Interview with David Dollar and Louis Kuijs on China Quarterly Update, March 2009

TO BE NOTED: From Speak Out:

"Des Johnson:

With a growth GDP of 6.5%,and Banks OK where's the problem?Yes a substantial reduction of GDP, but wasn't that expected after the sucessful Olympics.Due to the size(both geography /population) and the inclusion of Hong Kong,will not the domestic stimulus enable GDP above 5% for many years to come.

David Dollar:

I share your sentiment that if China can grow at 6.5% in this gloomy global environment that there is no big problem, compared to other parts of the world. Also, China has the fiscal strength to keep up stimulus into 2010. But fiscal stimulus cannot be the sustained source of growth for the indefinite future. You need to keep increasing the deficit each year to provide new stimulus, and after a few years the deficit would rise to unsustainable levels. So, we see the stimulus as a temporary measure to get through 2009 and perhaps 2010. Longer term, China needs new sources of demand. There should be some recovery in global trade and exports will continue to be important, but they will not play the same role as in the past. For this reason we argue that China should favor expenditures that both stimulate the economy in the short run and lay the foundation for sustained growth in the longer term. Increasing spending on health and education, for example, will reduce household vulnerability and enable them to use more of their income for private consumption and less for savings.

JUE ZHANG:

Since China's economy is highly dependent on foreign trade, it has also been hit hard for this global financial crisis. At the just-concluded NPC&CPPCC Annual Sessions hold on March 2009, Chinese Premier Wen Jiabao mentioned a four-trillion yuan stimulus package for China’s economic recovery. As such what is your opinion about this package plan, and what do you think China should do to adjust its industrial structure so as to make its economic development more health and stable?

Louis Kuijs:

The government’s "RMB 4 trillion package" emphasizes infrastructure and other investment, financed in part by government budget spending, and in part by bank lending. In addition, the government has taken some additional, more consumption oriented measures. I think the government’s policy response to the downturn has been right: forceful, with spending that can quickly lead to additional demand, activity, and employment. Indeed, I think the forceful stimulus policies have been key in dampening the downturn, by providing support for activity and sentiment. On your other question, we have in recent years written quite a bit about the rebalancing that China’s government is trying to achieve, most recently in a mid term evaluation of the 11th 5 Year Plan. In order to make growth more sustainable economically, environmentally, and socially, China needs to get more growth out of services and domestic consumption, and less growth from industry, investment, and exports. This requires reforms in several areas, including on fiscal policy, pricing, in the financial sector, and the labor market.

Henryk Szadziewski:

What effects, if any, will the global economic crisis have on the PRC's western development drive? Will resources from PRC stimulus measures be earmarked for the northwest of China?

David Dollar:

The global crisis should accelerate the Western development drive. First, China can now shift to a stimulative fiscal policy and spend more money on public infrastructure, including on development in the interior parts of the country. Second, in the future China’s growth will depend less on exports and more on domestic demand. To produce for the domestic market, being on the coast is not a big advantage. Interior locations have lower cost land and labor, so they have some advantage in producing for the domestic market. There are already stories in the press about firms and workers move to inland cities because opportunities are better there than in the depressed coastal areas.

Sengky Chheun:

When do the economy in my country increase?
What can I do to joint reduction downturn economy in my country?

David Dollar:

Small and medium-sized developing countries are going to be badly hit by the global crisis. Many of them will have negative growth in 2009. There are some cautious signs that big economies such as China and USA are reaching the bottom of their cycles and will start to recover, so I am hopeful that most developing countries will have positive growth in 2010. Unless your country has a vast amount of reserves, it is appropriate for developing countries to let their currencies devalue, which provides some stimulus, particularly through import substitution. Fiscal stimulus is also good, though each country needs to look carefully at its debt situation and what it can afford. As in the case of China, we recommend that much of the extra fiscal spending go into the safety net because inevitably many jobs will be lost and it is important to protect people’s livelihoods during this difficult year.

Resti Gabuya:

What is your outlook regarding China's demand for commodities such as steel, nickel, etc. this year? (based on the first quarter and last year's figures)

Louis Kuijs:

I think that, despite the strong headwinds from the global recession, China’s economy will continue to grow this year, supported by stimulus policies. I think exports and market based” investment will likely remain very weak. However, overall investment is holding up because of the impressive expansion of infrastructure and other government-influenced investment. Also, car sales are doing reasonably well, growing year on year in the start of 2009, in part because of government subsidies and tax brakes. Al in all, China’s demand for commodities such as steel and nickel should continue to grow, although demand growth will not be as rapid as it was in previous years.

