluation. Thoseviews were circulated within the government. 3The ambitious China 2020 study (World Bank1997) coincided with the Asian crisis, whichdistracted policymakers from the long-termissues addressed in the report and the impendingloss of IDA, which strained relations. Chineseofficials and researchers interviewed for thisCountry Assistance Evaluation (CAE) alsoAlthough Chinaexperienced the samerelative decline inrevenue as many othertransition economies, itavoided fiscal collapseand inflation because ofits high savings rate andimplicit taxation of thefinancial system, andbecause it undertooktimely fiscal reforms.criticized China 2020because it had too littleChinese input andfocused on problemsand long-term goals,rather than on concretesteps to achieve them.Other donors, however,reported that theyfound this reportvaluable for helpingformulate their ownassistance strategies,and sector ministriesfound the backgroundpapers very useful.Fiscal policy is the most difficult long-termchallenge of macro management. Althoughgovernment revenue never declined inabsolute terms, it decreased sharply as apercentage of GDP from 34.4 percent in 1978to 19.1 percent in 1990, reaching a low of 11.1percent in 1995 (figure 3.1). In part, this was anintended consequence of the decliningfinancial intermediation role of the government,but it was mainly due to the erosion ofstate-owned enterprise (SOE) profits becauseof competition from township and villageenterprises (TVEs). Central governmentfinances were particularly hard hit because of aseries of adverse (to the center) fiscal contractsnegotiated with individual provinces in themid- to late 1980s. The declining share ofgovernment revenue, attempts to maintainfunding of SOE investment (through banks, aswell as the budget), and pressures to cushionthe effects of reforms through subsidies led togrowing inflation in the late 1980s. Fiscalreforms in 1994 regularized intergovernmentalfiscal relations and set the stage for a gradualrecovery of the share of government revenueto 17.2 percent in 2001 (Ahmad and others2002). 4 Although China experienced the samerelative decline in revenue as many othertransition economies, it avoided fiscal collapseand inflation because of its high savings rateand implicit taxation of the financial system,and because it undertook timely fiscal reforms.The Bank argued strongly for these reforms inorder to improve the instruments of macromanagement. The Bank also gave advice on avalue added tax in 1993 and provided a fiscaltechnical assistance credit in 1995 to supportbudget administrative and fiscal policyimprovements, including tax policy andintergovernmental grants. The momentum forfiscal reform slowed in the late 1990s, andimplementation of the project was delayed, butinterest in fiscal issues has recently increased.Despite these achievements, China facestwo other difficult fiscal issues. First, continuingbudget deficits and large contingent liabilitiesfor pensions and the banking system createa debt management problem. Informal work onthe implications of contingent liabilities for12

PROGRESS ON DEVELOPMENT OBJECTIVESFigure 3.1Revenue Trend25Revenue as a percent of GDP201510501990 19911992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Central revenueNon-central revenuedebt management (see Krumm and Wong 2002for a published version) has reportedlysensitized officials to the seriousness of thisissue. Second, the intergovernmental fiscalsystem remains deeply flawed. The Bank’sProvincial Public Expenditure Review (PER)provides a good analysis of the issues (WorldBank 2002a). There is a mismatch between taxand expenditure assignments at different levelsof government, and the overall incidence of thefiscal system is regressive. Per capita governmentexpenditures in the richest five provinceswere 3.3 times those in the poorest fiveprovinces in 1998 (up from a differential of 2.1times in 1990). 5 This imbalance accentuatesregional inequality. Moreover, provincial andlocal authorities impose a number of ad hocfees that are a particular burden in poorerareas. 6 The level and arbitrary nature of thesefees have been a major source of discontent,leading to “tax revolts” in some poorer ruralareas. A pilot program introduced by AnhuiProvince to substitute taxes for fees and limitthe level of rural taxes is now being rolled outin other provinces, but it does not address theoverall regressiveness of the fiscal system. 7System ReformChina’s strategy of gradual economic reform hassuccessfully sustained growth, stability, and politicalsupport, but the unfinished reform agendaposes significant risks. 8 To some extent, these havebeen calculated risks—the calculation being that itwas more important to sustain growth after theAsian crisis than to press ahead with enterprise andbanking reform—but the risks are significantnonetheless. Although sometimes impatient withthe pace of reform, the Bank has broadlysupported China’s incremental approach.State-ownedenterprise reform iscentral to reform of theentire economic systemfor several reasons.The unfinished reformagenda poses significantrisks.• In the pre-reform system, SOE profits werethe main source of savings and government revenue.Prices bore little relationship to costsor scarcity and were used by the central authoritiesas implicit taxes and subsidies. Thusenterprise reform was closely linked to pricereform and had enormous macroeconomicimplications—15 of the 23 percentage point13

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEdrop in the share of government revenue toGDP between 1978 and 1995 was attributableto lower revenues from industrial SOEs.• SOEs have traditionally had enormous socialresponsibilities, providing lifetime employmentand housing, pensions, health care, andeducation for workers and their families. Withoutunemployment insurance and housingand pension reform, enterprise reforms resultingin dismissal of workers would createhardship and social unrest.• Reforms that shift responsibility for social servicesand insurance from the enterprise to thestate (the socialization of welfare) have budgetaryimplications. They require additionalpublic funding and/or individual fees at thesame time that revenues are tight.• Much SOE investment previously financedthrough budget grants is now funded throughloans from state-owned commercial banks.Banks, however, are subject to political and socialpressures and often lend to SOEs that mightnot qualify on strictly commercial criteria.It is not surprising that enterprise reformhas been gradual. The social responsibilities ofSOEs and the links between enterprise reform,social services and insurance, the budget, andthe financial sector mean that all aspects ofreform have to go forward together, or becarefully sequenced, to avoid adverse macro orsocial consequences.Considerable progress has been made onsystem reform. Price reform took place graduallyduring the 1980s and early 1990s, and mostprices in China are now market-determined. 9SOEs themselves steadily declined in importanceduring the 1990s. Their share of industrial outputIt is not surprising thatenterprise reform hasbeen gradual. All aspectsof reform have to goforward together, or becarefully sequenced, toavoid adverse macro orsocial consequences.declined from 78percent in 1978 to 54.6percent in 1990 and 23.5percent in 2000,although the share ofindustrial output of“state-owned and stateholdingenterprises” wasstill 47.3 percent in2000. 10 This relativedecline reflects the rapidgrowth of the non-state sector, rather than anabsolute decline of SOE output, but in recentyears SOE reform has accelerated. Under a 1997guideline of “focusing on the big and letting gothe small,” reform strategy has been to corporatizelarge enterprises while putting smallenterprises under private management orownership. By the end of 2000, 81 percent of the635,000 small SOEs had been transformed tonon-state ownership. 11 The introduction ofbankruptcy legislation, unemploymentinsurance, housing reform, and limited pensionreform has enabled the closure of many lossmakingSOEs and a reduction in SOE employmentof some 30 million jobs between 1998 and2002.Enterprise and related reforms are far fromcomplete, however, and this poses significantchallenges and risks. Although reformsboosted SOE productivity, the proportion ofSOEs incurring losses increased from 26percent of the total in 1992 to 50 percent in1998, as competing non-SOEs did evenbetter. 12 Despite housing and other reforms,many SOEs still have social obligations thatmay partly account for their poor financialperformance. Privatization of small SOEs haslacked transparency, frequently leading toasset-stripping and other forms of corruption.Large SOEs have been delinked fromministries and organized as corporations, butcorporate governance and regulation areweak. 13 Coverage of unemploymentinsurance and social security is limited tourban areas, and programs are underfundedbecause responsibility for funding remainsmainly at the municipal level. Finally,commercial banks have become seriouslyexposed to risk of non-repayment by SOEs.Nonperforming loans (NPLs), mainly fromSOEs, are officially estimated at around 25percent of total loans despite an earlier shiftof part of the portfolio to asset managementcorporations. Ultimately, since the banks arealso state-owned, NPLs create contingentliabilities for the budget.The Bank’s role in enterprise and relatedreforms has been mixed. One of the mostfrequently cited areas of successful Bank14

PROGRESS ON DEVELOPMENT OBJECTIVESassistance by Chinese sources is pensionreform. Bank support included ESW, researchpapers and participation in an internationalworkshop, a policy note at the request of thepremier, and a project to help supportimplementation of a pilot reform scheme inLiaoning Province (Lu 2002). 14 The Bank hasalso contributed to housing reform throughprojects as well as ESW. AAA on enterprisereform has been influential in promotingconcepts such as corporatization; the Bank hasgiven a great deal of advice in reports,seminars, and technical assistance oncorporate governance and bankruptcy, but ithas also been criticized for being too generic(“operating at a level of 30,000 feet,” as onestaff member put it) and too timid in discussingprivatization (Lu 2002). 15 Bank projects in theindustrial sector were the least successful in thelending program; five of eight industrialprojects completed after 1992 had unsatisfactoryoutcomes. Technology upgrading was thedominant objective in most projects, but somealso sought to pilot some type of reform.Overall, they failed on both counts. The Bank isill-suited to providing the kind of quick, flexibleassistance needed in industry, and partialreforms at the enterprise level do not succeedwithout a wider change in policies andincentives. More recent experience has alsobeen less than satisfactory. A technicalassistance project for enterprise reformattracted little interest from the local governmentsthat were meant to be its beneficiaries,and the Shenyang Industrial Reform Projecthad little impact on reform. 16 The Bank hasincorporated the lessons learned into itscurrent strategy and there have been no newindustrial projects in recent years. 17The biggest risk to China’s continuedgrowth and the biggest failure of the Bank’sassistance strategy thus far is the financialsector. The banking system has beenextremely successful in mobilizing householdsavings to replace SOE savings, but it does notallocate resources efficiently (a majority ofloans from the dominant state-owned banksgo to SOEs) and its alarming rate of NPLs posesa huge risk to the budget. While it is true thatthe potential budgetcosts are mitigated bythe fact that the state isboth creditor (as ownerof the banks) anddebtor (as owner of theSOEs), the systemic riskis still enormousbecause different levelsThe biggest risk to China’scontinued growth and thebiggest failure of theBank’s assistance strategythus far is the financialsector.of government have different net positions,the value of enterprise assets may be only afraction of outstanding loan value, the governmenthas an implicit contingent liability tohousehold depositors, and entry into WTO willincrease competitive pressure on banks as wellas enterprises. Financial sector reform cannotbe separated from enterprise reform, becauseto reform one quickly risks forcing collapse ofthe other. The government has made progressin recent years (see Annex E), but the stakesand risks are still high.The Bank’s financial sector review (WorldBank 1990) was the basis for assistancestrategy in the 1990s, which sought to createindependent banks that, while still stateowned,would operate on commercial principles,subject to an improved regulatory andsupervision system. The Bank recognized theneed to find ways to limit political interference,especially from local authorities who hadinfluence over local bank branches, as well ascontrol over SOEs. Bank advice to createregional branches of the People’s Bank ofChina (PBC), along the lines of the U.S. FederalReserve, represented an early (successful)attempt to limit local political interference andreassert central authority over monetaryaggregates. Although little subsequentprogress was made on the objectives set out inthe 1990 review, the Bank did not recast itsstrategy. 18A Financial Sector Technical AssistanceProject (FSTAP) completed in 1994 supporteddevelopment of financial sector “infrastructure”in areas such as the payments system, prudentialsupervision and regulation, and PBC’s debtmanagement, and provided an opportunity fordiscussion of policy issues. Other Bank lendingto the financial sector did little to build up15

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEinstitutional capacity for independent financialintermediation, however. Although three of thesix line-of-credit (LOC) projects completed after1991 were rated satisfactory and three weremarginally satisfactory shortly after completion,they appear less successful now than atthe time. Subprojects had good rates of return,but the Bank’s loans neither improved theoverall quality of loan portfolios nor had muchimpact on systemic financial sector issues. Tothe extent that project evaluation improved, itmay have been used to select the best projectsfor Bank funding, rather than to reject projectsthat showed a low rate of return. The last LOCoperation closed in 1996. The Bank had triedto develop a Financial Sector DevelopmentProject and then a project to support theConstruction Bank, but these efforts came tonothing. The Bank was reluctant to include alarge LOC component, and China disliked thedisclosure requirements and felt the Bank wasnot nimble enough in preparing the project.The Bank’s analytical work suffered from lackof staff with sufficient expertise or familiaritywith China, and there was frequent turnover.China also looked to investment banks andconsultants rather than the Bank for theincreasingly specialized policy and institutionaladvice being sought. Financial sector work onChina continued to dwindle after 1997. Duringthe 1997 Asian crisis, China’s top leadershipwas interested in lessons of the crisis forChina’s own banking and financial sector.However, there was little interest or confidencein Bank advice or support at lower levels, andthe Bank accommodated this lack of interest,undertaking almost no Bank work in the sectoruntil 2001.In 2001, the Bank agreed with the governmentto renew Bank support for financialsector reform and development through aprogram of AAA. The Bank produced a series ofconfidential policy notes on specific issues ofinterest. 19 The notes provide a good survey ofthe issues, but are based mainly on internationalexperience. If this promising renewal ofcollaboration is to be effective, the Bank willneed to ground its recommendations inanalysis of Chinese experience. 20Summary: Macro Management andSystem ReformChina’s achievements in growth and stabilizationover the past decade have been outstanding.Steady progress has also been made in key areasof system reform, but intermittent andincomplete reform of the intergovernment fiscalsystem, SOEs, and the financial sector pose risksfor continued growth and stability. The Bankmade a significant contribution to China’smacroeconomic management following theresumption of reform in the early 1990s, helpingto persuade the top leadership that continuedreform was not only consistent with, but essentialfor, high growth with low inflation. With respectto system reform more generally, the Bankhelped identify the critical nexus ofenterprise/financial sector/fiscal reforms neededto underpin high growth with stability, but it wasless successful in promoting implementation ofsome of the components. In the banking sector,the Bank largely failed to engage with the relevantauthorities throughout the mid- and late 1990s,though it helped improve basic bankinginfrastructure such as payment systems. TheBank has now reengaged in the financial sector,but the effectiveness of its advice remains to beseen. In state enterprise reform, the Bankprovided useful support on bankruptcy legislationand in associated housing and social securityreform, but attempts to introduce reformsthrough industrial projects were largelyunsuccessful, and overall reform advice remainedtoo generic to have much practical impact. In thefiscal area, the Bank’s advice was influential inhelping reverse the decline in governmentrevenues and the central share of revenues in theearly to mid-1990s, and more recently, the Bankhas stimulated government awareness of thelarge fiscal contingencies arising from nonperformingloans and unfounded enterprisepension obligations. Finally, Bank analysis andadvice helped stiffen China’s resolve to completeits successful negotiations on WTO entry. Overall,the Bank met with only mixed success in helpingmove reform forward. Incomplete financialsector and enterprise reform, and the associatedheavy fiscal contingencies, pose significant risksto China’s accomplishments. 2116

PROGRESS ON DEVELOPMENT OBJECTIVESPoverty ReductionNo country has been more successful thanChina in reducing poverty in the past 20 to 25years. Some 220–290 million people havemoved out of poverty, depending on the definitionused. The biggest reductions in povertycame in the early period, mainly due to ruralreforms. 22 In the latter part of the 1990s, thenumber of poor remained roughly constantdespite high growth rates, and China’s povertyrate, using the purchasing power parity dollarper-daymeasure was relatively high comparedwith other countries at a similar PPP incomelevel (see box 3.1). In contrast to the early1980s, the benefits of growth in the 1990s haveaccrued disproportionately to the better-off,and inequality has increased steadily. The ratioof urban-rural incomes, which had fallen from2.9 in 1978 to 1.9 in 1985, rose to 2.2 in 1990and 2.7 in 1999 (see Annex R, table R.8). 23Vulnerability has also increased markedly.Particularly in rural areas, access to health carehas deteriorated. In urban areas, insecurity hasincreased as enterprise reform has led toredundancies and uncertainty about funding forpensions and unemployment benefits. Andwhile migration restrictions have been relaxedsomewhat, under the urban registration(hukou) system, most migrants are not entitledto resident benefits such as housing andeducation. China is making good progress onmeeting most national Millennium DevelopmentGoals (see Annex R, table R.9 and ChinaCAS 2002), but progress has been highly unevengeographically. On current trends, some poorerregions will not meet all the goals by 2015.Growth was the most important factor inChina’s success in poverty reduction. But therecent slowing of poverty reduction and increasinginequality and vulnerability show thatgrowth—even very rapid growth—is notenough. Several structural factors offset thepoverty-reducing effects of growth: remote,resource-poor areas have lower growthpotential than coastal areas; the scope for raisingrural incomes by improving cropping patternsand the terms of trade for agriculture had largelybeen exhausted by the mid-1980s; and withaccelerating enterprise reform, employmentgrowth naturally lagsbehind output growthbecause of the hugereserve army of hiddenunemployed in state andcollective enterprises. 24But policy factors also inhibited povertyreduction. Special privileges designed to attractforeign investment (such as special economiczones) were long limited to the coastal region;the tax-sharing system has redistributedrevenues in favor of rich localities; and migrationfrom rural areas has been limited. This last policyhas special significance because one of the mainways in which growth trickles down fromleading sectors and regions is through themovement of labor.The Chinese government recognized earlyon that growth is not enough to reduce poverty.In 1986, at about the same time that China’sdevelopment strategy shifted from agriculturalgrowth to export-led development in coastalregions, the government set up the LeadingGroup for Poverty Reduction (LGPR) under theState Council and started to identify poorcounties that would qualify for targetedassistance. Studies have estimated that targetedprograms may have raised the rate of growth inpoor counties by 1 to 2 percent per year. 25Unfortunately, regional targeting may be a“blunt instrument” for reaching the poor(Lipton and Ravallion 1995). About half ofChina’s rural poor do not live in poor counties,and a majority of people living in targetedcounties are not poor. Thus coverage (of thepoor) was weak and leakage (to the non-poor)substantial.The government introduced several newelements into its poverty strategy during the period1999–01. The most significant new element was theadoption of a 10-year plan in 2001. The planintroduced an explicitmulti-sector approach,emphasizing agricultureand rural development,provision of educationand training to the poor,and facilitation ofvoluntary migration andNo country has been moresuccessful than China inreducing poverty in thepast 20 to 25 years.Growth was the mostimportant factor inChina’s success in povertyreduction. But growth—even very rapid growth—is not enough.17

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBox 3.1China’s Poverty in InternationalPerspectiveWhile there is broad agreement on the tremendous progressChina has made in reducing poverty, estimates of the remainingproblem depend critically on how poverty is defined. UsingChina’s official poverty line (an income level equivalent to 66cents per day), the number of poor people has declined from 250million (26 percent) of the population in 1978 to fewer than 30 million(2.3 percent) in 2001. Using World Bank figures based on adollar-per-day consumption level in PPP terms, the number ofpoor has declined from an estimated 490 million (51 percent) in1978 to about 205 million (16.1 percent) in 2000.China has a relatively high proportion of poor people comparedwith other countries at similar income level. Based onthe most widely used poverty line of a dollar per day consumptionin PPP terms, China ranked fourth among countrieswith annual per capita PPP income between US$2,500 andUS$4,500 in 1999 (see table below). Comparisons of povertyamong countries are sensitive to definitions, however—especiallyto the poverty line used to divide, somewhat arbitrarily,the poor from the non-poor. The China household saving rateis high even in low-income households, making the comparisonbased on levels of consumption less meaningful. Using incomerather than consumption, only 9.8 percent of thepopulation would have been below the dollar-per-day povertyline in 1999. Moreover, the PPP comparison is based on averageconsumption, whereas to compare poverty levels acrosscountries, it ought to be based on the consumption basket oflow-income households. The main conclusion to be drawn isnot that poverty is relatively high or low, but that a large proportionof the population is close to the poverty line, howeverdefined.Comparison of Poverty among Selected CountriesPer capita PPP incomePercentage in povertyCountry (US$) (measured by $1 per day consumption)El Salvador 4,260 26.9Turkmenistan 3,340 20.9Paraguay 4,380 19.5China 3,550 18.5Peru 4,480 15.5Guatemala 3,630 10.0Indonesia 2,660 7.7Sri Lanka 3,230 6.6Jamaica 3,390 3.2Egypt 3,460 3.1Ukraine 3,360 2.9Jordan 3,880

PROGRESS ON DEVELOPMENT OBJECTIVESUntil the late 1990s, China’s poverty strategywas to push for the fastest possible growth,combined with targeted regional developmentinterventions. Could China have done more toreduce poverty faster? Or would such attemptshave simply reduced growth without affectingpoverty? The recent changes in strategysuggest that the government thinks it couldhave done better. It is now recognized thatpoverty is not just a rural phenomenon andthat rural poverty is not just concentrated inremote areas. Vulnerability is also recognizedas a serious problem, though many requiredreforms (housing, pensions, social assistancefor the poor and unemployed) need furtherdevelopment and more secure funding, andothers (such as health finance reform) havescarcely begun. Similarly, the importance ofmigration in spreading the benefits of growthand helping to create a more sustainablebalance between population and resources infragile areas is now recognized, but migrantsstill face restrictions and discrimination. Whatis perhaps still not sufficiently recognized isthat the regressive fiscal system offsets many ofthe benefits of targeted interventions. 26The Bank has made a substantial contributionto China’s evolving poverty reductionstrategy through its AAA, poverty monitoring,and projects. The main strength of the Bankprogram has been the close integration ofthese three instruments.AAA and Poverty MonitoringThe Bank’s ESW and research on poverty havebeen influential both inside and outside China.Two studies of rural poverty (World Bank 1992and World Bank 2000) provided an overview ofpoverty issues and sensible strategy proposalson targeting and the need for a multi-sectorapproach to rural development. Combinedwith an international conference cosponsoredby the Bank in 2000, 27 these reports helpedinfluence the reorientation of governmentstrategy in the 10-year plan for povertyreduction adopted in 2001. Research by theBank’s Development Economics ResearchGroup (DECRG) on the determinants andmeasurement of poverty has also influencedboth scholarly and policy views. 28 Both thesector reports and research papers are widelycited in the literature. DECRG has also workedclosely with China’s Bureau of Statistics,providing training and advice on defining andmeasuring poverty and on the design of thehousehold survey and other monitoring activities.One gap in the Bank’s poverty work hasbeen the neglect of studies on urban poverty(although the Bank has been involved inanalyzing pension reform and other vulnerabilityissues, as discussed in the previous section).But a report by the Asian Development Bank(ADB 2002) has filled this gap admirably, and itmakes sense to build on this division of labor,rather than to duplicate efforts. One highpriorityarea would be a study of labor marketissues, including the informal sector and linksbetween rural and urban areas.Poverty LendingLending for poverty-related projects, asmeasured by “poverty-targeted intervention”(PTI) lending, has been relatively low—under15 percent of total lending in China, comparedwith 56 percent in India. 29 However, the shareof PTI lending may be a misleading measure ofsupport for poverty reduction for severalreasons: non-PTI projects (such as highwaysthat integrate remote markets) may be morebeneficial to the poor than direct interventions;projects may have poverty components, but stillnot qualify for PTI classification; and finally, theBank’s impact will largely depend on providingreplicable examples of best practices, given thesmall share of Bank lending in total investment.In fact, the Bank’s direct poverty lendingthrough integrated rural development projectshas provided a replicable model for targetedintervention. The Southwest Poverty Project, inparticular, has introduced new concepts andpractices that have benefited not only projectparticipants but also the government’s owntargeted interventions and practices (see box3.2). Nevertheless, the share of poverty-relatedprojects in the lending program has probablybeen less than optimal for demonstrationpurposes, and PTI lending has virtuallydisappeared following the loss of IDA.19

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEThis growing disparitybetween the share ofagricultural employmentand the share ofagricultural GDP reflectsthe growing importanceof non-farm income.Agricultural SectorAgriculture is still themost important sourceof livelihood for ruralresidents, though it isdeclining in relativeimportance. Half thepopulation was stillemployed in agriculturein 2000, down from 60percent in 1990, but agriculture’s share of GDPwas only 16 percent in 2000 (down from 27percent in 1990), despite continued annualgrowth of 3.5 to 4.0 percent. This growingdisparity between the share of agriculturalemployment and the share of agricultural GDPreflects the growing importance of non-farmincome, which grew from 26 percent offarmers’ household income in 1990 to47 percent in 1999.The structural changes also show theimportance of looking at agricultural productionas only one element in rural development andpoverty reduction. The Bank’s assistance strategyfor agriculture in China has increasingly donethat, gradually shifting its emphasis from increasingagricultural production to improving ruralincomes in poorer areas and improving naturalresource management for a more sustainablerural economy in ecologically fragile areas. Mostagriculture sector projects have emphasizeddiversification of production, including non-farmBox 3.2A Best Practice Poverty ProjectAn internal assessment review in 1995 identified the SouthwestPoverty Project as best practice soon after the project began beingimplemented. Subsequent project performance has confirmed thisassessment. The project implements many of the recommendationsof the 1992 rural poverty report (World Bank 1992b) and involvedDECRG and Chinese poverty-monitoring organizations inM&E. The design of the project went against long-standing conventionalwisdom that integrated rural development projectswere too complex to implement. Because of involvement of theLeading Group for Poverty Reduction (LGPR) and the support ofthe highest levels of the national government, it was able toovercome bureaucratic resistance to coordination.The outcome of the project has been highly satisfactory overall.Preliminary results of a review by DEC (Chen and Ravallion2003) estimate a rate of return on investment in the project ofnearly 10 percent. Since the comparator villages were part of thegovernment’s own program in poor counties, this is a measureof the Bank’s value added. Poorest households benefited most.This was achieved by targeting the poorest townships and villages,rather than attempting to identify poor households within“poor counties.” The latter approach has not worked well in verypoor areas because it undermines political support and leads tofavoritism in allocation, with attendant leakage and corruption.Not all components worked. Investments in TVEs, as in otherprojects, were largely unsuccessful, but this component was reducedsharply during implementation. The health component, involvingan attempt to provide collective insurance, was notvery successful. Preventive care was often preempted by expenditureon curative measures. The project was also moresuccessful in some provinces than in others. Success dependedon the capacity and commitment of provincial and local governmentsand on ability to monitor and enforce repayment ofcredit in the project.Several lessons have emerged from the project. Two lessonsthat the government is applying to its own projects are, first, theimportance of project supervision—for ensuring that implementationtakes place and benefits reach intended beneficiariesand for making adjustments to take account of problems,successes, and unexpected events—and second, the need to improvetargeting to reach the poorest areas. Two additional lessonshave yet to be assimilated. First, the project confirms thevalue of a multisector approach to poverty interventions. Whetherthis coordination should be done through national projectsunder the LGPR or through provincial authorities, and whetherall sectors (such as health and education) should be integratedunder a single project umbrella are still matters of intense debatewithin the government and the Bank. Second, the projecthighlights the primacy of national or sector policies in someareas. Labor mobility can be facilitated through a regional developmentproject, but national policies to remove obstacles tomovement and to protect migrants from exploitation are necessaryand more cost-effective. Improved education and (especially)health outcomes in poor regions will also requiresystemic changes and outside resources, as well as local efforts.20

PROGRESS ON DEVELOPMENT OBJECTIVESproduction, rather than just increasing productionor yields of traditional crops.The impact of the Bank’s program in agriculturehas been mixed. The Bank’s sector workand policy advice on grain policy and otherbroad aspects of agricultural strategy have beensound, 30 but failed to overcome resistance insome areas. By 1999, 83 percent of all agriculturalproducts were sold at market prices, butgrain marketing has been liberalized at a slowrate since the late 1980s. Quotas still exist, andpolicies on marketing arrangements werereversed in 1998. This mainly reflects strategicconcerns about dependence on grain imports;the economic case for liberalization is wellunderstood by Chinese policymakers. 31 Thenational market has become increasinglyintegrated, and domestic prices for most agriculturalproducts are close enough to world pricesthat WTO accession should have a relativelymodest impact on agricultural output andincomes, though there will be some adversedistributional effects that will need remedialaction (such as increased mobility of labor). 32OED ratings of Bank lending in agriculturehave been high—94 percent for outcomesduring 1993–2002. Sustainability was rated aslikely for 79 percent of lending—higher thanmost comparator countries and the Bankaverage—but institutional development wasrated favorably only 63 percent of the time (seeAnnex R, table R.5b). Borrower feedbackcredited the Bank with substantial impact onproject management (procurement and projectappraisal) and with introducing and popularizingmany innovations and new plant varieties,which raised incomes and productivity. Butthere were shortcomings as well. Selection ofproject components has been distorted byincentives for local governments to includeincome-generating activities to repay projectloans. Such incentives led to inclusion of manyunsuccessful TVE investments; although TVEscontributed enormously to rural developmentin the 1980s and early 1990s, Bank-supportedinvestments often failed because Bankprocedures are too cumbersome to supporttimely investment in commercial activities. TVEcomponents also tended to crowd out theprivate sector. (This lesson has been absorbedand the Bank has cut down on suchcomponents.) More generally, Bank projectshave focused too much on specific productionresults and on ad hoc arrangements for channelingcredit, rather than on helping to build aviable rural credit system. The blame for this isBox 3.3WBI/China Network for Training andResearch in Health Economics and FinanceThe WBI/China Network for Training and Research in HealthEconomics and Finance was established in 1991 at the requestof the Ministry of Health to create capability in health financingand related policy issues among senior-level decisionmakersin the ministries of health, finance, and planning andamong provincial and local government officials. Senior policyseminars (SPSs) organized by the Network have brought togetherministerial, director-general, and vice-gubernatoriallevels of governments from health and non-health sectors to debatehealth financing policy issues, some of which were supportedby policy research carried out by the Network’s researchcenters at six medical universities. Earlier seminars helped todemystify market mechanisms in the health sector, while laterones have facilitated decisions by individual provinces on allocationsto rural health. Increasingly, provincial governmentsare asking for the Network’s policy and operational researchinputs in formulating local health initiatives and activities. Perhapsthe greatest role the Network can play is influencing theState Planning and Development Commission (SPDC), Ministryof Finance, and State Council decisions, which would facilitatechanges at the wider country level and bring about larger centraland provincial allocations for basic health services and preventivecare. SPSs have reached only officials within theseentities with oversight for health. It is important to reach the decisionmakerswithin these institutions who wield greater influenceon broader fiscal and economic policies and todemonstrate to them the critical contributions of health toChina’s long-term productivity and growth. Thus far there hasnot been good follow-up on the results/outcome of policy issuesdebated at the SPSs.21

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEAlthough physicalconstruction targets andoutputs were achieved inseveral cases, crucialinstitutional issues didnot receive the attentionthey need.shared between theBank, which has beentoo eager for productionresults at the expense ofinstitutional developmentand sustainability,and the borrower(especially local governments),which hasresisted surrenderingcontrol to independent financial institutions. 33Finally, recent project assessments show that,although physical construction targets andoutputs were achieved in several cases, crucialinstitutional issues did not receive the attentionthey need. One such issue is the operation andmaintenance (O&M) of irrigation infrastructure.Gains in productivity and incomes from greaterwater availability achieved with support from aBank project may well be short-lived if O&Missues are not given the attention they need. Andwhile it is commendable that physicalimplementation often exceeds project targets inChina, this has sometimes had unintendedconsequences; for example, in the HebeiAgricultural Development Project, overexpansionof tube wells may have contributed tolowering the water table.Health SectorChina’s health and nutrition indicators havealways been good compared with countries at asimilar income level, and they continued toimprove on average in the 1990s. 34 But averageindicators mask rising regional and urban-ruraldifferences and a near crisis in poorer ruralareas, where infant mortality and other indicatorshave deteriorated. 35 The World HealthAverage indicators maskrising regional andurban-rural differencesand a near crisis inpoorer rural areas, whereinfant mortality andother indicators havedeteriorated.Organization (WHO2000) ranked China 61stout of 191 countries onoverall quality of health,but 188th in terms offairness of financialcontribution to health.While the WHOmethodology is controversialamong healtheconomists, the Bank’sown reports confirm the deterioration in healthaccess. In 1975, 85 percent of the rural populationhad access to cost-effective preventive andcurative health services and shared at least tosome extent the risks of medically causedfinancial misfortunes. In 1995, this coverage haddropped to about 10 percent (World Bank1996b). Decentralization of responsibility forhealth finance has widened disparities in healthresources, and the fee for service system hasdistorted incentives, leading to neglect ofpreventive care and to the prescribing ofinappropriate drugs and services. Serious illnessor injury is a major cause of poverty.The Bank’s ESW has thoroughly analyzedhealth finance issues (see especially WorldBank 1996b and the chapter on health financein World Bank 2002b), and the World BankInstitute (WBI)–China Network has helpedexpose senior officials to health sectorproblems (see box 3.3). However, this seemsto have had little impact at the highest levelof decisionmaking responsible for intersectorallocations or intergovernmental fiscalrelations. The lending program is small (3.2percent of total lending during 1993–02)compared with other large comparatorcountries, including IBRD countries such asBrazil (see Annex R, table R.5a). Projectratings have been variable, but include a highproportion of highly satisfactory outcomes. 36The lending portfolio has rightly focused onrural health issues. Most projects have beendisease-oriented, with fewer projectsdedicated to addressing health systemsperformance and reforms. An importantexception was the Integrated Regional HealthDevelopment project of 1990–98, whichintroduced a systematic approach to healthplanning and influenced the 1997 StateCouncil strategy on health sector reform.Within the constraints of the policyframework, the lending program has beeninnovative, had substantial to high institutionaldevelopment impact, introduced stateof-the-artconcepts and technology, andcontributed to building technical capacity.But overall the Bank assistance program hasnot managed to change the health financing22

PROGRESS ON DEVELOPMENT OBJECTIVESsystem, which continues to create perverseincentives and widening disparities in healthoutcomes.Summary: Poverty ReductionChina made substantial gains in povertyreduction over the past decade, but progresshas slowed significantly since the mid-1990s,despite continued high growth rates. Inequalityin incomes and access to social services hasgrown. Vulnerability has also increased with arise in unemployment combined with slowdevelopment of social protection. The Bankmade several significant contributions topoverty reduction in the 1990s. Its analyticalwork helped clarify the nature of rural povertyand shape China’s poverty reduction strategy.The Bank has also helped improve capacity forpoverty measurement, as well as monitoringand evaluation. Perhaps most important, theBank has helped establish successful modelsof targeted interventions through integratedrural development projects. In addition, manyprojects in agriculture, health, and transporthave contributed directly or indirectly topoverty reduction. Where the Bank has beenless successful is in persuading the governmentof the implications of broader developmentpolicies for poverty and for growinginequality and vulnerability. The mismatchbetween intergovernmental fiscal resourcesand responsibilities exacerbated regionalinequality; the health finance system in particularhas created adverse incentives forprovision of preventive care and led to grosslyunequal access to health services; grain policyhas penalized farmers in some of the poorerareas; and migration restrictions have limitedeconomic integration, helped perpetuate theurban-rural income gap, and denied those whodid manage to migrate equal access to services.The Bank has produced some excellent ESWanalyzing these problems, but has failed topersuade the government of the importanceor urgency of policy change. The situation maybe changing, however, as the government hasrecognized the risks that growing inequalityand vulnerability pose for social stability andeconomic progress.InfrastructureInfrastructure developmenthas been a centralelement in the Bank’sassistance strategy forChina. In the early andmid-1990s, helping tobreak infrastructurebottlenecks was seen ascritical to the strategy of sustaining high growthwithout inflation and thus preserving aconducive climate for reform; in more recentyears, infrastructure development was consideredto be one of the most effective ways ofpromoting market integration, povertyreduction, and development of inland China.Sector reform and institutional developmentwere important objectives as well, to bepursued mainly through parallel AAA and bypiloting individual reform elements in a seriesof projects. China also placed high priority onBank support for infrastructure—to providenew technology and management methods, aswell as finance.It is not surprising then that infrastructure(narrowly defined as transport and energy)dominated the Bank’s lending program. Duringthe period 1993–02, energy and transportcommitments were $11.1 billion, nearly half ofall lending. 37 Highway projects alone were 20.9percent of all lending, and power projectsaccounted for 17.2 percent. Other infrastructurelending was distributed across railways(4.3 percent of total Bank lending), urbantransport (3.1 percent), ports and inlandwaterways, and natural gas. The energy sectorreceived $90 million in Global EnvironmentFacility (GEF) grantsthrough the Bank aswell. The Bank alsocarried out a substantialamount of AAA, includingsupport for nationalsector and subsectorstrategies.Overall, Bank supportfor infrastructure washighly successful. Portfolioperformance wasThe Bank has helpedestablish successfulmodels of targetedinterventions throughintegrated ruraldevelopment projects.Infrastructuredevelopment wasconsidered to be one ofthe most effective ways ofpromoting marketintegration, povertyreduction, anddevelopment of inlandChina.23

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEwithout equal in the Bank. All 28 transportprojects that closed during the period 1993–02were rated at least fully satisfactory (and 2 wererated highly satisfactory). None of the 12completed energy projects was rated unsatisfactory,although 3 were marginally satisfactory(balanced by 3 highly satisfactory). Sustainabilitywas rated likely or highly likely for all transportprojects and all but one energy project, andinstitutional development was rated substantialfor 20 of 28 transport and 10 of 12 energy sectorprojects. OED sector reviews broadly confirmedthat China’s performance in the infrastructuresector was the best in the Bank. The energysector review (OED 2001) concluded that theBank’s assistance strategy was highly relevantand fully satisfactory, and that Bank performancewas highly satisfactory. The transport sectorreview (OED 1999), while more mixed in itsassessment, still rated outcomes satisfactory.Client satisfaction has also been high. Interviewfeedback was largely favorable, 38 and respondentsin the 2002 Client Survey ranked “helpingto strengthen infrastructure development” as themost effective area of Bank activity (Annex K).Many of the sector and macro objectives ofthe Bank’s assistance strategy were also met.China’s road network grew by 40 percent duringthe decade of the 1990s, and power generationcapacity now exceeds 300 gigawatts, makingChina the second-largest producer in the world(World Bank 2003). 39 China’s growth in powerand transportation networks certainly helpedsustain growth, dampen inflation, and integratemarket networks. Transport costs fell, and manypreviously local or regional markets, such asgrain, moved toward national integration. 40 TheBank’s role in expanding supply is debatableChina’s road networkgrew by 40 percent duringthe 1990s, and powergeneration capacity nowexceeds 300 gigawatts,making China the secondlargestproducer in theworld.since Bank financeaccounted for less than5 percent of road investmentand about 3.5percent of power investment,but Bank projectscontributed to 40percent (3,500 kilometers)of the expresswaysbuilt since 1985 (WorldBank 2003); in thepower sector, the Bank helped build 20 percentof the transmission lines and 20 gigawatts ofgenerating capacity, including the first 300-megawatt, 600-megawatt, and 900-megawattgenerating plants in China.Apart from its direct contribution to supplyexpansion, the Bank leveraged its influence intwo ways. First, Bank AAA contributed significantlyto sector policy reform and institutionaldevelopment, especially in the power sector.Over the course of the decade, and especiallyin the past five years, China introducedextensive policy and institutional changes thatwere first outlined in a Bank report on powersector reform (World Bank 1994c) and furtherdeveloped in other AAA and through pilotprojects. These changes include price reform,separation of management and regulation,corporatization of government energy productionunits, introduction of competitive powermarkets, and improvements in the policyframework for private participation ininfrastructure. The energy sector is perhaps themost successful example of the Bank’s dualtrackapproach to lending and policy reform.Transport reforms have been slower in coming,but the Bank introduced the concept of tollroads and worked with the government (whichcame up with the proposal) to promote securitizationof revenue-producing highways, thusopening the way for private participation andfaster expansion of the sector. 41Second, the Bank introduced the disciplineof the project process to civil works. Competitiveprocurement brought large efficiencygains and new technology. Improving theproject process laid the foundations for moregeneral reforms in the economic and administrativeframework. The financial managementsystems required by the Bank have revealedweaknesses and lack of accountability in theexisting framework, and the introduction ofmodern management tools and technologyopened up the possibility of change in mostof the infrastructure sector. In the railways,for example, new information and costaccounting systems have made possible theconsideration of separating infrastructurecosts from operating costs and thus could24

