China’s Knowledge Revolution
by Douglas Zhihua Zeng

Confronting Challenges Through Knowledge

The knowledge revolution provides countries with opportunities to strengthen their economic and social development by suggesting more efficient ways to produce goods and services and deliver them more effectively and at lower cost to more people. This is also the case for China which faces the following daunting challenges:

• Providing employment. Conservative estimates indicate that China will need to create 90 million to 100 million jobs during this decade to provide employment for the projected 40 million to 50 million people no longer required in the agriculture sector, state-owned enterprises, and town and village enterprises, as well as the new entrants to the labor force. However, other estimates suggest that the number of jobs that has to be created is actually much larger, from 200 million to 300 million. Effective unemployment is already about 10 percent, and regardless of which figures are correct, job creation is at the top of policymakers’ list of priorities.

• Maintaining growth and international competitiveness. China’s rapid growth has been possible because of the shifting of workers and resources from low-productivity agriculture to industry and because of high rates of both domestic and foreign investment. However, given the huge burden posed by state-owned enterprises and nonperforming loans, maintaining economic growth will be difficult.

• Reducing income and regional inequalities. China’s rapid growth has been concentrated in the coastal regions, while the central and western provinces are falling behind. As a result, inequality is growing. Some people have access to capital, education, and other assets, but others still rely primarily on their own labor in subsistence agriculture or in low-productivity enterprises.

• Sustaining the environment. Degraded water quality has damaged agriculture, ecosystems, and fisheries, with air pollution becoming a serious threat to the economy and the population. Each year more than 2 million people die from air and water pollution, the result of rapid industrialization and urbanization. China therefore needs to move away from resource-intensive development and move into services and knowledge-based development.

To confront these challenges and take full advantage of the opportunity to leapfrog provided by the knowledge revolution and knowledge economy, China has decided to undertake the transformation toward a knowledge- and service-based economy. In 1998 the government officially adopted the concept of a knowledge economy.

World Bank Recommendations

In September 2000, responding to the government’s request to provide input for its 10th Five-Year Development Plan from a knowledge economy perspective, the World Bank produced a report titled China’s Development Strategy: The Knowledge and Innovation Perspective. The Bank later significantly expanded and enriched the report, which is now called China and the Knowledge Economy: Seizing the 21st Century, which is available in both English and Chinese. It highlights the following policy recommendations:

• Redefining the role of the state by having the state back off its role as controller and producer and turning to becoming the architect of a new market economy and knowledge-based system.

• Revamping education by placing more emphasis on higher education and lifelong learning.

• Developing the information infrastructure by deploying foreign resources and expanding Internet access and domestic content.

• Diffusing technology throughout the economy by strengthening technology diffusion programs.

• Strengthening research and development (R&D) by increasing funding and paying more attention to strategic areas such as agriculture and the environment.

• Exploiting global knowledge by acquiring foreign knowledge through direct foreign investment and technology licensing

To further implement the strategies proposed in the report, the government asked the Bank to provide help with building a lifelong learning system based on distance (online) learning (see box 1). The Bank responded by establishing the China Lifelong Learning Project in 2002, which is currently being implemented. The project addresses a wide range of issues, such as the government’s new role, the expansion of distance education, the demand for and supply of labor, the required training and retraining, and the accreditation of learning programs. Meanwhile, the World Bank Institute’s Knowledge for Development Program organized a series of knowledge economy training courses for Chinese policymakers and other stakeholders in association with the Global Development Learning Network.

Initial Impact

Preliminary assessments indicate that China has made major strides since it embraced the knowledge economy concept as follows:

• China’s leadership at various levels has recognized the importance of a knowledge strategy and has incorporated components of such a strategy into the country’s 10th Five-Year Development Plan.

• China’s overall economic growth has recovered from the momentum lost since the industrial revolution, has come back on track following market reforms, and since the 1990s has entered a period of stable growth (see the figure). In 2002 the government implemented employment and social security system policies. From 1998 to 2001, of 25.5 million laid-off workers, 4.2 million (almost 20 percent) were re-employed. By the end of 2001, 140 million people were participating in the pension insurance plan.

• China has almost doubled its tertiary enrollment ratio from 7 percent in 1997 to 13 percent in 2001. It has also began to unleash the strength of private education, and in 2002 the government passed the Private Education Promotion Law.

• China has increased its R&D expenditures from 0.7 percent of GDP in 1998 to 1 percent in 2001. In the last five years it has also significantly strengthened the role of the private sector in R&D: enterprises’ R&D expenditures as a percentage of their total expenditures increased from 37 percent in 1996 to 60 percent in 2000, mostly because of the transformation of government research institutes into independent units.

• During the last five years China’s average annual growth rate has been 32 percent. The value added from the information industry was 4 percent of GDP in 2001, up from 2 percent in 1996. The information technology industry is expected to double in gross product by 2005 and to increase its share of GDP to 7 percent. In addition, the telephone penetration rate is expected to increase from 24 percent in 2001 to 40 percent in 2005. According to the latest estimates, the number of Internet users already exceeds 50 million.

Given its size and its unique position of being both a developing country and the second largest economy in the world (in purchasing power parity terms), China has no model to follow. However, it can leapfrog to a knowledge economy, and its success could chart a new path for other developing countries. The adoption of a knowledge strategy must be carried out in a systematic way, with priorities set and actions sequenced for each aspect of policy. In addition, the implementation of a knowledge strategy requires full commitment from the highest levels of government and strong coordination across functional sectors and between the central and local governments.

The author is a researcher at the World Bank Institute and participated in the research and writing of China and the Knowledge Economy: Seizing the 21 Century. He can be reached at Zzeng@worldbank.org.