Zadok Huang:

Some argue that there is a strong causal relationship between the strengthening of the health care system in China and consumer spending. What evidence is there to suggest that if consumers pay less out of their pocket on medical expenses that they will necessarily spend more? (i.e. is there any China/other country comparative analysis discussing this issue?) Assuming that this causal relationship is true, why then does the Chinese government's "Stimulus Plan" seem to downplay the urgency of these reforms – i.e. only allocating 3.8% of the stimulus to education/healthcare investments? Is there a stronger correlation between GDP growth and infrastructure investment than GDP growth and education/healthcare investment?

David Dollar:

We will be publishing an updated poverty assessment within a few weeks (keep an eye out on our website). Among other things it presents evidence that health shocks are one of the main factors driving people into poverty and that fear of health expenditures is a prime reason for high savings. The first stage of China’s stimulus was focused on infrastructure, and I think that was a reasonable response to sudden decline in industrial production. There are more opportunities for large-scale spending and job creation in infrastructure construction than in social services. But the government quickly followed up with an 850 billion yuan program to expand health insurance to 90% of the population, as well as enhanced spending for education and the safety net. This is a recognition that to make a transition to sustained growth based more on consumption will require improving these social services and reducing household vulnerability.

Dr. Ashish Manohar Urkude:

After the Globalisation, Privatisation and Liberalisation as we call LPG in India, is it a fact that the countries, companies and individuals can survive only if they have better understating and links around the globe? Especially after this global economic crisis/ crises, we are feeling the Economic and Financial heat hence, this question.

David Dollar:

In this global crisis the countries of the world face a fundamental choice as to whether we continue with globalization and economic integration or whether we go backwards into more protectionism and isolation. While the crisis is painful, I hope countries learned the lesson from the Great Depression that strongly reducing integration at this point will certainly make matters worse. The lesson I take from the crisis is that we need stronger global institutions to manage globalization. That includes greater trade liberalization and enforcement of trade rules through the WTO; a stronger role for IMF in surveillance and oversight of financial supervision; and reformed World Bank and other multilateral development institutions to help poor countries manage these cycles and invest for long-run development. To be more representative, the global institutions will require governance reform that enhances the voice of developing countries.

Gregore Lopez:

How will the Chinese government achieve the 8% growth or 6.5% as suggested by IMF.

What will be China's demand be from ASEAN?

How will China's stimulus plan impact on intra-East Asian trade.

Thank you.

Louis Kuijs:

In our World Bank scenario of 6.5 % GDP growth in 2009 (the IMF’s latest projection is not very different, at 6.7 %), a full 4.9 percentage point comes from what we call "government influenced" spending: investment decided on by the government and direct government consumption. This is in large part because of the government stimulus package that Jue Zhang was asking a question about above. Not all of this "government-influenced" spending is actually financed by the government itself. A major part is financed by the banking system. In any case, apart from the government influenced spending, we think that household consumption will continue to growth, although at a slower pace than in 2008. We think "market based" investment—investment by companies, state-owned and private ones—will be very weak this year, in response to a weak outlook for sales and profits and emerging spare capacity, while external trade will on balance subtract from growth because imports will not do as badly as exports. Thus, in all, China’s growth in 2009 is highly dependent on stimulus from the government.

We project that China’s overall imports will shrink by about 4 % in 2009, in real terms. Part of China’s imports (about 40 procent) are used as input in the "processing sector", the rest is used in China’s domestic economy. I think that processing trade will do worse than "normal trade" this year, as the international economic and trade cycle is very unfavorable. I am not sure, but I think that in the case of imports from ASEAN, processing imports make up a fairly large share. That would suggest that the prospects for China’s imports from ASEAN are not very good in 2009. Having said that, I think that, overall, ASEAN’s exports to China are likely to do better this year than ASEAN’s exports to other parts of the world. That is because demand in holding up better here, in large part because of the stimulus plan.

Susana:

How do you anticipate that Chinese FDI will behave this year, specifically Chinese NOC's overseas in Africa and Latin America?

David Dollar:

On balance I think that the interest of Chinese companies to invest abroad and "go global" will increase, not decrease. Many Chinese firms have been hurt financially so of course there will be some examples where Chinese firms pull back from potential overseas investment. But we project that China will continue to have large trade surpluses, creating an ever-growing pile of reserves that needs to be invested abroad. Chinese long-term demand for minerals and natural resources has not diminished. And now many Chinese companies face weakened investment and profit opportunities at home. So there are still strong factors in place that will push Chinese investment abroad.

