In an unprecedented development, the then-Chief Executive of World Bank, and now International Monetary Fund (IMF) Managing Director Kristalina Georgieva was accused on September 16, 2021 (alongside her advisor Simeon Djankov) of applying pressure on her staff to boost China’s position in the bank’s “Doing Business 2018” publication, based on an independent investigation conducted by WilmerHale.
The Substance of the Accusations
According to the mentioned law firm, it was hired by the lender’s International Bank for Reconstruction and Development on January 20, 2021 to review the internal circumstances that allegedly led to the data irregularities due to Georgieva’s ill judgment concerning Beijing.
As the WilmerHale report suggests, Chinese officials repeatedly voiced their discontent over the 2017 Doing Business report, claiming that it failed to adequately reflect the scope of Beijing’s reforms in addressing Jim Yong Kim, the then-President of World Bank, and other top executives at the bank.
When it became apparent that the 2018 draft report would suggest that China dropped in ranking, the bank’s staff began discussing options to improve Beijing’s position, including through adding data from Taiwan and Hong Kong into the mainland’s rating, says the report.
Georgieva, who is reported to be overseeing the issue since October 18, 2017, rejected any incorporation of Hong Kong data into the “Doing Business 2018” report for political reasons—yet, as WilmerHale’s findings argue, she asked “Mr. Djankov” to manage the final publication and work along the way to “identify changes to China’s data that would raise the country’s score.”
In the process of putting the 2018 edition together, the people involved concluded that adjusting China’s “legal rights indicator” was an “ideal vehicle” due to a variety of different opinions related to the effect of Chinese law, as the WilmerHale report claims. This apparently helped China keep its prior position in the bank’s ranking and gave “Mr. Djankov” green light to authorize publication.
Apart from vaguely stating that some staff on the Djankov’s team said that working under his supervision could be “emotionally harrowing,” the report accused both Mr. Djankovic and Ms. Georgieva of pressuring their staff “to make specific changes to China’s data points in an effort to increase its ranking.”
The findings also point to the fact that the final weeks before the “Doing Business 2018” was released at the end of October 2017saw the World Bank’s team, “presumably at the direction of” then-President Jim Kim, being under “both direct and indirect” pressure “to change the report’s methodology in an effort to boost China’s score.” This came to happen precisely at the same time when Mr. Kim and Ms. Georgieva were engaged in delicate negotiations with the Asian country, the U.S. and other members to raise the bank’s capital.
In the end, Beijing accepted a smaller shareholding in the bank than it sought as well as higher rates on bank loans that it received as part of a plan to defuse opposition from the Trump administration. According to the World Bank’s announcement made in 2018, a $13 billion paid-in capital increase boosted China’s shareholding stake to 6.01% from 4.68% but also brought lending reforms that will raise borrowing costs for higher-middle-income countries, including the Middle Kingdom.
The Road to Washington’s Wrath is Paved with Good Intentions
It is not a secret that the nature of the work conducted by top rank officials at the World Bank frequently requires geopolitical calculation and sensitivity. The same is true for Jim Yong Kim, nominated by President Barack Obama in 2012. Kim was dedicated to building bridges between the bank and the Asian Infrastructure Investment Bank (AIIB) established by China and the Asian country itself. Balancing between the two biggest economies in the world is a welcomed must amid a changing global economic architecture, not anything abnormal at all.
When it comes to the former Vice-President of the European Commission, although the alleged actions were conducted while Ms. Georgieva was working for the World Bank, they have been referred to the ethics committee’s board of directors at her new job with IMF. Hence, the WilmerHale report comes nearly two years after becoming the first head of the IMF from an emerging market and shortly before the most extraordinary global economic crisis in the Fund’s 76-year history, triggered by the COVID-19 virus.
Moreover, during these testing times, Ms. Georgieva has been overseeing the expansion in the reserve assets of 190 member countries, with $650 billion allocated to tackle the pandemic.
While the U.S. is the largest shareholder in the Washington-based IMF and World Bank, which means it enjoys veto powers over major decisions, the country is in the process of analyzing the “serious finding” in the WilmerHale report. As the Treasury Department’s spokeswoman Alexandra La Manna told Reuters, it is no secret that many GOP lawmakers have opposed expanding support for the mentioned institutions.
