China, Globalization, and the IMF -- Address by Eduardo Aninat
January 14, 2001Eduardo Aninat
Deputy Managing Director, International Monetary Fund
The Foundation for Globalization Cooperation's Second Globalization Forum
Sanya City, China, January 14, 2001
Mr. Chairman, ladies and gentlemen, I am honored to be here at this critical point in China's remarkable development. Your topic, globalization and its far-reaching ramifications, could not be more timely. It tops the international agenda in policymaking circles, it absorbs academics and scholars, it generates much interest in the media, and it fascinates people around the world as they debate the impact on their own lives.
For China, this topic is anything but theoretical. It could not be more real. In the coming months and years, China must make decisions that will determine how well it integrates further into the global system. There is no longer a question of whether to integrate, but only of how best to do so.
Globalization offers enormous benefits, in the form of higher productivity and living standards. But it also poses daunting challenges--navigating volatile capital markets and ensuring that the benefits of the globalized economy are shared by all. In the end, China, like all nations, must find its own way, true to its culture and institutions. The IMF, along with the rest of the UN family, can help by providing a safer environment to do so. As UN Secretary General Kofi Annan recently said: "It is our job to ensure globalization provides benefits, not just for some, but for all; that peace and security hold, not only for a few, but for the many; that opportunities exist, not merely for the privileged, but for every human being everywhere."1
In my remarks today, I would like to discuss how the international financial institutions, especially the IMF, can help. But first a look at the phenomenon of globalization and how it is shaping China's economic options.
Globalization: an irresistible force
Globalization can be defined as the increasing interaction among and integration of diverse human societies in all important dimensions of their activities--economic, social, political, cultural, and religious. It is not new; it has been occurring for centuries. The driving forces have been threefold.
- First, improvements in technology, especially in transportation and communication;
- Second, a desire by people to take advantage of the opportunities provided by
interactions with other societies--whether through trade, migration, investment, and acquisition
of knowledge; and
- Third, in recent decades, the lowering of barriers to international trade and capital flows resulting from the liberalization of policies.
But what is different about the current epoch is the enormous impact that new information technologies are having on market integration, efficiency, and industrial organization--along with its implications for the development of human capital. How do these new technologies help? They boost efficiency and growth by spreading knowledge and reducing transaction costs for individual firms and the economy as a whole. For example, as reliable and timely business information becomes available, firms can know their customers' needs better, hold smaller inventories, allocate assets more efficiently, and make workers more productive.
The increased availability of information also tends to lower barriers to entry, increase competition, and contribute to higher investment. While it is clear that a "digital divide" exists between industrialized and developing countries, the widespread availability of new technologies and improved access to markets over the Internet offer the opportunity for poor countries to move more rapidly into the modern age. The resulting increase in market efficiency and changes in the way businesses operate, translate into a positive supply shock that leads to a quantum leap in overall productivity.
Not surprisingly, in such an environment, developing human capital takes on added importance. In fact, it is not an exaggeration to say that the capital that matters most in the digital revolution is intellectual capital. Studies of the sources of growth show that the more rapid accumulation of human capital--and its more efficient use in key economic sectors--can be crucial for strengthening a nation's overall growth performance.
What is also different about the current epoch of globalization is its rapid pace. Since World War II, trade has been a major driving force in economic growth, with global trade expansion proceeding at twice the pace of global output growth. This has gone hand-in-hand with the greater internationalization of production, an expansion in the trade of services, the emergence of developing countries as producers and exporters of manufactures, and the explosive growth of international capital flows. The world as a whole has benefited greatly from this openness. Globally, real per capita incomes have roughly doubled since the mid-1960s, with those in developing countries growing, on average, just as fast as those in industrial countries.
The strong consensus among policymakers and economists today is that outward-oriented strategies are essential for achieving the sustained economic growth needed to raise living standards. Indeed, it is difficult to find evidence of a single country that has significantly raised living standards for its people on a sustained basis, without sharply expanding its trade and investment links with other countries. We know that more open economies grow faster than closed ones, and that faster growth is necessary, although not sufficient, to reduce poverty.