MP:

I guess the major concern on China is the level of unempolyment and excessive capacity after the stimulus package. Any view on how high the unempolyment level is in China assuming World Bank's 6.5% GDP growth is correct?

Louis Kuijs:

The official urban unemployment numbers do not give a good picture of the labor market problems in China, because many groups, including migrants, are not eligible to be registered as unemployed. More generally, unemployment is a difficult concept in a country like China, with such a large distinction between the urban and the rural area.

Therefore I personally find it useful to look at non-agricultural employment, because I see agriculture as the form of employment of last resort. Our very broad calculations based on recent trends suggest that every percentage point less non-agricultural GDP growth means about 5.4 million fewer non-agricultural jobs. Thus, based on our scenario of 6.5 % GDP growth for the year as a whole, compared to potential growth of around 9.5 %, and with growth particularly subdued early in the year, I would say the "shortage" of non-agricultural jobs this year is about 17 million, peaking at perhaps 20-25 million early in the year.

Martin ADAMS:

I am currently looking at how the global crisis is playing out at the provincial level in China, with a special interest in the economies of Guangdong and Beijing. Clearly, these two economies have have been effected in different ways by the global downturn, though have both suffered from a domestic-led slowdown in real estate. I wonder if you would be able to share any insights on how you see the continuing impact of the global crisis and real estate downturn playing out at the provincial level, with special reference to Guangdong and Beijing if possible. Also, to what degree (and when) do you expect stimulus measures beginning to take effect? Thank you very much indeed.

David Dollar:

Guangdong is probably the most severely affected province because it had a major real estate boom as well as the export boom, both of which are now over for the time being. Beijing is suffering from real estate slowdown, but it is not a major exporting region. There is not much feeling of a slowdown in Beijing, except for reduced construction activity. The stimulus package is starting to have real effect. The provides stimulus to some specific industries, but also has general spillover effect on consumer confidence and purchases. Anecdotally, we hear that many workers in Guangdong have accepted reduced compensation and that some factories have reopened to produce for the domestic market. I am impressed by the resilience of Chinese firms and workers. We will see some firms finding new niches in both an expanding domestic market and a reduced but still important external market. That is why we are cautiously optimistic that as the year progresses we will see gradual recovery. It may be strongest in central provinces at first, because the hit to the export economy in Guangdong is very serious. But with a lag I think we will see Guangdong firms coming back strongly, oriented more to the domestic market.

Vahur Oja:

Is there a possibility that Chinas growth in perspective of few years can by negative?

Louis Kuijs:

I think that, given China’s solid economic fundamentals, combined with the room to stimulate demand through government stimulus policies in this tough period, it is not likely that we will see negative growth in China. But, it is not completely impossible. The World Bank’s projections for world growth are among the most bearish, foreseeing a decline in global growth of 1.5 % this year. However, the global picture could conceivably be even much worse, in which case we will have to go back to the drawing board to do our forecast for China.

Michael Standaert:

Environmental groups are concerned that much of China's stimulus spending goes to high-energy, highly polluting industry. About 40 percent in environmental spending has been trimmed from the initial stimulus package, though China is spending 18 percent more on environmental protection than last year according to its 2009 budget. What does the Wold Bank think the impact of the economic downturn will be to China's environment and the efforts China has been trying to make to improve it? Also, China's estimated actual GDP of 6.5 percent is getting close to the World Bank-estimated annual loss of 5.8 percent of GDP due to environmental degradation - the question is, does the World Bank take this into account when making its China projections, and second, how do you think China can continue to develop without damaging its environment to the point where the costs outweigh the benefits?

David Dollar:

On balance I think the crisis is, ironically, good for China’s environment. We already have some preliminary data indicating a large increase in energy efficiency in 2008, because the most energy-intensive, polluting industries declined so sharply at the end of the year. It is true that some of the stimulus package is trying to limit the damage in those sectors, but I think that is reasonable because too rapid decline is difficult. I am also encouraged that the package includes high-speed passenger rail, urban public transport, waste-water treatment, and energy efficiency projects. In responding to the crisis, China is likely to grow now based more on services and less environmentally polluting sectors. It is true that the environmental costs of producing GDP are still high, but that is a subtraction from the level of GDP each year not from the growth rate. Unfortunately, no statistical agency calculates cost of pollution year by year. If we had those data, I bet the costs decline during 2009 because of the retrenchment of heavy industry and positive environmental projects. If that is true, then the growth rate adjusted for environmental costs would be higher than the 6.5% projected growth rate of GDP.