PROGRESS ON DEVELOPMENT OBJECTIVESbring about eventual changes in ownershipand administration.Despite these achievements, Bank assistancestrategy has been less successful in other areas.First, the Bank has been little involved inprimary fuel subsectors such as coal and gas,where it might have brought new technologyand useful international experience. 42 Second,institutional and policy components of projectswere less successful than physical implementation.It is not clear whether many of theproposed management techniques and policychanges have been internalized, nor how widelythey have been disseminated. In the powersector, for example, a multiple pricing arrangementwas a source of dispute in the ErtanHydroelectric Project; elsewhere in the sector,multiple pricing still creates incentives favoringthe use of thermal over hydro and the use ofolder, less efficient plants. 43Reforms and institutional changes have alsobeen less successful in transport than in energyfor a number of reasons. First, policy andinstitutional change have been less successfulwhenever coordination was required amongministries or levels of government, as isgenerally the case in transport. 44 For example,in highways, agreement has been reached inprinciple to introduce a fuel tax, but implementationhas been stymied by disagreementsbetween the center and provinces over allocationof charges and revenues. Second, China’sinfrastructure finance and loan repaymentsystem has distorted the allocation of investment,especially in highways, which have ahigher public goods element than power oreven railways. In particular, China has relied toomuch on toll road financing. While economicallyjustifiable under conditions of congestion,toll roads otherwise distort the provision ofpublic goods and constrain the ability of theBank to assist the government in stimulatingeconomic growth, for example, to finance roadsin poorer regions with limited capacity to repay.Finally, and most importantly, the benefits oftransport investment have been diminished bythe government’s broader developmentpolicies. Migration controls and local protectionismlimit demand for transport services.Market integration isconstrained by lowdensity of transportinfrastructure, to besure, but it is equallylimited by policies.Summary: InfrastructureDevelopmentChina successfully broke infrastructure bottlenecksthat imperiled growth and stability in theearly 1990s. A growing transport network alsopromoted market integration and developmentof lagging regions. China had a lot to gain frominternational experience in infrastructuredevelopment in the early 1990s, and the Bankhad a lot to offer. Bank support was highlysuccessful in promoting better project management,competitive bidding, and technicalimprovements. Even resource transfer from theBank was of some importance for breakinginfrastructure bottlenecks during this period. Inaddition, the Bank’s dual-track strategy ofpromoting sector policy and institutionalreform was successful, particularly in power,less so in transport and water. The mainquestion looking forward is whether the Bankcan still contribute significant value added inthe infrastructure sector, or whether the Bankfinance that the government still desires is asubstitute for reforms that could open up othermodes of finance.EnvironmentChina faces serious environmental problems,and because of its size, some of the effects, suchas greenhouse gas emissions, are also worldwide.During the 1990s, government gave increasedattention to the environment. Aware-ness washeightened by widely publicized inter-nationalreports45 and by events in China. Widespreadillness among users ofthe Huai River in China’sindus-trial NorthernPlain in 1994 was aturning point for government,resulting in theeventual closure of75,000 small, high-The energy sector isperhaps the mostsuccessful example of theBank’s dual-trackapproach to lending andpolicy reform.China faces seriousenvironmental problems,and some of the effects,such as greenhouse gasemissions, are alsoworldwide.25

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEAs a result of policy shifts,China has had somesuccesses in reversing orcontaining some forms ofenvironmentaldegradation.polluting TVEs nationwide.Floods in 1997 and1998 prompted theintroduction of a loggingban in sensitive areas.The government hasalso used less drasticmeasures, includingmore open environmentalreporting, price incentives, and new laws andregulations. Leaders regularly address environmentalissues in major speeches, and China hasadopted “sustainable development” as a guidingprinciple for the tenth five-year plan (2001–05).As a result of these policy shifts, China hashad some successes in reversing or containingsome forms of environmental degradation,though serious problems remain and futuretrends are uncertain:• Although China remains one of the most inefficientmajor economies in terms of primaryenergy use per unit of GDP (3.3 times higherthan the United States in 2001 and 40 percenthigher than India), unit energy use improvedby 30 percent between1995 and 2001. In a periodof increasing industrial production, industrialpollution loads have fallen drasticallysince the late 1990s.• China increased forest area during the 1990s,albeit with some loss of species diversity.• Erosion on the extended Loess Plateau area hasbeen contained, with benefits not only to thepeople living there but also in the quality of theYellow River and the amelioration of duststorms as far away as Beijing.• China made a major contribution to the globalenvironment through a sharp reduction inozone-depleting substances (ODS) in recentyears.AAABank environmental ESW has generally been ofhigh quality and has helped raise environmentalconsciousness and influenced policy. TheChina Environmental Strategy Paper (WorldBank 1992a) outlined the Bank’s environmentalassistance strategy and marked thebeginning of a major partnership with the StateEnvironmental Protection Agency (SEPA). 46Many of the recommendations found their wayinto China’s own environment strategy of 1994.The most recent major report Air, Land, andWater (World Bank 2001) updates the 1992strategy; it was produced collaboratively withSEPA and has had a significant impact on officialthinking; 47 some of its recommendations wereincorporated into the tenth five-year plan.ESW on individual environmentallyimportant sectors has been variable. A majoragricultural sector report, AcceleratingChina’s Rural Transformation (World Bank1999), provided a good basis for publicdiscussion of environmental issues. In thewater sector, a jointly produced comprehensivequantitative plan built around a“dynamic optimizing model” 48 gave highlyvalued assistance to the Ministry of WaterResources. An internal study of planning forthe Yellow River Basin highlighted theimportance of integrated river basin managementand contained some prescient remarksabout the opportunity cost of abstractingwater. 49 Most water sector AAA has beenbased on informal reports and workshops andseminars with project or individual ministrycounterparts. More recently, however, theBank published a water resources assistancestrategy (World Bank 2002b), which shouldprovide a broader basis for dialogue with themany agencies involved in water resourcemanagement. The only formal report on theforestry sector is OED’s own sector review(OED 2000). The lack of sector work inforestry has limited the Bank’s ability to judgewhether it is working in the right areas, toconduct policy dialogue, and to reach animportant wider audience of social scientistsconcerned with forestry issues and theirbroader environmental implications. However,in 2002, the World Bank helped form atask force on Forestry and Grasslandsthrough the Chinese Council for InternationalCooperation on Environment andDevelopment (CCICED). The task force hasproduced reports and promoted discussionon policy issues among Chinese officials andscholars and international efforts.26

PROGRESS ON DEVELOPMENT OBJECTIVESLendingWorld Bank lending has two environmentaldimensions: (a) to avoid or mitigate anyadverse impact of projects in any sector—the“do no harm” principle; and (b) to “do good”through projects that are intended, in whole orpart, to have environmentally beneficial effects.The Bank’s activity to prevent harm, mainlythrough safeguards and environmental impactassessments (EIAs), is discussed in chapter 4. 50This section focuses on lending intended tohave a positive impact. Projects intended tohave a positive environmental impact are foundin many sectors, and the definition of anenvironmental project is sometimes arbitrary.Many power projects, for example, are notclassified as environmental even though theymay have substantial environmental implications.Of the 11 completed projects fromvarious sectors classified as “environmental,” 3were rated as having highly satisfactoryoutcomes—an unusually high proportion. Butprojects with an environmental themeattracted a large number of relatively weakratings as well—one unsatisfactory outcomeand four marginally satisfactory. The remainingthree projects were rated satisfactory.Because of the crosscutting nature ofenvironmental concerns and the arbitraryclassification of projects, it makes more senseto review the extent to which environmentalconcerns are mainstreamed in individualsectors. In general, the Bank has done acommendable job of mainstreaming theenvironment in energy, forestry, agriculture,and transport. Performance in the water sectorhas been mixed, while little has been done inthe area of environmental health. Some ofthese assessments are elaborated in thesections below on air, land, and water.Air. Air quality improvements have beenstrongly influenced by technological changesin the energy sector, where the Bank has beenheavily involved. The environmental performanceof Bank-funded coal-fired power plantshas been very good when compared with non-Bank plants. Not only are emissions muchlower, but also China’s power authoritiesthemselves have taken responsibility forenvironmental managementand supervision.The Bank has financedseveral large hydro andmultipurpose dams thatsubstitute for thermalcoal-powered plants.China’s power authoritiesthemselves have takenresponsibility forenvironmentalmanagement andsupervision.While dams have theirown environmental problems, the Bank hasadequately addressed these in Bank projects.The multipurpose Xiaolangdi Dam, supportedby the Bank, has been credited with drasticallyreducing silt and enabling continuous flow inthe lower reaches of the Yellow River,something which has not been achieved in theprevious 10 years. The OED review of Chinaenergy operations concluded that the Bank hadmade substantial environmental contributionsin power generation, district heating, and manyother areas, though it has not been successfulin promoting the introduction of gas on a largescale to substitute for coal (OED 2001).China is the world’s biggest producer ofozone-depleting substances and the secondlargestproducer of carbon dioxide (CO 2), andboth are being reduced through internationalagreements and provision of grant fundsthrough the Multilateral Fund for the MontrealProtocol (MFMP) and the GEF. Energy conservationand fuel diversification policies havemade significant contributions to reducingglobal CO 2levels. Current Bank supportincludes lending projects for renewable energyscale-up, heating reform, and urban transportprograms to address emerging vehicularpollution trends.Land. Past neglect of land and watershedmanagement has caused severe and widespreaderosion, land degradation, and desertification.Bank-supported projects made major contributionsto increased efficiency of water use bydemonstrating thatprofitable orchard andmixed farming modelsare compatible withwatershed rehabilitationand soil preservation.Terracing and erosioncontrol projects in theChina is the world’sbiggest producer of ozonedepletingsubstances andthe second-largestproducer of carbondioxide.27

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBox 3.4Rural Water Supply in ChinaThe Bank has supported four rural water supply and sanitation(RWSS) projects, mainly in poor counties. Designs have evolvedby combining the strengths of existing village administrationsand community financial participation with international bestpractices. Design concepts include appropriate technology,financial cost recovery, decentralization of regulation, and financialautonomy. This contrasts with the more popular approachof justifying non-cost-recovery tariffs in poorcommunities by claiming the “beneficiaries are willing butnot able to pay.”In the latest generation of RWSS projects, the investment costfor water supply is 75 percent, paid for by cost recovery, and 95percent of villages abide by the tariff covenant. The average costof two yuan per cubic meter (about 25 cents) provides startlinglyclear evidence that even the poor can and are willing topay tariffs that raise eyebrows when proposed for urban consumers.Rural consumers supplied by Bank-supported RWSSconsume an average of 28 liters per capita per day (lcd). Whilelower than U.N. standards of minimum daily need, this level ofconsumption and the implied tariff captures most of the consumersurplus generated by supplying RWSS services. The high costrecoveryand sustainability, good quality, continuous service, anda cost-recovering tariff have increased welfare. Consumers,averaging five per household, are willing to pay a higher pricefor a better-quality product and to adjust their consumptiondownward to fit the household budget.The oft-quoted “affordability index” for this project was thatwater charges were 3 percent of disposable income. If the U.N.definition of supply or need had been used for planning purposes(implying 112 lcd consumption), then the affordability indexwould have been 12 percent and the project would presumablyhave been rejected as “unaffordable.”Source: Varley (2002).larger basins also have significant downstreambenefits, reducing silt loads and increasingincomes. Building, among other things, on theBank-supported central Loess Plateau and RedSoils projects in southeast China, these technologieshave been replicated.Land degradation is closely correlated withrural poverty. Erosion arising from deforestationincreases the silt load in rivers, increasingflood frequency and severity. In 1998, thegovernment introduced a blanket ban overmuch of the country on logging of naturalforests and on opening new lands at theexpense of forest. This reduced incomes inthese often-poor areas while increasing timberimport requirements. 51 Reforestation has beenimplemented on a vast scale, with plantationsrepresenting 40 percent of forest area; whilethis has arrested the decline in forest area, ithas not reversed the loss of biodiversity. Bankforestry projects have contributed 3.3 millionhectares of new high-quality forestry land (onesixthof the increase in forest areas) since theearly 1980s. Despite some evidence thatChina’s forestry regulations and policies havenegatively affected forests, OED’s forestrysector review (2000) concluded that the Bank’sforestry work in China has been remarkablysuccessful—“a high point in one of the highestqualityportfolios.”Water. The Bank has been involved in manyaspects of water resource management (WRM)with varying degrees of success. 52 Hydropower,watershed management, and forestryhave been discussed in previous sections. Theother areas of WRM with substantial environmentalimplications are water resources/floodcontrol, irrigation, and urban water supply andwaste management. Rural water supplyprojects, while more important for povertyreduction than the environment, have beenhighly successful and provide useful lessons forChina and other countries on the importanceof pricing and cost recovery (see box 3.4).A noted Bank success story was the TaihuFlood Control Project, praised by the viceminister of WRM for reducing losses during the1998 floods. Several Bank-supported projects inthe 1990s have been in the vanguard of Bank-China cooperation on integrated WRM. TheYangtze Basin Water Resources Project (1995)incorporated both autonomous, locally run Self-28

PROGRESS ON DEVELOPMENT OBJECTIVESRural water supplyprojects have been highlysuccessful and provideuseful lessons for Chinaand other countries onthe importance of pricingand cost recovery.Financing Irrigation Development Districts(SIDDs) to improve O&M and an integratedriver-basin development component. The firstand second Tarim Basin projects (1992/1998) inthe western Xinjiang Uygur Autonomous Regionhave the best-developed framework forintegrated water management—both thefinancial components of SIDD and a comprehensiveset of procedures/regulations for integratedWRM. Even with these successful models, onlylimited progress has been made in introducingintegrated river-basin approaches to WRM inChina. China has been reluctant to borrow formanagement components in Bank projects,devoting only about 5 percent of project funds tothis purpose, compared with 25 percent in Braziland Mexico (World Bank 2002b).The scale of Bank involvement in irrigationhas been very limited, but has had a positiveeffect on Chinese practices for procurement,project management, and (more recently)irrigation management, especially at the provinciallevel. Irrigation has usually been acomponent of an integrated area developmentproject. Poor and underfunded irrigation O&Mis still a problem, but the organization offarmers within SIDDs on both Bank- and non-Bank-supported projects has improvedmanagement and accountability, empoweringfarmers, through legal contracts, to pay for andreceive water services, both from local governmentagencies and publicly owned bulk-watercompanies. Water user associations (WUAs) arepart of SIDDs, playing a key role in manyaspects of improved water resources managementthat can increase productivity. The Bankhas supported water conservation throughtechnical innovations (for example, drip irrigation,drought-resistant crop varieties), conservationpricing, and agricultural engineeringsupport services, but these have not beenreplicated on a large scale.In two important areas, the Bank’s initialapproach to irrigation diminished its contribution.• Failing to allow for a very high opportunity costof water in the economic analysis of upstreamirrigation projects largely undermined theclaimed high rates of economic return and efficiency.For instance,the appraisal of run-ofthe-riverpumpingschemes on the upperreaches of the YellowRiver should have subtractedthe opportunitycosts (to high-valuemunicipal and industrialusers in the lowerreaches) of water supplied during the dry season.• A seeming disregard of an obvious and seriouswater resource constraint contributed to themining of groundwater resources on the NorthChina Plain. A recent Bank audit notes that inaddition to the impact of the demand ongroundwater, the Hebei Project put in manymore new wells than planned at appraisal (OED2002a). Conservation aspects do not appear tohave been high on the agenda. Even the economicbenefits were overstated, as the anticipatedsupply of irrigation water cannot besustained.One of the largest and fastest-growingprograms of Bank support has been in watersupply (WS) and wastewater treatment plants(WWTPs). 53 An OED sector review (OED 2002)judged the outcomes of China WS/WWTPprojects to be moderately satisfactory withrespect to overall development objectives,which are themselves described as modest.OED rated project outcomes satisfactory interms of efficacy and standards of construction,but efficiency only marginally so, and theinstitutional impact, modest or negligible. TheBank approach has supported capacitybuilding, with relatively little control over thequality of institutional reform. Projects still livein both a nonmarket and an under-regulatedenvironment. There has been no significantdifference between Bank- and non-Banksupportedwater utilities, raising questionsabout whether the Bank offers any real valueadded. Bank-supported projects may havebeen better implemented than others, butoverall water quality targets are not being met.Statistics for China show that, despite an 829

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEpercent increase in water consumption and a19 percent increase in wastewater treatmentcapacity, the proportion of waterways meetingminimum standards has decreased. There aretwo broad reasons for the disappointing sectorperformance and World Bank impact.• Institutional arrangements do not match thesource of the problem. Municipalities are responsiblefor WWTP, but much of the pollutioncomes from “non-point” agriculturalrunoff and periurban TVEs. Overall responsibilityfor management is fragmented amongseveral agencies, many of whose environmentalmandates may conflict with financialinterests, public and private.• Low prices for urban water supply and wastewatertreatment perpetuate unsustainable pollutionlevels for two reasons: they fail to restraindemand for water, and they provide insufficientfinancial resources for expansion of reticulation(network collection facilities). Themaximum water supply tariff level achieved isin the range of one to two yuan per cubicmeter, compared with an average of two yuanper cubic meter for rural water supply. BankWS/WWTP projects have introduced highertariffs and other policies, but the Bank has littleinfluence over the degree of institutional reformrequired to address environmentalmanagement needs. 54 Bank operations are tiedto particular municipal governments that cannotthemselves resolve the institutional problems.Bank projects, if successful, are at bestdemonstrations of what can be achieved withinthe existing framework. Project designs haveto go beyond existing agency partnerships andreach out to a broader array of public and privatepartnerships. 55Strengths and Weaknesses of the Bank’sEnvironment AssistanceThe Bank has influenced environment policyand legislation, has helped introduce environmentalconcerns into the mainstream of severalsectors, and has directly contributed to improvingnatural resource management (NRM), floodcontrol, and other areas. The Bank alsointroduced policy and institutional changessuch as water tariffs and integrated river basinmanagement into its projects. Yet the impact ofthe Bank on changing critical approaches towater resource management and otherenvironmental policies has been less thanhoped. Continued shortcomings in China’senvironmental strategy include:• Strategy still favors expanding supply ratherthan reducing demand, and technical and engineeringrather than economic approaches. Forexample, the proposed South-North TransferProject (in which the Bank is not involved)would require a water tariff of 6 to 10 yuan percubic meter to cover costs, while the maximumtariff level achieved, even in the most seriouslyaffected cities, is still in the range of 1to 2 yuan. 56 The proposed project may be justifiedas it ameliorates social conflicts over competitionfor water in rural areas, but the transfermight not even be necessary if tariffs wereraised sufficiently to restrain urban demand.• Coordination among overlapping agencies andlevels of government remains a major problem.Coordination of both water and environmentalresponsibilities and decisions will not be resolvedwithout a supra-ministerial body topush through reforms.• Neither the Bank nor the government hasfaced up to the reality of tradeoffs between equityand efficiency or between short-termgrowth and poverty reduction on the one handand long-term growth and environmental sustainabilityon the other. Although there areimportant complementarities between povertyreduction and environmental protection insome areas (such as NRM in the Loess Plateau),there may be difficult tradeoffs between upstreamirrigation and downstream urban useof the Yellow River or between the effects ofhigher urban water tariffs on poverty and theenvironment. Recognition that it is not alwaysa “win-win” situation would permit explorationof ways (such as tradable property rights inwater) to mitigate some of these tradeoffs.• More than in most sectors, the fiscal transfer systemleads to inaction, conflict of interest, andmisallocation or underinvestment in environmentallysound projects. Environmental pro-30

PROGRESS ON DEVELOPMENT OBJECTIVEStection is a quintessential public good, and requirementsthat investment costs be recoveredat the source can literally lead to underinvestmentupstream because of inability to capturethe benefits downstream. The recently completedLoess Plateau project, for example, wasexemplary in every respect but one: there wasunderinvestment in dams that provided benefitsmainly outside the project area.Summary: EnvironmentChina’s air, land, and water resources have beenput under tremendous strain by high growth and alegacy of poor environmental policies. Over thepast decade, progress in the environment has beenmixed, with some successes in reversing adversetrends. The Bank has made some visible contributionsto improving environmental protection, butthere have been shortcomings as well. The Bank’scollaborative AAA with SEPA has influencedenvironmental legislation, but it has had lessinfluence on integrated water resource managementand, until recently, has generated littledialogue on forestry sector policy. Bank-supportedprojects in natural resource management, forestry,power (both thermal and hydro), and multipurposedams have had a direct and favorable impactand may have influenced design and implementationof non-Bank projects as well. The Bank hashelped improve irrigation practices, especiallyCoordination amongoverlapping agencies andlevels of governmentremains a major problem.through water userassociations, but it mayalso have contributed tounsustainable expansionof irrigation in some partsof the North China Plain.In water supply and wastewater treatment plants,Bank projects have been well-implemented andhave introduced useful policy and institutionalinnovations, but because these are implemented atthe municipal level, diffusion seems to have beenlimited. The Bank has also helped mainstreamenvironmental concerns in a number of sectors,notably energy—China has made significantprogress in improving energy efficiency. Environmentalsafeguard policy (discussed in chapter 4)has been highly variable. Most EIAs are now donecollaboratively with Chinese research institutes.Exposure to international practice through Banksupport has strengthened China’s EIA system,which predates the Bank’s. However, increasedtechnical competence has not been matched byinstitutional independence from political interference,and environmental safeguards still tendto be applied too late in the project cycle to havesufficient impact on project design. Overall, theBank has had a positive impact on the environment,but improving coordination of environmentalpolicy, especially WRM, remains aconsiderable challenge.31

4Program Administrationand Crosscutting IssuesChapter 3 reviewed progress in, and the Bank’s impact on, the four maindevelopment assistance objectives. This chapter reviews the use of lendingand other instruments in achieving assistance objectives, comparesoutcomes in China with other countries, and examines some importantcrosscutting issues.LendingBy most measures, China’s portfolio is thelargest in the Bank Group. As of June 30, 2002,China had the largest total of IBRD loans ($18.4billion vs. $13.8 billion for number twoMexico), second largest total of IDA credits($9.6 billion, well behind India’s $24.3 billion),and an active portfolio of 101 projects, by farthe largest in the Bank Group.The regional allocation of Bank lending toChina has gradually shifted from eastern tocentral and western China, 1 with the share ofthe central and western provinces shifting from37 percent during FY81–92 to 43 percent inFY93–97 to 56 percent in FY98–02. Despite theshift from the better-off coastal region topoorer inland areas, the Bank’s overall regionallending allocation was regressive during mostof the past decade. Per capita Bank lending waspositively and significantly correlated withprovincial income per capita during 1993–97and still positively, though not significantly,correlated during 1997–02. 2This allocation is consistent with theoverwhelming emphasis given to reform in theearly 1990s and to a belief that the trickle-downeffects of growth were the dominant mechanismfor poverty reduction. The most willing andreform-minded partners were often in thecoastal areas; in Shanghai (the richest province),the Bank had a special reform support programin the early 1990s. The Bank was following thelead of the government, which also favoredcoastal development throughout most of theearly period. Moreover, the Bank found itdifficult to shift lending toward poor provinces(or to poorer regions within provinces) becauseof China’s requirement that all loans be repaidby beneficiaries. Here, too, Bank lendingpatterns were shaped by the same factors thatlimited the government’s ability to develop asystem of fiscal transfers to benefit poorerprovinces. Finally, political sensitivities have alsoinfluenced Bank lending allocations. Poorerprovinces generally have a higher proportion ofminorities, which entails more safeguards for33

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEChina has the bestperformingportfolio ofany large country in theBank Group.projects and attractswidespread outsideattention. The Bank hasnever been asked, forexample, to finance aproject in Tibet, one ofChina’s poorest provinces. 3The sector allocation of Bank lending inChina has always differed from that in the restof the world and has diverged even more inrecent years (figure 4.1). The most importantdifference is that, with the exception of theRural Sector Adjustment Loan in 1988, therehas been no adjustment lending in China. Theallocation of investment lending has beendistinctive on several dimensions:• Emphasis on infrastructure. Lending for infrastructure(transport, energy and mining,telecommunications) has always been unusuallyhigh in China, and the share of infrastructurehas been increasing in China (representing52 percent of the Bank’s loans during FY98–02)while declining elsewhere (32 percent Bankwideaverage during FY98–02). Transport aloneaccounted for 25 percent of the Bank’s commitmentsto China during FY98–02. 4• Declining share for human resource development.Bank lending to China for human resourcesdevelopment has declined. In the restof the Bank, it has increased.• Increasing share for environment, urban, andwater (EUW). Environment lending only startedafter 1990, but reached nearly 8 percent of totallending in China in the most recent five-year period.Overall EUW lending rose from 6 percentduring FY81–92 to 20 percent in FY98–02. Lendingfor infrastructure, broadly defined to includeEUW increased from 57 percent duringFY81–92 to 72 percent during FY98–02.• Sustained rural lending. Lending for agricultureand the rural sector ranged from 22 to25 percent in China between FY81 and FY02,compared with a declining Bankwide trend(from 23 percent to 14 percent).Project PerformanceChina has the best-performing portfolio of anylarge country in the Bank Group. Of the 138projects closed and evaluated through FY02, lessthan 9 percent were rated unsatisfactory(compared with a Bank average of 31 percentunsatisfactory for FY80–02). In the past decade,China’s percentage of satisfactory outcomes hasremained above those of the Bank, the East Asiaand Pacific (EAP) Region, and (with the exceptionof Brazil during 1998–02) other large comparatorcountries (table 4.1). China’s performance is evenmore striking with respect to sustainability andinstitutional development ratings. During theperiod FY98-02, sustainability was judged likelyfor 96 percent of China’s projects (weighted bycommitments), compared with 75 percent Bankwide;institutional development was ratedsubstantial for 80 percent of evaluated projects(50 percent Bankwide).Of the 12 projects rated unsatisfactory in thepast decade, 6 were industrial sector projects,and 3 were in agriculture and rural development;environment, health, and water supplyand sanitation each had one project ratedunsatisfactory (annex table R.5b showscomparative country performance by sector).What accounts for China’s exemplary projectperformance? The most frequently cited factoris the high degree of country “ownership” ofprojects. Projects are identified and largelyprepared by the government, and there is astrong commitment to implement projectsquickly and thoroughly, along with a generallystrong determination to abide by projectagreements and conditions. Ownership isreinforced by the Chinese system of repaymentobligations. The requirement to repay projectloans concentrates the minds of local governmentsand project beneficiaries on the costsand benefits of individual project componentsand lends a sense of urgency to projectimplementation. 5At the same time, the success of World Bankprojects in China may have been overstated fortwo reasons. First, there is a possible “haloeffect,” whereby projects are seen as successful,or given the benefit of a doubt, because ofthe strong performance of the Chineseeconomy. 6 Second, project performancecriteria give less emphasis to policy change inChina than elsewhere. An OED review of34

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESTable 4.1Overall Project Rating: Chinaand ComparisonsNet commitmentsInstitutionalTotal netdevelopmentNumber of commitments Outcome Sustainability impactExit fiscal year projects ($ million) (% satisfactory) (% likely) (% substantial)1993–97China 54 6,760 89 83 46Brazil 41 4,679 72 65 41India 70 10,858 71 55 29Indonesia 49 5,432 86 68 40Other East Asia and Pacific Region 146 11,153 82 68 40Bankwide 1,195 90,962 74 56 361998–02China 53 8,546 93 96 80Brazil 41 7,314 94 95 62India 58 8,260 77 77 49Indonesia 53 6,043 78 24 40Other East Asia and Pacific Region 142 19,752 89 72 46Bankwide 1,314 102,095 82 75 50lending to China’s water and sanitation sectorrated overall sector performance as onlymarginally satisfactory, despite satisfactoryoutcomes in 20 of 22 projects, on the groundsthat project objectives were insufficientlyambitious. Project objectives often give a lot ofweight to physical implementation, which isnearly always excellent in China, while thedual-track strategy means that indicators suchas improving sector policy are outside theproject framework. Effectiveness in improvingpolicies and in diffusing best practice need tobe evaluated in a top-down approach (seechapter 3).Portfolio ManagementThe evaluation of completed projects gives apicture mainly of the project portfolioapproved in the late 1980s and early 1990s. 7Evidence from internal assessments can beused to illuminate the status of the currentportfolio.• Internal quality-at-entry (QAE) reviews fromFY97–02 rated 20 of 21 projects (95 percent)There is a strongcommitment toimplement projectsquickly and thoroughly,along with a generallystrong determination toabide by projectagreements andconditions.satisfactory or better.As before, this ishigher than both theBankwide and the EAPRegional average (88percent and 92 percent,respectively).• Reviews of quality ofsupervision assessments(QSAs) fromFY97–02 gave Chinasimilar ratings (81 percentof 54 projects were satisfactory or better)to the region (82 percent) and the Bank as awhole (79 percent). China’s ratings startedbelow average and rose to above average duringthe latter part of this period.• Only 5 percent of the projects in the active portfoliowere considered at risk at the end ofFY02 (compared to 16.5 percent for the Bankas a whole), and disbursements at risk wereonly 2.6 percent (14.5 percent Bank average).As of January 2003, there were only three problemprojects (3 percent) in the portfolio, comparedto 12 percent for the Bank as a whole.35

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEFigure 4.1Comparison of Bank Sector InvestmentLending ActivitiesPercent of total investment lending302520151050Human Resource Development, a FY81–92 and FY93–02IndonesiaBankwideBrazilIndiaChinaPercent of total investment lending70Infrastructure, b FY81–92 and FY93–0260India50China40Indonesia30BrazilBankwide20100FY82–92 FY93–02 FY82–92 FY93–02Percent of total investment lending2520151050Environment, Urban Development, Water Supply,and Sanitation, FY81–92 and FY93–02BrazilBankwideIndonesiaIndiaChinaPercent of total investment lending0FY82–92 FY93–02 FY82–92 FY93–0230252015105Rural Development, FY81–92 and FY93–02BankwideIndonesiaChinaIndiaBrazila. 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 inChina, there are a number of recurringproblems. Internal portfolio risk assessmentsshow that 10 percent of projects were flaggedfor effectiveness delays in FY02, 14 percent forslow disbursement, and 14.3 percent for thenew indicator for financial performance.Counterpart fund problems had affected 13percent of projects in 2001, but this wasreduced to only 1 percent in 2002. In addition,the disbursement ratio improved significantlyin FY02 to 24.1 percent, which was above theBank average (20.7 percent) for the first time inseveral years. 8Several problems in portfolio managementbecame apparent around 1997. Through themid-1990s, the Bank conducted periodiccountry performance portfolio reviews (CPPRs)involving the full Bank management team andgovernment officials from the finance, planning,and line ministries, as well as from provincial andmunicipal governments. The last CPPR in 1996highlighted three broad problem areas:• Systemic issues: Counterpart funding, procurement,and project management weaknesses—allof which pointed to the need tostrengthen field-office capability.• Supervision: Need for more management attention,more cross-fertilization across sectors,increasing government capacity for supervisionand project monitoring, and more attentionto resettlement and other safeguard issues.• Lengthy procedures: Both the project approvalprocess in China and processing in theBank were slowing project implementation.36

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESThe Bank reorganization of 1997, which putsector directors in charge of large units dealingwith the entire region, and the Asian crisis,which occurred about the same time, reducedattention to portfolio management. The CPPRprocess was interrupted, and the position ofproject adviser for China was eliminated. Aninternal assessment in 1998 found the QSA inChina (at 57 percent satisfactory) to be belowthe Bank’s average of 75 percent. Mostimportant, the adequacy of supervision inputsand realism of ratings were rated very low (at 43percent and 50 percent satisfactory, respectively).Thus inadequate management attentionled very quickly to a drop in Bank performance.Spurred by these findings, the EAP Regioninitiated its own review of supervision in 1999,shortly before the Inspection Panel investigationof the Western Poverty Project. Theintensified scrutiny, both internal and external,of Bank-China relations after the InspectionPanel report led to a huge increase in managementattention to the portfolio. 9 The Regionintroduced a new portfolio and risk-managementprocess; decentralized a number offunctions (selected task management, procurement,financial management, and disbursements)to the resident mission; and introducedthematic supervision for groups of projects.These measures seem to have had a positiveimpact and may be responsible for theimproved QSA ratings (100 percent satisfactoryin FY01). Both staff and government officialsparticularly praised decentralization forimproving procurement and other services.But the higher attention to safeguard and otherportfolio issues may also account for renewedcomplaints by China about the “cost of doingbusiness” with the Bank.AAA/ESWAnalytical and advisory activities (AAA), especiallyeconomic and sector work, have always featuredprominently in the Bank’s statements of itsassistance strategy for China. 10 In part thisreflected the relatively low weight of projectlending in investment for a very large country andthe limited scope for nonproject conditionality.But it also stemmed from the Bank’s ambitiousBeginning in the mid-1980s, the Bank and thegovernment agreed on arolling three-yearprogram of studies.objectives to promotesystem reform and to actas a source of knowledgeon international experience.Chinese expectationsof the “knowledgeBank” were also high,and in China, prime ministers have been regularreaders of World Bank reports or have askedspecifically for World Bank advice on policyissues. The relevance of ESW was enhanced byinstitutionalized arrangements for its programming.Beginning in the mid-1980s, the Bank andthe government agreed on a rolling three-yearprogram of studies, subject to approval by theState Council. Programming extended beyondformal reports. For example, the Bank and theSystem Reform Commission 11 cosponsored anannual conference that brought together Chineseofficials and scholars with Bank staff and foreignexperts to discuss some aspect of reform. Thisarrangement allowed the Bank to respond tochanging concerns and to facilitate access toforeign expertise. This facilitative role was asimportant as the Bank’s own ESW in the earlydays of the relationship, but became lessimportant as Chinese officials became increasinglycapable of attracting and screening outsideadvice on their own.The prominence of AAA/ESW in countrystrategy prompts several questions. Were thehigh ambitions and expectations realized? Werethey realistic? How could AAA have been moreeffective? Is stand-alone ESW effective (a particularlyimportant question because of thedeclining lending program)? Some of theseissues are addressed here and some in the finalchapter on lessons and recommendations.There is a gap between the Bank’s rhetoricon the importance of ESW in country assistancestrategy and ESW budget allocations. ESW as aproportion of the total administrative budgetwas lower for China than for other largecomparator countries and for the Bank as awhole throughout the past decade, andspending on ESW declined both absolutely andrelatively during FY98-02 12 (see figure 4.2). Theeffect is most apparent on sector work. Inseveral sectors, new work is needed to take37

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEFigure 4.2Ratio of ESW to Total Direct CostPercent201816141210EAPChinaIndiaBrazilIndonesiaBankwide86FY93–97FY98–02stock of progress and problems and to lay thefoundation for better policy dialogue and newdirections in lending.Within China, there is a widespread view thatthe Bank’s AAA, which was so valued in the1980s, declined in relevance and quality duringthe 1990s. 13 There were exceptions, and therehas been an improvement in Chinese perceptionsof the relevance and quality of the Bank’sAAA in the last few years. The Bank’s macroeconomicadvice in the early to mid-1990s and themore recent work on pension reform wererepeatedly cited in interviews as examples ofhighly relevant and effective work (box 4.1).These examples were particularly well knownbecause of press coverage and public acknowledgmentof the Bank’s contribution by PremierZhu Rongji. Other areas in which respondentscited important Bank contributions to debateand policy change in the past decade includedvalue added tax (VAT) reform, WTO entry, publicutility reform, environmental policy, and preparationof the most recent five-year plan. Still,despite these examples,Within China, there is awidespread view that theBank’s AAA declined inrelevance and qualityduring the 1990s.Chinese officials andresearchers oftenexpressed disappointmentwith the overallrelevance and quality ofthe Bank’s ESW. They feltthe Bank was slow to adjust to the growingknowledge and sophistication of Chinesecounterparts and continued to provide genericadvice based on international experience, ratherthan discussing relevant policy options. 14 As oneresearcher put it, the Bank’s glossy reports werethorough and competent, but “Where is thevalue added?” There was also a feeling that theBank did too many reports on its own, makingtoo little use of Chinese collaborators. 15Internal ratings for a sample of twelve ESWreports on China from FY98–02 were similar tothe Bank average. Nine reports (75 percent)were rated satisfactory or above and two ofthose were highly satisfactory. All reports wererated relevant, but some reports fell short oncriteria of internal quality, presentation/dialogue, and likely impact. One surprisingresult was that half the reports were rated lessthan satisfactory for Bank processes. Specificshortcomings included failure to provideconcept papers or peer reviews at a criticalstage, but a more general theme was that therewas inadequate management attention. Thismay partly reflect organizational changes in1997 that broadened sector managerial responsibilityfrom the country to the region.OED’s assessments of the Bank’s AAA in itssector background studies was also mixed. Thegeneral quality of AAA was good, and the38