The bottom line is that countries have no choice but to integrate into the global economy. Not to do so risks marginalization; at a time when there is already a huge, and growing gap between rich and poor countries. Yet the process of opening up must be handled in a carefully sequenced, prudent manner, with existing structural weaknesses tackled and prudential regulations strengthened.
China: on the threshold
It is clear to me that this dilemma is a familiar one for China--and also that China recognizes that the benefits of integration into the global economy far outweigh the costs. Two decades of reform bear this out, with growth averaging around 9 percent since 1980--an extraordinary performance by any standard. In addition, it weathered the Asian crisis much better than most in the region, thanks to a timely easing of fiscal and monetary policies, its strong external position, a prudent approach to capital account liberalization, and financial reforms. The outlook for 2001 remains good, with growth expected to be around 7 percent.
But China is now at a critical juncture. It is ready to dramatically step up its integration into the global economy and become a major player on the international economic scene. This is evident in its decision to join the World Trade Organization (WTO) and in its actions to keep its currency a pillar of stability during the Asian financial crisis. Yet with this greater responsibility comes the urgent need to accelerate reforms; indeed WTO accession could well prove to be a watershed for a new generation of reforms.
China's decision to further open up its economy should help to make domestic industry more efficient, spur the development of the legal and regulatory framework necessary for a market economy, and increase foreign direct investment. But it will also give rise to major short-term dislocations in the transition--possibly including higher unemployment and greater income disparities. It will certainly increase competitive pressures in a number of sectors (agriculture, automobiles, and certain capital intensive producers, such as in telecommunications), all of which should work in the right direction for the longer term.
For these reasons, it is essential that China continue to prepare its domestic enterprises and banking system for global competition. This will entail establishing a government social security system, strengthening the banking system, and further liberalizing interest rates. As the effects of increased competition feed through into efficiency and productivity gains, reversing the declines witnessed in recent years, the benefits will be seen in higher living standards for China's people.
Will China's economy benefit from WTO accession? We believe the answer is clearly yes! At this point, China's exports are concentrated at the relatively low end of the value-added ladder, such as apparel, footwear, and household products. But China is moving up the ladder, with exports increasingly in the high-tech realm, and further liberalization can only serve to its benefit. Indeed, recent studies have underscored how all countries stand to gain from reducing trade barriers, especially their own.
There will necessarily be adverse short-term impacts in some sectors of China's economy, but the sectors likely to be so affected account for a small portion of output and trade. Imports will rise, but so, too, will exports as the effects of greater enterprise efficiency and quota elimination under the WTO Agreement on Textiles and Clothing are felt. In addition, from an early stage, China should attract higher foreign direct investment--especially in the services sector--leaving the balance of payments not greatly affected. It is the crucial gains to efficiency that hold the promise of sustained benefits for real incomes and living standards.
While a new generation of reforms will clearly be beneficial to China, there is also no question that industrial countries should practice what they preach, and open up their own economies more decisively and extensively. They are the ones who will benefit the most from their own trade liberalization. They should liberalize particularly in areas where developing countries have a clear and demonstrated comparative advantage (e.g., agriculture, processed foods, textiles and clothing, and light manufactures). A reduction in trade barriers by 50 percent globally would yield welfare gains in the order of an estimated $400 billion annually for the global economy--with developing countries capturing one-third of these gains! That is why developing countries should push for a new global trade round, a so-called "development round." In the meantime, the IMF supports calls for the poorest countries to have duty- and quota-free access to industrial country markets. It also supports giving developing countries credit, in future global trade rounds, for the unilateral steps they take.
The IMF: spreading the benefits
Of course, China's economic outlook will also be shaped by global developments. The strong global expansion of the last two years is losing steam. A slowdown has been expected, of course, but world growth this year now seems likely to be significantly lower than was projected in the last World Economic Outlook. However, the timely ½ percentage-point-cut in interest rates by the Federal Reserve will help ensure that the current slowdown in the United States takes the form of a "soft landing," particularly as there is further room for maneuver on both the monetary and fiscal policy fronts. Europe and Japan can also help by stepping up reform efforts--Europe in the labor and pension areas, and Japan in the corporate and financial sectors.
Asia as a whole has undergone a remarkable recovery in the last two years. However, the slowdown in the rest of the world, as well as political and economic uncertainties within the region, are lowering confidence and future growth prospects. This underlines the need to maintain supporting sound macroeconomic policies and accelerate reforms.