Ishaq Rahman:

How do you think the future of China's economy? Will it sustain for a long period, at least longer than the Miracle of Four Little Dragons?

thanks

Louis Kuijs:

We can never be sure, but personally I am pretty optimistic about China’s economic future in the medium and long term. China is still at a rather low level of overall development, with GDP per capita less than 10 percent of that in the US and Western Europe. That means that there is still a lot of room for further catch up. Of course, many countries have this room for catch up but do not see it materialized. However, China seems to have set in place the conditions—in terms of institutions and policies—that are good for growth. As a result, China has seen strong, steady growth over the last decades. Barring major upheaval or big policy mistakes, I think China should be able to continue to grow at robust rates in the coming decades, presumably close to the rates in the last decade. The coming few years will be very challenging, though, with a very weak global economy. This adds urgency and importance to the project of rebalancing the way that the economy is growing (see my answer to Jue Zhang above). But, with the right policy response, there is no obvious reason why China cannot go back to impressive rates of growth in the medium term. By the way, in my understanding, the four “little dragons” have done very well and are still growing.

Marco Furtado:

In page 6 it has an information about prices , including PPI( factory gate). I know the FPO, prices without transport, taxes and so on. Please, could you be kind enough to explain it?
-It has, in page 18, information about the subsidy to rural consumption. To 4 provinces it was until 30%, and to others 13%. Does it have a total amout that chinese government will use in that program? Most of it will be used this year?
-What are the mean industrial capacity that China is using at this moment? Industries as steel, mining, shipbuilding are in crisis and are using what % of the capacity? These industries have specials government programs?

Louis Kuijs:

I am not sure I fully understand your first question. The PPI is the factory gate price, in the sense of distinguishing it from the raw material price (input into the factory) and the CPI (retail price).

The government found that in the 4 provinces where it piloted subsidizing rural consumption by 13 %, sales of the subsidized goods increased 30 % in 2008. You have a good question about the amount of money the government has set aside for the nation-wide scheme in 2009. I have not seen mention of a limit to the total amount the government plans to spend on it, which suggests that it is open ended. The scheme will run until 2012.

It is very difficult to have good information on capacity utilization in the different industries, and it is especially difficult to have reliable information on recent trends. I do not have such recent information. I am afraid I cannot help you with this.

Dr. Ashish Manohar Urkude:

What are the most possible Forceful Economic Stimulus Measures (you have mentioned) that China can implement in this crisis situation, and how can they do it without hurting the Economies the world over?

Louis Kuijs:

Thank you for your question. China is currently implementing fiscal and monetary stimulus measures that boost domestic demand, growth, and employment. Much of this is good for other countries, because it tends to raise China's imports. If the stimulus leads to more investment in the export-oriented manufacturing sector, rather than domestically-oriented investment (such as infrastructure oriented on people instead of industry) or consumption, the stimulus may end up creating more manufacuring capacity and international competition. In that case it may be a net negative for other producers (although it may over the longer term still be a net positive for the world, because China is an efficient producer; it would allow people globally to have access to more good-value-for-money products, raising their living standards). Looking at the stimulus package, the bulk of the stimulus spending seems domestically oriented, with a lot going into areas like public transport, public housing, and health care. Thus, I think that on balance, China's stimulus spending is a plus for the world.

hx thanh:

What is the similarity, and what is the difference of impacts between Vietnam and China under the current global crisis ?

David Dollar:

There are a lot of similarities between the effects on China and on Vietnam. Like China, Vietnam had a property boom that began to deflate in 2008, starting the slowdown. This was then compounded by the global economic crisis which has slowed Vietnam's exports. So far exports have been about flat this year, which is a good performance relative to other Asian economies that are seeing large falls in exports. But still, the external sector does not provide much impetus for growth. Vietnam has a stimulus package that during the course of the year could grow to 2-3% of GDP about the same magnitude as China's. With fiscal stimulus replacing some of the lost demand from abroad, we see Vietnam's GDP growth around 5.5% in 2009. Like China, this is subdued compared to recent years, but very positive in the global context. The one main difference between the two countries is that Vietnam has relied more on capital inflow in recent years while China is a big capital exporter. If foreign investment diminishes for Vietnam that is likely to slow the growth propects for the next few years.

john edwards:

Interested in the implication of your views on the big difference between expected growth of market influenced investment and government influenced investment on outlook for steel production in China. Is the government component for exaemple more or less steel intensive than the market component?