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESBox 4.1A Chinese View of the Bank’s AAAA specially commissioned review of analytical and advisory activitiesand system reform (Lu 2002) concluded that the Bank’sAAA had been largely successful because the Bank consistentlyadvocated reform even when the political climate was unfavorable;relied on cooperation and persuasion, rather thantrying to impose its views; used a variety of outputs; and developeda sound knowledge base and extensive contacts. Thepaper, which was based on extensive interviews with leadingscholars and officials familiar with the Bank, as well as a documentreview, also found that Bank influence declined somewhatin the 1990s because of a reduction in the knowledge gapbetween the Bank and China, increasing political difficulty intaking reform measures, and the Bank’s failure to recognizeand exploit the strengths that contributed to past success.To be more effective, the paper suggested the Bank should:• Pay more attention to dissemination of results through moreinnovative formats.• Be more forward-looking in choice of topics. Devote moreattention to emerging sector and structural issues such asurbanization, education, and urban transport, rather than tostate-owned enterprises and other reform topics.• Extend its range of cooperation and revitalize its contacts.The Bank should, of course, be responsive to requests forwork from the top leadership, but it should also expand itsnetwork to replace its dwindling contacts from an earlierperiod and renew its collaborative approach to analyticalwork.impact was significant in a number of areas. Atthe macro level, special mention should bemade of the recent outstanding provincialpublic expenditure review (PER) (World Bank2002a), as well as the Dalian conference andrelated macro and fiscal advice in the early andmid-1990s. ESW on poverty (both within theRegion and in DEC) has made a significantcontribution, as has the Bank’s work onenvironment and the energy sector. In somesectors, however, AAA has been less effective orabsent altogether. In forestry, for example, theBank made loans of about $1 billion withoutany sector work (OED 2000). 16The Bank has also had mixed results inexploiting its comparative advantage in doingcross-sector work. A very good internal reporton rail-coal-power coordination had seeminglylittle impact on China’s investment planning orBank lending, largely because China did nothave a government agency prepared to coordinateacross sectors. Because the State EnvironmentalProtection Agency (SEPA) is across-sector agency, the Bank has been moresuccessful in influencing environmentalthinking and policy. In the water sector, whereChina’s own coordination is weak, the Bank hasfailed to gain a cross-sector audience. In thecase of enterprise reform and financial sectorreform, the Bank’s work has been too compartmentalizedto take advantage of the inherentlyclose links between the two areas.Donor CooperationThe Bank has been the second largest donor inChina, after Japan. During 1991–00, IBRD andIDA together accounted for 17.7 percent ofChina’s net receipts from donors; Japanaccounted for 24.9 percent; and the AsianDevelopment Bank (ADB), 5.9 percent (AnnexR, table R.3). Considering only concessionalassistance (ODA), IDA accounted for23.3 percent of total net disbursements during1993–01 (25.9 percent during 1993–97 and 18.7percent during 1998–00), Japan accounted for41.7 percent, and Germany 13.5 percent.China fits the Comprehensive DevelopmentFramework model of donor coordination moreclosely than most countries. 17 Donors, includingthe World Bank, play a negligible role in aidcoordination. China sets its own prioritiesand tries to match these with individualdonor interests throughagreements on sectorsand location of projects.The government’s ownaid management isfragmented, however,between the Ministry ofFinance, which coordi-China fits theComprehensiveDevelopment Frameworkmodel of donorcoordination more closelythan most countries.39

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEnates loans, and the Ministry of Foreign Tradeand Economic Cooperation, which coordinatesgrants. Generally the government allocatesdonor activities to areas or sectors that complementeach other; in the highway sector, forexample, the World Bank and ADB work ondifferent sections of the national highwaysystem.Weak coordination within the governmentputs a premium on information sharing andcoordination between the Bank and otherdonors. The Bank and the Fund, which havecollaborated effectively on fiscal policy advice,recently discovered that they had receivedseparate requests for advice on debt management.The requests were from different governmentagencies and overlapped in part; becausethey shared information, the Bank and Fundwere able to provide more effective support.The most notable coordination effortinvolving the Bank is the agreement to blendDFID grants and IBRD loans to mimic IDAterms. The first blend project was the TuberculosisControl Project approved in FY02. Giventhe constraints of China’s fiscal transfer andrepayment system, this partnership makessense. It enables the Bank to work on povertyreduction projects otherwise unavailable to it.In DFID’s view, the Bank (and China) have alsobenefited from DFID’s contribution to ideasand policy innovations (such as provision ofprovincial counterpart funding for poorcounties and the introduction of social assessmentsat the design stage) that would havebeen unlikely from the Bank working alone.Nevertheless, the Bank/DFID arrangement isan inferior solution to the serious problem of aweak fiscal transfer system.Other donors, active in many of the samesectors as the Bank, are highly complimentaryabout the Bank’s ESW and use it in formulatingtheir own strategies. A major objective of theirassistance is to provide a demonstration effectfrom their projects, butAll levels of governmentcomplain that the Bank’ssafeguard policies imposehigh transactions costs.the mechanisms ofdissemination of goodpractice in China are notwell developed, notwithstandingChina’s reputationfor rolling out successful pilots nationwide.The Bank could provide a valuable service byhelping to organize collaborative sector work tocompare donor experiences in project designand implementation in key sectors.SafeguardsWorld Bank experience with safeguards inChina is highly variable. China has been held upas a model of how safeguards should beapplied. An OED multicountry study of involuntaryresettlement cited China’s approach in theShuikou and Yantan dam projects as bestpractice because of its participatory approachand its emphasis on jobs and incomes, ratherthan mere relocation and shelter (Picciotto,Rice, and Van Wicklin 2000). At the otherextreme, an Inspection Panel Report found thatthe Bank had violated several of its ownsafeguard policies in the Western PovertyReduction Project (see box 4.2).China recognizes the need for safeguardpolicies and applies them to its own projects.China was among the first developing countrieswith environmental safeguards, and environmentalimpact assessments for Bank projectsare now conducted by Chinese researchinstitutes. But all levels of governmentcomplain that the Bank’s safeguard policiesimpose high transactions costs and that theBank has more stringent standards than otherdonors. China’s view is that Bank proceduresare intrusive, do not mesh with its own, lead tolong delays in project implementation, increasecosts, and are unnecessary because China hasits own safeguards (some incorporating Bankpractices). China argues that its “3-simultaneouspolicy,” requiring environmental supervisionat design, construction, and operationalphases, is more comprehensive than theBank’s safeguard policies (box 4.3).In 2000, an independent internal review wasundertaken of Bank supervision of safeguardsfor six of the largest projects in China. Some ofthe principal findings were:• Policy design, implementation, and Bank oversightof safeguards were generally satisfactory,but variable. Two projects each were highly40

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESBox 4.2Inspection Panel InvestigationThe 15-month Inspection Panel (IP) investigation (from April1999 to July 2000) of the Qinghai Component of the WesternPoverty Reduction Project had a significant impact on Bank-China relations and on the Bank’s approach to risk managementand safeguard policies. A request for inspection had been lodgedby the International Campaign for Tibet claiming that the projectmight irreversibly harm the livelihoods of Tibetan and Mongolianethnic peoples in the Qinghai area. The Board authorizeda review—the first full review since the creation of the IP in 1994.The Panel found that the Bank had violated a number of its ownpolicies, including environmental assessment, indigenous peoples,and involuntary resettlement (Operational Directives 4.01,4.20, and 4.30, respectively). When the Board asked for resubmissionof the project for approval following additional studies,China withdrew its request for financing of the Qinghai componentand has since implemented the project on its own on anaccelerated schedule.The Bank was naïve in thinking this was a routine projectof little interest to the outside world, and it was lax in its assessmentof risks and acceptance of government reassurances.Outside critics charged that the Bank was being used to legitimatea politically motivated project designed to dilute Tibetaninfluence, and the government felt that criticisms of the projectwere politically motivated and that the Bank’s management andBoard did too little to uphold the Bank’s political neutrality. Thegovernment was as surprised as the Bank at outside reaction.The fact is that any resettlement project in areas of traditionalTibetan settlement would be politically controversial.The investigation revealed the need to correct a number ofweaknesses in safeguard procedures: to distinguish advisoryfrom mandatory procedures; to strengthen managerial oversightof risk assessment; and to ensure that staff treat safeguardsas an integral part of project design, rather than animpediment to project implementation. The Bank responded byaccelerating revisions of some operational guidelines (for environmentbut not indigenous peoples), overhauling risk assessment,and improving managerial assessment. This was amostly welcome swing of the pendulum (“rebalancing the matrix”),which had gone too far in the direction of decentralization.But some feel that the reaction has gone too far, leading tolengthy and costly safeguard procedures and to risk aversion.These concerns are captured in phrases such as the increasing“cost of doing business” and charges that Bank safeguards areno longer designed to make sure projects “do no harm,” but to“avoid any criticism.” The Bank has since avoided some politicallysensitive components; for example, Xinjiang Province(with a majority Muslim population) was removed from an educationproject shortly after September 11, 2001. Whether thisshows undue risk aversion or mere prudence will be controversial,but such issues must be confronted and debated openlyas the Bank shifts its emphasis toward western China with itslarge concentration of minorities.satisfactory, satisfactory, and marginally satisfactory.Rated by safeguard, involuntary resettlementwas highly satisfactory, dam safetyand indigenous peoples (minorities) were satisfactory,and environmental mitigation wasmarginally satisfactory.• Risk avoidance is creating a “safeguarddilemma”—the minimum standard is gravitatingtoward “best practice” regardless of cost.• External monitoring by local institutes typicallysuffered from insufficient candor and lackof explicit recommendations for action.• Despite some excellent work on social assessmentand mitigation planning, the Bank isalso at times reluctant to risk offending theBorrower by directly raising issues relating tominorities. Social assessment is the weak pointin project design and delivery.• Management input to safeguard design andsupervision was inadequate. At the time the reportwas prepared (in August 2000) sectormanagers had no responsibility for oversight,and line managers had rarely visited the six projectsreviewed by the Panel, despite their sizeand importance ($1.7 billion loan amount). 18The principal recommendation of the reviewwas that the Bank should be more strategic inits approach to safeguards. In particular, sectorand policy work is needed to provide a contextfor project development, and early involvementis critical. Safeguardsshould be seen as anintegral part of developmentand projectdesign and not as anThe Bank should be morestrategic in its approachto safeguards.41

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBox 4.3The Views of the BorrowerChinese officials, researchers, and representatives of civil societyall agree that the World Bank has made an important contributionto China’s development. The consistent theme in allcomments, ranging from researchers and policymakers concernedwith structural reform and macro policy issues to projectofficials at the local level, was that the Bank’s maincontribution has been in the realm of ideas—introducing newconcepts, methods, and technologies to China. Innovations attributedto the Bank by the Chinese included economywideconcepts such as the economic value of services and corporategovernance reform; international development best practicessuch as feasibility studies, project appraisal, and internationalcompetitive bidding; and numerous specific technologies, neworganizational methods, and training at the project level. In aClient Survey commissioned by the Bank in late 2002, more thanhalf of all respondents said that transfer of new project conceptswas either the greatest value or second greatest value of theBank, and nearly half said that the Bank’s knowledge was eitherthe first or second greatest value. Financial resources andother contributions were seen as less important.There are also a number of criticisms of Bank assistance:• Cost of doing business. Projects take longer than they usedto, and the World Bank is said to be slower and more demandingthan the Asian Development Bank and bilateraldonors, for a number of reasons: overly stringent applicationof safeguard procedures; ambitious project objectives (for example,sector reform in railways) that slow preparation; projectcomplexity due to unwelcome components (such as ruralroad components in highway projects); and limited Bank administrativebudget, which leads to delays as the Bank seekstrust funds to carry out many of its core activities.• Loss of IDA is seen as a severe constraint. Because of China’srepayment system, poor provinces and social sector projectsmay be excluded from Bank projects if only IBRD terms areavailable. The initiative to blend DFID grants and IBRD is appreciated,but should be applied on a larger scale.• Inflexibility in adapting to China’s unique circumstances.A consistent theme in Chinese comments was that China isdifferent from other borrowers and the Bank needs to adaptits advice and procedures accordingly. The Bank was slowto recognize China’s growing sophistication and need fordetailed and specialized AAA in the 1990s, though the relevanceand effectiveness of AAA have improved significantlyin the past three or four years. The Bank shouldshow more respect for local capacity by using local consultants.China’s standards on procurement and safeguardsare high and often based on World Bank advice on internationalnorms. The Bank should harmonize with localstandards in these areas.Source: Annex J.add-on or a “cost of doing business” to beminimized. As noted previously, the Bank hassince responded to concerns about safeguardissues by strengthening risk management andby providing a separate budget for thematicsupervisions. These steps have improvedquality-of-supervision assessment ratings, butmore needs to be done to move safeguardplanning upstream and enhance strategic focusthrough sector work and social assessments atthe design stage.There is a strong case for moving towardgreater harmonization of safeguard proceduresbetween the World Bank and China, rather thansimply ring-fencing World Bank projects withthe Bank’s own procedures. Harmonizationhas already taken place in a number of areas.China has more often adopted Bank standardsthan the reverse, but the Bank has acceptedChina’s standards and definitions on resettlementand on indigenous peoples, whereChinese “minorities” are treated as equivalentto the Bank’s “indigenous peoples” (see OED2003a). Differences still exist in a number ofareas—for example, applicability of resettlementprovisions to illegal squatters, but furtherharmonization should be possible.There have also been suggestions for devolutionof responsibility for safeguard policies toChina, but this would be premature. Experiencewith local preparation of environmental impactassessments shows some significant weaknesses inChina’s safeguard design and implementation:perspectives are too narrowly focused on compli-42

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESance rather than problem solving and on theproject rather than the sector or region, includingdownstream areas; technical capacity is variable,though the general standard is good and improving;and technical evaluations are too oftendistorted or preempted by anticipation of adversepolitical consequences. Some provinces are closerto meeting implementation standards then others,and it should be possible to move gradually towardfurther devolution, but for the time being the Bankwill need to retain ultimate responsibility forsafeguards for reasons of competence, independence,and reputational risk.Crosscutting IssuesHow Should the Bank Deal with PoliticallySensitive Projects and Issues?Controversies such as application of safeguardsunder the Western Poverty Project posedifficult issues for the Bank. How can the Bankfulfill its obligations to borrowers and preserveits institutional integrity as a nonpoliticaldevelopment institution? There are no universalrules that will avoid the need for case-bycasedecisions in which a balance must bestruck, but there are guidelines and lessonsfrom experience.• The Bank has a mandate to promote developmentin member states “with due attentionto considerations of economy and efficiencyand without regard to political or other noneconomicinfluences or considerations” (ArticleIII, Section 5(b) of Articles of Agreement).• As an international organization with developmentexpertise, the Bank may be well placedto play a certification role on sensitive projectsif the borrower and the board agree. The ThreeGorges Project is a good example of the possibilitiesand limitations for the Bank in this role(see box 4.4).• The Bank should not shy away from projects justbecause they are controversial, but neither shouldit place itself in a situation that risks its reputationas a nonpolitical development institution. In decidingwhether to participate in controversialprojects, the Bank must weigh its potential contributionagainst its reputational risk.• Safeguards are a particularly important tool forrisk management of controversial projects, butthe Bank has to have the courage and independenceboth to call for studies and remediesit considers necessary and to resist rampingup standards and requirements unnecessarily.Similar considerations apply to other politicallysensitive issues, such as labor standards orinsider privatization, where safeguards may notbe applicable, but which have important socialand economic implications and pose reputationalrisks. For example, the CAE mission wastold in a visit to a factory where the Bank hadsupported severance payments for redundantBox 4.4Bank Involvement in the Three GorgesProjectThe massive Three Gorges Project was controversial both insideand outside China, especially because it involved involuntaryresettlement of 1.3 million people. At the request of thegovernment, the Canadian International Development Agencyfinanced, and the Bank supervised, a detailed appraisal of theproposed project. The appraisal report concluded that the firsttwo stages of the proposed project would have a high economicrate of return, but that taking the project to stage three (to allownavigation from the sea to Chongqing) would have only a negligibleeffect on the rate of return while entailing resettlementof an additional 600,000 people. Based on these findings, theBank stated that variants that only marginally raised the economicbenefits while greatly raising the numbers of people tobe resettled would be economically suboptimal and would requirefurther studies if the Bank were to participate in the project.However, the government decided to go ahead with the fullthree-stage project. The Bank did not participate in financingthe project.Source: OED (2001).43

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEworkers that a group of remaining workers hadbeen working 84-hour weeks for a lengthyperiod to complete export contracts. China’sLabor Law limits monthly overtime to 36 hours.A Bank supervision mission followed up butwas told that the CAE mission had misunderstood.19 When the Bank supports a project itshould make special provision to monitor suchissues both to protect its reputation and toprovide a good-practice model. The SouthwestPoverty Project provides a good example ofwhat should be done. The project supportedseasonal migration of young women to coastalfactory jobs, but also arranged for preinspectionof firms and monitoring of laborconditions. The Bank should go beyond bestpractice at the project level, however. It shoulduse project experience as an entry point forESW and policy dialogue on important issuesof social protection.Responsibility forimprovements in transparency,the rule of law,corruption, and otheraspects of governancelies squarely with China,but the Bank can help by supporting institutionaland policy changes that have proven effective inother countries. The Bank has long promotedchanges in corporate governance, regulatoryreform, and improvements in procurementpractices to help reduce incentives for corruption.Notable activities in recent years include aneconomic law reform project, fiscal and financialsector technical assistance projects, training inprocurement practices, and co-sponsorship ofan international conference on “EconomicReform and Good Governance: Fighting Corruptionin Transition Economies” (see World Bank2003, Annex G). It is noteworthy that respondentsto the Client Survey (Annex K in thisdocument) gave high ratings for the importanceand effectiveness of Bank support on the issue ofcorruption, but low ratings for the Bank’simportance and effectiveness on judicialreform. 20What is the value addedof the Bank’sparticipation ininfrastructure projects?Has the Bank Overinvested in Infrastructure?The share of infrastructure in the lendingprogram is slated to rise even further in thecoming CAS period, though this will be a largershare of a smaller lending program. 21 A numberof arguments have been made in favor ofconcentration on infrastructure. The rate ofreturn on infrastructure investments remainshigh. Infrastructure investment has a highpayoff in growth and, when directed toward thepoorer parts of China, in reduction of regionaldisparities as well. Infrastructure projects aregenerally low risk and, with the exception ofhydro projects, relatively noncontroversial.Last but not least, it is a country priority.The question is not simply whetherinfrastructure investment has a high return. Itdoes. The critical question is, what is the valueadded of the Bank’s participation in infrastructureprojects? Through the early to mid-1990sthe Bank contributed a measurable amount ofincremental funding and a great deal to technicalupgrading and improved efficiency. Inrecent years the dual-track approach ofsustained lending involvement plus policydialogue through AAA has also yieldedimportant policy reforms in energy. In thefuture, there are likely to be diminishingreturns from direct Bank involvement inprojects because competitive procurement andother project management methods havediffused across China. Where these methodshave not spread, the problems of the sectorcannot be solved through retailing of Bankrepeater projects, suggesting the need forbroader institutional and policy reforms. 22Selectivity and sector allocation gains addedsignificance in the face of exposure constraintson the size of the lending program. Whenlending peaked at about $3 billion in the early1990s (two to three times projected lending incurrent dollars for the coming CAS period),the Bank decided, and China reluctantlyagreed, to “graduate” the port subsector,recognizing that the Bank’s value added woulddiminish in the future and that China couldaccess technology directly from the privatesector. More recently, the Bank has phased outof power generation projects. Becauseinfrastructure projects can absorb anenormous amount of funds, a hard look is44

PROGRAM ADMINISTRATION AND CROSSCUTTING ISSUESneeded at the value added of conventionalhighway and wastewater projects.But what if these are what the client wants?China should, of course, have the ultimate sayin what projects it borrows for. But if the choiceis driven mainly by a self-imposed repaymentsystem, it would be a pity. So far, the compromisehas been to agree on projects that pushthe envelope through marginal policy ortechnical innovation in each project; but Chinawill do itself a disservice, both in the valueadded it will receive from the Bank and in theeffectiveness of its own projects, if it fails tomake the necessary changes to enable it tofinance its own low-risk projects and to diffusealready-tested techniques.Should the Bank Rely More on Stand-AloneAAA?The Bank’s dual-track approach—lending togain trust and detailed sector knowledge plusESW to persuade the government on policyissues—has been broadly effective in manysectors. In agriculture, for example, ESW hadstressed the importance of land contract reform,but projects were essential to work out some ofthe practical details of implementation and todemonstrate the effectiveness of contractreforms in practice. In the power sector, sectorwork introduced the importance of costrecovery, corporatization, and unbundlinggeneration and delivery, but projects (andproject conditionality) were the means of“pushing the envelope” of policy change. Butgiven the need for greater selectivity in lending,should the Bank rely only on AAA in somesectors? This is a high-risk strategy. It might workin energy, where Bank advice seems to be valuedfor its own sake, but would probably not do soin transport. Unfortunately, free advice is seldomvalued, and governments are not always able toimplement advice because of competinginterests (as in the case of the fuel tax).Moreover, the Bank is unlikely to be able tosustain a program of stand-alone nonlendingservices. Even with the large infrastructurelending program in China, the resourcesdevoted to sector work have been relativelylimited. The Bank’s comparative advantage inthe advisory business is that it is not free; Banksupport is tied to a lending program. It is in theBank’s interest, if it wants to be repaid, to ensurethat the borrower is in a position to generate thenecessary resources. Given that the money hasto be repaid, however, countries are reluctant tocommit to activities they do not perceive to bein their best interests. In any case, developmentis about both what to do and how to do it. The“how to” is the great strength of the Bank’sproject lending.45

5Evaluation of the Bank’sAssistanceThe performance of China’s economy with respect to growth and povertyreduction over the past decade is without equal in the world. What hasthe Bank contributed to this performance? And to what extent is theBank responsible for shortcomings in performance, such as growing inequalityand continued environmental problems? These are difficult questions to answerbecause the Bank’s program is small (and has been declining) in relationto China’s overall economy. It would be presumptuous to think the Bankcould take credit for the successes, or be held responsible for the failures, ofsuch a large and dynamic economy. 1 Nevertheless, by focusing on the valueadded of Bank assistance and by addressing a series of smaller questions, itshould be possible to reach some conclusions about the overall impact of theBank’s assistance.Outcome of the Bank’s AssistanceOverall impact can be assessed by consideringthe outcomes of the four main objectives of theBank’s assistance strategy and the relevance,efficacy, and efficiency of the program as awhole.Relevance of Bank assistance. The Bank’sassistance strategy and activities have beenrelevant in the large, if not always in the small,context—at the broadest level of strategicfocus and allocation of resources, the Bank hasdone the right things. The four main Bankobjectives—promoting system reform andbetter macro management, poverty reduction,infrastructure development, and environmentalprotection—have helped address China’smost pressing development issues. The gradualshift of emphasis toward poverty reduction andenvironmental protection has also been in theright direction, though the Bank wassometimes slow to recognize the importanceof issues such as growing inequality and vulnerability,intergovernmental fiscal problems, andthe need for better coordination of environmentalpolicy and WRM. Within some activities,such as the financial sector and enterprisereform, the relevance of Bank advice wanedduring the mid- to late 1990s, though in thefinancial sector the Bank has embarked on apromising reengagement. Relevance at the47

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCElevel of sector or regional allocation or thechoice of project components has always beenconstrained by the project repayment system.Projects were often skewed towardcomponents that generated revenue,sometimes at the expense of higher-returnpublic goods components. With the loss of IDA,Bank lending for social sectors and poorregions has become increasingly constrained.Blending IBRD loans with bilateral grants canease these constraints, but not eliminate them.Efficacy of Bank assistance. The Bank’srecord on efficacy—doing things right—hasbeen mixed. Project implementation has beenexcellent in most sectors, but efficacy alsodepends on achieving policy and institutionalchange within sectors and on achieving coordinationacross sectors and levels of governmentfor crosscutting objectives such as povertyreduction and environmental protection. Bankstrategy has been to rely on a dual-trackapproach, in which policy and institutionalchange depend mainly on persuasion throughAAA combined with piloting incrementalchanges through projects. This has beensuccessful in some areas (power sector andsocial security reform), but less so in others,particularly in areas that primarily depend onthe demonstration effect of projects at the locallevel. Similarly, the Bank has been moreeffective on coordination where there is a highlevelgovernment coordination body (such asthe LGPR, SEPA, and the erstwhile SCORES).Efficiency of Bank assistance. OEDnormally measures efficiency by the cost oflending, supervision, and ESW per approvedproject, per $1,000 of net commitment, and(more refined yet) by cost per dollar commitmentof satisfactory projects. By all thesemeasures, the China program scores well (seeAnnex R, table R.6). Two qualifications are inorder, however. First, the government hascomplained about the high cost of doingbusiness with the Bank, both in comparisonwith other donors and compared with earlierperiods for the Bank itself. The Bank clearlyneeds to balance the costs and benefits ofsafeguard studies at the project level and findmore systemic ways of addressing safeguardissues (such as thematic supervision, which isunder way). One measure of efficiency, elapsedtime for various stages of lending, shows notrend, but this is an issue that needs furtherinvestigation. The second qualification is thatthe low cost of the China program may actuallyrepresent inadequate allocation of resources.The budget allocation for AAA, particularlysector work, declined during the late 1990s andcertainly seems to have been inadequate tocarry out the dual-track strategy. The recentbudget increase for ESW may change this. Moregenerally, the China program seems to havebecome increasingly reliant on trust funds tofinance many of its activities. The Bank sees theuse of trust funds as a way to leverage its scarceadministrative budget, but the borrower seesthis as a source of delay and uncertainty.Overall outcome is based on the outcomesof particular objectives and on the relevance,efficacy, and efficiency of the Bank’s assistance.Outcome of Bank assistance to China is ratedsatisfactory.Sustainability of Positive OutcomesReform and institutional change in China havebeen gradual, but once changes have beenmade, they are rarely reversed. Sustainability ofcompleted projects in China was rated likely orhighly likely for 84 percent of net commitmentsduring 1993–97 and 94 percent during1998–02. This is well above the Bankwideaverage (56 percent and 73 percent, respectively,for the two periods) and higher thanlarge-country comparators. The main risks tosustainability are a financial crisis, externalshock, or social instability leading to aneconomic slowdown. Even a slowing of thegrowth rate could put poverty reduction at risk,given that poverty reduction has slowed orstagnated with an 8 percent growth rate inrecent years. In spite of these risks, sustainabilityis rated likely.Institutional Development ImpactThe institutional development impact (IDI) ofBank projects in China was rated substantial for46 percent of net commitments on projectscompleted during 1993–97, rising to 84 percent48

EVALUATION OF THE BANK’S ASSISTANCEduring 1998–02. Performance of the Chinaportfolio was marginally higher than theBankwide average (36 percent) during theearlier period and substantially higher than theBank average (50 percent) and comparatorcountries during the latter period. The reviewof institutional development impact by sectorand objectives showed a mixed performance.Bank impact on project management, procurementprocedures, and capacity building hasclearly been substantial at the project level,though there are questions about how widelythese institutional developments have diffused,particularly across provincial and lower-levelboundaries. Bank encouragement of citizenand community participation in decisionmaking(through water user associations,consultations on project designs, and the like)seems to have had some impact beyond theBank’s own projects. At the ministerial orindividual organizational level, the impact hasalso been substantial (for example, for theseparate transport ministries or for SEPA), butthe impact of projects involving coordination(for example, water basin management orintegrated rural development) seems to havehad limited impact beyond the particularproject. At the macro and sector level, IDI hasranged from modest to substantial. At themicro or project level, IDI has been improvingand in recent years has been substantial.Overall, institutional development impact israted substantial.Bank PerformanceTo what extent can China’s developmentoutcomes be attributed to the Bank? It would behard to argue that Bank assistance has madeChina worse off in any way, but apportioningattribution for successes is difficult. China’s ownefforts, along with advice and support from manysources, mean that most of China’s successes are“overdetermined.” The main strength of theBank has been its sustained support of an activityReform and institutionalchange in China havebeen gradual, but oncechanges have been made,they are rarely reversed.or program over anumber of years.Because of the Bank’slong-term involvement,it has been able to have asubstantial cumulativeimpact in a number ofareas, its views havegained a respectful hearing, and it has sometimesbeen well placed to take advantage of opportunitieswhen China was looking for support forchange. Bank performance has varied acrosssectors and over time, but the Bank has made apositive contribution in a large number of areas.In the Chinese context, the Bank is relativelysmall, but it has punched above its weight.One case of poor Bank performance shouldbe highlighted—the handling of the WesternPoverty Project, which led to the InspectionPanel investigation. Unfortunately, therepercussions of the Inspection Panel continue.The Bank still sometimes fails to get the rightbalance between development objectives andprotecting against reputational risk.Could the Bank have accomplished more if ithad been more ambitious or aggressive inpushing its own agenda? That seems unlikely.China clearly values the Bank more for its adviceand knowledge of international experience thanits money, and the Bank could not haveexpected to achieve more through conditionalitythan through persuasion and demonstration.Demonstration has generally worked wellwhen the partner agency had the authority todiffuse good practice and less well whereauthority was fragmented. Persuasion couldhave been better in some cases. The Bank hassometimes toned down its advice in anticipationof what it believes to be politically acceptable.2 China would, in fact, be better served bymore candid expression of Bank views.On balance, the Bank has performed well inChina, and overall Bank performance is ratedsatisfactory.49

6Lessons andRecommendationsChina’s experience offers lessons for other countries, as well for futuredevelopment efforts in China. This chapter first addresses lessonslearned and then makes recommendations on the repayment system,improving ESW, and improving performance of Bank lending.LessonsLessons from China’s Experience for OtherCountriesToo much has been made (by the Bank andothers) of China’s exceptionalism and theinapplicability of China’s experience to othercountries. The Bank should make a systematiceffort to analyze and disseminate lessons forother countries from China’s experience. The2004 Shanghai conference on lessons ofpoverty reduction was a commendable step inthis direction. Some of the important lessonsfrom China are:• China’s reform experience is relevant formany countries. China’s gradualist reformstrategy has often been portrayed as irrelevantto other countries because of its uniquecharacteristics, such as a large agricultural sector.If the economic system has broken down,the only option may be to pursue radical reform,as China did with the dysfunctional communesystem, but the main lesson of Chineseexperience is the importance of pursuing reformbefore systemic collapse.• Reform will be more sustainable if sequencedto protect potential losers during the earlystages. Mechanisms such as China’s strategy ofgrowing out of the plan or using transitionaldual pricing may not be applicable in othercountries, but the principle of using gradualchanges to reduce opposition and build a constituencyfor further reform is important.• China’s policy of beneficiary repayment hasbeen an important factor in promoting strongproject implementation and ownership. Yetoverly strict application of the principle createsproblems of its own (see discussion below).China and other countries have much to learnfrom each other on this issue.China has always been receptive to lessonsfrom other countries, especially newly industrializingcountries and other success cases. In itsaspiring role as a “knowledge bank,” the Bankshould increase its effort to learn and disseminatelessons from China, as well as for China.51

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBroadening the DialogueThe Bank’s dual-track approach of buildingtrust and supporting new techniques throughlending while promoting policy reformthrough AAA has been broadly effective. Butthere are a number of important areas—poverty, water, health, agriculture, and ruraldevelopment—that have issues that need to bediscussed at a higher or more inclusive levelthan the ministerial or regional projectcounterpart. Progress in reducing poverty andinequality, for example, depends on addressingweaknesses in the intergovernmental fiscalsystem. Finding an appropriate counterpart,especially for complex issues that requiresustained effort rather than stroke-of-the-pendecisions, is a major challenge for Bankassistance strategy.Implications of a Smaller Lending ProgramWith a smaller lending program, the Bank’simpact in China will depend more than ever oneffective persuasion and demonstration. Thisimplies that the Bank should:• Be more innovative in project selection and design.• Pay more attention to monitoring and evaluationand to dissemination of project lessons.• Rely more on systemic or policy changes thanon replication of projects.• Systematically evaluate projects in terms ofthe Bank’s value added.• Review personnel policy to ensure that teamshave the right balance of China knowledgeand relevant up-to-date experience from othercountries.One option that should be used sparingly isstand-alone sector work. In general, there areimportant synergies between ESW and lending.Importance of Candor and OpennessThe relationship between China and the Bankhas generally been based on working on anequal footing, mutual respect, and persuasion,rather than conditionality. This has served bothChina and the Bank well and could provide anexample for the Bank’s relations with othercountries. In particular, working on an equalfooting has promoted gradual but sustainablereform and mutual learning. But much greatercandor and openness are needed on bothsides. For example, more collaborative ESWcould have a high payoff, but China needs toprovide access to data and knowledgeablesources, and the Bank needs to be more willingto speak frankly and openly about problemsand policy options. In the banking sector, forexample, China has been reluctant to sharedata on nonperforming loans, which haveemerged as a major problem. But when theBank was allowed to study four bank branchesand found an emerging problem, it did notpursue the findings with relevant officials. Inthe Air, Land, and Water study (2001), theBank was rightly criticized by the QualityAssurance Group (QAG) for not discussingorganizational issues and options moreforthrightly in the summary report. OneChinese researcher remarked that the Bank is“too polite” to be effective. The Bank shouldnot strive to be impolite, of course, butspeaking hard truths serves China better.RecommendationsRepayment SystemChina’s repayment system is the source of boththe greatest strength and the greatestweakness of World Bank project performancein China. Its strength is that beneficiaryrepayment focuses attention on project detailand builds ownership. This is something othercountries could learn from China. Its weaknessis that the system biases the allocation ofproject funds against poor regions and publicgoods whose benefits are widely dispersed andgenerate no revenue. Blending bilateral grantsand IBRD loans can overcome the constrainton a case-by-case basis, but this is cumbersomeand has no effect on the overall concessionalityof foreign assistance. China could get the bestof both worlds by retaining the principle ofbeneficiary repayment, but differentiatingrepayment terms by ability to repay and bysector. The government operates a limitedversion of such a system for its domestic fiscal52

LESSONS AND RECOMMENDATIONStransfers, but refining the system and applyingit more widely to externally funded projectswould improve the efficiency and equity ofpublic investment allocation.Improving ESWThere are several ways in which the Bank’s ESWcould be made more effective:• Focus more on China, less on internationalexperience. The Bank has given too much emphasisto lessons of international experienceand too little to analysis of the Chinese economy.Lessons of international experienceshould remain an important part of the Bank’swork (though perhaps more through WBI thanESW), but the relevance should be testedagainst China’s problems and experience. Policyadvice should also be grounded in analysisof the Chinese economy rather than beingbased solely on international experience. Finally,analysis of China’s problems and accomplishmentswould help the Bank drawlessons from China’s experience for othercountries.• Broaden the audience. In the early days ofChina’s reform, the Bank sought especially toinfluence senior policymakers. As the agendahas moved from broad concepts to implementationand problem solving, the Bankshould try to promote and participate in amuch broader debate on policy and sector issues,not only among officials, but also amongresearchers and other stakeholders. Bank ESWcan help ensure that this broader debate isgrounded in analysis. The Bank still has a roleas confidential policy adviser, but its long-termimpact may be greater as a participant in policyanalysis before a broader audience.• More collaborative work would enhance effectiveness.The latest environment report(World Bank 2001), done in collaboration withSEPA, is a good example of the advantages tobe gained in access to data, understanding oflocal conditions, and ownership of recommendations.More collaborative work wouldhelp broaden the policy dialogue among researchersand officials and facilitate Bank contactswith a new generation of scholars. TheBank has been moving in this direction, but perhapsnot fast enough.• Carry out more sector work. ESW on China isunder-resourced. The effect is most apparenton sector work. It is unusual for there to be nowork on an important sector, but in severalsectors new work is needed to take stock ofprogress and problems and to lay the foundationfor better policy dialogue and new directionsin lending.Portfolio ManagementThere has been no CPPR since 1996. The ChinaDepartment argues that CPPRs are toounwieldy and costly to use in a country withsuch a large portfolio and that instruments likethematic supervision are more effective.Nevertheless, we recommend revisiting thepossibility of having another CPPR after moreexperience is gained with thematic supervision.We also recommend that a full-timeportfolio manager be appointed to help followup on systemic issues and facilitate cross-fertilizationamong project teams and sector units.Safeguards and the Cost of Doing BusinessWhile safeguards will remain a cost of doingbusiness with the Bank, finding more efficientways of implementing them and strengtheningthe systemic use of safeguards in China ispossible within the constraints of existingpolicy. Much could be done to furtherharmonize procedures and perspectives, whiledeveloping China’s capacity for technicallycompetent and independent environmentalsafeguard management. More sector work,such as Sector Environment Assessments,would provide a broader context for projectEIAs. Doing the work collaboratively wouldhelp develop China’s own capacity. Continuationof thematic supervision will also broadenperspectives, lower costs, and build long-termcapacity. Within China, use of a tiered system ofevaluation, in which experienced Chineseresearch institutes from coastal areas collaboratewith and monitor less experiencedinstitutes in central and western China(analogous to the relationship betweeninternational and Chinese groups in conduct-53

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEing EIAs), could promote diffusion of methodsand skills throughout China. Finally, introductionof more participatory and publicizedsafeguard methods could strengthen theindependence of Chinese experts and broadenthe debate on environment and othersafeguard issues.New Directions in InfrastructureThe Bank should not rely only on ESW ininfrastructure, nor should it retreat into peripheralactivities such as renewable energy. At thesame time, it should not simply continue a largelending program devoted to expanding thesupply of infrastructure into new regions of thecountry. Rather, it should try to move intorelatively neglected, but mainstream, areas oflending and expand the sector work to providethe analytical base for lending and policydialogue. 1 In energy, potential areas include gas,where the Bank could play a catalytic role increating an environment for the private sector,and electric power distribution, where Chinacould learn a lot from international experience.The time might also be right to try again tointerest the government in Bank assistance forcoal, where there are a number of importantissues of technology upgrading, environmentalprotection, cross-sector coordination, andenterprise reform. In transport, one strategy forthe Bank would be to support the neededhighway investments by becoming a partner ina road fund or funds that would draw on a fueltax for most of its revenues. This would allowthe Bank to wholesale its practices in highwayconstruction and, more important, place theBank in a position where it could influence theoverall resource allocation decision on what isto be built, as well as where and when. TheBank’s experience in highway design andnetwork construction would be spread over alarge program and contribute substantial valueadded to transportation in China. Other suggestionsare given in the three background paperson infrastructure (Churchill 2002; Churchill andThum 2002a, b; see also Annexes D and H).Poverty LendingThe Bank’s poverty-targeted lending has beeneffective and offers useful lessons (see box 3.2),but direct lending for poverty reduction is notnecessarily the most expedient or effectiveapproach in each sector. This is particularlytrue in the case of infrastructure, where investmentis essential for growth and benefits widelydistributed across all income classes. The Bank,for example, may contribute more to povertyreduction through the road sector by lendingfor highways than for feeder roads. It may makemore sense for the Bank to confine feeder roadlending to integrated rural poverty projectsthan as components of highway projects.However, in the case of electric power,improved distribution systems will have amajor impact on lower-income groups, but ifthese groups become the exclusive target ofthis lending, the benefits will never reach themas they will be preempted by commercial andbusiness interests, as well as higher-incomegroups.54

