China: Confronting the Challenges of Rebalancing Growth

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.

Richard NewfarmerSpecial Representative to the UN and WTO

World BankGeneva, Switzerland

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

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China

Botsw

ana

East A

sia-

Av

Indone

sia

Mal

aysi

a

LIC -A

vUS

Av. Annual growth, 1970-2005

Source: World Bank, China, CEM (2008)Source: World Bank, China, CEM (2008)

Sources? …high savings, investment

15

20

25

30

35

40

45

0 4 8 12 16 20 24 28 32 36

Savings, InvestmentPercent of GDP

Years since reform take-off

Investment

Savings

…and rapid technological progress

Contribution of TFP per Decade Since Growth Take-off (percentage point growth)

Decade 0 Decade 1 Decade 2 Decade 3

Japan 2.31 0.39 0.20

NIEs 1.05 1.49 2.33 0.85

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

Market price (percent of all goods

subject to market price)

Retail 3 34 89 96

Producer Goods 0 13 78 87

Farm Commodities 6 40 79 97

Ownership of Industrial Production

(percent of output)

SOEs 77 -- 33a 22b

Collectives 23 -- 36a 6.4b

Foreign, Private, Others 0 -- 31a 72b

Sources: Naughton (2006), OECD (2005), China Statistical Yearbook

Notes: a=1996; b=2004

…a great leap outward

0

10

20

30

40

50

60

70

1978 1981 1984 1987 1990 1993 1996 1999 2002

0

1

2

3

4

5

6

7

Merchandise trade

FDI

Percent of GDP Percent of GDP

….better macroeconomic management

(Change, in percent)

2

4

6

8

10

12

14

16

18

1978 1982 1986 1990 1994 1998 2002

Potential GDP

GDP

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 /

10

15

20

25

30

35

40

45

50

10 20 30 40 50 60

Share of industry in value added (percent) 3/

Investment over GDP ratio

(percent) 2/

Thailand

South Korea

US

Indonesia

Japan (1980)

Malaysia (1970)

Malaysia (1980)

Malaysia (1990)

Malaysia

Japan

Japan (1990)

Malaysia (1960)

India

China (2004)

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.

South Korea (1990)

Industry share in GDP and Investment over GDP

…while services are underdeveloped

Sources: World Development Indicators and NBS (for China).

1/ Using data in current prices. Data for 2001, unless otherwise indicated.

Services sector, as share of GDP (percent)

30

40

50

60

70

80

90

1,000 6,000 11,000 16,000 21,000 26,000 31,000 36,000

China (2004)

GDP per capita, at PPP, in 1995 US$

US

Japan

South Korea

Thailand

GDP per capita and services share in GDP

Savings remain high…while consumption stays low (as share of GDP)

35

40

45

50

55

60

65

1993 1995 1997 1999 2001 2003 2005

Private consumption share in GDP

Wage share in GDP 1/

…contributing to global imbalances

Source: IMF and World Bank Staff Estimates

Current account balances, percent of GDP

-8

-6

-4

-2

0

2

4

6

8

10

China Euro area Japan United States

2000200120022003200420052006

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…

0

200

400

600

800

1000

1200

1400

1600

1800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

KG

co

al e

qu

iva

len

t p

er

RM

B 1

00

0 o

utp

ut

PAPER AND PULP NON-FERROUS CEMCEMENT & GLASS IRON & STEEL CHEMICALS

Source: Rosen and Houser 2007

…but China is still falling short of its targets for improving the environment

0

5

10

15

20

25

SO2 Soot Water Discharge

Emissions in million tonsEmissions in million tons

21.7

14.5

11.8

10.6

14.1

13.0

2000 2005

Actual - 2005

Planned - 2005

…contributing to global warming

0

2000

4000

6000

8000

10000

12000

1990 2004 2015 2030

CO2 Emission, Million Ton

China

United States

OECD Europe

Source: World Energy Outlook, 2006, Reference Scenario

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

20 25 30 35 40 45 50 55 60

Brazil 2001

Argentina 2001

China 2003

Russia 1999

United States 1999

Italy 1999

Indonesia 2002

India 2000

Germany 2000

China 1980

Hungary 1999

…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

• 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

The 11th 5 Year Plan recognizes these problems, but China will have implement specific policies to rebalance growth

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

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.

This presentation is based on World Bank. 2008. China: Towards a Resource Saving Society. Country Economic Memorandum for China (forthcoming).

Further Reading

China: Confronting the Challenges of Rebalancing Growth

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.

Richard NewfarmerSpecial Representative to the UN and WTO

World BankGeneva, Switzerland