Ex-World Bank VP: Regardless of Washington's beliefs, China is vital for world's economy to survive
The global economy is slowing down, having barely recovered from the 2008 crisis. The oil price is falling deeper and deeper, leaving many nations in desperate straits, trying to figure out their budgets. Just a few days ago, the American stock market went through a plunge as damaging as any in the last several years. What is the reason for such a slowdown? Many are pointing fingers at China, saying that the giant has stopped growing - but is that truly so? What about all these emerging markets - will they push the global economy forward? We ask a former chief economist and a Vice President of the World Bank. Dr. Justin Yifu Lin is on Sophie&Co today.
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Sophie Shevardnadze:Former chief economist and a senior Vice-President of the World Bank, Dr. Justin Yifu Lin, it’s really great to have you with us today, sir.
Justin Yifu Lin: It’s my honor to be interviewed by your channel.
SS: Thank you. Thanks for being with us. So, China’s miraculous economic growth over the last 30 years is now slowing. Is the fairy tale over?
YL: Well, certainly, it slowed down somewhat. About 10% to now about 7% growth, and I’d like to mention - this adjustment, certianly, is significant. However, China is still the rapidest growing country in the world and China is still the driver of the growth of the world. China continues to contribute about 30% of the global growth.
SS: So, but nevertheless, the Chinese economy is stalling right now a little bit, slowing down. Can there be a global recovery without Chinese economy driving it anymore? Or do you think it could drag other countries down?
YL: We have to understand what’s the reason for the slowing down in China. I think that slowing down in China is caused mainly by external factors, because China is an export-oriented country; but high-income countries have not fully recovered from a 2008 crisis as a result. Their total income increase is very sluggish, and the demand did not increase much, so that slows down the export growth in China and this is not only unique to China but also to any other export-oriented economy in the world, and, secondly, in 2008, every country adopted some kind of intervention to support investments as a measure to stabilize the economy. Those kind of investment projects have been complete up to 5-6 years, but the global economy has not recovered yet, so as a result, the investment growth also dropped.
SS: Just to follow up your first point about the slowdown of exports: how can there be an extensive growth in China if the West stops to buy Chinese goods?
YL: Certainly, China will continue to export, but the growth of it is slowing down. It’s one thing. Secondly, the external market may not be recovering quickly, so China needs to rely more on domestic source of growth. I’m confident China still has plenty of opportunities for growth from domestic demand by investment, by consumption. So, I’m confident, China will be able to maintain around 7% growth in the coming years.
SS: Actually, the head of the IMF, Christine Lagarde, she seems to think like you, she says that the worrying news from China isn’t something that needs to be taken too seriously. She’s saying that Chinese economy’s just rebalancing and sort of transitioning. So I want to ask you, what is Chinese economy transitioning too, and how long till it rebalances?
YL: I think it’s a continuous process. It has not ended. Every country needs to adapt to the new challenges; currently, the new challenge is the slowing down of the demand in high-income countries. So, China needs to rely more on the domestic economic growth source. But, in the future, I’m sure, there will be other challenges, so you need to be ready.
SS: So you’re sort of looking inwards at this point, instead of outwards?
YL: It’s not necessarily inwards, because currently we are in the integrated world. If China maintains, say, 7% growth, we will have a major in the world, because China will contribute about 30% of the global growth - and that’s huge. And Chinese market, you know, we also started increasing marge for the other countries’ export to go to China. So, we are in an integrated world, although, as I mentioned, we need to rely more on the domestic demand to drive the growth. But domestic demand also comes from the external sources. For example, when you make an investment you need to get equipment from other country and, if we grow at 7%, we also need to import the raw materials, natural resources, from the resource-abundant countries like Russia, and with our income growing, we may import more high-end consumer goods from high-income countries.
SS: Do you have, like, a time-span in your mind? How long it will take for China to actually rebalance itself?
YL: China is already rebalancing…
SS: Let me rephrase my question. I’m not saying that Chinese economy is going down and everything’s bad - I’m just saying it is stalling and slowing down and a lot of people are talking about it, so, you more than anyone knows how long till it actually adjusts to what it was before.
YL: That depends on how long people are going to listen to me. The reason why so many people are pessimistic about China is because they think that slowing down in Chinese economy is due to internal structure problems; and internal structure problems are very hard to handle, and so they expect the growth rate in China to continue to drop. But, actually, as I already said, the slowing down in Chinese economy is mainly due to external issues, it’s not due to the internal structure problems. Certainly, China has many structural problems, but those problems has been there always, and it’s not a new fact. At the same time we can see other countries, even in the same period of time - they also slow down in their growth rate, and, in effect their deterioration is even sharper than in China. So, from this studies you can see the main causes of the slowing up in China. It’s not the internal structural problems.
SS: So you don’t think that now that the boom is over there could be a social discontent inside the country that your government eventually will have to deal with?