Notably, three members of the House Financial Service Committee, U.S. Representative Andy Barr (KY-06), U.S. Representative French Hill (Ar-02) and U.S. Representative Anthony Gonzalez (OH-16) sent a letter, dated September 22, 2021, to U.S. Treasury Secretary Janet Yellen to review and report to Congress about WilmerHale’s findings within 30 days.
The U.S. politicians are especially interested in obtaining information concerning “Director Georgieva’s interactions with Chinese representatives at the Fund during her deliberations and decision-making process leading up to the August 2, 2021 announcement by the IMF Board of Governors to approve a $650 billion general allocation of Special Drawing Rights (SDRs), which included an estimated $42 billion to the People’s Republic of China.”
What is especially interesting is the fact that although lawyers at WilmerHale made it clear that their “review should not be read to imply that there was any inappropriate conduct on behalf of any Chinese or other government officials,” the GOP signatories of the letter to Ms. Yellen outlined concerns with how “the Chinese Communist Party, in pursuing its self-interest, undermines and infiltrates multilateral institutions such as the Fund, the World Health Organization, and the United Nations.”
Moreover, they also asserted that “China feels entitled to a greater say in how these international organizations operate,” while, in their view, “its lack of commitment to multilateral values demonstrates why it must not be allowed to.”
The attempts to assassinate the IMF chief’s character went beyond political circles, as one of the most influential financial magazines also felt the need to weigh into the witch hunt against Ms. Georgieva.
“The head of the IMF must hold the ring while two of its biggest shareholders, America and China, confront each other in a new era of geopolitical rivalry,” The Economist editorial warned. “The next time the IMF tries to referee a currency dispute, or helps reschedule the debt of a country that has borrowed from China, the fund’s critics are sure to cite this investigation to undermine the institution’s credibility. That is why Ms. Georgieva, an esteemed servant of several international institutions, should resign,” the editorial concluded.
Kristalina Georgieva’s fate seems to be already sealed. Before the IMF and World Bank annual meetings to be held between October 11 and 17, U.S. Treasury Secretary Janet Yellen reportedly declined to answer phone calls from Ms. Georgieva, declaring her to be a persona non grata.
In Defense of Reason
Along with these concerted attempts to tarnish the good name of the IMF’s Bulgarian female managing director, some voices profoundly disagree with the accusations against her.
Shanta Devarajan, who was involved in overseeing the World Bank’s “Doing Business” report in 2017, called WilmerHale’s findings concerning the accusations of applying “undue pressure” by Ms. Georgieva on her staff being “beyond credulity.”
Devarajan, who currently serves as professor of development policy at Georgetown University, sent a series of tweets where he argued he never felt any pressure to change Beijing’s scores, rather accusing WilmerHale lawyers of using only half of his statements from an hours-long interview.
Georgieva’s “direction was to verify the China numbers, making sure that China received credit for the reforms they undertook, without compromising the integrity of Doing Business. The Bank’s lawyers left out the latter phrase,” he said, adding that a rush to judgment on Georgieva’s prior role as World Bank CEO “is misguided.”
“The changes to China’s score were either correcting coding errors or judgment calls on questions where judgment was required,” explained Devarajan, who was a senior director in the World Bank’s Development Economics group until 2019.
The former World Bank chief economist and Nobel laureate Joseph Stiglitz also called the WilmerHale investigation to be “a hatchet job”, denying that he’d heard of any complaints from the Doing Business staff related to feeling pressure from Ms. Georgieva in 2017.
“The fingerprints aren’t there. The report does not accurately reflect what happened,” concluded Stiglitz, who also questioned why it failed to mention the current president David Malpass when data irregularities involving Saudi Arabia’s rating occurred under his leadership.
Jeffrey Sachs, who is director of the Center for Sustainable Development at Columbia University, did not mince his words in his recent article in Financial Times, saying with conviction that “The heated attack against IMF managing director Kristalina Georgieva is not really about the alleged sanctity of World Bank data or about the quality of her management.”
According to Sachs, “It is about the role of China in a Washington-based multilateral institution.” Besides, the world’s famous economist added that the reason for this state of affairs is the fact that “many in the US Congress want Georgieva out because she is not a sworn enemy of Beijing.”
Interestingly, while China’s ranking stayed the same in 2018 as the prior year’s at No. 78, after Ms. Georgieva departed from the World Bank, Beijing was ranked 31st in 2020 and 25th in the unreleased 2021 report, which was now cancelled—all of this under the leadership of Republican David Malpass.
