Transcript of Board meeting of the Executive Directors of the Bank, held on Tuesday, July 7, 1992 : China - Country Policies and Bank Group Assistance Strategy

International Bank (or Reconstruction and Development FOR OFFICIAL USE ONLY EDS92-18 FROM: The Deputy Secretary July 10, 1992 EXECUTIVE DIRECTORS' MEETING OF JULY 7, 1992 CHINA: Country Policies and Bank Group Assistance Strategy Statement by Mr. Snoy At the request of Executive Directors at the meeting held on July 7, 1992, attached is a copy of the statement made by Mr. Snoy on the above subject. Distribution: Executive Directors and Alternates Office of the President Executive Vice Presidents, IFC and MIGA Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance ____________________________________________ . of their official duties. Its contents may not other'.\ is.: be disclosed without World Bs1nk authorization ___, .__ ' ... Executive Board Meeting of Tuesday, July 7, 1992 CHINA - Country Policies and Bank Group Assistance Strategy Statement made by Bernard Snoy, Executive Director for Austria, Belarus, Belgium, Czechoslovakia, Hungary, Luxembourg and Turkey Mr. Chairman, We would like to congratulate Mr. Burki and his staff for this excellent overview of the complex realities in China's economic set-up. We also welcome the Bank's adherence to a gradualist approach to enduring problems, keeping in mind that wholesale and abrupt reform could jeopardize the economic and social stability in a country holding one fifth of the world population, which certainly would not be in the best interest of either China or her next-door neighbors. I congratulate also the staff for the interesting Country Economic Memorandum on China we received recently. I appreciated the tentative conclusions outlined in pages 65 to 69, particularly those relating to agriculture as the entry point for the reform program, "privatization from below", emphasis on export development and the role of the state in maintaining social stability. I am more intrigued by the report's assertion that the use of decentralization and the promotion of non state industry generated a reorientation of the interest of the bureaucracy away from planning goals towards economic performance, but I agree that, if appropriate incremental reforms, stressing growing "marketization" and a continued associated increase of competitive forces via growth of the non state sector and trade reform, are instituted, then the remarkable experience of the past decade lends hope that the Chinese approach can indeed lead to a sustainable pattern of "growth with reform". Given that price reform and public enterprise reform have been highlighted in the President's memorandum as crucial to the future health of the Chinese economy, we would appreciate if staff could provide us with some further details about the likely evolution on both of these fronts. With regard to the former, the reform process in agricultural pricing is especially important, in view of the huge farming sector in China providing a livelihood to nearly 200 million  - 2 - families on the one hand, and the dependence of the mass of the urban population on the availability of affordable foodstuffs on the other. To strike a balance between these two important groups, grain subsidies alone made up over 10% of total government expenditures (or 2.3% of GDP) only a few years ago. Although the recent WB report on "Price Reform in China" indicates that this amount has now been reduced by half through gradual adjustments both at the procurement and the consumer level, we would appreciate to learn what other efforts are being planned to further reduce the remaining price distortions, and how the Bank sees its role in this process. concerning enterprise reform, we welcome the report's statement that promoting non-st~te enterprise development is not a substitute for reforms in the huge public enterprise sector. As this sector employs over 100 million workers who together with their families depend on their workplace not only for their current income, but also for their housing, health benefits and old age provisions, the complexity of the reform task ahead is obvious. Could staff therefore please explain what exactly they have in mind when they state that (para 31 in fine) "The Bank plans to direct both Economic and Sector Work and future lending operations, appropriately conditioned, to helping find realistic and relevant models of public enterprise reform for China." Also, given the efforts of economic transition currently underway in the former socialist countries of Central and Eastern Europe, we were wondering to what extent the Chinese experience could be made relevant in these countries, and vice-versa. In other words, what is the staff's assessment of cross-country replicability of successful reforms, be it in the areas of privatization, public sector reform, market incentives, etc.? We welcome the good marks that the World Bank is giving to the implementation process of its projects by the Chinese authorities, placing it substantially above either Bankwide or regional averages. This good track record is indeed in line with. the results reported by other U.N. agencies operating in China, and we would like to congratulate the Chinese authorities for it. We can only support the Bank's recent strategy to put more emphasis on regional balance in its lending operations. Whereas the problems of urbanization and the pitfalls of free market transition will continue to have to be checked in the coastal areas, the alleviation of severe rural poverty will require heightened efforts in the remote areas of Central and Western China. If the Bank remains committed to poverty reduction as its most important development goal, a more resolute shifting of its resources to these areas will be necessary. In this respect at least, although it likes to consider itself as the leader of ,. ! - 3 - developmental work in . China, the World Bank will only be the follower of other U. N. agencies that have carried out this important policy shift earlier. Regarding.the environmental issues to be addressed in China, we find the report's assessment probably overly optimistic. After all it should not be overlooked that, given its current technology, China has th~ potential to become the single largest polluter on Earth: according to some estimates, its unchecked carbon-dioxide output for example could exceed that of the entire OECO by · the middle of the next century! Although the report mentions a number of significant environmental initiatives in recent years (of which we would especially highlight the involvement of GEF), we urge the Bank to carefully monitor China's environmental front, given the size of its potential pitfalls. In this respect, and even though the Bank is not directly involved in it, could we elicit staff's comments on the long-te·rm environmental implications of the Three Gorges Dam, as it has recently been endorsed by the National People's Congress? Finally, we would like to raise the important question of the rationale for continuing IDA financing to China at the current level. The report itself is fairly silent on that issue, only stating laconically (para 33 in fine): "The case for providing a significant proportion of our assistance on IDA terms also remains robust." Could staff please explain what according to them makes this case so "robust", given the excellent growth performance of the Chinese economy as a whole and the impressive accumulation of financial reserves in recent years? As the IDA-10 negotiations seem to indicate, the availability of concessional resources in the near future is more likely to decrease than to increase at least in relative terms,· so that IDA's commitment levels to "blend" countries would have to be rethought. Even though this should not be regarded as a penalization for good performance, but rather as a logical consequence of the objective of graduating countries from IDA assistance, China's economic record looks bound to be a case in point for such a re-assessment. Thank you Mr. Chairman.