But short-term prospects aside, China and the rest of the world also need a stable environment in which to prosper. What can the IMF do to help bring this about? Let me focus on four key areas.
First, the IMF should promote lasting, non-inflationary growth for all; what we often call "high-quality growth." The emphasis is on growth that is people-centered--that is accompanied by adequate human capital investment, especially in education and health, to take full advantage of the tremendous leverage of human development on growth and welfare. Growth is our best hope for poverty reduction--the world's single, greatest development challenge. Growth is also a vital source of financing for targeted social outlays. For example, during the 1990s, Chile was able to finance four-fifths of its 50 percent increase in real per capita social outlays by using the higher revenue derived from faster growth.
Second, the IMF should be the center of competence for the stability of the international financial system. That is why we are forcefully strengthening our work on capital markets and banking systems. We are undertaking a number of initiatives aimed at improving many other institutions, markets, and practices that governments, businesses, and individuals use when they carry out economic and financial activities. And we are rethinking the way we monitor national economies and the global monetary system.
One particularly promising initiative underway, jointly with the World Bank, involves thorough health checks of a country's financial sector. We want to know how well the financial system would handle adversity. For example, would financial institutions remain profitable and solvent in the face of a large, sudden interest rate shock? We also want to get a reading on indicators that have signaled crises in the past and on the quality of the supervisory and regulatory system. After a successful pilot project for 12 countries, the Financial Sector Assessment Program (FSAP) has recently been expanded to cover about 24-30 countries a year. Of course, risk-taking is an integral part of a dynamic, market economy. But this program should help reduce the incidence of crises by identifying weaknesses in a country's financial sector and making timely suggestions of remedial policies.
Third, the IMF should work closely with the other international institutions set up to protect global public goods. Each institution needs to concentrate better on its areas of responsibility and expertise to be more efficient and accountable. For the IMF, this means a more intensive focus on its core areas of responsibility: providing advice on monetary, budget, and exchange rate policies, along with financial sector issues, and overseeing the functioning of the international monetary system. And we are working more closely with the World Bank and other agencies in diverse areas--in developing internationally recognized standards and codes of good practice in policymaking, reducing poverty, providing debt relief, and, as already mentioned, strengthening financial systems.
Since 1989, the IMF has provided technical assistance to support China's reform efforts, covering the areas of public expenditure management, tax administration and policy, monetary policy, the exchange system, and statistics. A major technical assistance project, in collaboration with the UN Development Programme and other partners, has just been initiated to further help China with fiscal policy and management reforms over the next three years. In May last year, the IMF co-hosted with China a first-ever meeting of multilateral and bilateral donors of technical assistance in statistics to take stock of lessons learned and plan for the future.
Fourth, the IMF should be an open and learning institution, continuously adapting to the evolving needs of the membership in order to perform better. It means not only being open to proposals from our 183 member governments, but also--in our culture of openness and transparency--increasingly reaching out to groups ranging from nongovernmental organizations and civil society generally to the private financial sector.
* * * * *
In closing, I would just like to point to the IMF Executive Board's recent proposal to increase China's quota at the IMF, following its resumption of the exercise of sovereignty over Hong Kong, effectively enhancing China's voting power and access to credit. When this increase comes into effect, China's quota will be the eighth largest. This is further recognition by the international community of China's growing role as a major player in the world economy. As China continues to open its doors to the world, it will attract valued transfers of knowledge and technology. The IMF is a willing partner, ready to help China enhance its reform process and economic prospects, so that this great nation can continue its extraordinary record of raising the standard of living of its people.
|China: Key Economic
|Real GDP growth||8.8||7.8||7.1||8.0|
|(In percent of total exports)|
|Key export items1|
|Textiles and apparel||23.6||22.0||21.2||20.3|
|Electrical (e.g. appliances, TVs)||13.4||14.7||16.9||18.0|
|Other (e.g. toys, machinery, footwear)||49.8||52.1||51.7||52.0|
|Key export markets1|
|Hong Kong SAR2||27.4||25.9||24.2||24.4|
1 First 3 quarters of 2000.
2 Mainly reexported.
1From the UN Secretary-General's Millennium Summit Report, 2000.