ANNEXES

ANNEX A:SUMMARY: ANALYTICAL AND ADVISORY SERVICESBACKGROUND PAPERWhen the World Bank began its operations inChina in 1982, Chinese policymaking was hinderedby significant ideological debates. Thegovernment directly controlled the prices of almostall industrial inputs. It controlled distributionthrough planned allocations and a variety ofquotas.Since then, the Bank has contributed toChina’s policymaking, reform efforts, and developmentthrough research and advisory activities,as well as project investment andtechnical assistance. After exerting considerableinfluence throughout the 1980s, however, theBank’s role waned during the 1990s. HaveChina’s economic advances and the growingskill of its own officials, economists, planners, andanalysts made the Bank’s advisory and analyticalservices less important? Or do the Bank’s servicemodalities and methodologies need correction?The Role of the World Bank in China’sReform and Development ProcessesTo ease China’s transition to a modern marketeconomy in the 1980s, the government practiced“incremental reform,” retaining the plannedallocation structure while allowing some activitiesto adopt the market system, with prices determinedby the market and producers gettingthe lion’s share of revenues. The government decentralizedlocal finance, introduced two-tieredpricing, made rural households responsible forproduction, and entered into contracts withstate-owned enterprises (SOEs) in urban areas.Together, these changes spurred the rapidgrowth of markets and of the economy as awhole.During this period, the World Bank’s analysisof China’s situation laid the foundation for comprehensivepolicy research. China: Long-TermDevelopment Issues and Options, published in1985, was a particularly important and influentialcountry report. It forecast China’s economicgrowth, affirmed the possibility of rapid growth,and provided policy analysis and recommendationson several key subjects:• Structural adjustments, system reform, andsocial policies during economic growth• Development of infrastructure and service sectorssuch as education, agriculture, energy,transportation, and urbanization• Reform of SOEs• Pricing reform• Creation of accounting and legal systems meetinginternational standards• Social policies, including social security, housing,social services, population, and ruralpoverty.China adopted as government policy many ofthe report’s recommendations on economic development.For instance, sectors such as agriculture,education, energy, and transportationbecame development priorities. But other recommendations,such as SOE reform and socialsecurity reform, failed to get the attention ofthe Chinese government until the need becamepressing, whereupon the recommendations wereadded 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 andAdvisory Services in China Since 1990,” by Lu Mai, Secretary General, China Development Research Foundation.57

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEThe burgeoning market economy helpedChina double its GDP in the 1980s. The Chinesegovernment pressed its advantage with dramaticeconomic reforms in the 1990s. Significantamong these reforms were (a) reforming macroeconomicmanagement in order to integrate thetwo-tiered economy (particularly on fiscal, taxation,foreign exchange, and pricing issues), (b)reforming the inefficient state-owned economy,and (c) reforming the social security system.The Bank’s considerable impact on Chinesegovernment policy during the period of incrementalreforms can be attributed to several factors.The Bank worked cooperatively andrespectfully with the Chinese government, buildingand maintaining effective channels of communicationto key Chinese officials. In the 1980s,the chief representatives of the World Bank BeijingOffice had friendly personal relations withthe leaders of the Chinese State Council andmany ministries and commissions. In the 1990s,some crucial researchers who had always hadgood working relationships with the Bank werepromoted to ministers or department directorsin the government.Bank studies and recommendations werebased on a sound knowledge base and ongoingexperience and supported China’s incrementalreform model. The Bank was able to transformits research findings into concise policy recommendationsin response to clearly defined policyneeds from the Chinese leadership. This isimportant because, although China’s reformprocess is gradual, the government maintains along list of development topics; successive topicsusually present themselves as urgent needs.Issues of ConcernDespite these successes, the influence of theWorld Bank’s policy research diminished in the1990s as resources were devoted to research reportsthat failed to get leaders’ attention. The reasonsfor the dwindling of influence are manifold.• China developed substantial capacity to performits own theoretical and policy research.• The reform process in the 1990s became muchmore difficult because it directly affected strongvested interests. While the suggestions fromWorld Bank experts were correct in many cases,the Chinese government has found them veryhard to adopt because of various political constraints.• Because it has not been able to isolate the factorsbehind its earlier successes, the Bank insome cases has proved unable to deploy itsstrengths effectively.• The Bank’s research findings are not publishedin formats that are well suited to most Chineseaudiences. Few Chinese read its lengthy researchreports because Chinese translationsappear after a long lag.• Since the 1990s, the World Bank’s research inChina has been insufficiently forwardlooking.The Bank has failed to focus on developmentalissues with significant implicationsfor China’s development prospects, suchas urbanization, education, and urban transport.In contrast, it has devoted disproportionateefforts and resources to the issue ofSOE reform. A related problem concerns thegap between clearly identifying actual policyresearch needs and supporting what may bea totally different set of priorities articulatedby the government.RecommendationsWorld Bank project loans and policy researchhave been closely related in China—to good effect.But with the elimination of soft loans andthe reduction in project loans, policy researchhas decreased in volume and significance. If theBank wants to retain its influence on China’s futurereforms and development, it should adjustits research and analysis services. Among therecommended adjustments are the following:• Expanding networks and channels for policy researchso that when a current group of Chinesecollaborators is promoted or retired, a newnetwork is ready to take its place.• Identifying current and future needs throughproactive collaboration with Chinese researchersand specialists in various governmentagencies who could define needs andmake suggestions in key research fields, aswell as assess the Bank’s reports from the perspectiveof Chinese experts.58

ANNEX A: SUMMARY: ANALYTICAL AND ADVISORY SERVICES BACKGROUND PAPER• Formulating improved output and deliveryformats for reports so that recommendationsfocus on the one or two most important findings.Proposals of no more than 3,000 wordscould be released separately and periodically(possibly 20 times per year) and circulatedwithin the Chinese government. This approachcould achieve a stable and loyal readership.• Strengthening the studies of China’s fundamentalconditions in cooperation with Chineseexperts, following the model of the WorldBank surveys that shed so much light on thechanging Chinese economy and society in thelate 1980s and early 1990s.• Upgrading the training of Chinese policy researchersin government, academia, and nonprofitorganizations. The World Bank shouldcontinue its efforts to provide support and assistanceto the capacity building effort of Chineseresearch institutions by offering personneltraining and short-term study tours.59

ANNEX B:SUMMARY: AGRICULTURE BACKGROUND PAPERChanges in the Agricultural and RuralSectorsLike most of China, the agricultural sectorchanged significantly between 1970 and 2000,both demographically and economically. Agricultureslipped from 40 percent of China’s economyto 16 percent, as industry and servicesadvanced. The share of the population engagedin agriculture shrank from 81 percent to 50 percent;the population share living in rural areasdeclined from 83 percent to 64 percent. Even so,in 2000, the rural economy still employed 475million people, with 347 million working in agricultureand 128 million in town and village enterprises.Historically tightly regulated, insulated,and protected, the agricultural sector is increasinglysubject to market forces, the pressuresof internationalism, shifting governmentpolicies, and changes in technology and consumerpreferences. Rural enterprises now providemore diverse employment opportunitiesand an important source of income for ruraland agricultural workers. A demand in urbanareas for more diverse foods is widening opportunitiesfor farmers to join China’s dynamicdomestic economy, although improved ways tomarket their products are needed.But prosperity is not equally spread throughoutChina, nor has the agricultural sector sharedin the wealth of industry and commerce. Incomesin urban areas are 2.7 times those in rural areas.Some provinces are remote, poor, and largelyunconnected to the modern Chinese economy.In other provinces, high levels of prosperity coexistwith equally high levels of rural poverty.China has recognized this problem, and the Bankcan provide new perspectives on how to solve it.Challenges for Rural ChinaThe focus of Chinese agriculture for decadeswas national self-sufficiency. To this end, thegovernment regulated what was grown, with anemphasis on grains. A government monopoly stillcontrols the grain market, but farmers are changingthe rural output mix in favor of commoditiesnot subject to price or market regulations, suchas oilseeds, fruit, meat, and fish. Consequentlythe share of these products in agricultural outputhas risen rapidly, while the share of outputsold at regulated prices has fallen—from 76 percentin 1980 to 56 percent in 2000. These shiftsare driven by changes in demand, by policy, andby attempts to find loopholes in policy.Shifts in the mix of agricultural output and inagriculture’s share in national output and employmentare typical of the structural changesthat occur with growth in an economy at China’sstage of development. However, challenging theprocess of change are conditions specific to Chinaand China’s policy choices to date. These conditionsand policy choices are the basis of the challengesconfronting rural China that will guide thepriorities in the Bank’s program of assistance toChina. The most prominent issues that appear toconcern policymakers include the following:• A focus on product quality, rather than volume,to meet shifting consumer tastes, and anexplicit shift in public discussion of food securityto reflect this changeThis is a summary of the CAE Background Paper, “World Bank’s Assistance to China’s Agriculture Sector,” byChristopher Findlay, Professor, Asia Pacific School of Economics and Government, Australian National University.61

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCE• Less reliance on collectively owned townshipand village enterprises, which tend to be speciallyfavored and inefficient, and more relianceon true private enterprises• More interest in trade in food—not only foodimports but also exports and access to marketsfor exports—again leading to a different perspectiveon food security, including an appreciationof product values and input costs anda reappraisal of China’s strategy with respectto the World Trade Organization’s Doha Round• Continuing pressure for reform of domesticgrain marketing systems to capture, throughcomparative advantage, more gains from theinternal trade in grain and to facilitate adjustmentto WTO commitments in the grainsector• Removing impediments evident in markets forfarm inputs and services that restrict farmers’ability to respond to opportunities and to adjustproduction in the face of new competition• Reform of rural finance markets to help farmersand rural entrepreneurs improve their operations• Better infrastructure for agricultural productmarkets, especially logistics and multi-modaltransport, to enhance trade and incomegrowth, particularly in poor areas• Redressing the growing imbalance in incomedistribution between rural and urban residentsand the large gap between prosperity andpoverty in rural areas• Removing impediments to internal migrationand relaxing other rural labor regulations, withimplications for the management of markets inagricultural inputs, especially land; for the managementof poverty programs; and for diversifyingfarmers’ income sources• Greater focus on environmental constraintsthat limit the sustainability of Chinese agricultureand rural enterprises and threaten furtherdegradation of water, soil, and othernatural resources• Correction of incentives in the national publicfinance systems that appear to be wideningdisparities rather than narrowing them• Reform of financial and bureaucratic arrangementsthat prevent local and inter-regionalfunding and development strategies.Policy change can be expected to respond tothe pressures associated with the foregoing issues,as China’s experience with grain market regulationand the household registration systemsuggests. But a body of knowledge about policyoptions and their impacts is critical if policymakersare to choose and implement policiesthat promote growth and reduce poverty.Review of World Bank AssistanceStrategyWorld Bank lending is large in absolute terms butsmall relative to capital inflow into China. TheWorld Bank has made the case for continuing tolend to China, observing that foreign direct investment(FDI) has tended to exaggerate regionaldisparities and has not met the need forpublic investment in essential sectors. Prioritiesin the Bank’s program—poverty alleviation,health, education, natural resource management,the environment, and urban development—havehad a low priority in FDI flows,whereas Bank projects have piloted innovativeapproaches to areas of need, catalyzed repeaterprojects that demonstrated sound policy principles,and helped to build institutions necessaryto complete structural reform.The 2002 country assistance strategy (coveringthe period 2003–05) contains several goals relevantto agriculture and the rural population. Itbuilds on a broad strategy that includes improvingagricultural practices, upgrading marginalland, improving township and village enterprises,boosting employment and productivity, and payingmore attention to lagging inland regions. Improvementsto agricultural productivity growthare expected to come from changing the mix ofoutput, strengthening land property rights, investingin irrigation, reforming water resourcemanagement, reforming systems of fees and taxesin agriculture, engaging more private sector participation,and improving transport and marketinfrastructure. Rural development programs willreflect key themes of the Bank’s program fortransition to a market economy, assistance todisadvantaged people and regions, the ruralurbantransition, and sustainable development.Over the next two years, assistance prioritieswill shift further from direct interest in produc-62

ANNEX B: SUMMARY: AGRICULTURE BACKGROUND PAPERtion to poverty alleviation, natural resource management(with special attention to water), revitalizingagricultural research and extensionprograms, and environmental sustainability. Theoverall interest in moving toward a market economyremains. The changes in the portfolio ofprojects are consistent with the new prioritiesidentified above. However, how project implementationproceeds will depend on whetherChina focuses on narrower or broader interpretationsof economic development: Will effortsfocus on rural areas in general or agriculturein particular? Should the goal be to bring prosperityto the countryside or to facilitate the migrationof the rural poor into the cities?Review and Further QuestionsThe biggest issue remains the system of subnationalfinance and the incentives it creates in projectselection and design. The consequence ofthis system is that the Bank’s contribution to publicgoods is being driven by its participation in theproduction of private goods. Ideally, the interactionshould be in the other direction. The originsof the current circumstances are understandable,given China’s public finance system, but this orientationleads to a bias in the portfolio and toproblems in project design, implementation, andevaluation. It has also raised demands on Bankstaff and crowded out the private sector.In order to achieve the goal of participationin projects, the Bank tends to be drawninto provincial-level activity. The sensible approachto poverty reduction, involving an integratedset of activities, then leads to large,complex projects requiring a high degree ofmicromanagement, thus exposing the Bank tosignificant risk.The responses to this situation include continuingwork to anticipate pressures for changein the three key areas of grain marketing, labormobility, and public finance; to deliver a steadyflow of ideas about policy innovation; and toensure, through project design and evaluation,that public goods, including capacity and institutionbuilding, are not underrepresented inthe portfolio.The fundamental issue is the degree to whichWorld Bank projects focusing on agriculturalproduction boost the welfare of the poor inrural China and the economies of the regions inwhich they live. Although the Chinese governmenthas recognized the need to addresspoverty in rural areas, it has traditionally usedWorld Bank loans for projects that will quicklygenerate income to repay the loans. This has distractedattention from a focus on building institutions,economic capacity, health, education,and other social lending of the sort that benefitsthe rural population over the long term. Integratingsuch lending into the Chinesedevelopment strategy will require a shift in Chinesedomestic economic policy and new waysof approaching and managing change.63

ANNEX C:SUMMARY: DECENTRALIZATION BACKGROUND PAPEREvaluations by Bank staff, borrower representatives,implementation agencies, and nongovernmentalorganizations (NGOs) have shownthat decentralization has had a positive impacton the Bank’s effectiveness and efficiency sincesome functions were decentralized to the ResidentMission in China (RMC) after 1997. Thepresence of project staff in the RMC, many ofwhom speak Chinese, has helped (i) resolveproject problems promptly, (ii) speed up transactiontimes, (iii) enhance the Bank’s appreciationof the local situation, (iv) facilitate localcapacity building through regular training andother support, and (v) build long-term relationshipsand trust by virtue of continuous presencein the community. Several improvementswere made possible by the Bank’s presence inBeijing, including the following:Project Management. With portfolio tasks beingmanaged in Beijing, increasingly by Chinese staff,RMC staff have spent more time within immediatereach of project staff, solving problems inreal time and engaging in almost continuous supervision.Also, the persistence of Bank staff inthe RMC has led to positive changes in projectdesign, implementation, and procurement.Public Procurement. The borrower consistentlycited the Bank’s role in public procurement asa major contribution to China’s development.RMC staff helped prepare the National PublicProcurement Law of 2000. It also played an importantrole in drafting standardized biddingdocuments for Bank projects in the early 1990s.Disbursement and Financial Management. Financialmanagement staff and disbursement staff are interchangeablein Beijing, streamlining their speedand effectiveness. Withdrawal applications arenow all processed in Beijing; the requisite formsand supporting documentation are digitized andsent electronically; the service standard for processingapplications is now 10 days; and financialmanagement assessments for projects underappraisal and oversight of financial reportingand audits have increased. (About 220 project auditsand 50 trust fund audits are reviewed everyyear.) The RMC is helping the Chinese NationalAudit Office adopt auditing standards in linewith Bank and international norms.Beneficiary Participation. The Bank has promotedthe engagement of stakeholders in the designand implementation of development projects,notably in the creation of water user associationsand in stakeholder consultation, throughtechniques such as rapid rural appraisal.Safeguards. The Bank’s safeguard policies havehelped the Chinese improve the content andapplication of their own environmental and socialsafeguard policies. The Bank and RMC staffare supervising the implementation of EnvironmentalAction Plans and Resettlement ActionPlans, unlike many Chinese agencies (and evenother donors). With two notable exceptions—resettlementof illegal squatters and the definitionof indigenous peoples—there has been an increasingacceptance of the Bank’s policy standardsand practices. Environmental policies areAnnex C summarizes the CAE Background Paper, “Impact of Decentralization,” by Daniel Ritchie, Consultant.65

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEnow more or less synchronized with the Bank,even though the definition of what constitutesa significant impact continues to vary. Possibly themost significant contribution by the Bank is inthe application of the policies.66

ANNEX D:SUMMARY: ENERGY BACKGROUND PAPERChina is now the second largest energy consumerin the world. The country’s energy intensityis about 60,000 BTU (British thermalunits) per dollar of GDP, three times the worldaverage and twice that of all developing countries.It generates more than 300 gigawatts, makingit both the world’s second largest producerand second largest consumer of energy. Industryaccounts for as much as 75 percent of totalenergy consumption, and although conservationefforts over the past two decades have resultedin more efficient consumption, householduse (10 percent in 1999) is growing fast with recentimprovements in the standard of living. Nationwide,although service is of uneven quality,rural access to electricity is high: about 96 percentof the nation’s villages and about 80 percentof rural families now have access to electricity.Three prominent issues in China’s energysector are the use of coal, management of electricpower, and efforts at energy sustainability thatinclude improving efficiency, conservation, anddeveloping renewable energy.Coal. China is the world’s largest producer andconsumer of coal. It is, in the foreseeable future,largely energy self-sufficient, although crudeoil imports have increased steadily since 1993.Coal also presents problems concerning infrastructureissues of transportation and distribution,air pollution and health, and the efficiencyof the technology used to burn coal (in powerplants, as well as households).Electric Power. The sheer size and the level ofgrowth in China’s power sector have been veryimpressive. However, its institutional structureis complex and inefficient. The tenth five-yearplan (2001–05) continues a number of ongoinginstitutional and organizational reforms: completelyseparating the distribution network fromgeneration; restructuring both generation andpower network enterprises; establishing competitiveand open regional markets; and developingefficient management throughout theelectricity chain, including generation, transmission,distribution, retail tariffs, and environmentalprotection.Sustainable Energy, including Conservation, Efficiency,and Renewables. China has one of the world’slargest renewable energy programs, with 20 gigawattsmall hydropower and large-scale installationof improved woodstoves and biogas plants.The tenth five-year plan emphasizes renewableenergy as an important measure to reduce thepower sector’s use of coal in the medium tolong term and to provide energy services to remoterural households.The Bank’s Energy Sector AssistanceStrategyBetween 1983 and 2002, China has been theBank’s largest borrower in the energy sector,with about $7 billion in loans, and energy isabout 20 percent of the Bank’s total lending toChina. Electric power received the most (86 percent),followed by oil and gas (10 percent), energyefficiency and renewables (2 percent), andcoal (2 percent), with substantial analytical andadvisory services. The sector also received $90million in Global Environment Facility grantsAnnex D summarizes “World Bank Assistance for China’s Energy Sector,” by Anthony Churchill and CordulaThum, Consultants.67

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEthrough the Bank. Nonetheless, given the sector’ssheer size, the Bank is a relatively marginalfinancial player in China’s energy sector (lessthan 5 percent). And the Bank has had only limitedinvolvement in the subsectors most criticalto China’s energy strategy—coal and petroleum.The Bank’s activities have progressed fromhelping China integrate into the global economyand build an energy infrastructure that support’sthe country’s accelerating economicgrowth to developing the institutions, practices,organizational and market reforms, and environmentaland resettlement programs to makeChina’s energy system equitable, efficient, andsustainable.After a period of significant loans during1983–98, there has been a dramatic decrease inoverall energy lending. Only four energy loanswere made in the period FY99–02. Three loanstotaling US$420 million were made duringFY99–00, but only one loan since then, forUS$10.5 million, in FY04. This is a shift from financingmajor capital projects to organizationaland market reform programs. In the past twoyears, the establishment of a competitive powermarket in Zhejiang Province is an example ofeffective AAA, and the Hubei Hydroelectric Project(2002) is a model for technical assistance,providing lessons on reforming electricity generation,distribution, trade, and management.Efficacy of Bank Projects:Performance and OutcomesCompletion and Supervision Ratings. The record ofcompleted energy and energy-related projects iscomparable to the transport sector: 6 were ratedhighly satisfactory; 4 were rated marginally satisfactory;none of the 20 projects had an unsatisfactoryoutcome; and one project was not rated. 1Sustainability was rated likely for all but one project(the Daguangba multipurpose hydroelectricproject, which was rated uncertain). And institutionaldevelopment impact was rated substantialor high for all but three projects (the Daguangba,Changcun Mining, and Fertilizer Rationalizationprojects, which all had a modest rating).An assessment of the Bank’s impact in a countrylike China needs to go beyond the immediateachievements of Bank projects, which ultimatelyaccount for only a minute portion ofoverall sector investments. In this respect, theBank’s strategy from 1985 to 1993 was highly relevantto the sector’s needs and consistent withthe Bank’s support of China’s gradualist approachto economic reform. Most projects hadminimal policy content, but they all shared astrong emphasis on technology transfer and capacitybuilding. Projects were targeted to maximizetheir demonstration value to the rest of thesector, with benefits to be gained from moderntechnology and management methods, internationalprocurement, and good resettlementpractices. These early physical and institutionalachievements were fully sustainable and pavedthe way for the more ambitious policy reformsof the mid- and late 1990s.The outcome of the Bank’s energy assistanceprogram since 1994 is rated satisfactory,its institutional development impact substantial,and its achievements sustainable. The Bank’spower sector strategy continues to be highly relevantand is supported by the government’sstated commitment to reform. However, theBank needs to renew a dialogue on the criticalcoal and petroleum sectors, where reform hasbeen lagging, and on promoting an integratedapproach to energy planning. Bank performanceduring the period is rated highly satisfactory,while borrower performance is ratedsatisfactory, with excellence in such aspects asresettlement, sustained commitment to energyefficiency, and renewed promotion of renewables,offset by weaknesses such as lack of effectivesectoral coordination at the central level,slow pace of power tariff reform, insufficient enforcementof environmental regulations, and insufficientprogress in reforming the coal sector.Sector Reform, Institutional Development Impact, andSustainability. The fundamental restructuring ofthe power sector has been the most ambitiousinstitutional objective pursued by the Bank in theenergy sector since 1994. In 2000, a joint reportof the State Power Corporation and the Bank laidout a plan to introduce competitive power marketsinto the Chinese power sector, starting ona provincial or regional scale. Pilot programs are68

ANNEX D: SUMMARY: ENERGY BACKGROUND PAPERunder way in Shanghai and Zhejiang. The electricityindustry in China is shifting to a competitivelybased electricity market framework,particularly Shanghai and Zhejiang in the EastChina power grid. Zhejiang is piloting the implementationof competitive power markets withassistance of the World Bank. The Bank is in aunique position to bring international experienceto bear in power market design.Zhejiang’s competitive electricity marketbegan trial operations in January 2000. A 2001World Bank review found that impressiveachievements have already been made:• Sound trading mechanisms, operating rules,and risk management have been established.• Information systems to operate a competitiveenergy pool have been well conceived, developed,and put in operation.• Reform has been widely accepted and supportedby government authorities.• Improvements have been widely accepted andsupported by government authorities.• Improvements have been made by generatorsin cost control, internal performance management,and contract trading analysis andrisk management.• And most important, average generation availability(92 percent in 2000) continued to improveas a result of competition.There are, however, problems that have preventedthe market from advancing further. Thepilot project has revealed the constraints andproblems that arise if the government persists inadopting a fragmented, piecemeal approach topower sector reform.Relevance of Bank AssistanceAn assessment of Bank involvement in China’senergy sector needs to start with the recognitionthat Bank financial support represents atiny portion of the sector’s total investmentneeds: even in the power sector, where theBank has been most active, total lending between1984 and 1995 (US$3.4 billion) accountedfor a mere 3.4 percent of sector investments.Consequently, aside from any actual or potentialdirect benefits of Bank projects, the relevanceof Bank assistance has to be seen primarily interms of whether it was geared, through targeting,type of instruments, or partnerships, toachieve maximum catalytic or demonstrationeffect and policy impact in areas emphasized bythe Bank’s corporate, sector, and country assistancestrategies.The Bank’s investments in the electric powersector reflect the Bank’s comparative advantageand were driven by the high priority inChina given to increasing power production. Financingbig hydro projects, and later large thermalplants, has historically been the Bank’scomparative advantage. Lack of electric powerto support economic growth, combined with aninefficient and obsolete supply system madepower plant construction an obvious highreturnactivity for the Bank and high ownershipvalue for the government. But there has beenless ownership concerning solving difficultiesassociated with pricing, financial matters, andother needed reforms that accompanied theseprojects.In the past few years, the Bank has encouragedChina to seek private sources of financing to increaseelectric power supplies. In spite of Bankencouragement, China has been able to attractonly relatively minor amounts of private financing,usually with substantial government support.Without an appropriate market structure,private capital is reluctant to enter this market.Getting the market structure “right” is the challengefor the future. In any case, given the sizeof the sector, most of the resources will have tocome from domestic savings, with external capitalplaying only a limited role.Given the large size (for the Bank) of theelectric power supply program, it has been difficultfor the Bank to find the resources and thewill to move into other areas of energy investments.The supply problems associated with primaryfuels, oil, gas, and coal are obvious, buttaking action has been beyond the capacity of theBank, particularly in the face of China’s unwillingnessto deal with the associated institutionalissues. The few attempts to do so have not beensuccessful and have discouraged further action.The fuel sector is the major unfinished businessfor the future.69

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCELessons• An incremental approach to institutional development,initially emphasizing technologytransfer and capacity building, can be extremelyeffective.• Internal Bank factors are critical to building upand sustaining an effective long-term sector dialogue.• In focusing on the ultimate introduction ofmarket forces in the energy sector as part of itspolicy dialogue, Bank staff should not losesight of the importance of fundamentals.• A two-pronged approach that combines highlevelpolicy dialogue with central authoritiesand a direct operational involvement with a representativeset of provincial utilities is essentialto success.• The Bank should be particularly sensitive topossible misinterpretation by outsiders of itsstance on private sector development issues.• The Bank’s emphases on ensuring compliancewith environmental guidelines in the design ofthe projects it finances and on designing andenacting appropriate environmental regulationsat the national level must be complementedby similar efforts at the monitoringand enhancing enforcement levels.Future Bank Involvement in theEnergy SectorThe Bank is at a crossroads in its energy sector dialoguewith China. After the major policy breakthroughsof the mid-1990s in the power sector,progress on sector reform has slowed, and majorpolicy issues in such critical subsectors as coal, oil,and gas have largely gone unattended. To addressthis, the Bank could choose to focus increasinglyon “peripheral” subsectors such as renewables andenergy efficiency where policy issues are less sensitiveand government buy-in more likely. But thisapproach may lead to a marginalization of theBank’s role in a sector of central importance tothe country’s future development, at a time whenIFC is not positioned to expand its involvement—precisely because major institutional and policyissues remain to be addressed. A more difficultpath is for the Bank to continue its sizable financialsupport to the energy sector, but frame itwithin a truly comprehensive dialogue on nationalenergy policy issues. This evaluation clearlysuggests that this is where the Bank’s comparativeadvantage lies. In particular, the Bank can:• Help promote comprehensive energy planningin China. The Bank should offer to helpat two levels: regionally, preferably in Sichuanprovince, which has a varied resource supplyand where the Bank has ongoing operations andinstitutional relationships; and nationally. TheBank could build on its recent working dialoguewith the State Council, a recently completedstudy on liquid national gas financed by the JapanPolicy and Human Resources Development Fund(PHRD), and an older Bank study of China’s coaland electricity delivery services.• Continue to balance assistance in termsof subsectoral priorities, mix of instruments,and central versus local dialogue.An appropriate mix of lending and nonlendinginstruments will continue to be needed formaximum impact, and sector interventions atcentral and provincial levels need to continueon parallel tracks.While future energy policy dialogue will needto be comprehensive, calling for broad-rangingeconomic and sector work, the scope of individualproject interventions need not be. Instead,individual projects may be geared to areasneglected in past Bank lending and areas inwhich IFC involvement is less likely:• In the power sector, the Bank should increaseits attention to inefficiencies at thedistribution level. It should broaden the effortsinitiated in Zhejiang province under theTongbai project. This increased emphasis onlocal issues, together with the photovoltaicpilot financed by the Bank under the RenewableEnergy Project, could pave the way for amore proactive and better-integrated Bankstrategy on rural energy.• The Bank should provide direct assistancetoward municipal-level naturalgas distribution and demand, for example,by replacing coal-fired furnaces with gasfiredfurnaces, co-generation, and district70

ANNEX D: SUMMARY: ENERGY BACKGROUND PAPERheating. Loans to municipalities could helpexpand municipal gas-distribution infrastructureand utilization of natural gas in urban districtheating systems.• The Bank should make a renewed and determinedattempt to engage Chinese authoritiesin a full-fledged dialogue on thecoal sector. The Bank must address coal in itsassistance strategy; the coal sector is too importantto China’s future social, environmental,and economic development, and the issues thesector must resolve are too daunting.• In its future lending to the power sector—and possibly the petroleum sector—theBank should give higher priority to theearly resolution of pending asset ownershipissues, which continue to cloud the reliabilityof many sector agencies’ financialstatements. In this context, the Bank shouldconsider revisiting its current auditing requirements(which only provide for certificationby government audit bureaus) and, at aminimum, ask to be provided with audit reportsfrom international auditors wheneverthese have been prepared (for example, forthose power companies that have obtained, orare seeking, partial listing on foreign stock exchanges).71

ANNEX E:SUMMARY: FINANCE BACKGROUND PAPERChina’s economy grew spectacularly throughthe 1990s. The banking system grew even faster,but there is widespread concern that its mountingproblems may mar what is otherwise a remarkableeconomic transformation.After China’s economic transition began in1978, output and incomes grew quickly and depositsflooded into Chinese banks. The banks—government-owned investment arms of theMinistry of Finance (MOF)—had little experiencein making sound loans. With depositorsprotected against losses from bad loans, depositsbecame contingent government liabilities,posing significant fiscal and macroeconomicrisks. But with national income doubling everydecade and domestic savings at 35–40 percentof GDP, the steady flow of new deposits has sofar spared China a banking crisis and allowed arisky situation to continue largely unchecked.The magnitudes are staggering: banking depositswere about 150 percent of GDP in 2003,up from less than 30 percent in 1978. Four statebanks account for about two thirds of these deposits.Banks lend mostly to state-owned enterprises(SOEs), not the booming private sector,which relies on retained earnings and informalfinance. If non-performing loans constitute onethird of the portfolio and are worth 10 percentof their face value, the government’s contingentliability is about 45 percent of GDP.Before 1978, “the plan” covered almost everydecision by SOEs. Prices, which bore little relationto costs or scarcity, were used by central authoritiesas implicit taxes and subsidies. Firms hadno role in allocating resources, and most investmentswere funded through budget grants.Credit, too, was an integral part of planning. Butthen as now, Beijing set targets and flows at a highlevel of aggregation, and provincial or municipalgovernments effectively controlled most SOEs.As budget-financed investment fell from 16percent of GDP in 1978 to 3 percent in 1995,Bank lending took up much of the slack, andwhen some SOEs could not qualify on strictlycommercial criteria, banks were pressed, or directed,to fund them. After 1980, economic reformsand increasing competition among firmsexposed the financial weakness of many SOEs.Loss-making SOEs rose from 26 percent of thetotal in 1992 to 50 percent in 1998.The Bank’s RoleIn the 1980s, the Bank offered China a windowon the world of market economics, in bankingas in other sectors. The Chinese authorities listenedto the Bank’s general advice and used theBank to vet the legions of experts who came tooffer guidance.During this period, the Bank approved nineline-of-credit projects that benefited borrowersin light industry and agriculture but did notachieve their stated purpose: to improve thesoundness of banks or the overall quality of theirloan portfolios. The last of these projects was approvedin 1990 and closed in 1996.When Beijing lost control of its monetary aggregatesin the late 1980s, the Bank workedclosely with Chinese counterparts to take stockof the banking system. A Financial Sector Review,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 duringthe 1990s,” by S. Ramachandran, Senior Evaluation Officer, Operations Evaluation Department, CountryEvaluation and Regional Relations (OEDCR), World Bank.73

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEflict between having banks operate autonomouslyand governments (at various levels) funding favoredenterprises regardless of profitability.The review’s prescriptions were sensible, butgeneric: to have banks, although governmentowned,operate commercially and be subject tothe central bank’s prudential regulation and supervision.The review also suggested removinginterest rate controls and credit ceilings and introducingindirect instruments of monetary policy.But the effort to remake the Chinese systemin the image of industrial countries ignored Chineserealities: “loans” were often understoodby all parties to be equity stakes, and the centralbank’s power was very limited. Enterprises hadunclear ownership, high debts, and uncheckedaccess to bank loans. Banks’ head offices had littleoversight and virtually no control over theirown branches, which often kept two sets ofbooks, one for the head office and central authoritiesand another for the local authorities,which exerted de facto control over localbranches.Central authority was splintered among rivalagencies—among them the Ministry of Finance,State Planning Commission, central bank, and theState Council’s research arm. Each of the manygroups had to agree on the scope and design ofa Bank project, and their rivalries were not conduciveto addressing difficult problems. The ambitiousFinancial Sector Development Project, firstproposed in the mid-1980s and continually preparedand altered during the 1990s, was finallyabandoned in 1997, because the Bank and its Chinesepartners could not agree on its components.A Financial Sector Technical Assistance Project(FSTAP), approved in August 1992, was designedto help the central bank better understand theinner workings of the banking system and soindirectly influence policies. At $60 million, it wasthe largest technical assistance loan the Bank hadever made. But the project’s approval did not endtensions among the various counterparts. Becauseeach entity liked only specific features,project implementation was difficult.As China’s banking deposits increased in the1990s and a new generation of policymakers returnedfrom advanced study abroad, the technicalabilities of Chinese officials rose dramatically.The Bank, meanwhile, did not increase the analyticalrigor of its reports, which then becameless useful to the technocrats in the government,who nevertheless proceeded to use themin bureaucratic battles for influence.No further financial sector projects and nomajor economic and sector work were conductedafter 1997. The Bank’s China Department,reorganized in 1994, was again shaken bythe mid-1997 reorganization of the East Asia Region.Bank staff fought to resuscitate or replacecanceled financial sector projects, but work dwindled.By 1999, most financial sector staff workingon China had left.Hopes for reviving the Bank’s involvementin the financial sector rose in mid-2000 when theBank’s new Regional vice president designateda full-time program manager for financial sectorwork in China with a greatly augmented budget.Regional sector staff think that they have turneda new page, but it is too early to tell if the Bank’seffectiveness has improved.The Decade’s Developmentsin PerspectiveChina has made significant improvements in theinstitutional setting of its financial sector. Thecentral bank law and commercial bank law wererevised in 1994–95. National financial accountingstandards and standards for risk-based loanclassification were introduced in 1998. The creditquota system has been replaced by a less rigidsystem of indicative quotas. Banks are trying toresolve their nonperforming loans (throughasset management companies). A troubled regionalcommercial bank was closed. Several foreignbanks were licensed, and further openingis set for 2004 under the World Trade Organization.For the capital markets, a long-delayed securitieslaw, approved in late 1998, defines insidertrading and permits criminal prosecution of offenders.Capital market oversight responsibilitieshave been clarified and consolidated, and a newagency has been established to oversee the insuranceindustry.Despite these advances, the problems ofChina’s huge banks are daunting. Deposit growthmay continue to postpone a banking crisis, butnonperforming loans must fall as a proportion74

ANNEX E: SUMMARY: FINANCE BACKGROUND PAPERof GDP if China is to grow out of the problem—and this requires drastic improvements in thequality of bank lending.Poorly defined property rights and reportsof corruption and misappropriation suggest thatthe central government may find it harder torealize the value of what it purportedly owns(as a shareholder) than what it is owed (as acreditor). If so, the banks’ nonperforming loanscould jeopardize central government finances.When added to Beijing’s external debts and theunfunded pension liabilities promised to a rapidlyaging population, the fiscal implications ofthe contingent liabilities from nonperformingloans of state banks are worrying.An EvaluationThe Bank’s work in the Chinese financial sector,especially during 1993–94, fell short in two ways.First, project preparation documents containedno analytical work on banking. To someextent, this was because data were not easilyavailable—or not forthcoming—but no great attemptwas made to get them, and readily availabledata were never analyzed. Five years afterthe East Asian crisis, for example, the Bank hasnot analyzed such issues as the size distributionof deposits that would greatly help in the orderlyhandling of a banking crisis that many fear willfollow if banking does not improve. And despiteconsiderable Chinese interest in asset managementcompanies, the Bank has not examinedtheir efficacy. Academics and commercial bankersappear to know more about what is happening—andare therefore more influential—thanthe Bank.After 1993–94, the Bank’s technical work failedto keep pace with the technical abilities of Chineseofficials. Written reports became inaccurateor misleading to avoid annoying every officialthrough which they were transmitted. Butoblique criticism or sugar-coated reports are oflittle interest to technically able counterparts, andsome reports have not been passed on to the decisionmakers,sometimes on technical grounds,but also in battles over turf.Second, after the mid-1990s, the Bank’s workon Chinese finance did not reflect what otherBank staff already knew about Chinese enterprises.The Bank would have been more persuasivehad it showed, for example, thatvalue-subtracting enterprises were being funded.Moreover, the Bank has framed the issue as makingbanks sound, while the authorities at thecentral and provincial levels have been moreconcerned about enterprise restructuring and itsattendant social and political implications. Powerfulfactions in China favor state support for astable of large, “strategically important” firms.Had the Bank integrated its banking work withits work on enterprises, its prescriptions mayhave been more appropriate and convincing tothe authorities.The Bank’s regional Poverty Reduction andEconomic Management (PREM) Network is nowresponsible for financial sector work in China.The program manager appointed in 2000 hasan ample budget to draw on expertise withinother parts of the Bank and outside. The workhas shifted from capacity-building projects withindividual banks to broader issues of overall financialsector reform and sequencing. Suchstrategic advice will be effective only if it is anchoredon analytical work specific to China. HavingChinese scholars and academics do analyticalwork under the Bank’s aegis could sharpen itsrelevance while augmenting the country’s policyorientedcapabilities.75

ANNEX F:SUMMARY: POVERTY BACKGROUND PAPERHowever one chooses to measure the availabledata, poverty rates fell in China during the 1990s.The proportion of the population living on lessthan $1 per day (in purchasing power parity) declinedfrom 32.9 percent in 1990 to 17.8 percentin 1999. Yet most of that reduction took place in1994–96. Using an income-poverty threshold forrural China, one gets a less extreme differencein the rates of poverty reduction during thethree thirds of the decade. However, the broadpattern still holds: the rate of reduction inpoverty was rapid during 1994–96 and far slowerduring the earlier and later years.But even after two decades of rapid growth,the overall incidence of poverty in China washigher than in many countries in similar circumstances.During the first and last thirds of thedecade, China experienced very high rates ofGDP growth that coincided with a rapid increasein per capita real personal income in both ruraland urban China. Yet both subperiods saw aslow or negative decline in poverty, indicatingthat China failed to realize the potential forpoverty reduction created by rapid growth. Thatfailure was due to a sharp increase in inequality.The increase in inequality is ascribable to five setsof circumstances:Increase in Inter-regional Inequality. Since the 1980s,China’s economic growth has been concentratedin the coastal and eastern provinces, which enjoyednatural advantages and public policy preferencesin attracting export industries and foreign directinvestment. In contrast, the central and westernregions were excluded from those advantages andhave grown at a much slower rate. Other policiesimpeded progress in the “backward” regions, includingan almost colonial approach to extractionof natural resources at extremely low ex-factoryprices, price controls on agriculture, and low investmentin infrastructure. Only after the mid-1990s did signs of a reversal of some of thesepolicies become discernible.Slow Growth in Rural Income. At the end of thedecade, poverty in China was overwhelminglyconcentrated in rural areas, which accountedfor nearly 70 percent of the population in 1999.The ratio of urban to rural per capita householdincome increased from 2.20 in 1990 to 2.65 in1999. This widening disparity was due to theslow growth of agriculture, discriminatory termsof trade, and reductions in public investment inagriculture.Regressive Transfers to Households and ReducedTransfers from Rich to Poor Provinces. The system oftaxation and transfers practiced by the state andcollectives is highly regressive. An average householdin rural areas paid a net tax amounting to0.5 percent of income, whereas an average urbanhousehold received a net subsidy of 11 percentof income. China’s budget system has undergonechanges that restrict the ability of the poorregions to fund essential services, such as educationand health, and to invest in economicdevelopment. The provinces, not the centralgovernment, must repay external lenders like theWorld Bank and bear foreign exchange risks forloans 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, Universityof California, Riverside.77

