This is a critical point in China’s remarkable development. 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.
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.
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
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, a 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 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 of 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 yes. China’s exports are concentrated at the relatively low end of the value-added ladder, such as apparel, footwear, and household products, but it is moving up the ladder, with exports increasingly in the high-tech realm, and further liberalization can only serve to its benefit.
There will necessarily be adverse short-term impacts in some sectors of China’s economy, but these 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 (agriculture, processed foods, textiles and clothing, and light manufactures). A reduction in trade barriers by 50 percent globally would yield welfare gains 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. 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 supports calls for the poorest countries to have dutyand quota-free access to industrial country markets.
IMF: spreading the benefits
Of course, China’s economic outlook will also be shaped by global developments. The strong global expansion of the past 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 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 has undergone a remarkable recovery in the past two years, but political and economic uncertainties within the region, as well as the slowdown in the rest of the world, are lowering confidence and future growth prospects. This underlines the need to maintain supporting sound macroeconomic policies and to 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?
First, the IMF should promote lasting, noninfla-tionary growth for all. The emphasis is on growth that is accompanied by adequate human capital investment—especially in education and health. 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.
Second, the IMF should be the center of competence for the stability of the international financial system. We are strengthening our work on capital markets and banking systems; undertaking initiatives to improve other institutions, markets, and practices that governments, businesses, and individuals use when they carry out economic and financial activities; and rethinking the way we monitor national economies and the global monetary system.
One particularly promising initiative under way, jointly with the World Bank, involves thorough health checks of a country’s financial sector. After a successful pilot project for 12 countries, the Financial Sector Assessment Program (FSAP) has recently been expanded to cover 24–30 countries a year.
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 providing advice on monetary, budget, and exchange rate policies, along with financial sector issues, and overseeing the functioning of the international monetary system.
Since 1989, the IMF has provided technical assistance to support China’s reform efforts, covering public expenditure management, tax administration and policy, monetary policy, the exchange system, and statistics.
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 increasingly reaching out to groups ranging from nongovernmental organizations and civil society generally to the private financial sector.
In closing, I would 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.