Executive Summary

The global agenda for sustainable development; China’s role; the urgency of the next decade

For the first time since reconstruction and the building of an open, international system after the Second World War, the world has a truly global agenda: fostering sustainable development (the Sustainable Development Goals, SDGs, UN, September 2015) and managing climate change (Paris, COP21, UNFCCC, December 2015), in each case, founded on agreements embraced by more than 190 nations. The investments of the next decade, the twenties, particularly in infrastructure, will be key to not only avoiding dangerous climate change, but also to delivering the “strong, balanced, sustainable and inclusive growth” articulated as a key objective of the G20.  China has contributed strongly and constructively to the creation of this global agenda; and China is crucial to its delivery.

To meet the objective of maintaining global temperatures increases “well-below” two degrees Celsius, the Paris target, global emissions have to peak in the next few years and by 2030 should be around 20% lower than now.  In the next 15 years, the world’s infrastructure will roughly double. If countries continue to build dirty infrastructure along current patterns, they will lock the world into a pathway that would make the Paris targets unachievable at the same time as determining that cities will be severely polluted and congested and ecosystems harmed beyond repair. That would be to create a dangerous and destructive future, not one of sustainable development, growth and poverty reduction.

Change and reform are urgent, at local, national and international levels. As the world’s largest emitter, although not on a per capita basis, China is already embarking on a more sustainable growth model.  China’s sheer size, its ever more prominent example as it has grown so rapidly, and its increasing investments outside China make it clear that China is critical, internally as well as externally.  Large though China is, and will be, it is still around one-quarter of global emissions and we must be clear that this is a world responsibility:  openness, internationalism and collaboration, as China has advocated so strongly, have never been more important.

A sustainable BRI as the core both of China’s next phase of development and of delivering the global agenda

The Belt and Road Initiative (BRI) can play a crucial role in China’s strategic shift to services, higher end manufacturing, increased innovation and a more skilled labour force. Building in part on a history of old trading links, it will increase connectivity and thus strengthen trade as well as financial links across Eurasia, Middle East, Africa and the Americas.  With rising productivity and wages taking it to a Lewis-turning point, China’s structure of production is moving strongly towards the service sector and higher technology. Simultaneously, external opportunities for low-cost manufacturing are slowing down with China’s market share already large, slower world growth, and the rise of competing low cost countries.  The focus thus turns to outward investments linked to major internal structural change.  The BRI is thus a logical and strategic next step in China’s development.

The BRI has real potential as a core driver of strong, sustainable and inclusive growth in partner countries and the world as a whole.  At the same time, the BRI can realise this powerful potential only if the investment is managed in relation to sound environmental and climate criteria; if not, it could undermine the global agenda and create profound risks for the future of world development and poverty reduction.  If China were to foster investment in heavily polluting energy or transport systems in partner countries, it would not only make the management of global climate change much more difficult but also make the investments vulnerable to policies in recipient countries that do follow the global agenda, thus increasingly stranding outdated and polluting assets.  It would be unfortunate to make investments that essentially depend for their success on partner countries pursuing policies that are damaging for the world as a whole.

The world, including China, is indeed moving in the direction of cleaner technologies and more efficient and forward-looking energy and climate policies. This is in part a result of powerful technical progress and innovative investment in which China has played a strong and constructive role and which have opened a wealth of new opportunities. And in part it is due to the recognition that the environmental, health and socio-economic consequences of fossil-fuel powered growth can be very damaging, with millions, for example, dying from air pollution. Some of the damage can be very costly, or impossible to reverse.  China’s experience is fundamental here; and China can and is turning this experience into valuable lessons for countries at earlier stages in their development, and, indeed, for many richer countries.

Chinese outward investments, with the BRI at its core, can drive the new growth model across the world that China is pioneering domestically. Middle-income-countries in particular will account for 70 percent of the new investments in infrastructure. Sustainability of these investments will be critical not only to inclusive growth in those countries but also to the sustainability of climate and ecosystems of the planet as a whole.  A sustainable BRI builds a safer world; it can be a key element in building and deepening the rules based responsible openness and internationalism that China has championed so strongly.

Sustainable and inclusive growth in partner countries

Investments in a clean BRI can provide many potential benefits for partner countries. First, better connectivity through trade hubs and transport networks will lead to integration both with the changing Chinese value chains and with new global markets. Second, better infrastructure will also enhance domestic integration that can lead to more specialisation and higher-end economic growth. Third, the resource and energy efficiency that such investments can facilitate will be powerful sources of growth and emissions reduction. Fourth, it increases the possibilities for joint ventures to transfer skills from China outwards, potentially leading to ‘upskilling’ in partner countries. Fifth, infrastructure can be central to health, education, gender, and city goals and those around inequality; these lie at the heart of the SDGs. Sixth, more reliable and affordable access to clean electricity is still a vital, unmet demand in many countries along the BRI and a necessary condition for economic growth and poverty reduction (and, again, a key element in the SDGs).