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEsequence, the extremely poor counties are oftennot eligible to participate in externally fundedpoverty-reduction projects.Low Employment Growth. During the 1990s, economicgrowth in China created very little employment,the primary conduit through whichthe poor benefit from growth. In the mid-1990s,state and collective enterprises began reducinga significant payroll of nonworkers employed ina form of “concealed unemployment insurance.”The reductions affected about 29 percent oftheir urban workforce—41.24 million people—and 6 percent of the workforce of township andvillage enterprises. No alternative system of socialprotection has been developed.Discriminatory Treatment of Migrants. The incidenceof poverty among urban migrants is about 50 percenthigher than among the registered urbanresidents. Migrants have been denied access tohealth and education services and the opportunityto seek employment on an equal footing withregistered urban residents. Restrictions on migrationhave also prevented laborers from leavingrural areas in response to market forces,thus contributing to the urban-rural inequality.If these adverse factors were completely offset,China’s income distribution would probablyhave become more equal in the 1990s, directingmore than the entire benefit of economic growthto poverty reduction. It is possible, however,that the steep fall in the incidence of poverty inthe 1980s precluded similar reductions in the1990s, as the remaining poverty became more intractable:heavily concentrated in poor areaswith inadequate infrastructure and little contactwith the rest of the economy.The Chinese Government’s ResponseThe evolution of the problem of poverty andChina’s public response to it may be dividedinto four distinct periods. From the late 1970s tothe mid-1980s, poverty fell rapidly in responseto a growth strategy based on agriculture. Fromthe mid-1980s until 1994, China’s developmentstrategy shifted to export-led growth as the nationrapidly joined the global economy. The fivesets of unequalizing forces outlined above graduallytook hold during this period. Growth wasexpected to alleviate poverty in most of China,but the need for targeted assistance for the ecologicallydisadvantaged poor areas also came tobe recognized.The third period began with a well-articulatedstrategy to commit greater resources topoverty reduction. In January 1994, the StateCouncil put into effect the national “8-7 Plan” tolift 80 million rural poor out of poverty in the remainingseven years of the century. Serious shortcomingscompromised this plan.The fourth period of China’s public responseto poverty may be said to have started around theturn of the millennium. New programs now aimto improve agriculture and farm production, provideeducation and training for the poor, promoteproductivity through science and technology, facilitateout-migration, voluntarily resettle peoplefrom ecologically disadvantaged areas, andpromote economic development in the westernprovinces, as well as in the relatively poorprovinces of the central region. There are also socialprotection programs for the urban poor.The World Bank’s RoleThrough its economic and sector work onpoverty assessment and analysis, IDA’s Poverty-Targeted Intervention (PTI) projects, and povertyreductioncomponents in non-PTI projects, theBank has proven the importance and viability ofpoverty reduction as the principal goal of its assistanceto China. During the 1990s, the Bankmade important contributions to China by disseminatingmethods of poverty monitoring, servingas a friendly critic of China’s povertyreductionstrategy, and offering a set of bestpracticeprojects for poverty reduction.Projects have been less important an instrumentfor the Bank’s poverty-reduction strategyin China than in other comparable countries.Even so, the Bank’s project portfolio for Chinain the 1990s included outstanding examples ofbest-practice poverty-reduction projects. In the1990s, examples were available for all majorpoverty-oriented sectors, although some sectorswere unable for one reason or another toclassify the poverty-oriented components oftheir projects as PTI lending.78

ANNEX F: SUMMARY: POVERTY BACKGROUND PAPERSince China became ineligible for IDA fundsin 2000, the Bank’s lending has included only onePTI project, thus jeopardizing the role of theBank as the provider of best-practice examplesof poverty-reduction projects. The Bank shouldnot completely abandon projects as an instrumentfor poverty reduction in China, a countrywith a higher absolute incidence of poverty thanmost countries with comparable real income.The Chinese government’s aversion to borrowingfor poverty-reduction projects, except onsoft terms, is a very puzzling phenomenon inview of the high financial rates of return on suchprojects.Future PrioritiesThe Bank’s analytical and operational instrumentscan provide effective assistance for furtherpoverty reduction in China.Poverty Monitoring. Any analysis of poverty inChina must contend with unreliable statistics.The inherent problems of the data include apoverty threshold that is too low and does notdifferentiate adequately between urban and ruraldifferences, the exclusion of a significant urbanpopulation of migrant workers, the exclusion ofrural poor who live outside county jurisdictions(estimated at 30–50 percent of the rural poor),records for lower-income groups that are eitherwithheld from study or do not exist, and poorsurvey methodology.The system of poverty monitoring in Chinaneeds to be improved, first by making household-levelsurvey data available both to theBank and to independent researchers in Chinaso that estimates of poverty become more accurateand transparent. A plurality of estimateswould promote healthy debate and open discussion.Adjustment and Broadening of the Poverty-ReductionStrategy. Two main directions for improvingChina’s poverty-reduction strategy are emphasizedin the Bank’s recent poverty assessment:(a) targeting of the poor should be improved indesignated rural counties and (b) the poor whoreside outside the designated rural countiesshould be brought under the umbrella of thepoverty-reduction programs. A third natural extensionis the need to provide an official umbrellafor the program of urban poverty reduction.Economic and Sector Work. The Bank’s ESW agendashould include an early and comprehensiveanalysis of household taxes and transfers, witha view to making these at least mildly progressive.Restructuring state finance to increase transfersfrom rich states to poor states is a necessaryconcomitant of the shift in the regional allocationof public expenditure that is contemplatedunder the poverty-reduction strategy.Lending Program. The Bank’s lending program inChina helped reduce poverty in the 1990s by includingin its portfolio a set of projects that provideda large benefit to the poor, projects thatserved as examples of best-practice methods ofinvestment for poverty reduction. Since 2000,PTI projects have been almost absent from theBank’s lending operation. To maintain the Bank’srole as a source of best-practice poverty-reductionproject blueprints and to preserve the credibilityof the Bank’s anti-poverty strategy, Banklending in China should include such projects inits portfolio, a challenge complicated by China’saversion to borrowing for poverty-reduction projectson IBRD terms. A combination of a “third window”and a serious effort at persuading China’sdecisionmakers of the rates of return on theseprojects might help overcome this problem.79

ANNEX G:SUMMARY: WATER BACKGROUND PAPERChina has an ancient tradition of water management,but in the past half century exploitation ofthe country’s water resources has intensified asa result of population and economic growth.Since 1949, China has increased the number ofits large dams from 22 to 22,000, almost half theglobal total. It also has more than 80,000 reservoirsand 240,000 kilometers of dikes. Most riversand streams are used for irrigation, power generation,transport, urban water supply, or wastedisposal—some for all of these purposes.With all these demands, China now faces anacute version of the global water crisis. Floodingand drought, always a problem in China, nowoccur with increasing frequency and greater impact.Associated water pollution imposes majorcosts that offset economic growth. Users consumemanmade and natural reservoirs (such asgroundwater and natural lakes) at rates wellabove recharge. Unsustainable depletion is exacerbatedby watershed degradation and organicand chemical pollution. Siltation, a very seriousproblem for centuries, continues with increasederosion from development, deforestation, andpoor farming practices that imperil flood controland storage/irrigation objectives. In key industrialareas, surface and groundwater pollution havecaused widespread sickness, requiring centralgovernment intervention to compensate forpoor enforcement of environmental regulations.China’s most serious water problems are experiencedin four river systems that dominate lifein the eastern third of the country. The availablewater, surface and ground, has been allocated byimplicit values that are far removed from economicrealities. (The value to users of untreatedbut usable water for municipal and industrial(M&I) and household demand, for example, isa multiple of 10 to 40 times that in agriculture.)The adjustment to available supplies over timeis mediated by often arbitrary institutional responsesfrom fragmented agencies, unrelatedto economic or social priorities in a systematicway. And tariff reforms have been slow in comingas a means of addressing water resourceconstraints because, until recently, setting rateswas seen purely as a financial matter.The central government’s successful leadershipin large projects involving multiple provinceshas not been repeated with water resourcesmanagement (WRM). The existing water managementframework is insufficiently comprehensiveor unified to optimize uses or resolveconflicts in a socially optimal manner. Negotiationshave not settled differences among sectorinterests (such as industry and agriculture), theministries responsible for different aspects ofWRM, or competing political jurisdictions. Whilethe river basin is clearly the most appropriatelocus for negotiation, effective institutions correspondingto basins, rather than provinces,have proved very difficult to establish, despitemuch central government commitment andawareness. The devolution of political and economicpower to separate riparian provincesalong the great rivers has made central governmentcontrol over allocation of water resourceseven more difficult.This is a summary of the CAE Background Paper, “World Bank Assistance for Water Resources Management,”by Robert C.G. Varley, Consultant.81

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEThe Scope of Bank Operations in ChinaFrom 1982 to 1993, before the Bank formallyadopted the Water Resource Management Policyin 1993, operations responded almost entirely tothe borrower’s investment priorities, financingprojects that had already been identified andthe basic concepts designed. Projects were notderived from an overarching policy or strategy.There is no evidence of a comprehensive lendingstrategy for individual sectors such as irrigationand water supply, let alone for “integratedwater resources management.” The approachwas pragmatic and ad hoc, but significant incrementalreforms were introduced and includedin projects where possible.In return for substantial transfer of some kindsof knowledge, access to high-caliber specialist expertise,and financing, the Chinese toleratedwhat they feel to be intrusive Bank covenants andburdensome procedures. China and the Bankhave developed over time a partnership that inthe early years cast the Bank in a more humblerole than it is accustomed to. However, the relationshiphas produced significant results.Overall and particularly more recently, theBank can claim credit for articulating a waterconservation and financial sustainability policyand for championing river basins as the basis ofintegrated water resources management. TheYangzi Basin Water Project was the Bank’s firsttruly integrated water resources project. Chinahas supported and provided the majority of thefunds for Bank projects that piggybacked innovativeinstitutional components on what werelargely conventional water supply, wastewatertreatment, irrigation, drainage, and flood controlprojects. These new components were seen tobe effective and have been replicated.The Bank’s considerable influence has alsobeen conveyed through professional interactionsat the project-management level, a highquality of technical advice, continuity of highqualitystaff, and a discerning client, very eagerand able to learn. The Bank also performed a usefulfunction during changing relationships betweencentral and provincial governments,playing the roles of intermediary, honest broker,and convener. Several significant reportsemerged from the close partnership betweenthe Bank and China. The Bank-China relationshipachieved a truly productive interaction, for example,with the cross-sectoral “China Water ResourcesAssistance Strategy/EAP 2002”(CWRAS),a strategic vision for future cooperation on waterresources management (WRM). But China’s needfor ESW and AAA exceeds the Bank’s level ofsupport.The 1997 assistance strategy for China didnot discuss water specifically—particularly surprisingsince the government of China has longacknowledged water to be a key problem area.The following Bank sector categories all havehigh relevance for water resources managementin China.Land and Watershed Management, Forestry. Banksupportedprojects made major contributions toincreased efficiency of water use by demonstratingthat profitable orchard and mixed farmingmodels are compatible with watershedrehabilitation and soil preservation. Terracing, upstreamforestation, and erosion-control projectsin the larger basins also have provided downstreambenefits, reducing silt loads and increasingincomes. Building on the successful centralLoess Plateau and Red Soils projects in the southeast,these practices and technologies have beenreplicated. But for these to be truly effective,basin-level management is needed.Water Resources and Flood Control. The Bank supportsseveral projects in integrated WRM. Theseinclude the Tarim Basin I and II Projects(1992/1998) in the western Xinjiang Uygur AutonomousRegion, which feature a well-developedframework for integrated watermanagement through self-financing irrigationdevelopment districts and a comprehensive setof procedures/regulations. Another, the Hai RiverBasin Project, focuses on China’s most complexand intensively developed basin. The Bank willhelp finance the components for river basinmanagement. Beijing, the site of the 2008Olympics, lies in the basin.China has been reticent to borrow for technicalassistance to support river basin institutional development,but the Bank and other donors havecoordinated assistance in a very cost-effective82

ANNEX G: SUMMARY: WATER BACKGROUND PAPERmanner. Chinese and Bank staff, supported byleading international consultants, have developeda comprehensive plan for the North ChinaPlain, built on a “dynamic optimizing model” thatrepresents the state of the art in analytic andtechnical engineering for WRM planning.Agriculture, Irrigation, and Drainage. Before openingto the world in 1978, China had an extensive,but troubled, irrigation program. Though limited,Bank involvement in irrigation has had a positiveeffect on Chinese practices in procurement,project management, and, more recently, irrigationmanagement, especially at the provinciallevel. Geographical poverty targeting has beenrefined to a county and township level, accompaniedby some concessionary IDA funding andfull loan recovery from the beneficiaries. Althoughthe distributional effects and provincialbearing of foreign exchange risk on the Bank loanhave been criticized, the emphasis on sound financehas been central to motivating projectparticipants, from governors on down. It hascreated a cascade of accountability and responsibilityfor results, from project managers whohave to collect levies down to beneficiaries whohave to pay them.The organization of farmers into self-managingirrigation development districts (SIDDs) hasimproved management and accountability, empoweringfarmers to pay for and receive waterservices. Water user associations (WUAs) withinthe development districts play a key role in manyaspects of improved WRM, including water providedby both local government agencies andpublicly owned bulk-water companies. Theseinnovations have been incorporated in Banksupportedprojects, but have not been replicatedon a wide scale.Multipurpose and Hydroelectric Dams. Traditionally,Bank energy project documents equated waterresources with “hydroelectric resources.” Manyof the large dams built with financing and assistancefrom the Bank were driven by the energysector and met their objectives. But most of theinvestments were not part of integrated WRMplans for the catchments concerned. For themost part, the complementarities and conflictsbetween energy and WRM objectives have notbeen systematically weighed in decisionmaking.Notwithstanding widespread criticism of resettlementand environmental impacts of WorldBank-supported dams in China (and elsewhere),an OED study on resettlement ranked Chinahighly. The Xiaolangdi Dam, supported by theBank, has been credited with drastically reducingsilt and enabling continuous flow in thelower reaches of the Yellow River, somethingnot achieved in the previous ten years.On the negative side, hydropower has costsin silt accumulation in reservoirs, environmentaldamage, resettlement, loss of cultural heritage,and potential conflicts between peak energy demandand water supply/irrigation priorities.Inland Waterways. Three Bank projects have supportedthe largest system of inland water transportationin the world. The Quality AssuranceGroup’s quality-at-entry report for the Second InlandWaterway Project noted the absence of anaction program on key sector issues, an institutionalcomponent, and any effort to engage governmentin a policy dialogue.Urban Water Supply and Wastewater Treatment Plants(WWTPs). Since 1985 the Bank has committed$2.2 billion to finance major water investments(water conveyance, treatment, and distribution,and WWTPs). Because of the country’s high populationconcentration, urbanization, and rapidgrowth, the economic and health impacts ofpoor WRM are major costs to Chinese society, estimatedvariously at 5–15 percent of GNP. But althoughwater supply and quality issues areentwined, management and regulatory systemsremain fragmented among at least three governmentbodies with overlapping responsibilities.Bank WS/WWTP projects usually address, buthave not significantly changed, the prevalence oflocal political interference, weak commercialmanagement, distorted tariffs, variable legal andregulatory frameworks, unstable central-localrelations, and the lack of long-term local finance.Overlapping agency responsibilities are compoundedby conflicts with local financial interestsand a desire to avoid the social unrest ofclosing high-polluting industries.83

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEFor water supply, China’s sector performancerelative to developing-country benchmarks hasput the country in the best practice quintile ofBank clients. However, the costs of new watersources are very high, and there is a large gap betweenthe current tariffs and those that are necessaryto finance the new supplies.Although a survey of 16 projects concludedthat the three Bank-supported wastewater treatmentplants in the sample were among the bestoperated in the country, WWTPs in general sufferfrom significant technical and financial problems—amongthem an absence of timely sewerconnections, poor design, reliance on expensivecombined-treatment plants, a lack of effluentguideline enforcement, and grosslyinadequate funding from service fees.Overall, WS and WWTP projects lack reliableestimates of usage, as well as realistic rates. Predictingthe demand response to changes in tariffrequires accurate measurement ofconsumption, as well as control and collectionsystems, and these are not well understood.Rural Water Supply. The Bank has supported fourrural water supply and sanitation (RWSS) projects,mainly in poor counties. Designs have evolved bycombining the strengths of existing village administrationsand community financial participationwith international best practices inappropriate technology, financial cost recovery,decentralization of regulation, and financial autonomy.In the latest generation of RWSS projects,75 percent of the investment cost is recovered infees and 95 percent of villages abide by the tariffcovenant—startlingly clear evidence that thepoor can and are willing to pay tariffs that raiseeyebrows when proposed for urban consumers.Strengths and Weaknesses of the Bank’sOperation in ChinaAs part of a global study (Bridge Over TroubledWaters) of the Bank’s 1993 Water ResourcesManagement Policy, OED sampled 18 of 35 waterprojects for China. The study found China’s projectsto have a higher degree of compliance withthe 1993 policy than any other large country.But out of 82 approved projects, only 29 hadbeen completed and subjected to independentevaluation by OED. The success of the Bank’s attemptsto influence water reforms in China alsoowes much to its humility in the policy sphere,the continuity of high-level professional staff,and earning the respect of its clients.The Bank’s strengths begin with its low-key,client-centered approach, ensuring good projectperformance by requiring cost recovery frombeneficiaries, and taking risks that projects mightnot perform as intended. Critics would cite thesesame factors as being weaknesses—particularlythe chance that beneficiaries will be saddledwith foreign-exchange risk and that flexibility inprocurement compliance will be exploited. Onthe other hand, the Bank’s weaknesses includeearly compromises to its commitment to soundeconomic analysis in the evaluation of some irrigationprojects. The analysis of expected economicrate of return (ERR) neglected importantfactors such as sustainability of water resourcesand their downstream opportunity cost. Failureto make an adjustment helped ensure a viableERR and Board approval (not an uncommonBank practice), but did not indicate the trueeconomic cost of the projects.The Bank may not have initially been sufficientlyfocused in its advice or forthright in criticismof the sustainability of China’s emphasis onmajor investments in hydraulic structures. Butwith strong support from the Bank, China hasnow made a course correction and is puttingmore emphasis on WRM and less on new infrastructure.Finally, the lack of coordination between Banksector units is a recurrent theme, which is beingaddressed by the China Water Resources AssistanceStrategy. It is mirrored by China’s lack ofa natural home for water resources managementand river-basin projects among institutions thatcannot transcend parochial sector and provincialinterests. Given the enormity of the issues, it isdisappointing that so little money has been appliedto critical high-return projects to addressinstitutional reform and demand management.The Bank’s Impact on Water Reform inChinaChina faces problems found in most countries—conflicts between upstream and downstream84

ANNEX G: SUMMARY: WATER BACKGROUND PAPERusers, overlapping jurisdictions, and quality andallocation problems. Overcoming these problemswas initially treated as a problem of augmentingsupply rather than devising ademand-led strategy for water management.While China has successfully used major hydraulicinfrastructure to control, use, and managewater resources, it has not conservedresources to meet future needs. Efficient waterallocation, pricing, groundwater and water qualityregulation, and institutional reform were notgiven sufficient emphasis. While engineering expertise,money, and commitment to a structuralapproach have been partially successful in meetingsocial goals, success has often come at ahigh environmental and economic cost. Withwater, the economic tradeoffs have becomestarker as demand for municipal and industrialuses competes with agriculture.The Bank has played a significant role in construction,capacity building, and knowledgetransfer in the past. While its influence on achievingpolicy, demand management, and institutionalreforms has worked slowly, it can point tosignificant innovations that could end up beingapplied all over China. SIDDs and WUAs, theLoess Plateau approach to watershed management,and new approaches to water saving havebeen taken beyond the pilot stage and prospectsfor replication are good. River basin managementin the Tarim project and also in the Li River(a tributary to the Yangtze under the YangtzeBasin Project) has taken hold, providing practicalexamples to other more complex basins. Demandmanagement with increased pricing isbeginning to take hold in water supply.Future success in Bank-China cooperationshould continue to be based on pragmatism andpilot testing new ideas where they are mostneeded and most likely to succeed. The Bankshould consider reordering its priorities in Chinato continue the following initiatives:• Watershed management• River-basin planning and management• Self-managing irrigation districts• Corporatization and privatization in the watersupply and wastewater treatment sector• Demand management and pricing• Adequate funding of ESW/AAAChina must conduct a strategic dialogue onwater policy at a level higher than that of the competingministries. Duplication of data collectionand divided responsibilities frustrate water resourcesmanagement and must be rationalizedthrough institutional reform, new administrativeprocesses, and incentives attuned to sustainabledevelopment. Fundamental reforms areneeded—not just changes in policies within thepresent institutional and regulatory framework.The coordination of water management responsibilitiesand decisions between ministrieswill not be resolved without a supraministerialbody to push through reforms and “bang headstogether.” The China–World Bank partnership inwater resources management, which up to nowhas been fragmented between Bank sector unitsand Chinese line ministries, needs high-leveloversight, perhaps at the level of the State Council,to implement the cross-sectoral China WaterResources Assistance Strategy.85

ANNEX H:SUMMARY: TRANSPORT BACKGROUND PAPERRapid economic development since the openingof China’s economy in the late 1970s has causeddemand for transport to surge. Supply has notkept pace. In fact, limited capacity of roads, railways,and inland waterways is one of the mostserious bottlenecks to the country’s future economicgrowth. In response, the government’stenth five-year plan (2001–05) envisages an increasein total outlays of around 15–20 percentper year. Even if only a fraction of this is finallyimplemented, surface transport will be radicallytransformed.Several trends are evident from international experienceabout the demand for transport: (1)freight transport will grow more slowly and passengertransport more quickly than the economy;(2) the infrastructure and assets needed to satisfya given level of transport demand will increase asusers demand higher-quality service; (3) rail’sshare of the transport total will fall; and (4) demandfor multimodal transport services will grow fasterthan demand for single-mode services.Transport Sector Performance and PolicyChallengesChina’s road network of 1.4 million kilometersranks among the sparsest in the world relativeto geographic area and population. Only about16 percent of the network is high-grade highway.A few interprovincial expressways have beenbuilt, but about 20 percent of rural communitiesstill have no all-weather vehicular access. Morethan half the nation’s highways are exceeding designedtraffic capacity limits, hindering foreigninvestment in other sectors.The chief component of China’s transportstrategy is the development of the “nationaltrunk highway system”(NTHS), a 35,000-kilometernetwork of 12 interprovincial highwaysthat will link 95 major Chinese cities and 600 millionpeople. The trunk system will link smallerroads and five north-south and seven east-westhighway routes. Estimates of the capital requiredover the span of the tenth five-year plan rangeas high as $20 billion annually. An expected doublingof car ownership (to 34 million cars) by2010 will ensure that demand-side pressures remainhigh.One of the consequences of improving theroad system will be a large movement of peopleout of agriculture and rural areas. The rapidityof the urban transition usually catches mostcountries by surprise—and China is no exception.The Bank can provide assistance in addressingthe transport problems of the growingurban areas, with their growing concentration oflower-income groups.Of particular concern will be the growth of themedium-size cities, which lack the resourcesand experience to manage the rapid growth andwhich receive inadequate attention from centraland provincial institutions. Early interventionscan have a significant impact on the efficiency andequity of their growth. In urban transport, for example,early reservation of roadway rights ofway can lay the basis for improved future mobilityand efficient land use.China’s 68,000 km rail system serves all itsprovinces. Some 5,500 kilometers are provinciallyadministered and locally maintained, in-This annex summarizes the CAE Background Paper, “World Bank Assistance for China’s Transport Sector,” byAnthony Churchill and Cordula Thum, Consultants.87

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEcluding 193 kilometers of urban track in Beijing,Shanghai, Guangzhou, Tianjin and Hong Kong—a remarkably small total given the area and populationof these cities. China Rail aims to laydown 6,000 kilometers of new rail, 3,000 kilometersof double tracks, and 5,000 kilometers ofelectrified railways by 2005. Another 450 kilometersof urban rail in up to 10 major centers isenvisaged. At around $80 million per kilometerfor subway construction, the latter commitmentalone is a sizable undertaking.China has a long history of using its waterwaynetwork, but inadequate funding has caused theinfrastructure and floating equipment to deterioratebadly, reducing the net size of the navigablenetwork from 170,000 kilometers in 1960to 11,930 kilometers in 2000. Although Chinahas 5,800 navigable rivers, 15 rivers more than1,000 kilometers long, and 12 lakes with an areagreater than 1,000 kilometers, the major inlandwaterways comprise only four rivers and onecanal that carry 80 percent of total traffic. The lackof a multipurpose development plan among thevarious ministries in charge of infrastructure hascontributed to the decline.Impact and Direction of the Bank’sAssistance StrategyTransport accounted for a major share (close to30 percent) of the Bank’s total lending to Chinabetween 1983 and 2001. Since 1983, the WorldBank has approved $10.5 billion in loans andcredits for 58 transport projects. At the end offiscal year 2002, 31 projects had been completedand 22 were being implemented. In its transportsector lending program (as in the othersectors), the Bank has used a pilot-project approachto sector reform.Since 1993, the Bank’s comprehensive transportstrategies have focused on increasing competitionand efficiency, identifying the changingpatterns of demand for transport, analyzing investmentneeds of the sector and their financing,suggesting improvements for transportationservices and safety, and addressing problems ofadministrative rivalries.Overall, highways have taken the lion’s shareof lending (59 percent), followed by railways(23 percent), ports and waterways (11 percent),and urban transport (7 percent). The Bank hascarried out a substantial amount of analyticaland advisory activities (AAA), financed under avariety of trust funds as well as the Bank’s ownbudget.Bank highway projects in China focus onroads that have a strong development potential,but not yet enough traffic to be attractive toprivate lenders. In railways, the Bank is chieflyinvolved in financing lines to developing inlandareas, and in waterways, to improving the majoraccesses to the principal rivers. The focus ofurban transport projects is now moving awayfrom the construction of ring roads, putting anew focus on corridor development, traffic management,and public transport.Out of 28 transport sector projects rated byOED, all had satisfactory or better outcomesand were deemed to be likely or highly likely tobe sustainable. On the other hand, only 19 wereseen as likely to have substantial institutionaldevelopment impact.Roads. By 2001, total lending to China’s highwaysector had exceeded $5.96 billion for 27 projects.Bank operations in the highway sector havebeen combined with technical assistance andtraining on a variety of topics related to the reformand modernization of the sector. Most projectswere intended to increase road capacityand, to a smaller extent, to improve maintenance.The Bank strategy supports ongoing institutionaldevelopment and sectoral reforms tomodernize the highway system and its management,and investment in high-priority links of theNTHS and the provincial road network that feedsinto it. Many World Bank transport projects inChina are for roads that have strong developmentpotential, but not yet enough traffic to be attractiveto private lenders.Railways. With project costs totaling $8.6 billion,China is the Bank’s largest borrower in the railwaysector. The Bank’s strategy focuses on providingsufficient transport capacity and ensuring thattechnical and management capabilities keep pacewith economic growth. Most projects have includedsubstantial funds for institutional components—training,studies, and consulting services.88

ANNEX H: TRANSPORT BACKGROUND PAPERThe Bank strategy has been to support increasesin capacity while at the same time introducingChina Rail to modern railwaymanagement and technologies. Better track-layingtechnologies, modern communications, andaxles designed to take heavier loads have allbeen part of the Bank’s contribution to improvingthe efficiency and capacity utilizationof the railways.The Bank has also made a significant contributionto improving the social and environmentalside of railway investments. The Bank’sinsistence on the application of various safeguardrequirements appears to have proved acceptableand to have become an integral part of investmentplanning. The Bank has also introducedmodern accounting, management, and financialpractices into the overall structure of railway administration.In particular, the application ofmodern administrative tools has alerted ChinaRail to the real costs of many of its operations.The issue for the Bank is how to support a reformprocess that is likely to take several decades.The relationship between the role of governmentas a regulator and the Ministry of Railwaysas an operator or enterprise remains an issue.Economic tariffs designed to reflect costs will becomeincreasingly important as the railways facemore and more competition. The debate hasonly begun on the extent to which China Railshould remain a monolithic structure or becomemore independent units designed to meet newcompetitive pressures.There appears to be agreement on the needfor a clear separation between the government’srole and that of the railway. The governmentunderstands the principle (if not always the practice)that railways should be organized alonglines of business, with clear financial goals, adequatecompensation for public services, andsufficient authority to set tariffs. Major barrierssuch as redundant labor and employee welfareobligations will need to be removed.Ports and Inland Waterways. The Bank played an importantrole in China’s port improvement from1983 to 1996; since 1993, the private sector hastaken over funding. A 1999 OED evaluation foundthat through new management styles and reforms,operating systems and equipment, and effectiveBank supervision, China’s ports learnedhow to do business and substantially improve portperformance in an environmentally sound way.The Bank has been involved in the waterwayssector since 1995 and has provided three waterwaysloans totaling $433 million in support ofmore efficient and economic inland waterwaytransport. Through preparation of inland waterwayprojects, the Bank is helping to implementnational policy guidelines for modernizing the inlandwaterway transport fleet at the provinciallevel. The major issue with respect to inland waterwayprojects is their relationships to watermanagement. Given the close interrelationshipsbetween water use in agriculture, flood control,power, and transport, there is a strong case formaking sure all investments take place within acomprehensive framework.Urban Transport. The Bank has sought to enhanceurban economic productivity by improving theefficiency of the urban transport system and tostrengthen public sector management by improvingthe planning and management of urbantransport. The Bank’s lending to China’s urbantransport sector began in 1991 with the FirstShanghai Metropolitan Transport Project, whichincreased capacity, reduced congestion, and improvedefficiency while improving planning, programming,financing, and management of thecity’s urban transport system.Fragmented administration and regulation arean obstacle to tackling urban transportation.Cities tend to focus on expensive building solutions,new highways, and urban rail systems,which appear to be more straightforward to administerand receive priority from the city leaders.But better management in several areas canmultiply the benefits of such projects: better trafficmanagement of the existing street system,greater autonomy and incentives to bus operators(with government restricting itself to a regulatoryrole), and effective control of the demandfor transport through pricing policies. All theseissues are now being examined in greater depth.Analytical and Advisory Activities and Economic andSector Work. Although the World Bank has loaned89

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEmore than $10.5 billion to the Chinese transportsector, its most important contribution hasbeen to introduce new ideas and stimulate newapproaches to problems.The 1999 OED assessment of the China transportportfolio determined that policy dialogue betweenChina and the Bank needed strengthening.The issue of highway safety is just one area wherea Bank study, drawing on global experience, couldbe of assistance to Chinese officials in identifyingwhere institutional and other changes are requiredand how the Bank might help.90

ANNEX I:SUMMARY: HEALTH BACKGROUND PAPERChina’s gross health and nutrition indicatorshave always been impressive. In 2000, the WorldHealth Organization ranked the country 61stout of 191 countries in overall quality of health.From the 1950s through the 1970s, the countryachieved unprecedented reductions in infantand child mortality, as well as gains in nutritionand overall life expectancy—all due to broadpublic health improvements.In the past two decades, as China adoptedeconomic reforms, growth and prosperity havepulled up its health and nutrition indicators. Butwide regional and rural-urban differences have appeared,as inequalities in development and accessto care have grown. Gains in the fight against infectiousdiseases have slowed and in some areasregressed. Rates of immunization have droppedin some areas, and outbreaks of immunizablediseases have occurred. The percentage of malnourishedchildren increased in rural areas between1987 and 1992, while urban malnutritiondropped sharply in the same period. Meanwhile,TB and HIV/AIDS infection rates have grown exponentially.For both diseases, China is a countryof global strategic importance.Even some of China’s encouraging health statisticscan be misleading. The number of physiciansper 100,000 population in China isestimated at 162—against India’s 48, for example—butonly a small proportion of rural “doctors”in China actually have post-secondarytraining. Funding of public sector facilities arebased on numbers of beds, which encouragesmanagers to increase the number of beds to tapnational allocations. But the uninsured majoritycannot afford the costs of care at many such facilities,so scarce resources are spent on facilitiesinaccessible to the poor.Nationwide statistics have masked the near crisisin the poorer rural areas. The national governmentnow supports just 3 percent of healthexpenditures and has handed funding responsibilityfor health care to subnational governments,many of which cannot afford it. Withoutan outside infusion of funds, economically laggingregions are too poor to provide adequatehealth services and preventive care. WHO’s reportfor 2000 ranked China 188th out of 191countries for fairness of financial contributionsto health care.Fiscal decentralization and the country’s transitionto a market economy has reduced publicfinancing of health care and services markedly.More than for any other sector in China, themajor share of public expenditure for health isborne at the subnational levels. Close to 60 percentof total budgetary expenditure for health isthe responsibility of counties and townships.Most subsidies pay for infrastructure costs andstaff salaries, with little money left to cover services.The situation is compounded by the unequalsubsidization of urban areas, which receive80 percent of total public spending, leaving 20percent for the rural areas in which 70 percentof the population lives.Before this transition, rural Chinese wereserved by a Cooperative Medical System (CMS).Its “barefoot doctors” delivered free preventiveand primary care services. Beyond basic services,patients paid coinsurance fees for drugs, hospi-This annex summarizes the CAE Background Paper, “World Bank Assistance for China’s Health Sector,” by ElaineOoi, Consultant.91

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEtalization, and inpatient services. In this way,more than 80 percent of the population had accessto care of reasonable quality and some protectionagainst catastrophic expenses. Abolishedin the mid-1980s, CMS programs were not replacedby an alternative financing system. Healthfacilities and providers looked to boost revenueto ensure economic survival, recover costs, orseize opportunities for tremendous profits.Several trends drove the decline of publichealth and the rise of inequalities in health access.Government regulations set the prices ofpreventive care and essential public health services,such as immunization, below cost. Providersopted not to immunize or compromised on qualityand safety. Profitable but inappropriate drugs,long hospital stays, and unnecessary diagnostictests replaced prevention. Facilities began topurchase expensive equipment—such as CATscanners—in order to charge high fees for theiruse. The system of cooperation, supervision,and referral broke down as facilities competedfor paying clients and resisted referring patientsas required.The World Bank’s Health Programin ChinaSince China became a member of the WorldBank in 1980, the Bank’s program of assistancein health has consisted of 11 projects and 3 economicand sector work (ESW) reviews. Bank assistancehas emphasized the demonstration valueof projects in order to pursue high-level dialogueon health policy reforms, health systemsperformance, and financing. Since the mid 1990s,projects have allowed experiments with ruralinsurance models and CMS-type schemes to improvehealth care access for the poor. Resultshave been mixed.There is a wide consensus that during theperiod of Bank assistance, China’s health systemdeteriorated in critical areas—it may serve muchof the majority, but fails to supply a social safetynet to the poorest. The problems are direct consequencesof government policy, and not onlyhealth policy.Bank dialogue with government agencies aimsat increasing budget allocations to counties andtownships to improve health system performance,but progress has been slow. Budgetary allocationsand management do not fall under thepurview of health authorities, so sustained reformsare less likely. The need remains to linkhealth projects more closely with the larger issuesof national budget priorities and public expenditures.The Bank has not fully exploitednon-project and non-health avenues for healthreform.The constraints on good health policy inChina—lack of public finance, disincentives forgood health practices, and varying levels of healthmanagement competency—have not been addressedsuccessfully. While Bank assistance hashad considerable success in addressing managementcompetency, the other problems aresystemic and require interventions outside thehealth sector.An example of a project designed to addressall four of these constraints is the Basic Health ServicesProject of 1998. Primarily targeting systemsreform, it faces difficult, politically sensitive issues,including personnel management, drug prescriptionbehavior, and increased budgetary allocationsto health at the county level. The projectintroduced innovative mechanisms to fund andmonitor cost-effective health interventions forthe very poor and hopes to demonstrate convincinglythat fiscal transfers to poor areas will payoff. But the project will have to overcome politicalinterference and loopholes created by thosewho stand to lose from project innovations.Although not formally part of the countryprogram, the WBI-China Network can greatly facilitatehealth finance reform. Established in1991 at the request of China’s Ministry of Healthwhen non-health forces increasingly influencedhealth financing, the Network has made a goodstart in exposing senior-level officials and provincialgovernments to the complex problems facedby the health sector. Closer collaboration betweenWBI-China Network and the country programwill be highly beneficial.The Bank’s projects were complex and addresseda wide range of health issues. Some focusedon specific diseases, others on institutionsand management; most combined them. Somehave been highly innovative, especially in theChinese context: shifting from health propa-92

ANNEX I: SUMMARY: HEALTH BACKGROUND PAPERganda to health promotion in support of tobaccocontrol; maintaining anonymity in surveillanceand treatment of HIV/AIDS; and increasing theuse of social assessment instruments in projectdesigns. Portfolio quality was generally high, reflectingbest practices for the sector, even if overallsector performance was less than hoped for.Future Bank-China CooperationOpening up of China’s western regions and meetingthe needs of migrants working in unregulatedhazardous industries will require engagement withgovernmental departments over issues related tothe environment and to occupational health andsafety. The country is poised to undertake policiesand reforms that will exert more pressure on thehealth system. Many of these challenges will testthe limits of Bank expertise, capability, and experience.The Bank’s health program will have tomake strategic choices about its future role inChina. Given the dynamic, complex situation, theBank should consider several actions.The Bank should be more involved with upstreampolicy advice so as to reach the decisionmakerswho control broader fiscal andeconomic policies. The new leadership has to beconvinced of the critical contributions of healthto China’s long-term productivity and growth.Health concerns should be included in acountry-level, macroeconomic dialogue withChina. The Bank has a responsibility to link itsmacroeconomic dialogue more effectively withsector dialogue, particularly on issues of healthfinance, the health work force, and civil servicereform.A health sector review for China is long overdue.Although the Bank has been working in the healthsector in China for 18 years, the first Project PerformanceAssessment Report (PPAR) was part of aneight-project cluster. The Bank has not evaluatedthe extent to which other poorer regions outsideBank project areas have benefited from Bank projectsand other assistance.Nonproject and non-health-sector avenues forinfluencing health outcomes should be thoroughlyexploited. Changes in other sectors will affect thehealth sector. To be part of this process, the Bank’shealth program must engage with other sectorsand entities.The Bank should follow up on its Provincial PublicExpenditure Review 2002 to bring health issuesto the forefront, with a target audience of seniorcountry-level decisionmakers from the Bank andborrower.Collaboration between the various channelsfor Bank interventions in health should be increasedthrough ESW/AAA, anchor work, theWBI/China Network, and project lending. In orderto achieve a sustained and well-directed effort forpolicy and reforms, inputs from these channelshave to be better coordinated as parts of a commonhealth strategy.93

