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China - OECD head calls for more social spending, flexible exchange rate

Tue, 03/23/2010 - 5:29am
OECD

Remarks by Angel Gurría, OECD Secretary-General, at the China Development Forum

Monday, 22 March 2010

Beijing, People’s Republic of China

 

Chairman Zhang Ping, Distinguished guests, Ladies and Gentlemen,

It is a great honour to participate once again in the China Development Forum. Our topic for discussion is obviously of great consequence for China and the whole world.

China´s long term growth performance

China’s economy has outperformed all expectations, both over the long haul and, more recently, during the global Great Recession. China bounced back promptly thanks to the effective monetary and fiscal stimulus.  Chinese demand is helping to support the global recovery. Actually, one third of the world’s growth this year will be attributable to China’s double-digit expansion, which will ease slightly next year, as the gradual withdrawal of monetary and fiscal stimulus outweighs the impact of stronger external demand.

The strong growth performance has been accompanied by dramatic improvements in living standards. In recent years, the growth of household consumption has been amongst the most rapid in the world.

China needs to upgrade its social infrastructure

As discussed in more detail in our written contribution to this conference , based on the OECD’s 2010 Economic Survey of China, the challenge now is to sustain vigorous, balanced growth to ensure that living standards continue their rapid convergence towards those in high income countries.

The best way to do this, in our view, is to step-up public spending in social infrastructure and to unify and strengthen China’s social safety nets. This is all the more important because income inequalities have risen and the average levels of consumption in China remain low. Higher public spending on education, health, pensions and social assistance will reduce such inequalities and help with the transformation of the growth model.

While, like many other countries China needs to foster social cohesion, unlike many other countries, it is in the enviable position of having the fiscal room to do it. This will also reduce the high propensity to save, thereby contributing to global rebalancing. Indeed, macroeconomic and structural policy recommendations can be mutually reinforcing.

Education, education, education

The rapid expansion of the education system will boost productivity and help reduce income differentials over the longer run. Efforts have been deployed to ensure that by the age of 15, all children have had nine years of primary and junior high schooling. Even so, more needs to be done to improve the quality of education, especially in rural areas and to move towards 12-years of universal school attainment. The OECD is pleased to be of help to Chinese authorities in this area, through our Programme for International Student Assessment (PISA) which this year will, for the first time, include a full-scale report of the performance of students in the Shanghai Province.

Providing greater old-age security

At the other end of the age spectrum, reducing income uncertainty for retirees will reduce the household saving rate.

China’s population is ageing fast, especially in rural areas, and the elderly are increasingly unlikely to live with their descendants. A patchwork of pension arrangements exists across the country.

There are three areas of reform which can help address these challenges: (1) gradually consolidating the various pension regimes; (2) shifting more of the cost of rural pensions to the central government and pooling pension contributions nationally; and (3) raising the very low retirement ages.

Health care reform

Health outcomes in China have significantly improved due to the adoption of effective reforms with long term targets (2020). These reforms aimed at increasing investment in medical infrastructure and generalising insurance coverage, among others. However, health status still varies widely across the country, and death rates from chronic diseases are rising. Catastrophic and chronic illnesses continue to push people into poverty, especially in the poorer regions.

Reducing the economic risks of illness through better health insurance would also make for lower precautionary savings.

This calls for further policy measures focused on primary care; improved management of hospitals and better pricing in the insurance system. Once near universal coverage is achieved, including of migrants in their place of residence rather than of origin, the different insurance systems should be merged and funded more by the central government.

There is also a need for greater labour market fluidity

The new labour laws enacted in 2008 should help deal with problems such as the failure of firms to pay workers on time and the frequent lack of a formal employment contract. But here much will depend on effective enforcement. Moreover, further changes are in order. While the hukou system  has been eased somewhat, it remains a major barrier to mobility and continues to split families. It also stands in the way of China’s urbanisation objectives.

In many places, migrants are or will soon be the majority of the urban labour force but without the same rights as local citizens, which may fuel social tensions. Another related problem is that if farmers do get rights in cities they lose their land use rights – a further barrier to mobility. Last, but not least, central governments should increase their transfers to local authorities.

Environment considerations

Increasing investment in social infrastructure needs to take into account its environmental consequences. China needs “greener” modes of production and technology when changing its growth model and should strengthen its contribution to the global effort to combat climate change.

There are many proposals on how to do this, but one element is common to all: we have to put a price on carbon emissions either through taxation, through trading of permits or a combination thereof

China and the global economy

For these reforms to succeed for the benefit of China and the rest of the world, we need a positive external environment. Thus, the question of China’s exchange rate policy needs to be addressed with enormous objectivity and as part of the broader challenge of correcting the global imbalances.

The current account deficit of the United States peaked at 6% of GDP in 2006, while the current account surpluses of China, Germany and Japan in 2007 were 11, 8 and 5% of GDP respectively. While the world´s current account imbalances have moderated as a result of the recent crisis, they are set to rise again as the recovery gathers steam.

Over time, the Chinese real effective exchange rate will inevitably appreciate, as service-sector prices move towards those in the more advanced economies. The question then is how a real appreciation will occur. It can happen through domestic inflation which may portend social tensions. Alternatively, it could occur through the introduction of a more flexible exchange rate regime that would provide more independence in the conduct of monetary policy, and attenuate the looming inflationary pressures. Both for China and for the rest of the world, the latter is preferable.

This is all the more important because low growth, record unemployment and record fiscal deficits and accumulated debt in many countries constitute the perfect breeding ground for the emergence of trade and investment protectionism. It is getting ugly out there.  There are too many fingers ready to pull the trigger. We must avoid it at all cost. Any miscalculation can have disastrous consequences.

Ladies and gentlemen,

China is not alone in having to tackle domestic policy challenges of global consequences. As a major participant in the world economy, China has a stake in seeing that policy challenges in other countries are also addressed in a satisfactory manner.

The OECD’s Enhanced Engagement initiative offers opportunities for Chinese authorities to share their concerns and perspectives in a multilateral, evidence based dialogue. A closer engagement of this kind has much to contribute to global efforts to build a stronger, cleaner and fairer world economy.

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