When it comes to Ms. Georgieva, she disagreed “fundamentally with the findings and interpretations” of the WilmerHale report.
“Let me be clear: the conclusions are wrong. I did not pressure anyone to alter any reports. There was absolutely no quid pro quo related to funding for the World Bank of any kind,” the IMF chief wrote in a statement.
Ms. Georgieva also highlighted her effort to prevent Hong Kong data from being added to the “Doing Business 2018” report as a sign of her commitment to preserving the integrity of World Bank data.
As of today, the “Doing Business” report’s publishing is cancelled, which could result in making some investors life more complicated when it comes to assessing where to put their money, as Reuters reports.
The report was the World Bank’s leading publication, which ranked countries based on their regulatory and legal environments, ease of business start-ups, financing, infrastructure and other business climate measures. Due to this fact, it was closely monitored by governments around the world looking to attract more FDI in accordance with their place in the ranking.
“Going forward, we will be working on a new approach to assessing the business and investment climate,” the World Bank informed.
The Bretton Woods Institutions’ Original Sin and BRICS
While colonialism seems to be the thing of the past, the sad reality is that inequality between the Global North and the Global South persists. This is happening due to power imbalances inscribed in the world economy and maintained by the developed countries, which claim to have the right and responsibility to set the rules of international trade and finance for the rest of the world.
To serve “their own economic interests, quite often at the expense of everyone else,” to quote economic anthropologist Jason Hickel, the Global North uses the IMF and the World Bank for this purpose.
By tradition under an unwritten transatlantic agreement, Europe has to select the managing directors of the IMF while the U.S. chooses presidents of the World Bank. Kristalina Georgieva is the second woman to have run the IMF, following the current European Central Bank President Christine Lagarde.
In the BRICS Sanya Declaration issued in April 2011, the members declared that “the voice of emerging and developing countries in international affairs should be enhanced.” Unfortunately, a month later, when Western countries backtracked on their 2009 promise to “appoint the heads and senior leadership of the international financial institutions through an open, transparent and merit-based selection process” by deciding to replace Dominique Strauss-Kahn with the then France’s Finance Minister Lagarde, the emerging economies accepted the fact that Europe will remain to pick the IMF’s Managing Director.
By doing this, Europe decided to discriminate against more than 90% of the world’s population once again. This reduced the legitimacy of the institution, as there was no hope that Legard would step down before 2016 to make place for a non-European person.
The very same scenario repeated in 2012 when Roberto Zoellick announced he would step down as World Bank President. “We will take a position together with the BRICS, making a common choice,” Brazil’s Minister of Finance Guido Mantega declared, giving a glimmer of hope that Ngozi Okonjo-Iweala from Nigeria would win broad support among the Global South countries. Sadly, the U.S. candidate, Jim Yong Kim, got this job with the not insignificant help of the Russian government.
In this way, we are faced with an incredibly undemocratic situation where the U.S., G7 and the EU control the veto process in the IMF and the World Bank to the detriment of the majority of the world’s population. In other words, “For every vote that the average person in the Global North has, the average person in the Global South has only one-eighth of a vote (and the average South Asian has only one-20th of a vote),” as Hickel argues in his Al Jazeera article published on November 26, 2020, titled Apartheid in the World Bank and the IMF.
Bearing in mind that both the IMF and the World Bank were founded back in 1944, “these institutions were designed with colonial principles in mind, and they remain largely colonial in character to this day,” the scholar concludes.
Ever since an informal meeting of the foreign ministers of Brazil, Russia, India, and China at the Brazilian mission to the United Nations in New York, which took place on September 20, 2006, the growing discontent about the distribution of power in the IMF and the World Bank became the main unifying factor of the group whose emergence “can be understood as a continuation of the decolonisation process,” as Jyrki Käkönen declares in his academic article Global change: BRICS and the pluralist world order, published in Third World Thematics in 2019.
It was the economic crisis of 2008 that allowed the BRIC nations to openly state their dissatisfaction when in the São Paulo communiqué, jointly issued by Finance Ministers, they made it clear that “reform of the International Monetary Fund and of the World Bank Group should move forward and be guided towards more equitable voice and participation balance between advanced and developing countries.”
A similar request was made in 2009 in Horsham, where the BRICs called it “imperative” that successive heads of the IMF and the World Bank be selected through “open merit-based” processes, irrespective of nationality or regional considerations.