ANNEX J:CLIENT CONSULTATIONS IN PREPARATION FOR THECOUNTRY ASSISTANCE STRATEGYIn conjunction with preparation of the 2002–05Country Assistance Strategy (CAS), a series ofconsultation workshops were held in Beijing,Liaoning, and Zhejiang provinces on the coast,and in Ningxia Hui Autonomous Region in westernChina in June 2002. Attending the workshopsand sharing their views wererepresentatives of all stakeholder groups—keygovernment ministries; officials from these andmany other provinces; project staff gatheredfrom throughout China; and leaders of civil societyinvolved in economic reform, gender equality,poverty reduction, environment, nationalminorities, rural development, health, and nonprofitagencies. The results of those exchangesare described below. This annex is based onAnnex C of the CAS.Findings from Consultation with CivilSociety Representatives• The Bank’s major contribution to China is thetransfer of knowledge. The Bank has introducednew ideas, supported reforms, andhelped to change management systems.• The Bank’s support to basic and higher educationand the development of science andtechnology contributed significantly to China’sdevelopment.• Inclusion of social assessments in Bank projectsis helpful and has improved project designand beneficiary participation.• The Bank used to work only with the government,but in recent years provided support toinformation sharing and capacity building ofChina’s nongovernmental organizations. SinceNGOs play a complementary role to the governmentand are more innovative, the Bankshould expand its support for developmentof civil society/NGOs in China, particularlyNGOs in western provinces and those dealingwith issues such as sustainable development,laid-off workers, urban poverty, HIV/AIDS, etc.Findings from Consultations withCentral Ministries and Agencies,Provincial Government Officials,and Project Management OfficesThey Value the Bank’s Contributionsand Procedures• The major benefit is the Bank’s advice on policyand management, technology transfer,human resources development, and introductionof knowledge and innovation.• Bank projects introduced international bestpractice to China, such as competitive biddingprocedures ensuring project quality and costsavings, a project supervisory system promotingsuccessful implementation, use of internationalconsultants, and helpful approachesto environmental and resettlement assessment.These all supported changes and reforms in theway institutions function. As a result, Bank-assistedprojects have higher quality and bettermanagement than domestic projects.• The Bank’s project preparation cycle, procurementprocedures, and the supervision systemimprove the chances for success. In someprovinces, all civil works projects have adoptedthe Bank’s project management procedures asstandard practice.• The Bank’s environmental assessment and resettlementpolicies take a new, thoughtful approachto these issues.95

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCE• Competitive bidding, whether internationalor national, has reduced investment costs tolevels much below original budgets. Bank procurementprocedures may be less flexible thanfor some other donors, but they also providemore benefits.• Bank expertise and the quality of its nonlendingservices are viewed as high quality.• Bank assistance is particularly valued for health,water resources management, forestry, environmentalprotection, poverty reduction, and infrastructure.Future assistance was requested insome of these areas and for post-WTO training,rural employment, and cross-sectoral studies.• The Bank’s decentralization to Beijing facilitatedefficient communications, timely Bank responses,and faster loan disbursement.But Some See Room for Improvement,Sometimes in Areas Valued by Others• The preparation and approval process for Bankassistedprojects should be further streamlined.Current procedures require borrowersto carry out duplicate tasks; they should be harmonizedwith local approaches.• Projects sometimes have components that theborrower does not want and subsequently hasdifficulties in implementing.• Procurement procedures should be more flexible.For example, the Bank requires award ofcontracts to the lowest responsive bidder,which in China might encourage bidders tooffer very low prices to get contracts, with theresult that prices must be increased later orquality suffers.• The Bank should reduce the time for reviewingbidding documents by setting a deadline.In the case of procuring computers, borrowerproblems with the bidding and review processcan cause delays and result in the purchase ofalready obsolete equipment.• The use of international consultants to superviseprojects is considered uneconomical, particularlyin the case of consultants unfamiliarwith China. Borrowers favor use of local experts,given the experience they have accumulatedover the past decades.• Chinese collaboration on studies is particularlyimportant to ensure quality and relevance.• Safeguard requirements are often seen as excessiveand complicated.• Representatives of poor western provinceswould like to have concessional financing forprojects, particularly for rural developmentprojects.• Bank lending terms are not attractive. Thefront-end fee is too high and a major burden.If indirect costs such as for international consultantsand training are included, the costs ofBank loans are higher than financing fromother sources.• Counterpart funding requirements may be toohigh for poorer provinces.• Loan commitment and front-end fees shouldbe rebated when project components are adjustedand part of the loan is canceled.• While missions are effective and useful, thetiming (twice a year) may be too frequent andthe length of missions too long. The numberof supervision missions should be decidedflexibly on the basis of implementation performance,so as to lower costs for both theBank and the borrower.• While the shift in the Bank strategy to thewestern provinces is correct, the easternprovinces still need new, innovative ideas; institutionalimprovements; and lessons fromthe Bank’s experience, which come from continuedlending.96

ANNEX K:CLIENT SURVEY FINDINGSThe figure below is based on a Client Survey conductedby the China Department in 2002. It plotsrespondents’ ratings of the relative importance ofhaving the Bank involved in various areas vs. theirratings of Bank effectiveness in these same areas.The correlation between perceived importanceand perceived effectiveness is high. The horizontaland vertical lines represent the mean ratings andpermit a rough classification of activities into fourquadrants representing perceived areas of strengths(such as the environment) where Bank involvementis both important and effective; highpriorityimprovements (regulatory framework isthe only example) where Bank involvement isseen as important, but relatively ineffective; improvements(for example, judicial system) whereBank involvement is seen as neither very importantnor effective; 1 and exceeding expectations(economic growth) where Bank assistance is seenas less important, but relatively effective.Respondents Rate Importance versus Effectiveness of Bank Involvement in Various AreasMean effectiveness4.144.043.953.853.753.663.563.463.373.273.173.07Exceeding ExpectationsStrengthsInfrastructureEnvironmentCorruptionInterior ProvincesAgriculture Natural ResourcesMgmt.PovertyEconomic GrowthTransparency in GovernanceCoordinatedHealth EducationGender Strategy Public Sector Regulatory FrameworkDisparitiesInformation TechnologyFinancial SystemSocial ProtectionPrivate Sector2.98 Judicial System2.88ImprovementsHigh-Priority Improvements3.57 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 4.53Mean importance97

ANNEX L:GUIDE TO OED’S COUNTRY EVALUATION RATING METHODOLOGYThis methodological note describes the key elementsof OED’s Country Assistance Evaluation(CAE) methodology. 1CAEs rate the outcomes of Bank assistance programs,not clients’ overall development progress.An assistance program needs to be assessed on howwell it met its particular objectives, which are typicallya subset of the client’s development objectives.If an assistance program is large in relationto the client’s total development effort, the programoutcome will be similar to the client’s overall developmentprogress. However, most Bank assistanceprograms provide only a fraction of the totalresources devoted to a client’s development bydonors, stakeholders, and the government itself.In CAEs, OED rates only the outcome of the Bank’sprogram, not the client’s overall development outcome,although the latter is clearly relevant forjudging the program’s outcome.The experience gained in CAEs confirms thatprogram outcomes sometimes diverge significantlyfrom the client’s overall developmentprogress. CAEs have identified assistance programsthat had:• Satisfactory outcomes matched by good clientdevelopment• Unsatisfactory outcomes with clients thatachieved good overall development results,notwithstanding the weak Bank program• Satisfactory outcomes with clients that did notachieve satisfactory overall results during theperiod of program implementation.Assessments of assistance program outcome andBank performance are not the same.By the same token, an unsatisfactory assistanceprogram outcome does not always mean thatBank performance was also unsatisfactory, andvice-versa. This becomes clearer once we considerthat the Bank’s contribution to the outcomeof its assistance program is only part of the story.The assistance program’s outcome is determinedby the joint impact of four agents: (a) the client,(b) the Bank, (c) partners and other stakeholders,and (d) exogenous forces (such as events ofnature, international economic shocks, and soon). Under the right circumstances, a negativecontribution from any one agent might overwhelmthe positive contributions from the otherthree, and lead to an unsatisfactory outcome.OED measures Bank performance primarilyon the basis of contributory actions the Bank directlycontrolled. Judgments regarding Bankperformance typically consider the relevanceand implementation of the strategy; the designand supervision of the Bank’s lending interventions;the scope, quality, and follow-up of diagnosticwork and other analytical and advisoryactivities; the consistency of Bank’s lending withits nonlending work and with its safeguard policies;and the Bank’s partnership activities.Evaluation in Three DimensionsAs a check on the inherent subjectivity of ratings,OED examines a number of elements that contributeto assistance program outcomes. Theconsistency of ratings is further tested by examiningthe country assistance program acrossthree dimensions:(a) A Products and Services Dimension, involvinga “bottom-up” analysis of major programinputs—loans, analytical and advisoryactivities, and aid coordination(b) A Development Impact Dimension, involvinga “top-down” analysis of the principal99

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEprogram objectives for relevance, efficacy, outcome,sustainability, and institutional impact(c) An Attribution Dimension, in which the evaluatorassigns responsibility for the programoutcome to the four categories of actors.Rating Assistance Program OutcomeIn rating the outcome (expected developmentimpact) of an assistance program, OED gaugesthe extent to which major strategic objectiveswere relevant and achieved, without any shortcomings.Programs typically express their goals interms of higher-order objectives, such as povertyreduction. The Country Assistance Strategy (CAS)may also establish intermediate goals, such as improvedtargeting of social services or promotionof integrated rural development, and specify howthey are expected to contribute toward achievingthe higher-order objective. OED’s task is then tovalidate whether the intermediate objectives producedsatisfactory net benefits and whether the resultschain specified in the CAS was valid. Wherecausal linkages were not fully specified in the CAS,it is the evaluator’s task to reconstruct this causalchain from the available evidence and assess relevance,efficacy, and outcome with reference to theintermediate and higher-order objectives.Evaluators also assess the degree of clientownership of international development priorities,such as the Millennium Development Goals,and Bank corporate advocacy priorities, such assafeguards. Ideally, any differences in dealingwith these issues would be identified and resolvedby the CAS, enabling the evaluator tofocus on whether the tradeoffs adopted were appropriate.However, in other instances, the strategymay be found to have glossed over certainconflicts or avoided addressing key client developmentconstraints. In either case, the consequencescould include a diminution ofprogram relevance, a loss of client ownership,and/or unwelcome side-effects, such as safeguardviolations, all of which must be taken intoaccount in judging program outcome.Ratings ScaleOED utilizes six rating categories for outcome,ranging from highly satisfactory to highly unsatisfactory:Highly Satisfactory: The assistance programachieved at least acceptable progress toward allmajor relevant objectives, and had best practicedevelopment impact on one or more of them.No major shortcomings were identified.Satisfactory: The assistance program achievedacceptable progress toward all major relevantobjectives. No best practice achievements ormajor shortcomings were identified.Moderately Satisfactory: The assistance programachieved acceptable progress toward mostof its major relevant objectives. No major shortcomingswere identified.Moderately Unsatisfactory: The assistanceprogram did not make acceptable progress towardmost of its major relevant objectives, ormade acceptable progress on all of them, but either(a) did not take into adequate account a keydevelopment constraint or (b) produced a majorshortcoming, such as a safeguard violation.Unsatisfactory: The assistance program didnot make acceptable progress toward most of itsmajor relevant objectives, and either (a) did nottake into adequate account a key developmentconstraint or (b) produced a major shortcoming,such as a safeguard violation.Highly Unsatisfactory: The assistance programdid not make acceptable progress towardany of its major relevant objectives and did nottake into adequate account a key developmentconstraint, while also producing at least onemajor shortcoming, such as a safeguard violation.The institutional development impact(IDI) can be rated as: high, substantial, modest,or negligible. IDI measures the extent to whichthe program bolstered the client’s ability to makemore efficient, equitable, and sustainable use ofits human, financial, and natural resources. Examplesof areas included in judging the institutionaldevelopment impact of the program are:• The soundness of economic management• The structure of the public sector and, in particular,the civil service• The institutional soundness of the financialsector• The soundness of legal, regulatory, and judicialsystems100

ANNEX L: GUIDE TO OED’S COUNTRY EVALUATION RATING METHODOLOGY• The extent of monitoring and evaluation systems• The effectiveness of aid coordination• The degree of financial accountability• The extent of building NGO capacity• The level of social and environmentalcapital.Sustainability can be rated as highly likely,likely, unlikely, highly unlikely, or, if availableinformation is insufficient, nonevaluable. Sustainabilitymeasures the resilience to risk of thedevelopment benefits of the country assistanceprogram over time, taking into account eightfactors:• Technical resilience• Financial resilience (including policies on costrecovery)• Economic resilience• Social support (including conditions subject tosafeguard policies)• Environmental resilience• Ownership by governments and other keystakeholders• Institutional support (including a supportivelegal/regulatory framework, and organizationaland management effectiveness)• Resilience to exogenous effects, such as internationaleconomic shocks or changes inthe political and security environments.101

ANNEX M:MANAGEMENT ACTION RECORDRecommendations1. Repayment system. China’s loan repayment system encouragesgood project performance, but distorts the allocationof resources. While continuing to pursue blendoperations in the interim, the Bank should try to persuadethe government of the need to modify the repayment systemand to give high priority to reform of the overall intergovernmentalfiscal system.Management Response1. To increase resource flows to poor areas, China’s newgovernment leaders are strongly committed to reform ofthe fiscal system and intergovernmental fiscal relations,and have welcomed substantial Bank advisory support inthis area. They are also considering innovative financingarrangements to expand on the donor partnerships that nowfacilitate Bank-China collaboration on poverty reduction.2. Improving the effectiveness of ESW. The Bank shouldfocus more on China and less on international experience;do more collaborative ESW; and increase its sector workto take stock of sectoral changes and lay the foundationfor better policy dialogue and new directions in lending.2. Our clients and we continue to see the need for policyadvice based on a mix of international and Chinese lessonslearned, as suited to issues and audiences. The questionis not whether the Bank should rely more or less on internationalexperience, but how it can bring to bear the mostpertinent views on issues. As to our collaboration with localinstitutions on AAA, it is already substantial and still increasingas Chinese expertise expands. And our sectorwork program has expanded in line with budget allocations.3. Improving the effectiveness of lending. The Bank’s Chinaportfolio is one of the largest and most successful. To improveit further in a period of lower lending levels, the Bankshould take steps to improve portfolio management;strengthen the systemic use of safeguards within a collaborativeframework; pursue new directions in infrastructurelending; and enhance the poverty impact oflending.3. Ongoing measures to enhance investment effectivenessinclude: recruitment of a portfolio manager for FY05;harmonization and streamlining of safeguard proceduresof the government and the Bank and joint formulation ofregulatory guidelines for investments; design of investments—includingthose in infrastructure—to promote innovationand change, as appropriate, and address povertyissues; and identification of additional innovative financingarrangements to facilitate Bank support for poverty reductionand the Millennium Development Goals.103

ANNEX N:COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAE1. General ObservationsThe Department agrees with the general thrustof the CAE. Put simply, China has performedvery well over the past two decades. It has beenvery much “in charge” of the developmentalagenda, and this is a major factor in explainingthe country’s impressive accomplishments todate. The Bank has played an important butvarying role in the process depending on the sector,issue, and time period—in part due to changingcountry circumstances and in part due tofactors specific to the Bank. As noted in theSummary, “The main strength of the Bank hasbeen its sustained support of an activity or programover a number of years.” This has allowedthe Bank to “have a substantial cumulative impactin a number of areas” and to be “well- placedto take advantage of opportunities when Chinais looking for support for change.”Against this broad premise, we are puzzled bythe statement in the same paragraph that, “TheBank’s view on issues has sometimes been lessthan fully transparent. Looking forward, theBank should give more attention to trying topromote and participate in a much broader debateon policy and sector issues, not only amongofficials, but also among researchers and otherstakeholders.” While the Bank has publicly shareda broad range of its analytical work and participatedin an open dialogue on most subjects, ithas treated some sensitive issues more discreetly.Our aim in doing so is to reach our clients in asensitive but effective way, not to educate an externalaudience. We have thus been able to maintaina dialogue on difficult issues being debatedwithin the government and have helped ourclients to shape important policy reforms.The report notes areas where the Bank hasbeen quite effective and areas where we have eitherbeen short of the mark or less involvedthan warranted. We agree with many of these observations,but on some issues the judgment istoo simplistic, particularly regarding how countrycircumstances can influence Bank prioritiesor the way the Bank has approached issues inChina. Reform is not a smooth or a continuousprocess. For some issues, such as the financialsector (see more on this below), circumstancesdictate when a topic is ripe for serious attention—particularlyso in China where the political/planningprocess determines the timing,speed, and nature of how and when key reformsare to be addressed.We recognize that the scale and diversity of issuesfacing China are unparalleled in world historyand that the continuing progress of Chinais as remarkable as the complexity of the developmentchallenges it faces. On the Bank’s side,while our performance may have varied acrosssectors and over time and Bank contributionscould never be considered dominant, givenChina’s scale and government ownership (asthe CAE notes), the Bank has certainly “punchedabove its weight.” In light of these two factors,it is not clear that more could have been accomplishedor that performance was anythingless than fully satisfactory. Any suggestion of“mixed success” on either the government’s orthe Bank’s part seems to imply that total successwould ever have been feasible in such a complexcontext.In addition, while the report acknowledgesthat “China fits the Comprehensive DevelopmentFramework model of donor coordinationmore closely than most countries,” the Bank iscriticized throughout for not being involved inevery aspect of every issue. However, no one developmentinstitution—including the World105

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEBank—can be expected to assist all areas of acountry’s development agenda, much less acountry with an economy as diverse and complexas China’s. On issues that China’s other developmentpartners were better placed to provideassistance or were already involved, the Bank hasrightly taken a supplemental role in providingsupport or has even decided to forgo any involvement.So, although the CAE points outareas of limited or nonexistent Bank involvement,such as in the coal subsector, forestry sectorwork, or judicial reform, it should berecognized that development partners, such asthe IFC for coal, the FAO and Ford Foundationfor forestry, and bilaterals and the EU for judicialreform, provided the support required and probablybetter than we could have.Broadly, then, we wonder at the tone of partsof the evaluation, which suggests that the Bankhas failed to achieve results as though we were thesole implementers of change in China, ratherthan an adviser and facilitator. Reform in China isdriven by the government and not outsiders suchas the Bank. The current tone seems contrary tothe opening statement in Chapter 5: “It would bepresumptuous to think that the Bank could takecredit for successes, or be held responsible for thefailures, of such a large and dynamic economy.”We agree and would therefore urge that the reportput China back in the “driver’s seat.”2. Policy AgendaMacroeconomic ManagementWe concur with the assessment’s highlighting oftwo critical periods that tested China’s macromanagement, the prominence of fiscal policy,and the remaining difficult issues. However, thedescription of the Bank’s role would benefitfrom a broader view.• The discussion of the Asian Crisis shouldnote that, despite supporting an expansionaryfiscal policy, the Bank consistently flagged therisks if such a policy were not used as a temporarymeasure (see, for example, our fiscalpolicy notes in 1998, the CEM in 1999, noteson the tenth five-year plan in 2000, notes onthe composition of public spending and on fiscalresponse in 2001 and 2002, and the domesticdebt risks study in 2003). Avoiding deflationand competitive devaluation wereimportant—and sometimes conflicting—concernsat different times; accordingly, the Bankoffered advice on different occasions.• The discussion of fiscal issues shouldnote that the Bank has provided several writteninputs and organized specialized workshopson the composition of publicexpenditures, the reform of the malfunctioningintergovernmental finance system, domesticdebt risks, reform of the tradepromotion and export tax regime, the managementof rural public finance, and the coordinationof fiscal-monetary and externalpolicies. The Bank has positioned itself to bean adviser in this area as political windowsopen. Recently, the new government requestedassistance (and the Bank responded) on issuesrelated to increased external sector liberalization,reform of the financial sector and ruralfinance, and other issues tied to the sustainabilityof the fiscal situation.PrivatizationAs the evaluation notes, the Bank has expressedimpatience with the pace of reform while broadlysupporting China’s phased approach. We recognizedthat, in the short run, an exclusive focuson privatization and assumptions that marketdiscipline would provide good governance wasunlikely to be appropriate in a country (and enterprisesector) as large and diverse as China.While pursuing privatization, there was an importantparallel track of improving governanceof public agencies and separating the functionsof state-as-owner and state-as-regulator. Hence,the Bank was not “too timid in discussing privatization”as the evaluation states, but rather recognizedthat the issues are differentiated andcomplex. Indeed, privatization was a politically(and philosophically) sensitive issue in Chinaduring the 1990s and thus was more appropriatelyhandled on a confidential basis; for example,in the mid-1990s, the Bank’s Regional VicePresident raised this issue directly with the VicePremier and both recognized the delicate natureof the topic.106

ANNEX N: COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAEFinancial SectorThe CAE highlights the importance of financialsector reforms—which we agree with—and correctlynotes that following some important earlywork, the Bank’s support for these reforms felloff during much of the 1990s. As in other areas,China’s experience has shown that unless a countryis serious about addressing an issue, particularlyin the financial sector, advisory or financialsupport from outsiders—whether the Bank orothers—is likely to be ineffective. For much ofthe early to mid-1990s, China pursued financialsector reform slowly. Against this background,Bank advisory support and financial intermediationloans had limited impact. At the time, theBank recognized that significant support in thisarea would be both costly and difficult and thatuntil a stronger government commitment to reformsin this area emerged, a more ambitious assistanceeffort might be wasted. As noted by theCAE, in line with a renewed government commitmentbrought on by lessons of the Asian FinancialCrisis, we have over the past few yearsmounted an ambitious financial sector reformprogram for China—the largest effort in theBank—reflecting our perception that the governmentis now taking this issue more seriously.Sector Strategy. While the evaluation is correct innoting no major sectorwide reviews after theinfluential 1989 report, it is incorrect in statingthat the Bank never recast its strategy after thattime. This issue received considerable managerialattention regarding implications for countryvulnerabilities and searching for opportunities forconstructive engagement. Meanwhile, implementationof the Financial Sector Technical AssistanceProject kept the financial sector verymuch on our agenda. The sector was an importantcomponent in the Bank’s country assistancestrategies during the 1990s, and several countryeconomic memoranda, including the China 2020report, devoted separate sections to policy issuesand development strategy for the sector.Involvement with State Banks. The CAE incorrectlyattributes the Bank’s lack of involvement in theState commercial banks during the Asian crisisto our client’s lack of interest or confidence inthe Bank’s advice or support. We would insteadpoint to the changed circumstances of thosebanks. At the time, both the World Bank andthe government recognized that the rationale forcontinued Bank assistance for the credit operationsof State commercial banks no longer existed:(i) the banks were flush with liquidity anddid not need our financial support; (ii) withoutmore serious policy efforts in dealing with nonperformingloans (NPLs) and restructuring, WorldBank lending would not likely be effective atany rate; and (iii) since the government relied onexpansionary fiscal/monetary policy as a responseto the Regional Financial Crises, Bank-supportedcredit operations were unlikely to be effective asan instrument for reform. Our scaled-back involvement,therefore, had a logical basis. Oncethese circumstances changed and the environmentfor our support improved, the governmenthas sought our involvement on issuesbesetting the State banks and other sector institutions,as the CAE mentions.Recent AAA. The evaluation casts doubts on thepotential effectiveness of the more recent AAAfor financial sector reform. This is contrary to thefeedback consistently given to Bank managementby the government and is puzzling in viewof the rapidly increasing requests for assistancefrom the MOF, the central bank, financial regulators,and the planning commission on bothgeneral architectural and specific technical aspectsof financial sector reform.Poverty ReductionWhile we agree with the CAE that regional andrural/urban inequalities have increased substantiallyand need to be addressed, it should benoted that the inequality issue in China differsfrom that in many other countries. It does notstem from one group or one region stagnatingrelative to others; rather, urban areas and coastalprovinces are growing annually at near doubledigits, while growth in rural areas and some interiorprovinces is closer to 4 to 5 percent. Recommendationsshould therefore reflect this fact.Some of the problems are a consequence of anexcessive concentration of riches, not poor performancemore generally.107

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEWe also question the CAE’s finding that theBank was less successful in “persuading the governmentof the implications of broader developmentpolicies for poverty and inequality.”For all three of the major issues cited—intergovernmentalfiscal relations, grain pricing policies,and restrictions on migration—the Bankproduced major economic reports in recentyears that set out the necessary reform agenda.Further, the government has been moving inthe right direction on all three fronts, albeit notso rapidly as one would have hoped in someareas. It is also debatable whether the governmentcould or should have moved more aggressivelythan it did. For example, fiscal reformsin other large transition countries where revenueshave also sharply fallen indicate that thenecessary institutional changes and shifts intax/revenue policies to promote more equitytake years if not a decade or more to put inplace. Similarly, while China’s restrictive policyon migration has accelerated regional inequalities,in the view of many it has also made it possiblefor the country to avoid many of theundesirable social consequences that other developingnations have experienced regardingrural-urban migration in the face of weak socialservice systems. Now that such systems are beginningto take shape in China, cities and regionsare better equipped to cope with pressuresfrom more flexible migration policies, and thisin fact is now happening. Finally, regarding grainprices, since 1997, the government has beenpurchasing smaller amounts of grain at the administeredprocurement prices—less than 10percent of the crop in the latest years for whichinformation is available. Overproduction since1997 has resulted in a sharp divergence betweenofficial and free market prices, and the resultinglosses of grain marketing entities, combinedwith the widespread rural distress that resultedfrom falling free-market prices, have resulted ina substantial relaxation of grain marketing quotas.Moreover, post-WTO developments are seenlargely in the form of the removal of restrictionson crop diversification, and by making deep concessionsin agriculture, China has essentiallyavoided going down the path of most countriesthat have subsidized increasingly inefficient foodproduction. In sum, then, we do not concurwith the point made that the Bank has been“less successful in persuading the government”in these areas.InfrastructureLending for Infrastructure. The CAE notes the positiverole that Bank lending for infrastructurehas played in China—in both stimulating growthand directly or indirectly reducing poverty andregional inequalities. We strongly concur. However,the CAE questions whether the share oflending for infrastructure should increase asproposed in the recent CAS. In terms of lendingamounts, the proposed lending for infrastructureis actually declining as China mobilizes morefrom domestic resources for such investments.To illustrate, the Bank’s infrastructure lending toChina totaled $5.5 billion in FY94–96, but onlyabout $2.3 billion in FY01–03. However, theshare of infrastructure is increasing in the Bankprogram only because, with the loss of IDA,lending in the social sectors is much less than before.Moreover, given the substantial infrastructureneeds in the interior provinces, the rationalefor continued support is as strong today as it was10 years ago in promoting growth and povertyreduction. The more relevant issue, therefore, iswhether China should make more use of IBRDresources for social investments—a point withwhich we would agree.We do, however, agree that a hard look isneeded at our involvement in some infrastructureissues. For example, in view of the disappointingresults regionally and globally with BOT(build, operate, and transfer) and PPI (private participationin infrastructure), it is sensible to reexaminethe respective roles of public and privatesources of financing for infrastructure.Impact on Reforms and Institutional Change in InfrastructureSectors. We agree that our policy impacthas been more striking for energy thantransport, with the proviso that we have madea significant difference in the urban transportarrangements in many cities and that a coregroup of national professionals are now viewingpolicies and issues differently compared with a108

ANNEX N: COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAEdecade ago when we first started working in thesubsector. In particular, we have helped developa cadre of professionals around the country(mostly in the design institutes) who know howto study problems better and develop more effectivesolutions.Regarding the institutional shortfalls in othertransport subsectors, we wish to complement thereport with the following information:• In highways, the report notes three areas wherethe Bank has made little headway: fuel tax reform,establishment of a unified Ministry ofTransport, and traffic safety. This, of course, hasto do with constraints also noted in the report.Since Bank lending accounts for only asmall share of China’s resource flows, the Bankrelied mostly on a dual-track approach of buildingtrust through lending while promotingpolicy dialogue through sector work. This hasled to a reduced efficacy in transport where successlargely depends on achieving coordinationacross sectors and/or levels of government.We have therefore expanded our AAA program,including dissemination seminars toshow (i) the unsustainability of the current financingmechanisms in the sector (which relytoo much on toll financing), (ii) the necessityof intermodal coordination for logistics improvementand further market integration,and (iii) the need to mainstream sector developmentexternalities such as traffic accidents.• In railways, the dual-track approach stumbledon difficulties in building trust. Now that thishas been achieved to some extent, theprospects for institutional reforms are improving.Bank Group Involvement in the Gas and Coal Sectors.The recommendation that the Bank should beinvolved in lending for gas and coal is questionable.In the context of the Bank’s current poverty andgrowth objectives, coal and gas are clearly not priorityareas for financing and are better addressedthrough policy-related work since the chief problemsinvolve regulatory, environmental, and—forcoal—serious social issues. IFC has, in fact, beenactively involved in the mining sector, and since2000 has co-hosted with the Ministry of Land andResources annual conferences aimed at giving theoverseas mining industry and potential investorsa full picture of the present mining investment climatein China. In addition, a major IFC-supported“Study on Coal Sector Reform in China” was donein 2001 in collaboration with the government, followedearly this year by a “China Coal Industry Administrationand Regulation Workshop,” whichwas based on several in-depth technical studies.The Bank has also maintained a dialogue with thegovernment on clean coal technologies over thepast five years through technical and policy studies,awareness workshops (the last one in September2004), and recently a stand-alone GEFproject. Several reports on the coal sector were alsopublished by the Energy Sector Management AssistanceProgram (ESMAP).Regarding the gas sector, the Bank has doneextensive AAA and TA in the past three years.Some of our outputs include the 2001 studies on“Modernizing China’s Oil and Gas Sector: Structure,Reform and Regulation,” “Power and GasRegulation,” “Regulatory Framework for China’sDownstream Gas Sector,” and, in 2002, “EconomicRegulation of Long-distance Gas Transmissionand Urban Gas Distribution.” In fact,the Bank’s activities are helping to shape reformsin the gas sector.EnvironmentWe question the implication that the Bank hada limited impact on environmental issues. WhileChina’s rapid economic growth has posed immenseenvironmental challenges, we suggestthat the Bank has had a significant influence inthis area and prevented existing problems frombecoming even more severe. The recent CASindicates the range of the Bank’s support toChina in addressing environmental issues, includingthose of global importance, the institutionaland regulatory framework in China, andthe challenges of protecting air, land, and waterresources. We note that the CAE omits discussionof significant areas of the Bank’s contribution toenvironmental management such as air pollutionreduction, industrial pollution control programs,and strengthening of environmental monitoringand regulation in municipalities.109

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEWater-Related Issues. There appears to be a disconnectbetween the views expressed in AnnexG and the main text section on water. The generaltone of the annex is that the Bank’s assistancein the water sector has been effective, is on theright track, and is making significant contributions.The general tone of the main text seemsto be that the Bank’s assistance has been less thansatisfactory, particularly in water resources management.Needless to say, we agree with theannex and not with the main text.In general, the main text characterizes our performanceas “mixed,” despite achievements underprojects such as those for the Tarim Basin, theYangtze Basin, Water Conservation, the LoessPlateau, and others that have significantly contributedto mainstreaming the environment intowater sector operations. On institutional reformin water, the report questions our performance,although the Bank has had considerable successin irrigation reform, river basin management, andwatershed management. Water Users’ Associationsstarted under World Bank projects are nowbecoming national policy. River basin managementis becoming more common, albeit slowly,and the Bank-assisted Tarim Basin and YangtzeBasin projects have played an important role inthis. The Loess Plateau watershed managementmodel is also being replicated. Regarding integratedwater resources management (IWRM),while progress has been slow, it is positive, asshown in various projects and in the Bank’s WaterResources Assistance Strategy prepared in 2002.Achieving integrated water resources managementis a monumental, very long-term process,and China—with Bank assistance—is on the righttrack, but still has some way to go.Similarly, on water supply and wastewatermanagement, we disagree with the report’s conclusionthat our impact on institutional developmenthas been negligible. We believe thatChina’s achievements of expanding and improvingurban water supply and wastewater managementservices, as well as their financial andinstitutional frameworks over the last 15 yearshave been remarkable and compare well withthose of other Bank borrowers. The Bank hasmade a significant contribution to this achievement.Advances that the Bank first pushed for asinnovations and that are now national norms includefull cost recovery on water supply and recoveryof at least the operating costs for sewerageservices, formal independence of utilities, properfinancial management, and proper investmentplanning and implementation. The Bank is nowpursuing further institutional advances such as fullcommercialization of certain services andstrengthening of the regulatory framework.3. Operational InstrumentsAnalytical and Advisory ServicesChanging Needs, Changing Products. The evaluationrecognizes that our client’s needs changed inthe course of the 1990s and that AAA was thereforerefocused on more quickly prepared technicalpieces, sometimes of a multisectoral nature,and on issues that often defied easy solutions. Atthe same time, the CAE shows a nostalgic hopethat the Bank will continue to produce long,general reports for senior leaders as if they stillneeded to be schooled in basic principles or requiredadvice on the simpler issues of the past.As China’s reform process shifted from the liberalizationphase to the more difficult structuraland institution-building phase, the Bank’s ESWhad to evolve by moving away from reports to acombination of policy notes, workshops, studies,and research. Moreover, WBI and DevelopmentEconomics and Chief Economist Vice Presidency(DEC) activities have been integrated moreclosely with the need to provide a range of advisoryservices supported by capacity buildingand in-depth research on current as well as futurechallenges to economic management. The CAEshould unequivocally acknowledge and endorsethis shift. Otherwise, it runs the risk of being internallycontradictory by acknowledging thechange in knowledge requirements since themid-1990s while criticizing the Bank’s decision toshift away from reliance on the lengthy strategicdocuments produced during the early stages ofits involvement in China.In this regard, we would also point out theCAE’s discussion of the themes of our 2002 CASshould also mention the major CAS emphasis onknowledge transfer. There is now a two-way ex-110

ANNEX N: COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAEchange of knowledge between the Bank andChina, in which the Bank is both a provider anda recipient of knowledge in its interactions withan ever more sophisticated and informed client.This mutually beneficial exchange reflects ournew relationship.International vs. Chinese Experience. The CAE recommendsgrounding policy advice more on Chineseexperience as opposed to internationallessons learned. However, we see the need tolook at both sources, with the proper “mix” dependingon the issue and the audience. We willcontinue to approach issues in this way, consideringinternational and/or domestic experienceas warranted. The CAE also recommendsthat the Bank draw lessons from Chinese experiencefor the benefit of other countries. This objectivewas built explicitly into the China CAS of2002, and, as mentioned in the CAE, the upcomingShanghai Conference on “Scaling UpPoverty Reduction” is a notable example.Collaborative Work. The local research community’sdesire to increase its work with the Bankis welcome, and we are doing this where possible.One of the strategic elements for the knowledgeagenda and AAA program outlined in the2002 CAS is, indeed, to accelerate the use oflocal experts and institutions. However, sincelocal capabilities are still uneven, it will be importantto continue to support institutional developmentas part of this collaborative work.The Bank’s extensive use of trust funds tosupport AAA work supports such longer-term effortsto build local capacities, while also establishingnetworks of communication and expertiseand sustaining reform. Research-support grantsto Beijing University and the Chinese Academyof Social Sciences are examples. Moreover, formalcosponsorship with the authorities of importantinstitutional mechanisms, such as theAPEC Finance and Development Program, helpsto transfer cutting-edge knowledge to local collaboratorsand, more broadly, to East Asia Regionalnetworks.AAA Budget. The portrayal of our budget allocationsfor AAA reveals a lack of understanding ofthe overall budget situation for the China program.The Bank’s budget allocation system has consistentlyconstrained funding for China below whatmight be regarded as “normal.” Given the substantialbudget needs for project supervision andlending as a result of the large lending program,the amount available for ESW—particularly whenexpressed as a percentage of the overall program—seemslow. Resource constraints, however,have become less binding recently, and the2002 CAS, which recognizes the importance of theBank’s advisory services relative to lending, couldtherefore envisage an increased share of resourcesfor nonlending services.China’s View of the Bank’s AAA. Regarding concernsabout the Bank’s ESW expressed by Chineseofficials, we strongly agree that many reportsare produced for external and institutional purposesand not solely for Chinese technical specialists.This was true of the China 2020 report,which was timed for release at the Hong KongAnnual Meetings in 1997. This report was mainlyproduced to help the external world better understandChina, and it remains one of the mostrequested World Bank documents on China.The report was not, however, without a Chineseaudience. While it may have lacked immediateoperable suggestions for macroeconomists, manyline ministry and sector experts greatly appreciatedit, particularly its companion backgroundstudies on the environment, social protection,health financing, food security, income disparities,and integration into the global economy.Other outputs were meant to serve the needs ofmacroeconomists, such as policy notes on thefive-year plans. The first set of notes in 1995 waswell received, and the Bank has been requestedto provide similar support to the two plans sincethen.Regarding the recommendation in box 4.1that the Bank needs to do more work on urbanization,education, and urban transport, significantanalysis has been carried out in all threeareas and provided to the government, althoughnot as yet to the public.Quality of AAA. On the observation that the Bankneeds to tighten management oversight over111