While strong infrastructure is a necessary condition for sustainable and inclusive growth, it is not sufficient.  Improved public services, education and effective public administration are crucial to harnessing the full potential of advances in infrastructure and new trade links. Such policies, investments and reforms will in turn enable and increase the quality and quantity of infrastructure investments.  At the core of these measures should be fiscal reforms to generate incentives for cleaner growth, maintain fiscal sustainability, and reduce corruption. A national and local tax reform agenda can raise revenue, decrease the costs of doing business and reduce the risk of financial and macro-economic instability.  As well as sharing technology, China, through its institutions, finance mechanisms, and practices can help trading partners to improve overall delivery and governance, build institutional capacities and manage liabilities effectively.  In sum, the BRI and the fostering and supporting of good public policy by helping build clean, inclusive and sustainable infrastructure, can promote sustainable growth and lasting poverty reduction in partner countries.  In so doing, it will contribute to a more sustainable world.

The next stage in China: domestic reforms and rebalancing can foster sustainable growth within and beyond China

Chinese structural and fiscal reforms are key elements in building the next stage of China’s development strategy.  These reforms could also offer important and relevant examples for partner countries, particularly in the context of the BRI.  There are, of course, many important dimensions to these reforms. We focus here on three broad action areas, following from the basic economic logic described above.  They are: (i) strong strategic investment for sustainable and innovative cities in a more service and high-tech economy; (ii) investment in people, human capital, and the management of a rapid and just transition in jobs and activities; and (iii) reforming local public finance and services for strong, creative and stable cities and regions.

A clear strategy for city development: sustainable investment for dynamic innovation

China is restructuring rapidly to move to a more service-oriented and higher technology economy, to reduce its greenhouse gas emissions, and to clean the environment. Investment and reforms in the organization and in the infrastructure of cities form a vital part of that process. Chinese cities have suffered severely under poor air quality and intense congestion.  These investments and reforms would enable China’s cities to become much more productive, to retain and attract a high calibre work force, and to act as dynamic centres for the innovation that will drive China forward.

Investment in growth/labour/upskilling

A more sustainable, clean growth model of the kind China is seeking will involve different skills and industries.  And China will be phasing out inefficient and polluting activities. In other words, a major transition involving substantial dislocation. It is important to invest in and manage such a transition carefully; this was clearly recognised and was made a priority in the 13th plan (2016-2020). The new growth model holds vast opportunities for employment, in highly skilled jobs associated with investments in services, high-tech, innovation, and renewable energy.  The digital economy and artificial intelligence are likely to be central to much of this change, requiring strong and continuing investments in education and training. Some aspects of the socio-economic consequences of the transition can be managed by investment in people and livelihoods as part of retraining and reskilling.  Nevertheless, there will be some who may find it difficult to grasp such new opportunities, and direct income support will inevitably be part of managing a “just transition”.  How China manages the profound changes in its next phase of development will carry important lessons for many others.

Local service provision and taxation

Local infrastructure and public services are needed to strengthen, stabilise and reform China’s existing towns and cities, many of which have grown very rapidly.  They are also needed to sustain new “hubs” and for private-sector activities to facilitate a shift in production and employment to the interior, or along the international corridors. The performance of such infrastructure and services will require local management and creativity. Own-source tax handles are a key element to anchor the spending, provide revenue streams, assure sustainable access to credit, without buildup of liabilities and risk, and to provide signals to the private sector.  Without strong focus on local public finance and services, there could be persistent risks from the fragility of local finances.  Without clear incentive structures to radically reduce congestion, pollution and greenhouse gas emissions, many cities could remain or become unproductive, unhealthy and unattractive places to live and work.

Conclusions

•       China’s role in developing the global agenda for sustainable growth and managing climate change has been, and remains, crucial. The purposeful and considered transition to a sustainable economy within China, together with a well-planned BRI delivering investment in sustainable infrastructure, are of vital importance to the delivery of that agenda; in other words, for sustainable and inclusive growth and poverty reduction across the world. Just as China was a leader in shaping the global agenda of sustainable development and managing climate change in this decade, it can be a leader in the coming decade in driving forward the new growth story of the 21st century.

•       Using its powerful voice in the international arena to champion internationalism and openness while directing its outward investment flows into sustainable infrastructure, China can play a key role in building a strong, sustainable and collaborative international system.

•       Through its domestic reforms, overseas investment and international leadership, China can help align global policy and investment with the urgent imperative to decarbonize the global economy.

•       China’s internal reform agenda is not only vital to its next stage of development and sound world growth, it will have many lessons to share with partner countries. The way China promotes sustainable investments, sound policies and a strong investment climate will contribute greatly towards the sustainable development of Chinese partner countries, in particular along the Belt and Road.  This includes investing in skills and managing dislocation. Two or three decades ago, China was importing skills, technology and financial instruments; the next decade will see strong flows the other way.

•       This is the growth story, within China and via the BRI, that the world needs if we are to fight poverty, confront climate change, overcome natural resource and environmental challenges, and provide opportunities for shared prosperity.  Both the intense urgency of action and the outstanding opportunities in new investment and innovation, particularly in sustainable infrastructure, are insufficiently understood.  That must change. In this new story, China will surely lead.