Statement by Jorgen F. Varder at the Board meeting of March 18, 1997

CONFIDENTIAL International Bank for Reconstruction and Development 87608 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-76 March 17, 1997 Board Meeting of March 18, 1997 Statement by Jorgen F. Varder China: Country Assistance Strategy We welcome the Country Assistance Strategy for China and extend our general support to its content:. The document gives a short, but good overview of the current issues in China's economic and ~ocial development. I agree with the basic analysis and sectoral priorities presented in the CAS. In order to maintain the momentum of reforms towards a market economy, it is important that support for implementing macro-economic and structural reforms stands at the center of the Bank's assistance strategy in China. I appr~iate the strategic focus on poverty reduction and rural development. It is, however, shown (page 7) how the relative incidence of poverty has in fact remained more or less constant during the past 9-12 year period - a period of remarkable growth in the national economy. This issue could have been highlighted even more in the CAS, both in the analysis and in the proposed strategy. Human development/poverty are treated as a "sector'' issue. Distribution of growth and its effect on poverty and the environment could instead be seen as a key challenge for China in the coming years, cross-cutting other sectors. This issue will become even more critical as IDA lending will cease before the end of this century (paras. 49-50). In view of this, the Bank should strongly encourage the Central Government to establish ways to allocate resources to the poorer provinces .in order to maintain high levels of IBRD lending in poverty reduction and social sectors. I fully concur with .the aim to direct more funding to the interior provinces. Such a regional shift is necessary for more balanc~ regional development. I welcome the trend that nearly all IDA-lending is directed to the int~rior areas and that over 80% goes to poverty reduction and social sectors. ·" The reform of State-Owned Enterprises (SOE) is vital and urgently needed in the transition to a market-oriented economy in China. The importance of SOEs for employment, social security and social stability is significant. But many SOEs are now making losses and are having problems with inter-enterprise arrears and wage and tax arrears. The discrepancy between the declared intentions to reform large unprofitable SOEs and the continued subsidizing of them give cause for concern. Delays in this transition process could effectively block necessary reforms in the public finances and the financial sector due to the substantial financial demand by th~ SOEs. This document has a restricted distribution and may be used by recipients only in the perfonnance or their official duties. It should not be distributed without the consent of the Executive Director concerned.  2 Reforming the SOE-sector should at the same time be pursued at a speed that takes into consideration the potential negative side effects for the Chinese society and on alternative employment opportunities. The ideas of transferring responsibility for social safety nets to the Government - both on a municipal and eventually national level - by i.a. using pilot schemes - seem sound in this context. In order to increase development effectiveness, I believe that the Bank should give high priority to capacity building efforts. The possibilities to increase technical assistance in infrastructure projects might be an area for further review. Furthermore, I would have welcomed a discussion in the CAS on the Bank's participatory approach in China. I appreciate the comprehensive risk analysis in the CAS. In the evaluation of the risks, rising unemployment of the rural population should be monitored more closely. The rural population represents nearly 70% of the total population and 200-300 million are said to be underemployed or unemployed. I would have liked to get a clearer answer in the CAS on how the emphasis on infrastructure, especially highways and power plants, will relate to the increasingly important objectives of poverty reduction and greater equality between the coastal provinces and the poor inland. The World Bank's large commitment and portfolio in China should be subject to .· continuous careful assessment and analysis. With respect to portfolio concentration management, the Bank should continue to monitor closely the lending levels in subsequent CASs. Given the increased and diverse portfolio of the country program and China's position as one of the main borrowers from the Bank, I wonder whether there are any plans to place the Country Director in Beijing and delegate more authority to the Resident Mission ?