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEtask implementation and dissemination, wewould point out that the EAP Region has formalizedsector lead economist positions in all sectorunits, and these individuals have taken ongreater quality assurance functions in their respectiveunits, complementing the role beingplayed by the country lead economists. At thesame time, the focus remains on impact and results,which usually require a range of activitiesand which depend on what others are doing—features that are more difficult to reflect in theearlier QAG approach.Absence of Forestry Sector Work. Despite lending forforestry of more than $1 billion and a body ofwork that OED’s sector review of 2000 characterizedas “a high point in one of the highest-qualityportfolios,” no Bank sector work was done onforestry. As the OED review mentions, however,the Bank attempted to launch AAA activities, butour client did not see the need for such work becauseof the perceived relative health of the forestsector policy framework. Forest sectoranalytical work was, however, done by the FAOand the Ford Foundation, while the Bank used itsresources for topics not well covered by otherdonors, such as rural development, poverty, grainmarketing, and agricultural research.Cross-Sectoral Work. This, indeed, poses challenges,especially for a large country like China.Three developments are worth noting to fleshout the evaluation. First, the shift in requestsfrom the authorities for nonlending support inareas requiring meaningful cross-sectoral analysisis fairly recent, reflecting the complexity of theissues faced in moving from the stroke-of-the-penliberalization phase to the current stage of buildinginstitutions for a rapidly growing, highly articulated,globalized, and market-orientedeconomy. In many instances, the immediate impulseto request such assistance from the Bankarose from the need to go beyond the compartmentalization(and the narrower perspectivesthat result from it) that exists among governmentdepartments. Second, the Bank has used theopportunity of the request for inputs into thefive-year plans and the Western Region DevelopmentPlan to exploit some of the cross-sectorallinkages and in the process helped develop usefulpolicy analysis and design frameworks. Third,on a more limited scale, technical analysis inseveral sectors has combined perspectives fromother sectors. For example, the China CEM 1999carried out stress testing on the financial sectorbased on enterprise sector analysis. However,more needs to be done. In the area of enterpriseand financial sector reform, for example, ESWunder way on state-owned commercial bank reformand on domestic debt risks is buildingupon perspectives from banking, managementof local government finance, social security reform,and the housing market and urbanization.In part, this has been facilitated by unifying thePoverty Reduction and Economic Management(PREM) unit with previous units for the financialsector and private sector development. Moreimportant, however, is the evolving focus of theauthorities on regional and subnational developmentissues, which explicitly lend themselvesto cross-sectoral approaches. The Bank is theleading agency among China’s developmentpartners involved in providing analytical and advisorysupport on this set of issues.Impact of LendingThe report characterizes Bank lending as “negligible”and never the main instrument of our strategy.However, the Bank’s financial contribution hadan impact greater than its quantitative size wouldsuggest and should not be considered too smallto have had an effect. This was the case since: (i)Bank lending to specific geographic areas had a sustained,cumulative impact over time (for example,Xinjiang benefited from $1.2 billion in supportfor more than 20 projects and Sichuan receivedmore than $2.3 billion under about 40 projects);(ii) for much of the 1990s until 1997/98, China’sreserves were still recovering from their near depletionin the early 1990s, so that during much ofthe decade foreign exchange was, in fact, an issue;and (iii) by viewing our lending from the perspectiveof national foreign reserves and revenue/GDPratios, the report overlooks the factthat, unlike other countries, our lending in Chinais largely provincially based and most provinceshave major fiscal and foreign exchange access issues,which the Bank helped to relieve.112

ANNEX N: COMMENTS FROM BANK REGIONAL STAFF ON DRAFT CAEPortfolio ManagementThe depiction of factors that improved the QAGrating in subsequent years appears incompleteby attributing the improvement to Regional effortsand increased scrutiny of the portfolio afterissues surfaced under the Western Poverty Project(in May 1999). We, however, see the turnaroundthat began at the start of FY99 (in July1998) as largely the result of efforts initiated byCountry management during that year to (i)provide budget to accelerate decentralizationof staff, task management, and core services tothe field; (ii) designate a senior Beijing Office staffmember to oversee portfolio performance as ade facto Project Adviser; (iii) increase funding ofsupervision—which averaged about 21 staffweeks per project in FY99 or 22 percent abovethe Regional goal of 17 staff weeks; and (iv)carry out a QAG-type supervision assessmentwith assistance from the Region’s OperationsAdviser, which found satisfactory supervision ofthe sample projects. The impact of these measureswas reflected in QAG’s FY99 RSA, whichrated China’s supervision at 85 percent, slightlyhigher than the Bank’s average (at 82 percent).By the time of the RSA in FY00, China’s supervisionwas rated 100 percent, compared with 92percent Bankwide.SafeguardsAs noted in box 4.2, the Western Poverty Projectwas a major blemish on an otherwise relativelystrong performance in the Bank’s involvementin safeguard issues. However, this single operationshould not detract from the reality that onlyone of some 250 investment projects duringmore than two decades has been subject to suchcontroversy.The criticism that line managers had rarely visitedthe six projects reviewed by a Panel assessingsafeguards compliance seems unrealistic.With some 120 active projects scattered overmore than 20 provinces and with managers visitingChina no more than twice a year, it wouldseem impossible for most projects to be visitedmore than once or twice by managers in thecourse of even five years.4. ConclusionOverall, we broadly endorse the recommendationsof the evaluation, which in general are consistentwith our current strategy. In particular, westrongly agree that many lessons from China’sexperience are applicable to other countries, andfor this reason we are sponsoring an upcomingpoverty conference in Shanghai aimed in part atsharing lessons from China with others in the developmentcommunity. We also agree on the importanceof broadening our dialogue and havetherefore in the past few years reoriented ourpolicy support to respond better to the needs ofthe government’s most-senior decisionmakers.Testament to the effectiveness of this reorientationis the substantial increase in government requestsfor Bank assistance with the most complexinstitutional and structural policy issues, includingthe eleventh five-year plan. Further, we agreethat our somewhat smaller lending program mustbe used strategically and are therefore designingeach operation to introduce innovation andchange in the sectors supported, where needed,including poverty reduction and infrastructuredevelopment. In our analytical and advisory work,we will continue to provide our client with objectiveadvice that draws on relevant lessonslearned from other countries as well as China.Maintaining the quality of this support is our toppriority, and our approach on each issue will betailored to ensure greatest effectiveness. At thesame time, efforts to protect portfolio quality willcontinue, so that our future performance showsthe excellent outcomes realized in the past.113

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ANNEX O: COMMENTS FROM THE GOVERNMENT OF CHINA119

ANNEX P:SUMMARY: CHINA—IFC COUNTRY IMPACT REVIEWChina and the International FinanceCorporation (IFC)China has the largest economy, and attractedthe most foreign direct investments (FDI) in recentyears, among countries in which IFC operates.In 2002, China surpassed the U.S. as the topFDI destination country. IFC approved its first investmentin China in June 1985, a US$17 millionloan. For the next seven years, IFC activity levelsremained low, gaining momentum only after1992. By the end of FY03, cumulative commitmentstotaled $811 million, and IFC’s held portfoliostood at US$510 million, about 3 percentof its total held portfolio. China now representsIFC’s sixth largest country portfolio exposureand its third largest country equity portfolio. Atthe end of FY03, IFC’s China held portfolio wasabout 49 percent equity, 44 percent loans (includingguarantees and risk management facilities),and 7 percent quasi-equity. The equityshare in the China portfolio was unusually highcompared with the IFC overall portfolio equityshare of about 20 percent.IFC’s StrategiesIFC’s strategies in China have been relevant andwell-tailored to the country context. IFC progressivelyadapted them initially to the marketopportunities, and then later to more pioneeringselectivity in line with IFC’s corporate strategicpriorities. The strategies reflected successivelythe evolution of the government’s economic reforminitiatives, IFC’s potential to add value,and IFC’s lessons from its difficult early portfolioexperiences. Beginning with the country assistancestrategy for 1997, IFC placed increasedemphasis on developing capital markets, privatesector participation in infrastructure andextractive industries, and SME development.Subsequent strategies (1999, 2001, and 2003)added priority consideration to frontier provincesand corporate governance—partly by expandingtechnical assistance and advisory services (TA totaledmore than US$10 million from 1997 to2003)—and to improving access by private companies,particularly SMEs, to financing from localbanks and financial markets. While less than 15percent of total FDI flows into China to date hasgone to the frontier provinces and less than 1 percentinto the financial sector, IFC directed morethan 20 percent and 30 percent, respectively, ofits commitments to these two areas, demonstratinga strong pioneering and leadership role,in line with the CAS and corporate priorities ofmaximizing IFC’s development impact additionality.Project OutcomesDespite China’s large economy, above averageGDP growth rate, stable political environment,low sovereign risk rating, and substantial FDIflows since 1993, IFC’s mature projects (approvedFY90–FY99) have had development and investmentoutcomes below the IFC averages. While theThis Executive Summary has been extracted from the report of the International Finance Corporation’s OperationsEvaluation Group (OEG), “China: Country Impact Review,” dated March 29, 2004. Consistent withthe provisions of IFC’s disclosure policy, detailed profit contribution data have been removed. Questions onthis document should be referred to the OEG Task Manager, Denis Carpio (DCarpio@ifc.org), 202-473-1013.121

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEdevelopment outcome and investment outcome“win-win” success rate matches the average of theTransition Countries, the proportion of “loselose”outcomes for the China projects is substantiallyhigher than for the Transition Countriesand IFC as a whole. However, mature projectswithin two of IFC’s present strategic priorities,namely in the frontier regions of China and in thefinancial markets (excluding collective investmentvehicles or CIVs)—together comprising 38percent of the 29 mature projects evaluated,show a much higher proportion of “win-win”outcomes compared with projects in the coastalregions, and compared with all of IFC. The environmentalperformance of the China projectsis better than the IFC average.Profit Contribution. For the period FY90–FY03, theChina loan and equity portfolio, excluding unrealizedcapital gains, made a negative cumulativecontribution to IFC’s net income. Includingthe unrealized capital gains expected to be realizedin future fiscal years, the net profit contributionremained negative.Outcome Drivers. Four major factors mainly accountfor the poor project development outcomesand portfolio profitability.• Excess capacity and a challenging business climate.Other than in the frontier regions, overcapacityin many manufacturing industries,particularly in the coastal regions, has resultedfrom FDI exuberance, government-directedor induced investments (including FDI) and the“soft” budget constraints on expansion of stateownedenterprises (SOEs) through their easyaccess to low-interest loans from governmentownedbanks, rather than market-based resourceallocation. The overcapacity hasdepressed both profit margins and capacityutilization during the initial operating years ofmany IFC real sector projects, putting developmentoutcomes and investment returnsbelow satisfactory return thresholds. In addition,the difficult business climate for privatecompanies has overwhelmed even some ofthe high-quality sponsors with well-implementedIFC projects (construction and operationphases) yielding less than satisfactoryproject outcomes, including exit problems forIFC’s equity investments, and has also limitedIFC’s use of quasi-equity instruments.• Restrictions on private investments in sectorsthat have been most profitable for IFC worldwide.Government policies restrict private sector,particularly foreign, sponsorship of projectsin several major sectors in which IFC equity investmentsgenerally performed above averagein other developing countries during the 1990s.These restricted sectors included extractive industries,infrastructure, and, until recently, petrochemicals/chemicalsand financial markets.• High project-risk intensity. About 87 percentof the 29 mature IFC projects in China approvedin FY90–FY99, feature three or fourhigh-risk factors (out of four evaluated). Theseprojects have had much lower development aswell as investment outcome success rates comparedwith the projects (13 percent) with twoor fewer high-risk factors.• The rapid growth of IFC’s commitments inan unfamiliar environment prevented experiencefrom informing IFC’s appraisal of laterprojects. IFC increased its China project commitmentsin an unfamiliar country environmentmuch faster than IFC could acquirelessons from mature projects approved earlier.Its appraisal work quality for the mature Chinaprojects was therefore weaker than for projectsin countries with a much longer history of IFCoperations (that is, non-transition countries),and was similar to the average for transitioncountries that also had rapid portfolio growthwith lagged experience accumulation.Prospects for Recent ProjectsThe most recent IFC projects (approved inFY00–FY03) show better project screening, appraisaland structuring quality, and feature relativelyless layering of high-risk factors, comparedto the evaluated mature projects approved inFY90–FY99. In addition, the new Chinese governmentappears intent on more aggressivelyaddressing the problems related to the SOEsand the banking sector that contribute to a difficultbusiness climate for the private sector, andoverall there are indications that manufacturing122

ANNEX P: SUMMARY: CHINA—IFC COUNTRY IMPACT REVIEWcapacity utilization is higher now than during thepast few years. Nonetheless, the overall risk levelof the recent projects as a group is still high because:(a) SOEs are expected to continue theirdominant role in the financial and other “vital sectors”for many more years, prolonging the “unlevelplaying field” for private sector firmscompeting with such SOEs, and (b) the highproportion, almost 50 percent, of equity investmentsin the recent IFC commitments, will continueto face exit and value realization risks,particularly in the financial sector where IFC’s equitycommitments are concentrated. The outcomesof the recently approved projects maytherefore not be significantly better than thoseof the mature projects.Going ForwardApply Lessons of Experience and Stress Strategic Priorityand Quality over Quantity. China’s transitionchallenges and prospects—in the context ofboth new projects and the partial or full privatizationof SOEs in the financial, energy, extractiveindustries, and infrastructure sectors—presentopportunities for IFC, but also pose high risks.In addressing these opportunities, IFC shouldgrow its investment operations, particularly equityinvestments, within its strategic priorities,and in pace with improvements in the businessclimate and exit avenues. The essential operationalconsiderations for achieving better resultsfrom new IFC projects in China are:1) Strategic selectivity at screening in favor of priorityfrontier provinces and sectors, and onthe strength of IFC’s role and value added2) Also greater selectivity in project screening,instrument selection, and pricing from awarenessof past results for projects featuring similarintensity of high-risk factors, and in theuse of equity investments, including more rigorousanalysis and structuring of equity exitmechanisms3) Better management of project-level risks inthe appraisal and structuring of projects, particularlyin assessing the future supply-demandbalance and the role of SOEs in the productmarket or in the financial sector, as well ascloser supervision4) Reflecting in IFC’s loan terms and conditions,both the potential for higher income throughcontingent payments when projects do well(“loan sweeteners” and/or equity acquisitionfeatures), as well as the possibility of lost incomefrom loan prepayments by successfulclient companies receiving attractive refinancingoffers in a likely increasingly competitivebanking system5) Continue as a high priority for IFC (and theWBG), the use of technical assistance (TA) andadvisory operations for project preparationand sector reforms to help accelerate the transitionprocess and improve the business climate,including removal of the regulatorybarriers to the use of quasi-equity instrumentsand the timely remittance in foreign currencyof the full realized value of negotiated equitydivestments by foreign investors.IFC management should satisfy itself that thenecessary incentives and procedures are in placefor project selectivity applying the above criteria,portfolio oversight, and corporate monitoringof adherence to IFC’s strategic priorities aswell as to project and investment instrumentselection guidelines.Consider How to Address the Finding of Low Profitabilityof Large Middle-Income-Country Portfolios.The Board and IFC management should addressthe low net profitability levels of the combinedportfolios of middle-income countries with largeeconomies, FDI flows, and IFC exposure.123

ANNEX Q:REPORT FROM THE COMMITTEE ON DEVELOPMENTEFFECTIVENESS (CODE)On March 29, 2004, the Committee for DevelopmentEffectiveness (CODE) discussed China:Country Assistance Evaluation (CAE), preparedby the Operations Evaluation Department (OED).BackgroundThe China CAE focuses on the period ofFY93–02. The main findings of the evaluation arethat the overall outcome of the Bank’s assistancestrategy was satisfactory, with China holdingthe best performing portfolio in the BankGroup. The Bank made significant contributionsin all of its key objectives and played an importantrole in poverty reduction, macro-management,and systemic reform. The CAE found thatthe Bank has been less successful in supportingfinancial sector reforms, in persuading the governmentto forge the linkages between broaderdevelopment policies and poverty and inequality,and in environmental safeguard policy. Theproject repayment system has also constrainedsector and regional allocation and the choice ofproject components. The CAE found that theBank has generally played a relevant role inChina, specifically due to its long-term engagementand working with the client more throughdialogue and persuasion than conditionality, butthe Bank now needs to adapt its strategy to a reducedlending program.Conclusions and Next StepsThe Committee welcomed the opportunity todiscuss the document and praised the impactthat the World Bank Group had in support ofChina’s development during the past decade.The Committee commended the quality of thereport, and broadly supported the findings andrecommendations. Members noted there weremany lessons to be learned from the developmentpartnership between China and the Bank,and suggested that these lessons should betransmitted to other clients, specifically middleincomecountries (MICs). The challenges of developingfurther a program in China with reducedIBRD and no IDA allocations was raised. Somemembers expressed a view that OED’s evaluationof the Bank’s performance in China could wellbe rated higher than “satisfactory” for its exceptionalcontribution to assisting the countryin its overall poverty reduction achievements.OED responded that the Bank has made someoutstanding contributions, but that shortcomingsin the financial sector and lapses on safeguardsprecluded a highly satisfactory rating.Among the specific issues raised by the Committeewere:Fiscal Transfer and Income InequalityCommittee members expressed the view thatChina’s beneficiary repayment and fiscal transfersystem has both rewarding and challengingeffects. It has served China well by strengtheningclient ownership, which led to the developmentof coastal provinces. However, this systemposes hindrances for poor inland provinces thatmay not have the ability to repay, consequentlyconstraining the impact of the Bank’s interventions.Management responded that the Bank offeredadvice regarding beneficiary repayment,recommending ways to avoid the distortion ofincentives. They further emphasized that theprovincial expenditure review indicated that differentiationneeds to be built into the repaymentsystem to reflect the “ability to pay” of theregion and the sector. Some members pointedout that income inequality across geographicalareas and sectors in China has grown and shouldbe addressed. Management explained that in-125

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEequality in China can chiefly be attributed tofaster growth of urban areas (8 percent over thepast 20 years) vs. rural areas (4 percent over thepast 20 years). Management also stressed thatsustained rural growth can be considered successfulby any standard and pointed out thatpoverty mapping was done on a regional basis,but agreed that inequality in terms of access toservices needs to be addressed. It was furthernoted that the lessons drawn from this CAEshould help the Bank and the country developan appropriate strategy in this regard.Dual-Track Approach and Country OwnershipSome speakers observed that the CAE clearlyhighlights the positive outcomes of the dualtracknature of the development partnershipbetween the Bank and the country: a mix of investmentoperations bolstered by long-term andcontinuous dialogue, persuasion, and demonstration.The Management clarified that this systemis successful with clients who have both aclear idea of their development direction and sufficientimplementation ability. Some Committeemembers stressed the crucial importance ofsafeguards for the Bank’s fiduciary responsibility,but emphasized that they be built into countrysystems to reduce their cost ofimplementation. The Management explainedthat China has formal safeguard standards similarto those of the Bank and that these are beingapplied to all investments. Some members felt,and the Management agreed, that for the dualtrackapproach to continue to work in China(and also be applied elsewhere), careful balancingis necessary between country ownershipand the Bank Group’s mandate.Deepening ReformsSome members observed that investment lendingstrategy pursued in China should be utilizedto support systemic reforms, private sector development,and inequality reduction. The memberspointed out that “deepening” reforms couldbe effectively married with investment operations,especially in infrastructure for poor areas.The Management agreed with the observationsof the Committee and confirmed that China continuesto have basic infrastructure lending needsthat the Bank could help finance.Quality of ESWMembers broadly supported the finding of theCAE that the Bank needs to improve its ESW, particularlyby focusing on timely delivery and relevantexperiences, both Chinese and foreign. Itwas observed that China was one of the Bank’srare clients where the synergy between ESWand investment operations was probably used ina most productive manner. They noted the potentialfor high-quality and timely ESW on theBank Group’s lending activities.Pietro Veglio, Acting Chairman126

ANNEX R:REFERENCE TABLESTable R.1: China at a GlanceTable R.2: Key Economic and Social Indicators—China and Comparisons, 1992–01Table R.3a: China: Average Annual Net Receipts from All Donors for 1980–98 (US$m)Table R.3b: China: Net Receipts from All Donors for 1980–98 (US$m)Table R.4: List of Economic and Sector Work for ChinaTable R.5a: Allocation of Investment Lending by Sector (%), 1993–02Table R.5b: Project Rating by Sector and Exit Fiscal Year: China and ComparisonsTable R.5c: Portfolio Status Indicators: China and ComparisonsTable R.6: Costs of Bank Programs for China and Comparison Countries, FY91–01Table R.7: China: The World Bank’s Senior ManagementTable R.8: China: Poverty and InequalityTable R.9: Millennium Development Goals: China127

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.1China at a GlanceEast Asia Lower-middle-POVERTY and SOCIAL China and Pacific income2002Population, mid-year (millions) 1,281.0 1,838 2,411GNI per capita (Atlas method, US$) 950 950 1,390GNI (Atlas method, US$ billions) 1,219.1 1,740 3,352Average annual growth, 1996–02Population (%) 0.8 1.0 1.0Labor force (%) 0.9 1.2 1.2Most recent estimate (latest year available, 1996–02)Poverty (% of population belownational poverty line) 5 .. ..Urban population (% of total population) 38 38 49Life expectancy at birth (years) 71 69 69Infant mortality (per 1,000 live births) 30 33 30Child malnutrition (% of children under 5) 10 15 11Access to an improved water source(% of population) 75 76 81Illiteracy (% of population age 15+) 14 13 13Gross primary enrollment(% of school-age population) 106 106 111Male 105 105 111Female 108 106 110Development diamond*GNIpercapitaLife expectancyAccess to improved water sourceChinaLower-middle-income groupGrossprimaryenrollmentKEY ECONOMIC RATIOS andLONG-TERM TRENDS 1982 1992 2001 2002GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7Gross domestic investment/GDP 33.2 36.2 38.5 41.0Exports of goods and services/GDP 8.9 19.5 25.5 29.5Gross domestic savings/GDP 34.8 37.7 40.9 44.0Gross national savings/GDP 35.1 38.0 40.0 43.8Current account balance/GDP 2.4 1.9 1.5 2.9Interest payments/GDP 0.2 0.6 0.5 0.5Total debt/GDP 3.8 15.9 14.6 12.6Total debt service/exports 8.0 8.6 7.7 6.1Present value of debt/GDP .. .. 14.1 ..Present value of debt/exports .. .. 51.8 ..Economic ratios*DomesticsavingsTradeIndebtednessInvestment1982–92 1992–02 2001 2002 2002–06(average annual growth)GDP 9.7 9.0 7.5 8.0 7.5GDP per capita 8.1 8.0 6.7 7.2 6.6Exports of goods and services 5.9 14.3 9.6 29.4 14.8STRUCTURE of the ECONOMY 1982 1992 2001 2002(% of GDP)Agriculture 33.3 21.8 15.8 14.5Industry 45.0 43.9 50.1 51.7Manufacturing 37.3 33.1 34.2 44.5Services 21.7 34.3 34.1 33.7Private consumption 50.7 49.2 45.7 42.5General government consumption 14.5 13.1 13.4 13.5Imports of goods and services 7.3 18.0 23.1 26.51982–92 1992–02 2001 2002(average annual growth)Agriculture 4.6 3.7 2.8 2.9Industry 11.6 11.3 8.4 9.9Manufacturing 11.2 10.4 9.0 8.1Services 11.7 8.4 8.4 7.3Private consumption 11.4 8.1 2.8 1.9General government consumption 9.9 8.4 10.5 7.0Gross domestic investment 9.5 9.7 13.9 14.9Imports of goods and services 9.7 12.8 10.8 27.5ChinaLower-middle-income groupNote: 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.20151050403020100–10Growth of investment and GDP (%)97 98 99 00 01 02GDI GDPGrowth of exports and imports (%)97 98 99 00 01 02Exports Imports128

ANNEX R: REFERENCE TABLESPRICES and GOVERNMENT FINANCE 1982 1992 2001 2002Domestic prices (% change)Consumer prices 6.0 6.4 0.7 –0.8Implicit GDP deflator –0.2 7.9 1.2 –2.6Government finance(% of GDP, includes current grants)Current revenue 22.9 14.7 17.1 17.9Current budget balance .. 2.0 1.1 0.0Overall surplus/deficit –0.3 –1.0 –4.7 –3.0TRADE 1982 1992 2001 2002(US$ millions)Total exports (fob) 22,321 84,940 266,155 325,565Food 2,908 8,309 12,780 14,623Fuel 5,314 4,693 8,420 8,372Manufactures 12,271 67,936 239,802 297,085Total imports (cif) 19,285 80,585 243,610 295,203Food 4,201 3,146 4,980 5,237Fuel and energy 183 3,570 17,495 19,285Capital goods 3,204 31,312 107,040 137,030Export price index (1995=100) 41 85 83 78Import price index (1995=100) 71 95 91 86Terms of trade (1995=100) 58 89 91 90BALANCE of PAYMENTS 1982 1992 2001 2002(US$ millions)Exports of goods and services 24,906 94,198 299,409 365,395Imports of goods and services 20,555 86,752 271,325 328,013Resource balance 4,350 7,446 28,085 37,383Net income 376 249 –19,174 –14,945Net current transfers 486 1,155 8,492 12,984Current account balance 5,212 8,850 17,401 35,422Financing items (net) –995 –10,952 30,046 40,085Changes in net reserves –4,217 2,102 –47,447 –75,507Memo:Reserves including gold (US$ millions) .. 24,842 220,051 297,721Conversion rate (DEC, local/US$) 2.4 5.9 8.3 8.3EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002(US$ millions)Total debt outstanding and disbursed 8,358 72,428 170,110 155,678IBRD 0 3,752 11,550 12,051IDA 1 4,287 8,654 8,729Total debt service 2,125 8,618 24,297 22,688IBRD 0 460 1,550 1,631IDA 0 30 151 175Inflation (%)1050–597 98 99 00 01 02GDP deflator CPIExport and import levels (US$ mill.)400,000300,000200,000100,000096 97 98 99 00 01 02ExportsImportsCurrent account balance to GDP (%)54321096 97 98 99 00 01 02Composition of 2002 debt (US$ mill.)G: 43,920A: 12,051B: 8,729D: 6,987Composition of net resource flowsOfficial grants 47 327 240 ..Official creditors 657 2,343 2,156 –839Private creditors –122 8,949 –4,017 –13,593Foreign direct investment 430 11,156 44,241 49,308Portfolio equity 0 1,243 3,015 2,286E: 21,888World Bank programCommitments 330 1,865 782 563Disbursements 1 1,131 1,791 1,733Principal repayments 0 197 904 1,157Net flows 1 1,134 887 576Interest payments 0 293 797 649Net transfers 1 841 90 –73A - IBRDB - IDAC - IMFF: 62,103D - Other multilateralE - BilateralF - PrivateG - Short-termNote: This table was produced from the Development Economics central database.129

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.2Key Economic and Social Indicators—China and Comparisons, 1992–01ChinaSeries name 1992 1993 1994 1995 1996 1997GNI per capita, Atlas method (current US$) 390 410 450 520 620 710GNI per capita, PPP (current international $) 1,810 2,060 2,340 2,650 2,900 3,110GDP growth (annual %) 14.3 13.5 12.8 10.5 9.6 8.8GDP per capita growth (annual %) 12.9 12.2 11.6 9.3 8.4 7.7Agriculture, value added (% of GDP) 21.8 19.9 20.2 20.5 20.4 19.1Services, etc., value added (% of GDP) 34.3 32.7 31.9 30.7 30.1 30.9Industry, value added (% of GDP) 43.9 47.4 47.8 48.8 49.5 50.0Manufacturing, value added (% of GDP) 33.1 34.5 34.4 34.7 34.7 34.6Exports of goods and services (% of GDP) 19.5 17.1 25.3 24.0 21.0 23.1Imports of goods and services (% of GDP) 18.0 18.6 23.4 21.7 18.9 18.3Manufactures exports (% of merchandise exports) 78.7 80.6 82.3 84.0 84.4 85.4Manufactures imports (% of merchandise imports) 80.4 84.0 83.9 78.5 79.1 77.1Current account balance (% of GDP) 1.5 -2.7 1.3 0.2 0.9 4.1Foreign direct investment, net inflows (% of GDP) 2.7 6.4 6.2 5.1 4.9 4.9Total debt service (% of GNI) 2.1 2.4 2.1 2.2 2.0 2.1Gross international reserves in months of imports 3.8 3.2 5.9 6.3 7.7 9.7Current revenue, excluding grants (% of GDP) 4.2 3.0 6.4 5.7 5.5 5.8Expenditure, total (% of GDP) 8.0 6.4 9.4 8.2 8.0 8.1Overall budget balance, excluding capital grants (% of GDP) –1.0 –0.8 –1.2 –1.0 –0.8 –0.8Inflation, consumer prices (annual %) 6.3 14.6 24.2 16.9 8.3 2.8Life expectancy at birth, total (years) 69.0 .. .. 69.4 .. 69.7Illiteracy rate, adult total (% of people ages 15 and above) 21.5 20.8 20.0 19.2 18.6 18.0Immunization, DPT (% of children under 12 months) 94.0 95.0 93.0 92.0 95.0 96.0Improved 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* .. .. .. .. 43.0School enrollment, primary (% gross) 119.0 116.9 116.8 117.5 119.8 123.0School enrollment, secondary (% gross) 55.0 56.8 61.0 65.8 68.9 58.9Population, total (million) 1,165 1,178 1,192 1,205 1,218 1,230Population growth (annual %) 1.2 1.1 1.1 1.1 1.0 1.0Urban 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, 2001.130

ANNEX R: REFERENCE TABLESAverage 1992–011998 1999 2000 2001 China Brazil India Indonesia EAP World740 780 840 890 635 3658 398 815 741 4,9763,300 3,580 3,920 4,260 2,993 6,669 1,971 2,731 3,028 6,5147.8 7.1 7.9 7.3 10.0 2.7 5.9 3.9 7.5 2.66.7 6.1 7.2 6.5 8.9 1.3 4.0 2.2 6.2 1.218.6 17.6 15.9 15.0 18.9 8.2 28.2 17.4 17.9 5.532.1 32.9 33.2 32.9 32.2 57.3 45.0 39.8 37.3 61.449.3 49.4 50.9 52.2 48.9 34.6 26.9 42.8 44.8 33.133.7 33.6 34.5 35.4 34.3 23.5 16.4 24.5 30.7 21.821.9 22.0 25.9 25.6 22.5 9.5 11.4 33.3 33.8 21.617.3 19.1 23.2 24.7 20.3 10.4 14.1 29.1 31.4 21.287.3 88.3 88.2 .. 84.4 55.5 74.9 50.4 74.7 77.081.3 80.3 75.7 .. 80.0 69.8 52.2 70.3 78.7 74.73.3 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 1.72.0 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 4.66.3 7.2 .. .. 5.5 24.9 12.2 17.6 10.8 25.39.3 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 66.117.3 16.6 15.9 15.3 18.3 16.2 45.5 15.5 16.8 25.698.0 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 78.8107.4 106.4 .. .. 115.9 122.7 100.2 113.0 114.0 102.561.7 62.8 .. .. 61.4 56.6 48.9 49.8 59.2 62.81,242 1,254 1,262 1,272 1,222 162.7 955.8 198.9 1,739.0 5,777.20.9 0.8 0.9 0.8 1.0 1.4 1.8 1.6 1.2 1.433.9 34.9 35.8 36.7 32.7 79.0 26.9 37.2 33.5 45.5131

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.3aChina: Average Annual Net Receipts fromAll Donors for 1980–98 (US$m)Donors 1981–90 1991–00 1991–95 1996–00 1998 1999 2000IBRD 239.2 878.7 759.8 997.6 1,078.0 788.3 968.0IDA 264.3 648.8 746.8 550.8 553.8 406.8 315.5ADB 7.5 504.8 342.6 667.1 721.6 704.3 700.8ADB Special Funds 0.9 7.8 15.6 .. .. .. ..JAPAN 1,392.9 2,146.0 3,566.7 725.4 968.9 –1,889.9 –2,295.8EC + EU members 809.1 2,936.3 2,583.1 3,289.6 3,343.3 3,187.1 946.9UNITED STATES 42.5 785.3 662.4 908.3 144.9 1,802.7 –393.3Total multilateral 650.6 2,198.1 2,002.3 2,393.9 2,571.7 2,072.9 2,119.6Total bilateral 2,327.1 6,118.5 7,189.5 5,047.6 4,643.3 3,294.1 –1,576.4Other donors 17.0 298.7 372.7 224.7 529.2 143.8 210.8Total of all donors 2,994.9 8,615.4 9,564.6 7,666.2 7,744.2 5,510.8 754.0Table R.3bChina: Net Receipts from All Donors for1980–98 (US$m)Donors 1981–90 1991–00 1991–95 1996–00 1998 1999 2000IBRD 2,391.9 8,787.23 3,799.17 4,988.06 1,077.97 788.34 967.99IDA 2,643.26 6,488.03 3,734.15 2,753.88 553.82 406.81 315.48ADB 75.38 5,048.38 1,712.75 3,335.63 721.59 704.32 700.83ADB 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 –2,295.75EC + EU members 8,090.92 29,363.33 12,915.34 16,447.99 3,343.27 3,187.07 946.94UNITED STATES 425 7,853.27 3,312 4,541.27 144.85 1,802.73 –393.31Total multilateral 6,505.84 21,981.12 10,011.54 11,969.58 2,571.66 2,072.88 2,119.55Total bilateral 23,271.26 61,185.39 35,947.61 25,237.78 4,643.33 3,294.09 –1,576.42Other donors 170.38 2,987.24 1,863.65 1,123.59 529.24 143.84 210.84Total of all donors 29,948.78 86,153.9 47,822.95 38,330.95 7,744.23 5,510.81 753.97Source: OECD Beyond 2020 CD rom data, 2002.132

ANNEX R: REFERENCE TABLESTable R.4List of Economic and Sector Workfor ChinaNo. Document Title Date Report No. Document Type1 China - Country assistance strategy Vol. 1 1/22/2003 25141 Country AssistanceStrategy Document2 China - Agenda for water sector strategy for North China -summary report 5/9/2002 22040 Sector Report3 China - National development and sub-national finance :a review of provincial expenditures 4/9/2002 22951 Economic Report4 Technology assessment of clean coal technologies for China, Vol. 2 5/31/2001 23488 ESMAP Paper5 China - Overcoming rural poverty 10/18/2000 21105 Sector Report6 Assessing markets for renewable energy in rural areas ofNorthwestern China 8/31/2000 21359 ESMAP Paper7 China - Managing public expenditures for better results :country economic memorandum 4/25/2000 20342 Economic Report8 Strategic goals for Chinese education in the 21st century 11/30/1999 18969 Sector Report9 China - Improving the technical efficiency of decentralizedpower companies 9/30/1999 ESM222 ESMAP Paper10 China - Rural China : transition and development 5/28/1999 19361 Sector Report11 China - Weathering the storm and learning the lessons :country economic memorandum 5/25/1999 18768 Economic Report12 Power trade strategy for the Greater Mekong Sub-region 3/31/1999 19067 Sector Report13 China - Country assistance strategy : progress report 5/6/1998 20541 CAS Progress Report14 China - Forward with one spirit: a strategy for the transport sector 4/23/1998 15959 Sector Report15 China 2020 : development challenges in the new century 9/18/1997 17027 Sector Report16 China ‘ s management of enterprise assets : the state as a shareholder 6/5/1997 16265 Economic Report17 China - Country Assistance Strategy 2/25/1997 16321 Country AssistanceStrategy Document18 China - Fruit and vegetable marketing performance 11/6/1996 15658 Sector Report19 China - Container transport services and trade :framework for an efficient container transport system 10/10/1996 15303 Sector Report20 China - Renewable energy for electric power 9/11/1996 15592 Sector Report21 China - Pension system reform 8/22/1996 15121 Sector Report22 China - Issues and options in health financing 8/12/1996 15278 Sector Report23 China - Energy for rural development in China : an assessmentbased on a joint Chinese/ESMAP study in six counties 7/31/1996 ESM183 ESMAP Paper24 China - Higher education reform 6/27/1996 15573 Sector Report25 China - Reform of state-owned enterprises 6/21/1996 14924 Sector Report26 China - The Chinese economy : fighting inflation, deepening reforms 5/31/1996 15626 World Bank CountryStudy27 China and Vietnam - project evaluation by the ESMAPTechnical Advisory Group (TAG) 3/24/1996 18671 ESMAP Paper28 China - Social sector expenditure review 2/29/1996 17348 Sector Report(Table continues on the following page.)133

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.4List of Economic and Sector Workfor China (continued)No. Document Title Date Report No. Document Type29 China - The emerging capital market 11/3/1995 14501 Sector Report30 China - Public investment and finance 10/18/1995 14540 Economic Report31 China - Country assistance strategy 5/4/1995 14454 Country AssistanceStrategy Document32 China - Investment strategies for China ‘ s coal andelectricity delivery system 3/8/1995 12687 Sector Report33 China - Strategies for road freight development 2/17/1995 12600 Sector Report34 China - Energy efficiency and pollution control in township andvillage enterprises (TVE) industry 12/31/1994 ESM168 ESMAP Paper35 China - Internal market development and regulation 12/31/1994 13664 World Bank CountryStudy36 China - Urban environmental service management 12/31/1994 13073 Sector Report37 China - GNP per capita 12/15/1994 13580 Economic Report38 China - Country economic memorandum : macroeconomic stabilityin a decentralized economy 10/26/1994 13399 Economic Report39 China - Power sector reform : toward competition andimproved performance 9/15/1994 12929 Sector Report40 China - Agro-industrial crop marketing 6/17/1994 12974 Sector Report41 China - Environmental action plan of China 1991-2000 3/31/1994 E37 Environmental ActionPlan42 China - Internal market development and regulation 3/17/1994 12291 Sector Report43 China - Foreign trade reform 2/28/1994 12914 World Bank CountryStudy44 China - Highway development and management :issues, options, and strategies 2/24/1994 11819 Sector Report45 China - Industrial organization and efficiency case study :the automotive sector 12/31/1993 12134 Sector Report46 China - Southeast coastal region : strategic issues in ports andshipping development 12/10/1993 11771 Sector Report47 China - New skills for economic development : theemployment and training implications of enterprise reform 11/24/1993 11785 Sector Report48 China - Budgetary policy and intergovernmental fiscal relations 7/28/1993 11094 Sector Report49 China - Strategic options for power sector reform : summary,speeches, and documents from a Workshop, Beijing July 8 - 10, 1993 7/10/1993 ESM156 ESMAP Paper50 China - Updating economic memorandum : managing rapidgrowth and transition 6/30/1993 11932 Economic Report51 China - Yellow river basin investment planning study 6/30/1993 11146 Sector Report52 China - Animal feed sector study 6/24/1993 10922 Sector Report53 China - Foreign trade reform : meeting the challenge of the 1990s 6/18/1993 11568 Sector Report54 China - Involuntary resettlement 6/8/1993 11641 Sector Report55 China - The achievement and challenge of price reform 3/31/1993 11772 World Bank CountryStudy134

ANNEX R: REFERENCE TABLESNo. Document Title Date Report No. Document Type56 China - Railway strategy 2/25/1993 10592 Sector Report57 China - Energy conservation study 2/4/1993 10813 Sector Report58 Industrial restructuring : a tale of three Chinese cities 12/15/1992 10479 Sector Report59 China - Long-term issues and options in the health transition 10/31/1992 11269 World Bank CountryStudy60 China - Strategies for reducing poverty in the 1990s 10/31/1992 11245 World Bank CountryStudy61 China - Urban land management : options for an emergingmarket economy 10/1/1992 10692 Sector Report62 China - Statistical system in transition 9/22/1992 9557 Economic Report63 China - Reforming the urban employment and wage system 6/30/1992 10266 Sector Report64 China - Strategies for reducing poverty in the 1990s 6/29/1992 10409 Sector Report65 China - Country economic memorandum : reform andthe role of the plan in the 1990s 6/19/1992 10199 Economic Report66 Price reform in China 5/28/1992 10414 Economic Report67 China - Environmental strategy paper 4/30/1992 9669 Sector Report68 China - Telecommunications sector study : survey, assessmentand strategy recommendations 2/14/1992 9413 Sector Report69 China - Implementation options for urban housing reform 1/31/1992 10315 World Bank CountryStudy70 China - Options for reform in the grain sector 7/31/1991 9804 World Bank CountryStudy71 China - Provincial education planning and finance sector study 6/26/1991 8657 Sector Report72 China - Urban housing reform : issues and implementation options 6/26/1991 9222 Sector Report73 China - Economic development in Jiangsu Province 6/25/1991 9354 Economic Report74 China - Managing an agricultural transformation : grain sector review 4/9/1991 8652 Sector Report75 China - Efficiency and environmental impact of coal use 3/20/1991 8915 Sector Report76 China - Financial sector review : financial policies and World Bank Countryinstitutional development 12/31/1990 PUB8415 Study77 China - Revenue mobilization and tax policy 6/30/1990 PUB7605 World Bank CountryStudy78 China - Long term issues and options in the health transition 6/25/1990 7965 Sector Report79 China - Reforming social security in a socialist economy 6/25/1990 8074 Economic Report80 China - Electronics sector report 6/21/1990 7962 Sector Report81 China - Country economic memorandum : between plan and market 5/8/1990 8440 Economic Report82 China - Fuelwood development and conservation projectHunan province 12/31/1989 ESM105 ESMAP Paper83 China - Revenue mobilization and tax policy 6/15/1989 7605 Sector Report84 China - Macroeconomic stability and industrial growthunder decentralized socialism 6/12/1989 7483 Economic Report(Table continues on the following page.)135