The grouping’s struggle to reform the IMF culminated in 2010 when the Board of Governors approved quota reform—including a quota shift by more than 6% in favor of large emerging economies. The IMF hailed these steps as “historic” to point out that they represented “a major realignment in the ranking of quota shares that better reflects global economic realities and a strengthening in the Fund’s legitimacy and effectiveness.”
We Must Not Harbor Any Illusions
Despite the significant win of the BRICs regarding quota reforms, the U.S. waited five years to agree on reforms that were endorsed by almost all the members of the IMF.
The damage done by the prolonged reluctance to push the reforms through the U.S. Congress has significantly impacted the county’s image and credibility. As George Osborne, the then the British Chancellor of the Exchequer, concluded at that time, it was a “tragedy that an agreement reached across all the members of the IMF was being blocked by the US Congress.”
Regardless of its multilateral commitments, the U.S. delay resulted in keeping the rest of the world hostage to the whims of its Congress, which has limited any prospect of further reforms, especially important for the smaller economies.
2010 were supposed to be part of a more significant change. Still, the zero-sum nature of this sensitive development and the increased competition between the U.S. and China reflected in the recent attacks on the IMF’s Kristalina Georgieva bode ill for the future as far as Washington’s constructive role within the organization is concerned.
With the formation of China’s Asia Infrastructure Investment Bank (AIIB) and BRICS’ New Development Bank, which recently admitted the United Arab Emirates, Uruguay and Bangladesh as members in its first expansion push, leaders in the large emerging economies would be well-advised to have no illusions about the U.S. role in the Bretton Woods Institutions and its rather apparent intentions.
The IMF and World Bank are becoming too rigid, and they do not seem to be fit for purpose in the 21st century. That is why the acceleration of the delegitimation process has to gain new momentum and more attention put on the non-Bretton Woods institutions in due course.
From our partner RIAC
Can e-commerce help save the planet?
If you have logged onto Google Flights recently, you might have noticed a small change in the page’s layout. Alongside the usual sortable categories, like price, duration, and departure time, there is a new field: CO2 emissions.
Launched in October 2021, the column gives would-be travellers an estimate of how much carbon dioxide they will be responsible for emitting.
“When you’re choosing among flights of similar cost or timing, you can also factor carbon emissions into your decision,” wrote Google’s Vice President of Travel Products, Richard Holden.
Google is part of a wave of digital companies, including Amazon, and Ant Financial, encouraging consumers to make more sustainable choices by offering eco-friendly filter options, outlining the environmental impact of products, and leveraging engagement strategies used in video games.
Experts say these digital nudges can help increase awareness about environmental threats and the uptake of solutions to reduce greenhouse gas emissions.
“Our consumption practices are putting tremendous pressure on the planet, driving climate change, stoking pollution and pushing species towards extinction,” says David Jensen, Digital Transformation Coordinator with the United Nations Environment Programme (UNEP).
“We need to make better decisions about the things we buy and trips we take,” he added. “These green digital nudges help consumers make better decisions as well as collectively drive businesses to adopt sustainable practices through consumer pressure.”
At least 1.5 billion people consume products and services through e-commerce platforms, and global e-commerce sales reached US$26.7 trillion in 2019, according to a recent UN Conference on Trade and Development (UNCTAD) report.
Meanwhile, 4.5 billion people are on social media and 2.5 billion play online games. These tallies mean digital platforms could influence green behaviors at a planetary scale, says Jensen.
One example is UNEP-led Playing for the Planet Alliance, which places green activations in games. UNEP’s Little Book of Green Nudges has also led to more than 130 universities piloting 40 different nudges to shift behaviour.
A 2020 study by Globescan involving many of the world’s largest retailers found that seven out of 10 consumers want to become more sustainable. However, only three out of 10 have been able to change their lifestyles.
E-commerce providers can help close this gap.
“The algorithms and filters that underpin e-commerce platforms must begin to nudge sustainable and net-zero products and services by default,” said Jensen. “Sustainable consumption should be a core part of the shopping experience empowering people to make choices that align with their values.”
Embedding sustainability in tech
Many groups are trying to leverage this opportunity to make the world a more sustainable place.
The Green Digital Finance Alliance (GDFA), launched by Ant Group and UNEP, aims to enhance financing for sustainable development through digital platforms and fintech applications. It launched the Every Action Counts Coalition, a global network of digital, financial, retail investment, e-commerce and consumer goods companies. The coalition aims to help 1 billion people make greener choices and take action for the planet by 2025 through online tools and platforms.
