China - Sichuan Agricultural Development Project : board presentation

Sichuan A&ricultural Develo.pment Project Board Presentation (July 7, 1992) Mr. Chairman, Members of the Board, The project before you this morning is the first of our FY93 program in support of China's accelerating reforms and continued efforts to alleviate poverty. Before turning to the specifics of this operation, though, I would first like to highlight a few key points on economic developments in China, the current reform agenda and the role of the Bank Group in supporting China's reforms. Starting around the middle of 1988, when inflation was running at around 30 percent on a year-to-year basis, the attention of the Chinese authorities became strongly focussed on the immediate need to restore macroeconomic stability. In the event, as is now well known, results were achieved remarkably rapidly. By 1990, inflation was below 3 percent, and 1991 was to see the continued maintenance of overall stability. It thus proved possible to ease overall demand management, and real growth in the economy, which in most other countries is an inevitable casualty of stabilization. GDP growth rebounded from 4.6 percent in 1989 to 7.0 percent in 1991. Stabilization efforts did not mean cessation of reform activity - a theme I shall return to. Equally, the success of stabilization does not constitute cause for complacency on the macroeconomic side - both the Chinese authorities and we ourselves will continue to monitor trends in monetary and fiscal management closely, so as to be alert to any symptoms of renewed overheating. Nonetheless, it is clear from the very active climate of policy discussion in China over recent months that the present time is seen as an opportunity not only for stocktaking but also, more importantly, for looking ahead to the design and implementation of the very challenging next phase of major reforms. Adopting, for a moment, the long term view, I want to suggest that, even today, there is an inadequate appreciation in the outside world of the depth of the transformation the past fourteen years have brought to the Chinese economy. In agriculture, which still employs more than 60 percent of the Chinese labor force, the old collective system has been totally eliminated, and replaced by a network of well over 100 million individual family farms. The service sectors, too, have been transformed. Road and water transport now operate largely outside the State sector; 60 percent of the value of building construction comes from nonstate firms; and half of all workers in retailing and catering are employed by private or individual enterprises. The industrial sector, in turn, bears witness to the impact of reform. Effective control over the so-called State-owned sector has largely passed from central ministries to provinces, cities and counties, while the relative share of this sector in industrial output has shrunk from almost 80 percent, when reforms commenced, to barely over 50 percent last year. One key element in this change has been the growth of the rural Township and Village Enterprises, averaging 20 percent or more in real output terms. Between 1985 and 1990, these rural firms created 23 million new jobs in industry and services. The non-State industrial sector now accounts for nearly one-half  2 of industrial output and employs as many people as the state sector. Though smaller in absolute terms, the growth of foreign-invested businesses has been even more dramatic, and currently runs at over 30 percent a year. As this last item illustrates, a crucial aspect of China's reforms has been a remarkable opening to the outside world. Imports and exports combined have grown from 10 percent of GDP in 1978 to 38 percent in 1991, an amazing achievement for an economy of this size. And with the phased, gradual opening up first of special economic zones, then of key coastal cities and more recently of the hinterland to foreign investors, China has emerged as one of the world's most important hosts to direct foreign investment: net disbursements last year exceeded US$ 3 billion and are currently running at record levels. These and other changes have contributed to remarkable overall growth performance. The Chinese economy in 1991 was almost two and a half times the size, in real terms, of a decade before. This growth, in tum, has lifted many Chinese out of the confines of absolute poverty: a study on poverty carried out by Bank staff and soon to be distributed to the Board estimates the number of absolute poor - at 8-9 % of the total population. This represents a remarkable improvement since 1978 when reforms began in earnest in China. These are some of China's achievements: achievements to which the Bank's intensive program of economic and sector dialogue and operational support, and the effective Chinese response to that program, have made an acknowledged and respected contribution. As we look ahead to the balance of the present decade, it is clear that China still faces a series of tough challenges: challenges which will test even its own demonstrated ability to implement change. The demanding nature of these abiding challenges underlies our belief that the Bank Group needs to remain equally committed and engaged, during these coming years, to the support of China's reform efforts. Central to the ongoing reform agenda is the imperative to expand still further the role of markets - both domestic and international - in determining the allocation of productive resources within China. Price reforms for products and services have already progressed a long way. As a report on Price Reform recently distributed to the Board illustrates, over 70 percent of all consumer goods, by sales value, are now fully deregulated, as well as some two thirds of farm produce. Remaining priorities for liberalization lie largely in energy, transport and grain. Progress over the past 18 months, while still selective, has been substantial, at times spectacular, and Bank operations planned for the near future will lend added momentum to further price reform and enterprise commercialization. We are also pursuing an active work program in the area of foreign trade policy, where significant reform movement has been resumed and more can be expected. But markets for the factors of production are also of critical importance. In this area we have intensified our sector work on markets for urban land and labor, and we will soon present an operation to help build a policy and institutional framework appropriate for the functioning of a more decentralized financial system.  