The Big Questions China Still Has to Answer

September 2, 2011

Robert Zoellick As first published on September 1, 2011 in the Financial Times

The world’s economic leaders need to “rebalance” their thinking as well as their economies. Fiscal and monetary policies have dominated. That makes sense to a degree: decisions on deficits, debt and the eurozone this autumn may well determine whether the global economy slides deeper into danger, or begins the long climb back. But these policies are insufficient for sustained growth: we need action on the structural dynamics to generate jobs, higher productivity, and a sustainable long-term rebalancing. What happens in China is as important as Europe, Japan, or the United States.

China’s growth has been a source of strength in the crisis, but its leaders know their growth model is unsustainable. For 30 years, China has enjoyed average annual growth of about 10 per cent. In 1990, its income per capita was 30 percent lower than the average for Sub-Saharan Africa – today, it is three times greater, over $4,000. By 2030, if China reaches a per capita income of $16,000 – a reasonable possibility – the effect on the world economy would be equivalent to adding 15 of today’s South Koreas. It is hard to see how that expansion could be accommodated within an export and investment-led growth model, so China will need to rebalance through boosting domestic demand, lowering savings and increasing consumption.

Without fundamental structural changes, China is in danger of becoming caught in a “middle income trap” – exacerbating the world’s growth problems. In the short term, there is the risk of inflation driven by food prices. In the longer term, the drivers of China’s meteoric rise are waning: resources have largely shifted from agriculture to industry; as the labour force shrinks and the population ages, there are fewer workers to support retirees; productivity increases are declining, partly because the economy is exhausting gains from the transfer of basic production methods. Then there are other challenges, including serious environmental degradation; rising inequality; heavy use of energy and production of carbon; an underdeveloped service sector and an over-reliance on foreign markets.

China’s policymakers are well aware of “what” they need to do. Their 12th five-year plan points the way. Their challenge now is “how” to do it. Together, China’s Development Research Center of the State Council, its Ministry of Finance and the World Bank are working to turn “what” into “how” for a report later this year. Our starting point is a vision of China in 2030 as one of the high income countries, while also protecting its environment and natural resources, encouraging creativity and innovation, and sharing responsibilities in the global economy.

This weekend in Beijing, a high-level group of Chinese and international experts will be discussing possible reforms and how to implement them, step by step.

A critical question is how China can complete its transition to a market economy. A broad agenda needs to include redefining the role of the government and the rule of law, expanding the private sector, promoting competition, and deepening reforms in the land, labour, and financial markets.

To unleash human potential, China will need to accelerate the pace of open innovation, so that competition encourages Chinese firms to invent products and processes– not only through China’s research and development, but also by participating in global networks.

China can “grow green” through a mix of market incentives, regulations, public and private investments, standards, and institutional development. China also aims to deliver equality of opportunity and social security to all its citizens. To do so, it needs to consider how best to deliver more and better quality public services, ensure effective and efficient social safety nets, and mobilise the private and public sectors to share responsibilities in financing, delivering, and monitoring the delivery of social services.

China will weigh how to strengthen its fiscal system – bringing all public resources “on budget” and connecting resources to different levels of government expenditures. Yet without mobilising additional resources, including from state-owned enterprises, it will be difficult to advance reforms. We will also discuss how China can embrace its global role. China is already an important stakeholder in the international system – yet a cautious one. In the future its leaders can be a key partner for global solutions.

Even while coping with today’s economic turmoil, world leaders need to design the engines of growth for tomorrow. That agenda will also build market confidence that can provide a boost today. China’s quest to find a sustainable growth model will contribute to other developing countries, regional and global growth, and the stability of the international economy. China is preparing to address its challenges. Developed countries would be wise to look ahead at their structural growth challenges too.

The writer is World Bank president.