Announcement of China's Need to Meet Key Challenges to Become a Global Economic Force on May 12, 1994

HOLD FOR RELEASE World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. *Telephone: (202) 477-1234 New Release 94/S57EAP Contact: Peter Stephens (202) 458-0344 Embargo against delivery at: fax (202) 522-3405 11.45am Thursday May 12, 1994, Beijing. (10:45pm Wednesday May 11, 1994, DST in US) China Must Meet Key Challenges to Become a Global Economic Force, says World Bank official. Beijing, May 12 -- "What China does now makes a big difference to the rest of the world," said Mr. Ernest Stern, Managing Director of the World Bank, in a speech to the China Summit today. China is being looked upon increasingly as a "potential center of economic gravity," Mr. Stem said. Speaking to a high level business, government and academic audience brought together by the International Herald Tribune and the Chinese Government, he added that China's success in realizing its potential is not guaranteed. It will depend on how the country responds to several key issues relating to external conditions; domestic challenges; and the quality and stability of economic growth. External Conditions Given China's spectacular economic performance in recent years -- 9 percent average annual growth rates since 1978 and a 17 percent average annual increase in exports over the same period -- Mr. Stern said that it is time for China "not just to respond to external conditions, but to help shape them." He singled out trade and investment policies as areas warranting special attention. On trade, he urged China to launch a bold program of import liberalization -- assuring a steady reduction in quantitative restrictions and consolidation of tariffs into fewer categories at lower rates. He said that this further opening up would not only "contribute to making China a full member of the international trading community, but also would benefit the domestic consumer by gradually introducing competitive pressures for quality at lower prices." He added that "increased openness will generate increased employment." On investment, Mr. Stern noted that China attracted 40 percent of all foreign direct investment to the developing world in 1993 -- about $20 billion. He cautioned, however, that some of these flows can be volatile and said China must look at the quality, as well as the quantity, of investment flows. "Steps must be taken," he said, "not only to ensure that China's investment climate remains competitive, but also to encourage high-quality investment -- to support improved technology and financial services, for example." That kind of investment will facilitate China's "hook up" to the global economy -- and enhance China's leadership role, he said. Domestic Challenges Mr. Stern noted that being competitive in the global arena requires "agility." This, in turn, requires a large degree of decentralization, private initiative and strong institutions so that the country is "diverse and flexible -- and can react to change with minimal disruption." He said that building this kind of capacity "means continuous investment in learning and broadening participation in economic decision-making." Mr. Stern emphasized that each country has to find the "balance" appropriate to its own circumstances--between economic growth and equality of opportunity, local interests and the national interest, urban and rural needs, and centralization and participation. Whatever the particular balance might be, he stressed that "a system that can absorb change is vital for the long-term stability which underlies sustainable growth." Quality and Stability of Growth While commending China on its "phenomenal" economic achievements, Mr. Stern said that the dramatic growth of recent years has taken place against a background of "severe imbalances" among regions and income groups, rapid changes in relative welfare among people and regions, increasing environmental destruction, and periodic high inflation. He added that "China's very high growth rates have been largely the result of very high investment rates -- major underlying issues of productivity improvement remain to be addressed." Underscoring that "managing the quality and stability of growth is the key to China's future," Mr. Stern pointed to five areas requiring urgent attention. They are: * Macroeconomic stability, involving immediate measures to improve fiscal and monetary discipline. He advised the speedy introduction of market-based instruments and reforms to help address the current overheating problem, as well as to improve domestic resource allocation and encourage increased external investment. Reform of inefficient state enterprises. This is a critical element of effective fiscal management, he said. Mr. Stem noted that "at least a third" of China's more than 100,000 state-owned enterprises lose money -- and that the volume of budgetary subsidies to the state enterprise sector is now one-and-a-half times the total fiscal deficit. "China simply cannot afford the drag that inefficient enterprises currently impose on the economy," he said. They are the major cause of China's recurrent bouts of inflation. Reform of the sector must be linked with a series of other reforms to improve labor mobility, housing, unemployment compensation and other social measures to help protect the lives of the more than 70 million workers and their dependents who rely on the state enterprise system. * Improving basic infrastructure, in order "to integrate and realize the full potential of what is the world's largest single market; to attract foreign investment; and to extend growth to the poorer and more remote areas." He emphasized that private investment and self-financing through appropriate pricing are central to meet the huge financing requirements of infrastructure. * Environmental sustainability. This is also essential, said Mr. Stem -- to assure the "quality of growth" as well as the "quality of life" in China. He noted that in China, as in most countries, "economic policies largely determine environmental problems--and their solutions." He said that systemic economic reform would help to improve environmental sustainability by improving efficiency -- including energy conservation and agricultural productivity -- and by generating increased funds for investment to protect the environment. * Continued efforts to reduce poverty. As China continues its transition to what its leaders have called a "socialist market" economy and the country assumes a position of global economic leadership, it must not relax its efforts to address "the ultimate challenge of development: poverty reduction." While noting that China's gains in the fight against poverty were "among the most impressive that the world has ever seen" (a 60 percent reduction in the incidence of absolute poverty' between 1978 and 1985), the challenge now is to deal with the 100 million Chinese remaining in absolute poverty. He called for a comprehensive set of actions to help the poor and he commended the government's recent announcement of a program aimed at eliminating absolute poverty by the year 2000. Mr. Stem pledged the World Bank's continuing support for China in meeting that objective. [Note: At the end of April, the World Bank has supported 138 projects in China since the first loan in 1981. China borrowed about US$3.2 billion from the Bank in the 1993 fiscal year, making it the Bank's largest single borrower. Cumulative lending to China totals US$18.6 billion.] IDefined as an income level insufficient to provide 2150 calories a day.