Transcript China: Confronting the Challenges of Rebalancing Growth Richard Newfarmer

China: Confronting the Challenges
of Rebalancing Growth
Richard Newfarmer
Special Representative to the UN and WTO
World Bank
Geneva, Switzerland
This presentation is adapted from a presentation by Bert Hofman
and Louis Kuijs of the World Bank with assistance of Min Zhao,
Jianping Zhao, and Jianwu He.
Main points…
• China rapid growth has been based on an unusual
combination of capital accumulation and productivity
growth
• But success has produced new challenges – imbalances,
environmental degradation, and income inequality –
that have to be addressed
• Vigorous implementation of new policies can rebalance
growth and lead to a better quality of life
China has been among the fastest growing
economies
Av. Annual growth, 1970-2005
Source: World Bank, China, CEM (2008)
U
S
v
-A
LI
C
al
ay
si
a
M
ne
si
a
In
do
Ea
st
A
si
aA
an
a
B
ot
sw
na
C
hi
v
9
8
7
6
5
4
3
2
1
0
Sources? …high savings, investment
Savings, Investment
Percent of GDP
45
Savings
40
35
30
25
Investment
20
15
0
4
8
12
16
20
24
Years since reform take-off
28
32
3
…and rapid technological progress
Contribution of TFP per Decade Since Growth Take-off
(percentage point growth)
Decade 0
Japan
Decade 1
Decade 2
Decade 3
2.31
0.39
0.20
0.85
NIEs
1.05
1.49
2.33
China
3.28
3.98
3.36
India
1.52
1.50
3.17
Indonesia
3.27
0.96
2.22
-1.92
Source: IMF (2006) and authors’ estimates for Indonesia based on CIEC and BPS data.
Note: Indonesia’s TFP is estimated assuming an initial capital output ratio of 1.1, a depreciation rate of 4 percent, a
capital share in output of 0.3.
Favorable policies…unleashing market forces
1978
1985
1995
2003
Retail
3
34
89
96
Producer Goods
0
13
78
87
Farm Commodities
6
40
79
97
SOEs
77
--
33a
22b
Collectives
23
--
36a
6.4b
Foreign, Private, Others
0
--
31a
72b
Market price (percent of all goods
subject to market price)
Ownership of Industrial Production
(percent of output)
Sources: Naughton (2006), OECD (2005), China Statistical Yearbook
Notes: a=1996; b=2004
…a great leap outward
70
Percent of GDP
Percent of GDP
7
60
6
50
5
40
4
30
3
Merchandise trade
20
2
FDI
10
1
0
0
1978
1981
1984
1987
1990
1993
1996
1999
2002
….better macroeconomic management
18
16
Potential GDP
(Change, in percent)
GDP
14
12
10
8
6
4
2
1978
1982
1986
1990
1994
1998
2002
China’s Key Challenges
• How to get more balanced growth?
• How to achieve more environmentally
sustainable growth?
• How to create broadly shared growth?
China is overly reliant on industry and
investment
Industry/ share in GDP and Investment over GDP
50
Investment over
GDP ratio
(percent) 2/
45
China (2004)
40
South Korea
(1990)
Malaysia (1990)
35
Japan (1990)
Japan (1980)
30
Japan
25
South
Korea
Malaysia (1980)
India
20
US
Thailand
Indonesia
Malaysia (1970)
15
10
Malaysia
Share of industry in value added (percent) 3/
Malaysia (1960)
10
20
30
40
50
Sources: World Development Indicators, NBS (for China), and staff estimates.
1/ Using data in current prices. Data for 2001, unless otherwise indicated.
2/ Assuming that, of the revision of GDP, 85 percent is contributed by consumption, and 15
percent by investment.
3/ Including construction, as is the case in most countries.
60
…while services are underdeveloped
GDP per capita and services share in GDP
90
Services sector, as share of GDP (percent)
80
US
70
60
Japan
South
Korea
50
Thailand
40
China (2004)
GDP per capita, at PPP, in 1995 US$
30
1,000
6,000
11,000
16,000
21,000
Sources: World Development Indicators and NBS (for China).
1/ Using data in current prices. Data for 2001, unless otherwise indicated.
