Premier Li Keqiang, colleagues from international organizations, and everyone here today. I’m very pleased to see all of you and want to thank Premier Li for hosting this virtual meeting.
We meet today under troubling circumstances for development. People in many countries are facing hunger, violence, and political fragility. Refugees and other displaced persons exceed 80 million, creating severe challenges to humanitarian assistance, border regions, and human rights.
The number of people in extreme poverty has increased by over 100 million since the beginning of the pandemic, even as global spending has increased to an all-time record. As many as a billion people lack access to clean drinking water, while 800 million people lack access to reliable electricity.
The recovery has been highly uneven. There was a rapid rebound in more advanced economies, and in China, but a weak rebound, or none at all, for people in most other countries, particularly the poorest. This is causing tragic reversals in development, made worse by the latest setbacks from inflation, supply chain bottlenecks, and high energy prices.
Poverty is increasing and median incomes declining, the opposite of our development goals. For many developing countries, there has been a deterioration in education, literacy, and women’s empowerment, and a backslide in nutrition, health, and human capital. The low vaccination rate adds to the risk and human suffering.
Premier Li, I listened carefully to the emphasis you put on global macroeconomic policies. Part of the inequality problem is global finance itself and the unequal structure of the stimulus. Many of the sovereign debt policies are set up to favor creditors, and monetary and fiscal policies may also be contributing to inequality. At a minimum, they are operating in uncharted territory. Let me take in turn how prevailing monetary, fiscal, and sovereign debt policies are leading to inequality.
First, monetary policy in the advanced economies had been built around a reserve requirement ratio and limited growth in bank reserves that helped achieve stability in currencies and prices. Financial regulation and market-oriented base interest rates supported that stability. China still operates through this reserve requirement ratio, which it lowered in July to provide stimulus, and Premier Li discussed future moves today.
Other major central banks have changed to a post-monetarism system in which central banks are using very large amounts of excess bank reserves to purchase and hold long-duration bonds and other assets. This is wholly uncharted territory. This approach adds stimulus by providing price support for a highly select group of assets – notably to the exclusion of small businesses and developing countries – and restrains policy through regulation of liquidity and bank capitalization ratios.
Second, fiscal policy is in equally uncharted territory and also risks adding to inequality. Debt and government spending in the advanced economies are orders of magnitude larger than in the past, with no apparent plans to alter course. This channels resources to narrow groups within the current major borrowers but crowds out others, leaving them behind.
And a third financial aspect of the inequality problem relates to sovereign debt policies and the burden of expensive debt for low- and middle-income countries. It is consuming a growing proportion of scarce fiscal resources.
The relief from the G20’s DSSI was a fraction of the original proposal and was only temporary. This shortfall will quickly add to the debt burden through interest charges. My strong view is that much more needs to be done to increase debt transparency and allow a path out of excessive debt burdens. The framework should allow a standstill in payments for countries with unsustainable debt, promote transparency of debt terms and conditions, and move away from the collateral and escrow arrangements that have appeared in several debt and debt-like arrangements. Financial centers should create a more balanced relationship between debtors and creditors. As one of the largest creditors of developing countries, China’s active participation and strong voice in debt reduction efforts are very much needed and would benefit all participants by encouraging sustainable investment and debt.
Premier Li, I’d like to make two points on the second topic of our conversation, China’s domestic reforms.
First, while China’s GDP growth has had a rapid and very welcome recovery from the impact of COVID-19, growth has been slowing recently. This reflects structural headwinds that can be addressed.
We estimate growth at around 8 percent this year, slowing to roughly 5 percent in 2022. The labor force has started to decline, and productivity growth has been sluggish despite high rates of fixed investment. Improved labor markets and labor standards are needed that put workers at the heart of an inclusive recovery. Boosting short-term growth through credit financed stimulus would exacerbate financial risks. Instead, the key to China’s future growth lies in a rebalancing of domestic demand and increases in private sector innovation and expansion, as our joint teams analyzed in the Innovative China: New Drivers of Growth report two years ago. Recent steps to support small- and medium-sized enterprises by clearing the arrears from SOEs and larger companies go in the right direction.
China’s experience with growth and poverty reduction over the past four decades demonstrates the power of market-oriented reforms, property rights, and the ingenuity of China’s entrepreneurs. These are lessons that China can share with others and are particularly relevant for China’s future growth as well.
Second, China’s structural transformation toward lower carbon intensity, which is an important part of its climate response, is closely aligned with the goal of domestic rebalancing. Indeed, one reason for the high carbon intensity of China’s economy is the over-weighting of real estate and the associated demand for cement and steel in China’s economy. A more service oriented, consumption driven growth model would create more sustainable jobs and generate less pollution and greenhouse gas emissions as well.
A very clear message from Kunming and Glasgow is that the response to climate change and the loss of biodiversity are core development issues.
Given its size, China’s own mitigation and coal transition efforts are particularly important. We have refocused our lending to China on supporting global public goods – including reducing greenhouse gas emissions, controlling marine plastics and water pollution, and supporting a shift to sustainable agricultural practices – in ways that can be replicated and scaled. I am pleased that you and I, Premier Li, agreed to focus our next joint study on the greening of China’s growth. This offers us the opportunity to analyze these issues and the appropriate policy mix in greater depth.
Let me close with a word about IDA, which is a vital resource to help low-income countries face the huge challenges we’ve been discussing. Our shareholders have provided strong support for an early IDA20 replenishment. I was particularly pleased to hear President Xi endorse this during his remarks at the G20 Summit in Rome. China was the sixth largest IDA contributor in IDA19 and helped shape IDA’s agenda in important ways including through the emphasis on jobs and economic transformation. I also see consistency between the priorities in IDA20 and directions in China’s Global Development Initiative, announced by President Xi at the UN General Assembly in September this year; and I know that the world’s poorest countries will welcome China’s enhanced support next week during the final meeting of the IDA20 replenishment.
Thank you, Premier, and I look forward to our discussions.