Understanding China, Remarks by John Lipsky, First Deputy Managing Director, IMF, At the Conference on Global Implications of China's Trade, Investment and Growth, Washington
April 6, 2007
Speech
Thank you, Simon, for that introduction. And let me in turn welcome you to the IMF as our new Economic Counselor—we're absolutely delighted to have you at the helm of our Research Department for what we hope will be a great many years.
I'm glad to be able to spend a few minutes with all of you, and—having had a chance to look at your rich conference program—regret that it's only a few. One of the unfortunate aspects of my job is that is one gets to look at the menu but not always have time to order.
China's rise over the past three decades has been spectacular. It has consistently been among the world's fastest growing countries, with recent GDP growth exceeding 10 percent for four straight years. What's heartening is that the growth has rescued several hundred millions from abject poverty. By some estimates, China alone accounted for over 75 percent of poverty reduction in the developing world over the last 20 years.
How did China pull this off? As you've been discussing this morning, the role of trade is undeniable. China's merchandise exports grew 12-fold over the last 15 years, compared with a tripling in world trade—which itself is not a trifle. This is similar to what other countries who have had sustained high growth have done.
This point comes through very clearly in work that my friend Michael Spence and his colleagues have just completed at the Commission on Growth and Development. (Some of this work, coincidentally, is being presented today in New York.) They looked at growth miracles, defined as growth of over 7% a year and sustained for over 25 years. Each and every one of these miracles had had an export sector as a driver of growth and an increasing share of trade in GDP. There are no exceptions. Every growth miracle involves leveraging the demand and resources of the global economy.
Of course, resource mobility is also vital. Productivity in China has been enhanced by moving resources from the less productive agricultural sector to more productive uses in manufacturing. About 100 million people have moved from rural to urban areas over the last two decades. And more recently, foreign investment has played a major role in steering resources into their most productive uses. Productivity in foreign-owned firms is higher than productivity in domestic firms, as some of the work you'll discuss this afternoon demonstrates.
What does China do next? How does it sustain this spectacular performance? While the external sector will continue to be vital, China will also have to begin looking inward to sustain growth in the long run. And, happily, this is exactly the direction in which Chinese policymakers intend to go.
•They clearly see the importance of improving financial intermediation to help to boost internal demand. With better intermediation, China could grow just as fast with significantly less investment, allowing consumption to play a larger role in supporting demand.
• The aging of the population will also place large and immediate demands on the financial system. The proportion of people age 60 and over is growing faster in China than in any other major country, with the number of retirees predicted to double between 2005 and 2015. Developing the financial sector is vital to provide satisfactory living standards to these growing number of retirees and to the children who will have the responsibility of supporting them.
• Growth also needs to be more inclusive. As the Chinese authorities have noted, it needs to be better balanced between rural and urban areas, and also between eastern and western regions. In China, rural incomes are less than one-third of urban incomes; the corresponding figure in the United States, for example, is 80 percent.
• And, finally, as Premier Wen Jiabao has noted on many occasions, the environmental consequences of rapid growth must be addressed. Seven of the world's 10 most polluted cities are in China. One-third of the water courses are severely polluted. Enhanced enforcement of environmental regulations is needed, and economic decisions on energy and land use have to reflect environmental concerns.
As China's turns its focus inward, there will of course be implications for the rest of the global economy.
• As China looks inward, it will provide a vast and dynamic market for the rest of the world. China's need for natural resources and raw materials will continue to boost prospects of resource-exporting countries. But, in addition, as China's income grows, the opportunities for other foreign producers will also expand, including no doubt in the provision of services.
• There are also implications for global imbalances. Lower savings relative to investment in China will lead to a decline in China's current account surplus. And the big change to watch for is a turning point in the U.S. savings rate. The low U.S. savings rates reflect the rather remarkable growth in household net worth, an unexpected surge in productivity in the mid-1990s, and an unexpected disinflation that lowered real long-term interest rates and thus raised the value of long-lived assets. Savings in the United States should return to more normal levels as these forces abate. This rebalancing of domestic demand across countries is one the factors that should help bring about a gradual unwinding of global imbalances.
It's important to do careful research on China's success story, and on the likely implications of what it does next for the rest of the world. I'm glad these questions are being addressed at this conference. After all, it is the accumulation of past research findings that has produced much of today's understanding—and conventional wisdom—of the sources of China's success.
So, on behalf of the IMF, let me express my gratitude to all of you from other institutions who have joined our staff today. The research you have produced and discussed will, I'm sure, be part of tomorrow's conventional wisdom on China.
Thank you.
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