Monday, February 27, 2012

World Bank warns China on growth, reforms

The World Bank has warned China that it needs to embrace fundamental free-market reforms if it wants to see its economy continue to grow at the "impressive" pace of the past three decades.

In the 400 page report the World Bank said China had reached a "turning point" and needed to reform a growth model that it described as "unsustainable".

The role of government and state enterprises both needed redefining, the report said, however it said that even if growth slows, China was likely to become the world's largest economy before 2030.

The report lays out six reforms it says China should adopt. The country should enact structural reforms to promote a market-based economy. This could be achieved by redefining the role of government, reforming state enterprises, developing the private sector and promoting competition. The report also advises China to quicken the pace of innovation, both internally and by participating in global research projects.

Strengthening the fiscal system by mobilising additional revenues and boosting local government financing was also identified as a priority as was an encouragement to engage more with the global economy.

Investment in green projects is encouraged and as well as increased efficiency in the use of resources. The World Bank also called on China to bring about a change in social welfare and to promote social security for all citizens.

Beijing might find it difficult to accept the suggestions. China is resilient to criticism or being dictated to, often referring to such things as "interference in China's own domestic affairs". However, the director of the World Bank Robert Zoellick was clear in the bank's assessment. "The case for reform is compelling" because China has "reached a turning point in its development path", Zoellick said [YouTube].

"China has an opportunity to avoid the middle-income trap, promote inclusive growth, without further intruding on the environment, and continue its progress towards becoming a responsible stakeholder in the international economy," Zoellick added.

A failure to implement such changes could result in an economic crisis that will not only affect China but the rest of the world. Editor in Chief at the Economist John Micklethwait, speaking on CNN said that one of the most important things China can do in to increase domestic consumption. "China doing well, is good for everybody," Micklethwait said.

How resilient China will be to accept any changes is hard to assess. Chinese leaders frequently talk about the need to reform the country's economic model, partly by reducing its heavy reliance on exports and increasing domestic consumption. But significant reforms have been slow as stability-obsessed leaders try to maintain rapid economic growth seen as essential to create enough jobs for the country's 1.3 billion people and suppress any potential unrest.

Beijing prohibits or restricts foreign investment in certain sectors such as auto, energy, finance, banking and telecommunications, drawing criticism from overseas competitors over the lack of market access and unfair treatment.

Domestically, privately owned firms also complain about the lack of competition and the fact they cannot access financing from commercial banks, which prefer to lend money to major state-owned enterprises.

Such issues will need to be seriously addressed, says both the World Bank and leading economists if China wants to remain on track. In the first hint of a reaction from China Vice Premier Li Keqiang said China had carried out "all-round, win-win and fruitful cooperation" with the World Bank over the past 30 years, and strengthened cooperation in joint studies in recent years.

The vice premier pledged his support to joint efforts with the World Bank and other countries to promote reform on global economic governance. However, in the report that was published by the state news agency Xinhua, Li failed to address other specific key points in the World Bank report.

[Links: World Bank: Opening remarks / China : Case for Change on the Road to 2030 / Executive Summary - downloads page / BBC / CNN / Guardian / Telegraph]

tvnewswatch, London, UK

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