Slide 1
Improving the Efficiency of
China’s Growth Is Important for
the Whole World
David Dollar
World Bank Country Director, Beijing
China has been the most successful developing country over the past two decades,
growing rapidly and achieving the fastest poverty reduction in history. While there are
good reasons to think that China could continue to grow rapidly for two more decades,
the country also faces some serious challenges. China’s growth has been inefficient in
three ways. China’s growth uses up more capital than is necessary, which is wasteful for
China and also affects the whole world economy because of China’s growing weight in
the world. China’s recent growth has also involved use of natural resources – water,
energy, and clean air – at a rate that is not sustainable. Again, improving efficiency of
natural resources use is good for China and good for the global environment. Finally,
China’s rapid growth in the past decade has produced less employment, poverty
reduction, and social improvement than it could have. Increasing the social benefits from
China’s growth would improve the lives of its people and contribute to global goals such
as the Millenium Development Goals (MDGs).
Slide 2
China will emerge as
the largest trading nation by 2020
Exports in constant
1997 US dollars, billions
8750
6800
3800
3100
2400
900
US
1400
370
OHI China OD
2003
US
OHI China OD
2020
If recent trends continue, China will emerge as the largest trading nation before 2020.
China’s emergence is part of a more general trend for world production and trade to come
increasingly from developing countries. The U.S. together with other high-income (OHI)
countries account now for about 75% of world trade. By 2020 the share of high-income
will decline to 50%. This scenario is not a naïve projection of recent growth rates, but
rather takes account of the differing elasticities China’s products and other trading
nations.
Slide 3
…and the largest economy
Trillions of constant
PPP US dollars
GDP in 2000 and 2030
30
25
20
15
10
5
0
Japan China India
2000
U.S.
Japan China India
U.S.
2030
Measured at purchasing power parity (PPP), China is already the second largest economy
in the world, and will emerge as the largest by 2030, even if its growth rate slows
somewhat to the 6% range.
Slide 4
China’s growth prospects and challenges
• Favorable demographics and investment
climate… but, major inefficiencies in
• Financial system
• Natural resource use (water, energy)
• Social development and equity
(governance, inter-governmental fiscal)
The prospects for China’s continued rapid growth are good. It has favorable
demographics with a rapidly growing labor force and a still-declining ratio of dependents
(children and the aged) to workers. Population is shifting from rural areas to urban areas
at a rate of nearly 20 million per year, which is a source of productivity growth on the
supply side and of demand for consumer durables on the demand side. Among
developing countries, China has developed a relatively good investment climate –
attracting foreign investors and its own private entrepreneurs.
While prospects remain favorable, there are some serious inefficiencies or challenges that
need to be addressed, notably in the financial system, natural resource use, and social
development. How China addresses these will determine the extent of its ultimate
success and have a large spillover effect on the rest of the world as well.
Slide 5
Investment climate bottlenecks
Costs as a share of sales
30
Disputes with suppliers and creditors
Regulation
Bribes
Crime
Infrastructure disruptions
20
10
0
China
Poland
Brazil
Pakistan Algeria Uganda Tanzania
Source: World Development Report 2005, Investment Climate Surveys
The World Bank has been working with developing countries to carry out standardized
surveys of firms that aim to measure firm performance and to capture objectively the
main problems in their investment climates: that is, the regulatory and infrastructure
environment for production. This is looking at economic governance at a micro level. To
get new investment to take advantage of export opportunities, locations need to create
good environments for firms to start up, connect to the global market, and expand. The
project has so far covered several dozen countries. Some of the firms covered in the
surveys are large foreign investors. But most of the firms are small and medium
domestic enterprises, which are really the backbone of growth and job creation.
The figure above summarizes the cost of key bottlenecks observed in surveys for seven
developing countries. This measure of economic governance shows that China has a very
good investment climate in terms of infrastructure services, low regulatory burden and
crime, and levels of corruption not out of line with other developing countries. It is
because it has a good investment climate that China continues to attract foreign
investment and to export so dynamically.
Slide 6
Growth rates 1990-2003
13.4
10.9
8.9
8.5
Household
consumption
Government
consumption
Capital
formation
Export
volume
While China has grown well since 1990, it is remarkable how much savings and
investment this has required. Since 1990 China’s investment has been growing more
rapidly than consumption – either household or government consumption. Much of this
capital formation has been aimed at external markets, and China’s export volume has
grown much faster than its GDP (so that trade to GDP keeps rising).
This pattern of growth raises a number of issues or problems. On the one hand, the need
for such a large amount of investment for China’s level of growth reflects the inefficiency
of the financial system and the preference of local governments for large amounts of
investment. A lot of bad investments are financed which ultimately produce little value.
This is wasteful for China in real terms, and also creates the financial sector problem of a
large volume of non-performing loans. This situation creates a systemic risk for China,
in which some kind of internal or external shock could set off a costly financial crisis.
It also seems clear that this pattern of growth cannot be sustained indefinitely.