Excellent report by the way (as usual)

Louis Kuijs:

Hi John, nice to hear from you. I would think that the weakness in market based investment in real estate and, until recently, car sales, have affected steel production a lot. Weak exports, and their impact on investment in manufacturing, also clearly affect steel consumption. But I would think that real estate is probably a more important driver of the slowdown in steel demand in the second half of 2008. Infrastructure is pretty intensive in steel. Indeed, infrastructure is probably much more intensive in domestic steel than investment in manufacturing, where the machinery is more likely to come from abroad. Moreover, domestic car sales seem to be recovering, in no small part because of the stimulus package. In all, it may depend on the composition of market based investment. If real estate holds up (as in will not fall much more from now), manufacturing investment declines and infrastructure investment accelerates, while car sales also do all right, I could imagine that this is a good composition of spending for domestic steel.

Ma. Azuncion Micael:

What plans and programs could World Bank do help the Asia Pacific countries in times of Economic Crisis? Could we all go back and support the basics like boosting up the Agriculture and Food industry, as at the end of the day, people will still seek for food to live, and this will result for business and flow of money. Could we boost up also the Tourism industry of each Asia Pacific nations as the result of this is really good for the economy of the countries. What could be the actions of each countries to be motivated of not to be dependent to US businesses like manufacturing, business process outsourcing and call centers. May the BPO and call center will go back its business location in USA, European or origin countries, and let the Asian workers be situated to work to these foreign countries, so that foreign currencies will be utilized. Foreign investors are good, but big amount of money goes to the owners and top management, and minimal only to the workers. So money are still kept within the filthy rich society, limiting the rank and file people to grow. It is better that Asian should work abroad than investors go to and invest in Asia or Philippines. Study the statistics and population of A & B class which mostly company owners and top management, compare to the Class C & D in the society, which majority of the population are in this category whop are workers...Foreign countries invest in Asia and Philippines for lower manpower cost, and giving them high return on investment, therefore making Asia and Philippines being always dependent and workers in thier own countries. Yes, there are job opportunities for Asian and Filipinos, but still salary is low, compare if they will work abroad, and will be paid in dollars. May the business go back to the basics, and may each countries utilize well its unique resources in order to create a good exchange globally...May someone work on this, and do actions. Let us go back to the basic, and start with positive mind.

David Dollar:

I share your sentiment that this is a good time for developing countries to "get back to basics." Most employment is in agriculture or small and medium enterprises (SMEs). That was true before the crisis hit, and even more true now. So, as countries develop plans to deal with the crisis it makes sense to keep an eye on these two key sectors. The World Bank can help developing countries in various ways. Some countries, such as Mongolia, have been hit with sudden drop in export earnings and with withdrawal of private investment. The World Bank can help with quick-disbursing support to balance of payments and the budget. We can also help with design and funding of the safety net, because many workers will lose their jobs this year. I also think it is important not to lose sight of the longer term development agenda so that investment in infrastructure, the traditional business of the Bank, is still important. We are trying to increase projects in support of agriculture and help the banking system get funds to SMEs.

Charuwan Laosumrit:

What the world economy crisis effects luxury industry like shipyard in China? How the federal government can support this sector?

Louis Kuijs:

Shipbuilding, in China and abroad, has been affected very heavily by the global crisis. While this creates serious problems for the companies and people involved, there is only so much that the government can do. One problem that has amplified the downturn in shipbuilding is the breakdown of trade credit. It is here that governments, and international institutions, can do something. Several governments are actively trying to provide help here. China's government has just recently reached agreement with the IFC in this area.

Grant Colquhoun:

On the face of it the FAI data point to government policy having a quick impact on investment (via increased rail invstment especially). Do you have a feel for whether this upturn is reflective of on the gorund activity as opposed to land purchases etc?

On an unrelated point, quarterly GDP & monthly IP data are difficult to interpret because they are only published as growth rates. Do you know if the NBS has any plans to publish in levels? How robust are the World Bank's q/q estimates?