“We will bring like-minded members together to experiment with new innovative business models that empower everyone to become a green digital champion,” says Marianne Haahr, GDFA Executive Director.
In one example, GDFA member Mastercard, in collaboration with the fintech company Doconomy, provides shoppers with a personalized carbon footprint tracker to inform their spending decisions.
In the UK, Mastercard is partnering with HELPFUL to offer incentives for purchasing products from a list of over 150 sustainable brands.
Mobile apps like Ant Forest, by Ant Group, are also using a combination of incentives and digital engagement models to urge 600 million people make sustainable choices. Users are rewarded for low-carbon decisions through green energy points they can use to plant real trees. So far, the Ant Forest app has resulted in 122 million trees being planted, reducing carbon emissions by over 6 million tons.
Three e-commerce titans are also aiming to support greener lifestyles. Amazon has adopted the Climate Pledge Friendly initiative to help at least 100 million people find climate-friendly products that carry at least one of 32 different environmental certifications.
SAP’s Ariba platform is the largest digital business-to-business network on the planet. It has also embraced the idea of “procuring with purpose,” offering a detailed look at corporate supply chains so potential partners can assess the social, economic and environmental impact of transactions.
“Digital transformation is an opportunity to rethink how our business models can contribute to sustainability and how we can achieve full environmental transparency and accountability across our entire value chain,” said SAP’s Chief Sustainability Officer Daniel Schmid.
UNEP’s Jensen says a crucial next step would be for mobile phone operating systems to adopt standards that would allow apps to share environment and carbon footprint information.
“This would enable people to seamlessly calculate their footprints across all applications to develop insights and change behaviours,” Jensen said. “Everyone needs access to an individual’ environmental dashboard’ to truly understand their impact and options for more sustainable living.”
Need for common standards
As platforms begin to encode sustainability into their algorithms and product recommendations, common standards are needed to ensure reliability and public trust, say experts.
Indeed, many online retailers are claiming to do more for the environment than they actually are. A January analysis by the European Commission and European national consumer authorities found that in 42 per cent, sustainability claims were exaggerated or false.
In November, the One Planet network issued guidance material for e-commerce platforms that outlines how to better inform consumers and enable more sustainable consumption, based on 10 principles from UNEP and the International Trade Centre.
The European Union is also pioneering core standards for digital sustainability through digital product passports that contain relevant information on a product’s origin, composition, environmental and carbon performance.
“Digital product passports will be an essential tool to strengthen consumer protection and increase the level of trust and rigour to environmental performance claims,” says Jensen. “They are the next frontier on the pathway to planetary sustainability in the digital age.”
2022: Small Medium Business & Economic Development Errors
Calling Michelangelo: would Michelangelo erect a skyscraper or can an architect liberate David from a rock of marble? When visibly damaged are the global economies, already drowning their citizenry, how can their economic development departments in hands of those who never ever created a single SME or ran a business, expect anything else from them other than lingering economic agonies?
The day pandemic ends; immediately, on the next day, the panic on the center stage would be the struggling economies across the world. On the small medium business economic fronts, despite, already accepted globally, as the largest tax contributor to any nation. Visible worldwide, already abandoned and ignored without any specific solutions, there is something strategically wrong with upskilling exporters and reskilling manufacturers or the building growth of small medium business economies. The SME sectors in most nations are in serious trouble but are their economic development rightly balanced?
Matching Mindsets: Across the world, hard working citizens across the world pursue their goals and some end up with a job seeker mindset and some job creator mindset; both are good. Here is a globally proven fact; job seekers help build enterprises but job creators are the ones who create that enterprise in the first place. Study in your neighborhoods anywhere across the world and discover the difference.
Visible on LinkedIn: Today, on the SME economic development fronts of the world, clearly visible on their LinkedIn profiles, the related Ministries, mandated government departments, trade-groups, chambers, trade associations and export promotion agencies are primarily led by job seeker mindsets and academic or bureaucratic mentality. Check all this on LinkedIn profiles of economic development teams anywhere across the world.
Will jumbo-pilots do heart transplant, after all, economic performance depends on matching right competency; Needed today, post pandemic economic recovery demands skilled warriors with mastery of national mobilization to decipher SME creation and scalability of diversified SME verticals on digital platforms of upskilling for global age exportability. This fact has hindered any serious progress on such fronts during the last decade. The absence of any significant progress on digitization, national mobilization of entrepreneurialism and upskilling of exportability are clear proofs of a tragically one-sided mindset.
