China: Confronting the Challenges of Rebalancing Growth

1
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.

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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

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China has been among the fastest growing economies
Av. Annual growth, 1970-2005
Source World Bank, China, CEM (2008)
4
Dramatically reducing poverty
(Percent of population that are poor)
5
Sources? high savings, investment
6
.favorable demographics
7
and rapid technological progress
8
Favorable policiesunleashing market forces
9
a great leap outward
10
.better macroeconomic management
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Chinas Key Challenges

• How to get more balanced growth?
• How to achieve more environmentally sustainable
  growth?
• How to create broadly shared growth?

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China is overly reliant on industry and investment
Industry share in GDP and Investment over GDP

/
50
Investment over
GDP ratio
45
China (2004)
(percent) 2/
40
South Korea
(1990)
Malaysia (1990)
35
Japan (1990)
Japan (1980)
30
South
Malaysia (1980)
Korea
Japan
25
India
Malaysia
20
Thailand
US
Indonesia
Malaysia (1970)
15
Share of industry in value added (percent) 3/
Malaysia (1960)
10
10
20
30
40
50
60
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.
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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
China (2004)
40
GDP per capita, at PPP, in 1995 US
30
1,000
6,000
11,000
16,000
21,000
26,000
31,000
36,000
Sources World Development Indicators and NBS
(for China).
1/ Using data in current prices. Data for 2001,
unless otherwise indicated.
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Domestic imbalance between savings and consumption
Sectoral savings and investments, percent of GDP
15
Savings remain highwhile consumption stays low
(as share of GDP)
16
contributing to global imbalances
Current account balances, percent of GDP
Source IMF and World Bank Staff Estimates
17
Chinas Key Challenges

• How to get more balanced growth?
• How to achieve more environmentally sustainable
  growth?
• How to create broadly shared growth?

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China is struggling to contain pollution
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and industries are getting more efficient in
using energy
Source Rosen and Houser 2007
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but China is still falling short of its targets
for improving the environment
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contributing to global warming
Source World Energy Outlook, 2006, Reference
Scenario
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Chinas Key Challenges

• How to get more balanced growth?
• How to achieve more environmentally sustainable
  growth?
• How to create broadly shared growth?

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Chinese society has become more unequal
Gini index for per capita income
24
Chinese society has become more unequal
25
largely because of sectoral differences in
productivity
Source Poverty Assessment, World Bank forthcoming
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Chinas 11th Five Year Plan

• Harmonious Society
• Five Balances
• Scientific approach to development
• Adds up to more balanced, sustainable, and
  equitable growth.
• Specific targets on energy intensity, water
  intensity, SOx, NOx Emissions

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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

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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.
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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
  Chinas EconomyModeling a Policy Package. World
  Bank China Research Paper 7. Beijing World Bank
  (September).
• Hofman, Bert, and Jingliang Wu 2007. Explaining
  Chinas Development and Reforms Paper submitted
  to the Growth Commission (www.growthcommission.org
  ).
• Kuijs, Louis. 2006. How Would Chinas Saving and
  Investment Evolve? World Bank Policy Research
  Working Paper 3958. Washington World Bank.
• Kuijs, Louis, and Tao Wang. 2006. Chinas 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.
  Chinas Uneven Progress in Poverty Alleviation.
  Policy Research Working Paper Series 3408, The
  World Bank, Washington DC.

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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.