Dragon-ride out of crisis a possibility

Signs of economic recovery have become evident just more than two months after the G20 summit. Did the G20 meeting help?

Though the G20 may have fallen short of expectations on commitments to a low-carbon future and the developing world, the world has begun benefiting from the additional $1-trillion stimulus package. In the medium term, the world stands to benefit from a reform of the International Monetary Fund and the World Bank and the agreement to regulate financial markets.

The past two months have highlighted the rise of other major players on the global stage such as China. And it is noteworthy that developing countries like China, India and Indonesia are continuing to grow this year.

China's sustainable growth depends partly on the effectiveness of the policies it pursues as it seeks to balance the economic structure and be a positive influence on the rest of Asia and the world beyond.

Discussions have been continuing on whether the 2-year $586-billion stimulus package is enough to overcome the economic crisis ever since the Chinese government announced it could achieve an 8 percent growth this year.

The package is a story in itself, coming as it does after a dramatic change in economic conditions. But will it be enough to increase consumption, generate employment, and achieve an 8 percent development rate in the short run, as well as lay the foundation for a more balanced consumption-led rather than export-dependent growth?

Traditionally, there are three considerations in this regard: the size of the stimulus package (the bigger the better), its composition (tax cuts versus spending), and the extent of frontloading (the sooner consumers spent it the better).

In China's case, the extent to which the stimulus package actually encourages consumption and manages to change people's lack of confidence in the social security and pension systems will be the key.

As a whole, it appears that the stimulus package is working, partly because the Chinese government has a range of fiscal, monetary and administrative instruments that governments of few other countries have access to in these troubled economic times.

In fact, many advanced countries are seeking to extend the reach of their policy instruments so that they too can influence the level of credit and incentivize the nature of its use. Investment and retail spending are growing, and car sales are up. Bank lending is expanding (total lending rose from 772 billion yuan in December to 1,662 billion yuan in January). Energy use is up, too.

On the other hand, there are two concerns. For one, more transparency is needed to determine how much spending is true addition, and how much would have been spent anyway. With only 4 percent for healthcare, education and cultural services and 5 percent to provide rural families with subsidies, the proposed expenditures should be seen as a down payment on additional measures needed to shift the economy away from its reliance on exports to the domestic market, and to raise spending on social sectors.

Over the past 30 years of reforms, China's rapid growth has dramatically reduced poverty and raised living standards. According to the 2007-08 National Human Development Report (HDR), 52 percent of the improvement in China's Human Development Index between 1980 and 2005 can be attributed to improvement in GDP growth, 18 percent to better life expectancy, and 30 percent to education.

But the government itself recognizes this unprecedented economic growth has come at the high cost of environmental degradation, inequality and social insecurity.

The 2007-08 HDR highlights the pressing need for spending more to provide social services to China's 1.3 billion people, and to re-examine the role of the State as a provider of these services. While per capita social spending has risen sharply, the burden has shifted from the State to households, whose share in social spending increased from 20 percent in 1978 to as much as 60 percent in 2000.

The social security system, which covers only a quarter of the eligible population, remains insufficiently funded. The end-result is that households have been compelled to save more. Consumption declined from 66 percent in the pre-reform days to 50 percent in 2006. While clearly the export-led growth model worked well for China in recent years, there is now need for a change in future growth strategies.

Global imbalances (likely to persist for some time), the sharp drop in global demand for China's products and climate change all require new thinking beyond the current stimulus package.

There are reasons to be optimistic: China's finances are in good shape. Besides its $2-trillion reserves, China has low inflation and national debt, and its tax receipts are as high as 20 percent of GDP. All these factors bode well for taking additional measures that can help rebalance the economy between exports and domestic consumption and fix the social sectors.

The time is ripe for innovative policies to steer China toward a sustainable economic and social order. And with climate change posing the greatest challenge, China can seize the chance to become a competitive low-carbon economy.

Importantly, remembering that 60 percent of Asia's trade is within Asia, China can contribute to regional recovery, too. Recent decisions by the Chinese leadership to provide substantial credit lines to Indonesia ($15 billion) and Central Asia ($10 billion), show Beijing is willing to seize the moment.

If its neighbors recover and become prosperous, it will benefit China in the long term. This mutually beneficial opportunity led to the setting up of the first-ever cross-border economic zone between China and Vietnam, supported by the UN Development Programme, last year.

Will China's economy grow at 8 percent this year? The answer most likely is "yes". Will China continue to grow in the future? The same answer holds true. Can this growth be sustained to benefit the world, especially Asian countries? That is a challenge for China's policymakers. But a historic alignment of specific circumstances now makes it a distinct possibility.

The author is UN Resident Coordinator and UNDP Resident Representative in China.

(China Daily 06/24/2009 page9)