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Speech by the World Bank Managing Director Sri Mulyani Indrawati at the China Development Forum

Sri Mulyani Indrawati

Diaoyutai State Guesthouse

Beijing, China

March 18, 2012

As Prepared for Delivery

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Speech at China Development Forum

On the Road to 2030

Sri Mulyani Indrawati, Managing Director,

The World Bank

Diaoyutai State Guesthouse, Beijing, March 18, 2012

Honorable Ministers, Ladies and Gentlemen,

Thank you for inviting me to speak again at this important and prestigious forum.

Christine has talked about the world economy with sobering outlook and fiscal risks looming, especially in developed countries.

I would like to focus on China’s development prospects.

Since we last met in March 2011, China has maintained -rapid growth,- contained inflation, unveiled a far-reaching plan to guide its reforms over the next 5 years, and taken on a greater role in global governance.

It has done so in the setting of a sluggish global economy.  

And China’s growth is not only good for its own citizens, but for developing countries at large, which collectively grew by 6 % in 2011, compared to a paltry growth rate of 1.6% in high income countries.

China’s achievements over the past thirty-two years have been spectacular: With growth averaging almost 10 percent per year - driven mainly by an investment and export led growth - China joined the group of upper-middle income countries in 2010, with a per capita GDP of approximately $5000.

Over this period, some 600 million Chinese citizens pulled themselves out of poverty.

China’s rapid development was the combined result of many factors:

A supportive external environment of high growth rates and a more globalized production, accommodated China’s external opening. 

A range of domestic policy reforms:

  • Comprehensive market-oriented reforms reduced distortions, increased competition, labor mobility, and unlocked infrastructure bottlenecks – creating productivity gains.
  • Improvements in the well-being of citizens and creation of jobs for a growing and increasingly urbanized labor force – creating a significant middle class.
  • New technology allowed China to “leapfrog” to higher levels of productivity.

China succeeded not only through what it did, but how it did it.  Visions articulated in multi-year plans were implemented vigorously, pragmatically and diligently.

Test reforms in selected provinces or villages, draw lessons, adjust and consolidate by scaling up across the country.  Repeat the same process at the next level of development.

Eventually, many small steps will yield large results.

Development is a never ending journey fraught with uncertainties. New opportunities and risks will surface on the road.  Constant change requires constant strategic adjustment. China has excelled in this.

Looking forward, the external environment will be less supportive for export-driven economies such as China.

The future offers new opportunities through:

  • deepened globalization,
  • growth of emerging economies,
  • a growing middle class globally from 1.8 billion to 5 billion in which 2/3 in Asia (2030) and
  • new technologies.

However, the world has entered a phase of low growth, often termed “the new normal”, with heightened macro-financial risks in the developed economies.

China’s growth model may, therefore, need to be redesigned to be more balanced: socially, environmentally and globally.  It is not about the level of growth, it is about a better quality of growth, it is about equality and inclusive growth.

The weakened external demand and an environment of slower and low global growth will shift the focus to domestic demand growth.

On the domestic side, the move from investment-led growth to consumption and sustainable growth will highlight several pressures:

  • Demographic change – China will be growing older, have a shrinking labor force and labor costs will rise
  • Social pressures – arising from inequality (rural-urban, agricultural- manufacturing), with people seeking equitable outcomes
  • Environmental pressures – demands for greener growth and less energy consumption/intensity and
  • Calls for better and more efficient urban agglomeration.

Going forward, a focus of reforms could be towards:

  • Promotion of innovation to maximize productivity
  • Investment in human capital, including improving access to and quality of health care, education and social protection, which is important to maintain social harmony
  • Providing right incentives and signals for a greener, more energy efficient technology, and
  • Land policy, reducing price distortions, and improving processes to reflect a balance between industrial/urban growth and the rural/agricultural needs.

Increasing inequality is found in many MICs.  The large differential in access to public services and inefficiencies in those public services (often due to a lack of competition) is a great challenge and one that will need to be addressed.

When you combine this with an aging population, a growing middle class, and a pension program, China is facing double threats – MIC trap (lag of adequate institutional adjustments) and the trap of a High Income trap of fiscally unsustainable entitlements.

A larger allocation of fiscal resources to social services would need to be combined with an improvement in those services, by enhancing capacity and introducing greater transparency, accountability and competition based on quality and efficiency of the service delivery.

Improving and strengthening fiscal decentralization is imperative – matching local government revenue to expenditure responsibility, more equitable transfers and introducing greater fiscal transparency, including bring public resources “on budget”.

China’s win-win relations with the rest of the world could be carried forward through maintaining openness and increasing the globalization of Chinese firms. Given the increasing size of the Chinese economy and its role as a global player, China will be expected to change its role from a recipient of global standards to one of actively shaping global standards in finance, foreign direct investment (FDI), climate change and governance.  This compatibility of domestic policy with global standards is increasingly important.

A central element of this strategy will be rethinking of the role of government.  Redesigning the growth model to be more balanced is important not only for China but also for other emerging economies.

This is the most difficult of task, based on my own experience as Finance Minister in Indonesia.  

The role of government needs to be reoriented. A direct   role or intervention of government in building infrastructure, implementing industrial policy based on comparative advantage and adopting open policy on trade and investment for technological catch up is suitable for early stage of development to reap “the advantages of backwardness” by rapidly traversing a well traveled path.

When a country edges closer to the technology frontier, direct government intervention may actually retard growth, not help it. Government needs to shift from being a direct player to becoming a regulator and enabler of the market – making sure markets allocate resources efficiently, that firms are strong and innovative enough to compete internationally, and that the labor force is well educated and competitive to respond to an ever changing environment. 

Government will need to provide more intangible public goods and services. These include systems, rules, and policies that increase production efficiency, promote competition, facilitate specialization, enhance the efficiency of resource allocation, protect the environment, and reduce risks.

As in many reform programs throughout the history of countries, success will depend on the ability to get wider and critical support for change from those who believe in the medium and long term gains, while dealing with those who have incentives to maintain the status quo.

China will chart its own unique development path to address these challenges. If successful, China could well become a harmonious creative and modern society, closing the gap to the developed economies well within our lifetime. This is in the interest of China and the World at large. We are all stakeholders in this endeavor. Good luck on the road ahead!