Investment cannot just keep rising as a share of GDP and it will be increasingly difficult
for China to keep increasing its share of world trade at the same rate.
Slide 7
Financial sector reform
• Reform/privatization of state-owned
commercial banks
• Reform of pension system
• Exchange rate?
In the medium term China will need to rely more on domestic consumption to drive
demand in its economy. Getting this adjustment requires an integrated series of reforms.
On the one hand, development of robust pension and health insurance systems would
stimulate household consumption since families would have to rely less on large built-up
savings. The financial system could also do a better job of financing consumer durables.
Finally, the government could put more expenditure into social areas such as health and
education – where recurrent costs are recorded as consumption. Institutional and policy
changes that lead to lower savings and investment would in turn affect China’s external
balance. Less saving and more consumption should lead to higher imports, reducing
China’s trade surplus. Appreciation of the exchange rate would also help stimulate
consumption and spur adjustment.
Slide 8
Distribution of water
Distribution of water in China’s river systems
• Water is not evenly
distributed
• South = Water Abundant
• North = Water Scarce
• Distribution of population and Total quantity of
water resources
industry does not match
distribution of water resorucesTotal runoff
The rate at which natural resources are being used up in China is unsustainable. First,
take water. China is a relatively water scarce country; its per capita availability of
renewable water resources is only about one-third of the world average. Furthermore, its
water is not distributed in the same way as population. Most of the water is in the south,
whereas more than 40% of the population lives in the north.
Slide 9
Renewable fresh water per capita
North China
China
728 cubic meters
2183
Thailand
3380
Japan
3386
Vietnam
U.S.
Indonesia
Myanmar
4513
9621
13,233
17,848
As a result, the large population in China’s northern half has only 728 cubic meters per
capita of water, compared to 3380 in Japan or Thailand, and much higher levels in waterrich countries such as the U.S., Indonesia, or Myanmar.
Slide 10
Water quality
quality
in main river basins
• 5 grade Water
water
classification
system
(G1 best)
– 2000: G1-3 58%, G4 21.6 %,
G5 6.9%, G5+ 13.8%
• Most pollution occurs when water
passes through large cities
Grade I - II
Grade III - IV
Grade V
Not only are the natural sources of water scarce in China, but the resource has not been
well taken care of. As a result, there is serious pollution in all major river systems,
especially in the north.
Slide 11
Urban water prices
Dollars per cubic meter
1.45
0.51
0.15
China
U.S.
Germany
There are a variety of weaknesses in China’s water policy. One weakness is that the
price of water in urban areas is very low, so that waste is not penalized.
Slide 12
Water policies
• Grain policies and imports
• Water pricing
• Enforce water pollution regulations
Water prices are even lower in rural areas. While it is understandable that the
government wants to help the poor rural population, subsidizing the price of water is not
sustainable and in fact is more of a boon to consumers than to producers. More rational
water policies would encourage farmers to concentrate on rice and food crops, while
opening up more space for imports of grain used for animal feed. China could import
significant quantities of animal feed without in any sense becoming food insecure.
Urbanization is potentially a water saving development path, as urban uses of water in
production and consumption are generally lower than rural and agricultural uses.
However, proper urban pricing and enforcement of water pollution standards are
important if the potential of urbanization to be water-saving is to be realized.
Slide 13
Growth rate of petroleum imports
1988 - 2003
31.1%
6.8%
1.8%
Japan
U.S.
China
Energy is another important factor in China’s development equation. While China is rich
in coal, it appears so far to be scarce in oil and natural gas, which are important fuels for
some aspects of industrialization and development. Over the past 15 years China oil
imports have been growing rapidly, and it has emerged as the second largest importer
behind the U.S. It is projected to emerge as the largest importer. Given the supply
situation in the world and the fact that much oil and gas come from politically unstable
countries, this is clearly a risk factor for the country’s future.
Slide 14
Energy efficiency
• Industrial processes use 20-100 percent
more energy in China than in OECD
countries
• Residential heating in China uses 50-100
percent more energy than in OECD
countries
• Current Chinese auto emissions standards
equal European standards in 1994
While it is inevitable that energy use will grow with China’s economy, much could be
done to increase the energy efficiency of China’s development. For specific industrial
processes, China uses more energy than OECD countries. Its residential space heating is
highly inefficient, using 50-100% more energy than is used in OECD countries with
comparable climates. Given the rapid pace of housing construction, enforcing strict
standards now would make a big difference for future energy demand. So too with auto
standards, which lag behind European standards by ten years. Energy use and autorelated air pollution could be dramatically reduced by stricter emission standards.
Slide 15
China
Harbin
Changchun
Shenyang
Anshan
Beijing
Lanzhou
Tianjin
Taiyuan
Jinan
Zibo
Zhengzhou
Wuhan
Chengdu
Chongqing
Shanghai
Nanchang
Guiyang
Kunming
Pinxiang
Guangzhou
Air pollution has become a serious problem in China. Of the 30 most air-polluted cities in
the world, 20 are in China. The air pollution results from the combination of (1) coal use
for power, industry, and home heating and (2) growing motorization.
