Great Transformation Needs Great Wisdom: Comment on World Bank Report

Great Transformation Needs Great Wisdom: Comment on World Bank Report

Recently, the World Bank (WB) and the Development Research Centre (DRC) of the State Council of China jointly released a 468-page research report titled “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”. The report has attracted huge attention and controversy in the world. Is this a poison pill or bitter medicine? In my view, it obviously looks like China’s idiom: good medicine for health tastes bitter to the mouth.

The report is divided into two parts: Overview and supporting reports. The former comprises nine chapters. The latter consists of five relevant reports. The report was highly complimentary about China’s success that provides valuable lessons for other countries. However, in the next 15 to 20 years, China is well positioned to join the ranks of the world’s high-income countries. China has to change the country’s growth strategy to respond to the new challenges that will come and avoid the “middle income trap.” The so-called middle-income trap is a likely cause of a growth slowdown. Fortunately, the World Bank thinks that China has an opportunity to avoid the middle-income trap and promote inclusive growth.

Accordingly, the report has recommended six strategic directions for China over the next 20 years. First, rethinking the role of the state and the private sector to encourage increased competition in the economy. Second, encouraging innovation and adopting an open innovation system with links to global research and development networks. Third, looking to green development as a significant new growth opportunity. Fourth, promoting equality of opportunity and social protection for all. Fifth, strengthening the fiscal system and improving fiscal sustainability. Sixth, ensuring that China, as an international stakeholder, continues its integration with global markets.

Especially, the report has stressed that China needs a fundamental strategic shift and indicated that government should accumulate the reform momentum to accelerate the pace of reform. China should change the prolonged negative real interest rate in order to add the value of depositors, increase state-owned enterprise dividends, and enlarge government spending for people's livelihood. Frankly speaking, the points of report have really struck at the heart of China's economy: the negative real interest rate policy has been implemented for two years that resulted in the depreciation of savings; the state-owned enterprises have seized on huge monopoly profits, but paid stingy dividend; moreover, the income growth of civilian hasn’t usually kept up with the pace of economic growth.

Not surprisingly, the report did not show the sensitive words that some people wanted to see, such as the privatization of state-owned enterprises and bank, and the political democracy, etc. Also, the report didn’t say the detail of the fundamental strategic shift of China’s economic development. Nevertheless, the report is a valuable attempt because this was the first time that joint research was conducted by experts from the World Bank and China.

Today, China is facing great challenge. In the next twenty years, China will realize great transformation. Undoubtedly, China urgently needs to absorb the great wisdom from domestic and international community.

China: the challenges and the change

Six months before the Congress of the Communist Party of China, that will install a new leadership, and when the world carefully watches China’s appetite for commodities, the government set a GDP target lower than the magic 8 percent of the last eight years. Internally, the major worries are the abyss between rich and poor, the dependence on exports and the pros & cons of “state capitalism”. A comprehensive joint report of The World Bank and the Development Research Center of the State Council of the People’s Republic of China, recently released, points 6 strategic directions towards a China 2030: Building a Modern, Harmonious, and Creative High-Income Society.

Robert B. Zoellick: “China’s leaders have recognized that the country’s growth model, which has been so successful for the past 30 years, will need to be changed to accommodate new challenges”.

Breaking the 8 percent GDP target tradition set in the previous eight years – exceeded every year, as the GDP target has been more a floor than a ceiling – in his annual work report to the National People’s Congress, China’s annual parliamentary session, Chinese Premier Wen Jiabao cut that target to 7.5 percent, set a 4 percent target for inflation, in line with 2011, and set “expanding consumer demand” as first priority for the year.

The lower growth target is being seen as some leeway to rebalance the economy and defuse price pressures in the months preceding the leadership handover. The Communist Party, will install a new leadership later this year. Early next year, Wen Jiabao and Hu Jintao will step down as premier and president.

With this leadership, China becomes the world’s second-largest economy. But now, Beijing wants to wean the economy off its dependence on exports and external demand. Faced with a sluggish U.S. economy and the European debt crisis, China’s slower growth, a result of the weaknesses in the rest of the world is showing the weaknesses of it’s own economic model, now faced with a need to change, if it wants to keep previous growth levels.

In recent years, an abyss have widen between rich and poor. Now, Wen Jiabao is saying: “We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups, and enhance people’s ability to consume”.

Chinese Premier Wen Jiabao: “We aim to promote steady and robust economic development, keep prices stable, and guard against financial risks by keeping the total money and credit supply at an appropriate level”.

The need to change

“China has to change the country’s growth strategy to respond to the new challenges that will come and avoid the “middle income trap”, a likely cause of growth slowdown. The World Bank thinks China has an opportunity to avoid the middle-income trap and promote inclusive growth.” refers Xu Hongcai, professor at the HsinHua University, and deputy director of information department of China Center for International Economic Exchanges, on the the World Bank and Development Research Center joint Report. “The negative real interest rate policy has been implemented for two years that resulted in the depreciation of savings; the state-owned enterprises have seized on huge monopoly profits, but paid stingy dividend; moreover, the income growth of the civilian population hasn’t kept up with the pace of economic growth”, he also points.

“The report has stressed that China needs a fundamental strategic shift and indicated that the government should gather the momentum to accelerate the pace of reform.” The joint report, also notes Xu Hongcai, “looks like China’s idiom: good medicine for health tastes bitter to the mouth”. But it’s “a valuable attempt because this was the first time that joint research was conducted by experts from the World Bank and China. (…) China is facing great challenge. In the next twenty years, China will perform a great transformation. China urgently needs to absorb the wisdom of the domestic and international community.”

World Bank Report | “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”

The report is the result of the first joint research conducted by The World Bank and the Development Research Center of the State Council of the People’s Republic of China. There, you can read: “China should complete its transition to a market economy — through enterprise, land, labor, and financial sector reforms — strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

The report lays out the case for “a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030. It recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses, and external imbalances.”

The “China 2030″ report lays out 6 strategic directions:

1. Completing the transition to a market economy;

2. Accelerating the pace of open innovation;

3. Going “green” to transform environmental stresses into green growth as a driver for development;

4. Expanding opportunities and services such as health, education and access to jobs for all people;

5. Modernizing and strengthening its domestic fiscal system;

6.Seeking mutually beneficial relations with the world by connecting China’s structural reforms to the changing international economy.