Louis Kuijs:

LK: You are right to point out that the FAI data includes asset sales such as land purchases. As of now, we strictly speaking cannot know for sure how much of the increased FAI in the areas like railways and other infrastructure is capital formation as opposed to from asset transactions. However, the acceleration in "government influenced" investment is probably large enough to assume that this is not all from land sales. Moreover, we have seen other indicators, such as on cement production, and from the several PMIs, that indicate that there is an impact on real economic activity. Having said that, I would caution against assuming the tough time is over and things will get steadily better from here. As we mention in the quarterly, we think that, while the stimulus package provides a lot of useful support to activity and sentiment, China's economy cannot rebound to the rates of growth anywhere close to what we were used to unless the world economy recovers. And we don't think that will happen very soon.

Regarding your second question, monthly IP data is already available as levels, I think, albeit in the form of year to date. The same is true for GDP. But, it is indeed cumbersome for the users to have to calculate the monthly and quarterly data. I understand that it is in the long term plans of the NBS to move to normal quarterly and monthly numbers, but I do unfortunately not know when this may happen. How robust are the WB's q/q estimates. I would say, there are quite a few decisions/assumptions going in them, in terms of the length of period, the type of seasonal adjustment package, and others. We felt sufficiently comfortable to publish the number, but clearly, other estimates of the SAAR number range from 1 to 3 % and, given the margins of error, are all basically the same.

Lang Tyleang:

I have a question about the current economic of China. Since the global financial crisis, especially the devalued of stock exchange and real estate price turn down quickly, millions of people lose their jobs because of protection policy of their domestic products and the loss of incomes, how can China use a policy that can recover from million of unemployement in the next comming year? What is the role of financial system to recover the non performaning loans and maintain a ressonable liquidity for the next few years after the financial cirsis has been reduced?

David Dollar:

It will be difficult to make the adjustment quickly but the basic direction of adjustment is clear. China will lose millions of jobs in manufacturing and it will be hard to recover these in the next couple years. Most job creation will be in services and in SMEs, so it is important to keep these sectors in mind. We recommend that China put more public resources into social services such as health and education and in the safety net. Those expenditures help people get through the immediate crisis. We also think that they will gradually reduce vulnerability of households and enable them to spend more of their income on consumption. Consumption everywhere is primarily services, so this will do a better job of creating jobs than investment in manufacturing. The banking system needs to continue to reform so that it can do a better job lending money to SMEs. If it does a good job of this, there should be no big problem with NPLs in the future.

DR.A.SARVALINGAM:

How long china will wait for its previous level?. The higher the export is the cause for higher the growth of economy.Even the increase in domestic consumption will solve the remedy to it. But the country has not increased its domestic consumption.What is solution to achieve it?

Louis Kuijs:

China has seen a successful industrialization and integration to the world economy, to such an extent that, starting from a situation with surplus labor, the capacity to produce has grown faster than the capacity to consume because wages--and consumption--have not kept up with profits--and investment. The government has been trying to rebalance the economy, getting more growth out of domestic consumption. As you note, so far the success has not been very large. I think the solution to this is to get more growth out of labor intensive service activity and less growth out of capital intensive industrial activity. As per my answer to Jue Zhang, this requires an array of policies including on pricing of inputs, the financial sector, fiscal policy, and the labor market. If you are interested in more detail on this, please check out our evaluation of the 11th 5 year plan.

PHL:

Dear Sirs,

I have 4 questions:

Premier Wen has declared that no national voucher program (like that implemented last autumn in Taiwan/Ch. Taipei to apparent success) will be part of the stimulus package. However, several local governments have issued vouchers.
Q1: Do have any data on the size, design and initial impact of these provincial voucher programs?

Q2: Seeing how boosting private consumption, especially in rural areas, is vital to recovery, and tax incentives are irrelevant here (high savings rate + most of the rural population already pay no income tax); do you believe the central government SHOULD include such measures in the stimulus?

On stimulus design:
Q3: Do you see a danger in stimulus spending being channelled, in too high a degree, into capital-intensive, low-labour infrastructure projects (other than much needed post-EQ reconstruction)?

Q4: Do you think the extra efforts included in the to stengthen the rural social security net are enough?

Louis Kuijs:

Regarding your first question, I have seen reports on several of the individual initiatives, but do not have a comprehensive picture. According to the press reports I have read, they have an impact. And, several are designed to expire, so that people have an incentive to use them instead of save them. On the other hand, there have also been reports of people trying to trade them with eachother. Overall, I think they have a beneficial impact, but the macro impact is unlikely to be significant.

