David Dollar's blog

This is my last week in the World Bank, after working at the institution for 20 years, the last five as country director for China and Mongolia.

A few weeks ago I had the unique opportunity to camp out on top of the Great Wall, which was a fitting exclamation mark at the end of my five years as the World Bank's China Country Director. It was a cloudy, drizzly day as we started, but then cleared up and turned into a lovely evening. The large group of kids we had with us slept in one of the guard towers along the wall, but I and a few others opted to sleep under the stars. The next morning opened with some mist, but then turned into a spectacular blue day. Some long-term Beijing residents hiking with us noted that they couldn’t recall ever seeing the countryside so green.

Beijing’s dry climate sets a limit on how green and blue it’s ever going to get, but the improvement over five years is noticeable and is one of the two most striking achievements of China in this period. In many cities, air pollution has declined as a result of policies that include banning the use of coal in inner cities, strengthening public transportation, discouraging car use (gasoline now costs 50% more than in the U.S.), moving heavy industry out of inner cities, and more stringent enforcement of environmental regulations.

Better materials and student participation characterize the READ schools project. (photo by Prateek Tandon)

Mongolia’s extreme climate was brought home to me again last week as I went with our World Bank team on a retreat about an hour and a half out of the capital city Ulaanbaatar. Wednesday afternoon was hot and summery, but on Thursday a cold front brought extreme storms that knocked out power and left a dusting of snow on the hills around UB. The life of the rural population, mostly herders, is inherently vulnerable in this extreme environment. Yet a number of projects supported by the World Bank have reduced this vulnerability somewhat in recent years.

Traveling around the countryside now I am struck by the fact that – for better or worse – my Blackberry keeps me connected most of the time. One of our innovative projects has offered subsidies, which private phone companies have competed for, to expand coverage in the countryside. The economics of cell phones is such that a one-time subsidy to erect towers will enable private companies to offer connectivity on a commercial basis.

This somewhat provocative question was the title of a conference hosted by Oxford and Standard Charter this week in London.  My answer was: "No, not tomorrow; but yes, eventually – especially if China continues to vigorously pursue economic reform."
 
The reason that China cannot be the engine of global growth tomorrow is straight-forward.  For the last decade an awful lot of the final demand in the world has come from the U.S.  That era is over for the time being as U.S. households now concentrate on rebuilding their savings.  No one country can fill the gap left by the slowdown in U.S. consumption: Japan, Germany, and China together have less consumption than the U.S., so no one of them can replace the U.S. as the major source of demand in the world.  It's not realistic to expect China to play that role.  But we are probably moving into a more multi-polar period in which there is more balanced growth in all of the major economies. 

Children perform during "Call for Green China" – a unique cultural tour to raise awareness about pressing environmental issues in China and possible solutions.

The old people in the park are saying that this was the best April in 20-plus years in terms of air quality here in Beijing. There has been permanent improvement based on some of the changes made for the Olympics: some factories relocated to less populous areas, restrictions on private car use, improved public transportation as an alternative.

Other factors are more long term – the sandstorms common when I lived here in 1986 are largely gone, owing to successful re-greening efforts west of here. There was a frenzied pace of construction as modern Beijing was being built, which has naturally slowed down – construction dust was a key part of air pollution here.

There is more room for improvement, but the progress was notable during a lovely April. One key issue going forward will be to continue to control private vehicle use.

China's share of population living below the poverty line declined from 65 percent at the beginning of economic reform in 1981 to 4 percent in 2007.

At the height of the recent boom the U.S. household savings rate dropped to zero: the average American family saved nothing from its annual income of more than $38,000 per person. In China, by contrast, poor rural families earning less than $200 per person save 18 percent of their meager income. This is one of the striking findings of the World Bank poverty assessment released today.

The poverty study uses a wealth of household survey and village-level data to tell a fascinating story of progress and vulnerability. The progress is remarkable: the share of the population living below the World Bank's consumption poverty line for China declined from 65 percent at the beginning of economic reform (1981) to 4 percent in 2007. The pace of poverty reduction varied over these 26 years. One of the periods of most rapid poverty reduction has been the boom time since China joined the World Trade Organization. Poverty declined from 16 percent in 2001 to 4 percent in just six years.

Click chart to see larger version.

