"Chinese Economic Development, Prospects and Challenges"
Keynote Address by
Haruhiko Kuroda
President
Asian Development Bank
At the China Development Forum
19 March 2006
Beijing, People's Republic of China
I. Introduction
Honorable Chairman, distinguished guests, ladies and gentlemen:
When the history of the 20th and 21st centuries is written, the People's Republic of China will surely be recognized as one of the world's great development success stories. Today, however, the story is far from complete. While China has made truly amazing progress, some tough challenges lie ahead.
I would like to express my heartfelt appreciation to the forum organizers for this opportunity to talk about some of these challenges, as well as the country's exciting future prospects. As a key partner in development, the Asian Development Bank (ADB) is committed to working with the Government on its journey towards widely shared, equitable growth and prosperity - prosperity that benefits all China's people, especially the poor.
II. China and Asia: Growing Together
Over the past 25 years or so, China's economic performance has been spectacular, averaging real GDP growth of 9.6% a year, and external trade growth of 14.6 %. China recently released a growth figure of 9.9% for 2005 after having revised GDP figures substantially for the period 1993-2004. This growth rate for 2005 leaves little doubt that China has been, and will continue to be, a major driver of growth in Asia.
China's efforts to open up to the outside world have been extremely positive - not only for the country itself, but for the region as a whole. Spurred by strong processing exports and domestic demand, China's imports from Asia have soared, China has now overtaken the US as the single largest export market for Korea, absorbing 24.5% of its exports in 2004. China is also an important and growing market for Japan, Malaysia, Philippines, Singapore and Thailand, and a key driver of regional integration.
Obviously, with its sheer size and rapid climb up the value-added chain, China's emergence as a manufacturing base has greatly modified the global competition landscape. In the short run, economies that are slow to adapt to the changing dynamics of comparative advantage could face more direct competition. However, for most Asian economies, the new growth dividend of China's expansion can also facilitate adjustment to a more integrated regional economy. Over the medium to long-term, China's economy offers tremendous opportunities for Asian exporters of primary commodities, manufacturing inputs and final goods, which will more than compensate for the challenges it has brought.
III. The Challenges Ahead
The benefits for China itself are clear and measurable. Sustained, rapid, economic growth and targeted government programs have put China ahead of schedule in achieving many of the Millennium Development Goals (MDGs). For example, the proportion of the population living on less than $1 per day has already fallen from 33% in 1990 to 10.4% in 2004 - well ahead of the MDG target for cutting absolute poverty rates by half by 2015.
Having come this far, China is well positioned to take the next steps on its journey to sustainable growth and prosperity - steps to make growth more inclusive and further reduce poverty, to improve governance and promote stronger social development, and to counter the negative environmental impacts of growth. Let me offer a few thoughts on each of these areas.
A. Inclusive Growth for Poverty Reduction
Despite notable progress in poverty reduction, China still has a very large population of poor people. Again using the $1 per day guideline, about 135 million people were classified as poor in 2004 against the international standard. The speed of poverty reduction has slowed, partly due to slow growth in rural income in recent years. Moreover, income distribution actually worsened in the past two decades.
If economic growth is to benefit most of the population - especially the poor - it must be equitable and inclusive. While some deterioration in income distribution is inevitable as China moves from a centrally planned to a market economy, the speed of the growing inequality is worrying. China's income inequality is now above the average of many regions.
Poor interior regions have not benefited as much from economic growth and reforms as the east coast. Per capita GDP in the interior is less than half that along the east coast. An ADB business climate survey found that about 39% of foreign companies operating in China would not consider expanding their operations into the interior provinces, mainly because of a lack of markets and poor infrastructure.
In addition to income inequalities, education, health, social security and gender disparities have widened among some segments of society. Compared to other developing economies, China has shown impressive progress toward eliminating illiteracy and achieving universal, 9-year compulsory education. But disparities persist in education access, quality, and outcomes across regional, urban-rural, and gender dimensions.
Similarly, there is still a large gap in the quality of health services between rural and urban areas. Health insurance systems largely exclude rural residents and migrant workers. Overemphasis on the "user pays" principle in compulsory education and public health threatens social service access for poor households.
So, what are the solutions?
With about 60% of the population engaged in the agriculture sector, improving the performance of agriculture is the direct way to reduce urban-rural inequalities. Given the arable land and water constraints, agricultural development needs to focus on improving rural infrastructure, diversifying crop production, and adopting integrated, environmentally friendly approaches to farming. Rebuilding the rural financial system would also relieve the lack of financial services that constrains farmers' investment options.
Creating sufficient job opportunities for the 150 million surplus rural laborers is also critically important. This is a major and ongoing challenge which will require greater SME and private sector development, as well as vocational training for rural migrants. Furthermore, if China is to avoid the urban poverty and slums that are evident in many of the world's mega cities, the Government has to learn from the lessons of urban development in Asian and Latin American countries - lessons like the importance of urban housing, infrastructure and social safety nets.