26,000
31,000
36,000
Savings remain high…while consumption stays
low (as share of GDP)
65
60
Private consumption share in GDP
55
Wage share in GDP 1/
50
45
40
35
1993
1995
1997
1999
2001
2003
2005
…contributing to global imbalances
Current account balances, percent of GDP
10
8
2000
2001
2002
2003
2004
2005
2006
6
4
2
0
China
Euro area
-2
-4
-6
Source: IMF and World Bank Staff Estimates
-8
Japan
United States
China’s Key Challenges
• How to get more balanced growth?
• How to achieve more environmentally
sustainable growth?
• How to create broadly shared growth?
China is struggling to contain pollution…
…and industries are getting more efficient in
using energy…
PAPER AND PULP
NON-FERROUS
CEMCEMENT & GLASS
IRON & STEEL
CHEMICALS
KG coal equivalent per RMB 1000 output
1800
1600
1400
1200
1000
800
600
400
200
0
1995
1996
1997
Source: Rosen and Houser 2007
1998
1999
2000
2001
2002
2003
2004
2005
…but China is still falling short of its targets for
improving the environment
Emissions in million tons
25
Actual - 2005
21.7
20
Planned - 2005
14.5
15
14.1
11.8
10
13.0
10.6
2000
2005
5
0
SO2
Soot
Water Discharge
…contributing to global warming
CO2 Emission, Million Ton
12000
China
10000
United
States
8000
6000
OECD Europe
4000
2000
0
1990
2004
Source: World Energy Outlook, 2006, Reference Scenario
2015
2030
China’s Key Challenges
• How to get more balanced growth?
• How to achieve more environmentally sustainable growth?
• How to create broadly shared growth?
Chinese society has become more unequal
Hungary 1999
China 1980
Germany 2000
India 2000
Indonesia 2002
Italy 1999
United States 1999
Russia 1999
China 2003
Argentina 2001
Brazil 2001
20
25
30
35
40
45
50
55
60
…largely because of sectoral differences in
productivity
Source: Poverty Assessment, World Bank forthcoming
The 11th 5 Year Plan recognizes these problems, but China
will have implement specific policies to rebalance growth
• Internalize externalities
– Tax energy use
– Price land at value
– Price water at opportunity costs
– Remove tax preferences for foreign investment
– Subsidize energy saving technology
• Reduce savings
– Impose dividends on State Enterprises
– Spend more on education, health, social welfare
– Increase flexibility of RMB
The 11th 5 Year Plan recognizes these problems, but China
will have implement specific policies to rebalance growth
• Encourage labor-intensive growth
– Reduce restrictions on labor mobility
– Reduce payroll taxes
– Increase competition in services
• Improve regulatory controls and responsiveness
– City planning
– Building norms
– Land use (national and local)
– Revise political incentives at local level
If it is able to confront these challenges, China will be able to
forge a more broadly shared, sustainable path of economic
development.
References and Further Reading
This presentation is based on World Bank. 2008. China: Towards a Resource
Saving Society. Country Economic Memorandum for China (forthcoming).
Further Reading
Berrah, Noureddine, Fei Fang, Roland Priddle and Leiping Wang, Sustainable Energy in China: The
Clising Window of Opportunity, Washington Dc, World Bank, ESMAP.
He, Jianwu, and Louis Kuijs. 2007. Rebalancing China’s Economy—Modeling a Policy Package.
World Bank China Research Paper 7. Beijing: World Bank (September).
Hofman, Bert, and Jingliang Wu 2007. “Explaining China’s Development and Reforms” Paper
submitted to the Growth Commission (www.growthcommission.org).
Kuijs, Louis. 2006. How Would China’s Saving and Investment Evolve? World Bank Policy
Research Working Paper 3958. Washington: World Bank.
Kuijs, Louis, and Tao Wang. 2006. China’s Pattern of Growth, Moving to Sustainability and
Reducing Inequality. In China and the World Economy Volume 14 No.1 (January).pp. 1-14.
Ravallion, Martin, and Shaohua Chen. 2004. China’s Uneven Progress in Poverty Alleviation. Policy
Research Working Paper Series 3408, The World Bank, Washington DC.
China: Confronting the Challenges
of Rebalancing Growth
Richard Newfarmer
Special Representative to the UN and WTO
World Bank
Geneva, Switzerland
This presentation is adapted from a presentation by Bert Hofman
and Louis Kuijs of the World Bank with assistance of Min Zhao,
Jianping Zhao, and Jianwu He.