YL: You know, currently, the unemployment rate in the country is about 4.5% and we have social safety net to support the poor and household income continues to grow at around 9-10%. Consumption increases every year at along 10%. So, under the current situation the prediction that China, because of the slowing down, will have big social-political problems - I don’t think they really understand it.
SS: Can’t argue with this. There are also huge environmental concerns in China, and you know that. How long or how fast till Chinese economy is less dependent on fossil fuels? I mean, China is the second largest consumer of oil in the world and it’s striving towards green energy - do you think that will actually drive the oil prices further down?
YL: Answering the first one, I’d like to recollect your statement. The oil price drop and slowing down is not due to the lack of the money in China. Actually, China continues to increase its input of oil from the world, and the reason why the oil price dropped down is because supply increased too much. That’s why we should not point fingers on the reason of the slowing down on the oil price. Secondly, certainly, pollution is a big issue in China. Currently, China is still in a stage of manufacturing development. Manufacturing sectors is still the most important sector in China, so… To fully understand the situation, and pollution is a big issue we have to deal with. The government is strengthening the environmental protection, the government can try to use more green energy, but at this stage, as long as we are still in the manufacturing stage, environmental stress is going to be much higher. How long will be this stage? That very much depends on how fast we grow. If we will grow very fast, we will become high-income country and our economic structure will step into service-oriented economy by that stage…
SS: Yeah, but these are general terms. Do you have any timespan in mind? One year, two years, three years? I’m sure you can make prognosis...
YL: Well. I think, if you look at other countries’ experiences…
SS: China’s very unique, you can’t really compare it with other countries’ experiences.
YL: You cannot skip that stage. I think we will be there for some time there. For me, certainly, I hope it will be handled as fast as possible, but I also need to be realistic. You know, we do a lot, because we can compare the pollution situation, let’s say in China and India. Both countries are large countries and actually the pollution in China is much less than the pollution in India - so we are, in a sense, the same stage. So, I think the best way to, you know, address this issue is to understand the causes of the problem and to find a way out of the problem. I think that the way out of the problem, one, is to continue to have a growth so we can reach the service-stage in our economy, then we won’t have so many emission and we don’t have to rely so much on energy. Secondly, we can change our composition of the energy away from coal to, let’s say, gas, and at the same time strengthening our environmental protection.
SS:Doctor Lin, on a different note, I’m sure you remember last year President Obama saying that Washington will not allow China to write the rules of the global economy - I’m sure you remember that, right? It was a huge statement that went all over the place. If you don’t remember it, I’m saying it right now. I just want to know your take - cna the U.S. really do that, or it’s just the bravado to get voters?
YL: I think that they are free economy, free country, they can say anything they like.
SS: What do you think, can the U.S. really not allow China to write the rules of the global economy?
YL: No, we contribute to the global economy, we have been the driver of the global growth and I think the most important thing for the world, including for the high-income countries - growth. So, China is acting positively for the global economy all the time.
SS: So it was just the get votes before the elections, right?
YL: Pretty like it.
SS: But, U.S. is doing something else - it’s aiming actually at the new TPP deal to counter China’s economic influence in the region. Why is it America’s ultimate goal to isolate China?
YL: Well, you know, sometimes people have kind of geopolitical considerations, but it’s pretty strange. China now is largest trading country in the world. Among these members of TPP… you know, China is the number one trading partner of those countries. So, to have a trade pact without China - that seems to be pretty strange.
SS: So you’re saying that it’s nonsense, that the U.S. cannot isolate China with the TPP?
YL: Well, it has some psychological effects, but in reality, I think that the impact may be not as large, as expected.
SS: Do you think China could eventually join the TPP?
YL: Certainly. China is a very pragmatical country.
SS: Okay. What should China be doing right now to counter the U.S. influence? Does it have an answer to TPP as things stay right now?
YL: Pacific Ocean is not large enough to accommodate two large countries, to accommodate all countries in the world. So, we do have an another completeraties in our economy with the U.S. economy, with Russian economy, and I do believe that if we will work together, everyone will win.
SS: I’ve heard you say on couple of occasions that current international order favors first interests of the U.S. and that China should step up its play more and, maybe, have a more important role in global decision making. Now, is Chinese-led AIB a step into direction?
YL: I think that it affects it. The current global architecture has been set after the WWII. At that time, U.S. was the dominating economy in the world because in the post-war period, U.S. alone contributed to one and half of global GDP, and if you look into the documents of the Bretton Woods negotiations, we know that a lot of rules were set up by the high-income countries, and especially, by the U.S. and for the interests of the U.S. At that time, the interests of the U.S. were compatible with the interests of the world, because U.S. was, on one hand, the largest country in the world, and the U.S. was the only in the rising stage. So, stability and the growth of the U.S. contribute to the stability and growth in the world. But the global situation has changed a lot. Now, the emerging markets contribute to the global growth, much more than the high-income countries. So, certainly, we need to make this stage reflecting the new situation, so there’s a talk about the reform in the Bretton Woods institution, including the World Bank…
SS: We’ll talk about the reforms in the World Bank, but I just want to hear you tell me more about this new Chinese-led Asian Infrastructure Investment Bank. Is that a step in that direction to actually be a more active decision-maker on a global scene? Because, you know, Americans are urging their allies not to join that bank. Does it see it as a threat?
