Deepening Supply-Side Structural Reforms – Kristalina Georgieva, World Bank Chief Executive Officer’s Speech at the China Development Forum
Chairman He Lifeng, President Nakao, Distinguished Delegates, Ladies and Gentlemen,
The famous Confucian scholar Zhu Xi wrote “I wonder how the pond stays so clear; it must be that spring water keeps flowing in from upstream”. That notion of refreshing our thinking, keeping it clear, is what the China Development Forum is known for – a great place for exchanging views and developing new ideas. It has been a tradition for my institution, the World Bank, to take part in the debates of the Forum and I am excited to continue this tradition in the first months of assuming my position as the Bank’s new Chief Executive Officer.
The subject of this session — deepening supply-side structural reforms — is both important and timely. Important, because these reforms are essential to accelerate growth and create the jobs without which we cannot meet the aspirations we have collectively defined with the Sustainable Development Goals.
And timely because the focus on stimulating growth is becoming more pressing as year after year the world economy fails to return to the growth trajectory from before the financial crisis. Stagnant global trade, low investment, and heightened policy uncertainty made 2016 another difficult year for the world economy. Global growth remained disappointing with a post-crisis low of 2.3 percent. The data suggest that a stronger than expected economic recovery is under way this year, and growth is projected to rise to 2.7 percent in 2017 – but still against headwinds of policy unpredictability in some of the major economies and persistently stagnant productivity growth.
Let me acknowledge than a third – 35 percent – of global growth last year came from China’s contribution, and its share is projected to remain high. This is a major achievement.
In its 13th five year plan China has laid out its ambitions to focus on increasing productivity and innovation as new drivers of growth. Structural reforms have become central to the country’s agenda for 2020.
This high-level commitment to reforms has been reiterated by President Xi Jinping at the Hangzhou G-20 summit, and more recently by Premier Li Keqiang in his report on the work of government to the National People’s Congress. The report lists progress on a broad range of supply side structural reforms, including in the important, but challenging areas of enterprise reforms, overcapacity reduction and financial deleveraging.
Internationally, China’s leadership of the G-20 put the spotlight on structural reforms, innovation, digital economy and infrastructure investment as means to boost growth. Work that followed, including an IMF paper on structural reforms and macroeconomic performance, brought some important observations.
Interestingly, the potential payoff from different types of structural reforms varies. For instance, economies at all levels of income benefit from tax and financial sector reforms, but reforms to the legal system and property rights boost productivity growth in low and middle-income countries, not in high-income economies.
Trade liberalization is particularly beneficial for low-income countries. But labor market reforms and increased competition in goods and factor markets benefit middle and high-income countries the most. The analysis also suggests that the benefits of reforms tend to be more pronounced when reforms are bundled together.
Let me focus on some lessons from experience in supply side structural reforms. The first is that the role for the government is widely accepted in lowering taxes and administrative burden, but there is considerable debate about it in industrial policies and in promoting technological change.
In principle, market failure, coordination issues, and high-risk in developing new technology and innovation warrant a role for the state. In practice, the extent of government involvement, and indeed its success has varied widely among countries across the globe.
Clearly, there have been success stories on both sides. For instance, China’s neighbors Japan and Korea are good examples of countries for which industrial policies have worked well—though even these countries had their missteps. One key to their successes was, on the one hand, relentless domestic competition and, on the other, openness to the world. This not only created markets large enough for production to come to scale, but also allowed for ideas from abroad to be adopted — and perfected.
Other emerging economies had more mixed results in implementing industrial policies. For some, industries that were protected behind high-tariff barriers never grew out of infancy and remained a burden to the state and the economy.
The evidence is more consistently positive in promoting more investment in R&D. Governments in OECD countries have been actively engaged in developing new technologies by promoting R&D. Some have argued that the state should go further in more downstream activities, in developing and commercializing new technologies.
China’s government has also been actively engaged on technology policy and innovation in the past two decades. China now spends more than 2 percent of GDP in R&D, a share almost three times that of 20 years ago and one that is comparable with OECD countries. And it spends more than 4 times as much on domestic R&D than it spends on the import of technology (up from equal amounts spent on each in the early 2000). China has also greatly expanded its list of key industrial programs, and provides considerable budget, finance and other resources to those sectors.
The current debate is therefore not whether governments need to be engaged in industrial policy, but to what extent they should be engaged. How and with which tools, and where the market can more effectively step in. This division of responsibility clearly differs from country to country, and from time to time.
Second, competition has proven to be a strong driver of efficiency, diffusion of technology and innovation. In fact, the OECD recently argued that one reason behind the slowdown in productivity growth could be the waning competitive pressures on firms, which in turn are linked to loose monetary policy since the global financial crisis. To put it simply, when stimulus money is abundant even inefficient firms survive.
Competition can be increased by making it easier to enter markets, by reducing the burden on start-up firms, by increasing creditor rights and simplifying bankruptcy procedures so that inefficient firms can exit, and by leveling the playing field among all enterprises.
And competition depends on well-functioning financial system that supports investments with the highest returns, is capable to finance innovations and start-ups, and can play an active role in deleveraging and restructuring of firms that are no longer viable. There are plenty of lessons in this regard for China from rest of the world, especially since the financial crisis.
Third, labor markets need education systems able to build human capital for the 21st century. Addressing this challenge will require a multi-pronged approach, reflecting on what we have learned: that systems that do well prepare children early on; that they provide equitable access to quality higher education; that they are market-based and financially sustainable; and that they reform continuously and use information for improvement and accountability.
The World Bank Group has identified a number of promising examples of such approaches – both within the region and abroad. For instance, Japan – with its “Comprehensive Support System for Children and Childcare” intends to create a unified preschool and nursery care and education system that caters to all children aged 0-6 years.
Here in China, Shanghai offers a model to the world on how to support equitable access to higher quality education. Its approach of “Entrusted Management” partnerships was established to bridge the gap between urban and rural schools. And Chinese universities are already climbing up the ranks of world leading institutions, providing millions of graduates in science, technology and mathematics every year.
Because technology and innovation move so quickly, education systems must also provide a different kind of education. According to some academic research, more than half of the existing jobs in China’s economy are at risk of automation in the next decade. At the same time, in aging societies, people will likely work longer as the pension age catches up with our increased longevity. The Oxford Martin School studies the vulnerability of jobs to increasing automation. Their work suggests that jobs that draw most on non-routine creative and social skills, on problem-solving, teamwork, leadership and conflict resolution, on complex perception and manipulation are less vulnerable to automation.
This and more active labor market policies will be essential to ensuring that the children of today are prepared to adapt to the job market of tomorrow.
In conclusion, let me stress that we at the World Bank are committed to support China’s growth strategy, including through developing supply side policies. We are currently working with the Development Research Center of the State Council on a study that will inform the conversation in China and elsewhere on how to promote the new drivers of growth that China’s economy and the world economy needs.
From this work, we know that China is already well under way in developing new drivers of growth: its services’ sector is thriving, its manufacturing sector is moving up the value chain, and China’s exports are becoming more sophisticated. And we are confident in China’s determination to further advance its growth-enhancing policies.
My institution is proud of our long and productive partnership with China, and I look forward to contributing to it.
Thank you very much. Xie Xie Da Jia!
 This is based on: IMF (2015): STRUCTURAL REFORMS AND MACROECONOMIC PERFORMANCE: INITIAL CONSIDERATIONS FOR THE FUND. IMF Staff Report, October 13, 2015.