Regarding your second question, we think that cutting income taxes is not that obvious now. There is a discussion on increasing the treshold. We don't think it will have a major impact and will benefit higher income people as much or more as the medium income groups. Your point strengthens the concerns in that regard. There could, though, be a case for lowering social security contributions, which are paid by a much larger group of people, including many migrants.

Regarding your third question, yes, there is such a danger. Some infrastructure projects are indeed not very labor intensive at all. We think that there is a point when further general investment oriented stimulus is not the most appropriate response to further growth downgrades. As I argue in my recent blog, one response would be to do more consumption oriented stimulus. The other would be to not do more general stimulus, but to focus more on the medium and long term issues, and to alleviate the consequences of the downturn by via the social safety net.

Regarding your fourth question, the government has taken some useful steps in strengthening the presences and spending of the government in the areas of health, education and social safety. There is still more to be done.

Lang Tyleang:

Regarding the projection about the economic growth of China in 2009 about 6.5%, what is the evidence to measure of economic of one of the powerful economic countries? In case that the econoimic growth still under projection because of the huge unemployeement rate, high inflation, the lose value of stock exchange, and real estate devalued, what is the recommendation or policy should China take action to push up its economy?
Will it affects strongly on the countries who does not have financial market like the case of Cambodia? In your view of views, should the financial market in Cambodia be implemented during the financial crisis?

David Dollar:

If China’s growth rate comes in lower than expected, the country has a number of tools it can use. It has plenty of fiscal space to increase spending. We still caution the government to make sure spending addresses real needs. If you build infrastructure that is not really needed, it creates jobs today but has no payoff tomorrow. So, there may not be too much scope for increasing infrastructure spending beyond the current plans. But there is scope to increase spending on social services and the safety net. This is a form of consumption, and also encourages more household consumption. This kind of growth will also benefit China’s trading partners, because it will increase demand for imports. For developing countries like Cambodia the global crisis provides some useful lessons. I would be careful about liberalizing capital flows until there is a strong domestic financial system. But I still think direct foreign investment is useful for developing countries. It is likely to be low for a couple years, but then come back.

Bin (Karen) Zhai:

I am the first year MBA student from Pennsylvania State University. I have lots of interest in the work of private development sector of World Bank and very curious about the role of Public-Private Partnership activities in China's economic development. Can you share the insight about that? Thanks.

David Dollar:

There are a lot of interesting examples of public-private partnerships. For example, in quite a few cities it has been possible to get private investment in water supply, but the public sector -- in many cases with a WB loan -- has to provide the sewers and collection system. It is too risky and political for private firms to develop the sewer system throughout a big city, but the private sector can easily and efficiently do water treatment. The railway is also moving toward public-private partnerships with private investment in engines and cars and public investment in the tracks. Intuitively, it makes sense for the public sector to investment in the monopoly parts of the system such as tracks, sewers, power lines while encouraging private investment on a competitive basis for the parts of the system that are not inherently monopolies.

Angela:

Regarding the World Bank's role in China, how does the country office collaborate with your counterpart - Ministry of Finance - in dealing with different issues, especially in anti-corruption matters given the recent sanction of the WB on four Chinese firms for allegation of collusion?

David Dollar:

The recent sanctioning of firms from China and other countries was based on collusion in the Philippines so our China country office is not directly involved in that case. For the World Bank projects in China we work closely with the Ministry of Finance and central audit bodies to protect against risks of corruption. The key aspects that go into anti-corruption efforts at the project level are competitive bidding to award contracts, supervision of the bidding process by World Bank office, supervision of physical implementation of the project to ensure quality, and auditing of project accounts.

Stephanie Erev:

At a time when it seems China ought to be doing everything to stimulate domestic demand, I find it strange (and, frankly, worrying) that the stimulus measures put forth so far have a net impact of increasing export capacity. I realize the exporters carry significant political influence in the nation, but I just can't see this ending well; what do you envision as the best-case/worst-case scenarios resulting from even greater Chinese production?

Louis Kuijs:

The stimulus measures announced so far are increasing domestic demand significantly. In our understanding, and in our scenario, China in 2009 is likely to see imports fall less than exports, largely because of the stimulus package. In that sense, the stimulus package is a plus for the world economy. A significant portion of this is investment. However, a lot of investment coming from the stimulus package is in "people oriented" infrastructure, such as public transport, public housing, and sewage, rather than industry oriented infrastructure such as ports. Some of the spending will end up as benefiting manufacturing. How this will play out? It depends a lot on the world economy. Several multinational companies are reconsidering relocating production. China happens to be a very competitive place to produce, and it may become even more competitive in the future. That will challenge producers in other countries, although it benefits consumers, who get good value for money products. However, my point would be that this is happening largely regardless of the stimulus policies. I think the stimulus policies are not primarily geared to boosting industrial capacity.

