Confronting China’s Growth Challenges: Strategies for Rebalancing

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.

2. 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

3. China has been among the fastest growing economies Av. Annual growth, 1970-2005 Source: World Bank, China, CEM (2008)

4. Sources? …high savings, investment

5. …and rapid technological progress

6. Favorable policies…unleashing market forces

7. …a great leap outward

8. ….better macroeconomic management

9. China’s Key Challenges • How to get more balanced growth? • How to achieve more environmentally sustainable growth? • How to create broadlyshared growth?

10. China is overly reliant on industry and investment Industry share in GDP and Investment over GDP / 50 Investment over GDP ratio China (2004) 45 (percent) 2/ 40 South Korea (1990) Malaysia (1990) 35 Japan (1990) Japan (1980) 30 South Malaysia (1980) Korea Japan 25 India Malaysia 20 US Thailand 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.

11. …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.

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

13. …contributing to global imbalances Current account balances, percent of GDP Source: IMF and World Bank Staff Estimates

14. China’s Key Challenges • How to get more balanced growth? • How to achieve more environmentally sustainable growth? • How to create broadlyshared growth?

15. China is struggling to contain pollution…

16. …and industries are getting more efficient in using energy… Source: Rosen and Houser 2007

17. Emissions in million tons Actual - 2005 21.7 Planned - 2005 14.5 14.1 11.8 13.0 10.6 2000 2005 …but China is still falling short of its targets for improving the environment

18. …contributing to global warming Source: World Energy Outlook, 2006, Reference Scenario

19. China’s Key Challenges • How to get more balanced growth? • How to achieve more environmentally sustainable growth? • How to create broadlyshared growth?

20. Chinese society has become more unequal

21. …largely because of sectoral differences in productivity Source: Poverty Assessment, World Bank forthcoming

22. 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

23. 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.

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

25. 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.