In the short term, however, priority should be given to the poorest of the poor and poorest rural areas. A recent ADB study shows that a basic social development and poverty reduction program for rural areas would be affordable even in the current fiscal circumstances. For a cost of additional RMB100 billion a year, with in two to three years, the Government could
- establish a rural minimum living standard support system to help about 25 million of the poorest people,
- provide free 9 year compulsory education for 120 million students in rural areas;
- establish a basic rural health care system to cover all 770 million farmers; and
- speed up the participative poverty reduction program in the 148,000 poorest villages nationwide.
Ambitious, yes - but achievable. Given that fiscal revenue increased by about RMB 500 billion per year in the past two years, such an outlay is quite feasible, and would go a long way to making growth more inclusive and equitable.
B. Governance for Social and Economic Development
Beyond its economic and social dimensions, China's transition from a centrally planned to a market economy marks a fundamental change in the system of governance. In our view, continued reform in the legal and regulatory system is needed to support the market economy and to conform to WTO rules. In order to minimize waste of public resources and reduce corruption, considerable work needs to be done to improve the country's auditing and accounting system. It is also important to build local public administration capabilities in the central and western provinces and support efforts to broaden public participation, particularly by the poor, in decisions that affect them. In all of these areas, ADB could continue to provide assistance and bring global best practices to China.
Our experience has taught us that sustainable social and economic development requires strong government partnerships with civil society. The 1990s witnessed an explosive growth of NGOs in almost all Asian countries. I am pleased to note that the Government of China has taken steps to increase public participation, with a positive role for NGOs. Recently, for example, ADB assisted Jianxi province involve NGOs at the village level in implementation of a poverty reduction project. This is the first time China has allowed NGOs to participate in social services using large scale public resources.
C. Environmental Sustainability and Energy Conservation
Turning to the environment, it is clear that here, too, China faces a very large challenge. Inappropriate pricing, use of obsolete, polluting technologies, limited natural resources and weaknesses in environmental management have left a legacy of land degradation, poor and declining water quality, air pollution and acid rain. Over the next two to three decades, rapid growth, industrialization and urbanization will place even greater pressure on China's environment and natural resources.
ADB is actively assisting China to deal with these issues. By the end of 2005, ADB had provided over $3.4 billion in loans to support environmental improvement. In our view, increasing investment in the environment from both public and private sources, and more closely involving private companies, NGOs and the general public in environmental protection, should be top priorities as China continues to grow.
Improving the transparency of environmental legal and regulatory processes, along with stronger enforcement, are important elements of environmental sustainability. While good progress has been made in water tariff reform, there is a need to strengthen wastewater tariff and solid waste charges reforms. Pricing policies, too, should encourage use of cleaner energies and reduce air pollution.
Due consideration must be given to sustaining energy resources in China. The demand for energy continues to outpace supply, resulting in shortages of petroleum products and electricity. The large share of manufacturing in China has led to concerns regarding the country's relatively high energy intensity. The projected GDP growth rate of over 7% to 2020, along with rapid urbanization and motorization will add to the stress.
Energy conservation can only be achieved through a comprehensive approach that includes energy system optimization, construction of cogeneration power plants and energy efficient buildings, demand side management and capacity building for promoting and implementing energy conservation projects. I am pleased to know that the Government recognizes the enormous potential for, and the benefits of, energy conservation. In its recently approved 11th Five Year Program, the Government targets a decrease in energy consumption per unit of GDP output by 20% by 2010.
IV. The Future Role of ADB in China
Ladies and Gentlemen, this year is the 20th anniversary of China's membership in ADB. In the past 20 years, China and ADB have become true partners in development. ADB's support includes lending, technical assistance, policy advice and information. Our assistance covers a wide range of activities, including infrastructure and environment projects, legal and institutional reforms, and human resource and capacity development in key agencies.
Our operations in China focus on promoting pro-poor economic growth - that is, ensuring that the poor can participate in and benefit from the process of growth. Jointly with the Government, ADB has channeled most of its lending to the central and western regions in which the majority of the poor live.
By end of 2005, our total lending to China had exceeded $16 billion. We have also provided more than $220 million in technical assistance grants. Over the next three years, our lending is expected to total about $4.5 billion.
Of course, as China's development needs change, so should our partnership change. We are glad to know, for example, that the 11th Five Year Program targets rural development as one of the country's top priorities. ADB has operated intensively in agricultural and rural development in Asian countries in the past four decades, including in China. We welcome opportunities to expand both our lending operations and our knowledge sharing with China in areas like rural infrastructure, biogas development, rural industrial promotion, rural financial reform, poverty reduction in the poor regions, vocational training for rural migrants, reform in rural health system, environmental protection and energy efficiency. We will continue to seek creative, effective ways to cooperate with the Government and the people of China and other development stakeholders to help achieve our shared goal of widespread, sustainable growth, and an end to poverty in Asia.
V. Concluding Remarks
Ladies and gentlemen, the challenges I have outlined today are daunting. But the Government's track record of reforms and excellent management of its globalization process give me confidence that such challenges can and will be met.
Judging by the historical experience of other Asian countries, China is well positioned to sustain robust growth over the next decade, thanks to a high domestic saving rate, rapid productivity growth, attractiveness as a destination for FDI, and responsible macroeconomic management. By ensuring that growth is inclusive, accountable and environmentally sound, China will continue to be a major player in the world economy, and a primary driver of regional and global prosperity.
Thank you.
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