Remarks by Angel Gurría
Thursday, 19 March 2015
(As prepared for delivery)
Ladies and Gentlemen,
We gather at a time of great opportunity, both for China and for everyone doing business here. Thirty years of annual average GDP growth of 10% have changed the face of the country immeasurably: hundreds of millions have been lifted out of poverty, and China now stands firmly at the head of the group of middle-income countries. A truly remarkable feat!
Yet, China cannot afford to rest on its laurels. The rate of economic expansion has begun to slow, and GDP growth is projected to drop to 6.9% in 2016, down from 10.4% in 2010.
If the next thirty years are to be as bright as the last, China will have to overcome a number of important challenges. In particular, the government will need to manage China’s transition from: rural to urban, public to private, prime-age to ageing, investment to consumption, and manufacturing to services. This will call for a raft of structural reforms across a range of policy domains.
The 13th Five-Year Plan (FYP) represents an important opportunity for China. The OECD is proud to have been asked to make a contribution to the Government’s preparation for the 13th FYP. As we celebrate 20 years of successful co-operation with China, we have produced three reports for the National Development and Reform Commission (NDRC) as input for the 13th FYP: 1) China in a Changing Global Environment; 2) All on Board: Making Inclusive Growth Happen in China; and 3) a National Urban Policy Review of China.
This evening, I would like to share a few of the key messages with you.
Our first message for China’s leaders is that they should prioritise measures to boost productivity and climb up Global Value Chains (GVCs).
To date, China’s role in GVCs has been to a large extent as an assembler, engaging in relatively low value added activities. At last count, the domestic value added content of China’s exports was 67%, which stood below the OECD average (76%), and was the second lowest in the G20, leaving much scope for China to engage in higher value added activities.
Despite major reforms in recent years, China still retains substantial barriers to trade and investment in services. According to our Services Trade Restrictiveness Index (STRI), China scores worse than average for the majority of sectors. As a result, in value added terms, only 30% of China’s exports reflect services, which is low by OECD standards (48%). Removing these growth-hampering restrictions on services will be crucial for China’s efforts to move up GVCs.
Greater liberalisation in key sectors such as telecoms, banking, distribution and insurance industries is paramount for future growth. China could also consider expanding the list of “non-sensitive” areas and industries that can receive foreign investment through a filing procedure, and exploit the full potential of trade facilitation measures.
Moving up GVCs will also demand a transition to a high-productivity, knowledge-driven economy. For that, China needs greater investment in skills, school curricula more adapted to labour market needs and better targeted vocational education. At the same time, more public funding is needed in fundamental research. R&D expenditure in China rose to more than 2% of GDP in 2013, overtaking the EU average, but it is still behind the United States, at 2.8% of GDP, Japan, at almost 3.4% of GDP, and Korea at 4.15% of GDP.
A second important message from our reports is that the 13th FYP period ought to redefine the balance between the market and the state. Pro-competition reforms will be of the utmost importance, including the liberalisation of product market regulations and the reform of state-own enterprises to create a level-playing field. At the same time, there will be a need for the state to establish and enforce health and safety standards and environmental protection legislation.
With the market set to play an increasingly decisive role in China’s economy in the coming years, the State will need to adapt, strengthening the judicial system, and modernising public administration. One priority area for reform should be the development of a single, unified code of conduct for civil servants to regulate against conflicts of interest. Further efforts will also be required to secure property rights and the rule of law.
Third, we recommend that China’s leader put well-being and inclusiveness at the centre of policy-making. This will be absolutely essential for China to sustain income and living standards in a period of slowing growth.
Of late, income inequality in China has stabilised and begun to decline, but a national Gini coefficient of 0.47, against the latest OECD average of 0.32 tells you that it’s still too high!
To continue to reduce inequalities and improve living standards for all citizens, the government could look again at the redistributive capacity of the tax-benefit system. Unlike most OECD countries, the Chinese tax system barely reduces income inequality. Despite a relatively high top rate of 45%, personal income tax in China accounted for only 6% of tax revenues in 2013, against an OECD average of 25%, so there is room to improve.
Furthermore, we provided clear evidence in our analysis that growth in living standards has been held back by below-par improvements in health. Poor air quality alone reduced life expectancy in China by 0.4 years! One way to reduce the effect of pollution on life expectancy is to introduce a uniform price for carbon emissions, either through taxes or through a national carbon trading scheme.
Now health in China is also hampered by lifestyle choices. China should invest more on preventive measures, for instance by addressing smoking which takes a heavy toll!
Investment in education and skills, focussing on disadvantaged groups, is the surest way to make growth more inclusive. Labour market reforms to better balance flexibility and security can also help achieve a more efficient allocation of labour and improve income distribution. One key reform will be to address the imbalance between the protection of permanent and temporary employees through reforms to the employment protection legislation.
Our fourth key message is that the way in which urbanisation processes are managed will be increasingly important for economic growth. The last 35 years have seen China’s urban population roughly quadruple to more than 700 million people, and it is likely to rise by a further 240 million over the next 35 years.
This staggering rate of urbanisation has taken place on the back of cheap labour, cheap land, the under-pricing of environmental externalities and rising export demand. None of these factors can be counted on in future.
It will be essential to break the link between the type of hukou and public service provision. Around 275 million migrant workers already live in cities while still holding a rural hukou. As a result, they suffer from systematic disadvantages on the labour market and in the access to education, health care, the pension system and other forms of social protection. This discrimination undermines labour-market efficiency and ultimately growth.
Equal access to education is a particularly serious problem. Most migrants’ children, around 60 million in 2010, are left behind in their villages; a minority, around 35.8 million in the same year, accompany their parents to the city. The long-term costs of under-educating a generation of Chinese youth are likely to be substantial, and will not help efforts to improve labour productivity!
Ladies and Gentlemen: China has come a long way, but now is not the time for the government to take its foot off the reform pedal! Over the coming years the OECD will redouble its efforts to engage with China, and hopefully China will feel increasingly “comfortable” with the OECD!
I look forward to hearing your views on the key challenges and opportunities that I have set out tonight.