Julie Sheetz:

Following up on the poverty theme: is there any evidence to suggest this crisis will spur reform of the informal labor sector, ie migrant workers?

Louis Kuijs:

To be honest, I am not sure. Until the crisis hit, there was quite a bit of pressure and some momentum to move on reforms that make moving to the cities--especially moving permanently and with the whole family--easier. Because of the crisis, there is now much less net migration into cities. In fact, there may be net migration back to the country side this year. Thus, the economic pressure for migration oriented reform may have decreased temporarily.

Des Johnson:

Yes I see how continued stimulus, particularly when deficits become substantial over time usually weaken economies.The US seem to have the double problem of high deficits and bad domestic debts.Is it inevitable that China will/is become the worlds major enconomy.This would not be a bad thing as they make things but India seem to rely on services to the "rich" developed countries.Is not this the major problem - with developed countries producing less,and then employment going offshore for service industries.How can this be rectified.

David Dollar:

Developed countries like the USA are still very productive. USA produces much more manufacturing value added than any other country. But I do think it was a problem that the US developed such a large trade deficit. On the other side, I don't think it was good for China, Japan, and Germany to build up such large surpluses. So, while it is painful, everyone will be better off with more balanced trade among these major economies. That requires the US to consume less and save more, and the surplus countries to consume more and save less. With those macro adjustments, there should sufficient growth and employment for each country. Up until now, it was not possible to get the major economies to coordinate macro policies to get a balanced outcome. Hopefully the crisis will lead to a more serious effort to coordinate policies.

Sabina Gu:

Would Social Businesses as Prof. Yunus proposes them help the regions in west-china to evolve? Would this be an interesting model (and of course a market) for western "capitalistic" entreprises? Which sectors would be most important? Would this be a way to prevent social turmoils?

Thanks for your answers.

Louis Kuijs:

There has been some development of social businesses such as microcredit in Western China. It seems to be expanding quite rapidly suggesting that it is filling a need. Growth based on domestic demand will provide more opportunities for inland locations. Efforts to get credit to small firms and households and to ensure that people have good social services will create a social foundation for less developed areas to take advantage of the new opportunities.

David Fouquet:

Despite what you just indicated about the upside of 6.5% GDP growth, I wonder if there is not a looming "job gap" as indicated by Beijing itself in absorption of new graduates and youth job-seekers, as well as providing some form of alternative employment for the acknowledged 20 rural migrants who once had positions in urban centres. The stimulus plans may compensate for some of that and all above figures are approximate and rounded off, but exports, investment and other drivers have been compromised and I wonder if increased unemployed, underployed and new jobseekers couldnot represent a serious social and political timebomb.
Thanks

Louis Kuijs:

We also think there is a job gap, as indicated by my answer to MP above. I agree, the weak economy is creating a lot of job market pressures. What this means for social stability is another matter. The government has been concerned about this, and is quite pro active in dampening it in various ways, ranging from economic stimulus to various types of labor market intervention. However, so far, social tension, if it happened, seems to have been quite local and specific, usually in response to a specific issue such as non payment of wages. In my personal view, the probability of significant systemic social tension is quite modest.

John Bishop:

How crucial is reform to China's health care system to boosting domestic consumption? Is the US$123 billion announced spending on health care reform through 2011 enough to make a difference in lowering out-of-pocket health care costs, thereby boosting domestic consumption?

Louis Kuijs:

It is always difficult to calibrate the contribution of any single reform. I do think that making households more relaxed about spending by strengthening the role of the government in health, education, and social safety is important to lowering the household saving rate. There is more to increasing domestic consumption than this--see our mid term evaluation of the 5YP report on rebalancing for the array of policies--but it is an important element. In that area of strengthening the role of the government, improving medical insurance is key. Raising the government's contribution to medical insurance, as planned under the health care plan, should have a (statistically) significant contribution. I don't think we can expect miracles from one policy. But, eventual further raising the government's contribution to medical insurance to levels seen in mature market economies should have an economically significant impact on domestic consumption."