What to make of it when, within a few hours last week, the statistical bureau depressed us with a 26% decline in exports for February and then elated us with a 27% increase in urban fixed asset investment? These two figures capture nicely the struggle that is going on within the Chinese economy.

We launched our China Quarterly report today with our take on how to reconcile the conflicting data. Clearly, the global economy is in very poor shape. Global GDP declined at an annualized rate of 5% in the fourth quarter of 2008, and global industrial production declined at a 20% rate. These are shocking numbers that those of us born after the 1930s have never seen. Naturally this has had a large effect on China, which is an open, export-oriented economy. China's seasonally adjusted monthly exports peaked at around $120 billion last fall, and then fell off a cliff – dropping by about one-third (see chart).

The Hebei province produces one-quarter of China's steel, and has felt sharply the country's slowdown in investment during the financial crisis.

Last week I had the honor to be the first foreigner to speak at the Hebei Provincial Party School in Shijiazhuang, China. The school provides a range of mid-career training programs to local officials from this province, about the size of France. The topic was the global economic crisis and China's need for a new growth model.

These officials, close to the ground, understand the need for a new model. More than half of China’s growth in recent years has come from exports and investment. Hebei is not an especially export-oriented province, but it still has a large number of exporting firms, whose orders have dried up. Officials are particularly worried about what happens to small and medium firms in this situation. Hebei is also a major producer of the heavy industrial products like steel and cement that are inputs into construction. The province produces one-quarter of China’s steel, and hence has felt sharply the country’s slowdown in investment. The stimulus package to finance infrastructure investment helps limit the damage, but it is not likely to replace all of the lost investment in real estate and manufacturing. The fundamental problem is that real estate and manufacturing have large excess capacity, so that it is hard to see much incentive to invest further in those sectors.

Local meets global in Ulaanbataar: ice sculptures of Chinggis Khaan in front of the popular Grand Khaan Irish Pub.

It was more than 20 degrees below zero (centigrade) as we visited Ulaanbataar this week.  If you want to understand Mongolian culture and politics you have to visit this coldest of the world’s capitals in the dead of winter.  My wife joined me on this trip and provided some useful perspective since it was her first trip since summer 2005.  What struck her immediately was the absence of traditional Mongolian clothing, which had been prevalent four years before, and the explosive growth of cars and traffic, which had not.  Since 2005 Mongolia has undergone a mining boom as the price of its main export, copper, climbed from historical levels of about $2,000 per ton to a high of $8,685 in mid-2008. 

The commodity price boom meant that Mongolia earned far more dollars for roughly the same physical volume of exports.   This increased income reached a lot of the population through increased government spending and transfers and the real estate and construction booms.  People could afford a lot more imported products including cars, clothing, appliances, and an increasing share of their food. 

You could read the new GDP data from China as very negative or surprisingly positive.

Here’s the negative story: 4th quarter GDP growth was 6.8% from the year-before, the lowest rate in seven years. Quarterly growth rate peaked near 14% in the second quarter of 2007 and has plummeted since then (Chart 1). The deceleration started in the property sector, which began to weaken early in 2008, and has since been exacerbated by the sharp fall in exports. Seasonally adjusted exports dropped 18% in November, from the month before (Chart 2).

The negative view assumes that these trends will continue and worsen. The industries hit immediately such as exporters and the heavy manufacturing (steel, cement) that depends on construction will release millions of workers, which will have negative spillover effects on all the other sectors of the economy. So, first quarter of 2009 will see even slower growth—some private analysts forecast as low as 2%—and recovery will take a long time.

The December export numbers for China showed a 2.8 percent decline from the year before. This was the worst showing in a decade, but better than the 4-5 percent decline expected by the business press. There is still plenty of cause for worry, as economist and blogger Brad Setser wrote in a recent post, "This really doesn’t look good". While Setser is talking about the breath-taking drop in Korean and Taiwanese exports in December, some of those exports normally would be on their way to China for further processing and re-export. So, the grim news from those economies in December probably presages more tough times ahead for China's exports.

In this deteriorating global environment, the Ministry of Finance and the World Bank's Beijing office last week held a seminar with some very good international and Chinese economists to discuss China’s macroeconomic policy options. While the economists had a wide range of views, I took away a pretty strong consensus from them on three things: