Global Leadership in the New Normal
(As Prepared for Delivery)
Excellencies, Honorable Delegates, Ladies and Gentlemen,
It is a great pleasure to once again address the China Development Forum. I want to thank Vice Minister Liu Shijin for his kind introduction and for his long standing support for the partnership between the DRC and the World Bank. And I would like to thank Chairman Xu Shaoshi for his insightful remarks.
Given our topic today the question to start with is: What is normal today?
With a gradual rebalancing of the economy towards services and shifting demographics, China’s ‘New Normal’ presents a different picture. But strictly speaking it is not that new. New directions for China’s economic course have been in the making for years, and the indicative growth rate of about 7 percent for next year is in line with this trend.
Reforms for the New Normal
China can afford lower growth rates while continuing to deliver the necessary jobs. Not only that, the lower growth rates can also open the space to implement the reforms needed to achieve the ‘New Normal.’
The route to rebalancing demand is complex. China will have to bring down debt to GDP ratio and gradually wean itself off credit-driven investment as a driver of demand growth. While external demand can take up some of the slack, a return to the high current account surpluses of the past is neither desirable, nor doable in a world of lackluster growth.
So consumption will have to fill the gap, which means either larger central government consumption, or higher household consumption. The latter will require a higher household share in national income, which in the short run can best be achieved through fiscal policy as well.
Therefore, a smooth transition is likely to require an active fiscal policy that targets consumption, more so if the slowdown were to turn out more rapid than currently foreseen.
The list of changes underway is long: fiscal reforms, financial sector reforms, land reforms, and environmental management. The revised budget law and new rules on local borrowing, a more flexible RMB and deposit rate. New property rights for farmers, including the right to trade rural construction land and opening up of hukou for small and medium cities.
These are remarkable and profound changes already being implemented.
China is moving fast - not just in comparison with its own past performance, but also compared to other economies in need of structural reforms—and these include almost all other G-20 countries.
But there is no time for complacency and it is important to stay the course. The next phase of reform agenda could get tougher.
As Premier Li told the National People’s Congress:
“Systemic, institutional and structural problems have become ‘tigers in the road,’ holding up development. Without deepening reform and making economic structural adjustments, we will have a difficult time sustaining steady and sound development.”
For China the issue is not that it has to deal with the tigers in the road but how to tackle them – so that its people will benefit in a changing environment.
China’s reform path ahead will be different from its past measures. It will require persistence because the results may not manifest themselves as quickly as the costs and the burden.
Let me focus on three areas to make China’s ‘New Normal Growth’ inclusive, sustainable, and efficient.
First, making growth more inclusive.
China’s record on fighting poverty remains unprecedented. More than 600 million people moved out of poverty since reforms took off in 1978. Without this achievement the millennium development goal of halving global poverty would have been unreachable. Yet, China has seen a rapid increase in inequality.
Rapidly rising income inequality is a global concern. In China it has been rising fast since reforms took off, although it has been coming down slightly in recent years following a set of measures taken.
China has made tremendous investments in leveling the playing field: in education - to increase people’s capabilities to benefit from growth; in infrastructure - to connect people with markets; and in safety nets - to protect the most vulnerable in its society.
As a result, China’s education budget is 7 times higher than in 2000, and the number of people benefiting from China’s safety nets increased from 5 million to over 70 million in the same period.
But from the perspective of growth and development, inequality of opportunity is key.
A major area to address is the urban-rural divide. As I mentioned, China is already reforming its hukou system to provide some 100 million migrants access to urban life. At the same time, there are currently some 250 million migrants in China’s cities, and tens of millions more will move to the cities in the years to come.
According to our joint urbanization study with the Development Research Center, China can afford to integrate all migrants into the urban fabric, much like Japan and Korea did in their phase of rapid urbanization. To do so would require further reforms in the fiscal system, in pensions and health insurance, in affordable housing, and in rural land rights.
None of these are easy.
However, the pay-offs of such reforms would be large: a mobile, more urban labor force that is as productive and that will increase much needed consumer demand.
Another area of reforms that would increase equality is health care. China has dramatically expanded the health insurance system in the past five years, and more than 90 percent of its people now have coverage.
The next wave of reforms should focus on improving the quality of health care, while controlling its price tag. The choices that China makes in the coming years will determine how cost-effectively it can care for its aging population and its rapidly rising incidence of non-communicable diseases.
Together with our Chinese partners, we are currently studying better health care delivery, and we will share our findings later this year. International experience suggests reforms, including: moving away from fee-for-service payments, strengthening the role of health insurers as buyers of services, and shifting demand away from hospital care to primary care.
Defining, regulating and supervising the role of private health care providers could equally contribute to more cost effective service delivery.
Further reforms to the fiscal system could also address inequality. With China’s labor force becoming more mobile, China needs to ensure that people have access to health care, education, and pensions, where they live. To enable jurisdictions to provide quality services, China could apply a “money-follows-people” principle. The key to financing this principle could be the equalization grant, which currently plays a subordinate role compared to shared taxes and earmarked grants.
For this to work, local governments need to be held accountable for delivering the services that can empower people to improve their lives and that of their families.
The second item on the ‘New Normal’ agenda is to make growth more sustainable.
In the past two decades, China has made major efforts to reduce emission intensity and control pollution. China is already the largest producer of renewable energy in the world, and the current Five-Year Plan has hard environmental targets to control energy intensity, pollution, and water use.
People not only demand but also deserve a cleaner environment. China understands that to be well-off, its children have to be able to play outside and breathe clean air.
China just confirmed that it will commit to enforcing its new environmental law. For the next Five Year Plan, China could achieve a breakthrough by implementing measures currently under consideration. These may include capping energy use, particularly coal and expanding the carbon cap-and-trade-system that is currently piloted in 7 localities across all of China—or alternatively, introducing a tax on carbon. Last year’s drop in coal production by almost 3 percent—the first such drop in decades—signifies that such ambitious goals are feasible.
Crucial for China’s success is matching its green ambition with greener governance. This means building the right institutions, sharpening the instruments of environmental policy and providing the right incentives for local officials to pursue environmental goals. This requires authorities to better coordinate their river management, anti-air pollution measures and the pricing of environmental goods—and taxing of the environmental bads.
And finally, for local officials to pursue environmental goals, will require a change in the way they are evaluated. Being green should have its rewards.
Internationally, the importance of the joint declaration of China and the USA regarding greenhouse gas emissions cannot be overestimated. China’s submission to the COP-21 meeting could solidify the country’s commitments to global environmental goals and hold or even reverse greenhouse gas emissions by 2030 or before. The next Five Year Plan will be crucial in solidifying the basis for meeting that goal which would not only help China become healthier, but the rest of the world too.
Finally, China aspires to make its growth more efficient and more sustainable. The ongoing fiscal and financial reforms will go a long way in achieving better use of people’s talents and savings.
They are a start, but much remains to be done, including clarifying responsibilities for different levels of government, strengthening the revenue base for local authorities, further liberalization of interest rates and establishment of a new framework for monetary policy suited for China’s evolving macroeconomic environment.
Going forward, China needs to harmonize the coexistence of market mechanisms and the role of the government. Two crucial shifts towards more innovation and efficiency have already been made: the 3rd plenum’s principle that the market should play a decisive role in resource allocation and the 4th plenum’s principle of the rule of law.
Premier Li has spelled out what this fundamental change will mean for the way China is governed: A decisive role for the market requires the government to step back where it can, but regulate and supervise where needed. Rule of law means that – without exception – it is applied equally, irrespective of ownership or nationality of origin.
In the 13th Five Year Plan, these principles can be shaped in a variety of ways:
First, China can continue to open up sectors for private investment, as it has already done effectively in the Shanghai Free Trade Zone and elsewhere. A move to a nationwide negative list for restricted industries, rather than the positive list currently used could accelerate this process. The reduction of administrative burdens on small enterprises, which caused the number of new businesses to jump by 50 percent, is evidence that further improvements in the business climate has much scope to generate growth and jobs in the years ahead.
Second, achieving higher efficiency and more innovation requires more competition. For the overwhelming majority of China’s enterprises, the domestic market will be the main or only market, and ensuring entry and competition in this market and avoiding the distortions and waste that come with monopolies and oligopolies is key.
China could consider raising competition policy to a different level by establishing an independent competition authority that can impartially rule over uncompetitive behavior and level the playing field.
Third, China can accelerate State-Owned Enterprise reforms. Provinces are currently developing their own reform plans, and are separating commercial from non-commercial enterprises, which is a good first step. Focusing on the return on assets of commercial SOEs and their contribution to the government budget is a second element of reforms.
Allowing more mixed ownership in SOEs across the board can improve the way these enterprises are governed and the efficiency with which they use society’s resources. But increasing transparency of SOEs, increasing accountability, and hardening budget constraints are crucial for higher performance and more efficient growth.
This will also be critical for China’s role in the international arena where a level playing field – in trade, investment, and development – will be critical too.
Let me acknowledge that reforms of the depth and nature that China is pursuing are not only tough but unprecedented. As I mentioned at the outset, they often come with trade-offs and are triggering opposition by those that benefit from the status quo.
As Premier Li recently told the media:
“Reforms will upset vested interest. It is like taking the knife to one's own flesh. But despite the pain we will continue.”
Withstanding the temptation to slow or weaken the reform path towards the ‘New Normal’ will require strong leadership. So it is good to see that China’s leaders are focused and aware of the challenges ahead.
If China manages to implement a truly inclusive, sustainable and efficient growth model, a triple win may be in reach: For its people, for its country and for the global community.