YL: Yeah, but it’s better to join, because AIIB, it’s not only benefitting China. AIB is benefiting the world because the goal of the AIIB is providing funds…
SS: What was the point of its creating?
YL: Because we need to have infrastructure improvement…
SS: But come on, China’s already the largest donor of the infrastructure improvement in the region, you need to make up a bank that can counter a World Bank in order to do that?
YL: Let’s look into Asian situation. I got into the Asian development studies, from the year 2010 to 2020 Asia alone needs to have $8 trln of infrastructure investment, $8 trln of infrastructure investment. Each year it requires $800 million of infrastructure investment. World Bank and Asian Development Bank cannot contribute more than 10% of that.
SS: So you think your bank is overlapping with the….
YL: No, they are complementary to each other.
SS: Really, you can work together well and effectively?
YL: Certainly, because the need is so large! World Bank and Asian Development Bank can contribute to less than 20% of the total needs, and that’s how you still have 80% to be filled. In this regard, the high-income country like the U.S., if they are really concerned of the well being of the poor countries, they should welcome to have more resources to be put into infrastructure, and that’s the reason why Britain, Germany, France and other high-income countries, they also joined, because it’s good for everyone.
SS: But you didn’t answer my question - you didn’t tell me why the U.S. is urging its allies not to join that bank, although they are joining…
YL: I can tell you only about China. Certainly, to have an improvement of the infrastructure in Asia, in world - that would be good for all countries, because we know that the bottleneck of growth in most countries today is infrastructure shortage, infrastructural bottleneck. If you have more countries improve infrastructure, that’s good for the recipient countries and certainly that’s also good for China, because if that growth can be enhanced, then China will have larger markets, so it’s a win-win, and opportunity there. If U.S. doesn't want to do it, it cannot prohibit China or other countries to do it. So not only we have AIIB, we also have a new bank, the so called BRICS bank, you know: China, Russia, India, Brazil and South Africa - they also formed a new bank in order to provide funding.
SS: Talking about the BRICS new bank, why do you think there’s such desire for a lending pool outside the U.S? Maybe it’s still because the IMF and the World Bank aren’t quite doing their job as well as they could in the developing countries?
YL: I think that, certainly, that’s for certain reasons. IMF and the World Bank - that’s one possibility for them to expand their capital base. But if they expend their capital base, they should increase the voice and their voting power, but high-income countries are not willing to do that, and so they cannot also increase their capital base. After the WWII, it was reasonable to have a Bretton Woods system, but now the reality is changing and either we change the Bretton Woods system or we need to allow the new institution to emerge.
SS: I want to talk, lastly, about another huge project that you guys are overlooking - Beijing is investing tens of billions of dollars in the Silk Road. It’s actually to build up infrastructure for land trade route that links China to Europe. So, I mean, the way it looks for us is that China has been building railroads for free….
YL: We’re not doing it for free, it's an investment.
SS: It’s an investment? Because, as of now, it is still cheaper to transport goods by sea than by the land. How long till Silk Road actually starts bringing money in that sense?
YL: If the proposal has been implemented, then we’ll build a high-speed train from China to Moscow and then to the Western Europe.
SS: Also, are you going to include Russia in that route?
YL: Certainly! And that will transform the global map, because that will make the connectivity of China, of Russia, of Central Asia, of Europe together, and it will make one integrated market, and that will provide the momentum of growth in the all countries involved and also in the world. So, it’s good for Russia, it’s good for the Central Asia, it’s good for Europe.
SS: Here’s my last question to you. I mean, obviously, it’s a huge investment, so China’s going to do everything to protect its investment, as far as the Silk Road goes. Could there be any political issue, say, a loss of large investment, where China will have to involve itself abroad more? For instance, I don’t know, interfering in the situation in Afghanistan.
YL: China likes to be a responsible stakeholder in the world, so China certainly will get involved more in the global issues. China is not an inward-oriented country as China was before 1979, and now China moves towards the globalization, openness of its economy, and certainly if China wants to rise its weight in the global economy, China needs to play more active role in the global issues. But Chinese philosophy is somewhat different. We always respect country's’ sovereignty. We always think that the best solution for every country issue comes from, is their own country, their own population, their own government. So China does not intend to intervene in other countries’ domestic issues.
SS: Dr. Lin, it’s been such a pleasure talking to you. Thank you very much for this interview and all the best of luck.