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.4List of Economic and Sector Workfor China (continued)No. Document Title Date Report No. Document Type85 County - level rural energy assessments : a joint study ofESMAP and Chinese experts 5/31/1989 ESM101 ESMAP Paper86 China - Rural industry : overview, issues, and prospects 3/1/1989 7267 Sector Report87 China - External trade and capital reform issues and options 9/30/1988 PUB6680 World Bank CountryStudy88 China - Finance and investment 9/30/1988 PUB6445 World Bank CountryStudy89 China - Growth and development in Gansu province 9/30/1988 PUB6064 World Bank CountryStudy90 China - External trade and capital reform issues and options 10/20/1987 6680 Sector Report91 China - Technical and vocational education development 8/7/1987 6789 Sector Report92 China - Zhejiang : challenges of rapid urbanization 8/3/1987 6612 Sector Report93 China - Textbook development 7/1/1987 6735 Sector Report94 China - Finance and investment 6/11/1987 6445 Economic Report95 China - Water transport sector study 2/12/1987 6383 Sector Report96 China - Livestock sector study 1/15/1987 6589 Sector Report97 China - Growth and development in Gansu province 11/20/1986 6064 Economic Report98 China - Issues and prospects in education 5/31/1986 18954 World Bank CountryStudy99 China - Management and finance of higher education 5/31/1986 5912 Sector Report100 China - Long-term issues and options 5/31/1985 5206 Economic Report101 China - The health sector 4/30/1984 4664 Sector Report102 China - Socialist economic development 8/31/1983 PUB3391 World Bank CountryStudy103 China - Recent economic trends and policy developments 3/31/1983 4072 Economic Report104 China - Shanghai sector memorandum 12/15/1982 4227 Sector Report105 China - Rural finance : a sector study 8/31/1982 3864 Sector Report106 China - Socialist economic development 3/2/1982 3391 Economic ReportSource: Imagebank, data as of 11/10/02.136

ANNEX R: REFERENCE TABLESTable R.5aAllocation of Investment Lending bySector (%), 1993–02China Brazil India Indonesia Other EAP BankwideEconomic policy 0.2 0.0 0.3 0.0 0.2 0.5Education 3.0 17.3 8.4 13.8 13.7 10.6Energy and mining 19.6 2.1 17.7 16.0 22.5 14.3Environment 4.8 5.5 2.1 2.8 2.4 3.6Financial sector 0.4 1.0 4.0 4.6 3.1 3.8Global information/communications technology 1.1 0.0 0.4 4.7 3.2 1.0Health, nutrition, and population 3.2 9.8 17.5 7.3 6.0 8.3Private sector development 0.0 2.6 2.0 1.4 2.0 3.9Public sector governance 1.3 4.8 0.0 3.2 2.5 2.6Rural sector 24.1 17.3 19.3 6.4 11.4 14.7Social development 0.5 0.0 0.0 0.0 0.0 0.2Social protection 1.2 0.1 0.1 4.8 4.5 4.4Transport 29.1 25.8 19.0 19.4 17.2 19.9Urban development 2.8 4.8 4.5 14.6 6.6 6.1Water supply and sanitation 8.6 8.9 4.8 1.0 4.5 6.1Total 100.0 100.0 100.0 100.0 100.0 100.0Total investment lending (million US$) 22,762.8 8,126.58 17,467.9 7,654.287 18,307.5 146,791.4Source: World Bank data as of 12/16/02.137

138Table R.5bInstitutional developmentOutcome, % satisfactory Sustainability, % likely impact , % substantialNumber of Total net By By By netSector Board projects comm. ($m) By number net comm. By number net comm. By number comm.Education 1998–02Education 1993–97Energy and mining 1998–02Energy and mining 1993–97Project Rating by Sector and Exit FY: Chinaand ComparisonsBrazil 6 818.0 50 49 67 68 17 12China 5 558.2 100 100 100 100 100 100India 5 812.0 100 100 100 100 80 85Indonesia 7 364.0 100 100 14 13 29 24EAP 23 1,550.0 96 99 57 72 61 73Bankwide 120 7,323.0 82 85 64 72 41 45Brazil 1 140.0 100 100 0 0 100 100China 5 489.6 100 100 80 88 60 61India 0Indonesia 7 637.0 86 92 86 92 71 68EAP 22 1,753.0 91 87 86 84 68 69Bankwide 98 4,592.0 74 76 50 56 31 39Brazil 3 484.0 100 100 100 100 67 46China 6 1,028.9 100 100 80 93 80 93India 12 2,731.0 58 72 55 66 58 51Indonesia 7 1,040.0 43 46 0 0 43 35EAP 30 3,479.0 69 68 57 54 45 52Bankwide 131 13,818.0 68 68 59 61 46 50Brazil 3 555.0 0 0 100 100 0 0China 14 2,198.1 79 81 71 78 57 36India 26 4,606.0 58 70 62 72 27 26Indonesia 7 1,275.0 71 91 86 93 29 29EAP 40 5,002.0 85 82 80 81 50 50Bankwide 206 20,200.0 62 70 53 64 32 36CHINA: AN EVALUATION OF WORLD BANK ASSISTANCE

139Environment 1998–02Brazil 3 181.0 67 80 100 100 67 80China 3 564.7 67 57 100 100 33 36India 4 351.0 75 60 50 36 50 36Indonesia 2 61.0 50 76 50 76 0 0EAP 5 625.0 60 59 80 98 20 33Bankwide 41 1,819.0 78 70 77 79 54 40Environment 1993–97Brazil 3 156.0 100 100 67 72 33 40China 2 0.0 100 100 100 100 0 0India 0Indonesia 0EAP 2 49.0 50 61 50 61 0 0Bankwide 9 275.0 56 74 44 58 22 29Financial sector 1998–02Brazil 0China 1 114.2 0 0 0 0 0 0India 2 557.0 50 31 100 100 50 31Indonesia 3 256.0 0 0 0 0 0 0EAP 12 6,331.0 50 92 50 92 18 23Bankwide 70 11,920.0 71 90 70 87 46 50Financial sector 1993–97Brazil 1 184.0 0 0 0 0 0 0China 2 300.6 100 100 100 100 0 0India 2 266.0 50 30 50 30 50 30Indonesia 4 609.0 75 61 75 61 50 37EAP 12 1,465.0 55 71 55 71 25 36Bankwide 63 8,876.0 56 58 44 53 37 47Global information 1998–02& communication Brazil 0technology China 1 208.2 100 100 100 100 0 0India 0Indonesia 1 288.0 100 100 100 100 100 100EAP 4 536.0 100 100 100 100 50 59Bankwide 15 1,082.0 100 100 100 100 73 74ANNEX R: REFERENCE TABLES(Table continues on the following page.)

140Table R.5bProject Rating by Sector and Exit FY: China andComparisons (continued)Institutional developmentOutcome, % satisfactory Sustainability, % likely impact , % substantialNumber of Total net By By By netSector Board projects comm. ($m) By number net comm. By number net comm. By number comm.Health, nutrition & 1993–97population Brazil 3 214.0 100 100 100 100 67 72China 1 93.8 0 0 0 0 100 100India 4 412.0 100 100 75 88 25 12Indonesia 4 212.0 75 82 100 100 50 67EAP 7 393.0 71 67 86 76 43 60Bankwide 47 1,688.0 68 84 55 68 23 32Health, nutrition & 1998–02population Brazil 2 376.0 100 100 100 100 50 42China 4 288.7 75 64 100 100 75 62India 6 459.0 83 82 83 85 33 34Indonesia 4 127.0 50 95 50 95 25 57EAP 11 562.0 64 74 60 76 36 45Bankwide 87 4,207.0 65 75 58 69 33 39Public sector 1998–02governance Brazil 3 810.0 100 100 67 87 67 87China 1 82.6 0 0 0 0 0 0India 2 400.0 100 100 100 100 50 38Indonesia 2 512.0 100 100 0 0 0 0EAP 8 1,168.0 88 93 67 84 50 41Bankwide 82 5,748.0 86 91 83 91 60 57Public sector 1993–97governance Brazil 1 24.0 0 0 0 0 0 0China 1 20.0 100 100 100 100 100 100India 0Indonesia 2 140.0 100 100 100 100 100 100EAP 4 179.0 75 90 75 90 75 90Bankwide 62 2,559.0 48 73 36 47 19 34Transport 1998–02Brazil 4 504.0 100 100 100 100 100 100China 13 2,705.6 100 100 100 100 100 100CHINA: AN EVALUATION OF WORLD BANK ASSISTANCE

141India 4 370.0 75 49 75 49 75 49Indonesia 5 468 100 100 100 100 100 100EAP 28 3,881.0 100 100 93 98 82 90Bankwide 121 10,516.0 91 92 77 84 72 76Transport 1993–97Brazil 4 695.0 100 100 50 42 50 67China 15 1,711.4 100 100 100 100 47 38India 4 721.0 50 48 50 48 0 0Indonesia 7 1,018.0 100 100 43 57 29 40EAP 37 3,618.0 92 95 76 80 30 31Bankwide 135 9,956.0 72 82 51 52 31 32Rural sector 1993–97Brazil 19 1,943.0 84 72 79 79 68 41China 11 1,531.6 82 87 73 69 36 34India 23 2,745.0 65 67 17 21 35 39Indonesia 15 999.0 73 67 40 29 33 18EAP 42 3,161.0 74 81 55 60 38 29Bankwide 296 15,606.0 66 74 39 48 33 36Rural sector 1998–02Brazil 9 882.0 78 58 89 74 88 79China 11 1,978.8 100 100 100 100 91 90India 13 1,090.0 85 83 82 80 69 57Indonesia 8 342.0 71 73 14 4 14 26EAP 29 3,084.0 86 96 67 87 46 70Bankwide 197 10,480.0 68 79 53 69 40 52Water supply & 1998–02sanitation Brazil 2 383.0 100 100 100 100 50 36China 2 195.7 50 57 50 57 50 57India 3 271.0 67 64 33 34 67 64Indonesia 3 317.0 100 100 33 14 33 14EAP 8 650.0 88 87 50 38 50 39Bankwide 60 3,815.0 59 58 42 36 31 24Water supply & 1993–97sanitation Brazil 2 360.0 100 100 50 22 50 22China 1 75.9 100 100 100 100 0 0India 4 318.0 75 60 75 91 75 60Indonesia 1 42.0 100 100 0 0 0 0EAP 7 296.0 86 87 57 64 0 0Bankwide 47 3,248.0 60 58 32 27 23 16ANNEX R: REFERENCE TABLESSource: OED data as of 11/08/02.

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.5cPortfolio Status Indicators: China andComparisonsNumber Net commit- Projects at Commitment Projects at CommitmentCountry of projects ment amount risk (%) at risk (%) risk (%) at riskBrazil 52 4,899.5 7.7 6.7 4 328.4China 97 15,400.4 5.2 2.6 5 397.1India 67 12,725.3 9.0 8.6 6 1,093.5Indonesia 43 3,404.6 23.3 28.8 10 979.5EAP 242 24,868.3 13.2 8.8 32 2,197.8Bankwide 1,435 100,075.5 18.0 16.3 258 16,280.3Source: World Bank data as of 11/08/2002.Table R.6Costs of Bank Programs for China andComparison Countries, FY91–01Regions/countries Total costs, $m Lending costs, $m Supervision costs, $m ESW costs, $mBank 3,478.1 1,243.0 1,150.8 1,084.2EAP 523.6 205.1 172.7 145.9China 154.0 69.4 59.4 25.2Brazil 82.9 28.5 38.4 15.9India 166.0 68.5 65.8 31.7Indonesia 116.8 44.6 47.2 25.0Cost Structure by PercentageBank 100 36 33 31EAP 100 39 33 28China 100 45 39 16Brazil 100 34 46 19India 100 41 40 19Indonesia 100 38 40 21Efficiency TableAverageAverage Average costs perNumber of Gross costs costs $1,000 of grossprojects Gross commit. of per approved per $1,000 commitment AverageRegions/ Total costs, approved commitment, sat. & nonrisky project, of gross of sat. & non- projectcountries $m in FY91–01 $m projects, $m $1,000 commitment risky projects size, $mBank 3,478 2,671 242,060 208,551 1,302 14.4 16.7 91EAP 524 448 62,095 56,042 1,169 8.4 9.3 139China 69 151 26,306 24,217 1,020 2.6 2.9 174Brazil 29 82 12,398 10,733 1,011 2.3 2.7 151India 69 112 21,071 19,182 1,482 3.3 3.6 188Indonesia 45 102 12,977 10,999 1,146 3.4 4.0591 127Note: Total costs include lending completion, supervision, and ESW costs/ Lending, supervision, and ESW costs are actual costs covering all projects in FY91–01.Source: World Bank data as of August, 2001.142

ANNEX R: REFERENCE TABLESTable R.7China: The World Bank’s SeniorManagementYear Vice President Country Director Chief/Resident Representative1990 Attila Karaosmanoglu Shahid Javed Burki Edwin R. Lim1991 Attila Karaosmanoglu Shahid Javed Burki Attila Sonmez1992 Gautam S. Kaji Shahid Javed Burki Attila Sonmez1993 Gautam S. Kaji Shahid Javed Burki Pieter P. Bottelier1994 Gautam S. Kaji Nicholas Hope Pieter P. Bottelier1995 Russell J. Cheetham Nicholas Hope Pieter P. Bottelier1996 Russell J. Cheetham Nicholas Hope Pieter P. Bottelier1997 J. Khalilzadeh-Shirazi (Acting) Nicholas Hope Pieter P. Bottelier1998 Jean-Michel Severino Yukon Huang1999 Jean-Michel Severino Yukon Huang1999 Jemal-ud-din Kassum Yukon Huang2000 Jemal-ud-din Kassum Yukon Huang2001 Jemal-ud-din Kassum Yukon Huang2002 Jemal-ud-din Kassum Yukon HuangSource: The World Bank Telephone Directories, 1990–02.Table R.8China: Poverty and Inequality1978 1980 1985 1990 1993 1996 1998 1999 2000 2001Official estimateTotal headcount 250 97 86 76 59 43 2.9National (%) 26 9.2 7.5 6.4 4.8 3.4 2.3Rural (%) 11.9 9.5 8.2 6.3 4.6Urban (%) 0.4 0.4 0.3 0.3 0.3PPP ($)Total headcount 490 375 212 223 224 204National (%) 51 32.9 17.4 17.8 17.8 16.1Rural (%) 44.4 24.8 26.2 27Urban (%) 1.0 0.4 1.0 0.5 0.5InequalityGini coeff. 28.8 a 33.5 40.3 41.6Urban/rural 2.9 2.7 1.9 2.2 2.7 b 2.7Urban/rural (real) 3.4 2.2 2.3 2.8 b 2.7a. 1981.b. 1995.Source: World Development Indicators and China Statistical Yearbook.143

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCETable R.9Millennium Development Goals: ChinaChina Country Profile1990 1995 1999 20001 Eradicate extreme poverty and hunger2015 target = halve 1990 $1 a day povertyand malnutrition ratesPopulation below $1 a day (%) .. .. 18.8 ..Poverty gap at $1 a day (%) .. .. 4.4 ..Percentage share of income or consumptionheld by poorest 20% .. .. 5.9 ..Prevalence of child malnutrition (% of childrenunder 5) 17.4 12.9 9 10Population below minimum level of dietaryenergy consumption (%) 16 .. 9 ..2 Achieve universal primary education2015 target = net enrollment to 100Net primary enrollment ratio (% of relevantage group) 97.4 97.9 93.2 ..Percentage of cohort reaching grade 5 (%) 86 93.8 97.3 ..Youth literacy rate (% ages 15–24) 94.7 96.5 97.6 97.83 Promote gender equality2005 target = education ratio to 100Ratio of girls to boys in primary andsecondary education (%) 81.1 87.3 88.6 ..Ratio of young literate females to males(% ages 15–24) 94.3 96.1 97.1 97.3Share of women employed in thenonagricultural sector (%) .. .. .. ..Proportion of seats held by women innational parliament (%) 21.3 .. 65.0 ..4 Reduce child mortality2015 target = reduce 1990 under 5 mortalityby two-thirdsUnder 5 mortality rate (per 1,000) 47 43 41 39.5Infant mortality rate (per 1,000 live births) 38 36.2 33 32Immunization, measles (% of childrenunder 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 sufferfrom 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 ofpeople 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 theSpecial Needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international measuresin 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 cooperationwith pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of newtechnologies, especially information and communications.Source: World Development Indicators database, April 2002.144

ANNEX R: REFERENCE TABLESChina Country Profile1990 1995 1999 20005 Improve maternal health2015 target = reduce 1990 maternal mortalityby three-fourthsMaternal 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 diseases2015 target = halt, and begin to reverse, AIDS, etc.Prevalence of HIV, female (% ages 15–24) .. .. 0 ..Contraceptive prevalence rate (% of womenages 15–49) 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 sustainability2015 target = various (see notes)Forest area (% of total land area) 15.6 .. .. 17.5Nationally protected areas (% of total land area) .. 6.4 6.4 ..GDP per unit of energy use (PPP $ per kgoil 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 .. .. 75Access to improved sanitation (% of population) 29 .. .. 38Access to secure tenure (% of population) .. .. .. ..8 Develop a Global Partnership for Development2015 target = various (see notes)Youth unemployment rate (% of total laborforce ages 15-24) .. 2.9 3.1 3.1Fixed line and mobile telephones (per 1,000 people) 5.9 35.9 120 177.6Personal computers (per 1,000 people) 0.4 2.3 12.2 15.9General indicatorsPopulation (billion) 1.1 1.2 1.3 1.3Gross national income ($) 368.1 billion 622.7 billion 978.1 billion 1.1 trillionGNI per capita ($) 320 520 780 840Adult literacy rate (% of people ages 15 and over) 76.9 80.8 83.4 84.1Total fertility rate (births per woman) 2.1 1.9 .. 1.9Life expectancy at birth (years) 68.9 69.4 .. 70.3Aid (% of GNI) 0.6 0.5 0.2 0.2External debt (% of GNI) 15.6 17.2 15.8 14.1Investment (% of GDP) 34.7 40.8 37.2 37.3Trade (% of GDP) 31.9 45.7 41.2 49.1145

ENDNOTESChapter 11. See World Bank (1997a) for a lower bound estimate.2. Still, the decollectivization of agriculture after1979 was quite radical—and arguably the most farreachingand beneficial reform in the developingworld in the past quarter century—but China’s overallapproach to reform has been gradualist. Sachs andWoo (1997) have argued that China had the luxury ofbeing able to choose a gradual reform path because,unlike most other transition economies, it had a largeagricultural sector.3. See the background paper by Khan (2002). Seealso Khan and Riskin (2001) and Kanbur and Zhang(2001). The Gini Index rose from 28.8 in 1981 (Chenand Wang 2001) to 40.3 in 1998. By this widely usedmeasure of inequality, China has gone from one of themost equal income distributions to a distributionmore unequal than average. Figures for comparatorcountries at the end of the 1990s (from World DevelopmentIndicators 2002) were Brazil (60.7), India(37.8), and Indonesia (31.7).4. Based on WHO’s list of most polluted cities interms of air quality. Cited in OECD (2002), p. 589.5. For an expression of concern by Chinese scholars,see Wang, Angang, and Yanzhu (2002).Chapter 21. World Bank (1982), China: Socialist EconomicDevelopment (3 volumes). The Bank worked withChinese counterpart teams, which included ZhuRongji, then head of the State Economic Commission.2. In FY88, lending to China was $1,693.6 million,and through May 30, 1989, total Bank lending toChina was $1,348.4 million (of which 38 percent wasIDA over the two years). No projects were taken tothe Board between May 30, 1989, and February 27,1990. Five projects totaling $590 million (all IDA)were approved in FY90. On January 29, 1991, IBRDlending resumed and total lending during FY91 was$1,579.3 million.3. Kapur, Lewis, and Webb (1997), pp. 24 and 25,respectively. Jacobson and Oksenberg (1990) alsorate this period as a big success, but note that the Bankwas not the source of reform, only a facilitator (p. 140).They also list a number of challenges and troublespots, including long project-processing times by theBank, access to data, the level of IDA, and various issuesregarding the pace and extent of reform (pp.152–54).4. The Bank’s first formal assistance strategy statementin 1991 stated, “Since China’s change in representationin 1980, the fundamental objective of theBank’s lending activities, economic and sector workand associated technical assistance has been to provideanalytical and material support to China’s economicreform and modernization process.” The reportgoes on to list six elements of the CAS, four of whichhighlighted reform as the key component.5. This book provides a useful historical perspectiveon the limited impact outsiders have typicallyhad in China.6. Lending for infrastructure was about half oflending to China during both FY83–92 and FY93–02.The Bankwide average share of infrastructure in investmentlending fell from 46 percent to 35 percentin the respective periods; as a share of total lendingBankwide, infrastructure lending fell from 39 percentto 25 percent.7. For comments by the Bank’s Regional staff onthis and other issues, see Annex N.8. Transfer of foreign exchange resources has beeneven less an objective. At the end of 2001, total reservesminus gold were more than $215 billion—equivalentto 70 years of World Bank lending at the highest annualrate achieved in the mid-1990s.9. See Annex N.147

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEChapter 31. The link made by the Bank between macromanagementand system reform is well illustrated bythe title of the 1996 Country Economic Memorandum(CEM), The Chinese Economy: Fighting Inflation,Deepening Reform (World Bank 1996a).2. See Harrold, Hwa, and Jiwei (1993), Lu (2002),and discussion below.3. Although the Bank supported an expansionaryfiscal policy in the aftermath of the Asian crisis, itstressed in numerous reports and policy notes thatsuch a policy was risky if it was not a temporary measure.See Annex N.4. This uses the IMF definition, which differs fromthe official definition in that losses of SOEs are classifiedas expenditures, rather than negative revenues.5. Calculated from World Bank (2002a), Table 2.6. In1998, Shanghai’s per capita government expenditureswere 19 times those of Hebei Province in 1998 (Table2.5). Per student recurrent expenditure on compulsoryprimary education was more than 10 times higher inthe top-spending province than in the bottom-spendingprovince (Table 6.6). The central government transfersa large portion of its revenue to the provinces but,because most transfers are tax rebates based on source,the transfers are not equalizing.6. Extrabudgetary funds (EBFs) may account for asmuch as 20 percent of GDP (World Bank 2002), so theoverall tax “take” may not have declined. This gives theworst of both worlds: high tax burdens combinedwith the inefficiency, inequity, and lack of transparencyof EBFs.7. See Annex N.8. Qian (2002) provides a good review of China’sapproach to reform and the reasons it has been largelysuccessful thus far. For a review of the early reform periodand the debate over gradual vs. “big bang” reform,see Tidrick (1994).9. This does not mean that price reform is complete,but relative prices are not significantly out of linewith those in other countries. Utility prices are stillmainly regulated, but cost-based. See also the next sectionon progress in agriculture.10. China, National Bureau of Statistics (2001) and earlieryears. Although the Chinese term (guoyou kongguqiye) is often translated as “state-holding enterprises,”the term “state-controlled shareholding companies”would be more accurate. Comparisons are approximatebecause of changes in definitions over time.11. See the background paper by Lu (2002).12. The return on assets of SOEs was estimated at6 percent in 1996, compared with 8.4 percent for collectivesand 9.9 percent for joint ventures. Part of thepoor financial return may reflect ongoing social obligations.13. See Annex N.14. The Bank’s study of pension reform worldwide(World Bank 1994a) and the follow-up report onChina (World Bank 1996c) helped persuade China tofollow a “three-pillar model,” which includes a mandatorypay-as-you-go defined-benefit component, amandatory defined-contribution component, and avoluntary defined-contribution component. The workshopwas the “China Development Forum on SocialSecurity Reform,” sponsored by the Development ResearchCenter of the State Council in 2000.15. For an overview of the issues and the Bank’sadvice, see Tenev and Zhang (2002). Nolan (2002)also criticized the Bank for failing to support the government’sstrategy of creating globally competitive enterprisegroups. It is unclear that the Bank eitherwould be effective or should be involved in pursuingthis objective.16. The ambitious Shenyang Industrial ReformProject supported technology upgrading and reorganizationof the Shenyang Machine Tool Company,including a component supporting severance paymentsfor redundant workers. The technology upgradingappears to have been successful, but thereform impact has been minimal. The severance paymentcomponent was superseded by a municipalscheme, and continuing disputes over the company’sdebt repayment obligations to the municipality suggesta failure to replace the prevailing bargaining cultureof SOEs with a binding hard budget constraint.17. See Annex N.18. Other ESW included a review of capital marketdevelopment (World Bank 1995a), but this did not alterthe Bank’s approach to banking sector development.19. The issues include bank supervision, depositinsurance, interest rate liberalization, and state commercialbank reform.20. See Annex N.21. See Annex N.22. Decollectivization and a gradual move to higher,market-determined prices increased incentives; partialabandonment of the goal of grain self-sufficiencyat the local level and relaxation of constraints on rural148

ENDNOTESmarketing helped reverse distorted cropping patterns;and industrial planning and marketing reformspermitted the rapid expansion of rural township andvillage enterprises (TVEs), which generated about 65million jobs in the first decade of reforms.23. However, recent unpublished research by A.R.Khan indicates that there may have been a reversal inthe trend of inequality during the past two or threeyears.24. See the background paper by Khan (2002).25. Jalan and Ravallion (1998) estimated that livingin a designated poor county raised consumption by1.1 percent per year during the period 1985–90. Park,Wang, and Wu (2002) estimated the effect on rural incomegrowth in designated counties at 2.28 percentduring the period 1985–92 and 0.91 percent during1992–95; the rates of return on poverty investmentswere 15.5 percent and 11.6 percent, respectively, forthe two periods.26. In 1995, an average rural household paid nettaxes of 0.5 percent of income, while the averageurban household received a net subsidy of 11 percent.Net tax per capita of extremely poor rural householdsin 1995 was 36 times higher than that of nonpoorhouseholds. In urban areas, transfers accounted for5.4 percent of the income of poor households, comparedwith 11.1 percent for the nonpoor. If the distributionof net urban subsidies in 1995 had beenmerely equal, the increase in the urban Gini coefficientbetween 1988 and 1995 would have been half of whatit actually was. See Khan (2002) and Khan and Riskin(2001).27. “International Conference on China’s PovertyReduction Strategies in the Early 21st Century” inMay 2000, cosponsored by the government, the WorldBank, UNDP, and the Asian Development Bank.28. See Jalan and Ravallion (1998), Chen and Wang(2001), and Ravallion and Chen (1998).29. Projects are classified as “poverty-targeted interventions”if they have a specific mechanism fortargeting the poor or the proportion of poor amongthe beneficiaries is significantly higher than the proportionof poor in the total population. This is an assessmentmade at the time of Board approval. Thefigures for China are for 1990–01, and those for Indiaare for 1994–99. See Annex F for further discussion ofPTI projects.30. See Annex R, table R.4, for a list of ESW products.31. Many people inside and outside China (for example,Brown 1995) still view self-sufficiency in grainproduction as an important economic objective. As thebackground paper on agriculture (Findlay 2003, citingFeng Lu 1996) notes, however, “The answer to thequestion of ‘who will feed China’ is that China will feeditself through trade.”32. DECRG has sponsored some useful analyticalwork on WTO accession, culminating in an international“Seminar on WTO Accession, Policy Reform, andPoverty Reduction in China” in June 2002.33. The Bank supported four rural credit projects;the last one was approved in 1990 and closed in 1996.These ceased because of a growing realization that noprogress was being made in developing an independentand sustainable rural financial system. Althoughsubproject rates of return were high, theportfolio of the Agricultural Bank of China remainedpoor, suggesting that banks did not use credit analysisfor general lending, but to select subprojects forthe Bank to finance.34. The CAE could not cover all sectors. Healthrather than education was selected for review becausethe Bank’s education lending has declined in the1990s and has been less poverty-oriented.35. See background paper by Ooi (2002).36. Of the six completed projects, three have beenrated highly satisfactory, and one each satisfactory,marginally satisfactory, and marginally unsatisfactory.37. Water supply and sanitation projects accountedfor an additional 8.6 percent of lending. These are consideredin the next section.38. As in other sectors, there were many criticismsof the (increasing) cost of doing business with theBank, especially from the Ministry of Railways, butthere was nearly unanimous appreciation for theBank’s role in bringing new technology and managementconcepts.39. Water production and the length of the waternetwork also grew by more than 50 percent during thedecade. The Bank’s role in the water sector is coveredin the section on the environment.40. See Findlay (2003) for evidence of increasingintegration of grain markets.41. As argued later, however, the use of toll roadshas been overdone and is largely inappropriate for thelow-density traffic outside the coastal regions. Still, itwas a clever piece of financial engineering, whichhelped overcome a financing constraint at the time.149

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEMoreover, Bank participation and subsequent securitizationhelped attract private sector finance by eliminatingthe risk of construction delay, which is a majorimpediment to private investment in such projects. Inthe longer term, even when toll roads are appropriate,it will be important for the government to comparethe cost of finance through private investmentwith the cost of long-term government borrowing.42. In coal, this was because of Chinese reluctance.In gas, the Bank has been reluctant to becomeinvolved for fear of crowding out the private sector,but given the risks associated with lack of a regulatoryinfrastructure and explicit public support, a largeBank or IFC presence might actually help bring inprivate sector involvement.43. See Annex N for Regional comments on this andother infrastructure issues.44. In energy, policy changes could be decidedwithin a single ministry. In transport, not only has thefuel tax been stalled, but the Bank has made littleheadway in gaining acceptance for its arguments fora unified Ministry of Transport or for incorporatingsafety components into highway projects (becausesafety is under the jurisdiction of another ministry).There was also little response to an excellent Bank report(1995b) on coordination and tradeoffs of investmentsin rail transport, coal-washing, mine-mouthgeneration, and transmission lines. This is perhapsnot surprising because the degree of coordination impliedby this study never existed, even at the height ofcentral planning. China was a command economy, butnever a centrally planned economy to the same extentas the Soviet Union. The potential for efficiency gainsremains, but it might be more productive to concentrateon introducing reforms in market structure anddifferential pricing in order to create incentives for optimizationof intersector investment decisions.45. Smil (1993) argued that China could not sustainits high rate of economic growth without an environmentaldisaster, and Brown’s (1995) question,“Who Will Feed China?,” received international attentionand fueled a debate about China’s environmentaldegradation, exhaustion of natural resources,and the unsustainability of a “growth at any cost” policy.For an up-to-date assessment of the state of theenvironment in China, see UNDP (2002).46. SEPA drafts environmental legislation, overseesregulation and monitoring of environmental policy,and provides technical direction to provincialenvironmental protection bureaus. SEPA has ministrystatus, but it is not a cabinet ministry (that is, it is stillnot involved in some important government decisionmakingprocesses).47. A previous Bank report, Clear Water, Blue Skies(1997b), was technically more sophisticated, but hasbeen criticized in China for being too much a Bankproduct. Air, Land, and Water was criticized within theBank (by QAG) as insufficiently cutting-edge technically,but it seems to have had more impact in China.48. “Agenda for Strategy for North China” is availableon the Beijing Web site and at www.worldbank.org.cn49. The study noted that “sooner, rather than later,Yellow River planners will have to squarely face equityvs. efficiency issues. Policymakers seem to be operatingunder the assumption that the Yellow River is a freegood with low opportunity costs or none…. Untilthere are realistic allocation provisions that YRCC[Yellow River Control Commission] can enforce, theupper and middle reach regions will probably continueto follow what we have termed the ‘first-come, firstserved’rule, to the potential detriment of basin-wideeconomic performance.”50. Safeguards and EIAs should, in fact, go beyondthe “do no harm” principle. One of the main shortcomingsof safeguard analysis as now conducted inChina is that it should be employed upstream at thedesign stage, rather than simply as damage mitigationat a later stage.51. This may have increased unsustainable loggingin other countries to meet China’s import demand.52. From 1993 to 2002, the Bank supported 47water-related projects, most of them with environmentalimplications. By subsector, these included 9 inagriculture/irrigation, 5 in watershed management/forestry, 18 in urban water supply and waste management,6 multipurpose/hydropower dams, 3 inlandwaterways, 4 water resources/flood control, and 2 ruralwater supply. See the background paper on water(Varley 2002) and Annex G.53. Since 1985, the Bank has committed $2.2 billionof total project costs of $7.7 billon to financemajor water investments (water conveyance, treatment,and distribution and WWTPs.)54. See Annex N.55. The Bank has not been involved in privatizationin China, and the government has adopted a cau-150

ENDNOTEStious approach. The misallocation of project risks betweenpublic and private sectors has limited the scopefor nonrecourse project-based lending—build, operate,transfer (BOT) projects are in reality a noncompetitiveform of public procurement (returns areguaranteed, the assets are largely for bulk-water andremain in public control and even management, whilewater distribution is off-limits to investors).56. See Annex N.Chapter 41. This is an official classification. The eastern regionincludes 11 provinces of Liaoning, Hebei, Beijing, Tianjin,Shandong, Jiangsu, Shanghai, Zhejiang, Fujian,Guangdong, and Hainan; the central region includes8 provinces of Heilongjiang, Jilin, Shanxi, Henan, Hubei,Hunan, Anhui, and Jiangxi; and the western region includes12 provinces of Inner Mongolia, Xinjiang, Ningxia,Gansu, Qinghai, Shaanxi, Sichuan, Chongqing, Tibet,Guizhou, Yunnan, and Guangxi.2. For 1993–97: t= 5.97, Adj. R-squared = 0.5443.For 1998–02: t = 1.00, Adj. R-squared = 0.0001.3. The government considers Tibet eligible only forgrants, not loans, because of low repayment capacity.4. Other donors have also stressed infrastructureprojects in China, though the trend is downward. Bilateralofficial development assistance (ODA) commitmentsfor infrastructure were 61 percent of thebilateral total during 1993–97, falling to 38 percent during1999–01. The corresponding figures for healthplus education were 9 percent and 14 percent in therespective periods.5. The repayment system is also one of the mainsources of inequity and perverse incentives. See chapter6 for a discussion of this dilemma.6. It is difficult to test for the existence of a haloeffect because good policy is normally associated withbetter outcomes. That such an effect exists, however,is shown by the example of Indonesia, which saw itscombined percentage of satisfactory and highly satisfactoryratings drop from 79 percent in FY92–97 to47 percent in FY98–02, mainly because of a sharp increasein marginally satisfactory ratings. The declinesurely owed as much to changes in perceptions of Indonesia’soverall performance after the Asian crisis asto actual changes in performance of investment projectsexiting during that period.7. Of the 82 projects approved during FY96–02, only13 have been completed and 8 evaluated.8. The improvement in disbursements and availabilityof counterpart funds may be a response tolower interest rates on IBRD loans. After the Asian crisisin 1997, the government lowered domestic interestrates, causing many provincial and localgovernments to substitute domestic borrowing for useof Bank project funds.9. See Annex N.10. This section draws on a workshop with Chineseofficials and researchers on AAA, supplementary interviews,a specially commissioned review of AAA andsystem reform (Lu 2002), other sector and thematicbackground papers, and internal assessment reviewsof ESW.11. Later named the State Council Organization forReform of the Economic System (SCORES). In November2002, SCORES was merged with the State Developmentand Planning Commission to create theNational Development and Reform Commission.12. Trust funds and central research and networkbudgets supplement spending on China-related ESW,but it is unlikely that this significantly affects China’srelative position. The budget allocation for ESW increasedby two-thirds between FY01 and FY03, however.13. See Annex N.14. This complaint is not unique to China. See reportby OED (2003b) on knowledge services.15. The Bank’s ESW has multiple purposes, as wellas other audiences than Chinese officials and researchers.ESW informs the Board, other donors, andthe broader development community of the Bank’s assessmentof developments in China, and it providesthe analytical underpinning for Bank strategy andlending.16. See Annex N.17. See Annex N.18. This is as much a commentary on the Bank’sapproach to risk management as on the China program.Low management engagement in supervisionis a Bankwide problem.19. According to the Region, the company’s managementtold the supervision mission that some employeeshad been working up to 30 percent overtime,but they assured the mission that overtime is voluntary(indeed, workers are eager for the overtime) and thatworkers are paid overtime premiums as required by law.20. Perceptions may have been influenced by thefact the Bank was not formally involved in judicial re-151

CHINA: AN EVALUATION OF WORLD BANK ASSISTANCEforms before the August 2002 approval of two subprojectsunder the Economic Law Reform Project.21. The share of transport will rise from 24.6 percentduring 1993–02 to 34 percent in the coming CASperiod. (The figures refer to the share of number ofprojects, which is the only figure presented in theCAS.) Using a broad definition of infrastructure that includesenergy, transport, urban, and water supply andsanitation, the share by number of projects will risefrom 51.5 percent to 65 percent. The Bank’s regionalstaff has noted that, though the share of infrastructurelending will rise, the absolute amount will fall becauseof the smaller lending program. See Annex N.22. CAE mission members were, in fact, surprisedto be told repeatedly by local officials that the biggestadvantage of Bank projects was the introduction ofcompetitive procurement and other project managementtechniques because these practices had supposedlydiffused throughout China years before. Onesenior official explained that Bank involvement stillprovides a barrier to political interference in procurement,resulting in large procurement savings onbig ICB projects. If this is the case, the Bank mayneed to look for other instruments than direct involvementin project finance.Chapter 51. See Annex N.2. See background paper by Lu (2002), chapter 6,and Annex E.Chapter 61. Both the Bank’s Regional staff and the governmenthave reservations about the recommendations in thissection. See Annexes N and O, respectively.Annex D1. The Henan (Qinbei) Power project (Loan 3980,approved in fiscal 1996) was canceled at China’s requestbefore being declared effective.Annex K1. The rating for the judicial system may reflect thefact that Bank activity in this area only began in 2002.Annex L1. In this note, assistance program refers to productsand services generated in support of the economicdevelopment of a client country over a specifiedperiod of time, and client refers to the country thatreceives the benefits of that program.152

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