Is it a cruise holiday, or what? Today, the estimated numbers of all frontline economic development team members across 200 nations are roughly enough to fill the world-largest-cruise-ship Symphony that holds 6200 guests. If 99.9% of them are job-seeker mindsets, how can the global economic development fraternity sleep tonight? As many billion people already rely on their performances, some two billion in a critical economic crisis, plus one billion starving and fighting deep poverty. If this is what is holding grassroots prosperity for the last decade, when will be the best time to push the red panic button?
The Big Fallacy of “Access to Finance” Notion: The goals of banking and every major institution on over-fanaticized notions of intricate banking, taxation are of little or no value as SME of the world are not primarily looking for “Access to Capital” they are rather seeking answers and dialogue with entrepreneurial job creator mindsets. SME management and economic development is not about fancy PDF studies of recycled data and extra rubber stamps to convince that lip service is working. No, it is not working right across the world.
SME are also not looking for government loans. They do not require expensive programs offered on Tax relief, as they make no profit, they do not require free financial audits, as they already know what their financial problems are and they also do that require mechanical surveys created by bureaucracies asking the wrong questions. This is the state of SME recovery and economic development outputs and lingering of sufferings.
SME development teams across the world now require mandatory direct SME ownership experiences
The New Hypothesis 2022: The new hypothesis challenges any program on the small medium business development fronts unless in the right hands and right mindsets they are only damaging the national economy. Upon satisfactory research and study, create right equilibrium and bring job seeker and job creator mindsets to collaborate for desired results. As a start 50-50, balances are good targets, however, anything less than 10% active participation of the job creator mindset at any frontline mandated SME Ministry, department, agency or trade groups automatically raises red flags and is deemed ineffective and irrelevant.
The accidental economists: The hypothesis, further challenges, around the world, economic institutes of sorts, already, focused on past, present and future of local and global economy. Although brilliant in their own rights and great job seekers, they too lack the entrepreneurial job creator mindsets and have no experience of creating enterprises at large. Brilliantly tabulating data creating colorful illustrative charts, but seriously void of specific solutions, justifiably as their profession rejects speculations, however, such bodies never ready to bring such disruptive issues in fear of creating conflicts amongst their own job seeker fraternities. The March of Displaced cometh, the cries of the replaced by automation get louder, the anger of talented misplaced by wrong mindsets becomes visible. Act accordingly
The trail of silence: Academia will neither, as they know well their own myopic job seeker mindset. In a world where facial recognition used to select desired groups, pronouns to right gatherings, social media to isolate voting, but on economic survival fronts where, either print currency or buy riot gears or both, a new norm; unforgiveable is the treatment of small medium business economies and mishmash support of growth. Last century, laborious and procedural skills were precious, this century surrounded by extreme automation; mindsets are now very precious.
Global-age of national mobilization: Start with a constructive open-minded collaborative narrative, demonstrate open courage to allow entrepreneurial points of views heard and critically analyze ideas on mobilization of small mid size business economies. Applying the same new hypotheses across all high potential contributors to SME growth, like national trade groups, associations and chambers as their frontline economic developers must also balance with the job creator mindset otherwise they too become irrelevant. Such ideas are not just criticism rather survival strategies. Across the world, this is a new revolution to arm SME with the right skills to become masters of trade and exports, something abandoned by their economic policies. To further discuss or debate at Cabinet Level explore how Expothon is making footprints on new SME thinking and tabling new deployment strategies. Expothon is also planning a global series of virtual events to uplift SME economies in dozens of selected nations.
Two wheels of the same cart: Silence on such matters is not a good sign. Address candidly; allow both mindsets to debate on how and why as the future becomes workless and how and why small medium business sectors can become the driving engine of new economic progress. Job seekers and job creators are two wheels of the same cart; right assembly will take us far on this economic growth passage. Face the new global age with new confidence. Let the nation witness leadership on mobilization of entrepreneurialism and see a tide of SME growth rise. The rest is easy.
Rebalancing Act: China’s 2022 Outlook
Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha
After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.
The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.
The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.
Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.
In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.
Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.
None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.
First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.
Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.
A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.
Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.
In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.
Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.
While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.
In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.
However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.
First published on China Daily, via World Bank
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