Slide 16
Gasoline retail price
Dollars per liter
1.00
0.41
China
0.50
U.S.
Japan
As with water, many energy prices are low in China. The retail price of gasoline is below
the U.S. level and far behind other OECD countries such as Japan, encouraging
inefficient motorization.
Slide 17
Energy policies
• Petroleum tax and pricing
• Urban planning and public transport
• Auto and construction standards
China’s cheap gas policy is an important factor encouraging the development of a car
culture. A significant petroleum tax could lead to more conservation and also provide a
source of funds for urban planning and for public transportation investments. Many of
the autos and buildings that China will have in five to ten years have not been built yet,
so strict energy-related standards will have a big effect if they are put in place soon (and
enforced).
Slide 18
Poverty decline has slowed since mid-1990s
Headcount index
60
50
2000 calorie poverty line
40
30
20
10
Official poverty line
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
China should be praised for achieving the most rapid poverty reduction in history. But
most of this reduction was achieved in two waves – the first with the household
responsibility system in the 1978 to 1985 period and the second, related to labor-intensive
manufactures and exports and rural-urban migration, in the 1990 to 1996 period. The
chart above shows the poverty rate using both the official poverty line (solid line in the
picture) and a somewhat higher poverty line (dashed line) based on the real consumption
needed to have a daily diet with at least 2000 calories. Both lines show similar trends;
poverty reduction has slowed very markedly in the last few years, even though growth
has accelerated to extremely high levels.
Slide 19
… while inequality has risen sharply
Gini coefficient
45
40
National
35
30
Rural
25
Urban
20
15
10
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
China’s recent growth has not has much effect on poverty because it is not touching the
remaining poor – most of whom are cut off from the dynamic market economy for one
reason or another: they are in remote locations far from markets, and/or ethnic minorities
not well integrated into society and/or disabled. The sharp rise in both rural and urban
inequality in recent years is a reflection of this fact that recent growth is largely
bypassing the remaining poor.
Slide 20
Rate of decline of infant mortality
1990-2003
(percent per annum)
3.6
3.9
2.6
2.2
1.8
China
India
Middle- High- Japan
income income
China’s recent growth is also having surprisingly little effect on social indicators. Infant
mortality declined more slowly in China than in other middle-income countries and more
slowly than in India, despite the much slower increase in income in these comparators.
High-income countries in which infant mortality is already low have nevertheless
managed to continue high rates of decline. In this sense we can say that China’s growth
in the last 15 years has brought less social improvement than one would have expected.
Slide 21
Government health expenditures
Percent of GDP
6.5%
6.6%
Japan
Highincome
2.9%
2%
China
Middleincome
This result partly reflects the pattern of growth noted at the outset of this presentation. A
lot of resources have gone into investment, especially for export. Government spending
has grown less rapidly, and that is reflected in the low share of GDP that is accounted for
by public health expenditure – low relative to middle-income countries and far behind
what rich countries spend as a share of their income.
Slide 22
Social and equity policies
• Reform of land ownership and rights
• Inter-governmental fiscal system
• Facilitate rural-urban migration
Increasing the social benefits of China’s growth will require a number of measures. One
important issue concerns land rights over agricultural land. The ongoing process of
urbanization requires alienating some land out of agriculture to urban uses. At the
moment this is handled in an administrative way, with relatively little benefit accruing to
the farmers who are displaced. There are reasons why the country may not want the full
market value of the land to go to individual peasant families, but there is a lot of scope to
increase the compensation to rural families. This would ease their adjustment to urban
life and reduce inequalities. Also, newspaper reports suggest that the current, nontransparent system is sometimes a source of abuse.
To be fair to local governments, currently they have few sources of revenue to finance
their infrastructure needs and social expenditure. There is a need for an overhaul of the
inter-governmental fiscal system, to ensure that every community can pay for basic
health and education and to devise sustainable funding sources for local infrastructure.
Adequate financing of local services and a more market-based system of land transfer
would greatly ease the inevitable process of rural-urban migration.
Slide 23
China’s Growth Prospects
and Challenges
• Favorable demographics and investment
climate… but, major inefficiencies in
• Financial system
• Natural resource use (water, energy)
• Social development and equity
(governance, inter-governmental fiscal)
In summary, the prospects for China’s continued rapid growth are good. It has favorable
demographics with a rapidly growing labor force and a still-declining ratio of dependents
(children and the aged) to workers. Population is shifting from rural areas to urban areas
at a rate of nearly 20 million per year, which is a source of productivity growth on the
supply side and of demand for consumer durables on the demand side. Among
developing countries, China has developed a relatively good investment climate –
attracting foreign investors and its own private entrepreneurs.
While prospects remain favorable, there are some serious inefficiencies or challenges that
need to be addressed, notably in the financial system, natural resource use, and social
development. How China addresses these will determine the extent of its ultimate
success and have a large spillover effect on the rest of the world as well.