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 Newfarmer Special Representative to the UN and WTO World Bank Geneva, 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 Av. Annual growth, Source: World Bank, China, CEM (2008)

Dramatically reducing poverty (Percent of population that are poor)

Sources? …high savings, investment

….favorable demographics

…and rapid technological progress

Favorable policies…unleashing market forces

…a great leap outward

….better macroeconomic management

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 / 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) ,0006,00011,00016,00021,00026,00031,00036,000 China (2004) GDP per capita, at PPP, in 1995 US$ US Japan South Korea Thailand GDP per capita and services share in GDP

Domestic imbalance between savings and consumption Sectoral savings and investments, percent of GDP

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

…contributing to global imbalances Source: IMF and World Bank Staff Estimates Current account balances, percent of 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 struggling to contain pollution…

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

…but China is still falling short of its targets for improving the environment Emissions in million tons Actual Planned

…contributing to global warming 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?

… Gini index for per capita income Chinese society has become more unequal

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

China’s 11 th 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, SO x, NO x Emissions

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 Rebalancing China’s Economy—Modeling a Policy Package. World Bank China Research Paper 7. Beijing: World Bank (September). Hofman, Bert, and Jingliang Wu “Explaining China’s Development and Reforms” Paper submitted to the Growth Commission ( Kuijs, Louis How Would China’s Saving and Investment Evolve? World Bank Policy Research Working Paper Washington: World Bank. Kuijs, Louis, and Tao Wang China’s Pattern of Growth, Moving to Sustainability and Reducing Inequality. In China and the World Economy Volume 14 No.1 (January).pp Ravallion, Martin, and Shaohua Chen 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 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 Newfarmer Special Representative to the UN and WTO World Bank Geneva, Switzerland