3 China today has a mixed economy, with ownership and control already highly dispersed, and markets often keenly competitive. Yet some of the domestic players are still very seriously constrained in their pursuit of greater competitiveness. I am referring to what is still labelled the State owned enterprise sector, though the overwhelming majority might more accurately be termed provincial, municipal or county enterprises. Such firms employ over 100 million Chinese, and most of the urban population is, directly or indirectly, dependant on them for its livelihood. Despite some progress with State enterprise reform since 1984, much deeper restructuring and reform of the State sector will be essential for it to compete effectively in an unfettered market-place. To date, however, these processes have proceeded at a considerably slower pace than we would like to see. To a large degree, the bottlenecks can be ascribed to the need to manage with sensitivity the potential social costs of the mergers, bankruptcies and unemployment that are going to be involved. Major pieces of sector work recently completed by Bank staff have documented the extent to which Chinese urban workers are dependant upon their specific workplace, rather than the broader community or the market-place, for the provision of housing and pensions, as well as the still limited development of unemployment compensation schemes. These reports have helped to advance development of the necessary blueprints for reform, and their message has been very clearly heard by the Chinese authorities: we are now receiving excellent cooperation in developing a first operation to help transform these blueprints into reality. If continued progress can be achieved in putting in place the overall policy and legal framework for enterprise reform and restructuring, this will provide the basis for an active program of Bank and IFC operational support for such reform and restructuring efforts. In particular, innovative models must be sought to cut across the existing ownership boundaries within China's mixed economy, and harness the dynamism of the nonstate sector to the task of redeploying currently redundant workers. There are other challenges which we take very seriously. China's achievements in combatting poverty are well known and are now well documented in the recently completed Bank sector report to which I have already made a reference. Perhaps the report's strongest message is that poverty has increasingly retreated to a number of isolated regional redoubts, where adverse environmental conditions, poor communications and deficiencies in education and health services, felt particularly keenly by women and girls, make further progress harder to achieve. Taking the poverty study as a guide to future strategy, we are moving to address the causes of deprivation more directly, by increasingly concentrating our human resources lending, as well as carefully chosen region-specific interventions in the agriculture sector, like the present project, on the pursuit of this crucial priority. In the environment, China faces a series of major challenges in both rural and urban areas. Already, though, we have witnessed a true sea-change in attitudes over recent years. Few borrowing countries can claim to have internalized these concerns within their own policy- making to a comparable degree. Here, too, Bank staff have just completed a comprehensive sector report, which has been distributed to the Board, and which is helping to crystallize China's internal debate on ways to achieve further progress. With this study as the basis for a  4 systematic overall policy approach, we intend to step up substantially the program of environmentally-oriented operations we present to the Board. The project you are to consider today seeks to integrate the twin objectives I have just outlined: to combat acute rural poverty and to address the degradation of the productive environment which so often goes hand-in-hand with the incidence of poverty. Sichuan Province, with over 108 million inhabitants, is the most populous province in China. But because of its location, topography and limited supply of arable land, it is also one of China's poorest provinces. Throughout its history, Sichuan has had to struggle to supply food to its massive population, while trying at the same time to diversify and commercialize its agriculture to provide farm families with a decent living. The present project would provide reliable supplies of irrigation water to intensify crop production in Sichuan. It would also promote manageable, economically viable small-scale activities such as livestock and silk worm raising, tree-planting and small cottage industries for the production of hand-knitted garments. These measures would help 4 million people attain food security, while providing poorer households, particularly poor women in remote areas, with rare opportunities to earn incomes above the subsistence level. In addition, to combat the environmental destruction I spoke of earlier, project-supported soil conservation demonstration areas would provide an opportunity for voluntary settlement of virtually landless poor rural inhabitants and would help reverse the serious existing problem of soil erosion on steep hills. In summary, the project provides, in our view, an excellent example of the potential for practical cooperation between China and institutions like the Bank, in the pursuit of our shared goals of economic development, environmental conservation and the lasting eradication of absolute poverty. Thank you.